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, 1995
[ ] 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.)
4880 Cox Road, Glen Allen, Virginia 23060
(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 1995, the registrant had 20,198,678 shares of common stock of
$.01 par 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, 1995 and
December 31, 1994.........................................3
Consolidated Statements of Operations for the three months
and the nine months ended September 30, 1995 and 1994.....4
Consolidated Statement of Shareholders' Equity for
the nine months ended September 30, 1995..................5
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1995 and 1994.........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............................................15
Item 2. Changes in Securities.......................................15
Item 3.Defaults Upon Senior Securities...............................15
Item 4. Submission of Matters to a Vote of Security Holders..........15
Item 5. Other Information............................................15
Item 6. Exhibits and Reports on Form 8-K............................15
SIGNATURES...........................................................16
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,
1995 1994
ASSETS
Mortgage investments:
Collateral for CMOs $ 832,915 $ 441,222
Adjustable-rate mortgage securities, net 2,143,373 2,321,388
Fixed-rate mortgage securities, net 38,622 194,078
Other mortgage securities 65,755 64,293
Mortgage warehouse lines of credit 10,482 7,938
3,091,147 3,028,919
Mortgage loans in warehouse 329,217 518,131
Cash, substantially restricted 3,403 6,340
Accrued interest receivable 15,923 19,019
Other assets 24,768 28,187
$ 3,464,458 $ 3,600,596
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized mortgage obligations $ 773,744 $ 424,800
Repurchase agreements 2,192,243 2,804,946
Notes payable 169,342 135,110
Accrued interest payable 7,097 11,450
Other liabilities 24,521 26,819
3,166,947 3,403,125
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share,
50,000,000 shares authorized:
9.75% Cumulative Convertible Series A,
1,552,500 and none issued
and outstanding, respectively 35,466 -
($37,260 aggregate liquidation preference)
Common stock, par value $.01 per share,
50,000,000 shares authorized, 20,134,370
and 20,078,013 issued and outstanding, respectively 201 201
Additional paid-in capital 280,265 279,296
Net unrealized loss on available-for-sale
mortgage investments (8,796) (72,678)
Retained deficit (9,625) (9,348)
297,511 197,471
$ 3,464,458 $ 3,600,596
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,
1995 1994 1995 1994
Interest Income:
Collateral for CMOs $ 17,334 $ 8,474 $ 40,040 $ 25,283
Adjustable-rate mortgage securities 38,457 34,634 108,774 86,285
Fixed-rate mortgage securities 1,515 3,654 6,363 11,361
Other mortgage securities 2,138 4,286 7,558 10,216
Mortgage warehouse lines of credit 170 709 445 3,481
Mortgage loans in warehouse 6,236 8,160 24,496 26,318
65,850 59,917 187,676 162,944
Interest and CMO-related expense:
Collateralized mortgage obligations:
Interest 14,058 7,882 33,346 23,665
Other 499 319 1,401 1,079
Repurchase agreements 35,130 35,909 111,441 91,551
Notes payable 3,192 1,481 9,045 3,644
Commercial paper - 404 - 1,986
Other 791 1,355 3,182 3,629
53,670 47,350 158,415 125,554
Net margin on mortgage assets 12,180 12,567 29,261 37,390
Gain on sale of mortgage assets,
net of associated costs 2,033 5,949 6,421 22,508
Other income (expense), net 316 (167) 2,235 453
General and administrative expenses (4,401) (5,397) (13,152) (16,530)
Net income 10,128 12,952 24,765 43,821
Dividends on preferred stock (908) - (908) -
Net income available
to common stockholders $ 9,220 $ 12,952 $ 23,857 $ 43,821
Net income per common share $ 0.46 $ 0.65 $ 1.19 $ 2.22
Weighted average number of common
shares outstanding 20,129,011 20,051,221 20,104,265 19,751,899
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENT OF Net
SHAREHOLDERS' EQUITY unrealized
(amounts in thousands except share data) loss on
available-
Additional for-sale
Preferred Common paid-in mortgage Retained
stock stock capital securities deficit Total
Balance at
December 31, 1994 $ - $ 201 $ 279,296 $ (72,678) $ (9,348) $ 197,471
Net income - nine months ended
September 30, 1995 - - - - 24,765 24,765
Issuance of preferred
stock 35,466 - - - - 35,466
Issuance of common
stock - - 969 - - 969
Net change in unrealized loss on
available-for-sale mortgage
investments - - - 63,882 - 63,882
Common dividends declared
- $1.20 per share - - - - (24,134) (24,134)
Preferred dividends
declared - $0.585 per
share - - - - (908) (908)
Balance at September 30, 1995
$ 35,466 $ 201 $ 280,265 $ (8,796) $ (9,625) $297,511
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended
(amounts in thousands) September 30,
1995 1994
Operating activities:
Net income $ 23,857 $ 43,821
Adjustments to reconcile net income to net cash
provided by
operating activities:
Amortization and depreciation 9,651 5,788
Net decrease in mortgage loans held for sale 191,574 326,516
Net (increase) decrease in
accrued interest, other assets and
other liabilities (12,428) 8,237
Net gain from sales of mortgage investments (2,276) (6,802)
Other 2,638 (1,465)
Net cash provided by operating activities 213,016 376,095
Investing activities:
Collateral for CMOs:
Purchases of mortgage loans
subsequently securitized (464,564) -
Principal payments on collateral 149,908 103,698
Net decrease in funds held by trustees 797 11,581
(313,859) 115,279
Purchase of CMOs, net - (1,890)
Purchase of other mortgage investments (431,226) (889,996)
Payments on other mortgage investments 171,875 366,847
Proceeds from sales of other mortgage investments 634,364 89,177
Capital expenditures (584) (1,275)
Net cash used for investing activities 60,570 (321,858)
Financing activities:
Proceeds from issuance of CMOs 451,155 -
Principal payments on CMOs (125,692) (113,694)
(Repayments of) proceeds from borrowings, net (623,146) 88,408
Proceeds from stock issuance, net 36,435 19,349
Dividends paid (15,275) (46,204)
Net cash used for financing activities (276,523) (52,141)
Net (decrease) increase in cash (2,937) 2,096
Cash at beginning of period 6,340 1,549
Cash at end of period $ 3,403 $ 3,645
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(amounts in thousands except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 taxable corporations that
are consolidated with RMC for financial reporting purposes, but are 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, 1995, the
Consolidated Statements of Operations for the three and nine months ended
September 30, 1995 and 1994, the Consolidated Statement of Stockholders'
Equity for the nine months ended September 30, 1995, the Consolidated
Statements of Cash Flows for the nine months ended September 30, 1995 and 1994
and related notes to consolidated financial statements are unaudited.
Operating results for the nine months ended September 30, 1995 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1995. 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, 1994.
Certain amounts for 1994 have been reclassified to conform with the
presentation for 1995.
NOTE 2 - NET INCOME PER COMMON SHARE
Net income per common share as shown on the consolidated statements of
operations for the three and nine months ended September 30, 1995 and 1994 is
primary net income per common share. Fully diluted net income per common
share is not presented because the Series A Cumulative Convertible Preferred
Stock is anti-dilutive.
NOTE 3 - AVAILABLE-FOR-SALE MORTGAGE INVESTMENTS
The Company has classified all of its mortgage investments as available-
for-sale. The following tables summarize the Company's mortgage
investments held at September 30, 1995 and mortgage investments sold during
the nine months ended September 30, 1995. The basis of securities sold is
computed using the specific identification method.
Investments held at September 30, 1995
Amortized Fair Gross Gross
cost basis value unrealized gain unrealized loss
Collateral for CMOs $822,182 $832,915 $10,977 $(244)
Adjustable-rate mortgage
securities 2,171,486 2,143,373 7,320 (35,433)
Fixed-rate mortgage securities 39,106 38,622 570 (1,054)
Other mortgage securities 56,687 65,755 11,277 (2,209)
Mortgage warehouse
lines of credit 10,482 10,482 - -
$3,099,943 $3,091,147 $30,144 $ (38,940)
Investments sold during the nine months ended September 30, 1995
Amortized Proceeds Gross Gross
cost basis from sale realized gain realized loss
Collateral for CMOs $ - $ - $ - $ -
Adjustable-rate mortgage
securities 623,261 627,748 13,654 (9,167)
Fixed-rate mortgage
securities - - - -
Other mortgage securities 8,827 6,616 1,859 (4,070)
Mortgage warehouse lines
of credit - - - -
$632,088 $634,364 $15,513 $(13,237)
The gross realized gain on sale of adjustable-rate mortgage securities sold
during 1995 includes the basis in the repurchase obligation related to
convertible adjustable-rate mortgage loans previously securitized or sold.
NOTE 4 - OTHER MATTERS
The gain on sale of mortgage assets for the nine months ended September 30,
1995 is net of tax expense totaling $5,252.
NOTE 5 - SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
Nine months ended September 30,
1995 1994
Cash paid for interest $ 160,279 $ 126,877
Supplemental disclosure of
non-cash activities:
Purchase of collateral for CMOs $ - $ (54,204)
Assumption of CMOs - 52,314
Purchase of CMOs, net $ - $ (1,890)
NOTE 6- SUBSEQUENT EVENT
Subsequent to September 30, 1995, the Company issued 2,196,824 shares of
Series B cumulative convertible preferred stock. Net proceeds from this
issuance totaling $51.5 million were used initially to pay down short-term
borrowings.
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 sales of mortgage loans and the interest spread realized
while the mortgage loans are being accumulated for securitization or sale.
The Company's results were negatively impacted during the nine months
ended September 30, 1995 by the rapid increase in interest rates during 1994
primarily during the second half of the year, and the resulting lower level of
overall mortgage loan originations in the market. As a result of this rapid
increase in interest rates, the Company experienced a decrease in the net
interest spread earned on the adjustable-rate mortgage securities, which
constitute a significant portion of its portfolio of mortgage investments.
The net interest spread that the Company earns on adjustable-rate mortgage
securities has increased during the second and third quarters of 1995 and the
Company expects this trend to continue during the fourth quarter of 1995
assuming a relatively stable interest rate environment during this time
period. Additionally, the net interest margin that the Company earned on its
portfolio of mortgage investments during the third quarter of 1995 improved
relative to the margin earned during the first and second quarter of 1995 as a
result of the issuance of certain CMOs during 1995.
Results of Operations
Three Months Ended Nine Months Ended
(amounts in thousands except September 30, September 30,
per share information) 1995 1994 1995 1994
Net margin on mortgage assets $ 12,180 $ 12,567 $ 29,261 $ 37,390
Gain on sale of mortgage assets, net of
associated costs 2,033 5,949 6,421 22,508
General and administrative expenses 4,401 5,397 13,152 16,530
Net income 10,128 12,952 24,765 43,821
Net income per common share 0.46 0.65 1.19 2.22
Principal balance of mortgage
loans funded 242,213 574,498 679,008 2,418,164
Three Months and Nine Months Ended September 30, 1995 Compared to Three Months
and Nine Months Ended September 30, 1994 The decrease in the Company's
earnings during the nine months ended September 30, 1995 as compared to the
same period in 1994 is primarily the result of the decrease in the net margin
on mortgage assets and the gain on sale of mortgage assets. The decrease in
the Company's earnings for the three months ended September 30, 1995 as
compared with the same period in 1994 can be attributed primarily to the
decrease in gain on sale of mortgage assets.
Net margin on mortgage assets decreased to $29.3 million for the nine
months ended September 30, 1995 from $37.4 million for nine months ended
September 30, 1994. This decrease resulted primarily from the change in the
net interest spread on the portfolio-related assets which declined from 1.26%
for the nine months ended September 30, 1994 to 0.90% for the nine months
ended September 30, 1995.
The gain on sale of mortgage assets decreased to $2.0 million for the
three months ended September 30, 1995 from $5.9 million for the three months
ended September 30, 1994. The gain on sale of mortgage assets decreased to
$6.4 million for the nine months ended September 30, 1995 from $22.5 million
for the nine months ended September 30, 1994. These decreases 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 and a higher
level of price competition for mortgage loans. Lower funding levels resulted
in lower gain on sale relating to loans securitized or sold. The gain on sale
of mortgage assets also decreased as a result of the Company's securitization
strategy during this time period which includes securitizing a significant
portion of its mortgage loan production through the issuance of CMOs.
General and administrative expenses decreased to $13.2 million for the
nine months ended September 30, 1995 from $16.5 million for the nine months
ended September 30, 1994 as the result of the Company's effort to reduce costs
in line with the reduced level of mortgage loan originations.
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)
1995 1994 1995 1994
Average Effective Average Effective Average Effective Average Effective
Balance Rate Balance Rate Balance Rate Balance Rate
Interest-earning assets : (1)
Collateral for CMOs (2)
$833,871 8.38% $374,204 9.06% $635,493 8.50% $ 375,597 8.98%
Adjustable-rate mortgage securities
2,209,192 6.96 2,433,875 5.69 2,151,567 6.74 2,229,197 5.16
Fixed-rate mortgage securities
66,674 9.09 204,647 7.14 104,699 8.10 206,888 7.32
Other mortgage securities
54,132 15.81 70,561 24.30 56,744 17.76 74,350 18.32
Mortgage warehouse lines of credit
6,807 12.93 40,091 7.06 6,298 11.54 76,075 6.10
Total portfolio-related assets
3,170,676 7.54 3,123,378 6.63 2,954,801 7.39 2,962,107 6.15
Mortgage loans in warehouse
279,759 8.92 470,013 6.94 378,909 8.27 557,643 6.29
Total interest-earning assets
$3,450,435 7.66% $3,593,391 6.67% $3,333,710 7.49% $3,519,750 6.17%
Interest-bearing liabilities:
Portfolio-related liabilities:
CMOs
$787,372 7.14% $376,187 8.38% $614,651 7.23% $381,898 8.26%
Repurchase agreements:
Adjustable-rate mortgage securities
2,075,714 6.17 2,275,294 4.96 1,981,963 6.31 2,117,803 4.29
Fixed-rate mortgage securities
59,786 5.63 188,617 5.35 95,533 5.48 195,186 5.19
Other mortgage securities
6,212 6.31 5,089 5.11 5,870 6.36 6,431 4.17
Mortgage warehouse lines of credit
4,835 6.70 35,133 4.71 5,575 7.73 69,724 3.82
Total portfolio-related liabilities
2,933,919 6.42 2,880,320 5.43 2,703,592 6.49 2,771,042 4.89
Warehouse-related liabilities:
Repurchase agreements
113,710 6.93 356,967 5.63 242,492 7.09 420,386 4.95
Notes payable
112,048 7.13 77,187 8.10 85,751 7.68 70,963 7.03
Total warehouse-related liabilities
225,758 7.03 434,154 6.07 328,243 7.25 491,349 5.25
Total interest-bearing liabilities
$3,159,677 6.46% $3,314,474 5.51% $3,031,835 6.57% $3,262,391 4.94%
Net interest spread on portfolio-related assets
1.12% 1.20% 0.90% 1.26%
Total net interest spread
1.20% 1.16% 0.92% 1.23%
Net yield on average interest earning assets
1.74% 1.58% 1.51% 1.59%
(1) Average balances exclude adjustments made in accordance with Statement
of Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities to record available-for-sale securities at fair
value.
(2) Average balances exclude funds held by trustees of $2,953 and $6,939 for
the three months ended September 30, 1995 and September 30, 1994,
respectively, and $3,999 and $7,554 for the nine months ended September 30,
1995 and September 30, 1994, respectively.
The decrease in net interest spread for the nine months ended September
30, 1995 relative to the same periods in 1994 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 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 rapidly increasing short-term
interest rates from February 1994 to February 1995, the interest rate on
certain repurchase borrowings, which are not subject to caps, 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., teaser rates). As of September 30, 1995,
adjustable-rate mortgage securities in the Company's portfolio were "teased"
approximately 0.33% on a weighted average basis. Comparatively, as of
September 30, 1994, adjustable-rate mortgage securities in the Company's
portfolio were "teased" approximately 1.50% on a weighted average basis.
During the fourth quarter, the rate the Company earns on adjustable-rate
securities will continue to increase 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 either i) decrease
or ii) increase more slowly than the resets on these securities. Conversely,
the spread on these securities could decrease if the rates on the related
repurchase borrowings 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 had a
negative impact on the value of the Company's portfolio. As interest rates
have stabilized during 1995, the net interest spread on portfolio-related
assets has increased relative to early 1995 and the fair value of the
Company's available-for-sale mortgage investments increased by $63.9 million
during the first nine months of 1995, decreasing the net unrealized loss on
available-for-sale mortgage investments from $72.7 million at December 31,
1994 to $8.8 million at September 30, 1995. This increase is attributable
primarily to the increase in value of adjustable-rate mortgage securities.
The Company anticipates that the net interest spread on portfolio-related
assets will continue to increase during the remainder of 1995 assuming a
relatively stable interest rate environment.
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 and Nine Months Ended September 30, 1995 Compared to Three and Nine
Months Ended September 30, 1994 The net margin on the Company's portfolio of
mortgage investments increased to $11.4 million for the three months ended
September 30, 1995 from $11.2 million for the three months ended September 30,
1994. The increase in net margin on the Company's portfolio of mortgage
investments is generally attributable to an increase in the spread on
adjustable-rate mortgage securities and the issuance of certain CMOs during
1995. The spread on adjustable-rate mortgage securities increased from 0.73%
for the three months ended September 30, 1994 to 0.79% for the three months
ended September 30, 1995. The average balance of Collateral for CMOs
increased to $833.9 million for the three months ended September 30, 1995 from
$374.2 million for the three months ended September 30, 1994. Additionally,
the spread on CMOs increased to 1.24% from 0.68% during the same time period.
The net margin on the Company's portfolio of mortgage investments
decreased to $27.5 million for the nine months ended September 30, 1995 from
$30.7 million for the nine months ended September 30, 1994. The decrease in
net margin on the Company's portfolio of mortgage investments is generally
attributable to a decline in the spread on adjustable-rate mortgage
securities. The spread on adjustable-rate mortgage securities decreased to
0.43% for the nine months ended September 30, 1995 from 0.87% for the nine
months ended September 30, 1994.
During the nine months ended September 30, 1995, the Company sold certain
investments to (i) reduce the Company's exposure to periodic cap risk as
discussed above, (ii) reduce the Company's exposure to further declines in the
market value of such securities and (iii) increase liquidity. The aggregate
principal amount of investments sold was $632.1 million, consisting of $623.3
million principal amount of adjustable-rate mortgage securities and $8.8
million of other mortgage securities from its portfolio. Additionally, during
the nine months ended September 30, 1995, the Company sold its repurchase
obligation on all convertible adjustable-rate mortgage loans previously
securitized or sold. During the nine months ended September 30, 1994, the
Company sold $55.5 million principal amount of adjustable-rate mortgage
securities and $21.2 million of other mortgage securities from its portfolio.
The Company realized a net gain of $2.3 million on the sale of mortgage
securities and its repurchase obligation for the nine months ended September
30, 1995 compared to a net gain of $6.8 million for the nine months ended
September 30, 1994. During the three months ended September 30, 1995, the
Company sold $124.9 million principal amount of adjustable-rate mortgage
securities from its portfolio. During the three months ended September 30,
1994, the Company sold $72.5 million principal amount of adjustable-rate
mortgage securities from its portfolio. The Company realized a net gain of
$1.5 million on the sale of mortgage securities for the three months ended
September 30, 1995 compared to a net gain of $2.3 million for the three months
ended September 30, 1994. During the nine months ended September 30, 1995,
the Company added approximately $608.2 million of collateral for CMOs, with
$576.9 million of associated borrowings, $1.7 million of fixed-rate mortgage
securities and $5.7 million of other mortgage securities to its portfolio
through its mortgage operations.
Mortgage Operations
The Company originates, purchases and services residential mortgage
loans. When a sufficient volume of mortgage loans is accumulated, the Company
sells or securitizes these mortgage loans primarily through the issuance of
CMOs or pass-through securities. During the accumulation period, the Company
finances its funding of mortgage loans through warehouse lines of credit or
through repurchase agreements.
The following table summarizes mortgage operations activity for the three and
nine months ended September 30, 1995 and 1994.
Three Months Ended Nine Months Ended
September 30, September 30,
(amounts in thousands) 1995 1994 1995 1994
Principal amount of loans funded $245,213 $574,498 $682,008 $2,418,164
Principal amount securitized
or sold 138,149 414,005 865,995 2,765,350
Investments added to portfolio from mortgage operations, net of associated
borrowings 5,556 4,245 40,401 47,687
Three Months and Nine Months Ended September 30, 1995 Compared to Three Months
Ended Nine Months Ended September 30, 1994 The decrease in the funding
volume of mortgage loans for the three months and the nine months ended
September 30, 1995 as compared to the three months and the nine months ended
September 30, 1994 is a result of the lower overall mortgage loan originations
in the market and an increased level of price competition for mortgage loans.
The gain on securitizations and sales of mortgage loans, excluding recognition
of deferred gains, decreased to $2.9 million for the nine months ended
September 30, 1995 from $3.6 million for the nine months ended September 30,
1994, resulting primarily from this lower funding volume and the Company's
current securitization strategy.
The Company's current securitization strategy includes securitizing a
significant portion of its loan production through the issuance of CMOs.
These securitizations are recorded as financing transactions and as such, no
gain on sale is recognized. Instead, income related to these securitizations
will be recognized over time as part of net margin income. With respect to
the remaining portion of the Company's loan production, the Company will
generally continue its strategy of either selling these loans in whole loan
pools 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 nine months ended September 30, 1995, the Company sold a
portion of its purchased mortgage servicing rights which were acquired along
with the Company's servicing operation in 1994. The gain resulting from this
sale totaled $1.2 million. Pursuant to the original acquisition strategy, the
Company will continue to sell purchased mortgage servicing rights as it adds
its own mortgage loan products to the servicing portfolio. As of September
30, 1995, the Company's serviced $922 million in mortgage loans.
During the three months ended September 30, 1995, the Company issued
various commitments to fund multi-family mortgage loans. As of the date of
filing, the Company had funded $7.9 million of such loans and had $358 million
of commitments outstanding to fund additional multi-family mortgage loans
through 1997.
Other Matters
The Company has exposure to credit losses related to delinquent loans in
warehouse. Additionally, the Company may retain a portion of the credit risk
after securitization. Such credit loss exposure is generally limited to an
amount equal to a fixed percentage of the principal balance of the pool of
mortgage loans at the time of securitization. After securitization, the
Company may also be exposed to losses due to fraud during the origination of
a mortgage loan or special hazards. The Company establishes discounts and
reserves for these estimated potential losses. This estimate is evaluated
periodically and the reserves are adjusted accordingly. At September 30,
1995, these discounts and reserves totaled $32.4 million.
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, 1995 was approximately
$23.0 million.
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, if
a significant decline in the market value of the Company's mortgage securities
should occur, the Company's available liquidity may be reduced. As a result
of such a reduction in liquidity, 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
asses 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
credit facilities aggregating $185 million to finance mortgage loan fundings
that expire in November 1995 and May 1996. One facility includes a sub-
agreement which allows the Company to borrow up to $30 million for working
capital purposes. The Company also has various committed repurchase
agreements totaling $260 million maturing in November 1995 and May 1996
relating to mortgage loans in warehouse. The Company expects that these
credit facilities will be renewed, if necessary, at their respective
expiration dates, although there can be no assurance of such renewal. The
Company may also finance a portion of its mortgage loans in warehouse with
repurchase agreements on an uncommitted basis. At September 30, 1995, the
Company had borrowed $230.6 million under these credit facilities. The lines
of credit contain certain financial covenants which the Company met as of
September 30, 1995. 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. The Company may lengthen the duration of its
repurchase agreements by entering into certain futures and / or option
contracts. At September 30, 1995, the Company had outstanding obligations of
$2.1 billion under such repurchase agreements, of which $2.1 billion, $30.9
million and $8.3 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. As of September 30, 1995, the Company
had lengthened the duration of $750 million of its repurchase agreements to
six months by entering into certain futures and option contracts.
Additionally, the Company owns approximately $61.0 million of its CMOs and has
financed such CMOs with $58.0 million of short-term debt. For financial
statement presentation purposes, the Company has classified the $58.0 million
of short-term debt as CMOs outstanding.
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.
The Company has outstanding $50 million in unsecured notes maturing
between 1999 and 2001. The proceeds from this issuance were used for general
corporate purposes. The note agreements contain certain financial covenants
which the Company met as of September 30, 1995. However, changes in asset
levels or results of operations could result in the violation of one or more
covenants in the future.
During the nine months ended September 30, 1995, the Company issued
1,552,500 shares of Series A convertible preferred stock. Net proceeds from
this issuance totaling $35.7 million was used initially to pay down short-term
borrowings. Subsequent to September 30, 1995, the Company issued 2,196,824
shares of Series B cumulative convertible preferred stock. Net proceeds from
this issuance totaling $51.5 million were also used initially to pay down
short-term borrowings.
The REIT provisions of the Internal Revenue Code require Resource REIT to
distribute to shareholders substantially all of its taxable income, thereby
restricting its ability to retain earnings. The Company may issue additional
common stock, preferred stock or other securities in the future in order to
fund growth in its operations, growth in its portfolio of mortgage
investments, or for other purposes.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
At September 30, 1995, there were no material pending legal
proceedings, outside the normal course of business, to which the
Company was a party or of which any of its property was subject.
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
Thomas H. Potts, President
(authorized officer of registrant)
Lynn K. Geurin
Lynn K. Geurin, Executive Vice
President and Chief Financial Officer
(principal accounting officer)
Dated: November 14, 1995
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