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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
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-11914
THORNBURG MORTGAGE ASSET CORPORATION
(Exact name of Registrant as specified in its Charter)
MARYLAND 85-0404134
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
119 E. MARCY STREET, SUITE 201
SANTA FE, NEW MEXICO 87501
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (505) 989-1900
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
- ---------------------------------------- ------------------------------------
Common Stock ($.01 par value) New York Stock Exchange
Series A 9.68% Cumulative Convertible
Preferred Stock ($.01 par value) New York Stock Exchange
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 X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
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. [ ]
At March 18, 1997, the aggregate market value of the voting stock held by
non-affiliates was $347,768,744, based on the closing price of the common stock
on the New York Stock Exchange.
Number of shares of Common Stock outstanding at March 18, 1997: 16,321,578
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement dated March 24, 1997,
issued in connection with the Annual Meeting of Shareholders of the
Registrant to be held on April 24, 1997, are incorporated by reference into
Parts I and III.
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THORNBURG MORTGAGE ASSET CORPORATION
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
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ITEM 1. BUSINESS.................................................... 3
ITEM 2. PROPERTIES.................................................. 13
ITEM 3. LEGAL PROCEEDINGS........................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS.......................... 14
ITEM 6. SELECTED FINANCIAL DATA..................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................... 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 25
ITEM 11. EXECUTIVE COMPENSATION...................................... 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................... 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K...................................... 26
FINANCIAL STATEMENTS................................................. F-1
SIGNATURES
EXHIBIT INDEX
PART I
ITEM 1. BUSINESS
GENERAL
Thornburg Mortgage Asset Corporation (the "Company") is a specialized financial
institution that primarily invests in adjustable-rate mortgage ("ARM")
securities, thereby indirectly providing capital to the single family
residential housing market. ARM securities represent interests in pools of ARM
loans, which often include guarantees or other credit enhancements against
losses from loan defaults. While the Company is not a bank or savings and loan,
its business purpose, strategy, method of operation and risk profile are best
understood in comparison to such institutions. The Company leverages its equity
capital using borrowed funds, invests in ARM securities and seeks to generate
income based on the difference between the yield on its ARM securities portfolio
and the cost of its borrowings. The corporate structure of the Company differs
from most lending institutions in that the Company is organized for tax purposes
as a real estate investment trust ("REIT") and therefore generally passes
through substantially all of its earnings to shareholders without paying federal
or state income tax at the corporate level. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT".
OPERATING POLICIES AND STRATEGIES
Investment Strategies
The Company's investment strategy is to purchase ARM securities and, possibly at
some future date, ARM loans originated and serviced by other mortgage lending
institutions. Increasingly, mortgage lending is being conducted by mortgage
lenders who specialize in the origination and servicing of mortgage loans and
then sell these loans to other mortgage investment institutions, such as the
Company. The Company believes it has a competitive advantage in the acquisition
and investment of these mortgage securities and mortgage loans because of the
low cost of its operations relative to traditional mortgage investors like banks
and savings and loans. Like traditional financial institutions, the Company
seeks to generate income for distribution to its shareholders primarily from the
difference between the interest income on its ARM assets and the financing costs
associated with carrying its ARM assets.
The Company purchases ARM securities from broker-dealers and financial
institutions that regularly make markets in these securities. The Company can
also purchase ARM securities from other mortgage suppliers, including mortgage
bankers, banks, savings and loans, investment banking firms, home builders and
other firms involved in originating, packaging and selling mortgage loans.
The Company's mortgage securities portfolio may consist of either agency or
privately issued (generally publicly registered) mortgage pass-through
securities, multiclass pass-through securities, collateralized mortgage
obligations ("CMOs") or short-term investments that either mature within one
year or have an interest rate that reprices within one year.
The Company's investment policy is to invest at least 70% of total assets in
High Quality adjustable and variable rate mortgage securities and short-term
investments. High Quality means:
(1)securities that are unrated but are guaranteed by the U.S. Government
or issued or guaranteed by an agency of the U.S. Government;
(2)securities which are rated within one of the two highest rating
categories by at least one of either Standard & Poor's Corporation or
Moody's Investors Service, Inc. (the "Rating Agencies"); or
(3)securities that are unrated or whose ratings have not been updated but are
determined to be of comparable quality (by the rating standards of at
least one of the Rating Agencies) to a High Quality rated mortgage
security, as determined by the Manager (as defined below) and approved by
the Company's Board of Directors.
The remainder of the Company's ARM portfolio, comprising not more than 30% of
total assets, may consist of Other Investment assets, which may include:
(1)adjustable or variable rate pass-through certificates, multi-class
pass-through certificates or CMOs backed by loans on single-family,
multi-family, commercial or other real estate-related properties so long
as they are rated at least Investment Grade at the time of purchase.
"Investment Grade" generally means a security rating of BBB or Baa or
better by at least one of the Rating Agencies;
(2)ARM loans secured by first liens on single-family residential properties,
generally underwritten to "A" quality standards, and acquired for the
purpose of future securitization; or
(3)a limited amount, currently $20 million as authorized by the Board of
Directors, of less than investment grade classes of ARM securities that
are created as a result of the Company's loan acquisition and
securitization efforts.
Since inception, the Company has generally invested less than 15%, currently
less than 5%, of its total assets in Other Investment assets. The Company
believes that, due to recent changes in the mortgage industry and the current
real estate environment, a strategy to selectively increase its investment in
Other Investment assets can provide attractive benefits to the Company without
commensurately higher risk. The Company may increase its investment in Other
Investment assets, specifically classes of multiclass pass-throughs, which may
benefit from future credit rating upgrades as senior classes of these securities
pay off, or have the potential to increase in value as a result of the
appreciation of underlying real estate values. The Company may also begin to
acquire ARM loans for the purpose of future securitization into ARM securities
for the Company's investment portfolio pursuant to its strategy discussed under
"Portfolio of Mortgage Securities - Pass-Through Certificates - Privately Issued
ARM Pass-Through Certificates." The Company believes that its strategy to
increase its investment in Other Investment assets and to securitize ARM loans
that it acquires will provide the Company with higher yielding investments and
give the Company greater control over the types of ARM securities originated and
held in its investment portfolio. In pursuing this strategy the Company will
likely have to accept a higher degree of credit risk than it has in the past.
However, the Company remains committed to maintaining a high level of credit
quality, consistent with its objectives of avoiding substantial credit risk, and
providing an attractive return on equity.
The Company does not invest in REMIC residuals or other CMO residuals and,
therefore does not create excess inclusion income or unrelated business taxable
income for tax exempt investors. Therefore, the Company is a mortgage REIT
eligible for purchase by tax exempt investors, such as pension plans, profit
sharing plans, 401(k) plans, Keogh plans and Individual Retirement Accounts
("IRAs").
Financing Strategies
The Company employs a leveraging strategy to increase its assets by borrowing
against its ARM securities and then uses the proceeds to acquire additional ARM
securities. By leveraging its portfolio in this manner, the Company expects to
maintain an equity-to-assets ratio of 10%, and not less than 8%, when measured
on a historical cost basis. The Company believes that this level of capital is
sufficient to allow the Company to continue to operate in interest rate
environments in which the Company's borrowing rates might exceed its portfolio
yield. These conditions could occur when the interest rate adjustments on the
ARM securities lag the interest rate increases in the Company's variable rate
borrowings or when the interest rate of the Company's variable rate borrowings
are mismatched with the interest rate indices of the Company's ARM securities.
The Company also believes that this capital level is adequate to protect the
Company from having to sell assets during periods when the value of its ARM
securities are declining. If the ratio of the Company's equity-to-total assets,
measured on a historical cost basis, falls below 8%, then, subject to the source
of income limitations applicable to the Company as a REIT, the Company will take
action to increase its equity-to-assets ratio to 8% of total assets or greater,
when measured on a historical cost basis, through normal portfolio amortization,
sale of assets or other steps as necessary.
The Company's ARM securities are financed primarily at short-term borrowing
rates and can be financed utilizing reverse repurchase agreements, dollar-roll
agreements, borrowings under lines of credit and other secured or unsecured
financings which the Company may establish with approved institutional lenders.
To date, reverse repurchase agreements have been the primary source of financing
utilized by the Company to finance its ARM securities. Generally, upon repayment
of each reverse repurchase agreement the ARM securities used to collateralize
the financing will immediately be pledged to secure a new reverse repurchase
agreement. The Company has established lines of credit and collateralized
financing agreements with twenty-four different financial institutions.
Reverse repurchase agreements take the form of a simultaneous sale of pledged
securities to a lender at an agreed upon price in return for the lender's
agreement to resell the same securities back to the borrower at a future date
(the maturity of the borrowing) at a higher price. The price difference is the
cost of borrowing under these agreements. In the event of the insolvency or
bankruptcy of a lender during the term of a reverse repurchase agreement,
provisions of the Federal Bankruptcy Code, if applicable, may permit the lender
to consider the agreement to resell the securities to be an executory contract
that, at the lender's option, may be either assumed or rejected by the lender.
If a bankrupt lender rejects its obligation to resell pledged securities to the
Company, the Company's claim against the lender for the damages resulting
therefrom may be treated as one of many unsecured claims against the lender's
assets. These claims would be subject to significant delay and, if and when
payments are received, they may be substantially less than the damages actually
suffered by the Company. To mitigate this risk the Company enters into
collateralized borrowings with only financially sound institutions approved by
the Board of Directors, including a majority of unaffiliated directors, and
monitors the financial condition of such institutions on a regular, periodic
basis.
The Company mitigates its interest-rate risk from borrowings by selecting
maturities that approximately match the interest-rate adjustment periods on its
ARM securities. Accordingly, borrowings bear variable or short-term fixed (one
year or less) interest rates. Generally, the borrowing agreements require the
Company to deposit additional collateral in the event the market value of
existing collateral declines, which, in dramatically rising interest rate
markets, could require the Company to sell assets to reduce the borrowings.
The Company's Bylaws limit borrowings, excluding the collateralized borrowings
in the form of reverse repurchase agreements, dollar-roll agreements and other
forms of collateralized borrowings discussed above, to no more than 300% of the
Company's net assets, on a consolidated basis, unless approved by a majority of
the unaffiliated directors. This limitation generally applies only to unsecured
borrowings of the Company. For this purpose, the term "net assets" means the
total assets (less intangibles) of the Company at cost, before deducting
depreciation or other non-cash reserves, less total liabilities, as calculated
at the end of each quarter in accordance with generally accepted accounting
principles. Accordingly, the 300% limitation on unsecured borrowings does not
affect the Company's ability to finance its total assets with collateralized
borrowings.
Hedging Strategies
The Company makes use of hedging transactions to mitigate the impact of certain
adverse changes in interest rates on its net interest income. In general, ARM
securities have a maximum lifetime interest rate cap, or ceiling, meaning that
each ARM security contains a contractual maximum rate. The borrowings incurred
by the Company to finance its ARM securities portfolio are not subject to
equivalent interest rate caps. Accordingly, the Company purchases interest rate
cap agreements to prevent the Company's borrowing costs from exceeding the
lifetime maximum interest rate on its ARM securities. These agreements have the
effect of offsetting a portion of the Company's borrowing costs if prevailing
interest rates exceed the rate specified in the cap agreement. An interest rate
cap agreement is a contractual agreement whereby the Company pays a fee, which
may at times be financed, typically to either a commercial bank or investment
banking firm, in exchange for the right to receive payments equal to the
difference between a contractually specified cap rate level and a periodically
determined future interest rate times a contractually specified principal, or
notional, amount. These agreements also may appreciate in value as interest
rates rise, though not usually by as much as the market value of its ARM
securities would decline, which would offset some of the decline in the market
value of the Company's portfolio of ARM securities at such a time.
In addition, ARM securities are also generally subject to periodic caps.
Periodic caps generally limit the maximum interest rate change on any interest
rate adjustment date to either a maximum of 1% per semiannual adjustment or 2%
per annual adjustment. The borrowings incurred by the Company do not have
similar periodic caps. The Company generally does not hedge against the risk of
its borrowing costs rising above the periodic interest rate cap level on the ARM
securities because the contractual future interest rate adjustments on the ARM
securities will cause their interest rates to increase over time and reestablish
the ARM securities' interest rate to a spread over the then current index rate.
The Company has also entered into interest rate swap agreements. In accordance
with the terms of the swap agreements, the Company pays a fixed rate of interest
during the term of the agreements and receives a payment that varies monthly
with the one month LIBOR Index. These agreements have the effect of fixing the
Company's borrowing costs on a similar amount of swaps owned by the Company and,
as a result, the Company has reduced the interest rate variability of its
borrowings. The Company may also use interest rate swap agreements from time to
time to change from one interest rate index to another interest rate index and
thus decrease further the basis risk between the Company's interest yielding
assets and the financing of such assets.
The ARM securities held by the Company were generally purchased at prices
greater than par. The Company is amortizing the respective premiums paid for
these securities over their expected lives using the level yield method of
accounting. To the extent that the prepayment rate on the Company's ARM
securities differs from expectations, the Company's net interest income will be
affected. Prepayments generally increase when mortgage interest rates fall below
the interest rates on ARM loans, such as those that back the Company's
portfolio. To the extent there is an increase in prepayment rates, resulting in
a shortening of the expected lives of the Company's ARM securities, the
Company's net income and, therefore, the amount available for dividends could be
adversely affected. In an attempt to mitigate the adverse effect of an increase
in prepayments on ARM securities acquired above par, the Company has entered
into transactions where it purchases ARM securities at prices below par, however
the Company's portfolio of ARM securities is currently held at a net premium.
The Company may also purchase limited amounts of "principal only" mortgage
derivative securities backed by either fixed-rate mortgages or ARM securities as
a hedge against the adverse effect of increased prepayments. To date, the
Company has chosen not to purchase any "principal only" mortgage derivative
securities.
The Company may enter into other hedging-type transactions designed to protect
its borrowings costs or portfolio yields from interest rate changes. Such
transactions may include the purchase or sale of interest rate futures contracts
or options on interest rate futures contracts. The Company may also purchase
"interest only" mortgage derivative securities or other derivative products for
purposes of mitigating risk from interest rate changes. The Company has not, to
date, entered into these types of transactions, but may do so in the future. The
Company will not invest in any futures transactions unless the Company and
Thornburg Mortgage Advisory Corporation (the "Manager") are exempt from the
registration requirements of the Commodities Exchange Act or otherwise comply
with the provisions of that Act.
Hedging transactions currently utilized by the Company generally are designed to
protect the Company's net interest income during periods when the Company's
borrowing costs exceed the maximum lifetime interest rates on its ARM
securities. The Company does not intend to hedge for speculative purposes.
Further, no hedging strategy can completely insulate the Company from risk, and
certain of the federal income tax requirements that the Company must satisfy to
qualify as a REIT limit the Company's ability to hedge, particularly with
respect to hedging against periodic cap risk. The Company carefully monitors and
may have to limit its hedging strategies to ensure that it does not realize
excessive hedging income, or hold hedging assets having excess value in relation
to total assets. See "Federal Income Tax Considerations - Requirements for
Qualification as a REIT".
Securitization of Mortgage Loans
The Company may create, through securitization, ARM securities with
substantially all ARM loans it may acquire. The Company intends to purchase ARM
loans for securitization when it believes that it can earn a higher yield on
these mortgage securities created through securitization than on comparable
mortgage securities purchased in the market or in order to facilitate its
compliance with its exemption from the Investment Company Act of 1940. See
"Operating Restrictions" below. Following the securitization process, the
Company intends to hold the newly created ARM securities in its investment
portfolio and will retain a limited amount of the risk of future credit loss as
part of its securitization program.
Operating Restrictions
The Board of Directors has established the Company's operating policies and any
revisions in the operating policies and strategies require the approval of the
Board of Directors, including a majority of the unaffiliated directors. Except
as otherwise restricted, the Board of Directors has the power to modify or alter
the operating policies without the consent of shareholders. Developments in the
market which affect the operating policies and strategies mentioned herein or
which change the Company's assessment of the market may cause the Board of
Directors (including a majority of the unaffiliated directors) to revise the
Company's operating policies and financing strategies.
In the event the rating of an ARM security held by the Company is reduced by the
Rating Agencies to below Investment Grade after acquisition by the Company, the
asset may be retained in the Company's investment portfolio if the Manager
recommends that it be retained and the recommendation is approved by the Board
of Directors (including a majority of the unaffiliated directors).
The Company has elected to qualify as a REIT for tax purposes. The Company has
adopted certain compliance guidelines which include restrictions on the
acquisition, holding and sale of assets. Prior to the acquisition of any asset,
the Company determines whether such asset will constitute a Qualified REIT Asset
as defined by the Internal Revenue Code of 1986, as amended (the "Code").
Substantially all the assets that the Company has acquired and will acquire for
investment are expected to be Qualified REIT Assets. This policy limits the
investment strategies that the Company may employ.
The Company closely monitors its purchases of ARM securities and the income from
such assets, including from its hedging strategies, so as to ensure at all times
that it maintains its qualification as a REIT. The Company developed certain
accounting systems and testing procedures with the help of qualified accountants
and tax experts to facilitate its ongoing compliance with the REIT provisions of
the Code. See "Federal Income Tax Considerations - Requirements for
Qualification as a REIT". No changes in the Company's investment policies and
operating policies and strategies, including credit criteria for mortgage asset
investments, may be made without the approval of the Company's Board of
Directors, including a majority of the unaffiliated directors.
The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act of 1940. The
Investment Company Act exempts entities that are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate" ("Qualifying Interests"). Under current interpretation
of the staff of the SEC, in order to qualify for this exemption, the Company
must maintain at least 55% of its assets directly in Qualifying Interests. In
addition, unless certain mortgage securities represent all the certificates
issued with respect to an underlying pool of mortgages, such mortgage securities
may be treated as securities separate from the underlying mortgage loans and,
thus, may not be considered Qualifying Interests for purposes of the 55%
requirement. The Company closely monitors its compliance with this requirement
and intends to maintain its exempt status. Up to the present, the Company has
been able to maintain its exemption through the purchase of whole pool
government agency and privately issued ARM securities that qualify for the
exemption. See "Portfolio of Mortgage Securities - Pass-Through Certificates -
Privately Issued ARM Pass-Through Certificates."
The Company does not purchase any assets from or enter into any servicing or
administrative agreements (other than the Management Agreement) with any
entities affiliated with the Manager. Any changes in this policy would be
subject to approval by the Board of Directors, including a majority of the
unaffiliated directors.
PORTFOLIO OF MORTGAGE SECURITIES
As of December 31, 1996, ARM securities comprised approximately 99% of the
Company's total assets. The Company has invested in the following types of
mortgage securities in accordance with the operating policies established by the
Board of Directors and described in "Business - Operating Policies and
Strategies Operating Restrictions."
PASS-THROUGH CERTIFICATES
The Company's investments in mortgage securities are concentrated in High
Quality ARM pass-through certificates which account for approximately 61% of ARM
securities held. These High Quality ARM pass-through certificates consist of
Agency Certificates and privately issued ARM pass-through certificates that meet
the High Quality credit criteria. These High Quality ARM pass-through
certificates acquired by the Company represent interests in ARM loans which are
secured primarily by first liens on single-family (one-to-four units)
residential properties, although the Company may also acquire ARM pass-through
certificates secured by liens on other types of real estate-related properties.
The ARM pass-through certificates acquired by the Company are generally subject
to periodic interest rate adjustments, as well as periodic and lifetime interest
rate caps which limit the amount an ARM security's interest rate can change
during any given period.
The following is a discussion of each type of pass-through certificate held by
the Company as of December 31, 1996:
FHLMC ARM Programs
FHLMC is a shareholder-owned government sponsored enterprise created pursuant to
an Act of Congress on July 24, 1970. The principal activity of FHLMC consists of
the purchase of first lien, conventional residential mortgages, including both
whole loans and participation interests in such mortgages and the resale of the
loans and participations in the form of guaranteed mortgage securities. During
1996, FHLMC issued $6.4 billion of FHLMC ARM certificates and as of December 31,
1996, there was $52.5 billion of all types of FHLMC ARM certificates
outstanding, of which FHLMC held $10.6 billion in its own portfolio.
Each FHLMC ARM Certificate issued to date has been issued in the form of a
pass-through certificate representing an undivided interest in a pool of ARM
loans purchased by FHLMC. The ARM loans included in each pool are fully
amortizing, conventional mortgage loans with original terms to maturity of up to
40 years secured by first liens on one-to-four unit family residential
properties or multi-family properties. The interest rate paid on FHLMC ARM
Certificates adjust periodically on the first day of the month following the
month in which the interest rates on the underlying mortgage loans adjust.
FHLMC guarantees to each holder of its ARM Certificates the timely payment of
interest at the applicable pass-through rate and ultimate collection of all
principal on the holder's pro rata share of the unpaid principal balance of the
related ARM loans, but does not guarantee the timely payment of scheduled
principal of the underlying mortgage loans. The obligations of FHLMC under its
guarantees are solely those of FHLMC and are not backed by the full faith and
credit of the U.S. Government. If FHLMC were unable to satisfy such obligations,
distributions to holders of FHLMC ARM Certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of FHLMC ARM Certificates would be affected by
delinquent payments and defaults on such mortgage loans.
FNMA ARM Programs
FNMA is a federally chartered and privately owned corporation organized and
existing under the Federal National Mortgage Association Charter Act. FNMA
provides funds to the mortgage market primarily by purchasing home mortgage
loans from mortgage loan originators, thereby replenishing their funds for
additional lending. FNMA established its first ARM programs in 1982 and
currently has several ARM programs under which ARM certificates may be issued,
including programs for the issuance of securities through REMICs under the Code.
During 1996, FNMA issued $15.3 billion of FNMA ARM certificates and as of
December 31, 1996, there was $66.0 billion of all types of FNMA ARM certificates
outstanding, of which FNMA held $12.8 billion in its own portfolio.
Each FNMA ARM Certificate issued to date has been issued in the form of a
pass-through certificate representing a fractional undivided interest in a pool
of ARM loans formed by FNMA. The ARM loans included in each pool are fully
amortizing conventional mortgage loans secured by a first lien on either
one-to-four family residential properties or multi-family properties. The
original terms to maturities of the mortgage loans generally do not exceed 40
years. FNMA has issued several different series of ARM Certificates. Each series
bears an initial interest rate and margin tied to an index based on all loans in
the related pool, less a fixed percentage representing servicing compensation
and FNMA's guarantee fee.
FNMA guarantees to the registered holder of a FNMA ARM Certificate that it will
distribute amounts representing scheduled principal and interest (at the rate
provided by the FNMA ARM Certificate) on the mortgage loans in the pool
underlying the FNMA ARM Certificate, whether or not received, and the full
principal amount of any such mortgage loan foreclosed or otherwise finally
liquidated, whether or not the principal amount is actually received. The
obligations of FNMA under its guarantees are solely those of FNMA and are not
backed by the full faith and credit of the U.S. Government. If FNMA were unable
to satisfy such obligations, distributions to holders of FNMA ARM Certificates
would consist solely of payments and other recoveries on the underlying mortgage
loans and, accordingly, monthly distributions to holders of FNMA ARM
Certificates would be affected by delinquent payments and defaults on such
mortgage loans.
Privately Issued ARM Pass-Through Certificates
Privately issued ARM Pass-Through Certificates are structured similar to the
Agency Certificates discussed above but are issued by originators of, and
investors in, mortgage loans, including savings and loan associations, savings
banks, commercial banks, mortgage banks, investment banks and special purpose
subsidiaries of such institutions. Privately issued ARM pass-through
certificates are usually backed by a pool of non-conforming conventional
adjustable-rate mortgage loans and are generally structured with one or more
types of credit enhancement, including pool insurance, guarantees, or
subordination. Accordingly, the privately issued ARM pass-through certificates
typically are not guaranteed by an entity having the credit status of FHLMC or
FNMA.
Privately issued ARM pass-through certificates credit enhanced by mortgage pool
insurance provided the Company with an alternative source of ARM securities
(other than Agency ARM securities) that meet the Qualifying Interests test for
purposes maintaining the Company's exemption under the Investment Company Act of
1940. Since the inception of the Company in 1993, most of the providers of
mortgage pool insurance have stopped providing such insurance. Therefore, in the
future the Company will be more reliant on the purchase of Agency ARM securities
as its source of Qualifying Interests in real estate and has to amended its
operating policies to allow the purchase of ARM loans in order to be able to
increase its flexibility when meeting its Investment Company Act requirements.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND MULTICLASS PASS-THROUGH
SECURITIES
CMOs are debt obligations, ordinarily issued in series and most commonly backed
by a pool of fixed rate mortgage loans or pass-through certificates, each of
which consists of several serially maturing classes. Multiclass pass-through
securities are equity interests in a trust composed of similar underlying
mortgage assets. Generally, principal and interest payments received on the
underlying mortgage-related assets securing a series of CMOs or multiclass
pass-through securities are applied to principal and interest due on one or more
classes of the CMOs of such series or to pay scheduled distributions of
principal and interest on multiclass pass-throughs. Scheduled payments of
principal and interest on the mortgage-related assets and other collateral
securing a series of CMOs or multiclass pass-throughs are intended to be
sufficient to make timely payments of principal and interest on such issues or
securities and to retire each class of such obligations by their stated
maturity.
Multiclass pass-through securities backed by ARM securities or ARM loans owned
by the Company are typically structured into classes designated as senior
classes, mezzanine classes and subordinated classes. The Company does not own
any variable rate classes of CMO's which are backed by fixed rate mortgages.
The senior classes in a multiclass pass-through security generally have first
priority over all cash flows and consequently have the least amount of credit
risk since principal losses are generally covered by mortgage pool insurance
policies or are charged against the subordinated classes in order of
subordination. As a result of these features, the senior classes receive the
highest credit rating from Rating Agencies of the series of classes for each
multiclass pass-through security.
The mezzanine classes of a multiclass pass-through security generally have a
slightly greater risk of principal loss than the senior classes since they
provide some credit enhancement to the senior classes. In most, but not all,
instances, mezzanine classes participate on a pro-rata basis with senior classes
in their right to receive cash flow and have expected lives similar to the
senior classes. In other instances, mezzanine classes are subordinate in their
right to receive cash flow and have average lives that are longer than the
senior classes. However, in all cases, a mezzanine class generally has a similar
or slightly lower credit rating than the senior class from the Rating Agencies.
Generally, the mezzanine classes that the Company has acquired are rated High
Quality.
Subordinated classes are junior in the right to receive payment from the
underlying mortgages to other classes of a multiclass pass-through security. The
subordination provides credit enhancement to the senior and mezzanine classes.
Subordinated classes may be at risk for some payment failures on the mortgage
loans securing or underlying such securities and generally represent a greater
level of credit risk as they are responsible for bearing the risk of credit loss
on all of the outstanding loans underlying a CMO or multi-class pass-through. As
a result of being subject to more credit risk, subordinated classes generally
have lower credit ratings relative to the senior and mezzanine classes from the
Rating Agencies.
The Subordinated classes which the Company has acquired are all rated at least
Investment Grade at the time of purchase by one of the Rating Agencies and in
certain cases are High Quality. Also, the Subordinated classes acquired by the
Company are limited in amount and bear yields which the Company believes are
commensurate with the increased risks involved.
The market for Subordinated classes is not extensive and at times may be
illiquid. In addition, the Company's ability to sell Subordinated classes is
limited by the REIT Provisions of the Code. The Company has not purchased any
Subordinated classes that are not Qualified REIT Assets. The Subordinated
classes acquired by the Company, which are not High Quality, together with the
Company's other investments in Other Investment assets, may not, in the
aggregate, comprise more than 30% of the Company's total assets, in accordance
with the Company's investment policy.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The Company has elected to be treated as a REIT for tax purposes. In brief, if
certain detailed conditions imposed by the REIT provisions of the Code are met,
entities that invest primarily in real estate investments and mortgage loans,
and that otherwise would be taxed as corporations are, with certain limited
exceptions, not taxed at the corporate level on their taxable income that is
currently distributed to their shareholders. This treatment eliminates most of
the "double taxation" (at the corporate level and then again at the shareholder
level when the income is distributed) that typically results from the use of
corporate investment vehicles.
In the event that the Company does not qualify as a REIT in any year, it would
be subject to federal income tax as a domestic corporation and the amount of the
Company's after-tax cash available for distribution to its shareholders would be
reduced. The Company believes it has satisfied the requirements for
qualification as a REIT since commencement of its operations in June 1993. The
Company intends at all times to continue to comply with the requirements for
qualification as a REIT under the Code, as described below.
REQUIREMENTS FOR QUALIFICATION AS A REIT
To qualify for tax treatment as a REIT under the Code, the Company must meet
certain tests which are described briefly below.
Ownership of Common Stock
For all taxable years after the first taxable year for which a REIT election is
made, the Company's shares of capital stock must be held by a minimum of 100
persons for at least 335 days of a 12 month year (or a proportionate part of a
short tax year). In addition, at all times during the second half of each
taxable year, no more than 50% in value of the capital stock of the Company may
be owned directly or indirectly by five or fewer individuals. The Company is
required to maintain records regarding the actual and constructive ownership of
its shares, and other information, and to demand statements from persons owning
above a specified level of the REIT's shares (as long as the Company has over
200 or more shareholders, only persons holding 1% or more of the Company's
outstanding shares of capital stock) regarding their ownership of shares. The
Company must keep a list of those shareholders who fail to reply to such a
demand.
The Company is required to use and does use the calendar year as its taxable
year for income purposes.
Nature of Assets
On the last day of each calendar quarter at least 75% of the value of the
Company's assets must consist of Qualified REIT Assets, government securities,
cash and cash items. The Company expects that substantially all of its assets
will continue to be Qualified REIT Assets. On the last day of each calendar
quarter, of the investments in securities not included in the foregoing 75%
assets test, the value of any one issuer's securities may not exceed 5% by value
of the Company's total assets and the Company may not own more than 10% of any
one issuer's outstanding voting securities. Pursuant to its compliance
guidelines, the Company intends to monitor closely the purchase and holding of
its assets in order to comply with the above assets tests.
Sources of Income
The Company must meet the following three separate income-based tests each year:
1. THE 75% TEST.At least 75% of the Company's gross income for the taxable
year must be derived from Qualified REIT Assets including interest (other than
interest based in whole or in part on the income or profits of any person) on
obligations secured by mortgages on real property or interests in real property.
The investments that the Company has made and will continue to make will give
rise primarily to mortgage interest qualifying under the 75% income test.
2. THE 95% TEST.In addition to deriving 75% of its gross income from the
sources listed above, at least an additional 20% of the Company's gross income
for the taxable year must be derived from those sources, or from dividends,
interest or gains from the sale or disposition of stock or other securities that
are not dealer property. The Company intends to limit substantially all of the
assets that it acquires to Qualified REIT Assets. The policy of the Company to
maintain REIT status may limit the type of assets, including hedging contracts
and other securities, that the Company otherwise might acquire.
3. THE 30% LIMIT.The Company must also derive less than 30% of its gross
income from the sale or other disposition of (i) Qualified REIT Assets held for
less than four years, other than foreclosure property or property involuntarily
or compulsorily converted through destruction, condemnation or similar events,
(ii) stock or securities held for less than one year (including hedges) and
(iii) property in a prohibited transaction. As a result of the Company's having
to limit such gains, the Company may have to hold mortgage loans and mortgage
assets for four or more years and securities and hedges (other than securities
and hedges that are Qualified REIT Assets) for one year or more at times when
the Company might otherwise have determined that the disposition of such assets
for short-term gains might be advantageous in order to ensure that it maintains
compliance with the 30% source of income limit.
Distributions
The Company must distribute to its shareholders on a pro rata basis each year an
amount equal to at least (i) 95% of its taxable income before deduction of
dividends paid and excluding net capital gain, plus (ii) 95% of the excess of
the net income from foreclosure property over the tax imposed on such income by
the Code, less (iii) any "excess noncash income". The Company intends to make
distributions to its shareholders in sufficient amounts to meet this 95%
distribution requirement.
The Service has ruled that if a REIT's dividend reinvestment plan ("DRP") allows
shareholders of the REIT to elect to have cash distributions reinvested in
shares of the REIT at a purchase price equal to at least 95% of fair market
value on the distribution date, then such cash distributions qualify under the
95% distribution test. The Company believes that its DRP complies with this
ruling.
TAXATION OF THE COMPANY'S SHAREHOLDERS
For any taxable year in which the Company is treated as a REIT for federal
income purposes, amounts distributed by the Company to its shareholders out of
current or accumulated earnings and profits will be includable by the
shareholders as ordinary income for federal income tax purposes unless properly
designated by the Company as capital gain dividends.
Distributions of the Company will not be eligible for the dividends received
deduction for corporations. Shareholders may not deduct any net operating losses
or capital losses of the Company.
Any loss on the sale or exchange of shares of the common stock of the Company
held by a shareholder for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividend received on the common
stock held by such shareholders.
If the Company makes distributions to its shareholders in excess of its current
and accumulated earnings and profits, those distributions will be considered
first a tax-free return of capital, reducing the tax basis of a shareholder's
shares until the tax basis is zero. Such distributions in excess of the tax
basis will be taxable as gain realized from the sale of the Company's shares.
The Company will withhold 30% of dividend distributions to shareholders that the
Company knows to be foreign persons unless the shareholder provides the Company
with a properly completed IRS form for claiming the reduced withholding rate
under an applicable income tax treaty.
Under the Code, if a portion of the Company's assets were treated as a taxable
mortgage pool or if the Company were to hold REMIC residual interests, a portion
of the Company's dividends would be treated as unrelated business taxable income
("UBTI") for pension plans and other tax exempt entities. The Company believes
that it does not engage in activities that would cause any portion of the
Company's income to be taxable as UBTI for pension plans and similar tax exempt
shareholders. The Company believes that its shares of stock will be treated as
publicly offered securities under the plan asset rules of the Employment
Retirement Income Security Act ("ERISA") for Qualified Plans.
The provisions of the Code are highly technical and complex. This summary is not
intended to be a detailed discussion of all applicable provisions of the Code,
the rules and regulations promulgated thereunder, or the administrative and
judicial interpretations thereof. The Company has not obtained a ruling from the
Internal Revenue Service with respect to tax considerations relevant to its
organization or operation, or to an acquisition of its common stock. This
summary is not intended to be a substitute for prudent tax planning, and each
shareholder of the Company is urged to consult its own tax advisor with respect
to these and other federal, state and local tax consequences of the acquisition,
ownership and disposition of shares of stock of the Company and any potential
changes in applicable law.
COMPETITION
In acquiring ARM assets, the Company competes with other mortgage REITs,
investment banking firms, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, other lenders, FNMA, FHLMC and other
entities purchasing ARM assets, many of which have greater financial resources
than the Company. The existence of these competitive entities, as well as the
possibility of additional entities forming in the future, may increase the
competition for the acquisition of ARM assets resulting in higher prices and
lower yields on such mortgage assets.
EMPLOYEES
As of December 31, 1996, the Company had no employees. The Manager carries out
the day to day operations of the Company, subject to the supervision of the
Board of Directors and under the terms of a Management Agreement discussed
below.
THE MANAGEMENT AGREEMENT
On June 17, 1994, the Company renewed its Management Agreement with Thornburg
Mortgage Advisory Corporation, the Manager, for a term of five years, with an
annual review required each year. On December 15, 1995, the Agreement was
amended to provide that in the event a person or entity obtains more than 20% of
the Company's common stock, if the Company is combined with another entity, or
if the Company terminates the Agreement other than for cause, the Company is
obligated to acquire substantially all of the assets of the Manager through an
exchange of shares with a value based on a formula tied to the Manager's net
profits. The Company has the right to terminate the Management Agreement upon
the occurrence of certain specific events, including a material breach by the
Manager of any provision contained in the Management Agreement.
The Manager at all times is subject to the supervision of the Company's Board of
Directors and has only such functions and authority as the Company may delegate
to it. The Manager is responsible for the day-to-day operations of the Company
and performs such services and activities relating to the assets and operations
of the Company as may be appropriate.
The Manager receives a per annum base management fee on a declining scale based
on the Average Net Invested Assets (generally defined as the difference between
assets and liabilities financing such assets) of the Company and its
subsidiaries for such year, payable monthly in arrears. The Manager is also
entitled to receive, as incentive compensation for each fiscal quarter, an
amount equal to 20% of the Net Income of the Company, before incentive
compensation, in excess of the amount that would produce an annualized Return on
Equity equal to 1% over the Ten Year U.S. Treasury Rate. For further information
regarding the base management fee, incentive compensation and applicable
definitions, see the Company's Proxy Statement dated March 24, 1997 under the
caption "Certain Relationships and Related Transactions".
On September 18, 1996, the Board of Directors of the Company completed a study
of the management fees and expenses of comparable companies. The study indicated
that the total management fees and other operating expenses of the Company are
below the level of other comparable companies, whether the other companies were
self-managed or externally managed. The study also indicated that the Company's
base management fee was significantly less than any other externally managed
company and that the performance fee was higher. As a result of the study, the
unaffiliated directors modified the Manager's compensation formula by lowering
the performance based compensation from 25% to 20% of the Company's annualized
net income, before performance based compensation, above an annualized Return on
Equity as described above and by simplifying the formula for the base management
fee. These changes took effect October 1, 1996. The combined fees paid to the
Manager for the period from October 1, 1996 to December 31, 1996 was virtually
the same under the new management fee formulas as they would have been under the
prior formula.
Subject to the limitations set forth below, the Company pays all operating
expenses except those specifically required to be paid by the Manager under the
Management Agreement. The operating expenses required to be paid by the Manager
include the compensation of the Company's officers and the cost of office space,
equipment and other personnel required for the Company's day-to-day operations.
The expenses that will be paid by the Company will include issuance and
transaction costs incident to the acquisition, disposition and financing of
investments, regular legal and auditing fees and expenses, the fees and expenses
of the Company's directors, the costs of printing and mailing proxies and
reports to shareholders, the fees and expenses of the Company's custodian and
transfer agent, if any, and reimbursement of any obligation of the Manager for
any New Mexico Gross Receipts Tax liability. The expenses required to be paid by
the Company which are attributable to the operations of the Company shall be
limited to an amount per year equal to the greater of 2% of the Average Net
Invested Assets of the Company or 25% of the Company's Net Income for that year.
The determination of Net Income for purposes of calculating the expense
limitation will be the same as for calculating the Manager's incentive
compensation except that it will include any incentive compensation payable for
such period. Expenses in excess of such amount will be paid by the Manager,
unless the unaffiliated directors determine that, based upon unusual or
non-recurring factors, a higher level of expenses is justified for such fiscal
year. In that event, such expenses may be recovered by the Manager in succeeding
years to the extent that expenses in succeeding quarters are below the
limitation of expenses. The Company, rather than the Manager, will also be
required to pay expenses associated with litigation and other extraordinary or
non-recurring expenses. Expense reimbursement will be made monthly, subject to
adjustment at the end of each year.
The transaction costs incident to the acquisition and disposition of
investments, the incentive compensation and the New Mexico Gross Receipts Tax
liability will not be subject to the 2% limitation on operating expenses.
Expenses excluded from the expense limitation are those incurred in connection
with the servicing of mortgage loans, the raising of capital, the acquisition of
assets, interest expenses, taxes and license fees, non-cash costs and the
incentive management fee.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Santa Fe, New
Mexico and are provided by the Manager in accordance with the Management
Agreement.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1996, there were no pending legal proceedings to which
the Company was a party or of which any of its property was subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock began trading on June 25, 1993 and is traded on the
New York Stock Exchange under the trading symbol TMA. As of January 31, 1997,
the Company had 16,321,578 shares of common stock issued and outstanding which
was held by 1,123 holders of record and approximately 12,500 beneficial owners.
The following table sets forth, for the periods indicated, the high, low and
closing sales prices per share of common stock as reported on the New York Stock
Exchange composite tape and the cash dividends declared per share of common
stock.
Cash
Stock Prices Dividends
----------------------------- Declared
1996 High Low Close Per Share
---- -------- -------- -------- ---------
Fourth Quarter ended December 31, 1996 21 1/2 16 1/8 21 3/8 $0.45
Third Quarter ended September 30, 1996 17 5/8 14 7/8 16 1/4 $0.40
Second Quarter ended June 30, 1996 17 14 1/8 16 1/4 $0.40
First Quarter ended March 31, 1996 16 5/8 14 1/8 14 3/8 $0.40
1995
----
Fourth Quarter ended December 31, 1995 15 7/8 14 1/8 15 3/4 $0.38
Third Quarter ended September 30, 1995 15 1/2 13 14 1/2 $0.25
Second Quarter ended June 30, 1995 14 7/8 8 1/4 13 5/8 $0.15
First Quarter ended March 31, 1995 10 7 3/8 9 $0.15
1994
----
Fourth Quarter ended December 31, 1994 12 1/4 6 3/4 7 3/8 $0.15
Third Quarter ended September 30, 1994 14 5/8 11 1/8 12 1/2 $0.25
Second Quarter ended June 30, 1994 16 1/8 13 3/8 14 $0.30
First Quarter ended March 31, 1994 17 1/4 15 3/8 15 3/8 $0.30
The Company intends to pay quarterly dividends and to make such distributions to
its shareholders in amounts such that all or substantially all of its taxable
income in each year (subject to certain adjustments) is distributed so as to
qualify for the tax benefits accorded to a REIT under the Code. All
distributions will be made by the Company at the discretion of the Board of
Directors and will depend on the earnings of the Company, financial condition of
the Company, maintenance of REIT status and such other factors as the Board of
Directors may deem relevant from time to time.
The Company has a Dividend Reinvestment and Stock Purchase Plan (the "DRP") that
allows both common and preferred shareholders to have their dividends reinvested
in additional shares of common stock and to purchase additional shares. The
common stock to be acquired for distribution under the DRP may be purchased at
the Company's direction from the Company at a 3% discount from the then
prevailing market price or in the open market. The additional purchases of stock
are subject to a minimum of $50 and a maximum of $15,000 for each dividend
payment date. State Street Bank & Trust Company (the "Agent"), the Company's
transfer agent, is the Trustee and administrator of the DRP. Shareholders who
own stock that is registered in their own name desiring to participate must
deliver a completed enrollment form to the Agent which is available from the
Agent or the Company. Shareholders who own stock that is registered in a name
other than their own (e.g., broker or bank nominee) desiring to participate must
either request the broker or nominee to participate on their behalf or request
that the broker or nominee reregister the stock in the shareholder's name and
deliver a completed enrollment form to the Agent.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from audited financial
statements of the Company for the years ended December 31, 1996, 1995 and 1994.
The selected financial data should be read in conjunction with the more detailed
information contained in the Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" included elsewhere in this Form 10-K (dollars in thousands, except
per share data).
OPERATIONS STATEMENT HIGHLIGHTS
1996 1995 1994 1993
--------- --------- --------- ---------
Net interest income $ 30,345 $ 13,496 $ 13,055 $ 3,157
Net income $ 25,737 $ 10,452 $ 11,946 $ 2,572
Net income per share $ 1.73 $ 0.88 $ 1.02 $ 0.36
Average number of shares outstanding 14,873,700 11,926,996 11,758,810 7,173,745
Distributable income per share $ 1.76 $ 0.92 $ 1.02 $ 0.36
Dividends declared per share $ 1.65 $ 0.93 $ 1.00 $ 0.29
Noninterest expense as percent of average assets 0.21% 0.13% 0.11% 0.18% (1)
BALANCE SHEET HIGHLIGHTS
As of December 31
-----------------------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- -----------
Adjustable-rate mortgage securities $ 2,727,875 $ 1,995,287 $ 1,727,469 $ 1,320,169
Total assets $ 2,755,358 $ 2,017,985 $ 1,751,832 $ 1,364,429
Shareholders' equity (2) $ 238,005 $ 182,312 $ 180,035 $ 170,326
Number of shares outstanding 16,219,241 12,190,712 11,772,951 11,748,331
Yield on adjustable-rate mortgage assets 6.64% 6.73% 5.66% 4.03%
Effective spread on net interest earning assets 1.34% 1.11% 0.17% 0.90% (1)
Return on average assets 1.09% 0.56% 0.66% 0.82% (1)
(1) Annualized; the Company commenced operations on June 25, 1993.
(2) Shareholders' equity before mark-to-market adjustment
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
At December 31, 1996, the Company held total assets of $2.755 billion, $2.728
billion of which consisted of ARM securities, as compared to $2.018 billion and
$1.995 billion, respectively, at December 31, 1995. Since commencing operations,
the Company has purchased only ARM securities which have been either backed by
agencies of the U.S. government or privately-issued (generally publicly
registered) mortgage securities, most of which are rated AA or higher by at
least one of the Rating Agencies. At December 31, 1996, 95.0% of the assets held
by the Company were High Quality assets as compared with the Company's
investment policy of investing at least 70% of its total assets in High Quality
ARM securities and cash and cash equivalents. All of the ARM securities
currently owned by the Company are in the form of adjustable-rate pass-through
certificates. The Company does not currently own any floating rate classes of
CMO's.
The following table presents a schedule of ARM securities owned at December 31,
1996 and December 31, 1995 classified by High Quality and Other Investment
assets and further classified by type of issuer and by ratings categories.
ARM SECURITIES BY ISSUER AND CREDIT RATING
(amounts in thousands)
December 31, 1996 December 31, 1995
------------------- -------------------
Carrying Portfolio Carrying Portfolio
Value Mix Value Mix
---------- ------ ---------- ------
HIGH QUALITY:
FHLMC/FNMA $1,474,842 54.1% $ 894,433 44.8%
Privately Issued:
AAA/Aaa Rating 260,031 9.5 165,196 8.3
AA/Aa Rating 862,727 31.6 784,633 39.3
--------- ------ --------- ------
Total Privately Issued 1,122,758 41.1 949,829 47.6
--------- ------ --------- ------
--------- ------ --------- ------
Total High Quality 2,597,600 95.2 1,844,262 92.4
--------- ------ --------- ------
OTHER INVESTMENT:
Privately Issued:
A Rating 106,531 3.9 134,970 6.8
BBB/Baa Rating 14,017 0.5 16,055 0.8
BB/Ba Rating 9,727 0.4 - -
--------- ------ --------- ------
Total Other Investment 130,275 4.8 151,025 7.6
--------- ------ --------- ------
Total ARM Securities $2,727,875 100.0% $1,995,287 100.0%
========== ====== ========== ======
Over the course of 1996, High Quality ARM securities increased as a percent of
the total ARM securities portfolio. This was in part due to upgrades to the
credit rating of certain securities. During the year ended December 31, 1996,
two of the Company's ARM securities, in the amount of $42.0 million, were
upgraded from an A equivalent rating to a Aa equivalent rating. At the same
time, one security with a carrying value of $9.7 million was downgraded from an
A rating to a Ba rating. Management has carefully reviewed certain securities it
has identified as having an increased level of credit risk and the potential for
downgrade and has discussed these particular investments with the Board of
Directors. The security that was downgraded was one of the securities identified
by management as having an increased level of credit risk. At this time, the
Company believes that the potential credit exposure of the Other Investment
segment of the Company's ARM securities portfolio is minimal and is commensurate
with the higher yield the Company receives on this segment of the portfolio. The
Company monitors the credit losses on the underlying loans of all of its
privately issued ARM securities and evaluates the adequacy of the remaining
credit support on an ongoing basis. Although the Company has not realized any
credit losses on any ARM security, as of December 31, 1996, the Company has
reserved $990,000 for possible losses on its existing portfolio and will
continue to evaluate potential credit exposure in the future.
The following table classifies the Company's portfolio of ARM securities by type
of interest rate index.
ARM SECURITIES BY INDEX
(amounts in thousands)
December 31, 1996 December 31, 1995
--------------------- --------------------
Carrying Portfolio Carrying Portfolio
Value Mix Value Mix
---------- --------- ---------- --------
INDEX:
One-month LIBOR $ 10,646 0.4% $ 10,229 0.5%
Six-month LIBOR 1,252,884 45.9 1,494,102 74.9
Six-month Certificate of Deposit 69,348 2.6 32,349 1.6
Six-month Constant Maturity Treasury 8,841 0.3 - -
One-year Constant Maturity Treasury 1,238,892 45.4 385,066 19.3
11th District Cost of Funds 147,264 5.4 73,541 3.7
--------- ------ --------- ------
$2,727,875 100.0% $1,995,287 100.0%
========= ====== ========= ======
The portfolio had a current weighted average coupon of 7.57% at December 31,
1996 and if the portfolio had been "fully indexed", the weighted average coupon
would have been approximately 7.61%, based upon the current composition of the
portfolio and the applicable indices. As of December 31, 1995 the portfolio had
a weighted average coupon of 7.42% and if the portfolio had been "fully
indexed", the weighted average coupon would have been approximately 7.51%, based
upon the composition of the portfolio and the applicable indices at that time.
At December 31, 1996, the current yield of the ARM securities portfolio was
6.64% as compared to 6.73% as of December 31, 1995 with an average term to the
next repricing date of 105 days as of December 31, 1996 as compared to 90 days
as of December 31, 1995. The current yield includes the impact of the
amortization of applicable premiums and discounts, the cost of hedging, the
amortization of the deferred gains from hedging activity and the impact of
principal payment receivables.
During 1996, the Company purchased $1.584 billion of ARM securities, $1.540
billion of which were High Quality ARM securities. The Company sold ARM
securities in the amount of $276.4 million at a net gain of $1,362,000 during
1996. Of special note, during the fourth quarter of 1996, the Company had an
opportunity to purchase a significant amount of fully-indexed, seasoned ARM
securities that could be purchased at a higher current yield than the yield the
Company was receiving on a group of it's recently originated low coupon ARM
securities which were prepaying faster than the Company had expected at the time
of acquisition. The Company took advantage of this opportunity and sold $245.0
million of its ARM securities and realized a net gain of $829,000 and replaced
them with the higher yielding fully-indexed, seasoned securities.
The sale of ARM securities during 1996 reflects the Company's desire to manage
the portfolio with a view to enhance the total return of the portfolio. The
Company monitors the performance of its individual ARM securities and
selectively sells an asset when there is an opportunity to replace it with an
ARM security that has an expected higher long-term yield or more attractive
interest rate sensitivity characteristics. In the case of the 1996 sales, the
Company was able to sell ARM securities that had either low lifetime maximum
interest rate caps or low current coupons that were prepaying faster than
expected and replaced them with ARM securities with higher maximum interest rate
caps and/or higher current coupons and, in many instances, better prepayment
performance. The Company is presented with investment opportunities in the ARM
securities market on a daily basis and management evaluates such opportunities
against the performance of its existing ARM securities. At times, the Company is
able to identify opportunities that it believes will improve the total return of
its ARM securities portfolio by replacing selected securities. In managing the
portfolio, the Company may at times realize either gains or losses in the
process of replacing selected assets when the Company believes it has identified
better investment opportunities in order to improve the long-term total return.
During 1996, the composition of the Company's ARM securities by index has
changed, reflecting an increased percentage of investments in ARM securities
indexed to the one-year constant maturity treasury index and a decreased
percentage of investments in six-month LIBOR indexed ARM securities. This change
is largely a reflection of the types of ARM securities that were produced or
available for sale during 1996, with new LIBOR ARM production down markedly from
prior years. This change also reflects the Company's strategy of acquiring a
larger percentage of fully indexed ARM securities with lifetime maximum interest
rates above 11%. Most of the LIBOR based ARM securities production does not meet
the Company's current maximum lifetime interest rate requirement. As a result of
the Company's effort, the average maximum lifetime interest rate cap for the
Company's portfolio has increased to 11.42% at December 31, 1996, as compared to
10.73% at December 31, 1995.
For the quarter ended December 31, 1996, the Company's mortgage securities paid
down at an approximate average annualized constant prepayment rate of 21%, close
to long-term expectations. The annualized constant prepayment rate averaged
approximately 26% during the full year of 1996, having averaged approximately
32% during the first half of the year and 22% during the second half of the
year. In the event that actual prepayment experience exceeds expectations due to
sustained increased prepayment activity, the Company would have to amortize its
premiums over a shorter time period, resulting in a reduced yield to maturity on
the Company's ARM securities. Conversely, if actual prepayment experience is
less than the assumed constant prepayment rate, the premium would be amortized
over a longer time period, resulting in a higher yield to maturity. The Company
monitors its prepayment experience on a monthly basis in order to adjust the
amortization of the net premium as appropriate.
The fair value of the Company's portfolio of ARM securities classified as
available-for-sale improved by $5.6 million during 1996, generally as a result
of: (i) the upward repricing of the interest rates on the Company's ARM
securities relative to their respective indexes; and (ii) an increased demand
for ARM securities as reflected in the price at which similar ARM securities
traded in the open market during the year. As of December 31, 1996, the
Company's portfolio of ARM securities available-for-sale, including the
applicable cap agreements, had a net unrealized loss of $14.7 million, or 0.65%
of the securities available-for-sale, as compared to a net unrealized loss of
$20.3 million or 1.41% of the securities available-for-sale, as of December 31,
1995.
The Company has purchased Cap Agreements in order to limit its exposure to risks
associated with the lifetime interest rate caps of its ARM securities should
interest rates rise above specified levels. The Cap Agreements act to reduce the
effect of the lifetime or maximum interest rate cap limitation. The Cap
Agreements purchased by the Company will allow the yield on the ARM securities
to continue to rise in a high interest rate environment just as the Company's
cost of borrowings would continue to rise, since the borrowings do not have any
interest rate cap limitation. At December 31, 1996, the Cap Agreements owned by
the Company had a remaining notional balance of $2.266 billion with an average
final maturity of 3.0 years, as compared to a remaining notional balance of
$1.461 billion with an average final maturity of 4.3 years at December 31, 1995.
Pursuant to the terms of the Cap Agreements, the Company will receive cash
payments if the three-month or six-month LIBOR index increases above certain
specified levels which range from 7.50% to 12.50% and average approximately
9.93%. The fair value of these Cap Agreements also tends to increase when
general market interest rates increase and decrease when market interest rates
decrease, helping to partially offset changes in the fair value of the Company's
ARM securities. At December 31, 1996 the fair value of the Cap Agreements was
$2.5 million, $12.1 million less than the amortized cost of the Cap Agreements.
As of December 31, 1996, the Company had entered into two interest rate swap
agreements having an aggregate notional balance of $300 million and a weighted
average remaining term of 4 months. In accordance with these agreements, the
Company will pay a fixed rate of interest during the term of these agreements
and receive a payment that varies monthly with the one-month LIBOR Index. As of
December 31, 1996, the average cost of the Company's borrowings was 5.72%, which
includes the impact of the interest rate swap agreements. As a result of
entering into these agreements the Company extended the weighted average term to
the next re-pricing date of its borrowing from 50 days to 62 days.
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
For the year ended December 31, 1996, the Company's net income was $25,737,000
or $1.73 per share based on a weighted average of 14,873,700 shares outstanding
as compared to $10,452,000 or $0.88 per share based on a weighted average of
11,926,996 shares outstanding for the year ended December 31, 1995. This 146%
increase in earnings, a 97% increase on a per share basis, was achieved despite
a 25% increase in the average number of shares outstanding during the two
periods. Net interest income for the year totaled $30,345,000 as compared to
$13,496,000 for the same period in 1995, an increase of 125%. Net interest
income is comprised of the interest income earned on mortgage investments less
interest expense from borrowings. The Company recorded a net gain from the sale
of ARM securities in the amount of $372,000 during 1996 as compared to a net
loss of $568,000 during 1995. During 1996 the Company incurred operating
expenses of $4,980,000 consisting of a base management fee of $1,872,000, a
performance based fee of $2,462,000 and other operating expenses of $646,000.
During 1995 the Company incurred operating expenses of $2,476,000 consisting of
a base management fee of $1,390,000, a performance based fee of $596,000 and
other operating expenses of $490,000. Total operating expenses decreased to
16.4% of net interest income for 1996 as compared to 18.3% for 1995, also
contributing to the Company's improved net earnings.
The table below highlights the historical trend and the components of return on
average equity (annualized):
COMPONENTS OF RETURN ON AVERAGE EQUITY (1)
Net
Interest Provision Gain (Loss) G & A Performance Net
For The Income/ For Losses/ on ARM Sales/ Expense(2)/ Fee/ Income/
Quarter Ended Equity Equity Equity Equity Equity Equity (ROE)
------------- -------- ----------- ------------- ----------- ----------- ------------
Mar 31, 1995 2.58% - -1.47% 1.02% - 0.09%
Jun 30, 1995 5.51% - - 1.04% - 4.47%
Sep 30, 1995 9.85% - 0.09% 1.07% 0.34% 8.54%
Dec 31, 1995 11.94% - 0.11% 1.05% 0.97% 10.03%
Mar 31, 1996 13.37% - 0.03% 1.04% 1.27% 11.08%
Jun 30, 1996 13.14% - - 1.00% 0.92% 11.22%
Sep 30, 1996 13.42% 0.34% 0.88% 1.03% 1.07% 11.86%
Dec 31, 1996 14.99% 1.32% 1.38% 1.46% 1.23% 12.37%
(1) Average equity excludes unrealized gain (loss) on available-for-sale ARM
securities.
(2) Excludes performance fees.
For the year ended December 31, 1996, the Company's taxable income was
$26,159,000 or $1.76 per weighted average share outstanding. Taxable income in
1996 includes the carry forward of the $568,000 net capital loss on the sale of
ARM securities from 1995 and excludes loss provisions of $990,000 recorded in
1996. For the year ended December 31, 1995, the Company's taxable income was
$11,020,000 or $0.92 per weighted average share outstanding. Taxable income in
1995 excluded the $568,000 net capital loss on the sale of ARM securities. As a
REIT, the Company is required to declare dividends amounting to 85% of each
years taxable income by the end of each calendar year and to have declared
dividends amounting to 95% of its taxable income for each year by the time it
files its applicable tax return and, therefore, generally passes through
substantially all of its earnings to shareholders without paying federal income
tax at the corporate level.
The following table highlights the quarterly dividend history of the Company:
DIVIDEND SUMMARY
($ in thousands, except per share amounts)
Cumulative
Taxable Taxable Dividend Dividend Undistributed
For The Net Net Income Declared Pay-out Taxable
Quarter Ended Income Per Share Per Share Ratio(1) Net Income
------------- ---------- ----------- ---------- -------- -----------
Mar 31, 1995 $ 701 $ 0.06 $ 0.15 252% (874)
Jun 30, 1995 1,993 0.17 0.15 89% (634)
Sep 30, 1995 3,791 0.32 0.25 79% 139
Dec 31, 1995 4,535 0.37 0.38 102% 41
Mar 31, 1996 5,118 0.41 0.40 97% 188
Jun 30, 1996 6,169 0.42 0.40 103% (18)
Sep 30, 1996 6,708 0.42 0.40 96% 250
Dec 31, 1996 8,164 0.50 0.45 89% 1,115
(1) Dividend declared divided into applicable quarter's taxable income.
The primary reasons for the rise in the Company's net interest income for 1996
as compared to 1995 was the combined effect of an increase in the yield on the
Company's portfolio of ARM securities and a decrease in the Company's cost of
funds as well as the increased size of the Company's portfolio. Net interest
income increased by $16,849,000. Of this increase, $8,092,000 is the result of
the lower interest rate on the Company's cost of funds and $2,545,000 is the
result of the higher yield on the Company's ARM securities portfolio and other
interest earning assets for a combined favorable rate variance of $10,637,000.
The increased average size of the Company's portfolio during 1996 as compared to
1995 also contributed to higher net interest income in the amount of $6,212,000.
The average balance of the Company's interest earning assets was $2.351 billion
during 1996 as compared to $1.850 billion during 1995, an increase of 27%.
The following table highlights the components of net interest spread and the
annualized yield on net interest earning assets (dollars in millions):
COMPONENTS OF NET INTEREST SPREAD AND YIELD ON NET INTEREST EARNING ASSETS (1)
ARM Securities
Average ---------------------------------- Yield on Yield on
Interest Wgt. Avg. Weighted Interest Net Net Interest
For The Earning Fully Indexed Average Yield Earning Cost of Interest Earning
Quarter Ended Assets Coupon Coupon Adj.(2) Assets Funds Spread Assets
------------- ---------- ------------- -------- ------- -------- ------- -------- ------------
Mar 31, 1995 $ 1,748.7 8.46% 6.33% 0.26% 6.07% 6.33% -0.26% 0.49%
Jun 30, 1995 1,809.7 7.94% 6.77% 0.40% 6.37% 6.21% 0.16% 0.55%
Sep 30, 1995 1,864.3 7.93% 7.24% 0.58% 6.66% 6.04% 0.62% 1.04%
Dec 31, 1995 1,975.6 7.51% 7.42% 0.69% 6.73% 6.05% 0.68% 1.11%
Mar 31, 1996 2,025.8 7.56% 7.48% 0.99% 6.49% 5.60% 0.89% 1.32%
Jun 30, 1996 2,248.2 7.83% 7.28% 0.85% 6.43% 5.59% 0.84% 1.32%
Sep 30, 1996 2,506.0 7.80% 7.31% 0.80% 6.51% 5.71% 0.80% 1.32%
Dec 31, 1996 2,624.4 7.61% 7.57% 0.93% 6.64% 5.72% 0.92% 1.34%
(1)Yield on Net Interest Earning Assets is computed by dividing annualized
net interest income by the average daily balance of interest earning
assets.
(2)Yield adjustments include the impact of amortizing premiums and
discounts, the cost of hedging activities, the amortization of deferred
gains from hedging activities and the impact of principal payment
receivables.
The Company's ARM securities portfolio generated a yield of 6.45% during 1996 as
compared to 6.31% during 1995. The Company's cost of funds during 1996 was 5.67%
as compared to 6.15% during 1995, primarily as a result of lower short-term
interest rates available to the Company for financing purposes. The combined
effect of the higher yield on the Company's ARM securities portfolio and the
lower cost of funds increased the Company's net spread to 0.78% for 1996 from a
spread of 0.16% for 1995, an increase of 0.62%. The Company's yield on net
interest earning assets, which includes the impact of shareholders' equity, rose
to 1.29% for 1996 from 0.73% for 1995.
The following table reflects the average balances for each category of the
Company's interest earning assets as well as the Company's interest bearing
liabilities with the corresponding effective rate of interest annualized for the
year ended December 31, 1996 and December 31, 1995:
AVERAGE BALANCE AND RATE TABLE
(amounts in thousands)
For the Year Ended For the Year Ended
December 31, 1996 December 31, 1995
---------------------- ---------------------
Average Effective Average Effective
Balance Rate Balance Rate
----------- --------- ---------- ---------
Interest Earning Assets:
ARM securities $2,336,900 6.45% $1,836,154 6.31%
Cash and cash equivalents 14,200 5.29 13,352 5.89
--------- ----- --------- -----
2,351,100 6.44 1,849,506 6.31
--------- ----- --------- -----
Interest Bearing Liabilities:
Borrowings 2,138,236 5.67 1,676,981 6.15
--------- ----- --------- -----
Net Interest Earning Assets and Spread $ 212,864 0.78% $ 172,525 0.16%
========= ===== ========= =====
Yield on Net Interest Earning Assets (1) 1.29% 0.73%
===== =====
(1) Yield on Net Interest Earning Assets is computed by dividing annualized
net interest income by the average daily balance of interest earning assets.
As of the end of 1996, the Company's yield on its ARM securities portfolio,
including the impact of the amortization of premiums and discounts, the cost of
hedging, the amortization of deferred gains from hedging activity and the impact
of principal payment receivables, was 6.64% as compared to 6.73% as of the end
of 1995, a decrease of 0.09%. The Company's cost of funds as of December 31,
1996 was 5.72% as compared to 6.05% as of December 31, 1995, a decrease of
0.33%. As a result of these changes, the Company's net interest spread as of the
end of 1996 was 0.92% as compared to 0.68% as of the end of 1995, an increase of
0.24%.
During 1996 the Company realized a net gain from the sale of ARM securities in
the amount of $372,000. The Company's net gain includes $1,362,000 from the sale
of ARM securities and a provision for losses of $990,000. The Company has not
realized any actual losses on any ARM security to date, but the Company's review
of the underlying ARM collateral has indicated the potential of loss on two ARM
securities and, as a result, the Company has provided for such potential losses.
During 1995 the Company realized a loss of $568,000 on the sale of ARM
securities.
For the year ended December 31, 1996, the Company's ratio of operating expenses
to average assets was 0.21% as compared to 0.13% for 1995. The Company's
operating expense ratio is well below the average of other more traditional
mortgage portfolio lending institutions such as banks and savings and loans. The
increase in the Company's operating expenses is primarily the result of
achieving sufficient earnings for the Company's shareholders such that a higher
performance based fee was earned by the Manager. In order for the Manager to
earn a performance fee, the rate of return on the shareholders' investment, as
defined in the Management Agreement, must exceed the average ten-year US
Treasury rate during the quarter plus 1%. During 1996, the Manager earned a
performance fee of $2,462,000. During 1996, after paying this performance fee,
the Company's return on equity was 11.68%. See Note 7 to the Financial
Statements for a discussion of the management fee formulas.
The following table highlights the quarterly trend of operating expenses as a
percent of average assets:
ANNUALIZED OPERATING EXPENSE RATIOS
Management Fee & Total
For The Other Expenses/ Performance Fee/ G & A Expense/
Quarter Ended Average Assets Average Assets Average Assets
------------- ---------------- ---------------- --------------
Mar 31, 1995 0.10% 0.00% 0.10%
Jun 30, 1995 0.10% 0.00% 0.10%
Sep 30, 1995 0.10% 0.03% 0.13%
Dec 31, 1995 0.10% 0.09% 0.19%
Mar 31, 1996 0.09% 0.12% 0.21%
Jun 30, 1996 0.10% 0.09% 0.19%
Sep 30, 1996 0.10% 0.10% 0.20%
Dec 31, 1996 0.13% 0.11% 0.24%
RESULTS OF OPERATIONS - 1995 COMPARED TO 1994
For the year ended December 31, 1995, the Company's net income was $10,452,000
or $0.88 per share based on a weighted average of 11,926,996 shares outstanding
as compared to $11,946,000 or $1.02 per share based on a weighted average of
11,758,810 shares outstanding for the year ended December 31, 1994. Net interest
income for the year totaled $13,496,000 as compared to $13,055,000 for the same
period in 1994. Net interest income is comprised of the interest income earned
on mortgage investments less interest expense from borrowings. The Company
recorded a net loss from the sale of ARM securities in the amount of $568,000
during 1995 as compared to a net gain of $863,000 during 1994. During 1995 the
Company incurred operating expenses of $2,476,000 consisting of a base
management fee of $1,390,000, a performance based fee of $596,000 and other
operating expenses of $490,000. During 1994 the Company incurred operating
expenses of $1,972,000 consisting of a base management fee of $1,342,000, a
performance based fee of $121,000 and other operating expenses of $509,000.
For the year ended December 31, 1995, the Company's taxable income was
$11,020,000 or $0.92 per weighted average share outstanding. Taxable income
excludes the $568,000 net capital loss on the sale of ARM securities. As a REIT,
the Company is required to declare dividends amounting to 85% of each years
taxable income by the end of each calendar year and to have declared dividends
amounting to 95% of its taxable income for each year by the time it files its
applicable tax return.
The improvement in the Company's net interest income during 1995 as compared to
1994 was $441,000. As presented in the table below, the Company had, on average,
$172.5 million more interest earning assets than interest bearing liabilities
during 1995. The improvement in the Company's net interest income was primarily
the result of the higher yield on the $172.5 million of net interest earning
assets in 1995 as compared to 1994 and in part due to the higher average
balances of total interest earning assets and interest bearing liabilities at a
positive spread.
The weighted average coupon of the ARM securities portfolio (the rate actually
received before the impact of yield adjustments such as hedging cost and
amortization of premiums and discounts) was 7.42% as of December 31, 1995 as
compared to 5.79% as of December 31, 1994, a rise of 1.63%. This improvement in
the weighted average portfolio coupon was partially offset by additional premium
amortization resulting from increased prepayment activity during the year. As a
result, the yield on the Company's ARM securities portfolio was 6.73% at
December 31, 1995, a rise of 1.07% from 5.66% as of December 31, 1994. Also,
during the year ended December 31, 1995, the Company's cost of money declined by
0.20%. As of December 31, 1995 the interest rate on the Company's borrowings was
6.05% as compared to 6.25% as of December 31, 1994. As a result of both the
improved yield on ARM securities and a lower cost of money the Company's net
interest spread as of December 31, 1995 was a positive 0.68% as compared to a
negative 0.59% as of December 31, 1994.
The following table reflects the average balances for each category of the
Company's interest earning assets as well as the Company's interest bearing
liabilities, with the corresponding effective rate of interest annualized for
the year ended December 31, 1995 and December 31, 1994:
AVERAGE BALANCE AND RATE TABLE
(amounts in thousands)
For the Year Ended For the Year Ended
December 31, 1995 December 31, 1994
-------------------- --------------------
Average Effective Average Effective
Balance Rate Balance Rate
---------- ------ ----------- --------
Interest Earning Assets:
ARM securities $1,836,154 6.31% $1,778,578 4.74%
Cash and cash equivalents 13,352 5.89 13,069 4.28
--------- ----- --------- -----
1,849,506 6.31 1,791,647 4.73
--------- ----- --------- -----
Interest Bearing Liabilities:
Borrowings 1,676,981 6.15 1,619,978 4.43
--------- ----- --------- -----
Net Interest Earning Assets and Spread $ 172,525 0.16% $ 171,669 0.30%
========= ===== ========= =====
Yield on Net Interest Earning Assets (1) 0.73% 0.73%
===== =====
(1) Yield on Net Interest Earning Assets is computed by dividing annualized
net interest income by the average daily balance of interest earning assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds for the years ended December 31, 1996 and
1995 consisted of reverse repurchase agreements, which totaled $2.459 billion
and $1.781 billion at the respective year ends. The Company's other significant
sources of funds for the years ended December 31, 1996 and 1995 consisted of
payments of principal and interest from the ARM securities in the amounts of
$713.7 million and $395.7 million, respectively, and the proceeds from the sale
of ARM securities in the amounts of $277.6 million and $75.4 million,
respectively. In the future, the Company expects its primary sources of funds
will consist of borrowed funds under reverse repurchase agreement transactions
with one to twelve month maturities, of monthly payments of principal and
interest on its ARM securities portfolio and possibly from asset sales as
needed. The Company's liquid assets generally consist of unpledged ARM
securities, cash and cash equivalents.
Total borrowings incurred at December 31, 1996 had a weighted average interest
rate of 5.72% and a weighted average remaining term to maturity of 4.2 months.
As of December 31, 1996, $1.104 billion of the Company's borrowings were
variable-rate term reverse repurchase agreements. Term reverse repurchase
agreements are committed financings with original maturities that range from
three months to two years. The interest rates on these term reverse repurchase
agreements are indexed to either the one, three or six-month LIBOR rate and
reprice accordingly.
The Company has borrowing arrangements with twenty-four different financial
institutions and at December 31, 1996 had borrowed funds under reverse
repurchase agreements with thirteen of these firms. Because the Company borrows
money based on the fair value of its ARM securities and because increases in
short-term interest rates can negatively impact the valuation of ARM securities,
the Company's borrowing ability could be limited and lenders may initiate margin
calls in the event short-term interest rates increase. Additionally, certain of
the Company's ARM securities are rated less than AA by the Rating Agencies and
have less liquidity than securities that are rated AA or higher. Other mortgage
securities which are rated AA or higher by the Rating Agencies derive their
credit rating based on a mortgage pool insurer's rating. As a result of either
changes in interest rates, credit performance of a mortgage pool or a downgrade
of a mortgage pool issuer, the Company may find it difficult to borrow against
such assets and, therefore, may be required to sell certain mortgage securities
in order to maintain liquidity. If required, these sales could be at prices
lower than the carrying value of the assets, which would result in losses. For
the year ended December 31, 1996, the Company had adequate cash flow, liquid
assets and unpledged collateral with which to meet its margin requirements
during such periods. Further, the Company believes it will continue to have
sufficient liquidity to meet its future cash requirements from its primary
sources of funds for the foreseeable future without needing to sell assets.
In October 1995, the Company entered into a Sales Agency Agreement with
PaineWebber Incorporated. In accordance with the Sales Agency Agreement,
PaineWebber agreed to sell, at the direction and discretion of the Company, up
to 1,174,969 additional shares of the Company's common stock. During 1996, the
Company sold 207,500 shares under this Sales Agency Agreement and received net
proceeds of $3.1 million. During 1995, the Company sold 148,300 shares under
this Sales Agency Agreement and received net proceeds of $2.1 million.
In April 1996, the Company completed a public offering of 3,450,000 shares of
its common stock. The Company received net proceeds of $48.7 million.
In December 1996, the Company's Registration Statement on Form S-3, registering
the sale of up to $200 million of additional securities, was declared effective
by the Securities and Exchange Commission. This registration statement includes
the possible issuances of common stock, preferred stock, warrants or shareholder
rights. When combined with the Registration Statement which was declared
effective September 12, 1995, the Company had $242 million of its securities
registered for future sale as of December 31, 1996.
In January 1997, the Company issued 2,760,000 shares of Series A 9.68%
Cumulative Convertible Preferred Stock at a price of $25 per share. Net proceeds
from this issuance totaled $65.9 million.
The Company has a Dividend Reinvestment and Stock Purchase Plan (the "Plan")
designed to provide a convenient and economical way for existing shareholders to
automatically reinvest their dividends in additional shares of common stock and
to purchase additional shares at a 3% discount to the current market price of
the common stock, as defined in the Plan. As a result of 1996 participation in
the Plan, the Company issued 347,434 new shares of common stock and received
$5.4 million of new equity capital.
EFFECTS OF INTEREST RATE CHANGES
Changes in interest rates impact the Company's earnings in various ways. While
the Company only invests in ARM securities, rising short-term interest rates may
temporarily negatively affect the Company's earnings and conversely falling
short-term interest rates may temporarily increase the Company's earnings. This
impact can occur for several reasons and may be mitigated by portfolio
prepayment activity as discussed below. First, the Company's borrowings will
react to changes in interest rates sooner than the Company's ARM securities
because the weighted average next re-pricing date of the borrowings is usually a
shorter time period. Second, interest rates on ARM loans are generally limited
to an increase of either 1% or 2% per adjustment period (commonly referred to as
the periodic cap) and the Company's borrowings do not have similar limitations.
Third, the Company's ARM securities lag changes in the indices due to the notice
period provided to ARM borrowers when the interest rate on their loans are
scheduled to change. The periodic cap only affects the Company's earnings when
interest rates move by more than 1% per six-month period or 2% per year.
The rate of prepayment on the Company's mortgage securities may decrease if
interest rates rise, or if the difference between long-term and short-term
interest rates increases. Decreased prepayments would cause the Company to
amortize the premiums paid for its ARM securities over a longer time period than
otherwise, resulting in an increased yield on its mortgage securities.
Therefore, in rising interest rate environments where prepayments are declining,
not only would the interest rate on the ARM securities portfolio increase to
re-establish a spread over the higher interest rates, but the yield would also
rise due to slower prepayments. The combined effect could significantly mitigate
other negative effects that rising short-term interest rates might have on
earnings.
Conversely, the rate of prepayment on the Company's mortgage securities may
increase if interest rates decline, or if the difference between long-term and
short-term interest rates diminishes. Increased prepayments would cause the
Company to amortize the premiums paid for its mortgage securities faster than
otherwise, resulting in a reduced yield on its mortgage securities.
Additionally, to the extent proceeds of prepayments cannot be reinvested at a
rate of interest at least equal to the rate previously earned on such mortgage
securities, the Company's earnings may be adversely affected.
Lastly, because the Company only invests in ARM assets and approximately 9% of
such mortgage assets are purchased with shareholders' equity, the Company's
earnings over time will tend to increase following periods when short-term
interest rates have risen and decrease following periods when short-term
interest rates have declined. This is because the financed portion of the
Company's portfolio of ARM securities will, over time, re-price to a spread over
the Company's cost of funds while the portion of the Company's portfolio of ARM
securities that are purchased with shareholders' equity will generally have a
higher yield in a higher interest rate environment and a lower yield in a lower
interest rate environment.
OTHER MATTERS
The Company calculates its Qualified REIT Assets, as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), to be 99.9% of its total assets,
as compared to the Code requirement that at least 75% of its total assets must
be Qualified REIT Assets. The Company also calculates that 99.5% of its revenue
qualifies for the 75% source of income test and 100% of its revenue qualifies
for the 95% source of income test under the REIT rules. Furthermore, the
Company's revenues during the year ended December 31, 1996 subject to the 30%
income limitation under the REIT rules amount to 0.90% of total revenue. The
Company also met all REIT requirements regarding the ownership of its common
stock and the distributions of its net income. Therefore, as of December 31,
1996, the Company believes that it will continue to qualify as a REIT under the
provisions of the Code.
The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act of 1940. If
the Company were to become regulated as an investment company, then the
Company's use of leverage would be substantially reduced. The Investment Company
Act exempts entities that are "primarily engaged in the business of purchasing
or otherwise acquiring mortgages and other liens on and interests in real
estate" ("Qualifying Interests"). Under current interpretation of the staff of
the SEC, in order to qualify for this exemption, the Company must maintain at
least 55% of its assets directly in Qualifying Interests. In addition, unless
certain mortgage securities represent all the certificates issued with respect
to an underlying pool of mortgages, such mortgage securities may be treated as
securities separate from the underlying mortgage loans and, thus, may not be
considered Qualifying Interests for purposes of the 55% requirement. As of
December 31, 1996, the Company calculates that it is in compliance with this
requirement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and the related notes, together
with the Independent Auditors' Report thereon are set forth on pages F-3
through F-15 on 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 is incorporated herein by reference
to the definitive Proxy Statement dated March 24, 1997 pursuant to
General Instruction G(3).
ITEM 11.EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the definitive Proxy Statement dated March 24, 1997 pursuant to
General Instruction G(3).
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
to the definitive Proxy Statement dated March 24, 1997 pursuant to
General Instruction G(3).
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the definitive Proxy Statement dated March 24, 1997 pursuant to
General Instruction G(3).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. The following Financial Statements of the Company are included
in Part II, Item 8 of this Annual Report on Form-K:
Independent Auditors' Report;
Balance Sheets as of December 31, 1996 and 1995;
Statements of Operations for the years ended December 31, 1996,
1995 and 1994;
Statements of Shareholders' Equity for the years ended December
31, 1996, 1995 and 1994;
Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994 and
Notes to Financial Statements.
2. Schedules to Financial Statements:
All financial statement schedules have been omitted because
they are either inapplicable or the information required is
provided in the Company's Financial Statements and Notes
thereto, included in Part II, Item 8 of this Annual Report on
Form 10-K.
3. Exhibits:
See "Exhibit Index".
(b) Reports on Form 8-K:
None
THORNBURG MORTGAGE ASSET CORPORATION
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
For Inclusion in Form 10-K
Filed with
Securities and Exchange Commission
December 31, 1996
THORNBURG MORTGAGE ASSET CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
FINANCIAL STATEMENTS: ----
Independent Auditor's Report F-3
Balance sheets F-4
Statements of operations F-5
Statement of shareholders' equity F-6
Statements of cash flows F-7
Notes to financial statements F-8
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Thornburg Mortgage Asset Corporation
Santa Fe, New Mexico
We have audited the accompanying balance sheets of Thornburg Mortgage Asset
Corporation as of December 31, 1996 and 1995 and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 financial statements referred to above present fairly, in
all material respects, the financial position of Thornburg Mortgage Asset
Corporation as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
McGLADREY & PULLEN, LLP
New York, New York
January 14, 1997, except for the last paragraph
of Note 5, as to which the date is January 24, 1997
THORNBURG MORTGAGE ASSET CORPORATION
BALANCE SHEETS
(In thousands, except share data)
December 31
---------------------------------
1996 1995
--------------- ---------------
ASSETS
ARM securities (Notes 2 and 3) $ 2,727,875 $ 1,995,287
Cash and cash equivalents 3,693 3,660
Accrued interest receivable 23,563 18,778
Prepaid expenses and other 227 260
------------- -------------
$ 2,755,358 $ 2,017,985
============= =============
LIABILITIES
Reverse repurchase agreements (Note 3) $ 2,459,132 $ 1,780,854
Other borrowings (Note 3) 14,187 18,446
Payable for securities purchased 32,683 42,990
Accrued interest payable 18,747 9,907
Dividends payable (Note 5) 7,299 4,632
Accrued expenses and other 1,112 679
------------- -------------
2,533,160 1,857,508
------------- -------------
SHAREHOLDERS' EQUITY (Note 5)
Common stock: par value $.01 per share;
50,000,000 shares authorized, 16,219,241
and 12,190,712 shares issued
and outstanding 162 122
Additional paid-in-capital 233,177 175,708
Available-for-sale securities:
Unrealized gain (loss) (Note 2) (15,807) (21,835)
Realized deferred hedging gain 4,541 7,009
Retained earnings (deficit) 125 (527)
------------- --------------
222,198 160,477
------------- --------------
$ 2,755,358 $ 2,017,985
============= =============
See Notes to Financial Statements.
THORNBURG MORTGAGE ASSET CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except share data)
Year ended December 31
-------------------------------------------
1996 1995 1994
------------ ------------ -------------
Interest income from ARM securities and cash $ 151,511 $ 116,617 $ 84,798
Interest expense on borrowed funds 121,166 103,121 71,743
---------- ---------- ----------
Net interest income 30,345 13,496 13,055
---------- ---------- ----------
Gain (loss) on sale of ARM securities 372 (568) 863
General and administrative expenses:
Management fee (Note 7) 1,872 1,390 1,342
Performance fee (Note 7) 2,462 596 121
Other 646 490 509
---------- ---------- ----------
4,980 2,476 1,972
---------- ---------- ----------
Net income $ 25,737 $ 10,452 $ 11,946
========== ========== ==========
Net income per share $ 1.73 $ 0.88 $ 1.02
========== ========== ==========
Average number of shares outstanding 14,873,700 11,926,996 11,758,810
========== ========== ==========
See Notes to Financial Statements.
THORNBURG MORTGAGE ASSET CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1996
(In thousands, except share data)
Available-for-Sale Securities
-----------------------------
Common Additional Realized Retained
Stock Paid-in Unrealized Deferred Gain Earnings
Par Value Capital Gain (Loss) From Hedging (Deficit) Total
--------- ---------- ------------ -------------- ------------ ----------
Balance,
December 31, 1993 $ 117 $ 170,206 $ - $ - $ 3 $ 170,326
Issuance of common
stock (Note 5) 1 260 - - - 261
Available-for-sale securities:
Fair value adjustment, net
of amortization - - (60,052) - - (60,052)
Deferred gain on sale of
hedges, net of amortization - - - 9,259 - 9,259
Net income - - - - 11,946 11,946
Dividends declared -
$1.00 per share - - - - (11,757) (11,757)
-------- --------- --------- ---------- ---------- ---------
Balance, December 31, 1994 118 170,466 (60,052) 9,259 192 119,983
Issuance of common
stock (Note 5) 4 5,242 - - - 5,246
Available-for-sale securities:
Fair value adjustment, net
of amortization - - 38,217 - - 38,217
Amortization of deferred
hedging gain - - - (2,250) - (2,250)
Net income - - - - 10,452 10,452
Dividends declared -
$0.93 per share - - - - (11,171) (11,171)
-------- --------- --------- ---------- ---------- ---------
Balance, December 31, 1995 122 175,708 (21,835) 7,009 (527) 160,477
Issuance of common
stock (Note 5) 40 57,469 - - - 57,509
Available-for-sale securities:
Fair value adjustment, net
of amortization - - 6,028 - - 6,028
Amortization of deferred
hedging gain - - - (2,468) - (2,468)
Net income - - - - 25,737 25,737
Dividends declared -
$1.65 per share - - - - (25,085) (25,085)
-------- --------- --------- ---------- ---------- ---------
Balance, December 31, 1996 $ 162 $ 233,177 $ (15,807) $ 4,541 $ 125 $ 222,198
======== ========= ========= ========== ========== =========
See Notes to Financial Statements.
THORNBURG MORTGAGE ASSET CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
Operating Activities:
Net income $ 25,737 $ 10,452 $ 11,946
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization 14,346 4,699 3,186
Net (gain) loss from investing activities (372) 568 (863)
Decrease (increase) in accrued interest receivable (4,785) (5,329) (7,270)
Decrease (increase) in prepaid expenses and other 33 (193) 11
Increase (decrease) in accrued interest payable 8,840 3,349 442
Increase (decrease) in accrued expenses and other 433 463 13
--------- --------- ---------
Net cash provided by operating activities 44,232 14,009 7,465
--------- --------- ---------
Investing Activities:
Available-for-sale assets:
Purchase of ARM assets (1,583,678) (548,672) (767,892)
Proceeds on sales of ARM assets 277,594 75,374 145,796
Principal payments on ARM assets 441,722 201,583 139,431
Held-to-maturity assets:
Principal payments on ARM assets 111,684 78,268 55,027
Purchase of interest rate cap agreements (631) (403) (3,436)
--------- --------- ---------
Net cash (used in) investing activities (753,309) (193,850) (431,074)
--------- --------- ---------
Financing Activities:
Net borrowings from reverse repurchase agreements 678,278 178,920 407,828
Repayments of other borrowings (4,259) (3,208) -
Proceeds from common stock issued 57,509 5,246 261
Dividends paid (22,418) (8,305) (11,636)
--------- --------- ---------
Net cash provided by financing activities 709,110 172,653 396,453
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 33 (7,188) (27,156)
Cash and cash equivalents at beginning of period 3,660 10,848 38,004
--------- --------- ---------
Cash and cash equivalents at end of period $ 3,693 $ 3,660 $ 10,848
========= ========= =========
Supplemental disclosure of cash flow information
and non-cash activities are included in Note 3.
See Notes to Financial Statements
THORNBURG MORTGAGE ASSET CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Thornburg Mortgage Asset Corporation (the "Company") was incorporated
in Maryland on July 28, 1992. The Company commenced its operations of
purchasing and managing for investment a portfolio of adjustable-rate
mortgage securities on June 25, 1993, upon receipt of the net proceeds
from the initial public offering of the Company's common stock.
A summary of the Company's significant accounting policies follows:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and highly liquid
investments with original maturities of three months or less. The
carrying amount of cash equivalents approximates their value.
ADJUSTABLE-RATE MORTGAGE SECURITIES
The Company's policy is to classify each of its assets as
available-for-sale as they are purchased and then monitor each asset
for a period of time, generally six to twelve months, prior to
making a determination whether the asset will be classified as
held-to-maturity. Management has made the determination that certain
adjustable-rate mortgage ("ARM") securities are available-for-sale
in order to be prepared to respond to potential future opportunities
in the market, to sell ARM securities in order to optimize the
portfolio's total return and to retain its ability to respond to
economic conditions that require the Company to sell assets in order
to maintain an appropriate level of liquidity. Management
re-evaluates the classification of the ARM securities on a quarterly
basis. All ARM securities classified as held-to-maturity are carried
at the fair value of the security at the time the designation is
made and any fair value adjustment to the cost basis as of the date
of the classification is amortized into interest income as a yield
adjustment. All ARM securities designated available-for-sale are
reported at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of shareholders'
equity.
Premiums and discounts associated with the purchase of the ARM
securities are amortized into interest income over the lives of the
securities using the effective yield method adjusted for the effects
of estimated prepayments.
ARM securities transactions are recorded on the date the ARM
securities are purchased or sold. Purchases of new issue ARM
securities are recorded when all significant uncertainties regarding
the characteristics of the securities are removed, generally shortly
before settlement date. Realized gains and losses on ARM securities
transactions are determined on the specific identification basis.
CREDIT RISK
The Company has limited its exposure to credit losses on its
portfolio of ARM securities by only purchasing ARM securities that
have some form of credit enhancement and are either guaranteed by an
agency of the federal government or have an investment grade rating
at the time of purchase, or the equivalent, by at least one of two
nationally recognized rating agencies, Moody's or Standard & Poor's
(the "Rating Agencies"). The Company also limits its exposure to
credit losses by limiting its investment in investment grade
securities that are rated A, or equivalent, or BBB, or equivalent,
("Other Investments") to no more than 30% of the portfolio and
currently has less than 5% of its portfolio invested in Other
Investments. Other Investments generate a higher yield, believed to
be commensurate with the additional credit risk of such investments.
The Company monitors the delinquencies and losses on the underlying
mortgages of its ARM securities and, if the credit performance of
the underlying mortgage loans is not as good as expected, makes a
provision for possible credit losses at a level deemed appropriate
by management to provide for known losses as well as unidentified
potential future losses in its ARM securities portfolio. The
provision is based on management's assessment of numerous factors
affecting its portfolio of ARM securities including, but not limited
to, current and projected economic conditions, delinquency status,
credit losses to date on underlying mortgages and remaining credit
protection. The provision is made by reducing the cost basis of the
individual security and the amount of such write-down is recorded as
a realized loss, thereby reducing earnings. Provisions for credit
losses do not reduce taxable income and therefore do not affect the
dividends paid by the Company to shareholders in the period the
provisions are taken. Actual losses realized by the Company do
reduce taxable income in the period the actual loss is realized and
would affect the dividends paid to shareholders for that tax year.
INTEREST RATE CAP AGREEMENTS
The Company purchases interest rate cap agreements (the "Cap
Agreements") to limit the Company's risks associated with the
lifetime or maximum interest rate caps of its ARM securities should
interest rates rise above specified levels. The Cap Agreements, in
effect, reduce the effect of the lifetime cap feature so that the
yield on the ARM securities will continue to rise in high interest
rate environments as the Company's cost of borrowings also continue
to rise. The Company's borrowings do not have a similar interest
rate cap limitation.
The Cap Agreements classified as a hedge against held-to-maturity
securities are initially carried at their fair value as of the time
the Cap Agreements and the related securities are designated as
held-to-maturity with an adjustment to equity for any unrealized
gains or losses at the time of the designation. Any adjustment to
equity is thereafter amortized into interest income as a yield
adjustment in a manner consistent with the amortization of any
premium or discount. The Cap Agreements that are classified as a
hedge against available-for-sale securities are carried at fair
value with unrealized gains and losses reported as a separate
component of equity, consistent with the reporting of such
securities. The carrying value of the Cap Agreements are included in
ARM securities on the balance sheet. The amortization of the
carrying value of the Cap Agreements is included in interest income
as a contra item (i.e. expense) and, as such, reduces interest
income over the lives of the Cap Agreements.
Realized gains and losses resulting from the termination of the Cap
Agreements that are hedging assets classified as held-to-maturity
are deferred as an adjustment to the carrying value of the related
assets and are amortized into interest income over the terms of the
related assets. Realized gains and losses resulting from the
termination of such agreements that are hedging assets classified as
available-for-sale are initially reported in a separate component of
equity, consistent with the reporting of those assets, and are
thereafter amortized as a yield adjustment. Cash flows from hedging
transactions are included with the items hedged in the Statement of
Cash Flows.
INTEREST RATE SWAP AGREEMENTS
The Company enters into interest rate swap agreements in order to
manage its interest rate exposure when financing its ARM assets.
Revenues and expenses from the interest rate swap agreements are
accounted for on an accrual basis and recognized as a net adjustment
to interest expense.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment
Trust ("REIT") and intends to comply with the provisions of the
Internal Revenue Code of 1986, as amended (the "Code") with respect
thereto. Accordingly, the Company will not be subject to Federal
income tax to the extent of its distributions to shareholders and as
long as certain asset, income and stock ownership tests are met.
NET INCOME PER SHARE
Net income per share is computed by dividing net income by the
weighted average number of common shares and common share
equivalents (e.g., stock options), if dilutive, outstanding during
the period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
NOTE 2. ADJUSTABLE-RATE MORTGAGE SECURITIES AND INTEREST RATE CAP AGREEMENTS
Investments in ARM securities consist of mortgage certificates secured
by ARM loans primarily on single-family residential housing.
The following table pertains to the Company's ARM securities classified
as available-for-sale as of December 31, 1996 and 1995, which are
carried at their fair value (dollars in thousands):
Available-for-Sale
-----------------------------
1996 1995
-------------- --------------
Amortized cost basis $ 2,282,991 $ 1,440,345
Allowance for losses (990) -
------------- ---------
Amortized cost, net 2,282,001 1,440,345
------------ ------------
Gross unrealized gains 7,686 4,468
Gross unrealized losses (22,408) (24,800)
------------- ------------
Fair value $ 2,267,279 $ 1,420,013
============= ============
During 1996, the Company realized $1,427,000 in gains and $65,000 in
losses on the sale of $276.4 million of ARM securities. During 1995,
the Company realized $91,000 in gains and $659,000 in losses on the
sale of $75.9 million of ARM securities and, during 1994, the Company
realized $983,000 in gains and $120,000 in losses on the sale of $145.8
million of ARM securities. All of the ARM securities sold were
classified as available-for-sale.
As of December 31, 1996, the Company had reduced the cost basis of its
ARM securities due to potential future credit losses in the amount of
$990,000. Although no credit losses have been realized on any of the
Company's ARM securities, the Company's analysis of losses on loans
underlying certain ARM securities owned by the Company relative to the
remaining credit support protecting the Company from credit losses
indicates that there is the possibility of future losses.
The following table pertains to the Company's ARM securities classified
as held-to-maturity as of December 31, 1996 and 1995, which are carried
at their amortized cost basis (dollars in thousands):
Held-to-Maturity
-----------------------------
1996 1995
-------------- --------------
Amortized cost basis $ 460,596 $ 575,274
Gross unrealized gains 4,169 3,746
Gross unrealized losses (4,306) (5,437)
------------- -------------
Fair value $ 460,459 $ 573,583
============ ============
As of December 31, 1996, the Company had no commitments to purchase ARM
securities.
The average effective yield on the ARM securities owned, including the
amortization of the net premium paid for the ARM securities and the Cap
Agreements, was 6.64% as of December 31, 1996 and 6.73% as of December
31, 1995.
As of December 31, 1996 and December 31, 1995, the Company had
purchased Cap Agreements with a remaining notional amount of $2.266
billion and $1.462 billion, respectively. The notional amount of the
Cap Agreements purchased decline at a rate that is expected to
approximate the amortization of the ARM securities. Under these Cap
Agreements, the Company will receive cash payments should either the
three-month or six-month London InterBank Offer Rate ("LIBOR") increase
above the contract rates of the Cap Agreements which range from 7.50%
to 12.50% and average approximately 9.93%. The Company's ARM securities
portfolio had an average lifetime interest rate cap of 11.42% as of
December 31, 1996. The initial aggregate notional amount of the Cap
Agreements declines to approximately $1.547 billion over the period of
the agreements, which expire between 1999 and 2001. The Company
purchased these Cap Agreements by incurring a one-time fee, or premium.
The premium is amortized, or expensed, over the lives of the Cap
Agreements and decreases interest income on the Company's ARM
securities during the period of amortization. The Company has credit
risk to the extent that the counterparties to the cap agreements do not
perform their obligations under the Cap Agreements. If one of the
counterparties does not perform, the Company would not receive the cash
to which it would otherwise be entitled under the conditions of the Cap
Agreement. In order to mitigate this risk and to achieve competitive
pricing, the Company has entered into Cap Agreements with five
different counterparties, three of which are rated AAA, two of which
are rated AA.
NOTE 3. REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS
The Company has entered into reverse repurchase agreements to finance
most of its ARM securities. The reverse repurchase agreements are
secured by the market value of the Company's ARM securities and bear
interest rates that have historically moved in close relationship to
LIBOR.
As of December 31, 1996, the Company had outstanding $2.459 billion of
reverse repurchase agreements with a weighted average borrowing rate of
5.68% and a weighted average remaining maturity of 4.0 months. As of
December 31, 1996, $1.104 billion of the Company's borrowings were
variable-rate term reverse repurchase agreements with original
maturities that range from six months to two years. The interest rates
of these term reverse repurchase agreements are indexed to either the
one, three or six-month LIBOR rate and reprice accordingly. The reverse
repurchase agreements at December 31, 1996 were collateralized by ARM
securities with a carrying value of $2.581 billion, including accrued
interest.
At December 31, 1996, the reverse repurchase agreements had the
following remaining maturities (dollars in thousands):
Within 30 days $ 619,066
30 to 90 days 816,081
90 days to one year 760,525
Over one year 263,460
-----------
$ 2,459,132
===========
As of December 31, 1996, the Company had entered into two interest rate
swap agreements having an aggregate notional balance of $300 million
and a weighted average remaining term of 4.0 months. In accordance with
these agreements, the Company will pay a fixed rate of interest during
the term of these agreements and receive a payment that varies monthly
with the one-month LIBOR rate. As a result of entering into these
agreements, the Company has reduced the interest rate variability of
its cost to finance its adjustable-rate mortgage assets by increasing
the average period until the next repricing of its borrowings from 50
days to 62 days.
The Company has a line of credit agreement which provides for
short-term borrowings of up to $25 million collateralized by the
Company's principal and interest receivables. As of December 31, 1996,
there was no balance outstanding under this agreement.
As of December 31, 1996, the Company had financed most of its portfolio
of interest rate cap agreements with $14.2 million of other borrowings
which require quarterly or semi-annual payments until the year 2000.
These borrowings have a weighted average fixed rate of interest of
7.91% and have a weighted average remaining maturity of 3.0 years. The
other borrowings financing cap agreements at December 31, 1996 were
collateralized by ARM securities with a carrying value of $17.6
million, including accrued interest. The aggregate maturities of these
other borrowings are as follows (dollars in thousands):
1997 $ 4,169
1998 4,509
1999 4,877
2000 632
----------
$ 14,187
==========
The total cash paid for interest was $112.2 million, $100.4 million and
$71.3 million for 1996, 1995 and 1994 respectively.
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1996 and
December 31, 1995. FASB Statement No. 107, Disclosures About Fair Value
of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced
or liquidation sale (dollars in thousands):
December 31, 1996 December 31, 1995
---------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets: ---------- ---------- ---------- ----------
ARM securities $2,689,727 $2,692,521 $1,988,127 $1,990,217
Cap agreements 5,465 2,535 7,160 3,379
Liabilities:
Other borrowings 14,187 14,744 18,446 19,131
Swap agreements (7) 440 (33) 580
The above carrying amounts for assets are combined in the balance sheet
under the caption adjustable-rate mortgage securities. The carrying
amount for assets categorized as available-for-sale is their fair value
whereas the carrying amount for assets held-to-maturity is their
amortized cost.
The fair values of the Company's ARM securities and cap agreements are
based on market prices provided by certain dealers who make markets in
these financial instruments. The fair value of the Company's long-term
debt and interest rate swap agreements, which are off-balance sheet
financial instruments, are based on market values provided by dealers
who are familiar with the terms of the long-term debt and swap
agreements. The fair values reported reflect estimates and may not
necessarily be indicative of the amounts the Company could realize in a
current market exchange. Cash and cash equivalents, interest
receivable, reverse repurchase agreements and other liabilities are
reflected in the financial statements at their amortized cost, which
approximates their fair value because of the short-term nature of these
instruments.
NOTE 5. COMMON AND PREFERRED STOCK
In October 1995, the Company entered into a Sales Agency Agreement with
PaineWebber Incorporated. In accordance with the Sales Agency
Agreement, PaineWebber agreed to sell, at the direction and discretion
of the Company, up to 1,174,969 additional shares of the Company's
common stock. During 1996, the Company sold 207,500 shares under this
Sales Agency Agreement and received net proceeds of $3.1 million and
during 1995, the Company sold 148,300 shares under this Sales Agency
Agreement and received net proceeds of $2.1 million.
During 1996, the Company issued 347,434 shares of common stock under
its dividend reinvestment and stock purchase plan and received net
proceeds of $5.4 million and during 1995, the Company issued 269,461
shares of common stock under this plan and received net proceeds of
$3.1 million. During 1994, the Company issued 24,620 shares of common
stock under this plan and received net proceeds of $261,000.
In April 1996, the Company completed a public offering of 3,450,000
shares of its common stock. The Company received net proceeds of $48.7
million.
During 1996, stock options for 23,595 shares of common stock were
exercised at an average exercise price of $15.41 for which the Company
received proceeds of $364,000.
During the Company's 1996 fiscal year, the Company declared dividends
to shareholders totaling $1.65 per share, of which $1.20 was paid
during 1996 and $0.45 was paid on January 10, 1997. During the
Company's 1995 fiscal year, the Company declared dividends to
shareholders totaling $0.93 per share. During the Company's 1994 fiscal
year, the Company declared dividends to shareholders totaling $1.00 per
share. For Federal income tax purposes, $0.03 of the 1996 dividend was
long-term capital gains and all other dividends paid for fiscal years
1996, 1995 and 1994 are ordinary income to the Company's shareholders.
In December 1996, the Company's Registration Statement on Form S-3,
registering the sale of up to $200 million of additional securities,
was declared effective by the Securities and Exchange Commission. This
registration statement includes the possible issuances of common stock,
preferred stock, warrants or shareholder rights. When combined with the
Registration Statement which was declared effective September 12, 1995,
the Company had $242 million of its securities registered for future
sale as of December 31, 1996.
In January 1997, the Company issued 2,760,000 shares of Series A 9.68%
Cumulative Convertible Preferred Stock at a price of $25 per share. Net
proceeds from this issuance totaled $65.9 million.
NOTE 6. STOCK OPTION PLAN
The Company has a Stock Option Plan which authorizes the granting of
options to purchase an aggregate of up to 1,000,000 shares, but not
more than 5% of the outstanding shares of the Company's common stock.
The exercise price for any options granted under the Stock Option Plan
may not be less than 100% of the fair market value of the shares of the
common stock at the time the option is granted. Options become
exercisable six months after the date granted and will expire ten years
after the date granted.
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized
for the Company's stock option plan. Had compensation cost for the
Company's stock option plan been determined based on the fair value at
the grant date for awards in 1996 consistent with the provisions of
SFAS No. 123, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
1996
------------
Net earnings - as reported $ 25,737,000
Net earnings - pro forma $ 25,551,000
Earnings per share - as reported $ 1.73
Earnings per share - pro forma $ 1.72
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1996: dividend yield of
10%; expected volatility of 23.3%; risk-free interest rate of 6.52%;
and expected lives of 7 years.
Information regarding options is as follows:
1996 1995 1994
---------------- ---------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------- ------- ------- ------- --------
Outstanding, beginning of year 482,078 $15.529 488,284 $15.538 414,300 $15.455
Granted 169,099 15.439 23,791 15.358 73,984 16.000
Exercised (23,595) 15.407 - - - -
Expired (836) 14.375 (29,997) 15.556 - -
------- ------ -------- ------ ------- ------
Outstanding, end of year 626,746 $15.510 482,078 $15.529 488,284 $15.538
======= ======= ======= ======= ======= ======
Weighted average fair value of
options granted during the year $186,577
=======
The following table summarizes information about stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
----------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Options Contractual Exercise Exercisable Exercise
Range of Exercise Prices Outstanding Life (Yrs) Price At 12/31/96 Price
------------------------ ----------- ----------- -------- ------------ ---------
$9.375 196 8.2 $ 9.375 196 $ 9.375
$14.375 - $16.125 613,217 7.3 15.436 613,217 15.436
$19.000 13,333 10.0 19.000 - -
------------------------ ----------- ----------- -------- ----------- --------
$9.375 - $16.125 626,746 7.4 $ 15.510 613,413 $ 15.434
======================== =========== =========== ======== =========== ========
NOTE 7. TRANSACTIONS WITH AFFILIATES
The Company has a Management Agreement (the "Agreement") with Thornburg
Mortgage Advisory Corporation ("the Manager"). Under the terms of this
Agreement, the Manager, subject to the supervision of the Company's
Board of Directors, is responsible for the management of the day-to-day
operations of the Company and provides all personnel and office space.
The Agreement provides for an annual review by the unaffiliated
directors of the Board of Directors of the Manager's performance under
the Agreement.
The Company pays the Manager an annual base management fee based on
average shareholders' equity, adjusted for liabilities that are not
incurred to finance assets ("Average Shareholders' Equity" or "Average
Net Invested Assets" as defined in the Agreement) payable monthly in
arrears as follows: 1.1% of the first $300 million of Average
Shareholders' Equity, plus 0.8% of Average Shareholders' Equity above
$300 million.
For the years ended December 31, 1996, 1995 and 1994, the Company paid
the Manager $1,872,000, $1,390,000 and $1,342,000, respectively, in
base management fees in accordance with the terms of the Agreement.
The Manager is also entitled to earn performance based compensation in
an amount equal to 20% of the Company's annualized net income, before
performance based compensation, above an annualized Return on Equity
equal to the ten year U.S. Treasury Rate plus 1%. For purposes of the
performance fee calculation, equity is generally defined as proceeds
from issuance of common stock before underwriter's discount and other
costs of issuance, plus retained earnings. For the years ended December
31, 1996, 1995 and 1994, the Company paid the Manager $2,462,000,
$596,000 and $121,000, respectively, in performance based compensation
in accordance with the terms of the Agreement.
On September 18, 1996, the Board of Directors of the Company completed
a study of the management fees and expenses of comparable companies.
The study indicated that the total management fees and other operating
expenses of the Company are below the level of other comparable
companies, whether the other companies were self-managed or externally
managed. The study also indicated that the Company's base management
fee was significantly less than any other externally managed company
and that the performance fee was higher. As a result of the study, the
unaffiliated directors decreased the formula for the performance based
compensation from 25% to 20% of the Company's annualized net income,
before performance based compensation, above an annualized Return on
Equity as described above. Additionally, the unaffiliated directors
simplified the formula described above for the base management fee.
These changes took effect October 1, 1996. The combined fees paid to
the Manager for the period from October 1, 1996 to December 31, 1996
was virtually the same under the new management fee formulas as they
would have been under the prior formula.
NOTE 8. NET INTEREST INCOME ANALYSIS
The following table summarizes the amount of interest income and
interest expense and the average effective interest rate for the
periods ended December 31, 1996, 1995 and 1994 (dollars in thousands):
1996 1995 1994
---------------- ---------------- ----------------
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ------- -------- ------- -------- -------
Interest Earning Assets:
ARM securities $150,759 6.45% $115,830 6.31% $84,238 4.74%
Cash and cash equivalents 752 5.29 787 5.98 560 4.28
-------- ------ ------- ------ ------- ------
151,511 6.44 116,617 6.31 84,798 4.73
-------- ------ ------- ------ ------- ------
Interest Bearing Liabilities:
Borrowings 121,166 5.67 103,121 6.15 71,743 4.43
------- ------ ------- ------ ------- ------
Net Interest Earning Assets and Spread $ 30,345 0.78% $ 13,497 0.16% $13,055 0.30%
======= ====== ======= ====== ====== ======
Yield on Net Interest Earning Assets (1) 1.29% 0.73% 0.73%
====== ====== ======
(1) Yield on Net Interest Earning Assets is computed by dividing
annualized net interest income by the average daily balance of interest
earning assets.
The following table presents the total amount of change in interest
income/expense from the table above and presents the amount of change
due to changes in interest rates versus the amount of change due to
changes in volume (dollars in thousands):
1996 versus 1995 1995 versus 1994
---------------------------- ---------------------------
Rate Volume Total Rate Volume Total
-------- -------- -------- -------- -------- --------
Interest Income:
ARM securities $ 2,625 $ 32,304 $ 34,930 $ 27,959 $ 3,632 $ 31,591
Cash and cash equivalents (80) 45 (35) 211 17 227
------- ------- ------- ------- ------- -------
2,545 32,349 34,894 28,170 3,649 31,818
------- ------- ------- ------- ------- -------
Interest Expense:
Borrowings (8,092) 26,138 18,045 27,872 3,505 31,377
------- ------- ------- ------- ------- -------
Net interest income $ 10,637 $ 6,212 $ 16,849 $ 298 $ 144 $ 441
======= ======= ======= ======= ======= =======
NOTE 9. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of the quarterly results of operations
(dollars in thousands, except per share amounts):
Year Ended December 31, 1996
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Interest income from ARM securities and cash $ 42,955 $ 40,173 $ 35,680 $ 32,702
Interest expense on borrowed funds 33,978 32,221 28,455 26,512
-------- -------- -------- --------
Net interest income 8,977 7,952 7,225 6,190
-------- -------- -------- --------
Gain (loss) on sale of ARM securities 39 320 - 13
General and administrative expenses 1,607 1,244 1,056 1,072
-------- -------- -------- --------
Net income $ 7,409 $ 7,028 $ 6,169 $ 5,131
======== ======== ======== ========
Net income per share $ 0.46 $ 0.44 $ 0.42 $ 0.41
======== ======== ======== ========
Average number of shares outstanding 16,207,446 16,080,363 14,844,227 12,334,847
========== ========== ========== ==========
Year Ended December 31, 1995
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Interest income from ARM securities and cash $ 32,561 $ 30,178 $ 27,988 $ 25,880
Interest expense on borrowed funds 27,101 25,757 25,541 24,722
-------- -------- -------- --------
Net interest income 5,460 4,421 2,457 1,158
-------- -------- -------- --------
Gain (loss) on sale of ARM securities 49 42 - (659)
General and administrative expenses 925 630 464 457
-------- -------- -------- --------
Net income $ 4,584 $ 3,833 $ 1,993 $ 42
======== ======== ======== ========
Net income per share $ 0.38 $ 0.33 $ 0.17 $ 0.00
======== ======== ======== ========
Average number of shares outstanding 12,102,969 11,946,970 11,873,557 11,780,726
========== ========== ========== ==========
Year Ended December 31, 1994
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Interest income from ARM securities and cash $ 25,457 $ 23,137 $ 19,673 $ 16,531
Interest expense on borrowed funds 23,474 19,834 15,918 12,517
-------- -------- -------- --------
Net interest income 1,983 3,303 3,755 4,014
-------- -------- -------- --------
Gain (loss) on sale of ARM securities (59) 388 398 136
General and administrative expenses 472 480 462 558
-------- -------- -------- --------
Net income $ 1,452 $ 3,211 $ 3,691 $ 3,592
======== ======== ======== ========
Net income per share $ 0.12 $ 0.27 $ 0.32 $ 0.31
======== ======== ======== ========
Average number of shares outstanding 11,771,717 11,760,854 11,754,059 11,748,331
========== ========== ========== ==========
================================================================================
SIGNATURES
================================================================================
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THORNBURG MORTGAGE ASSET CORPORATION
(Registrant)
Dated: March 26, 1997 /s/ H. Garrett Thornburg, Jr.
-----------------------------
H. Garrett Thornburg, Jr.
Chairman of the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
Dated: March 26, 1997 /s/ Richard P. Story
--------------------
Richard P. Story
Chief Financial Officer and Treasurer
(Principal Accounting 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/ H. Garrett Thornburg, Jr. Chairman of the Board, March 26, 1997
- ----------------------------- Director and Chief
H. Garrett Thornburg, Jr. Executive Officer
/s/ Larry A. Goldstone President, Director and March 26, 1997
- ----------------------------- Chief Operating Officer
Larry A. Goldstone
/s/ David A. Ater Director March 26, 1997
- -----------------------------
David A. Ater
/s/ Joseph H. Badal Director March 26, 1997
- -----------------------------
Joseph H. Badal
/s/ Owen M. Lopez Director March 26, 1997
- -----------------------------
Owen M. Lopez
/s/ James H. Lorie Director March 26, 1997
- -----------------------------
James H. Lorie
/s/ Stuart C. Sherman Director March 26, 1997
- -----------------------------
Stuart C. Sherman
================================================================================
Exhibit Index
================================================================================
Sequentially
Numbered
Exhibit Number Exhibit Description Page
- -------------- -------------------------------------------------- ------------
1.1 Sales Agency Agreement (a)
3.1 Articles of Incorporation of the Registrant (b)
3.1.1 Articles of Amendment to Articles of Incorporation
dated June 29, 1995 (c)
3.1.2 Articles Supplementary dated January 21, 1997 (d)
3.2 Amended and Restated Bylaws of the Registrant (e)
4.1 Specimen Common Stock Certificates (b)
4.2 Specimen Preferred Stock Certificates (d)
10.1 Management Agreement between the Registrant and
Thornburg Mortgage Advisory Corporation dated
June 17, 1994 (e)
10.1.1 Amendment to Management Agreement dated
June 16, 1995 (a)
10.1.2 Amendment to Management Agreement dated
December 15, 1995 (f)
10.1.3 Amendment to Management Agreement dated
September 18, 1996 (g)
10.2 Form of Servicing Agreement (b)
10.3 Form of 1992 Stock Option and Incentive Plan
as amended and restated March 14, 1997 * .......... 45
10.4 Form of Dividend Reinvestment and Stock
Purchase Plan (h)
10.4.1 Amendment dated January 8, 1997 to the Company's
Dividend Reinvestment and Stock Purchase Plan (i)
22. Notice and Proxy Statement for the Annual Meeting
of Shareholders to be held on April 24, 1997 (j)
- -----------------------
* Being filed herewith.
(a)Previously filed with Registrant's Form 8-K dated October 10, 1995 and
incorporated herein by reference pursuant to Rule 12b-32.
(b)Previously filed as part of Form S-11 which went effective on June 18, 1993
and incorporated herein by reference pursuant to Rule 12b-32.
(c)Previously filed with Registrant's Form 10-Q dated June 30, 1995 and
incorporated herein by reference pursuant to Rule 12b-32.
(d)Previously filed as part of Form 8-A dated January 17, 1997 and incorporated
herein by reference pursuant to Rule 12b-32.
(e)Previously filed as part of Form S-8 dated July 1, 1994 and incorporated
herein by reference pursuant to Rule 12b-32.
(f)Previously filed with Registrant's Form 10-K dated December 31, 1995 and
incorporated herein by reference pursuant to Rule 12b-32.
(g)Previously filed with Registrant's Form 10-Q dated September 30, 1996 and
incorporated herein by reference pursuant to Rule 12b-32.
(h)Previously filed as Exhibit 4 to Registrant's registration statement on Form
S-3 dated August 31, 1994 and incorporated herein by reference pursuant to
Rule 12b-32.
(i)Previously filed as Exhibit 4 to Registrant's registration statement on Form
S-3 dated March 14, 1997 and incorporated by reference pursuant to Rule
12-b32.
(j)Previously filed on March 24, 1997 and incorporated by reference pursuant to
Rule 12-b32.