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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-9819
DYNEX CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Virginia 52-1549373
(State or other jurisdiction of incorporation (I.R.S. Employer I.D. No.)
or organization)
4551 Cox Road, Suite 300, Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 217-5800
Securities registered pursuant to Section 12(b)of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g)of the Act:
Title of each class Name of each exchange on which registered
Series A 9.75%Cumulative Convertible
Preferred Stock, $.01 par value Nasdaq National Market
Series B 9.55% Cumulative Convertible
Preferred Stock, $.01 par value Nasdaq National Market
Series C 9.73% Cumulative Convertible
Preferred Stock, $.01 par value Nasdaq National Market
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 90 days.
Yes _X__ No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of March 30, 2001, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $11,446,206 at a closing
price on The New York Stock Exchange of $1.00. Common stock outstanding as of
March 30, 2001 was 11,446,206 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be filed pursuant to Regulation
14A within 120 days from December 31, 2000, are incorporated by reference into
Part III.
DYNEX CAPITAL, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
Item 1. BUSINESS........................................................ 3
Item 2. PROPERTIES..................................................... 11
Item 3. LEGAL PROCEEDINGS.............................................. 11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 12
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................................ 12
Item 6. SELECTED FINANCIAL DATA........................................ 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 14
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................... 26
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 27
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE......................... 27
PART III
Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 27
Item 11.EXECUTIVE COMPENSATION......................................... 28
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.......................................... 28
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 28
PART IV
Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K........................................ 28
SIGNATURES............................................................. 31
Item 1. BUSINESS
GENERAL
Dynex Capital, Inc. (the "Company") was incorporated in the Commonwealth of
Virginia in 1987. The Company is a financial services company, which invests in
a portfolio of securities and investments backed principally by single family
mortgage loans, commercial mortgage loans and manufactured housing installment
loans. These loans were funded primarily by the Company's loan production
operations or purchased in bulk in the market. Historically, the Company's loan
production operations have included single family mortgage lending, commercial
mortgage lending and manufactured housing lending. Through its specialty finance
business, the Company also has provided for the purchase and leaseback of single
family model homes to builders and the purchase and management of delinquent
property tax receivables. Loans funded through the Company's production
operations have generally been pooled and pledged (i.e. securitized) as
collateral for non-recourse bonds ("collateralized bonds"), which provides
long-term financing for such loans while limiting credit, interest rate and
liquidity risk. The Company sold its single family mortgage lending business in
1996 due to changes in the business environment at that time.
Since early 1999, the Company has focused its efforts on conserving its
capital base and repaying its outstanding recourse borrowings. The Company's
ability to execute its fundamental business plan and strategies has been
negatively impacted since the fourth quarter of 1998, when the fixed income
markets were significantly disrupted by the collapse of certain foreign
economies. Specifically, as a result of this disruption, investors in fixed
income securities generally demanded higher yields in order to purchase
securities issued by specialty finance companies and ratings agencies began
imposing higher credit enhancement levels and other requirements on
securitizations sponsored by specialty finance companies like Dynex. The net
result of these changes in the market reduced the Company's ability to compete
against larger finance companies, investment banks and depository institutions,
which generally have not been penalized by investors or ratings agencies when
issuing fixed income securities. In addition, access to interim lenders that
provided short-term funding to support the accumulation of loans for
securitization was reduced and terms of existing facilities were tightened.
These lenders began to pressure the Company to sell or securitize assets to
repay amounts outstanding under the various facilities. As a result of the
difficult market environment for specialty finance companies, during 1999 the
Company sold both its manufactured housing lending/servicing operations and
model home purchase/leaseback business. Additionally, the Company began to
phase-out its commercial lending operations; this phase-out was completed by the
end of 2000, including the sale of the commercial loan servicing portfolio for
loans that had been securitized.
On a long-term basis, the Company believes that competitive pressures,
including competing against larger companies which generally have significantly
lower costs of capital and access to both short-term and long-term financing
sources, will effectively keep specialty finance companies like Dynex from
earning an adequate risk-adjusted return on its invested capital. As of December
31, 2000, the Company's business operations were essentially limited to the
management of its investment portfolio and the active collection of its
portfolio of delinquent property tax receivables. The Company currently has no
loan origination operations, and for the foreseeable future does not intend to
purchase loans or securities in the secondary market.
The Company's principal source of earnings historically has been its net
interest income from its investment portfolio. The Company's investment
portfolio consists primarily of collateral for collateralized bonds,
asset-backed securities and delinquent property tax receivables. The Company
funds its investment portfolio with both borrowings and funds raised from the
issuance of equity. For the portion of the investment portfolio funded with
borrowings, the Company generates net interest income to the extent that there
is a positive spread between the yield on the interest-earning assets and the
cost of borrowed funds. The cost of the Company's borrowings may be increased or
decreased by interest rate swap, cap or floor agreements. For the other portion
of the investment portfolio funded with equity, net interest income is primarily
a function of the yield generated from the interest-earning asset. Over the past
two years, net interest margin has declined materially due to the decline in
average earning assets, higher provisions for credit losses, and the increase in
short-term interest rates in 2000.
References to "Dynex REIT" herein mean the parent company and its
wholly-owned subsidiaries, consolidated for financial reporting purposes, while
references to the "Company" mean the parent company, its wholly-owned
subsidiaries and Dynex Holding, Inc. ("DHI") and its subsidiaries, which are not
consolidated for financial reporting or tax purposes. The Company's loan
production and servicing activities were operated by subsidiaries of DHI. Prior
to December 31, 2000, all of the outstanding non-voting preferred stock of DHI
(which represented a 99% economic interest in DHI) was owned by Dynex REIT and
all of the outstanding voting common stock of DHI (which represented a 1%
economic interest in DHI) was owned by certain senior officers of Dynex REIT. In
December 2000, certain DHI subsidiaries were sold to Dynex REIT, and DHI was
liquidated pursuant to a plan of liquidation as approved by its board of
directors. Up until the time of its liquidation, DHI was accounted for in the
accompanying financial statements in a manner similar to the equity method.
Dynex REIT has elected to be treated as a real estate investment trust
("REIT") for federal income tax purposes under the Internal Revenue Code of
1986, as amended, and, as such, must distribute substantially all of its taxable
income to shareholders. Provided that Dynex REIT meets all of the proscribed
Internal Revenue Code requirements, Dynex REIT will generally not be subject to
federal income tax.
Recent Events
As stated above, since early 1999 the Company has focused on repaying its
outstanding recourse borrowings. During 2000, the Company paid down on-balance
sheet recourse borrowings by $403 million and off-balance sheet liabilities
(such as letters of credit and conditional repurchase obligations) of $180
million. On March 26, 2001, the Company extinguished its credit facility with a
consortium of commercial banks and on March 30, 2001, repurchased a net $29.5
million of its Senior Notes due July 2002 (the "July 2002 Notes") pursuant to a
Purchase Agreement with a majority of the holders of the July 2002 Notes as
discussed below. After this repurchase, as of March 30, 2001, the Company's
outstanding recourse debt or credit obligations were $68 million of the July
2002 Notes and $29.2 million of reverse repurchase agreements. The Company
believes it is in full compliance with the terms of both the July 2002 Notes and
the reverse repurchase facility.
The Company and a majority of the holders of the July 2002 Notes approved
an amendment (the "Amendment") to the related indenture whereby the remaining
July 2002 Notes were secured (subject to any prior security interests) by
substantially all of the assets of the Company. See Note 8 in the accompanying
consolidated financial statements for further information on the Amendment and
the Purchase Agreement. The Amendment allows the Company to make distributions
on its capital stock in an amount not to exceed the sum of (a) $26 million, (b)
the cash proceeds of any "permitted subordinated indebtedness", (c) the cash
proceeds of the issuance of any "qualified capital stock", and (d) any
distributions required in order for the Company to maintain its REIT status.
The Company terminated on January 26, 2001 an Agreement and Plan of Merger
with California Investment Fund, LLC ("CIF"), whereby CIF was to purchase all of
the equity securities of the Company for $90 million (the "Merger Agreement").
See Item 3 for further information as to the Merger Agreement. The Board of the
Company continues to evaluate various courses of action to improve shareholder
value given the depressed prices of the Company's preferred and common stocks,
and to provide greater liquidity for such stocks. Such alternatives include,
among others: (i) an outright sale of the Company to a third party; (ii) the
sale to a third party of either "permitted subordinated indebtedness" or
"qualified capital stock"; and (iii) one or more distributions to shareholders
as permitted by the Amendment. Distributions as defined in the Amendment include
dividends, redemptions, repurchases, retirement, defeasance or other acquistion.
The Company expects to inform shareholders of the Company's contemplated course
of action by May 31, 2001. As of March 30, 2001, the Company had unrestricted
cash of approximately $21 million.
The Company expects its first quarter results to be favorably impacted by
the recent declines in short-term interest rates, the discount realized by the
Company on the purchase of the $29.4 million of the July 2002 Notes, and the
resolution of a matter related to the Company's prior relationship with AutoBond
Acceptance Corporation ("AutoBond"). While the overall impact on earnings of
these items is expected to be approximately $10 million, the Company at this
time does not know whether this may be offset by provisions for credit losses or
other items. However, the Company did not incur any material losses from the
sale of loans or tax-exempt bond positions during the first quarter of 2001. As
of March 30, 2001, the Company had completed all but approximately $4 million of
its planned asset sales.
Business Focus and Strategy
The Company has historically strived to create a diversified investment
portfolio that in the aggregate generates stable income for the Company in a
variety of interest rate environments and preserves the capital base of the
Company. The Company focused on markets where it believed that it could generate
investments for its portfolio at a lower cost than if these investments were
purchased in the secondary market. Over the past five years, the markets that
the Company has participated in have included single family mortgage lending,
commercial mortgage lending, manufactured housing lending, and various specialty
finance businesses, including purchase/leaseback of model homes and the purchase
and collection of delinquent property tax receivables. As previously indicated,
the Company has either sold or phased-out its various lending businesses, and is
now primarily focused on collecting its delinquent property tax receivables,
reducing its remaining recourse debt, and improving shareholder value.
The Company has historically sought to generate growth in earnings and
dividends per share in a variety of ways, including (i) adding investments to
its portfolio when opportunities in the market are favorable; (ii) developing
production capabilities to originate and acquire financial assets in order to
create attractively priced investments for its portfolio, as well as control the
underwriting and servicing of these assets; and (iii) increasing the efficiency
with which the Company utilizes its equity capital over time. To increase
potential returns to shareholders, the Company had employed leverage through the
use of secured borrowings and repurchase agreements to fund a portion of its
investment portfolio. Over the past two years, the Company's investment
portfolio has declined as a result of sales and paydowns, the Company has sold
or phased-out of the majority of its production operations, and has reduced
leverage through the paydown of debt. Over the past two years, the Company's
return on shareholders' equity has been negative.
Prior Lending Operations
The Company generally has been a vertically integrated lender by performing
the sourcing, underwriting, funding and servicing of loans to maximize
efficiency and provide superior customer service. The Company generally has
focused on loan products that maximize the advantages of the REIT tax election
and has emphasized direct relationships with the borrower and minimized, to the
extent practical, the use of origination intermediaries. The Company has
historically utilized internally generated guidelines to underwrite loans for
all product types and maintained centralized loan pricing, and performed the
servicing function for loans on which the Company has credit exposure. As of
December 31, 2000, other than the servicing of delinquent property tax
receivables and the remaining loans held for sale, the Company no longer
services any of its previously originated/purchased loans.
The Company's loan funding activity during 2000 consisted of the funding of
approximately $29.5 million related to multifamily loan commitments and the
purchase of approximately $7.6 million of property tax receivables under a
previously executed contract to purchase.
During 1999, the Company funded $224.3 million of commercial loans
consisting of $136.7 million of multifamily construction loans, $57.3 million of
multifamily permanent loans and $30.3 million in other types of commercial
loans. The majority of the multifamily loans consist of mortgage loans on
properties that have been allocated low income housing tax credits.
Prior to the sale of the manufactured housing lending operations to Bingham
Financial Services Corporation ("Bingham") (NASDAQ: BSFC) in December 1999, the
Company funded $494.1 million of manufactured housing loans during 1999. The
Company sold $77.3 million of such loans to Bingham as part of the sale
transaction. The Company securitized a total of $601.8 million of its
manufactured housing loans (including current and prior years' production)
through the issuance of collateralized bonds during 1999.
During 1999, the Company funded $140.8 million through its specialty
finance division, consisting of $120.3 million of model homes purchase/leaseback
transactions before the sale of this operation in November 1999, and $20.5
million of delinquent property tax receivable purchases. As previously
mentioned, the Company purchased $7.6 million of delinquent property tax
receivables in 2000.
At December 31, 2000, the Company owned the right to call ARM and
fixed-rate mortgage pass-through securities previously issued and sold by the
Company once the outstanding balance of such securities reaches 10% or less of
the original amount issued. These securities are expected to meet their "call
thresholds" beginning in 2001. The aggregate callable balance of such securities
at the time of the call is approximately $368 million, representing a total of
22 securities. The Company may or may not elect to call one or more of these
securities at the time of eligibility. During 2000, four securities reached
their call triggers but the Company declined to call these securities based on
an analysis of the fair value of the underlying collateral.
Primary Servicing
The Company no longer services on a primary basis any of the assets
included in its investment portfolio other than loans held for sale and
delinquent property tax receivables. During 1997, the Company established a
servicing function in Pittsburgh, Pennsylvania, to manage the collection of the
Company's delinquent property tax receivables. The Company's responsibilities as
servicer include contacting property owners, collecting voluntary payments, and
foreclosing, rehabilitating and selling remaining properties if collection
efforts fail. During 1999, the Company also established a satellite servicing
office in Cleveland, Ohio. As of December 31, 2000, the Company had a servicing
portfolio with an aggregate redemptive value of $147.5 million of delinquent
property tax receivables in seven states, but with the majority in Pennsylvania
and Ohio.
Master Servicing
The Company performs the function of master servicer for certain of the
securities it has issued. The master servicer's function typically includes
monitoring and reconciling the loan payments remitted by the servicers of the
loans, determining the payments due on the securities and determining that the
funds are correctly sent to a trustee or investors for each series of
securities. Master servicing responsibilities also include monitoring the
servicers' compliance with its servicing guidelines. As master servicer, the
Company is paid a monthly fee based on the outstanding principal balance of each
such loan master serviced or serviced by the Company as of the last day of each
month. As of December 31, 2000, the Company master serviced $2.3 billion in
securities.
Securitization
Since late 1995, the Company's predominate securitization structure has
been collateralized bonds. Generally, for accounting and tax purposes, the loans
and securities financed through the issuance of collateralized bonds are treated
as assets of the Company, and the collateralized bonds are treated as debt of
the Company. The Company earns the net interest spread between the interest
income on the securities and the interest and other expenses associated with the
collateralized bond financing. The net interest spread is directly impacted by
the credit performance of the underlying mortgage loans, by the level of
prepayments of the underlying mortgage loans and, to the extent collateralized
bond classes are variable-rate, may be affected by changes in short-term rates.
The Company's investment in the collateralized bonds is typically referred to as
the overcollateralization.
Investment Portfolio
The core of the Company's earnings is derived from its investment
portfolio. The Company's strategy for its investment portfolio has been to
create a diversified portfolio of high quality assets that in the aggregate
generates stable income in a variety of interest rate and prepayment
environments and preserves the Company's capital base. In many instances, the
investment strategy has involved not only the creation of the asset, but also
structuring the related securitization or borrowing to create a stable yield
profile and reduce interest rate and credit risk.
Credit Quality. The Company has historically sought to originate high
quality loans, as the Company generally retains the subordinate or first loss,
non-investment grade class or classes on loans that it has securitized,
generally in the form of overcollateralization on its collateralized bond
security structure. On securities where the Company has retained a portion of
the credit risk below the investment grade level (BBB), the Company's exposure
to credit losses below the investment grade level was $253.7 million as of
December 31, 2000. This credit exposure is reduced by reserves, discounts and
third party guarantees of $134.5 million. Credit risk retained on the Company's
investment portfolio is discussed further below.
Composition. The following table presents the balance sheet composition of
the investment portfolio at fair market value by investment type and the
percentage of the total investments as of December 31, 2000 and 1999.
- --------------------------------------------- ---------------------------------------------------------------
As of December 31,
2000 1999
------------------------------- -------------------------------
(amounts in thousands) Balance % of Total Balance % of Total
- --------------------------------------------- ----------------- ------------- ----------------- -------------
Investments:
Collateral for collateralized bonds $ 3,042,158 97.8% $ 3,700,714 90.0%
Securities:
Funding Notes and Securities - - 95,027 2.3
Adjustable-rate mortgage securities 4,266 0.1 11,410 0.3
Fixed-rate mortgage securities 1,400 0.0 9,623 0.2
Derivative and residual securities 3,698 0.1 11,651 0.3
Other investments 44,010 1.4 48,927 1.2
Loans held for sale 17,376 0.6 232,384 5.7
- --------------------------------------------- ----------------- ------------- ----------------- -------------
Total investments $ 3,112,908 100% $ 4,111,356 100%
- --------------------------------------------- ----------------- ------------- ----------------- -------------
Collateral for collateralized bonds. Collateral for collateralized bonds
represents the single largest investment in the Company's portfolio. Collateral
for collateralized bonds is composed primarily of securities backed primarily by
adjustable-rate and fixed-rate mortgage loans secured by first liens on single
family homes, fixed-rate mortgage loans secured by multifamily residential
housing properties and commercial properties, manufactured housing installment
loans secured by either a UCC filing or a motor vehicle title, and property tax
receivables. Interest margin on the net investment in collateralized bonds
(defined as the principal balance of collateral for collateralized bonds less
the principal balance of the collateralized bonds outstanding) is derived
primarily from the difference between (i) the cash flow generated from the
collateral pledged to secure the collateralized bonds and (ii) the amounts
required for payment on the collateralized bonds and related insurance and
administrative expenses. Collateralized bonds are generally non-recourse to the
Company. The Company's yield on its net investment in collateralized bonds is
affected primarily by changes in interest rates, prepayment rates and credit
losses on the underlying loans. The Company may retain for its investment
portfolio certain classes of the collateralized bonds issued and pledge such
classes as collateral for repurchase agreements.
ARM securities. Another segment of the Company's portfolio is the
investments in ARM securities. The interest rates on the majority of the
Company's ARM securities reset every six months and the rates are subject to
both periodic and lifetime limitations. Generally, the Company finances a
portion of its ARM securities with repurchase agreements, which have a fixed
rate of interest over a term that ranges from 30 to 90 days and, therefore, are
not subject to repricing limitations. As a result, the net interest margin on
the ARM securities could decline if the spread between the yield on the ARM
security versus the interest rate on the repurchase agreement was reduced.
Fixed-rate mortgage securities. Fixed-rate mortgage securities consist of
securities that have a fixed-rate of interest for specified periods of time. The
Company's yields on these securities are primarily affected by changes in
prepayment rates. Such yields will decline with an increase in prepayment rates
and will increase with a decrease in prepayment rates. The Company generally
borrows against its fixed-rate mortgage securities through the use of repurchase
agreements. Additionally, the net interest margin the Company realizes on its
fixed-rate mortgage securities will be subject to the spread between the yield
on the fixed-rate mortgage securities and the effective interest rate on the
repurchase agreements. The effective interest rates on the repurchase agreements
generally reset within 30-day intervals.
Derivative and residual securities. Derivative and residual securities
consist primarily of interest-only securities ("I/Os"), principal-only
securities ("P/Os") and residual interests which were either purchased or were
created through the Company's production operations. An I/O is a class of a
collateralized bond or a mortgage pass-through security that pays to the holder
substantially all interest. A P/O is a class of a collateralized bond or a
mortgage pass-through security that pays to the holder substantially all
principal. Residual interests represent the excess cash flows on a pool of
mortgage collateral after payment of principal, interest and expenses of the
related mortgage-backed security or repurchase arrangement. Residual interests
may have little or no principal amount and may not receive scheduled interest
payments. The yields on these securities are affected primarily by changes in
prepayment rates and by changes in short-term interest rates.
Other investments. Other investments consists primarily of an installment
note receivable received in connection with the sale of the Company's single
family mortgage operations in May 1996, and property tax receivables.
Loans held for sale. As of December 31, 2000, all loans are held for sale
and consist principally of multifamily permanent and construction mortgage
loans. Since these loans are held for sale, the loans are carried at the lower
of cost or market.
Investment Portfolio Risks
The Company is exposed to several types of risks inherent in its investment
portfolio. These risks include credit risk (inherent in the loans before
securitization and the security structure after securitization),
prepayment/interest rate risk (inherent in the underlying loan) and margin call
risk (inherent in the security if it is used as collateral for recourse
borrowings).
Credit Risk. Credit risk is the risk of loss to the Company from the
failure by a borrower (or the proceeds from the liquidation of the underlying
collateral) to fully repay the principal balance and interest due on a loan. A
borrower's ability to repay, or the value of the underlying collateral, could be
negatively influenced by economic and market conditions. These conditions could
be global, national, regional or local in nature. When a loan is funded and
becomes part of the Company's investment portfolio, the Company has all of the
credit risk on the loan should it default. Upon securitization of the pool of
loans, the credit risk retained by the Company is generally limited to the net
investment in collateralized bonds and subordinated securities. The Company
provides for reserves for expected losses based on the current performance of
the respective pool of loans; however, if losses are experienced more rapidly
due to market conditions than the Company has provided for in its reserves, the
Company may be required to provide for additional reserves for these losses.
The Company evaluates and monitors its exposure to credit losses and has
established reserves and discounts for probable credit losses based upon
anticipated future losses on the loans, general economic conditions and
historical trends in the portfolio. Generally the Company considers its credit
exposure to include securities and overcollateralization rated below
investment-grade. As of December 31, 2000, the Company's credit exposure on
securities rated below investment grade or as to overcollateralization was
$253.7 million. The amount of ultimate losses from this credit exposure is
reduced by on-balance sheet reserves and discounts of $104.2 million, and third
party guarantees of an amount up to $30.3 million. These amounts exclude
investments that are not securitized and therefore are not rated. Such
investments include loans held for sale which are carried at the lower of cost
or market, and delinquent property tax receivables which are not securitized.
The Company is currently engaged in a dispute with the counterparty to the
$30.3 million in reimbursement guarantees. Such guarantees are payable when
cumulative loss trigger levels are reached on certain of the Company's
single-family mortgage loan securitizations. Currently, these trigger levels
have been reached on four of the Company's securities, and the Company has made
claims under the reimbursement guarantees in amounts approximating $1.2 million.
The counterparty has denied payment on these claims, citing various deficiencies
in loan underwriting which would render these loans and corresponding claims
ineligible under the reimbursement agreements. The Company disputes this
classification and is pursuing this matter through court-ordered arbitration.
Prepayment/Interest Rate Risk. The interest rate environment may also
impact the Company. For example, in a rising rate environment, the Company's net
interest margin may be reduced, as the interest cost for its funding sources
(collateralized bonds, repurchase agreements, and committed lines of credit)
could increase more rapidly than the interest earned on the associated asset
financed. The Company's funding sources are substantially based on the one-month
London InterBank Offered Rate ("LIBOR") and reprice at least monthly, while the
associated assets are principally six-month LIBOR or one-year Constant Maturity
Treasury ("CMT") based and generally reprice every six-to-twelve months. In a
declining rate environment, net interest margin may be enhanced for the opposite
reasons. However, in a period of declining interest rates, loans in the
investment portfolio will generally prepay more rapidly (to the extent that such
loans are not prohibited from prepayment), which may result in additional
amortization expense of asset premium. In a flat yield curve environment (i.e.,
when the spread between the yield on the one-year Treasury security and the
yield on the ten-year Treasury security is less than 1.0%), single-family
adjustable rate mortgage ("ARM") loans tend to rapidly prepay, causing
additional amortization of asset premium. In addition, the spread between the
Company's funding costs and asset yields would most likely compress, causing a
further reduction in the Company's net interest margin. Lastly, the Company's
investment portfolio may shrink, or proceeds returned from prepaid assets may be
invested in lower yielding assets. The severity of the impact of a flat yield
curve to the Company would depend on the length of time the yield curve remained
flat.
Margin Call Risk. The Company uses repurchase agreements to finance a
portion of its investment portfolio. Margin call risk is the risk that the
Company will be required to provide additional collateral to the counterparties
of its secured recourse borrowings should the value of the asset pledged as
collateral for the recourse borrowings decline. The value of the pledged
security or loan is impacted by a variety of factors, including the perceived
credit risk of the security or loan, the type and performance of the underlying
loans in the security, current market volatility, and the general amount of
liquidity in the market place for the asset financed. In instances where market
volatility is high, there are credit issues on the collateral, or where overall
liquidity in the market has been reduced, the Company may experience margin
calls from its lenders. Depending on the Company's current liquidity position,
the Company may be forced to sell assets to meet margin calls, which may result
in losses. As of December 31, 2000, the Company had repurchase agreements
outstanding of $35.0 million with one counterparty, and had pledged securities
with an aggregate outstanding principal balance of $108.0..
FEDERAL INCOME TAX CONSIDERATIONS
General
Dynex REIT believes it has complied and, intends to comply in the future,
with the requirements for qualification as a REIT under the Internal Revenue
Code (the Code). To the extent that Dynex REIT qualifies as a REIT for federal
income tax purposes, it generally will not be subject to federal income tax on
the amount of its income or gain that is distributed to shareholders. DHI and
its subsidiaries are not qualified REIT subsidiaries and are not consolidated
with Dynex REIT for either tax or financial reporting purposes. Consequently,
the taxable income and loss of DHI and its subsidiaries is subject to federal
and state income taxes. Dynex REIT will include in taxable income amounts earned
by DHI only when DHI remits its after-tax earnings in the form of a dividend to
Dynex REIT.
DHI was liquidated pursuant to a plan of liquidation on December 31, 2000
under Sections 331 and 336 of the Code. The liquidation of DHI resulted in the
recognition of an estimated $17.5 million in capital gains for Dynex REIT, which
was wholly-offset by Dynex REIT's capital loss carryforwards. Dynex REIT is in
the process of finalizing its income tax return for 2000, and it currently
estimates that it has a net operating loss carryforward of approximately $120
million and capital loss carryforwards of $70.9 million at December 31, 2000.
The REIT rules generally require that a REIT invest primarily in real
estate-related assets, that its activities be passive rather than active and
that it distribute annually to its shareholders substantially all of its taxable
income. Dynex REIT could be subject to income tax if it failed to satisfy those
requirements or if it acquired certain types of income-producing real property.
Although no complete assurances can be given, Dynex REIT does not expect that it
will be subject to material amounts of such taxes.
Failure to satisfy certain Code requirements could cause Dynex REIT to lose
its status as a REIT. If Dynex REIT failed to qualify as a REIT for any taxable
year, it would be subject to federal income tax (including any applicable
alternative minimum tax) at regular corporate rates and would not receive
deductions for dividends paid to shareholders. As a result, the amount of any
after-tax earnings available for distribution to shareholders would decrease
substantially. While the Board of Directors intends to cause Dynex REIT to
operate in a manner that will enable it to qualify as a REIT in future taxable
years, there can be no certainty that such intention will be realized.
In December 1999, with an effective date of January 1, 2001, Congress
signed into law several changes to the provisions of the Code relating to REITs.
The most significant of these changes relates to the reduction of the
distribution requirement from 95% to 90% of taxable income and to the ability of
REITs to own a 100% interest in taxable REIT subsidiaries.
Qualification of the Company as a REIT
Qualification as a REIT requires that Dynex REIT satisfy a variety of tests
relating to its income, assets, distributions and ownership. The significant
tests are summarized below.
Sources of Income. To continue qualifying as a REIT, Dynex REIT must satisfy
two distinct tests with respect to the sources of its income: the "75% income
test" and the "95% income test". The 75% income test requires that Dynex REIT
derive at least 75% of its gross income (excluding gross income from prohibited
transactions) from certain real estate-related sources. In order to satisfy the
95% income test, 95% of Dynex REIT's gross income for the taxable year must
consist either of income that qualifies under the 75% income test or certain
other types of passive income.
If Dynex REIT fails to meet either the 75% income test or the 95% income
test, or both, in a taxable year, it might nonetheless continue to qualify as a
REIT, if its failure was due to reasonable cause and not willful neglect and the
nature and amounts of its items of gross income were properly disclosed to the
Internal Revenue Service. However, in such a case Dynex REIT would be required
to pay a tax equal to 100% of any excess non-qualifying income.
Nature and Diversification of Assets. At the end of each calendar quarter,
three asset tests must be met by Dynex REIT. Under the 75% asset test, at least
75% of the value of Dynex REIT's total assets must represent cash or cash items
(including receivables), government securities or real estate assets. Under the
"10% asset test", Dynex REIT may not own more than 10% of the outstanding voting
securities of any single non-governmental issuer, if such securities do not
qualify under the 75% asset test. Under the "5% asset test," ownership of any
stocks or securities that do not qualify under the 75% asset test must be
limited, in respect of any single non-governmental issuer, to an amount not
greater than 5% of the value of the total assets of Dynex REIT.
If Dynex REIT inadvertently fails to satisfy one or more of the asset tests
at the end of a calendar quarter, such failure would not cause it to lose its
REIT status, provided that (i) it satisfied all of the asset tests at the close
of a preceding calendar quarter and (ii) the discrepancy between the values of
Dynex REIT's assets and the standards imposed by the asset tests either did not
exist immediately after the acquisition of any particular asset or was not
wholly or partially caused by such an acquisition. If the condition described in
clause (ii) of the preceding sentence was not satisfied, Dynex REIT still could
avoid disqualification by eliminating any discrepancy within 30 days after the
close of the calendar quarter in which it arose.
Distributions. With respect to each taxable year, in order to maintain its
REIT status, Dynex REIT generally must distribute to its shareholders an amount
at least equal to 95% of the sum of its "REIT taxable income" (determined
without regard to the deduction for dividends paid and by excluding any net
capital gain) and any after-tax net income from certain types of foreclosure
property minus any "excess noncash income" (the "95% distribution requirement").
The Code provides that distributions relating to a particular year may be made
in the following year for purposes of the 95% distribution requirement, in
certain circumstances. Dynex REIT will balance the benefit to the shareholders
of making these distributions and maintaining REIT status against their impact
on the liquidity of Dynex REIT. In an unlikely situation, it may benefit the
shareholders if Dynex REIT retained cash to preserve liquidity and thereby lose
REIT status. Effective January 1, 2001, the Code has reduced the distribution
requirement from 95% of REIT taxable income to 90% of REIT taxable income.
Ownership. In order to maintain its REIT status, Dynex REIT must not be
deemed to be closely held and must have more than 100 shareholders. The closely
held prohibition requires that not more than 50% of the value of Dynex REIT's
outstanding shares be owned by five or fewer persons at anytime during the last
half of Dynex REIT's taxable year. The more than 100 shareholders rule requires
that Dynex REIT have at least 100 shareholders for 335 days of a twelve-month
taxable year. In the event that Dynex REIT failed to satisfy the ownership
requirements Dynex REIT would be subject to fines and required to take curative
action to meet the ownership requirements in order to maintain its REIT status.
For federal income tax purposes, Dynex REIT is required to recognize income
on an accrual basis and to make distributions to its shareholders when income is
recognized. Accordingly, it is possible that income could be recognized and
distributions required to be made in advance of the actual receipt of such funds
by Dynex REIT. The nature of Dynex REIT's investments is such that it expects to
have sufficient assets to meet federal income tax distribution requirements.
Taxation of Distributions by Dynex REIT
Assuming that Dynex REIT maintains its status as a REIT, any distributions
that are properly designated as "capital gain dividends" will generally be taxed
to shareholders as long-term capital gains, regardless of how long a shareholder
has owned his shares. Any other distributions out of Dynex REIT's current or
accumulated earnings and profits will be dividends taxable as ordinary income.
Distributions in excess of Dynex REIT's current or accumulated earnings and
profits will be treated as tax-free returns of capital, to the extent of the
shareholder's basis in his shares and, as gain from the disposition of shares,
to the extent they exceed such basis. Shareholders may not include on their own
tax returns any of Dynex REIT ordinary or capital losses. Distributions to
shareholders attributable to "excess inclusion income"' of Dynex REIT will be
characterized as excess inclusion income in the hands of the shareholders.
Excess inclusion income can arise from Dynex REIT's holdings of residual
interests in real estate mortgage investment conduits and in certain other types
of mortgage-backed security structures created after 1991. Excess inclusion
income constitutes unrelated business taxable income ("UBTI") for tax-exempt
entities (including employee benefit plans and individual retirement accounts)
and it may not be offset by current deductions or net operating loss carryovers.
In the event that Dynex REIT's excess inclusion income is greater than its
taxable income, Dynex REIT's distribution would be based on Dynex REIT's excess
inclusion income. Dividends paid by Dynex REIT to organizations that generally
are exempt from federal income tax under Section 501(a) of the Code should not
be taxable to them as UBTI except to the extent that (i) purchase of shares of
Dynex REIT was financed by "acquisition indebtedness" or (ii) such dividends
constitute excess inclusion income. In 2000, Dynex REIT's excess inclusion
income was an estimated $6 million, and given that Dynex REIT did not declare
nor pay a dividend in 2000, in order to satisfy the 95% distribution
requirements, Dynex REIT will need to distribute or have shareholders consent to
such an amount by the earlier of September 15, 2001 or the date on which Dynex
REIT files its federal income tax return.
Taxable Income
Dynex REIT uses the calendar year for both tax and financial reporting
purposes. However, there may be differences between taxable income and income
computed in accordance with GAAP. These differences primarily arise from timing
differences in the recognition of revenue and expense for tax and GAAP purposes.
Dynex REIT's estimated taxable loss for 2000, excluding capital loss
carryforwards generated during the year, was $109.6 million.
REGULATION
The Company's existing consumer-related servicing activities consist of
collections on the delinquent property tax receivables. The Company believes
that such servicing operations are managed in compliance with the Fair Debt
Collections Practices Act.
The Company believes that it is in material compliance with all material
rules and regulations to which it is subject.
COMPETITION
The Company competes with a number of institutions with greater financial
resources in originating and purchasing loans. In addition, in purchasing
portfolio investments and in issuing securities, the Company competes with
investment banking firms, savings and loan associations, commercial banks,
mortgage bankers, insurance companies and federal agencies and other entities
purchasing mortgage assets, many of which have greater financial resources and a
lower cost of capital than the Company.
EMPLOYEES
As of December 31, 2000, the Company had 70 employees.
Item 2. PROPERTIES
The Company's executive and administrative offices and operations offices are
both located in Glen Allen, Virginia, on properties leased by the Company which
consist of 11,194 square feet. The address is 4551 Cox Road, Suite 300, Glen
Allen, Virginia 23060. The lease expires in 2005. The Company also occupies
space located in Cleveland, Ohio, Pittsburgh, Pennsylvania, and North
Versailles, Pennsylvania. These locations consist of approximately 14,846 square
feet, and the leases associated with these properties expire in 2004.
Item 3. LEGAL PROCEEDINGS
On February 8, 1999, AutoBond Acceptance Corporation et al ("AutoBond")
commenced an action in the District Court of Travis County, Texas (250th
Judicial District) against the Company alleging that the Company breached the
terms of a Credit Agreement, dated June 9, 1998. The terms of the Credit
Agreement provided for the purchase by the Company of funding notes
collateralized by automobile installment contracts acquired by AutoBond. The
Company suspended purchasing the funding notes in February 1999 on grounds that
AutoBond had violated certain provisions of the Credit Agreement. On June 9,
2000, the Company settled the matter with AutoBond for a cash payment of $20.0
million. In return for the payment, the Company received a complete release of
all claims against it by AutoBond, and ownership of the AutoBond subsidiaries
which own the underlying automobile installment contracts. In February 2001, the
Company resolved a matter related to AutoBond to the mutual satisfaction of the
parties involved. In connection with the resolution of this matter, the Company
received $7.5 million.
On November 7, 2000, the Company entered into an Agreement and Plan of
Merger with California Investment Fund, LLC ("CIF"), for the purchase of all of
the equity securities of the Company for $90 million (the "Merger Agreement").
The Merger Agreement obligated CIF to, among other things, deliver to the
Company evidence of commitments for the financing of the acquisition based upon
a predetermined timeline. CIF failed to deliver such evidence of the financing
commitments pursuant to the terms of the Merger Agreement. Pursuant to a letter
dated December 22, 2000, the Company agreed to forebear its right to terminate
the Merger Agreement and extended the timeline. In return, CIF agreed to deliver
written binding financing commitments and evidence of the consent of the holders
of the July 2002 Notes to the merger transaction on or before January 25, 2001.
On January 25, 2001, CIF failed to meet the requirements as set forth in the
Merger Agreement and the letter of December 22, 2000, and the Company terminated
the Merger Agreement effective January 26, 2001 and requested that the escrow
agent release to the Company the $1 million and 572,178 shares of common stock
of the Company which CIF placed in escrow under the Merger Agreement (the
"Escrow Amount"). On January 29, 2001, the Company filed for Declaratory
Judgment in Federal District Court in the Eastern District of Virginia,
Alexandria Division. CIF has filed a counterclaim and demand for jury trial and
asked for damages of $45 million. The Company believes that the Agreement is
clear that the maximum damages that CIF may recover from the Company is $2
million. The Company intends to defend itself vigorously against the
counterclaim by CIF, and will seek the release of the Escrow Amount. The Company
does not expect that the resolution of this matter will have a materially
adverse effect on its financial statements.
The Company is also subject to other lawsuits or claims which arise in the
ordinary course of its business, some of which seek damages in amounts which
could be material to the financial statements. Although no assurance can be
given with respect to the ultimate outcome of any such litigation or claim, the
Company believes the resolution of such lawsuits or claims will not have a
material effect on the Company's consolidated balance sheet, but could
materially affect consolidated results of operations in a given year.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Dynex Capital, Inc.'s common stock is traded on the New York Stock Exchange
under the trading symbol DX. The common stock was held by approximately 3,662
holders of record as of February 28, 2001. During the last two years, the high
and low closing stock prices and cash dividends declared on common stock,
adjusted for the two-for-one stock split effective May 5, 1997 and the
one-for-four reverse stock split effective August 2, 1999, were as follows:
- --------------------------------------------------------------------------------
Cash
Dividends
High Low Declared
- --------------------------------------------------------------------------------
2000:
First quarter $ 9.56 $ 3.38 $ -
Second quarter 5.25 1.19 -
Third quarter 1.88 0.47 -
Fourth quarter 1.75 0.63 -
1999:
First quarter $22.00 $11.00 $ -
Second quarter 16.00 8.25 -
Third quarter 13.19 5.50 -
Fourth quarter 8.63 6.00 -
- --------------------------------------------------------------------------------
Item 6. SELECTED FINANCIAL DATA
(amounts in thousands except share data)
- ------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Net interest margin $ ( 3,146) $ 48,015 $ 66,538 $ 83,454 $ 73,750
Net (loss) gain on sales, write-downs, and impairment (78,516) (96,700) (20,346) 11,584 21,127
charges
Equity in net (loss) earnings of Dynex Holding, Inc. ( 680) ( 1,923) 2,456 ( 1,109) ( 4,309)
Other (expense) income ( 428) 1,673 2,852 1,716 606
General and administrative expenses ( 8,712) ( 7,740) ( 8,973) ( 9,531) ( 8,365)
Net administrative fees and expenses to Dynex ( 381) (16,943) (22,379) (12,116) ( 9,761)
Holding, Inc.
Extraordinary item - loss on extinguishment of debt - ( 1,517) ( 571) - -
- ------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (91,863) $ (75,135) $ 19,577 $ 73,998 $ 73,048
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 291,160 $ 350,798 $410,821 $346,859 $333,029
- ------------------------------------------------------------------------------------------------------------------------------
Total expenses $ 383,023 $ 425,933 $391,244 $272,861 $259,981
- ------------------------------------------------------------------------------------------------------------------------------
(Loss) income per common share before extraordinary item:
Basic(1) $ ( 9.15) $ (7.53) $ 0.62 $ 5.50 $ 6.17
Diluted (1) ( 9.15) (7.53) 0.62 5.48 5.94
Net (loss) income per common share after extraordinary item:
Basic(1) $ ( 9.15) $ (7.67) $ 0.57 $ 5.50 $ 6.17
Diluted (1) $ ( 9.15) (7.67) 0.57 5.48 5.94
Dividends declared per share:
Common (1) $ - $ - $ 3.40 $ 5.42 $ 4.532
Series A Preferred - 1.17 2.37 2.71 2.375
Series B Preferred - 1.17 2.37 2.71 2.375
Series C Preferred - 1.46 2.92 2.92 0.600
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Investments (3) $3,112,908 $4,109,736 $4,956,665 $5,211,009 $3,918,989
Total assets 3,159,596 4,192,516 5,178,848 5,367,413 3,980,820
Non-recourse debt 2,856,728 3,282,378 3,665,316 3,632,079 2,149,068
Recourse debt 134,168 537,098 1,032,733 1,133,536 1,294,972
Total liabilities 3,002,465 3,867,444 4,726,044 4,806,504 3,477,203
Shareholders' equity 157,131 325,072 452,804 560,909 503,617
Number of common shares outstanding 11,446,206 11,444,099 46,027,426 45,146,242 20,653,593
Average number of common shares (1) 11,445,236 11,483,977 11,436,599 10,757,845 10,222,395
Book value per common share (1) 2.07 $ 16.74 $ 27.75 $ 37.59 $ 34.60
- ----------------------------------------------------------------------------------------------------------------------------
(1) Adjusted for two-for-one common stock split effective May 5, 1997 and the
one-for-four reverse common stock split effective August 2, 1999.
(2) Excludes unrealized gain/loss on investments available-for-sale.
(3) Investments classified as available for sale are shown at fair value.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is a financial services company which invests in a portfolio of
securities and investments backed principally by single family mortgage loans,
commercial mortgage loans and manufactured housing installment loans. Such loans
have been funded generally by the Company's loan production operations or
purchased in bulk in the market. Loans funded through the Company's production
operations have generally been pooled and pledged as collateral using a
collateralized bond security structure, which provides long-term financing for
the loans while limiting credit, interest rate and liquidity risk.
FINANCIAL CONDITION
- ------------------------------------------------------ -----------------------------------------
December 31,
(amounts in thousands except per share data) 2000 1999
- ------------------------------------------------------ -------------------- --------------------
Investments:
Collateral for collateralized bonds $ 3,042,158 $ 3,700,714
Securities 9,364 129,331
Other investments 44,010 48,927
Loans held for sale or securitization 17,376 232,384
Non-recourse debt 2,856,728 3,282,378
Recourse debt 134,168 537,098
Shareholders' equity 157,131 325,072
Book value per common share 2.07 16.74
- ------------------------------------------------------ -------------------- --------------------
Collateral for Collateralized Bonds
Collateral for collateralized bonds consists primarily of securities backed
by adjustable-rate and fixed-rate mortgage loans secured by first liens on
single family properties, fixed-rate loans secured by first liens on multifamily
and commercial properties, manufactured housing installment loans secured by
either a UCC filing or a motor vehicle title and delinquent property tax
receivables. As of December 31, 2000, the Company had 23 series of
collateralized bonds outstanding. Collateral for collateralized bonds are
considered available for sale, and are therefore carried at estimated fair
value. The collateral for collateralized bonds decreased to $3.0 billion at
December 31, 2000 compared to $3.7 billion at December 31, 1999. This decrease
of $0.7 billion is primarily the result of paydowns on collateral and in an
increase in the unrealized loss.
Securities
Securities at December 31, 2000 consist primarily of adjustable-rate and
fixed-rate mortgage-backed securities. Securities also include derivative and
residual securities. Securities at December 31, 1999 include the aforementioned
securities as well as fixed-rate "funding notes and securities" secured by
automobile installment contracts. Derivative securities are classes of
collateralized bonds, mortgage pass-through certificates or mortgage
certificates that pay to the holder substantially all interest (i.e., an
interest-only security), or substantially all principal (i.e., a principal-only
security). Residual interests represent the right to receive the excess of (i)
the cash flow from the collateral pledged to secure related mortgage-backed
securities, together with any reinvestment income thereon, over (ii) the amount
required for principal and interest payments on the mortgage-backed securities
or repurchase arrangements, together with any related administrative expenses.
Securities decreased to $9.4 million at December 31, 2000 compared to $127.7
million at December 31, 1999 primarily as a result of the sale of such
securities, which were sold in order to repay recourse debt.
Other Investments
Other investments consist primarily of delinquent property tax receivables
and a note receivable received in connection with the sale of the Company's
single family mortgage operations in May 1996. Other investments decreased to
$44.0 million at December 31, 2000 from $48.9 million at December 31, 1999. This
decrease of $4.9 million was primarily the result of paydown on the note
receivable of $13.9 million, partially offset by the purchase of additional
delinquent property tax receivables of $ 7.6 million in 2000.
Loans Held for Sale
Loans held for sale or securitization decreased from $232.4 million at
December 31, 1999 to $17.4 million at December 31, 2000 principally due to sales
in 2000. The proceeds from the sales of loans were used to repay associated
recourse debt outstanding.
Non-recourse Debt
Collateralized bonds issued by the Company are recourse only to the assets
pledged as collateral, and are otherwise non-recourse to the Company.
Collateralized bonds decreased to $2.9 billion at December 31, 2000 from $3.3
billion at December 31, 1999. This decrease was primarily a result of principal
paydowns made during the year, from the principal payments received from the
associated collateral for collateralized bonds.
Recourse Debt
Recourse debt decreased from $537.1 million at December 31, 1999 to $134.2
million at December 31, 2000. At December 31, 1999, the Company was in violation
of certain covenants on a substantial portion of its recourse debt, and during
2000, the Company focused its efforts on the repayment of such debt, primarily
from sales of associated assets pledged to secure such recourse debt. During
2000, the Company repaid a net $261.2 million of warehouse financing, $128.1
million of repurchase agreement financing, and $13.6 million of unsecured senior
note financing. In addition, during 2000 the Company reduced its obligations
under letters of credit and conditional bond repurchase agreements by $180
million.
Shareholders' Equity
Shareholders' equity decreased to $157.1 million at December 31, 2000 from
$325.1 million at December 31, 1999. This decrease was a combined result of a
$76.1 million increase in the net unrealized loss on investments available for
sale from $48.5 million at December 31, 1999 to $124.6 million at December 31,
2000, and a net loss of $91.9 million during the year.
RESULTS OF OPERATIONS
- ----------------------------------------------------------------- --------------------------------------------------
For the Year Ended December 31,
(amounts in thousands except per share information) 2000 1999 1998
- ----------------------------------------------------------------- ---------------- --------------- -----------------
Net interest margin before provision for losses $ 31,487 $ 64,169 $ 72,959
Provision for losses (34,633) (16,154) (6,421)
Net interest margin (3,146) 48,015 66,538
Net loss on sales, write-downs and impairment charges:
Related to commercial production operations (50,940) (59,962) -
Related to sales of investments and trading activities (15,872) (12,682) (2,714)
Related to AutoBond and AutoBond securities (11,012) (31,732) (17,632)
Related to sale of loan production operations (228) 7,676 -
Other (892) - -
Equity in (losses) earnings of DHI (680) (1,923) 2,456
General and administrative expenses (8,712) (7,740) (8,973)
Net administrative fees and expenses to DHI (381) (16,943) (22,379)
Net income (loss) before preferred stock dividends (91,863) (75,135) 19,577
Basic net income (loss) per common share(1) $ (9.15) $ (7.53) $ 0.62
Diluted net income (loss) per common share(1) $ (9.15) $ (7.67) $ 0.57
Dividends declared per share:
Common(1) $ - $ - $3.40
Series A and B Preferred - 1.17 2.37
Series C Preferred - 1.46 2.92
- ----------------------------------------------------------------- ---------------- --------------- -----------------
(1) Adjusted for both the two-for-one common stock split effective
May 5, 1997 and the one-for-four reverse common stock split effective
August 2, 1999.
2000 Compared to 1999. The decrease in net income and net income per common
share during 2000 as compared to 1999 is primarily the result of a decrease in
net interest margin, which is partially offset by (a) a decrease in net loss on
sales, (b) impairment charges and write-downs, and (c) decreases in general and
administrative expenses and net administrative fees and expenses to DHI.
Net interest margin before provision for losses for the year ended December
31, 2000 decreased $32.7 million, or 51% to $31.5 million, from $64.2 million
for the same period for 1999. The decrease in net interest margin was primarily
the result of the decline in average interest-earning assets from $4.6 billion
in 1999, to $3.7 billion in 2000. In addition, the average cost of funds of the
Company increased to 7.35% in 2000 from 6.21% in 1999 due to an overall market
increase in short-term interest rates, and to a lesser extent, fees paid and
rate increases associated with the Company's recourse borrowings.
Provision for losses increased to $34.6 million in 2000, or 0.93% of
average interest earning assets, from $16.1 million or 0.35% during 1999. The
provision for losses increased as a result of an overall increase in credit risk
retained from securities issued by the Company (principally for securities
issued in the latter portion of 1999), and a charge of $13.3 million in the
fourth quarter of 2000 due to the underperformance of the Company's securitized
manufactured housing loan portfolio. The Company has seen the loss severity on
manufactured housing loans increase dramatically since the end of the third
quarter of 2000 as a result of the saturation in the market place with both new
and used (repossessed) manufactured housing units. In addition, the Company has
seen some increase in overall default rates on its manufactured housing loans.
The Company anticipates that market conditions for manufactured housing loans
will remain unfavorable through 2001.
Net loss on sales, impairment charges and write-downs decreased from an
aggregated net loss of $96.7 million in 1999, to $78.5 million in 2000. During
2000, the Company incurred losses related to the phasing-out of its commercial
production operations, including the sales of substantially all of the Company's
remaining commercial and multifamily loan positions. In addition, as discussed
in Note 13 to the accompanying financial statements, the Company was party to
various conditional bond repurchase agreements whereby the Company had the
option to purchase $167.8 million of tax-exempt bonds secured by multifamily
mortgage loans which expired in June 2000. The Company did not exercise this
option, as it did not have the ability to finance this purchase, and the
counterparty to the agreement retained $30.3 million in cash collateral as
settlement as provided for in the related agreements. The Company recorded a
charge against earnings of $30.3 million in 2000 as a result.
During 2000, as discussed in Note 16 to the accompanying financial
statements, the Company settled the outstanding litigation with AutoBond for $20
million. The Company had accrued a reserve as of December 31, 1999, for $27
million related to the litigation, and reversed $5.6 million of this reserve in
2000 as a result of the settlement. In June 2000, the Company recorded permanent
impairment charges of $16.6 million on AutoBond related securities. During the
fourth quarter 2000, the Company completed the sale of substantially all of the
remaining outstanding securities and loans related to AutoBond. At December 31,
2000, the Company has automobile installment contracts of $1.6 million
remaining.
Also during 2000, the Company recorded impairment charges and loss on sales
of securities aggregating $8.5 million, relating to the write-down of basis and
then the sale of $33.9 million of securities. Such securities were sold in order
for the Company to pay-down its recourse debt outstanding. As a result of the
sale of securities, the Company either sold or terminated related derivative
hedge positions at an aggregate net loss of $7.3 million. During 1999, the
Company had gains of $4.2 million related to various derivative trading
positions opened and closed during 1999. The Company had no such gains in 2000.
Net administrative fees and expenses to DHI decreased $16.5 million, or
98%, to $0.4 million for the year ended December 31, 2000 as compared to the
same period in 1999. These decreases are principally a combined result of the
sale of the Company's model home purchase/leaseback and manufactured housing
loan production operations during 1999. All general and administrative expenses
of these businesses were incurred by DHI.
1999 Compared to 1998. The decrease in net income and net income per common
share during 1999 as compared to 1998 is primarily the result of (i) a decrease
in net interest margin (ii) an increase in the loss on sale of investments and
trading activities and (iii) write-downs associated with the commercial loan
production operations. These decreases were partially offset by the reduction in
general and administrative expenses and net administrative fees and expenses to
DHI and the gain on the sale of the model home purchase/leaseback and the
manufactured housing lending operations in 1999.
Net interest margin for the year ended December 31, 1999 decreased to $48.0
million, or 27.8%, versus net interest margin of $66.5 million for the same
period in 1998. This decrease in net interest margin was primarily the result of
the decline in average interest-earning assets from $5.4 billion for the year
ended December 31, 1998 to $4.6 billion for the year ended December 31, 1999. In
addition, provision for losses increased to $16.2 million or 0.35% on an
annualized basis of interest-earning assets during the year ended December 31,
1999, compared to $6.4 million and 0.12% during the same period in 1998. This
increase in provision for losses was a result of increasing the reserve for
probable losses on the various loan pools pledged as collateral for
collateralized bonds where the Company has retained credit risk.
During 1999, Dynex REIT recorded a loss of $31.6 million related to the
writedown of $261.9 million of multifamily and commercial loans held for sale at
December 31, 1999. In addition, the Company realized losses of $28.4 million,
which were primarily related to the write-off of previously deferred hedging
costs on $255.6 million of multifamily and commercial loan commitments which
expired and were not extended by the Company during the fourth quarter of 1999
or the first quarter of 2000. These costs were related to now-closed options and
futures positions entered into by the Company in 1998 and 1999.
The net loss on sale of investments and trading activities for the year
ended December 31, 1999 increased to $12.7 million, as compared to $2.7 million
for the same period in 1998. The increase for the year ended December 31, 1999
is primarily the result of a $9.3 million loss on the sale of $70.7 million of
securities during 1999 and a $7.4 million loss on the sale of $58.7 million of
commercial loans during 1999. These increases were partially offset by $4.2
million of realized gains on various derivative trading positions entered into
during 1999. The loss on sale of investments and trading activities during 1998
is primarily the results of net losses recognized of $1.4 million on trading
positions entered into during 1998.
During 1999, Dynex REIT recorded an impairment charge of $4.7 million
relating to the funding notes and other AutoBond securities held by the Company
at December 31, 1999. In addition, Dynex REIT recorded a charge of $27.0 million
related to the establishment of a reserve for the AutoBond litigation discussed
in Item 3. Legal Proceedings. During 1998, Dynex REIT recorded charges to
earnings totaling $17.6 million in regard to AutoBond related assets. This
charge included an impairment charge on the funding notes of $14.0 million and
$3.6 million to other AutoBond related securities.
Net administrative fees and expenses to DHI decreased $5.5 million, or
24.3%, to $16.9 million in the year ended December 31, 1999. This decrease is
primarily the result of decreased origination volume of the Company's commercial
loan production operations and the sale of the Company's model home
purchase/leaseback and manufactured housing loan production operations during
1999.
The following table summarizes the average balances of interest-earning
assets and their average effective yields, along with the average
interest-bearing liabilities and the related average effective interest rates,
for each of the periods presented.
Average Balances and Effective Interest Rates
- ------------------------------------------- --------------------------------------------------------------------------------
(amounts in thousands) Year ended December 31,
- ------------------------------------------- --------------------------------------------------------------------------------
2000 1999 1998
Average Effective Average Effective Average Effective
Balance Rate Balance Rate Balance Rate
- ------------------------------------------- -------------- ----------- -------------- ----------- -------------- -----------
Interest-earning assets (1):
Collateral for collateralized bonds $ 3,460,973 7.84% $ 3,828,007 7.43% $ 4,094,030 7.43%
(2) (3)
Securities 55,425 6.49 226,908 6.27 565,625 7.62
Other investments 42,188 13.03 202,111 8.50 196,759 8.17
Loans held for sale 134,672 7.99 329,507 7.97 546,272 8.14
-------------- ----------- -------------- ----------- -------------- -----------
-------------- ----------- -------------- ----------- -------------- -----------
Total interest-earning assets $ 3,693,258 7.89% $ 4,586,533 7.46% $ 5,402,686 7.54%
============== =========== ============== =========== ============== ===========
============== =========== ============== =========== ============== ===========
Interest-bearing liabilities:
Non-recourse debt (3) $ 3,132,550 7.34% $ 3,363,095 6.18% $ 3,544,898 6.41%
Recourse debt - collateralized bonds 65,651 7.13 271,919 5.71 523,208 5.90
retained
-------------- ----------- -------------- ----------- -------------- -----------
3,198,201 7.33 3,635,014 6.14 4,068,106 6.34
Recourse debt secured by investments:
Securities 21,156 8.55 143,392 6.51 422,164 5.91
Other investments 5,163 6.75 145,808 6.49 108,361 6.83
Loans held for sale 93,620 6.35 259,061 5.50 415,778 5.57
Recourse debt - unsecured 101,242 8.54 121,743 8.78 143,378 8.97
-------------- ----------- -------------- ----------- -------------- -----------
Total interest-bearing liabilities $ 3,419,382 7.35% $ 4,305,018 6.21% $ 5,157,787 6.34%
============== =========== ============== =========== ============== ===========
============== =========== ============== =========== ============== ===========
Net interest spread on all investments (3) 0.54% 1.25% 1.20%
=========== =========== ===========
=========== =========== ===========
Net yield on average interest-earning 1.08% 1.63% 1.49%
assets
=========== =========== ===========
=========== =========== ===========
- ------------------------------------------- -------------- ----------- -------------- ----------- -------------- -----------
(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 $862 , $1,844, and
$3,189 for the years ended December 31, 2000, 1999, and 1998, respectively.
(3) Effective rates are calculated excluding non-interest related
collateralized bond expenses and provision for credit losses.
2000 compared to 1999. The net interest spread for the year ended December 31,
2000 decreased to 0.54%, from 1.25% for the year ended December 31, 1999. This
decrease was primarily due to the increased cost of interest-bearing liabilities
as the result of overall increases in short-term rates between the years. A
substantial portion of the Company's interest-bearing liabilities reprice
monthly, and are indexed to one-month LIBOR, which on average increased to 6.41%
for 2000, versus 5.25% for 1999. This increase in one-month LIBOR accounts for a
substantial portion of the overall increase in the cost of interest-bearing
liabilities. The Company also experienced overall increases in borrowing costs
on its recourse debt as a result of extension fees, covenant violations and
other related issues during 2000. The overall yield on interest-earnings assets,
increased to 7.89% for the year ended December 31, 2000 from 7.46% for the same
period in 1999, benefited from the rising-rate environment, but lagging relative
to the Company's liabilities.
Individually, the net interest spread on collateral for collateralized
bonds decreased 78 basis points, from 129 basis points for the year ended
December 31, 1999 to 51 basis points for the same period in 2000. This decrease
was largely due to the effect of the increase in short-term rates during the
year. The net interest spread on securities decreased to a negative 206 basis
points for the year ended December 31, 2000, from a negative 24 basis points for
the year ended December 31, 1999. This decrease was primarily the result of
increased borrowing costs on securities due to both the increase in the average
one-month LIBOR during the nine months ended September 30, 2000 as well as an
increase in the interest spread on certain credit facilities during the past
twelve months. The net interest spread on other investments increased 427 basis
points, from 201 basis points for the year ended December 31, 1999, to 628 basis
points for the same period in 2000, primarily due to the sale or paydown of
lower yielding investments, leaving principally the higher yielding delinquent
property tax receivables. The net interest spread on loans held for sale
decreased 83 basis points for the year ended December 31, 1999 from 247 basis
points to 164 basis points for the year ended December 31, 2000, primarily as a
result of increased borrowing costs due to (a) the increase in the average
one-month LIBOR during 2000, (b) increases in the interest spread on certain
credit facilities, (c) higher fees as a result of violation of certain covenants
under certain of these facilities in 2000, and (d) fees for extensions of these
facilities to provide additional time for the Company to sell the related
collateral, principally loans held for sale and funding notes and securities.
1999 compared to 1998. The net interest spread increased to 1.25% for the year
ended December 31, 1999 from 1.20% for the same period in 1998. This increase
was primarily due to a reduction in premium amortization expense related to
collateral for collateralized bonds, which decreased from $27.5 million for the
year ended December 31, 1998 to $16.3 million for the year ended December 31,
1999. The overall yield on interest-earnings assets decreased to 7.46% for the
year ended December 31, 1999 from 7.54% for the same period in 1998. The cost of
interest-bearing liabilities decreased to 6.21% for the year ended December 31,
1999 from 6.34% for the same period in 1998.
Individually, the net interest spread on collateral for collateralized
bonds increased 20 basis points, from 109 basis points for the year ended
December 31, 1998 to 129 basis points for the same period in 1999. This increase
was primarily due to lower premium amortization caused by decreased prepayments
during the year ended December 31, 1999 compared to the same period in 1998. The
net interest spread on securities decreased 195 basis points, from 171 basis
points for the year ended December 31, 1998 to a negative 24 basis points for
the year ended December 31, 1999. This decrease was primarily the result of a
150 basis point increase during 1999 of the interest spread on the notes payable
secured by the funding notes, and the sale of certain higher coupon collateral
during the third quarter of 1998. In addition, several of the Company's residual
ARM trusts were placed on non-accrual status during the third quarter of 1998.
The net interest spread on other investments increased 67 basis points, from 134
basis points for the year ended December 31, 1998 to 201 basis points for the
same period in 1999, primarily due to the purchase of higher yielding property
tax receivables during 1999. The net interest spread on loans held for sale or
securitization decreased 10 basis points, from 257 basis points for the year
ended December 31, 1998, to 247 basis points for the same period in 1999. This
decrease is primarily attributable to the funding of lower coupon collateral
during 1999.
The following tables summarize the amount of change in interest income and
interest expense due to changes in interest rates versus changes in volume:
- --------------------------------------------------------------------------------------------------------------------
2000 to 1999 1999 to 1998
- --------------------------------------------------------------------------------------------------------------------
Rate Volume Total Rate Volume Total
- --------------------------------------------------------------------------------------------------------------------
Collateral for collateralized bonds $ 15,228 $ (28,234) $ (13,006) $ 245 $ (19,769) $ (19,524)
Securities 474 (11,107) (10,633) (6,582) (22,280) (28,862)
Other investments 6,239 (17,923) (11,684) 667 444 1,111
Loans held for sale or securitization 65 (15,575) (15,510) (870) (17,303) (18,173)
- --------------------------------------------------------------------------------------------------------------------
Total interest income 22,006 (72,839) (50,833) (6,540) (58,908) (65,448)
- --------------------------------------------------------------------------------------------------------------------
Non-recourse debt 37,000 (14,958) 22,042 (7,905) (11,401) (19,306)
Recourse debt - collateralized bonds 3,130 (13,986) (10,856) (939) (14,386) (15,325)
retained
- --------------------------------------------------------------------------------------------------------------------
Total collateralized bonds 40,130 (28,944) 11,186 (8,844) (25,787) (34,631)
Recourse debt secured by investments:
Securities 2,253 (9,881) (7,628) 2,322 (18,174) (15,852)
Other investments 358 (9,602) (9,244) (391) 2,481 2,090
Loans held for sale or securitization 1,952 (10,368) (8,416) (281) (8,739) (9,020)
Recourse debt - unsecured (287) (1,758) (2,045) (267) (1,905) (2,172)
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 44,406 (60,553) (16,147) (7,461) (52,124) (59,585)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Net margin on portfolio $ (22,400) $ (12,286) $ (34,686) $ 921 $ (6,784) $ (5,863)
- --------------------------------------------------------------------------------------------------------------------
Note: The change in interest income and interest expense due to changes in both
volume and rate, which cannot be segregated, has been allocated proportionately
to the change due to volume and the change due to rate. This table excludes net
interest income on advances to DHI, other interest expense and provision for
credit losses.
Interest Income and Interest-Earning Assets
Approximately $1.17 billion of the investment portfolio as of December 31,
2000, or 38%, is comprised of loans or securities that have coupon rates which
adjust over time (subject to certain periodic and lifetime limitations) in
conjunction with changes in short-term interest rates. Approximately 64% of the
ARM loans underlying the ARM securities and collateral for collateralized bonds
are indexed to and reset based upon the level of six-month LIBOR; approximately
27% are indexed to and reset based upon the level of the one-year Constant
Maturity Treasury (CMT) index. The following table presents a breakdown, by
principal balance, of the Company's collateral for collateralized bonds and ARM
and fixed mortgage securities by type of underlying loan as of December 31, 2000
and December 31, 1999. The percentage of fixed-rate loans to all loans increased
from 56% at December 31, 1999, to 62% at December 31, 2000, as most of the
prepayments in the Company's investment portfolio have occurred in the
single-family ARM portion. The table below excludes various investments in the
Company's portfolio, including securities such as derivative and residual
securities and other securities, and non-securitized investments including other
investments and loans held for sale. Most of these excluded investments would be
considered fixed-rate, and amounted to approximately $66.9 million at December
31, 2000.
Investment Portfolio Composition (1)
($ in millions)
- -------------------------------- ------------------ -------------------- --------------------- --------------- ---------------
Other Indices Based
LIBOR Based ARM CMT Based ARM Loans ARM Loans Fixed-Rate
December 31, Loans Loans Total
- -------------------------------- ------------------ -------------------- --------------------- --------------- ---------------
1999 $ 1,048.5 $ 430.8 $ 121.1 $ 2,061.5 $ 3,661.9
2000 758.6 309.9 97.4 1,926.3 3,092.2
- -------------------------------- ------------------ -------------------- --------------------- --------------- ---------------
(1) Includes only the principal amount of collateral for collateralized
bonds, ARM securities and fixed securities.
The average asset yield is reduced for the amortization of premiums, net of
discounts on the investment portfolio. As indicated in the table below, premiums
on the collateral for collateralized bonds, ARM securities and fixed-rate
securities at December 31, 2000 were $30.1 million, or approximately 0.96% of
the aggregate balance of the related investments. Approximately $30.5 million of
this premium basis relates to multifamily and commercial mortgage loans, with a
principal balance of $817.4 million at December 31, 2000, and that have
prepayment lockouts or yield maintenance provisions for at least seven years.
Amortization expense as a percentage of principal paydowns has increased to
1.55% for the year ended December 31, 2000 from 1.42% in 1999 as the Company
experienced higher prepayment activity during 2000 on its securitized
single-family loan portfolio which it owns above par. The amortization expense
as a percentage of principal paydowns increased from 1.24% for the year ended
December 31, 1998 to 1.42% for the same period in 1999 primarily due to the
addition of premium at the very end of 1998 from the securitization of
approximately $434 million of multifamily and commercial loans. The principal
repayment rate (indicated in the table below as "CPR Annualized Rate") was 19.8%
for the year ended December 31, 2000. CPR or "constant prepayment rate" is a
measure of the annual prepayment rate on a pool of loans. Excluded from this
table are loans held for sale, which are carried at the lower of cost or market
as of December 31, 2000 and 1999.
Net Premium Basis and Amortization
($ in millions)
- -----------------------------------------------------------------------------------------------------
Amortization
Net CPR Annualized Expense as a %
Remaining Amortization Rate Principal of Principal
Premium Expense Paydowns Paydowns
- -----------------------------------------------------------------------------------------------------
1998 $ 77.8 $ 27.5 41% $ 2,215.2 1.24%
1999 38.3 16.3 20% 1,145.8 1.42%
2000 30.1 8.1 20% 523.0 1.55%
- -----------------------------------------------------------------------------------------------------
Credit Exposures
The Company securitizes its loan production into collateralized bonds or
pass-through securitization structures. With either structure, the Company may
use overcollateralization, subordination, third-party guarantees, reserve funds,
bond insurance, mortgage pool insurance or any combination of the foregoing as a
form of credit enhancement. With all forms of credit enhancement, the Company
may retain a limited portion of the direct credit risk after securitization.
The following table summarizes the aggregate principal amount of collateral
for collateralized bonds and ARM and fixed-rate mortgage pass-through securities
outstanding; the direct credit exposure retained by the Company (represented by
the amount of overcollateralization pledged and subordinated securities owned by
the Company and rated below BBB by one of the nationally recognized rating
agencies), net of the credit reserves maintained by the Company for such
exposure; and the actual credit losses incurred for each year. Credit reserves
maintained by the Company and included in the table below includes third-party
reimbursement guarantees of $30.3 million. The table excludes any risks related
to representations and warranties made on loans funded by the Company and
securitized in mortgage pass-through securities generally funded prior to 1995.
This table also excludes any credit exposure on loans held for sale or
securitization, funding notes and securities, and other investments.
The Company is currently engaged in a dispute with the counterparty to the
$30.3 million in reimbursement guarantees. Such guarantees are payable when
cumulative loss trigger levels are reached on certain of the Company's
single-family mortgage loan securitizations. Currently, these trigger levels
have been reached on four of the Company's securities, and the Company has made
claims under the reimbursement guarantees in amounts approximating $1.2 million.
The counterparty has denied payment on these claims, citing various deficiencies
in loan underwriting which would render these loans and corresponding claims
ineligible under the reimbursement agreements. The Company disputes this
classification and is pursuing this matter through court-ordered arbitration.
Credit Reserves and Actual Credit Losses
($ in millions)
- ---------------------------------------------------------------------------------------------------------
Credit Exposure, Credit Exposure, Net of
Outstanding Loan Net Actual Credit Credit Reserves to
Principal Balance of Credit Reserves Losses Outstanding Loan Balance
- ---------------------------------------------------------------------------------------------------------
1998 $ 4,389.7 $ 159.7 $ 20.3 3.64%
1999 3,770.3 183.2 19.7 4.86%
2000 3,245.3 119.1 26.6 3.67%
- ---------------------------------------------------------------------------------------------------------
The following table summarizes single family mortgage loan, manufactured
housing loan and commercial mortgage loan delinquencies as a percentage of the
outstanding collateral balance for those securities in which Dynex has retained
a portion of the direct credit risk. The delinquencies as a percentage of the
outstanding collateral increased to 1.96% at December 31, 2000, from 1.64% at
December 31, 1999, primarily from increasing delinquencies in the Company's
manufactured housing loan portfolio. The Company monitors and evaluates its
exposure to credit losses and has established reserves based upon anticipated
losses, general economic conditions and trends in the investment portfolio. As
of December 31, 2000, management believes the level of credit reserves are
sufficient to cover any losses which may occur as a result of current
delinquencies presented in the table below.
Delinquency Statistics
- -----------------------------------------------------------------------------------------------------
60 to 89 days delinquent 90 days and over
December 31, delinquent (2) Total
- -----------------------------------------------------------------------------------------------------
1998 (1) 0.25% 2.11% 2.36%
1999 (1) 0.27% 1.37% 1.64%
2000 0.37% 1.59% 1.96%
- -----------------------------------------------------------------------------------------------------
(1) Excludes funding notes and securities.
(2) Includes foreclosures, repossessions and REO.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", is effective for all fiscal
years beginning after June 15, 2000. FAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Under FAS No. 133, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative. The Company will adopt
FAS No. 133 effective January 1, 2001. Management does not expect the adoption
of FAS No. 133 to have a significant impact on the financial position, results
of operations, or cash flows of the Company.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" ("FAS No.
140"). FAS No. 140 replaces the Statement of Financial Accounting Standards No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("FAS No. 125"). FAS No. 140 revises the
standards for accounting for securitization and other transfers of financial
assets and collateral and requires certain disclosure, but it carries over most
of FAS No. 125 provisions without reconsideration. FAS No. 140 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after March 31, 2001. FAS No. 140 is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures about securitization and collateral accepted need not be reported
for periods ending on or before December 15, 2000, for which financial
statements are presented for comparative purposes. FAS No. 140 is to be applied
prospectively with certain exceptions. Other than those exceptions, earlier or
retroactive application of its accounting provision is not permitted. The
Company does not believe the adoption of FAS No. 140 will have a material impact
on its financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations from a variety of
sources. These sources have included cash flow generated from the investment
portfolio, including net interest income and principal payments and prepayments,
common stock offerings through the dividend reinvestment plan, short-term
warehouse lines of credit with commercial and investment banks, repurchase
agreements and the capital markets via the asset-backed securities market (which
provides long-term non-recourse funding of the investment portfolio via the
issuance of collateralized bonds). Historically, cash flow generated from the
investment portfolio has satisfied its working capital needs, and the Company
has had sufficient access to capital to fund its loan production operations, on
both a short-term (prior to securitization) and long-term (after securitization)
basis. However, market conditions since October 1998 have substantially reduced
the Company's access to capital. The Company is currently unable to access
short-term warehouse lines of credit, and is unable to efficiently access the
asset-backed securities market to meet its long-term funding needs. Largely as a
result of its inability to access additional capital, the Company sold its
manufactured housing and model home purchase/leaseback operations in 1999, and
ceased issuing new commitments in its commercial lending operations. For all of
2000, the Company was focused on substantially reducing both its short-term debt
and capital requirements, generally through the sale of assets.
During 2000, the Company reduced its recourse debt by approximately $403.0
million, from $537.1 million at December 31, 1999 to $134.1 million at December
31, 2000. Recourse debt was reduced primarily through the sale of various assets
of the Company. As of March 30, 2001, the Company has fully satisfied all of its
warehouse facility obligations, has been or was released from all obligations
under letters of credit or conditional bond repurchase obligations, and had
reduced its repurchase agreement borrowings to $29.2 million.
Non-recourse Debt
Dynex REIT, through limited-purpose finance subsidiaries, has issued
non-recourse debt in the form of collateralized bonds to fund the majority of
its investment portfolio. The obligations under the collateralized bonds are
payable solely from the collateral for collateralized bonds and are otherwise
non-recourse to Dynex REIT. Collateral for collateralized bonds are not subject
to margin calls. The maturity of each class of collateralized bonds is directly
affected by the rate of principal prepayments on the related collateral. Each
series is also subject to redemption according to specific terms of the
respective indentures, generally when the remaining balance of the bonds equals
35% or less of the original principal balance of the bonds. At December 31,
2000, Dynex REIT had $2.9 billion of collateralized bonds outstanding.
Recourse Debt
Secured. At December 31, 2000, the Company had a secured non-revolving credit
facility under which $66.8 million of letters of credit to support tax-exempt
bonds were outstanding. These letters of credit were secured, in part, by $22.3
million in cash held in escrow. These letters of credit were released during the
first quarter of 2001 as a result of the purchase, sale or transfer of the
underlying tax-exempt bonds, and the facility was extinguished.
The Company also uses repurchase agreements to finance a portion of its
investments, which generally have maturities of thirty-days or less. Repurchase
agreements allow the Company to sell investments for cash together with a
simultaneous agreement to repurchase the same investments on a specified date
for a price which is equal to the original sales price plus an interest
component. At December 31, 2000, the Company had repurchase agreements
outstanding of $35.0 million, all with Lehman Brothers, Inc. These repurchase
agreements remain on an "overnight" or one-day basis, and were secured by
securities with an unpaid principal balance of approximately $108.0 million, and
a fair value of approximately $94.5 million. The majority of these securities
are rated investment grade.
Increases in short-term interest rates, long-term interest rates or market
risk could negatively impact the valuation of securities and may limit the
Company's borrowing ability or cause various lenders to initiate margin calls
for securities financed using repurchase agreements. Additionally, certain
investments are classes of securities rated AA, A or BBB that are subordinated
to other classes from the same series of securities. Such subordinated classes
may 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 loans or receivables. In instances of a
downgrade of an insurer or the deterioration of the credit quality of the
underlying collateral, the Company may be required to sell certain investments
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.
Unsecured. As of December 31, 2000, the Company has $97.25 million
outstanding of its Senior Unsecured Notes issued in July 1997 and due July 15,
2002 (the "July 2002 Notes"). On March 30, 2001, the Company entered into an
amendment to the related indenture governing the July 2002 Notes whereby the
Company pledged to the Trustee of the July 2002 Notes substantially all of the
Company's unencumbered assets and the stock of its subsidiaries. In
consideration of this pledge, the indenture was further amended to provide for
the release of the Company from certain covenant restrictions in the indenture,
and specifically provided for the Company's ability to make distributions on its
capital stock in an amount not to exceed the sum of (a) $26 million, (b) the
cash proceeds of any "permitted subordinated indebtedness", (c) the cash
proceeds of the issuance of any "qualified capital stock", and (d) any
distributions required in order for the Company to maintain its REIT status. In
addition, the Company entered into a Purchase Agreement with holders of 50.1% of
the 2002 Notes which require the purchase by the Company of such securities at
various discounts based on a computation of available cash. On March 30, 2001,
the Company retired an additional $29.5 million of the July 2002 Notes for $26.5
million in cash under the Purchase Agreement. The discounts provided for under
the Purchase Agreement are as follows: by April 15, 2001, 10%; by July 15, 2001,
8%; by October 15, 2001, 6%; by January 15, 2002, 4%; by March 1, 2002, 2%;
thereafter until maturity, 0%.
The table below sets forth the recourse debt and recourse debt to equity of
the Company as of December 31, 2000, 1999, and 1998. Total recourse debt
decreased from $1.0 billion for December 31, 1998 to $0.5 billion for December
31, 1999 and $0.13 billion in 2000. These decreases are the result of the
Company's efforts since the end of 1998 to reduce its exposure to recourse debt
through the securitization or sale of assets. Recourse debt as a percentage of
equity also declined as a result of pay-downs on recourse debt, offset partially
by the Company's declining equity base due to the increase in accumulated other
comprehensive losses and operating losses in 2000.
Total Recourse Debt
($ in millions)
- ---------------------------------------------------------------------------------
Total Recourse Debt to
December 31, Total Recourse Debt Equity
- ---------------------------------------------------------------------------------
1998 $1,032.7 228%
1999 537.1 165%
2000 134.2 85%
- ---------------------------------------------------------------------------------
Summary of Selected Quarterly Results (unaudited)
(amounts in thousands except share data)
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
First Second Quarter Third Quarter Fourth Quarter
Year ended December 31, 2000 Quarter
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
Operating results:
Total revenues $ 79,214 $ 75,850 $ 70,789 $ 64,879
Net interest margin 5,979 1,901 1,252 (12,278)
Net loss (10,704) (68,695) (836) (11,629)
Basic net loss per common share (1.22) (6.28) (.35) (1.30)
Diluted net loss per common share (1.22) (6.28) (.35) (1.30)
Cash dividends declared per common share - - - -
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
Average interest-earning assets 4,084,732 3,868,116 3,503,052 3,317,136
Average borrowed funds 3,758,559 3,563,818 3,268,035 3,087,114
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
Net interest spread on interest-earning assets 0.83% 0.46% 0.4% 0.42%
Average asset yield 7.75% 7.81% 8.05% 7.98%
Net yield on average interest-earning assets (1) 1.38% 1.04% 0.92% 0.94%
Cost of funds 6.93% 7.35% 7.65% 7.56%
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
First Second Quarter Third Quarter Fourth Quarter
Year ended December 31, 1999 Quarter
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
Operating results:
Total revenues $ 88,477 $ 84,925 $ 86,308 $ 91,088
Net interest margin 11,213 14,594 12,274 9,934
Net income (loss) 2,259 3,574 320 (81,288)
Basic net income (loss) per common share (0.08) 0.03 (0.25) (7.39)
Diluted net income (loss) per common share (0.08) 0.03 (0.25) (7.39)
Cash dividends declared per common share -