UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 March 31, 1996
|_| 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 April 30, 1996, the registrant had 20,402,382 shares of common stock of
$.01 value outstanding, which is the registrant's only class of common
stock.
=============================================================================
3
RESOURCE MORTGAGE CAPITAL, INC.
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1996 and
December 31, 1995................................3
Consolidated Statements of Operations for the
three months ended March 31, 1996 and 1995.......4
Consolidated Statement of Shareholders' Equity for
the three months ended March 31, 1996............5
Consolidated Statements of Cash Flows for
the three months ended March 31, 1996 and 1995...6
Notes to Unaudited 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...................................17
Item 2.Changes in Securities...............................17
Item 3.Defaults Upon Senior Securities.....................17
Item 4.Submission of Matters to a Vote of Security
Holders...........................................17
Item 5.Other Information...................................17
Item 6.Exhibits and Reports on Form 8-K....................17
SIGNATURES.................................................18
===================================================================
PART I. FINANCIAL INFORMATION
===================================================================
Item 1. Financial Statements
RESOURCE MORTGAGE CAPITAL, INC
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
March December
31, 31,
1996 1995
----------- -----------
ASSETS
Mortgage assets:
Mortgage investments:
Collateral for CMOs ........................ $1,576,171 $1,028,935
Mortgage securities ........................ 2,073,726 2,149,416
Mortgage loans in warehouse .................. 360,735 247,633
----------- -----------
4,010,632 3,425,984
Cash ............................................ 8,545 22,229
Accrued interest receivable ..................... 15,331 14,851
Other assets .................................... 47,632 26,974
----------- -----------
$ 4,082,140 $ 3,490,038
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized mortgage obligations ............. $1,468,925 $ 949,139
Repurchase agreements ........................... 2,003,263 1,983,358
Notes payable ................................... 212,978 154,041
Accrued interest payable ........................ 5,766 5,278
Other liabilities ............................... 15,873 43,399
----------- -----------
3,706,805 3,135,215
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 50,000,000 shares authorized:
9.75% cumulative convertible Series A,
1,552,500 issued and outstanding
($37,260 aggregate liquidation 35,460 35,460
preference)
9.55% cumulative convertible Series B,
2,196,824 issued and outstanding
($53,822 aggregate liquidation 51,425 51,425
preference)
Common stock, par value $.01 per share,
50,000,000 shares authorized, 203 202
20,297,926 and 20,198,654 issued and
outstanding, respectively
Additional paid-in capital ...................... 283,505 281,508
Net unrealized gain (loss) on mortgage 13,615 (4,759)
investments
Retained deficit ................................ (8,873) (9,013)
----------- -----------
375,335 354,823
=========== ===========
$ 4,082,140 $ 3,490,038
=========== ===========
See notes to unaudited consolidated financial
statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share data)
Three Months Ended
March 31,
1996 1995
-------- -------
Interest Income:
Collateral for CMOs $ 23,509 $ 9,672
Mortgage securities 36,537 40,410
Mortgage loans in warehouse 12,119 10,734
--------- ---------
72,165 60,816
--------- ---------
Interest and related expense:
Collateralized mortgage obligations 17,773 8,692
Repurchase agreements 33,104 40,599
Notes payable 2,508 2,722
Other 561 1,190
Provision for losses 400 209
--------- ---------
54,346 53,412
--------- ---------
Net margin on mortgage assets 17,819 7,404
Gain on sale of mortgage assets, net of 201 2,663
associated costs
Other income 616 947
General and administrative expenses (5,951) (4,418)
--------- ---------
Net income 12,685 6,596
Dividends on preferred stock (2,193) -
========= =========
Net income available to common
shareholders $ 10,492 $ 6,596
========= =========
Net income per common share $ 0.52 $ 0.33
========= =========
Weighted average number of common shares
outstanding 20,265,199 20,078,013
========= =========
See notes to unaudited consolidated
financial statements.
RESOURCE MORTGAGE CAPITAL,
INC.
CONSOLIDATED STATEMENT
OF SHAREHOLDERS' EQUITY
(amounts in thousands
except share data)
Net
unrealized
Preferred Additional gain
stock paid- (loss)on
Series Series Common in mortgage Retained
A B stock capital investments deficit Total
------ ------ ----- ----- ----------- ----- -------
Balance at December
31, 1995 $35,460 $51,425 $202 $281,508 $(4,759) $(9,013) $ 354,823
Net income - three
months ended - - - - - 12,685 12,685
March 31, 1996
Issuance of common
stock - - 1 1,997 - - 1,998
Net change in
unrealized gain
(loss) on
mortgage investments - - - - 18,374 - 18,374
Common dividends
declared - $0.51
per share - - - - - (10,352) (10,352)
Preferred Series A
dividends declared
- $0.585 per share - - - - - (908) (908)
Preferred Series B
dividends declared
- $0.585 per share - - - - - (1,285) (1,285)
------ ------ ----- ------ ------ ------ ------
Balance at March 31,
1996 $35,460 $51,425 $203 $283,505 $13,615 $(8,873) $375,335
====== ====== ===== ====== ====== ====== ======
See notes to unaudited consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Three Months Ended
March 31,
1996 1995
--------- --------
Operating activities:
Net income available to common shareholders $ 10,492 $ 6,596
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation 5,124 2,578
Net (increase) decrease in mortgage loans
held in warehouse (142,194) 159,952
Net increase in accrued interest, other
assets and other liabilities (44,104) (16,102)
Provision for losses 400 209
Net (gain) loss from sales of mortgage
assets (201) 901
Other - (1,128)
--------- --------
Net cash (used for) provided by
operating activities (170,483) 153,006
--------- --------
Investing activities:
Collateral for CMOs:
Purchases of mortgage loans subsequently
securitized (608,084) (164,746)
Principal payments on collateral 67,116 51,101
Net change in funds held by trustees 3,056 1,607
--------- --------
(537,912) (112,03)
Purchase of mortgage securities (23,300) (2,210)
Principal payments on mortgage securities 115,511 48,620
Proceeds from sales of mortgage securities - 305,980
Capital expenditures (1,122) (59)
--------- --------
Net cash (used for) provided by
investing activities (446,823) 240,293
--------- --------
Financing activities:
Collateralized mortgage obligations
Proceeds from issuance of securities 587,347 162,055
Principal payments on securities (53,032) (46,202)
--------- --------
534,315 115,853
Proceeds from (repayments of) borrowings, net 78,842 (512,772)
Proceeds from issuance of common stock, net 1,998 -
Dividends paid (11,533) -
--------- --------
Net cash provided by (used for)
financing activities 603,622 (396,919)
--------- --------
Net decrease in cash (13,684) (3,620)
Cash at beginning of period 22,229 6,340
========= ========
Cash at end of period $ 8,545 $ 2,720
========= ========
Cash paid for interest $ 52,749 $ 52,697
========= ========
See notes to unaudited consolidated financial
statements.
RESOURCE MORTGAGE CAPITAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1996 (amounts in
thousands except share data)
NOTE 1--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 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 of the
consolidated financial statements have been included. The Consolidated Balance
Sheet at March 31, 1996, the Consolidated Statements of Operations for the three
months ended March 31, 1996 and 1995, the Consolidated Statement of
Stockholders' Equity for the three months ended March 31, 1996, the Consolidated
Statements of Cash Flows for the three months ended March 31, 1996 and 1995 and
related notes to consolidated financial statements are unaudited. Operating
results for the three months ended March 31, 1996 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1996. 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,
1995.
Certain amounts for 1995 have been reclassified to conform with the presentation
for 1996.
NOTE 2--NET INCOME PER COMMON SHARE
Net income per common share as shown on the consolidated statements of
operations for the three months ended March 31, 1996 is primary net income per
common share. Fully diluted net income per common share is not presented because
the Series A and B Cumulative Convertible Preferred Stocks are anti-dilutive.
NOTE 3--AVAILABLE FOR SALE MORTGAGE INVESTMENTS
The following table summarizes the Company's amortized cost basis of collateral
for CMOs and mortgage securities held at March 31, 1996, and the related average
effective interest rates (calculated excluding unrealized gains and losses):
Effective
Amortized Interest
Cost Rate
--------- ----------
Collateral for CMOs $1,553,015 8.7%
Allowance for losses (2,200)
---------
Amortized cost, net $1,550,815
=========
Mortgage securities:
Adjustable-rate mortgage
securities $1,981,903 6.8%
Fixed-rate mortgage
securities 42,182 9.7%
Other mortgage securities 67,076 10.1%
---------
2,091,161
Allowance for losses (5,694)
---------
Amortized cost, net $2,085,467
=========
The Company has classified collateral for CMOs and all mortgage securities as
available-for-sale. There were no mortgage investments sold during the three
months ended March 31, 1996. The specific identification method is used to
calculate the basis of mortgage investments sold. The following table presents
the fair value of the Company's collateral for CMOs and mortgage securities held
at March 31, 1996:
Collateral Mortgage
for securities
CMOs
-------- --------
Amortized cost, net $1,550,815 $2,085,467
Gross unrealized
gains 27,239 23,966
Gross unrealized
losses (1,883) (35,707)
---------- ---------
Fair value 1,576,171 $2,073,726
========== ==========
NOTE 4--SUBSEQUENT EVENT
On May 13, 1996, the Company completed the sale of its single-family
correspondent, wholesale, and servicing operations (collectively, the
single-family mortgage operations) to Dominion Mortgage Services Inc.
(Dominion), a wholly-owned subsidiary of Dominion Resources, Inc. The purchase
price was $67.9 million for stock and assets of the single-family mortgage
operations. The terms of the purchase included an initial cash payment of $20.4
million, with the remainder of the purchase price paid in annual installments of
$9.5 million over the five year period beginning January 2, 1997, pursuant to a
note agreement. The note bears interest at a rate of 6.50%. The terms of the
sale generally prohibit the Company from acquiring single-family, residential
mortgages through either correspondents or a wholesale network for a period of
five years.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Resource Mortgage Capital, Inc. (the Company) originates, services, and
securitizes residential mortgage loans (collectively, the mortgage operations)
and invests in a portfolio of mortgage loans and securities. The Company's
strategy is to use its mortgage operations to create investments for its
portfolio. Currently, the Company's primary sources of mortgage originations
include multi-family and manufactured housing loans. Prior to the sale of its
single-family mortgage operations, which was effective as of May 13, 1996 as
discussed below, the Company also originated and serviced single-family
residential mortgage loans. The Company's principal sources of earnings are net
interest income on its mortgage investment portfolio, and the interest spread
realized while mortgage loans are being accumulated for securitization or sale.
To a lesser extent, the Company's earnings also include gains from the
securitization or sale of mortgage loans and investments.
The Company's earnings per common share for the three months ended March 31,
1996 were $0.52 per common share compared with $0.33 per common share for the
three months ended March 31, 1995. This increase in earnings was the result of
an improvement in the net interest margin on mortgage assets, principally due to
the increasing net interest spread earned on adjustable-rate mortgage (ARM)
securities as a result of the ARM securities being substantially fully-indexed
for the quarter, and the favorable short-term interest rate environment which
has reduced the Company's borrowing costs. The net interest spread earned on ARM
securities increased to 1.18% for the quarter ended March 31, 1996 versus 0.02%
for the same period in 1995. The net interest margin contribution from ARM
securities increased to $6.8 million for the first three months of 1996 from
$3.6 million for the first three months of 1995. The net interest margin was
also positively impacted by the Company's strategy of securitizing its mortgage
loan production into collateralized mortgage obligations (CMOs), as CMOs issued
since March 31, 1995 have increased CMO net interest margin contribution to $5.7
million in the first quarter of 1996 versus $1.0 million for the same period in
1995.
Sale of Single-family Mortgage Operations On May 13, 1996, the Company completed
the sale of its single-family correspondent, wholesale, and servicing operations
(collectively, the single-family mortgage operations) to Dominion Mortgage
Services Inc. (Dominion), a wholly-owned subsidiary of Dominion Resources, Inc.
The purchase price was $67.9 million for the stock and assets of the
single-family mortgage operations. The terms of the purchase included an initial
cash payment of $20.4 million, with the remainder of the purchase price paid
evenly over the next five years pursuant to a note. The terms of the sale
generally prohibit the Company from acquiring single-family, residential
mortgages through either correspondents or a wholesale network for a period of
five years.
The discussion and analysis in "Results of Operations" and "Liquidity and
Capital Resources" provides information that management believes to be relevant
to an understanding of the Company's consolidated results of operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and the notes thereto.
Results of Operations
This section provides a discussion of the Company's results of operations for
the three months ended March 31, 1996 and 1995. An overview of these results is
initially presented, and is followed by more specific discussions related to
mortgage investments and mortgage operations activities.
Three Months Ended
March 31,
-----------------------
(amounts in thousands except per 1996 1995
share information) ------- -------
Net margin on mortgage assets $17,819 $7,404
Net gain on sale of mortgage
assets 201 2,663
General and administrative
expenses 5,951 4,418
Net income 12,685 6,596
Net income per common share 0.52 0.33
Principal balance of mortgage
loans funded through mortgage
operations 358,913 237,119
Dividends declared per share:
Common $ 0.510 $ 0.360
Series A Preferred 0.585 -
Series B Preferred 0.585 -
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995.
The increase in the Company's earnings during the three months ended March 31,
1996 as compared to the prior year period is primarily the result of the
increase in the net margin on mortgage assets offset in part by a decrease in
the net gain on sale of mortgage assets and an increase in general and
administrative expenses.
Net margin on mortgage assets increased 141% to $17.8 million for the three
months ended March 31, 1996, from $7.4 million for the three months ended March
31, 1995. This increase resulted from an overall increase in the net interest
spread on all interest-earning assets, as well as the increase in net interest
margin contribution from CMOs issued in the last four quarters. The net interest
spread on portfolio-related assets increased from 0.61% for the three months
ended March 31, 1995 to 1.38% for the three months ended March 31, 1996. This
increase is principally attributable to an increase in the net interest spread
on ARM securities which increased from 0.02% at March 31, 1995 to 1.18% at March
31, 1996, as generally all ARM securities were fully-indexed for the three month
period ended March 31, 1996. The net spread on CMOs also increased, from 1.21%
at March 31, 1995 to 1.39% at March 31, 1996. The net interest spread on
mortgage loans in warehouse increased from 0.29% at March 31, 1995 to 2.33% at
March 31, 1996. The increase in the warehouse spread was the result of both a
lower borrowing rate and a higher average coupon rate on the loans in warehouse
in the first quarter of 1996 versus the same period in 1995.
The net gain on sale of mortgage assets decreased to $0.2 million for the three
months ended March 31, 1996 from $2.7 million for the three months ended March
31, 1995. This decrease resulted primarily from the Company's issuance of CMOs
which are accounted for as financing transactions versus pass-through securities
which are accounted for as a sale. During the first quarter of 1995, the Company
had gains on pass-through securitizations and sales of mortgage loans totaling
$2.2 million. Additionally, during the first quarter of 1995, the Company sold
capitalized servicing rights in the first quarter of 1995 for a net gain of $1.2
million. There were no such transactions in the first quarter of 1996.
General and administrative expenses increased 34.7% to $6.0 million for the
three months ended March 31, 1996, from $4.4 million for the three months ended
March 31, 1995, resulting from the Company's continued expansion of the
single-family mortgage wholesale operations and the start up costs related to
manufactured housing lending. During the first quarter of 1996, the Company
opened three regional manufactured housing lending offices. General and
administrative expenses are expected to decrease as a result of the sale of the
single-family mortgage operations.
The following table summarizes the average balances of the Company's
interest-earning assets and their average effective yields, along with the
Company's average interest-bearing liabilities and the related average effective
interest rates, for each of the periods presented.
Average Balances and Effective Interest Rates
Three Months Ended March 31,
----------------------------------
(amounts in thousands) 1996 1995
--------------- --------------
Average Effective Average Effective
Balance Rate Balance Rate
-------- ----- ------ ------
Interest-earning assets:(1)
Collateral for CMOs(2) $1,079,600 8.70% $ 461,135 8.39%
Adjustable-rate
mortgage securities 1,987,569 6.83 2,169,935 6.37
Fixed-rate mortgage
securities 39,855 9.68 145,535 7.52
Other mortgage
securities 65,636 10.10 57,951 21.56
------- ---- ------ ----
Total portfolio-
related assets 3,172,660 7.57 2,834,556 7.07
Mortgage loans in
warehouse 573,666 8.45 572,404 7.48
------- ---- ------ ----
Total interest-
earning assets $3,746,326 7.70% $3,406,960 7.14%
======== ==== ========= ====
Interest-bearing
liabilities:
Portfolio-related
liabilities:
CMOs 923,785 7.31% $ 460,134 7.18%
Repurchase agreements:
Adjustable-rate
mortgage
securities $1,917,513 5.65 1,949,852 6.35
Fixed-rate
mortgage
securities 25,528 5.77 134,188 5.40
Other mortgage
securities 7,382 5.74 6,236 6.35
------- ---- ------ ----
Total portfolio-
related
liabilities 2,874,208 6.19 2,550,410 6.46
Warehouse-related
liabilities:
Repurchase agreements 362,231 6.13 453,132 7.06
Notes payable 84,621 6.09 54,585 8.26
------- ---- ------ ----
Total warehouse-
related
liabilities 446,852 6.12 507,717 7.19
------- ---- ------ ----
Total interest-
bearing
liabilities $3,321,060 6.18% $3,058,127 6.58%
======= ==== ====== ====
Net interest spread (3) 1.53% 0.56%
==== ====
Net yield on average
interest earning assets 2.23% 1.24%
==== ====
- ----------------
<FN>
(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 $3,192 and $6,137
for the three months ended March 31, 1996 and March 31, 1995, respectively.
(3) Effective rates are calculated excluding "Provision for losses".
</FN>
The increase in net interest spread for the three months ended March 31, 1996
compared to the three months ended March 31, 1995 is principally due to the
increased spread on ARM securities, CMOs and warehouse loans. The net interest
spread on ARM securities increased 1.16%, from .02% at March 31, 1995 to 1.18%
at March 31, 1996. ARM securities during the first quarter of 1996 were
generally fully-indexed relative to their respective indices. At March 31, 1995,
the ARM securities were "teased" approximately 1.90% on a weighted average
basis. The ARM securities have become fully-indexed as short-term interest rates
stabilized and then declined during the latter half of 1995 and through the
first quarter of 1996. The net interest spread also increased as the Company has
retained a greater portion of its loan production in the portfolio in the form
of CMOs. As a result, the net interest spread on CMOs increased to 1.39% for the
three months ended March 31, 1996 from 1.21% for the same period in 1995. The
net interest spread also increased as a result of the more favorable short-term
interest rate environment during the first quarter of 1996, which has reduced
the Company's overall weighted average borrowing costs to 6.18% as of March 31,
1996 from 6.58% at March 31, 1995.
Mortgage Investments
The Company's investment strategy is to create a diversified portfolio of
mortgage investments that in the aggregate generates stable income in a variety
of interest rate and prepayment rate environments and preserves the capital base
of the Company. The Company has pursued its strategy of concentrating on its
mortgage operations to create investments with attractive yields. In many
instances, the Company's investment strategy has involved not only the creation
or acquisition of the asset, but also the related borrowing to finance a portion
of that asset, such as CMO investments.
The net interest spread on portfolio-related assets has improved over last year
as short-term interest rates have stabilized and declined. As a result of this
declining short-term interest rate environment, the fair value of the Company's
mortgage investments has also improved. The net unrealized gain on mortgage
investments improved by $45.8 million in first quarter of 1996 compared to the
first quarter 1995, and by $18.4 million compared to the fourth quarter of 1995.
This increase in the portfolio's value is attributable principally to the
increase in value of the Company's ARM securities and secondarily to the value
of the CMOs added.
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995.
The net margin on the Company's portfolio of mortgage investments increased to
13.6 million for the first quarter of 1996 from $5.3 million for the first
quarter of 1995. The increase in net margin on the Company's portfolio of
mortgage investments is generally attributable to an increase in the net
interest spread earned on such investments which increased from 0.61% for first
quarter of 1995 to 1.38% for first quarter of 1996. Specifically, the spread on
the Company's ARM securities increased from 0.02% for the three months ended
March 31, 1995 to 1.18% for the three months ended March 31, 1996. The
stabilizing and then declining interest rate environment experienced in the
latter half of 1995 and through the first quarter of 1996 enabled the ARM
securities to reset upwards and generally become fully-indexed. The decline in
interest rates also resulted in lower short-term borrowing costs for the
Company. In addition to increasing spreads on ARM securities, the spread on CMOs
increased to 1.39% in the first quarter of 1996 from 1.21% in the first quarter
of 1995. The increase in the net interest spread for CMOs resulted principally
from higher rates on collateral for CMOs in the first quarter of 1996.
Consistent with the Company's current securitization strategy, the average
balance of collateral for CMOs also increased to $1.08 billion for the three
months ended March 31, 1996 from $461.1 million for the three months ended March
31, 1995. This increase in collateral for CMOs, coupled with the increased
coupon rates on the underlying mortgage loans, resulted in net margin
contribution from CMOs of $5.7 million in the first quarter of 1996 versus $1.0
million for the first quarter of 1995. In addition, average capital invested in
the mortgage investment portfolio in the first quarter of 1996 increased to $298
million from $284 million in the first quarter of 1995.
During the three months ended March 31, 1996, the Company had no sales of
mortgage investments compared to $319.0 million for the three months ended March
31, 1995. Additionally, during the three months ended March 31, 1996, the
Company added approximately $595 million of collateral for CMOs, with $582
million of associated borrowings, to its investment portfolio.
The Company uses various hedging instruments to limit its exposure to interest
rate risk. The Company owns interest rate cap agreements which limit its
exposure to the lifetime interest rate caps on its ARM securities. At March 31,
1996, the Company had purchased cap agreements with aggregate notional amounts
of $1.6 billion. Pursuant to these agreements, the Company will receive
additional cash flow should the related index increase above the specified
contract rates. The amortization of the cost of the cap agreements will reduce
interest income on ARM securities over the lives of the agreements. The
expiration dates on these interest rate caps range from 1996 through 2003. The
Company has also entered into various interest rate swap agreements to limit its
exposure to changes in financing rates of the ARM securities. During 1995, the
Company entered into a series of interest rate swap agreements which effectively
caps the increase in borrowing costs in any six-month period to 1% for $1.0
billion notional amount of short-term borrowings. These interest rate swaps
agreements expire in 2001. During 1995, the Company also entered into a 5 year
amortizing $220 million notional interest rate swap agreement related to
variable CMO classes. Under the terms of this agreement, the Company receives
one-month LIBOR and pays 6.15%. This agreement expires in 2000. During the first
quarter 1996, the Company entered into an interest rate swap agreement with a
$410 million notional amount, that reduces the interest rate risk associated
with certain Prime-based collateral for CMOs, securitized in the first quarter
of 1996, financed with LIBOR-based debt. This agreement expires in 2003.
Mortgage Operations
The Company's mortgage operations have principally consisted of (i) the purchase
or origination of single-family and multi-family loans through the wholesale and
correspondent operations, (ii) the securitization of such mortgage loans, and
(iii) the servicing of mortgage loans where the Company has retained all or a
portion of the credit risk. 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 months
ended March 31, 1996 and 1995.
Three Months Ended
March 31,
(amounts in thousands) 1996 1995
------- --------
Principal amount of loans funded
through mortgage operations $ 358,913 $ 237,119
Principal amount of loans bulk
purchased 408,639 -
Principal amount securitized or sold 95,387 402,788
Gain on sale of mortgage assets
(related to pass-through
securitizations or whole loan sales) - 2,176
Investments, including premiums and
discounts, added to portfolio from
securitization of mortgage loans,
net of associated borrowings 21,481 4,840
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995.
The increase in the funding volume of mortgage loans for the three months ended
March 31, 1996 as compared to the three months ended March 31, 1995 is the
result of an increased level of fundings through the correspondent and wholesale
operations. Single-family originations totaled $348 million for the three months
ended March 31, 1996 compared to $226 million for the three months ended March
31, 1995. These fundings increased as overall industry mortgage loan origination
volume increased, due to interest rates being substantially below those
experienced during the first quarter of 1995. Additionally, the Company more
than doubled its origination activity in its wholesale operations, from $50
million of the quarter ended March 31, 1995 to $109 million for the quarter
ended March 31, 1996. During the three months ended March 31, 1996, the Company
also funded multi-family mortgage loans with an aggregate principal balance of
$11.1 million, compared to $10.7 million in the first three months of 1995. As
of March 31, 1996, the Company has $554.6 million in commitments to originate
multi-family loans. Multi-family loans in warehouse totaled $18.9 million at
March 31, 1996. There were no such loans in warehouse at March 31, 1995. The
Company also purchased, on a bulk loan basis, $409 million of Prime-based,
single-family loans during the first three months of 1996. There were no such
bulk purchases during the three months ended March 31, 1995.
The Company continues to invest in building the infrastructure for its
manufactured housing operations, and now has three regional offices to support
origination and collection activities.
The gain on sale of mortgage assets decreased from prior year due to the
Company's securitization strategy focusing on CMO structures versus the
pass-through structures used in prior years. The CMO securitizations are
recorded as financing transactions, and, as such, no gain is recognized at the
time of issuance. Instead, income related to CMOs is recognized over time as
part of net interest margin. The Company may also securitize its loan production
as pass-through securities pursuant to a senior/subordinated structure, in which
case a gain or loss is recognized at the time of issuance.
With the securitization structures, the Company may use overcollateralization,
subordination, reserve funds, bond insurance, mortgage pool insurance or any
combination of the foregoing for credit enhancement. Regardless of the form of
credit enhancement, the Company may retain a limited portion of the direct
credit risk after securitization. This risk can include risk of loss related to
hazards not covered under standard hazard insurance policies and credit risks on
loans not covered by pool insurance. Such 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. The Company may also be
contingently exposed to losses due to fraud during the origination of a mortgage
loan if the originator of such mortgage loan defaults on its obligation to
repurchase the loan. The Company has established discounts and reserve funds to
cover these risks which totaled $3.3 million and $5.7 million, respectively, at
March 31, 1996 compared to $3.6 and $6.2 million, respectively, at December 31,
1995.
With CMO structures, the Company also retains credit risk related to the amount
of overcollateralization required in conjunction with the bond insurance. Losses
are first applied to the overcollateralization amount, and any losses in excess
of that amount would be borne by the bond insurer or the holders of the CMOs.
The Company only incurs credit losses to the extent that losses are incurred in
the repossession, foreclosure and sale of the underlying single-family
collateral. Such losses generally equal the excess of the principal amount
outstanding, less any mortgage insurance, over the liquidation value of the
collateral. To compensate the Company for retaining this loss exposure, the
Company generally receives an excess yield on the mortgage loans relative to the
yield on the CMOs. At March 31, 1996, the Company retained $55.5 million in
principal amount of overcollateralization compared to $42.0 million at December
31, 1995. The reserves established for such exposure totaled $2.2 million at
March 31, 1996 and $1.8 million at December 31, 1995.
The following table summarizes the mortgage loan delinquency information as a
percentage of the total loan portfolio balance at March 31, 1996 compared to
December 31, 1995. These amounts represent the collateral for CMOs where the
Company has retained a portion of the credit risk.
(dollar amounts ---------------------------------------------
in thousands) March 31, 1996 December 31, 1995
---------------------------------------------
Number Number
of Dollar of Dollar
loans amount Percent loans amount Percent
===== ======= ====== ====== ======= ======
Collateral
principal balance 6,157 $1,237,149 100% 4,673 $ 700,125 100%
===== ======= ===== ====== ======= =====
Delinquent loan
principal balance
60 to 90 days
delinquent 62 10,014 0.81 87 14,846 2.12
90 days and
over delinquent
(includes REO and
foreclosures) 155 29,910 2.42 152 28,649 4.09
===== ======= ====== ====== ======= =====
Total 217 $ 39,924 3.23% 239 $43,495 6.21%
===== ======= ====== ====== ======= =====
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 investments 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 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 credit facilities
aggregating $200 million to finance mortgage loan fundings and for working
capital purposes which expire in November 1996 and April 1998. One of these
facilities includes several sublines aggregating $300 million to serve various
purposes, such as multi-family loan fundings, working capital, bond calls and
manufactured housing fundings, which may not, in the aggregate, exceed the
overall facility commitment of $150 million at any time. The working capital
subline can not exceed $30 million. The Company expects that these credit
facilities will be renewed, if necessary, at their respective expiration dates,
although there can be no assurance of such renewal. The Company also finances a
portion of its mortgage loans in warehouse with repurchase agreements on an
uncommitted basis. As of March 31, 1996, the Company had outstanding obligations
of $103.6 million under such repurchase agreements. The lines of credit contain
certain financial covenants which the Company met as of March 31, 1996. However,
changes in asset levels or results of operations could result in the violation
of one or more covenants in the future.
The Company finances ARM 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 a price which is equal to the original
sales price plus an interest component. At March 31, 1996, the Company had
outstanding obligations of $1.9 billion under such repurchase agreements, of
which $1.86 billion, $37.9 million and $6.7 million were secured by ARM
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 ARM securities are
AAA or AA rated classes that are subordinate to related AAA rated classes from
the same series of securities. Such AAA or AA rated classes have less liquidity
than securities that are not subordinated, and the value of such classes is more
dependent on the credit rating of the related insurer or the credit performance
of the underlying mortgage loans. In instances of a downgrade of an insurer, or
the deterioration of the credit quality of the underlying mortgage collateral,
the Company may be required to sell certain mortgage assets in order to maintain
liquidity. If required, these sales could be made at prices lower than the
carrying value of the assets, which could result in losses.
The Company may lengthen the duration of its repurchase agreements by entering
into certain futures and/or option contracts. As of March 31, 1996, the Company
had lengthened the duration of $1.3 billion of its repurchase agreements to
three months by entering into certain futures and option contracts.
Additionally, the Company owns approximately $217.9 million of its CMOs and has
financed such CMOs with $202.9 million of short-term debt. For financial
statement presentation purposes, the Company has classified the $202.9 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 issued two series of unsecured notes totaling $50 million in 1994.
The proceeds from this issuance were used for general corporate purposes. The
notes have an outstanding balance at March 31, 1996 of $47 million. The notes
mature between 1999 and 2001. The note agreements contain certain financial
covenants which the Company met as of March 31, 1996. However, changes in asset
levels or results of operations could result in the violation of one or more
covenants in the future.
Other Matters
The Company and its qualified REIT subsidiaries (collectively "Resource REIT")
have elected to be treated as a real estate investment trust for federal income
tax purposes. The REIT provisions of the Internal Revenue Code require Resource
REIT to distribute to shareholders substantially all of its taxable income,
thereby restricting its ability to retain earnings. The Company may issue
additional common stock 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. Resource REIT estimates that its taxable income for the
three months ended March 31, 1996 was approximately $14.6 million. Taxable
income differs from the financial statement net income which is determined in
accordance with generally accepted accounting principles.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
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: /s/ Thomas H. Potts
Thomas H. Potts, President
(authorized officer of registrant)
/s/ Lynn K. Geurin
Lynn K. Geurin, Executive Vice President
and Chief Financial Officer
(principal accounting officer)
Dated: May 15, 1996