-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, oMS95TV/rduE1c3Ieh4IV6IIjZtNY9OGNxhJb0/ngAIVY/mWOfu6h1V2+yq4JgxF jPjQNQk/GWVEjS/Sjx7DWw== 0000826675-94-000004.txt : 19940517 0000826675-94-000004.hdr.sgml : 19940517 ACCESSION NUMBER: 0000826675-94-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESOURCE MORTGAGE CAPITAL INC/VA CENTRAL INDEX KEY: 0000826675 STANDARD INDUSTRIAL CLASSIFICATION: 6798 IRS NUMBER: 521549373 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09819 FILM NUMBER: 94528716 BUSINESS ADDRESS: STREET 1: 10500 LITTLE PATUXENT PKWY STREET 2: SUITE 650 CITY: COLUMBIA STATE: MD ZIP: 21044 BUSINESS PHONE: 4107152000 FORMER COMPANY: FORMER CONFORMED NAME: RESOURCE MORTGAGE INVESTMENT CORP DATE OF NAME CHANGE: 19930505 FORMER COMPANY: FORMER CONFORMED NAME: RAC MORTGAGE INVESTMENT CORP /VA/ DATE OF NAME CHANGE: 19930505 10-Q 1 10-Q 3/31/94 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q //x// Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended March 31, 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. //x// Yes / / No On April 30, 1994, the registrant had 19,734,872 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 March 31, 1994 and December 31, 1993 3 Consolidated Statements of Operations for the three months ended March 31, 1994 4 Consolidated Statement of Shareholders' Equity for the three months ended March 31, 1994 5 Consolidated Statements of Cash Flows for the three months ended March 31, 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) March 31, December 31, 1994 1993 --------- ------------ ASSETS Mortgage investments: Collateral for CMOs $ 390,093 $ 434,698 Adjustable-rate mortgage securities, net 2,150,553 2,021,196 Fixed-rate mortgage securities, net 203,421 214,128 Other mortgage securities 81,539 65,625 Mortgage warehouse participations 94,591 156,688 ----------- ------------- 2,920,197 2,892,335 Mortgage loans in warehouse 573,724 777,769 Cash 7,401 1,549 Accrued interest receivable 13,468 13,466 Other assets 19,111 41,643 ----------- ------------- $ 3,533,901 $ 3,726,762 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Collateralized mortgage obligations $ 382,148 $ 432,677 Repurchase agreements 2,679,821 2,754,166 Notes payable 57,271 87,451 Commercial paper 86,615 148,672 Accrued interest payable 11,375 14,695 Deferred income 13,891 13,214 Other liabilities 14,562 22,855 ------------ ------------ 3,245,683 3,473,730 ------------ ---------- SHAREHOLDERS' EQUITY Common stock: par value $.01 per share, 50,000,000 shares authorized, 19,619,145 and 19,331,932 issued and outstanding, respectively 196 193 Additional paid-in capital 267,517 259,622 Net unrealized gain on available- for-sale mortgage investments 21,930 - Retained earnings (deficit) (1,425 ) (6,783 ) ------------ ----------- 288,218 253,032 ------------ ----------- $ 3,533,901 $ 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 March 31, 1994 1993 Interest Income: Collateral for CMOs $ 8,539 $ 11,704 Adjustable-rate mortgage securities 25,296 17,071 Fixed-rate mortgage securities 4,118 3,267 Other mortgage investments 2,428 1,740 Mortgage warehouse participations 1,429 1,472 Mortgage loans in warehouse 9,485 4,549 -------- ------- 51,295 39,803 -------- ------- Interest and CMO-related expense: Collateralized mortgage obligations: Interest 8,040 10,999 Other 408 552 Repurchase agreements 26,883 14,431 Notes payable 770 1,166 Commercial paper 803 927 Other 1,129 1,218 ------- ------ 38,033 29,293 ------- ------ Net margin on mortgage assets 13,262 10,510 Gain on sale of mortgage assets, net of associated costs 6,841 5,059 Other income 229 189 General & administrative expenses (4,832 ) (3,259) --------- ------- Net income $ 15,500 $ 12,499 ======== ========== Net income per share $ 0.80 $ 0.76 ======== ========== Weighted average number of common shares outstanding 19,447,618 16,517,599 ========== =========== See notes to consolidated financial statements. RESOURCE MORTGAGE CAPITAL, INC. CONSOLIDATED STATEMENT OF Net SHAREHOLDERS' EQUITY unrealized (amounts in thousands except share data) gain 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 287,213 3 7,895 - - 7,898 Net income - three months ended March 31, 1994 - - - - 15,500 15,500 Net change in unrealized gain on available-for-sale mortgage investments - - - 21,930 - 21,930 Dividends declared - $0.52 per share - - - - (10,142) (10,142) -------- ------- -------- ------- -------- -------- Balance at March 31, 1994 19,619,145 $ 196 $ 267,517 $ 21,930 $ (1,425) $ 288,218 ========== ===== ========= ======== ========= ========= See notes to consolidated financial statements. RESOURCE MORTGAGE CAPITAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended (amounts in thousands) March 31, 1994 1993 ----- ------ Operating activities: Net income $ 15,500 $ 12,499 Adjustments to reconcile net income to net cash used for operating activities: Amortization and depreciation 1,343 1,391 Net decrease (increase) in mortgage loans held for sale 200,554 (94,379) Net decrease (increase) in accrued interest, other payables and other assets 20,251 (546) Net gain from sales of mortgage investments (1,514) (803) Other 85 - ---------- ---------- Net cash provided by (used for) operating activities 236,219 (81,838) ---------- ---------- Investing activities: Collateral for CMOs: Principal payments on collateral 48,501 49,505 Net decrease in funds held by trustees 2,337 12,746 --------- -------- 50,838 62,251 Purchase of other mortgage investments (260,152) (387,104) Payments on other mortgage investments 136,071 19,419 Proceeds from sales of other mortgage investments 67,844 151,344 Capital expenditures (883) (161) ---------- --------- Net cash used for investing activities (6,282) (154,251) ---------- --------- Financing activities: Principal payments on CMOs (50,232) (61,465) (Repayments of) proceeds from short-term borrowings, net (166,583) 314,556 Proceeds from stock offerings, net 7,897 577 Dividends paid (15,167) (18,165) --------- --------- Net cash provided by financing activities (224,085) 235,503 --------- --------- Net increase (decrease) in cash 5,852 (586) Cash at beginning of period 1,549 1,135 Cash at end of period $ 7,401 $ 549 =========== =========== Cash paid for interest $ 40,376 $ 30,587 ========== =========== See notes to consolidated financial statements. RESOURCE MORTGAGE CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 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. The Company's mortgage loan purchase program is 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 March 31 1994, the Consolidated Statements of Operations for the three months ended March 31, 1994 and 1993, the Consolidated Statement of Stockholders' Equity for the three months ended March 31, 1994, the Consolidated Statements of Cash Flows for the three months ended March 31, 1994 and 1993 and related notes are unaudited. Operating results for the three months ended March 31, 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 $952,894 during the three months ended March 31, 1994. During this period, the Company sold mortgage loans with an aggregate principal balance of $1,155,432, primarily as collateral for mortgage securities. In the three months ended March 31, 1994, the Company recognized net gains of $5,327 on securitizations and sales of mortgage loans. Additionally, during the three months ended March 31, 1994, the Company deferred gains of $1,530 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 related taxes totaling $459 for the three months ended March 31, 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. 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 results have improved primarily from an increase in the net margin on its mortgage assets. This increase in net margin resulted primarily from the addition to the Company's portfolio of investments created by the Company's mortgage conduit operations. Lower overall mortgage loan originations in the market are anticipated for 1994 as compared to 1993 as a result of the recent increase in mortgage loan interest rates and the resulting decrease in mortgage loan refinancings. The Company expects that new loan products and other lines of business will reduce the impact on the Company of the overall lower level of mortgage loan originations in the market. Results of Operations Three Months Ended (amounts in thousands except per share March 31, ------------------------------ information) 1994 1993 ---- ---- Net margin on mortgage assets $ 13,262 $ 10,510 Net gain on sale of mortgage assets 6,841 5,059 Net income 15,500 12,499 Net income per share 0.80 0.76 Principal balance of mortgage loans funded 952,894 863,585 Three Months Ended March 31, 1994 Compared to Three Months Ended March 31, 1993 - ------------------------------------------------------------------------ The increase in the Company's earnings during the first three 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 earnings was partially offset by an increase in general and administrative expenses. The net margin on mortgage assets increased to $13.3 million for the three months ended March 31, 1994 from $10.5 million for the three months ended March 31, 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. The gain on sale of mortgage assets increased to $6.8 million for the three months ended March 31, 1994 from $5.1 million for the three months ended March 31, 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 Company incurred $4.8 million of general and administrative expenses for the three months ended March 31, 1994 as compared with $3.3 million during the three months ended March 31, 1993. The increase in general and administrative expenses is due primarily to the growth of the underwriting and risk management departments in late 1993. 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 March 31, ---------------------------- (amounts in thousands) 1994 1993 Average Effective Average Effective Balance Rate Balance Rate -------- --------- -------- ---------- Interest-earning assets : (1) Collateral for CMOs (2) $ 384,179 8.89 % $ 505,092 9.27 % Adjustable-rate mortgage securities 2,126,564 4.76 1,314,080 5.20 Fixed-rate mortgage securities 209,951 7.85 167,423 7.81 Other mortgage securities 74,841 12.97 36,097 19.28 Mortgage warehouse participations 103,456 5.53 118,405 4.97 ---------- ----- --------- ----- Total portfolio -related assets 2,898,991 5.77 2,141,097 6.59 Mortgage loans in warehouse 650,776 5.83 263,620 6.90 ---------- ----- --------- ----- Total interest -earning assets $ 3,549,767 5.78 % $ 2,404,717 6.62 % ========== ===== ========= ===== Interest-bearing liabilities: Portfolio-related liabilities: CMOs $ 394,540 8.15 % $ 514,282 8.55 % Repurchase agreements: Adjustable-rate mortgage securities 2,055,643 3.62 1,215,304 3.68 Fixed-rate mortgage securities 197,114 5.19 151,475 4.29 Other mortgage securities 11,214 3.71 6,652 3.85 Commercial paper 96,732 3.32 112,972 3.28 --------- ----- --------- ----- Total portfolio -related liabilities 2,755,243 4.37 2,000,685 4.96 Warehouse-related liabilities: Repurchase agreements 508,760 4.41 136,356 4.60 Notes payable 51,098 6.03 79,948 5.83 --------- ----- --------- ----- Total warehouse -related liabilities 559,858 4.56 216,304 5.06 --------- ----- --------- ----- Total interest-bearing liabilities $ 3,315,101 4.40 % $ 2,216,989 4.97 % ========= ===== ========= ==== Net interest spread 1.38 % 1.65 % ===== ==== Net yield on average interest earning assets 1.67 % 2.04 % ===== ===== - ------------------ (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 $12,632 and $20,841 for the three months ended March 31, 1994 and March 31, 1993, respectively. The decrease in net interest spread is primarily the result of the decrease in the spread on adjustable-rate mortgage securities. The decrease in the spread on adjustable-rate mortgage securities resulted from 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 these securities may increase as the mortgage loans underlying these securities reset to a level where the interest rate is not teased. Conversely, the spread on these securities could decrease further should the rates on the related repurchase borrowings 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 Ended March 31, 1994 Compared to Three Months Ended March 31, 1993 - ------------------------------------------------------------------------ The size of the Company's portfolio of mortgage investments at March 31, 1994 has increased as compared to March 31, 1993, through the addition of investments created through the Company's conduit operations and the purchase of mortgage investments. During the three months ended March 31, 1994, the Company added approximately $204.6 million principal amount of adjustable-rate mortgage securities, $8.8 million principal amount of fixed-rate mortgage securities and $0.5 million of other mortgage securities to its portfolio through its conduit operations. Also during the three months ended March 31, 1994, the Company purchased approximately $17.5 million principal amount of adjustable-rate mortgage securities, $10.7 million principal amount of fixed-rate mortgage securities and $16.0 million of other mortgage securities for its portfolio. A portion of these securities were financed through repurchase agreements with investment banking firms. Additionally, during the three months ended March 31, 1994, the Company sold $55.5 million principal amount of adjustable-rate securities and $5.7 million of other mortgage securities from its portfolio. During the three months ended March 31, 1993, the Company sold $150.4 million principal amount of fixed-rate mortgage securities from its portfolio. The Company realized net gains of $1.5 million and $0.8 million on the sale of mortgage securities for the three months ended March 31, 1994 and 1993. The net margin on the Company's portfolio of mortgage investments increased to $10.1 million for the three months ended March 31, 1994 from $8.7 million for the three months ended March 31, 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 are funded primarily by sales of commercial paper. An agreement with a bond guarantor and a syndicate of commercial banks provides 100% credit and liquidity support for the commercial paper and for the Company's obligations under such lines of credit. As of March 31, 1994, the Company had $185.0 million of such lines of credit and had advanced $94.6 million pursuant to such lines of credit. Under the Company's liquidity agreement, which terminates on May 9, 1995, such lines of credit are limited to $250 million. 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 multi-family mortgage loans and recently began to originate single family mortgage loans. Single-family Mortgage Operations Through its single-family mortgage operations, the Company purchases mortgage loans from approved sellers, primarily mortgage companies, savings and loan associations and commercial banks and, beginning in 1994, 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 single-family activity for the three months ended March 31, 1994 and 1993. Three Months Ended March 31, (amounts in thousands) 1994 1993 ----- ----- Principal amount of loans funded $ 952,894 $ 832,933 Principal amount securitized or sold 1,155,432 768,105 Investments added to portfolio from the single-family conduit, net of associated borrowings 19,837 16,028 Three Months Ended March 31, 1994 Compared to Three Months Ended March 31, 1993 - ------------------------------------------------------------------------ The increase in the funding volume of single-family loans for the three months ended March 31, 1994 as compared to the three months ended March 31, 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 $5.3 million for the three months ended March 31, 1994 from $4.3 million for the three months ended March 31, 1993. This increase was primarily the result of the increased volume of mortgage loans securitized or sold during the period. During the first quarter 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. Multi-family Mortgage Operations The Company originates multi-family mortgage loans secured by properties that have qualified for low income housing tax credits pursuant to Section 42 of the Internal Revenue Code. These tax credits, which are available generally for ten years beginning when the property was placed in service, provide a substantial incentive for the borrower not to default on the mortgage loan, as the borrower would lose upon foreclosure any future tax credits relating to the property and could face recapture of a portion of the tax credits already taken. At March 31, 1994, mortgage loans in warehouse included multi-family mortgage loans with an aggregate principal balance of $11.2 million and the Company had commitments outstanding to fund an additional $26.1 million in such mortgage loans. 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 March 31, 1994 the allowance totaled $5.5 million and was included in other liabilities. The Company is exposed to losses to the extent that mortgage loans which were in warehouse at the time of the January 1994 earthquake in the Los Angeles area are secured by properties that were damaged as a result of the earthquake. The Company does not expect that any losses due to this earthquake will have a material effect on its financial position or results of operations. 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 three months ended March 31, 1994 was approximately $16.3 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 presently has revolving committed repurchase agreements of $300 million and $100 million maturing on June 25, 1994 and September 12, 1994, respectively. 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 March 31, 1994 the Company had borrowed $481.2 million under these credit facilities. The lines of credit contain certain financial covenants which the Company met as of March 31, 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 March 31, 1994, the Company had outstanding obligations of $2.3 billion under such repurchase agreements, of which $2.1 billion, $196.1 million and $8.4 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 rated classes that are subordinate to related AAA rated classes from the same series of securities. Such AA rated classes have less liquidity than securities that are not subordinated, and the value of such classes is more dependent on the credit rating of the related mortgage pool insurer or the credit performance of the underlying mortgage loans. As a result of either changes in interest rates, a downgrade of a mortgage pool 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. An agreement with a consortium of commercial banks provides 100% liquidity support for the commercial paper and for the Company's obligation to fund on such lines of credit. Based on such liquidity support, the Company's commercial paper has been rated in the highest category by two nationally recognized rating agencies. 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 quarter ended March 31, 1994 the Company issued 287,213 additional shares of common stock through its Dividend Reinvestment Plan. Total net proceeds of $7.9 million were used for general corporate purposes. Subsequent Events The rapid increase in market interest rates since May 5, 1994, may adversely impact both the Company's net margin income during the remainder of 1994 and the Company's volume of mortgage loans funded. In particular, the interest rates that the Company pays under its various borrowing arrangements may increase faster than the interest rates the Company earns on its adjustable-rate mortgage securities or mortgage loans in warehouse. Additionally, the increase in mortgage interest rates will reduce overall mortgage origination activity in the market, which may reduce the Company's ability to purchase or originate mortgage loans at a volume level consistent with the $4.0 billion funded during 1993. To the extent that the Company experiences a lower net margin and a lower volume of mortgage loans funded, the Company would likely have lower income on a quarterly basis during the remainder of 1994 than during the first quarter of 1994. Because the Company's dividend is based on taxable income and the Company had a taxable income carryover of $0.45 per share from 1993, the Company believes that a temporary reduction in earnings would not necessitate a reduction in the current dividend level. 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, President (authorized officer of registrant) ------------------------------- Lynn K. Geurin, Executive Vice President and Chief Financial Officer (principal accounting officer) Dated: May 16, 1994 EX-99 2 EXHIBIT 99 Exhibit 99.1 ANALYSIS OF PROJECTED YIELD This presentation contains an analysis of the projected yield on the Company's mortgage investments as of March 31, 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; 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 March 31, 1994 and December 31, 1993 and can be summarized as follows (amounts in thousands): March 31, December 31, 1994 (2) 1993 --------- ------------ Collateral for CMOs, net of CMO liabilities $ 3,346 $ 8,403 --------- ----------- Adjustable-rate mortgage securities, net (1) 140,479 132,401 --------- ----------- Fixed-rate mortgage securities, net (1) 14,216 14,520 --------- ----------- Other mortgage securities: Mortgage residual interests 41,501 22,900 ----------- ----------- Mortgage derivative securities 38,023 37,494 ----------- ----------- Other mortgage securities subtotal 79,524 60,394 ----------- ----------- Mortgage warehouse participations, net of related liabilities 9,081 9,393 ----------- ------------ Net investment $ 246,646 $ 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 March 31, 1994 the discount totaled $16.4 million on adjustable-rate mortgage securities and $2.0 million on fixed-rate mortgage securities. Amounts exclude certain first-loss class securities retained by the Company from mortgage securties for which a senior/ subordinated security structure is used as a primary source of credit enhancement. (2) Amounts exclude adjustments related to unrealized gains and losses on available-for-sale mortgage investments in accordance with the Statement of Financial Accounting Standards No.115. The following tables list the Company's various investments (and related information) as of March 31, 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 (3,043) RAC Four, Series 77 Loans 9.55 1,690 RMSC Series 89-4A Loans 10.60 257 (89-4A&B) RMSC Series 89-4B Loans 10.59 RMSC Series 91-2 Loans 9.81 909 RMSC Series 92-12 Loans 8.10 1,333 RMSC, 4 Misc. Series Loans 11.18 46 RAC Four, 26 Misc. Series Various 9.90 2,154 ------ Total $ 3,346 ========= - --------------------- (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 March 31, 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 $ 376,290 3.78-5.23%(A) $ 21,594 FNMA and FHLMC Pools, various 136,372 3.85-5.61 (B) 7,920 FNMA and FHLMC Pools, various 6,136 3.85-5.61 (C) 347 LIBOR ARM Trust 1991-19, Class B 40,01 5.60 (A) 2,298 LIBOR ARM Trust 1992-1, Class B 40,350 5.55 (A) 2,223 LIBOR ARM Trust 1992-4, Class B 59,940 5.57 (A) 3,314 LIBOR ARM Trust 1992-6, Class B 70,109 5.61 (A) 3,994 LIBOR ARM Trust 1992-8, Class B 105,208 5.54 (A) 6,018 LIBOR ARM Trust 1992-10, Class B 32,945 5.50 (A) 1,884 RMSC, AHF 1989-1 Trust, Class A-2 7,051 5.61 (B) 399 RMSC, Series 1991-5 55,445 6.26 (A) 3,058 RMSC, Series 1991-7, Class B 48,003 5.85 (A) 2,767 RMSC, Series 1991-11 69,160 5.70 (A) 3,961 RMSC, Series 1991-12, Class B 45,983 5.65 (A) 2,639 RMSC, Series 1991-15, Class B 39,972 5.73 (A) 2,293 RMSC, Series 1991-16, Class B 57,109 5.82 (A) 3,275 RMSC, Series 1991-17, Class B 39,523 5.63 (A) 2,269 RMSC, Series 1992-5 81,407 5.74 (A) 4,665 RTC M-1, A-4 410 7.01 (C) 23 RTC M-6, A-1, A-2 40,238 5.59, 5.68 (C) 2,326 SMSC, Series 1992-1, Class B 5,000 5.55 (A) 285 SMSC, Series 1992-4, Class B 55,900 5.47 (A) 3,157 SMSC, Series 1992-6, Class B 60,193 5.41 (A) 3,415 SMSC, Series 1993-1, Class B-1, B-2 9,963 5.59, 5.53 (A) 570 SMSC, Series 1993-3, Class A-2, B-2 112,103 5.55 (A) 6,410 SMSC, Series 1993-5, Class A-2, B-2 67,169 5.29 (A) 3,866 SMSC, Series 1993-6, Class B 16,951 5.11 (A) 971 SMSC, Series 1993-7, Class B 30,147 4.99 (A) 1,725 SMSC, Series 1993-9, Class A-2, B-2 96,560 4.74 (A) 5,563 SMSC, Series 1993-11 147,681 3.66 (A) 8,530 SMSC, Series 1994-1, Class A, B 98,082 3.89 (A) 5,652 SMSC, Series 1994-3, Class M 44,121 4.00 (A) 2,380 LIBOR Cap Agreements (5) 20,688 ------- Total $ 140,479 ======== (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 March 31, 1994. (3) Pass-through rate as of March 31, 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 Amount Cap 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 $ 1,172 9.60 % $ 720 RMSC, various series 21,004 8.19 1,285 (3) RMSC, various series 3,517 10.02 227 (3) RMSC, Series 91-2,Class 2-B (4) 11,672 10.00 1,513 (3) SMSC, Series 1993-3, Class A-1, B-1 (4) 82,364 6.75 5,103 (3) SMSC, Series 1993-5, Class A-1, B-1 (4) 53,262 6.51 3,293 (3) SMSC, Series 1993-9, Class A-1, B-1 (4) 32,240 6.09 1,993 (3) LIBOR Cap Agreements(5) 82 -------- Total $ 14,216 ========== (1) As of March 31, 1994. (2) Equal to the outstanding principal balance of the securities, plus any unamortized premiums and net of any unamortized discounts at March 31, 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 March 31, 1994. (4) These series become adjustable-rate in 1995-1998. (5) The Company has purchased various LIBOR cap agreements in regard to the repurchase borrowings on SMSC Series 1993-3, Series 1993-5 and Series 1993-9. Pursuant to the cap agreements, the Company will receive additional cash flows should six-month LIBOR increase above certain levels ranging from 6.58%-6.75%. The aggregate notional amount of these cap agreements was $16 million at March 31, 1994. 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 % $ 1,585 GMS, Series 1994-1 FNMA 100.00 3.76 2,032 GMS, Series 1994-2 FHLMC 100.00 4.11 3,280 GMS, Series 1994-3 FHLMC 100.00 3.93 2,739 LIBOR ARM Trust 1991-19 Loans 100.00 5.60 298 LIBOR ARM Trust 1992-1 Loans 100.00 5.46 329 LIBOR ARM Trust 1992-4 Loans 100.00 5.51 374 ML Trust XI FHLMC 49.00 8.50 739 NMF, Series 1994-1 FNMA 100.00 3.83 6,281 NMF, Series 1994-2 FHLMC 100.00 3.80 1,654 NMF, Series 1994-3 FHLMC 100.00 3.90 2,538 RAC Four, Series 39 FHLMC 49.90 10.20 487 RAC Four, Series 62 GNMA 30.00 10.00 451 RAC Four, Series 73 GNMA 55.00 11.50 4,637 RAC Four, Series 74 GNMA 23.60 10.50 1,759 RAC Four, Series 75 GNMA 36.00 9.50 1,336 RAC Four, 22 Misc. Series Various Various 11.54 400 RMSC, Series 1991-7 Loans 100.00 6.01 436 RMSC, Series 1991-12 Loans 100.00 6.59 21 RMSC, Series 1991-15 Loans 100.00 6.67 106 RMSC, Series 1991-16 Loans 100.00 6.79 5 RMSC, Series 1991-17 Loans 100.00 5.62 97 Shearson Lehman, Series K FNMA 50.00 10.00 181 LCPI Various 100.00 9.00 9,647 LIBOR Cap Agreements (3) 89 ------ Total $ 41,501 ========= - -------------------- (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 March 31, 1994. (3) The Company has purchased LIBOR cap agreements through June 1994 in regard to portions of the exposure to higher short-term interest rates of certain of the mortgage residual interests. These cap agreements reduce the Company's risk should one-month LIBOR exceed 8.50%. The aggregate notional amount of these cap agreements was $150 million at March 31, 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 % $ 92 FNMA Trust 29 I/O GNMA 9.50 8,580 FNMA Trust 151 I/O FNMA 10.00 1,677 Interest-only strips, various I/O Loans Various 5,432 LIBOR ARM Trust 1992-8, Class I I/O Loans 5.54 789 LIBOR ARM Trust 1992-9, Class I I/O Loans 5.46 561 LIBOR ARM Trust 1992-10, Class I I/O Loans 5.41 474 Principal-only strips, various P/O Loans Various 4,281 RMSC, Series 89-6, 6F I/O Loans 10.62 281 RMSC, Series 1989-7A, A-2 I/O Loans 10.33 70 RMSC, Series 1989-7B, B-2 I/O Loans 10.39 154 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 8.96 254 RMSC, Series 1992-2, Class I I/O Loans 9.07 3,500 RMSC, Series 1992-2, Class P P/O Loans 8.47 46 RMSC, Series 1992-18, Class P P/O Loans 8.18 148 RMSC, Series 1992-18, Class X I/O Loans 8.18 1,232 SMSC, Series 1992-1, Class I I/O Loans 5.46 478 SMSC, Series 1992-2, Class I I/O Loans 5.53 527 SMSC, Series 1992-3, Class I I/O Loans 5.56 259 SMSC, Series 1992-4, Class I I/O Loans 5.46 288 SMSC, Series 1993-8, Class 1I, 2I I/O Loans 7.97 1,271 SMSC, Series 1993-10, Class I I/O Loans 7.72 2,843 SMSC, Series 1994-4, Class 1I, 2I I/O Loans 7.09 4,374 ------- Total $ 38,023 ========== - --------------------- (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 March 31, 1994. The Company owned 100% of each such security, except for the FNMA Trusts. Mortgage Warehouse Participations (Dollars in thousands) Description Weighted Average Coupon (1) Net Investment (2) - ----------- -------------------------- ------------------ Various Participations 5.64% $ 9,081 - ---------------------- (1) Based upon the weighted average rate on each participation as of March 31, 1994. (2) Equal to equity invested in mortgage warehouse participations as of March 31, 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 April 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 March 31, 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 April 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 23.5% 22.6% 21.1% 18.7% 15.6% 11.9% 8.4% Case B 25.4 24.5 23.1 20.7 17.8 14.3 10.9 Case C 27.0 26.2* 24.7 22.5 19.6 16.3 13.1 Case D 28.5 27.6 26.2 24.0 21.3 18.2 15.1 Case E 29.8 28.9 27.6 25.6 22.9 19.9 16.8 Case F 31.0 30.1 28.8 26.7 24.3 21.4 18.3 Case G 32.0 31.1 29.9 27.9 25.7 22.8 19.6 The case most representative of short-term interest rates and prepayment rates as of April 1, 1994, is case C-II, represented by the "*." This "base case" is not in the center of the table due to the relatively low levels of short term interest rates and relatively high projected prepayment speeds as of March 31, 1994. The yields for each case expressed above are level yields relative to the Company's aggregate net investment of $246.6 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, and (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 2.5 years in Case C-II, the base case, and ranges from a high of 5.2 years in Case G-VII to a low of 2.2 years in Case A-I. The assumptions that are set forth below detail certain information with respect to the mortgage investments as of March 31, 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 April 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. 9.50 590 380 330 230 200 175 160 10.00 525 400 330 230 200 175 160 10.50 490 335 330 265 210 185 165 11.50 395 325 305 270 235 200 190 FNMA Certif. 9.00 685 430 310 225 200 185 175 9.50 590 450 365 250 220 195 175 10.00 590 450 370 295 240 215 190 FHLMC Certif. 8.50 670 465 270 220 200 190 180 10.00 580 445 390 305 255 230 215 10.25 565 435 390 320 260 235 220 10.50 555 430 390 335 265 240 225 Fixed-rate Mortgage Loans: MCA 1, Series 1 340 335 330 325 320 315 310 RAC Four, Series 77 565 435 390 320 260 235 220 RMSC, Series 1989-4A and 1989-4B 565 430 390 330 255 230 210 RMSC, Series 91-2** 435 370 300 235 170 100 70 RMSC, Series 92-12 730 430 240 205 190 180 175 * Case C is the case most representative of projected prepayment speeds as of April 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 26 22 18 14 10 6 2 LIBOR ARM Trust 1991-19 26 22 18 14 10 6 2 LIBOR ARM Trust 1992-1 26 22 18 14 10 6 2 LIBOR ARM Trust 1992-4 26 22 18 14 10 6 2 LIBOR ARM Trust 1992-6 26 22 18 14 10 6 2 LIBOR ARM Trust 1992-8 26 22 18 14 10 6 2 LIBOR ARM Trust 1992-10 26 22 18 14 10 6 2 RMSC, AHF 1989-1 40 36 32 28 26 22 18 RMSC, Series 1991-5 26 22 18 14 10 6 2 RMSC, Series 1991-7 28 24 20 16 12 8 4 RMSC, Series 1991-11 26 22 18 14 10 6 2 RMSC, Series 1991-12 28 24 20 16 12 8 4 RMSC, Series 1991-15 28 24 20 16 12 8 4 RMSC, Series 1991-16 26 22 18 14 10 6 2 RMSC, Series 1991-17 26 22 18 14 10 6 2 RMSC, Series 1992-5 26 22 18 14 10 6 2 RTC M-1 15 13 10 7 5 5 5 RTC M-6 17 15 10 7 5 5 5 SMSC, Series 1992-4 26 22 18 14 10 6 2 SMSC, Series 1992-6 26 22 18 14 10 6 2 SMSC, Series 1993-1 26 22 18 14 10 6 2 SMSC, Series 1993-3** 26 22 18 14 10 6 2 SMSC, Series 1993-5** 26 22 18 14 10 6 2 SMSC, Series 1993-6 26 22 18 14 10 6 2 SMSC, Series 1993-7 26 22 18 14 10 6 2 SMSC, Series 1993-9** 26 22 18 14 10 6 2 SMSC, Series 1993-11 26 22 18 14 10 6 2 SMSC, Series 1994-1 26 22 18 14 10 6 2 SMSC, Series 1994-3 28 24 20 16 12 8 4 - ---------------------- * Case C is the case most representative of projected prepayment speeds as of April 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 April 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 2.750% 3.750% 4.750% 5.750% 6.750% 7.750% 8.750% Three-month 3.000 4.000 5.000 6.000 7.000 8.000 9.000 Six-month 3.375 4.375 5.375 6.375 7.375 8.375 9.375 COFI 2.987 3.687 4.387 5.087 5.787 6.487 7.187 1 Yr-CMT 3.500 4.500 5.500 6.500 7.500 8.500 9.500 Reinvestment Rates 2.375 3.375 4.375 5.375 6.375 7.375 8.375 - --------------------- * Case II is the case most representative of short-term interest rates as of April 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 March 31, 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 March 31, 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. 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. RAC Four - Ryland Acceptance Corporation Four. 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. -----END PRIVACY-ENHANCED MESSAGE-----