UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended September 30, 1994
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission file number 1-9819
RESOURCE MORTGAGE CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Virginia 52-1549373
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
2800 Parham Road, Richmond, Virginia 23228
(Address of principal executive offices) (Zip Code)
(804) 967-5800
(Registrant's telephone number, including area code)
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 ninety days. [x] Yes [ ] No
On October 31, 1994, the registrant had 20,055,908 shares of common stock of
$.01 value outstanding, which is the registrant's only class of common stock.
RESOURCE MORTGAGE CAPITAL, INC.
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1994 and
December 31, 1993 3
Consolidated Statements of Operations for the three months
and the nine months ended September 30, 1994 and 1993 4
Consolidated Statement of Shareholders' Equity for
the nine months ended September 30, 1994 5
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1994 and 1993 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3.
Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6.
Exhibits and Reports on Form 8-K 16
SIGNATURES 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
September 30, December 31,
1994 1993
ASSETS
Mortgage investments:
Collateral for CMOs $ 381,253 $ 434,698
Adjustable-rate mortgage securities, net 2,574,984 2,021,196
Fixed-rate mortgage securities, net 203,607 214,128
Other mortgage securities 73,313 65,625
Mortgage warehouse lines of credit 17,710 156,688
3,250,867 2,892,335
Mortgage loans in warehouse 450,434 777,769
Cash 3,645 1,549
Accrued interest receivable 18,513 13,466
Other assets 22,553 41,643
$ 3,746,012 $ 3,726,762
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized mortgage obligations $ 370,549 $ 432,677
Repurchase agreements 2,953,170 2,754,166
Notes payable 125,527 87,451
Commercial paper - 148,672
Accrued interest payable 9,369 14,695
Deferred income 13,058 13,214
Other liabilities 18,476 22,855
3,490,149 3,473,730
SHAREHOLDERS' EQUITY
Common stock: par value $.01 per share,
50,000,000 shares authorized, 20,055,908 and
19,331,932 issued and outstanding, respectively 201 193
Additional paid-in capital 278,963 259,622
Net unrealized loss on available-for-sale mortgage investments
(19,157) -
Retained earnings (deficit) (4,144) (6,783 )
255,863 253,032
$ 3,746,012 $ 3,726,762
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Interest Income:
Collateral for CMOs $ 8,474 $ 9,075 $25,283 $ 31,214
Adjustable-rate mortgage securities 34,634 19,013 86,285 54,722
Fixed-rate mortgage securities 3,654 3,528 11,361 10,194
Other mortgage investments 4,286 2,222 10,216 5,793
Mortgage warehouse lines of credit 709 1,429 3,481 3,847
Mortgage loans in warehouse 8,160 9,031 26,318 18,859
59,917 44,298 162,944 124,629
Interest and CMO-related expense:
Collateralized mortgage obligations:
Interest 7,882 8,543 23,665 29,377
Other 319 466 1,079 1,561
Repurchase agreements 35,909 20,234 91,551 51,183
Notes payable 1,742 1,130 3,923 3,636
Commercial paper 404 852 1,986 2,359
Other 1,094 1,717 3,350 4,053
47,350 32,942 125,554 92,169
Net margin on mortgage assets 12,567 11,356 37,390 32,460
Valuation adjustments on mortgage assets - (1,400) - (2,400)
Gain on sale of mortgage assets, net of associated costs
5,949 7,761 22,508 18,641
Other (expense) income, net (167) 62 453 454
General & administrative expenses (5,397) (4,033) (16,530) (10,251)
Net income $ 12,952 $13,846 $ 43,821 $ 38,904
Net income per share $ 0.65 $ 0.80 $ 2.22 $ 2.31
Weighted average number of common shares outstanding
20,051,221 17,398,529 19,751,899 16,820,624
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENT OF
SHAREHOLDERS' EQUITY
(amounts in thousands except share data)
Net
unrealized
loss on
available-
Additional for-sale Retained
Number of Common paid-in mortgage earnings
shares stock capital investments (deficit) Total
Balance at December 31, 1993
19,331,932 $ 193 $ 259,622 $ - $ (6,783) $ 253,032
Issuance of common stock, net
723,976 8 19,341 19,349
Net income - nine months ended
September 30, 1994
43,821 43,821
Net change in unrealized loss on
available-for-sale mortgage investments
(19,157) (19,157)
Dividends declared - $2.08 per share (41,182) (41,182)
Balance at September 30, 1994
20,055,908 $ 201 $ 278,963 $ (19,157 $ (4,14 ) $ 255,863
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Nine months ended
September 30,
1994 1993
Operating activities:
Net income $ 43,821 $ 38,904
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Amortization and depreciation 5,78 5,345
Net decrease (increase) in mortgage loans held for sale
326,516 (508,615)
Net decrease in accrued interest, other payables and other assets
8,237 67
Net gain from sales of mortgage investments
(6,802) (1,420)
Other (1,465) 4,905
Net cash provided by (used for) operating activities
376,095 (460,814)
Investing activities:
Collateral for CMOs:
Principal payments on collateral 103,698 162,870
Net decrease in funds held by trustees 11,581 13,613
115,279 176,483
Purchase of CMOs, net (1,890) -
Purchase of other mortgage investments (889,996 (928,616)
Payments on other mortgage investments 366,847 90,091
Proceeds from sales of other mortgage investments 89,177 263,931
Capital expenditures (1,275) (322)
Net cash used for investing activities (321,858 (398,433
Financing activities:
Principal payments on CMOs (113,694) (174,050)
Proceeds from short-term borrowings, net 88,408 1,014,348
Proceeds from stock offerings, net 19,349 62,648
Dividends paid (46,204 (43,917)
Net cash (used for) provided by financing activities
(52,141) 859,029
Net increase (decrease) in cash 2,096 (218 )
Cash at beginning of period 1,549 1,135
Cash at end of period $ 3,645 $ 917
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
(amounts in thousands except share data)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do
not include all of the information and notes required by generally
accepted accounting principles for complete financial statements.
The consolidated financial statements include the accounts of
Resource Mortgage Capital, Inc., its wholly owned subsidiaries,
and certain other entities. As used herein, the "Company" refers
to Resource Mortgage Capital, Inc. ("RMC") and each of the
entities that is consolidated with RMC for financial reporting
purposes. A portion of the Company's mortgage operations are
operated by a taxable corporation that is consolidated with RMC
for financial reporting purposes, but is not consolidated for
income tax purposes. All significant intercompany balances and
transactions have been eliminated in consolidation.
In the opinion of management, all material adjustments, consisting
of normal recurring adjustments, considered necessary for a fair
presentation have been included. The Consolidated Balance Sheet
at September 30, 1994, the Consolidated Statements of Operations
for the three months and the nine months ended September 30, 1994
and 1993, the Consolidated Statement of Stockholders' Equity for
the nine months ended September 30, 1994, the Consolidated
Statements of Cash Flows for the nine months ended September 30,
1994 and 1993 and related notes to consolidated financial
statements are unaudited. Operating results for the nine months
ended September 30, 1994 are not necessarily indicative of the
results that may be expected for the year ending December 31,
1994. For further information, refer to the audited consolidated
financial statements and footnotes included in the Company's Form
10-K for the year ended December 31, 1993.
NOTE 2--MORTGAGE LOANS IN WAREHOUSE AND SECURITIZATION ACTIVITY
The Company purchases and originates fixed-rate and adjustable-
rate loans secured by first mortgages or first deeds of trust on
single-family attached or detached residential properties and
originates fixed-rate loans secured by first mortgages or deeds of
trust on multi-family residential properties. The Company funded
mortgage loans with an aggregate principal balance of $2,418,164
during the nine months ended September 30, 1994. During this
period, the Company sold or securitized mortgage loans with an
aggregate principal balance of $2,765,350.
In the nine months ended September 30, 1994, the Company
recognized net gains of $15,706 on securitizations and sales of
mortgage loans. Additionally, during the nine months ended
September 30, 1994, the Company deferred gains of $2,823 related
to securitization and sales of adjustable-rate mortgage loans that
are convertible to a fixed rate. The deferred gain will be
recognized as income over the five year optional conversion
period. The recognized gain and deferred gain are net of taxes
totaling $2,082 for the nine months ended September 30, 1994.
NOTE 3--AVAILABLE-FOR-SALE MORTGAGE INVESTMENTS
On January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities. This statement requires that
investments in debt and equity securities be classified as either
held-to-maturity securities, trading securities, or available-for-
sale securities. Held-to-maturity securities are defined as
securities that the Company has the positive intent and ability to
hold to maturity and are measured at amortized cost. Trading
securities are defined as securities that are bought and held
principally for the purpose of selling in the near term and are
measured at fair value, with unrealized gains and losses included
in earnings. Securities not classified as either held-to-maturity
securities or trading securities are deemed to be available-for
sale securities and are measured at fair value, with unrealized
gains and losses reported as a separate component of shareholders'
equity. The Company has classified all of its mortgage
investments as available-for-sale securities.
NOTE 4--ACQUISITION
On September 30, 1994, the Company acquired all of the outstanding
common stock of Cram Mortgage Service, Inc., subsequently renamed
to Meritech Mortgage Services, Inc. ("Meritech"), for a purchase
price of $7,188. The Company will use mortgage loan servicing
capabilities provided by Meritech to service a portion of the
mortgage loans originated or purchased by the Company.
The purchase price was approximately $7,100. Of this amount,
approximately $5,700 was paid in cash with the remaining $1,500 paid
through the issuance of a note to the sellers, due in installments
through October 1, 1999. The acquisition was accounted for as a
purchase, and accordingly, the purchase price was allocated to the
assets and liabilities acquired based on their estimated fair
values as of the date of acquisition. There was no goodwill as a
result of the purchase. Meritech's results of operations are not
material to the Company's consolidated financial statements and
pro forma financial information has therefore not been presented.
NOTE 5--SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
INFORMATION
Nine months ended September 30,
1994 1993
Cash paid for interest $ 126,877 $ 89,838
Supplemental disclosure of non-cash activities:
Purchase of collateral for CMOs $ (54,204) $ -
Assumption of CMOs 52,314 -
Purchase of CMOs, net $ (1,890) $ -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS
Resource Mortgage Capital, Inc. (the "Company") originates,
purchases, services and securitizes residential mortgage loans
(collectively, the "mortgage operations") and invests in a
portfolio of residential mortgage securities. The Company's
primary strategy is to use its mortgage operations to create
investments for its portfolio. The Company's principal sources of
income are net interest income on its investment portfolio, gains
on the securitization and sale of mortgage loans and the interest
spread realized while the mortgage loans are being accumulated for
sale or securitization.
The Company's net income on a per share basis has declined in
1994 primarily as a result of the rapid increase in interest rates
and the resulting lower level of overall mortgage loan
originations in the market. As a result of the rapid increase in
interest rates during 1994, the Company has experienced a decrease
in the net spread earned on the adjustable-rate mortgage
securities, which constitute a significant portion of the
portfolio of mortgage investments. Lower anticipated mortgage
loan origination volume is expected to further reduce the gain on
securitization or sale of mortgage assets during the remainder of
1994. The Company expects this adverse environment to continue
into 1995 and likely result in a reduction of the Company's
dividend.
Results of Operations
Three Months Ended Nine Months Ended
(amounts in thousands except
per share September 30, September 30,
information) 1994 1993 1994 1993
Net margin on mortgage assets $ 12,567 $ 11,356 $37,390 $ 32,460
Net gain on sale of mortgage assets 5,949 7,761 22,508 18,641
General and administrative expenses 5,397 4,033 16,530 10,251
Net income 12,952 13,846 43,821 38,904
Net income per share 0.65 0.80 2.22 2.31
Principal balance of mortgage loans funded
574,498 1,192,012 2,418,164 2,903,107
Three Months Ended September 30, 1994 Compared to Three Months
September 30, 1993 The decrease in the Company's earnings during
the three months ended September 30, 1994 as compared to the same
period in 1993 is primarily the result of the decrease in the gain
on sale of mortgage assets and an increase in general and
administrative expenses which offset the increase in net margin.
Net margin on mortgage assets increased to $12.6 million for the
three months ended September 30, 1994 from $11.4 million for three
months ended September 30, 1993. This increase resulted primarily
from the overall growth of the portfolio partially offset by a
decrease in the net interest spread on the portfolio from 1.45%
for the three months ended September 30, 1993 to 1.16% for the
three months ended September 30, 1994.
The gain on sale of mortgage assets decreased to $5.9 million
for the three months ended September 30, 1994 from $7.8 million
for the three months ended September 30, 1993. This decrease
resulted primarily from lower mortgage loan funding levels by the
Company as a result of a decrease in overall mortgage loan
originations in the market. Lower funding levels resulted in
lower gain on sale relating to loans securitized or sold.
The Company incurred $5.4 million of general and administrative
expenses for the three months ended September 30, 1994 as compared
with $4.0 million during the three months ended September 30,
1993. The increase in general and administrative expenses is due
primarily to the development of the Company's mortgage loan
origination capabilities and the growth of the underwriting and
risk management departments in late 1993 and early 1994. The
underwriting and risk management departments were expanded when
the Company began purchasing mortgage loans without a commitment
for mortgage pool insurance in 1993. General and administrative
expenses of $5.4 million for the three months ended September 30,
1994 represents a 14% decline as compared with $6.3 million for
the three months ended June 30, 1994. The Company will continue
to take steps to control general and administrative expenses in
line with the lower volume of mortgage loan fundings.
Nine Months Ended September 30, 1994 Compared to Nine Months
September 30, 1993 The increase in the Company's earnings for
the nine months ended September 30, 1994 as compared to the same
period in 1993 is primarily the result of the increase in net
margin on mortgage assets and the increase in the net gain on sale
of mortgage assets, partially offset by an increase in general and
administrative expenses.
Net margin on mortgage assets increased to $37.4 million for
the nine months ended September 30, 1994 from $32.5 million for
the nine months ended September 30, 1993. This increase resulted
primarily from the overall growth of the portfolio partially
offset by a decrease in the net interest spread on the portfolio
from 1.37% for the nine months ended September 30, 1993 to 1.23%
for the nine months ended September 30, 1994.
The gain on sale of mortgage assets increased to $22.5 million
for the nine months ended September 30, 1994 from $18.6 million
for the nine months ended September 30, 1993. This increase
resulted from an increase in the gain on sale of mortgage assets
from the Company's portfolio. As part of its ongoing portfolio
management strategy, from time to time the Company may sell
mortgage assets from its portfolio.
The increase in earnings was partially offset by an increase in
general and administrative expenses. The Company incurred $16.5
million of general and administrative expenses for the nine months
ended September 30, 1994 as compared with $10.3 million during the
nine months ended September 30, 1993. The increase in general and
administrative expenses is due primarily to the development of the
Company's mortgage loan origination capabilities and the growth of
the underwriting and risk management departments in late 1993 and
early 1994. The underwriting and risk management departments were
expanded when the Company began purchasing mortgage loans without
a commitment for mortgage pool insurance in 1993.
The following tables summarize the average balances of the
Company's interest-earning assets and their average effective
yields, along with the Company's average interest-bearing
liabilities and the related average effective interest rates, for
each of the periods presented.
Average Balances and Effective Interest Rates
Three Months Ended September 30, Nine Months Ended September 30,
(amounts in thousands) 1994 1993 1994 1993
Interest-earning assets : (1)
Collateral for CMOs (2)
$ 374,204 9.06 % $398,468 9.11 % $ 375,597 8.98 % $452,843 9.19 %
Adjustable-rate mortgage securities
2,433,875 5.69 1,553,817 4.89 2,229,197 5.16 1.452,307 5.02
Fixed-rate mortgage securities
204,647 7.14 177,895 6.74 206,888 7.32 175,470 7.34
Other mortgage securities
70,561 24.30 41,238 21.53 74,350 18.32 37,955 20.34
Mortgage warehouse lines of credit
40,091 7.06 111,294 5.13 76,075 6.10 102,081 5.02
Total portfolio-related assets
3,123,378 6.63 2,282,712 6.09 2,962,107 6.15 2,220,656 6.32
Mortgage loans in warehouse
470,013 6.94 609,886 5.92 557,643 6.29 399,569 6.29
Total interest-earning assets
$ 3,593,391 6.67 % $ 2,892,59 6.05% $ 3,519,750 6.17 $ 2,620,225 6.3 %
Interest-bearing liabilities:
Portfolio-related liabilities:
CMOs
$ 376,187 8.38 % $ 404,415 8.45 % $ 381,898 8.26 % $459,898 8.52 %
Repurchase agreements:
Adjustable-rate mortgage securities
2,275,294 4.96 1,465,221 3.57 2,117,803 4.29 1,358,392 3.59
Fixed-rate mortgage securities
188,617 5.35 168,656 5.24 195,186 5.19 163,592 4.82
Other mortgage securities
5,089 5.11 4,596 3.74 6,431 4.17 5,582 3.75
Commercial paper
35,133 4.71 104,186 3.27 69,724 3.82 96,405 3.26
Total portfolio-related liabilities
2,880,320 5.43 2,147,074 4.61 2,771,042 4.89 2,083,869 4.76
Warehouse-related liabilities:
Repurchase agreements
356,967 5.63 444,114 4.42 420,386 4.95 252,889 4.52
Notes payable
77,187 8.10 81,730 5.53 70,963 7.03 85,800 5.65
Total warehouse-related liabilities
434,154 6.07 525,844 4.59 491,349 5.25 338,689 4.80
Total interest-bearing liabilities
$ 3,314,474 5.5 % $ 2,672,918 4.60 % $ 3,262,391 4.94% 2,422,557 4.76 %
Net interest spread
1.16 1.45% 1.23% 1.56%
Net yield on average interest earning assets
1.58% 1.80% 1.59 % 1.91%
(1) Average balances exclude adjustments made in accordance with
Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities to record
available-for-sale securities at fair value.
(2) Average balances exclude funds held by trustees of $6,939 and
$15,345 for the three months ended September 30, 1994 and
September 30, 1993, respectively and $7,554 and $17,632 for the
nine months ended September 30, 1994 and September 30, 1993,
respectively.
The decrease in net interest spread is primarily the result of
the decrease in the spread on adjustable-rate mortgage securities.
Adjustable-rate mortgage securities reset throughout the year,
generally on a semiannual basis. These securities are generally
subject to certain periodic and lifetime interest rate caps. Due
to the nature of the periodic caps, semiannual rate increases are
generally limited to 1%. As a result of the rapidly increasing
interest rate environment during the first nine months of 1994,
the interest rate on certain repurchase borrowings increased at a
faster rate than the interest rate earned on the adjustable-rate
mortgage securities which collateralize these borrowings,
decreasing the net interest spread on these securities.
Additionally, the decrease in the spread on adjustable-rate
mortgage securities resulted from the increase in securities
retained in the portfolio during late 1993 and early 1994 with low
initial pass-through rates (i.e., a "teaser rate"). As of
September 30, 1994, adjustable-rate mortgage securities in the
Company's portfolio were "teased" approximately 1.50% on a
weighted average basis. In future periods the rate the Company
earns on adjustable-rate securities will increase approximately
0.50% during each three month period until these securities become
fully indexed. The spread on adjustable-rate mortgage securities
may increase to the extent the rates on the related repurchase
borrowings increase slower than the resets on these securities.
Conversely, the spread on these securities could decrease further
should the rates on the related repurchase borrowings continue to
increase faster than the interest rates reset on these securities.
Portfolio Activity
The Company's investment strategy is to create a diversified
portfolio of mortgage securities that in the aggregate generate
stable income in a variety of interest rate and prepayment rate
environments and preserve the capital base of the Company.
However, the rapid increase in short term interest rates has
reduced the portfolio income since the first quarter of 1994, and
further rapid increases in short term interest rates could lead to
further reductions in portfolio income. In addition, the increase
in interest rates has reduced the market value of the Company's
mortgage assets to an amount which is approximately $19,157 below
the Company's basis in such assets.
The Company has pursued its strategy of concentrating on its
mortgage operations to create investments with attractive yields
and to benefit from potential gains on sale or securitization. In
many instances the Company's investment strategy involves not only
the creation or acquisition of the asset, but also the related
borrowing to finance a portion of that asset.
Three Months Ended September 30, 1994 Compared to Three Months
Ended September 30, 1993 The net margin on the Company's
portfolio of mortgage investments increased to $11.2 million for
the three months ended September 30, 1994 from $8.4 million for
the three months ended September 30, 1993. This increase resulted
from the overall growth of mortgage assets partially offset by a
decrease in the net interest spread on the portfolio.
The size of the Company's portfolio of mortgage investments at
September 30, 1994 has increased as compared to September 30,
1993, through the addition of investments created through the
Company's mortgage operations and the purchase of mortgage
investments. During the three months ended September 30, 1994,
the Company added approximately $7.5 million principal amount of
adjustable-rate mortgage securities and $3.5 million of other
mortgage securities to its portfolio through its mortgage
operations. Also during the three months ended September 30,
1994, the Company purchased approximately $241.7 million principal
amount of adjustable-rate mortgage securities, $10.9 million
principal amount of fixed-rate mortgage securities, $1.9 million
of other mortgage securities and $16.9 million of collateral for
CMOs, net of $16.7 million of associated borrowings, for its
portfolio. A portion of these securities were financed through
repurchase agreements with investment banking firms.
Additionally, during the three months ended September 30, 1994,
the Company sold $3.2 million of other mortgage securities from
its portfolio. During the three months ended September 30, 1993,
the Company sold $72.5 million principal amount of adjustable-rate
mortgage securities from its portfolio. The Company realized net
gains of $2.3 million and $0.2 million on the sale of mortgage
securities for the three months ended September 30, 1994 and 1993,
respectively.
Nine Months Ended September 30, 1994 Compared to Nine Months Ended
September 30, 1993 The net margin on the Company's portfolio of
mortgage investments increased to $30.7 million for the nine
months ended September 30, 1994 from $25.8 million for the nine
months ended September 30, 1993. This increase resulted from the
overall growth of mortgage assets partially offset by a decrease
in the net interest spread on the portfolio.
The size of the Company's portfolio of mortgage investments at
September 30, 1994 has increased as compared to September 30,
1993, through the addition of investments created through the
Company's mortgage operations and the purchase of mortgage
investments. During the nine months ended September 30, 1994, the
Company added approximately $532.4 million principal amount of
adjustable-rate mortgage securities, $0.9 million principal amount
of fixed-rate mortgage securities and $15.3 million of other
mortgage securities to its portfolio through its mortgage
operations. Also during the nine months ended September 30, 1994,
the Company purchased approximately $274.0 million principal
amount of adjustable-rate mortgage securities, $34.3 million
principal amount of fixed-rate mortgage securities, $21.7 million
of other mortgage securities and $54.2 million of collateral for
CMOs, net of $52.3 million of associated borrowings, for its
portfolio. A portion of these securities were financed through
repurchase agreements with investment banking firms.
Additionally, during the nine months ended September 30, 1994, the
Company sold $55.5 million principal amount of adjustable-rate
securities and $21.2 million of other mortgage securities from its
portfolio. During the nine months ended September 30, 1993, the
Company sold $75.1 million principal amount of adjustable-rate
mortgage securities and $187.4 million of fixed-rate mortgage
securities from its portfolio. The Company realized net gains of
$6.8 million and $1.4 million on the sale of mortgage securities
for the nine months ended September 30, 1994 and 1993,
respectively.
The Company provides mortgage warehouse lines of credit to
various mortgage companies. The Company's obligations under such
lines of credit are funded by bank lines of credit or by
repurchase agreements. As of September 30, 1994, the Company had
$48.0 million of such lines of credit outstanding and had advanced
$17.7 million pursuant to such lines of credit.
Mortgage Operations
The Company acts primarily as an intermediary between the
originators of mortgage loans and the permanent investors in the
mortgage loans or the mortgage-related securities backed by such
mortgage loans. The Company also originates and services single-
family mortgage loans and originates multi-family mortgage loans.
Through its mortgage operations, the Company purchases mortgage
loans from approved sellers, primarily mortgage companies, savings
and loan associations and commercial banks and originates mortgage
loans directly. When a sufficient volume of mortgage loans is
accumulated, the Company sells or securitizes these mortgage loans
through the issuance of CMOs or pass-through securities. During
the accumulation period, the Company finances its purchases of
mortgage loans through warehouse lines of credit or through
repurchase agreements.
The following table summarizes mortgage operations activity for
the three months and nine months ended September 30, 1994 and
1993.
Three Months Ended Nine Months Ended
September 30, September 30,
(amounts in thousands) 1994 1993 1994 1993
Principal amount of loans funded
574,498 $1,192,012 $ 2,418,164 $2,903,107
Principal amount securitized or sold
414,005 882,765 2,765,350 2,394,657
Investments added to portfolio from mortgage operations,
net of associated borrowings
4,245 24,598 47,687 50,963
Three Months Ended September 30, 1994 Compared to Three Months
Ended September 30, 1993 The decrease in the funding volume of
mortgage loans for the three months ended September 30, 1994 as
compared to the three months ended September 30, 1993 is a result
of the lower overall mortgage loan originations in the market.
The gain on securitizations and sales of mortgage loans decreased
to $3.6 million for the three months ended September 30, 1994 from
$7.6 million for the three months ended September 30, 1993,
resulting primarily from this lower funding volume.
Nine Months Ended September 30, 1994 Compared to Nine Months Ended
September 30, 1993 The decrease in the funding volume of
mortgage loans for the nine months ended September 30, 1994 as
compared to the nine months ended September 30, 1993 is a result
of the lower overall mortgage loan originations in the market.
The gain on securitizations and sales of mortgage loans decreased
to $15.7 million for the nine months ended September 30, 1994 from
$17.2 million for the nine months ended September 30, 1993,
resulting primarily from increased competition in the market and
lower funding volume.
During 1994, the Company began originating certain single-
family mortgage loans through a network of mortgage brokers. As
the Company developed these mortgage loan origination
capabilities, general and administrative expenses have increased.
The Company plans to securitize these new loan products through
the issuance of CMOs, and, therefore, no gain on sale will be
recognized on these securitizations. Instead, profits from these
securitizations will be recognized over time as part of net margin
income. This strategy, which is consistent with the Company's
goal of increasing its net margin income, will have a negative
impact on earnings during 1994 and 1995. With respect to
purchased mortgage loans, the Company will generally continue its
strategy of either selling these loans in whole loan form or
securitizing them using a senior subordinated structure. The
Company will recognize a gain or loss on sale of mortgage assets
as a result of such sales or securitizations.
During the third quarter of 1994, the Company acquired a
mortgage servicing company with a servicing portfolio of
approximately $600 million. Through this acquisition, the Company
plans to service a portion of the mortgage loans it originates or
purchases as discussed above. The addition of this servicing
capability gives the Company complete control over the entire
mortgage process on originated mortgage loans, from underwriting
and origination to servicing and securitization.
Other Matters
The Company has limited exposure to losses due to fraud
resulting from the origination of a mortgage loan. The Company
has established a loss allowance for such losses. An estimate for
such losses is made at the time loans are sold or securitized, and
the loss allowance is adjusted accordingly. This estimate is
based on management's judgement and the allowance is evaluated
periodically. At September 30, 1994 the allowance totaled $4.3
million and was included in other liabilities.
During the third quarter of 1994 the Company moved its
corporate offices to the Richmond, Virginia area. The Company's
operations had previously been located in this area and the move
is intended to enhance communication and interaction between the
corporate and operations functions.
The Company and its qualified REIT subsidiaries (collectively
"Resource REIT") have elected to be treated as a real estate
investment trust for federal income tax purposes, and therefore is
required to distribute annually substantially all of its taxable
income. Resource REIT estimates that its taxable income for the
nine months ended September 30, 1994 was approximately $42.5
million. Taxable income differs from the financial statement net
income which is determined in accordance with generally accepted
accounting principles.
Liquidity and Capital Resources
The Company uses its cash flow from operations, issuance of
CMOs or pass-through securities, other borrowings and capital
resources to meet its working capital needs. Historically, these
sources of cash flow have provided sufficient liquidity for the
conduct of the Company's operations. However, given the decline in
the market value during 1994 of the Company's mortgage assets,
primarily related to the decline in the market value of its
adjustable-rate mortgage securities, the Company's available
liquidity has been reduced. To the extent the market value of the
Company's mortgage assets continues to decline, the Company may be
forced to sell certain mortgage assets in order to maintain
liquidity. If required, these sales could be made at prices lower
than the carrying value of such assets, which could result in
losses.
The Company's borrowings may bear fixed or variable interest
rates, may require additional collateral in the event that the
value of the existing collateral declines, and may be due on
demand or upon the occurrence of certain events. If borrowing
costs are higher than the yields on the mortgage assets purchased
with such funds, the Company's ability to acquire mortgage assets
may be substantially reduced and it may experience losses.
The Company borrows funds on a short-term basis to support the
accumulation of mortgage loans prior to the sale of such mortgage
loans or the issuance of mortgage securities. These short-term
borrowings consist of the Company's warehouse lines of credit and
repurchase agreements and are paid down as the Company securitizes
or sells mortgage loans. The Company has a $150 million credit
facility, which also allows the Company to borrow up to $30
million on an unsecured basis for working capital purposes. This
credit facility expires in February 1995. The Company also has
various committed repurchase agreements totaling $425 million.
These facilities mature in June and September 1995. The Company
has arranged separate financing for the origination of multi-
family mortgage loans for up to $75 million. The Company expects
that these credit facilities will be renewed if necessary, at
their respective expiration dates, although there can be no
assurance of such renewal. At September 30, 1994 the Company had
borrowed $421.7 million under these credit facilities. The lines
of credit contain certain financial covenants which the Company
met as of September 30, 1994. However, changes in asset levels or
results of operations could result in the violation of one or more
covenants in the future.
The Company finances adjustable-rate mortgage securities and
certain other mortgage assets through repurchase agreements.
Repurchase agreements allow the Company to sell mortgage assets
for cash together with a simultaneous agreement to repurchase the
same mortgage assets on a specified date for an increased price,
which is equal to the original sales price plus an interest
component. At September 30, 1994, the Company had outstanding
obligations of $2.6 billion under such repurchase agreements, of
which $2.4 billion, $192.5 million and $7.2 million were secured
by adjustable-rate mortgage securities, fixed-rate mortgage
securities and other mortgage securities, respectively. Increases
in either short-term interest rates or long-term interest rates
could negatively impact the valuation of these mortgage assets and
may limit the Company's borrowing ability or cause various lenders
to initiate margin calls. Additionally, certain of the Company's
adjustable-rate mortgage securities are AA or AAA rated classes
that are subordinate to related AAA rated classes from the same
series of securities. Such AA or AAA rated classes have less
liquidity than securities that are not subordinated, and the value
of such classes is more dependent on the credit rating of the
related insurer or the credit performance of the underlying
mortgage loans. As a result of such a downgrade of an insurer, or
the deterioration of the credit quality of the underlying mortgage
collateral, the Company may be required to sell certain mortgage
assets in order to maintain liquidity. If required, these sales
could be made at prices lower than the carrying value of the
assets, which could result in losses.
A substantial portion of the assets of the Company are pledged
to secure indebtedness incurred by the Company. Accordingly, those
assets would not be available for distribution to any general
creditors or the stockholders of the Company in the event of the
Company's liquidation, except to the extent that the value of such
assets exceeds the amount of the indebtedness they secure.
On October 14, 1994 the Company issued $50 million in notes
maturing between 1999 and 2001. The proceeds from this issuance
were used to provide additional liquidity.
The REIT provisions of the Internal Revenue Code require
Resource REIT to distribute to shareholders substantially all of
its taxable income, thereby restricting its ability to retain
earnings. The Company may issue additional common stock or other
securities in the future in order to fund growth in its
operations, growth in its portfolio of mortgage investments, or
for other purposes.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 1993, the Company was notified by the
Securities and Exchange Commission (the "Commission")
that a formal order of investigation had been issued
to review trading activity in the Company's stock
during April and May of 1992. In this regard, the
Company and certain of its officers and directors have
produced documents and testified before the staff of
the Commission. The Company and the subpoenaed
officers and directors are complying with the requests
of the Commission. Based on information available to
the Company, and upon advice of counsel, management
does not believe that the investigation will result in
any action that will have a material adverse impact on
the Company.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
RESOURCE MORTGAGE CAPITAL, INC.
By:
Thomas H. Potts,
President
(authorized officer of registrant)
Lynn K. Geurin,
Executive Vice
President and Chief Financial Officer
(principal accounting officer)
Dated: November 14, 1994