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 June 30, 1997
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-9819
DYNEX CAPITAL, INC.
(formerly 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.)
10900 Nuckols Road, 3rd Floor, Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
(804) 217-5800
(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 July 31, 1997, the registrant had 43,509,527 shares of common stock of $.01
value outstanding, which is the registrant's only class of common stock.
DYNEX CAPITAL, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1997 and
December 31, 1996.........................................3
Consolidated Statements of Operations for the three
and six months
ended June 30, 1997 and 1996..............................4
Consolidated Statement of Shareholders' Equity for
the six months ended June 30, 1997........................5
Consolidated Statements of Cash Flows for
the six months ended June 30, 1997 and 1996...............6
Notes to Unaudited Consolidated Financial Statements......7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................10
PART II. OTHER INFORMATION
Item 1. Legal
Proceedings..........................................................30
Item 2. Changes in
Securities...........................................................30
Item 3. Defaults Upon Senior
Securities...........................................................30
Item 4. Submission of Matters to a Vote of Security
Holders..........31
Item 5. Other
Information..........................................................31
Item 6. Exhibits and Reports on Form
8-K..................................................................31
SIGNATURES...........................................................32
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
June 30, December 31,
1997 1996
------------ ------------
ASSETS
Investments:
Portfolio assets:
Collateral for collateralized bonds $ 3,338,916 $ 2,702,294
Mortgage securities 1,181,424 892,037
Other 135,748 96,236
Loans held for securitization 307,392 265,537
------------ ------------
4,963,480 3,956,104
Cash 7,910 11,396
Accrued interest receivable 8,632 8,078
Other assets 58,778 11,879
------------ ------------
$ 5,038,800 $ 3,987,457
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Collateralized bonds $ 3,110,678 $ 2,519,708
Repurchase agreements 661,310 756,448
Notes payable 306,594 177,124
Payable for investments purchased 393,844 -
Accrued interest payable 2,501 2,717
Other liabilities 31,542 27,843
------------ ------------
4,506,469 3,483,840
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per share,
50,000,000 shares authorized:
9.75% Cumulative Convertible Series A,
1,481,160 and 1,552,500 issued and 33,831 35,460
outstanding, respectively
9.55% Cumulative Convertible Series B,
2,061,243 and 2,196,824 issued and 48,251 51,425
outstanding, respectively
9.73% Cumulative Convertible Series C,
1,839,000 and 1,840,000 issued and 52,711 52,740
outstanding, respectively
Common stock, par value $.01 per share, 100,000,000
shares authorized,
42,822,154 and 41,307,186 issued and 428 207
outstanding, respectively
Additional paid-in capital 311,080 291,637
Net unrealized gain on investments available-for-sale 77,006 64,402
Retained earnings 9,024 7,746
------------ ------------
532,331 503,617
------------ ------------
$ 5,038,800 $ 3,987,457
============ ============
<FN>
See notes to unaudited consolidated financial statements.
</FN>
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ----------------------------
1997 1996 1997 1996
-------------- --------------- ------------- ------------
Interest income:
Collateral for collateralized bonds $ 45,433 $ 32,134 $ 93,895 $ 55,643
Mortgage securities 21,598 35,419 41,279 71,956
Other portfolio assets 2,887 999 5,249 1,667
Loans held for securitization 11,113 9,774 17,669 21,225
-------------- ---------------
------------- ------------
81,031 78,326 158,092 150,491
-------------- --------------- ------------- ------------
Interest and related expense:
Collateralized bonds 38,266 26,306 77,618 44,079
Repurchase agreements 15,363 29,856 27,691 62,960
Notes payable 4,191 2,337 7,391 4,845
Other 413 1,135 969 1,696
Provision for losses 1,420 400 2,415 800
-------------- ---------------
------------- ------------
59,653 60,034 116,084 114,380
-------------- --------------- ------------- ------------
Net interest margin 21,378 18,292 42,008 36,111
Gain on sale of single-family operations - 18,899 - 18,899
Gain (loss) on sale of assets, net of associated costs 2,201 (6,397) 4,688 (6,196)
Other income 574 407 986 1,023
General and administrative expenses (5,769) (5,304) (10,988) (11,255)
============== =============== ============= ============
Net income $ 18,384 $ 25,897 $ 36,694 $ 38,582
============== =============== ============= ============
Net income 18,384 25,897 36,694 38,582
Dividends on preferred stock (3,716) (2,193) (7,403) (4,386)
============== =============== ============= ============
Net income available to common shareholders $ 14,668 $ 23,704 $ 29,291 $ 34,196
============== =============== ============= ============
Per common share:
Primary $ 0.35 $ 0.58 $ 0.70 $ 0.84
============== =============== ============= ============
Fully diluted $ 0.34 $ 0.54 $ 0.69 $ 0.80
============== =============== ============= ============
<FN>
See notes to unaudited consolidated financial statements.
</FN>
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(amounts in thousands except share data)
Net
Additional Unrealized Gain
Preferred Common Paid-in on Investments Retained
Stock Stock Capital Available-for-Sale Earnings Total
----------- ---------- ------------ ----------------- ------------- ------------
Balance at December 31, 1996 $ 139,625 $ 207 $ 291,637 $ 64,402 $ 7,746 $ 503,617
Net income - six months ended
June 30, 1997 - - - - 36,694 36,694
Issuance of common stock - 6 14,826 - - 14,832
Conversion of preferred stock (4,832) 2 4,830 - - -
Two-for-one stock split 213 (213) -
Change in net unrealized gain on
investments available-for-sale - - - 12,604 - 12,604
Dividends on common stock
at $0.66 per share - - - - (28,013) (28,013)
Dividends on preferred stock - - - - (7,403) (7,403)
------------ ----------- ------------- ------------------ -------------- -------------
Balance at June 30, 1997 $ 134,793 $ 428 $ 311,080 $ 77,006 $ 9,024 $ 532,331
============ =========== ============= ================== ============== =============
<FN>
See notes to unaudited consolidated financial statements.
</FN>
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended
(amounts in thousands) June 30,
1997 1996
---------------------- ---------------------
Operating activities:
Net income $ 36,694 $ 38,582
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Provision for losses 2,415 800
Net (gain) loss on sale of assets (4,688) 6,196
Gain on sale of single-family operations - (18,899)
Amortization and depreciation 11,693 11,538
Net change in accrued interest, other assets and other liabilities (41,883) (21,678)
----------------- ------------------
Net cash provided by operating activities 4,231 16,539
----------------- ------------------
Investing activities:
Collateral for collateralized bonds:
Fundings of loans subsequently securitized (894,871) (1,176,393)
Principal payments on collateral 387,040 204,773
Net change in funds held by trustees (432) 3,056
----------------- ------------------
(508,263) (968,564)
Net (increase) decrease in loans held for securitization (42,560) 108,293
Purchase of other portfolio assets (56,777) (1,412)
Payments on other portfolio assets 16,931 5,704
Purchase of mortgage securities (881,864) (46,749)
Payments on mortgage securities 37,645 200,542
Proceeds from sales of mortgage securities 432,011 11,432
Proceeds from sale of single-family operations - 20,413
Capital expenditures (2,037) (1,655)
----------------- ------------------
Net cash used for investing activities (1,004,914) (671,996)
----------------- ------------------
Financing activities:
Collateralized bonds:
Proceeds from issuance of securities 975,110 1,115,161
Principal payments on securities (387,333) (186,340 )
----------------- ------------------
587,777 928,821
Proceeds from (repayments on) borrowings, net 428,176 (255,113)
Proceeds from stock offerings, net 14,832 4,499
Dividends paid (33,588) (24,078)
----------------- ------------------
Net cash provided by financing activities 997,197 654,129
----------------- ------------------
Net decrease in cash (3,486) (1,328)
Cash at beginning of period 11,396 22,229
================= ==================
Cash at end of period $ 7,910 $ 20,901
================= ==================
Cash paid for interest $ 107,622 $ 110,156
================= ==================
<FN>
See notes to unaudited consolidated financial statements.
</FN>
DYNEX CAPITAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (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 Dynex Capital, Inc., its wholly-owned subsidiaries, and certain
other entities. As used herein, the "Company" refers to Dynex Capital, Inc.
(Dynex) and each of the entities that is consolidated with Dynex for financial
reporting purposes. A portion of the Company's operations are operated by
taxable corporations that are consolidated with Dynex 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
Sheets at June 30, 1997 and December 31, 1996, the Consolidated Statements of
Operations for the three and six months ended June 30, 1997 and 1996, the
Consolidated Statement of Shareholders' Equity for the six months ended June 30,
1997, the Consolidated Statements of Cash Flows for the six months ended June
30, 1997 and 1996 and related notes to consolidated financial statements are
unaudited. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. 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, 1996.
Certain amounts for 1996 have been reclassified to conform with the presentation
for 1997.
NOTE 2--NET INCOME PER COMMON SHARE
Net income per common share as shown on the consolidated statements of
operations for the three and six months ended June 30, 1997 and 1996 is
presented on both a primary net income per common share and fully diluted net
income per common share basis. Fully diluted net income per common share assumes
the conversion of the convertible Preferred Stock into common stock, using the
if-converted method, and dilutive Stock Appreciation Rights, using the Treasury
Stock method. The average number of shares is increased by the assumed
conversion of convertible items, but only if these items are dilutive. For the
three and six months ended June 30, 1997 and 1996, the Company's Series A and
Series B Preferred Stock and Stock Appreciation Rights were dilutive, while the
Series C Preferred Stock was anti-dilutive. As a result of the two-for-one split
of the Company's common stock discussed in Note 7, the Company's Preferred Stock
is convertible into two shares of common stock for one share of Preferred Stock.
The following table summarizes the average number of shares of common stock and
equivalents used to compute primary and fully diluted net income per common
share for the three and six months ended June 30, 1997 and 1996:
- ----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
----------- ------------ ----------- ------------
Primary 42,430,631 40,758,848 42,050,785 40,644,624
Fully diluted 53,445,725 48,257,496 53,185,945 48,143,272
- ----------------------------------------------------------------------------
NOTE 3--PORTFOLIO ASSETS
The Company has classified collateral for collateralized bonds and all mortgage
securities as available-for-sale. The following table summarizes the Company's
amortized cost basis and fair value of collateral for collateralized bonds and
mortgage securities held at June 30, 1997 and December 31, 1996, and the related
average effective interest rates (calculated excluding unrealized gains and
losses) for the month ended June 30, 1997 and December 31, 1996:
NOTE 3--PORTFOLIO ASSETS
The Company has classified collateral for collateralized bonds and all mortgage
securities as available-for-sale. The following table summarizes the Company's
amortized cost basis and fair value of collateral for collateralized bonds and
mortgage securities held at June 30, 1997 and December 31, 1996, and the related
average effective interest rates (calculated excluding unrealized gains and
losses) for the month ended June 30, 1997 and December 31, 1996:
- ------------------------------------------------------------------------------------------------------------------------
June 30, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------
Effective Effective
Interest Rate Interest Rate
- ------------------------------------------------------------------------------------------------------------------------
Collateral for collateralized bonds:
Amortized cost $ 3,300,132 7.6% $ 2,668,633 7.9%
Allowance for losses (30,011 ) (31,732 )
- ------------------------------------------------------------------------------------------------------------------------
Amortized cost, net 3,270,121 2,636,901
Gross unrealized gains 79,509 73,696
Gross unrealized losses (10,714) (8,303)
- ------------------------------------------------------------------------------------------------------------------------
Fair Value $ 3,338,916 $ 2,702,294
- ------------------------------------------------------------------------------------------------------------------------
Mortgage securities:
Adjustable-rate mortgage securities $ 676,649 7.3% $ 780,259 6.9%
Fixed-rate mortgage securities 417,907 7.8% 29,505 10.9%
Other mortgage securities 83,276 17.5% 88,198 16.4%
- ------------------------------------------------------------------------------------------------------------------------
1,177,832 897,962
Allowance for losses (4,619) (4,934)
- ------------------------------------------------------------------------------------------------------------------------
Amortized cost, net 1,173,213 893,028
Gross unrealized gains 26,160 23,591
Gross unrealized losses (17,949) (24,582)
- ------------------------------------------------------------------------------------------------------------------------
Fair Value $ 1,181,424 $ 892,037
- ------------------------------------------------------------------------------------------------------------------------
Mortgage securities with an aggregate principal balance of $430,523 were sold
during the six months ended June 30, 1997 for an aggregate net gain of $1,488.
The specific identification method is used to calculate the basis of mortgage
securities sold. Gain on sale of assets also includes premiums received of
$3,156 various call options written which expired unexercised during the six
months ended June 30, 1997, which was offset by $125 of premiums paid on various
call options purchased during the same period.
NOTE 4--ADOPTION OF FINANCIAL ACCOUNTING STANDARDS
In January 1997, the Company adopted the Financial Accounting Standards Board
Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (FAS No. 125). FAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial components approach that focuses on control of the respective assets
and liabilities. It distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings. FAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. The impact of adopting FAS No. 125 did not
result in a material change to the Company's financial position and results of
operations.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting No. 128, "Earnings Per Share " (FAS No. 128). FAS No. 128
supersedes APB Opinion No. 15, "Earnings Per Share", and specifies the
computation, presentation, and disclosure requirements for earnings per share
(EPS) for entities with publicly held common stock or potential common stock.
FAS No. 128 will replace Primary EPS and Fully Diluted EPS with Basic EPS and
Diluted EPS, respectively. FAS No. 128 will require dual presentation of Basic
EPS and Diluted EPS on the face of the income statement for all entities with
complex capital structures. FAS No. 128 also will require a reconciliation of
the numerator and denominator of the Basic EPS to the numerator and denominator
of the Diluted EPS computation. FAS No. 128 will be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application of this statement is not permitted. The Company has
determined that this statement will not result in a material change to the
Company's financial position and results of operations.
NOTE 5 -- OTHER MATTERS
During the period from April 1, 1997 through June 30, 1997, the Company issued
290,000 shares of its common stock, adjusted for the two-for-one stock split,
pursuant to a registration statement filed with the Securities and Exchange
Commission. The net proceeds from the issuance were approximately $5,142, for
the six months ended June 30, 1997. The Company also issued 349,832 shares of
its common stock, adjusted for the two-for-one stock split, pursuant to its
dividend reinvestment program for net proceeds of $9,690, for the six months
ended June 30, 1997.
NOTE 6- CHANGE OF COMPANY NAME
Effective April 25, 1997, the Company changed its name from Resource
Mortgage Capital, Inc. to Dynex Capital, Inc.
NOTE 7 -- STOCK SPLIT
At the annual meeting of shareholders, held on April 24, 1997, the shareholders
approved an amendment to the Articles of Incorporation to effect a two-for-one
split of the issued and outstanding shares of the Company's $0.01 par value
common stock to holders of record on May 5, 1997 and also to increase the number
of authorized shares of common stock to 100,000,000. As a result of the split
approximately 21.2 million additional shares were issued. All references in the
accompanying financial statements to the number of shares and per share amounts
for 1996 and 1997 have been restated to reflect the stock split.
NOTE 8 -- SUBSEQUENT EVENT
On July 14, 1997, the Company issued $100,000 of 7.875% senior unsecured notes
maturing on July 15, 2002. The notes will pay interest semi-annually in arrears
on January 15 and July 15, commencing on January 15, 1998. The net proceeds were
initially used to reduce short-term debt related to financing loans held for
securitization during the accumulation period.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary
Dynex Capital, Inc. (the "Company") is a mortgage and consumer finance
company which uses its loan production operations to create investments for its
portfolio. Currently, the Company's primary loan production operations include
the origination of mortgage loans secured by multi-family and commercial
properties and the origination of loans secured by manufactured homes. The
Company will generally securitize the loans funded as collateral for
collateralized bonds, limiting its credit risk and providing long-term financing
for its portfolio. The Company has elected to be treated as a real estate
investment trust (REIT) for federal income tax purposes and, as such, must
distribute substantially all of its taxable income to shareholders and will
generally not be subject to federal income tax. The Company changed its name to
Dynex Capital, Inc. from Resource Mortgage Capital, Inc.
effective April 25, 1997.
The Company's principal source of earnings is net interest income on its
investment portfolio. The Company's investment portfolio consists principally of
collateral for collateralized bonds, adjustable-rate mortgage (ARM) securities
and loans held for securitization. The Company funds its portfolio investments
with both borrowings and cash raised from the issuance of equity. For the
portion of the portfolio investments funded with borrowings, the Company
generates net interest income to the extent that there is a positive spread
between the yield on the interest-earning assets and the cost of borrowed funds.
The cost of the Company's borrowings may be increased or decreased by interest
rate swap, cap or floor agreements. For the portion of the balance sheet that is
funded with equity, net interest income is primarily a function of the yield
generated from the interest-earning asset.
Business Focus and Strategy
The Company's overall level of earnings is dependent upon (i) the spread
between interest earned on its investment portfolio and the cost of borrowed
funds to finance those investments; and (ii) the aggregate amount of
interest-earning assets that the Company has on its balance sheet. The Company
strives to create a diversified portfolio of 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. In many instances,
the Company's investment strategy involves not only the creation or acquisition
of the asset, but also the structuring of the related borrowings through the
securitization process to create a stable yield profile.
Investment Portfolio Strategies
The Company adheres to the following business strategies in managing its
investment portfolio:
use of its loan origination capabilities to provide assets for its
investment portfolio, generally at a lower effective cost than if
investments of comparable risk profiles were purchased in the secondary
market;
securitization of its loan production to provide long-term financing for
its investment portfolio and to reduce the Company's liquidity, interest
rate and credit risk;
utilization of leverage to finance purchases of loans and investments in
line with prudent capital allocation guidelines which are designed to
balance the risk in certain assets, thereby increasing potential returns
to shareholders while seeking to protect the Company's equity base;
structuring borrowings to have interest rate adjustment indices and
interest rate adjustment periods that, on an aggregate basis, generally
correspond (within a range of one to six months) to the interest rate
adjustment indices and interest rate adjustment periods of the related
asset; and
utilization of interest rate caps, swaps and similar instruments and
securitization vehicles with such instruments embodied in the structure to
mitigate the risk of the cost of its variable rate liabilities increasing
at a faster rate than the earnings on its assets during a period of rising
interest rates.
Lending Strategies
The Company generally adheres to the following business strategies in its
lending operations:
developing loan production capabilities to originate and acquire financial
assets in order to create attractively priced investments for its
portfolio, generally at a lower cost than if investments with comparable
risk profiles were purchased in the secondary market;
focusing on loan products that maximize the advantages of the REIT tax
election;
emphasizing direct relationships with the borrower and minimize, to the
extent practical, the use of origination intermediaries;
using internally generated guidelines to underwrite loans for all product
types and maintain centralized loan pricing;
performing the servicing function for loans on which the Company has
credit exposure; emphasize the use of early intervention, aggressive
collection and loss mitigation techniques in the servicing process to
manage and seek to reduce delinquencies and to minimize losses in its
securitized loan pools; and
vertical integration of the loan origination process by performing the
sourcing, underwriting, funding and servicing of loans to maximize
efficiency and provide superior customer service.
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------
(amounts in thousands except per share information) 1997 1996 1997 1996
--------------------------------------------------------------
Net interest margin $ 21,378 $ 18,292 $ 42,008 $ 36,111
Gain on sale of single-family operations - 18,899 - 18,899
Gain (loss) on sale of assets, net of associated costs 2,201 (6,397 ) 4,688 (6,196)
General and administrative expenses (5,769 ) (5,304 ) (10,988 ) (11,255)
Net income 18,384 25,897 36,694 38,582
Primary net income per common share (1) 0.35 0.58 0.70 0.84
Fully diluted net income per common share (1) 0.34 0.54 0.69 0.80
Principal balance of fundings through production operations 832,795 337,231 1,007,941 1,104,861
Dividends declared per share:
Common (1) $ 0.335 $ 0.275 $ 0.660 $ 0.530
Series A Preferred 0.670 0.585 1.320 1.170
Series B Preferred 0.670 0.585 1.320 1.170
Series C Preferred 0.730 - 1.460 -
-----------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Adjusted for two-for-one common stock split effective May 5, 1997.
</FN>
Three and Six Months Ended June 30, 1997 Compared to Three and Six Months Ended
June 30, 1996. The decrease in the Company's earnings during the three and six
months ended June 30, 1997 as compared to the same period in 1996 is primarily
the result of the one-time gain on sale of single-family operations recognized
during the three months ended June 30, 1996. This was partially offset by the
increase in net interest margin as well as by the gain on sale of certain
investments during 1997.
Net interest margin for the six months ended June 30, 1997 increased to $42.0
million, or 16%, over the $36.1 million for the same period for 1996. This
increase was principally the result of an increase in the net interest spread on
investments as a result of the Company's investment in higher yielding other
mortgage securities. The Company also had on average, more invested equity in
its investments during the six months ended June 30, 1997, compared to the same
period in 1996.
The gain on the sale of single-family operations was a one-time gain related
to the sale of the Company's single-family correspondent, wholesale and
servicing business on May 13, 1996. The gain (loss) on sale of assets increased
to a net $4.7 million gain for the six months ended June 30, 1997, as compared
to a $6.2 million loss for the six months ended June 30, 1996. The increase in
the net gain is a primarily a result of premiums received of $3.2 million on
call options which expired unexercised during the first half of 1997 and the
sale of certain investments which generated a net gain of $1.5 million. This was
offset by premiums paid of $0.1 million on call options purchased. During the
six months ended June 30, 1996, the Company sold certain underperforming
securities in its investment portfolio which resulted in a $4.7 million loss. In
addition, the carrying value of certain other mortgage securities was reduced
during June 1996 as anticipated future prepayment rates were expected to result
in the Company receiving less cash than its current basis in those investments.
General and administrative expenses decreased $0.3 million, or 2%, to $11.0
million for the six months ended June 30, 1997 as compared to the same period
for 1996. The decrease is a result of the sale of single-family operations
substantially offset by the growth in the current production operations. General
and administrative expenses increased $0.5 million, or 9%, for the three months
ended June 30, 1997 versus the same period for 1996 due to the costs associated
with the Company's current production operations. General and administrative
expenses should increase on a quarterly basis during 1997 as the Company
continues to build its production infrastructure.
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 June 30, Six Months Ended June 30,
----------------------------------------------- ------------------------------------------
(amounts in thousands) 1997 1996 1997 1996
---------------------- ------------------------ -------------------- --------------------
Average Effective Average Effective Average Effective Average Effective
Balance Rate Balance Rate Balance Rate Balance Rate
---------------------- ------------------------ -------------------- --------------------
Interest-earning assets : (1)
Collateral for $ 2,372,929 7.66 % $ 1,594,875 8.06 % $ 2,436,554 7.71 % $ 1,337,237 8.32 %
collateralized bonds (2) (3)
Adjustable-rate mortgage 763,092 7.31 1,921,917 6.72 768,576 7.34 1,954,743 6.77
securities
Fixed-rate mortgage 376,584 7.50 41,986 12.37 201,908 7.62 40,921 11.06
securities
Other mortgage securities 121,944 17.33 74,161 9.84 116,759 17.28 68,290 10.20
Other portfolio assets 118,616 9.74 49,497 8.07 108,813 9.65 37,588 8.87
Loans held for 573,273 7.75 482,412 8.13 441,848 8.00 516,809 8.22
securitization
---------- ------- ---------- ------- -------- ----- -------- -----
Total interest-earning $ 4,326,438 7.93 % $ 4,164,848 7.52 % $ 4,074,458 7.99 % $ 3,955,588 7.61 %
assets
============ ========= ============= ========= ==================== ============ ========
Interest-bearing liabilities:
Collateralized bonds (3) $2,258,768 6.60 % $ 1,513,078 6.71 % $ 2,320,876 6.51 % $ 1,270,825 6.65
Repurchase agreements:
Adjustable-rate 709,327 5.84 1,821,868 5.43 713,996 6.00 1,869,691 5.54
mortgage securities
Fixed-rate mortgage 369,838 5.38 36,306 5.69 198,155 5.40 30,917 5.72
securities
Other mortgage 9,661 6.06 8,970 5.71 10,045 5.94 8,176 5.72
securities
Loans held for 238,729 6.32 278,609 6.54 135,145 6.28 320,420 6.29
securitization
Notes payable:
Other portfolio assets 41,664 7.64 354 7.90 27,720 7.71 451 6.66
Loans held for 203,740 5.93 76,591 5.82 180,240 5.57 80,332 5.99
securitization
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total $3,831,727 6.30 % $ 3,735,776 6.04 % $ 3,586,177 6.30 % $ 3,580,812 6.01 %
interest-bearing liabilities
============ ======== ============= ======== ========== ===== =========== ====
Net interest spread on all 1.63 % 1.48 % 1.69 % 1.60 %
investments
======= ========= ====== =======
Net yield on average 2.35 % 2.11 % 2.45 % 2.16 %
interest-earning assets ======== ========= ======== ========
--------------------------------------------------------------------------------------------------------------------------
<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 $2,943 and $3,262 for the
three months ended June 30, 1997 and June 30, 1996, respectively, and $2,614
and $3,215 for the six months ended June 30, 1997 and June 30, 1996,
respectively.
(3)Effective rates are calculated excluding non-interest related collateralized
bond expenses and provision for credit losses.
</FN>
The increase in net interest spread for the three and six months ended June
30, 1997 relative to the same period in 1996 is primarily the result of the
increased investment in other mortgage securities, primarily residual trusts
which own collateral financed by repurchase agreements, as well as a result of
the increased spread on other mortgage securities and ARM securities, offset by
a decrease in the net spread on net investment in collateralized bonds (defined
as collateral for collateralized bonds less collateralized bonds) and fixed-rate
mortgage securities. The Company's overall yield on interest-earning assets
increased to 7.99% for the six months ended June 30, 1997 from 7.61% for the
same period in 1996. The weighted average borrowing costs also increased to
6.30% for the six months ended June 30, 1997 from 6.01% for the six months ended
June 30, 1996. This increase in borrowing costs was due to primarily the 0.25%
increase in short term interest rates during March 1997. The yield on
interest-earnings assets rose 0.41% to 7.93% during the three months ended June
30, 1997 compared to 7.52% for the three months ended June 30, 1996. The
weighted average borrowing costs also rose to 6.30% for the three months ended
June 30, 1997 from 6.04% for the same period in 1996.
Individually, the net interest spread on collateralized bonds decreased 47
basis points, from 167 basis points for the six months ended June 30, 1996, to
120 basis points for the six months ended June 30, 1997. This decline was
primarily due to the securitization of lower coupon collateral, principally A+
quality single-family mortgage loans. In addition, the spread on the net
investment in collateralized bonds decreased due to higher premium amortization
caused by higher prepayments during the six months ended June 30, 1997 than
during the same period in 1996. The net interest spread on ARM securities
increased slightly by 11 basis points, from 123 basis points for the six months
ended June 30, 1996, to 134 basis points during the same period in 1997. The net
interest spread on fixed-rate mortgage securities decreased to 222 basis points
for the six months ended June 30, 1997, from 534 basis points for the same
period in 1996. This decrease is attributable to the purchase of $786 million in
lower yielding fixed-rate securities during the six months ended June 30, 1997.
The net interest spread on other mortgage securities increased to 1134 basis
points for the six months ended June 30, 1997 from 448 basis points for the six
months ended June 30, 1996. This increase is due to the purchase of $38 million
of residual trusts during the first quarter 1997, and the purchase of $44
million of residual trusts during fourth quarter 1996. The net interest spread
on other portfolio assets decreased 27 basis points, from 221 basis points from
the six months ended June 30, 1996, to 194 basis points for the six months ended
June 30, 1997, due to higher borrowing costs associated with the Company's
single-family model home purchase leasing business.
PORTFOLIO RESULTS
The core of the Company's earnings is derived from the Company's investment
portfolio. The Company's investment strategy is to create a diversified
portfolio of securities that in the aggregate generates stable income in a
variety of interest rate and prepayment rate environments and preserves the
capital base of the Company. The Company has pursued its strategy of
concentrating on its production activities to create investments with attractive
yields. In many instances, the Company's investment strategy has involved not
only the creation or acquisition of the asset, but also structuring the related
borrowings through the securitization process to create a stable yield profile.
Approximately $3.9 billion of the Company's investment portfolio as of June
30, 1997 is comprised of loans or securities that have coupon rates which adjust
over time (subject to certain periodic and lifetime limitations) in conjunction
with changes in short-term interest rates. Generally, during a period of rising
interest rates, the Company's net interest spread earned on its investment
portfolio will decrease. The decrease of the net interest spread results from
(i) the lag in resets of the ARM loans underlying the ARM securities and
collateral for collateralized bonds relative to the rate resets on the
associated borrowings and (ii) rate resets on the ARM loans which are generally
limited to 1% every six months, while the associated borrowings have no such
limitation. As interest rates stabilize and the ARM loans reset, the net
interest margin may be restored to its former level as the yields on the ARM
loans adjust to market conditions. Conversely, net interest margin may increase
following a fall in short-term interest rates. This increase may be temporary as
the yields on the ARM loans adjust to the new market conditions after a lag
period. In each case, however, the Company expects that the increase or decrease
in the net interest spread due to changes in the short-term interest rates to be
temporary. The net interest spread may also be increased or decreased by the
cost or proceeds of interest rate swap, cap or floor agreements.
Interest Income and Interest-Earning Assets
The Company's average interest-earning assets were $4.1 billion for the six
months ended June 30, 1997, an increase of approximately 3% from $4.0 billion of
average interest-earning assets during the same period of 1996. Total interest
income rose approximately 8%, from $150.5 million for the six months ended June
30, 1996 to $162.8 million for the same period of 1997. Overall, the yield on
interest-earning assets rose to 7.99% for the six months ended June 30, 1997
from 7.61% for the six months ended June 30, 1996, as the investment in higher
yielding assets grew. On a quarter to quarter basis, average interest-earning
assets for the quarter ended March 31, 1997 were $3.8 billion versus $4.3
billion for the quarter ended June 30, 1997. This increase in average
interest-earnings assets was the result of the purchase of $786 million of
fixed-rate mortgage securities and the bulk purchase of approximately $703
million in single-family mortgage loans during the quarter ended June 30, 1997.
Total interest income for the quarter ended March 31, 1997 was $77.1 million
versus $85.7 million for the quarter ended June 30, 1997. The increase was due
to the growth in average interest-earning assets. As indicated in the table
below, average yields for these periods were 8.06% and 7.93%, respectively,
which were 2.37% and 1.96% higher than the average daily London InterBank
Offered Rate (LIBOR) for six-month deposits (six-month LIBOR) during those
periods. The decrease in the average asset yield from the first quarter is due
to the purchase of lower coupon collateral, principally A+ quality single-family
mortgage loans, and the purchase of lower yielding mortgage securities during
the second quarter of 1997. The majority of the ARM loans underlying the
Company's ARM securities and collateral for collateralized bonds are indexed to
and reset based upon the level of six-month LIBOR. The Company expects that the
yield on the ARM loans underlying certain collateral for collateralized bonds
will trend upward during the third quarter since the majority of the ARM loans
securitized during June 1997, which were not fully-indexed, will reset during
the next six months. Additionally, as a result of the six months LIBOR daily
average increase during the first quarter of 1997, the Company expects that the
yield on the ARM loans underlying the ARM securities and certain other
collateral for collateralized bonds will trend upward during the third quarter
since the majority of the ARM loans underlying the Company's ARM securities and
collateral for collateralized bonds reset generally every six months and on a
one to two month lag.
Earning Asset Yield
($ in millions)
- --------------------- --------------- - -------------- -- ------------- --- ---------------- ----------------
Average Daily Asset
Interest- Average Average Six Yield versus
Earning Interest Asset Month Six Month
Assets Income Yield LIBOR LIBOR
- --------------------- --------------- - -------------- -- ------------- --- ---------------- ----------------
1995, Quarter 3 $ 3,450.4 $ 66.8 7.74% 5.89% 1.85%
1995, Quarter 4 3,360.8 64.5 7.67% 5.75% 1.92%
1996, Quarter 1 3,746.3 72.1 7.70% 5.34% 2.36%
1996, Quarter 2 4,164.8 78.3 7.52% 5.64% 1.88%
1996, Quarter 3 4,106.5 78.4 7.64% 5.80% 1.84%
1996, Quarter 4 4,308.6 83.2 7.72% 5.60% 2.12%
1997, Quarter 1 3,822.5 77.1 8.06% 5.69% 2.37%
1997, Quarter 2 4,326.4 85.7 7.93% 5.97% 1.96%
- --------------------- --- ----------- -- ------------- -- ------------- --- ---------------- ----------------
The net yield on average interest-earning assets decreased to 2.35% for
the three months ended June 30, 1997, compared to 2.56% for the three months
ended March 31, 1997, but increased from 2.11% for the three months ended June
30, 1996. The decrease from the three months ended March 31, 1997 is principally
due to the increase in short term interest rates during March 1997 on the
associated borrowings on the interest-earning assets. The increase from the
three months ended June 30, 1996 is due to the increased investment in higher
yielding assets. The net yield percentages presented below exclude non-interest
collateralized bonds expenses such as provision for credit losses, and interest
on senior notes payable. If these expenses were included, the net yield on
average interest-earning assets would be 1.98% for the three months ended June
30, 1997.
Net Yield on Average Interest-Earning Assets
($ in millions)
- -----------------------------------------------------------
Net Yield on
Average Interest- Average Interest-
Earning Assets Earning Assets
- -----------------------------------------------------------
1995, Quarter 3 $ 3,450.4 1.74%
1995, Quarter 4 3,360.8 2.00%
1996, Quarter 1 3,746.3 2.23%
1996, Quarter 2 4,164.8 2.11%
1996, Quarter 3 4,106.5 2.21%
1996, Quarter 4 4,308.6 2.25%
1997, Quarter 1 3,822.5 2.56%
1997, Quarter 2 4,326.4 2.35%
- -----------------------------------------------------------
The average asset yield is reduced for the amortization of premium on the
Company's investment portfolio. By creating its investments through its
production operations, the Company believes that premium amounts are less than
if the investments were acquired in the market. As indicated in the table below,
premiums on the Company's ARM securities, fixed-rate securities and collateral
for collateralized bonds at June 30, 1997 were $62.7 million, or approximately
1.46% of the aggregate investment portfolio balance. The mortgage principal
repayment rate for the Company (indicated in the table below as "CPR Annualized
Rate") was approximately 30% for the three months ended June 30, 1997. CPR
stands for "constant prepayment rate" and is a measure of the annual prepayment
rate on a pool of loans.
Premium Basis and Amortization (1)
($ in millions)
- ---------------------------------------------------------------------------------------------------------------------
Amortization
Ending Expense as a
CPR Investment %of
Net Premium Amortization Annualized Principal Average
(Discount) Expense Rate Balance Assets
- ---------------------------------------------------------------------------------------------------------------------
1995, Quarter 3 $ 35.3 $ 2.5 (2) $ 2,705.0 0.30%
1995, Quarter 4 39.3 2.8 (2) 2,772.9 0.33%
1996, Quarter 1 49.3 3.2 30% 3,214.4 0.34%
1996, Quarter 2 56.0 4.0 28% 3,557.7 0.38%
1996, Quarter 3 60.8 2.8 19% 3,808.3 0.28%
1996, Quarter 4 54.1 3.7 24% 3,379.0 0.34%
1997, Quarter 1 50.2 3.8 29% 3,176.9 0.40%
1997, Quarter 2 62.7 4.0 30% 4,284.5 0.37%
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes only collateral for collateralized bonds, ARM securities and fixed-rate securities.
(2) CPR rates were not available for those periods.
</FN>
Interest Expense and Cost of Funds
The Company's largest expense is the interest cost on borrowed funds. Funds
to finance the investment portfolio are generally borrowed in the form of
collateralized bonds or repurchase agreements, both of which are primarily
indexed to one-month LIBOR. The Company may use interest rate swaps, caps and
financial futures to manage its interest rate risk. The net cost of these
instruments is included in the cost of funds table below as a component of
interest expense for the period to which it relates. For the three-month period
ended June 30, 1997 as compared to the same period in 1996, interest expense
increased to $60.3 million from $56.4 million while the average cost of funds
also increased to 6.30% compared to 6.04%. The increased average cost of funds
for the second quarter of 1997 compared to the second quarter of 1996 was due
primarily to increased cost of funds for ARM securities. On a quarter to quarter
basis, the cost of funds, which was 6.30% for the three months ended March 31,
1997, remained at 6.30% for the three months ended June 30, 1997. The increased
cost of funds on collateralized bonds and repurchase agreements due to the 0.25%
increase in short term interest rates during March 1997 was offset by the lower
borrowing rate on $786 million of fixed-rate mortgage securities purchased
during the second quarter of 1997.
Cost of Funds
($ in millions)
- ------------------------------------------------------------------------------------------------
Average
Average Borrowed Interest Cost One-month
Funds Expense (1) of Funds LIBOR
- ------------------------------------------------------------------------------------------------
1995, Quarter 3 $ 3,159.7 $ 51.0 6.46% 5.88%
1995, Quarter 4 3,025.3 47.6 6.30% 5.86%
1996, Quarter 1 3,425.8 51.3 5.99% 5.43%
1996, Quarter 2 3,735.8 56.4 6.04% 5.45%
1996, Quarter 3 3,667.9 55.7 6.07% 5.46%
1996, Quarter 4 3,825.1 59.0 6.16% 5.46%
1997, Quarter 1 3,340.6 52.6 6.30% 5.46%
1997, Quarter 2 3,831.7 60.3 6.30% 5.69%
- ------------------------------------------------------------------------------------------------
<FN>
(1) Excludes non-interest collateralized bond-related expenses and interest on
non-portfolio related notes payable.
</FN>
Interest Rate Agreements
As part of its asset/liability management process, the Company enters into
interest rate agreements such as interest rate caps and swaps and financial
futures contracts. These agreements are used to reduce interest rate risk which
arises from the lifetime yield caps on the ARM securities, the mismatched
repricing of portfolio investments versus borrowed funds, and finally, assets
repricing on indices such as the prime rate which differ from the related
borrowing indices. The agreements are designed to protect the portfolio's cash
flow, and to provide income and capital appreciation to the Company in the event
that short-term interest rates rise quickly.
The following table includes all interest rate agreements in effect as of the
various quarter ends for asset/liability management of the investment portfolio.
This table excludes all interest rate agreements in effect for the Company's
loan production operations. Generally, interest rate swaps and caps are used to
manage the interest rate risk associated with assets that have periodic and
annual interest rate reset limitations financed with borrowings that have no
such limitations. Financial futures contracts and options on futures are used to
lengthen the terms of repurchase agreement financing, generally from one month
to three and six months. Amounts presented are aggregate notional amounts. To
the extent any of these agreements are terminated, gains and losses are
generally amortized over the remaining period of the original agreement.
Instruments Used for Interest Rate Risk Management Purposes (1)
($ in millions)
- ---------------------------------------------------------------------------------------------------
Interest Interest Financial Options
Notional Amounts Rate Caps Rate Swaps Futures on Futures
- ---------------------------------------------------------------------------------------------------
1995, Quarter 3 $ 1,475 $ 220 $ 1,000 $ 500
1995, Quarter 4 1,575 1,227 1,000 2,130
1996, Quarter 1 1,575 1,631 1,000 1,250
1996, Quarter 2 1,575 1,559 400 880
1996, Quarter 3 1,499 1,480 1,550 -
1996, Quarter 4 1,499 1,453 - -
1997, Quarter 1 1,499 1,427 - -
1997, Quarter 2 1,499 1,442 - -
- ---------------------------------------------------------------------------------------------------
<FN>
(1) Excludes all interest rate agreements in effect for the Company's loan
production operations.
</FN>
Net Interest Rate Agreement Expense
The net interest rate agreement expense, or hedging expense, equals the
cost of the agreements, net of any benefits received from these agreements. For
the quarter ended June 30, 1997, net hedging expense amounted to $1.23 million
versus $2.65 million and $1.02 million for the quarters ended March 31, 1997 and
June 30, 1996, respectively. The decrease in hedging expense for the quarter
ended June 30, 1997 compared to March 31, 1997, relates primarily to the benefit
received on financial futures used to lengthen repurchase agreement maturities
during the quarter. Such amounts exclude the hedging costs and benefits
associated with the Company's production activities as these amounts are
deferred as additional premium or discount on the loans funded and amortized
over the life of the loans as an adjustment to their yield.
Net Interest Rate Agreement Expense
($ in millions)
- ---------------------------------------------------------------------------------------------------
Net Expense as
Net Expense Percentage of
Net Interest as Percentage Average
Rate Agreement of Average Borrowings
Expense Assets (annualized) (annualized)
- ---------------------------------------------------------------------------------------------------
1995, Quarter 3 $ 0.86 0.100% 0.109%
1995, Quarter 4 0.16 0.018% 0.020%
1996, Quarter 1 1.63 0.174% 0.191%
1996, Quarter 2 1.02 0.100% 0.110%
1996, Quarter 3 1.29 0.126% 0.141%
1996, Quarter 4 2.67 0.248% 0.280%
1997, Quarter 1 2.65 0.277% 0.317%
1997, Quarter 2 1.23 0.114% 0.128%
- ---------------------------------------------------------------------------------------------------
Fair Value
The fair value of the available-for-sale portion of the Company's investment
portfolio as of June 30, 1997, as measured by the net unrealized gain on
investments available-for-sale, was $77.0 million above its cost basis, which
represents a $35.8 million improvement from June 30, 1996. At June 30, 1996, the
fair value of the available-for-sale portion of the Company's investment
portfolio was above its amortized cost by $41.2 million. This increase in the
portfolio's value is primarily attributable to the increase in the value of the
collateral for collateralized bonds relative to the collateralized bonds issued
during the last twelve months, as well as an increase in value of the Company's
ARM securities. The fair value of the available-for-sale portion of the
Company's investment portfolio at March 31, 1997, was $58.5 million above the
amortized cost of its investment portfolio. The increase from March 1997 to June
1997 was primarily the result of the increase in the value of the collateral for
collateralized bonds relative to collateralized bonds issued during the second
quarter.
Credit Exposures
The Company securitizes its loan production in collateralized bonds or
pass-through securitization structures. With either structure, the Company may
use overcollateralization, subordination, reserve funds, bond insurance,
mortgage pool insurance or any combination of the foregoing as a form of credit
enhancement. With all forms of credit enhancement, the Company may retain a
limited portion of the direct credit risk after securitization.
The following table summarizes the aggregate principal amount of collateral
for collateralized bonds and pass-through securities outstanding; the maximum
direct credit exposure retained by the Company (represented by the amount of
overcollateralization pledged and subordinated securities rated below BBB or not
rated owned by the Company), net of the credit reserves maintained by the
Company for such exposure; and the actual credit losses incurred for the
quarter. The table excludes reserves and losses due to fraud and special hazard
exposure.
Credit Reserves and Actual Credit Losses
($ in millions)
- -----------------------------------------------------------------------------------------------
Maximum Credit
Maximum Credit Exposure, Net
Outstanding Exposure, Net Actual of Credit
Collateral of Credit Credit Reserves to
Balance Reserves Loss Average Assets
-----------------------------------------------------------------------------------------------
1995, Quarter 3 $ 2,462 $ 34.9 $ - 1.01%
1995, Quarter 4 2,504 47.4 - 1.41%
1996, Quarter 1 2,888 59.9 - 1.60%
1996, Quarter 2 3,131 27.7 1.1 0.67%
1996, Quarter 3 3,919 29.5 2.0 0.72%
1996, Quarter 4 3,848 30.0 2.1 0.70%
1997, Quarter 1 3,583 29.6 2.6 0.78%
1997, Quarter 2 4,306 50.3 4.9 1.16%
- -----------------------------------------------------------------------------------------------
The percentage of maximum credit exposure net of credit reserves to average
assets was 1.16% as of June 30, 1997, compared to 0.78% and 0.67% at March 31,
1997 and June 30, 1996, respectively. The increase in the second quarter of 1997
compared to prior quarters is the result of the securitization of approximately
$1 billion of collateral during June 1997.
The following table summarizes single-family mortgage loan and manufactured
housing loan delinquencies as a percentage of the outstanding collateral balance
for those securities mentioned above in which the Company has retained a portion
of the direct credit risk. Multi-family loan collateral is not included as there
were no delinquencies as of June 30, 1997. As of June 30, 1997, the Company
believes that its credit reserves are sufficient to cover any losses which may
occur as a result of current delinquencies presented in the table below.
Delinquency Statistics
- -----------------------------------------------------------------------------------------------------
90 days and over delinquent
60 to 90 days delinquent (includes REO and foreclosures) Total
- -----------------------------------------------------------------------------------------------------
1995, Quarter 3 0.78% 1.77% 2.55%
1995, Quarter 4 2.50% 3.23% 5.73%
1996, Quarter 1 0.90% 2.95% 3.85%
1996, Quarter 2 1.91% 3.47% 5.38%
1996, Quarter 3 0.73% 3.01% 3.74%
1996, Quarter 4 0.88% 3.40% 4.28%
1997, Quarter 1 0.95% 4.16% 5.11%
1997, Quarter 2 0.59% 3.25% 3.84%
- -----------------------------------------------------------------------------------------------------
The following table summarizes the credit rating for investments held in the
Company's portfolio assets. This table excludes the Company's other mortgage
securities (as the risk on such securities is primarily prepayment-related, not
credit-related) and other portfolio assets. The carrying balances of the
investments rated below A are net of credit reserves and discounts. The average
credit rating of the Company's mortgage investments at the end of the second
quarter of 1997 was AAA. At June 30, 1997, securities with a credit rating of AA
or better were $3.9 billion, or 96.0% of the Company's total mortgage
investments compared to 99.1% and 97.7% at March 31, 1997 and June 30, 1996,
respectively. At the end of the second quarter 1997, $380.5 million of all
investments were split rated between rating agencies. Where investments were
split-rated, for purposes of this table, the Company classified such investments
based on the higher credit rating.
Portfolio Assets by Credit Rating (1)
($ in millions)
- -------------------- -- ---------- --- ---------- -- ---------- --- ---------- ----------- ----------- -------- ------------
AAA AA A Below A AAA AA A Below A
Carrying Carrying Carrying Carrying Percent of Percent Percent Percent of
Value Value Value Value Total of Total of Total Total
- -------------------- -- ---------- --- ---------- -- ---------- --- ---------- ----------- ----------- -------- ------------
1996, Quarter 1 $ 2,487.3 $ 943.1 $ 64.2 $ 60.6 70.0% 26.5% 1.8% 1.7%
1996, Quarter 2 2,935.2 914.0 63.6 28.7 74.5% 23.2% 1.6% 0.7%
1996, Quarter 3 3,333.3 766.4 17.1 31.1 80.3% 18.5% 0.4% 0.8%
1996, Quarter 4 2,708.4 752.8 - 29.9 77.5% 21.6% - 0.9%
1997, Quarter 1 2,504.1 739.4 - 29.4 76.5% 22.6% - 0.9%
1997, Quarter 2 3,341.6 517.8 103.2 57.2 83.1% 12.9% 2.6% 1.4%
- -------------------- -- ---------- --- ---------- -- ---------- --- ---------- ----------- ----------- -------- ------------
<FN>
(1) Excludes other mortgage securities and other portfolio assets.
</FN>
Purchase, Securitization and Sale of Portfolio Assets
During the six months ended June 30, 1997, the Company sold various portfolio
investments due to favorable market conditions. The aggregate principal amount
of investments sold during the six months ended June 30, 1997 was $430.5
million, consisting primarily of other mortgage securities, which resulted in
gains of $1.5 million. Also during the six months ended June 30, 1997, the
Company exercised its call right or otherwise purchased $47.7 million of ARM
securities, $790.4 million of fixed-rate mortgage securities and $43.8 million
of other mortgage securities. During June, 1997, the Company securitized
$1,023.5 million in single-family loans, ARM securities and manufactured housing
loans through the issuance of collateralized bonds.
LOAN PRODUCTION ACTIVITIES
The Company's primary production activities include low-income housing tax
credit multi-family and manufactured housing lending. During the first quarter
of 1997, the Company broadened its multi-family lending capabilities to include
other types of commercial real estate. The expanded commercial lending efforts
may include apartment properties which have not received low-income housing tax
credits, assisted living and retirement housing, limited and full service
hotels, urban and suburban office buildings, retail shopping strips and centers,
light industrial buildings and manufactured housing parks. The Company has also
expanded its manufactured housing lending during the first quarter of 1997 to
include inventory financing to manufactured housing dealers. In addition to
these primary sources of production, the Company also provides leases and loans
to builders for single-family homes that serve as model homes for those
builders. Along with these production sources, the Company may also purchase
single-family loans on a "bulk" basis from time to time and may originate such
loans on a retail basis.
The primary purpose of the Company's production operations is to enhance the
return on shareholders' equity (ROE) by earning a favorable net interest spread
while loans are being accumulated for securitization and creating investments
for its portfolio through the securitization process at a lower cost than if
such investments were purchased from third parties. The creation of such
investments generally involves the issuance of collateralized bonds or
pass-through securities collateralized by the loans generated from the Company's
production activities, and the retention of one or more classes of the
securities or collateralized bonds relating to such issuance. The issuance of
collateralized bonds and pass-through securities generally limits the Company's
credit and interest rate risk in contrast to retaining loans in its portfolio in
whole-loan form.
When a sufficient volume of loans is accumulated, the Company generally
securitizes the loans through the issuance of collateralized bonds or
pass-through securities. The Company believes that securitization is an
efficient and cost effective way for the Company to (i) reduce capital otherwise
required to own the loans in whole loan form; (ii) limit the Company's exposure
to credit risk on the loans; (iii) lower the overall cost of financing the
loans; and (iv) depending on the securitization structure, limit the Company's
exposure to interest rate and/or valuation risk. As a result of the reduction in
the availability of mortgage pool insurance, and the Company's desire to both
reduce its recourse borrowings as a percentage of its overall borrowings, as
well as the variability of its earnings, the Company has utilized the
collateralized bond structure for securitizing substantially all of its loan
production since the beginning of 1995.
The following table summarizes the production activity for the three and six
month periods ended June 30, 1997 and 1996.
Loan Production Activity
($ in thousands)
- --------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Multi-family $ 24,618 $ 72,553 $ 32,681 $ 83,674
Commercial 13,726 - 18,339 -
Manufactured housing 68,999 2,741 98,239 2,741
Single-family 702,850 260,125 800,994 1,016,556
Specialty finance 22,602 1,812 57,688 1,890
========== ========== ========== ==========
Total principal amount
of fundings through $832,795 $337,231 $1,007,941 $1,104,861
production operations ========== ========== ========== ==========
Principal amount $894,871 $557,253 $ 894,871 $1,152,640
securitized or sold ========== ========== ========== ==========
--------------------------------------------------------------------------
The Company began funding manufactured housing loans during the second
quarter of 1996. Since commencement, the Company has opened five regional
offices in North Carolina, Georgia, Texas, Michigan and Washington. As of June
30, 1997, the Company had $24.4 million in principal balance of manufactured
housing loans in inventory, and had commitments outstanding of approximately
$34.8 million. The majority of all manufactured housing funding volume to date
has been obtained through relationships with manufactured housing dealers and,
to a lesser extent, through direct marketing to consumers and correspondent
relationships. In the future, the Company plans to expand its sources of
origination to nearly all sources for manufactured housing loans by establishing
relationships with park owners, developers of manufactured housing communities,
manufacturers of manufactured homes, brokers and other correspondents. Once
certain volume levels are achieved at a particular region, district offices may
be opened in an effort to further market penetration. The first district office
is expected to be opened in the latter part of 1997.
As of June 30, 1997, the Company had $240.0 million in principal balance of
multi-family loans held for securitization. The Company funded $24.6 million in
multi-family loans during the three months ended June 30, 1997 compared to $8.1
million for the three months ended March 31, 1997 and $72.6 million for the
three months ended June 30, 1996. The lower funding volume for the first quarter
of 1997 compared to the second quarter of 1997 was due to delays by the
prospective borrowers caused by longer than expected construction and lease-up
periods. Principally all fundings under the Company's multi-family lending
programs consist of properties that have been allocated low income housing tax
credits. As of June 30, 1997 commitments to fund multi-family loans over the
next 20 months were approximately $508.1 million. The Company expects that it
will have funded volume sufficient enough to securitize a portion of its
multi-family loans in the second half of 1997 through the issuance of
collateralized bonds. The Company may retain a portion of the credit risk after
securitization and intends to continue servicing the loans.
As previously mentioned, during the first quarter of 1997 the Company
expanded its production operations to include commercial loans. The Company
funded $13.7 million of commercial loans during the second quarter, consisting
primarily of light industrial space and distribution centers. The Company plans
to securitize these commercial loans with the Company's multi-family production.
Included in the second quarter of 1997 specialty finance fundings are $20.5
million of model homes purchased from home builders which were simultaneously
leased back to the builders. The terms of these leases are generally twelve to
eighteen months at lease rates of typically one-month LIBOR plus a spread. At
the end of each lease, the Company will sell the home. As of June 30, 1997, the
Company had leases on $85.3 million of model homes, and had otherwise provided
financing to home builders for model homes for an additional $10.7 million.
Additionally, during the second quarter of 1997, the Company purchased $702.8
million of single-family mortgage loans through various bulk purchases of which
substantially all were securitized at the end of June 1997. This is compared to
$108.6 million purchased during the second quarter of 1996. The Company will
continue to purchase single-family loans on a bulk basis to the extent, upon
securitization, such purchases would generate a favorable return on a proforma
basis.
OTHER ITEMS
General and Administrative Expenses
General and administrative expenses (G&A expense) consist of expenses
incurred in conducting the Company's production activities and managing the
investment portfolio, as well as various other corporate expenses. G&A expense
increased for the three-month period ended June 30, 1997 as compared to the same
period in 1996, primarily as a result of continued costs in connection with the
build-up of the production infrastructure for the manufacturing housing,
commercial lending, and specialty finance. G&A expense for the three months
ended June 30, 1996 include partial expenses for the single-family mortgage
operations which was sold May 13, 1996. G&A related to the production operations
is likely to increase over time as the Company expands its production activities
with current and new product types.
The following table summarizes the Company's efficiency, the ratio of G&A
expense to average interest- earning assets, and the ratio of G&A expense to
average total equity.
Operating Expense Ratios
---------------------------------------------------------------------
G&A Expense/Average G&A
G&A Interest-Earningge Expense/Average
Efficiency Assets Total Equity(2)
Ratio (1) (Annualized) (Annualized)
- ---------------------------------------------------------------------
1995, Quarter 3 6.68% 0.51% 5.71%
1995, Quarter 4 7.51% 0.59% 5.50%
1996, Quarter 1 8.25% 0.64% 6.53%
1996, Quarter 2 6.77% 0.51% 5.60%
1996, Quarter 3 5.67% 0.43% 4.60%
1996, Quarter 4 6.09% 0.47% 4.57%
1997, Quarter 1 6.77% 0.55% 4.65%
1997, Quarter 2 6.73% 0.53% 5.05%
- ---------------------------------------------------------------------
<FN>
(1) G&A expense as a percentage of interest income.
(2) Average total equity excludes net unrealized gain (loss) on investments
available-for-sale.
</FN>
Net Income and Return on Equity
Net income decreased from $25.9 million for the three months ended June 30,
1996 to $18.4 million for the three months ended June 30, 1997. Return on common
equity (excluding the impact of the net unrealized gain on investments
available-for-sale) also decreased from 32.5% for the three months ended June
30, 1996 to 18.3% for the three months ended June 30, 1997. The decrease in both
the net income and the return on common equity is due to the sale of the
single-family operations on May 13, 1996, which generated a one-time net gain of
$18.9 million for the second quarter 1996. This decrease was offset partially by
the higher level of net interest margin and gain on sale of assets.
Components of Return on Equity
($ in thousands)
- --------------------------------------------------------------------------------------------------------------------------
Gains and G&A Preferred
Net Interest Provision Other Expense/ Dividend/ Return on
Margin/ for Losses Income Average Average Average Net Income
Average /Average Common /Average Common Common Common Available to
Common Equity Equity Common Equi Equity Equity Equity Common
(annualized) (annualized) (annualized (annualized) (annualized) (annualized) Shareholders
- --------------------------------------------------------------------------------------------------------------------------
1995, Quarter 3 19.2% 1.7% 3.8% 6.5% 1.3% 13.5% $ 9,220
1995, Quarter 4 22.0% 1.8% 4.7% 7.2% 2.7% 15.0% 10,307
1996, Quarter 1 26.3% 0.6% 1.2% 8.6% 3.2% 15.1% 10,492
1996, Quarter 2 25.6% 0.5% 17.7% 7.3% 3.0% 32.5% 23,704
1996, Quarter 3 26.5% 1.2% 2.7% 5.9% 2.9% 19.2% 14,363
1996, Quarter 4 28.3% 1.9% 4.2% 6.7% 4.6% 19.3% 14,480
1997, Quarter 1 27.9% 1.3% 3.7% 6.7% 4.8% 18.8% 14,623
1997, Quarter 2 28.3% 1.8% 3.5% 7.1% 4.6% 18.3% 14,668
- --------------------------------------------------------------------------------------------------------------------------
Dividends and Taxable Income
The Company and its qualified REIT subsidiaries (collectively "Dynex 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 Dynex
REIT to distribute to shareholders substantially all of its taxable income,
thereby restricting its ability to retain earnings. The Company may issue
additional common stock, preferred stock or other securities in the future in
order to fund growth in its operations, growth in its portfolio of mortgage
investments, or for other purposes.
The Company intends to declare and pay out as dividends 100% of its taxable
income over time. The Company's current practice is to declare quarterly
dividends per share. Generally, the Company strives to declare a quarterly
dividend per share which, in conjunction with the other quarterly dividends,
will result in the distribution of most or all of the taxable income earned
during the calendar year. At the time of the dividend announcement, however, the
total level of taxable income for the quarter is unknown. Additionally, the
Company has considerations other than the desire to pay out most of its taxable
earnings, which may take precedence when determining the level of dividends.
Dividend Summary
($ in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------
Estimated
Taxable Net Estimated Dividend Estimated
Income Taxable Net Declared Cumulative
Available to Income Per Per Dividend Undistributed
Common Common Common Pay-out Taxable
Shareholders Share (1) Share (1) Ratio Income (Loss)
- ------------------------------------------------------------------------------------------------
1995, Quarter 3 $ 11,223 $ 0.279 $ 0.220 79% $ 1,410
1995, Quarter 4 13,176 0.325 0.240 74% 4,882
1996, Quarter 1 12,719 0.314 0.255 81% 7,249
1996, Quarter 2 13,359 0.328 0.275 84% 9,376
1996, Quarter 3 13,973 0.341 0.293 86% 11,194
1996, Quarter 4 8,831 0.214 0.310 145% 5,672
1997, Quarter 1 23,849 0.572 0.325 57% 15,854
1997, Quarter 2 12,016 0.283 0.335 118% 13,524
- ------------------------------------------------------------------------------------------------
<FN>
(1) Adjusted for two-for-one common stock split.
</FN>
Taxable income differs from the financial statement net income which is
determined in accordance with generally accepted accounting principles (GAAP).
For the three months ended June 30, 1997, the Company's taxable income per share
of $0.283 was lower than the Company's declared dividend per share of $0.335.
For the six months ended June 30, 1997, the Company's taxable net income per
share of $0.855 was higher than the declared dividend per share of $0.66. The
majority of the difference was caused by GAAP and tax differences related to the
sale of the single-family operations. For tax purposes, the sale of the
single-family operations is accounted for on an installment sale basis with
annual taxable income of approximately $10 million from 1996 through 2001.
Cumulative undistributed taxable income represents timing differences in the
amounts earned for tax purposes versus the amounts distributed. Such amounts can
be distributed for tax purposes in the subsequent year as a portion of the
normal quarterly dividend. Such amounts also include certain estimates of
taxable income until such time that the company files its federal income tax
returns for each year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has various sources of cash flow upon which it relies for its
working capital needs. Sources of cash flow from operations include primarily
the return of principal on its portfolio of investments and the issuance of
collateralized bonds. Other borrowings provide the Company with additional cash
flow in the event that it is necessary. Historically, these sources have
provided sufficient liquidity for the conduct of the Company's operations.
However, if a significant decline in the market value of the Company's
investment portfolio should occur, the Company's available liquidity from these
other borrowings may be reduced. As a result of such a reduction in liquidity,
the Company may be forced to sell certain investments 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.
In order to grow its equity base, the Company may issue additional capital
stock. Management strives to issue such additional shares when it believes
existing shareholders are likely to benefit from such offerings through higher
earnings and dividends per share than as compared to the level of earnings and
dividends the Company would likely generate without such offerings. During the
period from April 1, 1997 through June 30, 1997, the Company issued 290,000
shares of its common stock, adjusted for the two-for-one stock split, pursuant
to a registration statement filed with the Securities and Exchange Commission.
The net proceeds from the issuance were approximately $5.1 million for the six
months ended June 30, 1997. The Company also issued 349,832 shares of its common
stock, adjusted for the two-for-one stock split, pursuant to its dividend
reinvestment program for net proceeds of $9.7 million, for the six months ended
June 30, 1997.
The Company borrows funds on a short-term basis to support the accumulation
of loans prior to the sale of such loans or the issuance of collateralized bonds
and mortgage- or asset-backed securities. These borrowings may bear fixed or
variable interest rates, may require additional collateral in the event that the
value of the existing collateral declines, and may be due on demand or upon the
occurrence of certain events. If borrowing costs are higher than the yields on
the assets financed with such funds, the Company's ability to acquire or fund
additional assets may be substantially reduced and it may experience losses.
These short-term borrowings consist of the Company's lines of credit and
repurchase agreements. These borrowings are paid down as the Company securitizes
or sells loans.
A substantial portion of the assets of the Company are pledged to secure
indebtedness incurred by the Company. Accordingly, those assets would not be
available for distribution to any general creditors or the stockholders of the
Company in the event of the Company's liquidation, except to the extent that the
value of such assets exceeds the amount of the indebtedness they secure.
Lines of Credit
At June 30, 1997, the Company had three credit facilities aggregating $500
million to finance loan fundings of which $300 million expires in 1997 and $200
million expires in 1998. One of these facilities includes several sublines
aggregating $300 million to serve various purposes, such as multi-family loan
fundings, working capital, and manufactured housing loan fundings, which may
not, in the aggregate, exceed the overall facility commitment of $150 million at
any time. Working capital borrowings under this facility are limited to $30
million. The Company expects that these credit facilities will be renewed, if
necessary, at their respective expiration dates, although there can be no
assurance of such renewal. The lines of credit contain certain financial
covenants which the Company met as of June 30, 1997. However, changes in asset
levels or results of operations could result in the violation of one or more
covenants in the future.
Repurchase Agreements
The Company finances the majority of its portfolio assets through
collateralized bonds and repurchase agreements. Collateralized bonds are
non-recourse to the Company. Repurchase agreements allow the Company to sell
portfolio assets for cash together with a simultaneous agreement to repurchase
the same portfolio assets on a specified date for a price which is equal to the
original sales price plus an interest component. At June 30, 1997, the Company
had outstanding obligations of $1.1 billion under such repurchase agreements. As
of June 30, 1997, $431.3 million of various classes of collateralized bonds
issued by the Company have been retained by the Company and have been pledged as
security for $440.5 million of such repurchase agreements. For financial
statement presentation purposes, the Company classified these $440.5 million of
repurchase agreements, secured by collateralized bonds, as collateralized bonds
outstanding. The remainder of the repurchase agreements were secured by ARM
securities -- $617.4 million, fixed-rate securities -- $18.7 million and other
mortgage securities -- $9.7.
Increases in either short-term interest rates or long-term interest rates
could negatively impact the valuation of these mortgage securities and may limit
the Company's borrowing ability or cause various lenders to initiate margin
calls. Additionally, certain of the Company's ARM securities are AAA or AA rated
classes that are subordinate to related AAA rated classes from the same series
of securities. Such AAA or AA rated classes have less liquidity than securities
that are not subordinated and the value of such classes is more dependent on the
credit rating of the related insurer or the credit performance of the underlying
mortgage loans. In instances of a downgrade of an insurer or the deterioration
of the credit quality of the underlying mortgage collateral, the Company may be
required to sell certain portfolio assets in order to maintain liquidity. If
required, these sales could be made at prices lower than the carrying value of
the assets, which could result in losses.
In addition to the lines of credit, the Company also may finance a portion of
its loans held for securitization with repurchase agreements on an uncommitted
basis. At June 30, 1997, the Company had $15.4 million outstanding obligations
under such repurchase agreements.
To reduce the Company's exposure to changes in short-term interest rates on
its repurchase agreements, the Company may lengthen the duration of its
repurchase agreements secured by mortgage securities by entering into certain
futures and/or option contracts. As of June 30, 1997, the Company had no such
financial futures or option contracts outstanding.
Potential immediate sources of liquidity for the Company include cash
balances and unused availability on the credit facilities described above. The
potential immediate sources of liquidity decreased 54% during the second quarter
of 1997 in comparison to the prior quarter due to the increased level of
production for which the Company had not established credit lines. During July,
however, the Company issued $100 million of senior notes, which were used to pay
down such short-term borrowings related to financing loans held for
securitization during the accumulation period. As a result, the Company
anticipates that the potential immediate sources of liquidity will be more
comparable to prior quarters in the future.
Potential Immediate Sources of Liquidity
($ in millions)
- --------------------------------------------------------------------------------------------------------------------
Potential Immediate
Estimated Unused Potential Sources of Liquidity as
Borrowing Immediate Sources % of Recourse
Cash Balance Capacity of Liquidity Borrowings (1)
- --------------------------------------------------------------------------------------------------------------------
1996, Quarter 1 $ 8.5 $ 32.6 $ 41.1 1.79%
1996, Quarter 2 20.9 102.8 123.7 6.56%
1996, Quarter 3 13.8 118.7 132.5 10.13%
1996, Quarter 4 11.4 131.8 143.2 10.16%
1997, Quarter 1 8.4 139.9 148.3 10.26%
1997, Quarter 2 7.9 59.7 67.6 4.82%
- --------------------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes borrowings, such as collateralized bonds, that are non-recourse to
the Company.
</FN>
Unsecured Borrowings
The Company issued two series of unsecured notes payable totaling $50 million
in 1994. The proceeds from this issuance were used for general corporate
purposes. These notes payable have an outstanding balance at June 30, 1997 of
$44 million. The first principal repayment on one of the series of notes payable
was due October 1995 and annually thereafter, with quarterly interest payments
due. Principal repayment on the second note payable is contracted to begin in
October 1998. The notes mature between 1999 and 2001 and bear fixed interest
rates of 9.56% and 10.03%, respectively. The note agreements contain certain
financial covenants which the Company met as of June 30, 1997. However, changes
in asset levels or results of operations could result in the violation of one or
more covenants in the future. The Company also has various acquisition notes
payable totaling $2.0 million at June 30, 1997.
On July 14, 1997, the Company issued $100 million of senior unsecured notes
maturing on July 15, 2002. The notes will bear a fixed interest of 7.875% and
pay interest semi-annually in arrears on January 15 and July 15, commencing on
January 15, 1998. The net proceeds were initially used to reduce short-term debt
related to financing loans held for securitization during the accumulation
period.
FORWARD-LOOKING STATEMENTS
Certain written statements in this Form 10-Q made by the Company, that are
not historical fact constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements may
involve factors that could cause the actual results of the Company to differ
materially from historical results or from any results expressed or implied by
such forward-looking statements. The Company cautions the public not to place
undue reliance on forward-looking statements, which may be based on assumptions
and anticipated events that do not materialize. The Company does not undertake,
and the Securities Litigation Reform Act specifically relieves the Company from,
any obligation to update any forward-looking statements.
Factors that may cause actual results to differ from historical results or
from any results expressed or implied by forward-looking statements include the
following:
Economic Conditions. The Company is affected by consumer demand for
manufactured housing, multi-family housing and other products which it finances.
A material decline in demand for these products and services would result in a
reduction in the volume of loans originated by the Company. The risk of defaults
and credit losses could increase during an economic slowdown or recession. This
could have an adverse effect on the Company's financial performance and the
performance on the Company's securitized loan pools.
Capital Resources. The Company relies on various credit facilities and
repurchase agreements with certain investment banking firms to help meet the
Company's short-term funding needs. The Company believes that as these
agreements expire, they will continue to be available or will be able to be
replaced; however no assurance can be given as to such availability or the
prospective terms and conditions of such agreements or replacements.
Interest Rate Fluctuations. The Company's income depends on its ability to
earn greater interest on its investments than the interest cost to finance these
investments. Interest rates in the markets served by the Company generally rise
or fall with interest rates as a whole. A majority of the loans currently
originated by the Company are fixed-rate. The profitability of a particular
securitization may be reduced if interest rates increase substantially before
these loans are securitized. In addition, the majority of the investments held
by the Company are variable rate collateral for collateralized bonds and
adjustable-rate investments. These investments are financed through non-recourse
long-term collateralized bonds and recourse short-term repurchase agreements.
The net interest spread for these investments could decrease during a period of
rapidly rising interest rates, since the investments generally have periodic
interest rate caps and the related borrowing have no such interest rate caps.
Defaults. Defaults by borrowers on loans retained by the Company may have an
adverse impact on the Company's financial performance, if actual credit losses
differ materially from estimates made by the Company at the time of
securitization. The allowance for losses is calculated on the basis of
historical experience and management's best estimates. Actual defaults may
differ from the Company's estimate as a result of economic conditions. Actual
defaults on ARM loans may increase during a rising interest rate environment.
The Company believes that its reserves are adequate for such risks.
Prepayments. Prepayments by borrowers on loans retained by the Company may
have an adverse impact on the Company's financial performance, if prepayments
differ materially from estimates made by the Company. The prepayment rate is
calculated on the basis of historical experience and management's best
estimates. Actual rates of prepayment may vary as a result of the prevailing
interest rate. Prepayments are expected to increase during a declining interest
rate environment. The Company's exposure to more rapid prepayments is (i) the
faster amortization of premium on the investments and (ii) the replacement of
investments in its portfolio with lower yield securities.
Competition. The financial services industry is a highly competitive market.
Increased competition in the market could adversely affect the Company's market
share within the industry and hamper the Company's efforts to expand its
production sources.
Regulatory Changes. The Company's business is subject to federal and state
regulation which, among other things require the Company to maintain various
licenses and qualifications and require specific disclosures to borrowers.
Changes in existing laws and regulations or in the interpretation thereof, or
the introduction of new laws and regulations, could adversely affect the
Company's operation and the performance of the Company's securitized loan pools.
New Production Sources. The Company has expanded both its manufactured
housing and commercial lending businesses. The Company is incurring or will
incur expenditures related to the start-up of these businesses, with no
guarantee that production targets set by the Company will be met or that these
businesses will be profitable. Various factors such as economic conditions,
interest rates, competition and the lack of the Company's prior experience in
these businesses could all impact these new production sources.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In connection with the sale of its single-family mortgage
operations, the Company has indemnified the purchaser for a period
of up to five years for various representations and warranties made
as part of the sale. One of the companies included in the sale has
been named in a lawsuit seeking class action status regarding
violations of the Real Estate Settlement and Procedures Act (RESPA).
The lawsuit alleges that this entity violated RESPA by payment of
premiums to wholesale brokers for sourcing single-family mortgage
loans with above market rates. The plaintiffs seek compensatory and
punitive damages. Pursuant to the terms of the sale, the Company has
indemnified the purchaser against any such violations of RESPA on
loans funded through May 13, 1996. The Federal District Court of
Alexandria, Virginia has denied class action status for this law-
suit. The Company expects the case to be settled without any
financial impact to the Company.
See also the Form 10-Q for the quarter ended March 31, 1997 for
other legal proceedings.
Item 2. Changes in Securities
On May 5, 1997, the Company effected a two-for-one split with
respect to all of the issued and outstanding shares of its common
stock. Stockholders of record as of the close of business on May 5,
1997 became entitled to receive one newly issued share of common
stock for each share of common stock held on such date. Pursuant to
the company's Articles of Incorporation, as amended, the number of
shares of common stock into which the Company's Series A Cumulative
Convertible Preferred Stock, the Series B Cumulative Convertible
Preferred Stock and the Series C Cumulative Convertible Preferred
Stock are convertible was automatically adjusted to reflect the
stock split. Similarly, the number of shares of common stock
issuable upon exercise of outstanding Stock Appreciation Rights were
also automatically adjusted to reflect the stock split in accordance
with the Company's 1992 Incentive Stock Plan.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of shareholders held on April 24, 1997,
for which proxies were solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934, the following matters were voted upon
by shareholders.
1. The election of five directors for a term expiring in 1998:
J. Sidney Davenport
Richard C. Leone
Thomas H. Potts
Paul S. Reid
Donald B. Vaden
2. Approval of an amendment to the Company's Articles of Incorpora-
tion to change the Company's name to "Dynex Capital, Inc."
3. Approval of an amendment to the Company's Articles of
Incorporation increasing the number of authorized shares of
common stock to 100,000,000 and effecting a two-for-one split
of the issued and outstanding shares of common stock
4. Approval of the Resource Mortgage Capita, Inc. 1992 Stock
Incentive Plan, as amended.
5. Approval of the Resource Mortgage Capital, Inc. Bonus Plan for
certain executive officers and key employees of the Company.
6. Approval of the appointment of KPMG Peat Marwick LLP,
independent certified public accountants, as auditors of the Company.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Current Report on Form 8-K filed with the Commission on July 18, 1997,
regarding the offering of the Notes described in the Company's
Prospectus dated July 14, 1997 and Prospectus Supplement dated July 14,
1997 which were filed with the
Commission on July 16, 1997
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.
DYNEX 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: August 14, 1997