================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
|X| Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended September 30, 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 23060-6740
(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
Aggregate market value of voting stock held by non-affiliates of the registrant
as of September 30, 2003: None. As of October 31, 2003, 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/A with the reduced disclosure format.
================================================================================
MERIT SECURITIES CORPORATION
FORM 10-Q/A
INDEX
This amendment on Form 10-Q/A reflects restatement of the Company's
financial statements as discussed in Note 7 to the condensed consolidated
financial statements.
All of the information in this Form 10-Q/A is as of November 13, 2003, the
filing date of the original Form 10-Q, and has not been updated for events
subsequent to that date other than for the matter discussed above.
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 2003 (as restated)
and December 31, 2002 (unaudited)...............................1
Condensed Consolidated Statements of Operations
and Comprehensive Income for the three months and
nine months ended September 30, 2003 (as restated)
and 2002 (unaudited) ...........................................2
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2003
(as restated) 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...................7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..............................................10
Item 4. Controls and Procedures..........................................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................12
Item 5. Other Information................................................12
Item 6. Exhibits and Reports on Form 8-K.................................12
SIGNATURES...................................................................15
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,
2003 2002
--------------------- ---------------------
(As restated, see
Note 7)
ASSETS:
Collateral for collateralized bonds:
Loans, net $ 836,012 $ 1,017,446
Debt securities, available-for-sale 270,287 323,791
Other loans 3,794 6,505
Asset-backed Securities, held-to-maturity 926 1,644
Due from affiliates, net 37,648 11,507
--------------------- ---------------------
$ 1,148,667 $ 1,360,893
===================== =====================
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Collateralized bonds $ 1,081,423 $ 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 (loss) 367 (134)
Accumulated deficit (1,807) (6,770)
--------------------- ---------------------
67,244 61,780
--------------------- ---------------------
$ 1,148,667 $ 1,360,893
===================== =====================
See notes to unaudited condensed consolidated financial statements.
MERIT SECURITIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
(amounts in thousands)
---------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ -----------------------------------
2003 2002 2003 2002
---------------- ---------------- --------------- ---------------
(As restated, (As restated,
see Note 7) see Note 7)
Interest income:
Collateral for collateralized bonds $ 19,176 $ 25,727 $ 61,701 $ 80,478
Other loans 26 17 101 44
Asset-backed securities, held-to-maturity 118 - 234 -
---------------- ---------------- --------------- ---------------
19,320 25,744 62,036 80,522
---------------- ---------------- --------------- ---------------
Interest and related expense:
Interest expense on collateralized bonds 11,945 15,648 38,111 49,002
Other collateralized bond expense 230 502 1,017 1,496
---------------- ---------------- --------------- ---------------
12,175 16,150 39,128 50,498
---------------- ---------------- --------------- ---------------
Net interest margin before provision for
loan losses 7,145 9,594 22,908 30,024
Provision for loan losses (1,473) (5,486) (16,506) (16,643)
---------------- ---------------- --------------- ---------------
Net interest margin 5,672 4,108 6,402 13,381
Impairment charges - (2,429) (1,454) (8,832)
Other (17) 164 15 (380)
---------------- ---------------- --------------- ---------------
Net income 5,655 1,843 4,963 4,169
Change in net unrealized gain (loss) during
period on:
Investments classified as available-for-sale 1,943 (216) (501) 5,383
---------------- ---------------- --------------- ---------------
Comprehensive income $ 7,598 $ 1,627 $ 4,462 $ 9,552
================ ================ =============== ===============
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,
-------------------------------------------------
2003 2002
---------------------- ----------------------
(As restated, see
Note 7)
Operating activities:
Net income $ 4,963 $ 4,169
Adjustments to reconcile net income to net cash
provided by operating activities:
Impairment charges 1,454 8,832
Provision for loan losses 16,506 16,643
Amortization, net 3,602 6,760
Other 1,745 (1,806)
---------------------- ----------------------
Net cash provided by operating activities 28,270 34,598
---------------------- ----------------------
Investing activities:
Principal payments on collateral 218,276 324,830
Purchase of loans - (158,933)
Proceeds from sale of collateralized bonds - 605,272
---------------------- ----------------------
---------------------- ----------------------
Net cash provided by investing activities 218,276 771,169
---------------------- ----------------------
Financing activities:
Principal payments on collateralized bonds (220,405) (775,649)
Payments to affiliates (26,141) (6,018)
Capital distributions - (24,100)
---------------------- ----------------------
Net cash used for financing activities (246,546) (805,767)
---------------------- ----------------------
Net change in cash - -
Cash, beginning of period - -
---------------------- ----------------------
Cash, end of period $ - $ -
====================== ======================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 36,124 $ 46,932
====================== ======================
See notes to unaudited condensed consolidated financial statements.
MERIT SECURITIES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(amounts in thousands)
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 significant 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 condensed consolidated financial statements have been included. The
Condensed Consolidated Balance Sheet at September 30, 2003 and December 31,
2002, the Condensed Consolidated Statements of Operations and Comprehensive
Income for the three months and nine months ended September 30, 2003 and 2002,
the Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002, and the related notes to condensed consolidated
financial statements are unaudited. Operating results for the nine months ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. For further information, refer
to the audited financial statements and footnotes included in the Company's Form
10-K for the year ended December 31, 2002.
The Company uses estimates in establishing fair value for its financial
instruments as discussed in Note 4.
The Company also has credit risk on certain investments in its portfolio as
discussed in Note 5. An allowance for loan losses has been estimated and
established for current existing losses based on management's judgment. The
allowance for loan losses is evaluated and adjusted periodically by management
based on the actual and projected timing and amount of credit losses. Provisions
made to increase the allowance related to credit risk are presented as provision
for loan losses in the accompanying condensed consolidated statements of
operations. The Company's actual credit losses may differ from those estimates
used to establish the allowance.
Certain reclassifications have been made to the financial statements for
2002 to conform to the presentation for 2003, including the reclassification of
the extraordinary gain recorded in the three and nine month periods ended
September 30, 2002 pursuant to the adoption of SFAS No. 145, "Recission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections".
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 Unified Commercial Code 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 September 30,
2003 and December 31, 2002 are reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a component of accumulated other
comprehensive income. Loans included within collateral for collateralized bonds
are reported at amortized cost.
The following table summarizes the types of collateral for collateralized
bonds as of September 30, 2003 and December 31, 2002:
- --------------------------------------------------------------------------------------------------------------------
September 30, 2003 December 31, 2002
- --------------------------------------------------------------------------------------------------------------------
Loans, at amortized cost $ 858,974 $ 1,038,146
Allowance for loan losses (22,962) (20,700)
- --------------------------------------------------------------------------------------------------------------------
836,012 1,017,446
Debt Securities, at fair value 270,287 323,791
- --------------------------------------------------------------------------------------------------------------------
$ 1,106,299 $ 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 September 30, 2003 and December 31,
2002:
- ------------------------------------------------------------------------------------------------------------------
September 30, 2003 December 31, 2002
- ------------------------------------------------------------------------------------------------------------------
Debt securities, at amortized cost $ 269,822 $ 323,728
Gross unrealized gains 465 63
- ------------------------------------------------------------------------------------------------------------------
Estimated fair value $ 270,287 $ 323,791
- ------------------------------------------------------------------------------------------------------------------
NOTE 3 -- DUE FROM AFFILIATES, NET
Due from affiliates, net, include amounts loaned by the Company to its
parent, or to affiliates of its parent. Interest is charged on amounts due to or
from affiliates at the Federal Funds rate plus 100 basis points. These
inter-company loans are subject to a maximum outstanding of $50,000. Interest
income was $162 and $233 for the three and nine-months ended September 30, 2003,
respectively, on amounts due from affiliates. Interest expense was $1 and
interest income was $3 for the three and nine months ended September 30, 2002,
respectively, on amounts due from affiliates.
NOTE 4 -- FAIR VALUE
Securities classified as available-for-sale are carried in the accompanying
financial statements at estimated fair value. 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 the Company believes 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 September 30, 2003 and
December 31, 2002. Prepayment rate assumptions at September 30, 2003, and
December 31, 2002, were generally at a "constant prepayment rate," or CPR
ranging from 35%-40% in 2003 and a range of 30%-45% in 2002, for collateral for
collateralized bonds consisting of securities backed by single-family mortgage
loans, and a CPR equivalent of 10% 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 are based on estimates, actual gains and losses recognized may
differ from those estimates recorded in the condensed consolidated financial
statements.
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 nine months
ended September 30, 2003 and September 30, 2002:
- -------------------------------------------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------------------------------------------
Beginning balance $ 20,700 $ 15,364
Provision for loan losses 16,506 16,643
Credit losses, net of recoveries (14,244) (17,080)
- -------------------------------------------------------------------------------------------------------------------
Ending balance $ 22,962 $ 14,927
- -------------------------------------------------------------------------------------------------------------------
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
"over-collateralization"), excluding price premiums and discounts and hedge
gains and losses. The allowance for loan losses is included in collateral for
collateralized bonds in the accompanying condensed consolidated balance sheets.
The Company continues to experience unfavorable results in its manufactured
housing loan portfolio in terms of elevated delinquencies and loss severity. For
the nine months ended September 30, 2003, the Company recorded $16,506 as a
provision for loan losses. Included in this amount is $6,120 in provision for
loan losses recorded in June 2003 specifically for currently existing credit
losses within outstanding manufactured housing loans that are current as to
payment but which the Company has determined to be impaired. Previously, the
Company had not considered current loans to be impaired under generally accepted
accounting principles and therefore had not provided for these loans. Continued
worsening trends in both the industry as a whole and the Company's portfolio of
manufactured housing loans prompted the Company to prepare analysis on these
pools of loans. The Company has not originated any new manufactured housing
loans since 1999, and has empirical data on the historical performance of this
static pool of loans. The Company analyzed performance and default activity for
loans that were current at various points in time over the last 36 months, and
based on that analysis, identified default trends on these loans. The Company
also considered current market conditions in this analysis, with the expectation
that these market conditions would continue for the foreseeable future. Given
this new observable data, the Company now believes the inclusion of amounts in
the provision for loan losses for loans which are current as to payment is an
appropriate application of the definition of impairment within generally
accepted accounting principles, and has accounted for this provision as a change
in accounting estimate and, accordingly, recorded the amount as additional
provision for loan losses.
Within each collateralized bond series, a group of loans are held within
the securitization structure as a credit reserve to provide additional cash flow
to cover losses. Once the cumulative level of losses surpasses the cash flow
available from the credit reserve and losses have depleted the
over-collateralization, future losses are passed to the holders of the lowest
classes of bonds within the structure. On one of the deal structures of the
Company, total cumulative losses have surpassed the cash flow available from the
credit reserve and have completely depleted the over-collateralization. The
reserves for loan losses on this securitization decreased as these losses began
to be borne by the subordinated bondholders.
The allowance for loan losses on the over-collateralization totaled $22,962
and $20,700 at September 30, 2003 and December 31, 2002 respectively, and are
included in collateral for collateralized bonds in the accompanying condensed
consolidated balance sheets. Over-collateralization at September 30, 2003 and
December 31, 2002 totaled $44,747 and $54,915 respectively.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement is effective for financial instruments entered into or modified after
May 31, 2003; and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities, which are subject to the provisions
of this Statement for the first fiscal period beginning after December 15, 2003.
This Statement amends SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and SFAS No. 128, "Earnings per Share," to establish
standards outlining how to classify and measure certain financial instruments
with characteristics of both liabilities and equity. It requires that certain
financial instruments that were previously classified as equity now be
classified as a liability (or, in some circumstances, as an asset). The adoption
of SFAS No. 150 did not have a material effect on the Company's results of
operations, cash flows or financial position.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities - an interpretation of ARB No. 51", which addresses
consolidation of variable interest entities. FIN No. 46 expands the criteria for
consideration in determining whether a variable interest entity should be
consolidated by a business entity, and requires existing unconsolidated variable
interest entities (which include, but are not limited to, Special Purpose
Entities, or SPEs) to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among parties involved. This
interpretation applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after December 31, 2003, to variable interest entities
in which an enterprise holds a variable interest that it acquired before
February 1, 2003. The adoption of FIN No. 46 did not have a material effect on
the Company's results of operations, cash flows or financial position.
NOTE 7 -- RESTATEMENT OF FINANCIAL STATEMENTS
The Company has determined that it recorded allowance for loan losses
during 2003 in excess of its actual exposure to credit losses for the excess of
collateral for collateralized bonds pledged over collateralized bonds issued on
one securitization transaction. Accordingly, the Company's exposure to credit
losses was limited under the securitization structure, and such credit loss
exposure had been fully depleted or reserved during the second quarter of 2003.
Under the securitization structure, with limited exception, future credit losses
are to be borne by the holders of the subordinated bond classes. The Company
continued to record provisions for loan losses in its financial statements
during the third quarter of 2003. At the quarter ended September 30, 2003, the
allowance for loan losses exceeded the net investment collateral for
collateralized bonds for this particular securitization transaction. As a
result, the Company has restated its financial statements for the three and
nine-month periods ended September 30, 2003 for the excess allowance for the
loan losses.
The following tables summarize the significant effects of such restatement:
Condensed Consolidated Balance Sheets Data
------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
(amounts in thousands) (As Previously
Reported) (As Restated)
- -----------------------------------------------------------------------------------------------------------------
September 30, 2003 September 30, 2003
----------------------- ---------------------
Collateral for collateralized bonds - loans $ 825,220 $ 836,012
Total assets 1,137,875 1,148,667
Accumulated deficit (12,599) (1,807)
Total shareholder's equity 56,452 67,244
Total liabilities and shareholder's equity 1,137,875 1,148,667
- ------------------------------------------------------------------------------------------------------------------
Condensed Consolidated Statements of Operations Data
----------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
(amounts in thousands) Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
------------------------------------- ----------------------------------
(As (As
Previously Previously
Reported) (As Restated) Reported) (As Restated)
- -----------------------------------------------------------------------------------------------------------------
Provision for loan losses $ (5,003) $ (1,473) $ (27,298) $ (16,506)
Net interest margin 2,142 5,672 (4,390) 6,402
Net income (loss) 2,125 5,655 (5,829) 4,963
Comprehensive income (loss) $ 4,068 $ 7,598 $ (6,330) $ 4,462
- -----------------------------------------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
As discussed in Note 7, the Company has restated its financial statements
for the three and nine month period ended September 30, 2003. The Management
Discussion and Analysis gives effect to this restatement
The Company was organized to facilitate the securitization of loans through
the issuance and sale of collateralized bonds (the "Bonds"). Generally. the
Bonds issued are, or have been, 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 are used to purchase
Collateral from Issuer Holding Corp. ("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 except series outstanding) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Collateral for collateralized bonds $ 1,106,299 $ 1,341,237
Other loans 3,794 6,505
Asset-backed securities, held-to-maturity 926 1,644
Collateralized bonds 1,081,423 1,299,113
Shareholder's equity 67,244 61,780
Collateralized bond series outstanding 4 4
- -------------------------------------------------------------------------------------------------------------------
Collateral for Collateralized Bonds
- -----------------------------------
As of both September 30, 2003 and December 31, 2002, the Company had 4
series of collateralized bonds outstanding. The collateral for collateralized
bonds decreased to $1.1 billion at September 30, 2003 compared to $1.3 billion
at December 31, 2002. This decrease of $234.9 million is primarily the result of
$218.3 million in paydowns on the collateral, $16.5 million of additions to
allowance for loan losses, $1.5 million in loss on impairment, $1.9 million
decrease in accrued interest receivable, and $0.6 million of net premium
amortization offset by a $0.4 million decrease in unrealized loss on collateral
for collateralized bonds.
Other Loans
- -----------
Other loans decreased to $3.8 million at September 30, 2003 from $6.5
million at December 31, 2002. Other loans are composed of single family loans
not included in the securitization completed in April 2002 and retained by the
Company as individual loans. This decrease resulted from pay-downs on the loans
of $2.7 million.
Asset-backed Securities
- -----------------------
Asset-backed securities decreased to $0.9 million at September 30, 2003,
compared to $1.6 million at December 31, 2002, as a result of principal payments
of $1.0 million during the year partially offset by $0.3 million in discount
amortization and accrued interest.
Non-recourse Debt - Collateralized Bonds
- ----------------------------------------
Collateralized bonds decreased to $1.1 billion at September 30, 2003 from
$1.3 billion at December 31, 2002. This decrease of $217.7 million is the result
of $220.4 million in paydowns and a $0.3 million decrease in accrued interest
payable offset by $3.0 million of amortization of premium and discounts during
the nine months ended September 30, 2003. Additionally, for certain
securitizations, surplus cash in the amount of $3.3 million was retained within
the security structure and used to repay collateralized bonds outstanding,
instead of being released to the Company, as certain performance triggers were
not met in such securitizations.
Shareholder's Equity
- --------------------
Shareholder's equity increased to $67.2 million at September 30, 2003 from
$61.8 million at December 31, 2002. This increase was primarily the result of
net income of $4.9 million and a decrease of $0.5 million in net unrealized loss
on investments available-for-sale.
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ------------------------------------
(amounts in thousands) 2003 2002 2003 2002
- ---------------------------------------------------------------------------- ------------------------------------
Interest income - collateral for $ 19,176 $ 25,727 $ 61,701 $ 80,478
collateralized bonds
Interest expense - collateralized bonds 11,945 15,648 38,111 49,002
Provision for loan losses 1,473 5,486 16,506 16,643
Net interest margin 5,672 4,108 6,402 13,381
Impairment charges - (2,429) (1,454) (8,832)
Net income 5,655 1,843 4,963 4,169
- ------------------------------------------------------------------------------------------------------------------
Interest income on the collateral for collateralized bonds decreased to
$19.2 million from $25.7 million for the three-month period ended September 30,
2003 and 2002, respectively. Interest income on the collateral for
collateralized bonds decreased to $61.7 million for the nine months ended
September 30, 2003 from $80.5 million for the same period in 2002. This decrease
was primarily a result of the continued impact of prepayments on interest
income, as average collateral for collateralized bonds declined from $1.5
billion to $1.2 billion for the nine-month period ended September 30, 2002 and
2003, respectively, and $1.6 billion to $1.1 billion for the three-month period
ended September 30, 2002 and 2003, respectively, coupled with the overall
decline in interest rates during 2003.
Interest expense on collateralized bonds decreased to $11.9 million from
$15.6 million for the three-month period ended September 30, 2003 and 2002,
respectively. Interest expense on collateralized bonds decreased to $38.1
million for the nine months ended September 30, 2003 from $49.0 million for the
nine months ended September 30, 2002. This decrease resulted from the decline in
collateralized bonds due to prepayments and paydowns on the related assets and
normal scheduled bond paydowns, as well as a decrease in one-month London
InterBank Offered Rate ("LIBOR") during the three and nine month period ended
September 30, 2003 and 2002. The one-month LIBOR rate at September 30, 2003 was
1.12% as compared to 1.81% at September 30, 2002.
Provision for loan losses decreased to $1.5 million from $5.5 million for
the three-month period ended September 30, 2003 and 2002, respectively.
Provision for loan losses decreased to $16.5 million for the nine-month period
ended September 30, 2003 from $16.6 million for the same period in 2002.
Included in provision for loan losses is $6.1 million recorded in June 2003
specifically for currently existing credit losses within outstanding
manufactured housing loans that are current as to payment but which the Company
has determined to be impaired. Previously, the Company had not considered
current loans to be impaired under generally accepted accounting principles and
therefore had not provided for these loans. Continued worsening trends in both
the industry as a whole and the Company's portfolio of manufactured housing
loans prompted the Company to prepare analysis on these pools of loans. The
Company has not originated any new manufactured housing loans since 1999, and
has empirical data on the historical performance of this static pool of loans.
The Company analyzed performance and default activity for loans that were
current at various points in time over the last 36 months, and based on that
analysis, identified default trends on these loans. The Company also considered
current market conditions in this analysis, with the expectation that these
market conditions would continue for the foreseeable future. Given this new
observable data, the Company now believes the inclusion of amounts in the
provision for loan losses for loans which are current as to payment is an
appropriate application of the definition of impairment within generally
accepted accounting principles, and has accounted for this provision as a change
in accounting estimate and, accordingly, recorded the amount as additional
provision for loan losses.
Within each collateralized bond series, a group of loans are held within
the securitization structure as additional support for potential credit losses
and to provide additional cash flow to cover such credit losses. Once the
cumulative level of losses surpassed the cash flow available from the credit
reserve and losses have depleted the over-collateralization, future losses are
passed to the holders of the lowest classes of bonds within the structure. On
one of the securitization structures of the Company, total cumulative losses
have surpassed the level of the cash flow available from the credit reserve and
have completely depleted the over-collateralization. As the
over-collateralization has been depleted, the Company's provision for loan
losses correspondingly declined.
Net interest margin increased to $5.7 million from $4.1 million for the
three-month periods ended September 30, 2003 and 2002, respectively. Net
interest margin decreased to $6.4 million from $13.4 million for the nine-month
periods ended September 30, 2003 and 2002, respectively. These decreases were
primarily a result of an increase in provision for loan losses, as discussed
above, and a decline in interest earning assets partially offset by reduced
borrowing costs on collateralized bonds outstanding during these periods.
No impairment charges were recorded in the three-month period ended
September 30, 2003 as compared to $2.4 million in the three-month period ended
September 30, 2002. Impairment charges decreased to $1.4 million from $8.8
million for the nine-month periods ended September 30, 2003 and 2002,
respectively. These decreases are primarily a result of a decrease in realized
losses on the debt securities portion of collateral for collateralized bonds and
an other-than-temporary impairment in 2002 on a group of loans retained by the
Company during the SASCO 9 securitization in 2002.
Net income increased to $5.6 million from $1.8 million for the three-month
periods ended September 30, 2003 and 2002, respectively. This increase is
primarily a result of a net decrease of $4.0 million in provision for loan
losses, a decrease of $3.9 million in interest expense, and a decrease of $2.4
million in impairment charges partially offset by a $6.5 million decrease in
interest income on collateral for collateralized bonds during the respective
periods. Net income increased to $4.9 million from $4.2 million for the
nine-month periods ended September 30, 2003 and 2002, respectively. This
increase is primarily a result of a net decrease of $0.2 million in provision
for loan losses, a decrease of $11.4 million in interest expense on
collateralized bonds, a $7.4 million decrease in impairment charges, and a $0.4
million decrease in other expense during the respective periods. These decreases
are partially offset by a $18.8 million decrease in interest income on
collateral for collateralized bonds.
Critical Accounting Policies
----------------------------
The discussion and analysis of the Company's financial condition and
results of operations are based in large part upon its consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America ("generally accepted
accounting principles".) The preparation of the financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reported period. Actual results could differ from those
estimates.
Critical accounting policies are defined as those that are reflective of
significant judgements or uncertainties, and which may result in materially
different results under different assumptions and conditions, or the application
of which may have a material impact on the Company's financial statements. The
following are the Company's critical accounting policies.
Consolidation of Subsidiaries. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, after
significant inter-company transactions have been eliminated.
Impairments. The Company evaluates the debt and asset-backed securities in
its investment portfolio for other-than-temporary impairments. A security is
generally defined to be other-than-temporarily impaired if, for a period of a
maximum of three consecutive quarters, the carrying value of such security
exceeds its estimated fair value and the Company estimates, based on projected
future cash flows or other fair value determinants, that the fair value is not
likely to exceed the carrying value in the foreseeable future. If an
other-than-temporary impairment is deemed to exist, the Company records an
impairment charge to adjust the carrying value of the security down to its
estimated fair value. In certain instances, as a result of the
other-than-temporary impairment analysis, the recognition or accrual of interest
will be discontinued and the security will be placed on non-accrual status.
Fair Value. Securities classified as available-for-sale are carried in the
accompanying condensed consolidated financial statements at estimated fair
value. 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 June 30, 2003 and December 31, 2002. Prepayment
rate assumptions at June 30, 2003 and December 31, 2002 were generally at a
"constant prepayment rate," or CPR, ranging from 35%-40% in 2003 and 30%-45% in
2002, for collateral for collateralized bonds consisting of securities backed by
single-family mortgage loans, and a CPR equivalent ranging from 10% 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 are based on estimates, actual gains and losses recognized may
differ from those estimates recorded in the condensed consolidated financial
statements.
Allowance for Loan Losses. The Company has limited exposure to credit risk
retained on loans, which it has securitized through the issuance of non-recourse
securitization financing. The aggregate loss exposure is generally limited to
the amount of collateral in excess of the related investment-grade non-recourse
securitization financing issued (commonly referred to as
"over-collateralization"), excluding price premiums and discounts and hedge
basis adjustments. The allowance for loan losses is included in collateral for
collateralized bonds in the accompanying balance sheets.
An allowance for loan losses has been estimated and established for
currently existing probable losses to the extent losses are borne by the Company
under the terms of the securitization transaction. Factors considered in
establishing an allowance include current loan delinquencies, historical cure
rates of delinquent loans, and historical and anticipated loss severity of the
loans as they are liquidated. The allowance for losses is evaluated and adjusted
periodically by management based on the actual and estimated timing and amount
of probable credit losses, using the above factors, as well as industry loss
experience. Where loans are considered homogeneous, the allowance for losses are
established and evaluated on a pool basis. Otherwise, the allowance for losses
is established and evaluated on a loan-specific basis. Provisions made to
increase the allowance are a current period expense to operations. Generally,
the Company considers manufactured housing loans to be impaired when they are 30
days past due. The Company also provides an allowance for currently existing
credit losses within outstanding manufactured housing loans that are current as
to payment but which the Company has determined to be impaired based on default
trends, current market conditions and empirical observable performance data on
the loans. Single-family loans are considered impaired when they are 60 days
past due. The Company's actual credit losses may differ from those estimates
used to establish the allowance.
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, 2003, the Company retained $44.7 million
in aggregate principal amount of over-collateralization compared to $54.9
million at December 31, 2002. The Company had reserves, or otherwise had
provided coverage on $23.0 million at September 30, 2003. During the first nine
months of 2003, the Company provided for additional reserves of $16.5 million
and incurred credit losses of $14.2 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 $27.5 million and a remaining deductible aggregating $0.9
million on $57.1 million of securitized single family mortgage loans which are
subject to such reimbursement agreements and $193.5 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 65% on such policies before the Company would incur losses.
Recent Accounting Pronouncements
- --------------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities which are subject to the provisions
of this statement for the first fiscal period beginning after December 15, 2003.
This statement amends SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and SFAS No. 128, "Earnings per Share", to establish
standards outlining how to classify and measure certain financial instruments
with characteristics of both liabilities and equity. It requires that certain
financial instruments that were previously classified as equity now be
classified as a liability (or, in some circumstances, as an asset). The adoption
of SFAS No. 150 did not have a material effect on the Company's results of
operations, cash flows or financial position.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities - an interpretation of ARB No. 51," which addresses
consolidation of variable interest entities. FIN No. 46 expands the criteria for
consideration in determining whether a variable interest entity should be
consolidated by a business entity, and requires existing unconsolidated variable
interest entities (which include, but are not limited to, special purpose
entities, or SPEs) to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among parties involved. This
interpretation applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest entities in
which an enterprise holds a variable interest that it acquired before February
1, 2003. The adoption of FIN No. 46 did not have a material effect on the
Company's results of operations, cash flows or financial position.
Other Matters
- -------------
At September 30, 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.
As a financial services company, net interest margin 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 of high quality assets that, in the aggregate, preserves the Company's
capital base while generating 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.
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 September 30, 2003. 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 September 30, 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 September 30, 2003. As of September 30, 2003,
one-month LIBOR was 1.12% and six-month LIBOR was 1.18%. 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 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 collateralized bonds, underlying collateral, and asset-backed
securities held-to-maturity and there are likely to be such changes in the
future.
- ------------------------------------- --- ----------------------------------
Basis Point % Change in Net
Increase (Decrease) Interest Margin
in Interest Rates From Base Case
+200 (19.9)%
+100 (10.4)%
Base -
-100 11.1%
-200 14.6%
- ------------------------------------- --- ----------------------------------
Approximately $390.5 million of the Company's collateral for collateralized
bonds as of September 30, 2003, 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 73% and 14% 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. 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
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, 2003, approximately $749.6 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.
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.
As of the end of the period covered by this report, the Company
carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 under the Exchange Act. 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, except as described below.
The Company identified an internal control deficiency related
to the recording of allowance for loan losses in excess of loss
obligations. Management believes that it has performed the
appropriate procedures to ensure that the information included
herein for the quarter ended September 30, 2003 is materially
accurate in all reasonable aspects. This internal control
deficiency did not impact the consolidated financial statements
of the Company's parent.
In conducting its review of disclosure controls, management
concluded that sufficient disclosure controls and procedures,
other than this deficiency, did exist 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.
(b) Changes in internal controls.
The Company's management is also responsible for establishing
and maintaining adequate internal control over financial
reporting. There were no changes in the Company's internal control
over financial reporting identified in connection with the
evaluation of it that occurred during the Company's last fiscal
quarter that materially effected, or is reasonably likely to
materially affect internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
None
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 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 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).
31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
10.1 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).
10.2 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).
10.3 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).
10.4 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).
10.5 Copy of the Standard Terms to Master Servicing Agreement, June 1, 1995
Edition (Attached as an exhibit to the Registrant's Current Report on Form 8-K,
filed July 10, 1995, incorporated herein by reference).
99.1 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).
99.2 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).
99.3 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).
99.4 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).
99.5 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).
99.6 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).
(b) Reports on Form 8-K
None
SIGNATURE
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 19, 2004 By: /s/ Stephen J. Benedetti
-------------------------------------
Stephen J. Benedetti
President
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Stephen J. Benedetti Principal Executive Officer/Director May 19, 2004
- --------------------------------------------
Stephen J. Benedetti
/s/ Kevin J. Sciuk Principal Financial Officer/Controller May 19, 2004
- --------------------------------------------
Kevin J. Sciuk
/s/ J. Thomas O'Brien, Jr. Director May 19, 2004
- --------------------------------------------
J. Thomas O'Brien, Jr.
/s/ Christopher T. Bennett Director May 19, 2004
- --------------------------------------------
Christopher T. Bennett
EXHIBIT INDEX
Sequentially
Exhibit Numbered Page
- ------- -------------
31.1 Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. I
31.2 Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. II
32.1 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 III
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. IV
Exhibit 31.1
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/A of Merit
Securities Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures as of the end of the period covered by this
report based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control of financial reporting.
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, 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 and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over financial
reporting.
Dated: May 19, 2004 By: /s/ Stephen J. Benedetti
------------------------------
Stephen J. Benedetti
Principal Executive Officer
Exhibit 31.2
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/A of Merit Securities
Corporation;
2) Based on my knowledge, this 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 report;
3) Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period
covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control of financial reporting.
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over financial
reporting.
Dated: May 19, 2004 By: /s/ Kevin J. Sciuk
----------------------------------
Kevin J. Sciuk
Principal Financial Officer
Exhibit 32.1
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/A for the quarter ended September 30, 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 19, 2004 By: /s/ Stephen J. Benedetti
-------------------------------
Stephen J. Benedetti
Principal Executive Officer
Exhibit 32.2
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/A for the quarter ended September 30, 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 19, 2004 By: /s/ Kevin J. Sciuk
-------------------------------
Kevin J. Sciuk
Principal Financial Officer