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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000826675-01-000010.txt : 20010410
<SEC-HEADER>0000826675-01-000010.hdr.sgml : 20010410
ACCESSION NUMBER: 0000826675-01-000010
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010406
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: DYNEX CAPITAL INC
CENTRAL INDEX KEY: 0000826675
STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798]
IRS NUMBER: 521549373
STATE OF INCORPORATION: VA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-09819
FILM NUMBER: 1596781
BUSINESS ADDRESS:
STREET 1: 4551 COX RD
STREET 2: STE 300
CITY: GLEN ALLEN
STATE: VA
ZIP: 23060
BUSINESS PHONE: 8049675800
MAIL ADDRESS:
STREET 1: 4551 COX RD
STREET 2: STE 300
CITY: GLEN ALLEN
STATE: VA
ZIP: 23060
FORMER COMPANY:
FORMER CONFORMED NAME: RESOURCE MORTGAGE CAPITAL INC/VA
DATE OF NAME CHANGE: 19930722
FORMER COMPANY:
FORMER CONFORMED NAME: RESOURCE MORTGAGE INVESTMENT CORP
DATE OF NAME CHANGE: 19930505
FORMER COMPANY:
FORMER CONFORMED NAME: RAC MORTGAGE INVESTMENT CORP /VA/
DATE OF NAME CHANGE: 19930505
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>DYNEX CAPITAL, INC.
<TEXT>
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.
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
- --------------------------------------------- ---------------------------------------------------------------
As of December 31,
2000 1999
------------------------------- -------------------------------
(amounts in thousands) Balance % of Total Balance % of Total
- --------------------------------------------- ----------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
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%
- --------------------------------------------- ----------------- ------------- ----------------- -------------
</TABLE>
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Cash
Dividends
High Low Declared
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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 -
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Item 6. SELECTED FINANCIAL DATA
(amounts in thousands except share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
</TABLE>
<PAGE>
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
<TABLE>
<CAPTION>
- ------------------------------------------------------ -----------------------------------------
December 31,
(amounts in thousands except per share data) 2000 1999
- ------------------------------------------------------ -------------------- --------------------
<S> <C> <C>
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
- ------------------------------------------------------ -------------------- --------------------
</TABLE>
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
<TABLE>
<CAPTION>
- ----------------------------------------------------------------- --------------------------------------------------
For the Year Ended December 31,
(amounts in thousands except per share information) 2000 1999 1998
- ----------------------------------------------------------------- ---------------- --------------- -----------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------- ---------------- --------------- -----------------
<FN>
(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.
</FN>
</TABLE>
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
<TABLE>
<CAPTION>
- ------------------------------------------- --------------------------------------------------------------------------------
(amounts in thousands) Year ended December 31,
- ------------------------------------------- --------------------------------------------------------------------------------
2000 1999 1998
Average Effective Average Effective Average Effective
Balance Rate Balance Rate Balance Rate
- ------------------------------------------- -------------- ----------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
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
=========== =========== ===========
=========== =========== ===========
- ------------------------------------------- -------------- ----------- -------------- ----------- -------------- -----------
<FN>
(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.
</FN>
</TABLE>
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
2000 to 1999 1999 to 1998
- --------------------------------------------------------------------------------------------------------------------
Rate Volume Total Rate Volume Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------------------
<FN>
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.
</FN>
</TABLE>
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)
<TABLE>
<CAPTION>
- -------------------------------- ------------------ -------------------- --------------------- --------------- ---------------
Other Indices Based
LIBOR Based ARM CMT Based ARM Loans ARM Loans Fixed-Rate
December 31, Loans Loans Total
- -------------------------------- ------------------ -------------------- --------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
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
- -------------------------------- ------------------ -------------------- --------------------- --------------- ---------------
<FN>
(1) Includes only the principal amount of collateral for collateralized
bonds, ARM securities and fixed securities.
</FN>
</TABLE>
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)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Amortization
Net CPR Annualized Expense as a %
Remaining Amortization Rate Principal of Principal
Premium Expense Paydowns Paydowns
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
- -----------------------------------------------------------------------------------------------------
</TABLE>
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)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Credit Exposure, Credit Exposure, Net of
Outstanding Loan Net Actual Credit Credit Reserves to
Principal Balance of Credit Reserves Losses Outstanding Loan Balance
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
60 to 89 days delinquent 90 days and over
December 31, delinquent (2) Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 (1) 0.25% 2.11% 2.36%
1999 (1) 0.27% 1.37% 1.64%
2000 0.37% 1.59% 1.96%
- -----------------------------------------------------------------------------------------------------
<FN>
(1) Excludes funding notes and securities.
(2) Includes foreclosures, repossessions and REO.
</FN>
</TABLE>
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)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Total Recourse Debt to
December 31, Total Recourse Debt Equity
- ---------------------------------------------------------------------------------
<S> <C> <C>
1998 $1,032.7 228%
1999 537.1 165%
2000 134.2 85%
- ---------------------------------------------------------------------------------
</TABLE>
<PAGE>
Summary of Selected Quarterly Results (unaudited)
(amounts in thousands except share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
First Second Quarter Third Quarter Fourth Quarter
Year ended December 31, 2000 Quarter
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
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 - - - -
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
Average interest-earning assets 4,817,483 4,639,592 4,563,995 4,325,061
Average borrowed funds 4,576,714 4,379,658 4,253,524 4,010,174
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
Net interest spread on interest-earning assets 1.07% 1.39% 1.32% 1.21%
Average asset yield 7.24% 7.24% 7.60% 7.80%
Net yield on average interest-earning assets (1) 1.38% 1.72% 1.74% 1.69%
Cost of funds 6.17% 5.85% 6.28% 6.59%
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
- ------------------------------------------------------ ---------------- ---------------- --------------- ----------------
<FN>
(1) Computed as net interest margin excluding non-interest collateralized
bond expenses.
</FN>
</TABLE>
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain written statements in this Form 10-K made by the Company, that are
not historical fact constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements may
involve factors that could cause the actual results of the Company to differ
materially from historical results or from any results expressed or implied by
such forward-looking statements. The Company cautions the public not to place
undue reliance on forward-looking statements, which may be based on assumptions
and anticipated events that do not materialize. The Company does not undertake,
and the Securities Litigation Reform Act specifically relieves the Company from,
any obligation to update any forward-looking statements.
Factors that may cause actual results to differ from historical results or
from any results expressed or implied by forward-looking statements include the
following:
Economic Conditions. The Company is affected by general economic
conditions. The risk of defaults and credit losses could increase during an
economic slowdown or recession. This could have an adverse effect on the
Company's financial performance and the performance on the Company's securitized
loan pools.
Capital Resources. The Company relies on a repurchase facility with an
investment banking firm to help provide the Company's short-term funding needs.
The Company's access to alternative or additional sources of financing has been
significantly reduced.
Capital Markets. The Company relies on the capital markets for the sale
upon securitization of its collateralized bonds or other types of securities.
While the Company has historically been able to sell such collateralized bonds
and securities into the capital markets, the Company's access to capital markets
has been substantially reduced, which may impair the Company's ability to call
and re-securitize its existing securitizations in the future.
Interest Rate Fluctuations. The Company's income depends on its ability to
earn greater interest on its investments than the interest cost to finance these
investments. Interest rates in the markets served by the Company generally rise
or fall with interest rates as a whole. A majority of the loans currently
pledged as collateral for collateralized bonds by the Company are fixed-rate.
The Company currently finances these fixed-rate assets through non-recourse
debt, approximately $207 million of which is variable rate. In addition, a
significant amount of the investments held by the Company are variable rate
collateral for collateralized bonds. These investments are financed through
non-recourse long-term collateralized bonds and, to a lesser extent, recourse
short-term repurchase agreements. The net interest spread for these investments
could decrease during a period of rapidly rising short-term interest rates,
since the investments generally have periodic interest rate caps and the related
borrowing have no such interest rate caps.
Defaults. Defaults by borrowers on loans retained by the Company may have
an adverse impact on the Company's financial performance, if actual credit
losses differ materially from estimates made by the Company at the time of
securitization. The allowance for losses is calculated on the basis of
historical experience and management's best estimates. Actual default rates or
loss severities may differ from the Company's estimate as a result of economic
conditions. Actual defaults on ARM loans may increase during a rising interest
rate environment. The Company believes that its reserves are adequate for such
risks on loans that were delinquent as of December 31, 2000.
Prepayments. Prepayments by borrowers on loans securitized by the Company
may have an adverse impact on the Company's financial performance. Prepayments
are expected to increase during a declining interest rate or flat yield curve
environment. The Company's exposure to rapid prepayments is primarily (i) the
faster amortization of premium on the investments and, to the extent applicable,
amortization of bond discount, and (ii) the replacement of investments in its
portfolio with lower yield securities.
Competition. The financial services industry is a highly competitive
market. Increased competition in the market has adversely affected the Company,
and may continue to do so.
Regulatory Changes. The Company's businesses as of December 31, 2000 are
not subject to any material federal or state regulation or licensing
requirements. However, changes in existing laws and regulations or in the
interpretation thereof, or the introduction of new laws and regulations, could
adversely affect the Company and the performance of the Company's securitized
loan pools or its ability to collect on its delinquent property tax
receivables..
Risks and Uncertainties. See Note 1 to the Company's financial statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument due to fluctuations in
interest and foreign exchange rates and in equity and commodity prices. Market
risk is inherent to both derivative and non-derivative financial instruments,
and accordingly, the scope of the Company's market risk management extends
beyond derivatives to include all market risk sensitive financial instruments.
As a financial services company, net interest income comprises the primary
component of the Company's earnings. As a result, the Company is subject to risk
resulting from interest rate fluctuations to the extent that there is a gap
between the amount of the Company's interest-earning assets and the amount of
interest-bearing liabilities that are prepaid, mature or reprice within
specified periods. The Company's strategy has been to mitigate interest rate
risk through the creation of a diversified investment portfolio of high quality
assets that, in the aggregate, preserves the Company's capital base while
generating stable income in a variety of interest rate and prepayment
environments.
The Company monitors the aggregate cash flow, projected net yield and
market value of its investment portfolio under various interest rate and
prepayment assumptions. While certain investments may perform poorly in an
increasing or decreasing interest rate environment, other investments may
perform well, and others may not be impacted at all.
The Company measures the sensitivity of its net interest income, excluding
various accounting adjustments including provision for losses, and premium and
discount amortization, to changes in interest rates. Changes in interest rates
are defined as instantaneous, parallel, and sustained interest rate movements in
100 basis point increments. The Company estimates its interest income for the
next twelve months assuming no changes in interest rates from those at period
end. Once the base case has been estimated, cash flows are projected for each of
the defined interest rate scenarios. Those scenario results are then compared
against the base case to determine the estimated change to net interest income,
excluding various accounting adjustments as set forth above.
The following table summarizes the Company's net interest margin
sensitivity analysis as of December 31, 2000. This analysis represents
management's estimate of the percentage change in net interest margin given a
parallel shift in interest rates. The "Base" case represents the interest rate
environment as it existed as of December 31, 2000. The analysis is heavily
dependent upon the assumptions used in the model. The effect of changes in
future interest rates, the shape of the yield curve or the mix of assets and
liabilities may cause actual results to differ from the modeled results. In
addition, certain financial instruments provide a degree of "optionality." The
model considers the effects of these embedded options when projecting cash flows
and earnings. The most significant option affecting the Company's portfolio is
the borrowers' option to prepay the loans. The model applies prepayment rate
assumptions representing management's estimate of prepayment activity on a
projected basis for each collateral pool in the investment portfolio. While the
Company's model considers these factors, the extent to which borrowers utilize
the ability to exercise their option may cause actual results to significantly
differ from the analysis. Furthermore, its projected results assume no additions
or subtractions to the Company's portfolio, and no change to the Company's
liability structure. Historically, the Company has made significant changes to
its assets and liabilities, and is likely to do so in the future.
<PAGE>
Basis Point % Change in Net
Increase (Decrease) in Interest Margin from
Interest Rates Base Case
- -------------------------- -----------------------
+200 (9.7)%
+100 (4.8)%
Base
-100 4.8%
-200 9.7%
The Company's investment policy sets forth guidelines for assuming interest
rate risk. The investment policy stipulates that given a 200 basis point
increase or decrease in interest rates over a twelve month period, the estimated
net interest margin may not change by more than 25% of current net interest
margin during the subsequent one year period
Approximately $1.17 billion of the Company's investment portfolio as of
December 31, 2000 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% and 27%
of the ARM loans underlying the Company's ARM securities and collateral for
collateralized bonds are indexed to and reset based upon the level of six-month
LIBOR and one-year CMT, respectively.
Generally, during a period of rising short-term interest rates, the
Company's net interest spread earned on its investment portfolio will decrease.
The decrease of the net interest spread results from (i) the lag in resets of
the ARM loans underlying the ARM securities and collateral for collateralized
bonds relative to the rate resets on the associated borrowings and (ii) rate
resets on the ARM loans which are generally limited to 1% every six months or 2%
every twelve months and subject to lifetime caps, while the associated
borrowings have no such limitation. As short-term interest rates stabilize and
the ARM loans reset, the net interest margin may be restored to its former level
as the yields on the ARM loans adjust to market conditions. Conversely, net
interest margin may increase following a fall in short-term interest rates. This
increase may be temporary as the yields on the ARM loans adjust to the new
market conditions after a lag period. In each case, however, the Company expects
that the increase or decrease in the net interest spread due to changes in the
short-term interest rates to be temporary. The net interest spread may also be
increased or decreased by the proceeds or costs of interest rate swap, cap or
floor agreements, to the extent that the Company has entered into such
agreements.
The remaining portion of the Company's investments portfolio as of December
31, 2000, approximately $1.9 billion, is comprised of loans or securities that
have coupon rates that are fixed. The Company has substantially limited its
interest rate risk on such investments through (i) the issuance of fixed-rate
collateralized bonds and notes payable which approximated $1.6 billion as of
December 31, 2000, and (ii) equity, which approximated $157.1 million as of the
same date. Overall, the Company's interest rate risk is related both to the rate
of change in short term interest rates, and to the level of short term interest
rates.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the related notes,
together with the Independent Auditors' Reports thereon are set forth on pages
F-1 through F-25 of this Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 as to directors and executive officers
of the Company is included in the Company's proxy statement for its 2001 Annual
Meeting of Stockholders (the 2001 Proxy Statement) in the Election of Directors
and Management of the Company sections and is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is included in the 2001 Proxy Statement
in the Management of the Company section and is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is included in the 2001 Proxy Statement
in the Ownership of Common Stock section and is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is included in the 2001 Proxy Statement
in the Compensation Committee Interlocks and Insider Participation section and
is incorporated herein by reference.
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. and 2. Financial Statements and Financial Statement Schedule
The information required by this section of Item 14 is set forth in the
Consolidated Financial Statements and Independent Auditors' Report beginning at
page F-1 of this Form 10-K. The index to the Financial Statements and Schedule
is set forth at page F-2 of this Form 10-K.
3. Exhibits
Exhibit
Number Exhibit
3.1 Articles of Incorporation of the Registrant, as amended, effective as
of February 4, 1988. (Incorporated herein by reference to the
Company's Amendment No. 1 to the Registration Statement on Form S-3
(No. 333-10783)filed March 21, 1997.)
3.2 Amended Bylaws of the Registrant (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
1992, as amended.)
3.3 Amendment to the Articles of Incorporation, effective December 29,
1989(Incorporated herein by reference to the Company's Amendment
No. 1 to the Registration Statement on Form S-3 (No. 333-10783)
filed March 21, 1997.)
3.4 Amendment to Articles of Incorporation, effective June 27, 1995
(Incorporated herein by reference to the Company's Current Report
on Form 8-K (File No. 1-9819), dated June 26, 1995.)
3.5 Amendment to Articles of Incorporation, effective October 23, 1995,
(Incorporated herein by reference to the Company's Current Report on
Form 8-K (File No. 1-9819), dated October 19, 1995.)
3.6 Amendment to the Articles of Incorporation, effective October 9, 1996,
(Incorporated herein by reference to the Registrant's Current Report
on Form 8-K, filed October 15, 1996.)
3.7 Amendment to the Articles of Incorporation, effective October 10, 1996,
(Incorporated herein by reference to the Registrant's Current Report
on Form 8-K, filed October 15, 1996.)
3.8 Amendment to the Articles of Incorporation, effective October 19,
1992. (Incorporated herein by reference to the Company's Amendment
No. 1 to the Registration Statement on Form S-3 (No. 333-10783)
filed March 21, 1997.)
3.9 Amendment to the Articles of Incorporation, effective August 17, 1992.
(Incorporated herein by reference to the Company's Amendment No. 1 to
the Registration Statement on Form S-3 (No. 333-10783) filed
March 21, 1997.)
3.10 Amendment to Articles of Incorporation, effective April 25, 1997.
(Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997.)
3.11 Amendment to Articles of Incorporation, effective May 5, 1997.
(Incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997.)
10.1 Dividend Reinvestment and Stock Purchase Plan (Incorporated herein
by reference to the Company's Registration Statement on Form S-3
(No. 333-35769).)
10.2 Executive Deferred Compensation Plan (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-9819) dated March 21, 1994.)
10.3 Employment Agreement: Thomas H. Potts (Incorporated by reference to
Exhibits to the Company's Annual Report filed on Form 10-K for the year
ended December 31, 1994 (File No. 1-9819) dated March 31, 1995.)
10.4 Promissory Note, dated as of May 13, 1996, between the Registrant (as
Lender) and Dominion Mortgage Services, Inc. (as Borrower)(Incorporated
herein by reference to Exhibits to the Company's Form 10-Q for the
quarter ended June 30, 1996 (File No. 1-9819) dated August 14, 1996.)
10.5 The Registrant's Bonus Plan (Incorporated by reference to Exhibits to
the Company's Annual Report filed on Form 10-K for the year ended
December 31, 1996 (File No. 1-9819) dated March 31, 1997.)
10.6 The Directors Stock Appreciation Rights Plan (Incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997.)
10.7 1992 Stock Incentive Plan as amended (Incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.)
21.1 List of consolidated entities of the Company (filed herewith)
23.1 Consent of Deloitte & Touche LLP (filed herewith)
(b) Reports on Form 8-K
Current Report on Form 8-K as filed with the Commission on October 18, 2000,
relating to the possible acquisition of the Company by California Investment
Fund LLC.
Current Report on Form 8-K as filed with the Commission on November 8, 2000,
relating to the agreement and plan of merger between the Company and California
Investment Fund LLC.
Current Report on Form 8-K as filed with the Commission on December 26, 2000,
relating to the letter dated December 22, 2000 and delivered to California
Investment Fund, LLC declaring that CIF was in breach of the terms of the merger
agreement.
Current Report on Form 8-K as filed with the Commission on December 28, 2000,
relating to the letter dated December 22, 2000 which was countersigned by
California Investment Fund, LLC.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DYNEX CAPITAL, INC.
(Registrant)
April 4, 2001 /s/ Thomas H. Potts
Thomas H. Potts
President
(Principal Executive Officer)
April 4, 2001 /s/ Stephen J. Benedetti
Stephen J. Benedetti
Vice President and Treasurer
(Principal Accounting and Financial Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>>
/s/ Thomas H. Potts Director April 4, 2001
Thomas H. Potts
/s/ J. Sidney Davenport, IV Director April 4, 2001
J. Sidney Davenport, IV
/s/ Leon A. Felman Director April 4, 2001
Leon A. Felman
/s/ Barry Igdaloff Director April 4, 2001
Barry Igdaloff
/s/ Barry S. Shein Director April 4, 2001
Barry S. Shein
/s/ Donald B. Vaden Director April 4, 2001
Donald B. Vaden
</TABLE>
<PAGE>
DYNEX CAPITAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
For Inclusion in Form 10-K
Annual Report Filed with
Securities and Exchange Commission
December 31, 2000
<PAGE>
DYNEX CAPITAL, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Financial Statements: Page
<S> <C>
Independent Auditors' Report for the Years Ended
December 31, 2000 , 1999 and 1998 F-3
Consolidated Balance Sheets -- December 31, 2000 and 1999 F-4
Consolidated Statements of Operations -- Years ended
December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Shareholders' Equity -- Years ended
December 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows -- Years ended
December 31, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements --
December 31, 2000, 1999, and 1998
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Dynex Capital, Inc.
We have audited the accompanying consolidated balance sheets of Dynex Capital,
Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the
related consolidated statements of operations, shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Dynex Capital, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 30, 2001
CONSOLIDATED BALANCE SHEETS
DYNEX CAPITAL, INC.
December 31, 2000 and 1999
(amounts in thousands except share data)
<TABLE>
<CAPTION>
2000 1999
------------------ -----------------
ASSETS
<S> <C> <C>
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 17,376 232,384
------------------ -----------------
3,112,908 4,111,356
Investments in and advances to Dynex Holding, Inc. - 4,814
Cash, substantially restricted 26,773 54,433
Accrued interest receivable 323 2,208
Other assets 19,592 19,705
------------------ -----------------
$ 3,159,596 $ 4,192,516
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Non-recourse debt $ 2,856,728 $ 3,282,378
Recourse debt:
Secured by collateralized bonds retained 32,910 144,746
Secured by investments 4,535 282,479
Unsecured 96,723 109,873
--------------
---- -----------------
2,990,896 3,819,476
Accrued interest payable 3,775 6,303
Accrued expenses and other liabilities 7,794 41,665
------------------
------------------ -----------------
3,002,465 3,867,444
------------------ -----------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 50,000,000 shares authorized:
9.75% Cumulative Convertible Series A,
1,309,061 issued and outstanding 29,900 29,900
9.55% Cumulative Convertible Series B,
1,912,434 issued and outstanding 44,767 44,767
9.73% Cumulative Convertible Series C,
1,840,000 issued and outstanding 52,740 52,740
Common stock, par value $.01 per share,
100,000,000 shares authorized,
11,444,206 and 11,444,099 issued and outstanding, respectively 114 114
Additional paid-in capital 351,999 351,995
Accumulated other comprehensive loss (124,589) (48,507)
Accumulated deficit (197,800) (105,937)
------------------ -----------------
157,131 325,072
--------------
---- -----------------
$ 3,159,596 $ 4,192,516
================== =================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
DYNEX CAPITAL, INC.
Years ended December 31, 2000, 1999 and 1998 (amounts in thousands except share
data)
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
Interest income:
Collateral for collateralized bonds $ 271,463 $ 284,470 $ 303,994
Securities 3,595 14,228 41,991
Other investments 5,336 4,388 4,099
Loans held for sale 10,766 26,276 44,450
Other - 12,087 10,979
------------------- ------------------- -------------------
291,160 341,449 405,513
------------------- ------------------- -------------------
Interest and related expense:
Non-recourse debt 232,916 210,794 231,242
Recourse debt 21,595 59,906 99,119
Other 5,162 6,580 2,193
------------------- ------------------- -------------------
259,673 277,280 332,554
------------------- ------------------- -------------------
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 (78,516) (96,700) (20,346)
Equity in net (loss) earnings of Dynex Holding, Inc. (680) (1,923) 2,456
Other (expense) income (428) 1,673 2,852
------------------- ------------------- -------------------
(82,771) (48,935) 51,500
General and administrative expenses (8,712) (7,740) (8,973)
Net administrative fees and expenses to Dynex Holding, Inc. (381) (16,943) (22,379)
------------------- ------------------- -------------------
(Loss) income before extraordinary item (91,863) (73,618) 20,148
Extraordinary item - loss on extinguishment of debt - (1,517) (571)
--------------- --------------- ---------------
----- ----- -----
Net (loss) income (91,863) (75,135) 19,577
Dividends on preferred stock (12,911) (12,910) (13,019)
------------------- ------------------- -------------------
Net (loss) income available to common shareholders $ (104,774) $ (88,045) $ 6,558
=================== =================== ===================
Net (loss) income per common share before extraordinary item:
Basic $ (9.15) $ (7.53) $ 0.62
=================== =================== ===================
Diluted $ (9.15) $ (7.53) $ 0.62
=================== =================== ===================
Net (loss) income per common share after extraordinary item:
Basic $ (9.15) $ (7.67) $ 0.57
=================== =================== ===================
Diluted $ (9.15) $ (7.67) $ 0.57
=================== =================== ===================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DYNEX CAPITAL, INC.
Years ended December 31, 2000, 1999, and 1998 (amounts in thousands except share
data)
<TABLE>
<CAPTION>
Accumulated Retained
Additional Other Earnings
Preferred Common Paid-in Comprehensive (Accumulated
Stock Stock Capital (Loss) Income Deficit) Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 130,482 451 342,570 79,441 7,965 560,909
Comprehensive loss:
Net income - 1998 - - - - 19,577 19,577
Change in net unrealized gain on
investments classified as available
for sale during the period - - - (82,538) - (82,538)
-------------
Total comprehensive loss (62,961)
Issuance of common stock - 7 7,652 - - 7,659
Conversion of preferred stock (3,075) 3 3,072 - - -
Retirement of common stock - (1) (912) - - (913)
Dividends on common stock at $3.40
per share - - - - (38,871) (38,871)
Dividends on preferred stock - - - - (13,019) (13,019)
----------------------------------------------------------------------------------------
Balance at December 31, 1998 127,407 460 352,382 (3,097) (24,348) 452,804
Comprehensive loss:
Net loss - 1999 - - - - (75,135) (75,135)
Change in net unrealized loss on
investments classified as available
for sale during the period - - - (45,410) - (45,410)
-------------
Total comprehensive loss (120,545)
Issuance of common stock - - 30 - - 30
One-for-four reverse common stock
split - (345) 345 - - -
Retirement of common stock - (1) (699) - - (700)
Issuance of restricted stock awards - - 6 - - 6
Forfeitures of restricted stock awards - - (69) - - (69)
Dividends on preferred stock - - - - (6,454) (6,454)
----------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 127,407 $ 114 $ 351,995 $ (48,507) $ (105,937) $ 325,072
Comprehensive loss:
Net loss - 2000 - - - - (91,863) (91,863)
Change in net unrealized loss on
investments classified as available
for sale during the period - - - (76,082) - (76,082)
-------------
Total comprehensive loss (167,945)
Issuance of common stock - - 4 - - 4
----------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 127,407 $ 114 $ 351,999 $ (124,589) $ (197,800) $ 157,131
========================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
DYNEX CAPITAL, INC.
Years ended December 31, 2000, 1999 and 1998
(amounts in thousands except share data)
<TABLE>
<CAPTION>
2000 1999 1998
-------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net (loss) income $ (91,863) $ (75,135) $ 19,577
Adjustments to reconcile net (loss) income to cash provided by operating
activities:
Provision for losses 34,633 16,154 6,421
Net loss on sales, write-downs, and impairment charges 78,516 96,700 20,346
Equity in net (earnings) loss of Dynex Holding, Inc. 680 1,923 (2,456)
Extraordinary item - loss on extinguishment of debt - 1,517 571
Amortization and depreciation 16,117 28,133 43,938
Payment of litigation settlement (20,000) - -
Net change in restricted cash 8,014 (6,865) (11,948)
Net change in accrued interest, other assets and other liabilities (5,629) (9,425) (4,471)
-------------- --------------- ---------------
Net cash provided by operating activities 20,468 53,002 71,978
-------------- --------------- ---------------
Investing activities:
Collateral for collateralized bonds:
Fundings of investments subsequently securitized - (627,290) (1,857,617)
Principal payments on collateral 521,355 1,119,841 2,112,473
Decrease in accrued interest receivable 2,132 5,080 1,057
Net decrease (increase) in funds held by trustee 774 (1,051) 889
Net decrease (increase) in loans held for sale or securitization 198,785 84,762 (155,497)
Purchase of other investments (9,476) (33,348) (38,192)
Payments received on other investments 4,358 11,254 16,977
Purchase of securities - (23,737) (599,869)
Proceeds from sales of other investments 4,468 - -
Payments received on securities 20,533 79,009 122,693
Proceeds from sales of securities 20,111 61,415 424,338
Payments for sale of tax-exempt bond obligations (30,284) - -
Investment in and advances to Dynex Holding, Inc. 4,134 (26,335) (47,572)
Proceeds from sale of loan production operations 9,500 213,591 19,000
Capital expenditures (92) (281) (402)
-------------- --------------- ---------------
Net cash provided by (used for) investing activities 746,298 862,910 (1,722)
-------------- --------------- ---------------
Financing activities:
Collateralized bonds:
Proceeds from issuance of bonds 140,724 1,069,048 1,817,179
Principal payments on bonds (524,040) (1,091,216) (2,066,915)
Increase (decrease) in accrued interest payable 780 3,677 (262)
Repayment of senior notes (13,570) (17,833) (11,750)
(Repayment of ) proceeds from recourse debt borrowings, net (390,310) (851,771) 252,554
Net proceeds from issuance of stock 4 30 7,659
Retirement of common stock - (700) (913)
Dividends paid - (9,682) (68,155)
-------------- --------------- ---------------
Net cash used for financing activities (786,412) (898,447) (70,603)
-------------- --------------- ---------------
Net (decrease) increase in cash (19,646)) 17,465 (347)
Cash at beginning of period 23,131 5,666 6,013
-------------- --------------- ---------------
Cash at end of period $ 3,485 $ 23,131 $ 5,666
============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
December 31, 2000, 1999, and 1998
(amounts in thousands except share data)
NOTE 1 - BASIS OF PRESENTATION
Basis of Presentation
The consolidated financial statements include the accounts of Dynex Capital,
Inc. and its qualified REIT subsidiaries (together, "Dynex REIT"). The Company's
operations related to originating or purchasing loans were primarily conducted
through Dynex Holding, Inc. ("DHI"), a taxable affiliate of Dynex REIT. During
2000, 1999 and 1998, Dynex REIT owned all of the outstanding non-voting
preferred stock of DHI representing a 99% economic ownership interest in DHI.
The common stock of DHI represents a 1% economic ownership of DHI and was owned
by certain officers of Dynex REIT. For each of the three years in the period
ended December 31, 2000, DHI was accounted for under an accounting method
similar to the equity method. In November 2000, certain subsidiaries of DHI were
sold to Dynex REIT, and on December 31, 2000, DHI was liquidated in a taxable
transaction into Dynex REIT. As a result of the liquidation, effectively all of
the assets and liabilities of DHI have been transferred to Dynex REIT as of
December 31, 2000. References to the "Company" mean Dynex Capital, Inc., its
consolidated subsidiaries, and DHI and its consolidated subsidiaries. All
significant intercompany balances and transactions with Dynex REIT's
consolidated subsidiaries have been eliminated in consolidation of Dynex REIT.
Risks and Uncertainties
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.
During 2000, the Company paid down on-balance sheet recourse borrowings by
$402,935 and off-balance sheet liabilities (such as letters of credit and
conditional repurchase obligations) of $180,000. On March 26, 2001, the Company
extinguished its credit facility with a consortium of commercial banks and on
March 30, 2001, repurchased a net $29,484 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 $67,766 of the July 2002 Notes and $29,200 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 existing security interests) by
substantially all of the assets of the Company. See Note 8 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) $26,000, (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 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) the 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 above-referenced amendment. The Company
expects to inform shareholders of the Company's contemplated course of action by
May 31, 2001.
Reclassifications
Certain reclassifications have been made to the financial statements for the
years ended December 31, 1999 and 1998 to conform to the December 31, 2000
presentation.
Stock Splits
On May 5, 1997, Dynex REIT completed a two-for-one common stock split. On July
26, 1999, Dynex REIT completed a one-for-four reverse common stock split. All
references to the per share amounts in the accompanying consolidated financial
statements and related notes have been restated to reflect both stock splits.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Federal Income Taxes
Dynex REIT has elected to be taxed as a real estate investment trust ("REIT")
under the Internal Revenue Code. As a result, Dynex REIT generally will not be
subject to federal income taxation at the corporate level to the extent that it
distributes at least 95 percent of its taxable income to its shareholders within
the proscribed period and complies with certain other requirements. No provision
has been made for income taxes for Dynex Capital, Inc. and its qualified REIT
subsidiaries in the accompanying consolidated financial statements, as Dynex
REIT believes it has met or will meet the prescribed requirements.
Investments
Pursuant to the requirements of Statement of Financial Accounting Standards No.
115 ("FAS No. 115"), "Accounting for Certain Investments in Debt and Equity
Securities," Dynex REIT is required to classify certain of its investments as
either trading, available-for-sale or held-to-maturity. Dynex REIT has
classified collateral for collateralized bonds and securities as
available-for-sale. These investments are therefore reported at fair value, with
unrealized gains and losses excluded from earnings and reported as accumulated
other comprehensive income. Any decline in the fair value of an investment below
its amortized cost which is deemed to be other than temporary is charged to
earnings. The basis of any securities sold is computed using the specific
identification method. Collateral for collateralized bonds can be sold only
subject to the lien of the respective collateralized bond indenture, unless the
related bonds have been redeemed.
Collateral for Collateralized Bonds. Collateral for collateralized bonds
consists of securities which have been pledged to secure collateralized bonds.
These securities are primarily backed by loans on single family, multifamily and
commercial properties and installment loans on manufactured housing.
Substantially all of the collateral for collateralized bonds is pledged to
secure non-recourse debt in the form of collateralized bonds issued by
limited-purpose finance subsidiaries and is not available for the satisfaction
of general claims of Dynex REIT. As the collateralized bonds are non-recourse to
Dynex REIT, Dynex REIT's exposure to loss on the assets pledged as collateral
for collateralized bonds is generally limited to the amount of collateral
pledged to the collateralized bonds in excess of the amount of the
collateralized bonds issued.
Securities. Securities at December 31, 2000 consist primarily of adjustable-rate
mortgage ("ARM") securities, fixed-rate mortgage securities, and mortgage
derivative securities. Securities at December 31, 1999 consist primarily of
fixed-rate funding notes and securities secured by fixed-rate automobile
installment contracts ("Funding Notes" and "Securities"), ARM securities,
fixed-rate mortgage securities, mortgage derivative securities and mortgage
residual interests.
Other Investments. Other investments consist primarily of delinquent property
tax receivables and an installment note receivable received in connection with
the sale of the Company's single family mortgage operations in May 1996. Other
investments are carried at their amortized cost basis.
Loans Held for Sale
Loans held for sale at December 31, 2000 and 1999 primarily include first
mortgage loans secured by multifamily and commercial properties. These loans are
considered held for sale, and accordingly are carried at the lower of cost or
market. Certain loans held for sale at December 31, 2000 and 1999 are
construction loans on multifamily properties. Such loans are carried at the
balance funded to date. Interest earned on these loans is capitalized and
included as a component of the amount funded until construction is completed.
Price Premiums and Discounts
Price premiums and discounts on investments and obligations are amortized into
interest income or expense, respectively, over the life of the related
investment or obligation using a method that approximates the effective yield
method.
Deferred Issuance Costs
Costs incurred in connection with the issuance of collateralized bonds and
unsecured notes are deferred and amortized over the estimated lives of their
respective debt obligations using a method that approximates the effective yield
method.
Derivative Financial Instruments
Dynex REIT may enter into interest rate swap agreements, interest rate cap
agreements, interest rate floor agreements, financial forwards, financial
futures and options on financial futures ("Interest Rate Agreements") to manage
its sensitivity to changes in interest rates. These Interest Rate Agreements are
intended to provide income and cash flow to offset potential reduced net
interest income and cash flow under certain interest rate environments. At trade
date, these instruments are designated as either hedge positions or trade
positions.
For Interest Rate Agreements designated as hedge instruments, Dynex REIT
evaluates the effectiveness of these hedges periodically against the financial
instrument being hedged under various interest rate scenarios. The revenues and
costs associated with interest rate swap agreements are recorded as adjustments
to interest income or expense on the asset or liability being hedged. For
interest rate cap agreements, the amortization of the cost of the agreements is
recorded as a reduction in the net interest income on the related investment.
The unamortized cost is included in the carrying amount of the related
investment. Revenues or cost associated with futures and option contracts are
recognized in income or expense in a manner consistent with the accounting for
the asset or liability being hedged. Amounts payable to or receivable from
counterparties are included in the financial statement line of the item being
hedged. Interest Rate Agreements that are hedge instruments and hedge an
available for sale investment which is carried at its fair value are also
carried at fair value, with unrealized gains and losses reported as accumulated
other comprehensive income.
As a part of Dynex REIT's interest rate risk management process, Dynex REIT may
be required periodically to terminate hedge instruments. Any realized gain or
loss resulting from the termination of a hedge is amortized into income or
expense of the corresponding hedged instrument over the remaining period of the
original hedge or hedged instrument as a yield adjustment.
If the underlying asset, liability or commitment is sold or matures, or the
criteria that was executed at the time the hedge instrument was entered into no
longer exists, the Interest Rate Agreement is no longer accounted for as a
hedge. Under these circumstances, the accumulated change in the market value of
the hedge is recognized in current income to the extent that the effects of
interest rate or price changes of the hedged item have not offset the hedge
results.
Dynex REIT may also enter into forward delivery contracts and interest rate
futures and options contracts for hedging interest rate risk associated with
commitments made to fund loans. Gains and losses on these contracts are deferred
as an adjustment to the carrying value of the related loans until the loan has
been funded and accounted for consistent with the accounting of the underlying
loan, or are recognized if the associated forward contract expires or is
otherwise terminated.
For Interest Rate Agreements entered into for trading purposes, realized and
unrealized changes in fair value of these instruments are recognized in the
consolidated statements of operations as trading activities in the period in
which the changes occur or when such trade instruments are settled. Amounts
payable to or receivable from counterparties, if any, are included on the
consolidated balance sheets in accrued expenses and other liabilities.
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.
Cash - Restricted
Approximately $23,288 and $31,302 of cash at December 31, 2000 and 1999,
respectively, is either held as collateral primarily for outstanding letters of
credit; or is held in trust to cover losses not otherwise covered by insurance.
Net Income Per Common Share
Net income per common share is presented on both a basic net income per common
share and diluted net income per common share basis. Diluted net income per
common share assumes the conversion of the convertible preferred stock into
common stock, using the if-converted method, and stock appreciation rights,
using the treasury stock method, but only if these items are dilutive. As a
result of the two-for-one split in May 1997 and the one-for-four reverse split
in July 1999 of Dynex REIT's common stock, the preferred stock is convertible
into one share of common stock for two shares of preferred stock.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. Actual
results could differ from those estimates. The primary estimates inherent in the
accompanying consolidated financial statements are discussed below.
Fair Value. Dynex REIT uses estimates in establishing fair value for its
financial instruments. Estimates of fair value for financial instruments may be
based on market prices provided by certain dealers. Estimates of fair value for
certain other financial instruments are determined by calculating the present
value of the projected cash flows of the instruments using appropriate discount
rates, prepayment rates and credit loss assumptions. Collateral for
collateralized bonds make up a significant portion of Dynex REIT's investments.
The estimate of fair value for collateral for collateralized bonds is determined
by calculating the present value of the projected cash flows of the instruments,
using discount rates, prepayment rate assumptions and credit loss assumptions
established by management. The discount rate used in the determination of fair
value of the collateral for collateralized bonds was 16% at December 31, 2000
and 1999. Prepayment rate assumptions at December 31, 2000 were generally at a
"constant prepayment rate", or CPR, of 28% for securities secured by single
family mortgage loans, and a CPR equivalent of 7% for securities secured by
manufactured housing loan collateral. Commercial mortgage loan collateral was
generally assumed to prepay at the average expiration date of associated
prepayment lock-out periods. For the December 31, 1999 estimate of fair value,
the Company estimated CPR for single-family mortgage loans of 30%, and a CPR
equivalent of 12% for securities secured by manufactured housing loans. CPR
assumptions for each year are based in part on the actual prepayment rates
experienced and in part on management's estimate of future prepayment activity.
The loss assumptions utilized vary for each series of collateral of
collateralized bonds, depending on the collateral pledged. The cash flows for
the collateral for collateralized bonds were projected to the estimated date
that the security can be called and retired by the Company, which is typically
triggered when the remaining security balance equals 35% of the original
balance. In most cases, the Company assumes that at the time of the call, the
underlying collateral is sold at anticipated market prices.
Estimates of fair value for other financial instruments are based primarily on
management's judgment. Since the fair value of Dynex REIT's financial
instruments is based on estimates, actual gains and losses recognized may differ
from those estimates recorded in the consolidated financial statements. The fair
value of all on- and off-balance sheet financial instruments is presented in
Note 9.
Allowance for Losses. As discussed in Note 6, Dynex REIT has credit risk on
certain investments in its portfolio. An allowance for losses has been estimated
and established for current expected losses based on management's judgment. The
allowance for losses is evaluated and adjusted periodically by management based
on the actual and projected timing and amount of probable credit losses, as well
as industry loss experience. Provisions made to increase the allowance related
to credit risk are presented as provision for losses in the accompanying
consolidated statements of operations. Dynex REIT's actual credit losses may
differ from those estimates used to establish the allowance.
Derivative and Residual Securities. Income on certain derivative and residual
securities is accrued using the effective yield method based upon estimates of
future cash flows to be received over the estimated remaining lives of the
related securities. Reductions in carrying value are made when the total
projected cash flow is less than the Company's basis, based on either the
dealers' prepayment assumptions or, if it would accelerate such adjustments,
management's expectations of interest rates and future prepayment rates. In some
cases, derivative and residual securities may also be placed on non-accrual
status.
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 the 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.
NOTE 3 - SUBSEQUENT EVENTS
On March 30, 2000, 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) $26,000, (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 July 2002 Notes which require
the purchase of such securities at various discounts based on a computation of
available cash. On March 30, 2000, the Company retired a net $29,484 of July
2002 Notes for $26,535 in cash. The discounts provided for under the above
referenced 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%.
At December 31, 2000, Dynex REIT had a secured non-revolving credit facility
under which $66,765 of letters of credit to support tax-exempt bonds had been
issued. The letters of credit were collateralized by approximately $22,318 of
cash. 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,
the facility was extinguished, and all the collateral pledged under facility was
released to the Company.
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 $90,000 (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 $1,000 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
$45,000. The Company believes that the Agreement is clear that the maximum
damages that CIF may recover from the Company is $2,000. 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.
In February 2001, the Company resolved a matter related to AutoBond Acceptance
Corporation ("AutoBond") to the mutual satisfaction of the parties involved. In
connection with the resolution of this matter, the Company received $7,500.
NOTE 4 - COLLATERAL FOR COLLATERALIZED BONDS, SECURITIES AND OTHER INVESTMENTS
The following table summarizes Dynex REIT's amortized cost basis and fair value
of investments classified as available-for-sale, as of December 31, 2000 and
1999, and the related average effective interest rates:
<TABLE>
<CAPTION>
- ------------------------------------------- ------------------------------ ----- ------------------------------
2000 1999
Effective Effective
Fair Value Interest Rate Fair Value Interest Rate
- ------------------------------------------- --------------- -------------- ----- -------------- ---------------
<S> <C> <C> <C> <C>
Collateral for collateralized bonds:
Amortized cost $ 3,189,414 7.8% $ 3,752,702 7.8%
Allowance for losses (25,314) (15,299)
- ------------------------------------------- --------------- -------------- ----- -------------- ---------------
Amortized cost, net 3,164,100 3,737,403
Gross unrealized gains 37,803 34,198
Gross unrealized losses (159,745) (70,887)
- ------------------------------------------- --------------- -------------- ----- -------------- ---------------
$ 3,042,158 $ 3,700,714
- ------------------------------------------- --------------- -------------- ----- -------------- ---------------
Securities:
Funding Notes and Securities $ - $ 94,890 6.8%
- %
Adjustable-rate mortgage securities 5,008 10.9% 18,047 7.0%
Fixed-rate mortgage securities 1,505 9.3% 9,861 13.5%
Derivative and residual securities 5,553 7.9% 18,421 1.5%
- ------------------------------------------- --------------- -------------- ----- -------------- ---------------
12,066 141,219
Allowance for losses (55) (1,690)
- ------------------------------------------- --------------- -------------- ----- -------------- ---------------
Amortized cost, net 12,011 139,529
Gross unrealized gains 411 1,353
Gross unrealized losses (3,058) (13,171)
- ------------------------------------------- --------------- -------------- ----- -------------- ---------------
$ 9,364 $ 127,711
- ------------------------------------------- --------------- -------------- ----- -------------- ---------------
</TABLE>
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 housing, fixed-rate loans
on multifamily and commercial properties and manufactured housing installment
loans secured by either a UCC filing or a motor vehicle title. All collateral
for collateralized bonds is pledged to secure repayment of the related
collateralized bonds. All principal and interest (less servicing-related fees)
on the collateral is remitted to a trustee and is available for payment on the
collateralized bonds.
During 1999, Dynex REIT securitized $2,300,000 of collateral, through the
issuance of three series of collateralized bonds. The collateral securitized
primarily included manufactured housing loans, and the resecuritization of
previously securitized single family mortgage loans pursuant to a call feature
in the Company's prior securitizations. The securitizations were accounted for
as financing of the underlying collateral pursuant to Statement of Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("FAS No. 125"), as Dynex REIT retains call
rights which are substantially in excess of a clean-up call as defined by this
accounting standard.
The components of collateral for collateralized bonds at December 31, 2000 and
1999 are as follows:
<TABLE>
<CAPTION>
---------------------------------------------- --------------- ------ ----------------
2000 1999
---------------------------------------------- --------------- ------ ----------------
<S> <C> <C>
Collateral, net of allowance $ 3,111,413 $ 3,670,570
Funds held by trustees 515 2,707
Accrued interest receivable 20,622 22,754
Unamortized premiums and discounts, net 31,550 41,372
Unrealized loss, net (121,942) (36,689)
---------------------------------------------- --------------- ------ ----------------
$ 3,042,158 $ 3,700,714
---------------------------------------------- --------------- ------ ----------------
</TABLE>
Securities. Funding Notes and Securities consisted of fixed-rate funding notes
and securities secured by fixed-rate automobile installment contracts acquired
by AutoBond. Adjustable-rate mortgage securities ("ARM") consist of mortgage
certificates secured by ARM loans. Fixed-rate mortgage securities consist of
mortgage certificates secured by mortgage loans that have a fixed rate of
interest for at least one year from the balance sheet date. 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.
Other investments. Other investments primarily include delinquent property tax
receivables and an installment note receivable in connection with the sale of
the Company's single family mortgage operations in May 1996.
Sale of investments. Proceeds from sales of securities totaled $20,111, $61,415,
and $424,338 in 2000, 1999, and 1998, respectively. See Note 13, Net Loss on
Sales, Write-downs and Impairment Charges for further discussion.
Sensitivity analysis. The Company owned interest-only and principal-only
securities, some of which were pledged to support certain of the Company's
collateralized bond securities, and purchased from an affiliate during the
period 1992-1995, These interest-only and principal-only securities had an
investment basis of $3,563 and $1,549, respectively, and estimated market values
of $1,986 and $1,409, respectively at December 31, 2000. Market values were
obtained by the Company based on quotes from a third party dealer. The majority
of these interest-only and principal-only securities are rated `AAA' by at least
one nationally recognized ratings agency, and have very little sensitivity to
the credit risk of the underlying single-family mortgage loans. The majority of
the risk associated with the Company's investment in these securities relates to
the prepayment speeds of the underlying single-family mortgage loans. In
providing market prices, the third-party used average prepayment speed
assumptions of 20 CPR and 13 CPR, respectively, for the interest-only and
principal-only securities.
In accordance with the disclosure requirements of FAS No. 140, the following
table is a sensitivity analysis of the impact of adverse changes in prepayment
speed assumptions on the fair value of the Company's interest-only and
principal-only securities at December 31, 2000:
- --------------------------------- ------------------------ ---------------------
Type of Security Prepayment speed Decline in value
- --------------------------------- ------------------------ ---------------------
Interest-only 20 CPR $ -
30 CPR 387
40 CPR 671
Principal-only 13 CPR -
10 CPR 38
6 CPR 92
The Company also performed sensitivity analysis on the discount rate assumptions
used by the third party by increasing the respective discount rates by 100 basis
points and 150 basis points respectively, and determined that such changes were
immaterial to the value of the above securities.
These sensitivity analyses are based on management estimates and are
hypothetical in nature. Actual results will differ from projected results.
NOTE 5 - LOANS HELD FOR SALE
The following table summarizes Dynex REIT's loans held for sale which are
carried at the lower of cost or market, at December 31, 2000 and 1999,
respectively.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Secured by multifamily and commercial properties $ 17,499 $ 234,593
Secured by manufactured homes - 2,852
Secured by single family residential properties 308 629
---------------- ----------------
17,807 238,074
Deferred hedging costs 39 3,496
Net discount (162) (8,744)
Allowance for losses (308) (442)
- -----------------------------------------------------------------------------------------------------
Total loans held for sale $ 17,376 $ 232,384
- -----------------------------------------------------------------------------------------------------
</TABLE>
The Company funded $29,529 of multifamily loan commitments during 2000 and
purchased $7,585 of delinquent property tax receivables under a preexisting
contract, and had no outstanding commitments to lend at December 31, 2000 other
than an existing contract to purchase additional delinquent property tax
receivables of an estimated $8 million in October 2001. The Company funded loans
with an aggregate principal balance of $706,636 during 1999.
NOTE 6 - ALLOWANCE FOR LOSSES
The Company reserves for credit risk on various securities where it has exposure
to losses on various investments in its investment portfolio. The following
table summarizes the aggregate activity for the allowance for losses on
investments for the years ended December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------- -------------- --------------- ---------------
2000 1999 1998
- --------------------------------------------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Allowance at beginning of year $17,484 $ 20,370 $ 30,270
Provision for losses 34,633 16,154 6,421
Credit losses, net of recoveries (26,389) (19,040) (16,321)
- --------------------------------------------------------- -------------- --------------- ---------------
Allowance at end of year $25,728 $ 17,484 $ 20,370
- --------------------------------------------------------- -------------- --------------- ---------------
</TABLE>
Collateral for collateralized bonds. Dynex REIT has exposure to credit risk
retained on loans that it has securitized through the issuance of collateralized
bonds. The aggregate loss exposure is generally limited to the amount of
collateral in excess of the related investment-grade collateralized bonds issued
(commonly referred to as "overcollateralization"), excluding price premiums and
discounts and hedge gains and losses. In some cases, the aggregate loss exposure
may be increased by the use of surplus cash or cash reserve funds contained
within the security structure to cover losses. The allowance for losses on the
overcollateralization totaled $25,314 and $15,299 at December 31, 2000 and 1999
respectively, and is included in collateral for collateralized bonds in the
accompanying consolidated balance sheets. The principal balance of
overcollateralization amounted to $245,755 and $249,489 at December 31, 2000 and
1999, respectively and $116,021 and $179,438, at December 31, 2000 and 1999,
respectively, net of allowance for losses, collateral discounts and bond
premiums, and third party loss reimbursement guarantees.
The Company is currently engaged in a dispute with the counterparty to the loss
reimbursement guarantees, which aggregated $30,334 at December 31, 2000. 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 $1,236. 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.
Securities. On certain securities collateralized by mortgage loans purchased by
Dynex REIT for which mortgage pool insurance is used as the primary source of
credit enhancement, Dynex REIT has limited exposure to certain credit risks such
as fraud in the origination and special hazards not covered by such insurance.
An allowance was established based on the estimate of losses at the time of
securitization. The allowance for losses for securities is $55 and $1,690 at
December 31, 2000 and 1999, respectively, and is included in securities in the
accompanying consolidated balance sheets.
The remaining allowance of $359 and $495 at December 31, 2000 and 1999,
respectively is associated with other investments.
NOTE 7 - NON-RECOURSE DEBT
Dynex REIT, through limited-purpose finance subsidiaries, has issued
non-recourse debt in the form of collateralized bonds. Each series of
collateralized bonds may consist of various classes of bonds, either at fixed or
variable rates of interest. Payments received on the collateral for
collateralized bonds and any reinvestment income thereon are used to make
payments on the collateralized bonds (see Note 4). The obligations under the
collateralized bonds are payable solely from the collateral for collateralized
bonds and are otherwise non-recourse to Dynex REIT. The maturity of each class
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. As a
result, the actual maturity of any class of a series of collateralized bonds is
likely to occur earlier than its stated maturity.
Dynex REIT may retain certain classes of collateralized bonds issued, financing
these retained collateralized bonds through a combination of repurchase
agreements and equity. Total retained bonds at December 31, 2000 and 1999 were
$151,072 and $239,079, respectively.
The components of collateralized bonds along with certain other information at
December 31, 2000 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------- ------------------------------------ --- ----------------------------------
2000 1999
- ------------------------------- ------------------------------------ --- ----------------------------------
Bonds Outstanding Range of Bonds Range of
Interest Rates Outstanding Interest Rates
- ------------------------------- ------------------- ---------------- --- ----------------- ----------------
<S> <C> <C> <C> <C>
Variable-rate classes $ 1,533,575 6.9% - 10.1% $ 1,968,915 5.8% - 9.1%
Fixed-rate classes 1,295,597 6.2% -11.5% 1,315,944 6.2% - 11.5%
Accrued interest payable 10,144 9,364
Deferred bond issuance costs (9,254) (10,818)
Unamortized net (discount)
premium 26,666 (1,027)
- ------------------------------- ------------------- ---------------- --- ----------------- ----------------
$ 2,856,728 $ 3,282,378
- ------------------------------- ------------------- ---------------- --- ----------------- ----------------
Range of stated maturities 2009-2033 2009-2033
Number of series 23 27
- ------------------------------- ------------------- ---------------- --- ----------------- ----------------
</TABLE>
The variable rate classes are based on one-month London InterBank Offered Rate
(LIBOR). The average effective rate of interest expense for non-recourse debt
was 7.3%, 6.2%, and 6.4% for the years ended December 31, 2000, 1999 and 1998,
respectively.
NOTE 8 - RECOURSE DEBT
Dynex REIT utilizes repurchase agreements, notes payable and secured credit
facilities (together, "recourse debt") to finance certain of its investments.
The following table summarizes Dynex REIT's recourse debt outstanding and the
weighted-average annual rates at December 31, 2000 and 1999:
<TABLE>
<CAPTION>
- ------------------------------------------ ----------------------------------------- -- -----------------------------------------
2000 1999
- ------------------------------------------ ----------------------------------------- -- -----------------------------------------
Weighted-Average Weighted-Average
Annual Rate Market Value Annual Rate Market Value
Amount of Collateral Amount of Collateral
Outstanding Outstanding
- ------------------------------------------ ------------- ------------- ------------- -- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Recourse debt secured by:
Collateralized bonds $ 32,910 7.68% $ 90,803 $ 144,746 6.68% $ 173,278
Securities 2,105 7.32% 3,380 66,090 8.70% 114,641
Other investments 2,000 7.81% 9,658 31,498 8.47% 36,614
- ------------------------------------------
Loans held for sale or securitization - - % - 183,901 7.93% 257,739
- ------------------------------------------
Other assets 430 7.64% 373 990 7.42% 895
- ------------------------------------------
------------- ------------- ------------- -------------
37,445 104,214 427,225 583,167
- ------------------------------------------
- ------------------------------------------
Unsecured debt:
- ------------------------------------------
7.875% senior notes 97,250 7.88% - 97,250 7.88% -
- ------------------------------------------
Series B 10.03% senior notes - - % - 13,570 10.03% -
- ------------------------------------------
Capitalized costs (527) - (947) -
- ------------------------------------------ ------------- ------------- ------------- -- ------------- ------------- -------------
$ 134,168 $ 104,214 $ 537,098 $ 583,167
- ------------------------------------------ ------------- ------------- ------------- -- ------------- ------------- -------------
</TABLE>
Secured Debt. At December 31, 2000 and 1999, recourse debt consisted of $35,015
and $163,045, respectively, of repurchase agreements secured by investments,
$2,000 and $263,190, respectively, outstanding under secured credit facilities
which are secured by loans held for sale or securitization, securities and other
investments, and $431and $990, respectively, of amounts outstanding under a
capital lease. The $2,000 borrowed at December 31, 2000 under the secured credit
facility was repaid on January 2, 2001, and the facility was extinguished. At
December 31, 2000, all recourse debt in the form of repurchase agreements was
with Lehman Brothers, Inc., had overnight or one-day maturity, and bears
interest at rates indexed to LIBOR. If Lehman Brothers, Inc. fails to return the
collateral, the ultimate realization of the security by Dynex REIT may be
delayed or limited.
At December 31, 2000, Dynex REIT had a secured non-revolving credit facility
under which $66,765 of letters of credit to support tax-exempt bonds had been
issued. The letters of credit were collateralized by approximately $22,318 of
cash. 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 has entered into capital leases for financing its furniture and
computer equipment. Interest expense on these capital leases was $52, $177, and
$274 for the years ended December 31, 2000 1999, and 1998, respectively. The
leases expire in 2002. The aggregate payments due under the capital leases for
the remaining two years after December 31, 2000 are $212, and $255,
respectively.
Unsecured Debt. As of December 31, 2000, Dynex REIT had $97,250 outstanding of
its Senior Unsecured Notes issued in July 1997 and due July 15, 2002 (the "July
2002 Notes"). On March 30, 2000, the Company entered into an amendment to the
related indenture governing the July 2002 Notes whereby the Company pledged to
the Trustee of the 2002 Notes substantially all of the Company's unencumbered
assets in its investment portfolio 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) $26,000 , (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 July 2002
Notes which require the repayment of amounts due under the indenture prior to
maturity at various discounts based on a computation of available cash. On March
30, the Company retired $29,484 of July 2002 Notes for $26,536 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%.
NOTE 9 - FAIR VALUE AND ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FAS No. 107") requires the disclosure of the
estimated fair value of on-and off-balance-sheet financial instruments. The
following table presents the amortized cost and estimated fair values of Dynex
REIT's financial instruments as of December 31, 2000 and 1999:
<TABLE>
<CAPTION>
- ------------------------------------------ ---------------------------------------- ----------------------------------------
2000 1999
---------------------------------------- ----------------------------------------
Notional Amortized Fair Notional Amortized Fair
Recorded financial instruments: Amount Cost Value Amount Cost Value
- ------------------------------------------ ------------- ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Collateral for collateralized bonds $ - $ 3,164,100 $3,042,158 $ - $3,734,310 $3,699,829
Securities - 12,011 9,364 - 135,431 126,675
Other investments - 44,010 44,010 - 48,927 48,752
Loans held for sale - 17,376 17,376 - 236,332 237,192
Interest rate cap agreements - - - 1,364,000 7,190 1,920
Liabilities:
Non-recourse debt - 2,856,728 2,856,728 - 3,282,378 3,282,378
Recourse debt:
Secured by collateralized bonds
retained - 32,910 32,910 - 144,746 144,746
Secured by investments - 4,105 4,105 - 282,479 282,479
Unsecured - 96,723 87,737 - 109,873 80,747
Off-balance sheet financial instruments:
- ------------------------------------------ ------------- ------------- ------------ ------------- ------------ -------------
Interest rate swap agreements - - - 1,020,000 - (1,259)
Commitments to fund loans - - - 54,668 (3,948) 49,066
- ------------------------------------------ ------------- ------------- ------------ ------------- ------------ -------------
</TABLE>
The fair value of collateral for collateralized bonds, securities, other
investments, loans held for sale and interest rate cap agreements is based on
actual market price quotes, or by determining the present value of the projected
future cash flows using appropriate discount rates, credit losses and prepayment
assumptions. Secured recourse debt is short-term in nature and reprices at least
monthly. Therefore, the carrying value approximates the fair value. Non-recourse
debt is both floating and fixed, and is considered within the security structure
along with the associated collateral for collateralized bonds. For unsecured
debt maturing in less than one year, carrying value approximates fair value. For
unsecured debt with a maturity of greater than one year, the fair value was
determined by calculating the present value of the projected cash flows using
appropriate discount rates. The fair value of the off-balance sheet financial
instruments excluding the commitments to fund loans was determined from actual
market quotes. The fair value of the commitments to fund loans was estimated
assuming the loans were securitized at current market rates.
Derivative Financial Instruments Used for Interest Rate Risk Management
Dynex REIT may engage in derivative financial instrument activities for the
purpose of interest rate risk management and yield enhancement. As of December
31, 2000, Dynex REIT had no freestanding derivative financial instrument
positions outstanding. As of December 31, 1999, all of Dynex REIT's outstanding
derivative financial positions were for interest rate risk management. For all
derivative financial instruments, Dynex REIT has credit risk to the extent that
the counterparties do not perform their obligation under the agreements. If one
of the counterparties does not perform, Dynex REIT would not receive the cash to
which it would otherwise be entitled under the conditions of the agreement.
Interest rate cap agreements. At December 31, 1999, Dynex REIT had LIBOR and
one-year Constant Maturity Treasury (CMT) index based interest rate cap
agreements to limit its exposure to the lifetime interest rate caps on certain
of its ARM securities and collateral for collateralized bonds. Contract rates on
these cap agreements ranged from 9.0% to 11.5%, with expiration dates ranging
from 2001 to 2004. The Company sold these cap agreements in 2000 along with the
sale of the associated securities being hedged.
Interest rate swap agreements. Dynex REIT may enter into various interest rate
swap agreements to limit its exposure to changes in financing rates of
collateral for collateralized bonds and certain securities. As of December 31,
1999, Dynex REIT had entered into a series of interest rate swap agreements
which limited the increase in borrowing costs in any six-month period to 1% for
$1,020,000 notional amount of short-term borrowings. Pursuant to the terms of
this agreement, Dynex REIT paid the lesser of current six-month LIBOR, or
six-month LIBOR in effect 180-days prior plus 1%, and received current 6-month
LIBOR. The Company paired-out of this position in 2000 in connection with the
sale of associated securities being hedged.
Derivative Financial Instruments Used for Other Than Risk Rate Management
Purposes The Company may enter into financial futures, forwards and options
contracts to enhance the overall yield on its investment portfolio. Such
derivative contracts are accounted for as trading positions, and generally are
for terms of less than three months. The Company realized gross gains of none,
$4,160 and $4,136 from these contracts in 2000, 1999 and 1998, respectively,
primarily from premium income received on options contracts written. The Company
realized gross losses of none, $14 and $5,565 from these contracts in 2000, 1999
and 1998, respectively. There were no open trading positions at December 31,
2000.
NOTE 10 - SALE OF LOAN PRODUCTION OPERATIONS
On December 20, 1999, the Company sold its manufactured housing lending
operations, which was operated through its affiliate, Dynex Financial, Inc.
("DFI"), to a subsidiary of Bingham Financial Services Corporation (NYSE: BFSC)
("BFSC") for $18,602. Under the terms of the sale, BFSC purchased all of the
outstanding stock of DFI, certain computer software rights, and manufacturing
housing loans which had been held in warehouse at the time of the sale. As a
result of the sale, the Company recorded a net gain of $1,540. Dynex REIT is
currently engaged in arbitration with BFSC related to approximately $832 of
amounts due under the associated purchase agreement that BFSC has unilaterally
withheld from payment. BFSC has alleged that it overpaid for loans purchased
from the Company during the period from October 12, 1999 to closing. The Company
disputes this allegation and believes it will recover this amount through the
arbitration..
On November 10, 1999, the Company sold its model home purchase/leaseback
operations and related assets, which were operated through its affiliate, Dynex
Residential, Inc., to Residential Funding Corporation, an indirect subsidiary of
General Motors Corporation for $194,989. As a result of the sale, the Company
recorded a net gain of $6,136. The provisions of the sale included
indemnification escrows and reserves amounting to $3,000. $2,000 of the escrow
was released in December 2000, and the balance is expected to be released
without set-off for indemnification, in 2001.
NOTE 11 - EARNINGS PER SHARE
The following table reconciles the numerator and denominator for both the basic
and diluted EPS for the years ended December 31, 2000, 1999, and 1998.
<TABLE>
<CAPTION>
- ------------------------------------- -------------------------- -- ---------------------------- -- ----------------------------
2000 1999 1998
-------------------------- -- ---------------------------- -- ----------------------------
- -------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Number of Number of Number of
Income Shares Income Shares Income Shares
(loss) (loss) (loss)
- ------------------------------------- ---------- -- ------------ -- ----------- --- ------------ -- ----------- --- ------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before extraordinary $(91,863) $(73,618) $ 20,148
item
Extraordinary item - loss on
extinguishment of debt - (1,517) (571)
---------- ----------- -----------
Net income (loss) after (91,863) (75,135) 19,577
extraordinary item
Less: Dividends payable on (12,911) (12,910) (13,019) -
preferred stock
---------- ------------ ----------- ------------ ----------- ------------
------------ ------------ ------------
Basic (104,774) 11,445,236 (88,045) 11,483,977 6,558 11,436,599
Effect of dividends and additional
shares
of Series A, Series B, and Series - - - - - -
C preferred stock
---------- ----------- ----------- ------------ ----------- ------------
Diluted $(104,774) 11,445,236 $(88,045) 11,483,977 $ 6,558 11,436,599
========== =========== =========== ============ =========== ============
Earnings per share before extraordinary item:
Basic EPS (9.15) ($7.53) $0.62
=========== ============ ============
Diluted EPS (9.15) ($7.53) $0.62
=========== ============ ============
Earnings per share after extraordinary item:
Basic EPS (9.15) ($7.67) $0.57
=========== ============ ============
Diluted EPS (9.15) ($7.67) $0.57
=========== ============ ============
Reconciliation of anti-dilutive
shares:
Dividends and additional shares of preferred stock:
Series A $ 3,063 654,531 $ 3,063 654,531 $ 3,111 660,812
Series B 4,475 956,217 4,475 956,217 4,535 959,282
Series C 5,373 920,000 5,372 920,000 5,373 920,000
Expense and incremental shares
of stock appreciation rights - - - 28,931 929 15,226
---------- ----------- ----------- ------------ ----------- ------------
$ 12,911 2,530,748 $ 12,910 2,559,679 $ 13,948 2,555,320
========== =========== =========== ============ =========== ============
- ------------------------------------- ---------- --- ----------- -- ----------- --- ------------ -- ----------- --- ------------
</TABLE>
During 1999, Dynex REIT exercised its call rights on two series of previously
issued collateralized bonds and re-securitized these two series along with six
series of previously issued collateralized bonds redeemed in 1998. This
re-securitization resulted in $2,114 of additional costs in 1999. In addition,
Dynex REIT purchased $2,750 of the 2002 Notes during 1999, which resulted in an
extraordinary gain of $597. During 1998, Dynex REIT redeemed six series of
previously issued collateralized bonds, which resulted in $571 of additional
costs related to such redemptions. As a result of these early redemptions, both
the basic and diluted earnings per share were reduced by $0.14 during 1999 and
$0.05 during 1998.
NOTE 12 - PREFERRED STOCK
The following table presents a summary of Dynex REIT's issued and outstanding
preferred stock:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Issue Dividends Paid
Price Per Share
------------------------------------
Per Share 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A 9.75% Cumulative Convertible Preferred Stock ("Series A") $ 24.00 $ - $ 1.17 $ 2.37
Series B 9.55% Cumulative Convertible Preferred Stock ("Series B") 24.50 - 1.17 2.37
Series C 9.73% Cumulative Convertible Preferred Stock ("Series C") 30.00 - 1.46 2.92
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Dynex REIT is authorized to issue up to 50,000,000 shares of preferred stock.
For all series issued, dividends are cumulative from the date of issue and are
payable quarterly in arrears. The dividends are equal, per share, to the greater
of (i) the per quarter base rate of $0.585 for Series A and Series B, and $0.73
for Series C, or (ii) one half times the quarterly dividend declared on Dynex
REIT's common stock. Two shares of Series A, Series B and Series C are
convertible at any time at the option of the holder into one share of common
stock. Each series is redeemable by Dynex REIT at any time, in whole or in part,
(i) two shares of preferred stock for one share of common stock, plus accrued
and unpaid dividends, provided that for 20 trading days within any period of 30
consecutive trading days, the closing price of the common stock equals or
exceeds one-half of the issue price, or (ii) for cash at the issue price, plus
any accrued and unpaid dividends.
In the event of liquidation, the holders of all series of preferred stock will
be entitled to receive out of the assets of Dynex REIT, prior to any such
distribution to the common shareholders, the issue price per share in cash, plus
any accrued and unpaid dividends.
No shares of Series A, B or C preferred stock were converted during 1999 or
2000.
The Company has not declared a dividend on its preferred stock dating back to
the third quarter of 1999. As of December 31, 2000, the total amount of
dividends in arrears was $19,367. Individually, the amount of dividends in
arrears on the Series A, the Series B and the Series C was $4,595 ($3.51 per
Series A share), $6,713 ($3.51 per Series B share) and $8,059 ($4.38 per Series
C share), respectively.
NOTE 13 - NET LOSS ON SALES, WRITE-DOWNS AND IMPAIRMENT CHARGES
The following table sets forth the composition of net loss on sales,
write-downs and impairment charges for the years ended December 31, 2000, 1999,
and 1998.
<TABLE>
<CAPTION>
- ------------------------------------------- --------- -----------------------------------------
For the years ended,
2000 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Phase-out of commercial production operations $50,940 $ 59,962 $ -
Sales of investments 15,872 12,682 2,714
AutoBond litigation and AutoBond securities 11,012 31,732 17,632
Sales of loan production operations 228 (7,676) -
Other 464 - -
- ----------------------------------------------------------------------------------------------
$ 78,516 $ 96,700 $ 20,346
- ----------------------------------------------------------------------------------------------
</TABLE>
During the years ended December 31, 2000 and 1999, Dynex REIT incurred
losses related to the phasing-out of its commercial production operations,
including the sale of substantially all of Dynex REIT's remaining commercial and
multifamily loans not previously securitized. During 1999, Dynex REIT
reclassified loans with a principal balance of $261,925 from held for
securitization to held for sale, and recognized a loss of $31,597 to adjust the
carrying value of these loans to the lower of cost or market at December 31,
1999. The reclassification was necessary as Dynex REIT no longer had the intent
nor the ability to hold such loans to maturity. During 2000, Dynex REIT sold
substantially all of its remaining loans held for sale, and including the lower
of cost or market adjustment for those loans held for sale remaining at December
31, 2000, incurred losses aggregating $20,656 during 2000. Dynex REIT also
wrote-off $28,365 during 1999 of previously deferred hedging costs related to
the expiration of the forward commitments to fund $255,577 of multifamily and
commercial loans. During 2000, Dynex REIT incurred losses of $30,284 related to
a conditional repurchase option to purchase $167,800 of tax-exempt bonds secured
by multifamily mortgage loans, and which Dynex REIT did not exercise. The
counterparty to the option agreement retained $30,284 of cash in collateral as a
result.
Dynex REIT incurred gross gains of none, $285, and $8,481 and gross losses of
$15,872, $9,598, and $8,532 related to the sales of investments in 2000, 1999,
and 1998, respectively. Gross losses included write-downs and impairment charges
recorded in anticipation of the sale of such investments. Investments and
trading activities for the year ended December 31, 1999 also includes losses of
$7,386 related to the sale of $58,724 of commercial loans during the year and
gains of $4,176 on various derivative trading positions entered into during the
year ended December 31, 1999.
As discussed in Note 16, the Company settled the outstanding litigation with
AutoBond Acceptance Corporation ("AutoBond") for $20,000 during 2000. Dynex REIT
had accrued a reserve in December 1999 for $27,000 related to the litigation.
Dynex REIT reversed $5,600 of this reserve during the year ended December 31,
2000. As a condition to the settlement, Dynex REIT received all of the
outstanding capital stock of the AutoBond entities (the "AutoBond Entities")
from which Dynex REIT had previously purchased securities, and the AutoBond
Entities were included in Dynex REIT's consolidated financial statements from
that point forward. The Company recorded permanent impairment charges of
$16,612, resulting from write-downs required on securities that Dynex REIT owned
that it had purchased previously in 1998 and 1999 from the AutoBond Entities.
During the fourth quarter 2000, the Company completed the sale of substantially
all of the remaining outstanding securities and loans issued or owned by the
AutoBond Entities. In 1999, Dynex REIT recorded an impairment charge of $4,732
relating to the Funding Notes and Securities held by the Company at December 31,
1999. In 1998, Dynex REIT recorded an impairment charge of $17,632 relating to
the Funding Notes, a senior unsecured convertible note acquired from AutoBond in
June 1998 and certain equity securities of AutoBond held by the Company at
December 31, 1998.
See Note 10, Sale of Loan Production Operations, for discussion of the gain from
sale of such operations recorded during the year ended December 31, 1999
NOTE 14 - EMPLOYEE BENEFITS
Stock Incentive Plan
Pursuant to the Company's 1992 Stock Incentive Plan, as amended on April 24,
1997 (the "Employee Incentive Plan"), the Company may grant to eligible
employees stock options, stock appreciation rights ("SARs") and restricted stock
awards. An aggregate of 2,400,000 shares of common stock is available for
distribution pursuant to the Employee Incentive Plan. The Company may also grant
dividend equivalent rights ("DERs") in connection with the grant of options or
SARs. These SARs and related DERs generally become exercisable as to 20 percent
of the granted amounts each year after the date of the grant.
The Company expensed $276 for SARs and DERs related to the Employee Incentive
Plan during 2000, and there was no expense during 1999 and 1998.
Stock Incentive Plan for Outside Directors
In 1995, Dynex REIT adopted a Stock Incentive Plan for its Board of Directors
(the "Board Incentive Plan") with terms similar to the Employee Incentive Plan.
On May 1, 1995, the date of the initial date of grant under the Board Incentive
Plan, each member of the Board of Directors was granted 14,000 SARs. Each Board
member has subsequently received a grant of 2,000 SARs on May 1, 1996, 1997,
1998, and 1999. The SARs granted on May 1, 1995 were fully vested on May 1,
1998. Each successive award will become exercisable as to 20% of the granted
amounts each year after the date of grant. The maximum period in which any SAR
may be exercised is 73 months from the date of grant. The maximum number of
shares of common stock encompassed by the SARs granted under the Board Incentive
Plan is 200,000.
Dynex REIT expensed $14 for SARs and DERs related to the Board Incentive Plan
during 2000 and there was no expense during 1999 and 1998.
The Agreement and Plan of Merger entered into between the Company and CIF
contemplated that SARs granted under both the Employee Incentive Plan and the
Board Incentive Plan and related DERs outstanding would be redeemed prior to the
effective date of the merger. Accordingly, the Company redeemed for cash all
issued and outstanding SARs and related DERs, valuing the SARs and related DERs
using a common option-valuation technique and the consideration for the common
stock to be paid by CIF. As a result, there were no further SARs or DERs
outstanding at December 31, 2000.
The following table presents a summary of the SARs activity for both the
Employee Incentive Plan and the Board Incentive Plan.
<TABLE>
<CAPTION>
- ---------------------------------- --------------------------------------------------------
Years ended December 31,
- --------------------------------------------------------------------------------------
2000 1999
- ------------------------ ----- ------------------------ ---- -------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Number of Price Number of Price Number of Price
Shares Shares Shares
---------------------------------- ------------- ---------- ----- ------------ ----------- ---- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
SARs outstanding at beginning of
year 278,712 $ 42.41 219,695 $44.72 173,723 $43.48
SARs granted 94,500 8.81 111,858 14.00 64,775 47.00
SARs forfeited (288,151) 27.17 (33,316) 34.15 (5,303) 48.48
SARs exercised (85,061) 26.89 (19,525) 10.86 (13,500) 28.16
---------------------------------- ------------- --------------- ------------ ----------- ---- ------------- -----------
SARs outstanding at end of year - - 278,712 33.33 219,695 $44.72
---------------------------------- ------------- --------------- ------------ ----------- ---- ------------- -----------
SARs vested and exercisable - - 103,458 42.41 85,120 $41.52
---------------------------------- ------------- ---------- ----- ------------ ----------- ---- ------------- -----------
</TABLE>
The Company adopted the disclosure-only option under Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("FAS No.
123") in 1999. If the fair value accounting provisions of FAS No. 123 had been
adopted as of January 1, 1996 the pro forma effect on the 1999, and 1998 would
have been immaterial.
Employee Savings Plan
The Company provides an Employee Savings Plan under Section 401(k) of the
Internal Revenue Code. The Employee Savings Plan allows eligible employees to
defer up to 12% of their income on a pretax basis. The Company matches the
employees' contribution, up to 6% of the employees' eligible compensation. The
Company may also make discretionary contributions based on the profitability of
the Company. The total expense related to the Company's matching and
discretionary contributions in 2000, 1999, and 1998 was $130, $541, and $497,
respectively. The Company does not provide post employment or post retirement
benefits to its employees.
401(k) Overflow Plan
During 1997, the Company adopted a non-qualifying overflow plan which covers
employees who have contributed to the Employee Savings Plan the maximum amount
allowed under the Internal Revenue Code. The excess contributions are made to
the overflow plan on an after-tax basis. However, the Company partially
reimburses employees for the effect of the contributions being made on an
after-tax basis. The Company matches the employee's contribution up to 6% of the
employee's eligible compensation. The total expense related to the Company's
reimbursements in 2000, 1999, and 1998 was $8, $60, and $56, respectively.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
The Company makes various representations and warranties relating to the sale or
securitization of loans. To the extent the Company were to breach any of these
representations or warranties, and such breach could not be cured within the
allowable time period, the Company would be required to repurchase such loans,
and could incur losses. In the opinion of management, no material losses are
expected to result from any such representations and warranties.
The Company has made various representations and warranties relating to the sale
of various production operations. To the extent the Company were to breach any
of these representations or warranties, and such breach could not be cured
within the allowable time period, the Company would be required to cover any
loss and expenses up to certain limits. In the opinion of management, no
material losses are expected to result from any such representations and
warranties.
In 1999 and 1998, Dynex REIT facilitated the issuance of tax-exempt multifamily
housing bonds, the proceeds of which were used to fund construction mortgage
loans on multifamily properties. These tax-exempt bonds were sold to third party
investors. Dynex REIT enters into various standby commitment and similar
agreements whereby Dynex REIT is required to pay principal and interest to the
bondholders in the event there is a payment shortfall from the borrower, and is
required to repurchase bonds if the bonds cannot be successfully re-marketed.
Dynex REIT provided letters of credit to support its obligations in an amount
equal to $66,765 at December 31, 2000. These letters of credit at December 31,
2000 were secured by cash in the amount of $22,318, which is restricted until
such time that these letters of credit are released. These letters of credit
were released in the first quarter of 2001 as a result of the purchase, sale or
transfer of the underlying tax-exempt bonds. The Company incurred aggregate
losses of $4,186 relating to the release of these letter of credits and such
amount was accrued in the accompanying financial statements as of December 31,
2000.
As of December 31, 2000, Dynex REIT is obligated under noncancelable operating
leases with expiration dates through 2005. Rent and lease expense under those
leases was $442, $278, and $336, respectively in 2000, 1999, and 1998. The
future minimum lease payments under these noncancelable leases are as follows:
2001--$440; 2002--$365; 2003--$340 and 2004--$278 and 2005--$82.
NOTE 16 - LITIGATION
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 and
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
$20,000. 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 $7,500.
As discussed in Note 3, the Company is involved in litigation with CIF related
to the termination of the Agreement and Plan of Merger entered into with CIF for
the purchase of all of the equity securities of the Company for $90,000. The
Company does not expect that the resolution of this matter will have a
materially adverse effect on its financial position.
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.
NOTE 17 - SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------- ----------------------------------------------------
Years ended December 31,
- ---------------------------------------------------------- ----------------------------------------------------
2000 1999 1998
---------------------------------------------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Cash paid for interest $ 249,699 $ 264,130 $ 319,626
----------------------------------------------------------
----------------------------------------------------------
Supplemental disclosure of non-cash activities:
----------------------------------------------------------
Collateral for collateralized bonds owned
subsequently securitized $ - $ 1,607,891 $ -
----------------------------------------------------------
Securities owned subsequently securitized $ 71,209 $ 4,986 $ 257,959
----------------------------------------------------------
Other investments owned subsequently securitized $ - $ - $ 37,221
---------------------------------------------------------- -------------- -- --------------- -- ---------------
</TABLE>
NOTE 18 - RELATED PARTY TRANSACTIONS
Dynex REIT had a credit arrangement with DHI whereby DHI and any of DHI's
subsidiaries can borrow funds from Dynex REIT to finance its operations. Under
this arrangement, Dynex REIT can also borrow funds from DHI. The terms of the
agreement allow DHI and its subsidiaries to borrow up to $50 million from Dynex
REIT at a rate of Prime plus 1.0%. Dynex REIT can borrow up to $50 million from
DHI at a rate of one-month LIBOR plus 1.0%. This agreement has a one-year
maturity which is extended automatically unless notice is received from one of
the parties to the agreement within 30 days of the anticipated termination of
the agreement. Effective as of December 31, 2000, DHI liquidated its operations
in a taxable liquidation pursuant to sections 331 and 336 of the Internal
Revenue Code. Prior to the liquidation, effective as of November 1, 2000, DHI
sold several of its operating companies to Dynex REIT at their respective
estimated fair value. These operating companies are included in the consolidated
financial statements of Dynex REIT at December 31, 2000. As of December 31, 2000
as a result of the liquidation, amounts due to DHI under the borrowing
arrangement were forgiven. As of December 31, 1999, net borrowings due to DHI
under this agreement totaled $26,720. Net interest expense under this agreement
was $1,403, $706 and $992 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Dynex REIT had a funding agreement with Dynex Commercial, Inc. ("DCI"), formerly
an operating subsidiary of DHI, whereby Dynex REIT paid DCI a fee for commercial
mortgage loans transferred to Dynex REIT from DCI. Dynex REIT paid DCI $288,
$2,147 and $4,753, respectively under this agreement for the years ended
December 31, 2000, 1999 and 1998.
Prior to the sale of its manufactured housing lending operations in
December 1999, Dynex REIT had a loan funding agreement with Dynex Financial,
Inc. ("DFI"), an operating subsidiary of DHI, whereby Dynex REIT paid DFI on a
fee plus cost basis for the origination of manufactured housing loans on behalf
of Dynex REIT. During 1999 and 1998, Dynex REIT paid DFI $12,369 and $15,771,
respectively under such agreement. This agreement was terminated as a result of
the sale of the manufactured housing operations during 1999.
Prior to its sale, Dynex REIT had note agreements with Dynex Residential, Inc.
("DRI"), formerly an operating subsidiary of DHI, whereby DRI and its
subsidiaries could borrow up to $287,000 from Dynex REIT on a secured basis to
finance the acquisition of model homes from single-family home builders. The
interest rate on the note was adjustable and was based on 30-day LIBOR plus
2.875%. On November 10, 1999, as discussed in Note 10, DRI was sold to
Residential Funding Corporation, and SMFC Funding Corporation ("SMFC") at the
time an affiliate of DRI and a subsidiary of DHI, assumed notes from DRI with an
unpaid principal balance of $4,577. The remainder of the DRI notes were paid off
at the time of the sale There was no outstanding balance on the SMFC notes as of
December 31, 2000 and the outstanding balance of the note as of December 31,
1999 was $4,274. Interest income recorded by Dynex REIT for the years ended
December 31, 2000, 1999, and 1998 was $164, $12,793, and $11,971, respectively.
Dynex REIT had entered into subservicing agreements with DCI, Dynex Commercial
Services, Inc. ("DCSI"), DFI and GLS Capital Services, Inc ("GLS") to service
commercial, single family, and consumer loans and property tax receivables. All
of these entities were formerly subsidiaries of DHI. For servicing the
commercial loans, DCI or DSCI, as applicable, received an annual servicing fee
of 0.02% of the aggregate unpaid principal balance of the loans. DSCI sold the
majority of its commercial mortgage loan servicing portfolio to a third-party in
2000. For servicing the single family mortgage, consumer and manufactured
housing loans, DFI received annual fees ranging from sixty dollars ($60) to one
hundred forty-four dollars ($144) per loan and certain incentive fees. The
subservicing agreement with DFI was terminated due to the sale of DFI on
December 20, 1999. A new subservicing agreement was entered into with Bingham
Financial Services Corporation, the new parent of DFI. For servicing the
property tax receivables, GLS receives an annual servicing fee of 0.72% of the
aggregate unpaid principal balance of the property tax receivables. Servicing
fees paid by Dynex REIT under such agreements were $258, $2,873 and $1,061 in
2000, 1999 and 1998, respectively.
During 1999, the Company made a loan to Thomas H. Potts, president of the
Company, as evidenced by a promissory note in the aggregate principal amount of
$935 (the "Potts Note"). Interest accrued on the outstanding balance through
1999 at a simple interest rate of Prime plus one-half percent per annum, and for
2000, at the short-term monthly "applicable federal rate" (commonly known as the
AFR rate) based on tables published by the Internal Revenue Service. Mr. Potts
directly owns 399,502 shares of common stock of the Company, all of which have
been pledged as collateral to secure the Potts Note. As of December 31, 2000,
interest on the Potts Note was current and the outstanding balance of the Potts
Note was $687.
NOTE 19- INVESTMENT IN AND ADVANCES TO DYNEX HOLDING, INC.
DHI was liquidated pursuant to Internal Revenue Code Sections 331 and 336 in a
taxable liquidation effective December 31, 2000. The results of operations and
financial position of DHI are summarized below:
<TABLE>
<CAPTION>
- --------------------------------------------------------- ----------------------------------------------------
Condensed Income Statement Information Years ended December 31,
- --------------------------------------------------------- ----------------------------------------------------
2000 1999 1998
- --------------------------------------------------------- --------- ---- --------------- -- ------------------
<S> <C> <C> <C>
Total revenues $ 4,157 $ 40,710 $ 30,126
- --------------------------------------------------------------------------------------------------------------
Total expenses 4,838 42,653 27,645
- --------------------------------------------------------------------------------------------------------------
Net income (loss) (681) (1,943) 2,481
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------- ----------------------------------------
Condensed Balance Sheet Information December 31,
- --------------------------------------------------------------------- ----------------------------------------
2000 1999
- --------------------------------------------------------------------------- -------------- -- ----------------
Total assets $ - $ 36,822
- --------------------------------------------------------------------------------------------------------------
Total liabilities - 9,075
- --------------------------------------------------------------------------------------------------------------
Total equity - 27,747
- ------------------------------------------------------------------------ ------------- -- --------------- ----
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered Page
<S> <C> <C>
21.1 List of consolidated entities I
23.1 Consent of Deloitte & Touche LLP II
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>LIST OF CONSOLIDATED ENTITIES
<TEXT>
Exhibit 21.1
Dynex Capital, Inc.
List of Consolidated Entities
As of December 31, 2000
AutoBond Funding Corporation 1997-A
Dynex Commercial Services, Inc.
Dynex Healthcare Capital, Inc.
Dynex Home Loan, Inc.
Dynex Securities, Inc.
Financial Asset Securitization, Inc.
GLS Capital Services, Inc.
GLS Development, Inc.
SMFC Funding Corporation
MSC I L.P.
Issuer Holding Corp.
Commercial Capital Access One, Inc.
Resource Finance Co. One
Resource Finance Co. Two
ND Holding Co.
Merit Securities Corporation
GLS Capital, Inc.
GLS Capital Services - Marlborough, Inc.
GLS Capital - Cuyahoga, Inc.
PaineWebber Mortgage Obligations, Inc.
SHF Corp.
NOTE: All companies were incorporated in Virginia except for PaineWebber
Mortgage Obligations (Delaware) and AutoBond Funding Corporation
1997-A (Nevada).
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>CONSENT OF DELOITTE & TOUCHE LLP
<TEXT>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
Nos. 333-22859, 333-10783, 333-10587 and 333-35769 of Dynex Capital, Inc. on
Form S-3 and Registration Statement No. 333-32663 of Dynex Capital, Inc. on Form
S-8 of our report dated March 30, 2001, appearing in this Annual Report on Form
10-K of Dynex Capital, Inc. for the year ended December 31, 2000.
DELOITTE & TOUCHE LLP
Richmond, Virginia
April 4, 2001
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>FDS ART. 5 FOR THE YEAR ENDED 12/31/00
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000826675
<NAME> Dynex Capital, Inc.
<MULTIPLIER> 1000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> DEC-31-2000
<EXCHANGE-RATE> 1
<CASH> 26,773
<SECURITIES> 3,095,532
<RECEIVABLES> 323
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,159,596
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 127,407
<COMMON> 114
<OTHER-SE> 29,610
<TOTAL-LIABILITY-AND-EQUITY> 3,159,596
<SALES> 0
<TOTAL-REVENUES> 291,160
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 101,629
<LOSS-PROVISION> 34,633
<INTEREST-EXPENSE> 259,673
<INCOME-PRETAX> (104,775)
<INCOME-TAX> 0
<INCOME-CONTINUING> (104,775)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (104,775)
<EPS-BASIC> (9.15)
<EPS-DILUTED> (9.15)
<FN>
The Company's balance sheet is unclassified.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----