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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 March 31, 2003
|_| Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
MERIT SECURITIES CORPORATION
(Exact name of registrant as specified in its charter)
Commission file number 33-83524
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.
|X| Yes |_| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). |_| Yes |X| No
As of May 10, 2003, 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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i
MERIT SECURITIES CORPORATION
FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2003
and December 31, 2002 (unaudited)...................................................1
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2003 and 2002 (unaudited).................................................2
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2002 (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
Item 4. Controls and Procedures................................................................10
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
(amounts in thousands except share data)
March 31, December 31,
2003 2002
---------------- ------------------
ASSETS:
Collateral for collateralized bonds:
Loans $ 954,426 $ 1,017,446
Debt securities, available-for-sale 305,096 323,791
Other loans 5,786 6,505
Asset-backed Securities, held-to-maturity 1,386 1,644
Due from affiliates, net 18,233 11,507
---------------- ------------------
$ 1,284,927 $ 1,360,893
================ ==================
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Non-recourse debt - collateralized bonds $ 1,220,231 $ 1,299,113
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 68,674
Accumulated other comprehensive income 464 (134)
Retained earnings (4,452) (6,770)
---------------- ------------------
64,696 61,780
---------------- ------------------
$ 1,284,927 $ 1,360,893
================ ==================
See notes to unaudited condensed financial statements.
1
MERIT SECURITIES CORPORATION
Condensed Consolidated Statements of Operations, Unaudited
(amounts in thousands)
Three Months Ended
March 31,
-----------------------------
2003 2002
------------- -------------
Interest income:
Collateral for collateralized bonds $ 22,190 $ 26,815
Other loans 38 -
Asset-backed securities, held-to-maturity 62 -
------------ -----------
22,290 26,815
------------ -----------
Interest and related expense:
Interest expense on collateralized bonds 13,353 16,869
Other collateralized bond expense 234 435
------------- --------------
13,587 17,304
------------- --------------
Net interest margin before provision for losses 8,703 9,511
Provision for losses (5,003) (5,877)
------------- --------------
Net margin 3,700 3,634
Impairment charges (1,382) (1,961)
------------- --------------
Net income 2,318 1,673
Other comprehensive income 464 108
------------- --------------
Comprehensive Income $ 2,782 $ 1,781
============= ==============
See notes to unaudited condensed financial statements.
2
MERIT SECURITIES CORPORATION
Condensed Consolidated Statements of Cash Flows, Unaudited
(amounts in thousands)
-------------------------------
Three Months Ended
March 31,
-------------------------------
2003 2002
------------ ----------
Operating activities:
Net income $ 2,318 $ 1,673
Adjustments to reconcile net income to net
cash provided by operating activities:
Impairment charges 1,382 1,961
Provision for losses 5,003 5,877
Amortization, net 1,018 2,903
Other 909 1,073
------------ ----------
Net cash provided by operating activities 10,630 13,487
------------ ----------
Investing activities:
Principal payments on collateral 76,070 145,578
------------ ----------
Net cash provided by investing activities 76,070 145,578
------------ ----------
Financing activities:
Principal payments on collateralized bonds (79,666) (148,325)
Payments to affiliates (7,034) 582
Dividends and capital distributions - (11,322)
------------ ----------
Net cash used in financing activities (86,700) (159,065)
------------ ----------
Net decrease in cash - -
Cash, beginning of period - -
------------ ----------
Cash, end of period $ - $ -
------------ ----------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 13,181 $ 16,256
------------ ----------
See notes to unaudited condensed consolidated financial statements.
3
MERIT SECURITIES CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2003
(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"),
which was purchased from Dynex Capital, Inc. ("Dynex"), its parent, on March 31,
2002. 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. 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 inter-company balances and transactions have been eliminated
in the consolidation of the Company.
In the opinion of management, all material adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation of the
financial statements have been included. The Condensed Consolidated Balance
Sheet at March 31, 2003 and December 31, 2002, the Condensed Consolidated
Statements of Operations for the three months ended March 31, 2003 and 2002, the
Condensed Consolidated Statements of Cash Flows for the three months ended March
31, 2003 and 2002, and the related notes to condensed consolidated financial
statements are unaudited. Operating results for the three months ended March 31,
2003 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003.
Certain amounts for 2002 have been reclassified to conform to the presentation
for 2003.
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. 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 Company has classified all of its debt securities included within collateral
for collateralized bonds as available-for-sale. As such, debt securities
included within collateral for collateralized bonds at March 31, 2003 and
December 31, 2002 are reported at fair value, with unrealized gains and losses
excluded from earnings and reported as accumulated other comprehensive income.
Loans included within collateral for collateralized bonds are reported at
amortized cost.
4
The following table summarizes the components of collateral for collateralized
bonds as of March 31, 2003 and December 31, 2002:
- --------------------------------- ------------------------ ---------------------
March 31, 2003 December 31, 2002
- --------------------------------- ------------------------ ---------------------
Loans, at amortized cost $ 975,377 $ 1,038,146
Allowance for loan losses (20,951) (20,700)
- --------------------------------- ------------------------ ---------------------
954,426 1,017,446
Debt Securities, at fair value 305,096 323,791
- --------------------------------- ------------------------ ---------------------
$ 1,259,522 $ 1,341,237
- --------------------------------- ------------------------ ---------------------
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 March 31, 2003 and December 31, 2002:
- --------------------------------------- --------------------- ------------------
March 31, 2003 December 31, 2002
- --------------------------------------- --------------------- ------------------
Debt securities, at amortized cost $ 304,482 $ 323,728
Gross unrealized gains 614 63
- --------------------------------------- --------------------- ------------------
Estimated fair value $ 305,096 $ 323,791
- --------------------------------------- --------------------- ------------------
NOTE 3 -- DUE FROM AFFILIATES, NET
Cash flows generated by operations are loaned by the Company to its parent and
interest is charged to the parent at the Prime rate.
NOTE 4 -- FAIR VALUE
Securities classified as available-for-sale are carried in the accompanying
financial statements at estimated fair value. The Company uses estimates in
establishing fair value for its available-for-sale securities. Estimates of fair
value for securities may be based on market prices provided by certain dealers.
Estimates of fair value for certain other securities are determined by
calculating the present value of the projected cash flows of the instruments
using market-based discount rates, prepayment rates and credit loss assumptions.
The estimate of fair value for securities pledged as collateral for
collateralized bonds is determined by calculating the present value of the
projected cash flows of the instruments using prepayment rate assumptions and
credit loss assumptions based on historical experience and estimated future
activity, and using discount rates commensurate with those believed would be
used by third parties. Such discount rate used in the determination of fair
value of securities pledged as collateral for collateralized bonds was 16% at
March 31, 2003 and December 31, 2002. Prepayment rate assumptions at March 31,
2003, and December 31, 2002, were generally at a "constant prepayment rate," or
CPR ranging from 30%-45% for both 2003 and 2002, for collateral for
collateralized bonds consisting of securities backed by single-family mortgage
loans, and a CPR equivalent of 8% for 2003 and 11% for 2002 for collateral for
collateralized bonds consisting of securities backed by manufactured housing
loans. 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. The loss assumptions utilized vary
depending on the collateral pledged.
Estimates of fair value for other financial instruments are based primarily on
management's judgment. 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 consolidated financial statements.
5
NOTE 5 -- ALLOWANCE FOR LOAN LOSSES
The following table summarizes the activity for the allowance for loan losses on
loans within collateral for collateralized bonds for the three months ended
March 31, 2003 and March 31, 2002:
- ---------------------------------------------------- --------------- -----------
2003 2002
- ---------------------------------------------------- --------------- -----------
Beginning balance ............................... $ 20,700 $ 15,364
Provision for losses ............................ 5,003 5,877
Losses charged-off, net of recoveries ........... (4,752) (4,882)
- ---------------------------------------------------- -------- --------
Ending balance .................................. $ 20,951 $ 16,359
- ---------------------------------------------------- -------- --------
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 loan losses is included in loans within collateral
for collateralized bonds in the accompanying balance sheets.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 and (vi) consumer installment loans
(collectively, the "Collateral"). 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 from the collateral 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
- -------------------------------------------------------- ---------- ------------
March 31, December 31,
(amounts in thousands except series outstanding) 2003 2002
- -------------------------------------------------------- ---------- ------------
Collateral for collateralized bonds .....................$1,259,522 $1,341,237
Other loans ............................................. 5,786 6,505
Asset-backed Securities ................................. 1,386 1,644
Non-recourse debt collateralized bonds .................. 1,220,231 1,299,113
Shareholder's equity .................................... 64,696 61,780
Collateralized bond series outstanding .................. 4 4
- ------------------------------------------------------------------- ----------
Collateral for collateralized bonds
As of both March 31, 2003 and December 31, 2002, the Company had 4 series of
collateralized bonds outstanding. The collateral for collateralized bonds
decreased to $1.26 billion at March 31, 2003 compared to $1.34 billion at
December 31, 2002. This decrease of $81.7 million is the result of $75.0 million
in paydowns on the collateral, $5.0 million of increased provisions for loan
losses, and $1.5 million of impairment losses on securities.
6
Other loans
Other loans decreased to $5.8 million at March 31, 2003 from $6.5 million at
December 31, 2002. Other loans is composed of non-performing loans not included
in the securitization completed in April 2002 which were reclassified to Other
loans from collateral for collateralized bonds. This decrease resulted from
paydowns on the loans of $0.7 million.
Asset-backed Securities
Asset-backed securities decreased to $1.4 million at March 31, 2003, compared to
$1.6 million at December 31, 2002, as a result of principal payments of $0.3
million during the year partially offset by $0.1 million in discount
amortization and accrued interest.
Non-recourse debt - collateralized bonds
Collateralized bonds decreased to $1.22 billion at March 31, 2003 from $1.30
billion at December 31, 2002. This decrease of $78.9 million is the result of
$79.7 million in paydowns offset by $0.9 million of amortization of premium and
discounts during the three months ended March 31, 2003.
Shareholder's Equity
Shareholder's equity increased to $64.7 million at March 31, 2003 from $61.8
million at December 31, 2002. This increase was primarily the result of net
income of $2.3 million during the three months ended March 31, 2003 and an
increase in accumulated other comprehensive income of $0.6 million.
RESULTS OF OPERATIONS
- ------------------------------------------------------ -------------------------
Three Months Ended
March 31,
- ------------------------------------------------------ -------------------------
(amounts in thousands) 2003 2002
- ------------------------------------------------------ ----------- -------------
Interest income ........................... $22,290 $26,815
Interest expense .......................... 13,587 17,304
Provision for losses ...................... 5,003 5,877
Net interest margin ....................... 3,700 3,634
Impairment charges ........................ 1,382 1,961
Net income ................................ 2,318 1,673
- --------------------------------------------------------------------------------
Interest income decreased to $22.3 million for the three months ended March 31,
2003 from $26.8 million for the same period in 2002. This decrease was primarily
a result of paydowns of interest earning assets from $1.5 billion at March 31,
2002 to $1.3 billion at March 31, 2003 and lower interest rates between the
respective periods.
Interest and other expense decreased to $13.6 million for the three months ended
March 31, 2003 from $17.3 million for the three months ended March 31, 2002.
This decrease resulted from the decline in collateralized bonds due to
prepayments on the related assets and normal scheduled bond paydowns as well as
a decrease in interest rates during the period.
Provision for losses decreased to $5.0 million for the three months ended March
31, 2003 from $5.9 million for the same period in 2002 due to lower expected
losses resulting from lower principal balances.
Net interest margin for the three months ended March 31, 2003 was $3.7 million
compared to $3.6 million for the same period in 2002. This increase for the
three months ended March 31, 2003 was the result of an decrease in provision for
7
losses coupled with reduced borrowing costs on collateralized bonds outstanding,
offset by a decline in interest earning assets.
Impairment charges decreased to $1.4 million for the three months ended March
31, 2003 from $2.0 million for the same period in 2002. Credit losses
experienced by one security have decreased due to lower principal balances.
Credit Exposures
With collateralized bond structures, the Company retains credit risk relative to
the amount of overcollateralization required in conjunction with the bond
issuance. Losses are generally first applied to the overcollateralized amount,
or in some instances surplus cash and then the overcollaterialized 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 March
31, 2003, the Company retained $92.1 million in aggregate principal amount of
overcollateralization compared to $93.6 million at December 31, 2002. The
Company had reserves, or otherwise had provided coverage on $21.0 million at
March 31, 2003. During the first three months of 2003, the Company provided for
additional reserves of $5.0 million and incurred credit losses of $4.7 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 $1.3 million
on $72.1 million of securitized single family mortgage loans which are subject
to such reimbursement agreements and $241.4 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 53% on
such policies before the Company would incur losses.
Other Matters
At March 31, 2003, 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.
Additionally, cash flow from the investment portfolio represents the primary
component of the Company's incoming cash flow. 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's strategy has been to mitigate interest rate
risk through the creation of a diversified investment portfolio that generates
stable income and cash flow in a variety of interest rate and prepayment
environments.
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. While certain investments may perform poorly in
an increasing or decreasing interest rate environment, other investments may
perform well, and others may not be impacted at all.
8
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 interest rate movements in 100 basis point and 200 basis point ratable
increments, both up and down, over the ensuing twelve months from the
measurement date. The Company estimates its net interest margin cash flow for
the next twenty-four months assuming that interest rates over such time period
follow the forward LIBOR curve (based on the 90-day Eurodollar futures contract)
as of 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 cash flow.
The following table summarizes the Company's net interest margin cash flow
sensitivity analysis as of March 31, 2003. This analysis represents management's
estimate of the percentage change in net interest margin cash flow given a shift
in interest rates. The "Base" case represents the interest rate environment as
it existed as of March 31, 2003. As of March 31, 2003, one-month LIBOR was 1.30%
and six-month LIBOR was 1.23%. The analysis is heavily dependent upon the
assumptions used in the model. Prepayment rate assumptions used were estimates
and were generally at a "constant prepayment rate", or CPR, ranging from 30% to
70% for collateral for collateralized bonds consisting of single-family mortgage
loans and securities, and a CPR equivalent ranging from 7% to 8% for collateral
for collateralized bonds consisting of manufactured housing loans and
securities.
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 borrower's 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.
Given the current composition and performance of the investment portfolio, and
the limitation to estimating twenty-four months of net interest margin cash
flows, variations in prepayment rate assumptions are not expected to have a
material impact on the net interest margin cash flows. Projected results assume
no additions or subtractions to the Company's portfolio, and no change to the
Company's liability structure. Historically, there have been significant changes
in the Company's assets and liabilities, and there are likely to be such changes
in the future.
------------------------ ---------------------
Basis Point % Change in Net
Increase (Decrease) in Interest Margin
Interest Rates from Base Case
------------------------ ---------------------
+200 (18.5)%
+100 (10.4)%
Base -
-100 12.4%
-200 26.3%
------------------------ --------------------
Approximately $471.6 million of the Company's investment portfolio as of March
31, 2003, 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. Approximately 73% and 14%
of the adjustable rate mortgage ("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 Constant Maturity Treasury ("CMT"),
respectively. These ARM assets are financed with adjustable-rate collateralized
bond borrowings.
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
9
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 the
Company has entered into such agreements.
The remaining portion of the Company's collateral for collateralized bonds, as
of March 31, 2003, approximately $822.5 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.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
None
Item 5. Other Information:
None
10
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 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).
4.5 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).
4.6 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).
4.7 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).
4.8 Copy of the Structure Asset Securitization
Corporation Series 2002-9 Indenture Supplement, dated
as of April 1, 2002, by and between Structured Asset
Securitization Corporation and J. P. Morgan Chase, as
Trustee (related schedules and exhibits available
upon request of the Trustee). (Incorporated herein by
reference to Exhibit of Structured Asset
Securitization Corporation's Current Report on Form
8-K, filed April 25, 2002).
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).
11
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 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).
99.12 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).
99.13 Certification of Principal Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.14 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
12
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
Dated: May 14, 2003 By: /s/ Stephen J. Benedetti
--------------------------------------------------
Stephen J. Benedetti
President
(Principal Executive Officer, Principal Financial
Officer)
By: /s/ Kevin J. Sciuk
-------------------------------------------------
Kevin J. Sciuk
Controller
(Principal Accounting Officer)
13
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
annual 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.
Dated: May 14, 2003 By: /s/ Stephen J. Benedetti
--------------------------------
Stephen J. Benedetti
Principal Executive Officer
14
CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin J. Sciuk, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Merit Securities
Corporation;
2. Based on my knowledge, this quarterely 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.
Dated: May 14, 2003 By: /s/ Kevin J. Sciuk
-----------------------------
Kevin J. Sciuk
Principal Financial Officer
15
Exhibit 99.13
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 March 31, 2003, 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.
Dated: May 14, 2003 By: /s/ Stephen J. Benedetti
---------------------------
Stephen J. Benedetti
Principal Executive Officer
16
Exhibit 99.14
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 March 31, 2003, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin
J. Sciuk, the Principal 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.
Dated: May 14, 2003 By: /s/ Kevin J. Sciuk
---------------------------
Kevin J. Sciuk
Principal Financial Officer
17