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Resource Bancshares Mortgage Group, Inc.
1999 Annual Report
A Company with a New Strategy and Mission
Charting the Course for the Future
Description of RBMG
Resource Bancshares Mortgage Group, Inc. is a diversified financial services
company engaged through wholly-owned subsidiaries primarily in the business of
mortgage banking, through the purchase (via a nationwide network of
correspondents and brokers), sale and servicing of agency-eligible and subprime
residential, single-family first-mortgage loans and the purchase and sale of
servicing rights associated with agency-eligible loans. In addition, two of the
Company's wholly-owned subsidiaries originate, sell and service small-ticket
commercial equipment leases and originate, sell, underwrite for investors and
service commercial mortgage loans.
Table of Contents:
Selected Financial Highlights
Letter to Our Shareholders, Customers and Employees
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosure About Market Risk
Consolidated Financial Statements and Notes
Report of Independent Accountants
Stock Data
Directors and Executive Officers
Corporate Information
SELECTED FINANCIAL HIGHLIGHTS
($ IN THOUSANDS, EXCEPT SHARE INFORMATION)
- ------------------------------------------------------------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $ 26,162 $ 21,778 $ 17,644 $ 16,902 $ 8,635
Net gain on sale of mortgage loans 93,560 171,463 103,370 79,178 33,822
Gain on sale of mortgage servicing rights 7,262 1,753 7,955 1,105 7,346
Servicing fees 46,958 43,156 30,869 28,763 24,205
Total revenues 173,792 243,726 (2) 161,018 126,617 76,697
Salary and employee benefits 72,868 (1) 82,406 62,235 55,578 (4) 31,199
Total expenses (including taxes) 167,870 (1) 195,055 (2) 139,220 (3) 106,994 (4) 62,478
Net income 5,922 (1) 48,671 (2) 21,798 (3) 19,623 (4) 14,219
PER COMMON SHARE DATA
Net income per common share - basic $ 0.29 (1)$ 2.10 (2) $ 1.07 (3)$ 1.02 (4) $ 0.88
Net income per common share - diluted 0.28 (1) 2.07 (2) 1.05 (3) 1.00 (4) 0.86
Market price per common share at year-end(5) 4.53 16.56 16.31 13.57 12.68
Book value per common share at year-end 11.08 10.96 9.21 7.77 5.71
Cash dividends paid per common share 0.43 0.29 0.13 0.06 -
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BALANCE SHEET
Mortgage loans held for sale
and mortgage-backed securities $ 480,504 $ 1,441,458 $ 1,179,188 $ 802,335 $ 1,035,229
Lease receivables 155,559 102,029 51,494 - -
Mortgage servicing rights, net 177,563 191,022 127,326 109,815 99,912
Residual interests in subprime securitizations 54,382 45,782 19,684 - -
Total assets 1,027,182 1,969,635 1,556,929 1,028,394 1,231,097
Total long-term borrowings 6,259 6,364 6,461 - 65,530
Total liabilities 814,710 1,717,477 1,341,790 871,093 1,137,693
Stockholders' equity 212,472 252,158 215,139 157,301 93,404
STATISTICS
Total mortgage loan and lease production $ 9,785,966 $ 16,540,016 $ 10,777,294 $ 9,995,725 $ 7,135,774
Total agency-eligible servicing
Portfolio (including subservicing) 9,078,226 13,595,736 10,195,354 8,658,742 7,821,736
Commercial mortgage loan servicing
portfolio 4,104,095 3,255,458 2,760,238 - -
Managed lease servicing portfolio 166,572 (6) 136,521 (6) 123,509 (6) - -
Return on average assets 0.47% (1) 2.73% (2) 1.78% (3) 1.91% (4) 1.95%
Return on average equity 2.52% (1) 21.01% (2) 12.82% (3) 14.43% (4) 17.00%
(1) Includes work force reduction charge totaling $3,789 pre-tax or $2,377
after-tax. Exclusive thereof, salary and employee benefits, total expenses
(including taxes), net income, net income per common share-basic, net income per
common share-diluted, return on average assets and return on average equity
would have been $71,849, $165,493, $8,299. $0.41, $0.39, 0.67% and 3.53%,
respectively.
(2) Includes a non-recurring gain relating to sale of retail operations totaling
$1,490 pre-tax or $917 after-tax. Exclusive thereof, total revenues, total
expenses, net income, net income per common share - basic, net income per common
share - diluted, return on average assets and return on average equity would
Have been $242,236, $194,482, $47,754, $2.07, $2.03, 2.68% and 20.61%,
respectively.
(3) Includes non-recurring and special charges relating to a terminated merger
agreement and a special charge relating to certain non-recoverable operating
receivables totaling $10,147 pre-tax or $6,241 after-tax. Exclusive thereof,
total expenses, net income, net income per common share - basic, net income per
common share - diluted, return on average assets and return on average equity
would have been $132,979, $28,039, $1.37, $1.35, 2.29% and 16.34%, respectively.
(4) Includes a non-recurring charge related to certain contractual employment
obligations totaling $5,190 pre-tax or $3,192 after-tax. Exclusive thereof,
salary and employee benefits, total expenses, net income, net income per common
share - basic, net income per common share - diluted, return on average assets
and return on average equity would have been $50,388, $103,802, $22,815, $1.19,
$1.17, 2.22% and 16.78%, respectively.
(5) Source of market price is Nasdaq.
(6) Managed lease servicing portfolio consists of $152,300, $98,956 and $49,104
of leases owned by the Company and $14,272, $37,565 and $74,405 of leases
serviced for investors as of December 31, 1999, 1998 and 1997, respectively.
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To our stockholders, customers and employees:
Just a few short months ago, I assumed responsibility as Chief Executive
Officer. Since that time, the Board, management and I have met extensively to
review your Company's current positioning in the eyes of its customers,
colleagues and investors. We have reconsidered our market function, chosen
markets, and product depth. We have re-assessed our corporate, management and
leadership structures. As a team we have restated the strategy, mission, goals,
business principles and core values which will chart this Company's course into
the future. In this, my first letter to you, I want to articulate this new
vision for your Company.
We cannot successfully compete against better-capitalized industry giants by
providing customers an undifferentiated product at comparable cost. Instead, we
must strive to out-perform our rivals by delivering greater value at lower cost
to us. We believe we can realize this vision by merging world-class customer
relationship management with a diverse product array and a state-of-the-art
order fulfillment process.
We have already launched E-RBMG as part of our larger efforts to develop leading
edge order fulfillment processes. This sophisticated on-line resource
significantly improves the way current and potential customers interact with us.
It accelerates the loan transaction cycle, virtually eliminates data re-keying,
creates a faster feedback loop on loan status inquiries and allows us to provide
faster, more accurate loan origination services. In our view, the capabilities
offered by E-RBMG are unmatched and position us as a leader in Internet based
business-to-business offerings within our industry. We are ahead of the curve
and intend to remain there. By mid-year the Phase II version of E-RBMG will be
on-line, offering a dramatically enhanced set of features and customer benefits.
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We have already finalized processes that enable us to offer both prime and
non-prime mortgage products to our customers irrespective of the channel through
which they were originally acquired. We plan to rapidly expand our product
offerings to include competitively priced ARMs, jumbos, seconds and home equity
lines. And, to support these efforts, we will re-engineer our critical loan
origination processes with switch-in front technologies that support seamless
delivery of multiple products across all channels at significantly lower all-in
costs.
In the days ahead, we will continue to implement our bold new vision by
undertaking a company-wide reorganization designed to support effective pursuit
of our new goals. We will reorganize around business processes rather than
traditional product groupings. Specifically, we will reorganize around four
primary business processes which we believe are critical to achievement of our
goals: production/sales; order fulfillment; servicing; and portfolio management.
These business units will continue to be centrally supported by the traditional
corporate functions.
Finally, we will rapidly deploy new internal reporting models which measure "net
value added" across products, customers, salespeople and the newly defined
business units. Deployment of this new tool in tandem with implementation of
risk-based internal pricing processes will make us better managers as we measure
the alignment of business units, products, customers and sales staff with our
broader strategic objectives.
In the months ahead, you will see E-business becoming a primary channel for our
growth. In fact, I believe we have the core competencies, deep experience and
core customer base that uniquely position this Company for success within that
market space. We are mortgage professionals in search of technological solutions
rather than technologists in search of mortgage professionals. In my view, the
electronic mortgage is coming and the next few years will see the traditional
mortgage business radically re-defined. By way of handling that transition, our
size is an advantage. We can move quickly while effecting process changes
rapidly. Ultimately, the market will search out a financial intermediary with a
rich product line, advanced origination technology and the highest levels of
service. We will be that intermediary.
Before closing, I want to acknowledge the many contributions of our former
Chairman and CEO, Ed Sebastian, who retired at the end of 1999. Ed provided
leadership during the critical decade that saw the Company move from its infancy
to its initial public capitalization and on toward maturity. His entrepreneurial
spirit and wisdom will be sorely missed as we build upon the solid foundation
that is his legacy.
Your Board, management, employees and I are all working with enthusiasm to
implement this new vision. I am confident that your Company has great potential.
I thank you for the opportunity to serve as your CEO as we Chart our Course into
the future and as we work together to create a new RBMG.
Douglas K. Freeman
Chief Executive Officer
March 22, 2000
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Strategy
Mission
Goals
Business Principles
Core Values
Tactics
Top Mortgage Originators For the Year Ended
December 31, 1999 (dollars in billions)
MARKET
RANK LENDER VOLUME SHARE
- ---------------------------------------------------------------------------
1 Chase Home Finance $93.42 7.3%
2 Norwest Mortgage 81.99 6.4%
3 Countrywide Credit Industries 75.37 5.9%
4 Bank of America Mortgage and Affiliates 63.22 5.0%
5 Washington Mutual 41.50 3.3%
28 Resource Bancshares Mortgage Group 8.84 0.7%
Source: Inside Mortgage Finance, January 21, 2000
Our Strategic Focus Will Move:
FROM TO
- ---- --
Volume Value
Market Share Customer Wallet Share
Volume Driven Price Profit Driven Pricing
Product Profitability Lifetime Customer Value
Undifferentiated Services Differentiated Services
Transaction Oriented Decisions Relationship Driven Decisions
1999 REVENUE BY DIVISION
Prime 69%
Nonprime 18%
Commercial 8%
Leasing 5%
OUR MARKET FUNCTION
Customers
Consumers
Small businesses
Middle market companies
Large corporations
Distribution Networks
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Direct
Broker
Bankers
Savings & Loans
Financial Intermediaries
Finance, human resources etcetera
Production
Order fulfillment
Servicing
Portfolio
Products
30 year fixed
15 year fixed
ARMs
Home equity
Non-prime
Investors
GSEs
Insurance Companies
Finance Companies
Banks
Wall Street
Positioning Customers
High quality sales and service
Value-speed, flexibility, simple to do business with
Rich product line
Technology company
Positioning Colleagues
Market value leader
Most professional status
Personal wealth creation via work and ownership in Resource Bancshares Mortgage
Group, Inc.
Positioning Investors
Niche player
Financial intermediary characteristics- low credit risk, low volume risk
Technology play
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Strategy
Our strategy is to be a customer centric financial intermediary, which combines
the best of product depth, relationship management and service quality. The
resulting company has world-class operational effectiveness and delivers greater
value to our customers.
Mission Statement
The mission of Resource Bancshares Mortgage Group, Inc. is to be the premiere
provider of financial products and services to our chosen market segments. We
will be our customer's first choice of a financial intermediary by providing
depth, world class relationship management and exceptional customer service.
Resource Bancshares Mortgage Group, Inc.'s mission is to be our customers value
added provider.
Goals
To be in the top decile of like companies in ROE
To be in the top decile of like companies in EPS
To be a .com company
To exceed our customers expectations
To be the best managed business in the industry
To be the place where the best and brightest colleagues want to work
To be a business where our colleagues like each other and we have fun
Business Principles
Run it like you own it
Know your numbers
Know your customers
Develop good people
Manage expenses
Core Values
Teamwork and trust
A commitment to winning
Customers are our main focus
We have pride in our company
Do the right thing
We play win/win with our teammates
We are open and honest in our communications
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements of Resource Bancshares Mortgage Group,
Inc. (the Company) (and the notes thereto) and the other information included or
incorporated by reference into the Company's 1999 Annual Report on Form 10-K.
Statements included in this discussion and analysis (or elsewhere in this annual
report) which are not statements of historical fact are intended to be, and are
hereby identified as, "forward looking statements" for purposes of the safe
harbor provided by Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Readers are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties, and that actual
results could differ materially from those indicated by such forward-looking
statements. Important factors that could cause actual results to differ
materially from those indicated by such forward-looking statements include, but
are not limited to, the following which are described herein or in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999: (i) interest
rate risks, (ii) changes in economic conditions, (iii) competition, (iv)
possible changes in regulations and related matters, (v) litigation affecting
the mortgage banking business, (vi) delinquency and default risks, (vii) changes
in the market for servicing rights, mortgage loans and lease receivables, (viii)
environmental matters, (ix) changes in the demand for mortgage loans and leases,
(x) changes in the value of residual interests in subprime securitizations, (xi)
prepayment risks, (xii) possible changes in accounting estimates and (xiii)
availability of funding sources and other risks and uncertainties. The Company
disclaims any obligation to update any forward-looking statements.
THE COMPANY
The Company is a diversified financial services company engaged through
wholly-owned subsidiaries primarily in the business of mortgage banking, through
the purchase (via a nationwide network of correspondents and brokers), sale and
servicing of agency-eligible and subprime residential, single-family (i.e.
one-four family), first-mortgage loans and the purchase and sale of servicing
rights associated with agency-eligible loans. In addition, two of the Company's
wholly-owned subsidiaries originate, sell and service small-ticket commercial
equipment leases and originate, sell, underwrite for investors and service
commercial mortgage loans.
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LOAN AND LEASE PRODUCTION
A summary of production by source for the periods indicated is set forth
below:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Agency-Eligible Loan Production:
Correspondent $ 6,363,936 $11,666,560 $ 7,893,583
Wholesale 1,748,415 3,023,961 1,868,726
Retail -- 264,059 675,411
----------- ----------- -----------
Total Agency-Eligible Loan Production 8,112,351 14,954,580 10,437,720
Subprime Loan Production 728,410 607,664 339,574
Commercial Mortgage (for Investors
and Conduits) Loan Production 844,975 899,674 --
Lease Production 100,230 78,098 --
----------- ----------- -----------
Total Mortgage Loan and Lease Production $ 9,785,966 $16,540,016 $10,777,294
=========== =========== ===========
Initially, the Company was focused exclusively on purchasing
agency-eligible mortgage loans through its correspondents. To diversify its
sources of residential loan volume, the Company started a wholesale operation in
1994, a retail operation in 1995 (which was sold in 1998) and a subprime
operation in 1997. To further diversify its sources of production and revenue,
the Company acquired a small-ticket commercial equipment lease operation and a
commercial mortgage loan business. These two newer sources of production
accounted for approximately 10% and 6% of the Company's total production for
1999 and 1998, respectively. Historically, correspondent operations have
accounted for a diminishing percentage of the Company's total production (65%
for 1999, 71% for 1998 and 73% for 1997). Wholesale and subprime production
accounted for 18% and 7%, respectively, of the Company's 1999 total production.
A summary of key information relevant to industry loan production activity is
set forth below:
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
U. S. 1-4 Family Mortgage Originations Statistics (1):
U. S. 1-4 Family Mortgage Originations $1,287,000,000 $1,470,000,000 $ 857,000,000
Adjustable Rate Mortgage Market Share 21% 14% 22%
Estimated Fixed Rate Mortgage Originations 1,017,000,000 1,264,000,000 668,000,000
Company Information:
Residential Loan Production $ 8,840,761 $ 15,562,244 $ 10,777,294
Estimated Company Market Share 0.69% 1.06% 1.26%
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's total residential mortgage production decreased by 43% to
$8.8 billion for 1999 from $15.6 billion for 1998. This decrease is primarily
due to (1) the increase in competition in the market place; (2) an estimated 12%
decline in residential originations within
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the industry; (3) the increased ARM market share in 1999 (the Company offers
primarily fixed rate products); and (4) the rise in mortgage interest rates
during 1999. The Company's 44% production increase from 1997 to 1998 was
primarily attributed to a 72% nationwide production increase for the same
period.
Correspondent Loan Production
The Company purchases closed mortgage loans through its network of approved
correspondent lenders. Correspondents are primarily mortgage lenders, larger
mortgage brokers and smaller savings and loan associations and commercial banks
that have met the Company's approval requirements. The Company continues to
emphasize correspondent loan production as its basic business focus because of
the lower fixed expenses and capital investment required of the Company. A
summary of key information relevant to the Company's correspondent loan
production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------ ----------- -----------
Correspondent Loan Production $ 6,363,936 $11,666,560 $ 7,893,583
Estimated Correspondent Market Share(1) 0.49% 0.79% 0.92%
Approved Correspondents 909 852 919
Correspondent Division Expenses $ 55,438 $ 68,975 $ 47,618
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's correspondent loan production decreased by 45% to $6.4
billion for 1999 from $11.7 billion for 1998. This decrease in production is
primarily due to (1) the increase in competition in the market place; (2) an
estimated 12% decline in residential originations within the industry; (3) the
increased ARM market share in 1999 (the Company primarily offers fixed rate
products); and (4) the rise in mortgage interest rates during 1999. This decline
in production is the primary reason for the increase in correspondent division
expenses as a percentage of production which increased from 59 basis points for
1998 to 87 basis points for 1999 despite the reduction in correspondent division
expenses. The number of approved correspondent lenders increased 7% from 1998 to
1999. The Company's correspondent loan production increased by 48% to $11.7
billion for 1998 from $7.9 billion for 1997. This increase is primarily a result
of the 72% increase in nationwide mortgage originations for 1998.
Wholesale Loan Production
The wholesale division receives loan applications through brokers,
underwrites the loans, funds the loans at closing and prepares all closing
documentation. The wholesale branches and regional operating centers handle all
shipping and follow-up procedures on loans. Typically, mortgage brokers are
responsible for taking applications and accumulating the information precedent
to the Company's processing of the loans. Although the establishment of
wholesale branch offices and regional operating centers involves the incurrence
of fixed expenses associated with maintaining those offices, wholesale
operations also generally provide for higher profit margins than correspondent
loan production. Additionally, each branch office and regional
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operating center can serve a relatively sizable geographic area by establishing
relationships with large numbers of independent mortgage loan brokers who bear
much of the cost of identifying and interacting directly with loan applicants.
In 1999, the Company established regional operations centers to better
facilitate service to a larger geographic area. The Company's nationwide
salesforce is supported by these regional operating centers. A summary of key
information relevant to the Company's wholesale production activities is set
forth below:
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
Wholesale Loan Production $1,748,415 $3,023,961 $1,868,726
Estimated Wholesale Market Share (1) 0.14% 0.21% 0.22%
Wholesale Division Direct Operating Expenses $ 16,362 $ 16,037 $ 11,540
Approved Brokers 4,284 3,401 3,046
Regional Operation Centers 5 -- --
Number of Branches 2 15 15
Number of Employees 107 161 146
(1) Source: Mortgage Bankers Association of America, Economics Department.
Wholesale loan production decreased 42% ($1.3 billion) from $3.0 billion
for 1998 to $1.8 billion for 1999 primarily due to (1) the increase in
competition in the market place in 1999; (2) an estimated 12% decline in
residential originations within the industry; (3) the increased ARM market share
in 1999 (the Company offers primarily fixed rate products); and (4) the rise in
mortgage interest rates during 1999. Wholesale division operating expenses as a
percentage of production increased from 53 basis points in 1998 to 94 basis
points in 1999 primarily as a result of the decline in production.
The 62% ($1.2 billion) increase in wholesale loan production, from $1.9
billion in 1997 to $3.0 billion in 1998, resulted primarily from the Company's
expansion of its wholesale production channel and the 72% nationwide increase in
loan production. The Company's wholesale market share remained relatively
constant for 1998. The increase in direct operating expenses for the wholesale
division was primarily a result of the increased production. Wholesale division
direct operating expenses as a percentage of production decreased from 62 basis
points in 1997 to 53 basis points in 1998 as higher volumes better leveraged the
direct operating expenses.
Retail Loan Production
Effective May 1, 1998, the Company sold its retail production franchise.
Retail loan production and retail divisional direct operating expenses for the
year ended December 31, 1998 were $264.1 million and $6.0 million, respectively.
Subprime Loan Production
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In 1997, the Company began its initial expansion into subprime lending
activities. The Company does subprime business through its wholly-owned
subsidiary, Meritage Mortgage Corporation (Meritage). A summary of key
information relevant to the Company's subprime production activities is set
forth below:
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997
-------- -------- --------
Subprime Loan Production $728,410 $607,664 $339,574
Subprime Division Direct Operating Expenses $ 28,760 $ 19,896 $ 10,486
Number of Brokers 3,095 1,830 661
Number of Employees 293 271 139
Number of Branches 10 19 14
Subprime loan production increased by 20% to $728.4 million for 1999 as
compared to $607.7 million during 1998 as the Company has expanded its
operations. Between 1998 and 1999 the Company increased the number of its
subprime brokers by 1,265. The number of branches declined from 19 in 1998 to 10
at the end of 1999 as the Company reassessed the geographic regions that each
branch covers.
Subprime loan production increased by 79% to $607.7 million for 1998 as
compared to $339.6 million during 1997. This increase is partially attributable
to a 28% increase in nationwide subprime originations in 1998, but is primarily
due to expansion of the Company's subprime operations during 1998.
Commercial Mortgage Production
The Company's subsidiary, Laureate Capital Corp. (Laureate), originates
commercial mortgage loans for various insurance companies and other investors.
Commercial mortgage loans are generally originated in the name of the investor
and, in most instances, Laureate retains the right to service the loans under a
servicing agreement. A summary of key information relevant to the Company's
commercial mortgage production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE PERIOD ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
-------- -------- ------
Commercial Mortgage Production $844,975 $899,674 N/A
Commercial Mortgage Division
Operating Expenses $ 13,474 $ 11,231 N/A
Number of Branches 13 12 N/A
Number of Employees 88 81 N/A
Lease Production
The Company's wholly-owned subsidiary, Republic Leasing Company, Inc.
(Republic Leasing), originates and services small-ticket commercial equipment
leases. Substantially all of
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Republic Leasing's lease receivables are acquired from independent brokers who
operate throughout the continental United States. A summary of key information
relevant to the Company's lease production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE PERIOD ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
-------- -------- ------
Lease Production $100,230 $ 78,098 N/A
Lease Division Operating Expenses $ 6,275 $ 5,307 N/A
Number of Brokers 184 218 N/A
Number of Employees 61 66 N/A
SERVICING
Agency-Eligible Mortgage Servicing
Agency-eligible mortgage servicing includes collecting and remitting
mortgage loan payments, accounting for principal and interest, holding escrow
funds for payment of mortgage-related expenses such as taxes and insurance,
making advances to cover delinquent payments, making inspections as required of
the mortgaged premises, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults and
generally administering mortgage loans.
The Company is somewhat unique in that its strategy is to sell
substantially all of its produced agency-eligible mortgage servicing rights to
other approved servicers. Typically, the Company sells its agency-eligible
mortgage servicing rights within 90 to 180 days of purchase or origination.
However, for strategic reasons, the Company also strives to maintain a servicing
portfolio whose size is determined by reference to the Company's cash operating
costs which, in turn, are largely determined by the size of its loan production
platform.
A summary of key information relevant to the Company's agency-eligible loan
servicing activities is set forth below:
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($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Underlying Unpaid Principal Balances:
Beginning Balance * $ 9,865,100 $ 7,125,222 $ 6,670,267
Agency-Eligible Loan Production (net of
servicing-released production) 8,097,749 14,917,193 10,557,994
Net Change in Work-in-Process 228,712 604,131 26,007
Bulk Acquisitions -- 122,467 774,097
Sales of Servicing (9,104,706) (10,922,288) (9,699,058)
Paid-In-Full Loans (973,780) (1,639,776) (709,052)
Amortization, Curtailments and Other, net (290,681) (341,849) (495,033)
------------ ------------ ------------
Ending Balance* 7,822,394 9,865,100 7,125,222
Subservicing Ending Balance 1,255,832 3,730,636 3,070,132
------------ ------------ ------------
Total Underlying Unpaid Principal Balances $ 9,078,226 $ 13,595,736 $ 10,195,354
============ ============ ============
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and, therefore, exclude the subservicing portfolio. The
1999, 1998 and 1997 ending balance includes $139,376, $138,619 and -0- of
subprime loans being temporarily serviced until these loans are sold.
Of the $7.8 billion, $9.9 billion and $7.1 billion unpaid principal balance
at December 31, 1999, 1998 and 1997, approximately $6.3 billion, $5.5 billion
and $4.2 billion, respectively, of the related mortgage servicing right asset is
classified as available-for-sale, while $1.5 billion, $4.4 billion and $2.9
billion, respectively, of the related mortgage servicing right asset is
classified as held-for-sale.
A summary of agency-eligible servicing statistics follows:
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Average Underlying Unpaid Principal Balances
(including subservicing) $ 11,820,861 $ 11,864,513 $ 9,468,730
Weighted Average Note Rate* 7.50% 7.20% 7.69%
Weighted Average Servicing Fee* 0.43% 0.42% 0.40%
Delinquency (30+ days) Including
Bankruptcies and Foreclosures* 2.78% 2.01% 3.66%
Number of Servicing Division Employees 86 151 143
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and, therefore, exclude the subservicing portfolio.
The $0.04 billion, or 0.4%, decrease in the average underlying unpaid
principal balance of agency-eligible mortgage loans being serviced and
subserviced for 1999 as compared to 1998 is primarily related to the Company's
decreased loan production volumes during 1999. Since the Company generally sells
servicing rights related to the agency-eligible loans it produces within
13
15
90 to 180 days of purchase or origination, decreased production volumes
generally result in a lower volume of mortgage servicing rights held in
inventory pending sale.
Commercial Mortgage Servicing
Laureate originates commercial mortgage loans for investors and in most
cases, Laureate retains the right to service the loans. A summary of key
information relevant to the Company's commercial mortgage servicing activities
is set forth below:
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
($ IN THOUSANDS) 1999 1998 1997
---------- ---------- ----------
Commercial Mortgage Loan Servicing Portfolio $4,104,095 $3,255,458 $2,760,238
Weighted Average Note Rate 7.94% 8.11% 8.41%
Delinquencies (30+ Days) 0.29% 0.42% 0.60%
Lease Servicing
Republic Leasing services leases that are owned by it and also services
leases for investors. A summary of key information relevant to the Company's
lease servicing activity is set forth below:
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
($ IN THOUSANDS) 1999 1998 1997
-------- -------- --------
Owned Lease Servicing Portfolio $152,300 $ 98,956 $ 49,104
Serviced For Investors Servicing Portfolio 14,272 37,565 74,405
-------- -------- --------
Total Managed Lease Servicing Portfolio $166,572 $136,521 $123,509
======== ======== ========
Weighted Average Net Yield For Managed
Lease Servicing Portfolio 10.61% 10.81% 10.77%
Delinquencies (30+ Days) Managed
Lease Servicing Portfolio 2.76% 2.00% 3.35%
Consolidated Coverage Ratios
A summary of the Company's consolidated ratios of servicing fees and
interest income from owned leases to cash operating expenses net of amortization
and depreciation follows:
14
16
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
Total Company Servicing Fees $ 46,958 $ 43,156 $ 30,869
Net Interest Income from Owned Leases 7,270 4,637 N/A
--------- --------- ---------
Total Servicing Fees and Interest from Owned
Leases $ 54,228 $ 47,793 $ 30,869
Total Company Operating Expenses $ 165,158 $ 167,123 $ 125,931
Total Company Amortization and
Depreciation (39,249) (34,570) (21,859)
--------- --------- ---------
Total Company Operating Expenses, Net of
Amortization and Depreciation $ 125,909 $ 132,553 $ 104,072
--------- --------- ---------
Coverage Ratio 43% 36% 30%
========= ========= =========
The Company's coverage ratios for 1999, 1998 and 1997 at 43%, 36% and 30%,
respectively, were lower than the Company's target level of between 50% and 80%.
Effective May 1, 1998, the Company sold its retail production franchise, which
accounted for $6.0 million of the Company's cash operating expenses for 1998.
Without retail division operating expenses for 1998, the Company's coverage
ratio would have been 38%. Although the servicing portfolio and servicing fees
have increased, such increases have not kept pace with the pace of growth in
cash operating expenses. In the opinion of the Company's management, market
prices for servicing rights have been attractive throughout this period.
Accordingly, management has consciously determined on a risk-versus-return basis
to allow this ratio to move below its stated goals. Opportunistically and as
market conditions permit, management would expect to bring this ratio back in
line with the stated objective of maintaining a coverage ratio of between 50%
and 80%.
15
17
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED
DECEMBER 31, 1998
SUMMARY BY OPERATING DIVISION
Net income per common share on a diluted basis for 1999 was $0.28 as
compared to $2.07 for 1998. This 86% decrease in net income per common share was
less than the 88% decrease in net income due primarily to the impact of the
Company's stock repurchase program, which reduced the number of weighted average
shares outstanding across comparative periods. Following is a summary of the
revenues and expenses for each of the Company's operating divisions for the
years ended December 31, 1999 and 1998, respectively:
16
18
($ in thousands) Agency-Eligible
For the year ended ---------------------------------------- Commercial Total
December 31, 1999(1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments
- -------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ 8,240 $ (4,555) $ (12) $ 15,366 $ 323 $ 7,270 $ 26,632
Net gain on sale of
mortgage loans 64,033 -- -- 20,357 9,170 -- 93,560
Gain on sale of mortgage
servicing rights -- 7,262 -- -- -- -- 7,262
Servicing fees -- 41,791 -- -- 4,735 620 47,146
Other income 340 582 1,661 (4,372) 69 1,395 (325)
---------------------------------------------------------------------------------------------
Total revenues 72,613 45,080 1,649 31,351 14,297 9,285 174,275
---------------------------------------------------------------------------------------------
Salary and employee
benefits 38,751(2) 3,399(3) -- 15,840(4) 8,321 2,654 68,965
Occupancy expense 10,079(2) 419 -- 2,567(4) 1,123 453 14,641
Amortization and provision
for impairment of
mortgage servicing rights -- 29,580 -- -- 2,210 -- 31,790
General and administrative
expenses 22,970(2) 5,984 221 10,353(4) 1,820 3,168 44,516
---------------------------------------------------------------------------------------------
Total expenses 71,800(2) 39,382(3) 221 28,760(4) 13,474 6,275 159,912
---------------------------------------------------------------------------------------------
Income before income taxes 813(2) 5,698(3) 1,428 2,591(4) 823 3,010 14,363
Income tax expense (207)(2) (1,448)(3) (356) (1,237)(4) (405) (1,196) (4,849)
---------------------------------------------------------------------------------------------
Net income $ 606(2) $ 4,250(3) $ 1,072 $ 1,354(4) $ 418 $ 1,814 $ 9,514
=============================================================================================
For the year ended Other/
December 31, 1999(1) Eliminations Consolidated
- ----------------------------------------------------------
(UNAUDITED)
Net interest income $ (470) $ 26,162
Net gain on sale of
mortgage loans -- 93,560
Gain on sale of mortgage
servicing rights -- 7,262
Servicing fees (188) 46,958
Other income 175 (150)
------------------------------
Total revenues (483) 173,792
------------------------------
Salary and employee
benefits 3,903(5) 72,868(6)
Occupancy expense 214(5) 14,855(6)
Amortization and provision
for impairment of --
mortgage servicing rights -- 31,790
General and administrative
expenses 1,129(5) 45,645(6)
------------------------------
Total expenses 5,246(5) 165,158(6)
------------------------------
Income before income taxes (5,729)(5) 8,634(6)
Income tax expense 2,137(5) (2,712)(6)
------------------------------
Net income $(3,592)(5) $ 5,922(6)
==============================
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes work force reduction charge totaling $3,048 pre-tax or $1,912
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $37,931, $8,299,
$22,522, $68,752, $3,861, $1,343 and $2,518 respectively.
(3) Includes work force reduction charge totaling $31 pre-tax or $19 after-tax.
Exclusive thereof, salary and employee benefits, total expenses, net income
before income taxes, income tax expense and net income would have been $3,368,
$39,351, $5,729, $1,460 and $4,269 respectively.
(4) Includes work force reduction charge totaling $516 pre-tax or $324
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $15,674, $2,381,
$10,189, $28,244, $3,107, $1,429 and $1,678 respectively.
(5) Includes work force reduction charge totaling $194 pre-tax or $122
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $3,901, $24, $1,127,
$5,052, $(5,535), $(2,065) and $(3,470) respectively.
(6) Includes work force reduction charge totaling $3,789 pre-tax or $2,377
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $71,849, $12,699,
$45,031, $161,369, $12,423, $4,124 and $8,299 respectively.
($ in thousands) Agency-Eligible
For the year ended ---------------------------------------- Commercial Total
December 31, 1998(1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments
- -------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ 7,422 $ -- $ -- $ 9,565 $ 536 $ 4,637 $ 22,160
Net gain on sale of
mortgage loans 134,472 -- -- 27,980 9,011 -- 171,463
Gain on sale of mortgage
servicing rights -- 1,753 -- -- -- -- 1,753
Servicing fees -- 37,856 -- -- 3,777 1,014 42,647
Other income 1,756(2) 455 1,189 732 11 753 4,896
---------------------------------------------------------------------------------------------
Total revenues 143,650(2) 40,064 1,189 38,277 13,335 6,404 242,919
---------------------------------------------------------------------------------------------
Salary and employee benefits 53,158 3,449 -- 13,485 7,322 2,347 79,761
Occupancy expense 7,005 443 -- 1,921 840 376 10,585
Amortization and provision
for impairment of mortgage
servicing rights -- 27,897 -- -- 1,335 -- 29,232
General and administrative
expenses 28,046 6,446 196 4,490 1,734 2,584 43,496
---------------------------------------------------------------------------------------------
Total expenses 88,209 38,235 196 19,896 11,231 5,307 163,074
---------------------------------------------------------------------------------------------
Income before income taxes 55,441(2) 1,829 993 18,381 2,104 1,097 79,845
Income tax expense (20,059)(2) (662) (351) (6,656) (952) (435) (29,115)
---------------------------------------------------------------------------------------------
Net income $ 35,382(2) $ 1,167 $ 642 $ 11,725 $ 1,152 $ 662 $ 50,730
=============================================================================================
For the year ended Other/
December 31, 1998(1) Eliminations Consolidated
- ----------------------------------------------------------
(UNAUDITED)
Net interest income $ (382) $ 21,778
Net gain on sale of
mortgage loans -- 171,463
Gain on sale of mortgage
servicing rights -- 1,753
Servicing fees 509 43,156
Other income 680 5,576(2)
---------------------------
Total revenues 807 243,726(2)
---------------------------
Salary and employee benefits 2,645 82,406
Occupancy expense 634 11,219
Amortization and provision -- --
for impairment of mortgage
servicing rights -- 29,232
General and administrative
expenses 770 44,266
---------------------------
Total expenses 4,049 167,123
---------------------------
Income before income taxes (3,242) 76,603(2)
Income tax expense 1,183 (27,932)(2)
---------------------------
Net income $ (2,059) $ 48,671(2)
===========================
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes a non-recurring gain related to sale of retail operation totaling
$1,490 pre-tax, or $917 after-tax. Exclusive thereof, the year ended December
31, 1998 residential mortgage agency-eligible other income, total revenues,
income before taxes, income tax expense and net income and consolidated other
income, total revenues, income before taxes, income tax expense and net income
would have been $266, $142,160, $53,951, $19,486 and, $34,465; and $4,086,
$242,236, $75,113, $27,359 and, $47,754, respectively.
17
19
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage production operations.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1999 1998
---------- -----------
Net interest income $ 8,240 $ 7,422
Net gain on sale of mortgage loans 64,033 134,472
Other income 340 1,756
---------- -----------
Total production revenue 72,613 143,650
---------- -----------
Salary and employee benefits 38,751 53,158
Occupancy expense 10,079 7,005
General and administrative expenses 22,970 28,046
---------- -----------
Total production expenses 71,800 88,209
---------- -----------
Net pre-tax production margin $ 813 $ 55,441
---------- -----------
Production $8,112,351 $14,954,580
Pool delivery 8,642,639 14,713,137
Total production revenue to pool delivery 84 BPS 98 bps
Total production expenses to production 89 BPS 59 bps
---------- -----------
Net pre-tax production margin (5)BPS 39 bps
========== ===========
Summary
The production revenue to pool delivery ratio decreased 14 basis points for
1999 as compared to 1998. Generally, net gain on sale of mortgage loans (74
basis points for 1999 versus 91 basis points for 1998) declined primarily due to
compressed margins attributable to an aggressive competitive pricing environment
and lower overall agency-eligible production volume. Net interest income
increased from 5 basis points in 1998 to 10 basis points in 1999 primarily as a
result of the generally steeper yield curve environment. The production expenses
to production ratio increased 30 basis points for 1999 as compared to 1998. This
is primarily due to the 46% decline in production for 1999 as compared to 1998
which was partially offset by a $16.4 million decline in total production
expenses for 1999 as compared to 1998. As a consequence of the foregoing, the
Company's net agency-eligible pre-tax production margin declined 44 basis
points. Absent workforce reduction charges (discussed in greater detail
elsewhere within Management's Discussion and Analysis), total production
expenses would have declined by $19.5 million.
Net Interest Income
The following table analyzes net interest income allocated to the
Company's agency-eligible mortgage production activities in terms of rate and
volume variances of the interest spread (the difference between interest rates
earned on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds) for the years ended December 31, 1999 and
1998, respectively:
18
20
($ IN THOUSANDS)
Variance
Average Volume Average Rate Interest Attributable to
- -------------------------------------- ------------------ ---------------------
1999 1998 1999 1998 1999 1998 Variance Rate Volume
- -------------------------------------- ----------------------------------------------------
INTEREST INCOME
---------------
Mortgages Held-for-Sale
and Mortgage-Backed
$656,291 $1,172,994 6.85% 6.74% Securities $ 44,982 $79,078 $(34,096) $ 739 $(34,835)
- -------------------------------------- ----------------------------------------------------
INTEREST EXPENSE
----------------
$345,807 $ 457,967 4.14% 4.50% Warehouse Line * $ 14,313 $20,630 $ (6,317) $(1,265) $ (5,052)
303,092 689,711 5.21% 5.79% Gestation Line 15,779 39,958 (24,179) (1,780) (22,399)
110,380 97,422 6.21% 6.58% Servicing Secured Line 6,851 6,413 438 (415) 853
20,596 33,331 5.27% 5.75% Servicing Receivables 1,085 1,918 (833) (100) (733)
Line
7,142 8,726 8.57% 8.50% Other Borrowings 612 742 (130) 5 (135)
Facility Fees & Other 2,968 2,377 591 - 591
Charges
- -------------------------------------- ----------------------------------------------------
$787,017 $ 1,287,157 5.29% 5.60% Total Interest Expense $ 41,608 $72,038 $(30,430) $(3,555) $(26,875)
- -------------------------------------- ----------------------------------------------------
Net Interest Income Before
1.56% 1.14% Interdivisional $ 3,374 $ 7,040 $ (3,666) $ 4,294 $ (7,960)
================== Allocations ================================
Allocation to Other 470 382
Allocation to Agency-
Eligible Servicing 4,396 -
Division -------------------
Net Interest Income $ 8,240 $ 7,422
===================
* The interest-rate yield on the warehouse line is net of the benefit of escrow
deposits.
The 42 basis point increase in the interest-rate spread was primarily the
result of the steeper yield curve environment during 1999 compared to 1998. The
Company's mortgages and mortgage-backed securities are generally sold and
replaced within 30 to 35 days. Accordingly, the Company generally borrows at
rates based upon short-term indices, while its asset yields are primarily based
upon long-term mortgage rates.
Net Gain on Sale of Agency-Eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
----------- -----------
Gross proceeds on sales of mortgage loans $ 8,853,967 $14,921,242
Initial unadjusted acquisition cost of mortgage
loans sold, net of hedge results 8,861,915 14,917,751
----------- -----------
Unadjusted gain (loss) on sale of mortgage loans (7,948) 3,491
Loan origination and correspondent program
administrative fees 21,402 36,729
----------- -----------
Unadjusted aggregate margin 13,454 40,220
Acquisition basis allocated to mortgage
servicing rights (SFAS No. 125) 52,702 93,570
Net change in deferred administrative fees (2,123) 682
----------- -----------
Net gain on sale of agency-eligible mortgage loans $ 64,033 $ 134,472
=========== ===========
Net gain on sale of agency-eligible mortgage loans decreased $70.4
million from $134.5 million for 1998 to $64.0 million for 1999. The decrease is
primarily due to compressed margins attributable to an aggressive competitive
pricing environment in the correspondent channel and lower overall
agency-eligible production volume.
19
21
Other Income
The $1.4 million decline in other income for 1999 as compared to 1998 is
primarily attributable to the sale of the Company's retail production franchise
in 1998, which resulted in a nonrecurring gain of approximately $1.4 million.
AGENCY-ELIGIBLE REINSURANCE OPERATIONS
In November 1998, the Company formed a captive insurance company, MG
Reinsurance Company (MG Reinsurance). MG Reinsurance is licensed as a property
and casualty insurer and operates as a monoline captive insurance company
assuming reinsurance for PMI policies on agency-eligible mortgage loans
initially purchased or produced by the Company. During 1999 and 1998, the
Company recognized premium and investment income of approximately $1.7 million
and $1.2 million, respectively, that has been included as other income in the
agency-eligible reinsurance segment.
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
subprime mortgage production operations:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1999 1998
--------- --------
Net interest income $ 15,366 $ 9,565
Net gain on sale of mortgage loans 20,357 27,980
Other income (4,372) 732
--------- --------
Total production revenue 31,351 38,277
--------- --------
Salary and employee benefits 15,840 13,485
Occupancy expense 2,567 1,921
General and administrative expenses 10,353 4,490
--------- --------
Total production expenses 28,760 19,896
--------- --------
Net pre-tax production margin $ 2,591 $ 18,381
--------- --------
Production $ 728,410 $607,664
Whole loan sales and securitizations 699,317 551,110
Total production revenue to whole loan sales and securitizations 448 BPS 695 bps
Total production expenses to production 395 BPS 327 bps
--------- --------
Net pre-tax production margin 53 BPS 368 bps
========= ========
Summary
During 1999, subprime production volume of $728.4 million exceeded
whole loan sales and securitizations of $699.3 million by $29.1 million. At
December 31, 1999, the Company had unsold subprime mortgage loans of $128.8
million as compared to $97.9 million at December 31, 1998. Overall, the Company
operated during 1999 at a 0.53% pre-tax subprime production
20
22
margin. The 315 basis point decline in the pre-tax subprime production margin is
primarily due to the 217 basis point decline in net gain on the sale of subprime
mortgage loans. This decline is primarily attributable to compressed margins in
the subprime market during 1999 and the higher relative volumes of whole loan
sales as compared to securitizations from year to year. Salary and employee
benefit costs increased by 17%, or $2.4 million from 1998 to 1999. This was
primarily due to an increase in production volume of 20%. Occupancy expense
increased by $0.6 million primarily due to branch expansion cost and the
workforce reduction charge of $0.2 million. Workforce reduction charges are
discussed elsewhere in this Management's Discussion and Analysis. General and
administrative expenses increased approximately $5.9 million primarily due to
(1) an increase in provision expense of $2.6 million and (2) a 20% increase in
production volume for 1999 as compared to 1998.
Net Interest Income
The following table analyzes net interest income allocated to the Company's
subprime mortgage production activities in terms of rate and volume variances of
the interest spread (the difference between interest rates earned on loans and
residual certificates and interest rates paid on interest-bearing sources of
funds) for the years ended December 31, 1999 and 1998, respectively.
($ IN THOUSANDS) Variance
Average Volume Average Rate Interest Attributable to
- ------------------------------------- --------------------- ---------------------
1999 1998 1999 1998 1999 1998 Variance Rate Volume
- ------------------------------------- ----------------------------------------------------
Mortgages Held-for-Sale
and Residual
$ 235,552 $142,685 10.62% 10.29% Certificates $ 25,026 $ 14,684 $ 10,342 $ 785 $ 9,557
- ------------------------------------- ----------------------------------------------------
$ 171,358 $ 97,534 5.73% 5.25% Total Interest Expense $ 9,819 $ 5,119 $ 4,700 $ 825 $ 3,875
- ------------------------------------- ----------------------------------------------------
4.89% 5.04% Net Interest Income $ 15,207 $ 9,565 $ 5,642 $ (40) $ 5,682
================= ===============================
Allocation to Agency-
Eligible Servicing
Division 159 -
---------------------
Net Interest Income $ 15,366 $ 9,565
=====================
Net interest income from subprime products increased to $15.4 million for
1999 as compared to $9.6 million for 1998. This was primarily the result of the
increase in subprime loan production volume and an increase in accretion income
earned on residual interests to $6.6 million for 1999 as compared to $3.4 for
1998.
Net Gain on Sale and Securitization of Subprime Mortgage Loans
A reconciliation of the gain on securitization of subprime mortgage loans
for the periods indicated follows:
21
23
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
--------- ---------
Gross proceeds on securitization of subprime mortgage loans $ 248,456 $ 318,040
Initial acquisition cost of subprime mortgage loans securitized, net
of fees 252,162 324,549
--------- ---------
Unadjusted loss on securitization of subprime mortgage loans (3,706) (6,509)
Initial capitalization of residual certificates 16,394 22,240
Net deferred costs and administrative fees recognized (2,898) 357
--------- ---------
Net gain on securitization of subprime mortgage loans $ 9,790 $ 16,088
========= =========
The net gain on securitization of subprime mortgage loans declined by $6.3
million or 39% in 1999 as compared to 1998. This decline is primarily
attributable to a 22% decrease in the volume of subprime loans securitized as
well as compressed margins in the subprime market during 1999.
The Company assesses the fair value of residual certificates quarterly,
with assistance from an independent third party. This valuation is based on the
discounted cash flows expected to be available to the holder of the residual
certificates. Significant assumptions used at December 31, 1999 for residual
certificates then held by the Company generally include a discount rate of 13%,
a constant default rate of 3% and a loss severity rate of 25%, and ramping
periods are based on prepayment penalty periods and adjustable rate mortgage
first reset dates. Terminal prepayment rate assumptions specific to the
individual certificates for purposes of the December 31, 1999 valuations are set
forth below:
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2
---------------------------------------------------------------
Prepayment Speeds
Fixed rate mortgages 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr
Adjustable rate mortgages 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr
Terminal prepayment rate assumptions specific to the individual
certificates for purposes of the December 31, 1998 valuations are set forth
below:
1997-1 1997-2 1998-1 1998-2 OTHER
------------ ------------- ------------ ------------ ------------
Prepayment speeds
Fixed rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 32% cpr
Adjustable rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 24% cpr
The assumptions used in the independent third party valuation referred to
above are estimated based on current conditions for similar instruments that are
subject to prepayment and credit risks. Other factors considered in the
determination of fair value include credit and collateral quality of the
underlying loans, current economic conditions and various fees and costs
associated with ownership of the residual certificate including actual credit
history of the individual residual certificates. Although the Company believes
that the fair values of its residual certificates are reasonable given current
market conditions, the assumptions used are estimates and actual experience may
vary from these estimates. Differences in the actual
22
24
prepayment speed and loss experience from the assumptions used, could have a
significant effect on the fair value of the residual certificates.
As summarized in the following analysis, the recorded residual values
imply that the Company's securitizations are valued at 1.55 times the implied
excess yield at December 31, 1999, as compared to the 1.63 multiple implied at
December 31, 1998. The table below represents balances as of December 31, 1999,
unless otherwise noted.
23
25
Securitizations
----------------------------------------------------------------
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 Subtotal Other Total
------- ------- ------- -------- -------- -------- -------- ------- --------
($ in thousands)
Residual Certificates $ 5,971 $ 7,153 $10,334 $ 12,460 $ 9,566 $ 8,898 $ 54,382 $ -- $ 54,382
Bonds $22,763* $34,349* $74,099* $139,882* $121,887* $125,000* $517,980 $28,763* $546,743
------- ------- ------- -------- -------- -------- -------- ------- --------
Subtotal $28,734 $41,502 $84,433 $152,342 $131,453 $133,898 $572,362 $28,763 $601,125
Unpaid Principal Balance $27,583* $39,203* $79,724* $144,894* $122,689* $125,329* $539,422 $31,253* $570,675
------- ------- ------- -------- -------- -------- -------- ------- --------
Implied Price 104.17 105.86 105.91 105.14 107.14 106.84 106.11 92.03 105.34
------- ------- ------- -------- -------- -------- -------- ------- --------
Collateral Yield 12.03 11.19 9.80 9.73 9.84 9.82 10.01 10.37 10.03
Collateral Equivalent
Securitization Costs (0.71) (0.64) (0.59) (0.60) (0.62) (0.68) (0.63) (0.50) (0.62)
Collateral Equivalent
Bond Rate (5.10) (5.18) (5.55) (6.21) (5.98) (6.18) (5.92) (6.68) (5.96)
------- ------- ------- -------- -------- -------- -------- ------- --------
Implied Collateral
Equivalent Excess Yield 6.22 5.37 3.66 2.92 3.24 2.96 3.46 3.19 3.45
------- ------- ------- -------- -------- -------- -------- ------- --------
Implied Premium Above Par 4.17 5.86 5.91 5.14 7.14 6.84 6.11 -- 5.34
Implied Collateral
Equivalent Excess Yield 6.22 5.37 3.66 2.92 3.24 2.96 3.46 3.19 3.45
------- ------- ------- -------- -------- -------- -------- ------- --------
Multiple 0.67x 1.09x 1.61x 1.76x 2.20x 2.31x 1.76x --x 1.55x
------- ------- ------- -------- -------- -------- -------- ------- --------
* Amounts were based upon trustee statements dated January 25, 2000 that covered
the period ended December 31, 1999.
A summary of key information relevant to the subprime residual assets at
December 31, 1999 is set forth below:
Securitizations
------------------------------------------------------------------
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 Other * Total
------- ------- -------- -------- ------ ------ -------- --------
($ in thousands)
Balance at December 31, 1998 $ 7,997 $ 9,702 $ 10,815 $ 12,569 $ -- $ -- $ 4,700 $ 45,783
Initial Capitalization of
Residual Certificates -- -- -- -- 7,826 6,330 -- 14,156
Accretion 1,140 1,245 1,325 1,521 593 -- 752 6,576
Mark-to-Market (1,641) (1,130) (1,705) (1,630) 1,147 2,568 (5,452) (7,843)
Cash Flow (1,525) (2,664) (101) -- -- -- -- (4,290)
------- ------- -------- -------- ------ ------ -------- --------
Balance at December 31, 1999 $ 5,971 $ 7,153 $ 10,334 $ 12,460 $9,566 $8,898 $ -- $ 54,382
======= ======= ======== ======== ====== ====== ======== ========
* Represents a portion of a residual certificate the Company received in 1997 in
settlement of an account receivable. In 1999 the Company decided to
conservatively write off this receivable.
A summary of key information relevant to the subprime residual assets at
December 31, 1998 is set forth below:
Securitizations
------------------------------------------------------------------
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 Other Total
------- ------- -------- -------- ------ ------ -------- --------
($ in thousands)
Balance at December 31, 1997 $ 7,910 $ 6,507 $ -- $ -- $ -- $ -- $ 5,267 $ 19,684
Initial Capitalization of
Residual Certificates -- 2,164 9,040 11,017 -- -- -- 22,221
Accretion 1,073 1,153 559 -- -- -- 661 3,446
Mark-to-Market (986) (122) 1,216 1,552 -- -- (1,225) 435
Cash Flow -- -- -- -- -- -- (3) (3)
------- ------- -------- -------- ------ ------ -------- --------
Balance at December 31, 1998 $ 7,997 $ 9,702 $ 10,815 $ 12,569 $ -- $ -- $ 4,700 $ 45,783
======= ======= ======== ======== ====== ====== ======== ========
24
26
The Company sold subprime mortgage loans on a whole loan basis during 1999
and 1998. Whole loans are generally sold without recourse to third parties with
the gain or loss being calculated based on the difference between the carrying
value of the loans sold and the gross proceeds received from the purchaser less
expenses. Generally, no interest in these loans is retained by the Company.
A reconciliation of the gain on subprime mortgage whole loan sales for the
periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
--------- --------
Gross proceeds on whole loan sales of subprime mortgage loans $ 463,443 $238,186
Initial acquisition cost of subprime mortgage loans sold, net of fees 447,155 226,561
--------- --------
Unadjusted gain on whole loan sales of subprime mortgage loans 16,288 11,625
Net deferred costs and administrative fees recognized (5,721) 267
--------- --------
Net gain on whole loan sales of subprime mortgage loans $ 10,567 $ 11,892
========= ========
The $1.3 million decrease in the net gain on whole loan sales of subprime
mortgage loans from the 1998 gain of $11.9 million to $10.6 million reported for
1999 is primarily due to compressed margins in the subprime market during 1999.
Also, in response to the growth in the subprime division, management reassessed
its application of estimates related to Statement of Financial Accounting
Standard No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases" in the fourth
quarter of 1998. This resulted in a $5.7 million reduction in the net gain on
whole loan sales of subprime mortgage loans in 1999 as compared to a $0.3
million increase for 1998.
Other Income
The Company generally retains residual certificates in connection with the
securitization of subprime loans. These residual certificates are adjusted to
approximate market value each quarter. For the years ended December 31, 1999 and
1998, respectively, mark-to-market gain (loss) on residuals was approximately
$(7.8) million and $0.4 million, respectively. This amount is reflected as other
income (loss) within the subprime division. This ($7.8) million other loss was
partially offset by $3.4 million of other subprime income. This other subprime
income consists primarily of prepayment penalties.
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage servicing operations for the years ended December 31,
1999 and 1998:
25
27
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1999 1998
----------- -----------
Net interest expense $ (4,555) $ --
Loan servicing fees 41,791 37,856
Other income 582 455
----------- -----------
Servicing revenues 37,818 38,311
Salary and employee benefits 3,399 3,449
Occupancy expense 419 443
Amortization and provision for impairment of mortgage
servicing rights 29,580 27,897
General and administrative expenses 5,984 6,446
----------- -----------
Total loan servicing expenses 39,382 38,235
----------- -----------
Net pre-tax servicing margin (1,564) 76
Gain on sale of mortgage servicing rights 7,262 1,753
----------- -----------
Net pre-tax servicing contribution $ 5,698 $ 1,829
=========== ===========
Average servicing portfolio $ 9,279,848 $ 9,386,653
Servicing sold 9,104,706 10,922,288
Net pre-tax servicing margin to average servicing portfolio (2) BPS 0 bps
Gain on sale of servicing to servicing sold 8 BPS 2 bps
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio declined 2 basis points primarily due to the Company beginning during
the first quarter of 1999 to allocate net interest expense to the
agency-eligible servicing division. Had the $4.6 million in interest expense not
been allocated to the agency-eligible servicing division in 1999, the net
pre-tax servicing margin to average servicing portfolio would have been 3 basis
points, a slight improvement over the 1998 margin. The 6 basis point increase in
the gain on sale of servicing sold is primarily attributable to rising rates
which benefited the execution of servicing sales in the marketplace. Loan
servicing fees were $41.8 million for 1999, compared to $37.9 million for 1998,
an increase of 10%, primarily due to an increase in the weighted average service
fee on serviced portfolios. Amortization and provision for impairment of
mortgage servicing rights increased to $29.6 million during 1999 from $27.9
million during 1998, an increase of 6%. The increase in amortization is
primarily attributable to higher amortization charges associated with increased
book carrying values of mortgage servicing rights resulting from the rising rate
environment.
Given current market conditions, management continually assesses market
prepay trends and adjusts amortization accordingly. Management believes that the
value of the Company's mortgage servicing rights are reasonable in light of
current market conditions. However, there can be no guarantee that market
conditions will not change such that mortgage servicing rights valuations will
require additional amortization or impairment charges.
26
28
Net Interest Expense
During the first quarter of 1999, the Company began to allocate interest
expense to the agency-eligible servicing division. The net interest expense for
1999 is composed of benefits from escrow accounts of $8.0 million that is offset
by $12.6 million in interest expense. Had the Company allocated interest expense
to the agency-eligible servicing division during 1998, net interest expense
would have been $4.6 million. The net interest expense would have been composed
of benefit from escrows of $7.7 million that would have been offset by $12.3 in
interest expense.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
----------- ------------
Underlying unpaid principal balances of agency-eligible
mortgage loans on which servicing rights were sold
during the period $ 9,104,706 $ 10,922,288
=========== ============
Gross proceeds from sales of mortgage servicing rights $ 245,302 $ 256,292
Initial acquisition basis, net of amortization and hedge results 179,721 189,918
----------- ------------
Unadjusted gain on sale of mortgage servicing rights 65,581 66,374
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 125) (58,319) (64,621)
----------- ------------
Gain on sale of mortgage servicing rights $ 7,262 $ 1,753
=========== ============
Gain on sale of mortgage servicing rights increased $5.5 million from $1.8
million for 1998 to $7.3 million for 1999. The increase in the gain on sale of
mortgage servicing rights is primarily attributable to rising rates which
benefited the execution of servicing sales into the secondary markets.
COMMERCIAL MORTGAGE OPERATIONS
Following is a summary of the revenues and expenses of the Company's
commercial mortgage production operations.
27
29
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1999 1998
----------- -----------
Net interest income $ 323 $ 536
Net gain on sale of mortgage loans 9,170 9,011
Other income 69 11
----------- -----------
Total production revenue 9,562 9,558
----------- -----------
Salary and employee benefits 8,321 7,322
Occupancy expense 1,123 840
General and administrative expenses 1,820 1,734
----------- -----------
Total production expenses 11,264 9,896
----------- -----------
Net pre-tax production margin (1,702) (338)
----------- -----------
Servicing fees 4,735 3,777
Amortization of mortgage servicing rights 2,210 1,335
----------- -----------
Net pre-tax servicing margin 2,525 2,442
----------- -----------
Pre-tax income $ 823 $ 2,104
----------- -----------
Production $ 844,975 $ 899,674
Whole loan sales 868,775 875,874
Average commercial mortgage servicing portfolio $ 3,799,251 $ 3,006,859
Total production revenue to whole loan sales 110 BPS 109 bps
Total production expenses to production 133 BPS 110 bps
----------- -----------
Net pre-tax production margin (23) BPS (1) bps
----------- -----------
Servicing fees to average commercial mortgage servicing portfolio 12 BPS 13 bps
Amortization of mortgage servicing rights to average commercial
mortgage servicing portfolio 6 BPS 4 bps
----------- -----------
Net pre-tax servicing margin 6 BPS 9 bps
----------- -----------
The net pre-tax production margin declined for 1999 as compared to 1998
primarily due to an increase in production expenses. The production expense
increase is primarily attributable to Laureate opening one new branch in 1999
and a 9% increase in the number of employees from year to year. Laureate
originates commercial mortgage loans for various insurance companies and other
investors, primarily in Alabama, Florida, Indiana, North Carolina, Pennsylvania,
South Carolina, Tennessee and Virginia. Substantially all loans originated by
Laureate have been originated in the name of the investor, and in most cases,
Laureate has retained the right to service the loans under a servicing agreement
with the investor. Most commercial mortgage loan servicing agreements are
short-term, and retention of the servicing contract is dependent on maintaining
the investor relationship.
28
30
Net Gain on Sale of Commercial Mortgage Loans
A reconciliation of gain on sale of commercial mortgage loans for the
periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
-------- --------
Gross proceeds on sales of commercial mortgage loans $868,775 $875,874
Initial unadjusted acquisition cost of commercial
mortgage loans sold 868,775 875,874
-------- --------
Unadjusted gain on sale of commercial mortgage loans -- --
Commercial mortgage and origination fees 7,155 6,831
-------- --------
Unadjusted aggregate margin 7,155 6,831
Initial acquisition cost allocated to basis in commercial
Mortgage servicing rights (SFAS No. 125) 2,015 2,180
-------- --------
Net gain on sale of commercial mortgage loans $ 9,170 $ 9,011
======== ========
The net gain on sale of commercial mortgage loans increased $0.2 million
(2%) from $9.0 million for 1998 to $9.2 million for 1999. The increase is
primarily attributable to improved margins on sales of commercial mortgage
loans.
LEASING OPERATIONS
Following is a summary of the revenues and expenses of the Company's
small-ticket equipment leasing operations for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1999 1998
-------- --------
Net interest income $ 7,270 $ 4,637
Other income 1,395 753
-------- --------
Leasing production revenue 8,665 5,390
-------- --------
Salary and employee benefits 2,654 2,347
Occupancy expense 453 376
General and administrative expenses 3,168 2,584
-------- --------
Total lease operating expenses 6,275 5,307
-------- --------
Net pre-tax leasing production margin 2,390 83
Servicing fees 620 1,014
-------- --------
Net pre-tax leasing margin $ 3,010 $ 1,097
-------- --------
Average owned leasing portfolio $125,258 $ 73,508
Average serviced leasing portfolio 24,831 53,480
-------- --------
Average managed leasing portfolio $150,089 $126,988
======== ========
Leasing production revenue to average owned portfolio 692 BPS 733 bps
Leasing operating expenses to average owned portfolio 501 BPS 721 bps
-------- --------
Net pre-tax leasing production margin 191 BPS 12 bps
======== ========
Servicing fees to average serviced leasing portfolio 250 BPS 190 bps
======== ========
29
31
The 61% increase in leasing production revenue for 1999 as compared to 1998
is primarily due to the 70% increase in the average owned leasing portfolio
which is due to the policy of retaining originated leases on the balance sheet.
The net pre-tax leasing margin improved in 1999 as compared to 1998 due to the
increase in production revenue which was only partially offset by an 18%
increase in lease operating expenses. Efficiencies in managing costs were able
to be achieved in 1999 as the volume of leases owned substantially increased.
Substantially all of the Company's lease receivables are acquired from
independent brokers who operate throughout the continental United States and
referrals from independent banks. The Company has made an effort to increase the
owned portfolio. As it has increased its owned portfolio more cost efficiencies
have been achieved thereby increasing the net pre-tax leasing production margin.
Net Interest Income
Net interest income for 1999 was $7.3 million as compared to $4.6 million
for 1998. This is equivalent to a net interest margin of 3.25% and 4.35% for
1999 and 1998, respectively, based upon average lease receivables owned of
$125.3 million and $73.5 million, respectively, and average debt outstanding of
$92.4 and $53.5 million, respectively.
OTHER
During the third quarter of 1999, the Company reorganized its reporting
cost centers and is now reporting holding company costs as a reconciling item
between the segmented income statement and the consolidated income statement.
The primary components of holding company costs are 1) interest expense on the
debt on the Company's corporate headquarters; 2) salary and employee benefits of
corporate personnel; 3) depreciation on the corporate headquarters and 4) income
taxes. The 1998 segmented income statement has been restated to conform with the
1999 segmented income statement presentation.
WORKFORCE REDUCTION
During the fourth quarter of 1999, the Company incurred a $3.8 million
($2.4 million after-tax) charge related to a workforce reduction. The workforce
reduction became necessary as the Company continued to adapt to a smaller
overall residential mortgage market and intensely competitive pricing
conditions. The impact of the expense related to the workforce reduction is
summarized below by financial statement component and operating division:
30
32
Agency-Eligible
---------------------- Other/
($ in thousands) Production Servicing Subprime Eliminations Consolidated
---------- --------- -------- ------------ ------------
Salary and employee
Benefits $ 820 $ 31 $ 166 $ 2 $ 1,019
Occupancy expense 1,780 -- 186 190 2,156
General and
administrative expenses 448 -- 164 2 614
------- ---- ----- ----- -------
Net pre-tax impact 3,048 31 516 194 3,789
Estimated allocable
income tax expense (1,136) (12) (192) (72) (1,412)
------- ---- ----- ----- -------
Net after-tax Impact $ 1,912 $ 19 $ 324 $ 122 $ 2,377
======= ==== ===== ===== =======
31
33
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED
DECEMBER 31, 1997
SUMMARY BY OPERATING DIVISION
Following is a summary of the revenues and expenses for each of the
Company's operating divisions (with non-recurring and special charges separately
categorized) for the years ended December 31, 1998 and 1997, respectively:
32
34
Agency-Eligible
($ in thousands) --------------------------------------------
For the year ended Commercial Total Other/
December 31, 1998 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments Eliminations
- -------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ 7,422 $ -- $ -- $ 9,565 $ 536 $ 4,637 $ 22,160 $ (382)
Net gain on sale of mortgage
loans 134,472 -- -- 27,980 9,011 -- 171,463 --
Gain on sale of mortgage
servicing rights -- 1,753 -- -- -- -- 1,753 --
Servicing fees -- 37,856 -- -- 3,777 1,014 42,647 509
Other income 1,756 (2) 455 1,189 732 11 753 4,896 680
------------------------------------------------------------------------------------------
Total revenues 143,650 (2) 40,064 1,189 38,277 13,335 6,404 242,919 807
------------------------------------------------------------------------------------------
Salary and employee benefits 53,158 3,449 -- 13,485 7,322 2,347 79,761 2,645
Occupancy expense 7,005 443 -- 1,921 840 376 10,585 634
Amortization and provision for
impairment of mortgage --
servicing rights -- 27,897 -- -- 1,335 -- 29,232 --
General and administrative
expenses 28,046 6,446 196 4,490 1,734 2,584 43,496 770
------------------------------------------------------------------------------------------
Total expenses 88,209 38,235 196 19,896 11,231 5,307 163,074 4,049
------------------------------------------------------------------------------------------
Income before income taxes 55,441 (2) 1,829 993 18,381 2,104 1,097 79,845 (3,242)
Income tax expense (20,059)(2) (662) (351) (6,656) (952) (435) (29,115) 1,183
------------------------------------------------------------------------------------------
Net income $ 35,382(2) $ 1,167 $ 642 $11,725 $ 1,152 $ 662 $ 50,730 $ (2,059)
==========================================================================================
Non-Recurring
For the year ended and Special
December 31, 1998 (1) Charges Consolidated
- ----------------------------------------------------------
(UNAUDITED)
Net interest income $ 21,778
Net gain on sale of mortgage
loans 171,463
Gain on sale of mortgage
servicing rights 1,753
Servicing fees 43,156
Other income 5,576 (2)
---------------------------
Total revenues 243,726 (2)
---------------------------
Salary and employee benefits 82,406
Occupancy expense 11,219
Amortization and provision for
impairment of mortgage
servicing rights 29,232
General and administrative
expenses 44,266
---------------------------
Total expenses 167,123
---------------------------
Income before income taxes 76,603 (2)
Income tax expense (27,932)(2)
---------------------------
Net income $ 48,671(2)
===========================
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes a non-recurring gain related to sale of retail operation totaling
$1,490 pre-tax, or $917 after-tax. Exclusive thereof, the year ended December
31, 1998 residential mortgage agency-eligible other income, total revenues,
income before taxes, income tax expense and net income and consolidated other
income, total revenues, income before taxes, income tax expense and net income
would have been $266, $142,160, $53,951, $19,486 and $34,465; and $4,086,
$242,236, $75,113, $27,359 and $47,754, respectively.
Agency-Eligible
($ in thousands) --------------------------------------------
For the year ended Commercial Total Other/
December 31, 1997 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments Eliminations
- -------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ 16,764 $ -- $ -- $ 1,268 $ -- $ -- $ 18,032 $ (388)
Net gain on sale of mortgage
loans 89,358 -- -- 14,012 -- -- 103,370 --
Gain on sale of mortgage
servicing rights -- 7,955 -- -- -- -- 7,955 --
Servicing fees -- 30,869 -- -- -- -- 30,869 --
Other income 1,180 -- -- -- -- -- 1,180 --
------------------------------------------------------------------------------------------
Total revenues 107,302 38,824 -- 15,280 -- -- 161,406 (388)
------------------------------------------------------------------------------------------
Salary and employee benefits 50,005 3,025 -- 7,754 -- -- 60,784 1,451
Occupancy expense 6,052 318 -- 711 -- -- 7,081 377
Amortization and provision
for impairment of mortgage
servicing rights -- 18,315 -- -- -- -- 18,315 --
General and administrative
expenses 17,799 7,856 -- 2,021 -- -- 27,676 100
------------------------------------------------------------------------------------------
Total expenses 73,856 29,514 -- 10,486 -- -- 113,856 1,928
------------------------------------------------------------------------------------------
Income before income taxes 33,446 9,310 -- 4,794 -- -- 47,550 (2,316)
Income tax expense (12,678) (3,537) -- (1,825) -- -- (18,040) 845
------------------------------------------------------------------------------------------
Net income $ 20,768 $ 5,773 $ -- $ 2,969 $ -- $ -- $ 29,510 $ (1,471)
==========================================================================================
Non-Recurring
For the year ended and Special
December 31, 1997 (1) Charges Consolidated
- ----------------------------------------------------------
(UNAUDITED)
Net interest income $ 17,644
Net gain on sale of mortgage
loans 103,370
Gain on sale of mortgage
servicing rights 7,955
Servicing fees 30,869
Other income 1,180
---------------------------
Total revenues 161,018
---------------------------
Salary and employee benefits 62,235
Occupancy expense 7,458
Amortization and provision
for impairment of mortgage
servicing rights 18,315
General and administrative
expenses 10,147 37,923(2)
---------------------------
Total expenses 10,147 125,931(2)
---------------------------
Income before income taxes (10,147) 35,087(2)
Income tax expense 3,906 (13,289)(2)
---------------------------
Net income $ (6,241) $ 21,798(2)
===========================
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes non-recurring and special charges related to a merger agreement
that was terminated and certain nonrecoverable operating receivables totaling
$10,147 pretax, or $6,241 after tax. Exclusive thereof, the December 31, 1997
consolidated general and administrative expenses, total expenses, income before
income taxes, income tax expense and net income would have been $27,776,
$115,784, $45,235, $17,195 and $28,039, respectively.
33
35
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses allocated to the
Company's agency-eligible mortgage production operations.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1998 1997
----------- -----------
Net interest income $ 7,422 $ 16,764
Net gain on sale of mortgage loans 134,472 89,358
Other income 1,756 1,180
----------- -----------
Total production revenue 143,650 107,302
----------- -----------
Salary and employee benefits 53,158 50,005
Occupancy expense 7,005 6,052
General and administrative expenses 28,046 17,799
----------- -----------
Total production expenses 88,209 73,856
----------- -----------
Net pre-tax production margin $ 55,441 $ 33,446
----------- -----------
Production $14,954,580 $10,437,720
Pool delivery 14,713,137 10,212,966
Total production revenue to pool delivery 98 BPS 105 bps
Total production expenses to production 59 BPS 71 bps
----------- -----------
Net pre-tax production margin 39 BPS 34 bps
=========== ===========
Summary
Overall, the Company's net agency-eligible pre-tax production margin
improved 5 basis points, or 15%, to 39 basis points while in absolute dollars it
increased $22.0 million, or 66%. The production revenue to pool delivery ratio
declined seven basis points, or 7%, for 1998 as compared to 1997. Generally, net
gain on sale of mortgage loans (91 basis points for 1998 versus 88 basis points
for 1997) improved due to better overall execution into the secondary markets.
However, net interest income declined and offset this improvement due to the
relatively flatter yield curve environment. The production expenses to
production ratio decreased 12 basis points, or 17%, for 1998 as compared to
1997. Generally, this relates to better leverage of fixed operating expenses in
the higher volume production environment for 1998 versus 1997.
Net Interest Income
The following table analyzes net interest income for the years ended
December 31, 1998 and 1997, allocated to the Company's agency-eligible mortgage
production activities in terms of rate and volume variances of the interest-rate
spread (the difference between interest rates earned on loans and
mortgage-backed securities and interest rates paid on interest-bearing sources
of funds).
34
36
($ IN THOUSANDS) Variance
Average Volume Average Rate Interest Attributable to
- --------------------------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997 Variance Rate Volume
- --------------------------------------- ----------------------------------------------------
INTEREST INCOME
Mortgages Held-for-Sale
and Mortgage-Backed
$1,172,994 $ 917,341 6.74% 7.62% Securities $79,078 $69,889 $ 9,189 $(10,288) $19,477
- --------------------------------------- -----------------------------------------------------
INTEREST EXPENSE
$ 457,967 $ 430,727 4.50% 4.77% Warehouse Line * $20,630 $20,559 $ 71 $ (1,229) $ 1,300
689,711 461,467 5.79% 5.69% Gestation Line 39,958 26,245 13,713 732 12,981
97,422 48,199 6.58% 6.56% Servicing Secured Line 6,413 3,160 3,253 26 3,227
33,331 22,953 5.75% 6.10% Servicing Receivables 1,918 1,401 517 (116) 633
Line
8,726 4,804 8.50% 8.11% Other Borrowings 742 389 353 35 318
Facility Fees & Other
Charges 2,377 1,759 618 618
- --------------------------------------- -----------------------------------------------------
$1,287,157 $ 968,150 5.60% 5.53% Total Interest Expense $72,038 $53,513 $18,525 $ (552) $19,077
- --------------------------------------- -----------------------------------------------------
Net Interest Income
Before Interdivisional
1.14% 2.09% Allocations $ 7,040 $16,376 $(9,336) $(9,736) $ 400
================== ================================
Allocation to Other 382 388
Allocation to Agency-
Eligible Servicing
Division - -
-----------------
Net Interest Income $ 7,422 $16,764
=================
* The interest-rate yield on the warehouse line is net of the benefit of escrow
deposits.
Net interest income from agency-eligible products decreased 56% to $7.4
million for 1998 compared to $16.8 million for 1997. The 95 basis point decrease
in the interest-rate spread was primarily the result of the narrower spreads
between long and short-term rates in 1998 compared to 1997. The Company's
mortgages and mortgage-backed securities are generally sold and replaced within
30 to 35 days. The Company generally borrows at rates based upon short-term
indices, while its asset yields are primarily based upon long-term mortgage
rates.
Net Gain on Sale of Agency-Eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
----------- -----------
Gross proceeds on sales of mortgage loans $14,921,242 $10,427,031
Initial unadjusted acquisition cost of mortgage loans sold,
net of hedge results 14,917,751 10,422,340
----------- -----------
Unadjusted gain on sale of mortgage loans 3,491 4,691
Loan origination and correspondent program administrative fees 36,729 34,448
----------- -----------
Unadjusted aggregate margin 40,220 39,139
Acquisition basis allocated to mortgage servicing rights
(SFAS No. 125) 93,570 49,170
Net change in deferred administrative fees 682 1,049
----------- -----------
Net gain on sale of agency-eligible mortgage loans $ 134,472 $ 89,358
=========== ===========
The Company sold agency-eligible loans during 1998 with an aggregate
unpaid principal balance of $14.9 billion compared to sales of $10.4 billion for
1997. The amount of proceeds received on sales of mortgage loans exceeded the
initial unadjusted acquisition cost of the loans
35
37
sold by $3.5 million (2 basis points) for 1998 as compared to $4.7 million (4
basis points) for 1997. The Company received loan origination and correspondent
program administrative fees of $36.7 million (25 basis points) on these loans
during 1998 and $34.4 million (33 basis points) during 1997. The Company
allocated $93.6 million (63 basis points) to basis in mortgage servicing rights
for loans sold in 1998 as compared to $49.2 million (47 basis points) during
1997 in accordance with Statement of Financial Accounting Standards (SFAS) No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". Net gain on sale of agency-eligible mortgage
loans increased to $134.5 million for 1998 versus $89.4 million for 1997.
General and Administrative Expenses
General and administrative expenses allocated to the production of
agency-eligible mortgage loans increased $10.2 million to $28.0 million for 1998
as compared to $17.8 million for 1997. Provision for foreclosure and repurchase
expenses increased by $5.1 million to approximately $9.7 million for 1998
primarily due to the increase in repurchase loan volumes in 1998 as compared to
1997. The balance of the increase was primarily due to the overall growth of the
Company's production and servicing operations.
AGENCY-ELIGIBLE REINSURANCE OPERATIONS
During 1998, the Company formed a captive insurance company, MG Reinsurance
Company (MG Reinsurance). MG Reinsurance is licensed as a property and casualty
insurer and operates as a monoline captive insurance company assuming
reinsurance for agency-eligible mortgage loans initially purchased or produced
by the Company. During 1998, the Company recognized premium income of
approximately $1.2 million categorized as other income in the agency-eligible
production segment.
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses allocated to the
Company's subprime mortgage production operations.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1998 1997
-------- --------
Net interest income $ 9,565 $ 1,268
Net gain on sale of mortgage loans 27,980 14,012
Other income 732 --
-------- --------
Total production revenue 38,277 15,280
-------- --------
Salary and employee benefits 13,485 7,754
Occupancy expense 1,921 711
General and administrative expenses 4,490 2,021
-------- --------
Total production expenses 19,896 10,486
-------- --------
Net pre-tax production margin 18,381 $ 4,794
-------- --------
Production $607,664 $292,817
Whole loan sales and securitizations 551,110 284,841
Total production revenue to whole loan sales and securitizations 695 bps 536 bps
Total production expenses to production 327 bps 358 bps
-------- --------
Net pre-tax production margin 368 bps 178 bps
======== ========
36
38
Summary
During 1998, the Company produced $607.7 million of subprime loans. The
Company sold approximately $226.6 million (37%) of its 1998 production in whole
loan transactions and delivered $324.5 million into the secondary markets
through securitization transactions. Overall, the subprime division operated
during 1998 at a 3.68% pre-tax production margin. At December 31, 1998 the
Company had unsold subprime mortgage loans of $97.9 million. During 1997, the
Company's subprime division was in its initial startup phase and $46.8 million
of the subprime mortgage loan production for that period was purchased in bulk
from Meritage prior to the Company's acquisition of Meritage.
Net Interest Income
The following table analyzes net interest income for the years ended December
31, 1998 and 1997 allocated to the Company's subprime mortgage production
activities in terms of rate and volume variances of the interest rate spread
(the difference between interest rates earned on loans and residual certificates
and interest rates paid on interest-bearing sources of funds).
($ IN THOUSANDS) Variance
Average Volume Average Rate Interest Attributable to
- -------------------------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997 Variance Rate Volume
- -------------------------------------- ----------------------------------------------------
Mortgages Held-for-Sale
and Residual
$142,685 $19,512 10.29% 12.37% Certificates $ 14,684 $2,413 $12,271 $(2,961) $ 15,232
- -------------------------------------- ----------------------------------------------------
$ 97,534 $16,693 5.25% 6.86% Total Interest Expense $ 5,119 $1,145 $ 3,974 $(1,571) $ 5,545
- -------------------------------------- ----------------------------------------------------
5.04% 5.51% Net Interest Income $ 9,565 $1,268 $ 8,297 $(1,390) $ 9,687
================== ====================================================
Net interest income from subprime products increased 654% to $9.6 million
for 1998 as compared to $1.3 million for 1997. This was primarily the result of
increased subprime production volumes as subprime operations introduced and made
available through the Company's existing agency-eligible wholesale network
reached full year production levels.
Net Gain on Sale and Securitization of Subprime Mortgage Loans
A reconciliation of the gain on securitization of subprime mortgage loans
for the periods indicated follows:
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($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
--------- ---------
Gross proceeds on securitization of subprime mortgage loans $ 318,040 $ 164,787
Initial acquisition cost of subprime mortgage loans
securitized, net of fees 324,549 171,802
--------- ---------
Unadjusted loss on securitization of subprime mortgage loans (6,509) (7,015)
Initial capitalization of residual certificates 22,240 13,946
Net change in deferred administrative fees 357 N/A
--------- ---------
Net gain on securitization of subprime mortgage loans $ 16,088 $ 6,931
========= =========
The Company assesses the fair value of residual certificates quarterly,
with assistance from an independent third party. This valuation is based on the
discounted cash flows expected to be available to the holder of the residual
certificates. Significant assumptions used at December 31, 1998 for all residual
certificates then held by the Company include a discount rate of 13%, a constant
default rate of 3% and a loss severity rate of 25%, and ramping periods are
based on prepayment penalty periods and adjustable rate mortgage first reset
dates. Constant prepayment rate assumptions specific to the individual
certificates for purposes of the December 31, 1998 valuations are set forth
below:
1997-1 1997-2 1998-1 1998-2 OTHER
------------ ------------- ------------ ------------ ------------
Prepayment speeds
Fixed rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 32% cpr
Adjustable rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 24% cpr
The assumptions above are estimated based on current conditions for similar
instruments that are subject to prepayment and credit risks. Other factors
evaluated in the determination of fair value include credit and collateral
quality of the underlying loans, current economic conditions and various fees
and costs associated with ownership of the residual certificates. Although the
Company believes that the fair values of its residual certificates are
reasonable given current market conditions, the assumptions used are estimates
and actual experience may vary from these estimates. Differences in the actual
prepayment speed and loss experience from the assumptions used could have a
significant effect on the fair value of the residual certificates.
As summarized in the following analysis, the recorded residual values
imply that the Company's securitizations are valued at 1.63 times the implied
excess yield at December 31, 1998. The table below represents balances as of
December 31, 1998, unless otherwise noted.
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($ IN THOUSANDS) SECURITIZATIONS
-------------------------------------------------
1997-1 1997-2 1998-1 1998-2 SUBTOTAL OTHER TOTAL
--------- ----------- ----------- ---------- ---------- ----------- ------------
Residual Certificates $ 7,997 $ 9,702 $ 10,815 $ 12,569 $ 41,083 $ 4,700 $ 45,783
Bonds $ 51,778 * $ 75,504 * $ 117,977 * $ 169,514 * $ 414,773 $ 43,690 ** $ 458,463
--------- ----------- ----------- ---------- ---------- ----------- ------------
Subtotal $ 59,775 $ 85,206 $ 128,792 $ 182,083 $ 455,856 $ 48,390 $ 504,246
Unpaid Principal Balance $ 56,636 * $ 80,358 * $ 120,358 * $ 169,068 * $ 426,420 $ 46,686 ** $ 473,106
--------- ----------- ----------- ---------- ---------- ----------- ------------
Implied Price 105.54 106.03 107.01 107.70 106.90 103.65 106.58
--------- ----------- ----------- ---------- ---------- ----------- ------------
Collateral Yield 10.39 10.03 9.76 9.70 9.87 11.30 10.02
Collateral Equivalent
Securitization Costs (0.72) (0.65) (0.60) (0.60) (0.63) (0.50) (0.61)
Collateral Equivalent
Bond Rate (4.74) (4.90) (5.02) (5.60) (5.19) (6.96) (5.37)
--------- ----------- ----------- ---------- ---------- ----------- ------------
Implied Collateral
Equivalent Excess Yield 4.93 4.48 4.14 3.50 4.05 3.84 4.04
--------- ----------- ----------- ---------- ---------- ----------- ------------
Implied Premium Above Par 5.54 6.03 7.01 7.70 6.90 3.65 6.58
Implied Collateral
Equivalent Excess Yield 4.93 4.48 4.14 3.50 4.05 3.84 4.04
--------- ----------- ----------- ---------- ---------- ----------- ------------
Multiple 1.12 x 1.35 x 1.69 x 2.20 x 1.70 x 0.95 x 1.63 x
--------- ----------- ----------- ---------- ---------- ----------- ------------
* Amounts were based upon trustee statements dated January 23, 1999 that
covered the period ended December 31, 1998.
** Amounts were based upon trustee statements dated December 23, 1998 that
covered the period ended November 30, 1998.
The Company also sold subprime mortgage loans on a whole loan basis in 1998
and 1997. Whole loans are generally sold without recourse to third parties with
the gain or loss being calculated based on the difference between the carrying
value of the loans and the gross proceeds received from the purchaser less
expenses. Generally, no interest in these loans is retained by the Company.
A reconciliation of the gain on subprime mortgage whole loan sales for the
periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
-------- --------
Gross proceeds on whole loan sales of subprime mortgage loans $238,186 $118,817
Initial acquisition cost of subprime mortgage loans sold,
net of fees 226,561 117,003
-------- --------
Unadjusted gain on whole loan sales of subprime mortgage loans 11,625 1,814
Residual certificate received from sale N/A 5,267
Net change in deferred administrative fees 267 N/A
-------- --------
Net gain on whole loan sales of subprime mortgage loans $ 11,892 $ 7,081
======== ========
Other Income
During 1997 and 1998, the Company retained residual certificates in
connection with the securitization of subprime loans. These residual
certificates are adjusted to approximate market value each quarter. For the year
ended December 31, 1998, mark-to-market income on residuals was approximately
$0.4 million. This amount is reflected as other income within the subprime
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41
division. Accretion income for 1998 and 1997 relating to residuals was
approximately $3.4 million and $0.3 million, respectively, and is recorded as a
component of net interest income.
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses allocated to the
Company's agency-eligible mortgage servicing operations for the years ended
December 31, 1998 and 1997:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1998 1997
----------- ----------
Loan servicing fees $ 37,856 $ 30,869
Other income 455 --
----------- ----------
Servicing revenues 38,311 30,869
Salary and employee benefits 3,449 3,025
Occupancy expense 443 318
Amortization and provision for impairment of mortgage
servicing rights 27,897 18,315
General and administrative expenses 6,446 7,856
----------- ----------
Total loan servicing expenses 38,235 29,514
----------- ----------
Net pre-tax servicing margin 76 1,355
Gain on sale of mortgage servicing rights 1,753 7,955
----------- ----------
Net pre-tax servicing contribution $ 1,829 $ 9,310
=========== ==========
Average servicing portfolio $ 9,386,653 $7,470,892
Servicing sold 10,922,288 9,699,058
Net pre-tax servicing margin to average servicing portfolio 0 BPS 2 bps
Gain on sale of servicing to servicing sold 2 BPS 8 bps
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio declined 2 basis points from 1997 to 1998 primarily due to relatively
larger increases in amortization expense. The increased amortization expense is
largely attributable to the generally higher volumes of mortgage servicing
rights held-for-sale and increased prepayment speeds resulting from the
generally low interest rate environment which required relatively higher
periodic amortization charges. In the fourth quarter of 1998 the Company
recorded a reserve for potential impairment of mortgage servicing rights of
approximately $0.8 million.
Overall, the servicing division contributed $1.8 million to 1998 pre-tax
net income, a $7.5 million, or 80%, decrease over the $9.3 million contribution
for 1997.
Loan servicing fees were $37.9 million for 1998, compared to $30.9 million
for 1997, an increase of 23%. This increase is primarily related to an increase
in the average aggregate underlying unpaid principal balance of mortgage loans
serviced to $9.4 billion during 1998 from $7.5 billion during 1997, an increase
of 26%. Similarly, amortization and provision for impairment of mortgage
servicing rights also increased to $27.9 million during 1998 from $18.3 million
during 1997, an increase of 52%. The increase in amortization is primarily
attributable to
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42
the growth in the average balance of the mortgage loans serviced and the
generally higher prepay speed environment.
Management continually assesses market prepayment trends and adjusts
amortization accordingly. Management believes that the carrying value of
mortgage servicing rights is reasonable in light of current market conditions.
However, there can be no guarantee that market conditions will not change such
that mortgage servicing rights valuations will require additional amortization
or impairment charges.
Included in loan servicing fees for 1998 and 1997 are subservicing fees
received by the Company of $733 thousand and $567 thousand, respectively. The
subservicing fees are associated with temporary subservicing agreements between
the Company and purchasers of mortgage servicing rights.
Gain on Sale of Agency-Eligible Mortgage Servicing Rights
A reconciliation of the components of gain on sale of agency-eligible
mortgage servicing rights for the periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
------------ -----------
Underlying unpaid principal balances of agency-eligible mortgage
loans on which servicing rights were sold during the period $ 10,922,288 $ 9,181,405
============ ===========
Gross proceeds from sales of agency-eligible mortgage servicing
rights $ 256,292 $ 206,868
Initial acquisition basis, net of amortization and hedge results 189,918 160,314
------------ -----------
Unadjusted gain on sale of agency-eligible mortgage servicing
rights 66,374 46,554
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 125) (64,621) (38,599)
------------ -----------
Gain on sale of agency-eligible mortgage servicing rights $ 1,753 $ 7,955
============ ===========
During 1998, the Company completed 25 sales of agency-eligible mortgage
servicing rights representing $10.9 billion of underlying unpaid principal
mortgage loan balances. This compares to 31 sales of agency-eligible mortgage
servicing rights representing $9.2 billion of underlying unpaid principal
mortgage loan balances in 1997. The unadjusted gain on the sale of
agency-eligible mortgage servicing rights was $66.4 million (61 basis points)
for 1998, up from $46.6 million (51 basis points) for 1997. The Company reduced
this unadjusted gain by $64.6 million in 1998, versus a $38.6 million reduction
in 1997, in accordance with SFAS No. 125. During 1997, certain seasoned
available-for-sale agency-eligible mortgage servicing rights were sold at a
relatively higher margin as compared to 1998, thus causing the decrease in gain
on sale of agency-eligible mortgage servicing rights in 1998.
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43
COMMERCIAL MORTGAGE OPERATIONS
Following is a summary of the revenues and expenses allocated to the
Company's commercial mortgage production operations:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1998 1997
----------- ------
Net interest income $ 536 N/A
Net gain on sale of mortgage loans 9,011 N/A
Other income 11 N/A
----------- ------
Total production revenue 9,558 N/A
----------- ------
Salary and employee benefits 7,322 N/A
Occupancy expense 840 N/A
General and administrative expenses 1,734 N/A
----------- ------
Total production expenses 9,896 N/A
----------- ------
Net pre-tax production margin (338) N/A
----------- ------
Servicing fees 3,777 N/A
Amortization of mortgage servicing rights 1,335 N/A
----------- ------
Net pre-tax servicing margin 2,442 N/A
----------- ------
Pre-tax income $ 2,104 N/A
----------- ------
Production $ 899,674 N/A
Whole loan sales 875,874 N/A
Average commercial mortgage servicing portfolio $ 3,006,859 N/A
Total production revenue to whole loan sales 109 bps N/A
Total production expenses to production 110 bps N/A
----------- ------
Net pre-tax production margin (1)bps N/A
----------- ------
Servicing fees to average commercial mortgage servicing portfolio 13 bps N/A
Amortization of mortgage servicing rights to average commercial
mortgage servicing portfolio 4 bps N/A
----------- ------
Net pre-tax servicing margin 9 bps N/A
----------- ------
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44
Net Gain on Sale of Commercial Mortgage Loans
A reconciliation of gain on sale of commercial mortgage loans for the
periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
-------- ------
Gross proceeds on sales of commercial mortgage loans $875,874 N/A
Initial unadjusted acquisition cost of commercial mortgage loans sold 875,874 N/A
-------- ------
Unadjusted gain on sale of commercial mortgage loans -- N/A
Commercial mortgage and origination fees 6,831 N/A
-------- ------
Unadjusted aggregate margin 6,831 N/A
Initial acquisition cost allocated to basis in commercial
mortgage servicing rights (SFAS No. 125) 2,180 N/A
-------- ------
Net gain on sale of commercial mortgage loans $ 9,011 N/A
======== ======
During 1998, the commercial mortgage division originated $899.7 million and
sold approximately $875.9 million in commercial mortgage loans. Commercial
mortgage fees on the loans sold were $6.8 million or 78 basis points.
Origination fees are generally between 50 and 100 basis points of the loan
amount. In addition, the commercial mortgage division allocated $2.2 million, or
25 basis points, to basis in servicing rights retained on commercial mortgage
loans produced during the period.
LEASING OPERATIONS
Following is a summary of the revenues and expenses allocated to the
Company's small- ticket equipment leasing operations for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1998 1997
-------- --------
Net interest income $ 4,637 N/A
Other income 753 N/A
-------- --------
Leasing production revenue 5,390 N/A
-------- --------
Salary and employee benefits 2,347 N/A
Occupancy expense 376 N/A
General and administrative expenses 2,584 N/A
-------- --------
Total lease operating expenses 5,307 N/A
-------- --------
Net pre-tax leasing production margin 83 N/A
-------- --------
Servicing fees 1,014 N/A
-------- --------
Net pre-tax leasing margin $ 1,097 N/A
-------- --------
Average owned leasing portfolio $ 73,508 N/A
Average serviced leasing portfolio 53,480 N/A
-------- --------
Average managed leasing portfolio $126,988 N/A
======== ========
Leasing production revenue to average owned portfolio 733 bps N/A
Leasing operating expenses to average owned portfolio 721 bps N/A
-------- --------
Net pre-tax leasing production margin 12 bps N/A
======== ========
Servicing fees to average serviced leasing portfolio 190 bps N/A
======== ========
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45
At December 31, 1998, the Company's managed lease servicing portfolio was
$136.5 million. Of this managed lease portfolio, $98.9 million was owned and
$37.6 million was serviced for investors.
Net Interest Income
Net interest income for 1998 was $4.6 million. This is equivalent to a net
interest margin of 4.35% based upon average lease receivables owned of $73.5
million and average leasing debt outstanding of $53.5 million.
NON-RECURRING AND SPECIAL CHARGES
During 1998, the Company recognized a $1.5 million pre-tax gain ($0.9
million after-tax) on the sale of its retail production platform. During the
third quarter of 1997, the Company recorded a $2.3 million pre-tax charge ($1.4
million after-tax) related to a merger agreement that was terminated, and a
special pre-tax charge of $7.9 million ($4.8 million after-tax) relating to
certain nonrecoverable operating receivables.
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46
FINANCIAL CONDITION
During 1999, the Company experienced a 41% decrease in the volume of
production originated and acquired compared to 1998. Production decreased to
$9.8 billion during 1999 from $16.5 billion during 1998. The December 31, 1999,
locked residential mortgage application pipeline (mortgage loans not yet closed
but for which the interest rate has been locked) was approximately $0.4 billion
and the application pipeline (mortgage loans for which the interest rate has not
yet been locked) was approximately $0.3 billion. This compares to a locked
mortgage application pipeline of $1.1 billion and a $0.6 billion application
pipeline at December 31, 1998
Mortgage loans held-for-sale and mortgage-backed securities totaled $0.5
billion at December 31, 1999, versus $1.4 billion at December 31, 1998, a
decrease of 67%. The Company's servicing portfolio (exclusive of loans under
subservicing agreements) decreased to $7.8 billion at December 31, 1999, from
$9.9 billion at December 31, 1998, a decrease of 21%.
Short-term borrowings, which are the Company's primary source of funds,
totaled $0.7 billion at December 31, 1999, compared to $1.6 billion at December
31, 1998, a decrease of 55%. The decrease in the balance outstanding at December
31, 1999, resulted from decreased funding requirements related to the decrease
in the balance of mortgage loans held-for-sale and mortgage-backed securities.
At December 31, 1999, there were $6.3 million in long-term borrowings, compared
to $6.4 million at December 31, 1998. Other liabilities totaled $84.8 million as
of December 31, 1999, compared to the December 31, 1998 balance of $114.7
million, a decrease of $29.9 million, or 26%.
In general the declines in production, the pipeline, mortgage loans
held-for-sale, the servicing portfolio and short-term borrowings are primarily
attributed to (1) the current level of competition in the marketplace; (2) an
estimated 12% decline in estimated residential originations within the industry;
(3) the increased ARM market share (the Company offers primarily fixed rate
products); and (4) the rise in mortgage interest rates during 1999.
The Company continues to face the same challenges as other
production-oriented companies within the mortgage banking industry and as such
is not immune from significant volume declines precipitated by competitive
pricing, a rise in interest rates and other factors beyond the Company's
control. These and other important factors that could cause actual results to
differ materially from those reported are listed under the Risk Factors section
in the Company's 1999 Form 10K.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash-flow requirement involves the funding of loan
production, which is met primarily through external borrowings. In August 1999,
the Company and its wholly owned subsidiaries RBMG, Inc., Meritage Mortgage
Corporation and RBMG Asset Management Company, Inc. (not including the Company,
the Restricted Group), entered into a
45
47
$540 million warehouse line of credit provided by a syndicate of unaffiliated
banks that expires in July 2000. The credit agreement includes covenants
requiring the Restricted Group to maintain (i) a minimum net worth of $170
million, plus the Restricted Group's net income subsequent to June 30, 1999,
plus 90% of capital contributions to the Restricted Group and minus restricted
payments, (ii) a ratio of total Restricted Group liabilities to tangible net
worth of not more than 8.0 to 1.0, excluding debt incurred pursuant to gestation
and repurchase financing agreements, (iii) RBMG, Inc.'s eligibility as a
servicer of Ginnie Mae, FHA, VA, Fannie Mae and Freddie Mac mortgage loans (iv)
a mortgage servicing rights portfolio with an underlying unpaid principal
balance of at least $5 billion and (v) a ratio of consolidated cash flow to
consolidated interest expense (these terms are defined in the loan agreements)
of at least 1.50 to 1.00 (the interest rate coverage ratio). The provisions of
the agreement also restrict the Restricted Group's ability to engage
significantly in any type of business unrelated to the mortgage banking and
lending business and the servicing of mortgage loans.
In August of 1999, the Company and the Restricted Group also entered into a
$210 million subprime revolving credit facility and a $250 million servicing
revolving credit facility, which expire in July 2000. These facilities include
covenants identical to those described above with respect to the warehouse line
of credit.
The Restricted Group was in compliance with the debt covenants in place at
December 31, 1999 after it obtained an amendment and waiver dated February 1,
2000. The covenant that had been violated was the interest rate coverage ratio.
The syndicate of unaffiliated banks waived the violation and amended the
agreements. The amended agreements now call for the Restricted Group to maintain
an interest rate coverage ratio of 1.10 to 1.00 for the quarter ending March 31,
2000; and 1.20 to 1.00 for any period of two consecutive fiscal quarters
thereafter. Although management anticipates continued compliance with current
debt covenants, there can be no assurance that the Restricted Group will be able
to comply with the debt covenants specified for each of these financing
agreements. Failure to comply could result in the loss of the related financing.
RBMG Asset Management Company, Inc., a wholly-owned subsidiary of Meritage
and a bank are parties to a master repurchase agreement, pursuant to which RBMG
Asset Management Co. is entitled from time to time to deliver eligible subprime
mortgage loans in an aggregate principal amount of up to $200 million to the
bank. The master repurchase agreement has been extended through July 26, 2000.
The Company has entered into an uncommitted gestation financing
arrangement. The interest rate on funds borrowed pursuant to the gestation line
is based on a spread over the Federal Funds rate. The gestation line has a
funding limit of $1.2 billion.
The Company executed a $6.6 million note in May 1997. This debt is secured
by the Company's corporate headquarters. The terms of the related agreement
require the Company to make 120 equal monthly principal and interest payments
based upon a fixed interest rate of 8.07%. The note contains covenants similar
to those previously described.
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48
The Company has entered into a $10.0 million unsecured line of credit
agreement that expires in July 2000. The interest rate on funds borrowed is
based upon the prime rate announced by a major money center bank.
Republic Leasing, a wholly-owned subsidiary of the Company, has a $200
million credit facility to provide financing for its leasing portfolio. The
warehouse credit agreement matures in August 2000 and contains various covenants
regarding characteristics of the collateral and the performance of the leases
originated and serviced by Republic Leasing and that require the Company to
maintain a minimum net worth of $60 million and Republic Leasing to maintain a
ratio of total liabilities to net worth of no more than 10.0 to 1.0.
The Company has been repurchasing its stock pursuant to Board authority
since March 1998 and as of December 31, 1999 the Company had remaining authority
to repurchase up to $2.5 million of the Company's common stock in either open
market transactions or in private or block trades. Decisions regarding the
amount and timing of repurchases will be made by management based upon market
conditions and other factors. The repurchase authority will enable the Company
to repurchase shares to meet the Company's obligations pursuant to existing
bonus, stock option, dividend reinvestment and employee stock purchase and ESOP
plans. Shares repurchased are maintained in the Company's treasury account and
are not retired. At December 31, 1999, there were 4,686,391 shares held in the
Company's treasury account at an average cost of $8.78 per share.
YEAR 2000
The Company's growth motivated a generalized review of the adequacy of its
existing software environment and technological infrastructure to meet the
Company's long-term operating requirements. The Company completed implementation
of LoanXchange and other mission critical systems prior to December 31, 1999.
All required modifications to existing systems or systems provided by third
parties were completed prior to December 31, 1999. The Company has had no
significant Year 2000 system problems to date. The amount spent on Year 2000
issues was approximately $1.0 million, which was within the range budgeted.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security or a
foreign-currency denominated forecasted transaction. SFAS No. 133 is effective
for all fiscal quarters of
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all fiscal years beginning after June 15, 2000 (January 1, 2001 for the
Company). However, early adoption is permitted. The Company has not yet
determined either the impact that the adoption of SFAS 133 will have on its
earnings or statement of financial position or the period in which the statement
will be implemented.
In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." This statement requires that any retained
interests in mortgage-backed securities be classified in accordance with the
provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." This standard had no material impact on the Company's
financial position.
DIVISIONAL ANALYSIS OF PRE-TAX FUNDS GENERATED FROM OPERATIONS
The analyses which follow are included solely to assist investors in
obtaining a better understanding of the material elements of the Company's funds
generated by operations at a divisional level. It is intended as a supplement,
and not an alternative to, and should be read in conjunction with, the
Consolidated Statement of Cash Flows, which provides information concerning
elements of the Company's cash flows.
SUMMARY
On a combined divisional basis, during the years ended December 31, 1999
and 1998, the Company generated approximately $55.6 million and $54.9 million,
respectively, of positive funds from operations.
($ in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
------- --------
Agency-eligible production $20,626 $ 31,104
Agency-eligible servicing 28,623 28,282
Subprime production 1,624 (7,505)
Commercial mortgage 1,401 1,582
Leasing 3,316 1,407
------- --------
$55,590 $ 54,870
======= ========
Each of the Company's divisions produced positive operating funds during
both periods except for subprime production in 1998. The combined positive
operating funds were invested to reduce indebtedness, pay dividends, repurchase
stock and purchase fixed assets.
AGENCY-ELIGIBLE PRODUCTION
Generally, the Company purchases agency-eligible mortgage loans which are
resold with the rights to service the loans being retained by the Company. The
Company then separately sells a large percentage of the servicing rights so
produced. When the loans are sold, current accounting
48
50
principles require that the Company capitalize the estimated fair value of the
retained mortgage servicing rights sold and subsequently amortize the servicing
rights retained to expense. Accordingly, amounts reported as gains on sale of
agency-eligible mortgage loans may not represent positive funds flow to the
extent that the associated servicing rights are not sold for cash but are
instead retained and capitalized. In this context, the table below reconciles
the major elements of pre-tax operating funds flow of the Company's
agency-eligible production activities.
($ in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
-------- ---------
Income (loss) before income taxes $ 813 $ 55,441
Deduct:
Net gain on sale of mortgage loans, as reported (64,033) (134,472)
Add back:
Cash gains on sale of mortgage loans 13,454 40,220
Cash gains on sale of mortgage servicing rights 65,581 66,374
Depreciation 4,811 3,541
-------- ---------
$ 20,626 $ 31,104
======== =========
AGENCY-ELIGIBLE SERVICING
The Company's current strategy is to position itself as a national supplier
of agency-eligible servicing rights to the still consolidating mortgage
servicing industry. Accordingly, the Company generally sells a significant
percentage of its produced mortgage servicing rights to other approved servicers
under forward committed bulk purchase agreements. However, the Company maintains
a relatively small mortgage servicing portfolio. As discussed above, mortgage
servicing rights produced or purchased are initially capitalized and
subsequently must be amortized to expense. Much like depreciation, such
amortization charges are "non-cash." In this context, the table below reconciles
the major elements of pre-tax operating funds flow of the Company's
agency-eligible mortgage servicing activities.
($ in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
-------- --------
Income before income taxes $ 5,698 $ 1,829
Deduct:
Net gain on sale of mortgage servicing
rights, as reported (7,262) (1,753)
Add back:
Amortization and impairment of
mortgage servicing rights 29,580 27,897
Depreciation 607 309
-------- --------
$ 28,623 $ 28,282
======== ========
49
51
SUBPRIME PRODUCTION
Generally, the Company purchases subprime loans through a wholesale broker
network. The Company then separately sells or securitizes the loans so produced.
Existing accounting principles require that at the time loans are securitized,
the Company capitalize the estimated fair value of future cash flows to be
received in connection with retention by the Company of a residual interest in
the securitized loans. Accordingly, amounts reported as gains on sale of
subprime mortgage loans may not represent cash gains to the extent that
associated residual interests are retained and capitalized. In this context, the
table below reconciles the major elements of pre-tax operating funds flow of the
Company's subprime mortgage production activities.
($ in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
-------- --------
Income before income taxes $ 2,591 $ 18,381
Deduct:
Net gain on sale of subprime loans, as reported (20,357) (27,980)
Cash losses on securitization of subprime loans (3,706) (6,509)
Accretion income on residuals (6,576) (3,446)
Add back:
Cash gains on sale of whole subprime loans 16,288 11,625
Cash received from investments in residual certificates 4,290 3
Depreciation and amortization
of goodwill and intangibles 1,251 856
Mark to market on residuals 7,843 (435)
-------- --------
$ 1,624 $ (7,505)
======== ========
COMMERCIAL MORTGAGE
Generally, the Company originates commercial mortgage loans for
conduits, insurance companies and other investors. The Company either table
funds the loans or originates the loans pursuant to pre-existing investor
commitments to purchase the loans so originated. Similar to the
agency-eligible operation, the Company generally retains the right to service
the loans under various servicing agreements. Current accounting principles
require that the Company capitalize the estimated fair value of mortgage
servicing rights produced at the time the related loans are sold and
subsequently amortize the servicing rights retained to expense. Accordingly,
amounts reported as gains on sale of commercial mortgage loans may not
represent cash gains to the extent that the associated servicing rights are
not sold for cash but are instead retained and capitalized. Mortgage servicing
rights initially capitalized must be amortized subsequently to expense. Much
like depreciation, such amortization charges are "non-cash." In this context,
the table below reconciles the major elements of pre-tax operating funds flow
of commercial mortgage production and servicing activities.
50
52
($ in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
------- -------
Income before income taxes $ 823 $ 2,104
Deduct:
Net gain on sale of commercial loans,
as reported (9,170) (9,011)
Add back:
Cash gains on sale of whole
commercial loans 7,155 6,831
Amortization and impairment of
commercial mortgage servicing rights 2,210 1,335
Depreciation and amortization of
goodwill and intangibles 383 323
------- -------
$ 1,401 $ 1,582
======= =======
LEASING
Generally, the Company originates small-ticket equipment leases for
commercial customers that are retained as investments by the Company.
Investments in leases originated and retained are financed through a borrowing
facility at draw rates that approximate the net cash investment in the related
lease. Accordingly, financing activities related to growth in the balance of
leases held for investment do not significantly impact operating cash flow. In
this context, the table below reconciles the major elements of operating funds
flow allocable to leasing activities.
($ in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
------ ------
Income before income taxes $3,010 $1,097
Add back:
Depreciation and amortization of
goodwill and intangibles 306 310
------ ------
$3,316 $1,407
====== ======
Quantitative and Qualitative Disclosure About Market Risk
A primary market risk facing the Company is interest rate risk. The Company
attempts to manages this risk by striving to balance its loan origination and
loan servicing business segments, which are countercyclical in nature. In
addition, the Company uses various financial instruments, including derivatives
contracts, to manage the interest rate risk related specifically to its
committed pipeline, mortgage loan inventory, mortgage backed securities held for
sale, servicing rights, leases and residual interests retained in
securitizations. The overall objective of the Company's interest rate risk
management policies is to mitigate potentially significant adverse effects that
changes in the values of these items; resulting from changes in interest rates;
might have on the Company's consolidated balance sheet. The Company does not
speculate on the direction of interest rates in its management of interest rate
risk.
51
53
For purposes of this disclosure, the Company has performed various
sensitivity analyses that quantify the net financial impact of changes in
interest rates on its interest rate-sensitive assets, liabilities and
commitments. These analyses presume an instantaneous parallel shift of the yield
curve. Various techniques are employed to value the underlying financial
instruments and rely upon a number of critical assumptions. The scenarios
presented are illustrative. Actual experience may differ materially from the
estimated amounts presented for each scenario. To the extent that yield curve
shifts are non-parallel and to the extent that actual variations in significant
assumptions differ from those applied for purposes of the valuations, the
resultant valuations can also be expected to vary. Such variances may prove
material.
1999 If interest rates were to
------------------------- -------------------------------------------------------
Carrying Estimated Increase Decrease Increase Decrease
Amount Fair Value ------------------------- -------------------------
---------- ---------- 50 basis points 100 basis points
Estimated Fair Value Estimated Fair Value
------------------------- -------------------------
Mortgage loans held-for-sale and
mortgage backed securities $ 482,307 a $ 483,606 a $ 483,183 a $ 484,113 a $ 482,940 a $ 484,583 a
Servicing rights, net 183,832 b 201,068 b 206,215 b 196,345 b 209,773 b 192,980 b
Lease receivables 155,559 160,125 c 157,849 c 162,429 c 162,256 c 164,764 c
Residual interests in subprime
securitizations 54,382 54,382 53,547 54,982 52,602 55,492
Other assets 151,102 152,562 152,562 152,562 152,562 152,562
---------- ---------- ---------- ---------- ---------- ----------
Total assets $1,027,182 $1,051,743 $1,053,356 $1,050,431 $1,060,133 $1,050,381
---------- ---------- ---------- ---------- ---------- ----------
Long-term borrowings $ 6,259 $ 6,190 $ 6,190 $ 6,190 $ 6,190 $ 6,190
Other liabilities 808,451 808,451 808,451 808,451 808,451 808,451
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities $ 814,710 $ 814,641 $ 814,641 $ 814,641 $ 814,641 $ 814,641
---------- ---------- ---------- ---------- ---------- ----------
Net equity value $ 212,472 $ 237,102 $ 238,715 $ 235,790 $ 245,492 $ 235,740
========== ========== ========== ========== ========== ==========
a Estimated fair value has been adjusted to include $(840), $2,209, and $343 for
estimated fair value of mortgage purchase commitments, mandatory delivery
commitments and purchase option contracts, respectively, which have been
allocated as hedges against mortgage loans-held-for-sale and mortgage backed
securities. In addition, $1,803 of carrying value relating to purchase option
contracts has been classified as mortgage loans held-for-sale and mortgage
backed securities.
b Estimated fair value and carrying value has been adjusted to include $6,269 of
interest rate floor contracts for 1999 which has been allocated as hedges
against servicing rights, net. For the 50 bps increase, the 50 bps decrease, 100
bps increase and 100 bps decrease, respectively, the estimated fair value has
been adjusted to include $3,754, $10,240, $2,506 and $16,517, respectively, of
interest rate floor contracts which have been allocated as hedges against
servicing rights, net.
c Estimated fair value has been adjusted to include $(1,358), $(2,349), $(355),
$3,327 and $663, respectively, of interest rate floor contracts for 1999, 50 bps
increase, 50 bps decrease, 100 bps increase and 100 bps decrease, respectively,
which have been allocated as hedges against lease receivables.
1998 If interest rates were to
------------------------- -------------------------------------------------------
Carrying Estimated Increase Decrease Increase Decrease
Amount Fair Value ------------------------- -------------------------
---------- ---------- 50 basis points 100 basis points
Estimated Fair Value Estimated Fair Value
------------------------- -------------------------
Mortgage loans held-for-sale and
mortgage backed securities $1,444,281 a $1,445,864 a $1,439,874 a $1,443,160 a $1,439,183 a $1,444,857 a
Servicing rights, net 211,070 b 211,070 b 223,869 b 206,815 b 229,949 b 206,549 b
Lease receivables 102,029 106,531 c 106,359 c 106,734 c 106,172 c 106,923 c
Residual interests in subprime
securitizations 45,782 45,782 44,745 45,281 43,685 46,384
Other assets 166,473 168,113 168,113 168,113 168,113 168,113
---------- ---------- ---------- ---------- ---------- ----------
Total assets $1,969,635 $1,977,360 $1,982,960 $1,970,103 $1,987,102 $1,972,826
---------- ---------- ---------- ---------- ---------- ----------
Long-term borrowings $ 6,364 $ 6,371 $ 6,371 $ 6,371 $ 6,371 $ 6,371
Other liabilities 1,711,113 1,711,113 1,711,113 1,711,113 1,711,113 1,711,113
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities $1,717,477 $1,717,484 $1,717,484 $1,717,484 $1,717,484 $1,717,484
---------- ---------- ---------- ---------- ---------- ----------
Net equity value $ 252,158 $ 259,876 $ 265,476 $ 252,619 $ 269,618 $ 255,342
========== ========== ========== ========== ========== ==========
a Estimated fair value has been adjusted to include $2,600, $(451), and $1,183
for estimated fair value of mortgage purchase commitments, mandatory delivery
commitments and purchase option contracts, respectively, which have been
allocated as hedges against mortgage loans-held-for-sale and mortgage backed
securities. In addition, $2,823 of carrying value relating to purchase option
contracts has been classified as mortgage loans held-for-sale and mortgage
backed securities.
b Estimated fair value and carrying value has been adjusted to include $20,048
of interest rate floor contracts for 1998 which has been allocated as hedges
against servicing rights, net. For the 50 bps increase, the 50 bps decrease, 100
bps increase and 100 bps decrease, respectively, the estimated fair value has
been adjusted to include $15,234, $26,995, $10,325 and $36,401, respectively, of
interest rate floor contracts which have been allocated as hedges against
servicing rights, net.
c Estimated fair value has been adjusted to include $(759), $(63), $(1,436),
$609, $(2,138), respectively, of interest rate floor contracts for 1998, 50 bps
increase, 50 bps decrease, 100 bps increase and 100 bps decrease, respectively,
which have been allocated as hedges against lease receivables.
52
54
These analyses are limited by the fact that they are performed at a
particular point in time and do not incorporate other factors that would impact
the Company's financial performance in each such scenario. Consequently, the
preceding estimates should not be viewed as a forecast.
Qualitative disclosures about market risk are further discussed in Note 16
of the accompanying financial statements.
53
55
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED BALANCE SHEET
($ in thousands, except share information)
- ---------------------------------------------------------------------------------------------------------------------
December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 30,478 $ 18,124
Receivables 40,219 80,248
Trading securities:
Mortgage-backed securities -- 385,055
Residual interests in subprime securitizations 54,382 45,782
Mortgage loans held-for-sale 480,504 1,056,403
Lease receivables 155,559 102,029
Servicing rights, net 177,563 191,022
Premises and equipment, net 36,294 35,338
Accrued interest receivable 1,691 3,642
Goodwill and other intangibles 15,478 16,363
Other assets 35,014 35,629
----------- -----------
Total assets $ 1,027,182 $ 1,969,635
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 699,803 $ 1,566,287
Long-term borrowings 6,259 6,364
Accrued expenses 23,826 30,098
Other liabilities 84,822 114,728
----------- -----------
Total liabilities 814,710 1,717,477
----------- -----------
Stockholders' equity
Preferred stock - par value $.01 - 5,000,000 shares authorized; no
shares issued or outstanding
Common stock - par value $.01 - 50,000,000 shares authorized;
31,637,331 shares issued and outstanding at December 31, 1999 and 1998 316 316
Additional paid-in capital 300,909 307,114
Retained earnings 56,506 59,599
Treasury stock at cost-4,686,391 and 869,378 shares at December 31, 1999
and 1998, respectively (41,148) (11,499)
Common stock held by subsidiary at cost- 7,767,099 shares at December
31, 1999 and 1998 (98,953) (98,953)
Unearned shares of employee stock ownership plan 537,084 and 353,641
unallocated shares at December 31, 1999 and December 31, 1998,
respectively (5,158) (4,419)
----------- -----------
Total stockholders' equity 212,472 252,158
----------- -----------
Commitments and contingencies (Notes 7 and 12)
----------- -----------
Total liabilities and stockholders' equity $ 1,027,182 $ 1,969,635
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
54
56
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
($ in thousands, except share information)
For the Year Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------------
REVENUES
Interest income $84,617 $102,446 $72,302
Interest expense (58,455) (80,668) (54,658)
- --------------------------------------------------------------------------------------------------
Net interest income 26,162 21,778 17,644
Net gain on sale of mortgage loans 93,560 171,463 103,370
Gain on sale of mortgage servicing rights 7,262 1,753 7,955
Servicing fees 46,958 43,156 30,869
Other income (150) 5,576 1,180
- --------------------------------------------------------------------------------------------------
Total revenues 173,792 243,726 161,018
- --------------------------------------------------------------------------------------------------
EXPENSES
Salary and employee benefits 72,868 82,406 62,235
Occupancy expense 14,855 11,219 7,458
Amortization and provision for impairment
of mortgage servicing rights 31,790 29,232 18,315
General and administrative expenses 45,645 44,266 37,923
- --------------------------------------------------------------------------------------------------
Total expenses 165,158 167,123 125,931
- --------------------------------------------------------------------------------------------------
Income before income taxes 8,634 76,603 35,087
Income tax expense (2,712) (27,932) (13,289)
- --------------------------------------------------------------------------------------------------
Net income $5,922 $48,671 $21,798
- --------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding - Basic 20,643,166 23,122,835 20,396,428
Net income per common share - Basic $0.29 $2.10 $ 1.07
Weighted average common shares
outstanding - Diluted 20,799,502 23,501,108 20,800,828
Net income per common share - Diluted $0.28 $2.07 $ 1.05
The accompanying notes are an integral part of
these consolidated financial statements.
55
57
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands, except share information)
Additional Unearned Common Total
Common Stock Paid-in Retained ESOP Treasury Stock Held by Stockholders'
Shares Amount Capital Earnings Shares Stock Subsidiary Equity
---------------------------------------------------------------------------------------------------
Balance, December 31, 1996 19,285,020 $193 $149,653 $12,007 $ (4,552) $157,301
Issuance of restricted stock 23,528 * 328 328
Cash dividends (2,536) (2,536)
Acquisition of Meritage
Mortgage Corporation 808,548 8 8,692 8,700
Acquisition of Resource
Bancshares Corporation 9,894,889 99 125,962 ($98,953) 27,108
Exercise of stock options 62,000 1 629 630
Shares committed to be
released under Employee
Stock Ownership Plan 426 1,054 1,480
Shares issued or purchased
under Dividend Reinvestment
and Stock Purchase Plan
and Stock Investment Plan 37,163 * 428 (98) 330
Adjustment for the 5% stock
dividend declared on
October 31, 1997 1,009,235 10 13,398 (13,408)
Net income 21,798
Total comprehensive income 21,798
------------------------------------------------------------------------------------------------
Balance, December 31, 1997 31,120,470 311 299,516 17,763 (3,498) (98,953) 215,139
------------------------------------------------------------------------------------------------
Issuance of restricted stock 20,056 * 328 328
Cash dividends (6,714) (6,714)
Treasury stock purchases
(1,201,500 shares net
of issuances 332,122 shares) (16,280) (16,280)
Exercise of stock options 155,965 2 1,537 3,034 4,573
Shares committed to be
released under Employee
Stock Ownership Plan 544 1,079 1,623
Purchase of shares by Employee
Stock Ownership Plan (2,000) (2,000)
Shares issued or purchased
under Dividend Reinvestment
and Stock Purchase Plan
and Stock Investment Plan 198,722 2 3,425 (121) 1,747 5,053
Acquisition of Meritage
Mortgage Corporation 142,118 1 1,764 1,765
Net income 48,671
Total comprehensive income 48,671
------------------------------------------------------------------------------------------------
Balance, December 31, 1998 31,637,331 316 307,114 59,599 (4,419) (11,499) (98,953) 252,158
------------------------------------------------------------------------------------------------
Issuance of restricted stock 116 1,285 1,401
Cash dividends (8,902) (8,902)
Treasury stock purchases
(5,051,896 shares net
of issuances 1,234,883 shares) (43,216) (43,216)
Exercise of stock options (3) 7 4
Shares committed to be
released under Employee
Stock Ownership Plan (1,017) 2,261 1,244
Purchase of shares by Employee
Stock Ownership Plan (3,000) (3,000)
Shares issued or purchased
under Dividend Reinvestment
and Stock Purchase Plan
and Stock Investment Plan (5,301) (113) 12,275 6,861
Net income 5,922
Total comprehensive income 5,922
------------------------------------------------------------------------------------------------
Balance, December 31, 1999 31,637,331 $316 $300,909 $56,506 ($5,158) ($41,148) ($98,953) $212,472
================================================================================================
* - Amounts less than $1.
The accompanying notes are an integral part of these
consolidated financial statements.
56
58
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 5,922 $ 48,671 $ 21,798
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 39,249 34,570 21,859
Deferred income tax expense (benefit) 1,585 31,169 3,862
Employee Stock Ownership Plan compensation 1,244 1,623 1,480
Provision for estimated foreclosure losses and repurchased loans 10,608 11,023 4,615
Decrease (increase) in receivables 40,029 7,454 (24,303)
Acquisition of mortgage loans (9,300,681) (16,461,918) (10,777,294)
Proceeds from sales of mortgage loans
and mortgage-backed securities 10,346,580 16,358,939 10,503,811
Acquisition of mortgage servicing rights (252,450) (344,341) (230,503)
Sales of mortgage servicing rights 245,302 256,292 206,868
Net gain on sales of mortgage loans and servicing rights (100,822) (173,216) (111,325)
Decrease in accrued interest on loans 1,951 730 341
Increase in lease receivables (55,438) (50,535) -
Increase in other assets (3,078) (6,879) (764)
Increase in residual certificates (8,600) (26,098) (19,684)
Increase (decrease) in accrued expenses and other liabilities (37,763) 2,817 17,179
- ------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities 933,638 (309,699) (382,060)
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash assets acquired from Resource Bancshares Corporation - - 6,535
Acquisition of Meritage Mortgage Corporation - - (1,750)
Purchases of premises and equipment (8,363) (13,608) (8,613)
Disposition of premises and equipment 520 1,507 -
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,843) (12,101) (3,828)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings 26,248,644 42,977,794 28,328,222
Repayment of borrowings (27,115,233) (42,636,093) (27,929,479)
Debt issuance costs - (283) (553)
Issuance of restricted stock 1,401 328 328
Shares issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan 6,861 5,053 330
Acquisition of treasury stock (43,216) (16,280) -
Cash dividends (8,902) (6,714) (2,536)
Exercise of stock options 4 4,573 630
Loans to Employee Stock Ownership Plan (3,000) (2,000) -
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (913,441) 326,378 396,942
- ------------------------------------------------------------------------------------------------------------------------
Net increase in cash 12,354 4,578 11,054
Cash, beginning of year 18,124 13,546 2,492
- ------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 30,478 $ 18,124 $ 13,546
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL ACTIVITIES
Interest paid $ 58,361 $ 80,219 $ 55,762
Taxes paid net of refunds received 4,112 (3,595) 10,253
Non-cash activity acquisition of Resource Bancshares Corporation - - 20,573
Non-cash activity acquisition of Meritage Mortgage Corporation - 1,765 8,700
The accompanying notes are an integral part of these
consolidated financial statements.
57
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Note 1 - The Company:
Resource Bancshares Mortgage Group, Inc. (the Company) was organized to
acquire and operate the residential mortgage banking business of Resource
Bancshares Corporation (RBC), which commenced operations in May 1989. The assets
and liabilities of the residential mortgage banking business of RBC were
transferred to the Company on June 3, 1993, when the Company sold 58% of its
common stock in an initial public offering. Following the offering RBC retained
a significant ownership interest in the Company. On December 31, 1997, the
Company acquired RBC in a transaction in which it exchanged 9,894,889 shares of
the Company's common stock for all of the outstanding stock of RBC.
The Company is a diversified financial services company engaged through
wholly-owned subsidiaries primarily in the business of mortgage banking, through
the purchase (via a nationwide network of correspondents and brokers), sale and
servicing of agency-eligible and subprime residential, single-family
first-mortgage loans and the purchase and sale of servicing rights associated
with agency-eligible loans. In addition, two of the Company's wholly-owned
subsidiaries originate, sell and service small-ticket commercial equipment
leases and originate, sell, underwrite for investors and service commercial
mortgage loans.
Note 2 - Summary of Significant Accounting Policies:
The accounting and reporting policies of the Company reflect industry
practices and conform in all material respects with generally accepted
accounting principles. Certain amounts from prior years have been reclassified
to conform to current period presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated.
Significant Estimates
In preparing the financial statements, management is required to make
estimates based on available information that can affect the reported amounts of
assets, liabilities and disclosures as of the balance sheet date and revenues
and expenses for the related periods. Such estimates relate principally to the
Company's allowance for foreclosure losses and repurchased loans, its allowance
for lease losses and fair values of residual certificates. Additionally,
estimates concerning the fair values of mortgage loans held-for-sale, lease
receivables, servicing rights, servicing hedges and the Company's other hedging
instruments are all relevant to ensuring that leases and mortgage loans are
carried at the lower of cost or market, and that potential impairments of
servicing rights are recognized as and if required. Because of the inherent
uncertainties associated with any estimation process and due to possible future
changes in market
58
60
and economic conditions that will affect fair values, it is possible that actual
future results in realization of the underlying assets and liabilities could
differ significantly from the amounts reflected as of the balance sheet date.
Investment Securities
Substantially all of the Company's investments are in the form of
mortgage-backed securities and residuals that are held in conjunction with the
Company's mortgage banking activities. Such securities are classified as trading
securities as defined by Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
cost of securities sold is based on the specific identification method.
Mortgage Loans Held-for-Sale
Mortgage loans held-for-sale are stated at the lower of aggregate cost or
market.
As a servicer of mortgage loans and small-ticket equipment leases, the
Company will incur certain losses in the event it becomes necessary to carry out
foreclosure actions on loans and leases serviced. Substantially all other
serviced agency-eligible loans are fully guaranteed against such losses by the
securitizing government sponsored enterprise. The allowance for estimated losses
on foreclosure, which is part of the mortgage servicing rights basis, is
determined based on delinquency trends and management's evaluation of the
probability that foreclosure actions will be necessary. The allowance for
estimated losses on foreclosure was $401 and $851 at December 31, 1999 and 1998,
respectively.
On occasions the Company has to repurchase certain non-performing loans.
Upon repurchase of a loan, the Company initially capitalizes the current unpaid
principal balance and related advances and any other related costs are charged
against the allowance. The Company subsequently estimates the net realizable
value of the repurchased loan portfolio and records an estimate of the allowance
for losses on repurchases. The allowance for estimated losses on repurchases was
$1,798 and $2,330 at December 31, 1999 and 1998, respectively. The inventory of
actual and pending repurchases to which these reserves relate aggregated $20,700
and $46,586 at December 31, 1999 and 1998, respectively.
Mortgage Servicing Rights
The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," which superseded SFAS
No. 122 effective January 1, 1997. The provisions of SFAS No. 125 did not
materially alter the Company's accounting for mortgage servicing rights. As
required by SFAS No. 125, and as required by SFAS No. 122, the Company allocates
the total cost of a whole mortgage loan to the mortgage servicing rights and the
loan (without servicing rights) based on relative fair values. The market value
of servicing rights acquired in bulk transactions, rather than as a by-product
of the Company's loan production activities, is initially capitalized at the
lower of cost or the estimated present value of future expected net servicing
income. Amounts capitalized as mortgage servicing rights are amortized over the
period of, and in proportion to, estimated future net servicing income. The
Company assesses its capitalized mortgage servicing rights for impairment (on a
stratified basis) based on the estimated market values of those rights.
Impairments are recognized as a valuation
59
61
allowance for each impaired stratum. The analysis values such rights in
consideration of current forward committed delivery prices, prevailing interest,
prepayment and default rates, and other relevant factors as appropriate or
allocable to each valuation stratum.
Fees for servicing loans and leases are recognized monthly on an accrual
basis based upon the terms of the underlying agreement. Generally, such
agreements provide for fees based upon a percentage of the outstanding balance.
Residual Certificates in Subprime Securitizations
Residual certificates are classified as trading securities (as defined in
SFAS No. 115), and changes in their value are recorded as adjustments to income
in the period of change. The Company assesses the fair value of the residual
certificates quarterly, with assistance from an independent third party. This
valuation is based on the discounted cash flows available to the holder of the
residual certificate. Significant assumptions used in this valuation include
discount rate, prepayment speed and credit loss estimates. Each of these factors
can be significantly affected by, among other things, changes in the interest
rate environment and general economic conditions, and expose the Company to
prepayment, basis and rate risks. Other factors evaluated in the determination
of fair value include, but are not necessarily limited to, the credit and
collateral quality of the underlying loans, current economic conditions and
various fees and costs associated with ownership of the residual certificate.
Although the Company believes that the fair values of its residual certificates
are reasonable given current market conditions, the assumptions used are
estimates and actual experience may vary from these estimates. Differences in
the actual prepayment speed and loss experience and other assumptions from those
applied for valuation purposes, could have a significant effect on the estimated
fair value of the residual certificates.
Significant assumptions used at December 31, 1999 for residual certificates
then held by the Company generally include a discount rate of 13%, a constant
default rate of 3% and a loss severity rate of 25%, and ramping behaviors are
based on prepayment penalty periods and adjustable rate mortgage first reset
dates. Terminal prepayment rate assumptions specific to the individual
certificates for purposes of the December 31, 1999 valuations are set forth
below:
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2
---------------------------------------------------------------
Prepayment Speeds
Fixed rate mortgages 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr
Adjustable rate mortgages 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr
Terminal prepayment rate assumptions specific to the individual certificates
for purposes of the December 31, 1998 valuations are set forth below:
1997-1 1997-2 1998-1 1998-2 OTHER
------------ ------------- ------------ ------------ ------------
Prepayment speeds
Fixed rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 32% cpr
Adjustable rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 24% cpr
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Loan Origination and Correspondent Program Administration Fees
Fees charged in connection with loan origination and net fees charged to
loan correspondents in conjunction with certain administrative functions
performed by the Company in connection with the acquisition of mortgage loans
are deferred and reduce the carrying value of the underlying mortgage loans.
Allocable portions of such fees are included in the determination of the gain or
loss when the related mortgage loans or servicing rights are sold.
Sales of Mortgage Loans and Mortgage Servicing Rights
Gains or losses on sales of agency-eligible loans and on whole loan sales
of subprime mortgage loans are determined at settlement date and are measured by
the difference between the net proceeds and the carrying amount of the
underlying mortgage loans. Gains and losses on sales of mortgage servicing
rights are recognized at the sale date, which is the date the sales contract is
closed and substantially all risks and rewards of ownership pass to the buyer.
During 1997, 1998 and 1999, the Company completed six securitizations of
subprime mortgage loans. These securitizations were in the form of a sale of
loans to a trust. The trust took the form of a multi-class security structure
collateralized by a pool of subprime residential mortgage loans. The owners of
each security receive their monthly principal and interest payments from income
received from the underlying mortgage loans. As discussed above, effective
January 1, 1997, the Company adopted SFAS No. 125. Under this pronouncement,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. As a result, the Company capitalizes the estimated fair value
of the subordinated classes of securities formed upon sale of the loans to the
trust. The subordinated classes held by the Company are in the form of residual
certificates. The gain on the securitization is the sum of (a) the proceeds
received from the securitization plus (b) the fair value of the residual
certificates minus (c) the carrying value of the mortgage loans and minus (d)
the costs of the sale.
Lease Receivables
Lease receivables consist of direct finance equipment leases which are
carried at the lower of aggregate cost or market value. Interest income is
recognized monthly based on the net lease outstanding balance. Residuals are
recognized monthly based on the estimated end-of-lease value and are included as
an adjustment to interest income. Lease receivables are charged-off at the
earlier of the date they are deemed uncollectible or they become 120 days past
due. Certain direct costs to originate lease receivables are deferred and
recognized as an adjustment to interest income over the estimated life of the
lease. The allowance for lease losses is established through a provision charged
to operations. The allowance is reviewed and adjusted as needed based upon
management's evaluation of factors affecting the lease receivables portfolio
such as economic conditions, growth and composition of the portfolio, historical
loss experience and analysis of the collectibility of specific lease
receivables. The allowance is established at an amount that management believes
will be adequate to absorb probable losses on outstanding leases that may become
uncollectible. At December 31, 1999 and 1998, the allowance for lease losses was
$3,046 and $1,976, respectively. The inventory of lease receivables to which
these reserves
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relate aggregated $158,605 and $104,005 at December 31, 1999 and 1998,
respectively.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Maintenance and repairs are expensed as incurred.
Goodwill and Other Intangible Assets
Goodwill arising from the acquisitions of RBC and Meritage Mortgage
Corporation (Meritage) is being amortized over 20 years using the straight-line
method. Amortization expense for both acquisitions totaled $884 and $853 for the
years ended December 31, 1999 and 1998, respectively.
Income Taxes
The Company records taxes under an asset and liability approach,
recognizing deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities. Current taxes payable (receivable) of $1,127 and
$(3,237) for the years ended December 31, 1999 and 1998, are included in other
assets and liabilities.
Statement of Cash Flows
The Company has adopted the indirect method of reporting cash flows.
Note 3 - Receivables:
Receivables consist primarily of amounts due to the Company related to
sales of mortgage servicing rights and advances of delinquent principal,
interest, tax and insurance payments related to loans serviced. Management does
not anticipate losses on realization of the receivables. Receivables consist of
the following at:
DECEMBER 31,
--------------------
1999 1998
------- -------
Mortgage servicing rights sales, net of reserves $26,998 $55,618
Servicing advances 7,613 12,780
Other 5,608 11,850
------- -------
$40,219 $80,248
======= =======
Note 4 - Lease Receivables:
Lease receivables are summarized as follows:
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DECEMBER 31,
-------------------------
1999 1998
--------- ---------
Lease receivables $ 194,422 $ 129,585
Less-Unearned discount (35,817) (25,580)
Less-Allowance for lease losses (3,046) (1,976)
--------- ---------
$ 155,559 $ 102,029
========= =========
The components of the Company's investment in lease receivables are
summarized as follows:
DECEMBER 31,
----------------------
1999 1998
-------- --------
Minimum lease payments due from lessees $180,164 $119,756
Estimated residuals 6,102 4,167
Initial direct costs, net 8,156 5,662
-------- --------
$194,422 $129,585
======== ========
At December 31, 1999, the maturities of minimum lease receivables,
including lease residuals, are as follows:
2000 $ 62,922
2001 53,264
2002 38,772
2003 22,511
2004 8,529
2005 and thereafter 268
--------
$186,266
========
Leases represent unconditional obligations of the lessees to pay all
scheduled payments and require the lessees to assume all responsibility with
respect to the equipment, including the obligation to pay all costs relating to
its operation, maintenance, repair, sales and property taxes, and insurance. At
December 31, 1999 and 1998, the average lease size was approximately $26 and
$27, respectively, and there were 31 leases and 16 leases, respectively, with a
current lease receivable in excess of $250.
At December 31, 1999 and 1998, respectively, the equipment covered by
approximately 16% and 17% of the Company's net lease receivables were located in
the state of California and approximately 9% and 9% were located in the state of
Florida. At December 31, 1999 and 1998, respectively, approximately 20% and 19%
of the Company's net lease receivables were collateralized by computer equipment
and 7% and 9% were collateralized by titled equipment.
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The Company's leases are collateralized by the equipment subject to the
leases. In most instances, the Company requires a security deposit equal to one
monthly payment and personal guarantees. In addition, where considered
necessary, other credit enhancements are obtained. At December 31, 1999, the
Company held security deposits and sales and property taxes for the benefit of
lessees of $6,119.
Note 5 - Fair Value and Impairments of Mortgage Servicing Rights:
For purposes of evaluating its mortgage servicing portfolio for impairment,
the Company disaggregates its portfolio into two primary segments:
available-for-sale and held-for-sale.
The segment of the portfolio designated as available-for-sale is composed
of servicing rights that were purchased in bulk transactions or that were
retained out of production pursuant to individual portfolio retention decisions.
The available-for-sale portfolio is disaggregated for purposes of measuring
potential impairments according to defined risk tranches. The Company has
defined its risk tranches based upon interest rate band and product type. With
respect to each such risk tranche, the fair value thereof, which is based upon
an internal analysis that considers current market conditions, prevailing
interest, prepayment and default rates and other relevant factors, together with
the fair value of hedges allocated thereto (which is based upon an independent
third party estimate of value) is compared to amortized carrying values of the
mortgage servicing rights for purposes of measuring potential impairment. The
Company uses Constant Maturity Treasury rate (CMT) and Constant Maturity Swap
rate (CMS) floors and Callable Pass Through Certificates (CPC's) to protect
itself against interest and prepayment risk on its available-for-sale portfolio.
At December 31, 1999 and 1998 the following amounts related to the
available-for-sale portfolio:
RESIDENTIAL MORTGAGE SERVICING AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
- -------------------------------------------------------------------------- --------------------
Underlying unpaid principle balance $ 6,322,591 $ 5,458,334
Fair value of related mortgage servicing
rights $ 146,476 $ 102,454
Fair value/underlying unpaid principle balance 2.31% 1.88%
Net carrying value of related mortgage
servicing rights $ 137,419 $101,533
Net carrying value/underlying unpaid principle
balance 2.17% 1.86%
Weighted average note rate 7.35% 7.49%
Weighted average service fee 0.43% 0.39%
Net basis expressed as a multiple of weighted
average service fee 5.05 x 4.77 x
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COMMERCIAL MORTGAGE SERVICING AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
- -------------------------------------------------------------------------- --------------------
Underlying unpaid principle balance $ 4,104,095 $ 3,255,458
Fair value of related mortgage servicing
rights $ 17,236 $ 8,096
Fair value/underlying unpaid principle balance 0.42% 0.25%
Carrying value of related mortgage servicing
rights $ 9,243 $ 8,096
Net carrying value/underlying unpaid principle
balance 0.23% 0.25%
Weighted average note rate 7.94% 8.11%
Weighted average service fee 0.09% 0.09%
Net basis expressed as a multiple of weighted
average service fee 2.56 x 2.78 x
The segment of the portfolio designated as held-for-sale is composed of
recently produced servicing rights that are scheduled for sale and have been
allocated to specific forward servicing sales contracts. The held-for-sale
portfolio is disaggregated for purposes of measuring possible impairments
according to the specific forward sales contracts to which allocated, which the
Company has determined to be the appropriate approach to disaggregation by
predominant risk characteristic for this portfolio segment. For each such risk
tranche, the fair value is based upon the allocated forward committed delivery
price, which is compared to amortized carrying value for purposes of measuring
potential impairment. At December 31, 1999 and 1998 the following amounts
related to the held-for-sale portfolio:
RESIDENTIAL MORTGAGE SERVICING AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
- -------------------------------------------------------------------------- --------------------
Underlying unpaid principle balance $ 1,499,803 $ 4,406,766
Fair value of related mortgage servicing
rights $ 31,087 $ 89,489
Fair value/underlying unpaid principle balance 2.07% 2.03%
Net carrying value of related mortgage servicing
rights $30,901 $ 89,489
Net carrying value/underlying unpaid principle
balance 2.06% 2.03%
Weighted average note rate 7.90% 6.81%
Weighted average service fee 0.49% 0.45%
Net basis expressed as a multiple of weighted
average service fee 4.20 x 4.51 x
Note 6 - Premises and Equipment:
Premises and equipment are summarized as follows:
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Estimated DECEMBER 31,
Useful Lives 1999 1998
------------ -------- -------
Building 25 years $ 7,657 $ 7,657
Building improvements 10-15 years 1,682 1,489
Furniture, fixtures and equipment 5-10 years 41,418 39,038
-------- -------
50,757 48,184
Less-Accumulated depreciation (17,560) (15,943)
-------- -------
33,197 32,241
Land 3,097 3,097
-------- -------
$ 36,294 $35,338
======== =======
Depreciation expense was $6,887 in 1999, $4,486 in 1998, $3,275 in 1997.
Note 7 - Lease Commitments:
The Company has entered into various non-cancelable operating lease
agreements, primarily for office space. Certain of these leases contain renewal
options and escalation clauses. At December 31, 1999, the annual minimum rental
commitments for non-cancelable leases with remaining terms in excess of one year
are as follows:
2000 $ 4,879
2001 4,289
2002 2,269
2003 1,488
2004 1,214
2005 and thereafter 910
---------
$ 15,049
=========
Minimum rental commitments have not been reduced by minimum sublease
rentals of $553 due in the future under non-cancelable subleases. Rent expense
for operating leases, net of sublease rental income of $387 for 1999, $387 for
1998 and $445 for 1997, was $4,304 in 1999, $3,106 in 1998 and $2,181 in 1997.
Note 8 - Short-Term and Long-Term Borrowings:
The Company's primary cash-flow requirement involves the funding of loan
production, which is met primarily through external borrowings. In August 1999,
the Company and its wholly owned subsidiaries RBMG, Inc., Meritage and RBMG
Asset Management Company, Inc. (not including the Company, the Restricted
Group), entered into a $540,000 warehouse line of credit provided by a syndicate
of unaffiliated banks that expires in July
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2000. The credit agreement includes covenants requiring the Restricted Group to
maintain (i) a minimum net worth of $170,000, plus the Restricted Group's net
income subsequent to June 30, 1999, plus 90% of capital contributions to the
Restricted Group and minus restricted payments, (ii) a ratio of total Restricted
Group liabilities to tangible net worth of not more than 8.0 to 1.0, excluding
debt incurred pursuant to gestation and repurchase financing agreements, (iii)
RBMG, Inc.'s eligibility as a servicer of Ginnie Mae, FHA, VA, Fannie Mae and
Freddie Mac mortgage loans (iv) a mortgage servicing rights portfolio with an
underlying unpaid principal balance of at least $5,000,000 and (v) a ratio of
consolidated cash flow to consolidated interest expense (these terms are defined
in the loan agreements) of at least 1.50 to 1.00 (the interest rate coverage
ratio). The provisions of the agreement also restrict the Restricted Group's
ability to engage significantly in any type of business unrelated to the
mortgage banking and lending business and the servicing of mortgage loans. At
December 31, 1999 and 1998, the total amounts outstanding under this facility
and its predecessor were $329,600 and $468,600, respectively.
In August of 1999, the Company and the Restricted Group also entered into a
$210,000 subprime revolving credit facility and a $250,000 servicing revolving
credit facility, which expire in July 2000. These facilities include covenants
identical to those described above with respect to the warehouse line of credit.
At December 31, 1999 and 1998, the total amount outstanding under these
facilities and their predecessor were $108,200 and $85,000, respectively.
The Restricted Group was in compliance with the debt covenants in place at
December 31, 1999 after it obtained an amendment and waiver dated February 1,
2000. The covenant that had been violated was the interest rate coverage ratio.
The syndicate of unaffiliated banks waived the violation and amended the
agreements. The amended agreements now call for the Restricted Group to maintain
an interest rate coverage ratio of 1.10 to 1.00 for the quarter ending March 31,
2000; and 1.20 to 1.00 for any period of two consecutive fiscal quarters
thereafter. Although management anticipates continued compliance with current
debt covenants, there can be no assurance that the Restricted Group will be able
to comply with the debt covenants specified for each of these financing
agreements. Failure to comply could result in the loss of the related financing.
RBMG Asset Management Company, Inc., a wholly-owned subsidiary of Meritage
and a bank are parties to a master repurchase agreement, pursuant to which RBMG
Asset Management Co. is entitled from time to time to deliver eligible subprime
mortgage loans in an aggregate principal amount of up to $200,000 to the bank.
The master repurchase agreement has been extended through July 26, 2000. At
December 31, 1999 and 1998, no amounts were outstanding under this facility or
its predecessor.
The Company has entered into an uncommitted gestation financing
arrangement. The interest rate on funds borrowed pursuant to the gestation line
is based on a spread over the Federal Funds rate. The gestation line has a
funding limit of $1,200,000. The total amounts outstanding under this facility
and its predecessor at December 31, 1999 and 1998 were $0 and $753,684,
respectively.
The Company executed a $6,600 note in May 1997. This debt is secured by the
Company's corporate headquarters. The terms of the related agreement require the
Company to make 120 equal monthly principal and interest payments based upon a
fixed interest rate of 8.07%. The note contains covenants similar to those
previously described. The total amounts outstanding under this facility at
December 31, 1999 and 1998 were $6,364 and $6,461, respectively.
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The Company has entered into a $10,000 unsecured line of credit agreement
that expires in July 2000. The interest rate on funds borrowed is based upon the
prime rate announced by a major money center bank.
Republic Leasing, a wholly-owned subsidiary of the Company, has a $200,000
credit facility to provide financing for its leasing portfolio. The warehouse
credit agreement matures in August 2000 and contains various covenants regarding
characteristics of the collateral and the performance of the leases originated
and serviced by Republic Leasing and that require the Company to maintain a
minimum net worth of $60,000 and Republic Leasing to maintain a ratio of total
liabilities to net worth of no more than 10.0 to 1.0. At December 31, 1999 and
1998, the total amounts outstanding under this facility were $125,652 and
$80,405, respectively.
Note 9 - Capital Transactions:
The Company issued five percent stock dividends on March 8, 1994, September
12, 1994, May 8, 1995, August 31, 1995 and December 31, 1997. A ten percent
stock dividend was issued on June 30, 1995, and a seven percent stock dividend
was issued on September 24, 1996. All of the above are collectively referred to
as the Stock Dividends. Earnings per share and all other share numbers have been
restated for the effects of the Stock Dividends.
The Company began paying regular quarterly cash dividends of $0.03 per
share in the third quarter of 1996. This quarterly cash dividend was increased
to $0.04 per share in the fourth quarter of 1997, to $0.05 per share in the
first quarter of 1998, to $0.07 per share in the second quarter of 1998 to $0.10
per share in the fourth quarter of 1998 and finally to $0.11 per share in the
second quarter of 1999.
During 1995, the Company established a dividend reinvestment plan (DRIP).
The DRIP offers stockholders a method of reinvesting cash dividends in the
Company's common stock at a 5% discount from market prices. The Company reserves
the right to modify the pricing terms and any other provisions of the DRIP at
any time. The DRIP agent purchases either original issue or treasury shares from
the Company or the DRIP agent purchases shares on the open market. The Board of
Directors has authorized the issuance of 4,099,984 shares under the DRIP.
Through December 31, 1999, there were 1,673,989 shares issued under the DRIP.
The Company's Board of Directors has authorized the repurchase of up to
$62,000 of the Company's common stock in either open market transactions or in
private or block trades as of
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December 31, 1999. Through December 31, 1999, $59,496 of the Company's common
stock has been purchased. At December 31, 1999, there were 4,686,391 shares held
in the Company's treasury account at an average cost of $8.78 per share.
Note 10 - Income Taxes:
Income tax expense (benefit) consists of the following:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
------- -------- -------
Current:
Federal $ 1,871 $ (3,482) $ 8,885
State (744) 245 542
------- -------- -------
Total current 1,127 (3,237) 9,427
------- -------- -------
Deferred:
Federal 821 30,202 3,327
State 764 967 535
------- -------- -------
Total deferred 1,585 31,169 3,862
------- -------- -------
Total tax expense $ 2,712 $ 27,932 $13,289
======= ======== =======
Current income tax expense (benefit) represents the approximate amount
payable for each of the respective years. The above current and deferred
balances reflect certain reclassifications made as a result of prior year
returns. During 1999, 1998 and 1997, the Company qualified for state tax credits
of $275, $300 and $202, respectively, reducing current state tax expense that
otherwise would have been payable for each year.
The effective tax rate varied from the statutory federal tax rate of 35%
for 1999, 1998 and 1997 due to the following:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- --------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------- ------ -------- ------ ------- ------
Tax expense at statutory rate $ 3,022 35.0% $ 26,811 35.0% $12,280 35.0%
State tax, net of federal benefit 64 0.8% 1,571 2.1% 887 2.5%
Other, net (374) (4.3%) (450) (0.6)% 122 0.4%
------- ---- -------- ---- ------- ----
$ 2,712 31.5% $ 27,932 36.5% $13,289 37.9%
======= ==== ======== ==== ======= ====
Deferred tax (assets) liabilities are summarized as follows:
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DECEMBER 31,
------------------------
1999 1998
-------- --------
Mark to market $ (1,755) $ (1,864)
Deferred compensation (3,422) (3,235)
Deferred book income -- (4,833)
Foreclosure and repurchase reserves (3,522) (3,672)
State NOL carryforwards (668) (794)
Other, net (19) (45)
-------- --------
(9,386) (14,443)
-------- --------
Intangible Assets 42,632 49,608
Depreciation 6,756 4,864
Securitizations 8,970 7,231
Deferred tax income 7,094 7,094
Other, net 485 612
-------- --------
65,937 69,409
-------- --------
Net deferred tax liability $ 56,551 $ 54,966
======== ========
There are no valuation allowances provided for any of the Company's
deferred tax assets based on management's belief that it is more likely than not
that deferred tax assets will be realized. During 1999 and 1998, non-qualified
stock options were exercised generating a tax benefit of $0 and $1,562,
respectively. This benefit is reflected in additional paid-in capital.
Note 11 - Stock Options and Restricted Stock Plan:
Contemporaneous with the Company's initial public offering, certain
executives of the Company were granted options to purchase 901,310 shares of
common stock of the Company at the initial offering price of $5.83 per share.
The options have a term of ten years and expire in June 2003. At December 31,
1999 all the remaining outstanding executive options were exercisable. No
additional options have been granted and none have been forfeited. During 1999
and 1998, no options and 299,250 options, respectively, were exercised.
In addition, certain executive officers, in connection with their
recruitment, became entitled to receive restricted stock as part of their
compensation. Costs associated with these grants are included as compensation
expense of the Company in the accompanying consolidated financial statements. In
connection therewith, the Company issued restricted shares at the issuance
prices summarized as follows:
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RESTRICTED SHARES ISSUANCE PRICE PER
ISSUANCE DATE ISSUED SHARE
---------------------------------------------------------------
January 21, 1994 13,336 $ 6.93
January 26, 1995 59,136 6.87
January 27, 1996 18,438 13.87
February 1, 1997 24,704 13.27
January 30, 1998 20,048 16.35
February 1, 1999 93,520 15.01
On October 21, 1993, the Company adopted a phantom stock plan that provided
for the awarding of up to 450,655 deferred compensation units to officers and
certain key employees. The plan specified a five-year vesting schedule. In
addition, from time to time the Board of Directors approved participation in a
special phantom stock plan for certain officers of the Company. During 1996, the
Company terminated all of its phantom stock plans and canceled all outstanding
grants thereunder. In connection therewith, each former participant in the
phantom stock plans was awarded an option under a new non-qualified stock option
plan for each unit canceled under the phantom stock plans. Other terms of the
awarded options were substantially similar to the underlying canceled units. The
number of initially authorized units under the non-qualified stock option plan
was 223,817. Since forfeited units under the plan do not become available for
reissuance, no units are available for future grants under this plan.
Activity in the non-qualified stock option plan is summarized below:
UNITS UNITS
NON-QUALIFIED STOCK OPTION PLAN: GRANTED UNITS EXERCISED UNITS FORFEITED OUTSTANDING
- ---------------------------------------------------------------------------------------
Balance at December 31, 1997 223,817 -- -- 223,817
- 1998 activity -- (60,815) (38,801) (99,616)
------- ------- -------- --------
Balance at December 31, 1998 223,817 (60,815) (38,801) 124,201
------- ------- -------- --------
- 1999 activity -- (545) (135) (680)
------- ------- -------- --------
Balance at December 31, 1999 223,817 (61,360) (38,936) 123,521
======= ======= ======== ========
Of the 123,521 units outstanding at December 31, 1999 under the
non-qualified stock option plan, the following are exercise prices and percents
vested:
EXPIRATION UNITS EXERCISE PERCENT
DATE OUTSTANDING PRICE VESTED
- --------------------------------------------------------------------
January 21, 2004 46,419 $ 6.93 100%
January 26, 2005 20,438 6.85 80%
January 26, 2005 38,968 6.87 80%
July 1, 2005 17,696 10.64 80%
During 1995, the Company established an Omnibus Employee Stock Award Plan
(the Omnibus Plan). The Omnibus Plan was amended and restated in its entirety
effective October 31, 1997 primarily to increase the number of authorized shares
under the plan. The purpose of
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this plan is to provide key employees who are largely responsible for the
Company's growth and continued success with the opportunity to have or increase
their proprietary interest in the Company through the granting of any one or any
combination of options, stock appreciation rights, restricted stock and
unrestricted stock. This plan is authorized to issue up to 1,510,635 units. All
options vest 20% on the date of grant and 20% each year thereafter on the
anniversary date of the grant and expire 10 years after the grant date.
Activity in the Omnibus Plan is summarized below:
UNITS UNITS
OMNIBUS PLAN: GRANTED UNITS EXERCISED UNITS FORFEITED OUTSTANDING
- ----------------------------------------------------------------------------------------
Balance at December 31, 1997 593,293 -- -- 593,293
- 1998 activity 430,500 (32,700) (10,150) 387,650
--------- ------- ------- --------
Balance at December 31, 1998 1,023,793 (32,700) (10,150) 980,943
- 1999 activity 25,000 (55,875) -- (30,875)
--------- ------- ------- --------
Balance at December 31, 1999 1,048,793 (88,575) (10,150) 950,068
========= ======= ======= ========
Of the 950,068 units outstanding at December 31, 1999 under the Omnibus
Employee Stock Award Plan, the following are exercise prices and percents
vested:
EXPIRATION UNITS EXERCISE PERCENT
DATE OUTSTANDING PRICE VESTED
- ----------------------------------------------------------------
October 30, 2005 112,350 $14.25 100%
January 26, 2006 24,718 13.87 80%
March 21, 2006 56,175 13.36 80%
November 8, 2006 17,850 14.31 80%
December 3, 2006 7,875 13.87 80%
December 30, 2006 5,250 13.85 80%
September 3, 2007 5,250 15.91 60%
August 26, 2007 6,300 16.27 60%
September 16, 2007 6,300 15.94 60%
January 29, 2007 258,300 13.20 60%
April 11, 2007 10,500 14.73 60%
April 18, 2007 31,500 14.53 60%
May 1, 2007 6,300 13.57 60%
April 14, 2008 375,400 16.44 40%
May 1, 2008 6,000 17.75 40%
February 19, 2009 20,000 14.13 20%
During 1995, the Company established a Formula Stock Option Plan. The
purpose of this plan is to provide annually (on each September 1) to the
non-employee directors of the Company options to purchase 10,000 shares of the
common stock of the Company. All options
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vest 20% on the date of grant and 20% each year thereafter on the anniversary
date of the grant and expire 10 years after the grant date. The plan is
authorized to issue up to 420,000 shares of common stock. Options granted
include:
GRANT DATE UNITS GRANTED EXERCISE PRICE
- --------------------------------------------------------------------------
September 1, 1995 56,175 $14.16
September 1, 1996 56,175 11.79
September 1, 1997 52,500 15.91
September 1, 1998 60,000 15.75
September 1, 1999 60,000 6.00
The Company's current option plans are considered fixed stock award plans
for accounting purposes. Accordingly, total compensation expense for these fixed
plans is measured as the difference between the market value on the date of the
grant over the exercise price which fixed total expense is then recognized over
the vesting period. The Company recognized compensation expense related to the
aforedescribed plans (exclusive of the restricted stock plan which is expensed
as incurred) of $351, $(102), and $408 for 1999, 1998 and 1997, respectively.
The Company accounts for options using APB No. 25, "Accounting for Stock
Issued to Employees." For purposes of providing the pro forma disclosures
required under SFAS No. 123, the fair value of stock options granted in 1999,
1998 and 1997 was estimated at the date of grant using a Black-Scholes option
pricing model. The Black-Scholes option pricing model was originally developed
for use in estimating the fair value of traded options which have different
characteristics than the Company's employee stock options. The model is also
sensitive to changes in the subjective assumptions which can materially affect
fair value estimates. As a result, management believes that the Black-Scholes
model may not necessarily provide a reliable single measure of the fair value of
employee stock options.
For purposes of SFAS No. 123, each award was separately valued using the 10
year CMT rate on the date of grant as the risk-free interest rate. The expected
life of each grant was assumed to be equal to the term to expiration as of the
grant date. The expected dividend yield was established based upon the dividend
policies of the Company as of the date of award. Finally, for purposes of
assigning a volatility factor, the historical 100 day volatility factor was
reviewed for selected points in time over the past and a range of 36% to 65% was
assigned to the 1999, 1998 and 1997 awards for purposes of the SFAS No. 123
valuation. The following is a summary of the significant assumptions used in the
SFAS No. 123 valuation and the average fair value of the options granted:
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1999 1998 1997
-------- -------- --------
Average risk free interest rate 5.754% 5.565% 6.494%
Average expected life of grants 10 years 10 years 10 years
Average expected dividend yield $ 0.43 $ 0.21 $ 0.12
Average volatility factor 68.42% 49.30% 56.80%
Average fair value of options granted $ 4.39 $ 9.93 $ 9.76
For purposes of the required pro forma disclosures, SFAS No. 123 permits
straight-line amortization of the estimated fair value of the options over the
vesting period. Had compensation cost for the Company's 1999, 1998 and 1997
stock-based option awards been determined consistent with the requirements of
SFAS No. 123, net income and earnings per share would have been reported as
follows for 1999, 1998 and 1997.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------- -------- ---------
Net income as reported $ 5,922 $ 48,671 $ 21,798
After-tax adjustment for SFAS No. 123 (1,485) (1,968) (737)
------- -------- ---------
Pro forma net income as adjusted $ 4,437 $ 46,703 $ 21,061
======= ======== =========
Pro forma net income per common share - basic $ 0.22 $ 2.02 $ 1.03
Pro forma net income per common share - diluted $ 0.21 $ 1.99 $ 1.01
Due to the inclusion of only 1999, 1998 and 1997 option grants, the effects
of applying SFAS No. 123 in 1999, 1998 and 1997 may not be representative of the
pro forma impact in future years.
Note 12 - Commitments and Contingencies:
The Company was servicing and subservicing 87,810, 125,686 and 110,641,
residential loans owned by others, with unpaid balances aggregating
approximately $9,090,000, $13,600,000 and $10,200,000, at December 31, 1999,
1998 and 1997, respectively. Related escrow funds totaled approximately $44,714,
$80,300 and $72,100 as of December 31, 1999, 1998 and 1997, respectively. Loans
serviced for others and the related escrow funds are not included in the
accompanying consolidated balance sheet.
The Company has issued mortgage-backed securities under programs sponsored
by Ginnie Mae, Freddie Mac and Fannie Mae. In connection with servicing
mortgage-backed securities guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae,
the Company advances certain principal and interest payments to security holders
prior to their collection from specific mortgagors. Additionally, the Company
must remit certain payments of property taxes and insurance premiums in advance
of collecting them from specific mortgagors and make certain payments of
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attorney's fees and other costs related to loans in foreclosure. These amounts
are included in servicing advances under the caption receivables in the
accompanying consolidated financial statements.
The Company was servicing commercial mortgage loans of $4,104,095 and
$3,255,458 at December 31, 1999 and 1998, respectively. At December 31, 1999 and
1998, respectively, 27% and 35% of commercial mortgage loans outstanding were
being serviced for a single customer. In addition, at December 31, 1999 and
1998, respectively, the Company was servicing $14,272 and $37,565 of leases for
third parties, 100% and 98% of this portfolio was serviced for a single
customer. Commercial mortgage loans and leases serviced for others are not
included in the accompanying balance sheet.
The Company typically sells the residential mortgage servicing rights
associated with its mortgage production into forward sales contracts.
Additionally, from time to time, the Company will sell residential mortgage
servicing rights from its available-for-sale portfolio. In 1999, approximately
79% of its total sales under these forward sales contracts were to four major
customers. In 1998, approximately 97% of its total sales under these forward
sales contracts were to four major customers.
In the ordinary course of business, the Company is exposed to liability
under representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights. Under certain circumstances, the
Company may be required to repurchase mortgage loans or indemnify the purchasers
of loans or servicing rights for losses if there has been a breach of
representations or warranties. Repurchased loans are carried at the lower of
cost or estimated recoverable value. At December 31, 1999, $17,255 of these
repurchased loans are included in mortgage loans held-for-sale net of a loss
allowance of $1,798. At December 31, 1998, $33,285 of these repurchased loans
are included in mortgage loans held-for-sale net of a loss allowance of $2,330.
At December 31, 1997, $9,213 of these repurchased loans are included in mortgage
loans held-for-sale net of a loss allowance of $3,399. Provision for losses
related to the repurchases of loans for the years ended December 31, 1999, 1998
and 1997 totaled $5,795, $9,783 and $4,615 respectively. The total number of
loans repurchased for the year ended December 31, 1999, 1998 and 1997 was 356,
479 and 268, respectively. During 1999, 1998 and 1997 the Company repurchased
approximately $34,865, $46,586 and $26,800 of unpaid principal balances,
respectively.
In the ordinary course of its business, the Company is from time to time
subject to litigation. The Company is not a party to any material legal
proceedings.
Note 13 - Work Force Reduction Charges and Non-recurring Charges:
During the fourth quarter of 1999, the Company incurred a $3.8 million
($2.4 million after-tax) charge related to a workforce reduction. At December
31, 1999 approximately $2.0 million remained in the accrual related to these
workforce reduction charges. The workforce reduction is summarized below by
financial statement component and operating division:
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AGENCY-ELIGIBLE
----------------------
($ in thousands) Production Servicing Subprime Other CONSOLIDATED
---------- --------- -------- ----- ------------
Salary and employee
benefits $ 820 $ 31 $ 166 $ 2 $ 1,019
Occupancy expense 1,780 -- 186 190 2,156
General and
administrative expenses 448 -- 164 2 614
------- ---- ----- ----- -------
Net pre-tax impact 3,048 31 516 194 3,789
Estimated allocable
income tax expense (1,136) (12) (192) (72) (1,412)
------- ---- ----- ----- -------
Net after-tax impact $ 1,912 $ 19 $ 324 $ 122 $ 2,377
======= ==== ===== ===== =======
During the second quarter of 1998, the Company sold its retail production
franchise and recognized a $1,490 pre-tax ($917 after-tax) gain on the sale.
This gain is included in other income. During the third quarter of 1997, the
Company recorded a $2,279 pre-tax charge ($1,401 after-tax) related to a
terminated merger agreement and a special charge of $7,869 pre-tax ($4,839
after-tax) relating to certain nonrecoverable operating receivables. These
charges are included in general and administrative expenses.
Note 14 - Employee Benefits:
On July 1, 1993, the Company established a 401(k) Retirement Savings Plan
which is available to all regular, full-time active employees with six months
continuous service. The plan allows employees to contribute up to 15% of their
gross earnings on a before-tax basis annually, subject to the maximum
established by law. Employees become eligible to participate in the plan as of
the January 1 or July 1, following the completion of six months continuous
service. The Company contributes to the plan on a matching basis in an amount
determined annually by the Board of Directors. In 1998 and 1999 the Company's
match percentage was 100% of the employee's contribution up to the first 3% of
the employee's gross earnings and a 50% match on the second 3% of the employee's
gross earnings. An employee vests in the Company's matching contribution at a
rate of 25% per year. The Company recorded $1,136, $980 and $958 of matching
contributions as compensation expense during 1999, 1998 and 1997, respectively.
On January 1, 1994, the Company established a defined benefit pension plan
covering substantially all employees. Under the plan, retirement benefits are
based upon years of service and the employee's level of compensation during the
last five years prior to retirement. It is the Company's funding policy to make,
at a minimum, the annual contribution required by the Employee Retirement Income
Security Act of 1974, as amended.
Effective January 1, 1995, the Company established a non-qualified unfunded
Pension Restoration Plan (Restoration Plan). The purpose of the Restoration Plan
is to provide certain
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retirement benefits for eligible employees. Under the Restoration Plan,
retirement benefits are based upon years of service and the employee's level of
compensation during the last five years prior to retirement.
Effective January 1, 1998, the Company established a non-qualified unfunded
Supplemental Executive Retirement Plan (SERP). The purpose of the SERP is to
provide certain retirement benefits for eligible employees. Under the SERP,
retirement benefits are based upon the employee's level of compensation during
the high five years of the last 10 years prior to retirement.
The combined pension expense for all three defined benefit plans included
the following:
FOR THE YEAR ENDED DECEMBER 31,
=================================
1999 1998 1997
------- ------- -----
Service cost $ 1,900 $ 1,417 $ 555
Interest cost 786 563 186
Expected return on assets (204) (97) (46)
Amortization of prior service cost 316 316 44
Amortization of actuarial loss 79 17 24
Curtailment credit (220) -- --
------- ------- -----
$ 2,657 $ 2,216 $ 763
======= ======= =====
Change in the combined projected benefit obligation under the plans at
December 31, 1999 and 1998 is as follows:
DECEMBER 31,
-----------------------
1999 1998
-------- --------
Net benefit obligation at beginning of year $ 8,826 $ 3,010
Service cost 1,900 1,417
Interest cost 786 563
Plan amendments -- 3,696
Actuarial (gain) loss (994) 649
Curtailments (258) (477)
Benefits paid (40) (32)
-------- --------
Net benefit obligation at end of year $ 10,220 $ 8,826
======== ========
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The combined change in the plans' assets for the years ended December 31, 1999
and 1998 were:
DECEMBER 31,
---------------------
1999 1998
------- -------
Fair value of plan assets at beginning of year $ 1,862 $ 788
Actual return on plan assets 272 100
Employer contributions 1,349 1,006
Benefits paid (40) (32)
------- -------
Fair value of plan assets at end of year $ 3,443 $ 1,862
======= =======
Funded status at end of year $(6,777) $(6,965)
Unrecognized net actuarial (gain) loss (190) 951
Unrecognized prior service cost 3,451 3,805
------- -------
Net amount recognized at end of year $(3,516) $(2,209)
======= =======
Amounts recognized in the statement of financial position for the combined plans
consist of:
DECEMBER 31,
---------------------
1999 1998
------- -------
Accrued benefit cost $(5,630) $(4,315)
Intangible asset 2,114 2,106
------- -------
Net amount recognized at end of year $(3,516) $(2,209)
======= =======
Weighted-average assumptions used in accounting for the plans as of fiscal
year-end were:
1999 1998 1997
----- ----- -----
Discount rate 8.00% 6.75% 7.00%
Expected return on plan assets 8.00% 8.00% 8.00%
Rates of compensation increase-SERP 3.30% 3.30% 3.30%
Rates of compensation increase all other plans 4.00% 4.00% 4.00%
On January 1, 1995, the Company established the Stock Investment Plan (the
Stock Plan) covering substantially all employees. Under the Stock Plan, eligible
employees may make contributions, through payroll deductions, to acquire common
stock of the Company. The purchase price of such stock will be equal to 85% of
the fair market value on the purchase date with the Company subsidizing the
remaining 15% of the cost. The Company is responsible for custodian charges
(including brokerage expenses incurred in connection with the purchase of
shares) and all costs of maintaining and executing transfers. This plan will
continue until 425,528 shares of stock have been purchased by employees. The
Company has subsidized approximately $113, $121 and $108 relating to the
noncompensatory Stock Plan discount for 1999, 1998 and 1997, respectively.
Through December 31, 1999, there were 255,287 shares issued under the Stock
Plan.
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On January 1, 1995, the Company established the Employee Stock Ownership
Plan (ESOP) covering substantially all employees. Contributions to the ESOP,
which are at the discretion of and determined annually by the Board of
Directors, are not to exceed the maximum amount deductible under the applicable
sections of the Internal Revenue Code and are funded annually. However, such
contributions must be adequate to meet the required principal and interest
payments on the underlying loans discussed below.
During 1999 and 1998, the ESOP borrowed $3,000 and $2,000, respectively,
from the Company to purchase shares of the Company's common stock and pledged
those shares to secure loans outstanding. The principal amount of the 1999 loan
is repayable in annual installments of $500 commencing in March 2000. The
principal amount of the 1998 loan is repayable in annual installments of $500
commencing in January 1999. In accordance with other loan agreements, the ESOP
repaid $1,400 and $1,000 to the Company in 1999 and 1998, respectively. An
additional $221 and $108 was paid on these loans in 1999 and 1998, respectively,
from the cash dividends paid on the unallocated ESOP shares. For the years ended
December 31, 1999, 1998, and 1997 135,355, 94,593 and 99,545 shares,
respectively were released. Compensation expense related to the ESOP was $1,244,
$1,623 and $1,480 for the years ended December 31, 1999, 1998 and 1997,
respectively. At December 31, 1999, the fair market value of the unallocated
shares of stock held under the ESOP Plan was $2,434.
Note 15 - Net Income Per Common Share:
The following is a reconciliation of basic earnings per share to diluted
earnings per share as calculated under SFAS No. 128 for the years ended December
31, 1999, 1998 and 1997, respectively:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Net income $ 5,922 $ 48,671 $ 21,798
----------- ----------- -----------
Average common shares outstanding 20,643,166 23,122,835 20,396,428
----------- ----------- -----------
Earnings per share - basic $ 0.29 $ 2.10 $ 1.07
----------- ----------- -----------
Dilutive stock options 156,336 378,273 404,400
Average common and common equivalent
shares outstanding 20,799,502 23,501,108 20,800,828
----------- ----------- -----------
Earnings per share - diluted $ 0.28 $ 2.07 $ 1.05
----------- ----------- -----------
Options to purchase a total of 1,136,439 shares of common stock at prices
ranging from $10.64 to $17.75 per share were outstanding during 1999 but were
not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares. The options were still outstanding at December 31, 1999.
Options to purchase 6,000 shares of common stock at $17.75 per share were
outstanding during 1998 but were not included in the computation of diluted
earnings per share because the
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options' exercise price was greater than the average market price of the common
shares. The options, which will expire on May 1, 2008, were still outstanding at
December 31, 1998.
Options to purchase 6,300 shares of common stock at $16.27 per share were
outstanding during 1997 but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares. The options, which will expire on
August 26, 2007, were still outstanding at December 31, 1997.
Note 16 - Financial Instruments and Risk Management:
The Company is a party to various derivative financial instruments and
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers and to reduce its own
exposure to risks related to fluctuating interest rates. These financial
instruments include mortgage purchase commitments, mandatory delivery
commitments, put and call option contracts, swaps, futures contracts and
interest rate floor contracts. The Company uses these financial instruments
exclusively for purposes of managing its resale pricing and interest rate risks.
The Company's mortgage loans held-for-sale are acquired or originated
through a network of correspondents and wholesale brokers. In connection
therewith, the Company routinely enters into optional mortgage purchase
commitments to acquire or originate specific in-process mortgage loans when and
if closed by the counterparty, at the option of the mortgagor. Mortgage purchase
commitments obligate the Company to acquire mortgage loans on a delayed delivery
basis, which may extend for a period of 60 days, at a price which is fixed as of
the date of the contract.
Accordingly, the Company is subject to the risk that the market value of
its on-balance sheet mortgage loans held-for-sale and the mortgage loans it is
obligated to purchase under its mortgage purchase commitments may change
significantly prior to resale. In order to limit its resale price exposure for
agency-eligible mortgage loans, the Company enters into mandatory delivery
commitments which are contracts for delayed delivery of mortgage loans to third
parties. Mandatory delivery commitments obligate the Company to sell
agency-eligible mortgage loans on a delayed delivery basis at a price which is
fixed as of the date of the contract. Since mandatory delivery commitments
enable the Company to fix its resale prices for both on-balance sheet mortgage
loans held for sale (for which a fixed price has already been paid) and for
anticipated loan closures subject to mortgage purchase commitments (which fix
the delayed purchase price for the resultant mortgage loans), these instruments
can effectively limit the Company's resale price exposures.
The percentages of anticipated agency-eligible loan closures under mortgage
purchase commitments that are covered by mandatory delivery commitments not
allocated to on-balance sheet mortgages held-for-sale are monitored
continuously. The Company's resultant expected exposure to resale pricing risk
is continuously adjusted to consider changing expectations regarding anticipated
loan closure percentages and other market conditions. Generally, the
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Company buys put and call option contracts on U.S. Government Securities to
effect modest adjustments of its overall exposure to resale pricing changes.
Purchased call option contracts enable the Company, at its option, to
acquire an underlying financial security from a third party at a specified price
for a fixed period of time. Purchased put option contracts enable the Company,
at its option, to sell an underlying financial security to a third party at a
specified price and for a fixed period of time. Since these financial
instruments essentially enable the Company to fix the purchase or sale price on
financial instruments whose changes in value have historically correlated
closely with changes in value of mortgage loans, these instruments can be used
effectively to adjust the Company's overall exposure to resale pricing risks. In
addition, these instruments have the advantages of being available in smaller
denominations than are typical of the Company's mandatory delivery commitments
and of being traded in a highly liquid and efficient secondary market.
Periodically, the Company, in addition to mandatory delivery commitments,
also buys or sells swaps as part of its hedging activities for rate locked and
closed subprime mortgage loans. Generally, swaps positions are outstanding for
short periods of time and are used to hedge against price movements of another
financial instrument while execution of that instrument is bid among brokers.
Swaps also may be similarly used to hedge against price movements when another
financial instrument is illiquid due to temporary market conditions. Because the
changes in value of swaps contracts and the hedged items can be based on
different indices, there is a risk that the changes in value may not correlate.
There were no open futures positions as of December 31, 1999 or 1998.
As discussed in Note 12, the Company typically sells its produced
residential mortgage servicing rights between 90 and 180 days of origination or
purchase of the related loan pursuant to committed prices under forward sales
contracts. These forward sales contracts commit the Company to deliver mortgage
servicing rights backed by contractual levels of unpaid principal balances.
Outstanding commitments to deliver totaled $5,480,000 and $3,300,000 at December
31, 1999 and 1998, respectively.
The Company also maintains a portfolio of residential mortgage servicing
rights which, though available-for-sale, are not currently scheduled for sale
pursuant to the Company's forward sales contracts. In connection therewith, the
Company is subject to the risk that the economic value of such mortgage
servicing rights may decline in the event of a significant decline in long-term
interest rates. A significant decline in interest rates generally causes an
increase in actual and expected mortgage loan prepayments (for example increased
refinancing) which in turn tends to reduce the future expected cash flows (and
economic value) of associated mortgage servicing rights. Additionally, the
Company utilizes Callable Pass Through Certificates (CPC) to diversify basis
risk and improve hedge efficacy. The Company purchases a long-term call option
on a large pool of mortgage backed securities. When the price of the mortgage
backed securities rises, the value of the CPC will rise. This hedge offers
performance based upon the price and prepayment behavior of mortgage backed
securities, instead of either CMT or CMS basis. Interest rate floor contracts
provide for the Company to receive an interest rate differential on a notional
amount of outstanding principal to the extent that interest rates decline below
a specified
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rate which is fixed as of the date of the contract. Accordingly, the value of an
interest rate floor contract increases while the value of a mortgage servicing
right decreases in a declining interest rate environment. As such, interest rate
floor contracts can potentially effectively mitigate the Company's exposure to
declines in the economic value of its servicing rights in a declining interest
rate environment.
The Company uses an amortizing interest rate swap agreement to fix the
interest rate on its floating rate credit facility, which finances its fixed
rate leasing portfolio. Under this agreement, the Company makes or receives
payments based on the difference between a fixed rate paid by the Company and a
floating rate paid by the counterparty, applied to a notional amount of
outstanding principal. The interest rate swap agreement is valued based on the
difference between the fixed rate and the floating rate at year end.
The above described financial instruments involve, to varying degrees,
elements of credit and interest rate risk which are in excess of the amounts
recognized in the balance sheet. The Company believes that these instruments do
not represent a significant exposure to credit loss since the amounts subject to
credit risks are controlled through collateral requirements, credit approvals,
limits and monitoring procedures. The Company is exposed to credit losses in the
event of non-performance by counterparties to certain of its financial
instruments, but it does not expect any counterparties to fail since such risks
are managed through limits and monitoring procedures. The Company does not have
a significant exposure to any individual customer, correspondent or counterparty
in connection with these financial instruments. Except for mortgage purchase
commitments, the Company does not require collateral or other security to
support the financial instruments with credit risk whose contract or notional
amounts are summarized as follows:
CONTRACT AMOUNT AT DECEMBER 31,
-------------------------------
1999 1998
---------- ----------
Financial instruments whose contract amounts represent credit risk:
Mortgage loan purchase commitments $ 363,402 $1,089,539
Financial instruments whose contract amounts exceed the amount of
credit risk:
Mandatory delivery commitments (allocated against mortgages
held-for-sale) 484,752 1,263,861
Mandatory delivery commitments (allocated against mortgage
purchase commitments) 273,748 402,139
Purchased option contracts 160,000 310,000
Forward servicing sales contracts 5,480,000 3,300,000
Interest rate floor contracts 2,100,000 1,482,000
Interest rate swaps 125,733 81,147
Callable pass-through certificates 376,100 --
Mortgage loan purchase commitments expose the Company to credit loss in the
event the purchase commitments are funded as mortgage loans and the Company's
counterparties default prior to resale. The maximum credit loss to which the
Company is exposed is the notional amount of the commitments. However, the
Company does not believe the commitments
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represent a significant exposure to credit loss because the related loans are
secured by 1-4 family homes, most loans are insured or guaranteed through
private mortgage insurance or government approval programs and subjected to
underwriting standards specified by government agencies or private mortgage
insurance companies. The estimated credit exposure on financial instruments
whose contract amounts exceed the amount of credit risk is the increase in
market value of the instrument.
The Company generally does not charge a premium to its correspondents in
connection with issuance of its mortgage purchase commitments nor is a premium
charged to the Company in connection with its acquisition of mandatory delivery
or forward servicing sales contracts.
Premiums paid for purchased put and call option and futures contracts are
initially deferred and included in other assets in the balance sheet. Other
assets included $1,803 and $2,823 at December 31, 1999 and 1998, respectively,
of such deferred premiums. Ultimately, such deferred premiums and related
realized gains or losses from these activities are recorded as a component of
gains and losses on sales of mortgage loans at the earlier of the expiration of
the underlying contract or when exercise of the contract is deemed remote.
The Company uses CMT floors and CMS floors and Callable Pass-Through
Certificates to protect itself against interest and prepayment risk on its
available-for-sale portfolio. The Company monitors the changes in the fair value
of the CMT and CMS floors and the hedged mortgage servicing rights on an ongoing
basis. Premiums paid for interest rate floor contracts are initially deferred
and included in other assets in the balance sheet and are amortized over the
term of the underlying contract. Amounts received as interest rate differentials
under floor contracts as well as changes in the fair value of the contracts are
recorded as a reduction or increase of basis in mortgage servicing rights to the
extent that such changes generally correlate with changes in fair value of
mortgage servicing rights. Included in the mortgage servicing right basis are
deferred (losses) gains of $(5,059) and $13,509 and unamortized floor premiums
of $6,349 and $9,000 for 1999 and 1998, respectively. Other assets included
$11,318 and $6,539 at December 31, 1999 and 1998, respectively, of unamortized
premiums. For the years ended December 31, 1999 and 1998, respectively, $3,608
and $1,976 of deferred premiums paid for interest rate floor contracts were
amortized to expense.
The current variable rate index (CMT Treasury rate) was 6.437% and 4.65% at
December 31, 1999 and 1998, respectively. Other terms of the CMT interest rate
floor contracts outstanding at December 31, 1999, are summarized as follows:
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Notional
Contract Date Expiration Date Amount Floor Rate
- -------------------------------------------------------------------------------
February 13, 1995 February 13, 2000 $20,000 7.067%
February 13, 1995 February 13, 2000 45,000 6.567%
August 20, 1996 August 20, 2001 60,000 5.570%
April 22, 1997 April 22, 2000 125,000 6.750%
April 22, 1997 April 22, 2000 150,000 6.500%
April 22, 1997 April 22, 2000 375,000 6.250%
July 9, 1998 July 9, 2005 55,000 4.910%
July 9, 1998 July 9, 2001 125,000 5.160%
September 15, 1998 September 15, 2003 75,000 4.500%
October 13, 1998 October 13, 2003 150,000 4.500%
November 10, 1998 November 10, 2003 120,000 5.410%
January 19, 1999 January 19, 2002 200,000 4.200%
March 15, 1999 March 15, 2002 200,000 4.950%
May 15, 1999 May 15, 2006 200,000 7.000%
September 1, 1999 September 30, 2006 200,000 7.500%
------------
$ 2,100,000
============
During 1999, the Company purchased four CMT interest-rate floors contracts
for $8,388 with contract dates as listed above. The notional amounts of these
interest rate floors totaled $800,000. Two interest rate floors with a notional
amounts totaling $132,000 and a contract date of September 19, 1994, expired on
September 19, 1999.
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Note 17 - Segment Income Statement:
In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" the Company adopted segment reporting in
1998. The following tables present a summary of the revenues and expenses for
each of the Company's operating divisions for the years ended December 31, 1999,
1998 and 1997, respectively. Total assets of the operating divisions at December
31, 1999 are also presented. Revenues and expenses for each of the Company's
operating divisions for the years ended December 31, 1998 and 1997 have been
restated to conform to the 1999 presentation.
For purposes of segment reporting the Company operates through five
operating divisions. The agency-eligible production division purchases and sells
agency-eligible residential mortgage loans. The agency-eligible servicing
division services agency-eligible residential mortgage loans and also purchases
and sells servicing rights associated with these agency eligible loans. Mortgage
servicing includes collecting and remitting mortgage loans payments, accounting
for principal and interest, holding escrow funds for payment of mortgage-related
expenses such as taxes and insurance, making advances to cover delinquent
payments, making inspections as required of the mortgaged premises, contacting
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults and generally administering mortgage loans. The
subprime division purchases and sells subprime residential mortgage loans. The
commercial mortgage division originates commercial mortgage loans for various
insurance companies and other investors. Commercial mortgage loans are generally
originated in the name of the investor and, in most instances, the rights to
service the loans under a servicing agreement are retained by the Company. The
leasing division originates and services small-ticket commercial equipment
leases. Substantially all of the leasing division's receivables are acquired
from independent brokers who operate throughout the continental United States.
The agency-eligible reinsurance division operates as a licensed, property and
casualty monoline captive insurance company assuming reinsurance for PMI
policies on agency-eligible mortgage loans initially purchased or produced by
the Company.
Of the total 1999 agency-eligible production and agency-eligible servicing
revenues, $1.0 million and $0.2 million, respectively, are intercompany
revenues. The remaining revenues for the agency-eligible production and
agency-eligible servicing divisions and for all other operating divisions on the
1999 Segmented Income Statement are from external sources.
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Agency-Eligible
-------------------------------------------
For the year ended Commercial Total
December 31, 1999 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments
- ----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ 8,240 $ (4,555) $ (12) $ 15,366 $ 323 $ 7,270 $ 26,632
Net gain on sale of mortgage
loans 64,033 -- -- 20,357 9,170 -- 93,560
Gain on sale of mortgage
servicing rights -- 7,262 -- -- -- -- 7,262
Servicing fees -- 41,791 -- -- 4,735 620 47,146
Other income 340 582 1,661 (4,372) 69 1,395 (325)
---------------------------------------------------------------------------------------------------
Total revenues 72,613 45,080 1,649 31,351 14,297 9,285 174,275
---------------------------------------------------------------------------------------------------
Salary and employee benefits 38,751(2) 3,399(3) -- 15,840(4) 8,321 2,654 68,965
Occupancy expense 10,079(2) 419 -- 2,567(4) 1,123 453 14,641
Amortization and provision
for impairment of
mortgage servicing rights -- 29,580 -- -- 2,210 -- 31,790
General and administrative
expenses 22,970(2) 5,984 221 10,353(4) 1,820 3,168 44,516
---------------------------------------------------------------------------------------------------
Total expenses 71,800(2) 39,382(3) 221 28,760(4) 13,474 6,275 159,912
---------------------------------------------------------------------------------------------------
Income before income taxes 813(2) 5,698(3) 1,428 2,591(4) 823 3,010 14,363
Income tax expense (207)(2) (1,448)(3) (356) (1,237)(4) (405) (1,196) (4,849)
---------------------------------------------------------------------------------------------------
Net income $ 606(2) $ 4,250(3) $ 1,072 $ 1,354(4) $ 418 $ 1,814 $ 9,514
===================================================================================================
Total Assets $ 446,216 $ 168,320 $ 5,153 $ 213,573 $ 26,533 $ 167,088 $ 1,026,883
========= ========= ======== ========= ======== ========= ===========
For the year ended Other/
December 31, 1999 (1) Eliminations Consolidated
- -------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ (470) $ 26,162
Net gain on sale of mortgage
loans -- 93,560
Gain on sale of mortgage
servicing rights -- 7,262
Servicing fees (188) 46,958
Other income 175 (150)
-----------------------------------------
Total revenues (483) 173,792
-----------------------------------------
Salary and employee benefits 3,903(5) 72,868(6)
Occupancy expense 214(5) 14,855(6)
Amortization and provision
for impairment of
mortgage servicing rights -- 31,790
General and administrative
expenses 1,129(5) 45,645(6)
-----------------------------------------
Total expenses 5,246(5) 165,158(6)
-----------------------------------------
Income before income taxes (5,729)(5) 8,634(6)
Income tax expense 2,137(5) (2,712)(6)
-----------------------------------------
Net income $ (3,592)(5) $ 5,922(6)
=========================================
Total Assets $ 299 $ 1,027,182
========= ===========
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes work force reduction charge totaling $3,048 pre-tax or $1,912
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $37,931, $8,299,
$22,522, $68,752, $3,861, $1,343 and $2,518 respectively.
(3) Includes work force reduction charge totaling $31 pre-tax or $19 after-tax.
Exclusive thereof, salary and employee benefits, total expenses, net income
before income taxes, income tax expense and net income would have been $3,368,
$39,351, $5,729, $1,460 and $4,269 respectively.
(4) Includes work force reduction charge totaling $516 pre-tax or $324
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $15,674, $2,381,
$10,189, $28,244, $3,107, $1,429 and $1,678 respectively.
(5) Includes work force reduction charge totaling $194 pre-tax or $122
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $3,901, $24, $1,127,
$5,052, $(5,535), $(2,065) and $(3,470) respectively.
(6) Includes work force reduction charge totaling $3,789 pre-tax or $2,377
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $71,849, $12,699,
$45,031, $161,369, $12,423, $4,124 and $8,299 respectively.
88
Agency-Eligible
-------------------------------------------
For the year ended Commercial Total
December 31, 1998 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments
- ----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ 7,422 $ -- $ -- $ 9,565 $ 536 $ 4,637 $ 22,160
Net gain on sale of
mortgage loans 134,472 -- -- 27,980 9,011 -- 171,463
Gain on sale of mortgage
servicing rights -- 1,753 -- -- -- -- 1,753
Servicing fees -- 37,856 -- -- 3,777 1,014 42,647
Other income 1,756(2) 455 1,189 732 11 753 4,896
---------------------------------------------------------------------------------------------------
Total revenues 143,650(2) 40,064 1,189 38,277 13,335 6,404 242,919
---------------------------------------------------------------------------------------------------
Salary and employee benefits 53,158 3,449 -- 13,485 7,322 2,347 79,761
Occupancy expense 7,005 443 -- 1,921 840 376 10,585
Amortization and provision
for impairment of -- --
mortgage servicing rights -- 27,897 -- -- 1,335 -- 29,232
General and administrative
expenses 28,046 6,446 196 4,490 1,734 2,584 43,496
---------------------------------------------------------------------------------------------------
Total expenses 88,209 38,235 196 19,896 11,231 5,307 163,074
---------------------------------------------------------------------------------------------------
Income before income taxes 55,441(2) 1,829 993 18,381 2,104 1,097 79,845
Income tax expense (20,059)(2) (662) (351) (6,656) (952) (435) (29,115)
---------------------------------------------------------------------------------------------------
Net income $ 35,382(2) $ 1,167 $ 642 $ 11,725 $ 1,152 $ 662 $ 50,730
===================================================================================================
For the year ended Other/
December 31, 1998 (1) Eliminations Consolidated
- -------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ (382) $ 21,778
Net gain on sale of
mortgage loans 171,463
Gain on sale of mortgage
servicing rights -- 1,753
Servicing fees 509 43,156
Other income 680 5,576(2)
-----------------------------------------
Total revenues 807 243,726(2)
-----------------------------------------
Salary and employee benefits 2,645 82,406
Occupancy expense 634 11,219
Amortization and provision
for impairment of
mortgage servicing rights -- 29,232
General and administrative
expenses 770 44,266
-----------------------------------------
Total expenses 4,049 167,123
-----------------------------------------
Income before income taxes (3,242) 76,603(2)
Income tax expense 1,183 (27,932)(2)
-----------------------------------------
Net income $ (2,059) $ 48,671(2)
=========================================
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes a non-recurring gain related to sale of retail operation totaling
$1,490 pre-tax, or $917 after-tax. Exclusive thereof, the year ended December
31, 1998 residential mortgage agency-eligible other income, total revenues,
income before taxes, income tax expense and net income and consolidated other
income, total revenues, income before taxes, income tax expense and net income
would have been $266, $142,160, $53,951, $19,486 and, $34,465; and $4,086,
$242,236, $75,113, $27,359 and, $47,754, respectively.
Agency-Eligible
-------------------------------------------
For the year ended Commercial Total
December 31, 1997 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments
- ---------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ 16,764 $ -- $ -- $ 1,268 $ -- $ -- $ 18,032
Net gain on sale of
mortgage loans 89,358 -- 14,012 -- -- 103,370
Gain on sale of mortgage
servicing rights -- 7,955 -- -- -- -- 7,955
Servicing fees -- 30,869 -- -- -- -- 30,869
Other income 1,180 -- -- -- -- -- 1,180
--------------------------------------------------------------------------------------------------
Total revenues 107,302 38,824 -- 15,280 -- -- 161,406
--------------------------------------------------------------------------------------------------
Salary and employee benefits 50,005 3,025 -- 7,754 -- -- 60,784
Occupancy expense 6,052 318 -- 711 -- -- 7,081
Amortization and provision
for impairment of -- --
mortgage servicing rights -- 18,315 -- -- -- -- 18,315
General and administrative
expenses 17,799 7,856 -- 2,021 -- -- 27,676
--------------------------------------------------------------------------------------------------
Total expenses 73,856 29,514 -- 10,486 -- -- 113,856
--------------------------------------------------------------------------------------------------
Income before income taxes 33,446 9,310 -- 4,794 -- -- 47,550
Income tax expense (12,678) (3,537) -- (1,825) -- -- (18,040)
--------------------------------------------------------------------------------------------------
Net income $ 20,768 $ 5,773 $ -- $ 2,969 $ -- $ -- $ 29,510
==================================================================================================
89
Non-Recurring
and
For the year ended Other/ Special
December 31, 1997 (1) Eliminations Charges Consolidated
- ------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ (388) $ 17,644
Net gain on sale of
mortgage loans 103,370
Gain on sale of mortgage
servicing rights -- 7,955
Servicing fees -- 30,869
Other income -- 1,180
----------------------------------------
Total revenues (388) 161,018
----------------------------------------
Salary and employee benefits 1,451 62,235
Occupancy expense 377 7,458
Amortization and provision
for impairment of
mortgage servicing rights -- 18,315
General and administrative
expenses 100 10,147 37,923(2)
----------------------------------------
Total expenses 1,928 10,147 125,931(2)
----------------------------------------
Income before income taxes (2,316) (10,147) 35,087(2)
Income tax expense 845 3,906 (13,289)(2)
----------------------------------------
Net income $ (1,471) $ (6,241) $ 21,798(2)
========================================
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes non-recurring and special charges related to a merger agreement
that was terminated and certain nonrecoverable operating receivables totaling
$10,147 pretax, or $6,241 after tax. Exclusive thereof, the December 31, 1997
consolidated general and administrative expenses, total expenses, income before
income taxes, income tax expense and net income would have been $27,776,
$115,784, $45,235, $17,195 and $28,039, respectively.
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90
Note 18 - Quarterly Financial Data (Unaudited):
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------------------------
Net interest income $ 7,474 $ 7,423 $ 6,461 $ 4,804 $ 26,162
Net gain on sale of mortgage loans 37,289 26,188 16,823 13,260 93,560
Gain on sale of mortgage
servicing rights 2,998 1,825 1,494 945 7,262
Servicing fees 12,998 11,997 10,898 11,065 46,958
Other income 129 (312) 488 (455) (150)
- -------------------------------------------------------------------------------------------------------
Total revenues 60,888 47,121 36,164 29,619 173,792
- -------------------------------------------------------------------------------------------------------
Salary and employee benefits 20,497 16,714 19,511 16,146 (2) 72,868 (2)
Occupancy expense 3,173 3,465 4,062 4,155 (2) 14,855 (2)
Amortization and provision for impairment
of mortgage servicing rights 8,897 9,405 6,280 7,208 31,790
Provision for foreclosure losses and
repurchased loans 3,055 2,341 2,535 2,677 10,608
General and administrative expenses 7,908 9,879 6,935 10,315 (2) 35,037 (2)
- -------------------------------------------------------------------------------------------------------
Total expenses 43,530 41,804 39,323 40,501 (2) 165,158 (2)
- -------------------------------------------------------------------------------------------------------
Income before income taxes 17,358 5,317 (3,159) (10,882)(2) 8,634 (2)
Income tax expense (6,197) (1,981) 1,484 3,982 (2) (2,712)(2)
- -------------------------------------------------------------------------------------------------------
Net income 11,161 3,336 (1,675) (6,900)(2) 5,922 (2)
- -------------------------------------------------------------------------------------------------------
Net income per common share-basic $ 0.50 $ 0.16 $ (0.08) $ (0.36)(2) $ 0.29 (2)
Net income per common share-diluted $ 0.50 $ 0.16 $ (0.08) $ (0.36)(2) $ 0.28 (2)
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------------------------
Net interest income $ 4,292 $ 5,459 $ 4,601 $ 7,426 $ 21,778
Net gain on sale of mortgage loans 39,174 44,455 45,597 42,237 171,463
Gain on sale of mortgage
servicing rights 628 452 533 140 1,753
Servicing fees 9,303 10,412 11,419 12,022 43,156
Other income 974 1,923 (1) 487 2,192 5,576 (1)
- -------------------------------------------------------------------------------------------------------
Total revenues 54,371 62,701 (1) 62,637 64,017 243,726 (1)
- -------------------------------------------------------------------------------------------------------
Salary and employee benefits 20,714 20,848 20,479 20,365 82,406
Occupancy expense 2,780 2,651 2,627 3,161 11,219
Amortization and provision for impairment
of mortgage servicing rights 5,629 6,674 7,750 9,179 29,232
Provision for foreclosure losses and
repurchased loans 1,962 2,054 2,436 4,571 11,023
General and administrative expenses 7,830 8,814 7,959 8,640 33,243
- -------------------------------------------------------------------------------------------------------
Total expenses 38,915 41,041 41,251 45,916 167,123
- -------------------------------------------------------------------------------------------------------
Income before income taxes 15,456 21,660 (1) 21,386 18,101 76,603 (1)
Income tax expense (5,875) (8,548)(1) (8,134) (5,375) (27,932)(1)
- -------------------------------------------------------------------------------------------------------
Net income 9,581 13,112 (1) 13,252 12,726 48,671 (1)
- -------------------------------------------------------------------------------------------------------
Net income per common share-basic $ 0.42 $ 0.57 (1) $ 0.57 $ 0.56 $ 2.10 (1)
Net income per common share-diluted $ 0.41 $ 0.56 (1) $ 0.56 $ 0.55 $ 2.07 (1)
(1) Includes a non-recurring gain relating to sale of retail operation totaling
$1,490 pre-tax, or $917 after-tax. Exclusive thereof, second quarter 1998 and
full year 1998 other income, total revenue, income before income taxes, income
tax expense, net income, net income per common share - basic and net income per
common share - diluted would have been $433, $61,211, $20,170, $7,975, $12,195,
$0.56 and $0.52; and $4,086, $242,236, $75,113, $27,359, $47,754, $2.07 and
$2.03, respectively.
(2) Includes work force reduction charge totaling $3,789 pre-tax or $2,377
after-tax. Exclusive thereof, fourth quarter 1999 and full year 1999 salary and
employee benefits, occupancy expense, general and administrative expenses, total
expenses, net income before income taxes, income tax expense, net income, net
income per common share - basic and net income per common share - diluted would
have been $15,127, $1,999, $9,701, $36,712, ($7,093), ($2,570), $(4,523),
($0.24) and ($0.24) ; and $71,849, $12,699, $34,432, $161,369, $12,423, $4,124,
$8,299 and ($0.40) and ($0.40), respectively.
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Note 19 - Fair Value of Financial Instruments:
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1999 and 1998.
1999 1998
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Assets
Cash $ 30,478 $ 30,478 $ 18,124 $ 18,124
Receivables 40,219 40,219 80,248 80,248
Lease receivables 155,559 161,483 102,029 107,290
Residual interests in subprime
securitizations 54,382 54,382 45,782 45,782
Mortgage loans held-for-sale and
mortgage-backed securities 480,504 481,894 1,441,458 1,442,532
Liabilities
Short-term borrowings 699,803 699,803 1,566,287 1,566,287
Long-term borrowings 6,259 6,190 6,364 6,371
1999 1998
-------------------------------------- --------------------------------------
Notional Carrying Estimated Notional Carrying Estimated
Amount Value Fair Value Amount Value Fair Value
---------- ---------- ---------- ---------- ---------- ----------
Off-balance sheet instruments
Mortgage purchase commitments $ 363,402 -- $ (840) $1,089,539 -- $ 2,600
Mandatory delivery commitments
(allocated to mortgage purchase
commitments) 273,748 -- 2,209 402,139 -- (451)
Purchased option contracts 160,000 $ 1,803 343 310,000 $ 2,823 1,183
Interest rate floor contracts 2,100,000 6,269 6,269 1,482,000 20,048 20,048
Interest rate swaps 125,733 -- 1,358 81,147 -- (759)
Callable pass-through certificates 376,100 4,621 4,621 -- -- --
The following notes summarize the significant methods and assumptions used
in estimating the fair values of financial instruments.
Cash and receivables are short-term in nature. Accordingly, they are valued
at their carrying amounts which are a reasonable estimation of fair value.
Lease receivables are valued by management for each homogenous category of
leases by discounting future expected cash flows. Lease receivables
held-for-sale are valued by management based upon recent sales with
consideration given to differences between those leases and leases sold. The
implicit discount rate applied for purposes of determining the
88
92
aggregate discounted lease balance was obtained from an investment banker based
on recent market rates.
Mortgage loans held-for-sale and mortgage-backed securities covered by
mandatory delivery commitments allocated thereto are valued based upon
commitment delivery prices. Uncommitted mortgage loans held-for-sale are valued
by reference to quoted market prices for mortgage-backed securities, after
appropriate adjustments thereto. For purposes of developing the estimated fair
value, the portfolio has been segregated by product type, term and interest
rate.
Short-term borrowings are all tied to near term variable rate indices.
Accordingly they are valued at their carrying amounts, which are a reasonable
estimation of fair values.
Long-term borrowings are at a fixed rate of 8.07% and were valued based
upon the net present value of the borrowings using an estimated current rate of
8.50% and a rate of 7.375% for the prior year.
Mortgage purchase commitments are valued based upon the difference between
quoted mandatory delivery commitment prices (which are used by the Company to
price its mortgage purchase commitments) and the committed prices.
Mandatory delivery commitments are valued based upon the difference between
quoted prices for such commitments and the prices applicable to the underlying
commitment.
Purchased option contracts are valued based upon quoted prices for such
option contracts.
Interest rate floor contracts are valued based upon an independent third
party valuation.
Interest rate swaps are valued based upon the present value of future cash
flows based on the interest rate spread between the fixed rate and floating
rate.
89
93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Resource Bancshares
Mortgage Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity, and of
cash flows present fairly, in all material respects, the financial position of
Resource Bancshares Mortgage Group, Inc. and its subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Columbia, South Carolina
February 7, 2000
90
94
STOCK DATA
Information pertaining to high and low stock prices for each quarter during
1999 and 1998 is given in the following chart.
1999 1998
------------------------------------------------
QUARTER HIGH LOW HIGH LOW
- --------------------------------------------------------------------
First $17.00 $11.81 $18.00 $13.50
Second 13.63 9.00 19.63 15.06
Third 11.00 4.50 23.25 15.06
Fourth 6.50 4.44 17.13 9.50
Source: Nasdaq
The Company began paying cash dividends in 1996. The following chart
summarizes cash dividends declared and paid during 1998 and 1999. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for restrictions on the Company's ability to pay cash dividends.)
RECORD DATE PAYMENT DATE CASH DIVIDEND
- -----------------------------------------------------------------------------
February 16, 1998 March 18, 1998 0.05
June 1, 1998 June 30, 1998 0.07
July 31, 1998 August 31, 1998 0.07
November 6, 1998 December 4, 1998 0.10
February 10, 1999 March 10, 1999 0.10
May 20, 1999 June 21, 1999 0.11
August 17, 1999 September 17, 1999 0.11
November 16, 1999 December 14, 1999 0.11
As of March 6, 2000, there were approximately 630 record holders of the
Company's common stock.
91
95
DIRECTORS
- ---------
Boyd M. Guttery *
Chairman of the Board
Resource Bancshares Mortgage Group, Inc.
Atlanta, Georgia
Stuart M. Cable
Attorney
Goodwin, Proctor, & Hoar LLP
law firm
Boston, Massachusetts
Douglas K. Freeman
Chief Executive Officer
Resource Bancshares Mortgage Group, Inc.
Columbia, South Carolina
David W. Johnson, Jr.
President
Resource Bancshares Mortgage Group, Inc.
Columbia, South Carolina
Robin C. Kelton
Chairman
Kelton International Ltd.
investment bank
London, England
John O. Wolcott *
Executive Vice President
Olayan America Corporation
investment company
New York, New York
EXECUTIVE OFFICERS
- ------------------
Douglas K. Freeman
Chief Executive Officer
David W. Johnson, Jr.
President
Steven F. Herbert
Corporate Senior Executive Vice President
And Corporate Chief Financial Officer
Richard M. Duncan
President of RBMG, Inc.
Larry W. Reed
President and Chief Executive Officer
Meritage Mortgage Corporation
* Audit Committee
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96
CORPORATE INFORMATION
Exchange: NASDAQ
Symbol: RBMG
Internet Address: http://www.rbmg.com/
Investor Relations Contact
Steven F. Herbert
Corporate Senior Executive Vice President
and Corporate Chief Financial Officer
7909 Parklane Road
Columbia, South Carolina 29223
Tel: (803) 741-3539
Fax: (803) 741-3586
E-mail : investors@rbmg.com
1-800-933-2890
Dividend Reinvestment Plan
Resource Bancshares Mortgage Group, Inc. has an optional dividend reinvestment
plan. Shareholders interested in participating should contact Steven F. Herbert
at the address set forth above.
Form 10K and Other Information
Copies of the Resource Bancshares Mortgage Group, Inc. Annual Report on Form
10K, as filed with the Securities and Exchange Commission, will be furnished
without charge to shareholders upon written request to Steven F. Herbert at the
address set forth above.
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company, a division of EquiServe
Telephone
Inside the US: 1-800-446-2617
Outside the US: 1-201-324-0498
TDD/TTY for hearing impaired: 1-201-222-4955
Operators are available Monday - Friday, 8:30 a.m. to 7:00 p.m. Eastern time. An
interactive automated system is available around the clock everyday.
Internet
Internet: http://www.equiserve.com
General Correspondence
EquiServe
P.O. Box 2500
Jersey City, NJ 07303-2500
For questions regarding stock transfers, change of address or lost certificates.
Certificate Transfers by Mail
EquiServe
P.O. Box 2506
Jersey City, NJ 07303-2506
Dividend Reinvestment Plan
EquiServe
Dividend Reinvestment Service
P.O. Box 2598
Jersey City, NJ 07303-2598
Attn: Resource Bancshares Mortgage Group, Inc. DRP
Access Account Information Via Internet
http://gateway.equiserve.com
Internet Helpline: 1-877-843-9327
Operators are available Monday-Friday, 8:30 a.m. to 7:00 p.m. Eastern time.
93
97
RETURN ON ASSETS / RETURN ON EQUITY*
ROA - ROE -
(RETURN ON (RETURN ON
YEAR ASSETS) EQUITY)
- --------------------------------------------------
1993 4.81% 38.5%
1994 5.25% 25.98%
1995 1.95% 17.00%
1996 2.22% 16.78%
1997 2.29% 16.34%
1998 2.68% 20.61%
1999 0.67% 3.53%
NET OPERATING INCOME*
Year CONSOLIDATED
- ------------- --------------------------
1993 $ 17,580
1994 18,043
1995 14,219
1996 22,815
1997 28,039
1998 47,754
1999 8,299
DILUTED OPERATING EARNINGS PER SHARE *
Year CONSOLIDATED
- -------------- ------------------
1993 $ 0.76
1994 1.10
1995 0.86
1996 1.17
1997 1.35
1998 2.03
1999 0.39
* Amounts reflect operating amounts only. Excluded are the impact of
nonrecurring charges reported in 1996 and 1997 and non-recurring income reported
in 1998, and workforce reduction charges reported in 1999.