SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, DC 20549

                                 ------------


                                   FORM 8-K

                                CURRENT REPORT
                      PURSUANT TO SECTION 13 or 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934


                       Date of Report: February 27, 1997


                        RESOURCE MORTGAGE CAPITAL, INC.
              (Exact Name of Registrant as Specified in Charter)


Virginia                   1-9819                            52-1549373
(State or Other       (Commission File Numb                   (IRS Employer
Jurisdiction of                                             Identification No.)
Incorporation)                                                       
                  

                       10900 Nuckols Road, Richmond, Virginia 23060
                      (Address of Principal Executive Offices) (Zip Code)
              


      Registrant's telephone number, including area code: (804) 217-5800


                   4880 Cox Road, Glen Allen, Virginia 23060
         (Former Name or Former Address, if Changed Since Last Report)



<PAGE>



                                      

Item 5. Other Events.

      Attached as Annex A are the consolidated  financial statements of Resource
Mortgage Capital,  Inc., and the independent  auditor's report thereon,  for the
year ended December 31, 1996.




<PAGE>



                                  SIGNATURES

      Pursuant to the  requirements  of the Securities  Exchange Act of 1934, as
amended,  the  Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.

                          RESOURCE MORTGAGE CAPITAL, INC.


February 27, 1997           By: /s/ Thomas H.  Potts
                                --------------------

                                   Thomas H. Potts
                                   President



<PAGE>











                                          Annex A to Form 8-K

















                        Resource Mortgage Capital, Inc.

                       Consolidated Financial Statements

                          December 31, 1996 and 1995



<PAGE>


                                    


CONSOLIDATED BALANCE SHEETS
RESOURCE MORTGAGE CAPITAL, INC.

December 31, 1996 and 1995
(amounts in thousands except share data)
<TABLE>


                                                  
<S>                                              <C>        <C> 
ASSETS                                           1996       1995
                                                --------   --------

Investments:
   Portfolio assets:
       Collateral for collateralized bonds      $2,702,294 $1,028,935
       Mortgage securities                      892,037    2,149,416
       Other                                    96,236     27,585
   Loans held for securitization                265,537    220,048
                                                --------   --------
                                                3,956,104  3,425,984

Cash                                            11,396     22,229
Accrued interest receivable                      8,078     14,851
Other assets                                    11,879     26,974
                                                ========   ========
                                                $3,987,457 $3,490,038
                                                 ========   ========


LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
                           
Collateralized bonds                         $ 2,519,70  $ 949,139                                               
Repurchase agreements                           756,448  1,983,358
Notes payable                                   177,124    154,041
Accrued interest payable                         2,717      5,278
Other liabilities                               27,843     43,399
                                                --------   --------
                                                3,483,840  3,135,215
                                                 --------   --------

SHAREHOLDERS' EQUITY

Preferred stock, par value $.01 per share,
 50,000,000 shares authorized:
      9.75% Cumulative Convertible Series A,
        1,552,500 issued and outstanding,       35,460     35,460
respectively
      9.55% Cumulative Convertible Series B,
        2,196,824 issued and outstanding,       51,425     51,425
respectively
      9.73% Cumulative Convertible Series C,
        1,840,000 and none issued and           52,740          -
outstanding, respectively
Common stock,  par value $.01 per share,
50,000,000 shares authorized,
  20,653,593 and  20,198,654  issued and           207        202
outstanding, respectively
Additional paid-in capital                      291,637    281,508
Net unrealized gain (loss) on investments       64,402     (4,759)
available-for-sale
Retained earnings (deficit)                      7,746     (9,013)
                                                           --------
                                                --------
                                                503,617    354,823
                                                --------   --------
                                                $3,987,457  $3,490,038
                                                 ========   ========
See notes to consolidated financial statements.
</TABLE>


<PAGE>



CONSOLIDATED STATEMENTS OF OPERATIONS
RESOURCE MORTGAGE CAPITAL, INC.

<TABLE>
Years ended December 31, 1996, 1995 and
1994
(amounts in thousands except share data)
<S>                                        <C>      <C>      <C> 
                                           1996     1995     1994
                                           ------- -------- --------

Interest income:
     Collateral for collateralized bonds   148,675$ 61,007   $33,719                                         
     Mortgage securities                   129,253 161,889   157,701
     Other portfolio assets                4,700      2,637      765
     Loans held for securitization         29,439    28,349   35,121
                                           ------- -------- --------
                                           312,067 253,882   227,306
                                           ------- -------- --------

Interest and related expense:
     Collateralized bonds                  117,070  50,984    32,840
     Repurchase agreements                 105,970  142,474  134,791
     Notes payable                           8,195   11,186    6,189
     Other                                   2,819    3,931    6,998
     Provision for losses                    3,106    2,888    2,124
                                           ------- -------- --------
                                           237,160   211,463   182,942
                                           ------- -------- --------

Net interest margin                        74,907   42,419     44,364


Gain on sale of single-family mortgage     17,285       -        -
operations
Gain on sale of assets, net of associated     503    9,651    27,723
costs
Other income                                1,116    2,963    1,454
General and administrative expenses        (20,763) (18,123) (21,284)
                                           ------- -------- --------

Net income                                 $73,048   $36,910   $ 52,257
                                
                                           ======= ======== ========

Net income                                 $ 73,04  $ 36,910  $52,257
                                                
Dividends on preferred stock               (10,009) (2,746  )   -
                                           =======  ========   ========
Net income available to common             $63,039  $ 34,164   $52,257
shareholders                                   
                                           ======= ======== ========

Per common share:
     Primary                               $ 3.08 $   1.70  $2.64
                                                    
                                           ======= ======== ========
     Fully diluted                         $       $        $
                                            2.96     1.70     2.64
                                           ======= ======== ========
</TABLE>


See notes to consolidated financial statements.




<PAGE>



CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY
RESOURCE MORTGAGE CAPITAL,
INC.

Years ended December 31, 1996, 1995 and 1994 (amounts in thousands  except share
data)


Years ended December 31,
1996, 1995 and 1994
(amounts in thousands except
share data)
<TABLE>

                                                                             Net Unrealized
                                                             Additional       Gain (Loss)       Retained
                                       Preferred    Common     Paid-in       on Investments     Earnings
                                         Stock       Stock     Capital     Available-for-Sale   (Deficit)     Total
                                      ------------------------------------------------------------------------------------

<S>                                        <C>   <C>        <C>                 <C>            <C>           <C>      
Balance at December 31, 1993               $ -   $  193     $  259,622          $ -            $ (6,783)     $ 253,032
                                                        

Issuance of common stock                       -            8     19,674                  -           -           19,682
Net income - 1994                              -          -           -                   -        52,257         52,257
Change in net unrealized loss
    on investments available-for-sale          -          -           -                (72,678)       -          (72,678)
Dividends on common stock
    at $2.76 per share                         -          -                               -       (54,822)       (54,822)
                                                                  -
                                      ------------------------------------------------------------------------------------
Balance at December 31, 1994                   -          201    279,296               (72,678)    (9,348)       197,471

Issuance of common stock                         -          1      2,212                    -           -          2,213
Series A preferred stock issued,
    net of issuance costs                   35,460          -                               -           -         35,460
                                                             -
Series B preferred stock issued,
    net of issuance costs                   51,425          -                               -           -         51,425
                                                             -
Net income - 1995                                -          -                               -      36,910         36,910
                                                             -
Change in net unrealized loss
    on investments available-for-sale            -          -                           67,919          -         67,919
                                                             -
Dividends on common stock
    at $1.68 per share                           -          -                               -     (33,829)       (33,829)
                                                             -
Dividends on preferred stock                     -          -                               -      (2,746)        (2,746)
                                                             -
                                      ------------------------------------------------------------------------------------
Balance at December 31, 1995                86,885        202    281,508                (4,759)    (9,013)       354,823

Issuance of common stock                         -          5     10,129                    -           -         10,134
Series C preferred stock issued,
    net of issuance costs                   52,740          -                               -           -         52,740
                                                             -
Net income - 1996                                -          -                               -      73,048         73,048
                                                             -
Change in net unrealized loss
    on investments available-for-sale            -          -                           69,161          -         69,161
                                                             -
Dividends on common stock
    at $2.27 per share                           -          -                               -     (46,280)       (46,280)
                                                             -
Dividends on preferred stock                     -          -                               -     (10,009)       (10,009)
                                                             -
                                      ====================================================================================
Balance at December 31, 1996             $ 139,625       $ 207    $  291,637        $   64,402   $  7,746     $  503,617
                                                          
                                      ====================================================================================

</TABLE>


<PAGE>



CONSOLIDATED STATEMENTS OF CASH FLOWS
RESOURCE MORTGAGE CAPITAL, INC.

Years ended December 31, 1996, 1995 and
1994
(amounts in thousands)
<TABLE>
<S>                                         <C>       <C>       <C> 
                                            1996      1995      1994
                                          --------- --------- ---------
Operating activities:
   Net income                             $ 73,048  $36,910    $52,257
                                                    
   Adjustments to reconcile net income
to net cash
     provided by (used for) operating
activities:
       Provision for losses                  3,106     2,888     2,124
       Net gain from sale of portfolio        (503 )  (2,276 )  (7,685 )
assets
       Gain on sale of single-family       (17,285 )       -         -
operations
       Amortization and depreciation        23,046    14,091     8,006
       Net increase in accrued
interest, other
        assets and other liabilities       (22,891 )  (9,920 )  (3,006 )
       Other                                     -    (2,639 )  (2,092 )
                                          --------- --------- ---------
          Net cash provided by              58,521    39,054    49,604
operating activities
                                          --------- --------- ---------

Investing activities:
   Collateral for collateralized bonds:
       Fundings of loans subsequently     (1,571,95)(708,954 ) (77,917 )
securitized
       Principal payments on collateral    464,478   205,150   120,088
       Net change in funds held by           3,056       952    12,917
trustees
                                          --------- --------- ---------
                                          (1,104,42)(502,852 )  55,088

   Net (increase) decrease in loans        (60,005 ) 307,019   275,700
held for securitization
   Purchase of collateralized bonds, net         -         -    (1,890 )
                                                         
   Purchase of other portfolio assets      (33,319 ) (15,665 ) (16,872 )
   Payments on other portfolio assets       12,117     4,939        13
   Purchase of mortgage securities        (106,510 )(432,885 )(890,170 )
   Principal payments on mortgage          305,112   260,850   436,351
securities
   Proceeds from sales of mortgage         505,708   634,364   251,454
securities
   Proceeds from sale of single-family      20,413         -         -
operations
   Capital expenditures                     (3,162 )    (911 )  (1,990 )
                                          --------- --------- ---------
          Net cash (used for) provided    (464,067 ) 254,859   107,684
by investing activities
                                          --------- --------- ---------

Financing activities:
   Collateralized bonds:
       Proceeds from issuance of          2,060,402  678,121    68,972
securities
       Principal payments on securities (448,238 )(174,150 )(131,452 )
                                          
                                         --------- --------- ---------
                                          1,612,164  503,971   (62,480 )

   Repayments of borrowings, net          (1,228,60)(847,624 ) (48,283 )
   Proceeds from stock offerings, net       62,874    89,097    19,682
   Dividends paid                          (51,721 ) (25,042 ) (59,842 )
                                          --------- --------- ---------
          Net cash provided by (used       394,713  (279,598 )(150,923 )
for) financing activities
                                          --------- --------- ---------

Net (decrease) increase in cash            (10,833 )  14,315     6,365
Cash at beginning of year                   22,229     7,914     1,549
                                          ========= ========= =========
Cash at end of year                       $ 11,396  $22,229    $7,914
                                                     
                                          ========= ========= =========

See notes to consolidated financial statements.

</TABLE>

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESOURCE MORTGAGE CAPITAL, INC.

December 31, 1996, 1995 and 1994
(amounts in thousands except share data)


NOTE 1 - THE COMPANY
The  Company is a mortgage  and  consumer  finance  company  which uses its loan
production  operations  to create  investments  for its  portfolio.  The Company
originates or purchases mortgage loans and consumer installment loans throughout
the United  States.  Currently,  the  Company's  primary  production  operations
include the origination of mortgage loans secured by multi-family properties and
the  origination  of loans  secured by  manufactured  homes.  The  Company  will
securitize the loans funded principally as collateral for collateralized  bonds,
limiting  its credit  risk and  providing  long-term  financing  for those loans
securitized. The Company may also use other securitization vehicles for its loan
production, such as pass-through securities.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated  financial statements include the accounts of Resource Mortgage
Capital, Inc., its wholly owned subsidiaries  (together,  Resource Mortgage) and
certain other affiliated entities  (collectively,  the Company). All significant
intercompany balances and transactions have been eliminated in consolidation.

Certain  amounts  for 1995 and 1994 have been  reclassified  to  conform  to the
presentation for 1996.

Federal Income Taxes
Resource  Mortgage  has  elected to be taxed as a real estate  investment  trust
(REIT) under the Internal Revenue Code. As a result, Resource Mortgage 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 and complies with certain other requirements. No provision has been
made for income taxes for Resource  Mortgage and its qualified REIT subsidiaries
in the accompanying  consolidated  financial  statements,  as Resource  Mortgage
believes it has met the prescribed distribution requirements.

Portfolio Assets
Collateral  for  Collateralized  Bonds.   Collateral  for  collateralized  bonds
consists  of  single-family  and  multi-family  mortgage  loans  which have been
pledged to secure  collateralized  bonds. Loans are carried at their outstanding
principal balances, net of unamortized premiums and discounts.

Mortgage  Securities.  Mortgage securities consist of adjustable-rate  mortgage
securities  (ARMs),   fixed-rate  mortgage   securities,   mortgage  derivative
securities and mortgage residual interests.

Other Portfolio Assets.  Other portfolio assets consists of a note receivable at
December  31,  1996 of  $47,500  received  in  connection  with  the sale of the
Company's single-family mortgage operations in May 1996 (see Note 11), financing
lease  receivables  and  single-family  homes  leased  to home  builders.  Other
portfolio  assets are considered held to maturity and are therefore  reported at
their amortized cost basis.

Available-for-Sale  Investments.  Pursuant to the  requirements  of Statement of
Financial  Accounting  Standards No. 115,  Accounting for Certain Investments in
Debt  and  Equity  Securities,   the  Company  has  classified   collateral  for
collateralized  bonds  and  mortgage  securities  as  available-for-sale.  These
portfolio assets are therefore reported at fair value, with unrealized gains and
losses  excluded  from  earnings  and  reported  as  a  separate   component  of
shareholders'  equity.  The basis of any  securities  sold is computed using the
specific  identification  method.  Any of these investments may be sold prior to
maturity to support the Company's investment strategies.

Loans Held for Securitization
Loans held for  securitization  at December  31,  1996  include  mortgage  loans
secured by multi-family and single-family residential properties and installment
loans secured by manufactured  homes.  These loans were  originated  through the
Company's  loan  production  operations  and will  generally be  securitized  as
collateral  for  collateralized  bonds.  These loans are carried at their unpaid
principal balance,  net of any unamortized  discount or premium and adjusted for
deferred hedging gains or losses, if any.

Price Premiums and Discounts
Price   premiums  and   discounts  on  mortgage   securities,   collateral   for
collateralized  bonds and collateralized  bonds are deferred as an adjustment to
the  basis of the  related  investment  or  obligation  and are  amortized  into
interest  income  or  expense,  respectively,  over  the  life  of  the  related
investment  or  obligation  using the  effective  yield method  adjusted for the
effects of prepayments.

Deferred Issuance Costs
Costs  incurred in  connection  with the  issuance of  collateralized  bonds are
deferred and amortized  over the  estimated  lives of the  collateralized  bonds
using the interest method  adjusted for the effects of prepayments.  These costs
are included in the carrying value of the collateral for collateralized bonds.

Hedging Instruments
The nature of the  Company's  investment  and  financing  strategies  expose the
Company to interest rate risk.  Interest rate cap  agreements may be utilized to
limit the Company's risks related to the financing of certain investments should
short-term  interest rates rise above specified levels.  The amortization of the
cost of such interest rate cap agreements will reduce net interest margin on the
related  investment  over the lives of the  interest  rate cap  agreements.  The
remaining  unamortized  cost is  included  with the  related  investment  in the
consolidated  balance sheets.  The Company may also enter into financial futures
and options  contracts  and interest  rate swaps to moderate  the interest  rate
risks  inherent in the financing of its mortgage  securities.  Revenues or costs
associated with financial futures and options contracts are recognized in income
or expense in a manner consistent with the accounting for the asset or liability
being  hedged.  Revenues  and costs  associated  with  interest  rate  swaps are
recorded as adjustments to interest  expense on the financing  obligation  being
hedged.

The Company may also enter into forward  delivery  contracts and into  financial
futures and options contracts for the purpose of reducing exposure to the effect
of changes in interest  rates on loans which the Company has funded or committed
to fund.  Gains and losses on such  contracts are either (i) deferred until such
time the  related  loans are sold,  or (ii)  deferred  as an  adjustment  to the
carrying  value of the related loan and  amortized  into income over the life of
the  loan  using  the  effective  yield  method  adjusted  for  the  effects  of
prepayments.

Cash
Approximately  $6,600  and  $5,400  of cash  at  December  31,  1996  and  1995,
respectively,  is  restricted  for the payment of premiums on various  insurance
policies  related to certain mortgage  securities,  or is held in trust to cover
losses not  otherwise  covered by  insurance.  Cash at  December  31,  1995 also
included  approximately $15,300 of deposits in-transit from repurchase agreement
counterparties  or the  trustee  for  certain  mortgage  securities  pledged  as
collateral for repurchase agreements.

Net Income Per Common Share
Net  income  per  common  share  as  shown  on the  consolidated  statements  of
operations for the years ended December 31, 1996,  1995 and 1994 is presented on
both a primary  net  income per common  share and fully  diluted  net income per
common  share  basis.  Fully  diluted  net income per common  share  assumes the
conversion  of the  convertible  Preferred  Stock into common  stock,  using the
if-converted  method, and dilutive Stock Appreciation Rights, using the Treasury
Stock  method.  The  average  number  of  shares  is  increased  by the  assumed
conversion of convertible  items, but only if these items are dilutive.  For the
year ended  December  31, 1996 only,  the  Company's  Preferred  Stock and Stock
Appreciation  Rights were  dilutive.  The Preferred  Stocks are  convertible  to
shares of common stock on a one-for-one  basis.  The following table  summarizes
the average  number of shares of common  stock and  equivalents  used to compute
primary  and fully  diluted  net  income per  common  share for the years  ended
December 31, 1996, 1995 and 1994:


<PAGE>




-----------------------------------------------------------
                            Year ended December 31,
                         1996         1995         1994
                      ------------ ------------ -----------

    Primary            20,444,790   20,122,772  19,829,609
                      ============ ============ ===========

    Fully diluted      24,662,677   20,122,772  19,829,609
    
                      ============ ============ ===========

-----------------------------------------------------------


Stock Appreciation Rights
In January 1996,  the Company  adopted  Financial  Accounting  Standards  Board
Statement  No. 123,  Accounting  for  Stock-Based  Compensation  (FAS No. 123).
FAS  No.  123   establishes  a  fair  value  based  method  of  accounting  for
stock-based  compensation  plans.  FAS No. 123  permits  entities to expense an
estimated  fair  value of  employee  stock  options or to  continue  to measure
compensation  cost for these plans using the intrinsic value accounting  method
contained   in  APB  Opinion   No.  25.  As  the  Company   issues  only  stock
appreciation  rights  pursuant  to  various  stock  incentive  plans  which are
currently  paid in cash,  the impact of adopting  FAS No. 123 did not result in
a  material  change  to  the  Company's   financial   position  or  results  of
operations.


Use of Estimates
Fair Value.  The  Company  uses  estimates  in  establishing  fair value for its
investments available-for-sale. Estimates of fair value for most investments are
based on market prices provided by certain dealers.  Estimates of fair value for
certain other investments are determined by calculating the present value of the
projected net cash flows of the instruments using appropriate discount rates and
credit  loss  assumptions.  The  discount  rates used are based on  management's
estimates of market rates,  and the net cash flows are  projected  utilizing the
current interest rate environment and forecasted prepayment rates.  Estimates of
fair value for all remaining investments  available-for-sale are based primarily
on  management's  judgment.  Since the fair value of the  Company's  investments
available-for-sale  are 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 Notes 3 and 9.

Allowance  for Losses.  As discussed in Note 4, the Company has retained  credit
risk on certain  securitized  loans.  An allowance for losses has been estimated
and established for the credit risk retained 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 potential  credit  losses,  as
well as industry  loss  experience.  Provisions  made to increase the  allowance
related to the credit risk  retained is presented as  "Provision  for Losses" in
the accompanying  financial  statements.  The Company's actual credit losses may
differ from those estimates used to establish the allowance.

Other  Mortgage  Securities.  Income on certain  other  mortgage  securities  is
accrued using the effective yield method based upon estimates of future net cash
flows  to be  received  over  the  estimated  remaining  lives  of the  mortgage
securities. Estimated effective yields are changed prospectively consistent with
changes in current  interest  rates and current  prepayment  assumptions  on the
underlying  mortgage  collateral  used by  various  dealers  in  mortgage-backed
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.


<PAGE>



NOTE 3 - PORTFOLIO ASSETS
Collateral for Collateralized  Bonds and Mortgage Securities The following table
summarizes the Company's amortized cost basis and fair value of portfolio assets
classified as  available-for-sale at December 31, 1996 and 1995, and the related
average  effective  interest rates  (calculated for the month ended December 31,
1996 and 1995, and excluding unrealized gains and losses):
<TABLE>

------------------------------------------------------------------
                                 1996                 1995
------------------------------------------------------------------
                                     Effective            Effective
                                     Interest             Interest
                           Fair       Rate      Fair       Rate
                            Value                Value
------------------------------------------------------------------
<S>                        <C>                  <C>
Collateral for
collateralized bonds:
   Amortized cost          $2,668,633 7.9%      $1,012,399 8.4%
   Allowance for losses     (31,732 )              (1,800)
                           --------             ---------
     Amortized cost, net   2,636,901            1,010,599
   Gross unrealized          73,696                20,208
gains
   Gross unrealized          (8,303 )              (1,872)
losses
------------------------------------------------------------------
                           $2,702,294           $1,028,935
------------------------------------------------------------------

Mortgage Securities:
   Adjustable-rate         $780,259   6.9%     $2,087,435 6.8%
mortgage securities         
   Fixed-rate mortgage       29,505   10.9%        35,074  7.9%
securities
   Other mortgage            88,198   16.4%        56,190  15.6%
securities
                           --------             ---------
                            897,962             2,178,699
   Allowance for losses      (4,934 )              (6,188)
                           --------             ---------
       Amortized cost,      893,028             2,172,511
  net
   Gross unrealized          23,591                22,488
gains
    Gross unrealized losses (24,582 )             (45,583)
------------------------------------------------------------------
                           $892,037              $2,149,416
                            
------------------------------------------------------------------
</TABLE>

Collateral  for  collateralized  bonds.   Collateral  for  collateralized  bonds
consists of adjustable-rate and fixed-rate mortgage loans secured by first liens
on  single-family  and  multi-family  residential  housing.  All  collateral for
collateralized  bonds  is  pledged  to  secure  repayment  of the  related  debt
obligation.  All principal  and interest  (less  servicing  related fees) on the
collateral  is remitted to a trustee  and is  available  for payment on the bond
obligation.  The  Company's  exposure to loss on collateral  for  collateralized
bonds is limited to its net investment, as collateralized bonds are non-recourse
to the Company.  The Company may also be exposed to losses from  prepayments  of
the underlying  loans to the extent of  unamortized  net premium on the loans or
deferred costs related to the issuance of the collateralized bonds.

The components of collateral for  collateralized  bonds at December 31, 1996 and
1995 are as follows:

        --------------------------------------------
                                    1996     1995
        --------------------------------------------
        Mortgage collateral, net          
        of allowance             $2,555,903 $974,380
        Funds held by trustees       2,637    3,056
        Accrued interest            18,575    7,801
        receivable
        Unamortized premiums and    55,833   22,107
        discounts, net
        Deferred issuance costs      3,953    3,255
        Unrealized gain             65,393   18,336
        --------------------------------------------
                               $ 2,702,294 $1,028,935
                                  
        --------------------------------------------



Adjustable-Rate  Mortgage  Securities.  ARMs  consist of mortgage  certificates
secured by adjustable-rate mortgage loans.

Fixed-Rate  Mortgage  Securities.  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.


<PAGE>


Other Mortgage Securities.  Other mortgage securities include primarily mortgage
derivative  securities  and mortgage  residual  interests.  Mortgage  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).  Mortgage 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.

Sale of Securities.  Proceeds from sales of mortgage securities totaled $505,708
in 1996, compared to $634,364 in 1995. Gross gains of $4,489 in 1996 and $15,513
in 1995,  and gross losses of $6,887 in 1996 and $13,237 in 1995,  were realized
on those sales.  Gross  realized  losses in 1996  includes the  reduction of the
basis in certain other mortgage  securities recorded as writedowns for permanent
impairment  as  expectations  of future  prepayments  rates would  result in the
Company  receiving  less cash than its current basis in those  investments.  The
adjustment recorded by the Company was $1,460 and is included in the net gain on
sale of assets in the accompanying  financial  statements.  Gross realized gains
for 1995  includes the  recognition  of the  Company's  basis in the  repurchase
obligation  related to convertible  adjustable-rate  mortgage  loans  previously
securitized  or sold as a result of the transfer of this  obligation  to a third
party.

NOTE 4 - ALLOWANCE FOR LOSSES ON PORTFOLIO ASSETS

The  following  table  summarizes  the activity for the  allowance for losses on
portfolio assets for the years ended December 31, 1996 and 1995:
<TABLE>

   -----------------------------------------------------------------
                                    1996                1995
   -----------------------------------------------------------------
   -----------------------------------------------------------------
                            Collateral              Collateral
                            for         Mortgage   for        Mortgage
                            collateral  Securities collateral Securities
                              bonds                 bonds
   -----------------------------------------------------------------
<S>                           <C>       <C>      <C>       <C>        
   Beginning balance           $1,800   $ 6,188  $   -     $ 8,703
                              
   Provision for losses                                      
                              2,300      700      1,800     1,088
   Provision recorded due
   to  sale of                                          -        -
     single-family           29,434     1,600
   operations (see Note 11)
   Losses charged-off, net                                  (3,603)
                             (1,802)   (3,554)      -
   -----------------------------------------------------------------
                              $31,732    $4,934  $ 1,800    $ 6,188
                                                  
   -----------------------------------------------------------------
</TABLE>

The Company has limited  exposure to credit risk  retained on loans which it has
securitized  through the issuance of  collateralized  bonds.  The aggregate loss
exposure  is  generally  limited  to  the  Company's  net  investment  in  these
collateralized bonds, excluding price premiums and discounts and hedge gains and
losses.  The  Company  only incurs  credit  losses to the extent that losses are
incurred in the repossession, foreclosure and sale of the underlying collateral.
Such losses generally equal the excess of the principal amount  outstanding plus
servicer advances, less any proceeds from mortgage or hazard insurance, over the
liquidation value of the collateral.  An allowance for losses, which is based on
industry and Company  experience,  has been established for estimated  potential
losses over the expected life of these securities.  The allowance for losses for
collateralized  bonds is included in collateral for collateralized  bonds in the
accompanying consolidated balance sheets.

On certain mortgage securities collateralized by mortgage loans purchased by the
Company for which  mortgage  pool  insurance  is used as the  primary  source of
credit  enhancement,  the Company has limited  exposure to certain  credit risks
such as  fraud  in the  origination  and  special  hazard  not  covered  by such
insurance.  An allowance was established  based on the estimate of losses at the
time  of  securitization.  The  Company  has  not  significantly  utilized  pool
insurance as a form of credit enhancement since 1993. Accordingly, the Company's
exposure to such  potential  losses is  declining as the  remaining  outstanding
securities  pay-down.  The  allowance  for losses  for  mortgage  securities  is
included in mortgage securities in the accompanying consolidated balance sheets.

The allowance for losses is evaluated  and adjusted  periodically  by management
based on the actual and estimated amount of potential credit losses,  as well as
industry and Company loss experience.


<PAGE>


NOTE 5 - LOANS HELD FOR SECURITIZATION
The following table  summarizes the Company's loans held for  securitization  at
December 31, 1996 and 1995, respectively.

   ----------------------------------------------------
                                        1996    1995
   ----------------------------------------------------

   Secured by multi-family                  
   residential properties            $208,230 $  7,786
   Secured by manufactured homes       40,745        -
   Secured by single-family            21,735  190,898
   residential properties
                                       ------- --------
                                       270,710 198,684
   Net premium (discount)              (5,173)  21,364
   ----------------------------------------------------
                                    $ 265,537  $220,048
                                        
   ----------------------------------------------------


The Company  originates  fixed-rate loans secured by first mortgages or deeds of
trust on  multi-family  residential  properties.  The  Company  also  originates
fixed-rate and adjustable-rate installment loans on manufactured homes which are
secured  by  either  a  UCC  filing  or a  title.  Prior  to  the  sale  of  its
single-family  operations  (see Note 11), the Company  purchased and  originated
fixed-rate and  adjustable-rate  loans secured by first mortgages or first deeds
of  trust  on  single-family   attached  or  detached  residential   properties.
Subsequent  to the sale,  the  Company  is  prohibited  through  March 2001 from
purchasing  through   correspondent   relationships  or  originating  through  a
wholesale network certain types of single-family mortgage loans.

Net premium  (discount) on loans held for  securitization  includes premium paid
and discount obtained on loans held for  securitization.  Additionally,  the net
premium   (discount)  is  adjusted  by  the  gains  and  losses  generated  from
corresponding  hedging  transactions,  primarily used to protect the pipeline of
commitments  to fund  loans.  The  net  premium  (discount)  is  deferred  as an
adjustment to the carrying value of the loans until the loans are securitized or
sold.

The  Company  funded  mortgage  loans  with an  aggregate  principal  balance of
$744,001,  $893,953 and  $2,861,443  during 1996,  1995 and 1994,  respectively.
Additionally, the Company made bulk loan purchases totaling $731,460 and $22,433
in 1996 and 1995 respectively.

At  December  31,  1996,  a  portion  of  the  loans  secured  by  single-family
residential properties consists of loans delinquent in excess of 90 days and not
covered by mortgage pool insurance. These loans were funded prior to the sale of
the single-family mortgage operations, and were not subsequently securitized due
to delinquency  issues. The Company recorded a provision for losses of $2,636 at
the time of the  sale of the  single-family  mortgage  operations  in May  1996.
During 1996,  losses on loans  totaling $520 were  charged-off to the allowance,
and the balance of the  allowance  at December  31, 1996 and 1995 was $2,290 and
$174,  respectively.  The remaining  balance of single-family  residential loans
includes loans repurchased from mortgage  pass-through  securities issued by the
Company in prior years and which have mortgage pool insurance to cover losses.

NOTE 6 - COLLATERALIZED BONDS

he components of  collateralized  bonds along with certain other  information at
December 31, 1996 and 1995 are summarized below:

       --------------------------------------------------------
                                1996               1995
       --------------------------------------------------------
       --------------------------------------------------------
                         Bonds       Range of  Bonds       Range
                         Outstanding Interest  Outstanding of
                                      Rates               Interest
                                                          Rates
       --------------------------------------------------------
       Variable-rate     $ 2,288,709  5.5% -  $680,993    5.9% -
       classes                     6.0%                     6.4%
       Fixed-rate                 6.5% -      253,183    6.5% -
       classes            220,185   11.5%                   15.0%
       Accrued interest     4,688               3,021
       payable
       Unamortized          6,126              11,942
       premium
       --------------------------------------------------------
                         $ 2,519,708        $949,139
                                     
       --------------------------------------------------------

       Range of stated   1998-2030          1998 -2027
       maturities                                

       Number of series        31                  37
       --------------------------------------------------------


<PAGE>


Each series of  collateralized  bonds may  consist of various  classes of bonds,
either at fixed or variable  rates of interest.  Payments  received on the loans
pledged as  collateral  for  collateralized  bonds and any  reinvestment  income
thereon are used to make payments on the collateralized  bonds (see Note 3). The
obligations  under  the  collateralized   bonds  are  payable  solely  from  the
collateral  for  collateralized  bonds  and are  otherwise  non-recourse  to the
Company.  The  maturity  of each  class  is  directly  affected  by the  rate of
principal  prepayments on the related mortgage  collateral.  Each series is also
subject to redemption according to specific terms of the respective  indentures.
As a result,  the actual maturity of any class of a collateralized  bonds series
is likely to occur earlier than its stated maturity.

Included in the  collateralized  bond  balance are certain  bonds which were not
sold, but pledged as collateral for repurchase  borrowings.  The amount of those
repurchase agreements included in collateralized bonds was $366,689 and $102,027
at December 31, 1996 and 1995,  respectively.  These amounts are recourse to the
Company.

The variable  rate classes are based on 1-month  London  InterBank  Offered Rate
(LIBOR). The average effective rate of interest expense for collateralized bonds
was 6.5%,  7.2% and 8.3% for the years ended  December 31, 1996,  1995 and 1994,
respectively.

NOTE 7 - REPURCHASE AGREEMENTS

The  Company   utilizes   repurchase   agreements  to  finance  certain  of  its
investments.  These repurchase agreements are generally recourse to the Company.
These  repurchase  agreements bear interest at rates indexed to LIBOR and may be
secured by adjustable-rate mortgage securities,  fixed-rate mortgage securities,
loans held for securitization and certain other mortgage securities. At December
31, 1996,  substantially all repurchase  agreements had maturities within thirty
days.  If the  counterparty  to the  repurchase  agreement  fails to return  the
collateral,  the  ultimate  realization  of the  security  by the Company may be
delayed or limited.

The excess market value of the mortgage assets securing the Company's repurchase
obligations at December 31, 1996 did not exceed 10% of shareholders'  equity for
any of the individual  counterparties with whom the Company had contracted these
agreements.

The following table summarizes the Company's repurchase  agreements  outstanding
and the weighted  average annual rate for these  agreements at December 31, 1996
and 1995:

----------------------------------------------------------
                                    Weighted
                         Amount     Average     Market
                         Outstanding Annual      Value of
                                      Rate      Collateral
----------------------------------------------------------
December 31, 1996:
Repurchase agreements
secured by:
  Adjustable-rate        $717,232     5.82%     $ 757,389
mortgage securities       
  Fixed-rate mortgage      26,297     5.81%        28,502
securities
  Other mortgage           12,919     5.96%        20,134
securities
----------------------------------------------------------
                         $756,448               $ 806,025
                          
----------------------------------------------------------

December 31, 1995:
Repurchase agreements
secured by:
  Adjustable-rate        $1,951,492   5.80%     $2,040,425
mortgage securities
  Fixed-rate mortgage      24,165     6.03%        34,582
securities
  Other mortgage            7,701     6.12%        32,202
securities
----------------------------------------------------------
                         $1,983,358             $2,107,209
----------------------------------------------------------



<PAGE>


NOTE 8 - NOTES PAYABLE

The following table summarizes  amounts  outstanding  under the below referenced
notes  payable  facilities  and  the  weighted  average  annual  rate  of  these
facilities at December 31, 1996 and 1995:

-------------------------------------------------------
                                    Weighted  Carrying
                       Amount       Average   Value
                       Outstanding  Annual    of
                                      Rate    Collateral
-------------------------------------------------------
December 31, 1996:
Secured:
 Loans held for          $119,500      6.98%  $235,845
securitization                                 
 Other portfolio           11,583      7.87%    33,319
assets

Unsecured:
  Series A 9.56%            9,000      9.56%         -
senior notes
  Series B 10.03%          35,000     10.03%         -
senior notes
  Acquisition notes           841      8.00%         -
due 1997-1999
  Acquisition notes         1,200      8.73%         -
due 1999-2001
-------------------------------------------------------
                         $177,124            $269,164
-------------------------------------------------------
December 31, 1995:
Secured:
  Loans held for         $105,681      5.68%  $153,298
securitization                                 

Unsecured:
  Series A 9.56%           12,000      9.56%         -
senior notes
  Series B 10.03%          35,000     10.03%         -
senior notes
  Acquisition notes         1,360      8.00%         -
due 1997-1999
-------------------------------------------------------
                         $154,041            $153,298
-------------------------------------------------------


Secured.  At  December  31,  1996,  the  Company  had  three  credit  facilities
aggregating  $500,000 to finance the funding of loans, of which $350,000 expires
in 1997 and $150,000  expires in 1998.  The interest  rates on these  facilities
range from 1-month LIBOR plus 1% to 1-month LIBOR plus 1.375%.  The  contractual
rates paid on these facilities may be reduced by credits for  compensating  cash
balances.  One of these  facilities  includes a  sub-agreement  which allows the
Company to borrow up to $30,000  unsecured  for working  capital  purposes.  The
Company expects that these credit facilities will be renewed,  if necessary,  at
their respective  expiration  dates,  although there can be no assurance of such
renewal.

Unsecured.  The  Company's  Series A 9.56%  senior  notes are  payable in annual
installments  through  1999.  The  Company's  Series B 10.03%  senior  notes are
payable in annual  installments  through 2001.  The Company also issued  various
unsecured  notes payable in conjunction  with the  acquisition of a multi-family
mortgage broker (see Note 10) and the  acquisition of a  single-family  mortgage
servicer which was sold in 1996 along with the single-family mortgage operations
(see Note 11). The aggregate  principal  payments due under the unsecured  notes
for the next five years after  December 31, 1996 are $3,406,  $12,156,  $12,695,
$8,894 and $8,894.



<PAGE>



NOTE 9 - ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS

The following  table  presents the carrying  values and estimated fair values of
the Company's  recorded  financial  instruments,  as well as  information  about
certain specific off-balance sheet financial instruments as of December 31, 1996
and 1995:

-------------------------------------------------------------------------
                                 1996                     1995
-------------------------------------------------------------------------
                       Notional                 Notional
                       Amount Cost     Fair     Amount Cost     Fair
                              Basis    Value           Basis    Value
-------------------------------------------------------------------------
Recorded financial
instruments:

Assets:
  Collateral for       $  -   $2,628,288 $2,699,687 $ -   $1,010,59 $1,028,935
  collateralized           
  bonds
  Mortgage                 -   882,615  889,542     --     2,148,759 2,145,670
  securities
  Interest rate cap    1,499,00 19,025    5,102 1,575,000   23,752    3,746
  agreements
  Loans held for           -   265,537    277,710     --     220,048  223,451
  securitization
  Other portfolio          -   96,236    98,378     --       27,585   27,585
  assets
  Cash                     -   11,396     11,396     --       22,229   22,229
Liabilities:
  Collateralized           -  2,519,708  2,519,708   --      949,139  949,139
  bonds
  Repurchase               -  756,448   756,448     --       1,983,358 1,983,358
  agreements
  Notes payable            -  177,124   177,124     --       154,041  154,041

Off-balance sheet financial instruments:

Financial futures contracts:
  Repurchase               -        -        -    1,000,000   --    (107)
  agreements
  Loans held for       78,170       -      515    274,700     --    (628)
  securitization
Options on futures
contracts:
  Repurchase               -        -        -   2,130,000   --       46
  agreements
  Loans held for       100,000      -     (55)   30,000      --      (2)
  securitization
Interest rate swap
agreements:
  Mortgage securities  1,020,000    -  (1,177)    1,020,000   --    4,882
  Collateralized       432,801      -      334    207,094     --  (3,898)
  bonds
Forward delivery contracts:
  Loans held for       76,280       -      293        -       --       --
  securitization
Commitments to fund    536,931      -  554,582    954,900     --  985,200
loans
-------------------------------------------------------------------------

The estimated fair values of financial  instruments  have been determined  using
available market information and appropriate valuation methodologies. However, a
degree of judgment is  necessary  in  evaluating  market data and forming  these
estimates.

Recorded  Financial  Instruments.  The carrying  amount of cash and  liabilities
considered to be financial  instruments  approximates fair value at December 31,
1996 and 1995. As discussed in Note 2, the fair value of mortgage  securities is
based on actual dealer price quotes,  or by determining the present value of the
projected  net cash  flows  using  appropriate  discount  rates  and  prepayment
assumptions.

The Company has purchased  over the past four years LIBOR and One-year  Constant
Maturity  Treasury  Index (CMT) based  interest rate cap agreements to limit its
exposure to the lifetime  interest  rate caps on certain of its  adjustable-rate
mortgage  securities  and  collateral  for  collateralized  bonds.  Under  these
agreements,  the Company  will receive  additional  cash flow should the related
index  increase  above  the  contracted  rates.  Contract  rates  on  these  cap
agreements range from 8.0% to 11.5%,  with expiration dates ranging from 1999 to
2004.

Off-Balance  Sheet Financial  Instruments.  The Company may engage in derivative
financial   instrument   activities  for  the  purpose  of  interest  rate  risk
management.  As of December 31, 1996, all of the Company's  derivative financial
instruments were for purposes other than trading. The Company has credit risk to
the extent that the  counterparties to the derivative  financial  instruments do
not perform their obligation under the agreements.  If one of the counterparties
does not  perform,  the  Company  would not  receive  the cash to which it would
otherwise be entitled under the conditions of the agreement.

The Company may utilize  Eurodollar  financial  futures and options contracts to
moderate the risks  inherent in the  financing of its mortgage  securities  with
floating rate repurchase  agreements.  The Company utilizes these instruments to
synthetically   lengthen  the  terms  of  the  repurchase  agreement  financing,
generally  from one month to three and six months.  Under these  contracts,  the
Company  will  receive  additional  cash flow if the  related  Eurodollar  index
increases above the contracted  rates. The Company will pay additional cash flow
if the related  Eurodollar  index  decreases  below the contracted  rates. As of
December  31,  1996,  the  Company  had no  such  financial  futures  or  option
contracts.  As of December 31, 1995,  the Company had contracts  with a notional
value of $3,130,000 with contract rates ranging from 5.0% to 5.4%.

The Company may enter into various  interest  rate swap  agreements to limit its
exposure  to changes in  financing  rates of certain  mortgage  securities.  The
Company  has  entered  into a series  of  interest  rate swap  agreements  which
effectively  caps 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,  the Company pays the lesser of current  6-month  LIBOR,  or
6-month LIBOR in effect  180-days  prior plus 1%, and receives  current  6-month
LIBOR.  These  agreements  expire in 2001.  The Company has also  entered into a
5-year  amortizing   interest  rate  swap  agreement  related  to  variable-rate
collateralized  bond  classes with a remaining  notional of $178,045.  Under the
terms of this agreement, the Company receives 1-month LIBOR and pays 6.15%. This
agreement expires in 2000. The Company entered into a 7-year amortizing interest
rate swap agreement with remaining  notional of $254,756  related to prime-based
loans financed with LIBOR-based  variable-rate  collateralized  bonds. Under the
terms of the agreement,  the Company  receives 1-month LIBOR plus 2.65% and pays
1-month average prime in effect 3 months prior.

Forward delivery  contracts and financial futures and options contracts are used
to reduce exposure to the effect of changes in interest rates on funded mortgage
loans,  as well as those mortgage loans which the Company has committed to fund.
As of December  31,  1996,  the Company had  entered  into  commitments  to fund
multi-family  mortgage  loans of  $521,684  and  manufactured  housing  loans of
$15,247.  The  multi-family  commitments  had original terms of not more than 27
months. The manufactured housing commitments generally had original terms of not
more than 60 days.  The Company  has  deferred  net  hedging  gains of $2,022 at
December  31, 1996 and  deferred  net hedging  losses of $16,647 at December 31,
1995 related to these positions.

NOTE 10 - ACQUISITION

On August 30, 1996, the Company  acquired  Multi-Family  Capital  Markets,  Inc.
(MCM),   which  specializes  in  the  sourcing,   underwriting  and  closing  of
multi-family  loans  secured by first liens on  apartment  properties  that have
qualified for low income  housing tax credits.  The Company  acquired all of the
outstanding stock and assets of MCM for $4,000. Of this amount,  $2,800 was paid
in cash with the  remaining  $1,200 paid  through  the  issuance of notes to the
sellers,  due in installments  through  September 1, 1999 and September 1, 2001.
The acquisition was accounted for as a purchase,  and accordingly,  the purchase
price was  allocated  to the  assets  and  liabilities  acquired  based on their
estimated fair values as of the date of acquisition. MCM's results of operations
are not material to the Company's consolidated financial statements and proforma
financial information has therefore not been presented.

NOTE 11 - SALE OF SINGLE-FAMILY MORTGAGE OPERATIONS

On May 13, 1996, the Company sold its single-family correspondent, wholesale and
servicing operations  (collectively,  the single-family  mortgage operations) to
Dominion  Mortgage  Services,  Inc.  (Dominion),  a  wholly-owned  subsidiary of
Dominion Resources, Inc. (NYSE: D). The purchase price was $67,958 for the stock
and assets of the single-family  mortgage operations.  The terms of the purchase
included an initial cash payment of $20,458,  with the remainder of the purchase
price paid in five  annual  installments  of $9,500  beginning  January 2, 1997,
pursuant to a note  agreement.  The note bears interest at a rate of 6.50%.  The
terms of the sale generally  prohibit the Company from acquiring  single-family,
non-conforming residential mortgages through either correspondent  relationships
or a wholesale  network for a period of five years. As a result of the sale, the
Company  recorded a net gain of  $17,285.  Such amount  includes a provision  of
approximately  $31,000 for possible  losses on securitized  single-family  loans
where the  Company,  which  performed  the  servicing of such loans prior to the
sale, has retained a portion of the credit risk on these loans.


<PAGE>


NOTE 12 - PREFERRED STOCK

The following  table presents a summary of the Company's  issued and outstanding
preferred stock:

----------------------------------------------------------
                                   Liquidation Dividends
                                   Preference  Per Share
                                   Per        1996   1995
                                   Share
----------------------------------------------------------

Series A 9.75% Cumulative            $24.00  $2.375 $1.170
Convertible Preferred Stock
Series B 9.55% Cumulative             24.50   2.375 0.423
Convertible Preferred Stock
Series C 9.73% Cumulative             30.00   0.600     -
Convertible Preferred Stock
----------------------------------------------------------

The Company 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) the quarterly  dividend  declared on the Company's common
stock.  Each share of Series A, Series B and Series C is convertible at any time
at the  option of the  holder  into one share of common  stock.  Each  series is
redeemable  by the  Company,  in whole or in part,  (i) 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 the issue  price,  or (ii) for cash at the issue
price, plus any accrued and unpaid dividends beginning after June 30 and October
31, 1998 for Series A and B,  respectively  and September 30, 1999 for Series C.
Series C was issued in October  1996 with  proceeds  of $52,740  net of issuance
costs.

In the event of  liquidation,  the holders of all series of preferred stock will
be  entitled  to  receive  out of the assets of the  Company,  prior to any such
distribution to the common shareholders, the issue price per share in cash, plus
any accrued and unpaid dividends.

NOTE 13 - STOCK INCENTIVE PLAN

Pursuant to the Company's  1993 Stock  Incentive  Plan (the  Employee  Incentive
Plan),  the  Compensation  Committee  of the  Board of  Directors  may  grant to
eligible employees of the Company,  its subsidiaries and affiliates for a period
of ten years beginning June 17, 1993, stock options,  stock appreciation  rights
(SARs) and  restricted  stock awards.  An aggregate of 675,000  shares of common
stock  are  available  for  distribution  pursuant  to stock  options,  SARs and
restricted  stock.  The shares of common stock subject to any option or SAR that
terminates without a payment being made in the form of common stock would become
available  for  distribution  pursuant  to  the  Employee  Incentive  Plan.  The
Compensation  Committee  of the  Board  of  Directors  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.


<PAGE>



The following  table presents a summary of the SARs  outstanding at December 31,
1996 and 1995:

       -------------------------------------------
                               SARs    Exercise
                                         Price
       -------------------------------------------
       December 31, 1994       211,960 $8 3/4 - 29

       Granted                122,585      16 1/8
       Forfeitures            (24,973 )  17 7/8 -
                                               29
       SARs exercised          (3,062 )  17 7/8 -
                                               29
       -------------------------------------------
       December 31, 1995       306,510 $8 3/4 - 29

       Granted                  72,065 $ 20 3/4
                                         - 23 5/8
       Forfeitures             (11,517  16 1/8 -
                                           20 3/4
       SARs exercised          (16,114   8 3/4 -
                                           17 7/8
       Terminated at sale of
       single-family          (67,035 )  8 3/4 - 29
            mortgage
       operations
       -------------------------------------------
       December 31, 1996       283,909 $12 3/4 -
                                               29
       -------------------------------------------

The Company expensed $1,664, none and $8 for SARs and DERs during 1996, 1995 and
1994,  respectively.  There were no stock options outstanding as of December 31,
1996 and 1995.  The number of SARs vested and  exercisable  at December 31, 1996
and 1995 was 106,807 and 94,000, respectively.

In 1995, the Company  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 7,000 SARs.  Each Board
member  subsequently  received  a grant  of 1,000  SARs on May 1,  1996 and will
receive an additional grant of 1,000 SARs on May 1, 1997 and 1998, respectively.
The SARs  granted on May 1, 1995 will  become  exercisable  as to 33 1/3% of the
granted amount each of the next three years.  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 100,000. The Company expensed $163 for
SARs and DERs related to the Board Incentive Plan during 1996. There was no such
expense recorded for 1995. The number of SARs vested and exercisable at December
31, 1996 was 9,324.  There were no SARs vested and  exercisable  at December 31,
1995.

NOTE 14 - 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  matched  the
employees' contribution, up to 6% of the employees' income. 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 1996, 1995 and 1994 was $248, $136 and $331,  respectively.  The Company does
not provide post employment or post retirement benefits to its employees.

NOTE 15 - CONTINGENCIES

The Company makes various representations and warranties relating to the sale or
securitization  of mortgage  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 mortgage loans,  and could incur losses.  In the opinion of management,  no
material  losses  are  expected  to  result  from any such  representations  and
warranties.

In  connection  with  the sale of its  single-family  mortgage  operations,  the
Company  has  indemnified  the  purchaser  for a period of up to five  years for
various  representations  and  warranties  made as part of the sale.  One of the
companies  included in the sale has been named in a lawsuit seeking class action
status  regarding  violations of the Real Estate  Settlement  and Procedures Act
(RESPA).  The  lawsuit  alleges  that this entity  violated  RESPA by payment of
premiums to wholesale  brokers for sourcing  single-family  mortgage  loans with
above market rates.  The  plaintiffs  seek  compensatory  and punitive  damages.
Pursuant to the terms of the sale,  the Company has  indemnified  the  purchaser
against any such violations of RESPA on loans funded through May 13, 1996. While
the ultimate outcome of this action cannot be presently  determined,  management
believes  that the  ultimate  settlement  of the case  will not have a  material
adverse impact on the Company's financial condition.  Additionally,  the Company
believes that any other matters arising as a result of the indemnifications made
at the time of the sale will not have a material adverse effect on the Company's
financial condition.

As of December 31, 1996,  the Company is obligated  under  noncancelable  leases
with  expiration  dates through 2003.  The future  minimum lease  payments under
these noncancelable leases are as follows: 1997--$721;  1998--$825;  1999--$787;
2000--$582; 2001--$600; and thereafter--$1,254.

NOTE 16 - SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION


--------------------------------------------------------
                                  Year Ended December
                                          31,
                                 1996   1995     1994
--------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for interest          $228,969 $210,638 $177,943
--------------------------------------------------------
Supplemental disclosure of non-cash activities:
Purchase of collateral for      $         $       $
collateralized bonds                --      --     (54,204)
Assumption of collateral for        --      --      52,314
collateralized bonds
--------------------------------------------------------
Purchase of  collateral for                
collateralized bonds, net          $  --   $    --    $(1,890)
--------------------------------------------------------


<PAGE>









                         INDEPENDENT AUDITORS' REPORT




The Board of Directors
Resource Mortgage Capital, Inc.:


We have  audited  the  accompanying  consolidated  balance  sheets  of  Resource
Mortgage  Capital,  Inc. as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the  three-year  period ended  December 31, 1996.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Resource Mortgage
Capital, Inc.  as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.




                                                          KPMG PEAT MARWICK LLP


Richmond, Virginia
February 4, 1997
[{"type": "8-K", "sequence": "1", "description": "FORM 8-K", "secsgml_size_bytes": 73655}]
{"company-data": {"conformed-name": "RESOURCE MORTGAGE CAPITAL INC/VA", "cik": "0000826675", "assigned-sic": "6798", "irs-number": "521549373", "state-of-incorporation": "VA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "8-K", "act": "34", "file-number": "001-09819", "film-number": "97546219"}, "business-address": {"street1": "4880 COX ROAD", "city": "GLEN ALLEN", "state": "VA", "zip": "23060", "phone": "8049675800"}, "mail-address": {"street1": "4880 COX ROAD", "city": "GLEN ALLEN", "state": "VA", "zip": "23060"}, "former-company": [{"former-conformed-name": "RESOURCE MORTGAGE INVESTMENT CORP", "date-changed": "19930505"}, {"former-conformed-name": "RAC MORTGAGE INVESTMENT CORP /VA/", "date-changed": "19930505"}]}
SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, DC 20549

                                 ------------

                                   FORM 8-K

                                CURRENT REPORT
                      PURSUANT TO SECTION 13 or 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                       Date of Report: February 27, 1997

                        RESOURCE MORTGAGE CAPITAL, INC.
              (Exact Name of Registrant as Specified in Charter)

Virginia                   1-9819                            52-1549373
(State or Other       (Commission File Numb                   (IRS Employer
Jurisdiction of                                             Identification No.)
Incorporation)                                                       
                  

                       10900 Nuckols Road, Richmond, Virginia 23060
                      (Address of Principal Executive Offices) (Zip Code)
              

      Registrant's telephone number, including area code: (804) 217-5800

                   4880 Cox Road, Glen Allen, Virginia 23060
         (Former Name or Former Address, if Changed Since Last Report)
Item 5. Other Events.

      Attached as Annex A are the consolidated  financial statements of Resource
Mortgage Capital,  Inc., and the independent  auditor's report thereon,  for the
year ended December 31, 1996.
SIGNATURES

      Pursuant to the  requirements  of the Securities  Exchange Act of 1934, as
amended,  the  Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.

                          RESOURCE MORTGAGE CAPITAL, INC.

February 27, 1997           By: /s/ Thomas H.  Potts
                                --------------------

                                   Thomas H. Potts
                                   President
Annex A to Form 8-K

                        Resource Mortgage Capital, Inc.

                       Consolidated Financial Statements

                          December 31, 1996 and 1995
CONSOLIDATED BALANCE SHEETS
RESOURCE MORTGAGE CAPITAL, INC.

December 31, 1996 and 1995
(amounts in thousands except share data)
ASSETS                                           1996       1995
                                                --------   --------

Investments:
   Portfolio assets:
       Collateral for collateralized bonds      $2,702,294 $1,028,935
       Mortgage securities                      892,037    2,149,416
       Other                                    96,236     27,585
   Loans held for securitization                265,537    220,048
                                                --------   --------
                                                3,956,104  3,425,984

Cash                                            11,396     22,229
Accrued interest receivable                      8,078     14,851
Other assets                                    11,879     26,974
                                                ========   ========
                                                $3,987,457 $3,490,038
                                                 ========   ========

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
                           
Collateralized bonds                         $ 2,519,70  $ 949,139                                               
Repurchase agreements                           756,448  1,983,358
Notes payable                                   177,124    154,041
Accrued interest payable                         2,717      5,278
Other liabilities                               27,843     43,399
                                                --------   --------
                                                3,483,840  3,135,215
                                                 --------   --------

SHAREHOLDERS' EQUITY

Preferred stock, par value $.01 per share,
 50,000,000 shares authorized:
      9.75% Cumulative Convertible Series A,
        1,552,500 issued and outstanding,       35,460     35,460
respectively
      9.55% Cumulative Convertible Series B,
        2,196,824 issued and outstanding,       51,425     51,425
respectively
      9.73% Cumulative Convertible Series C,
        1,840,000 and none issued and           52,740          -
outstanding, respectively
Common stock,  par value $.01 per share,
50,000,000 shares authorized,
  20,653,593 and  20,198,654  issued and           207        202
outstanding, respectively
Additional paid-in capital                      291,637    281,508
Net unrealized gain (loss) on investments       64,402     (4,759)
available-for-sale
Retained earnings (deficit)                      7,746     (9,013)
                                                           --------
                                                --------
                                                503,617    354,823
                                                --------   --------
                                                $3,987,457  $3,490,038
                                                 ========   ========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
RESOURCE MORTGAGE CAPITAL, INC.

Years ended December 31, 1996, 1995 and
1994
(amounts in thousands except share data)
1996     1995     1994
                                           ------- -------- --------

Interest income:
     Collateral for collateralized bonds   148,675$ 61,007   $33,719                                         
     Mortgage securities                   129,253 161,889   157,701
     Other portfolio assets                4,700      2,637      765
     Loans held for securitization         29,439    28,349   35,121
                                           ------- -------- --------
                                           312,067 253,882   227,306
                                           ------- -------- --------

Interest and related expense:
     Collateralized bonds                  117,070  50,984    32,840
     Repurchase agreements                 105,970  142,474  134,791
     Notes payable                           8,195   11,186    6,189
     Other                                   2,819    3,931    6,998
     Provision for losses                    3,106    2,888    2,124
                                           ------- -------- --------
                                           237,160   211,463   182,942
                                           ------- -------- --------

Net interest margin                        74,907   42,419     44,364

Gain on sale of single-family mortgage     17,285       -        -
operations
Gain on sale of assets, net of associated     503    9,651    27,723
costs
Other income                                1,116    2,963    1,454
General and administrative expenses        (20,763) (18,123) (21,284)
                                           ------- -------- --------

Net income                                 $73,048   $36,910   $ 52,257
                                
                                           ======= ======== ========

Net income                                 $ 73,04  $ 36,910  $52,257
                                                
Dividends on preferred stock               (10,009) (2,746  )   -
                                           =======  ========   ========
Net income available to common             $63,039  $ 34,164   $52,257
shareholders                                   
                                           ======= ======== ========

Per common share:
     Primary                               $ 3.08 $   1.70  $2.64
                                                    
                                           ======= ======== ========
     Fully diluted                         $       $        $
                                            2.96     1.70     2.64
                                           ======= ======== ========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY
RESOURCE MORTGAGE CAPITAL,
INC.

Years ended December 31, 1996, 1995 and 1994 (amounts in thousands  except share
data)

Years ended December 31,
1996, 1995 and 1994
(amounts in thousands except
share data)

                                                                             Net Unrealized
                                                             Additional       Gain (Loss)       Retained
                                       Preferred    Common     Paid-in       on Investments     Earnings
                                         Stock       Stock     Capital     Available-for-Sale   (Deficit)     Total
                                      ------------------------------------------------------------------------------------
Balance at December 31, 1993               $ -   $  193     $  259,622          $ -            $ (6,783)     $ 253,032
                                                        

Issuance of common stock                       -            8     19,674                  -           -           19,682
Net income - 1994                              -          -           -                   -        52,257         52,257
Change in net unrealized loss
    on investments available-for-sale          -          -           -                (72,678)       -          (72,678)
Dividends on common stock
    at $2.76 per share                         -          -                               -       (54,822)       (54,822)
                                                                  -
                                      ------------------------------------------------------------------------------------
Balance at December 31, 1994                   -          201    279,296               (72,678)    (9,348)       197,471

Issuance of common stock                         -          1      2,212                    -           -          2,213
Series A preferred stock issued,
    net of issuance costs                   35,460          -                               -           -         35,460
                                                             -
Series B preferred stock issued,
    net of issuance costs                   51,425          -                               -           -         51,425
                                                             -
Net income - 1995                                -          -                               -      36,910         36,910
                                                             -
Change in net unrealized loss
    on investments available-for-sale            -          -                           67,919          -         67,919
                                                             -
Dividends on common stock
    at $1.68 per share                           -          -                               -     (33,829)       (33,829)
                                                             -
Dividends on preferred stock                     -          -                               -      (2,746)        (2,746)
                                                             -
                                      ------------------------------------------------------------------------------------
Balance at December 31, 1995                86,885        202    281,508                (4,759)    (9,013)       354,823

Issuance of common stock                         -          5     10,129                    -           -         10,134
Series C preferred stock issued,
    net of issuance costs                   52,740          -                               -           -         52,740
                                                             -
Net income - 1996                                -          -                               -      73,048         73,048
                                                             -
Change in net unrealized loss
    on investments available-for-sale            -          -                           69,161          -         69,161
                                                             -
Dividends on common stock
    at $2.27 per share                           -          -                               -     (46,280)       (46,280)
                                                             -
Dividends on preferred stock                     -          -                               -     (10,009)       (10,009)
                                                             -
                                      ====================================================================================
Balance at December 31, 1996             $ 139,625       $ 207    $  291,637        $   64,402   $  7,746     $  503,617
                                                          
                                      ====================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
RESOURCE MORTGAGE CAPITAL, INC.

Years ended December 31, 1996, 1995 and
1994
(amounts in thousands)
1996      1995      1994
                                          --------- --------- ---------
Operating activities:
   Net income                             $ 73,048  $36,910    $52,257
                                                    
   Adjustments to reconcile net income
to net cash
     provided by (used for) operating
activities:
       Provision for losses                  3,106     2,888     2,124
       Net gain from sale of portfolio        (503 )  (2,276 )  (7,685 )
assets
       Gain on sale of single-family       (17,285 )       -         -
operations
       Amortization and depreciation        23,046    14,091     8,006
       Net increase in accrued
interest, other
        assets and other liabilities       (22,891 )  (9,920 )  (3,006 )
       Other                                     -    (2,639 )  (2,092 )
                                          --------- --------- ---------
          Net cash provided by              58,521    39,054    49,604
operating activities
                                          --------- --------- ---------

Investing activities:
   Collateral for collateralized bonds:
       Fundings of loans subsequently     (1,571,95)(708,954 ) (77,917 )
securitized
       Principal payments on collateral    464,478   205,150   120,088
       Net change in funds held by           3,056       952    12,917
trustees
                                          --------- --------- ---------
                                          (1,104,42)(502,852 )  55,088

   Net (increase) decrease in loans        (60,005 ) 307,019   275,700
held for securitization
   Purchase of collateralized bonds, net         -         -    (1,890 )
                                                         
   Purchase of other portfolio assets      (33,319 ) (15,665 ) (16,872 )
   Payments on other portfolio assets       12,117     4,939        13
   Purchase of mortgage securities        (106,510 )(432,885 )(890,170 )
   Principal payments on mortgage          305,112   260,850   436,351
securities
   Proceeds from sales of mortgage         505,708   634,364   251,454
securities
   Proceeds from sale of single-family      20,413         -         -
operations
   Capital expenditures                     (3,162 )    (911 )  (1,990 )
                                          --------- --------- ---------
          Net cash (used for) provided    (464,067 ) 254,859   107,684
by investing activities
                                          --------- --------- ---------

Financing activities:
   Collateralized bonds:
       Proceeds from issuance of          2,060,402  678,121    68,972
securities
       Principal payments on securities (448,238 )(174,150 )(131,452 )
                                          
                                         --------- --------- ---------
                                          1,612,164  503,971   (62,480 )

   Repayments of borrowings, net          (1,228,60)(847,624 ) (48,283 )
   Proceeds from stock offerings, net       62,874    89,097    19,682
   Dividends paid                          (51,721 ) (25,042 ) (59,842 )
                                          --------- --------- ---------
          Net cash provided by (used       394,713  (279,598 )(150,923 )
for) financing activities
                                          --------- --------- ---------

Net (decrease) increase in cash            (10,833 )  14,315     6,365
Cash at beginning of year                   22,229     7,914     1,549
                                          ========= ========= =========
Cash at end of year                       $ 11,396  $22,229    $7,914
                                                     
                                          ========= ========= =========

See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESOURCE MORTGAGE CAPITAL, INC.

December 31, 1996, 1995 and 1994
(amounts in thousands except share data)

NOTE 1 - THE COMPANY
The  Company is a mortgage  and  consumer  finance  company  which uses its loan
production  operations  to create  investments  for its  portfolio.  The Company
originates or purchases mortgage loans and consumer installment loans throughout
the United  States.  Currently,  the  Company's  primary  production  operations
include the origination of mortgage loans secured by multi-family properties and
the  origination  of loans  secured by  manufactured  homes.  The  Company  will
securitize the loans funded principally as collateral for collateralized  bonds,
limiting  its credit  risk and  providing  long-term  financing  for those loans
securitized. The Company may also use other securitization vehicles for its loan
production, such as pass-through securities.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated  financial statements include the accounts of Resource Mortgage
Capital, Inc., its wholly owned subsidiaries  (together,  Resource Mortgage) and
certain other affiliated entities  (collectively,  the Company). All significant
intercompany balances and transactions have been eliminated in consolidation.

Certain  amounts  for 1995 and 1994 have been  reclassified  to  conform  to the
presentation for 1996.

Federal Income Taxes
Resource  Mortgage  has  elected to be taxed as a real estate  investment  trust
(REIT) under the Internal Revenue Code. As a result, Resource Mortgage 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 and complies with certain other requirements. No provision has been
made for income taxes for Resource  Mortgage and its qualified REIT subsidiaries
in the accompanying  consolidated  financial  statements,  as Resource  Mortgage
believes it has met the prescribed distribution requirements.

Portfolio Assets
Collateral  for  Collateralized  Bonds.   Collateral  for  collateralized  bonds
consists  of  single-family  and  multi-family  mortgage  loans  which have been
pledged to secure  collateralized  bonds. Loans are carried at their outstanding
principal balances, net of unamortized premiums and discounts.

Mortgage  Securities.  Mortgage securities consist of adjustable-rate  mortgage
securities  (ARMs),   fixed-rate  mortgage   securities,   mortgage  derivative
securities and mortgage residual interests.

Other Portfolio Assets.  Other portfolio assets consists of a note receivable at
December  31,  1996 of  $47,500  received  in  connection  with  the sale of the
Company's single-family mortgage operations in May 1996 (see Note 11), financing
lease  receivables  and  single-family  homes  leased  to home  builders.  Other
portfolio  assets are considered held to maturity and are therefore  reported at
their amortized cost basis.

Available-for-Sale  Investments.  Pursuant to the  requirements  of Statement of
Financial  Accounting  Standards No. 115,  Accounting for Certain Investments in
Debt  and  Equity  Securities,   the  Company  has  classified   collateral  for
collateralized  bonds  and  mortgage  securities  as  available-for-sale.  These
portfolio assets are therefore reported at fair value, with unrealized gains and
losses  excluded  from  earnings  and  reported  as  a  separate   component  of
shareholders'  equity.  The basis of any  securities  sold is computed using the
specific  identification  method.  Any of these investments may be sold prior to
maturity to support the Company's investment strategies.

Loans Held for Securitization
Loans held for  securitization  at December  31,  1996  include  mortgage  loans
secured by multi-family and single-family residential properties and installment
loans secured by manufactured  homes.  These loans were  originated  through the
Company's  loan  production  operations  and will  generally be  securitized  as
collateral  for  collateralized  bonds.  These loans are carried at their unpaid
principal balance,  net of any unamortized  discount or premium and adjusted for
deferred hedging gains or losses, if any.

Price Premiums and Discounts
Price   premiums  and   discounts  on  mortgage   securities,   collateral   for
collateralized  bonds and collateralized  bonds are deferred as an adjustment to
the  basis of the  related  investment  or  obligation  and are  amortized  into
interest  income  or  expense,  respectively,  over  the  life  of  the  related
investment  or  obligation  using the  effective  yield method  adjusted for the
effects of prepayments.

Deferred Issuance Costs
Costs  incurred in  connection  with the  issuance of  collateralized  bonds are
deferred and amortized  over the  estimated  lives of the  collateralized  bonds
using the interest method  adjusted for the effects of prepayments.  These costs
are included in the carrying value of the collateral for collateralized bonds.

Hedging Instruments
The nature of the  Company's  investment  and  financing  strategies  expose the
Company to interest rate risk.  Interest rate cap  agreements may be utilized to
limit the Company's risks related to the financing of certain investments should
short-term  interest rates rise above specified levels.  The amortization of the
cost of such interest rate cap agreements will reduce net interest margin on the
related  investment  over the lives of the  interest  rate cap  agreements.  The
remaining  unamortized  cost is  included  with the  related  investment  in the
consolidated  balance sheets.  The Company may also enter into financial futures
and options  contracts  and interest  rate swaps to moderate  the interest  rate
risks  inherent in the financing of its mortgage  securities.  Revenues or costs
associated with financial futures and options contracts are recognized in income
or expense in a manner consistent with the accounting for the asset or liability
being  hedged.  Revenues  and costs  associated  with  interest  rate  swaps are
recorded as adjustments to interest  expense on the financing  obligation  being
hedged.

The Company may also enter into forward  delivery  contracts and into  financial
futures and options contracts for the purpose of reducing exposure to the effect
of changes in interest  rates on loans which the Company has funded or committed
to fund.  Gains and losses on such  contracts are either (i) deferred until such
time the  related  loans are sold,  or (ii)  deferred  as an  adjustment  to the
carrying  value of the related loan and  amortized  into income over the life of
the  loan  using  the  effective  yield  method  adjusted  for  the  effects  of
prepayments.

Cash
Approximately  $6,600  and  $5,400  of cash  at  December  31,  1996  and  1995,
respectively,  is  restricted  for the payment of premiums on various  insurance
policies  related to certain mortgage  securities,  or is held in trust to cover
losses not  otherwise  covered by  insurance.  Cash at  December  31,  1995 also
included  approximately $15,300 of deposits in-transit from repurchase agreement
counterparties  or the  trustee  for  certain  mortgage  securities  pledged  as
collateral for repurchase agreements.

Net Income Per Common Share
Net  income  per  common  share  as  shown  on the  consolidated  statements  of
operations for the years ended December 31, 1996,  1995 and 1994 is presented on
both a primary  net  income per common  share and fully  diluted  net income per
common  share  basis.  Fully  diluted  net income per common  share  assumes the
conversion  of the  convertible  Preferred  Stock into common  stock,  using the
if-converted  method, and dilutive Stock Appreciation Rights, using the Treasury
Stock  method.  The  average  number  of  shares  is  increased  by the  assumed
conversion of convertible  items, but only if these items are dilutive.  For the
year ended  December  31, 1996 only,  the  Company's  Preferred  Stock and Stock
Appreciation  Rights were  dilutive.  The Preferred  Stocks are  convertible  to
shares of common stock on a one-for-one  basis.  The following table  summarizes
the average  number of shares of common  stock and  equivalents  used to compute
primary  and fully  diluted  net  income per  common  share for the years  ended
December 31, 1996, 1995 and 1994:
-----------------------------------------------------------
                            Year ended December 31,
                         1996         1995         1994
                      ------------ ------------ -----------

    Primary            20,444,790   20,122,772  19,829,609
                      ============ ============ ===========

    Fully diluted      24,662,677   20,122,772  19,829,609
    
                      ============ ============ ===========

-----------------------------------------------------------

Stock Appreciation Rights
In January 1996,  the Company  adopted  Financial  Accounting  Standards  Board
Statement  No. 123,  Accounting  for  Stock-Based  Compensation  (FAS No. 123).
FAS  No.  123   establishes  a  fair  value  based  method  of  accounting  for
stock-based  compensation  plans.  FAS No. 123  permits  entities to expense an
estimated  fair  value of  employee  stock  options or to  continue  to measure
compensation  cost for these plans using the intrinsic value accounting  method
contained   in  APB  Opinion   No.  25.  As  the  Company   issues  only  stock
appreciation  rights  pursuant  to  various  stock  incentive  plans  which are
currently  paid in cash,  the impact of adopting  FAS No. 123 did not result in
a  material  change  to  the  Company's   financial   position  or  results  of
operations.

Use of Estimates
Fair Value.  The  Company  uses  estimates  in  establishing  fair value for its
investments available-for-sale. Estimates of fair value for most investments are
based on market prices provided by certain dealers.  Estimates of fair value for
certain other investments are determined by calculating the present value of the
projected net cash flows of the instruments using appropriate discount rates and
credit  loss  assumptions.  The  discount  rates used are based on  management's
estimates of market rates,  and the net cash flows are  projected  utilizing the
current interest rate environment and forecasted prepayment rates.  Estimates of
fair value for all remaining investments  available-for-sale are based primarily
on  management's  judgment.  Since the fair value of the  Company's  investments
available-for-sale  are 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 Notes 3 and 9.

Allowance  for Losses.  As discussed in Note 4, the Company has retained  credit
risk on certain  securitized  loans.  An allowance for losses has been estimated
and established for the credit risk retained 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 potential  credit  losses,  as
well as industry  loss  experience.  Provisions  made to increase the  allowance
related to the credit risk  retained is presented as  "Provision  for Losses" in
the accompanying  financial  statements.  The Company's actual credit losses may
differ from those estimates used to establish the allowance.

Other  Mortgage  Securities.  Income on certain  other  mortgage  securities  is
accrued using the effective yield method based upon estimates of future net cash
flows  to be  received  over  the  estimated  remaining  lives  of the  mortgage
securities. Estimated effective yields are changed prospectively consistent with
changes in current  interest  rates and current  prepayment  assumptions  on the
underlying  mortgage  collateral  used by  various  dealers  in  mortgage-backed
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.
NOTE 3 - PORTFOLIO ASSETS
Collateral for Collateralized  Bonds and Mortgage Securities The following table
summarizes the Company's amortized cost basis and fair value of portfolio assets
classified as  available-for-sale at December 31, 1996 and 1995, and the related
average  effective  interest rates  (calculated for the month ended December 31,
1996 and 1995, and excluding unrealized gains and losses):

------------------------------------------------------------------
                                 1996                 1995
------------------------------------------------------------------
                                     Effective            Effective
                                     Interest             Interest
                           Fair       Rate      Fair       Rate
                            Value                Value
------------------------------------------------------------------
Collateral for
collateralized bonds:
   Amortized cost          $2,668,633 7.9%      $1,012,399 8.4%
   Allowance for losses     (31,732 )              (1,800)
                           --------             ---------
     Amortized cost, net   2,636,901            1,010,599
   Gross unrealized          73,696                20,208
gains
   Gross unrealized          (8,303 )              (1,872)
losses
------------------------------------------------------------------
                           $2,702,294           $1,028,935
------------------------------------------------------------------

Mortgage Securities:
   Adjustable-rate         $780,259   6.9%     $2,087,435 6.8%
mortgage securities         
   Fixed-rate mortgage       29,505   10.9%        35,074  7.9%
securities
   Other mortgage            88,198   16.4%        56,190  15.6%
securities
                           --------             ---------
                            897,962             2,178,699
   Allowance for losses      (4,934 )              (6,188)
                           --------             ---------
       Amortized cost,      893,028             2,172,511
  net
   Gross unrealized          23,591                22,488
gains
    Gross unrealized losses (24,582 )             (45,583)
------------------------------------------------------------------
                           $892,037              $2,149,416
                            
------------------------------------------------------------------
Collateral  for  collateralized  bonds.   Collateral  for  collateralized  bonds
consists of adjustable-rate and fixed-rate mortgage loans secured by first liens
on  single-family  and  multi-family  residential  housing.  All  collateral for
collateralized  bonds  is  pledged  to  secure  repayment  of the  related  debt
obligation.  All principal  and interest  (less  servicing  related fees) on the
collateral  is remitted to a trustee  and is  available  for payment on the bond
obligation.  The  Company's  exposure to loss on collateral  for  collateralized
bonds is limited to its net investment, as collateralized bonds are non-recourse
to the Company.  The Company may also be exposed to losses from  prepayments  of
the underlying  loans to the extent of  unamortized  net premium on the loans or
deferred costs related to the issuance of the collateralized bonds.

The components of collateral for  collateralized  bonds at December 31, 1996 and
1995 are as follows:

        --------------------------------------------
                                    1996     1995
        --------------------------------------------
        Mortgage collateral, net          
        of allowance             $2,555,903 $974,380
        Funds held by trustees       2,637    3,056
        Accrued interest            18,575    7,801
        receivable
        Unamortized premiums and    55,833   22,107
        discounts, net
        Deferred issuance costs      3,953    3,255
        Unrealized gain             65,393   18,336
        --------------------------------------------
                               $ 2,702,294 $1,028,935
                                  
        --------------------------------------------

Adjustable-Rate  Mortgage  Securities.  ARMs  consist of mortgage  certificates
secured by adjustable-rate mortgage loans.

Fixed-Rate  Mortgage  Securities.  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.
Other Mortgage Securities.  Other mortgage securities include primarily mortgage
derivative  securities  and mortgage  residual  interests.  Mortgage  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).  Mortgage 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.

Sale of Securities.  Proceeds from sales of mortgage securities totaled $505,708
in 1996, compared to $634,364 in 1995. Gross gains of $4,489 in 1996 and $15,513
in 1995,  and gross losses of $6,887 in 1996 and $13,237 in 1995,  were realized
on those sales.  Gross  realized  losses in 1996  includes the  reduction of the
basis in certain other mortgage  securities recorded as writedowns for permanent
impairment  as  expectations  of future  prepayments  rates would  result in the
Company  receiving  less cash than its current basis in those  investments.  The
adjustment recorded by the Company was $1,460 and is included in the net gain on
sale of assets in the accompanying  financial  statements.  Gross realized gains
for 1995  includes the  recognition  of the  Company's  basis in the  repurchase
obligation  related to convertible  adjustable-rate  mortgage  loans  previously
securitized  or sold as a result of the transfer of this  obligation  to a third
party.

NOTE 4 - ALLOWANCE FOR LOSSES ON PORTFOLIO ASSETS

The  following  table  summarizes  the activity for the  allowance for losses on
portfolio assets for the years ended December 31, 1996 and 1995:

   -----------------------------------------------------------------
                                    1996                1995
   -----------------------------------------------------------------
   -----------------------------------------------------------------
                            Collateral              Collateral
                            for         Mortgage   for        Mortgage
                            collateral  Securities collateral Securities
                              bonds                 bonds
   -----------------------------------------------------------------
Beginning balance           $1,800   $ 6,188  $   -     $ 8,703
                              
   Provision for losses                                      
                              2,300      700      1,800     1,088
   Provision recorded due
   to  sale of                                          -        -
     single-family           29,434     1,600
   operations (see Note 11)
   Losses charged-off, net                                  (3,603)
                             (1,802)   (3,554)      -
   -----------------------------------------------------------------
                              $31,732    $4,934  $ 1,800    $ 6,188
                                                  
   -----------------------------------------------------------------
The Company has limited  exposure to credit risk  retained on loans which it has
securitized  through the issuance of  collateralized  bonds.  The aggregate loss
exposure  is  generally  limited  to  the  Company's  net  investment  in  these
collateralized bonds, excluding price premiums and discounts and hedge gains and
losses.  The  Company  only incurs  credit  losses to the extent that losses are
incurred in the repossession, foreclosure and sale of the underlying collateral.
Such losses generally equal the excess of the principal amount  outstanding plus
servicer advances, less any proceeds from mortgage or hazard insurance, over the
liquidation value of the collateral.  An allowance for losses, which is based on
industry and Company  experience,  has been established for estimated  potential
losses over the expected life of these securities.  The allowance for losses for
collateralized  bonds is included in collateral for collateralized  bonds in the
accompanying consolidated balance sheets.

On certain mortgage securities collateralized by mortgage loans purchased by the
Company for which  mortgage  pool  insurance  is used as the  primary  source of
credit  enhancement,  the Company has limited  exposure to certain  credit risks
such as  fraud  in the  origination  and  special  hazard  not  covered  by such
insurance.  An allowance was established  based on the estimate of losses at the
time  of  securitization.  The  Company  has  not  significantly  utilized  pool
insurance as a form of credit enhancement since 1993. Accordingly, the Company's
exposure to such  potential  losses is  declining as the  remaining  outstanding
securities  pay-down.  The  allowance  for losses  for  mortgage  securities  is
included in mortgage securities in the accompanying consolidated balance sheets.

The allowance for losses is evaluated  and adjusted  periodically  by management
based on the actual and estimated amount of potential credit losses,  as well as
industry and Company loss experience.
NOTE 5 - LOANS HELD FOR SECURITIZATION
The following table  summarizes the Company's loans held for  securitization  at
December 31, 1996 and 1995, respectively.

   ----------------------------------------------------
                                        1996    1995
   ----------------------------------------------------

   Secured by multi-family                  
   residential properties            $208,230 $  7,786
   Secured by manufactured homes       40,745        -
   Secured by single-family            21,735  190,898
   residential properties
                                       ------- --------
                                       270,710 198,684
   Net premium (discount)              (5,173)  21,364
   ----------------------------------------------------
                                    $ 265,537  $220,048
                                        
   ----------------------------------------------------

The Company  originates  fixed-rate loans secured by first mortgages or deeds of
trust on  multi-family  residential  properties.  The  Company  also  originates
fixed-rate and adjustable-rate installment loans on manufactured homes which are
secured  by  either  a  UCC  filing  or a  title.  Prior  to  the  sale  of  its
single-family  operations  (see Note 11), the Company  purchased and  originated
fixed-rate and  adjustable-rate  loans secured by first mortgages or first deeds
of  trust  on  single-family   attached  or  detached  residential   properties.
Subsequent  to the sale,  the  Company  is  prohibited  through  March 2001 from
purchasing  through   correspondent   relationships  or  originating  through  a
wholesale network certain types of single-family mortgage loans.

Net premium  (discount) on loans held for  securitization  includes premium paid
and discount obtained on loans held for  securitization.  Additionally,  the net
premium   (discount)  is  adjusted  by  the  gains  and  losses  generated  from
corresponding  hedging  transactions,  primarily used to protect the pipeline of
commitments  to fund  loans.  The  net  premium  (discount)  is  deferred  as an
adjustment to the carrying value of the loans until the loans are securitized or
sold.

The  Company  funded  mortgage  loans  with an  aggregate  principal  balance of
$744,001,  $893,953 and  $2,861,443  during 1996,  1995 and 1994,  respectively.
Additionally, the Company made bulk loan purchases totaling $731,460 and $22,433
in 1996 and 1995 respectively.

At  December  31,  1996,  a  portion  of  the  loans  secured  by  single-family
residential properties consists of loans delinquent in excess of 90 days and not
covered by mortgage pool insurance. These loans were funded prior to the sale of
the single-family mortgage operations, and were not subsequently securitized due
to delinquency  issues. The Company recorded a provision for losses of $2,636 at
the time of the  sale of the  single-family  mortgage  operations  in May  1996.
During 1996,  losses on loans  totaling $520 were  charged-off to the allowance,
and the balance of the  allowance  at December  31, 1996 and 1995 was $2,290 and
$174,  respectively.  The remaining  balance of single-family  residential loans
includes loans repurchased from mortgage  pass-through  securities issued by the
Company in prior years and which have mortgage pool insurance to cover losses.

NOTE 6 - COLLATERALIZED BONDS

he components of  collateralized  bonds along with certain other  information at
December 31, 1996 and 1995 are summarized below:

       --------------------------------------------------------
                                1996               1995
       --------------------------------------------------------
       --------------------------------------------------------
                         Bonds       Range of  Bonds       Range
                         Outstanding Interest  Outstanding of
                                      Rates               Interest
                                                          Rates
       --------------------------------------------------------
       Variable-rate     $ 2,288,709  5.5% -  $680,993    5.9% -
       classes                     6.0%                     6.4%
       Fixed-rate                 6.5% -      253,183    6.5% -
       classes            220,185   11.5%                   15.0%
       Accrued interest     4,688               3,021
       payable
       Unamortized          6,126              11,942
       premium
       --------------------------------------------------------
                         $ 2,519,708        $949,139
                                     
       --------------------------------------------------------

       Range of stated   1998-2030          1998 -2027
       maturities                                

       Number of series        31                  37
       --------------------------------------------------------
Each series of  collateralized  bonds may  consist of various  classes of bonds,
either at fixed or variable  rates of interest.  Payments  received on the loans
pledged as  collateral  for  collateralized  bonds and any  reinvestment  income
thereon are used to make payments on the collateralized  bonds (see Note 3). The
obligations  under  the  collateralized   bonds  are  payable  solely  from  the
collateral  for  collateralized  bonds  and are  otherwise  non-recourse  to the
Company.  The  maturity  of each  class  is  directly  affected  by the  rate of
principal  prepayments on the related mortgage  collateral.  Each series is also
subject to redemption according to specific terms of the respective  indentures.
As a result,  the actual maturity of any class of a collateralized  bonds series
is likely to occur earlier than its stated maturity.

Included in the  collateralized  bond  balance are certain  bonds which were not
sold, but pledged as collateral for repurchase  borrowings.  The amount of those
repurchase agreements included in collateralized bonds was $366,689 and $102,027
at December 31, 1996 and 1995,  respectively.  These amounts are recourse to the
Company.

The variable  rate classes are based on 1-month  London  InterBank  Offered Rate
(LIBOR). The average effective rate of interest expense for collateralized bonds
was 6.5%,  7.2% and 8.3% for the years ended  December 31, 1996,  1995 and 1994,
respectively.

NOTE 7 - REPURCHASE AGREEMENTS

The  Company   utilizes   repurchase   agreements  to  finance  certain  of  its
investments.  These repurchase agreements are generally recourse to the Company.
These  repurchase  agreements bear interest at rates indexed to LIBOR and may be
secured by adjustable-rate mortgage securities,  fixed-rate mortgage securities,
loans held for securitization and certain other mortgage securities. At December
31, 1996,  substantially all repurchase  agreements had maturities within thirty
days.  If the  counterparty  to the  repurchase  agreement  fails to return  the
collateral,  the  ultimate  realization  of the  security  by the Company may be
delayed or limited.

The excess market value of the mortgage assets securing the Company's repurchase
obligations at December 31, 1996 did not exceed 10% of shareholders'  equity for
any of the individual  counterparties with whom the Company had contracted these
agreements.

The following table summarizes the Company's repurchase  agreements  outstanding
and the weighted  average annual rate for these  agreements at December 31, 1996
and 1995:

----------------------------------------------------------
                                    Weighted
                         Amount     Average     Market
                         Outstanding Annual      Value of
                                      Rate      Collateral
----------------------------------------------------------
December 31, 1996:
Repurchase agreements
secured by:
  Adjustable-rate        $717,232     5.82%     $ 757,389
mortgage securities       
  Fixed-rate mortgage      26,297     5.81%        28,502
securities
  Other mortgage           12,919     5.96%        20,134
securities
----------------------------------------------------------
                         $756,448               $ 806,025
                          
----------------------------------------------------------

December 31, 1995:
Repurchase agreements
secured by:
  Adjustable-rate        $1,951,492   5.80%     $2,040,425
mortgage securities
  Fixed-rate mortgage      24,165     6.03%        34,582
securities
  Other mortgage            7,701     6.12%        32,202
securities
----------------------------------------------------------
                         $1,983,358             $2,107,209
----------------------------------------------------------
NOTE 8 - NOTES PAYABLE

The following table summarizes  amounts  outstanding  under the below referenced
notes  payable  facilities  and  the  weighted  average  annual  rate  of  these
facilities at December 31, 1996 and 1995:

-------------------------------------------------------
                                    Weighted  Carrying
                       Amount       Average   Value
                       Outstanding  Annual    of
                                      Rate    Collateral
-------------------------------------------------------
December 31, 1996:
Secured:
 Loans held for          $119,500      6.98%  $235,845
securitization                                 
 Other portfolio           11,583      7.87%    33,319
assets

Unsecured:
  Series A 9.56%            9,000      9.56%         -
senior notes
  Series B 10.03%          35,000     10.03%         -
senior notes
  Acquisition notes           841      8.00%         -
due 1997-1999
  Acquisition notes         1,200      8.73%         -
due 1999-2001
-------------------------------------------------------
                         $177,124            $269,164
-------------------------------------------------------
December 31, 1995:
Secured:
  Loans held for         $105,681      5.68%  $153,298
securitization                                 

Unsecured:
  Series A 9.56%           12,000      9.56%         -
senior notes
  Series B 10.03%          35,000     10.03%         -
senior notes
  Acquisition notes         1,360      8.00%         -
due 1997-1999
-------------------------------------------------------
                         $154,041            $153,298
-------------------------------------------------------

Secured.  At  December  31,  1996,  the  Company  had  three  credit  facilities
aggregating  $500,000 to finance the funding of loans, of which $350,000 expires
in 1997 and $150,000  expires in 1998.  The interest  rates on these  facilities
range from 1-month LIBOR plus 1% to 1-month LIBOR plus 1.375%.  The  contractual
rates paid on these facilities may be reduced by credits for  compensating  cash
balances.  One of these  facilities  includes a  sub-agreement  which allows the
Company to borrow up to $30,000  unsecured  for working  capital  purposes.  The
Company expects that these credit facilities will be renewed,  if necessary,  at
their respective  expiration  dates,  although there can be no assurance of such
renewal.

Unsecured.  The  Company's  Series A 9.56%  senior  notes are  payable in annual
installments  through  1999.  The  Company's  Series B 10.03%  senior  notes are
payable in annual  installments  through 2001.  The Company also issued  various
unsecured  notes payable in conjunction  with the  acquisition of a multi-family
mortgage broker (see Note 10) and the  acquisition of a  single-family  mortgage
servicer which was sold in 1996 along with the single-family mortgage operations
(see Note 11). The aggregate  principal  payments due under the unsecured  notes
for the next five years after  December 31, 1996 are $3,406,  $12,156,  $12,695,
$8,894 and $8,894.
NOTE 9 - ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS

The following  table  presents the carrying  values and estimated fair values of
the Company's  recorded  financial  instruments,  as well as  information  about
certain specific off-balance sheet financial instruments as of December 31, 1996
and 1995:

-------------------------------------------------------------------------
                                 1996                     1995
-------------------------------------------------------------------------
                       Notional                 Notional
                       Amount Cost     Fair     Amount Cost     Fair
                              Basis    Value           Basis    Value
-------------------------------------------------------------------------
Recorded financial
instruments:

Assets:
  Collateral for       $  -   $2,628,288 $2,699,687 $ -   $1,010,59 $1,028,935
  collateralized           
  bonds
  Mortgage                 -   882,615  889,542     --     2,148,759 2,145,670
  securities
  Interest rate cap    1,499,00 19,025    5,102 1,575,000   23,752    3,746
  agreements
  Loans held for           -   265,537    277,710     --     220,048  223,451
  securitization
  Other portfolio          -   96,236    98,378     --       27,585   27,585
  assets
  Cash                     -   11,396     11,396     --       22,229   22,229
Liabilities:
  Collateralized           -  2,519,708  2,519,708   --      949,139  949,139
  bonds
  Repurchase               -  756,448   756,448     --       1,983,358 1,983,358
  agreements
  Notes payable            -  177,124   177,124     --       154,041  154,041

Off-balance sheet financial instruments:

Financial futures contracts:
  Repurchase               -        -        -    1,000,000   --    (107)
  agreements
  Loans held for       78,170       -      515    274,700     --    (628)
  securitization
Options on futures
contracts:
  Repurchase               -        -        -   2,130,000   --       46
  agreements
  Loans held for       100,000      -     (55)   30,000      --      (2)
  securitization
Interest rate swap
agreements:
  Mortgage securities  1,020,000    -  (1,177)    1,020,000   --    4,882
  Collateralized       432,801      -      334    207,094     --  (3,898)
  bonds
Forward delivery contracts:
  Loans held for       76,280       -      293        -       --       --
  securitization
Commitments to fund    536,931      -  554,582    954,900     --  985,200
loans
-------------------------------------------------------------------------

The estimated fair values of financial  instruments  have been determined  using
available market information and appropriate valuation methodologies. However, a
degree of judgment is  necessary  in  evaluating  market data and forming  these
estimates.

Recorded  Financial  Instruments.  The carrying  amount of cash and  liabilities
considered to be financial  instruments  approximates fair value at December 31,
1996 and 1995. As discussed in Note 2, the fair value of mortgage  securities is
based on actual dealer price quotes,  or by determining the present value of the
projected  net cash  flows  using  appropriate  discount  rates  and  prepayment
assumptions.

The Company has purchased  over the past four years LIBOR and One-year  Constant
Maturity  Treasury  Index (CMT) based  interest rate cap agreements to limit its
exposure to the lifetime  interest  rate caps on certain of its  adjustable-rate
mortgage  securities  and  collateral  for  collateralized  bonds.  Under  these
agreements,  the Company  will receive  additional  cash flow should the related
index  increase  above  the  contracted  rates.  Contract  rates  on  these  cap
agreements range from 8.0% to 11.5%,  with expiration dates ranging from 1999 to
2004.

Off-Balance  Sheet Financial  Instruments.  The Company may engage in derivative
financial   instrument   activities  for  the  purpose  of  interest  rate  risk
management.  As of December 31, 1996, all of the Company's  derivative financial
instruments were for purposes other than trading. The Company has credit risk to
the extent that the  counterparties to the derivative  financial  instruments do
not perform their obligation under the agreements.  If one of the counterparties
does not  perform,  the  Company  would not  receive  the cash to which it would
otherwise be entitled under the conditions of the agreement.

The Company may utilize  Eurodollar  financial  futures and options contracts to
moderate the risks  inherent in the  financing of its mortgage  securities  with
floating rate repurchase  agreements.  The Company utilizes these instruments to
synthetically   lengthen  the  terms  of  the  repurchase  agreement  financing,
generally  from one month to three and six months.  Under these  contracts,  the
Company  will  receive  additional  cash flow if the  related  Eurodollar  index
increases above the contracted  rates. The Company will pay additional cash flow
if the related  Eurodollar  index  decreases  below the contracted  rates. As of
December  31,  1996,  the  Company  had no  such  financial  futures  or  option
contracts.  As of December 31, 1995,  the Company had contracts  with a notional
value of $3,130,000 with contract rates ranging from 5.0% to 5.4%.

The Company may enter into various  interest  rate swap  agreements to limit its
exposure  to changes in  financing  rates of certain  mortgage  securities.  The
Company  has  entered  into a series  of  interest  rate swap  agreements  which
effectively  caps 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,  the Company pays the lesser of current  6-month  LIBOR,  or
6-month LIBOR in effect  180-days  prior plus 1%, and receives  current  6-month
LIBOR.  These  agreements  expire in 2001.  The Company has also  entered into a
5-year  amortizing   interest  rate  swap  agreement  related  to  variable-rate
collateralized  bond  classes with a remaining  notional of $178,045.  Under the
terms of this agreement, the Company receives 1-month LIBOR and pays 6.15%. This
agreement expires in 2000. The Company entered into a 7-year amortizing interest
rate swap agreement with remaining  notional of $254,756  related to prime-based
loans financed with LIBOR-based  variable-rate  collateralized  bonds. Under the
terms of the agreement,  the Company  receives 1-month LIBOR plus 2.65% and pays
1-month average prime in effect 3 months prior.

Forward delivery  contracts and financial futures and options contracts are used
to reduce exposure to the effect of changes in interest rates on funded mortgage
loans,  as well as those mortgage loans which the Company has committed to fund.
As of December  31,  1996,  the Company had  entered  into  commitments  to fund
multi-family  mortgage  loans of  $521,684  and  manufactured  housing  loans of
$15,247.  The  multi-family  commitments  had original terms of not more than 27
months. The manufactured housing commitments generally had original terms of not
more than 60 days.  The Company  has  deferred  net  hedging  gains of $2,022 at
December  31, 1996 and  deferred  net hedging  losses of $16,647 at December 31,
1995 related to these positions.

NOTE 10 - ACQUISITION

On August 30, 1996, the Company  acquired  Multi-Family  Capital  Markets,  Inc.
(MCM),   which  specializes  in  the  sourcing,   underwriting  and  closing  of
multi-family  loans  secured by first liens on  apartment  properties  that have
qualified for low income  housing tax credits.  The Company  acquired all of the
outstanding stock and assets of MCM for $4,000. Of this amount,  $2,800 was paid
in cash with the  remaining  $1,200 paid  through  the  issuance of notes to the
sellers,  due in installments  through  September 1, 1999 and September 1, 2001.
The acquisition was accounted for as a purchase,  and accordingly,  the purchase
price was  allocated  to the  assets  and  liabilities  acquired  based on their
estimated fair values as of the date of acquisition. MCM's results of operations
are not material to the Company's consolidated financial statements and proforma
financial information has therefore not been presented.

NOTE 11 - SALE OF SINGLE-FAMILY MORTGAGE OPERATIONS

On May 13, 1996, the Company sold its single-family correspondent, wholesale and
servicing operations  (collectively,  the single-family  mortgage operations) to
Dominion  Mortgage  Services,  Inc.  (Dominion),  a  wholly-owned  subsidiary of
Dominion Resources, Inc. (NYSE: D). The purchase price was $67,958 for the stock
and assets of the single-family  mortgage operations.  The terms of the purchase
included an initial cash payment of $20,458,  with the remainder of the purchase
price paid in five  annual  installments  of $9,500  beginning  January 2, 1997,
pursuant to a note  agreement.  The note bears interest at a rate of 6.50%.  The
terms of the sale generally  prohibit the Company from acquiring  single-family,
non-conforming residential mortgages through either correspondent  relationships
or a wholesale  network for a period of five years. As a result of the sale, the
Company  recorded a net gain of  $17,285.  Such amount  includes a provision  of
approximately  $31,000 for possible  losses on securitized  single-family  loans
where the  Company,  which  performed  the  servicing of such loans prior to the
sale, has retained a portion of the credit risk on these loans.
NOTE 12 - PREFERRED STOCK

The following  table presents a summary of the Company's  issued and outstanding
preferred stock:

----------------------------------------------------------
                                   Liquidation Dividends
                                   Preference  Per Share
                                   Per        1996   1995
                                   Share
----------------------------------------------------------

Series A 9.75% Cumulative            $24.00  $2.375 $1.170
Convertible Preferred Stock
Series B 9.55% Cumulative             24.50   2.375 0.423
Convertible Preferred Stock
Series C 9.73% Cumulative             30.00   0.600     -
Convertible Preferred Stock
----------------------------------------------------------

The Company 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) the quarterly  dividend  declared on the Company's common
stock.  Each share of Series A, Series B and Series C is convertible at any time
at the  option of the  holder  into one share of common  stock.  Each  series is
redeemable  by the  Company,  in whole or in part,  (i) 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 the issue  price,  or (ii) for cash at the issue
price, plus any accrued and unpaid dividends beginning after June 30 and October
31, 1998 for Series A and B,  respectively  and September 30, 1999 for Series C.
Series C was issued in October  1996 with  proceeds  of $52,740  net of issuance
costs.

In the event of  liquidation,  the holders of all series of preferred stock will
be  entitled  to  receive  out of the assets of the  Company,  prior to any such
distribution to the common shareholders, the issue price per share in cash, plus
any accrued and unpaid dividends.

NOTE 13 - STOCK INCENTIVE PLAN

Pursuant to the Company's  1993 Stock  Incentive  Plan (the  Employee  Incentive
Plan),  the  Compensation  Committee  of the  Board of  Directors  may  grant to
eligible employees of the Company,  its subsidiaries and affiliates for a period
of ten years beginning June 17, 1993, stock options,  stock appreciation  rights
(SARs) and  restricted  stock awards.  An aggregate of 675,000  shares of common
stock  are  available  for  distribution  pursuant  to stock  options,  SARs and
restricted  stock.  The shares of common stock subject to any option or SAR that
terminates without a payment being made in the form of common stock would become
available  for  distribution  pursuant  to  the  Employee  Incentive  Plan.  The
Compensation  Committee  of the  Board  of  Directors  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 following  table presents a summary of the SARs  outstanding at December 31,
1996 and 1995:

       -------------------------------------------
                               SARs    Exercise
                                         Price
       -------------------------------------------
       December 31, 1994       211,960 $8 3/4 - 29

       Granted                122,585      16 1/8
       Forfeitures            (24,973 )  17 7/8 -
                                               29
       SARs exercised          (3,062 )  17 7/8 -
                                               29
       -------------------------------------------
       December 31, 1995       306,510 $8 3/4 - 29

       Granted                  72,065 $ 20 3/4
                                         - 23 5/8
       Forfeitures             (11,517  16 1/8 -
                                           20 3/4
       SARs exercised          (16,114   8 3/4 -
                                           17 7/8
       Terminated at sale of
       single-family          (67,035 )  8 3/4 - 29
            mortgage
       operations
       -------------------------------------------
       December 31, 1996       283,909 $12 3/4 -
                                               29
       -------------------------------------------

The Company expensed $1,664, none and $8 for SARs and DERs during 1996, 1995 and
1994,  respectively.  There were no stock options outstanding as of December 31,
1996 and 1995.  The number of SARs vested and  exercisable  at December 31, 1996
and 1995 was 106,807 and 94,000, respectively.

In 1995, the Company  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 7,000 SARs.  Each Board
member  subsequently  received  a grant  of 1,000  SARs on May 1,  1996 and will
receive an additional grant of 1,000 SARs on May 1, 1997 and 1998, respectively.
The SARs  granted on May 1, 1995 will  become  exercisable  as to 33 1/3% of the
granted amount each of the next three years.  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 100,000. The Company expensed $163 for
SARs and DERs related to the Board Incentive Plan during 1996. There was no such
expense recorded for 1995. The number of SARs vested and exercisable at December
31, 1996 was 9,324.  There were no SARs vested and  exercisable  at December 31,
1995.

NOTE 14 - 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  matched  the
employees' contribution, up to 6% of the employees' income. 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 1996, 1995 and 1994 was $248, $136 and $331,  respectively.  The Company does
not provide post employment or post retirement benefits to its employees.

NOTE 15 - CONTINGENCIES

The Company makes various representations and warranties relating to the sale or
securitization  of mortgage  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 mortgage loans,  and could incur losses.  In the opinion of management,  no
material  losses  are  expected  to  result  from any such  representations  and
warranties.

In  connection  with  the sale of its  single-family  mortgage  operations,  the
Company  has  indemnified  the  purchaser  for a period of up to five  years for
various  representations  and  warranties  made as part of the sale.  One of the
companies  included in the sale has been named in a lawsuit seeking class action
status  regarding  violations of the Real Estate  Settlement  and Procedures Act
(RESPA).  The  lawsuit  alleges  that this entity  violated  RESPA by payment of
premiums to wholesale  brokers for sourcing  single-family  mortgage  loans with
above market rates.  The  plaintiffs  seek  compensatory  and punitive  damages.
Pursuant to the terms of the sale,  the Company has  indemnified  the  purchaser
against any such violations of RESPA on loans funded through May 13, 1996. While
the ultimate outcome of this action cannot be presently  determined,  management
believes  that the  ultimate  settlement  of the case  will not have a  material
adverse impact on the Company's financial condition.  Additionally,  the Company
believes that any other matters arising as a result of the indemnifications made
at the time of the sale will not have a material adverse effect on the Company's
financial condition.

As of December 31, 1996,  the Company is obligated  under  noncancelable  leases
with  expiration  dates through 2003.  The future  minimum lease  payments under
these noncancelable leases are as follows: 1997--$721;  1998--$825;  1999--$787;
2000--$582; 2001--$600; and thereafter--$1,254.

NOTE 16 - SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION

--------------------------------------------------------
                                  Year Ended December
                                          31,
                                 1996   1995     1994
--------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for interest          $228,969 $210,638 $177,943
--------------------------------------------------------
Supplemental disclosure of non-cash activities:
Purchase of collateral for      $         $       $
collateralized bonds                --      --     (54,204)
Assumption of collateral for        --      --      52,314
collateralized bonds
--------------------------------------------------------
Purchase of  collateral for                
collateralized bonds, net          $  --   $    --    $(1,890)
--------------------------------------------------------
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Resource Mortgage Capital, Inc.:

We have  audited  the  accompanying  consolidated  balance  sheets  of  Resource
Mortgage  Capital,  Inc. as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the  three-year  period ended  December 31, 1996.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Resource Mortgage
Capital, Inc.  as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

                                                          KPMG PEAT MARWICK LLP

Richmond, Virginia
February 4, 1997