10-Q/A: Quarterly report pursuant to Section 13 or 15(d)
Published on August 24, 1994
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
//xx// Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended June 30, 1994
// // Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-9819
RESOURCE MORTGAGE CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Virginia 52-1549373
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10500 Little Patuxent Parkway, Columbia, Maryland 21044
(Address of principal executive offices) (Zip Code)
(410) 715-2000
(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. //xx//
Yes // //No
On July 31, 1994, the registrant had 20,055,888 shares of common stock
of $.01 value outstanding, which is the registrant's only class of
common stock.
RESOURCE MORTGAGE CAPITAL, INC.
FORM 10-Q
INDEX
PAGE
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1994
and December 31, 1993 3
Consolidated Statements of Operations for the three
months ended and the six months ended
June 30, 1994 and 1993 4
Consolidated Statement of Shareholders'
Equity for the six months ended June 30, 1994 5
Consolidated Statements of Cash Flows for
the six months ended June 30, 1994 and
1993 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security
Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
June 30, December 31,
1994 1993
------- -----------
ASSETS
Mortgage investments:
Collateral for CMOs $ 388,610 $ 434,698
Adjustable-rate mortgage securities, net 2,381,504 2,021,196
Fixed-rate mortgage securities, net 203,925 214,128
Other mortgage securities 63,507 65,625
Mortgage warehouse participations 61,677 156,688
--------- ---------
3,099,223 2,892,335
Mortgage loans in warehouse 286,342 777,769
Cash 8,855 1,549
Accrued interest receivable 15,058 13,466
Other assets 17,817 41,643
-------- --------
$ 3,427,295 $ 3,726,762
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Collateralized mortgage obligations $ 377,699 $ 432,677
Repurchase agreements 2,622,359 2,754,166
Notes payable 61,909 87,451
Commercial paper 58,376 148,672
Accrued interest payable 11,340 14,695
Deferred income 13,829 13,214
Other liabilities 14,500 22,855
------- -------
3,160,012 3,473,730
--------- ---------
SHAREHOLDERS' EQUITY
Common stock: par value $.01 per share,
50,000,000 shares authorized, 20,040,552
and 19,331,932 issued and outstanding,
respectively 200 193
Additional paid-in capital 278,598 259,622
Net unrealized loss on available-for-sale
mortgage investments (10,060) -
Retained earnings (deficit) (1,455) (6,783)
-------- -------
267,283 253,032
-------- --------
$ 3,427,295 $ 3,726,762
=========== ===========
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share data)
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
---- ---- ---- ----
Interest Income:
Collateral for CMOs $ 8,270 $ 10,436 $ 16,809 $ 22,139
Adjustable-rate mortgage
securities 26,355 18,637 51,651 35,709
Fixed-rate mortgage securities 3,589 3,400 7,707 6,667
Other mortgage investments 3,502 1,831 5,930 3,571
Mortgage warehouse
participations 1,343 946 2,772 2,418
Mortgage loans in warehouse 8,673 5,279 18,158 9,828
------ ------ ------ -------
51,732 40,529 103,027 80,332
------ -------- -------- ------
Interest and CMO-related expense:
Collateralized mortgage obligations:
Interest 7,743 9,835 15,783 20,834
Other 352 543 760 1,095
Repurchase agreements 28,759 16,518 55,642 30,949
Notes payable 1,411 1,341 2,181 2,506
Commercial paper 779 580 1,582 1,507
Other 1,127 1,118 2,256 2,337
40,171 29,935 78,204 59,228
Net margin on mortgage assets 11,561 10,594 24,823 21,104
Valuation adjustments on
mortgage assets - (1,000) - (1,000)
Gain on sale of mortgage assets,
net of associated costs 9,718 5,820 16,559 10,880
Other income 391 102 620 292
General & administrative
expenses (6,301) (2,958) (11,133) (6,218)
------- ------- --------- -------
Net income $ 15,369 $ 12,558 $ 30,869 $ 25,058
======== ======== ======== ========
Net income per share $ 0.78 $ 0.76 $ 1.58 $ 1.52
========= ======= ======= ========
Weighted average number of
common shares outstanding 19,750,225 16,536,103 19,599,758 16,526,882
========== ========== ========== ==========
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENT OF Net
SHAREHOLDERS' EQUITY unrealized
(amounts in thousands except share data) loss on
available-
Additional for-sale Retained
Number of Common paid-in mortgage earnings
shares stock capital investments (deficit) Total
-------- ------ --------- ----------- -------- -----
Balance at
December 31,
1993 19,331,932 $ 193 $ 259,622 $ - $ (6,783)$ 253,032
Issuance of
common stock,
net 708,620 7 18,976 - - 18,983
Net income -
six months
ended
June 30,
1994
- - - - 30,869 30,869
Net change
in unrealized
loss on
available-
for-sale
mortgage
investments
- - - (10,060) - (10,060)
Dividends
declared -
$1.56 per
share - - - - (25,541) (25,541)
------- ------ ------- --------- ------- --------
Balance at
June 30,
1994 20,040,552 $ 200 $ 278,598 $ (10,060) $ (1,455)$ 267,283
========== ===== ========= ========== ======== ========
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Six months Ended
(amounts in thousands) June 30,
1994 1993
----- -----
Operating activities:
Net income $ 30,869 $ 25,058
Adjustments to reconcile net income to
net cash used for operating activities:
Amortization and depreciation 3,241 3,675
Net decrease (increase) in mortgage loans
held for sale 487,936 (197,734)
Net decrease in accrued interest, other
payables and other assets 18,831 91
Net gain from sales of mortgage investments (4,474) (1,211)
Other (149) 2,601
------- --------
Net cash provided by
(used for) operating activities 536,214 (167,520)
-------- ---------
Investing activities:
Collateral for CMOs:
Principal payments on collateral 81,657 106,413
Net decrease in funds held by trustees 9,466 9,416
------ ---------
91,123 115,829
Purchase of CMOs, net (1,651) -
Purchase of other mortgage investments (613,170) (578,315)
Payments on other mortgage investments 261,231 52,834
Proceeds from sales of other mortgage
investments 83,664 188,600
Capital expenditures (1,134) (227)
--------- ----------
Net cash used for investing activities (179,937) (221,279)
-------- ----------
Financing activities:
Principal payments on CMOs (89,741) (114,400)
(Repayments of) proceeds from short-term
borrowings, net (247,645) 533,767
Proceeds from stock offerings, net 18,983 1,057
Dividends paid (30,568) (30,566)
-------- ---------
Net cash (used for) provided by
financing activities (348,971) 389,858
--------- ---------
Net increase in cash 7,306 1,059
Cash at beginning of period 1,549 1,135
--------- ---------
Cash at end of period $ 8,855 $ 2,194
========== ==========
See notes to consolidated financial statements.
RESOURCE MORTGAGE CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994
(amounts in thousands except share data)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of
the information and notes required by generally accepted accounting
principles for complete financial statements. The consolidated
financial statements include the accounts of Resource Mortgage Capital,
Inc., its wholly owned subsidiaries, and certain other entities. As
used herein, the "Company" refers to Resource Mortgage Capital, Inc.
("RMC") and each of the entities that is consolidated with RMC for
financial reporting purposes. A portion of the Company's mortgage
operations are
operated by a taxable corporation that is consolidated with RMC for
financial reporting purposes, but is not consolidated for income tax
purposes. All significant intercompany balances and transactions have
been eliminated in consolidation.
In the opinion of management, all material adjustments, consisting of
normal recurring adjustments, considered necessary for a fair
presentation have been included. The Consolidated Balance Sheet at June
30, 1994, the Consolidated Statements of Operations for the three months
and the six months ended June 30, 1994 and 1993, the Consolidated
Statement of Stockholders' Equity for the six months ended June 30,
1994, the Consolidated Statements of Cash Flows for the six months ended
June 30, 1994 and 1993 and related notes are unaudited. Operating
results for the six months ended June 30, 1994 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1994. For further information, refer to the audited
consolidated financial statements and footnotes included in the
Company's Form 10-K for the year ended December 31, 1993.
NOTE 2--MORTGAGE LOANS IN WAREHOUSE AND SECURITIZATION ACTIVITY
The Company purchases and originates fixed-rate and adjustable-rate
loans secured by first mortgages or first deeds of trust on single-
family attached or detached residential properties and originates fixed-
rate loans secured by first mortgages or deeds of trust on multi-family
residential properties. The Company funded mortgage loans with an
aggregate principal balance of $1,839,864 during the six months ended
June 30, 1994. During this period, the Company sold or securitized
mortgage loans with an aggregate principal balance of $2,351,345.
In the six months ended June 30, 1994, the Company recognized net gains
of $12,085 on securitizations and sales of mortgage loans.
Additionally, during the six months ended June 30, 1994, the Company
deferred gains of $2,491 related to securitization and sales of
adjustable-rate mortgage loans that are convertible to a fixed rate.
The deferred gain will be recognized as income over the five year
optional conversion period. The recognized gain and deferred gain are
net of taxes totaling $1,408 for the six months ended June 30, 1994.
NOTE 3--AVAILABLE-FOR-SALE MORTGAGE INVESTMENTS
On January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities. This statement requires that investments in debt
and equity securities be classified as either held-to-maturity
securities, trading securities, or available-for-sale securities. Held-
to-maturity securities are defined as securities that the Company has
the positive intent and ability to hold to maturity and are measured at
amortized cost. Trading securities are defined as securities that are
bought and held principally for the purpose of selling in the near term
and are measured at fair value, with unrealized gains and losses
included in earnings. Securities not classified as either held-to-
maturity securities or trading securities are deemed to be available-for
sale securities and are measured at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity.
The Company has classified all of its mortgage investments as available-
for-sale securities.
NOTE 4--SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
Six months ended June 30,
1994 1993
----- -----
Cash paid for interest $ 40,376 $ 56,587
======== ========
Supplemental disclosure of non-cash
activities:
Purchase of collateral for CMOs $ (37,253) $ -
Assumption of CMOs 35,602 -
--------- ---------
Purchase of CMOs, net $ (1,651) $ -
=========== ===========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Resource Mortgage Capital, Inc. (the "Company") operates mortgage
conduits and invests in a portfolio of residential mortgage securities.
The Company's primary strategy is to use its mortgage conduit
operations, which involve the purchase and securitization of residential
mortgage loans, to create investments for its portfolio. The Company's
principal sources of income are net interest income on its investment
portfolio, gains on the securitization and sale of mortgage loans and
the interest spread realized while the mortgage loans are being
accumulated for securitization.
In recent periods, the Company's net income improved primarily from an
increase in the net margin on its mortgage assets and an increase in the
gain on sale of mortgage assets. The increase in net margin resulted
primarily from the addition to the Company's portfolio of investments
created by the Company's mortgage conduit operations. However, during
the first six months of 1994, this increase was partially offset by a
decrease in the net interest spread earned on the adjustable-rate
mortgage securities in the rising interest rate environment. Lower
overall mortgage loan originations in the market are anticipated for
1994 as compared to 1993 as a result of this recent increase in mortgage
loan interest rates and the resulting decrease in mortgage loan
refinancings. This lower anticipated volume is expected to reduce the
gain on sale of mortgage assets during the second six months of 1994
relative to the first six months of 1994.
Results of Operations
Three Months Ended Six Months Ended
(amounts in thousands
except per share June 30, June 30,
----------------- -----------------
information) 1994 1993 1994 1993
----- ----- ----- ------
Net margin on mortgage
assets $ 11,561 $ 10,594 $ 24,823 $ 21,104
Net gain on sale of
mortgage assets 9,718 5,820 16,559 10,880
General and administrative
expenses 6,301 2,958 11,133 6,218
Net income 15,369 12,558 30,869 25,058
Net income per share 0.78 0.76 1.58 1.52
Principal balance of
mortgage loans funded 886,970 847,958 1,839,864 1,711,544
Three Months and Six Months Ended June 30, 1994 Compared to Three Months
and Six Months Ended June 30, 1993
- ------------------------------------------------------------------------
The increase in the Company's earnings during the first six months of
1994 as compared to the same period in 1993 is primarily the result of
the increase in net margin on mortgage assets and the increase in the
net gain on sale of mortgage assets. The increase in the Company's
earnings for the three months ended June 30, 1994 as compared to the
same period in 1993 can be attributed primarily to the same factors
discussed in the comparison of the six months ended June 30, 1994 to the
same period in 1993.
The net margin on mortgage assets increased to $24.8 million for the
six months ended June 30, 1994 from $21.1 million for the six months
ended June 30, 1993. This increase resulted primarily from the overall
growth of the portfolio partially offset by a decrease in the net
interest spread on the portfolio from 1.61% for the six months ended
June 30, 1993 to 1.27% for the six months ended June 30, 1994.
The gain on sale of mortgage assets increased to $16.6 million for the
six months ended June 30, 1994 from $10.9 million for the six months
ended June 30, 1993. This increase resulted from (i) an increase in the
gain on securitizations and sales of mortgage loans and the (ii) an
increase in the gain on sale of mortgage assets from the Company's
portfolio. As part of its ongoing portfolio management strategy, from
time to time the Company may sell mortgage assets from its portfolio.
The increase in earnings was partially offset by an increase in
general and administrative expenses. The Company incurred $11.1 million
of general and administrative expenses for the six months ended June 30,
1994 as compared with $6.2 million during the six months ended June 30,
1993. The increase in general and administrative expenses is due
primarily to the development of the Company's mortgage loan origination
capabilities and the growth of the underwriting and risk management
departments in late 1993 and early 1994. The underwriting and risk management
departments were expanded when the Company began purchasing mortgage loans
without a commitment for mortgage pool insurance in 1993. The Company has
taken steps to reduce general and administrative expenses during the second
six months of 1994 relative to the first six months of 1994.
The following tables summarize the average balances of the Company's
interest-earning assets and their average effective yields, along with
the Company's average interest-bearing liabilities and the related
average effective interest rates, for each of the periods presented.
Average Balances and Effective Interest Rates
- ---------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(amounts in
thousands)
1994 1993 1994 1993
----- ----- ----- -----
Average Effective Average Effective Average Effective Average Effective
Balance Rate Balance Rate Balance Rate Balance Rate
- ------- --------- ------- -------- ------- --------- ------- ---------
Interest-
earning
assets : (1)
Collateral
for CMOs (2)
$ 368,409 8.98% $ 454,968 9.18% 376,294 8.93% $ 480,030 9.22%
Adjustable-
rate mortgage
securities
2,127,153 4.96 1,488,930 5.012,126,858 4.86 1,401,552 5.10
Fixed-
rate
mortgage
securities
204,580 7.02 181,091 7.51 208,008 7.41 174,257 7.65
Other
mortgage
securities
77,647 18.04 36,561 20.03 76,244 15.55 36,329 19.66
Mortgage
warehouse
participations
84,678 6.35 76,543 4.94 94,067 5.90 97,474 4.96
------ ---- ------- ----- ------- ---- ------- -----
Total
portfolio-
related
assets
2,862,467 6.02 2,238,093 6.302,881,471 5.89 2,189,642 6.44
Mortgage
loans
in
warehouse
552,140 6.28 325,202 6.49 601,458 6.04 294,411 6.68
------- ---- --------- ---- ------- ---- --------- -----
Total
interest-
earning
assets
$3,414,607 6.06%$ 2,563,295 6.32%3,482,929 5.92% $2,484,053 6.47%
========== ==== ========== ==== ========= ===== ========= =====
Interest-bearing liabilities:
Portfolio-related liabilities:
CMOs
$ 374,967 8.26% $ 460,996 8.53% 384,754 8.20% $ 487,639 8.54%
Repurchase agreements:
Adjustable-
rate
mortgage
securities
2,022,473 4.20 1,394,562 3.53 2,039,058 3.91 1,604,978 3.60
Fixed-
rate
mortgage
securities
194,127 5.20 170,645 4.87 198,471 5.12 161,060 4.59
Other
mortgage
securities
2,990 4.28 5,497 3.71 7,102 3.83 6,074 3.75
Commercial
paper
77,307 4.04 72,057 3.23 87,020 3.64 92,515 3.26
----- ----- -------- ----- ------- ---- ------ ------
Total
portfolio-
related
liabilities
2,671,864 4.84 2,103,847 4.72 2,716,405 4.60 2,052,266 4.84
Warehouse-
related
liabilities:
Repurchase
agreements
395,432 5.03 178,197 4.70 452,096 4.68 157,277 4.66
Notes
payable
84,605 6.64 95,722 5.60 67,852 6.41 87,835 5.71
----- ----- --------- ----- --------- ----- ------- ------
Total
warehouse-
related
liabilities
480,037 5.32 273,919 5.01 519,948 4.91 245,111 5.03
------- ---- ------- ----- ------- --- ------ -----
Total
interest-
bearing
liabilities
$3,151,901 4.91% $2,377,766 4.76% $3,236,353 4.65% $ 2,297,377 4.86%
========= ===== =========== ==== ========== ==== =========== =====
Net
interest
spread
1.15% 1.56% 1.27% 1.61%
===== ===== ===== ======
Net
yield
on
average
interest
earning
assets
1.53% 1.91% 1.60% 1.98%
===== ===== ===== ======
- -----------------
(1) Average balances exclude adjustments made in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities to record available-
for-sale securities at fair value.
(2) Average balances exclude funds held by trustees of $10,645 and
$16,710 for the three months ended June 30, 1994 and June 30, 1993,
respectively and $11,639 and $18,776 for the six months ended June 30,
1994 and June 30, 1993, respectively.
The decrease in net interest spread is primarily the result of the
decrease in the spread on adjustable-rate mortgage securities. As a
result of the rapidly increasing interest rate environment during the
first six months of 1994, the interest rate on certain repurchase
borrowings increased at a faster rate than the interest rate earned on
the adjustable-rate mortgage securities which collateralize these
borrowings. Additionally, the decrease in the spread on adjustable-rate
mortgage securities resulted from the increase in securities retained in
the portfolio during late 1993 and early 1994 with low initial pass-
through rates (i.e., a "teaser rate"). The spread on adjustable-rate
mortgage securities may increase as the mortgage loans underlying these
securities reset to a higher level. These resets occur generally every
six months. Conversely, the spread on these securities could decrease
further should the rates on the related repurchase borrowings continue
to increase faster than the interest rates reset on these securities.
Portfolio Activity
The Company's investment strategy is to create a diversified portfolio
of mortgage securities that in the aggregate generate stable income in a
variety of interest rate and prepayment rate environments and preserve
the capital base of the Company. The Company has pursued its strategy
of concentrating on its mortgage conduit activities in order to create
investments with attractive yields and to benefit from potential gains
on securitization. In many instances the Company's investment strategy
involves not only the creation or acquisition of the asset, but also the
related borrowing to pay for a portion of that asset.
Three Months and Six Months Ended June 30, 1994 Compared to Three Months
and Six Months Ended June 30, 1993
- ------------------------------------------------------------------------
The size of the Company's portfolio of mortgage investments at June 30,
1994 has increased as compared to June 30, 1993, through the addition of
investments created through the Company's conduit operations and the
purchase of mortgage investments. During the six months ended June 30,
1994, the Company added approximately $525.1 million principal amount of
adjustable-rate mortgage securities, $0.9 million principal amount of
fixed-rate mortgage securities and $11.7 million of other mortgage
securities to its portfolio through its conduit operations. Also during
the six months ended June 30, 1994, the Company purchased approximately
$34.8 million principal amount of adjustable-rate mortgage securities,
$20.2 million principal amount of fixed-rate mortgage securities, $23.1
million of other mortgage securities and $37.3 million of collateral for
CMOs, net of $35.6 million of associated borrowings, for its portfolio.
A portion of these securities were financed through repurchase
agreements with investment banking firms. Additionally, during the six
months ended June 30, 1994, the Company sold $55.5 million principal
amount of adjustable-rate securities and $18.1 million of other mortgage
securities from its portfolio. During the six months ended June 30,
1993, the Company sold $184.3 million principal amount of fixed-rate
mortgage securities from its portfolio. The Company realized net gains
of $4.5 million and $1.2 million on the sale of mortgage securities for
the six months ended June 30, 1994 and 1993, respectively.
The net margin on the Company's portfolio of mortgage investments
increased to $19.4 million for the six months ended June 30, 1994 from
$17.4 million for the six months ended June 30, 1993. This increase
resulted from the overall growth of mortgage assets partially offset by
a decrease in the net interest spread on the portfolio.
The Company funds mortgage warehouse lines of credit to various
mortgage companies, either through the purchase of a participation in
such lines of credit, or a direct loan (collectively "lines of credit").
The Company's obligations under such lines of credit may be funded by
sales of commercial paper or repurchase agreements. As of June 30,
1994, the Company had $185.0 million of such lines of credit and had
advanced $61.7 million pursuant to such lines of credit.
Mortgage Operations
The Company acts primarily as an intermediary between the originators
of mortgage loans and the permanent investors in the mortgage loans or
the mortgage-related securities backed by such mortgage loans. The
Company also originates single-family and multi-family mortgage loans
Through its mortgage operations, the Company purchases mortgage loans
from approved sellers, primarily mortgage companies, savings and loan
associations and commercial banks and originates mortgage loans
directly. When a sufficient volume of mortgage loans is accumulated,
the Company sells or securitizes these mortgage loans through the
issuance of CMOs or pass-through securities. During the accumulation
period, the Company finances its purchases of mortgage loans through
warehouse lines of credit or through repurchase agreements.
The following table summarizes mortgage operations activity for the
three months and six months ended June 30, 1994 and 1993.
Three Months Ended Six Months Ended
June 30, June 30,
(amounts in thousands) 1994 1993 1994 1993
---- ---- ---- ----
Principal amount of
loans funded $ 886,970 $ 847,958 $ 1,839,865 $ 1,711,544
Principal amount
securitized or sold 1,195,913 743,787 2,351,345 1,511,892
Investments added to
portfolio from
mortgage operations
conduit, net of
associated
borrowings 23,965 12,451 43,443 28,268
Three Months and Six Months Ended June 30, 1994 Compared to Three Months
and Six Months Ended June 30, 1993
- ------------------------------------------------------------------------
The increase in the funding volume of mortgage loans for the three months
and the six months ended June 30, 1994 as compared to the three months and
the six months ended June 30, 1993 reflects the success of new loan programs
introduced by the Company
during 1993. The gain on securitizations and sales of mortgage loans
increased to $12.1 million for the six months ended June 30, 1994 from
$10.9 million for the six months ended June 30, 1993. This increase was
primarily the result of the increased volume of mortgage loans
securitized or sold during the period.
During the first six months of 1994, the Company began originating
certain single-family mortgage loans through a network of mortgage
brokers. The Company also plans to develop a mortgage servicing
capability during 1994 for these mortgage loans. The Company will have
complete control over the entire mortgage process on these loans, from
underwriting and origination to accumulation and securitization. As the
Company developed these mortgage loan origination capabilities in recent
periods, general and administrative expenses have increased. The
Company plans to securitize these new loan products through the issuance
of CMOs, and, therefore, no gain on sale will be recognized on these
securitization. Instead, profits from these securitizations will be
recognized over time as part of net margin income. This strategy, which
is consistent with the Company's goal of increasing its net margin
income, will likely have a negative impact on earnings during the
balance of the year.
Other Matters
The Company has limited exposure to losses due to fraud resulting from
the origination of a mortgage loan. The Company has established a loss
allowance for such losses. An estimate for such losses is made at the
time loans are sold or securitized, and the loss allowance is adjusted
accordingly. This estimate is based on management's judgement and the
allowance is evaluated periodically. At June 30, 1994 the allowance
totaled $4.7 million and was included in other liabilities.
During the third quarter of 1994 the Company will be moving its
corporate offices to central Virginia. The Company's operations are
currently located in this area and the move will consolidate the
corporate and operations departments.
The Company and its qualified REIT subsidiaries (collectively
"Resource REIT") have elected to be treated as a real estate investment
trust for federal income tax purposes, and therefore is required to
distribute annually substantially all of its taxable income. Resource
REIT estimates that its taxable income for the six months ended June 30,
1994 was approximately $31.0 million. Taxable income differs from the
financial statement net income which is determined in accordance with
generally accepted accounting principles.
Liquidity and Capital Resources
The Company uses its cash flow from operations, issuance of CMOs or
pass-through securities, other borrowings and capital resources to meet
its working capital needs. Based on prior experience, the Company
believes that the cash flow from its portfolio and borrowing
arrangements provide sufficient liquidity for the conduct of its
operations.
The Company's borrowings may bear fixed or variable interest rates,
may require additional collateral in the event that the value of the
existing collateral declines, and may be due on demand or upon the
occurrence of certain events. If borrowing costs are higher than the
yields on the mortgage assets purchased with such funds, the Company's
ability to acquire mortgage assets may be substantially reduced and it
may experience losses.
The Company borrows funds on a short-term basis to support the
accumulation of mortgage loans prior to the sale of such mortgage loans
or the issuance of mortgage securities. These short-term borrowings
consist of the Company's warehouse lines of credit and repurchase
agreements and are paid down as the Company securitizes or sells
mortgage loans. The Company had a $150 million credit facility, which
also allows the Company to borrow up to $30 million on an unsecured
basis for working capital purposes. This credit facility expires in
February 1995. The Company also has various committed repurchase
agreements of $425 million. These facilities mature in June and
September 1995. The Company has arranged separate financing for the
origination of multi-family mortgage loans for up to $75 million. The
Company expects that these credit facilities will be renewed if
necessary, at their respective expiration dates, although there can be
no assurance of such renewal. At June 30, 1994 the Company had borrowed
$226.6 million under these credit facilities. The lines of credit
contain certain financial covenants which the Company met as of June 30,
1994. However, changes in asset levels or results of operations could
result in the violation of one or more covenants in the future.
The Company finances adjustable-rate mortgage securities and certain
other mortgage assets through repurchase agreements. Repurchase
agreements allow the Company to sell mortgage assets for cash together
with a simultaneous agreement to repurchase the same mortgage assets on
a specified date for an increased price, which is equal to the original
sales price plus an interest component. At June 30, 1994, the Company
had outstanding obligations of $2.5 billion under such repurchase
agreements, of which $2.3 billion, $194.2 million and $1.6 million were
secured by adjustable-rate mortgage securities, fixed-rate mortgage
securities and other mortgage securities, respectively. Increases in
either short-term interest rates or long-term interest rates could
negatively impact the valuation of these mortgage assets and may limit
the Company's borrowing ability or cause various lenders to initiate
margin calls. Additionally, certain of the Company's adjustable-rate
mortgage securities are AA or AAA rated classes that are subordinate to
related AAA rated classes from the same series of securities. Such AA
or AAA rated classes have less liquidity than securities that are not
subordinated, and the value of such classes is more dependent on the
credit rating of the related insurer or the credit performance of the
underlying mortgage loans. As a result of either changes in interest
rates, a downgrade of a insurer, or the deterioration of the credit
quality of the underlying mortgage collateral, the Company may be
required to sell certain mortgage assets in order to maintain liquidity.
If required, these sales could be made at prices lower than the carrying
value of the assets, which could result in losses.
The Company issues asset-backed commercial paper to support its funding
of mortgage warehouse lines of credit.
A substantial portion of the assets of the Company are pledged to
secure indebtedness incurred by the Company. Accordingly, those assets
would not be available for distribution to any general creditors or the
stockholders of the Company in the event of the Company's liquidation,
except to the extent that the value of such assets exceeds the amount of
the indebtedness they secure.
The REIT provisions of the Internal Revenue Code require Resource REIT
to distribute to shareholders substantially all of its taxable income,
thereby restricting its ability to retain earnings. The Company may
issue additional common stock or other securities in the future in order
to fund growth in its operations, growth in its portfolio of mortgage
investments, or for other purposes.
During the six months ended June 30, 1994 the Company issued 708,620
additional shares of common stock through its Dividend Reinvestment
Plan. Total net proceeds of $19.0 million were used for general
corporate purposes.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 1993, the Company was notified by the Securities
and Exchange Commission (the "Commission") that a formal
order of investigation had been issued to review trading
activity in the Company's stock during April and May of
1992. In this regard, the Company and certain of its
officers and directors have produced documents and testified
before the staff of the Commission. The Company and the
subpoenaed officers and directors are complying with the
requests of the Commission. Based on information available
to the Company, and upon advice of counsel, management does
not believe that the investigation will result in any action
that will have a material adverse impact on the Company.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Analysis of Projected Yield.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESOURCE MORTGAGE CAPITAL, INC.
By:Thomas H. Potts
-----------------------------
Thomas H. Potts, President
(authorized officer of registrant)
Lynn K. Geurin
-------------------------------
Lynn K. Geurin, Executive Vice
President and Chief Financial
Officer
(principal accounting officer)
Dated: August 15, 1994
Exhibit 99.1
ANALYSIS OF PROJECTED YIELD
This presentation contains an analysis of the projected yield on the
Company's mortgage investments as of June 30, 1994, under the specific
assumptions set forth herein. This presentation does not seek to predict, nor
should it be interpreted as a prediction of, the actual present or future
yield on such investments since the actual interest rates and prepayment rates
in the future will be different than those assumed in any of the projected
scenarios. Capitalized terms used herein and not defined herein shall have
the respective meanings assigned to them in the Glossary.
Resource Mortgage invests a portion of its equity in a portfolio of mortgage
investments. These investments include mortgage loans and mortgage securities
subject to collateralized mortgage obligations (CMOs), adjustable-rate
mortgage securities, fixed-rate mortgage securities, other mortgage securities
and participations in mortgage warehouse lines of credit.
The Company has pursued its investment strategy of concentrating on its
mortgage conduit activities in order to create investments for its portfolio
with attractive yields and also to benefit from potential securitization
income. Through its single-family mortgage conduit activities the Company
purchases mortgage loans from approved mortgage companies, savings and loan
associations and commercial banks, or originates the mortgage loans directly;
in its multi-family conduit activities, the Company originates the loans
directly. When a sufficient volume of loans is accumulated, the Company
securitizes these mortgage loans through the issuance of mortgage-backed
securities. The mortgage-backed securities are structured so that
substantially all of the securities are rated in one of the two highest
categories (i.e. AA or AAA) by at least one of the nationally recognized
rating agencies.
The yield on the Company's investment portfolio is influenced primarily by
(i) prepayment rates on the underlying mortgage loans, (ii) the level of
short-term interest rates and (iii) the relationship between short-term
financing rates and adjustable-rate mortgage yields. The following analysis
provides a projection of the yield of the Company's investment portfolio in
variety of interest rate and prepayment rate environments. The Company's
investment strategy is to create a diversified portfolio of mortgage
securities that in the aggregate generate stable income in a variety of
interest rate and prepayment rate environments. For purposes of this analysis
only, certain of the Company's assets and liabilities have been excluded, and
certain liability balances have been reduced to better reflect the Company's
net investment in its investment portfolio.
Summary of Mortgage Investments
For purposes of calculating the projected yield, the Company calculates its
net investment in its mortgage investments as of June 30, 1994 and December
31, 1993 and can be summarized as follows (amounts in thousands):
June 30, December 31,
1994 (2) 1993
-------- -------------
Collateral for CMOs, net of CMO liabilities $ 3,324 $ 8,403
---------- -----------
Adjustable-rate mortgage securities, net (1) 162,623 132,401
--------- ----------
Fixed-rate mortgage securities, net (1) 13,612 14,520
--------- ---------
Other mortgage securities:
Mortgage residual interests 41,816 22,900
Mortgage derivative securities 26,776 37,494
-------- ---------
Other mortgage securities subtotal 68,592 60,394
-------- ---------
Mortgage warehouse participations,
net of related liabilities 8,600 9,393
------- --------
Net investment $ 256,751 $ 225,111
========= ==========
(1) Net of repurchase borrowings and discounts recorded by the Company to
compensate for certain risks on mortgage securities collateralized by mortgage
loans purchased by the Company for which mortgage pool insurance is used as
the primary source of credit enhancement. At June 30, 1994 the discount
totaled $15.6 million on adjustable-rate mortgage securities and $3.6 million
on fixed-rate mortgage securities. Amounts also exclude certain first-loss
class securities retained by the Company from mortgage securities for which a
senior/subordinated security structure is used as the primary source of credit
enhancement.
(2) Amounts exclude adjustments related to unrealized gains and losses on
available-for-sale mortgage investments in accordance with Statement of
Financial Accounting Standards No. 115.
The following tables list the Company's various investments (and related
information) as of June 30, 1994 that were used in the calculation of the
projected yield.
Collateral Pledged to Secure CMOs
(Dollars in thousands)
Type of Weighted
Mortgage Average Net
Series Collateral Coupon Rate (1) Investment (2)
- ------- ---------- --------------- --------------
MCA1, Series 1 Loans (3) 8.97 (3,407)
PWMO, Series B FNMA Certificates 9.27 1,476
PWMO, Series C FHLMC & FNMA
Certificates 9.59 360
RAC Four, Series 77 Loans 9.55 1,669
RDII, Series A FNMA Certificates 11.28 (245)
RMSC Series 89-4A Loans 10.60 167
RMSC Series 89-5 Loans 10.59 (53)
RMSC Series 91-2 Loans 9.81 339
RMSC Series 92-12 Loans 8.10 1,233
RAC Four, 26 Misc. Series Various 9.90 1,785
------
Total $ 3,324
=======
- ----------------------
(1) Based on the weighted average coupons of the underlying mortgage loans or
mortgage certificates when the CMOs were issued and the current principal
balances of such mortgage collateral. This information is presented as of
December 31, 1993.
(2) Equal to the outstanding principal balance of the mortgage collateral
plus unamortized discounts, premiums, accrued interest receivable and deferred
issuance costs, and net of bond principal, discounts, premiums and accrued
interest payable as of June 30, 1994.
(3) Multi-family loans.
Adjustable-Rate Mortgage Securities
(Dollars in thousands)
Remaining
Principal Interest Net
Description (1) Balance (2) Rate (3) Investment (4)
----------- --------- --------------
FNMA Pools, various $ 384,589 4.48-6.02% (A) $ 23,500
FNMA and FHLMC Pools,
various 144,479 4.07-7.07 (B) 8,041
FNMA and FHLMC Pools,
various 6,136 4.07-7.07 (C) 794
FAI2 1993-E M 17,243 4.08 (A) 1,047
LIBOR ARM Trust 1991-19,
Class B 40,018 5.77 (A) 2,435
LIBOR ARM Trust 1992-1,
Class B 39,020 5.55 (A) 2,356
LIBOR ARM Trust 1992-4,
Class B 59,940 5.64 (A) 3,613
LIBOR ARM Trust 1992-6,
Class B 70,109 5.51 (A) 4,233
LIBOR ARM Trust 1992-8,
Class B 105,148 5.83 (A) 6,378
LIBOR ARM Trust 1992-10,
Class B 32,945 5.55 (A) 1,996
RMSC, AHF 1989-1 Trust,
Class A-2 7,051 5.62 (B) 423
RMSC, Series 1991-5 51,724 6.22 (A) 2,971
RMSC, Series 1991-7, Class B 48,003 5.99 (A) 2,932
RMSC, Series 1991-11 66,871 5.85 (A) 3,945
RMSC, Series 1991-12, Class B 45,983 5.67 (A) 2,796
RMSC, Series 1991-15, Class B 39,972 5.73 (A) 2,430
RMSC, Series 1991-16, Class B 57,109 5.79 (A) 3,471
RMSC, Series 1991-17, Class B 39,523 5.55 (A) 2,405
RMSC, Series 1992-5 77,907 5.70 (A) 4,673
RTC M-1, A-4 407 6.96 (C) 24
RTC M-6, A-1, A-2 37,925 5.34, 5.43 (C) 2,433
SMSC, Series 1992-1, Class B 5,000 5.56 (A) 303
SMSC, Series 1992-4, Class B 55,900 5.78 (A) 3,347
SMSC, Series 1992-6, Class B 60,193 5.61 (A) 3,620
SMSC, Series 1993-1,
Class B-1, B-2 9,963 5.64, 5.53 (A) 604
SMSC, Series 1993-3,
Class A-2, B-2 108,014 5.67 (A) 6,398
SMSC, Series 1993-5,
Class A-2, B-2 65, 467 5.78 (A) 3,976
SMSC, Series 1993-6, Class B
16,044 5.53 (A) 951
SMSC, Series 1993-7, Class B 28,401 5.05 (A) 1,723
SMSC, Series 1993-9,
Class A-2, B-2 95,280 4.98 (A) 5,784
SMSC, Series 1993-11 144,925 4.37 (A) 8,783
SMSC, Series 1994-1,
Class A, B 76,388 4.41 (A) 4,633
SMSC, Series 1994-3, Class M 39,219 4.60 (A) 2,369
SMSC, Series 1994-7,
Class A-1, B-1 82,995 4.96 (B) 5,123
SMSC, Series 1994-7,
Class A-2, B-2 195,950 4.43 (A) 12,049
LIBOR Cap Agreements (5) 20,064
-------
Total $ 162,623
==========
(A) Index - Six-month LIBOR
(B) Index - 1-yr CMT
(C) Index - COFI
(1) All the "Class B" adjustable-rate mortgage securities were created from
the Company's mortgage conduit operations, and represent a AA rated class that
is subordinated to AAA rated class(es) within the security offering.
(2) As of June 30, 1994.
(3) Pass-through rate as of June 30, 1994.
(4) Equal to the outstanding principal balance of the adjustable-rate
mortgage securities, plus any unamortized premiums and net of any unamortized
discounts, less repurchase borrowings, if any, calculated at 94% of such
amount.
(5) The Company has purchased various LIBOR cap agreements in regard to the
adjustable-rate mortgage securities. Pursuant to the cap agreements, the
Company will receive additional cash flows should six-month LIBOR increase
above certain levels as specified below.
Notional Cap
Amount Rate
-------- -----
Cap agreements expiring between 2001 and 2002 $ 230,500 11.50%
Cap agreements expiring between 2001 and 2002 108,000 10.50%
Cap agreements expiring in 1999 235,000 10.00%
Cap agreements expiring between 2000 and 2003 490,000 9.50%
Cap agreements expiring between 2002 and 2004 525,000 9.00%
----------
$ 1,588,500
============
Fixed-rate Mortgage Securities
(Dollars in thousands)
Remaining
Principal Interest Net
Description Balance (1) Rate Investment (2)
- ----------- ---------- --------- --------------
Citibank, Series 1990-B,
Class B-5 $ 1,170 9.60% $ 718
RMSC, various series 28,357 Various 1,363 (3)
RMSC, Series 91-2,
Class 2-B (4) 11,672 10.00 1,741 (3)
SMSC, Series 1993-3,
Class A-1, B-1 (4) 78,840 6.75 4,802 (3)
SMSC, Series 1993-5,
Class A-1, B-1 (4) 51,043 6.51 3,103 (3)
SMSC, Series 1993-9,
Class A-1, B-1 (4) 31,023 6.09 1,885 (3)
-------------
Total $ 13,612
===========
- ----------
(1) As of June 30, 1994.
(2) Equal to the outstanding principal balance of the securities, plus any
unamortized premiums and net of any unamortized discounts at June 30, 1994.
(3) Equal to the outstanding principal balance of the securities, plus any
unamortized premiums and net of any unamortized discounts, less the associated
repurchase agreement borrowings at June 30, 1994.
(4) These series become adjustable-rate in 1995-1998.
Other Mortgage Securities
(Dollars in thousands)
Other Mortgage Securities are comprised of mortgage residual interests and
mortgage derivative securities as set forth below.
Mortgage residual interests:
Type of Weighted
Mortgage Percent Average Net Net
Series Collateral Owned Coupon Rate (1) Investment (2)
- ------ ---------- ------- -------------- --------------
FNMA REMIC Trust 1988-22 FNMA 40.00 % 9.50 % $ 1,376
GMS, Series 1994-1 FNMA 100.00 3.76 4,473
GMS, Series 1994-2 FHLMC 100.00 4.11 4,155
GMS, Series 1994-3 FHLMC 100.00 3.93 3,425
LIBOR ARM Trust 1991-19 Loans 100.00 5.60 298
LIBOR ARM Trust 1992-1 Loans 100.00 5.46 314
LIBOR ARM Trust 1992-4 Loans 100.00 5.51 366
ML Trust XI FHLMC 49.00 8.50 216
NMF, Series 1994-1 FNMA 100.00 3.83 6,285
NMF, Series 1994-2 FHLMC 100.00 3.80 2,973
NMF, Series 1994-3 FHLMC 100.00 3.90 2,354
RAC Four, Series 39 FHLMC 49.90 10.20 455
RAC Four, Series 62 GNMA 30.00 10.00 428
RAC Four, Series 73 GNMA 55.00 11.50 4,414
RAC Four, Series 74 GNMA 23.60 10.50 1,652
RAC Four, Series 75 GNMA 36.00 9.50 1,270
RAC Four, 22 Misc. Series Various Various 11.54 349
RMSC, Series 1991-7 Loans 100.00 6.01 427
RMSC, Series 1991-12 Loans 100.00 6.59 21
RMSC, Series 1991-15 Loans 100.00 6.67 104
RMSC, Series 1991-17 Loans 100.00 5.62 94
Shearson Lehman,
Series K FNMA 50.00 10.00 117
NTF Various 48.30 9.00 6,250
--------
Total $ 41,816
==========
- ----------------
(1) Based on the weighted average coupons of the underlying mortgage loans or
mortgage certificates when the mortgage securities were issued and the current
principal balances of such mortgage collateral. This information is presented
as of December 31, 1993.
(2) Equal to the amortized cost of the mortgage residual interests as of June
30, 1994.
Other Mortgage Securities (continued)
Mortgage derivative securities: Weighted
Type of Average
Type of Mortgage Net Coupon Net
Description Securities (1) Collateral Rate (2) Investment (3)
- ----------- ------------- ---------- ---------- ---------------
Chemical, Series 1988-4 I/O Loans 9.82% $ 81
Interest-only strips, various I/O Loans Various 6,341
LIBOR ARM Trust 1992-8, Class I I/O Loans 5.54 755
LIBOR ARM Trust 1992-9, Class I I/O Loans 5.46 529
LIBOR ARM Trust 1992-10, Class I I/O Loans 5.41 450
Principal-only strips, various P/O Loans Various 4,471
RMSC, Series 89-6, 6F I/O Loans 10.62 274
RMSC, Series 1989-7B, B-2 I/O Loans 10.39 139
RMSC, Series 1991-14, Class 14-P P/O Loans 9.77 146
RMSC, Series 1991-16, Class I I/O Loans 5.79 266
RMSC, Series 1991-20, Class P P/O Loans 8.96 172
RMSC, Series 1992-2, Class P P/O Loans 8.47 39
RMSC, Series 1992-18, Class P P/O Loans 8.18 148
RMSC, Series 1992-18, Class X I/O Loans 8.18 1,155
SMSC, Series 1992-1, Class I I/O Loans 5.46 450
SMSC, Series 1992-2, Class I I/O Loans 5.53 498
SMSC, Series 1992-3, Class I I/O Loans 5.56 252
SMSC, Series 1992-4, Class I I/O Loans 5.46 274
SMSC, Series 1993-8,
Class 1I, 2I I/O Loans 7.97 1,160
SMSC, Series 1993-10, Class I I/O Loans 7.72 2,632
SMSC, Series 1994-4,
Class 1I, 2I I/O Loans 7.09 4,203
SMSC, Series 1994-9,
Class 1I, 2I I/O Loans 8.03, 7.38 2,127
SMSC, Series 1994-9, Class 1P P/O Loans 8.03 214
-------
Total $ 26,776
=========
- ---------------
(1) I/O means an interest-only security; P/O means a principal-only security.
(2) Based on the weighted average coupons of the underlying mortgage loans or
mortgage certificates when the mortgage securities were issued and the current
principal balances of such mortgage collateral. This information is presented
as of December 31, 1993 or as of the date purchased if purchased in 1994.
(3) Equal to the amortized cost of the mortgage derivative securities as of
June 30, 1994. The Company owned 100% of each such security.
Mortgage Warehouse Participations
(Dollars in thousands)
Description Weighted Average Coupon (1) Net Investment (2)
- ----------- -------------------------- ------------------
Various Participations 6.33% $ 8,600
- ---------------
(1) Based upon the weighted average rate on each participation as of
June 30, 1994.
(2) Equal to equity invested in mortgage warehouse participations as of
June 30, 1994.
YIELD ON MORTGAGE INVESTMENTS
This presentation contains an analysis of the yield sensitivity to different
short-term interest rates and prepayment rates of the Company's Mortgage
Investments (as described in the previous section) as of July 1,1994. The
Company utilizes this analysis in making decisions as to the cash flow
characteristics of investments that the Company desires to create or acquire
for its investment portfolio. The Company's investment strategy is to create
a diversified portfolio of mortgage securities that in the aggregate generates
stable income in a variety of interest rate and prepayment rate environments
and preserves the capital base of the Company. Capitalized terms used herein
and not defined within this section are defined in the glossary on page 15 of
this Exhibit.
This presentation does not reflect all of the Company's assets and
liabilities (or income and expenses of such excluded assets or liabilities)
nor any of the general and administrative expenses of the Company. This
presentation also does not purport to reflect the liquidation or ongoing value
of the Company's business or assets. The yield information presented herein
is provided solely for analytical purposes. This presentation does not seek
to predict, nor should it be interpreted as a prediction of, the actual
present or future yield on such investments.
The table below sets forth the estimated cash yields calculated on a semi-
annual equivalent basis as of June 30, 1994 of the projected net cash flows on
the Company's existing investment portfolio as set forth in "Mortgage
Investments" above, based upon the current balances of the assets as of July
1,1994, and upon assumptions set forth below on pages 10 through 14 for each
of the respective cases. The most important of these assumptions are the
prepayment rates applicable to each mortgage investment and the level of
short-term interest rates.
MORTGAGE INVESTMENTS YIELD SENSITIVITY ANALYSIS
-----------------------------------------------
YIELD ON INVESTMENT (%)
Short-Term Interest Rate Assumption Case
- ----------------------------------------
Prepayment
Assumption
Case Case I Case II Case III Case IV Case V Case VI Case VII
- ---- ------- ------- -------- ------- ------- ------- --------
Case A 25.1% 23.4% 21.5% 18.9% 15.2% 10.9% 5.8%
Case B 26.2 24.5 23.1 20.1 16.5 12.3 7.3
Case C 27.0 25.4* 22.6 21.1 17.6 13.5 8.6
Case D 27.9 26.3 24.5 22.1 18.7 14.7 9.9
Case E 28.5 26.9 25.2 22.9 19.6 15.9 10.9
Case F 28.9 27.4 25.8 23.6 20.4 16.5 11.9
Case G 29.3 27.9 26.3 24.2 21.1 17.3 12.6
The case most representative of short-term interest rates and prepayment
rates as of July 1,1994, is case C-II, represented by the "*."
The yields for each case expressed above are level yields relative to the
Company's aggregate net investment of $256.8 million in the various listed
mortgage investments as shown beginning on page 2. In addition to the
foregoing, the projected yields assume that the Company is able to reinvest
principal received on its investments at the same yield as the yield in each
case; consequently, these yields do not purport to reflect the return when
such reinvestment is not available.
Such yields do not give effect to the operating expenses of the Company.
These yields are also exclusive of the yields on mortgage assets of the
Company not listed in "Mortgage Investments" above. In particular, the listed
mortgage investments do not include (i) mortgage loans in warehouse, (ii)
certain first-loss class securities, and (iii) certain other adjustable-rate
and fixed-rate mortgage securities. These other securities are excluded in an
amount equal to the discount which compensates the Company for certain risks
on mortgage securities collateralized by mortgage loans for which mortgage
pool insurance is used as the primary source of credit enhancement. There is
no assurance that any particular yield actually will be obtained. Prepayment
speeds may exceed those shown in the tables on pages 11 and 12 and/or short-
term interest rates may exceed those shown in the table on page 13. If this
happens, the portfolio yields may differ significantly from those shown below.
Also, the table shows changes in short-term interest rates and prepayment
rates occurring on a gradual basis over one year. If these factors change
more rapidly, the portfolio yields may be significantly affected.
The Company also calculates the MacCauley duration of the aggregate cash
flows on its mortgage investments. The duration is 3.3 years in Case C-II,
the base case, and ranges from a high of 8.2 years in Case G-VII to a low of
2.8 years in Case A-I.
The assumptions that are set forth below detail certain information with
respect to the mortgage investments as of June 30, 1994, or other dates as
specified.
Factors Affecting Return
The return on the Company's portfolio of investments will be affected by a
number of factors. These include the rate of prepayments of the mortgage loans
directly or indirectly securing the mortgage investments and the
characteristics of the net cash flows available. Prepayments on mortgage
loans commonly are measured by a prepayment standard or model. Two models are
used herein. One such model which is used primarily for fixed-rate mortgage
loans (the "PSA" prepayment assumption model) is based on an assumed rate of
prepayment each month of the unpaid principal amount of a pool of new mortgage
loans expressed on an annual basis. A prepayment assumption of 100 percent of
the PSA assumes that each mortgage loan (regardless of interest rate,
principal amount, original term to maturity or geographic location) prepays at
an annual compounded rate of 0.2% of its outstanding principal balance in the
first month after origination. The prepayment rate increases by an additional
0.2% per annum in each month thereafter until the thirtieth month after
origination. In the thirtieth month and each month thereafter each mortgage
loan prepays at a constant prepayment rate of 6% per annum.
The other model used herein is the Constant Prepayment Rate ("CPR"), which
is used primarily to model prepayments on adjustable-rate mortgage loans. CPR
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans. A prepayment
assumption of 18% CPR assumes a rate of prepayment of the then outstanding
principal balance of such mortgage loans in each month equal to 18% per annum.
The Prepayment Assumption Model and CPR do not purport to be either an
historical description of the prepayment experience of any pool of mortgage
loans or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including mortgage loans underlying the mortgage investments.
The actual prepayment rate of the mortgage loans will likely differ from the
assumed prepayment rates.
The rate of principal payments on a single-family pool of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. In
general, however, mortgage loans are likely to be subject to relatively higher
prepayment rates if prevailing long-term interest rates fall significantly
below the interest rates on the mortgage loans. Conversely, the rate of
prepayments would be expected to decrease if long-term interest rates rise
above the interest rate on the mortgage loans. Other factors affecting
prepayment of mortgage loans include changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties,
assumability of mortgage loans and servicing decisions.
The terms of the multi-family mortgage loans that collateralize the multi-
family investments prohibit the prepayment of principal during the lock-out
period, a period generally equal to fifteen years after origination of the
loan. Subsequent to the lock-out period, prepayments will be subject to a
prepayment premium based on 1% of the remaining principal balance of the
multi-family mortgage loan.
The net cash flows on the Company's CMOs will be derived principally from
the difference between (i) the cash flow from the collateral pledged to secure
the CMO together with reinvestment income, and (ii) the amount required for
payment on the CMOs together with related administrative expenses. Certain of
the Company's other mortgage securities have similar net cash flow
characteristics (collectively, net cash flow investments). Distributions of
net cash flows on such net cash flow investments represent both income
relative to the investment and a return of the principal invested.
Assumptions Employed in Projecting the Net Cash Flows
In calculating the "Mortgage Investments Yield Sensitivity Analysis" above,
the projected net cash flows on the Company's mortgage investments were
calculated on the basis of the following:
(1) Prepayments on the mortgage loans underlying the mortgage investments
(other than adjustable-rate mortgage securities) were projected to be received
in proportion to the PSA model described in this report. Prepayments on the
adjustable-rate mortgage securities were projected to be received in
proportion to the CPR model described in this report.
The tables below show the prepayment rate projections, expressed as a
percentage of the PSA or CPR, on the mortgage loans underlying the mortgage
investments in which the Company has an interest under the assumed Case A,
Case B, Case C, Case D, Case E, Case F and Case G scenarios. Neither the
prepayment projections used in this report nor any other prepayment model or
projection purports to be a historical description of prepayment experience or
a prediction of the anticipated rate of prepayment of any pool of mortgage
loans. It is unlikely that actual prepayments on the mortgage collateral will
conform to any of the projected prepayment rates shown in the table below.
Prepayment rate projections for certain of the Company's smaller investments
are not listed in the tables below.
The prepayment rate for each type of mortgage loan is projected to begin at
the prepayment rate used in Case C in the table below. For cases other than
Case C, the applicable rate increases or decreases ratably over a one-year
period to the prepayment rate set forth for the applicable case. The
prepayment rates set forth in Case C are the average of the published
estimates of projected prepayment rates of a number of major Wall Street
firms, excluding the highest and lowest estimates, as published on Bloomberg
on July 1,1994. Cases A through B and Cases D through G represent the average
of the prepayment estimates from two investment banking firms multiplied by
the ratio of Case C and the average of the comparable prepayment estimates of
the two investment banking firms.
PREPAYMENT ASSUMPTION TABLE
FIXED-RATE MORTGAGE LOANS OR CERTIFICATES
Pass
Through Percentage of PSA
---------------------------------------------------
Mortgage
Certificates Rate (%)
Case A Case B Case C* Case D Case E Case F Case G
------ ----- ------ ------ ------ ------ -------
GNMA Certif. 9.50 485 350 240 160 125 100 85
10.00 465 365 280 190 155 130 110
10.50 495 330 285 200 145 120 105
11.50 340 290 280 235 190 160 150
FNMA Certif. 9.00 540 365 255 180 155 140 130
9.50 560 385 320 215 185 165 155
10.00 565 400 350 260 210 185 165
FHLMC Certif. 8.50 640 425 230 150 200 160 180
10.00 555 395 350 270 220 195 165
10.25 545 390 345 285 225 205 180
10.50 535 385 345 295 230 210 195
Fixed-rate Mortgage Loans:
MCA 1, Series 1 340 335 330 325 320 315 310
RAC Four, Series 77 540 365 255 180 155 140 130
RMSC, Series 1989-4A
and 1989-4B 565 390 320 220 185 165 155
RMSC, Series 91-2** 485 350 240 160 125 100 85
RMSC, Series 92-12 720 395 195 160 140 135 125
* Case C is the case most representative of projected prepayment speeds as
of July 1,1994. This is representative of the yield on a FNMA 30-year pass-
through security of 7.95%. (Case A represents a FNMA pass-through yield of
5.95%, Case B 6.95%, Case D 8.95%, Case E 9.95%, Case F 10.95% and Case G
11.95%).
** The mortgage loans underlying the security become adjustable-rate in
1996-1998.
CONSTANT PREPAYMENT RATES (CPR) TABLE (%)
ADJUSTABLE-RATE MORTGAGE LOANS OR CERTIFICATES
Case A Case B Case C* Case D Case E Case F Case G
------- ------ ------ ------- ------ ------- -------
FNMA Pools, Various 36 32 28 26 22 18 14
FHLMC Pools, Various 24 21 18 15 12 9 6
LIBOR ARM Trust
1991-19 24 21 18 15 12 9 6
LIBOR ARM Trust
1992-1 24 21 18 15 12 9 6
LIBOR ARM Trust
1992-4 24 21 18 15 12 9 6
LIBOR ARM Trust
1992-6 24 21 18 15 12 9 6
LIBOR ARM Trust 1
992-8 24 21 18 15 12 9 6
LIBOR ARM Trust
1992-10 24 21 18 15 12 9 6
RMSC, AHF 1989-1 40 36 32 28 26 22 18
RMSC, Series 1991-5 24 21 18 15 12 9 6
RMSC, Series 1991-7 24 21 18 15 12 9 6
RMSC, Series 1991-11 24 21 18 15 12 9 6
RMSC, Series 1991-12 24 21 18 15 12 9 6
RMSC, Series 1991-15 24 21 18 15 12 9 6
RMSC, Series 1991-16 24 21 18 15 12 9 6
RMSC, Series 1991-17 24 21 18 15 12 9 6
RMSC, Series 1992-5 24 21 18 15 12 9 6
RTC M-1 15 13 10 7 5 5 5
RTC M-6 17 15 10 7 5 5 5
SMSC, Series 1992-4 24 21 18 15 12 9 6
SMSC, Series 1992-6 24 21 18 15 12 9 6
SMSC, Series 1993-1 24 21 18 15 12 9 6
SMSC, Series 1993-3** 24 21 18 15 12 9 6
SMSC, Series 1993-5** 24 21 18 15 12 9 6
SMSC, Series 1993-6 24 21 18 15 12 9 6
SMSC, Series 1993-7 24 21 18 15 12 9 6
SMSC, Series 1993-9** 24 21 18 15 12 9 6
SMSC, Series 1993-11 24 21 18 15 12 9 6
SMSC, Series 1994-1 24 21 18 15 12 9 6
SMSC, Series 1994-3 24 21 18 15 12 9 6
- ----------------
* Case C is the case most representative of projected prepayment speeds as of
July 1,1994.
** The mortgage loans underlying these securities become adjustable-rate in
1995-1996.
(2) Principal and interest payments on the mortgage collateral was assumed to
be received monthly with interest payments received in arrears.
(3) The LIBOR, commercial paper, COFI, 1 Yr-CMT, and reinvestment income
rates are assumed to be as set forth in the table set forth below. The
applicable rate is assumed to begin at the rate set forth in Case II in the
table below. For cases other than Case II, the applicable rate increases or
decreases ratably over a one-year period to the rate set forth for the
applicable case. The rates set forth in Case II are representative of the
rates as of July 1,1994. Case I and Cases III through VII indicate rates
decreasing or increasing, respectively, from the rates of Case II in equal
steps each month over one year, to the rate indicated and continuing
thereafter at that rate. According to the scheduled resets and subject to the
periodic and lifetime caps, if applicable, the interest rates on the Company's
adjustable-rate mortgage securities, in each case, reset at the defined margin
relative to their respective indices.
SHORT TERM INTEREST RATE ASSUMPTIONS
Case I Case II* Case III Case IV Case V Case VI Case VII
------ ------- -------- ------- ------ ------- --------
LIBOR
One-month 3.375% 4.375% 5.375% 6.375% 7.375% 8.375% 9.375%
Three-month 3.625 4.625 5.625 6.625 7.625 8.625 9.625
Six-month 4.000 5.000 6.000 7.000 8.000 9.000 10.000
COFI 3.026 3.726 4.426 5.120 5.826 6.526 7.226
1 Yr-CMT 4.481 5.481 6.481 7.481 8.481 9.481 10.481
Reinvestment
Rates 3.000 4.000 5.000 6.000 7.000 8.000 9.000
- ----------------
* Case II is the case most representative of short-term interest rates as of
July 1,1994.
(4) Principal and interest payments on each mortgage investment were assumed
to be made in accordance with the terms for each such mortgage investment.
(5) It was assumed that no optional redemptions are exercised on any of the
mortgage investments.
(6) Administrative fees for each series of mortgage securities have been
calculated using the assumptions set forth in the prospectus relating to each
such series. The administrative fee generally is based upon a fixed
percentage of the principal amount of such mortgage securities outstanding.
(7) For the purposes of calculating the net cash flows on the adjustable-rate
mortgage securities that are subject to repurchase borrowings, it was assumed
that the repurchase borrowings were equal to 94% of the Company's cost basis
in such adjustable-rate mortgage securities, and that such ratio would remain
constant. Actual repurchase borrowings were greater on June 30, 1994 than the
amount used for modeling. If the ratio that the Company was able to borrow
were to decrease to a level below the 94% for adjustable-rate mortgage
securities used in modeling due to either increases in short-term interest
rates or other market conditions, the yield to the Company would be lower in
each case.
(8) For purposes of calculating the net cash flows on the fixed-rate mortgage
securities that are subject to repurchase borrowings, it was assumed that the
repurchase borrowings were equal to 93.5% of the Company's basis in such
fixed-rate mortgage securities, and that such ratio would remain constant.
Actual repurchase borrowings were greater on June 30, 1994 than the amount
used for modeling. If the ratio that the Company was able to borrow were to
decrease to a level below the 93.5% for fixed-rate mortgage securities used in
modeling due to either increases in short-term interest rates or other market
conditions, the yield to the Company would be lower in each case.
(9) In modeling the mortgage warehouse participations, it was assumed that
each participation had a remaining average life of one year and the spread
between the weighted average coupon, associated costs and the commercial paper
rate remained constant.
(10) No losses are projected on any mortgage loans owned by the Company or
underlying any adjustable-rate mortgage security or other mortgage security
that would not be covered by external sources of insurance or the Company's
allowance for losses. Any losses not covered by such insurance or allowance
would lower the yield in each case to the Company.
(11) While the cost of the LIBOR cap agreements has been added to the
Company's investment in its portfolio, the projections do not include any
benefit from them, as such caps are generally above the range of the short-
term interest rate assumptions set forth on page 13.
(12) In modeling certain of the Company's smaller mortgage investments, the
cash flows of the investments were modeled by substituting for the actual
assets and liabilities a small number of representative assets or liabilities,
the characteristics of which summarize the actual mortgage loans or mortgage
securities and the related liabilities that comprise the investment.
GLOSSARY
AHF - American Home Funding.
Adjustable-rate mortgage loan (ARM) - A mortgage loan that features
adjustments of the loan interest rate at predetermined times based on an
agreed margin to an established index. An ARM is usually subject to
periodic and lifetime interest-rate and/or payment-rate caps.
Adjustable-rate mortgage securities - Mortgage certificates that represent the
pass-through of principal and interest on adjustable-rate mortgage loans.
Bloomberg - Bloomberg Business Services, Inc. information systems.
Chemical - Chemical Acceptance Corporation.
Citibank - Citibank, N.A., REMIC mortgage pass-through certificates.
COFI - Eleventh District Cost of Funds Index.
Collateralized Mortgage Obligations (CMOs) - Debt obligations (bonds) that are
collateralized by mortgage loans or mortgage certificates. CMOs are
structured so that principal and interest payments received on the
collateral are sufficient to make principal and interest payments on the
bonds. The bonds may be issued in one or more classes with specified
interest rates and maturities which are designed for the investment
objectives of different bond purchasers.
Company - Resource Mortgage Capital, Inc.
FAI2 - Fund America Investors Corporation II.
FHLMC - Federal Home Loan Mortgage Corporation.
Fixed-rate mortgage loan - A mortgage loan which features a fixed interest
rate that does not change during the life of the loan, or does not change
for at least one year from the date of the analysis.
FNMA - Federal National Mortgage Association.
FNMA Yield - FNMA 30-year mortgage certificate yield.
GAAP - Generally accepted accounting principles.
GMS - General Mortgage Securities, Inc. Two.
GNMA - Government National Mortgage Association.
LIBOR - The London Inter-Bank Offered Rate for overseas deposits of U.S.
dollars. The LIBOR index generally follows the patterns of the short-term
interest rate environment in the U.S. market.
Long-term interest rates - The interest rates applicable to debt securities
with an average life of 10 years or more.
MCA 1 - Multi-family Capital Access One, Inc., a subsidiary of the Company
ML - Merrill Lynch
Mortgage certificates - Certificates which represent participation in pools of
mortgage loans. The principal and interest payments on the mortgage loans
are passed through to the certificate holders. GNMA, FNMA, or FHLMC may
issue and guarantee the payment of principal and interest on mortgage
certificates issued by them. Mortgage certificates may also be privately
issued.
Mortgage derivative securities - Mortgage securities that generally have a
market price that is substantially below or in excess of the principal
balance of the underlying mortgage loans or mortgage certificates (e.g., a
principal-only or interest-only security).
Mortgage loans - Mortgage loans secured by first liens on single-family
residential properties.
Mortgage residual interests - An investment which entitles the Company to
receive any excess cash flow on a pool of mortgage loans or mortgage
certificates after payment of principal, interest and fees on the related
mortgage securities.
Mortgage warehouse participations - A participation in a line of credit to a
mortgage originator that is secured by recently originated mortgage loans
that are in the process of being sold to permanent investors.
N/A - Not available.
NMF - National Mortgage Funding, Inc.
1 Yr-CMT - One-year constant maturity treasury index.
Other mortgage securities - Mortgage derivative securities and mortgage
residual interests.
Prepayment rates - Represent a measure as to how quickly the number of
mortgage loans in a pool are prepaid-in-full.
PWMO - PaineWebber Mortgage Obligations, Inc.
RAC Four - Ryland Acceptance Corporation Four.
RDII - RD Financial Corporation II.
REMIC - A real estate mortgage investment conduit pursuant to the Internal
Revenue Code of 1986, as amended.
RMSC - Ryland Mortgage Securities Corporation.
RTC - Resolution Trust Corporation
SMART - Structured Mortgage Asset Residential Trust.
SMSC - Saxon Mortgage Securities Corporation, an affiliate of the Company.
Short-term interest rates - Short-term interest rates are the interest rates
applicable to debt securities with an average life of six months or less.
16