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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended September 30, 2002
|_| Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission file number 33-83524
MERIT SECURITIES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1736551
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
4551 Cox Road, Suite 300, 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. |_|Yes |X|No
As of October 31, 2002, the latest practicable date, there were 1,000 shares of
Merit Securities Corporation common stock outstanding.
The registrant meets the conditions set forth in General Instructions H (1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
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MERIT SECURITIES CORPORATION
FORM 10-Q
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2002
and December 31, 2001 (unaudited).......................................................1
Condensed Consolidated Statements of Operations for the three months and nine months
ended September 30, 2002 and 2001(as restated) (unaudited).............................2
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 (as restated) (unaudited)..................................3
Notes to Unaudited Condensed Consolidated Financial Statements..............................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................................6
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................10
Item 5. Other Information..........................................................................10
Item 6. Exhibits and Reports on Form 8-K...........................................................10
SIGNATURES .......................................................................................13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERIT SECURITIES CORPORATION
Condensed CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands except share data)
September 30, December 31,
2002 2001
--------------------- ---------------------
ASSETS:
Collateral for collateralized bonds $ 1,428,614 $ 1,634,460
Loans 9,656 4,435
Due from affiliates, net 6,018 -
$ 1,444,288 $ 1,638,895
===================== =====================
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Non-recourse debt - collateralized bonds $ 1,373,631 $ 1,542,924
SHAREHOLDER'S EQUITY:
Common stock, no par value, 10,000 shares authorized,
1,000 shares issued and outstanding 10 10
Additional paid-in capital 68,674 92,774
Accumulated other comprehensive (loss) income (2,196) 3,187
Retained earnings 4,169 -
70,657 95,971
--------------------- ---------------------
$ 1,444,288 $ 1,638,895
===================== =====================
See notes to unaudited condensed consolidated financial statements.
MERIT SECURITIES CORPORATION
Condensed CONSOLIDATED STATEMENTS
OF OPERATIONS (UNAUDITED)
(amounts in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------- -------------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
(As Restated, (As Restated,
See Note 5) See Note 5)
Interest income:
Collateral for collateralized
bonds $ 25,727 $ 34,587 $ 80,478 $ 119,314
Loans 17 - 44 -
---------------- ---------------- ---------------- ----------------
25,744 34,587 80,522 119,314
---------------- ---------------- ---------------- ----------------
Interest and related expense:
Interest expense on
collateralized bonds 15,648 24,336 49,002 88,965
Other 502 439 1,496 1,317
---------------- ---------------- ---------------- ----------------
16,150 24,775 50,498 90,282
---------------- ---------------- ---------------- ----------------
Net interest margin before
provision for losses 9,594 9,812 30,024 29,032
Provision for losses (5,486) (12,213) (16,643) (21,323)
---------------- ---------------- ---------------- ----------------
Net interest margin 4,108 (2,401) 13,381 7,709
Impairment charges (2,429) (1,783) (8,832) (5,349)
Other income (loss) 3 - (1) -
---------------- ---------------- ---------------- ----------------
Income (loss) before extraordinary 1,682 (4,184) 4,548 2,360
items
Extraordinary items - gain (loss)
on extinguishment of debt 161 (1,013) (379) (1,013)
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 1,843 $ (5,197) $ 4,169 $ 1,347
================ ================ ================ ================
See notes to unaudited condensed consolidated financial statements.
MERIT SECURITIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
Nine Months Ended
September 30,
-----------------------------------------------------
2002 2001
---------------------- ----------------------
(As Restated,
See Note 5)
Operating activities:
Net income $ 4,169 $ 1,347
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss on extinguishment of debt 379 1,013
Impairment charge 8,832 5,349
Provision for losses 16,643 21,323
Amortization, net 6,760 4,694
Net (increase) decrease in accrued interest receivable
and funds held by trustee (1,951) 2,774
Decrease in accrued interest payable (217) (756)
Other (17) 86
---------------------- ----------------------
Net cash provided by operating activities 34,598 35,830
---------------------- ----------------------
Investing activities:
Purchase of loans (158,933) -
Proceeds from principal payments on collateral 324,830 460,723
Proceeds from sale of collateralized bonds 605,272 507,641
---------------------- ----------------------
Net cash provided by investing activities 771,169 968,364
---------------------- ----------------------
Financing activities:
Principal payments on collateralized bonds (775,649) (984,408)
Increase in due from affiliates (6,018) -
Capital distributions (24,100) (19,796)
---------------------- ----------------------
Net cash used for financing activities (805,767) (1,004,204)
---------------------- ----------------------
Net change in cash - (10)
Cash, beginning of period - 10
---------------------- ----------------------
Cash, end of period $ - $ -
====================== ======================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 46,932 $ 62,611
====================== ======================
See notes to unaudited condensed consolidated financial statements.
MERIT SECURITIES CORPORATION
NOTES TO UNAUDITED Condensed CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(amounts in thousands except share data)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed 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 accounting principles generally accepted in
the United States of America, hereinafter referred to as "generally accepted
accounting principles" for complete financial statements. The financial
statements include the accounts of Merit Securities Corporation (the "Company")
and its wholly owned subsidiary, Financial Asset Securitization, Inc. (FASI).
The Company is a wholly owned, limited-purpose finance subsidiary of Issuer
Holding Corporation ("IHC"). IHC was formed on September 4, 1996 to acquire all
of the outstanding stock of the Company and certain other affiliates of Dynex
Capital, Inc. ("Dynex"). IHC is a wholly owned subsidiary of Dynex. Dynex has
elected to be treated as a real estate investment trust ("REIT") for federal
income tax purposes under the Internal Revenue Code of 1986. Accordingly, the
Company is not subject to federal income tax. The Company was organized to
facilitate the securitization of loans through the issuance and sale of
collateralized bonds (the "Bonds"). All significant inter-company balances and
transactions have been eliminated in the consolidation of the Company.
In the opinion of management, all significant adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation of the
condensed consolidated financial statements have been included. However, the
financial statements presented are unaudited. Operating results for the nine
months ended September 30, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002.
On March 31, 2002, the Company purchased from Dynex Capital, Inc., its parent,
10,000 shares of common stock, representing 100% ownership, of FASI.
Certain reclassifications have been made to the financial statements for 2001 to
conform to the presentation for 2002.
NOTE 2 -- COLLATERAL FOR COLLATERALIZED BONDS
Collateral for collateralized bonds consists of loans and debt securities backed
primarily by adjustable-rate and fixed-rate mortgage loans secured by first
liens on single family residential housing and manufactured housing installment
loans secured by a UCC filing. Loans are reported at amortized cost with
established provisions for estimated losses. Debt securities are available for
sale and are, therefore, marked to market according to SFAS No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." All collateral for
collateralized bonds is pledged to secure repayment of the related
collateralized bonds. All principal and interest (less servicing-related fees)
on the collateral is remitted to a trustee and is available for payment on the
collateralized bonds. The Company's exposure to loss on collateral for
collateralized bonds is generally limited to the amount of collateral pledged in
excess of the related collateralized bonds issued, as the collateralized bonds
issued are non-recourse to the Company. The collateral for collateralized bonds
can be sold by the Company, but only subject to the lien of the collateralized
bond indenture.
The following table summarizes the components of collateral for collateralized
bonds as of September 30, 2002 and December 31, 2001. Debt securities pledged as
collateral for collateralized bonds are considered available for sale, and are
therefore recorded at fair value.
- ------------------------------------------------------ --------------------- ----------------------
September 30, December 31,
2002 2001
- ------------------------------------------------------ --------------------- ----------------------
Loans, at amortized cost $ 1,093,422 $ 1,192,109
Debt securities, at fair value 350,119 457,715
1,443,541 1,649,824
Reserve for loan losses (14,927) (15,364)
- ------------------------------------------------------ --------------------- ----------------------
$ 1,428,614 $ 1,634,460
- ------------------------------------------------------ --------------------- ----------------------
The following table summarizes the amortized cost basis, gross unrealized gains
and losses and estimated fair value of debt securities pledged as collateral for
collateralized bonds as of September 30, 2002:
------------------------- ------------------ ----------------- ----------------- ------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------- ------------------ ----------------- ----------------- ------------------
Debt securities $ 352,225 - $ (2,106) $ 350,119
------------------------- ------------------ ----------------- ----------------- ------------------
NOTE 3 -- FAIR VALUE
The Company estimates fair value for its financial instruments, primarily
collateral for collateralized bonds, by calculating the present value of the
projected net cash flows of the instruments using estimated market discount
rates, prepayment rates and credit loss assumptions. Discount rates used are
those management believes would be used by willing buyers of these financial
instruments at prevailing market rates. The discount rate used in the
determination of fair value of the collateral for collateralized bonds at both
September 30, 2002 and December 31, 2001 was 16%. Prepayment rate assumptions at
September 30, 2002, and December 31, 2001, were generally at a "constant
prepayment rate," or CPR. The CPR for collateral for collateralized bonds
consisting of single-family mortgage loans, ranged from 35%-45% for 2002 and
35%-60% for 2001. The CPR for collateral for collateralized bonds consisting of
manufactured housing loans, ranged from 11%-12% for 2002 and 9%-10% for 2001.
CPR assumptions for each year are based in part on the actual prepayment rates
experienced for the prior six-month period and in part on management's estimate
of future prepayment activity. Credit loss assumptions vary depending on the
collateral pledged, and are based in part on the actual credit losses
experienced for the prior six-month period and in part on management's estimate
of future credit losses based on the losses experienced on similar loans in the
marketplace. The cash flows for the collateral for collateralized bonds were
projected to the estimated date that the security could be called and retired by
the Company if there is economic value to the Company in calling and retiring
the security.
Variations in market discount rates, prepayment rates and credit loss
assumptions may materially impact the resulting fair values of the Company's
financial instruments. Since the fair value of the Company's financial
instruments is based on estimates, actual gains and losses recognized may differ
from those estimates recorded in the unaudited condensed consolidated financial
statements.
NOTE 4 - ALLOWANCE FOR LOSSES
The following table summarizes the activity for the allowance for losses on
collateral for collateralized bonds and loans for the nine months ended
September 30, 2002.
- ------------------------------------------------------ -----------------
2002
- ------------------------------------------------------ -----------------
Beginning balance $ 15,364
Provision for losses 16,120
Losses charged-off, net of recoveries (16,467)
- ------------------------------------------------------ -----------------
Ending balance $ 15,017
- ------------------------------------------------------ -----------------
The Company has limited exposure to credit risk retained on loans, which it has
securitized through the issuance of collateralized bonds. The aggregate loss
exposure is generally limited to the amount of collateral in excess of the
related investment-grade collateralized bonds issued (commonly referred to as
"overcollateralization"), excluding price premiums and discounts and hedge gains
and losses. The allowance for losses is included in collateral for
collateralized bonds in the accompanying balance sheets.
NOTE 5 -- RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of its financial statements for the three and nine
month periods ended September 30, 2001, the Company determined that the assets
previously reported as debt securities subject to the requirements of SFAS
No.115, " Accounting for Certain Investments in Debt and Equity Securities"
were, in fact, collateralized borrowings, where the collateral being pledged as
securities were loans that should have been accounted for under the requirements
of SFAS No. 5, "Accounting for Contingencies" or SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." As a result, the accompanying condensed
consolidated financial statements for the three and nine month periods ended
September 30, 2001 have been restated from the amounts previously reported to
correct the accounting for these investments.
A summary of the significant effects of the restatement is as follows:
- ------------------------- ---------------------------------------- --- ------------------------------------
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
---------------------------------------- ------------------------------------
(As Previously (As Previously
Reported) (As Restated) Reported) (As Restated)
- ------------------------- ------------------- ---------------- ----------------- ---------------
Provision for losses $ (13,996) $ (12,213) $ (26,672) $ (21,323)
Net interest margin (4,184) (2,401) 2,360 7,709
Impairment charges - (1,783) (3,566) (5,349)
- ------------------------- ------------------- --- ---------------- --- ----------------- -- ---------------
This restatement had no effect on income (loss) before extraordinary items or
net income (loss).
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
As discussed in Note 5 to the condensed consolidated financial statements
included in Item 1, the Company has restated its financial statements for the
three and nine month periods ended September 30, 2001. The following management
discussion and analysis takes into account the effects of the restatement.
The Company was organized to facilitate the securitization of loans through the
issuance and sale of collateralized bonds (the "Bonds"). The Bonds will be
secured primarily by: (i) mortgage loans secured by first or second liens on
residential property, (ii) Federal National Mortgage Association Mortgage-Backed
Certificates, (iii) Federal Home Loan Mortgage Corporation Mortgage-Backed
Certificates, (iv) Government National Mortgage Association Mortgage-Backed
Certificates, (v) other mortgage pass-through certificates or
mortgage-collateralized obligations. In the future, the Company may also
securitize other types of loans.
After payment of the expenses of an offering and certain administrative
expenses, the net proceeds from an offering of Bonds will be used to purchase
Collateral from IHC or various third parties. IHC can be expected to use the
proceeds to reduce indebtedness incurred to obtain such loans or to acquire
additional Collateral. After the issuance of a series of Bonds, the Company may
sell the Collateral securing that series of Bonds, subject to the lien of the
Bonds.
FINANCIAL CONDITION
- --------------------------------------------------- ------------------ ---- -------------------
September 30, December 31,
(amounts in thousands) 2002 2001
- --------------------------------------------------- ------------------ ---- -------------------
Collateral for collateralized bonds $ 1,428,614 $ 1,634,460
Non-recourse debt - collateralized bonds 1,373,631 1,542,924
Shareholder's equity 64,639 95,971
Collateralized bond series outstanding 4 5
- --------------------------------------------------- ------------------ ---- -------------------
Collateral for collateralized bonds
As of December 31, 2001, the Company had 5 series of collateralized bonds
outstanding. As of September 30, 2002, the Company had 4 series of
collateralized bonds outstanding. The collateral for collateralized bonds
decreased to $1.4 billion at September 30, 2002 compared to $1.6 billion at
December 31, 2001. This decrease of $206 million is primarily the result of $324
million in paydowns on the collateral, impairment losses of $22 million, and $12
million of impaired loans reclassified to "Loans". These were partially offset
by $155 million of additional collateral acquired from IHC in April 2002.
Non-recourse debt - collateralized bonds
Collateralized bonds decreased to $1.37 billion at September 30, 2002 from $1.54
billion at December 31, 2001 as a result of $345.5 million in paydowns during
the nine months ended September 30, 2002 and the call and retirement of $430.2
million of bonds. These were partially offset by the issuance of $605.3 million
in bonds in a securitization completed in April 2002.
Shareholder's Equity
Shareholder's equity decreased to $64.6 million at September 30, 2002 from $96.0
million at December 31, 2001. This decrease was primarily the result of an
increase of $5.3 million in net unrealized loss on investments
available-for-sale, a $6.0 receivable from affiliates and a $24.1 million
capital distribution to IHC during the period for the nine months ended
September 30, 2002, offset by net income of $4.2 million.
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ------------------------------------
(amounts in thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------- ------------------------------------
Interest income $ 25,744 $ 34,587 $ 80,522 $ 119,314
Interest expense on collateralized bonds 16,150 24,775 50,498 90,282
Provision for losses 5,486 12,213 16,643 21,323
Net interest margin 4,108 (2,401) 13,381 7,709
Net income (loss) 1,843 (5,197) 4,169 1,347
- ------------------------------------------------------------------------------------------------------------------
Interest income on the collateral for collateralized bonds decreased to $25.7
million from $34.6 million for the three month periods ended September 30, 2002
and 2001, respectively. Interest income on the collateral for collateralized
bonds decreased to $80.5 million for the nine months ended September 30, 2002
from $119.3 million for the same period in 2001. These decreases were primarily
a result of prepayments and paydowns on principal and lower interest rates
between the respective periods.
Interest expense on collateralized bonds decreased to $16.2 million from $24.8
million for the three month periods ended September 30, 2002 and 2001,
respectively. Interest expense on collateralized bonds decreased to $50.5
million for the nine months ended September 30, 2002 from $90.3 million for the
nine months ended September 30, 2001. These decreases resulted almost equally
from the decline in collateralized bonds due to prepayments and paydowns on the
related collateral for collateralized bonds coupled with an overall decline in
the cost of funds on the collateralized bonds.
Provision for losses decreased to $5.4 million from $12.2 million for the three
month periods ended September 30, 2002 and 2001, respectively. Provision for
losses decreased to $16.6 million for the nine month period ended September 30,
2002 from $21.3 million for the same period in 2001. Provision for losses
decreased because, in 2001, a large adjustment to reserve for losses on the
Company's manufactured housing loan portfolio was recorded. In both years the
provision is primarily to reserve for probable losses on various loan pools
pledged as collateral for collateralized bonds where the Company has retained
credit risk, principally the Company's investment in manufactured housing loan
pools.
Net interest margin increased to $4.1 million from $(2.4) million for the
three-month periods ended September 30, 2002 and 2001, respectively. Net
interest margin increased to $13.4 million from $7.7 million for the nine-month
periods ended September 30, 2002 and 2001, respectively. These increases were
primarily a result of a decrease in provision for losses and reduced borrowing
costs on collateralized bonds outstanding partially offset by a decline in
interest earning assets during these periods.
Credit Exposures
With collateralized bond structures, the Company retains credit risk relative to
the amount of over-collateralization required in conjunction with the bond
issuance. Losses are generally first applied to the over-collateralized amount,
or in some instances surplus cash and then the over-collateralized amount, with
any losses in excess of that amount borne by the bond insurer or the holders of
the collateralized bonds. The Company only incurs credit losses to the extent
that losses are incurred in the repossession, foreclosure and sale of the
underlying collateral. Such losses generally equal the excess of the principal
amount outstanding, less any proceeds from mortgage or hazard insurance, over
the liquidation value of the collateral. To compensate the Company for retaining
this loss exposure, the Company generally receives an excess yield on the
collateralized loans relative to the yield on the collateralized bonds. At
September 30, 2002, the Company retained $105 million in aggregate principal
amount of over-collateralization. The Company had reserves, or otherwise had
provided coverage for credit losses in the amount of $14.9 million at September
30, 2002. During the first nine months of 2002, the Company provided for
additional reserves of $16.6 million and incurred credit losses of $16.8
million.
Other forms of credit enhancement that benefit the Company, based upon the
performance of the underlying loans, may provide additional protection against
losses. These additional protections include loss reimbursement guarantees with
a remaining balance of $30.2 and a remaining deductible aggregating $1.5 million
on $100 million of securitized single family mortgage loans which are subject to
such reimbursement agreements and $305.7 million of securitized single family
mortgage loans which are subject to various mortgage pool insurance policies
whereby losses would need to exceed the remaining stop loss of at least 42% on
such policies before the Company would incur losses.
Other Matters
At September 30, 2002, the Company had securities of approximately $308.6
million remaining for issuance under a registration statement filed with the
Securities and Exchange Commission. The Company anticipates issuing additional
Bonds in the future.
Item 3. - Quantitative and Qualitative Disclosures about Market Risk
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument due to fluctuations in
interest and foreign exchange rates and in equity and commodity prices. Market
risk is inherent to both derivative and non-derivative financial instruments,
and accordingly, the scope of the Company's market risk management extends
beyond derivatives to include all market risk sensitive financial instruments.
Net interest income comprises the primary component of the Company's earnings.
As a result, the Company is subject to risk resulting from interest rate
fluctuations to the extent that there is a gap between the amount of the
Company's interest-earning assets and the amount of interest-bearing liabilities
that are prepaid, mature or re-price within specified periods.
The Company and IHC monitor the aggregate cash flow, projected net yield and
market value of the collateral for collateralized bonds under various interest
rate and prepayment assumptions.
Approximately $555 million of the Company's collateral for collateralized bonds
as of September 30, 2002, are 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.
Approximately 74% and 15% of these ARM loans underlying the Company's collateral
for collateralized bonds are indexed to and reset based upon the level of
six-month LIBOR and one-year CMT, respectively.
Generally, during a period of rising short-term interest rates, the Company's
net interest spread earned on its collateralized bonds will decrease. The
decrease of the net interest spread results from (i) the lag in resets of the
ARM loans underlying the collateral for collateralized bonds relative to the
rate resets on the collateralized bonds and (ii) rate resets on the ARM loans
which are generally limited to 1% every six months or 2% every twelve months and
subject to lifetime caps, while the associated borrowings have no such
limitation. As short-term 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
proceeds or costs of interest rate swap and cap agreements, to the extent that
the Company has entered into such agreements.
The remaining portion of the Company's collateral for collateralized bonds as of
September 30, 2002, approximately $894 million, is comprised of loans that have
coupon rates that are fixed. The Company has limited its interest rate risk on
such collateral primarily through the issuance of fixed-rate collateralized
bonds. Overall, the Company's interest rate risk is primarily related to the
rate of change in short-term interest rates and to the level of short-term
interest rates.
The Company focuses on the sensitivity of its cash flow, and measures such
sensitivity to changes in interest rates. Changes in interest rates are defined
as instantaneous, parallel, and sustained interest rate movements in 100 basis
point increments. The Company estimates its net interest margin cash flow for
the next twenty-four months assuming no changes in interest rates from those at
period end. Once the base case has been estimated, cash flows are projected for
each of the defined interest rate scenarios. Those scenario results are then
compared against the base case to determine the estimated change to net interest
income.
The following table summarizes the Company's net interest margin cash flow
sensitivity analysis as of September 30, 2002. This analysis represents
management's estimate of the percentage change in net interest margin cash flow
given a parallel shift in interest rates. The "Base" case represents the
interest rate environment as it existed as of September 30, 2002. The analysis
is heavily dependent upon the assumptions used in the model. The effect of
changes in future interest rates, the shape of the yield curve or the mix of
assets and liabilities may cause actual results to differ from the modeled
results. In addition, certain financial instruments provide a degree of
"optionality." The most significant option affecting the Company's portfolio is
the borrowers' option to prepay the loans. The model applies prepayment rate
assumptions representing management's estimate of prepayment activity on a
projected basis for each collateral pool in the investment portfolio. The model
applies the same prepayment rate assumptions for all five cases indicated below.
The extent to which borrowers utilize the ability to exercise their option may
cause actual results to significantly differ from the analysis.
- ------------------------- --------------------
Basis Point % Change in Net
Increase (Decrease) Interest Margin
in Interest Rates From Base Case
- ------------------------- --------------------
+200 (15.7)%
+100 (8.0)%
Base -
-100 10.5%
-200 23.1%
- ------------------------ ---------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
None
Item 4. Controls And Procedures
(a) Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Exchange Act, within 90
days prior to the filing date of this quarterly report (the
"Evaluation Date"), the Company carried out an evaluation of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures. This evaluation was
carried out under the supervision and with the participation
of the Company's management. Based upon that evaluation, the
Company's management concluded that the Company's disclosure
controls and procedures are effective. Disclosure controls and
procedures are controls and other procedures that are designed
to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to
be disclosed in the Company's reports filed under the Exchange
Act is accumulated and communicated to management, including
the Company's management, as appropriate, to allow timely
decisions regarding required disclosures.
(b) Changes in internal controls.
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect
the Company's internal controls subsequent to the Evaluation
Date, nor any significant deficiencies or material weaknesses
in such internal controls requiring corrective actions.
Item 5. Other Information:
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
3.1 Articles of Incorporation of the Registrant (Incorporated
herein by reference to the Exhibits to Registrant's
Registration Statement No. 33-83524 on Form S-3 filed
August 31, 1994).
3.2 Bylaws of the Registrant (Incorporated herein by reference
to the Exhibits to Registrant's Registration Statement
No. 33-83524 on Form S-3 filed August 31, 1994).
3.3 Amended and Restated Articles of Incorporation of the
Registrant, effective April 19, 1995 (Incorporated
herein by reference to Exhibit to the Registrant's
Current Report on Form 8-K, filed April 21, 1995).
4.1 Indenture between Registrant and Trustee, dated as of
August 1, 1994 (Incorporated herein by reference to
the Exhibits to Registrant's Registration Statement
No. 33-83524 on Form S-3 filed August 31, 1994).
4.2 Form of Supplement Indenture between Registrant and
Trustee (Incorporated herein by reference to the
Exhibits to Registrant's Registration Statement No.
33-83524 on Form S-3 filed August 31, 1994).
4.3 Copy of the Indenture, dated as of November 1, 1994,
by and between the Registrant and Texas Commerce Bank
National Association, as Trustee (Incorporated herein
by reference to Exhibit to the Registrant's Current
Report on Form 8-K, filed December 19, 1994).
4.4 Copy of the Series 4 Indenture Supplement, dated as
of June 1, 1995, by and between the Registrant and
Texas Commerce Bank National Association, as Trustee
(including schedules and exhibits) (Incorporated
herein by reference to Exhibit to the Registrant's
Current Report on Form 8-K, filed July 10, 1995).
4.5 Copy of the Series 10 Indenture Supplement, dated as
of December 1, 1997, by and between the Registrant
and Texas Commerce Bank National Association, as
Trustee (related schedules and exhibits available
upon request of the Trustee). (Incorporated herein by
reference to Exhibit of Registrant's Current Report
on Form 8-K, filed January 6, 1998).
4.6 Copy of the Series 11 Indenture Supplement, dated as
of March 1, 1998, by and between the Registrant and
Texas Commerce Bank National Association, as Trustee
(related schedules and exhibits available upon
request of the Trustee). (Incorporated herein by
reference to Exhibit of Registrant's Current Report
on Form 8-K, filed June 12, 1998).
4.7 Copy of the Series 12 Indenture Supplement, dated as
of March 1, 1999, by and between the Registrant and
Texas Commerce Bank National Association, as Trustee
(related schedules and exhibits available upon
request of the Trustee). (Incorporated herein by
reference to Exhibit of Registrant's Current Report
on Form 8-K, filed April 12, 1999).
4.8 Copy of the Series 13 Indenture Supplement, dated as
of August 1, 1999, by and between the Registrant and
Texas Commerce Bank National Association, as Trustee
(related schedules and exhibits available upon
request of the Trustee). (Incorporated herein by
reference to Exhibit of Registrant's Current Report
on Form 8-K, filed September 13, 1999).
4.9 Copy of the Series 14 Indenture Supplement, dated as
of November 1, 1999, by and between the Registrant
and Texas Commerce Bank National Association, as
Trustee (related schedules and exhibits available
upon request of the Trustee). (Incorporated herein by
reference to Exhibit of Registrant's Current Report
on Form 8-K, filed November 12, 1999).
99.1 Standard Provisions to Servicing Agreement
(Incorporated herein by reference to the Exhibits to
Registrant's Registration Statement No. 33-83524 on
Form S-3 filed August 31, 1994).
99.2 Form of Servicing Agreement (Incorporated herein by
reference to the Exhibits to Registrant's Registration
Statement No. 33-83524 on Form S-3 filed August 31, 1994).
99.3 Standard Terms to Master Servicing Agreement (Incorporated
herein by reference to the Exhibits to Registrant's
Registration Statement No. 33-83524 on Form S-3 filed
August 31, 1994).
99.4 Form of Master Servicing Agreement (Incorporated herein by
reference to the Exhibits to Registrant's Registration
Statement No. 33-83524 on Form S-3 filed August 31, 1994).
99.5 Form of Prospectus Supplement of Bonds secured by
adjustable-rate mortgage loans (Incorporated herein by
reference to Exhibits to Registrant's Pre-Effective
Amendment No. 4 to Registration Statement No. 33-83524
on Form S-3 filed December 5, 1994).
99.6 Form of Financial Guaranty Assurance Policy (Incorporated
herein by reference to the Exhibits to Registrant's
Registration Statement No. 33-83524 on Form S-3 filed
August 31, 1994).
99.7 Form of GEMICO Mortgage Pool Insurance Policy (Incorporated
herein by reference to the Exhibits to Registrant's
Registration Statement No. 33-83524 on Form S-3 filed
August 31, 1994).
99.8 Form of PMI Mortgage Insurance Co. Pool Insurance Policy
(Incorporated herein by reference to the Exhibits
to Registrant's Registration Statement No. 33-83524 on
Form S-3 filed August 31, 1994).
99.9 Form of Prospectus Supplement of Bonds secured by
fixed-rate mortgage loans (Incorporated herein by reference
to Exhibits to Registrant's Pre-Effective Amendment No. 4
to Registration Statement No. 33-83524 on Form S-3 filed
December 5, 1994).
99.10 Copy of the Saxon Mortgage Funding Corporation
Servicing Guide for Credit Sensitive Loans, February
1, 1995 Edition (Incorporated herein by reference to
Exhibit to the Registrant's Current Report on Form
8-K, filed March 8, 1995).
99.11 Copy of Financial Guaranty Insurance Policy No.
50364-N issued by Financial Guaranty Assurance Inc.,
dated April 7, 1995, with respect to the Series 3
Bonds (Incorporated herein by reference to Exhibit to
the Registrant's Current Report on Form 8-K, filed
April 21, 1995).
99.12 Copy of Financial Guaranty Insurance Policy No.
50382-N issued by Financial Guaranty Assurance Inc.,
dated June 29, 1995, with respect to the Series 4
Bonds (Incorporated herein by reference to Exhibit to
the Registrant's Current Report on Form 8-K, filed
July 10, 1995).
99.13 Copy of the Standard Terms to Master Servicing
Agreement, June 1, 1995 Edition (Incorporated herein
by reference to Exhibit to the Registrant's Current
Report on Form 8-K, filed July 10, 1995).
99.14 Copy of Financial Guaranty Insurance Policy No. 19804
issued by MBIA Insurance Corporation (Incorporated
herein by reference to Exhibit to the Registrant's
Current Report on Form 8-K, filed November 15, 1995).
99.15 Copy of Financial Guaranty Insurance Policy No. 20596
issued by MBIA Insurance Corporation (Incorporated
herein by reference to Exhibit to the Registrant's
Current Report on Form 8-K, filed March 21, 1996).
99.16 Copy of Financial Guaranty Insurance Policy No. 21296
issued by MBIA Insurance Corporation (Incorporated
herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K, filed June 19, 1996).
99.17 Copy of Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (Incorporated herein by reference to Exhibit to
the Registrant's Current Report on Form 8-K, filed
August 28, 2002).
99.18 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.19 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current report on Form 8-K as filed with the Commission on
August 28, 2002, regarding Certification of Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 Item 9 Regulation FD disclosure for in connection with
the Quarterly Report of Merit Securities Corporation on Form
10-Q for the quarter ended June 30, 2002.
Current report on Form 8-K as filed with the Commission on
September 19, 2002, regarding Certification of Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 Item 9 Regulation FD disclosure for in connection with
the Annual Report of Merit Securities Corporation on Form
10-K/A for the fiscal year ended December 31, 2001.
Current report on Form 8-K as filed with the Commission on
October 4, 2002, regarding Certification of Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 Item 9 Regulation FD disclosure for in connection with
the Quarterly Report of Merit Securities Corporation on Form
10-Q/A for the quarter ended March 31, 2002.
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.
MERIT SECURITIES CORPORATION
By: /s/ Stephen J. Benedetti
-----------------------------------------
Stephen J. Benedetti
President
(Principal Executive Officer,
Principal Financial Officer)
/s/ Kevin J. Sciuk
-----------------------------------------
Kevin J. Sciuk
Controller
(Principal Accounting Officer)
Dated: November 14, 2002
CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen J. Benedetti, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Merit
Securities Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Stephen J. Benedetti
-----------------------------
Stephen J. Benedetti
Principal Executive Officer
CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen J. Benedetti, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Merit
Securities Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Stephen J. Benedetti
Stephen J. Benedetti
Chief Financial Officer
Exhibit 99.18
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Merit Securities Corporation (the
"Company") on Form 10-Q for the quarter ending September 30, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Stephen J. Benedetti, the Principal Executive Officer of the Company, certify,
pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ Stephen J. Benedetti
Stephen J. Benedetti
Principal Executive Officer
November 14, 2002
Exhibit 99.19
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Merit Securities Corporation (the
"Company") on Form 10-Q for the quarter ending September 30, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Stephen J. Benedetti, the Chief Financial Officer of the Company, certify,
pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Stephen J. Benedetti
Stephen J. Benedetti
Chief Financial Officer
November 14, 2002