1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number 000-21786
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 57-0962375
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7909 Parklane Road, Columbia, SC 29223
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (803)741-3000
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for each shorter period that the registrant was
required to file reports) and (ii) has been subject to such filing requirements
for the past 90 days.
YES [X] NO [ ]
The number of shares of common stock of the Registrant outstanding as of
April 30, 2000 was 18,658,271.
Page 1
Exhibit Index on Pages A to F
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Form 10-Q for the quarter ended March 31, 2000
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - (Unaudited)
Consolidated Balance Sheet 3
Consolidated Statement of Income 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 39
PART II. OTHER INFORMATION 41
ITEM 2. Changes in Securities and Use of Proceeds 41
ITEM 6. Exhibits and Reports on Form 8-K 41
SIGNATURES 42
EXHIBIT INDEX A-F
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED BALANCE SHEET
($ IN THOUSANDS)
March 31, December 31,
2000 1999
------------ -----------
(Unaudited)
ASSETS
Cash $ 21,150 $ 30,478
Receivable from sale of mortgage-backed securities 90,455 --
Receivables 34,396 40,219
Trading securities:
Residual interests in subprime securitizations 47,604 54,382
Mortgage loans held for sale 446,145 480,504
Lease receivables 164,904 155,559
Servicing rights, net 172,864 177,563
Premises and equipment, net 35,205 36,294
Accrued interest receivable 1,763 1,691
Goodwill and other intangibles 15,256 15,478
Other assets 36,363 35,014
----------- -----------
Total assets $ 1,066,105 $ 1,027,182
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 753,261 $ 709,803
Long-term borrowings 6,232 6,259
Accrued expenses 10,822 13,826
Other liabilities 96,238 84,822
----------- -----------
Total liabilities 866,553 814,710
=========== ===========
Preferred stock - par value $0.01 - 5,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock - par value $0.01 - 50,000,000 shares authorized;
31,637,331 shares issued and outstanding at March 31, 2000
and December 31, 1999 316 316
Additional paid-in capital 298,648 300,909
Retained earnings 44,467 56,506
Common stock held by subsidiary at cost - 7,767,099 shares at
March 31, 2000 and December 31, 1999 (98,953) (98,953)
Treasury stock - 4,924,388 and 4,686,391 shares at March 31, 2000
and December 31, 1999, respectively (39,912) (41,148)
Unearned shares of employee stock ownership plan - 503,244 and 537,084
unallocated shares at March 31, 2000 and December 31, 1999, respectively (5,014) (5,158)
----------- -----------
Total stockholders' equity 199,552 212,472
=========== ===========
Total liabilities and stockholders' equity $ 1,066,105 $ 1,027,182
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED INCOME STATEMENT
($ IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
For the Quarter Ended March 31,
-------------------------------
2000 1999
------------ ------------
REVENUES
Interest income $ 15,338 $ 26,355
Interest expense (11,230) (18,881)
------------ ------------
Net interest income 4,108 7,474
Net gain on sale of mortgage loans 9,283 37,289
Gain on sale of mortgage servicing rights 808 2,998
Servicing fees 10,629 12,998
Mark-to-market on residual interests in subprime securitizations (7,675) (1,349)
Other income 2,069 1,478
------------ ------------
Total revenues 19,222 60,888
------------ ------------
EXPENSES
Salary and employee benefits 16,607 20,497
Occupancy expense 3,610 3,173
Amortization and provision for impairment of mortgage servicing rights 6,902 8,980
Provision expense 2,001 3,055
General and administrative expenses 5,866 7,825
------------ ------------
Total expenses 34,986 43,530
------------ ------------
Income (loss) before income taxes (15,764) 17,358
Income tax benefit (expense) 5,797 (6,197)
------------ ------------
Net income (loss) $ (9,967) $ 11,161
============ ============
Weighted average common shares outstanding -- Basic 18,657,683 22,224,610
============ ============
Net income (loss) per common share -- Basic $ (0.53) $ 0.50
============ ============
Weighted average common shares outstanding -- Diluted 18,657,683 22,477,224
============ ============
Net income (loss) per common share -- Diluted $ (0.53) $ 0.50
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands, except share information)
(Unaudited)
Unearned
Shares of
Common Employee
Common Stock Additional Stock Stock Total
Three Months Ended ------------------- Paid-in Retained Held by Treasury Ownership Stockholders
March 31, 1999 Shares Amount Capital Earnings Subsidiary Stock Plan Equity
- ---------------------------- ---------- ------- --------- -------- ---------- -------- ---------- ------------
Balance, December 31, 1998 31,637,331 $ 316 $ 307,114 $ 59,599 $ (98,953) $(11,499) $ (4,419) $252,158
Issuance of restricted stock 116 1,285 1,401
Cash dividends (2,244) (2,244)
Treasury stock purchases (18,501) (18,501)
Shares committed to be
released under Employee
Stock Ownership Plan 180 320 500
Purchase of shares by
Employee Stock Ownership
Plan (750) (750)
Shares issued or purchased
under Dividend Reinvestment
and Stock Purchase Plan and
Stock Investment Plan (56) (30) 1,359 1,273
Net income 11,161
Total comprehensive income 11,161
---------- ------ --------- -------- --------- -------- -------- --------
Balance, March 31, 1999 31,637,331 $ 316 $ 307,354 $ 68,486 $ (98,953) $(27,356) $ (4,849) $244,998
========== ====== ========= ======== ========= ======== ======== ========
Shares of
Common Employee
Common Stock Additional Stock Stock Total
Three Months Ended ------------------- Paid-in Retained Held by Treasury Ownership Stockholders
March 31, 2000 Shares Amount Capital Earnings Subsidiary Stock Plan Equity
- ---------------------------- ---------- ------- --------- -------- ---------- -------- ---------- ------------
Balance, December 31, 1999 31,637,331 $ 316 $ 300,909 $ 56,506 $ (98,953) $(41,148) $ (5,158) $212,472
Issuance of restricted stock (960) 1,750 790
Cash dividends (2,054) (2,054)
Treasury stock purchases (2,960) (2,960)
Shares committed to be
released under Employee
Stock Ownership Plan 81 144 225
Shares issued or purchased
under Dividend Reinvestment
and Stock Purchase Plan and
Stock Investment Plan (1,382) (18) 2,446 1,046
Net income (loss) (9,967)
Total comprehensive income (9,967)
---------- ------ --------- -------- --------- -------- -------- --------
Balance, March 31, 2000 31,637,331 $ 316 $ 298,648 $ 44,467 $ (98,953) $(39,912) $ (5,014) $199,552
========== ====== ========= ======== ========= ======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2000 1999
---------- -----------
OPERATING ACTIVITIES
Net income $ ($9,967) $ 11,161
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 9,500 10,538
Employee Stock Ownership Plan compensation 225 500
Provision for estimated foreclosure losses and repurchased loans 2,001 3,055
Increase in receivables from sale of mortgage backed securities (90,455) --
Decrease in receivables 5,823 9,837
Acquisition of mortgage loans (1,410,081) (3,474,106)
Proceeds from sales of mortgage loans
and mortgage-backed securities 1,452,081 3,822,113
Acquisition of mortgage servicing rights (33,325) (100,984)
Sales of mortgage servicing rights 31,929 78,888
Net gain on sales of mortgage loans and servicing rights (10,091) (40,287)
Increase in accrued interest on loans (72) (94)
Increase in lease receivables (9,704) (11,643)
Increase in other assets (1,800) (7,660)
Decrease in residual certificates 6,778 1,158
Increase in accrued expenses and other liabilities 8,412 15,660
---------- -----------
Net cash (used in) provided by operating activities (48,746) 318,136
---------- -----------
INVESTING ACTIVITIES
Purchases of premises and equipment (1,209) (2,063)
Disposition of premises and equipment 374 0
---------- -----------
Net cash used in investing activities (835) (2,063)
---------- -----------
FINANCING ACTIVITIES
Proceeds from borrowings 1,718,663 11,266,371
Repayment of borrowings (1,675,232) (11,508,155)
Issuance of restricted stock 790 1,401
Shares issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan 1,046 1,273
Acquisition of treasury stock (2,960) (18,501)
Cash dividends (2,054) (2,244)
Loans to Employee Stock Ownership Plan 0 (750)
---------- -----------
Net cash provided by (used in) financing activities 40,253 (260,605)
---------- -----------
Net increase (decrease) in cash (9,328) 55,468
Cash, beginning of year 30,478 18,124
---------- -----------
Cash, end of year $ 21,150 $ 73,592
========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
Note 1 - Basis of Presentation:
The financial information included herein should be read in conjunction
with the consolidated financial statements and related notes of Resource
Bancshares Mortgage Group, Inc. (the Company), included in the Company's
December 31, 1999, Annual Report on Form 10-K. Certain financial
information, which is normally included in financial statements prepared in
accordance with generally accepted accounting principles, is not required
for interim financial statements and has been omitted. The accompanying
interim consolidated financial statements are unaudited. However, in the
opinion of management of the Company, all adjustments, consisting of normal
recurring items, necessary for a fair presentation of operating results for
the periods shown have been made.
During the first quarter of 2000, management and the Board of Directors
reconsidered the Company's current positioning in the market and its
corporate, management and leadership structures. As a result, the Company
is reorganizing around the primary business processes that are critical to
achieving its new vision: production/sales, customer fulfillment, servicing
and portfolio management. These business units will continue to be
centrally supported by traditional corporate functions. Segment reporting,
which is done based upon the current holding company organization
structure, will change in future periods when the new organization
structure is fully implemented.
Certain prior period amounts have been reclassified to conform to
current period presentation and for comparability purposes.
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 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.
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The following is a reconciliation of basic earnings per share to
diluted earnings per share for the quarter ended March 31, 2000 and 1999,
respectively:
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
2000 1999
-------------- -------------
Net income (loss) $ (9,967) $ 11,161
-------------- -------------
Average common shares outstanding 18,657,683 22,224,610
-------------- -------------
Earnings (loss) per share - basic $ (0.53) $ 0.50
-------------- -------------
Dilutive stock options -- 252,614
-------------- -------------
Average common and common equivalent shares outstanding 18,657,683 22,477,224
-------------- -------------
Earnings (loss) per share - diluted $ (0.53) $ 0.50
-------------- -------------
Options to purchase 2,014,649 shares of common stock at prices ranging
between $4.50 - $17.75 per share were outstanding during the first quarter
of 2000 but were not included in the computation of diluted earnings
(loss) per share because the options' exercise prices were greater than
the average market price of the common shares.
Following is a summary of the allocated revenues and expenses for each
of the Company's operating divisions for the quarter ended March 31, 2000
and 1999, respectively:
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Agency-Eligible
For the three months ---------------------------------- Commercial Total Other/
ended March 31, 2000(1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ 238 $(1,297) $ (16) $ 3,086 $ (8) $2,127 $ 4,130 $ (22) $ 4,108
Net gain on sale of
mortgage loans 6,206 -- -- 2,441 636 -- 9,283 -- 9,283
Gain on sale of mortgage
servicing rights -- 808 -- -- -- -- 808 -- 808
Servicing fees -- 9,365 -- -- 1,314 99 10,778 (149) 10,629
Mark to market on
residual interests in
subprime securitizations -- -- -- (7,675) -- -- (7,675) -- (7,675)
Other income 120 128 746 893 13 262 2,162 (93) 2,069
------------------------------------------------------------------------------------------------------
Total revenues 6,564 9,004 730 (1,255) 1,955 2,488 19,486 (264) 19,222
------------------------------------------------------------------------------------------------------
Salary and employee
benefits 6,888(2) 693 42 5,545(3) 1,854(4) 760 15,782 825 16,607(5)
Occupancy expense 2,690(2) 55 -- 629 290 120 3,784 (174) 3,610(5)
Amortization and provision
for impairment of
mortgage servicing rights -- 6,277 -- -- 625 -- 6,902 -- 6,902
Provision expense 900 -- -- 742 -- 359 2,001 -- 2,001
General and administrative
expenses 2,514 938 89 1,454 417 294 5,706 160 5,866
------------------------------------------------------------------------------------------------------
Total expenses 12,992(2) 7,963 131 8,370(3) 3,186(4) 1,533 34,175 811 34,986(5)
------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes (6,428)(2) 1,041 599 (9,625)(3) (1,231)(4) 955 (14,689) (1,075) (15,764)(5)
Income tax benefit (expense) 2,383(2) (386) (210) 3,521(3) 466(4) (376) 5,398 399 5,797(5)
------------------------------------------------------------------------------------------------------
Net income (loss) $(4,045)(2) $ 655 $ 389 $(6,104)(3) $ (765)(4) $ 579 $ (9,291) $ (676) $ (9,967)(5)
======================================================================================================
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible. Management believes that these and all other revenues and expenses
have been allocated to the respective divisions on a reasonable basis.
(2) Includes work force reduction charge totaling $307 pre-tax or $194
after-tax. Exclusive thereof, salary and employee benefits, occupancy
expense, total expenses, net income (loss) before income taxes, income tax
benefit (expense) and net income would have been $6,752, $2,519, $12,685,
$(6,121), $2,270 and $(3,851), respectively.
(3) Includes work force reduction charge totaling $2,075 pre-tax or $1,312
after-tax. Exclusive thereof, salary and employee benefits, total expenses,
net income (loss) before income taxes, income tax benefit (expense) and net
income would have been $3,470, $6,295, $(7,550), $2,758 and $4,792,
respectively.
(4) Includes work force reduction charge totaling $191 pre-tax or $121
after-tax. Exclusive thereof, salary and employee benefits, total expenses,
net income (loss) before income taxes, income tax benefit (expense) and net
income (loss) would have been $1,663, $2,995, $(1,040), $396 and $(644),
respectively.
(5) Includes work force reduction charge totaling $194 pre-tax or $122
after-tax. Exclusive thereof, salary and employee benefits, occupancy
expense, total expenses, net income (loss) before income taxes, income tax
benefit (expense) and net income (loss) would have been $14,205, $3,439,
$32,413, $(13,191), $4,851 and $(8,430), respectively.
Agency-Eligible
For the three months ---------------------------------- Commercial Total Other/
ended March 31, 1999* Production Servicing Reinsurance Subprime Mortgage Leasing Segments Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ 3,761 $(1,389) $ -- $ 3,473 $ 94 $1,645 $ 7,584 $ (110) $ 7,474
Net gain on sale of
mortgage loans 33,193 -- -- 2,857 1,239 -- 37,289 -- 37,289
Gain on sale of mortgage
servicing rights -- 2,998 -- -- - -- 2,998 -- 2,998
Servicing fees -- 11,703 -- -- 975 161 12,839 159 12,998
Mark to market on
residual interests in
subprime securitizations -- -- -- (1,349) -- -- (1,349) -- (1,349)
Other income 82 161 652 417 11 151 1,474 4 1,478
------------------------------------------------------------------------------------------------------
Total revenues 37,036 13,473 652 5,398 2,319 1,957 60,835 53 60,888
------------------------------------------------------------------------------------------------------
Salary and employee
benefits 11,638 898 -- 3,301 1,738 640 18,215 2,282 20,497
Occupancy expense 1,934 107 -- 583 263 104 2,991 182 3,173
Amortization and provision
for impairment of
mortgage servicing rights -- 8,516 -- -- 464 -- 8,980 -- 8,980
Provision expense 2,108 -- 65 499 -- 383 3,055 -- 3,055
General and administrative
expenses 3,554 1,778 27 1,489 430 370 7,648 177 7,825
------------------------------------------------------------------------------------------------------
Total expenses 19,234 11,299 92 5,872 2,895 1,497 40,889 2,641 43,530
------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes 17,802 2,174 560 (474) (576) 460 19,946 (2,588) 17,358
Income tax benefit (expense) (6,367) (773) (197) 168 219 (192) (7,142) 945 (6,197)
------------------------------------------------------------------------------------------------------
Net income (loss) $11,435 $ 1,401 $ 363 $ (306) $ (357) $ 268 $ 12,804 $ (1,643) $ 11,161
======================================================================================================
* Revenues and expenses have been allocated on a direct basis to the extent
possible. Management believes that these and all other revenues and expenses
have been allocated to the respective divisions on a reasonable basis.
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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) 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 QUARTER ENDED MARCH 31,
-------------------------------
2000 1999
----------- ----------
Agency-Eligible Loan Production:
Correspondent $ 914,034 $2,428,021
Wholesale 248,088 711,822
---------- ----------
Total Agency-Eligible Loan Production 1,162,122 3,139,843
Subprime Loan Production 152,484 184,111
Commercial Mortgage (for Investors
And Conduits) Loan Production 95,475 150,152
Lease Production 24,246 20,525
---------- ----------
Total Mortgage Loan and Lease Production $1,434,327 $3,494,631
========== ==========
Initially, the Company was focused exclusively on purchasing
agency-eligible mortgage loans through its correspondents. To diversify its
sources of residential loan volume, the Company started a wholesale operation in
1994, a retail operation in 1995 (which was sold in 1998) and a subprime
operation in 1997. To further diversify its sources of production and revenue,
the Company acquired a small-ticket commercial equipment lease operation and a
commercial mortgage loan business. These two newer sources of production
accounted for approximately 8% and 5% of the Company's total production for the
first quarter of 2000 and 1999, respectively. Historically, correspondent
operations have accounted for a diminishing percentage of the Company's total
production (64% for the first quarter of 2000 and 69% for the first quarter of
1999). Wholesale and subprime production accounted for 17% and 11%,
respectively, of the Company's first quarter 2000 production. A summary of key
information relevant to industry loan production activity is set forth below:
($ IN THOUSANDS) AT OR FOR THE QUARTER ENDED MARCH 31,
-------------------------------------
2000 1999
-------------- ----------------
U. S. 1-4 Family Mortgage Originations Statistics (1):
U. S. 1-4 Family Mortgage Originations $197,000,000 $359,000,000
Adjustable Rate Mortgage Market Share 32.00% 12.00%
Estimated Fixed Rate Mortgage Originations $134,000,000 $316,000,000
Company Information:
Residential Loan Production $ 1,314,606 $ 3,323,954
Estimated Company Market Share 0.67% 0.93%
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's total residential mortgage production decreased by 60% to
$1.3 billion for the first quarter of 2000 from $3.3 billion for the first
quarter of 1999. During the first quarter of 2000, interest rates were higher
than during the first quarter of 1999, resulting in a
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decrease in industry wide residential loan origination of 45%. Likewise, the
higher rate environment resulted in an increase in ARM market share in the first
quarter of 2000. The Company has historically focused on fixed rate products,
and only recently has commenced offering a broader spectrum of mortgage
products, including adjustable rate products. Further, as often happens in the
mortgage banking industry, a rise in interest rates and resulting decrease in
volumes prompted increasing price competition in the marketplace during the
quarter.
Correspondent Loan Production
The Company purchases closed mortgage loans through its network of approved
correspondent lenders. Correspondents are primarily mortgage lenders, larger
mortgage brokers and smaller savings and loan associations and commercial banks
that have met the Company's approval requirements. The Company continues to
emphasize correspondent loan production as its basic business focus because of
the lower fixed expenses and capital investment required of the Company. A
summary of key information relevant to the Company's correspondent loan
production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE QUARTER ENDED MARCH 31,
-------------------------------------
2000 1999
------------ ----------
Correspondent Loan Production $914,034 $2,428,021
Estimated Correspondent Market Share (1) 0.46% 0.68%
Approved Correspondents 944 851
Correspondent Division Expenses $ 10,567 $ 17,062
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's correspondent loan production decreased by 62% to $0.9
billion for the first quarter of 2000 from $2.4 billion for the first quarter of
1999. During the first quarter of 2000, interest rates were higher than during
the first quarter of 1999, resulting in a decrease in industry wide residential
loan origination of 45%. Likewise, the higher rate environment resulted in an
increase in ARM market share in the first quarter of 2000. The Company has
historically focused on fixed rate products, and only recently has commenced
offering a broader spectrum of mortgage products, including adjustable rate
products. Further, as often happens in the mortgage banking industry, a rise in
interest rates and resulting decrease in volumes prompted increasing price
competition in the market place during the quarter. The correspondent division
expenses decreased by 38% to $10.6 million for the first quarter of 2000 from
$17.1 million for the first quarter of 1999 primarily due to the decrease in
correspondent production during the same period.
Wholesale Loan Production
The wholesale division receives loan applications through brokers,
underwrites the loans, funds the loans at closing and prepares all closing
documentation. The wholesale branches and regional operating centers handle all
shipping and follow-up procedures on loans. Typically, mortgage brokers are
responsible for taking applications and accumulating the information precedent
to the Company's processing and underwriting of the loans. Although the
establishment of wholesale branch offices and regional operating centers
involves the incurrence of fixed expenses associated with maintaining those
offices, wholesale operations also generally
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provide for higher profit margins than correspondent loan production.
Additionally, each branch office and regional operating center can serve a
relatively sizable geographic area by establishing relationships with large
numbers of independent mortgage loan brokers who bear much of the cost of
identifying and interacting directly with loan applicants. In 1999, the Company
closed branches and established regional operations centers to better facilitate
service to larger geographic areas. The Company's nationwide salesforce is
supported by these regional operating centers. A summary of key information
relevant to the Company's wholesale production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE QUARTER ENDED MARCH 31,
-------------------------------------
2000 1999
--------------- -------------
Wholesale Loan Production $248,088 $711,822
Estimated Wholesale Market Share (1) 0.13% 0.20%
Wholesale Division Direct Operating Expenses $ 2,425 $ 4,557
Approved Brokers 4,173 3,401
Regional Operation Centers 5 0
Number of Branches 2 15
Number of Employees 102 174
(1) Source: Mortgage Bankers Association of America, Economics Department.
Wholesale loan production decreased 65% ($0.5 billion) from $0.7 billion
for the first quarter of 1999 to $0.2 billion for the first quarter of 2000.
During the first quarter of 2000, interest rates were higher than during the
first quarter of 1999, resulting in a decrease in industry wide residential loan
origination of 45%. Likewise, the higher rate environment resulted in an
increase in ARM market share in the first quarter of 2000. The Company has
historically focused on fixed rate products, and only recently has commenced
offering a broader spectrum of mortgage products, including adjustable rate
products. Further, as often happens in the mortgage banking industry, a rise in
interest rates and resulting decrease in volumes prompted increasing price
competition in the market place during the quarter.
Subprime Loan Production
In 1997, the Company began its initial expansion into subprime lending
activities. The Company does subprime business through its wholly-owned
subsidiary, Meritage Mortgage Corporation (Meritage). A summary of key
information relevant to the Company's subprime production activities is set
forth below:
($ IN THOUSANDS) AT OR FOR THE QUARTER ENDED MARCH 31,
-------------------------------------
2000 1999
--------------- -------------
Subprime Loan Production $152,484 $184,111
Subprime Division Direct Operating Expenses $ 8,370 $ 5,955
Number of Brokers 3,529 1,831
Number of Employees 279 316
Number of Branches 10 19
13
14
Subprime loan production decreased by 17% to $152.5 million for the
first quarter of 2000 as compared to $184.1 million during the first quarter of
1999 primarily due to a decrease in industry wide residential loan originations
of 45%. Subprime division direct operating expenses increased by 41% to $8.4
million for the first quarter of 2000 as compared to 6.0 million during the
first quarter of 1999. This was primarily due to recognition of $2.2 million of
severance benefits associated with a planned reorganization of the Company
around it's primary business processes (production/sales, customer fulfillment,
servicing and portfolio management). Charges associated with the planned
reorganization are discussed elsewhere in this Management's Discussion and
Analysis. Between March 31, 1999 and 2000, respectively, the Company increased
the number of its subprime brokers by 1,698. The number of branches declined
from 19 at March 31, 1999 to 10 at of March 31, 2000 as the Company reassessed
the geographic regions that each branch covers.
Commercial Mortgage Production
The Company's subsidiary, Laureate Capital Corp. (Laureate), originates
commercial mortgage loans for various insurance companies and other investors.
Commercial mortgage loans are generally originated in the name of the investor
and, in most instances, Laureate retains the right to service the loans under a
servicing agreement. A summary of key information relevant to the Company's
commercial mortgage production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE QUARTER ENDED
MARCH 31,
---------------------------
2000 1999
----------- ----------
Commercial Mortgage Production $95,475 $150,152
Commercial Mortgage Division Direct Operating Expenses $ 3,186 $ 2,895
Number of Branches 11 13
Number of Employees 87 83
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 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 QUARTER ENDED
MARCH 31,
---------------------------
2000 1999
----------- ----------
Lease Production $24,246 $20,525
Lease Division Direct Operating Expenses $ 1,533 $ 1,497
Number of Brokers 207 232
Number of Employees 62 65
14
15
SERVICING
Residential Mortgage Servicing
Residential 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:
($ IN THOUSANDS) AT OR FOR THE QUARTER ENDED
MARCH 31,
---------------------------
2000 1999
----------- ------------
Underlying Unpaid Principal Balances:
Beginning Balance* $ 7,822,394 $ 9,865,100
Agency-Eligible Loan Production (net of
servicing-released production)* 1,100,297 3,133,563
Net Change in Work-in-Progress* 77,109 190,242
Sales of Servicing* (1,128,536) (3,003,253)
Paid-In-Full Loans* (106,809) (365,729)
Amortization, Curtailments and Other, net* (51,439) (84,169)
----------- -----------
Ending Balance* 7,713,016 9,735,754
Subservicing Ending Balance 1,357,253 3,272,754
----------- -----------
Total Underlying Unpaid Principal Balances $ 9,070,269 $13,008,508
=========== ===========
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and, therefore, exclude the subservicing portfolio. The
ending balance for the first quarter of 2000 and 1999, respectively, includes
$174,595 and -0-, respectively, of subprime loans being temporarily serviced
until these loans are sold.
Of the $7.7 billion and $9.7 billion unpaid principal balance at March 31,
2000 and 1999, $6.3 billion and $5.8 billion, respectively, of the related
mortgage servicing right asset is classified as available-for-sale, while $1.4
billion and $3.9 billion, respectively, of the related mortgage servicing right
asset is classified as held-for-sale.
15
16
A summary of agency-eligible servicing statistics follows:
($ IN THOUSANDS) AT OR FOR THE QUARTER ENDED
MARCH 31,
---------------------------
2000 1999
----------- -----------
Average Underlying Unpaid Principal Balances
(including subservicing) $ 8,041,986 $13,456,746
Weighted Average Note Rate* 7.54% 7.21%
Weighted Average Servicing Fee* 0.44% 0.44%
Delinquency (30+ days) Including Bankruptcies
and Foreclosures* 2.61% 1.82%
Number of Servicing Division Employees 76 157
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and, therefore, exclude the subservicing portfolio.
The $5.4 billion, or 40%, decrease in the average underlying unpaid
principal balance of agency-eligible mortgage loans being serviced and
subserviced for the first quarter of 2000 as compared to the first quarter of
1999 is primarily related to the Company's decreased loan production volumes
during the first quarter of 2000. Since the Company generally sells servicing
rights related to the agency-eligible loans it produces within 90 to 180 days of
purchase or origination, decreased production volumes generally result in a
lower volume of mortgage servicing rights held in inventory pending sale.
Commercial Mortgage Servicing
Laureate originates commercial mortgage loans for investors and in most
cases, Laureate retains the right to service the loans. A summary of key
information relevant to the Company's commercial mortgage servicing activities
is set forth below:
($ IN THOUSANDS) AT OR FOR THE QUARTER ENDED
MARCH 31,
---------------------------
2000 1999
----------- -----------
Commercial Mortgage Loan Servicing Portfolio $ 4,186,017 $ 3,437,851
Weighted Average Note Rate 7.92% 8.02%
Delinquencies (30+ Days) 0.55% 0.43%
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:
16
17
($ IN THOUSANDS) AT OR FOR THE QUARTER ENDED
MARCH 31,
---------------------------
2000 1999
----------- -----------
Owned Lease Servicing Portfolio $ 161,576 $ 110,161
Serviced For Investors Servicing Portfolio 10,539 30,366
----------- -----------
Total Managed Lease Servicing Portfolio $ 172,115 $ 140,527
=========== ===========
Weighted Average Net Yield For Managed
Lease Servicing Portfolio 10.63% 10.79%
Delinquencies (30+ Days) Managed Lease
Servicing Portfolio 2.82% 1.87%
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:
($ IN THOUSANDS) AT OR FOR THE QUARTER ENDED
MARCH 31,
---------------------------
2000 1999
----------- -----------
Total Company Servicing Fees $ 10,629 $ 12,998
Net Interest Income from Owned Leases 2,127 1,645
----------- -----------
Total Servicing Fees and Interest from Owned Leases $ 12,756 $ 14,643
----------- -----------
Total Company Operating Expenses $ 34,986 $ 43,530
Total Company Amortization and Depreciation (9,500) (10,538)
----------- -----------
Total Company Operating Expenses, Net of
Amortization and Depreciation $ 25,486 $ 32,992
----------- -----------
Coverage Ratio 50% 44%
=========== ===========
The Company's coverage ratios for the first quarter of 2000 and 1999 were 50%
and 44%, respectively. The coverage ratio for the first quarter of 1999 was
lower than the Company's target level of between 50% and 80%. In the opinion of
the Company's management, market prices for servicing rights were attractive
throughout that period. Accordingly, management 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
remain in line with the stated objective of maintaining a coverage ratio of
between 50% and 80%.
17
18
RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 2000,
COMPARED TO QUARTER ENDED MARCH 31, 1999
SUMMARY BY OPERATING DIVISION
Net income (loss) per common share on a diluted basis for the first
quarter of 2000 was $(0.53) as compared to $0.50 for the first quarter of 1999.
Following is a summary of the revenues and expenses for each of the Company's
operating divisions for the quarters ended March 31, 2000 and 1999,
respectively:
18
19
Agency-Eligible
For the three months ---------------------------------- Commercial Total Other/
ended March 31, 2000(1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ 238 $(1,297) $ (16) $ 3,086 $ (8) $2,127 $ 4,130 $ (22) $ 4,108
Net gain on sale of
mortgage loans 6,206 -- -- 2,441 636 -- 9,283 -- 9,283
Gain on sale of mortgage
servicing rights -- 808 -- -- -- -- 808 -- 808
Servicing fees -- 9,365 -- -- 1,314 99 10,778 (149) 10,629
Mark to market on
residual interests in
subprime securitizations -- -- -- (7,675) -- -- (7,675) -- (7,675)
Other income 120 128 746 893 13 262 2,162 (93) 2,069
------------------------------------------------------------------------------------------------------
Total revenues 6,564 9,004 730 (1,255) 1,955 2,488 19,486 (264) 19,222
------------------------------------------------------------------------------------------------------
Salary and employee
benefits 6,888(2) 693 42 5,545(3) 1,854(4) 760 15,782 825 16,607(5)
Occupancy expense 2,690(2) 55 -- 629 290 120 3,784 (174) 3,610(5)
Amortization and provision
for impairment of
mortgage servicing rights -- 6,277 -- -- 625 -- 6,902 -- 6,902
Provision expense 900 -- -- 742 -- 359 2,001 -- 2,001
General and administrative
expenses 2,514 938 89 1,454 417 294 5,706 160 5,866
------------------------------------------------------------------------------------------------------
Total expenses 12,992(2) 7,963 131 8,370(3) 3,186(4) 1,533 34,175 811 34,986(5)
------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes (6,428)(2) 1,041 599 (9,625)(3) (1,231)(4) 955 (14,689) (1,075) (15,764)(5)
Income tax benefit (expense) 2,383(2) (386) (210) 3,521(3) 466(4) (376) 5,398 399 5,797(5)
------------------------------------------------------------------------------------------------------
Net income (loss) $(4,045)(2) $ 655 $ 389 $(6,104)(3) $ (765)(4) $ 579 $ (9,291) $ (676) $ (9,967)(5)
======================================================================================================
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible. Management believes that these and all other revenues and expenses
have been allocated to the respective divisions on a reasonable basis.
(2) Includes work force reduction charge totaling $307 pre-tax or $194
after-tax. Exclusive thereof, salary and employee benefits, occupancy
expense, total expenses, net income (loss) before income taxes, income tax
benefit (expense) and net income would have been $6,752, $2,519, $12,685,
$(6,121), $2,270 and $(3,851), respectively.
(3) Includes work force reduction charge totaling $2,075 pre-tax or $1,312
after-tax. Exclusive thereof, salary and employee benefits, total expenses,
net income (loss) before income taxes, income tax benefit (expense) and net
income would have been $3,470, $6,295, $(7,550), $2,758 and $4,792,
respectively.
(4) Includes work force reduction charge totaling $191 pre-tax or $121
after-tax. Exclusive thereof, salary and employee benefits, total expenses,
net income (loss) before income taxes, income tax benefit (expense) and net
income (loss) would have been $1,663, $2,995, $(1,040), $396 and $(644),
respectively.
(5) Includes work force reduction charge totaling $194 pre-tax or $122
after-tax. Exclusive thereof, salary and employee benefits, occupancy
expense, total expenses, net income (loss) before income taxes, income tax
benefit (expense) and net income (loss) would have been $14,205, $3,439,
$32,413, $(13,191), $4,851 and $(8,430), respectively.
Agency-Eligible
For the three months ---------------------------------- Commercial Total Other/
ended March 31, 1999* Production Servicing Reinsurance Subprime Mortgage Leasing Segments Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income $ 3,761 $(1,389) $ -- $ 3,473 $ 94 $1,645 $ 7,584 $ (110) $ 7,474
Net gain on sale of
mortgage loans 33,193 -- -- 2,857 1,239 -- 37,289 -- 37,289
Gain on sale of mortgage
servicing rights -- 2,998 -- -- - -- 2,998 -- 2,998
Servicing fees -- 11,703 -- -- 975 161 12,839 159 12,998
Mark to market on
residual interests in
subprime securitizations -- -- -- (1,349) -- -- (1,349) -- (1,349)
Other income 82 161 652 417 11 151 1,474 4 1,478
------------------------------------------------------------------------------------------------------
Total revenues 37,036 13,473 652 5,398 2,319 1,957 60,835 53 60,888
------------------------------------------------------------------------------------------------------
Salary and employee
benefits 11,638 898 -- 3,301 1,738 640 18,215 2,282 20,497
Occupancy expense 1,934 107 -- 583 263 104 2,991 182 3,173
Amortization and provision
for impairment of
mortgage servicing rights -- 8,516 -- -- 464 -- 8,980 -- 8,980
Provision expense 2,108 -- 65 499 -- 383 3,055 -- 3,055
General and administrative
expenses 3,554 1,778 27 1,489 430 370 7,648 177 7,825
------------------------------------------------------------------------------------------------------
Total expenses 19,234 11,299 92 5,872 2,895 1,497 40,889 2,641 43,530
------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes 17,802 2,174 560 (474) (576) 460 19,946 (2,588) 17,358
Income tax benefit (expense) (6,367) (773) (197) 168 219 (192) (7,142) 945 (6,197)
------------------------------------------------------------------------------------------------------
Net income (loss) $11,435 $ 1,401 $ 363 $ (306) $ (357) $ 268 $ 12,804 $ (1,643) $ 11,161
======================================================================================================
* Revenues and expenses have been allocated on a direct basis to the extent
possible. Management believes that these and all other revenues and expenses
have been allocated to the respective divisions on a reasonable basis.
19
20
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage production operations.
($ IN THOUSANDS) AT OR FOR THE QUARTER ENDED
MARCH 31,
----------------------------
2000 1999
----------- ----------
Net interest income $ 238 $ 3,761
Net gain on sale of mortgage loans 6,206 33,193
Other income 120 82
----------- ----------
Total production revenue 6,564 37,036
----------- ----------
Salary and employee benefits 6,888 11,638
Occupancy expense 2,690 1,934
Provision expense 900 2,108
General and administrative expenses 2,514 3,554
----------- ----------
Total production expenses 12,992 19,234
----------- ----------
Net pre-tax production margin $ (6,428) $ 17,802
----------- ----------
Production $ 1,162,122 $3,139,849
Pool delivery 1,164,906 3,418,299
Total production revenue to pool delivery 56 bps 110 bps
Total production expenses to production 112 bps 61 bps
----------- ----------
Net pre-tax production margin (56) bps 49 bps
=========== ==========
Summary
The production revenue to pool delivery ratio decreased 54 basis points for
the first quarter of 2000 as compared to the first quarter of 1999. Net gain on
sale of mortgage loans (53 basis points for the first quarter of 2000 versus 97
basis points for 1999) declined primarily due to compressed margins attributable
to an aggressive competitive pricing environment and lower overall
agency-eligible production volume. Net interest income decreased from 11 basis
points in the first quarter of 1999 to 2 basis points in the first quarter of
2000 primarily as a result of a flattened yield curve. The production expenses
to production ratio increased 51 basis points from the first quarter of 1999 to
the first quarter of 2000. This is primarily due to the 63% decline in
production for the first quarter of 2000 as compared to the first quarter of
1999. Also, there were $0.3 million in charges ($0.2 million in occupancy
expense and $0.1 million in salary and employee benefits) during the first
quarter of 2000 associated with the reduction-in-force executed in late 1999.
This was partially offset by a $6.2 million decline in total production expenses
for the first quarter of 2000 as compared to the first quarter of 1999. As a
consequence of the foregoing, the Company's net agency-eligible pre-tax
production margin declined 105 basis points.
Net Interest Income
The following table analyzes net interest income allocated to the
Company's agency-eligible mortgage production activities in terms of rate and
volume variances of the interest spread (the difference between interest rates
earned on loans and mortgage-backed securities and interest
20
21
rates paid on interest-bearing sources of funds) for the quarters ended March
31, 2000 and 1999, respectively:
($ IN THOUSANDS)
Variance
Average Volume Average Rate Interest Attributable to
- ----------------------------------------- --------------------- ----------------------
2000 1999 2000 1999 2000 1999 Variance Rate Volume
- ----------------------------------------- ----------------------------------------------------
INTEREST INCOME
Mortgages Held-for-Sale
and Mortgage-Backed
$ 267,699 $1,052,324 8.01% 6.70% Securities $ 5,364 $17,628 $(12,264) $880 $(13,144)
- ----------------------------------------- ----------------------------------------------------
INTEREST EXPENSE
$ 259,132 $ 435,572 4.90% 4.16% Warehouse Line * $ 3,168 $ 4,463 $ (1,295) $513 $ (1,808)
-- 603,776 -- 5.16% Gestation Line -- 7,677 (7,677) -- (7,677)
123,309 127,750 7.01% 5.91% Servicing Secured Line 2,156 1,861 295 360 (65)
4,362 28,233 5.88% 5.21% Servicing Receivables Line 64 363 (299) 8 (307)
7,685 8,436 8.61% 8.27% Other Borrowings 165 172 (7) 8 (15)
Facility Fees & Other Charges 904 830 74 -- 74
- ----------------------------------------- ----------------------------------------------------
$ 394,488 $1,203,767 6.57% 5.18% Total Interest Expense $ 6,457 $15,366 $ (8,909) 889 $ (9,798)
- ----------------------------------------- ----------------------------------------------------
Net Interest Income Before
1.44% 1.52% Interdivisional Allocations $(1,093) $ 2,262 $ (3,355) $ (9) $ (3,346)
================ =============================
Allocation to Agency-Eligible
Servicing Division 1,297 1,389
Allocation to Other 127 110
Intercompany Net Interest
Expense Included In Segment (93) --
------------------
Net Interest Income $ 238 $ 3,761
==================
* The interest-rate yield on the warehouse line is net of the benefit of escrow
deposits.
The 8 basis point decrease in the interest-rate spread was primarily as a
result of a flattened yield curve. 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 QUARTER ENDED MARCH 31,
------------------------------
2000 1999
----------- -----------
Gross proceeds on sales of mortgage loans $ 1,208,385 $ 3,429,942
Initial unadjusted acquisition cost of mortgage loans sold, net of
hedge results 1,209,729 3,426,577
----------- -----------
Unadjusted gain (loss) on sale of mortgage loans (1,344) 3,365
Loan origination and correspondent program administrative fees 2,280 8,338
----------- -----------
Unadjusted aggregate margin 936 11,703
Acquisition basis allocated to mortgage servicing rights (SFAS No. 125) 5,795 22,349
Net deferred costs and administrative fees recognized (525) (859)
----------- -----------
Net gain on sale of agency-eligible mortgage loans $ 6,206 $ 33,193
=========== ===========
Net gain on sale of agency-eligible mortgage loans decreased $27.0
million from $33.2 million for the first quarter of 1999 to $6.2 million for the
first quarter of 2000. The decrease is
21
22
primarily due to compressed margins attributable to an aggressive competitive
pricing environment in the correspondent channel and lower overall
agency-eligible production volume.
Receivable from sale of mortgage-backed securities
The company sold certain mortgage-backed securities during the first
quarter of 2000, for which it did not receive the cash settlement until early
in the second quarter of 2000. This resulted in a $90.5 million receivable on
the March 31, 2000 Balance Sheet.
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 the first quarter of 2000
and 1999, the Company recognized premium and investment income of approximately
$0.75 million and $0.65 million, respectively, that has been included as other
income in the agency-eligible reinsurance segment.
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
subprime mortgage production operations:
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
($ IN THOUSANDS) 2000 1999
----------- -----------
Net interest income $ 3,086 $ 3,473
Net gain on sale of mortgage loans 2,441 2,857
Mark to market on residual interests in subprime securitizations (7,675) (1,349)
Other income 893 417
--------- ---------
Total production revenue (1,255) 5,398
--------- ---------
Salary and employee benefits 5,545 3,301
Occupancy expense 629 583
Provision expense 742 499
General and administrative expenses 1,454 1,489
--------- ---------
Total production expenses 8,370 5,872
--------- ---------
Net pre-tax production margin $ (9,625) $ (474)
--------- ---------
Production $ 152,484 $ 184,111
Whole loan sales and securitizations 135,455 98,624
Total production revenue to whole loan sales and securitizations (93) bps 547 bps
Total production expenses to production 549 bps 319 bps
--------- ---------
Net pre-tax production margin (642) bps 228 bps
========= =========
22
23
Summary
During the first quarter of 2000, subprime production volume of $152.5
million exceeded whole loan sales and securitizations of $135.5 million by $17.0
million. At March 31, 2000, the Company had unsold subprime mortgage loans of
$138.3 million as compared to $182.3 million at March 31, 1999. Overall, the
Company operated during the first quarter of 2000 at a (6.42%) pre-tax subprime
production margin. The $10.1 million (870 basis point) decline in the pre-tax
subprime production margin is primarily due to the ($7.7) million adjustment
during the first quarter of 2000 in the mark to market on residual interests in
subprime securitizations. The Company is currently exploring options to extract
cash in the short-term from these investments. Options being considered include
the outright sale of certain securities and/or a re-REMIC of residual cash
flows. Based upon initial market feedback, the Company reassessed the
assumptions utilized in valuing these relatively illiquid securities, primarily
the discount rate used in the valuation. Absent the $7.7 million adjustment to
residual interests, the margin on sale of subprime loans was 5%.
Also contributing to the decline in the pre-tax subprime production margin
during the first quarter of 2000 is the $0.4 million decline in net gain on sale
of subprime mortgage loans. This decline is primarily attributable to compressed
margins as a result of an intensely competitive pricing environment.
Salary and employee benefit costs increased by 41%, or $2.2 million, from
the first quarter of 1999 to the first quarter of 2000. This was primarily due
to recognition of severance benefits associated with a planned reorganization of
the Company around it's primary business processes (production/sales, order
fulfillment, servicing and portfolio management). Charges associated with the
planned reorganization are discussed elsewhere in this Management's Discussion
and Analysis. Occupancy expense increased by $0.05 million primarily due to
charges associated with acquisition of newly leased office space. Provision
expense increased by 49%, or $0.2 million, from the first quarter of 1999 to the
first quarter of 2000 primarily due to a change in certain estimates used in
calculating the provision. General and administrative expenses remained
relatively flat between quarters.
Net Interest Income
The following table analyzes net interest income allocated to the Company's
subprime mortgage production activities in terms of rate and volume variances of
the interest spread (the difference between interest rates earned on loans and
residual certificates and interest rates paid on interest-bearing sources of
funds) for the quarters ended March 31, 2000 and 1999, respectively.
($ IN THOUSANDS)
Variance
Average Volume Average Rate Interest Attributable to
- ---------------------------------------- --------------------- ----------------------
2000 1999 2000 1999 2000 1999 Variance Rate Volume
- ---------------------------------------- ----------------------------------------------------
Mortgages Held-for-Sale and
$192,668 $210,424 11.62% 10.12% Residual Certificates $ 5,594 $5,326 $ 268 $ 717 $(449)
- ----------------------------------------- ----------------------------------------------------
$135,963 $147,765 7.25% 5.09% Total Interest Expense $ 2,456 $1,853 $ 603 $ 751 $(148)
- ----------------------------------------- ----------------------------------------------------
4.37% 5.03% Net Interest Income $ 3,138 $3,473 $(335) $ (34) $(301)
================= ===============================
Intercompany Net Interest
Expense Included In Segment (52) --
---------------------
Net Interest Income $ 3,086 $3,473
=====================
23
24
Net interest income from subprime products decreased to $3.1 million for
the first quarter of 2000 as compared to $3.5 million for the first quarter of
1999. This was primarily a result of a flattened yield curve and the decline in
production volume, which was partially offset by $0.4 million increase in
accretion income from $1.5 million for the first quarter of 1999 to $1.9 million
for the first quarter of 2000.
Net Gain on Sale and Securitization of Subprime Mortgage Loans
During the first quarter of 2000 and 1999, there were no securitization
transactions. The gain on sale recorded in the respective income statements are
cash gains.
The Company sold subprime mortgage loans on a whole loan basis during the
first quarter of 2000 and 1999. Whole loans are generally sold without recourse
to third parties with the gain or loss being calculated based on the difference
between the carrying value of the loans sold and the gross proceeds received
from the purchaser less expenses. Generally, no interest in these loans is
retained by the Company.
A reconciliation of the gain on subprime mortgage whole loan sales for the
periods indicated follows:
($ IN THOUSANDS) FOR THE QUARTER ENDED MARCH 31,
-----------------------------------------
2000 1999
------------------ -----------------
Gross proceeds on whole loan sales of subprime mortgage loans $ 139,435 $ 102,050
Initial acquisition cost of subprime mortgage loans sold, net of fees 135,455 98,624
------------------ -----------------
Unadjusted gain on whole loan sales of subprime mortgage loans 3,980 3,426
Net deferred costs and administrative fees recognized (1,539) (569)
------------------ -----------------
Net gain on whole loan sales of subprime mortgage loans $ 2,441 $ 2,857
================== =================
The $0.4 million decrease in the net gain on whole loan sales of subprime
mortgage loans from the first quarter of 1999 gain of $2.9 million to $2.4
million reported for the first quarter of 2000 is primarily due to compressed
margins in the subprime market. Also, in accordance with 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" the Company reduced its net gain on whole loan sales of subprime
mortgage loans by $1.5 million in the first quarter of 2000 as compared to $0.6
million in the first quarter of 1999.
Mark to Market on Residual Interests in Subprime Securitizations
The Company generally has retained residual certificates in connection
with the securitization of subprime loans. These residual certificates are
adjusted to approximate market value each quarter. For the quarters ended March
31, 2000 and 1999, respectively, mark-to-market gain (loss) on residuals was
approximately $(7.7) million and $(1.3) million, respectively. Management has
initiated a strategic change in the Company's intent to hold these instruments
for the long-term. As a result, there has been a reassessment of the assumptions
utilized for purposes of valuing these relatively illiquid securities, primarily
the discount rate used in the valuation, as described below.
24
25
See additional discussion regarding this reassessment elsewhere in this
Management's Discussion and Analysis.
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 March 31, 2000 for residual
certificates then held by the Company generally include a discount rate of 15%,
a constant default rate of 3% (5% for 1997-1 and 1998-1) and a loss severity
rate of 25%. 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 March 31, 2000
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 March 31, 1999 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 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 1.44 times the implied
excess yield at March 31, 2000, as compared to the 1.41 multiple implied at
March 31, 1999. The table below represents balances as of March 31, 2000, unless
otherwise noted.
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SECURITIZATIONS
------------------------------------------------------------
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 TOTAL
-------- --------- -------- --------- --------- --------- ---------
($ IN THOUSANDS)
Residual Certificates $ 5,589 $ 6,225 $ 8,805 $ 11,319 $ 8,119 $ 7,720 $ 47,777
Bonds $16,115* $18,796* $62,326* $122,157* $112,167* $121,396* $452,957
-------- -------- -------- --------- --------- --------- ---------
Subtotal $21,704 $25,021 $71,131 $133,476 $120,286 $129,116 $500,734
Unpaid Principal Balance $20,891* $23,650* $67,951* $128,003* $115,175* $ 23,268* $478,938
-------- -------- -------- --------- --------- --------- ---------
Implied Price 103.89 105.80 104.68 104.28 104.44 104.74 104.55
-------- -------- -------- --------- --------- --------- ---------
Collateral Yield 12.49 12.17 9.93 9.74 9.82 9.82 10.01
Collateral Equivalent
Securitization Costs (0.70) (0.63) (0.59) (0.60) (0.62) (0.68) (0.63)
Collateral Equivalent Bond Rate (5.60) (5.11) (5.80) (6.45) (6.25) (6.39) (6.21)
-------- --------- -------- --------- --------- --------- ---------
Implied Collateral Equivalent
Excess Yield 6.19 6.43 3.54 2.69 2.95 2.75 3.17
-------- --------- -------- --------- --------- --------- ---------
Implied Premium Above Par 3.89 5.80 4.68 4.28 4.44 4.74 4.55
Implied Collateral Equivalent
Excess Yield 6.19 6.43 3.54 2.69 2.95 2.75 3.17
-------- --------- -------- --------- --------- --------- ---------
Multiple 0.63 x 0.90 x 1.32 x 1.59 x 1.50 x 1.73 x 1.44 x
-------- --------- -------- --------- --------- --------- ---------
* Amounts were based upon trustee statements dated April 25, 2000 that covered
the period ended March 31, 2000.
A SUMMARY OF KEY INFORMATION RELEVANT TO THE SUBPRIME RESIDUAL ASSETS AT MARCH
31, 2000 IS SET FORTH BELOW:
SECURITIZATIONS
------------------------------------------------------------
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 TOTAL
-------- --------- -------- --------- --------- --------- ---------
($ IN THOUSANDS)
Balance at December 31,1999 $ 5,971 $ 7,153 $10,334 $12,460 $ 9,566 $ 8,898 $54,382
Initial Capitalization of
Residual Certificates -- -- -- -- -- -- --
Accretion 263 296 359 412 311 247 1,888
Mark-to-Market (677) (1,001) (1,460) (1,553) (1,758) (1,426) (7,875)*
Cash Flow (140) (223) (428) - - - (791)
-------- --------- -------- --------- --------- --------- ---------
Balance at March 31, 2000 $ 5,417 $ 6,225 $ 8,805 $11,319 $ 8,119 $ 7,719 $47,604
======== ========= ======== ========= ========= ========= =========
* In 1999 the Company decided to conservatively write off the remaining portion
of a residual certificate it received in 1997 in settlement of an account
receivable. In the first quarter of 2000 the Company disposed of this residual
certificate and recovered approximately $0.2 million, which had been
previously reported as a mark-to-market loss. Thus the Company reported a
total market-to-market loss for the first quarter of 2000 of $7.7 million and
a $7.9 million market-to-market loss on the residual interests remaining on
the balance sheet at March 31, 2000.
A SUMMARY OF KEY INFORMATION RELEVANT TO THE SUBPRIME RESIDUAL ASSETS AT MARCH
31, 1999 IS SET FORTH BELOW:
SECURITIZATIONS
------------------------------------------------------------
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 OTHER* TOTAL
-------- --------- -------- --------- --------- --------- -------- --------
($ IN THOUSANDS)
Balance at December 31,1998 $7,997 $9,702 $10,815 $12,569 $ -- $ -- $ 4,700 $45,783
Initial Capitalization of
Residual Certificates -- -- -- -- -- -- --
Accretion 292 318 315 362 -- -- 179 1,466
Mark-to-Market 27 (109) (467) 661 -- -- (1,461) (1,349)
Cash Flow (421) (855) -- -- -- -- -- (1,276)
------ ------ ------- ------- ------- ------- -------- -------
Balance at March 31, 1999 $7,895 $9,056 $10,663 $13,592 $ -- $ -- $ 3,418 $44,624
====== ====== ======= ======= ======= ======= ======== =======
* 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.
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Other Income
Other income from subprime operations increased $0.5 million and consists
primarily of prepayment penalties.
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage servicing operations for the years ended March 31, 2000
and 1999:
FOR THE QUARTER ENDED MARCH 31,
--------------------------------
($ IN THOUSANDS) 2000 1999
------------ --------------
Net interest expense $ (1,297) $ (1,389)
Loan servicing fees 9,365 11,703
Other income 128 161
----------- ------------
Servicing revenues 8,196 10,475
Salary and employee benefits 693 898
Occupancy expense 55 107
Amortization and provision for impairment of mortgage
Servicing rights 6,277 8,516
General and administrative expenses 938 1,778
----------- ------------
Total loan servicing expenses 7,963 11,299
----------- ------------
Net pre-tax servicing margin 233 (824)
Gain on sale of mortgage servicing rights 808 2,998
----------- ------------
Net pre-tax servicing contribution $ 1,041 $ 2,174
=========== ============
Average servicing portfolio $ 8,041,986 $ 10,318,105
Servicing sold 1,128,536 3,003,253
Net pre-tax servicing margin to average servicing portfolio 1 bp (3) bps
Gain on sale of servicing to servicing sold 7 bps 10 bps
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio increased 4 basis points primarily due to the $2.2 million reduction
in amortization and provision for impairment of mortgage servicing rights from
the first quarter of 1999 to the first quarter of 2000. This reduction in
amortization and provision for impairment of mortgage servicing rights is
primarily due to the generally smaller size of the portfolio and slowing
prepayments due to higher rates. The 3 basis point decrease in the gain on sale
of servicing sold is primarily attributable to compressed margins in an
intensely competitive market during the first quarter of 2000. Loan servicing
fees were $9.4 million for the first quarter of 2000, compared to $11.7 million
for the first quarter of 1999, a decrease of 20%, primarily due to lower
production volumes which resulted in a lower average balance of agency-eligible
servicing rights held in inventory pending sale.
Management regularly 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
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will not change such that mortgage servicing rights valuations will require
additional amortization or impairment charges.
Net Interest Expense
The net interest expense for the first quarter of 2000 and the first
quarter of 1999 is composed of benefits from escrow accounts of $1.8 million and
$2.0 million, respectively, that is offset by $3.1 million and $3.4 million,
respectively, in interest expense.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
($ IN THOUSANDS) FOR THE QUARTER ENDED MARCH 31,
-------------------------------
2000 1999
----------- -----------
Underlying unpaid principal balances of agency-eligible
mortgage loans on which servicing rights were sold
during the period $ 1,128,536 $ 3,003,253
=========== ===========
Gross proceeds from sales of mortgage servicing rights $ 31,929 $ 78,888
Initial acquisition basis, net of amortization and hedge results 25,528 56,942
----------- -----------
Unadjusted gain on sale of mortgage servicing rights 6,401 21,946
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 125) (5,593) (18,948)
----------- -----------
Gain on sale of mortgage servicing rights $ 808 $ 2,998
=========== ===========
Gain on sale of mortgage servicing rights decreased $2.2 million from $3.0
million for the first quarter of 1999 to $0.8 million for the first quarter of
2000. The decrease in the gain on sale of mortgage servicing rights is primarily
attributable to lower production volumes which resulted in a lower balance of
agency-eligible servicing rights sold.
COMMERCIAL MORTGAGE OPERATIONS
Following is a summary of the revenues and expenses of the Company's
commercial mortgage production operations.
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29
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
($ IN THOUSANDS) 2000 1999
----------- -----------
Net interest income $ (8) $ 94
Net gain on sale of mortgage loans 636 1,239
Other income 13 11
----------- -----------
Total production revenue 641 1,344
----------- -----------
Salary and employee benefits 1,854 1,738
Occupancy expense 290 263
General and administrative expenses 417 430
----------- -----------
Total production expenses 2,561 2,431
----------- -----------
Net pre-tax production margin (1,920) (1,087)
----------- -----------
Servicing fees 1,314 975
Amortization of mortgage servicing rights 625 464
----------- -----------
Net pre-tax servicing margin 689 511
----------- -----------
Pre-tax income (loss) $ (1,231) $ (576)
----------- -----------
Production $ 95,475 $ 150,152
Whole loan sales 95,475 165,262
Average commercial mortgage servicing portfolio $ 4,170,476 $ 3,337,253
Total production revenue to whole loan sales 67 bps 81 bps
Total production expenses to production 268 bps 162 bps
----------- -----------
Net pre-tax production margin (201) bps (81) bps
----------- -----------
Servicing fees to average commercial mortgage servicing portfolio 13 bps 12 bps
Amortization of mortgage servicing rights to average commercial
mortgage servicing portfolio 6 bps 6 bps
----------- -----------
Net pre-tax servicing margin 7 bps 6 bps
----------- -----------
The net pre-tax production margin declined for the first quarter of 2000 as
compared to the first quarter of 1999 primarily due to a decrease in production
revenue and an increase in production expenses. Production revenue to whole loan
sales decreased 14 basis points from the first quarter of 1999 to the first
quarter of 2000. This decrease in production revenue between quarters is
primarily attributable to (1) an 8 basis point decrease in the net gain on sale
of commercial mortgage loans due to compressed margins in an intensely
competitive pricing environment and lower overall production volumes and (2) a 7
basis point decrease in the net interest margin due to a flattened yield curve.
Production expenses to production increased 106 basis points from the first
quarter of 1999 to the first quarter of 2000. The production expense increase is
primarily attributable to (1) a 5% increase in the number of employees from
quarter to quarter and (2) $0.2 million charge to salary and employee benefits
associated with the continuation of the workforce reduction initiated in the
fourth quarter of 1999. Such charges are discussed elsewhere in this
Management's Discussion and Analysis. Laureate originates commercial mortgage
loans for various insurance companies and other investors, primarily in
29
30
Alabama, Florida, Indiana, North Carolina, Pennsylvania, South Carolina,
Tennessee and Virginia. Substantially all loans originated by Laureate have been
originated in the name of the investor, and in most cases, Laureate has retained
the right to service the loans under a servicing agreement with the investor.
Most commercial mortgage loan servicing agreements are short-term, and retention
of the servicing contract is dependent on maintaining the investor relationship.
Net Gain on Sale of Commercial Mortgage Loans
A reconciliation of gain on sale of commercial mortgage loans for the
periods indicated follows:
($ IN THOUSANDS) FOR THE QUARTER ENDED MARCH 31,
-------------------------------
2000 1999
------- --------
Gross proceeds on sales of commercial mortgage loans $95,475 $165,262
Initial unadjusted acquisition cost of commercial mortgage loans
sold 95,475 165,262
------- --------
Unadjusted gain on sale of commercial mortgage loans -- --
Commercial mortgage and origination fees 752 849
------- --------
Unadjusted aggregate margin 752 849
Initial acquisition cost allocated to basis in commercial
mortgage servicing rights (SFAS No. 125) 116 390
------- --------
Net gain on sale of commercial mortgage loans $ 636 $ 1,239
======= ========
The net gain on sale of commercial mortgage loans decreased $0.6 million
(49%) from $1.2 million for the first quarter of 1999 to $0.6 million for the
first quarter of 2000. The decrease is primarily attributable to compressed
margins in an intensely competitive pricing environment and lower overall
production volumes.
LEASING OPERATIONS
Following is a summary of the revenues and expenses of the Company's
small-ticket equipment leasing operations for the periods indicated:
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31
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
($ IN THOUSANDS) 2000 1999
-------- --------
Net interest income $ 2,127 $ 1,645
Other income 262 151
-------- --------
Leasing production revenue 2,389 1,796
-------- --------
Salary and employee benefits 760 640
Occupancy expense 120 104
359 383
General and administrative expenses 294 370
-------- --------
Total lease operating expenses 1,533 1,497
-------- --------
Net pre-tax leasing production margin 856 299
Servicing fees 99 161
-------- --------
Net pre-tax leasing margin $ 955 $ 460
-------- --------
Average owned leasing portfolio $156,209 $104,355
Average serviced leasing portfolio 12,373 33,967
-------- --------
Average managed leasing portfolio $168,582 $138,322
======== ========
Leasing production revenue to average owned portfolio 612 bps 688 bps
Leasing operating expenses to average owned portfolio 393 bps 574 bps
-------- --------
Net pre-tax leasing production margin 219 bps 114 bps
======== ========
Servicing fees to average serviced leasing portfolio 320 bps 190 bps
======== ========
The 33% increase in leasing production revenue for the first quarter of
2000 as compared to the first quarter of 1999 is primarily due to the 50%
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 the first quarter of 2000 as compared to the first quarter of 1999
due to the increase in production revenue which was only partially offset by a
2% increase in lease operating expenses. Efficiencies in managing costs were
able to be achieved in the first quarter of 2000 as the volume of leases owned
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 the first quarter of 2000 was $2.1 million as
compared to $1.6 million for the first quarter of 1999. This is equivalent to an
annualized net interest margin of 3.90% and 4.44% for the first quarter of 2000
and 1999, respectively, based upon average lease receivables owned of $156.2
million and $104.4 million, respectively, and average debt outstanding of $132.3
and $85.6 million, respectively.
OTHER
During the third quarter of 1999, the Company reorganized its reporting
cost centers and is now reporting holding company costs as a reconciling item
between the segmented income statement and the consolidated income statement.
The primary components of holding company
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32
costs are 1) interest expense on the debt on the Company's corporate
headquarters; 2) salary and employee benefits of corporate personnel; 3)
depreciation on the corporate headquarters; and 4) income taxes. The first
quarter 1999 segmented income statement has been restated to conform with the
first quarter 2000 segmented income statement presentation.
WORKFORCE REDUCTION
During the fourth quarter of 1999, the Company initiated a workforce
reduction. The workforce reduction became necessary as the Company continued to
adapt to a smaller overall residential mortgage market and intensely competitive
pricing conditions. In the first quarter of 2000, the Company reconsidered it's
current positioning in the market and its corporate, management and leadership
structures. As a result, the Company is reorganizing around primary business
processes, production/sales, customer fulfillment, servicing and portfolio
management. In connection with the planned reorganization, a number of senior
management positions have been scheduled for elimination during the remainder of
the year. The impact of the expense in the first quarter of 2000 related to the
continuation of the workforce reduction and the planned reorganization is
summarized below by financial statement component and operating division:
($ in thousands) Agency-Eligible Commercial
Production Subprime Mortgage Consolidated
--------------- -------- ---------- ------------
Salary and employee
benefits $ 136 $ 2,075 $ 191 $ 2,402
Occupancy expense 171 -- -- 171
----- ------- ----- -------
Net pre-tax impact 307 2,075 191 2,573
Estimated allocable
income tax expense (113) (763) (70) (946)
----- ------- ----- -------
Net after-tax Impact $ 194 $ 1,312 $ 121 $ 1,627
===== ======= ===== =======
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FINANCIAL CONDITION
During the first quarter of 2000, the Company experienced a 24% decrease in
the volume of production originated and acquired compared to the fourth quarter
of 1999. Production decreased to $1.4 billion during the first quarter of 2000
from $1.9 billion during the fourth quarter of 1999. In general the decline in
production is primarily attributable to (1) the current level of competition in
the marketplace; (2) an estimated 25% decline in residential originations within
the industry from the fourth quarter of 1999 to the first quarter of 2000; (3)
the increased ARM market share (the Company offers primarily fixed rate
products); and (4) the rise in mortgage interest rates during the first quarter
of 2000. The March 31, 2000, locked residential mortgage application pipeline
(mortgage loans not yet closed but for which the interest rate has been locked)
was approximately $0.5 billion and the application pipeline (mortgage loans for
which the interest rate has not yet been locked) was approximately $0.4 billion.
This compares to a locked mortgage application pipeline of $0.4 billion and a
$0.3 billion application pipeline at December 31, 1999.
Mortgage loans held-for-sale and mortgage-backed securities totaled $0.4
billion at March 31, 1999, versus $0.5 billion at December 31, 1999, a decrease
of 7%. The Company's servicing portfolio (exclusive of loans under subservicing
agreements) decreased to $7.7 billion at March 31, 2000, from $7.8 billion at
December 31, 1999, a decrease of 1%. The decrease in mortgage loans
held-for-sale and mortgage-backed securities is primarily attributable to the
decrease in production, as previously discussed.
Short-term borrowings, which are the Company's primary source of funds,
totaled $0.8 billion at March 31, 2000, compared to $0.7 billion at December 31,
1999, an increase of 6%. At March 31, 2000, there were $6.2 million in long-term
borrowings, compared to $6.3 million at December 31, 1999. Other liabilities
totaled $96.2 million as of March 31, 2000, compared to the December 31, 1999
balance of $84.8 million, an increase of $11.4 million, or 13%. The increase in
other liabilities is primarily due to normal fluctuations in the monthly
business cycle.
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 $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
33
34
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 1.10 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 (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 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
March 31, 2000. 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.
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
34
35
August 2000 and contains various covenants regarding characteristics of the
collateral and the performance of the leases originated and serviced by Republic
Leasing. The warehouse credit agreement also requires 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 March 31, 2000, the Company had remaining authority
to repurchase up to $4.5 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 March 31, 2000, there were 4,924,388 shares held in the
Company's treasury account at an average cost of $8.11 per share.
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 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.
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.
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36
SUMMARY
On a combined divisional basis, during the quarters ended March 31, 2000
and 1999, the Company generated approximately $5.3 million and $30.5 million,
respectively, of positive funds from operations.
($ in thousands) FOR THE QUARTER ENDED MARCH 31,
-------------------------------
2000 1999
----------- -----------
Agency-eligible production $ (2,417) $ 20,182
Agency-eligible servicing 6,553 7,781
Subprime production 213 2,049
Commercial mortgage (397) (410)
Leasing 1,380 919
-------- --------
$ 5,332 $ 30,521
======== ========
Each of the Company's divisions produced positive operating funds during
both periods except for agency-eligible production in the first quarter of 2000
and commercial mortgage production in the first quarter of both 2000 and 1999.
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 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 QUARTER ENDED MARCH 31,
--------------------------------
2000 1999
------------ ----------
Income (loss) before income taxes $ (6,428) $ 17,802
Deduct:
Net gain on sale of mortgage loans,
as reported (6,206) (33,193)
Add back:
Cash gains on sale of mortgage loans 936 11,703
Cash gains on sale of mortgage
servicing rights 6,401 21,946
Depreciation 1,500 1,005
Provision expense 1,380 919
--------- --------
$ (2,417) $ 20,182
======== ========
36
37
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 QUARTER ENDED MARCH 31,
-------------------------------
2000 1999
----------- ----------
Income before income taxes $ 1,041 $ 2,174
Deduct:
Net gain on sale of mortgage servicing
rights, as reported (808) (2,998)
Add back:
Amortization and provision for impairment
of Mortgage servicing rights 6,277 8,516
Depreciation 43 89
------- -------
$ 6,553 $ 7,781
======= =======
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.
37
38
($ in thousands) FOR THE QUARTER ENDED MARCH 31,
-------------------------------
2000 1999
------------- --------------
Income (loss) before income taxes $(9,625) $ (474)
Deduct:
Net gain on sale of subprime loans, as reported (2,441) (2,857)
Accretion income on residuals (1,888) (1,466)
Add back:
Cash gains on sale of whole subprime loans 3,980 3,426
Cash received from investments in residual certificates 791 1,276
Depreciation and amortization
of goodwill and intangibles 779 296
Provision expense 742 499
Mark to market on residuals 7,875 1,349
------------- --------------
$ 213 $ 2,049
============= ==============
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.
38
39
($ in thousands) FOR THE QUARTER ENDED MARCH 31,
-------------------------------
2000 1999
--------- ---------
Income (loss) before income taxes $(1,231) $ (576)
Deduct:
Net gain on sale of commercial loans,
as reported (636) (1,239)
Add back:
Cash gains on sale of whole
commercial loans 752 849
Amortization and provision for impairment of
commercial mortgage servicing rights 625 464
Depreciation and amortization of
goodwill and intangibles 93 92
-------- -------
$ (397) $ (410)
======== =======
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 QUARTER ENDED MARCH 31,
-------------------------------
2000 1999
---------- ----------
Income before income taxes $ 955 $460
Add back:
Depreciation and amortization of
goodwill and intangibles 66 76
Provision expense 359 383
------ ----
$1,380 $919
====== ====
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk. The
Company manages this risk by striving to balance its loan origination and loan
servicing business segments, which are countercyclical in nature. In addition,
the Company utilizes 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
39
40
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.
For purposes of disclosure in the 1999 Annual Report on Form 10-K, the
Company performed various sensitivity analyses that quantify the net financial
impact of hypothetical 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 which rely upon a number of critical
assumptions. Actual experience may differ materially from the estimated. 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. The Company has procedures in place that monitor
whether material changes in market risk are likely to have occurred since
December 31, 1999. The Company does not believe that there have been any
material changes in market risk from those reported in the 1999 Annual Report on
Form 10-K.
40
41
PART II. OTHER INFORMATION
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
ON JANUARY 10, 2000, THE COMPANY ISSUED 100,000 SHARES OF ITS COMMON
STOCK, PAR VALUE $0.01 PER SHARE, TO DOUGLAS K. FREEMAN AT A PRICE OF
$4.50 PER SHARE. THE COMPANY BELIEVES THAT THE ISSUANCE OF THE SHARES
TO MR. FREEMAN WAS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933, AS AMENDED, UNDER REGULATION D AND SECTION
4 (2) PROMULGATED THEREUNDER BY VIRTUE OF HIS STATUS AS AN ACCREDITED
INVESTOR.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- (a) A LIST OF EXHIBITS FILED WITH THIS FORM 10-Q, ALONG WITH THE
EXHIBIT INDEX CAN BE FOUND ON PAGES A TO F FOLLOWING THE
SIGNATURE PAGE.
- (b) ON MARCH 29, 2000 THE COMPANY FILED A REPORT ON FORM 8-K
ANNOUNCING A CHANGE IN ACCOUNTANTS.
41
42
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
(Registrant)
/s/ Steven F. Herbert
---------------------------------------------
Steven F. Herbert
Corporate Senior Executive Vice President and
Corporate Chief Financial Officer
(signing in the capacity of (i) duly
authorized officer of the registrant and
(ii) principal financial officer of the
registrant)
DATED: May 14, 2000
42
43
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
3.1 Restated Certificate of Incorporation of the Registrant incorporated by reference to *
Exhibit 3.3 of the Registrant's Registration No. 33-53980
3.2 Certificate of Amendment of Certificate of Incorporation of the *
Registrant incorporated by reference to Exhibit 3.2 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997
3.3 Certificate of Designation of the Preferred Stock of the Registrant *
incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-A
filed on February 8, 1998
3.4 Amended and Restated Bylaws of the Registrant incorporated by reference to *
Exhibit 3.4 of the Registrant's Registration No. 33-53980
3.5 Amendment to Bylaws of Resource Bancshares Mortgage Group, Inc. dated January 28, 1999 *
incorporated by reference to Exhibit 3.5 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998
3.6 Amendment to Bylaws of Resource Bancshares Mortgage Group, Inc. incorporated by *
reference to Exhibit 3.1 of the Registrant's Registration No. 333-82105
4.1 Specimen Certificate of Registrant's Common Stock incorporated by *
reference to Exhibit 4.1 of the Registrant's Registration No.
33-53980
4.2 Rights Plan dated as of February 6, 1998 between the Registrant and First Chicago *
Trust Company of New York incorporated by reference to Exhibit 4.1 of the Registrant's
Form 8-A filed on February 8, 1998
4.3 Note Agreement between the Registrant and UNUM Life Insurance Company of *
America dated May 16, 1997 incorporated by reference to Exhibit 10.45 of the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997
10.1 Employment Agreement dated June 3, 1993, between the Registrant and *
David W. Johnson, Jr. as amended by amendment dated October 22, 1993
incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993
10.2 (A) Stock Option Agreement between the Registrant and David W. Johnson, Jr. *
incorporated by reference to Exhibit 10.8 (A) of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993
(B) Stock Option Agreement between the Registrant and Lee E. Shelton *
incorporated by reference to Exhibit 10.8 (B) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993
10.3 Termination Agreement dated June 3, 1993, between the Registrant and *
David W. Johnson, Jr. incorporated by reference to Exhibit 10.9 (A) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993
A
44
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10.4 (A) Deferred Compensation Agreement dated June 3, 1993, between the Registrant and *
David W. Johnson, Jr. incorporated by reference to Exhibit 10.10 (A) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993
(B) Deferred Compensation Rabbi Trust, for David W. Johnson, dated *
January 19, 1994, between Registrant and First Union National Bank of
North Carolina incorporated by reference to Exhibit 10.10 (C) of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993
10.5 Employment Agreement dated June 30, 1995, between the Registrant and *
Steven F. Herbert incorporated by reference to Exhibit 10.34 of the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1995
10.6 Employment Agreement dated September 25, 1995, between the Registrant and *
Richard M. Duncan incorporated by reference to Exhibit 10.38 of the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 1995
10.7 Office Building Lease dated March 8, 1991, as amended by Modification of Office *
Lease dated October 1, 1991, incorporated by reference to Exhibit 10.5 of the Registrant's
Registration No. 33-53980
10.8 Assignment and Assumption of Office Lease incorporated by reference to Exhibit 10.6 *
of the Registrant's Registration No. 33-53980
10.9 Governmental Real Estate Sub-Lease-Office, between Resource Bancshares Mortgage *
Group, Inc. and the South Carolina Department of Labor, Licensing and Regulation
incorporated by reference to Exhibit 10.19 of the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1994
10.10 First Sub-Lease Amendment to Governmental Real Estate Sub-Lease-Office, *
between Resource Bancshares Mortgage Group, Inc. and the South Carolina Department
of Labor, Licensing and Regulation incorporated by reference to Exhibit 10.20 of the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1994
10.11 Request for Extension of Governmental Real Estate Sub-Lease-Office, between the Registrant *
and the South Carolina Department of Labor, Licensing and Regulation dated
December 12, 1995 incorporated by reference to Exhibit 10.39 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
10.12 Section 125 Plan incorporated by reference to Exhibit 10.17 of the Registrant's Annual *
Report on Form 10-K for the year ended December 31, 1993
10.13 Pension Plan incorporated by reference to Exhibit 10.18 of the Registrant's Annual *
Report on Form 10-K for the year ended December 31, 1993
10.14 Amendment I to Pension Plan incorporated by reference to Exhibit 10.21 of the Registrant's *
Annual Report on Form 10-K for the year ended December 31, 1994
10.15 Amendment II to Pension Plan incorporated by reference to Exhibit 10.22 of the Registrant's *
Annual Report on Form 10-K for the year ended December 31, 1994
B
45
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10.16 Amendment to Pension Plan effective January 1, 1995 incorporated by *
reference to Exhibit 10.42 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995
10.17 (A) Phantom 401(k) Plan incorporated by reference to Exhibit 10.24 of the *
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994
(B) Amendment to Phantom 401(k) Plan incorporated by reference to Exhibit
10.17(B) of the Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 1999 *
(C) Merger and Transfer Agreement Between The Resource Bancshares Mortgage Group, Inc.
and Fidelity Management Trust Company incorporated by reference to Exhibit 10.53 of
the Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1999. *
10.18 Resource Bancshares Mortgage Group, Inc. Supplemental Executive Retirement Plan *
incorporated by reference to Exhibit 10.14 of the Registrant's Quarterly Report
on Form 10-Q for the period ended June 30, 1998.
10.19 First Amendment to Resource Bancshares Mortgage Group, Inc. Supplemental Executive *
Retirement Plan dated October 28, 1998 incorporated by reference to Exhibit 10.19 of
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998
10.20 Pension Restoration Plan incorporated by reference to Exhibit 10.25 of the Registrant's *
Annual Report on Form 10-K for the year ended December 31, 1994
10.21 Stock Investment Plan incorporated by reference to Exhibit 4.1 of the Registrant's *
Registration No. 33-87536
10.22 (A) Amendment I to Stock Investment Plan incorporated by reference to *
Exhibit 10.27 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994
(B) Amendment II to Stock Investment Plan dated November 30, 1998 *
incorporated by reference To Exhibit 4.1(c) of the Registrant's
Registration Statement No. 333-68909
(C) Amendment III to Stock Investment Plan dated February 2, 2000 ______
10.23 (A) Change of Control Agreement by and between Resource Bancshares Mortgage Group, Inc.
and Douglas K. Freeman, dated as of January 10, 2000. ______
(B) Incentive Stock Option Agreement pursuant to Resource Bancshares
Mortgage Group, Inc. Omnibus Stock Award Plan between Resource
Bancshares Mortgage Group, Inc. and Douglas K. Freeman dated as of January 10, 2000 ______
(C) Employment Agreement between Resource Bancshares Mortgage Group, Inc. and Douglas
K. Freeman dated as of January 10, 2000 ______
(D) Indemnity Agreement between Resource Bancshares Mortgage Group, Inc. and Douglas
K. Freeman dated as of January 10, 2000 ______
10.24 Employee Stock Ownership Plan incorporated by reference to Exhibit 10.29 *
of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994
C
46
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10.25 First Amendment to Employee Stock Ownership Plan dated October 31, 1995 *
incorporated by reference to Exhibit 10.41 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
10.26 Second Amendment to Employee Stock Ownership Plan dated August 12, 1996 *
incorporated by reference to Exhibit 10.45 of the Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 1996
10.27 Amended Resource Bancshares Mortgage Group, Inc. Successor Employee Stock *
Ownership Trust Agreement dated December 1, 1994, between the Registrant and
Marine Midland Bank incorporated by reference to Exhibit 10.30 of
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1994
10.28 ESOP Loan and Security Agreement dated January 12, 1995, between the Registrant *
and The Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust
incorporated by reference to Exhibit 10.31 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994
10.29 ESOP Loan and Security Agreement dated May 3, 1996, between the *
Registrant and The Resource Bancshares Mortgage Group, Inc. Employee
Stock Ownership Trust incorporated by reference to Exhibit 10.36 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996
10.30 (A) ESOP Notes dated January 20, 1998, April 1, 1998, July 1, 1998 and October 1, *
1998 between the Registrant and The Resource Bancshares Mortgage Group, Inc.
Employee Stock Ownership Trust incorporated by reference to Exhibit 10.30 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1998
(B) ESOP Notes dated March 8, 1999, April 26, 1999, July 1, 1999 and October 1, *
1999 between the Registrant and The Resource Bancshares Mortgage Group, Inc.
Employee Stock Ownership Trust
10.31 Formula Stock Option Plan incorporated by reference to Exhibit 10.36 of *
the Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1995
10.32 Amendment to Resource Bancshares Mortgage Group, Inc. Formula Stock *
Option Plan and Non-Qualified Stock Option Plan incorporated by
reference to Exhibit 10.42 of the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 1997
10.33 First Amendment to the Formula Stock Option Plan incorporated by reference to *
Exhibit 99.8 of the Registrant's Registration No. 333-29245 as filed on December 1, 1997
10.34 Second Amendment to Resource Bancshares Mortgage Group, Inc. Formula Stock *
Option Plan dated October 28, 1998 incorporated by reference to Exhibit 10.34 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1998
10.35 Amended and Restated Omnibus Stock Award Plan incorporated by reference to Exhibit 99.10 *
of the Registrant's Registration No. 333-29245 filed on December 1, 1997
10.36 First Amendment to Omnibus Stock Award Plan and form of Incentive Stock Option *
Agreement and Release to the Omnibus Stock Award Plan incorporated by reference to
Exhibit 10.44 of the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1998.
D
47
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10.37 Second Amendment to Resource Bancshares Mortgage Group, Inc. Omnibus *
Stock Award Plan dated October 29, 1998 incorporated by reference to
Exhibit 10.37 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998
10.38 Form of Incentive Stock Option Agreement (Omnibus Stock Award Plan) *
incorporated by reference to Exhibit 10.40 of the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 1997
10.39 Resource Bancshares Mortgage Group, Inc. Non-Qualified Stock Option Plan *
dated September 1, 1996 incorporated by reference to Exhibit 10.33 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996
10.40 Form of Non-Qualified Stock Option Agreement (Non-Qualified Stock *
Option Plan), incorporated by reference to Exhibit 10.41 of the
Registrant's Quarterly Report on Form 10-Q for the period ended March
31, 1997
10.41 First Amendment to Resource Bancshares Mortgage Group, Inc. *
Non-Qualified Stock Option Plan dated January 29, 1997 incorporated
by reference to Exhibit 10.41 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998
10.42 Second Amendment to the Non-Qualified Stock Option Plan dated February *
6, 1998 incorporated by reference to Exhibit 10.40 of the
Registrant's Quarterly Report on Form 10-Q for the period ended March
31, 1998
10.43 Third Amendment to Resource Bancshares Mortgage Group, Inc. *
Non-Qualified Stock Option Plan dated October 28, 1998 incorporated
by reference to Exhibit 10.43 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998
10.44 Agreement and Release Form of Non-Qualified Stock Option Agreement *
incorporated by reference to Exhibit 10.41 of the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 1998
10.45 Amended and Restated Retirement Savings Plan dated April 1, 1996 *
incorporated by reference to Exhibit 10.34 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996
10.46 First Amendment to Amended and Restated Retirement Savings Plan dated as of *
November 8, 1996 incorporated by reference to Exhibit 10.35 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996
10.47 Second Amendment to Amended and Restated Retirement Savings Plan dated *
January 1997, incorporated by reference to Exhibit 10.38 of the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 1997
10.48 (A) Agreement of Merger dated April 18, 1997 between Resource Bancshares *
Mortgage Group, Inc., RBC Merger Sub, Inc. and Resource Bancshares Corporation
incorporated by reference to Annex A of the Registrant's Registration No.333-29245
(B) First Amendment to Agreement of Merger dated April 18, 1997 between *
Resource Bancshares Mortgage Group, Inc., RBC Merger Sub, Inc. and
Resource Bancshares Corporation incorporated by reference to Exhibit
10.42 of the Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 1997
(C) Second Amendment to Agreement of Merger dated April 18, 1997 between Resource *
E
48
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
Bancshares Mortgage Group, Inc., RBC Merger Sub, Inc. and Resource Bancshares
Corporation incorporated by reference to Annex A of the Registrant's Registration No.
333-29245
10.49 (A) Mutual Release and Settlement Agreement between the Registrant, Lee E. Shelton *
and Constance P. Shelton dated January 31, 1997 incorporated by reference to Exhibit
10.44 of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997
(B) Amendment to Mutual Release and Settlement Agreement between *
Registrant, Lee E. Shelton and Constance P. Shelton dated January 31,
1997 incorporated by reference to Exhibit 10.44 of the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1997
10.50 Preferred Provider Organization Plan for Retired Executives incorporated by reference to *
Exhibit 10.43 of the Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1998
10.51 Resource Bancshares Mortgage Group, Inc. Flexible Benefits Plan Amended and *
Restated as of January 1, 1998 incorporated by reference to Exhibit 10.51 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998
10.52 The Resource Bancshares Mortgage Group, Inc. Nonqualified Deferred Compensation
Plan effective April 1, 1999 incorporated by reference to Exhibit 10.52 of the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1999 *
10.53 Voluntary Employees' Beneficiary Association Trust for the Employees
of Resource Bancshares Mortgage Group, Inc. *
10.54 Voluntary Employees' Beneficiary Association Plan for the Employees
of Resource Bancshares Mortgage Group, Inc. _____
11.1 Statement re: Computation of Net Income per Common Share _____
27.1 Financial Data Schedule _____
- ----------------------------------
* Incorporated by reference
F