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2000 ANNUAL REPORT
[PHOTO]
NAVIGATING THE COURSE FOR THE FUTURE
[RESOURCE BANCSHARES MORTGAGE GROUP, INC. LOGO]
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CORPORATE INFORMATION [RESOURCE BANCSHARES MORTGAGE GROUP, INC. LOGO]
DIRECTORS
BOYD M. GUTTERY*
Business Consultant
Atlanta, Georgia
STUART M. CABLE
Attorney
Goodwin, Proctor, & Hoar LLP
law firm
Boston, Massachusetts
DOUGLAS K. FREEMAN
Chairman and Chief Executive Officer
Resource Bancshares Mortgage
Group, Inc.
Columbia, South Carolina
DAVID W. JOHNSON, JR.
President (Retired)
Resource Bancshares Mortgage
Group, Inc.
Columbia, South Carolina
ROBIN C. KELTON
Chairman
Kelton International Ltd.
investment bank
London, England
JOEL A. SMITH, III*
Dean
Darla Moore School of Business
University of South Carolina
Columbia, South Carolina
ROGER O. GOLDMAN*
President
Ignite, Inc.
management consulting firm
New York, New York
*Audit Committee
KEY OFFICERS
DOUGLAS K. FREEMAN
Chairman and Chief Executive Officer
STEVEN F. HERBERT
Chief Financial Executive
HAROLD LEWIS, JR.
Chief Portfolio Management Executive
WILLIAM M. ROSS
Chief Sales and Fulfillment Executive
THOMAS J. LITTLE, JR.
Chief Human Resources Executive
CORPORATE INFORMATION
Exchange: Nasdaq
Symbol: RBMG
Internet Address:
http://www.rbmg.com
Investor Relations Contact
Steven F. Herbert
Chief Financial Executive
7909 Parklane Road
Columbia, South Carolina 29223
Tel: (803)741-3539
Fax: (803)741-3903
E-mail: investors@rbmg.com
1-800-933-2890
FORM 10K AND OTHER INFORMATION
Copies of the Resource Bancshares Mortgage Group, Inc. Annual Report on Form
10K, as filed with the Securities and Exchange Commission, will be furnished
without charge to shareholders upon written request to Steven F. Herbert at the
address set forth above.
TRANSFER AGENT AND REGISTRAR
EquiServe
Telephone
Inside the US: 1-800-446-2617
Outside the US: 1-201-324-0498
TDD/TTY for hearing impaired:
1-201-222-4955
Operators are available Monday-Friday, 8:30 a.m. to 7:00 p.m. Eastern time. An
interactive automated system is available around the clock everyday.
INTERNET
Internet: http://www.equiserve.com
GENERAL CORRESPONDENCE
EquiServe
P.O. Box 2500
Jersey City, NJ 07303-2500
For questions regarding stock transfers, change of address or lost certificates.
CERTIFICATE TRANSFERS BY MAIL
EquiServe
P.O. Box 2589
Jersey City, NJ 07303-2589
ACCESS ACCOUNT INFORMATION VIA INTERNET
http://gateway.EquiServe.com
Internet Helpline: 1-877-843-9327
Operators are available Monday-Friday
8:30 a.m. to 7:00 p.m. Eastern time.
RETURN ON ASSETS*
(consolidated)
[GRAPH]
RETURN ON EQUITY*
(consolidated)
[GRAPH]
NET OPERATING INCOME*
($ in millions)
[GRAPH]
DILUTED OPERATING
EARNINGS PER SHARE*
[GRAPH]
* Amounts reflect operating amounts only. Excluded are the impact of
non-recurring charges reported in 1996 and 1997 and non-recurring income
reported in 1998, and workforce reduction charges reported in 1999.
Also, excluded in 2000 are all unusual items as reported in the Annual
Report.
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TO OUR STOCKHOLDERS, CUSTOMERS AND COLLEAGUES:
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It has been a little more than a year since I assumed responsibility as
Chief Executive Officer. Throughout the first quarter of 2000, the Board,
management and I met extensively to review your Company's position in the eyes
of its customers, colleagues and investors and to reconsider our chosen markets,
mission, goals, business principles, and core values. I articulated the results
of that study and the resulting course that we charted for your Company in last
year's annual report. When we charted our course a year ago, we decided to focus
on becoming a customer centric financial intermediary that delivers value to its
customers by combining the best of product depth, relationship management and
service quality. We are now almost a full year into implementation of that
business plan and have made significant progress in navigating the course back
to profitability.
The mortgage banking industry is highly cyclical. When interest rates
are low, production volumes grow and profit margins widen. Throughout this past
year, we operated in a high interest rate environment in which available volumes
were lower than in the prior two years and competition for the "decreasing pie"
drove margins in the agency-eligible side of our business down. I am happy to
report that, as a result of recent reductions in interest rates by the Federal
Reserve Board, the wind is once again at our backs. Our agency-eligible locked
pipeline has grown to $1.2 billion at February 28, 2001 (145% greater than a
year ago), and agency-eligible closing volumes for the month of February were
$816.5 million (150% greater than February 2000 volumes). Likewise, margins have
improved on the agency-eligible side of our business from 53 basis points
average for 2000 to 61 basis points average for the fourth quarter of 2000.
The year 2000 was a watershed year during which we focused our efforts
on creating the infrastructure to enable your Company to operate profitably in
favorable as well as unfavorable economic environments. In other words, though
we can't control the speed and direction of the wind, we can adjust our sails
and our tack to take advantage of the wind that is available. Accordingly, our
focus in 2000 was to reduce the level of fixed costs in our loan production
operation; to put in place the infrastructure to process loans better, cheaper
and faster; to expand our product offerings focusing especially on higher
margin, non-traditional products; and to put in place world class sales and
portfolio management tools.
"I am happy to report that...the wind
is once again at our backs."
Resource Bancshares Mortgage Group, Inc. 1
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[PHOTO]
During the last half of the year we completed a company-wide
reorganization designed around business processes rather than traditional
product groupings to help us become customer centric. The resulting business
units are: sales, customer fulfillment, servicing, and portfolio management.
During the year, we deployed new internal reporting models to measure "net value
added" across products, customers, salespeople, and the newly defined business
units. That system is now a cornerstone of our management information and
accountability system. We have implemented a "balanced score card" management
accountability and compensation system that encompasses financial performance,
operational performance, customer satisfaction, employee satisfaction and
development measurements. We also have developed a series of "dashboard" reports
that track various sales, risk and financial measures, by customer.
During the year we also provided training to our salespeople on various
aspects of customer relationship management including consultative selling
techniques. We put into their hands world class technology including:
SALESFORCE.COM, a leading edge, web-based sales force automation tool
that gives our salespeople access to our databases to know the status of each
customer's pipeline of loans.
MAPP, a database that allows each salesperson to identify market area
potential for purposes of targeting new customers or increasing the "wallet
share" of existing customers.
RAP, a relationship action plan tool that provides discipline in
managing customer relationships.
These tools help our salespeople to be more efficient and effective.
Coupled with careful pruning of lower volume producers, these tools have enabled
our loans closed-per-agency-wholesale-salesperson to increase from $1.94
million in July 2000 to $5.41 million in January 2001.
PRODUCTION BY CHANNEL
($ in millions)
- Subprime
- Wholesale
- Correspondent
[GRAPH]
"...we have developed and are now selling the entire
value chain of our mortgage banking competencies
to our partners including sub-servicing, portfolio
management and customer fulfillment services."
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"e-RBMG is...the first
of many stepping
stones allowing RBMG
to ultimately process
loans in a virtual,
paperless process."
We view our brokers and correspondents as more than customers. We view
them as partners in a venture to bring mortgage financing to the public. Our
success depends on our helping these partners to succeed in a fiercely
competitive environment. Accordingly, as part of offering world class products
and services, we have developed and are now selling the entire value chain of
our mortgage banking competencies to our partners including sub-servicing,
portfolio management and customer fulfillment services. These services are being
offered under the brand name "Resource Mortgage Solutions."
In our customer fulfillment unit we have completed the centralization
of the loan processing operations from 34 separate subprime and agency-eligible
branches into 7 regional operating centers. This is enabling us to build to a
"critical mass" of volume in the remaining centers where we have significant
quantity and quality of experience and effective management leadership. Working
with outside consultants we re-engineered work processes to enable those
regional customer fulfillment centers to serve our customers better, cheaper and
faster. We believe that the consolidation of regional offices and re-engineering
of work processes have enabled us to cut $4.0 million out of annual expense from
our customer fulfillment processes.
We re-engineered our centralized post-closing operation in Columbia, SC
over a two-year period of time, resulting in an increase in
monthly-units-processed-per-loan-operations-personnel from 40 units in the
spring of 1998 to 70 units in December 2000.
Paperwork is the Achilles heel of the mortgage banking industry. Our
first step in proactively managing mortgage paperwork is e-RBMG. Launched early
in 2000, this sophisticated on-line tool dramatically improves the efficiency
and effectiveness of our interactions with customers. This web site allows
RBMG's correspondent lenders and brokers to upload and key files, register and
lock a loan, submit a loan to Fannie Mae Desktop Underwriting, print out a fax
cover sheet with a bar code
[GRAPH]
[GRAPH]
[GRAPH]
Resource Bancshares Mortgage Group, Inc. 3
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[PHOTO]
to be faxed and routed electronically, submit an electronic file to one of
RBMG's Regional Operations Centers for validation, and request closing funds
on-line. During 2000, we trained 2,575 people (representing 950 of our
correspondents and brokers) and closed $801 million of loans that had been
processed on e-RBMG. During the fourth quarter alone, we closed $388 million of
loans through e-RBMG. e-RBMG is the cornerstone of our future customer
fulfillment strategy and the first of many stepping stones allowing RBMG to
ultimately process loans in a virtual, paperless process. Much of our effort and
resources in 2001 and 2002 will be in furtherance of these endeavors.
During the year Mickey Ross joined our team as Chief Sales and
Fulfillment Executive. Mickey was previously President of Home Equity Sale, a
division of the Consumer Finance Group of Bank of America, responsible for
NationsCredit, EquiCredit, telephone and correspondent lending sales efforts.
Mickey's vast experience has enabled us to jump start many of the initiatives we
have undertaken to become a customer centric organization.
"Competitive advantage
in portfolio management
comes from having
better information
than our competitors
and exploiting that
information to squeeze
out incremental profit
through risk-based
pricing and best
execution modeling."
On the portfolio side, we focused during the year on two key
initiatives: shedding non-core assets from our balance sheet; and putting in
place the technology and people to provide RBMG with world class portfolio
management information.
During the year we completed the sale of substantially all of the
assets of Laureate Capital Corp. and the sale of all our residual interests in
subprime securitizations, and we engaged a consultant to assist us in evaluating
strategic alternatives for our leasing business. The sale of our residual
interests was part of our overall strategy to deliver our subprime loan
production into the cash markets. This transaction took a major source of
volatility out of our earnings stream while providing liquidity to facilitate
execution of our long-term strategic vision and to support continuation of our
stock repurchase program.
The mortgage market has become extremely sophisticated and competitive
in recent years. As a result, competitive advantage in portfolio management
comes from having better information than our competitors and exploiting that
information to squeeze out incremental profit through risk-based pricing and
best execution modeling. During 2000, we recruited Harold Lewis as Chief
Portfolio Management Executive. Prior to joining RBMG, Harold served as
President of Home Equity Services and NationsCredit Consumer Corporation. Harold
brings to our team extensive consumer credit and portfolio management
experience. Harold has assembled a team of colleagues with expertise in prime
and subprime secondary marketing, servicing asset management, risk management
and quantitative analysis. During the year we put in place best execution models
for agency-eligible and subprime products and have made significant progress in
implementing switch-in-front and risk-based pricing technologies. Likewise, we
have implemented new pipeline and servicing asset management software that is
state of the art. We now have one of the top portfolio management teams in the
mortgage banking industry.
From a strategy standpoint we continue to sell into the cash markets
the vast majority of the loans and servicing that we produce. However, we will
continue to own a sufficient quantity of servicing to enable us to maintain a
quality, state of the art servicing factory. In order to do this, we will retain
a small portion of the servicing that we generate and offer competitively priced
sub-servicing to our correspondents and others as part of our total product
offerings to customers.
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[PHOTO]
RBMG is uniquely qualified as a sub-servicer. RBMG is not a
mega-servicer intent on "owning" the underlying mortgage customer in order to
cross-sell additional products. We are, therefore, uniquely able to offer our
customers the opportunity to place their servicing with us, thereby gaining cost
savings, while retaining ownership of their customer.
During 2000, RBMG developed the ability to "private label" sub-service
in the name of the owner of the servicing. Resource Servicing Advantage has the
ability to carry out collections and customer service processes as specified by
the owner of the servicing. Further, as a result of its strategy to sell on a
quarterly basis much of the servicing it produces, RBMG is efficient at
servicing transfers and effective in dealing with dramatic changes in the number
of loans serviced. In spite of the effect of loan transfers and in the absence
of the "critical mass" typical of the servicing industry, RBMG serviced in
excess of 1,000 loans per-full-time-equivalent-employee throughout 2000.
Our servicing factory continues to maintain high standards of
performance. RBMG consistently maintains Tier 1 rankings from Freddie Mac for
both Investor Reporting and Default Reporting. Our delinquencies, including
loans in bankruptcy or foreclosure, have consistently remained below 3% during
2000, and averaged 2.5% for the year. This compares favorably with the
performance of our peers.
"RBMG is...uniquely able to offer our customers the opportunity
to place their servicing with us, thereby gaining cost savings,
while retaining ownership of their customer."
[GRAPH]
Resource Bancshares Mortgage Group, Inc. 5
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[PHOTO]
FROM LEFT TO RIGHT STANDING
WILLIAM M. ROSS Chief Sales and Fulfillment Executive
HAROLD LEWIS, JR. Chief Portfolio Management Executive
STEVEN F. HERBERT Chief Financial Executive
THOMAS J. LITTLE, JR. Chief Human Resources Executive
SITTING
DOUGLAS K. FREEMAN Chairman and Chief Executive Officer
In a nutshell, our performance for the year 2000 was all about
execution of our plan and navigating the new course that we charted for the
Company a year ago. That course required charges associated with shedding
non-core assets from our balance sheet and restructuring charges associated with
re-engineering work processes, organizational changes and consolidation of
regional operating centers. What has emerged from all of this hard work is a
Company with an improved and more liquid balance sheet, that is customer-centric
and that competes on the basis of value added.
I mentioned at the start of this letter that the interest rate
environment has improved in recent months so that the wind is once again at our
backs. What's different this time is that RBMG is entering the favorable end of
the interest rate cycle with reduced fixed costs, better automation, streamlined
work processes, better management information, stronger portfolio skills and
tools, and an improved and more liquid balance sheet. I look forward as you do
to a more prosperous 2001.
I would be remiss if I did not thank the people who have worked so hard
to navigate the new course that we charted a year ago. First and foremost, I
want to thank my colleagues at RBMG for all of the hard work during 2000 in
executing our business strategy. I am proud of your commitment to changing how
our Company operates. You have embraced our new corporate culture of change and
continuous process improvement. This cultural shift will allow us to
increasingly become a more customer-centric organization. There is still much to
do in the furtherance of our ultimate objectives of virtual loan processing in a
near paperless environment and developing strategic partnerships with our
brokers and correspondents. I look forward to working with you in 2001 in these
and other endeavors.
I would like to thank a member of our Board of Directors, Boyd Guttery,
who served as Chairman of the Board during the critical transition months. While
I assumed responsibility for day-to-day leadership inside the Company, his hard
work as Chairman ensured an orderly transition.
Finally, I want to thank David Johnson. David recently retired as
President of your Company. David was one of the founders who helped to build the
Company from the ground up. During the past year of organization changes and
re-engineering, David was my "compass" to ensure that we kept the best from the
past and adopted the best of the "new ideas." Without David's support and
leadership, we would not have made the progress that we did. David will continue
as a valued member of our Board of Directors, and I look forward to his
continued assistance and guidance.
/s/ DOUGLAS K FREEMAN
- ------------------------------------
Douglas K. Freeman
Chairman and Chief Executive Officer
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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 2000 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, 2000: (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) prepayment risks, (xi) possible changes in
accounting estimates and (xii) availability of funding sources and other risks
and uncertainties. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
THE COMPANY
The Company is a 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, one of the Company's
wholly-owned subsidiaries originates, sells and services small-ticket commercial
equipment leases.
LOAN AND LEASE PRODUCTION
A summary of production by source for the periods indicated is set
forth below:
For the Year Ended December 31,
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($ in thousands) 2000 1999 1998
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Agency-Eligible Loan Production:
Correspondent ............................................... $ 4,532,335 $ 6,363,936 $ 11,666,560
Wholesale ................................................... 1,098,699 1,748,415 3,023,961
Retail ...................................................... -- -- 264,059
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Total Agency-Eligible Loan Production ......................... 5,631,034 8,112,351 14,954,580
Subprime Loan Production .................................... 669,622 728,410 607,664
Lease Production ............................................ 103,324 100,230 78,098
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Total Mortgage Loan and Lease Production ...................... $ 6,403,980 $ 8,940,991 $ 15,640,342
==================================================================================================================================
The Company purchases agency-eligible mortgage loans through its
correspondents and originates loans through its wholesale and subprime
divisions. The Company also has a small-ticket commercial equipment lease
operation. Correspondent operations accounted for 71% of the Company's total
production for both the twelve months ended December 31, 2000 and 1999.
Wholesale and subprime production accounted for 17% and 10%, respectively, of
the Company's production for the year ended December 31, 2000 and 20% and 8%,
respectively, of the Company's production for the twelve months ended December
31, 1999. Lease production accounted for 2% and 1% of the Company's total
production for 2000 and 1999, respectively. A summary of key information
relevant to industry loan production activity is set forth below:
At or for the Year Ended December 31,
-----------------------------------------------------------
($ in thousands) 2000 1999 1998
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U.S. 1-4 Family Mortgage Originations Statistics(1):
U.S. 1-4 Family Mortgage Originations ....................... $1,024,000,000 $1,287,000,000 $1,470,000,000
Adjustable Rate Mortgage Market Share ....................... 24% 21% 14%
Estimated Fixed Rate Mortgage Originations .................. 778,000,000 1,017,000,000 1,264,000,000
Company Information:
Residential Loan Production ................................. $ 6,300,656 $ 8,840,761 $ 15,562,244
Estimated Company Market Share .............................. 0.62% 0.69% 1.06%
==================================================================================================================================
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's total residential mortgage production decreased by 29% to
$6.3 billion for 2000 from $8.8 billion for 1999. During 2000, interest rates
were higher than during 1999, resulting in a decrease in industry wide
residential loan originations of 20%. Likewise, the higher rate environment
resulted in an increase in ARM market share in 2000 compared to 1999. The
Company has historically focused
Resource Bancshares Mortgage Group, Inc. 7
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on fixed rate products, and only recently has commenced offering a broader
spectrum of mortgage products, including adjustable rate products. Further, a
rise in interest rates and resulting decrease in volumes prompted increasing
price competition in the marketplace during 2000 compared to 1999.
The Company's total residential mortgage production decreased 43% to
$8.8 billion for 1999 from $15.6 billion for 1998. During 1999, interest rates
were higher than during 1998, resulting in a decrease in industry wide
residential mortgage originations of 12%. Likewise, the higher rate environment
resulted in an increase in ARM market share in 1999 compared to 1998. During
1999 and 1998, the Company offered primarily fixed rate products. Further, a
rise in interest rates and resulting decrease in volumes prompted increasing
price competition in the marketplace during 1999 compared to 1998.
CORRESPONDENT LOAN PRODUCTION
The Company purchases closed mortgage loans processed through its network of
approved correspondent lenders. For certain correspondents, the Company
underwrites and table funds loan applications taken and processed by the
correspondent. Correspondents are primarily mortgage lenders, larger mortgage
brokers and smaller savings and loan associations and commercial banks that have
met the Company's approval requirements. The Company continues to emphasize
correspondent loan production as its basic business focus because of the lower
fixed expenses and capital investment required of the Company. A summary of key
information relevant to the Company's correspondent loan production activities
is set forth below:
At or for the Year Ended December 31,
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($ in thousands) 2000 1999 1998
------------ ------------ -------------
Correspondent Loan Production ................................. $ 4,532,335 $ 6,363,936 $ 11,666,560
Estimated Correspondent Market Share(1) ....................... 0.44% 0.49% 0.79%
Approved Correspondents ....................................... 924 909 852
Correspondent Division Expenses ............................... $ 40,732 $ 55,438 $ 68,975
============ ============ =============
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's correspondent loan production decreased by 29% to $4.5
billion for 2000 from $6.4 billion for 1999. During 2000, interest rates were
higher than during 1999, resulting in a decrease in industry wide residential
loan originations of 20%. Likewise, the higher rate environment resulted in an
increase in ARM market share in 2000 compared to 1999. 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, a rise in interest rates and resulting decrease in volumes
prompted increasing price competition in the marketplace during 2000. The
decline in production is the primary reason for the increase in correspondent
division expenses as a percentage of production which increased from 87 basis
points for 1999 to 90 basis points for 2000, in spite of the reduction in
correspondent division expenses. The number of approved correspondent lenders
increased 2% from 1999 to 2000.
The Company's total correspondent residential mortgage production
decreased 45% to $6.4 billion for 1999 from $11.7 billion for 1998. During 1999,
interest rates were higher than during 1998, resulting in a decrease in industry
wide residential mortgage originations of 12%. Likewise, the higher rate
environment resulted in an increase in ARM market share in 1999 compared to
1998. During 1999 and 1998, the Company offered primarily fixed rate products.
Further, a rise in interest rates and resulting decrease in volumes prompted
increasing price competition in the marketplace during 1999 compared to 1998.
The decline in production is the primary reason for the increase in
correspondent division expenses as a percentage of production which increased
from 59 basis points for 1998 to 87 basis points for 1999, in spite of the
reduction in correspondent division expenses. The number of approved
correspondent lenders increased 7% from 1998 to 1999.
During 2000, the Company introduced e-RBMG, the Company's
business-to-business Internet offering. e-RBMG makes it easier for
correspondents to interact with the Company by automating the flow of
information between the correspondent and the Company. e-RBMG allows
correspondent lenders to upload and key files, register and lock a loan, submit
a loan to Fannie Mae Desktop Underwriting, print out a fax cover with a bar code
to be faxed and routed electronically, submit an electronic file to one of the
Company's Regional Operation Centers for validation, and request closing funds
on-line.
WHOLESALE LOAN PRODUCTION
The wholesale division receives loan applications through brokers,
underwrites the loans, funds the loans at closing and prepares all closing
documentation. Typically, mortgage brokers are responsible for taking
applications and accumulating the information precedent to the Company's
processing and underwriting of the loans. The Company handles all shipping and
follow-up procedures on the loans. Although processing, underwriting and funding
loans for mortgage brokers involves more work and expense than that involved in
correspondent loan production, wholesale operations also generally provide for
higher profit margins than correspondent loan production. Prior to the fourth
quarter of 1999, the Company had wholesale processing branches in most major
markets throughout the United States. During 2000 the Company completed the
process started in 1999 of consolidating from an 18 branch environment into
regional operating centers to improve operating cost efficiency levels. The
Company's nationwide wholesale salesforce is now supported by four such regional
operating centers at December 31, 2000. A summary of key information relevant to
the Company's wholesale production activities is set forth below:
At or for the Year Ended December 31,
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($ in thousands) 2000 1999 1998
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Wholesale Loan Production ..................................... $ 1,098,699 $ 1,748,415 $ 3,023,961
Estimated Wholesale Market Share(1) ........................... 0.11% 0.14% 0.21%
Wholesale Division Direct Operating Expenses .................. $ 11,522 $ 16,362 $ 16,037
Approved Brokers .............................................. 4,227 4,284 3,401
Regional Operation Centers .................................... 4 5 --
Number of Branches ............................................ -- 2 15
Number of Employees ........................................... 116 107 161
==================================================================================================================================
(1) Source: Mortgage Bankers Association of America, Economics Department.
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Wholesale loan production decreased 37% ($0.7 billion) from $1.8
billion for 1999 to $1.1 billion for 2000. During 2000, interest rates were
higher than during 1999, resulting in a decrease in industry wide residential
loan originations of 20%. Likewise, the higher rate environment resulted in an
increase in ARM market share in 2000 compared to 1999. 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, a rise in interest rates and resulting decrease in volumes
prompted increasing price competition in the marketplace during 2000. Wholesale
division operating expenses as a percentage of production increased from 94
basis points in 1999 to 105 basis points in 2000, primarily as a result of the
decline in production volumes.
Wholesale loan production decreased 42% ($1.3 billion) from $3.0
billion for 1998 to $1.7 billion for 1999. During 1999, interest rates were
higher than during 1998, resulting in a decrease in industry wide residential
mortgage originations of 12%. Likewise, the higher rate environment resulted in
an increase in ARM market share in 1999 compared to 1998. During 1999 and 1998,
the Company offered primarily fixed rate products. Further, a rise in interest
rates and resulting decrease in volumes prompted increasing price competition in
the marketplace during 1999 compared to 1998. Wholesale division operating
expenses as a percentage of production increased from 53 basis points in 1998 to
94 basis points in 1999 primarily as a result of the decline in production
volumes.
The Company also offers the same advantages available through e-RBMG to
wholesale brokers.
E-RBMG OPERATIONS
Following is a summary of key e-RBMG operating statistics for the year
ended December 31, 2000:
Customers Added ....................................................................... 950
Headcount Trained ..................................................................... 2,575
Closed Loans ($ in thousands) ......................................................... $ 801,625
Pipeline ($ in thousands) ............................................................. $ 42,260
RETAIL LOAN PRODUCTION
Effective May 1, 1998, the Company sold its retail production
franchise. Retail loan production and retail divisional direct operating
expenses for the year ended December 31, 1998 were $264.1 million and $6.0
million, respectively.
SUBPRIME LOAN PRODUCTION
In 1997, the Company began its initial expansion into subprime lending
activities. The Company conducts subprime business through its wholly-owned
subsidiary, Meritage Mortgage Corporation (Meritage). A summary of key
information relevant to the Company's subprime production activities is set
forth below:
At or for the Year Ended December 31,
-------------------------------------------------------
($ in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Subprime Loan Production ...................................... $ 669,622 $ 728,410 $ 607,664
Subprime Division Direct Operating Expenses ................... $ 23,062 $ 28,760 $ 19,896
Number of Brokers ............................................. 3,548 3,095 1,830
Number of Employees ........................................... 230 293 271
Number of Branches ............................................ -- 10 19
Regional Operation Centers .................................... 3 -- --
==================================================================================================================================
Subprime loan production decreased by 8% to $669.6 million for 2000 as
compared to $728.4 million during 1999. The decrease in production volumes
relates to the higher rate environment in 2000 compared to 1999. Subprime
division direct operating expenses decreased 20% from $28.8 million in 1999 to
$23.1 million in 2000. This reduction in expenses is due to a decrease in
production and to phasing out of branch facilities. During 2000, the Company's
salespeople commenced working out of their homes or executive suites. The
Company centralized processing, underwriting and closing functions into three
regional operating centers where a critical mass of volume could be achieved for
better operating efficiency. As a result, the Company reduced direct operating
expenses by 51 bps from 1999 to 2000. Between 1999 and 2000 the Company
increased the number of its subprime brokers by 453.
Subprime loan production increased by 20% to $728.4 million for 1999 as
compared to $607.7 million during 1998 as the Company expanded its operations.
Between 1998 and 1999 the Company increased the number of its subprime brokers
by 1,265. The number of branches declined from 19 in 1998 to 10 at the end of
1999 as the Company reassessed the geographic regions that each branch covered.
COMMERCIAL MORTGAGE PRODUCTION
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of Laureate to BB&T Corporation of
Winston-Salem, N.C. Accordingly, the Company recorded a $1.4 million after-tax
charge during the period primarily related to the write-off of intangible assets
of Laureate.
LEASE PRODUCTION
The Company's wholly-owned subsidiary, Republic Leasing Company, Inc.
(Republic Leasing), originates and services small-ticket commercial equipment
leases. Substantially all of Republic Leasing's lease receivables are acquired
from independent brokers who operate throughout the continental United States. A
summary of key information relevant to the Company's lease production activities
is set forth below:
At or for the Year Ended December 31,
-------------------------------------------------------
($ in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Lease Production .............................................. $ 103,324 $ 100,230 $ 78,098
Lease Division Operating Expenses ............................. $ 7,901 $ 6,275 $ 5,307
Number of Brokers ............................................. 181 184 218
Number of Employees ........................................... 70 61 66
==================================================================================================================================
Resource Bancshares Mortgage Group, Inc. 9
12
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 residential mortgage servicing rights to other
approved servicers. Typically, the Company sells its residential 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 residential loan
servicing activities is set forth below:
At or for the Year Ended December 31,
---------------------------------------------------
($ in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Underlying Unpaid Principal Balances:
Beginning Balance* .................................................. $ 7,822,394 $ 9,865,100 $ 7,125,222
Residential Loan Production (net of servicing-released production) .. 5,462,435 8,097,749 14,917,193
Net Change in Work-in-Process ....................................... 15,277 228,712 604,131
Bulk Acquisitions ................................................... -- -- 122,467
Sales of Servicing .................................................. (4,473,456) (9,104,706) (10,922,288)
Paid-In-Full Loans .................................................. (580,393) (973,780) (1,639,776)
Amortization, Curtailments and Other, net ........................... (199,078) (290,681) (341,849)
- --------------------------------------------------------------------------------------------------------------------------------
Ending Balance* ..................................................... 8,047,179 7,822,394 9,865,100
Subservicing Ending Balance ......................................... 625,117 1,255,832 3,730,636
- --------------------------------------------------------------------------------------------------------------------------------
Total Underlying Unpaid Principal Balances ............................ $ 8,672,296 $ 9,078,226 $ 13,595,736
================================================================================================================================
* These numbers and statistics apply to the Company's owned residential
servicing portfolio and, therefore, exclude the subservicing portfolio. The
2000, 1999 and 1998 ending balance includes $236,267, $139,376 and $138,619 of
subprime loans being temporarily serviced until these loans are sold.
Of the $8.0 billion, $7.8 billion and $9.9 billion unpaid principal
balance at December 31, 2000, 1999 and 1998, approximately $5.5 billion, $6.3
billion and $5.5 billion, respectively, of the related mortgage servicing right
asset is classified as available-for-sale, while $2.5 billion, $1.5 billion and
$4.4 billion, respectively, of the related mortgage servicing right asset is
classified as held-for-sale.
A summary of residential servicing statistics follows:
At or for the Year Ended December 31,
---------------------------------------------------------
($ in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Average Underlying Unpaid Principal Balances (including subservicing) $ 9,049,296 $ 11,820,861 $ 11,864,513
Weighted Average Note Rate* ................................... 7.67% 7.50% 7.20%
Weighted Average Servicing Fee* ............................... 0.42% 0.43% 0.42%
Delinquency (30+ days) Including Bankruptcies and Foreclosures* 2.78% 2.78% 2.01%
Number of Servicing Division Employees ........................ 73 86 151
==================================================================================================================================
* These numbers and statistics apply to the Company's owned residential
servicing portfolio and, therefore, exclude the subservicing portfolio.
The year end average underlying unpaid principal balance of residential
mortgage loans being serviced and subserviced decreased $2.8 billion, or 23%,
from 1999 to 2000. This relates primarily to a decrease in the average balance
of servicing held-for-sale, which resulted from a decrease in residential loan
production in 2000 compared with 1999. Since the Company generally sells
servicing rights related to the residential 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.
Likewise, the $0.04 billion, or 0.4%, decrease in the average
underlying unpaid principal balance of residential mortgage loans being serviced
and subserviced for 1999 as compared to 1998 is primarily related to the
Company's decreased loan production volumes during 1999.
LEASE SERVICING
Republic Leasing services leases that are owned by it and also services
leases for investors. A summary of key information relevant to the Company's
lease servicing activity is set forth below:
At or for the Year Ended December 31,
-------------------------------------------------------
($ in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Owned Lease Servicing Portfolio ....................................... $ 188,912 $ 152,300 $ 98,956
Serviced For Investors Servicing Portfolio ............................ 3,729 14,272 37,565
- ----------------------------------------------------------------------------------------------------------------------------------
Total Managed Lease Servicing Portfolio ............................... $ 192,641 $ 166,572 $ 136,521
==================================================================================================================================
Weighted Average Net Yield For Managed Lease Servicing Portfolio 10.77% 10.61% 10.81%
Delinquencies (30+ Days) Managed Lease Servicing Portfolio ............ 2.40% 2.76% 2.00%
==================================================================================================================================
10
13
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:
At or for the Year Ended December 31,
-------------------------------------------------------
($ in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Total Company Servicing Fees .................................. $ 34,981 $ 42,223 $ 39,379
Net Interest Income from Owned Leases ......................... 9,176 7,270 4,637
- ----------------------------------------------------------------------------------------------------------------------------------
Total Servicing Fees and Interest from Owned Leases ........... $ 44,157 $ 49,493 $ 44,016
Total Company Operating Expenses .............................. $ 121,524 $ 151,684 $ 155,892
Total Company Amortization and Depreciation ................... (33,065) (36,653) (32,572)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Company Operating Expenses, Net of Amortization and Depreciation $ 88,459 $ 115,031 $ 123,320
- ----------------------------------------------------------------------------------------------------------------------------------
Coverage Ratio ................................................ 50% 43% 36%
==================================================================================================================================
The Company's coverage ratios for 2000, 1999 and 1998 at 50%, 43% and
36%, respectively, result from gradually moving toward the Company's target
level of between 50% and 80%. In the opinion of the Company's management, market
prices for servicing rights have been attractive throughout this period.
Accordingly, management consciously determined on a risk-versus-return basis to
allow this ratio to move slowly toward its stated goal. 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%.
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 2000, COMPARED TO YEAR ENDED
DECEMBER 31, 1999
SUMMARY BY OPERATING DIVISION
Net income (loss) per common share on a diluted basis for 2000 was
($2.39) as compared to $0.28 for 1999. Following is a summary of the revenues
and expenses for each of the Company's operating divisions for the years ended
December 31, 2000 and 1999, respectively:
For the Year Ended December 31, 2000(1)(2)
-------------------------------------------------------------------
Agency-Eligible
---------------------------------------- Commercial
(Unaudited)($ in thousands) Production Servicing Reinsurance Subprime Mortgage
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income ................................... $ 1,867 $ (5,326) (92) $ 11,439 $ --
Net gain on sale of mortgage loans .................... 24,194 -- -- 13,149 --
Gain on sale of mortgage servicing
rights .............................................. -- 2,222 -- -- --
Servicing fees ........................................ -- 34,738 -- -- --
Mark-to-market on residual interests
in subprime securitizations ......................... -- -- -- (39,338) --
Other income .......................................... 563 517 3,142 579 --
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues ...................................... 26,624 32,151 3,050 (14,171) --
- ----------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits .......................... 28,333 2,904 -- 11,682 --
Occupancy expense ..................................... 11,332 191 -- 2,670 --
Amortization and provision for impairment
of mortgage servicing rights ........................ -- 24,560 -- -- --
Provision expense ..................................... 2,102 -- -- 2,453 --
General and administrative expenses ................... 10,487 4,408 316 6,257 --
- ----------------------------------------------------------------------------------------------------------------------------
Total expenses ...................................... 52,254 32,063 316 23,062 --
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes ................................. (25,630) 88 2,734 (37,233) --
Income tax benefit (expense) .......................... 9,875 (34) (960) 13,616 --
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations .......................................... (15,755) 54 1,774 (23,617) --
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $261) ............................... -- -- -- -- (1,448)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit
of $354) ........................................... -- -- -- -- (660)
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) ..................................... $(15,755) $ 54 $ 1,774 $ (23,617) $(2,108)
============================================================================================================================
For the Year Ended December 31, 2000(1)(2)
------------------------------------------------------
Total Other/
Leasing Segments Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------
Net interest income ................................... $ 9,176 $ 17,064 $ (1,188) $ 15,876
Net gain on sale of mortgage loans .................... -- 37,343 -- 37,343
Gain on sale of mortgage servicing
rights .............................................. -- 2,222 -- 2,222
Servicing fees ........................................ 501 35,239 (258) 34,981
Mark-to-market on residual interests
in subprime securitizations ......................... -- (39,338) -- (39,338)
Other income .......................................... 1,229 6,030 120 6,150
- ----------------------------------------------------------------------------------------------------------------
Total revenues ...................................... 10,906 58,560 (1,326) 57,234
- ----------------------------------------------------------------------------------------------------------------
Salary and employee benefits .......................... 2,901 45,820 4,460 50,280
Occupancy expense ..................................... 497 14,690 (683) 14,007
Amortization and provision for impairment
of mortgage servicing rights ........................ -- 24,560 -- 24,560
Provision expense ..................................... 3,133 7,688 -- 7,688
General and administrative expenses ................... 1,370 22,838 2,151 24,989
- ----------------------------------------------------------------------------------------------------------------
Total expenses ...................................... 7,901 115,596 5,928 121,524
- ----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes ................................. 3,005 (57,036) (7,254) (64,290)
Income tax benefit (expense) .......................... (1,192) 21,305 2,795 24,100
- ----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations .......................................... 1,813 (35,731) (4,459) (40,190)
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $261) ............................... -- (1,448) -- (1,448)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit
of $354) ............................................ -- (660) -- (660)
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) ..................................... 1,813 $ (37,839) $ (4,459) $ (42,298)
=================================================================================================================
(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) See discussion of unusual items in Management's Discussion and
Analysis.
Resource Bancshares Mortgage Group, Inc. 11
14
For the Year Ended December 31, 1999(1)(2)
---------------------------------------------------------------------------
Agency-Eligible
--------------------------------------------- Commercial
(Unaudited)($ in thousands) Production Servicing Reinsurance Subprime Mortgage
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income.......................... $ 8,240 $ (4,555) $ (12) $ 15,366 $ --
Net gain on sale of mortgage loans........... 64,033 -- -- 20,357 --
Gain on sale of mortgage servicing rights.... -- 7,262 -- -- --
Servicing fees............................... -- 41,791 -- -- --
Mark to market on residual interests in
subprime securitizations................... -- -- -- (7,843) --
Other income................................. 340 582 1,661 3,471 --
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues............................. 72,613 45,080 1,649 31,351 --
- ---------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits................. 38,751 3,399 -- 15,840 --
Occupancy expense............................ 10,079 419 -- 2,567 --
Amortization and provision for impairment
of mortgage servicing rights............... -- 29,580 -- -- --
Provision expense............................ 5,722 -- 85 2,893 --
General and administrative expenses.......... 17,248 5,984 136 7,460 --
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses............................. 71,800 39,382 221 28,760 --
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes........................ 813 5,698 1,428 2,591 --
Income tax benefit (expense)................. (207) (1,448) (356) (1,237) --
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations..... 606 4,250 1,072 1,354 --
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $-0-).................... -- -- -- -- --
Operating net income of Laureate Capital
Corp. (less applicable income tax
expense of $405)........................... -- -- -- -- 418
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss)............................ $ 606 $ 4,250 $ 1,072 $ 1,354 $418
===========================================================================================================================
For the Year Ended December 31, 1999(1)(2)
--------------------------------------------------------------
Total Other/
(Unaudited)($ in thousands) Leasing Segments Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------
Net interest income.......................... $7,270 $ 26,309 $ (470) $ 25,839
Net gain on sale of mortgage loans........... -- 84,390 -- 84,390
Gain on sale of mortgage servicing rights.... -- 7,262 -- 7,262
Servicing fees............................... 620 42,411 (188) 42,223
Mark to market on residual interests in
subprime securitizations................... -- (7,843) -- (7,843)
Other income................................. 1,395 7,449 175 7,624
- ---------------------------------------------------------------------------------------------------------------
Total revenues............................. 9,285 159,978 (483) 159,495
- ---------------------------------------------------------------------------------------------------------------
Salary and employee benefits................. 2,654 60,644 3,903 64,547
Occupancy expense............................ 453 13,518 214 13,732
Amortization and provision for impairment
of mortgage servicing rights............... -- 29,580 -- 29,580
Provision expense............................ 1,908 10,608 -- 10,608
General and administrative expenses.......... 1,260 32,088 1,129 33,217
- ---------------------------------------------------------------------------------------------------------------
Total expenses............................. 6,275 146,438 5,246 151,684
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes........................ 3,010 13,540 (5,729) 7,811
Income tax benefit (expense)................. (1,196) (4,444) 2,137 (2,307)
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations..... 1,814 9,096 (3,592) 5,504
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $-0-).................... -- -- -- --
Operating net income of Laureate Capital
Corp. (less applicable income tax
expense of $405)......................... -- 418 -- 418
- ---------------------------------------------------------------------------------------------------------------
Net income (loss)............................ $1,814 $ 9,514 $(3,592) $ 5,922
===============================================================================================================
(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) See discussion of unusual items in Management's Discussion and Analysis.
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage production operations.
For the Year Ended December 31,
-----------------------------------
($ in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Net interest income ....................................................... $ 1,867 $ 8,240
Net gain on sale of mortgage loans ........................................ 24,194 64,033
Other income .............................................................. 563 340
- ------------------------------------------------------------------------------------------------------------------------
Total production revenue ................................................ 26,624 72,613
- ------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits .............................................. 28,333 38,751
Occupancy expense ......................................................... 11,332 10,079
Provision expense ......................................................... 2,102 5,722
General and administrative expenses ....................................... 10,487 17,248
- ------------------------------------------------------------------------------------------------------------------------
Total production expenses ............................................... 52,254 71,800
- ------------------------------------------------------------------------------------------------------------------------
Net pre-tax production margin ........................................... $ (25,630) $ 813
- ------------------------------------------------------------------------------------------------------------------------
Production ................................................................ $ 5,631,034 $ 8,112,351
Pooled production and whole loan sales .................................... 5,564,703 8,642,639
Total production revenue to pooled and whole loan sales ................... 48 bps 84 bps
Total production expenses to production ................................... 93 bps 89 bps
- ------------------------------------------------------------------------------------------------------------------------
Net pre-tax production margin ........................................... (45) bps (5) bps
========================================================================================================================
SUMMARY
The production revenue to pooled production and whole loan sales ratio
decreased 36 basis points for 2000 as compared to 1999. Generally, net gain on
sale of mortgage loans (43 basis points for 2000 versus 74 basis points for
1999) declined primarily due to compressed margins attributable to an
aggressively competitive pricing environment and lower overall agency-eligible
production volume. Net interest income decreased from 10 basis points for 1999
to 3 basis points for 2000 primarily as a result of the flattened yield curve
and, in part, due to higher financing costs associated with the renewal of the
Company's bank lines during the third quarter of 2000. The
12
15
production expenses to production ratio increased 4 basis points for 2000 as
compared to 1999. This is primarily due to the 31% decline in production for
2000 as compared to 1999 which was partially offset by a $19.5 million (27%)
decline in total production expenses for 2000 as compared to 1999. As a
consequence of the foregoing, the Company's net agency-eligible pre-tax
production margin declined 40 basis points. Absent workforce reduction charges
(discussed in greater detail elsewhere within Management's Discussion and
Analysis), total production expenses would have declined by $20.2 million.
NET INTEREST INCOME
The following table analyzes net interest income allocated to the
Company's agency-eligible mortgage production activities in terms of rate and
volume variances of the interest spread (the difference between interest rates
earned on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds) for the years ended December 31, 2000 and
1999, respectively:
($ 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
$364,231 $656,291 8.14% 6.85% Securities ............................... $29,632 $44,982 $(15,350) $ 4,668 $(20,018)
- ------------------------------- -----------------------------------------------
INTEREST EXPENSE
$280,613 $345,807 5.61% 4.14% Warehouse Line*............................. $15,746 $14,313 $ 1,433 $ 4,131 $ (2,698)
71,843 303,092 6.90% 5.21% Gestation Line.............................. 4,956 15,779 (10,823) 1,216 (12,039)
117,801 110,380 7.08% 6.21% Servicing Secured Line...................... 8,343 6,851 1,492 1,031 461
4,116 20,596 5.81% 5.27% Servicing Receivables Line.................. 239 1,085 (846) 22 (868)
8,491 7,142 8.57% 8.57% Other Borrowings............................ 728 612 116 -- 116
Facility Fees and Other Charges............. 3,222 2,968 254 -- 254
- ------------------------------- -----------------------------------------------
$482,864 $787,017 6.88% 5.29% Total Interest Expense...................... $33,234 $41,608 $ (8,374) $ 6,400 $(14,774)
- ------------------------------- -----------------------------------------------
Net Interest Income Before Interdivisional
1.26% 1.56% Allocations............................... $(3,602) $ 3,374 $ (6,976) $(1,732) $(5,244)
=========== =============================
Allocation to Other......................... 614 470
Allocation to Agency-Eligible Servicing
Division.................................. 5,326 4,396
Intercompany Net Interest Income Included in
Segmented Income Statement.................. (471) N/A
------- -------
Net Interest Income......................... $ 1,867 $ 8,240
======= =======
* The interest-rate on the warehouse line is net of the benefit of escrow
deposits.
The 30 basis point decrease in the interest-rate spread was primarily
the result of a flattened yield curve environment during 2000 compared to 1999.
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:
For the Year Ended December 31,
-----------------------------------
($ in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Gross proceeds on sales of mortgage loans ........................................... $ 5,554,746 $ 8,853,967
Initial unadjusted acquisition cost of mortgage loans sold, net of hedge results .... 5,568,456 8,861,915
- ----------------------------------------------------------------------------------------------------------------------------------
Unadjusted gain (loss) on sale of mortgage loans .................................... (13,710) (7,948)
Loan origination and correspondent program administrative fees ...................... 10,599 21,402
- ----------------------------------------------------------------------------------------------------------------------------------
Unadjusted aggregate margin ......................................................... (3,111) 13,454
Acquisition basis allocated to mortgage servicing rights (SFAS No. 125) ............. 30,279 52,702
Net deferred costs and administrative fees recognized ............................... (2,974) (2,123)
- ----------------------------------------------------------------------------------------------------------------------------------
Net gain on sale of agency-eligible mortgage loans .................................. $ 24,194 $ 64,033
==================================================================================================================================
Net gain on sale of agency-eligible mortgage loans decreased $39.8
million from $64.0 million for 1999 to $24.2 million for 2000. The decrease is
primarily due to compressed margins attributable to an aggressively competitive
pricing environment in the correspondent channel and lower overall
agency-eligible production volume.
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 2000 and 1999, the
Company recognized premium and investment income of $3.1 million and $1.7
million, respectively, that has been included as other income in the
agency-eligible reinsurance segment.
Resource Bancshares Mortgage Group, Inc. 13
16
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
subprime mortgage production operations:
For the Year Ended December 31,
-----------------------------------
($ in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Net interest income ....................................................... $ 11,439 $ 15,366
Net gain on sale of mortgage loans ........................................ 13,149 20,357
Mark-to-market on residual interests in subprime securitizations .......... (39,338) (7,843)
Other income .............................................................. 579 3,471
- ------------------------------------------------------------------------------------------------------------------------
Total production revenue ................................................. (14,171) 31,351
- ------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits .............................................. 11,682 15,840
Occupancy expense ......................................................... 2,670 2,567
Provision expense ......................................................... 2,453 2,893
General and administrative expenses ....................................... 6,257 7,460
- ------------------------------------------------------------------------------------------------------------------------
Total production expenses ................................................ 23,062 28,760
- ------------------------------------------------------------------------------------------------------------------------
Net pre-tax production margin ............................................. $ (37,233) $ 2,591
- ------------------------------------------------------------------------------------------------------------------------
Production ................................................................ $ 669,622 $ 728,410
Whole loan sales and securitizations ...................................... $ 662,694 $ 699,317
Total production revenue to whole loan sales and securitizations .......... (214) bps 448 bps
Total production expenses to production ................................... 344 bps 395 bps
- ------------------------------------------------------------------------------------------------------------------------
Net pre-tax production margin ............................................. (558) bps 53 bps
========================================================================================================================
SUMMARY
Overall, the Company operated during 2000 at a (5.58)% pre-tax subprime
production margin. The $39.8 million decline in the pre-tax subprime production
margin is primarily due to the ($39.3) million adjustment during 2000 in the
mark-to-market on residual interests in subprime securitizations and a ($1.1)
million adjustment to the residual hedges. During 2000 the Company marked down
its residual interests in prior subprime securitizations as a result of changes
in valuation assumptions due to changing market conditions and also wrote down
such residuals and the associated residual hedges (including hedge amortization
expense) as a result of signing a definitive agreement to sell all of the
Company's residuals. Absent mark-to-market adjustment to residual interests and
to residual hedges, the production revenue to whole loan sales and
securitizations ratio would have been 380 bps and 560 bps for the years ended
December 31, 2000 and 1999, respectively. Also contributing to the decline in
production revenue to whole loan sales and securitizations ratio is the $7.2
million decline in net gain on sale of subprime mortgage loans. This decline is
primarily attributable to lower sales volume and tighter margins associated with
selling exclusively into the cash markets for 2000 versus securitizing a portion
of the production in 1999.
The production expenses to production ratio decreased 51 bps during
2000 as compared to 1999. This reduction was achieved in spite of the inclusion
of restructuring and other unusual charges aggregating $2.3 million in operating
expense and in spite of reduced production volumes during year 2000. Absent the
$2.3 million in restructuring and unusual charges during 2000, the Company's
production expenses to production ratio would have decreased to 311 basis
points. See further discussion of unusual items elsewhere in this Management's
Discussion and Analysis.
Adjusting for the above mentioned impact of changes in the valuation of
residuals and residual hedges and restructuring and other unusual charges, the
net pre-tax production margin was 85 bps and 167 bps for the years ended
December 31, 2000 and 1999, respectively.
NET INTEREST INCOME
The following table analyzes net interest income allocated to the
Company's subprime mortgage production activities in terms of rate and volume
variances of the interest spread (the difference between interest rates earned
on loans and residual certificates and interest rates paid on interest-bearing
sources of funds) for the years ended December 31, 2000 and 1999, respectively.
($ in thousands) Variance
Average Volume Average Rate Interest Attributable to
- -------------------------------- ---------------- ----------------
2000 1999 2000 1999 2000 1999 Variance Rate Volume
- -------------------------------- -------------------------------------------
$182,217 $235,552 11.25% 10.62% Mortgages Held-for-Sale and Residual Certificates $20,499 $25,026 $(4,527) $ 1,140 $(5,667)
- -------------------------------- -------------------------------------------
$135,478 $171,358 7.35% 5.73% Total Interest Expense $ 9,963 $ 9,819 $ 144 $ 2,200 $(2,056)
- -------------------------------- -------------------------------------------
3.90% 4.89% Net Interest Income $10,536 $15,207 $(4,671) $(1,060) $(3,611)
=========== =========================
Allocation to Agency-Eligible Servicing Division -- 159
Intercompany Net Interest 903 N/A
----------------
Net Interest Income $11,439 $15,366
================
Net interest income from subprime products decreased to $11.4 million
for 2000 as compared to $15.4 million for 1999. This was primarily a result of a
flattened yield curve, the decline in production volume, and the sale during the
fourth quarter of the Company's residual certificates.
14
17
NET GAIN ON SALE AND SECURITIZATION OF SUBPRIME MORTGAGE LOANS
The Company sold subprime mortgage loans for cash on a whole loan basis
during 2000 and 1999. Whole loans are generally sold without recourse to third
parties with the gain or loss being calculated based on the difference between
the carrying value of the loans sold and the gross proceeds received from the
purchaser less expenses. Generally, the Company retains no interest in these
loans after sale.
A reconciliation of the gain on subprime mortgage whole loan sales for
the periods indicated follows:
For the Year Ended December 31,
---------------------------------
($ in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Gross proceeds on whole loan sales of subprime mortgage loans ............. $ 682,287 $ 463,443
Initial acquisition cost of subprime mortgage loans sold, net of fees ..... 662,694 447,155
- ------------------------------------------------------------------------------------------------------------------------
Unadjusted gain on whole loan sales of subprime mortgage loans ............ 19,593 16,288
Net deferred costs and administrative fees recognized ..................... (6,444) (5,721)
- ------------------------------------------------------------------------------------------------------------------------
Net gain on whole loan sales of subprime mortgage loans ................... $ 13,149 $ 10,567
========================================================================================================================
The gain on whole loan sales of subprime mortgage loans was $19.6
million and $16.3 million for the years ended December 31, 2000 and 1999,
respectively. The $3.3 million increase is a result of an increase in whole loan
sales in 2000, offset, in part, by a reduction in the margin on sale in 2000
compared with 1999. 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 gain on whole loan sales of subprime mortgage loans to $13.1 million
in 2000 as compared to $10.6 million in 1999.
There were no securitization transactions during 2000 compared to
transactions netting a $9.8 million gain on securitization of subprime mortgage
loans in 1999. A reconciliation of the gain on securitization of subprime
mortgage loans for the periods indicated follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Gross proceeds on securitization of subprime mortgage loans ............... N/A $ 248,456
Initial acquisition cost of subprime mortgage loans securitized, net of fees N/A 252,162
- ------------------------------------------------------------------------------------------------------------------------
Unadjusted loss on securitization of subprime mortgage loans .............. N/A (3,706)
Initial capitalization of residual certificates ........................... N/A 16,394
Net deferred costs and administrative fees recognized ..................... N/A (2,898)
- ------------------------------------------------------------------------------------------------------------------------
Net gain on securitization of subprime mortgage loans ..................... N/A $ 9,790
========================================================================================================================
MARK-TO-MARKET ON RESIDUAL INTERESTS IN SUBPRIME SECURITIZATIONS
The Company historically has retained residual certificates in
connection with the securitization of subprime loans. However, during 2000 the
Company executed no securitization transactions of subprime loans and marked
down its residual interests in prior subprime securitizations as a result of
signing a definitive agreement to sell all of the residual interests remaining
on its balance sheet at September 30, 2000. The Company closed on that sale
during the fourth quarter of 2000.
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage servicing operations for the years ended December 31,
2000 and 1999:
For the Year Ended December 31,
-----------------------------------
($ in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Net interest income ....................................................... $ (5,326) $ (4,555)
Loan servicing fees ....................................................... 34,738 41,791
Other income .............................................................. 517 582
- ------------------------------------------------------------------------------------------------------------------------
Servicing revenues ........................................................ 29,929 37,818
Salary and employee benefits .............................................. 2,904 3,399
Occupancy expense ......................................................... 191 419
Amortization and provision for impairment of mortgage servicing rights .... 24,560 29,580
General and administrative expenses ....................................... 4,408 5,984
- ------------------------------------------------------------------------------------------------------------------------
Total loan servicing expenses ............................................. 32,063 39,382
- ------------------------------------------------------------------------------------------------------------------------
Net pre-tax servicing margin .............................................. (2,134) (1,564)
Gain on sale of mortgage servicing rights ................................. 2,222 7,262
- ------------------------------------------------------------------------------------------------------------------------
Net pre-tax servicing contribution ........................................ $ 88 $ 5,698
========================================================================================================================
Average servicing portfolio ............................................... $ 7,968,380 $ 9,279,848
Servicing sold ............................................................ $ 4,473,456 $ 9,104,706
Net pre-tax servicing margin to average servicing portfolio ............... (3) bps (2) bps
Gain on sale of servicing to servicing sold ............................... 5 bps 8 bps
========================================================================================================================
Resource Bancshares Mortgage Group, Inc. 15
18
SUMMARY
The ratio of net pre-tax servicing margin to the average servicing
portfolio decreased 1 basis point in 2000 compared with 1999. This decrease
resulted from a reduction in servicing revenues of $7.9 million, offset in part
by a reduction in total loan servicing expenses of $7.3 million in 2000 compared
with 1999. Servicing revenues and expenses were down as a result of a decrease
of $1.3 billion in average loans serviced during 2000. Average loans serviced
were down in 2000 as a result of reduced loan production in 2000 compared with
1999, which reduced the average volume of servicing held for sale during 2000.
The $5.1 million decline in gain on sale of mortgage servicing rights is
primarily due to the lower production volumes that resulted in a lower balance
of agency-eligible servicing rights sold.
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 will not change such
that mortgage servicing rights valuations will require additional amortization
or impairment charges.
NET INTEREST EXPENSE
The net interest expense for 2000 and 1999 is composed of benefits from
escrow accounts of $5.8 million and $8.0 million, respectively, that is offset
by $11.1 million and $12.6 million, respectively, in interest expense.
GAIN ON SALE OF MORTGAGE SERVICING RIGHTS
A reconciliation of the components of gain on sale of mortgage
servicing rights for the periods indicated follows:
For the Year Ended December 31,
-----------------------------------
($ in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Underlying unpaid principal balances of agency-eligible mortgage loans
on which servicing rights were sold during the period ..................... $ 4,473,456 $ 9,104,706
========================================================================================================================
Gross proceeds from sales of mortgage servicing rights .................... $ 126,945 $ 245,302
Initial acquisition basis, net of amortization and hedge results .......... 106,438 179,721
- ------------------------------------------------------------------------------------------------------------------------
Unadjusted gain on sale of mortgage servicing rights ...................... 20,507 65,581
Acquisition basis allocated from mortgage loans, net of amortization (SFAS No. 125) (18,285) (58,319)
- ------------------------------------------------------------------------------------------------------------------------
Gain on sale of mortgage servicing rights ................................. $ 2,222 $ 7,262
========================================================================================================================
Gain on sale of mortgage servicing rights decreased $5.1 million from
$7.3 million for 1999 to $2.2 million for 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
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of Laureate to BB&T Corporation of
Winston-Salem, N.C. Accordingly, the Company recorded a $1.4 million after-tax
charge during the period primarily related to the write-off of intangible assets
of Laureate. The results of Laureate's operations are carried in the caption
"Discontinued Operations" in the Company's income statement for all periods
presented.
LEASING OPERATIONS
Following is a summary of the revenues and expenses of the Company's
small-ticket equipment leasing operations for the periods indicated:
For the Year Ended December 31,
-----------------------------------
($ in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Net interest income ....................................................... $ 9,176 $ 7,270
Other income .............................................................. 1,229 1,395
- ------------------------------------------------------------------------------------------------------------------------
Leasing production revenue .............................................. 10,405 8,665
- ------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits .............................................. 2,901 2,654
Occupancy expense ......................................................... 497 453
Provision expense ......................................................... 3,133 1,908
General and administrative expenses ....................................... 1,370 1,260
- ------------------------------------------------------------------------------------------------------------------------
Total lease operating expenses .......................................... 7,901 6,275
- ------------------------------------------------------------------------------------------------------------------------
Net pre-tax leasing production margin ..................................... 2,504 2,390
Servicing fees ............................................................ 501 620
- ------------------------------------------------------------------------------------------------------------------------
Net pre-tax leasing margin ................................................ $ 3,005 $ 3,010
- ------------------------------------------------------------------------------------------------------------------------
Average owned leasing portfolio ........................................... $ 171,806 $ 125,258
Average serviced leasing portfolio ........................................ 8,170 24,831
- ------------------------------------------------------------------------------------------------------------------------
Average managed leasing portfolio ......................................... $ 179,976 $ 150,089
========================================================================================================================
Leasing production revenue to average owned portfolio ..................... 606 bps 692 bps
Leasing operating expenses to average owned portfolio ..................... 460 bps 501 bps
- ------------------------------------------------------------------------------------------------------------------------
Net pre-tax leasing production margin ..................................... 146 bps 191 bps
========================================================================================================================
Servicing fees to average serviced leasing portfolio ...................... 613 bps 250 bps
========================================================================================================================
16
19
The 20% increase in leasing production revenue for 2000 as compared to
1999 is primarily due to the 37% 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 decreased 45 bps in 2000 as
compared to 1999 primarily as a result of the increased provision expenses
associated with higher delinquencies as the small business sectors are
beginning to exhibit signs of stress. 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.
Net Interest Income
Net interest income for 2000 was $9.2 million as compared to $7.3
million for 1999. This is equivalent to a net interest margin of 5.3% and 5.8%
for 2000 and 1999, respectively, based upon average lease receivables owned of
$171.8 million and $125.3 million, respectively, and average debt outstanding
of $146.3 and $92.4 million, respectively.
OTHER
During the third quarter of 1999, the Company reorganized its
reporting cost centers and is now reporting holding company costs as a
reconciling item between the segmented income statement and the consolidated
income statement. The primary components of holding company costs are (1)
interest expense on the debt on the Company's corporate headquarters; (2)
salary and employee benefits of corporate personnel; (3) depreciation on the
corporate headquarters and (4) income taxes. The 1999 segmented income
statement has been restated to conform with the 2000 segmented income statement
presentation.
UNUSUAL ITEMS
During the fourth quarter of 1999, the Company incurred a $3.8 million
($2.4 million after-tax) charge related to a workforce reduction. The workforce
reduction became necessary as the Company continued to adapt to a smaller
overall residential mortgage market and intensely competitive pricing
conditions. During 2000, the Company continued its efforts to reorganize around
primary business processes (production/sales, customer fulfillment, servicing
and portfolio management) and has thus made certain changes in organization at
its agency-eligible and subprime units. These changes resulted in a net
increase in the previously established reorganization reserves of $0.7 million
during 2000. In connection with the planned reorganization, the Company has
made certain changes in its senior management team and has closed certain
regional processing offices.
Also, during 2000, the Company (1) marked down its residual interests
in prior subprime securitizations as a result of changes in valuation
assumptions due to changing market conditions; (2) marked down its residual
interests in prior securitizations, and the associated residual hedges
(including hedge amortization expense) as a result of signing a definitive
agreement to sell all of the Company's residuals; (3) disposed of its
commercial mortgage operation, Laureate Capital Corp.; (4) restructured and
closed certain regional processing offices; (5) amended its defined benefit
pension plan to freeze benefits under the plan; (6) changed the benefits
available to employees under its 401(k) plan; (7) realized a gain on sale of a
branch facility; (8) contributed to a fund that will benefit qualified
charitable organizations; (9) incurred expenses for consultants who are
assisting management in re-engineering work processes and (10) redesignated a
lease of a former operations center as a nonoperating lease.
The net impact of these unusual items in 2000 is summarized below by
financial statement component and operating division:
Agency-Eligible
---------------------- Commercial
Production Servicing Subprime Mortgage Leasing Other Total
- ---------------------------------------------------------------------------------------------------------------------------------
Mark-to-market on residual interest in
subprime securitizations ........................ $ -- $ -- $ 39,338 $ -- $ -- $ -- $ 39,338
Residual hedge mark-to-market
and amortization ................................ -- -- 1,077 -- -- -- 1,077
Salary and employee benefits ...................... 678 (45) 1,459 -- (22) 234 2,304
Occupancy expense ................................. 171 -- -- -- -- -- 171
General and administrative expenses ............... 1,027 -- 796 -- -- 1,040 2,863
Other income ...................................... -- -- -- -- -- (392) (392)
- ---------------------------------------------------------------------------------------------------------------------------------
Net pre-tax effect on continuing operations ....... 1,876 (45) 42,670 -- (22) 882 45,361
Estimated allocable income tax .................... (700) 17 (15,773) -- 8 (330) (16,778)
- ---------------------------------------------------------------------------------------------------------------------------------
Net after-tax impact on continuing operations ..... 1,176 (28) 26,897 -- (14) 552 28,583
Loss on sale of operating assets of
Laureate Capital Corp. .......................... -- -- -- 1,448 -- -- 1,448
Operating loss of Laureate Capital Corp. .......... -- -- -- 660 -- -- 660
- ---------------------------------------------------------------------------------------------------------------------------------
Net after-tax impact .............................. $1,176 $(28) $ 26,897 $2,108 $(14) $ 552 $ 30,691
=================================================================================================================================
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED
DECEMBER 31, 1998
SUMMARY BY OPERATING DIVISION
Net income per common share on a diluted basis for 1999 was $0.28 as
compared to $2.07 for 1998. This 86% decrease in net income per common share
was less than the 88% decrease in net income due primarily to the impact of the
Company's stock repurchase program, which reduced the number of weighted
average shares outstanding across comparative periods. Following is a summary
of the revenues and expenses for each of the Company's operating divisions for
the years ended December 31, 1999 and 1998, respectively:
Resource Bancshares Mortgage Group, Inc. 17
20
For the Year Ended December 31, 1999(1)(2)
------------------------------------------------------------------
Agency-Eligible
---------------------------------------- Commercial
(Unaudited)($ in thousands) Production Servicing Reinsurance Subprime Mortgage
- -------------------------------------------------------------------------------------------------------------------
Net interest income ......................... $ 8,240 $ (4,555) $ (12) $ 15,366 $ --
Net gain on sale of mortgage loans .......... 64,033 -- -- 20,357 --
Gain on sale of mortgage servicing rights ... -- 7,262 -- -- --
Servicing fees .............................. -- 41,791 -- -- --
Mark-to-market on residual interests in
subprime securitizations .................. -- -- -- (7,843) --
Other income ................................ 340 582 1,661 3,471 --
- -------------------------------------------------------------------------------------------------------------------
Total revenues ............................ 72,613 45,080 1,649 31,351 --
- -------------------------------------------------------------------------------------------------------------------
Salary and employee benefits ................ 38,751 3,399 -- 15,840 --
Occupancy expense ........................... 10,079 419 -- 2,567 --
Amortization and provision for impairment
of mortgage servicing rights .............. -- 29,580 -- -- --
Provision expense ........................... 5,722 -- 85 2,893 --
General and administrative expenses ......... 17,248 5,984 136 7,460 --
- -------------------------------------------------------------------------------------------------------------------
Total expenses ............................ 71,800 39,382 221 28,760 --
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes ....................... 813 5,698 1,428 2,591 --
Income tax benefit (expense) ................ (207) (1,448) (356) (1,237) --
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations .... 606 4,250 1,072 1,354 --
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $-0-) ................... -- -- -- -- --
Operating net income of Laureate Capital
Corp. (less applicable income tax expense
of $405) ................................ -- -- -- -- 418
- -------------------------------------------------------------------------------------------------------------------
Net Income (loss) ........................... $ 606 $ 4,250 $ 1,072 $ 1,354 $418
===================================================================================================================
For the Year Ended December 31, 1999(1)(2)
--------------------------------------------------------
Total Other/
(Unaudited)($ in thousands) Leasing Segments Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------
Net interest income ......................... $ 7,270 $ 26,309 $ (470) $ 25,839
Net gain on sale of mortgage loans .......... -- 84,390 -- 84,390
Gain on sale of mortgage servicing rights ... -- 7,262 -- 7,262
Servicing fees .............................. 620 42,411 (188) 42,223
Mark-to-market on residual interests in
subprime securitizations .................. -- (7,843) -- (7,843)
Other income ................................ 1,395 7,449 175 7,624
- ---------------------------------------------------------------------------------------------------------
Total revenues ............................ 9,285 159,978 (483) 159,495
- ---------------------------------------------------------------------------------------------------------
Salary and employee benefits ................ 2,654 60,644 3,903 64,547
Occupancy expense ........................... 453 13,518 214 13,732
Amortization and provision for impairment
of mortgage servicing rights .............. -- 29,580 -- 29,580
Provision expense ........................... 1,908 10,608 -- 10,608
General and administrative expenses ......... 1,260 32,088 1,129 33,217
- ---------------------------------------------------------------------------------------------------------
Total expenses ............................ 6,275 146,438 5,246 151,684
- ---------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes ....................... 3,010 13,540 (5,729) 7,811
Income tax benefit (expense) ................ (1,196) (4,444) 2,137 (2,307)
- ---------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations .... 1,814 9,096 (3,592) 5,504
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $-0-) ................... -- -- -- --
Operating net income of Laureate Capital
Corp. (less applicable income tax expense
of $405) ................................ -- 418 -- 418
- ---------------------------------------------------------------------------------------------------------
Net Income (loss) ........................... $ 1,814 $ 9,514 $(3,592) $ 5,922
=========================================================================================================
(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) See discussion of unusual items in Management's Discussion and
Analysis.
For the Year Ended December 31, 1998(1)(2)
------------------------------------------------------------------
Agency-Eligible
---------------------------------------- Commercial
(Unaudited)($ in thousands) Production Servicing Reinsurance Subprime Mortgage
- -------------------------------------------------------------------------------------------------------------------
Net interest income......................... $ 7,422 $ -- $ -- $ 9,565 $ --
Net gain on sale of mortgage loans.......... 134,472 -- -- 27,980 --
Gain on sale of mortgage servicing rights... -- 1,753 -- -- --
Servicing fees.............................. -- 37,856 -- -- --
Mark-to-market on residual interests in
subprime securitizations.................. -- -- -- 435 --
Other income................................ 1,756 455 1,189 297 --
- -------------------------------------------------------------------------------------------------------------------
Total revenues............................ 143,650 40,064 1,189 38,277 --
- -------------------------------------------------------------------------------------------------------------------
Salary and employee benefits................ 53,158 3,449 -- 13,485 --
Occupancy expense........................... 7,005 443 -- 1,921 --
Amortization and provision for impairment
of mortgage servicing rights.............. -- 27,897 -- -- --
Provision expense........................... 7,453 -- 119 2,330 --
General and administrative expenses......... 20,593 6,446 77 2,160 --
- -------------------------------------------------------------------------------------------------------------------
Total expenses............................ 88,209 38,235 196 19,896 --
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes....................... 55,441 1,829 993 18,381 --
Income tax benefit (expense)................ (20,059) (662) (351) (6,656) --
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations.... 35,382 1,167 642 11,725 --
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $-0-)................... -- -- -- -- --
Operating net income of Laureate Capital
Corp. (less applicable income tax
expense of $952)........................ -- -- -- -- 1,152
- -------------------------------------------------------------------------------------------------------------------
Net Income (loss)........................... $ 35,382 $ 1,167 $ 642 $11,725 $1,152
===================================================================================================================
For the Year Ended December 31, 1998(1)(2)
--------------------------------------------------------
Total Other/
(Unaudited)($ in thousands) Leasing Segments Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------
Net interest income......................... $4,637 $ 21,624 $ (382) $ 21,242
Net gain on sale of mortgage loans.......... -- 162,452 -- 162,452
Gain on sale of mortgage servicing rights... -- 1,753 -- 1,753
Servicing fees.............................. 1,014 38,870 509 39,379
Mark-to-market on residual interests in
subprime securitizations.................. -- 435 -- 435
Other income................................ 753 4,450 680 5,130
- ---------------------------------------------------------------------------------------------------------
Total revenues............................ 6,404 229,584 807 230,391
- ---------------------------------------------------------------------------------------------------------
Salary and employee benefits................ 2,347 72,439 2,645 75,084
Occupancy expense........................... 376 9,745 634 10,379
Amortization and provision for impairment
of mortgage servicing rights.............. -- 27,897 -- 27,897
Provision expense........................... 1,121 11,023 -- 11,023
General and administrative expenses......... 1,463 30,739 770 31,509
- ---------------------------------------------------------------------------------------------------------
Total expenses............................ 5,307 151,843 4,049 155,892
- ---------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes....................... 1,097 77,741 (3,242) 74,499
Income tax benefit (expense)................ (435) (28,163) 1,183 (26,980)
- ---------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations.... 662 49,578 (2,059) 47,519
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $-0-)................... -- -- -- --
Operating net income of Laureate Capital
Corp. (less applicable income tax
expense of $952)........................ -- 1,152 -- 1,152
- ---------------------------------------------------------------------------------------------------------
Net Income (loss)........................... $ 662 $ 50,730 $ (2,059) $ 48,671
=========================================================================================================
(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) See discussion of unusual items in Management's Discussion and
Analysis.
18
21
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the
Company's agency-eligible mortgage production operations.
For the Year Ended December 31,
-----------------------------------------
($ in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Net interest income .............................. $ 8,240 $ 7,422
Net gain on sale of mortgage loans ............... 64,033 134,472
Other income ..................................... 340 1,756
- ---------------------------------------------------------------------------------------------------------------
Total production revenue ....................... 72,613 143,650
- ---------------------------------------------------------------------------------------------------------------
Salary and employee benefits ..................... 38,751 53,158
Occupancy expense ................................ 10,079 7,005
Provision expense ................................ 5,722 7,453
General and administrative expenses .............. 17,248 20,593
- ---------------------------------------------------------------------------------------------------------------
Total production expenses ...................... 71,800 88,209
- ---------------------------------------------------------------------------------------------------------------
Net pre-tax production margin .................. $ 813 $ 55,441
- ---------------------------------------------------------------------------------------------------------------
Production ....................................... $8,112,351 $14,954,580
Pool delivery .................................... 8,642,639 14,713,137
- ---------------------------------------------------------------------------------------------------------------
Total production revenue to pool delivery ........ 84 bps 98 bps
Total production expenses to production .......... 89 bps 59 bps
- ---------------------------------------------------------------------------------------------------------------
Net pre-tax production margin .................. (5) bps 39 bps
===============================================================================================================
SUMMARY
The production revenue to pool delivery ratio decreased 14 basis
points for 1999 as compared to 1998. Generally, net gain on sale of mortgage
loans (74 basis points for 1999 versus 91 basis points for 1998) declined
primarily due to compressed margins attributable to an aggressively competitive
pricing environment and lower overall agency-eligible production volume. Net
interest income increased from 5 basis points in 1998 to 10 basis points in
1999 primarily as a result of the generally steeper yield curve environment.
The production expenses to production ratio increased 30 basis points for 1999
as compared to 1998. This is primarily due to the 46% decline in production for
1999 as compared to 1998, which was partially offset by a $16.4 million decline
in total production expenses for 1999 as compared to 1998. As a consequence of
the foregoing, the Company's net agency-eligible pre-tax production margin
declined 44 basis points. Absent workforce reduction charges (discussed in
greater detail elsewhere within Management's Discussion and Analysis), total
production expenses would have declined by $19.5 million.
NET INTEREST INCOME
The following table analyzes net interest income allocated to the
Company's agency-eligible mortgage production activities in terms of rate and
volume variances of the interest spread (the difference between interest rates
earned on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds) for the years ended December 31, 1999 and
1998, respectively:
($ in thousands) Variance
Average Volume Average Rate Interest Attributable to
- ------------------------------------ ----------------- -------------------
1999 1998 1999 1998 1999 1998 Variance Rate Volume
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Mortgages Held-for-Sale and
$656,291 $1,172,994 6.85% 6.74% Mortgage-Backed Securities........... $44,982 $79,078 $(34,096) $ 739 $(34,835)
- ----------------------------------- ---------------------------------------------------
INTEREST EXPENSE
$345,807 $ 457,967 4.14% 4.50% Warehouse Line*........................ $14,313 $20,630 $ (6,317) $(1,265) $ (5,052)
303,092 689,711 5.21% 5.79% Gestation Line......................... 15,779 39,958 (24,179) (1,780) (22,399)
110,380 97,422 6.21% 6.58% Servicing Secured Line................. 6,851 6,413 438 (415) 853
20,596 33,331 5.27% 5.75% Servicing Receivables Line............. 1,085 1,918 (833) (100) (733)
7,142 8,726 8.57% 8.50% Other Borrowings....................... 612 742 (130) 5 (135)
Facility Fees and Other Charges........ 2,968 2,377 591 -- 591
- ----------------------------------- ---------------------------------------------------
$787,017 $1,287,157 5.29% 5.60% Total Interest Expense................. $41,608 $72,038 $(30,430) $(3,555) $(26,875)
- ----------------------------------- ---------------------------------------------------
Net Interest Income
1.56% 1.14% Before Interdivisional Allocations... $ 3,374 $ 7,040 $ (3,666) $ 4,294 $ (7,960)
============ ===============================
Allocation to Other.................... 470 382
Allocation to Agency-Eligible
Servicing Division................... 4,396 --
-----------------
Net Interest Income.................... $ 8,240 $ 7,422
=================
*The interest-rate yield on the warehouse line is net of the benefit of escrow
deposits.
The 42 basis point increase in the interest-rate spread was primarily
the result of the steeper yield curve environment during 1999 compared to 1998.
The Company's mortgages and mortgage-backed securities are generally sold and
replaced within 30 to 35 days. Accordingly, the Company generally borrows at
rates based upon short-term indices, while its asset yields are primarily based
upon long-term mortgage rates.
Resource Bancshares Mortgage Group, Inc. 19
22
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:
For the Year Ended December 31,
----------------------------------
($ in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Gross proceeds on sales of mortgage loans ............................................ $8,853,967 $14,921,242
Initial unadjusted acquisition cost of mortgage loans sold, net of hedge results ..... 8,861,915 14,917,751
- ---------------------------------------------------------------------------------------------------------------------------------
Unadjusted gain (loss) on sale of mortgage loans ..................................... (7,948) 3,491
Loan origination and correspondent program administrative fees ....................... 21,402 36,729
- ---------------------------------------------------------------------------------------------------------------------------------
Unadjusted aggregate margin .......................................................... 13,454 40,220
Acquisition basis allocated to mortgage servicing rights (SFAS No. 125) .............. 52,702 93,570
Net change in deferred administrative fees ........................................... (2,123) 682
- ---------------------------------------------------------------------------------------------------------------------------------
Net gain on sale of agency-eligible mortgage loans ................................... $ 64,033 $ 134,472
=================================================================================================================================
Net gain on sale of agency-eligible mortgage loans decreased $70.4
million from $134.5 million for 1998 to $64.0 million for 1999. The decrease is
primarily due to compressed margins attributable to an aggressively competitive
pricing environment in the correspondent channel and lower overall
agency-eligible production volume.
OTHER INCOME
The $1.4 million decline in other income for 1999 as compared to 1998
is primarily attributable to the sale of the Company's retail production
franchise in 1998, which resulted in a nonrecurring gain of approximately $1.4
million.
AGENCY-ELIGIBLE REINSURANCE OPERATIONS
In November 1998, the Company formed a captive insurance company, MG
Reinsurance Company (MG Reinsurance). MG Reinsurance is licensed as a property
and casualty insurer and operates as a monoline captive insurance company
assuming reinsurance for PMI policies on agency-eligible mortgage loans
initially purchased or produced by the Company. During 1999 and 1998, the
Company recognized premium and investment income of approximately $1.7 million
and $1.2 million, respectively, that has been included as other income in the
agency-eligible reinsurance segment.
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the
Company's subprime mortgage production operations:
For the Year Ended December 31,
-------------------------------
($ in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income .................................................................. $ 15,366 $ 9,565
Net gain on sale of mortgage loans ................................................... 20,357 27,980
Mark to market on residual interests in subprime securitizations ..................... (7,843) 435
Other income ......................................................................... 3,471 297
- ---------------------------------------------------------------------------------------------------------------------------------
Total production revenue ........................................................... 31,351 38,277
- ---------------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits ......................................................... 15,840 13,485
Occupancy expense .................................................................... 2,567 1,921
Provision expense .................................................................... 2,893 2,330
General and administrative expenses .................................................. 7,460 2,160
- ---------------------------------------------------------------------------------------------------------------------------------
Total production expenses .......................................................... 28,760 19,896
- ---------------------------------------------------------------------------------------------------------------------------------
Net pre-tax production margin ...................................................... $ 2,591 $ 18,381
- ---------------------------------------------------------------------------------------------------------------------------------
Production ........................................................................... $728,410 $607,664
Whole loan sales and securitizations ................................................. 699,317 551,110
Total production revenue to whole loan sales and securitizations ..................... 448 bps 695 bps
Total production expenses to production .............................................. 395 bps 327 bps
- ---------------------------------------------------------------------------------------------------------------------------------
Net pre-tax production margin ...................................................... 53 bps 368 bps
=================================================================================================================================
SUMMARY
During 1999, subprime production volume of $728.4 million exceeded
whole loan sales and securitizations of $699.3 million by $29.1 million. At
December 31, 1999, the Company had unsold subprime mortgage loans of $128.8
million as compared to $97.9 million at December 31, 1998. Overall, the Company
operated during 1999 at a 0.53% pre-tax subprime production margin. The 315
basis point decline in the pre-tax subprime production margin is primarily due
to the 217 basis point decline in net gain on the sale of subprime mortgage
loans. This decline is primarily attributable to compressed margins in the
subprime market during 1999 and the higher relative volumes of whole loan sales
as compared to securitizations from year to year. Salary and employee benefit
costs increased by 17%, or $2.4 million from 1998 to 1999. This was primarily
due to an increase in production volume of 20%. Occupancy expense increased by
$0.6 million primarily due to branch expansion cost and the workforce reduction
charge of $0.2 million. Workforce reduction charges are discussed elsewhere in
this Management's Discussion and Analysis. General and administrative expenses
increased approximately $5.3 million primarily due to a 20% increase in
production volume for 1999 as compared to 1998.
20
23
NET INTEREST INCOME
The following table analyzes net interest income allocated to the
Company's subprime mortgage production activities in terms of rate and volume
variances of the interest spread (the difference between interest rates earned
on loans and residual certificates and interest rates paid on interest-bearing
sources of funds) for the years ended December 31, 1999 and 1998, respectively.
($ in thousands) Variance
Average Volume Average Rate Interest Attributable to
- --------------------------------- --------------- ---------------
1999 1998 1999 1998 1999 1998 Variance Rate Volume
- --------------------------------- ----------------------------------------
$235,552 $142,685 10.62% 10.29% Mortgages Held-for-Sale and Residual Certificates.... $25,026 $14,684 $10,342 $785 $9,557
- --------------------------------- ----------------------------------------
$171,358 $ 97,534 5.73% 5.25% Total Interest Expense................................ $ 9,819 $ 5,119 $ 4,700 $825 $3,875
- --------------------------------- ----------------------------------------
4.89% 5.04% Net Interest Income................................... $15,207 $ 9,565 $ 5,642 $(40) $5,682
============= ======================
Allocation to Agency-Eligible Servicing Division...... 159 --
----------------
Net Interest Income................................... $15,366 $ 9,565
================
Net interest income from subprime products increased to $15.4 million
for 1999 as compared to $9.6 million for 1998. This was primarily the result of
the increase in subprime loan production volume and an increase in accretion
income earned on residual interests to $6.6 million for 1999 as compared to
$3.4 million for 1998.
NET GAIN ON SALE AND SECURITIZATION OF SUBPRIME MORTGAGE LOANS
A reconciliation of the gain on securitization of subprime mortgage
loans for the periods indicated follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Gross proceeds on securitization of subprime mortgage loans .......................... $248,456 $318,040
Initial acquisition cost of subprime mortgage loans securitized, net of fees ......... 252,162 324,549
- -------------------------------------------------------------------------------------------------------------------------------
Unadjusted loss on securitization of subprime mortgage loans ......................... (3,706) (6,509)
Initial capitalization of residual certificates ...................................... 16,394 22,240
Net deferred costs and administrative fees recognized ................................ (2,898) 357
- -------------------------------------------------------------------------------------------------------------------------------
Net gain on securitization of subprime mortgage loans ................................ $ 9,790 $ 16,088
===============================================================================================================================
The net gain on securitization of subprime mortgage loans declined by
$6.3 million or 39% in 1999 as compared to 1998. This decline is primarily
attributable to a 22% decrease in the volume of subprime loans securitized as
well as compressed margins in the subprime market during 1999.
The Company assesses the fair value of residual certificates
quarterly, with assistance from an independent third party. This valuation is
based on the discounted cash flows expected to be available to the holder of
the residual certificates. Significant assumptions used at December 31, 1999
for residual certificates then held by the Company generally include a discount
rate of 13%, a constant default rate of 3% and a loss severity rate of 25%, and
ramping periods are based on prepayment penalty periods and adjustable rate
mortgage first reset dates. Terminal prepayment rate assumptions specific to
the individual certificates for purposes of the December 31, 1999 valuations
are set forth below:
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2
- ----------------------------------------------------------------------------------------------------------------------------
Prepayment Speeds
Fixed rate mortgages ........... 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr
Adjustable rate mortgages ...... 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr
============================================================================================================================
Terminal prepayment rate assumptions specific to the individual
certificates for purposes of the December 31, 1998 valuations are set forth
below:
1997-1 1997-2 1998-1 1998-2 Other
- -----------------------------------------------------------------------------------------------------
Prepayment speeds
Fixed rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 32% cpr
Adjustable rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 24% cpr
======================================================================================================
The assumptions used in the independent third party valuation referred
to above are estimated based on current conditions for similar instruments that
are subject to prepayment and credit risks. Other factors considered in the
determination of fair value include credit and collateral quality of the
underlying loans, current economic conditions and various fees and costs
associated with ownership of the residual certificate including actual credit
history of the individual residual certificates. Although the Company believes
that the fair values of its residual certificates are reasonable given current
market conditions, the assumptions used are estimates and actual experience may
vary from these estimates. Differences in the actual prepayment speed and loss
experience from the assumptions used, could have a significant effect on the
fair value of the residual certificates.
Resource Bancshares Mortgage Group, Inc. 21
24
As summarized in the following analysis, the recorded residual values
imply that the Company's securitizations are valued at 1.55 times the implied
excess yield at December 31, 1999, as compared to the 1.63 multiple implied at
December 31, 1998. The table below represents balances as of December 31, 1999,
unless otherwise noted.
Securitizations
------------------------------------------------------------
($ in thousands) 1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 Subtotal Other Total
- ------------------------------------------------------------------------------------------------------------------------------
Residual Certificates ......... $ 5,971 $ 7,153 $10,334 $ 12,460 $ 9,566 $ 8,898 $ 54,382 $ -- $ 54,382
Bonds ......................... $22,763* $34,349* $74,099* $139,882* $121,887* $125,000* $517,980 $28,763* $546,743
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal ...................... $28,734 $41,502 $84,433 $152,342 $131,453 $133,898 $572,362 $28,763 $601,125
Unpaid Principal Balance ...... $27,583* $39,203* $79,724* $144,894* $122,689* $125,329* $539,422 $31,253* $570,675
- ------------------------------------------------------------------------------------------------------------------------------
Implied Price ................. 104.17 105.86 105.91 105.14 107.14 106.84 106.11 92.03 105.34
- ------------------------------------------------------------------------------------------------------------------------------
Collateral Yield .............. 12.03 11.19 9.80 9.73 9.84 9.82 10.01 10.37 10.03
Collateral Equivalent
Securitization Costs ........ (0.71) (0.64) (0.59) (0.60) (0.62) (0.68) (0.63) (0.50) (0.62)
Collateral Equivalent Bond Rate (5.10) (5.18) (5.55) (6.21) (5.98) (6.18) (5.92) (6.68) (5.96)
- ------------------------------------------------------------------------------------------------------------------------------
Implied Collateral Equivalent
Excess Yield ................ 6.22 5.37 3.66 2.92 3.24 2.96 3.46 3.19 3.45
- ------------------------------------------------------------------------------------------------------------------------------
Implied Premium Above Par ..... 4.17 5.86 5.91 5.14 7.14 6.84 6.11 -- 5.34
Implied Collateral Equivalent
Excess Yield ................ 6.22 5.37 3.66 2.92 3.24 2.96 3.46 3.19 3.45
- ------------------------------------------------------------------------------------------------------------------------------
Multiple ...................... 0.67x 1.09x 1.61x 1.76x 2.20x 2.31x 1.76x --x 1.55x
==============================================================================================================================
*Amounts were based upon trustee statements dated January 25, 2000 that covered
the period ended December 31, 1999.
A summary of key information relevant to the subprime residual assets
at December 31, 1999 is set forth below:
Securitizations
------------------------------------------------------------------
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 Other* Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 ..... $ 7,997 $ 9,702 $ 10,815 $ 12,569 $ -- $ -- $ 4,700 $ 45,783
Initial Capitalization of Residual
Certificates ................... -- -- -- -- 7,826 6,330 -- 14,156
Accretion ........................ 1,140 1,245 1,325 1,521 593 -- 752 6,576
Mark-to-Market ................... (1,641) (1,130) (1,705) (1,630) 1,147 2,568 (5,452) (7,843)
Cash Flow ........................ (1,525) (2,664) (101) -- -- -- -- (4,290)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 ..... $ 5,971 $ 7,153 $ 10,334 $ 12,460 $9,566 $8,898 $ -- $ 54,382
================================================================================================================================
*Represents a portion of a residual certificate the Company received in 1997 in
settlement of an account receivable. In 1999 the Company decided to
conservatively write off this receivable.
A summary of key information relevant to the subprime residual assets
at December 31, 1998 is set forth below:
Securitizations
-----------------------------------------------
1997-1 1997-2 1998-1 1998-2 Other Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 ....................... $ 7,910 $ 6,507 $ -- $ -- $ 5,267 $ 19,684
Initial Capitalization of Residual Certificates .... -- 2,164 9,040 11,017 -- 22,221
Accretion .......................................... 1,073 1,153 559 -- 661 3,446
Mark-to-Market ..................................... (986) (122) 1,216 1,552 (1,225) 435
Cash Flow .......................................... -- -- -- -- (3) (3)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 ....................... $ 7,997 $ 9,702 $10,815 $12,569 $ 4,700 $ 45,783
=================================================================================================================================
The Company sold subprime mortgage loans on a whole loan basis during
1999 and 1998. Whole loans are generally sold without recourse to third parties
with the gain or loss being calculated based on the difference between the
carrying value of the loans sold and the gross proceeds received from the
purchaser less expenses. Generally, no interest in these loans is retained by
the Company.
A reconciliation of the gain on subprime mortgage whole loan sales for
the periods indicated follows:
For the Year Ended December 31,
--------------------------------
($ in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Gross proceeds on whole loan sales of subprime mortgage loans ............ $463,443 $238,186
Initial acquisition cost of subprime mortgage loans sold, net of fees .... 447,155 226,561
- -------------------------------------------------------------------------------------------------------------------------
Unadjusted gain on whole loan sales of subprime mortgage loans ........... 16,288 11,625
Net deferred costs and administrative fees recognized .................... (5,721) 267
- -------------------------------------------------------------------------------------------------------------------------
Net gain on whole loan sales of subprime mortgage loans .................. $ 10,567 $ 11,892
=========================================================================================================================
22
25
The $1.3 million decrease in the net gain on whole loan sales of
subprime mortgage loans from the 1998 gain of $11.9 million to $10.6 million
reported for 1999 is primarily due to compressed margins in the subprime market
during 1999. Also, in response to the growth in the subprime division,
management reassessed its application of estimates related to Statement of
Financial Accounting Standard No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases" in the fourth quarter of 1998. This resulted in a $5.7 million
reduction in the net gain on whole loan sales of subprime mortgage loans in
1999 as compared to a $0.3 million increase for 1998.
MARK TO MARKET OF RESIDUAL INTERESTS IN SUBPRIME SECURITIZATIONS
The Company generally retains residual certificates in connection with
the securitization of subprime loans. These residual certificates are adjusted
to approximate market value each quarter. For the years ended December 31, 1999
and 1998, respectively, mark-to-market gain (loss) on residuals was
approximately $(7.8) million and $0.4 million, respectively.
OTHER INCOME
Other subprime income consists primarily of prepayment penalties
received upon early payoff of loans.
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses of the
Company's agency-eligible mortgage servicing operations for the years ended
December 31, 1999 and 1998:
For the Year Ended December 31,
----------------------------------
($ in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest expense ................................................................. $ (4,555) $ --
Loan servicing fees .................................................................. 41,791 37,856
Other income ......................................................................... 582 455
- ------------------------------------------------------------------------------------------------------------------------------------
Servicing revenues ................................................................. 37,818 38,311
Salary and employee benefits ......................................................... 3,399 3,449
Occupancy expense .................................................................... 419 443
Amortization and provision for impairment of mortgage servicing rights ............... 29,580 27,897
General and administrative expenses .................................................. 5,984 6,446
- ------------------------------------------------------------------------------------------------------------------------------------
Total loan servicing expenses ...................................................... 39,382 38,235
- ------------------------------------------------------------------------------------------------------------------------------------
Net pre-tax servicing margin ....................................................... (1,564) 76
Gain on sale of mortgage servicing rights ............................................ 7,262 1,753
- ------------------------------------------------------------------------------------------------------------------------------------
Net pre-tax servicing contribution ................................................. $ 5,698 $ 1,829
====================================================================================================================================
Average servicing portfolio .......................................................... $9,279,848 $ 9,386,653
Servicing sold ....................................................................... 9,104,706 10,922,288
- ------------------------------------------------------------------------------------------------------------------------------------
Net pre-tax servicing margin to average servicing portfolio .......................... (2) bps 0 bps
Gain on sale of servicing to servicing sold .......................................... 8 bps 2 bps
====================================================================================================================================
SUMMARY
The ratio of net pre-tax servicing margin to the average servicing
portfolio declined 2 basis points primarily due to the Company beginning during
the first quarter of 1999 to allocate net interest expense to the
agency-eligible servicing division. Had the $4.6 million in interest expense
not been allocated to the agency-eligible servicing division in 1999, the net
pre-tax servicing margin to average servicing portfolio would have been 3 basis
points, a slight improvement over the 1998 margin. The 6 basis point increase
in the gain on sale of servicing sold is primarily attributable to rising rates
which benefited the execution of servicing sales in the marketplace. Loan
servicing fees were $41.8 million for 1999, compared to $37.9 million for 1998,
an increase of 10%, primarily due to an increase in the weighted average
service fee on serviced portfolios. Amortization and provision for impairment
of mortgage servicing rights increased to $29.6 million during 1999 from $27.9
million during 1998, an increase of 6%. The increase in amortization is
primarily attributable to higher amortization charges associated with increased
book carrying values of mortgage servicing rights resulting from the rising
rate environment.
Given current market conditions, management continually assesses
market prepay trends and adjusts amortization accordingly. Management believes
that the value of the Company's mortgage servicing rights are reasonable in
light of current market conditions. However, there can be no guarantee that
market conditions will not change such that mortgage servicing rights
valuations will require additional amortization or impairment charges.
NET INTEREST EXPENSE
During the first quarter of 1999, the Company began to allocate
interest expense to the agency-eligible servicing division. The net interest
expense for 1999 is composed of benefits from escrow accounts of $8.0 million
that is offset by $12.6 million in interest expense. Had the Company allocated
interest expense to the agency-eligible servicing division during 1998, net
interest expense would have been $4.6 million. The net interest expense would
have been composed of benefit from escrows of $7.7 million that would have been
offset by $12.3 in interest expense.
Resource Bancshares Mortgage Group, Inc. 23
26
GAIN ON SALE OF MORTGAGE SERVICING RIGHTS
A reconciliation of the components of gain on sale of mortgage
servicing rights for the periods indicated follows:
For the Year Ended
December 31,
---------------------------
($ in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Underlying unpaid principal balances of agency-eligible mortgage loans on which servicing rights
were sold during the period .................................................................... $9,104,706 $10,922,288
=================================================================================================================================
Gross proceeds from sales of mortgage servicing rights ........................................... $ 245,302 $ 256,292
Initial acquisition basis, net of amortization and hedge results ................................. 179,721 189,918
- ---------------------------------------------------------------------------------------------------------------------------------
Unadjusted gain on sale of mortgage servicing rights ............................................. 65,581 66,374
Acquisition basis allocated from mortgage loans, net of amortization (SFAS No. 125) .............. (58,319) (64,621)
- ---------------------------------------------------------------------------------------------------------------------------------
Gain on sale of mortgage servicing rights ........................................................ $ 7,262 $ 1,753
=================================================================================================================================
Gain on sale of mortgage servicing rights increased $5.5 million from
$1.8 million for 1998 to $7.3 million for 1999. The increase in the gain on
sale of mortgage servicing rights is primarily attributable to rising rates
which benefited the execution of servicing sales into the secondary markets.
COMMERCIAL MORTGAGE OPERATIONS
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of Laureate to BB&T Corporation of
Winston-Salem, N.C. The results of Laureate's operations are carried in the
caption "Discontinued Operations" in the Company's income statement for all
periods presented.
LEASING OPERATIONS
Following is a summary of the revenues and expenses of the Company's
small-ticket equipment leasing operations for the periods indicated:
For the Year Ended December 31,
------------------------------
($ in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------
Net interest income ............................................ $ 7,270 $ 4,637
Other income ................................................... 1,395 753
- ---------------------------------------------------------------------------------------------------------
Leasing production revenue ................................... 8,665 5,390
- ---------------------------------------------------------------------------------------------------------
Salary and employee benefits ................................... 2,654 2,347
Occupancy expense .............................................. 453 376
Provision expense .............................................. 1,908 1,121
General and administrative expenses ............................ 1,260 1,463
- ---------------------------------------------------------------------------------------------------------
Total lease operating expenses ............................... 6,275 5,307
- ---------------------------------------------------------------------------------------------------------
Net pre-tax leasing production margin ........................ 2,390 83
Servicing fees ................................................. 620 1,014
- ---------------------------------------------------------------------------------------------------------
Net pre-tax leasing margin ................................... $ 3,010 $ 1,097
- ---------------------------------------------------------------------------------------------------------
Average owned leasing portfolio ................................ $125,258 $ 73,508
Average serviced leasing portfolio ............................. 24,831 53,480
- ---------------------------------------------------------------------------------------------------------
Average managed leasing portfolio .............................. $150,089 $126,988
=========================================================================================================
Leasing production revenue to average owned portfolio .......... 692 bps 733 bps
Leasing operating expenses to average owned portfolio .......... 501 bps 721 bps
- ---------------------------------------------------------------------------------------------------------
Net pre-tax leasing production margin .......................... 191 bps 12 bps
=========================================================================================================
Servicing fees to average serviced leasing portfolio ........... 250 bps 190 bps
=========================================================================================================
The 61% increase in leasing production revenue for 1999 as compared to
1998 is primarily due to the 70% increase in the average owned leasing
portfolio which is due to the policy of retaining originated leases on the
balance sheet. The net pre-tax leasing margin improved in 1999 as compared to
1998 due to the increase in production revenue which was only partially offset
by an 18% increase in lease operating expenses. The Company was able to achieve
efficiencies in managing costs in 1999 because the volume of leases owned
substantially increased. Substantially all of the Company's lease receivables
are acquired from independent brokers who operate throughout the continental
United States and referrals from independent banks. The Company has made an
effort to increase the owned portfolio. As it has increased its owned portfolio
more cost efficiencies have been achieved thereby increasing the net pre-tax
leasing production margin.
NET INTEREST INCOME
Net interest income for 1999 was $7.3 million as compared to $4.6
million for 1998. This is equivalent to a net interest margin of 3.25% and
4.35% for 1999 and 1998, respectively, based upon average lease receivables
owned of $125.3 million and $73.5 million, respectively, and average debt
outstanding of $92.4 and $53.5 million, respectively.
24
27
OTHER
During the third quarter of 1999, the Company reorganized its
reporting cost centers and is now reporting holding company costs as a
reconciling item between the segmented income statement and the consolidated
income statement. The primary components of holding company costs are (1)
interest expense on the debt on the Company's corporate headquarters; (2)
salary and employee benefits of corporate personnel; (3) depreciation on the
corporate headquarters and (4) income taxes. The 1998 segmented income
statement has been restated to conform with the 1999 segmented income statement
presentation.
WORKFORCE REDUCTION
During the fourth quarter of 1999, the Company incurred a $3.8 million
($2.4 million after-tax) charge related to a workforce reduction. The workforce
reduction became necessary as the Company continued to adapt to a smaller
overall residential mortgage market and intensely competitive pricing
conditions. The impact of the expense related to the workforce reduction is
summarized below by financial statement component and operating division:
Agency-Eligible
-------------------------- Other/
($ in thousands) Production Servicing Subprime Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits ......... $ 820 $ 31 $ 166 $ 2 $ 1,019
Occupancy expense .................... 1,780 -- 186 190 2,156
General and administrative expenses .. 448 -- 164 2 614
- --------------------------------------------------------------------------------------------------------------------------
Net pre-tax impact ................... 3,048 31 516 194 3,789
Estimated allocable income tax expense (1,136) (12) (192) (72) (1,412)
- --------------------------------------------------------------------------------------------------------------------------
Net after-tax impact ................. $ 1,912 $ 19 $ 324 $ 122 $ 2,377
==========================================================================================================================
FINANCIAL CONDITION
During 2000, the Company experienced a 28% decrease in the volume of
production originated and acquired compared with 1999. Production decreased to
$6.4 billion during 2000 from $8.9 billion during 1999. The December 31, 2000,
locked residential mortgage application pipeline (mortgage loans not yet closed
but for which the interest rate has been locked) was approximately $0.6 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
$0.5 billion at December 31, 2000 and December 31, 1999. The Company's
servicing portfolio (exclusive of loans serviced under subservicing agreements)
increased to $8.0 billion at December 31, 2000, from $7.8 billion at December
31, 1999, an increase of 3%.
Short-term borrowings, which are the Company's primary source of
funds, totaled $0.8 billion at December 31, 2000, compared to $0.7 billion at
December 31, 1999, an increase of 14%. At December 31, 2000, there were $6.1
million in long-term borrowings, compared to $6.3 million at December 31, 1999.
Other liabilities totaled $91.0 million as of December 31, 2000, compared to
the December 31, 1999 balance of $84.8 million, an increase of $6.2 million, or
7.3%.
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 2000 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 July
2000, 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 $325 million warehouse line of
credit provided by a syndicate of unaffiliated banks that expires in July 2001.
The credit agreement includes covenants requiring the Restricted Group to
maintain (i) a minimum net worth of $150 million, plus the Restricted Group's
net income subsequent to June 30, 2000, 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 1.25 to 1.00 for
any period of two consecutive fiscal quarters (the interest rate coverage
ratio). The Company is required to maintain $10 million of liquidity pursuant
to the agreement. 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 July 2000, the Company and the Restricted Group also entered into a
$65 million subprime revolving credit facility and a $200 million servicing
revolving credit facility, which expire in July 2001. These facilities include
covenants identical to those described above with respect to the warehouse line
of credit.
The Restricted Group was in compliance with the debt covenants in
place at December 31, 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.
Meritage, RBMG and a bank are parties to a master repurchase
agreement, pursuant to which Meritage and RBMG are entitled from time to time
to deliver eligible subprime mortgage loans in an aggregate principal amount of
up to $150 million to the bank. The master repurchase agreement has been
extended through July 2001.
Resource Bancshares Mortgage Group, Inc. 25
28
RBMG and Prime Funding Company entered into a $50 million commercial
paper conduit facility in November 2000. The facility expires in November 2001.
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 2001. 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 February 2001 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 December 31, 2000, the Company had
remaining authority to repurchase up to $3.5 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. Shares repurchased
are maintained in the Company's treasury account and are not retired. At
December 31, 2000, there were 6,949,711 shares held in the Company's treasury
account at an average cost of $7.20 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 (1) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(2) a hedge of the exposure to variable cash flows of a forecasted transaction
or (3) 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). The Company implemented SFAS No.
133 on January 1, 2001 and recorded certain transition adjustments in the
manner prescribed in SFAS No. 133. See discussion regarding adjustments and
table below.
Under SFAS No. 133, rate lock commitments given to borrowers,
correspondents or brokers are considered to be derivatives. The Derivative
Implementation Group (DIG) of the FASB has not yet made a final resolution as
to how mortgage companies should value rate locks. Pending ultimate resolution
of this issue by the FASB, the Company has tentatively implemented SFAS No. 133
assuming that the value of such derivatives is zero at rate lock date.
Commencing January 1, 2001, the Company will record on its balance sheet any
changes in value from the date of rate lock to the balance sheet date.
The Company hedges the interest rate risk inherent in rate lock
commitments with mandatory delivery commitments to sell loans and, to a lesser
extent, with options and futures transactions. Mandatory delivery commitments,
options and futures are considered to be derivatives under SFAS No. 133.
Accordingly, commencing January 1, 2001, these instruments will be
marked-to-market at the balance sheet date, with the result being reported as
an asset or liability in the balance sheet.
Certain of the Company's derivatives no longer needed for hedging rate
locks are "paired off" with an opposite position in the same derivative
security. Under SFAS No. 133, both positions are derivatives that must be
marked-to-market and the result carried as assets or liabilities in the balance
sheet until settlement date of the respective trades.
The Company hedges the future cash flows from sale of its inventory of
closed loans held-for-sale with mandatory delivery commitments to sell loans.
Mandatory delivery commitments are considered to be derivatives under SFAS No.
133 and are to be carried as an asset or liability on the balance sheet. Closed
loans are not derivatives and are carried at the lower of cost or market
(LOCOM) on the Company's balance sheet. Under SFAS No. 133, to the extent that
the Company establishes statistical correlation between changes in the value of
the hedge with changes in the value of the closed loans held-for-sale, it can
mark those derivatives to market and record the after tax impact of that in the
"Other Comprehensive Income" (OCI) caption in the equity section of the balance
sheet. If the LOCOM valuation of closed loans is a net loss, the Company must
record a charge to earnings. Simultaneously, the Company may take out of OCI a
like amount and record it in the income statement as an offset to the LOCOM
adjustment.
The Company hedges the interest rate risk (prepayment risk) inherent
in its servicing rights assets with various instruments including interest rate
floors, interest rate corridors, interest rate swaps, interest rate swaptions,
CPC call options, PO swaps, treasury futures and agency futures contracts. Each
of these instruments is considered to be a derivative under SFAS No. 133 and
must be marked-to-market, with the value being reported as an asset or a
liability in the balance sheet. Under SFAS No. 133 and the guidance provided by
the DIG, the Company may elect, at its option, hedge accounting treatment for
its servicing rights. If changes in the value of the servicing rights and the
hedges meet certain correlation criteria, changes in the fair value of the
servicing rights may be offset in the income statement by changes in the fair
value of the hedging instrument. The Company may elect not to qualify for hedge
accounting treatment. Under SFAS No. 133, the hedges must be marked-to-market
through the income statement. In contrast, servicing rights are LOCOM assets
under GAAP. When values go down, the impact is recorded through the income
statement. When values go up, the increase may be recorded in earnings only to
the extent of impairment reserves established by previous writedowns of
servicing under SFAS No. 125. The election for hedge treatment must be made at
the beginning of the accounting period. The Company did not elect hedge
accounting treatment as of January 1, 2001. Since the Company already carried
the value of its servicing hedges on its balance sheet at December 31, 2000,
there was no transition adjustment made at January 1, 2001.
26
29
The Company enters into interest rate swaps to pay fixed rate and
receive floating rate as a cash flow hedge of its variable rate debt used to
finance its fixed rate lease receivables. Interest rate swaps are considered to
be derivatives under SFAS No. 133 and are to be carried at market value as
assets or liabilities in the balance sheet with an offsetting entry to OCI.
Under the transition rules of SFAS No. 133, as of January 1, 2001, the
Company will recognize the value of derivatives on its balance sheet. It will
recognize in a separate line in its income statement in 2001, the cumulative
effect of changing to SFAS No. 133. That cumulative effect will be the
difference between retained earnings at December 31, 2000 and the amount of
retained earnings that would have been reported at that date if SFAS No. 133 had
been retroactively applied to all prior periods. The table below highlights the
impact of this transition adjustment.
Balance Sheet
---------------------------------------------------------------- Cumulative
Derivative Tax Derivative Tax Effect of
($ in thousands) Assets Asset Liabilities Liability OCI Change
- ----------------------------------------------------------------------------------------------------------------------------------
Rate lock commitments ......................... $ 1,366 $ -- $ -- $ 509 $ -- $ 857
Derivatives hedging rate lock commitments ..... 308 663 1,780 115 -- (924)
Pairoffs of derivatives ....................... 55 70 187 21 -- (83)
Derivatives hedging loans held-for-sale ....... -- 1,703 4,568 -- (2,865) --
Derivatives swapping variable rate debt to
fixed rate debt ............................. -- 659 1,745 -- (1,086) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total impact .................................. $ 1,729 $ 3,095 $ 8,280 $ 645 $ (3,951) $ (150)
==================================================================================================================================
DIVISIONAL ANALYSIS OF PRE-TAX FUNDS GENERATED FROM OPERATIONS
The analyses which follow are included solely to assist investors in
obtaining a better understanding of the material elements of the Company's funds
generated by operations at a divisional level. It is intended as a supplement,
and not an alternative to, and should be read in conjunction with, the
Consolidated Statement of Cash Flows, which provides information concerning
elements of the Company's cash flows.
SUMMARY
On a combined divisional basis, during the years ended December 31,
2000 and 1999, the Company generated approximately $13.6 million and $64.7
million, respectively, of positive funds from continuing operations.
For the Twelve Months Ended
December 31,
---------------------------
($ in thousands) 2000 1999
- ----------------------------------------------------------------------
Agency-eligible production ........ $ (24,460) $ 26,348
Agency-eligible servicing ......... 22,558 28,623
Subprime production ............... 9,019 4,517
Leasing ........................... 6,455 5,224
- ----------------------------------------------------------------------
$ 13,572 $ 64,712
======================================================================
Each of the Company's divisions produced positive operating funds
during both periods except for agency-eligible production which produced
negative operating funds in 2000. 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.
For the Twelve Months Ended
December 31,
---------------------------
($ in thousands) 2000 1999
- -----------------------------------------------------------------------------------------
Income (loss) before income taxes ..................... $ (25,630) $ 813
Deduct:
Net gain on sale of mortgage loans, as reported ..... (24,194) (64,033)
Add back:
Cash gains on sale of mortgage loans ................ (3,111) 13,454
Cash gains on sale of mortgage servicing rights ..... 20,507 65,581
Depreciation ........................................ 5,866 4,811
Provision expense ................................... 2,102 5,722
- -----------------------------------------------------------------------------------------
$ (24,460) $ 26,348
=========================================================================================
Resource Bancshares Mortgage Group, Inc. 27
30
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.
For the Twelve Months Ended
December 31,
----------------------------
($ in thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes ..................................................... $ 88 $ 5,698
Deduct:
Net gain on sale of mortgage servicing rights, as reported ................... (2,222) (7,262)
Add back:
Amortization and provision for impairment of mortgage servicing rights ....... 24,560 29,580
Depreciation ................................................................. 132 607
- -------------------------------------------------------------------------------------------------------------------
$ 22,558 $ 28,623
===================================================================================================================
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 2000, the Company
sold all of its loans to the cash markets. In this context, the table below
reconciles the major elements of pre-tax operating funds flow of the Company's
subprime mortgage production activities.
For the Twelve Months Ended
December 31,
---------------------------
($ in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------
Income (loss) before income taxes ............................... $ (37,233) $ 2,591
Deduct:
Net gain on sale of subprime loans, as reported ............... (13,149) (20,357)
Cash losses on securitization of subprime loans ............... -- (3,706)
Accretion income on residuals ................................. (5,634) (6,576)
Add back:
Cash gains on sale of whole subprime loans .................... 19,593 16,288
Cash received from investments in residual certificates ....... 1,922 4,290
Depreciation and amortization of goodwill and intangibles ..... 1,729 1,251
Provision expense ............................................. 2,453 2,893
Mark-to-market on residuals ................................... 39,338 7,843
- ----------------------------------------------------------------------------------------------------
$ 9,019 $ 4,517
====================================================================================================
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.
For the Twelve Months Ended
December 31,
---------------------------
($ in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------
Income before income taxes ...................................... $ 3,005 $ 3,010
Add back:
Depreciation and amortization of goodwill and intangibles ..... 317 306
Provision expense ............................................... 3,133 1,908
- ----------------------------------------------------------------------------------------------------
$ 6,455 $ 5,224
====================================================================================================
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A primary market risk facing the Company is interest rate risk. The
Company attempts to manage this risk by striving to balance its loan origination
and loan servicing business segments, which are countercyclical in nature. In
addition, the Company uses various financial instruments, including derivatives
contracts, to manage the interest rate risk related specifically to its
committed pipeline, mortgage loan inventory, mortgage-backed securities
held-for-sale, servicing rights and leases. The overall objective of the
Company's interest rate risk
28
31
management policies is to mitigate potentially significant adverse effects that
changes in the values of these items, resulting from changes in interest rates,
might have on the Company's consolidated balance sheet. The Company does not
speculate on the direction of interest rates in its management of interest rate
risk.
For purposes of this disclosure, the Company has performed various
sensitivity analyses that quantify the net financial impact of changes in
interest rates on its interest rate-sensitive assets, liabilities and
commitments. These analyses presume an instantaneous parallel shift of the yield
curve. Various techniques are employed to value the underlying financial
instruments and rely upon a number of critical assumptions. The scenarios
presented are illustrative. Actual experience may differ materially from the
estimated amounts presented for each scenario. To the extent that yield curve
shifts are non-parallel and to the extent that actual variations in significant
assumptions differ from those applied for purposes of the valuations, the
resultant valuations can also be expected to vary. Such variances may prove
material.
If Interest Rates Were to
------------------------ ------------------------
2000 Increase Decrease Increase Decrease
------------------------- ----------------------------------------------------
CARRYING ESTIMATED 50 Basis Points 100 Basis Points
AMOUNT FAIR VALUE Estimated Fair Value Estimated Fair Value
- -------------------------------------------------------------------------------------------------------------------------
Mortgage loans held-for-sale and
mortgage-backed securities ........ $ 541,785A $ 543,528A $ 542,829a $ 543,698a $ 542,418a $ 544,204a
Servicing rights, net ............... 176,395B 185,383B 187,113b 184,226b 187,969b 182,569b
Lease receivables ................... 191,777 193,290C 192,909c 193,571c 192,731c 193,586c
Other assets ........................ 159,796 159,796 159,796 159,796 159,796 159,796
- -------------------------------------------------------------------------------------------------------------------------
Total assets ...................... $1,069,753 $1,081,997 $1,082,647 $1,081,291 $1,082,914 $1,080,155
- -------------------------------------------------------------------------------------------------------------------------
Long-term borrowings ................ $ 6,145 $ 6,361 $ 6,210 $ 6,517 $ 6,064 $ 6,677
Other liabilities ................... 911,839 911,839 911,839 911,839 911,839 911,839
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities ................. $ 917,984 $ 918,200 $ 918,049 $ 918,356 $ 917,903 $ 918,516
- -------------------------------------------------------------------------------------------------------------------------
Net equity value .................... $ 151,769 $ 163,797 $ 164,598 $ 162,935 $ 165,011 $ 161,639
=========================================================================================================================
a Estimated fair value has been adjusted to include $1,366, $(6,347), and $434
for estimated fair value of mortgage purchase commitments, mandatory
delivery commitments and purchase option contracts, respectively, which have
been allocated as hedges against mortgage loans held-for-sale and
mortgage-backed securities. In addition, $211 of carrying value relating to
purchase option contracts has been classified as mortgage loans
held-for-sale and mortgage-backed securities.
b Estimated fair value and carrying value have been adjusted to include
$15,629 of interest rate floor contracts for 2000 which has been allocated
as hedges against servicing rights, net. For the 50 bps increase, the 50 bps
decrease, 100 bps increase and 100 bps decrease, respectively, the estimated
fair value has been adjusted to include $10,591, $23,399, $7,219 and
$34,492, respectively, of interest rate floor contracts which have been
allocated as hedges against servicing rights, net.
c Estimated fair value has been adjusted to include $(1,745), $(674),
$(2,932), $582 and $(4,134), respectively, of interest rate swap contracts
for 2000, 50 bps increase, 50 bps decrease, 100 bps increase and 100 bps
decrease, respectively, which have been allocated as hedges against lease
receivables.
If Interest Rates Were to
-------------------------------------------------
1999 Increase Decrease Increase Decrease
------------------------- -------------------------------------------------
Carrying Estimated 50 Basis Points 100 Basis Points
Amount Fair Value Estimated Fair Value Estimated Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage loans held-for-sale and
mortgage-backed securities .................... $ 482,307a $ 483,606a $ 483,183a $ 484,113a $ 482,940a $ 484,583a
Servicing rights, net ........................... 183,832b 201,068b 206,215b 196,345b 209,773b 192,980b
Lease receivables ............................... 155,559 160,125c 157,849c 162,429c 162,256c 164,764c
Residual interests in subprime securitizations .. 54,382 54,382 53,547 54,982 52,602 55,492
Other assets .................................... 151,102 152,562 152,562 152,562 152,562 152,562
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets .................................. $1,027,182 $1,051,743 $1,053,356 $1,050,431 $1,060,133 $1,050,381
- ---------------------------------------------------------------------------------------------------------------------------------
Long-term borrowings ............................ $ 6,259 $ 6,190 $ 6,190 $ 6,190 $ 6,190 $ 6,190
Other liabilities ............................... 808,451 808,451 808,451 808,451 808,451 808,451
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities ............................. $ 814,710 $ 814,641 $ 814,641 $ 814,641 $ 814,641 $ 814,641
- ---------------------------------------------------------------------------------------------------------------------------------
Net equity value ................................ $ 212,472 $ 237,102 $ 238,715 $ 235,790 $ 245,492 $ 235,740
=================================================================================================================================
a Estimated fair value has been adjusted to include $(840), $2,209, and $343
for estimated fair value of mortgage purchase commitments, mandatory
delivery commitments and purchase option contracts, respectively, which have
been allocated as hedges against mortgage loans held-for-sale and
mortgage-backed securities. In addition, $1,803 of carrying value relating
to purchase option contracts has been classified as mortgage loans
held-for-sale and mortgage-backed securities.
b Estimated fair value and carrying value have been adjusted to include $6,269
of interest rate floor contracts for 1999 which has been allocated as hedges
against servicing rights, net. For the 50 bps increase, the 50 bps decrease,
100 bps increase and 100 bps decrease, respectively, the estimated fair
value has been adjusted to include $3,754, $10,240, $2,506 and $16,517,
respectively, of interest rate floor contracts which have been allocated as
hedges against servicing rights, net.
c Estimated fair value has been adjusted to include $(1,358), $(2,349),
$(355), $3,327 and $663, respectively, of interest rate swap contracts for
1999, 50 bps increase, 50 bps decrease, 100 bps increase and 100 bps
decrease, respectively, which have been allocated as hedges against lease
receivables.
These analyses are limited by the fact that they are performed at a
particular point in time and do not incorporate other factors that would impact
the Company's financial performance in each such scenario. Consequently, the
preceding estimates should not be viewed as a forecast.
The Company is a party to various derivative financial instruments and
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers and to reduce its own
exposure to risks related to fluctuating
Resource Bancshares Mortgage Group, Inc. 29
32
interest rates. These financial instruments include mortgage purchase
commitments, mandatory delivery commitments, put and call option contracts,
swaps, futures contracts and interest rate floor contracts. The Company uses
these financial instruments exclusively for purposes of managing its resale
pricing and interest rate risks.
The Company's mortgage loans held-for-sale are acquired or originated
through a network of correspondents and wholesale brokers. In connection
therewith, the Company routinely enters into optional mortgage purchase
commitments to acquire or originate specific in-process mortgage loans when and
if closed by the counterparty, at the option of the mortgagor. Mortgage purchase
commitments obligate the Company to acquire mortgage loans on a delayed delivery
basis, which may extend for a period of 60 days, at a price which is fixed as of
the date of the contract.
Accordingly, the Company is subject to the risk that the market value
of its on-balance sheet mortgage loans held-for-sale and the mortgage loans it
is obligated to purchase under its mortgage purchase commitments may change
significantly prior to resale. In order to limit its resale price exposure for
agency-eligible mortgage loans, the Company enters into mandatory delivery
commitments which are contracts for delayed delivery of mortgage loans to third
parties. Mandatory delivery commitments obligate the Company to sell
agency-eligible mortgage loans on a delayed delivery basis at a price which is
fixed as of the date of the contract. Since mandatory delivery commitments
enable the Company to fix its resale prices for both on-balance sheet mortgage
loans held-for-sale (for which a fixed price has already been paid) and for
anticipated loan closures subject to mortgage purchase commitments (which fix
the delayed purchase price for the resultant mortgage loans), these instruments
can effectively limit the Company's resale price exposures.
The percentages of anticipated agency-eligible loan closures under
mortgage purchase commitments that are covered by mandatory delivery commitments
not allocated to on-balance sheet mortgages held-for-sale are monitored
continuously. The Company's resultant expected exposure to resale pricing risk
is continuously adjusted to consider changing expectations regarding anticipated
loan closure percentages and other market conditions. Generally, the Company
buys put and call option contracts on U.S. Government Securities to effect
modest adjustments of its overall exposure to resale pricing changes.
Purchased call option contracts enable the Company, at its option, to
acquire an underlying financial security from a third party at a specified price
for a fixed period of time. Purchased put option contracts enable the Company,
at its option, to sell an underlying financial security to a third-party at a
specified price and for a fixed period of time. Since these financial
instruments essentially enable the Company to fix the purchase or sale price on
financial instruments whose changes in value have historically correlated
closely with changes in value of mortgage loans, these instruments can be used
effectively to adjust the Company's overall exposure to resale pricing risks. In
addition, these instruments have the advantages of being available in smaller
denominations than are typical of the Company's mandatory delivery commitments
and of being traded in a highly liquid and efficient secondary market.
Periodically, the Company, in addition to mandatory delivery
commitments, also buys or sells futures contracts as part of its hedging
activities for rate locked and closed subprime mortgage loans. Generally,
futures positions are outstanding for short periods of time and are used to
hedge against price movements of another financial instrument while execution of
that instrument is bid among brokers. Futures contracts also may be similarly
used to hedge against price movements when another financial instrument is
illiquid due to temporary market conditions. Because the changes in value of
futures contracts and the hedged items can be based on different indices, there
is a risk that the changes in value may not correlate. There were no open
futures positions as of December 31, 2000 or 1999.
As discussed in Note 13, the Company typically sells its produced
residential mortgage servicing rights between 90 and 180 days of origination or
purchase of the related loan pursuant to committed prices under forward sales
contracts. These forward sales contracts commit the Company to deliver mortgage
servicing rights backed by contractual levels of unpaid principal balances.
Outstanding commitments to deliver totaled $797,000 and $5,480,000 at December
31, 2000 and 1999, respectively.
The Company also maintains a portfolio of residential mortgage
servicing rights which, though available-for-sale, are not currently scheduled
for sale pursuant to the Company's forward sales contracts. In connection
therewith, the Company is subject to the risk that the economic value of such
mortgage servicing rights may decline in the event of a significant decline in
long-term interest rates. A significant decline in interest rates generally
causes an increase in actual and expected mortgage loan prepayments (for example
increased refinancing) which in turn tends to reduce the future expected cash
flows (and economic value) of associated mortgage servicing rights. Interest
rate floor contracts provide for the Company to receive an interest rate
differential on a notional amount of outstanding principal to the extent that
interest rates decline below a specified rate which is fixed as of the date of
the contract. Accordingly, the value of an interest rate floor contract
increases while the value of a mortgage servicing right decreases in a declining
interest rate environment. As such, interest rate floor contracts can
potentially effectively mitigate the Company's exposure to declines in the
economic value of its servicing rights in a declining interest rate environment.
Additionally, the Company utilizes Callable Pass Through Certificates (CPC) to
diversify basis risk and improve hedge efficacy. The Company purchases a
long-term call option on a large pool of mortgage-backed securities. When the
price of the mortgage-backed securities rises, the value of the CPC will rise.
This hedge offers performance based upon the price and prepayment behavior of
mortgage-backed securities, instead of either CMT or CMS basis.
The Company uses an amortizing interest rate swap agreement to fix the
interest rate on its floating rate credit facility, which finances its fixed
rate leasing portfolio. Under this agreement, the Company makes or receives
payments based on the difference between a fixed rate paid by the Company and a
floating rate paid by the counterparty, applied to a notional amount of
outstanding principal. The interest rate swap agreement is valued based on the
difference between the fixed rate and the floating rate at year end.
The above described financial instruments involve, to varying degrees,
elements of credit and interest rate risk which are in excess of the amounts
recognized in the balance sheet. The Company believes that these instruments do
not represent a significant exposure to credit loss since the amounts subject to
credit risks are controlled through collateral requirements, credit approvals,
limits and monitoring
30
33
procedures. The Company does not have a significant exposure to any individual
customer, correspondent or counterparty in connection with these financial
instruments. Except for mortgage purchase commitments, the Company does not
require collateral or other security to support the financial instruments with
credit risk whose contract or notional amounts are summarized as follows:
Contract Amount at December 31,
-------------------------------
2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
Mortgage loan purchase commitments ..................................................... $ 742,469 $ 363,402
Financial instruments whose contract amounts exceed the amount of credit risk:
Mandatory delivery commitments (allocated against mortgages held-for-sale) ............. 395,011 484,752
Mandatory delivery commitments (allocated against mortgage purchase commitments) ....... 502,089 273,748
Purchased option contracts ............................................................. 30,000 160,000
Forward servicing sales contracts ...................................................... 797,000 5,480,000
Interest rate floor contracts .......................................................... 1,185,000 1,700,000
Interest rate swaps .................................................................... 158,501 125,733
Callable Pass-Through Certificates ..................................................... 343,022 380,000
================================================================================================================================
Mortgage loan purchase commitments expose the Company to credit loss in
the event the purchase commitments are funded as mortgage loans and the
Company's counterparties default prior to resale. The maximum credit loss to
which the Company is exposed is the notional amount of the commitments. However,
the Company does not believe the commitments represent a significant exposure to
credit loss because the related loans are secured by 1-4 family homes, most
loans are insured or guaranteed through private mortgage insurance or government
approval programs and subjected to underwriting standards specified by
government agencies or private mortgage insurance companies. The estimated
credit exposure on financial instruments whose contract amounts exceed the
amount of credit risk is the increase in market value of the instrument.
The Company generally does not charge a premium to its correspondents
in connection with issuance of its mortgage purchase commitments nor is a
premium charged to the Company in connection with its acquisition of mandatory
delivery or forward servicing sales contracts.
Premiums paid for purchased put and call option and futures contracts
are initially deferred and included in other assets in the balance sheet. Other
assets included $210 and $1,803 at December 31, 2000 and 1999, respectively, of
such deferred premiums. Ultimately, such deferred premiums and related realized
gains or losses from these activities are recorded as a component of gains and
losses on sales of mortgage loans at the earlier of the expiration of the
underlying contract or when exercise of the contract is deemed remote.
The Company uses CMT floors and CMS floors and Callable Pass-Through
Certificates to protect itself against interest rate and prepayment risk on its
available-for-sale portfolio. The Company monitors the changes in the fair value
of these instruments and the hedged mortgage servicing rights on an ongoing
basis. Premiums paid for these instruments are initially deferred and included
in other assets in the balance sheet and are amortized over the term of the
underlying contract. Amounts received as interest rate differentials under floor
contracts as well as changes in the fair value of all of these instruments are
recorded as a reduction or increase of basis in mortgage servicing rights to the
extent that such changes generally correlate with changes in fair value of
mortgage servicing rights. Included in the mortgage servicing right basis are
deferred gains (losses) of $5,659 and $(5,050) at December 31, 2000 and 1999,
respectively. Other assets included $9,970 and $11,318 at December 31, 2000 and
1999, respectively, of unamortized premiums. For the years ended December 31,
2000 and 1999, respectively, $3,336 and $3,608 of deferred premiums paid for
interest rate floor contracts were amortized to expense.
The current variable rate index for 10 year CMT and 10 year CMS were
5.11% and 6.168%, respectively, at December 31, 2000. Other terms of the
interest rate floor contracts and Callable Pass-Through Certificates outstanding
at December 31, 2000, are summarized as follows:
Contract Type(a) Contract Date Expiration Date Notional Amount Strike
- -------------------------------------------------------------------------------------------------------------------
CMT ..................... August 20, 1996 August 20, 2001 $ 60,000 5.570%
CMT ..................... July 9, 1998 July 9, 2005 55,000 4.910%
CMT ..................... July 9, 1998 July 9, 2001 125,000 5.160%
CMT ..................... September 15, 1998 September 15, 2003 75,000 4.500%
CMT ..................... October 13, 1998 October 13, 2003 150,000 4.500%
CMS ..................... November 10, 1998 November 10, 2003 120,000 5.410%
CMT ..................... January 19, 1999 January 19, 2002 200,000 4.200%
CMT ..................... March 15, 1999 March 15, 2002 200,000 4.950%
CPC ..................... May 15, 1999 May 15, 2006 164,443 N/A
CPC ..................... September 1, 1999 September 30, 2006 178,579 N/A
CMS ..................... March 15, 2000 March 15, 2005 200,000 6.690%
-----------
$ 1,528,022
===========
(a) Contract types: CMT--Constant Maturity Treasury floor, CMS--Constant
Maturity Swap floor, and CPC--Callable Pass-Through Certificate.
During 2000, the Company purchased one CMS interest-rate floor contract
for $1,988 with the contract and expiration dates as listed above. The notional
amount of this interest rate floor totaled $200,000. Five interest rate floors
with notional amounts totaling $715,000 expired during 2000.
Resource Bancshares Mortgage Group, Inc. 31
34
CONSOLIDATED BALANCE SHEET
December 31,
--------------------------
($ in thousands, except share information) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash ............................................................................................... $ 15,205 $ 30,478
Receivables ........................................................................................ 63,098 40,219
Trading securities:
Residual interests in subprime securitizations ................................................... -- 54,382
Mortgage loans held for sale ....................................................................... 541,574 480,504
Lease receivables .................................................................................. 191,777 155,559
Servicing rights, net .............................................................................. 160,766 177,563
Premises and equipment, net ........................................................................ 30,771 36,294
Accrued interest receivable ........................................................................ 2,645 1,691
Goodwill and other intangibles ..................................................................... 11,865 15,478
Other assets ....................................................................................... 52,052 35,014
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets ................................................................................. $ 1,069,753 $ 1,027,182
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings ............................................................................ $ 811,750 $ 709,803
Long-term borrowings ............................................................................. 6,145 6,259
Accrued expenses ................................................................................. 9,045 13,826
Other liabilities ................................................................................ 91,044 84,822
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities ............................................................................ 917,984 814,710
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
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 at
December 31, 2000 and December 31, 1999 ........................................................ 316 316
Additional paid-in capital ....................................................................... 297,996 300,909
Retained earnings ................................................................................ 6,291 56,506
Common stock held by subsidiary at cost--7,767,099 shares at December 31, 2000 and
December 31, 1999 .............................................................................. (98,953) (98,953)
Treasury stock--6,949,711 and 4,686,391 shares at December 31, 2000 and
December 31, 1999, respectively ................................................................ (50,050) (41,148)
Unearned shares of employee stock ownership plan--310,320 and 536,644 shares at
December 31, 2000 and December 31, 1999, respectively .......................................... (3,800) (5,158)
Unearned Variable Option Expense at December 31, 2000 and December 31, 1999, respectively ........ (31) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity ................................................................... 151,769 212,472
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity ................................................... $ 1,069,753 $ 1,027,182
=================================================================================================================================
The accompanying notes are an integral part of these financial statements.
32
35
CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31,
------------------------------------------
($ in thousands, except share information) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
REVENUES
Interest income .................................................................... $ 69,469 $ 83,149 $ 101,647
Interest expense ................................................................... (53,593) (57,310) (80,405)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income ................................................................ 15,876 25,839 21,242
Net gain on sale of mortgage loans ................................................. 37,343 84,390 162,452
Gain on sale of mortgage servicing rights .......................................... 2,222 7,262 1,753
Servicing fees ..................................................................... 34,981 42,223 39,379
Mark-to-market on residual interests in subprime securitizations ................... (39,338) (7,843) 435
Other income ....................................................................... 6,150 7,624 5,130
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues ............................................................... 57,234 159,495 230,391
- --------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Salary and employee benefits ....................................................... 50,280 64,547 75,084
Occupancy expense .................................................................. 14,007 13,732 10,379
Amortization and provision for impairment of mortgage servicing rights ............. 24,560 29,580 27,897
Provision expense .................................................................. 7,688 10,608 11,023
General and administrative expenses ................................................ 24,989 33,217 31,509
- --------------------------------------------------------------------------------------------------------------------------------
Total expenses ............................................................... 121,524 151,684 155,892
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes ....................... (64,290) 7,811 74,499
Income tax benefit (expense) ....................................................... 24,100 (2,307) (26,980)
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations ........................................... $ (40,190) $ 5,504 $ 47,519
- --------------------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp. (less applicable income
tax expense of $261 for the twelve months ended December 31, 2000) ............. (1,448) -- --
Operating profits (losses) of Laureate Capital Corp. for the twelve months ended
December 31, 2000, 1999 and 1998, respectively (less applicable income tax
expense (benefit) of $(354), $405, and $952, respectively) ..................... (660) 418 1,152
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) .................................................................. $ (42,298) $ 5,922 $ 48,671
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding--Basic................................... 17,727,445 20,643,166 23,122,835
Net income (loss) per common share from continuing operations--Basic ............... $ (2.27) $ 0.27 $ 2.06
Net income (loss) per common share from discontinued operations--Basic ............. $ (0.12) $ 0.02 $ 0.04
Weighted average common shares outstanding--Diluted ................................ 17,727,445 20,799,502 23,501,108
Net income (loss) per common share from continuing operations--Diluted ............. $ (2.27) $ 0.26 $ 2.02
Net income (loss) per common share from discontinued operations--Diluted ........... $ (0.12) $ 0.02 $ 0.05
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Resource Bancshares Mortgage Group, Inc. 33
36
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Additional Unearned
--------------------- Paid-in Retained ESOP
($ in thousands, except share information) Shares Amount Capital Earnings Shares
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 ....................... 31,120,470 $311 $299,516 $ 17,763 $ (3,498)
- -------------------------------------------------------------------------------------------------------------------------
Issuance of restricted stock ..................... 20,056 * 328 -- --
Cash dividends ................................... -- -- -- (6,714) --
Treasury stock purchases (1,201,500 shares
net of issuances 332,122 shares) ............... -- -- -- -- --
Exercise of stock options ........................ 155,965 2 1,537 -- --
Shares committed to be released under
Employee Stock Ownership Plan .................. -- -- 544 -- 1,079
Purchase of shares by Employee Stock
Ownership Plan ................................. -- -- -- -- (2,000)
Shares issued or purchased under Dividend
Reinvestment and Stock Purchase Plan
and Stock Investment Plan ...................... 198,722 2 3,425 (121) --
Acquisition of Meritage Mortgage Corporation ..... 142,118 1 1,764 -- --
Net income ....................................... -- -- -- 48,671 --
Total comprehensive income ....................... -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 ....................... 31,637,331 316 307,114 59,599 (4,419)
- -------------------------------------------------------------------------------------------------------------------------
Issuance of restricted stock ..................... -- -- 116 -- --
Cash dividends ................................... -- -- -- (8,902) --
Treasury stock purchases (5,051,896 shares
net of issuances 1,234,883 shares) ............. -- -- -- -- --
Exercise of stock options ........................ -- -- (3) -- --
Shares committed to be released under
Employee Stock Ownership Plan .................. -- -- (1,017) -- 2,261
Purchase of shares by Employee Stock
Ownership Plan ................................. -- -- -- -- (3,000)
Shares issued or purchased under Dividend
Reinvestment and Stock Purchase Plan
and Stock Investment Plan ...................... -- -- (5,301) (113) --
Net income ....................................... -- -- -- 5,922 --
Total comprehensive income ....................... -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 ....................... 31,637,331 316 300,909 56,506 (5,158)
- -------------------------------------------------------------------------------------------------------------------------
Issuance of restricted stock ..................... -- -- (1,046) -- --
Cash dividends ................................... -- -- -- (7,856) --
Treasury stock purchases (2,872,725 shares
net of issuances 609,405 shares) ............... -- -- -- -- --
Exercise of stock options ........................ -- -- -- -- --
Shares committed to be released under
Employee Stock Ownership Plan .................. -- -- (304) (15) 1,358
Purchase of shares by Employee Stock
Ownership Plan ................................. -- -- -- -- --
Variable option expense .......................... -- -- -- -- --
Shares issued or purchased under Dividend
Reinvestment and Stock Purchase Plan
and Stock Investment Plan ...................... -- -- (1,563) (46) --
Net income ....................................... -- -- -- (42,298) --
Total comprehensive income ....................... -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 ....................... 31,637,331 $316 $297,996 $ 6,291 $ (3,800)
=========================================================================================================================
Common Unearned Total
Treasury Stock Held by Variable Stockholders'
($ in thousands, except share information) Stock Subsidiary Option Equity
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 ....................... $ -- $(98,953) $-- $215,139
- ----------------------------------------------------------------------------------------------------------------
Issuance of restricted stock ..................... -- -- -- 328
Cash dividends ................................... -- -- -- (6,714)
Treasury stock purchases (1,201,500 shares
net of issuances 332,122 shares) ............... (16,280) -- -- (16,280)
Exercise of stock options ........................ 3,034 -- -- 4,573
Shares committed to be released under
Employee Stock Ownership Plan .................. -- -- -- 1,623
Purchase of shares by Employee Stock
Ownership Plan ................................. -- -- -- (2,000)
Shares issued or purchased under Dividend
Reinvestment and Stock Purchase Plan
and Stock Investment Plan ...................... 1,747 -- -- 5,053
Acquisition of Meritage Mortgage Corporation ..... -- -- -- 1,765
Net income ....................................... -- -- -- --
Total comprehensive income ....................... -- -- -- 48,671
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 ....................... (11,499) (98,953) -- 252,158
- ----------------------------------------------------------------------------------------------------------------
Issuance of restricted stock ..................... 1,285 -- -- 1,401
Cash dividends ................................... -- -- -- (8,902)
Treasury stock purchases (5,051,896 shares
net of issuances 1,234,883 shares) ............. (43,216) -- -- (43,216)
Exercise of stock options ........................ 7 -- -- 4
Shares committed to be released under
Employee Stock Ownership Plan .................. -- -- -- 1,244
Purchase of shares by Employee Stock
Ownership Plan ................................. -- -- -- (3,000)
Shares issued or purchased under Dividend
Reinvestment and Stock Purchase Plan
and Stock Investment Plan ...................... 12,275 -- -- 6,861
Net income ....................................... -- -- -- --
Total comprehensive income ....................... -- -- -- 5,922
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 ....................... (41,148) (98,953) -- 212,472
- ----------------------------------------------------------------------------------------------------------------
Issuance of restricted stock ..................... 2,060 -- -- 1,014
Cash dividends ................................... -- -- -- (7,856)
Treasury stock purchases (2,872,725 shares
net of issuances 609,405 shares) ............... (13,988) -- -- (13,988)
Exercise of stock options ........................ -- -- -- --
Shares committed to be released under
Employee Stock Ownership Plan .................. -- -- -- 1,039
Purchase of shares by Employee Stock
Ownership Plan ................................. -- -- -- --
Variable option expense .......................... -- -- (31) (31)
Shares issued or purchased under Dividend
Reinvestment and Stock Purchase Plan
and Stock Investment Plan ...................... 3,026 -- -- 1,417
Net income ....................................... -- -- -- --
Total comprehensive income ....................... -- -- -- (42,298)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 ....................... $(50,050) $(98,953) $ (31) $151,769
================================================================================================================
*Amounts less than $1.
The accompanying notes are an integral part of these consolidated financial
statements.
34
37
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended December 31,
----------------------------------------
($ in thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) from continuing operations ............................................. $ (40,190) $ 5,504 $ 47,519
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Depreciation and amortization .......................................................... 33,065 36,653 32,560
Deferred income tax (benefit) expense .................................................. (13,497) 1,585 31,169
Employee Stock Ownership Plan compensation ............................................. 658 1,244 1,623
Provision for estimated foreclosure losses and repurchased loans ....................... 7,688 10,608 11,023
(Increase) decrease in receivables ..................................................... (11,929) 57,540 (16,394)
Acquisition of mortgage loans .......................................................... (6,300,656) (8,455,706) (15,562,244)
Proceeds from sales of mortgage loans and mortgage-backed securities ................... 6,272,374 9,468,635 15,473,838
Acquisition of mortgage servicing rights ............................................... (141,729) (249,004) (339,715)
Sales of mortgage servicing rights ..................................................... 126,945 245,302 256,292
Net gain on sales of mortgage loans and servicing rights ............................... (39,565) (91,652) (182,443)
(Increase) decrease in accrued interest on loans ....................................... (954) 1,944 737
(Increase) in lease receivables ........................................................ (39,351) (55,438) (50,535)
(Increase) in other assets ............................................................. (17,321) (2,521) (7,155)
Decrease (increase) in residual certificates ........................................... 54,382 (8,600) (26,098)
Increase (decrease) in accrued expenses and other liabilities .......................... 21,030 (46,341) (636)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities of continuing operations.............. (89,050) 919,753 (312,005)
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of premises and equipment ...................................................... (3,896) (7,999) (12,989)
Disposition of premises and equipment .................................................... 1,090 448 1,314
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities of continuing operations............................ (2,806) (7,551) (11,675)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings ................................................................. 9,687,390 26,248,644 42,978,503
Repayment of borrowings .................................................................. (9,585,557) (27,105,233) (42,636,093)
Debt issuance costs ...................................................................... -- -- (283)
Issuance of restricted stock ............................................................. 1,014 1,401 328
Shares issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan .............................................................. 1,417 6,861 5,053
Acquisition of treasury stock ............................................................ (13,988) (43,216) (16,280)
Cash dividends ........................................................................... (7,856) (8,902) (6,714)
Exercise of stock options ................................................................ -- 4 4,573
Variable options expense ................................................................. 350 -- --
Loans to Employee Stock Ownership Plan ................................................... -- (3,000) (2,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities of continuing operations.............. 83,770 (903,441) 327,087
- -----------------------------------------------------------------------------------------------------------------------------------
Discontinued operations .................................................................. (6,187) 3,593 1,171
- -----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash .......................................................... (15,273) 12,354 4,578
Cash, beginning of year .................................................................. 30,478 18,124 13,546
- -----------------------------------------------------------------------------------------------------------------------------------
Cash, end of year ........................................................................ $ 15,205 $ 30,478 $ 18,124
===================================================================================================================================
SUPPLEMENTAL INFORMATION
Interest paid ............................................................................ $ 53,158 $ 57,349 $ 80,597
Taxes paid net of refunds received ....................................................... (6,396) 4,055 (3,727)
Non-cash activity acquisition of Meritage Mortgage Corporation ........................... -- -- 1,765
===================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Resource Bancshares Mortgage Group, Inc. 35
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except per share information)
NOTE 1--THE COMPANY:
Resource Bancshares Mortgage Group, Inc. (the Company) was organized to
acquire and operate the residential mortgage banking business of Resource
Bancshares Corporation (RBC), which commenced operations in May 1989. The assets
and liabilities of the residential mortgage banking business of RBC were
transferred to the Company on June 3, 1993, when the Company sold 58% of its
common stock in an initial public offering. Following the offering, RBC retained
a significant ownership interest in the Company. On December 31, 1997, the
Company acquired RBC in a transaction in which it exchanged 9,894,889 shares of
the Company's common stock for all of the outstanding stock of RBC.
Resource Bancshares Mortgage Group, Inc. is a financial services
company primarily engaged in the business of mortgage banking. Through its
wholly owned subsidiaries, RBMG works with correspondent lenders and brokers to
purchase, sell and service agency-eligible and subprime residential,
single-family first mortgage loans and to purchase and sell servicing rights
associated with agency-eligible and subprime loans. In addition, one of the
Company's wholly-owned subsidiaries originates, sells and services small-ticket
commercial leases.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Company reflect industry
practices and conform in all material respects with accounting principles
generally accepted in the United States. Certain amounts from prior years have
been reclassified to conform to current period presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
SIGNIFICANT ESTIMATES
In preparing the financial statements, management is required to make
estimates based on available information that can affect the reported amounts of
assets, liabilities and disclosures as of the balance sheet date and revenues
and expenses for the related periods. Such estimates relate principally to the
Company's allowance for foreclosure losses and repurchased loans, its allowance
for lease losses and fair values of residual certificates. Additionally,
estimates concerning the fair values of mortgage loans held-for-sale, lease
receivables, servicing rights, servicing hedges and the Company's other hedging
instruments are all relevant to ensuring that leases and mortgage loans are
carried at the lower of cost or market, and that potential impairments of
servicing rights are recognized as and if required. Because of the inherent
uncertainties associated with any estimation process and due to possible future
changes in market and economic conditions that will affect fair values, it is
possible that actual future results in realization of the underlying assets and
liabilities could differ significantly from the amounts reflected as of the
balance sheet date.
MORTGAGE LOANS HELD-FOR-SALE
Mortgage loans held-for-sale are stated at the lower of aggregate cost
or market.
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). The Company implemented SFAS
No. 133 on January 1, 2001. See Note 3 for further discussion of the impact of
SFAS No. 133 on accounting for mortgage loans held-for-sale.
As a servicer of mortgage loans and small-ticket equipment leases, the
Company will incur certain losses in the event it becomes necessary to carry out
foreclosure actions on loans and leases serviced. Substantially all serviced
agency-eligible loans are fully guaranteed against such losses by the
securitizing government sponsored enterprise. The allowance for estimated losses
on foreclosure, which is part of the mortgage servicing rights basis, is
determined based on delinquency trends and management's evaluation of the
probability that foreclosure actions will be necessary. The allowance for
estimated losses on foreclosure was $213 and $401 at December 31, 2000 and 1999,
respectively.
On occasions the Company has to repurchase certain non-performing
loans. Upon repurchase of a loan, the Company initially capitalizes the current
unpaid principal balance and related advances and any other related costs are
charged against the allowance. The Company subsequently estimates the net
realizable value of the repurchased loan portfolio and records an estimate of
the allowance for losses on repurchases. The allowance for estimated losses on
repurchases was $836 and $1,798 at December 31, 2000 and 1999, respectively. The
inventory of actual and pending repurchases to which these reserves relate
aggregated $13,006 and $20,700 at December 31, 2000 and 1999, respectively.
36
39
MORTGAGE SERVICING RIGHTS
The Company adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
superseded SFAS No. 122 effective January 1, 1997. The provisions of SFAS No.
125 did not materially alter the Company's accounting for mortgage servicing
rights. As required by SFAS No. 125, and as required by SFAS No. 122, the
Company allocates the total cost of a whole mortgage loan to the mortgage
servicing rights and the loan (without servicing rights) based on relative fair
values. The market value of servicing rights acquired in bulk transactions,
rather than as a by-product of the Company's loan production activities, is
initially capitalized at the lower of cost or the estimated present value of
future expected net servicing income. Amounts capitalized as mortgage servicing
rights are amortized over the period of, and in proportion to, estimated future
net servicing income. The Company assesses its capitalized mortgage servicing
rights for impairment (on a stratified basis) based on the estimated market
values of those rights. Impairments are recognized as a valuation allowance for
each impaired stratum. The analysis values such rights in consideration of
current forward committed delivery prices, prevailing interest, prepayment and
default rates, and other relevant factors as appropriate or allocable to each
valuation stratum.
Fees for servicing loans and leases are recognized monthly on an
accrual basis based upon the terms of the underlying agreement. Generally, such
agreements provide for fees based upon a percentage of the outstanding balance.
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). The Company implemented SFAS
No. 133 on January 1, 2001. See Note 3 for further discussion of the impact of
SFAS No. 133 on accounting for mortgage servicing rights.
LOAN ORIGINATION AND WHOLESALE PROGRAM ADMINISTRATION FEES
Fees charged in connection with loan origination and net fees charged
in conjunction with certain administrative functions performed by the Company in
connection with the acquisition of mortgage loans are deferred and reduce the
carrying value of the underlying mortgage loans. Allocable portions of such fees
are included in the determination of the gain or loss when the related mortgage
loans or servicing rights are sold.
SALES OF MORTGAGE LOANS AND MORTGAGE SERVICING RIGHTS
Gains or losses on sales of agency-eligible loans and on whole loan
sales of subprime mortgage loans are determined at settlement date and are
measured by the difference between the net proceeds and the carrying amount of
the underlying mortgage loans. Gains and losses on sales of mortgage servicing
rights are recognized at the sale date, which is the date the sales contract is
closed and substantially all risks and rewards of ownership pass to the buyer.
LEASE RECEIVABLES
Lease receivables consist of direct finance equipment leases which are
carried at the lower of aggregate cost or market value. Interest income is
recognized monthly based on the net lease outstanding balance. Residuals are
recognized monthly based on the estimated end-of-lease value and are included as
an adjustment to interest income. Lease receivables are charged-off at the
earlier of the date they are deemed uncollectible or they become 120 days past
due. Certain direct costs to originate lease receivables are deferred and
recognized as an adjustment to interest income over the estimated life of the
lease. The allowance for lease losses is established through a provision charged
to operations. The allowance is reviewed and adjusted as needed based upon
management's evaluation of factors affecting the lease receivables portfolio
such as economic conditions, growth and composition of the portfolio, historical
loss experience and analysis of the collectibility of specific lease
receivables. The allowance is established at an amount that management believes
will be adequate to absorb probable losses on outstanding leases that may become
uncollectible. At December 31, 2000 and 1999, the allowance for lease losses was
$3,782 and $3,046, respectively. The inventory of lease receivables to which
these reserves relate aggregated $195,559 and $158,605 at December 31, 2000 and
1999, respectively.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Maintenance and repairs are expensed as
incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill arising from the acquisitions of RBC and Meritage Mortgage
Corporation (Meritage) is being amortized over 20 years using the straight-line
method. Amortization expense for both acquisitions totaled $747 and $830 for the
years ended December 31, 2000 and 1999, respectively.
INCOME TAXES
The Company records taxes under an asset and liability approach,
recognizing deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities. Current taxes payable (receivable) of $(10,696) and
$1,127 for the years ended December 31, 2000 and 1999, are included in other
assets and liabilities.
STATEMENT OF CASH FLOWS
The Company has adopted the indirect method of reporting cash flows.
The Consolidated Statement of Cash Flows has been restated for 1999 and 1998 for
effects of discontinued operations resulting from the sale of Laureate Capital
Corp. in 2000.
Resource Bancshares Mortgage Group, Inc. 37
40
NOTE 3--SFAS No. 133:
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, as amended by
SFAS No. 137 and 138, 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 (1) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (2) a hedge of the exposure to variable cash
flows of a forecasted transaction or (3) 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).
The Company implemented SFAS No. 133 on January 1, 2001 and recorded certain
transition adjustments in the manner prescribed in SFAS No. 133.
Under SFAS No. 133, rate lock commitments given to borrowers,
correspondents or brokers are considered to be derivatives. The Derivative
Implementation Group (DIG) of the FASB has not yet made a final determination as
to how mortgage companies should value rate locks. Pending ultimate resolution
of this issue by the FASB, the Company has tentatively implemented SFAS No. 133
assuming that the value of such derivatives is zero at rate lock date.
Commencing January 1, 2001, the Company will record on its balance sheet any
changes in value from the date of rate lock to the balance sheet date.
The Company hedges the interest rate risk inherent in rate lock
commitments with mandatory delivery commitments to sell loans and, to a lesser
extent, with options and futures transactions. Mandatory delivery commitments,
options and futures are considered to be derivatives under SFAS No. 133.
Accordingly, commencing January 1, 2001, these instruments will be
marked-to-market at the balance sheet date, with the result being reported as an
asset or liability in the balance sheet.
Certain of the Company's derivatives no longer needed for hedging rate
locks are "paired-off" with an opposite position in the same derivative
security. Under SFAS No. 133, both positions are derivatives that must be
marked-to-market and the result carried as assets or liabilities in the balance
sheet until settlement date of the respective trades.
The Company hedges the future cash flows from sale of its inventory of
closed loans held-for-sale with mandatory delivery commitments to sell loans.
Mandatory delivery commitments are considered to be derivatives under SFAS No.
133 and are to be carried as an asset or liability on the balance sheet. Closed
loans are not derivatives and are carried at the lower of cost or market
("LOCOM") on the Company's balance sheet. Under SFAS No. 133, to the extent that
the Company establishes statistical correlation between changes in the value of
the hedge with changes in the value of the closed loans held-for-sale, it can
mark those derivatives to market and then record after tax impact of that in the
"Other Comprehensive Income" (OCI) caption in the equity section of the balance
sheet. If the LOCOM valuation of closed loans is a net loss, the Company must
record a charge to earnings. Simultaneously, the Company may take out of OCI a
like amount and record it in the income statement as an offset to the LOCOM
adjustment.
The Company hedges the interest rate risk (prepayment risk) inherent in
its servicing rights assets with various instruments including interest rate
floors, interest rate corridors, interest rate swaps, interest rate swaptions,
CPC call options, PO swaps, treasury futures and agency futures contracts. Each
of these instruments is considered to be a derivative under SFAS No. 133 and
must be marked-to-market, with the value being reported as an asset or a
liability in the balance sheet. Under SFAS No. 133 and the guidance provided by
the DIG, the Company may elect, at its option, hedge accounting treatment for
its servicing rights. If changes in the value of the servicing rights and the
hedges meet certain correlation criteria, changes in the fair value of the
servicing rights may be offset in the income statement by changes in the fair
value of the hedging instrument. The Company may elect not to qualify for hedge
accounting treatment. Under SFAS No. 133, the hedges must be marked-to-market
through the income statement. In contrast, servicing rights are LOCOM assets
under GAAP. When values go down, the impact is recorded through the income
statement. When values go up, the increase may be recorded in earnings only to
the extent of impairment reserves established by previous writedowns of
servicing under SFAS No. 125. The election for hedge treatment must be made at
the beginning of the accounting period. The Company did not elect hedge
accounting treatment related to servicing rights as of January 1, 2001. Since
the Company already carried the value of its servicing hedges on its balance
sheet at December 31, 2000, there was no transition adjustment made at January
1, 2001.
The Company enters into interest rate swaps to pay fixed rate and
receive floating rate as a cash flow hedge of its variable rate debt used to
finance its fixed rate lease receivables. Interest rate swaps are considered to
be derivatives under SFAS No. 133 and are to be carried at market value as
assets or liabilities in the balance sheet. Since this is a cash flow hedge
under SFAS No. 133, the after tax impact is charged to or credited to OCI.
Under the transition rules of SFAS No. 133, as of January 1, 2001, the
Company will recognize the value of derivatives on its balance sheet. It will
recognize in a separate line in its income statement in 2001 the cumulative
effect of changing to SFAS No. 133. That cumulative effect will be the
difference between retained earnings at December 31, 2000 and the amount of
retained earnings that would have been reported at that date if SFAS No. 133 had
been retroactively applied to all prior periods. The table below highlights the
estimated impact of this transition adjustment.
Balance Sheet
--------------------------------------------------------------- Cumulative
Derivative Tax Derivative Tax Effect of
($ in thousands) Assets Asset Liabilities Liability OCI Change
- ------------------------------------------------------------------------------------------------------------------------------------
Rate lock commitments ........................ $1,366 $ -- $ -- $509 $ -- $ 857
Derivatives hedging rate lock commitments .... 308 663 1,780 115 -- (924)
Pairoffs of derivatives ...................... 55 70 187 21 -- (83)
Derivatives hedging loans held for sale ...... -- 1,703 4,568 -- (2,865) --
Derivatives swapping variable rate debt to
fixed rate debt ............................ -- 659 1,745 -- (1,086) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total impact ................................. $1,729 $3,095 $8,280 $645 $(3,951) $(150)
====================================================================================================================================
38
41
NOTE 4--RECEIVABLES:
Receivables consist primarily of amounts due to the Company related to
sales of mortgage servicing rights and mortgage-backed-securities and advances
of delinquent principal, interest, tax and insurance payments related to loans
serviced. Management does not anticipate losses on realization of the
receivables. Receivables consist of the following:
December 31,
------------------------
2000 1999
- ---------------------------------------------------------------------------------------
Mortgage servicing rights sales, net of reserves ...... $ 19,083 $ 26,998
Servicing advances .................................... 6,601 7,613
Receivable from sale of mortgage-backed securities .... 25,866 --
Other ................................................. 11,548 5,608
- ---------------------------------------------------------------------------------------
$ 63,098 $ 40,219
=======================================================================================
NOTE 5--LEASE RECEIVABLES:
Lease receivables are summarized as follows:
December 31,
-------------------------
2000 1999
- ----------------------------------------------------------------------------------------
Lease receivables ..................................... $238,520 $194,422
Less--Unearned discount ............................... (42,961) (35,817)
Less--Allowance for lease losses ...................... (3,782) (3,046)
- ----------------------------------------------------------------------------------------
$191,777 $155,559
========================================================================================
The components of the Company's investment in lease receivables are
summarized as follows:
December 31,
-------------------------
2000 1999
- ----------------------------------------------------------------------------------------
Minimum lease payments due from lessees ............... $222,079 $180,164
Estimated residuals ................................... 7,191 6,102
Initial direct costs, net ............................. 9,250 8,156
- ----------------------------------------------------------------------------------------
$238,520 $194,422
========================================================================================
At December 31, 2000, the maturities of minimum lease receivables,
including lease residuals, are as follows:
2001........................................................ $ 83,130
2002........................................................ 67,644
2003........................................................ 45,310
2004........................................................ 24,741
2005........................................................ 8,378
2006 and thereafter......................................... 67
- ----------------------------------------------------------------------------------------
$229,270
========================================================================================
Leases represent unconditional obligations of the lessees to pay all
scheduled payments and require the lessees to assume all responsibility with
respect to the equipment, including the obligation to pay all costs relating to
its operation, maintenance, repair, sales and property taxes and insurance. At
December 31, 2000 and 1999, the average lease size was approximately $24 and
$26, respectively, and there were 28 leases and 31 leases, respectively, with a
current lease receivable in excess of $250.
At December 31, 2000 and 1999, respectively, the equipment covered by
approximately 16% and 16% of the Company's net lease receivables were located in
the state of California, approximately 7% and 9% were located in the state of
Florida and approximately 7% and 8% were located in the state of Texas. At
December 31, 2000 and 1999, respectively, approximately 16% and 20% of the
Company's net lease receivables were collateralized by computer equipment and 5%
and 7% were collateralized by titled equipment.
The Company's leases are collateralized by the equipment subject to the
leases. In most instances, the Company requires a security deposit equal to one
monthly payment and personal guarantees. In addition, where considered
necessary, other credit enhancements are obtained. At December 31, 2000, the
Company held security deposits and sales and property taxes for the benefit of
lessees of $6,980.
NOTE 6--FAIR VALUE AND IMPAIRMENTS OF MORTGAGE SERVICING RIGHTS:
For purposes of evaluating its mortgage servicing portfolio for
impairment, the Company disaggregates its portfolio into two primary segments:
available-for-sale and held-for-sale.
The segment of the portfolio designated as available-for-sale is
composed of servicing rights that were purchased in bulk transactions or that
were retained out of production pursuant to individual portfolio retention
decisions. The available-for-sale portfolio is disaggregated for purposes of
measuring potential impairments according to defined risk tranches. The Company
has defined its risk tranches based upon interest rate band and product type.
With respect to each such risk tranche, the fair value thereof, which is based
upon an internal analysis that considers current market conditions, prevailing
interest, prepayment speed and default rates and other relevant factors,
together with the fair value of hedges allocated thereto (which is based upon an
independent third party estimate of value) is compared to amortized carrying
values of the mortgage servicing rights for purposes of measuring potential
impairment. The Company uses Constant
Resource Bancshares Mortgage Group, Inc. 39
42
Maturity Treasury rate (CMT) and Constant Maturity Swap rate (CMS) floors and
Callable Pass Through Certificates (CPC's) to protect itself against interest
and prepayment risk on its available-for-sale portfolio. At December 31, 2000
and 1999 the following amounts related to the available-for-sale portfolio:
At December 31,
-----------------------------------
Residential Mortgage Servicing 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Underlying unpaid principal balance ....................................... $ 5,480,930 $ 6,322,591
Fair value of related mortgage servicing rights ........................... $ 117,626 $ 146,476
Fair value/underlying unpaid principal balance ............................ 2.15% 2.31%
Net carrying value of related mortgage servicing rights ................... $ 108,543 $ 137,419
Net carrying value/underlying unpaid principal balance .................... 1.98% 2.17%
Weighted average note rate ................................................ 7.40% 7.35%
Weighted average service fee .............................................. 0.42% 0.43%
Net basis expressed as a multiple of weighted average service fee ......... 4.72x 5.05x
===========================================================================================================================
The segment of the portfolio designated as held-for-sale is composed of
recently produced servicing rights that are scheduled for sale and have been
allocated to specific forward servicing sales contracts. The held-for-sale
portfolio is disaggregated for purposes of measuring possible impairments
according to the specific forward sales contracts to which allocated, which the
Company has determined to be the appropriate approach to disaggregation by
predominant risk characteristic for this portfolio segment. For each such risk
tranche, the fair value is based upon the allocated forward committed delivery
price, which is compared to amortized carrying value for purposes of measuring
potential impairment. At December 31, 2000 and 1999, the following amounts
related to the held-for-sale portfolio:
At December 31,
-----------------------------------
Residential Mortgage Servicing 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Underlying unpaid principal balance ....................................... $ 1,996,463 $ 1,499,803
Fair value of related mortgage servicing rights ........................... $ 52,128 $ 31,087
Fair value/underlying unpaid principal balance ............................ 2.61% 2.07%
Net carrying value of related mortgage servicing rights ................... $ 52,223 $ 30,901
Net carrying value/underlying unpaid principal balance .................... 2.62% 2.06%
Weighted average note rate ................................................ 8.17% 7.90%
Weighted average service fee .............................................. 0.45% 0.49%
Net basis expressed as a multiple of weighted average service fee ......... 5.82x 4.20x
===========================================================================================================================
NOTE 7--PREMISES AND EQUIPMENT:
Premises and equipment are summarized as follows:
Estimated December 31,
Useful -----------------------------
Lives 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Building .......................................................... 25 years $ 7,407 $ 7,657
Building improvements ............................................. 10-15 years 1,336 1,682
Furniture, fixtures and equipment ................................. 5-10 years 40,985 41,418
- ---------------------------------------------------------------------------------------------------------------------------
49,728 50,757
Less--Accumulated depreciation .................................... (22,054) (17,560)
- ---------------------------------------------------------------------------------------------------------------------------
27,674 33,197
Land .............................................................. 3,097 3,097
- ---------------------------------------------------------------------------------------------------------------------------
$ 30,771 $ 36,294
===========================================================================================================================
Depreciation expense was $7,339 in 2000, $6,633 in 1999, $4,294 in
1998.
NOTE 8--LEASE COMMITMENTS:
The Company has entered into various non-cancelable operating lease
agreements, primarily for office space. Certain of these leases contain renewal
options and escalation clauses. At December 31, 2000, the annual minimum rental
commitments for non-cancelable leases with remaining terms in excess of one year
are as follows:
2001 ........................................................................................................... $ 5,838
2002 ........................................................................................................... 4,179
2003 ........................................................................................................... 3,486
2004 ........................................................................................................... 2,580
2005 ........................................................................................................... 1,224
2006 and thereafter ............................................................................................ 909
- ---------------------------------------------------------------------------------------------------------------------------------
$ 18,216
=================================================================================================================================
40
43
Minimum rental commitments have not been reduced by minimum sublease
rentals of $1,314 due in the future under non-cancelable subleases. Rent expense
for operating leases, net of sublease rental income of $169 for 2000, $387 for
1999 and $387 for 1998, was $3,249 in 2000, $4,304 in 1999 and $3,106 in 1998.
NOTE 9--SHORT-TERM AND LONG-TERM BORROWINGS:
The Company's primary cash-flow requirement involves the funding of
loan production, which is met primarily through external borrowings. In July
2000, 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 $325 million warehouse line of
credit provided by a syndicate of unaffiliated banks that expires in July 2001.
The credit agreement includes covenants requiring the Restricted Group to
maintain (i) a minimum net worth of $150 million, plus the Restricted Group's
net income subsequent to June 30, 2000, 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 1.25 to 1.00 for any period of two
consecutive fiscal quarters (the interest rate coverage ratio). The Company is
required to maintain $10 million of liquidity pursuant to the agreement. The
provisions of the agreement also restrict the Restricted Group's ability to
engage significantly in any type of business unrelated to the mortgage banking
and lending business and the servicing of mortgage loans. At December 31, 2000
and 1999, the total amounts outstanding under this facility and its predecessor
were $256,420 and $329,600, respectively.
In July 2000, the Company and the Restricted Group also entered into a
$65 million subprime revolving credit facility and a $200 million servicing
revolving credit facility, which expire in July 2001. These facilities include
covenants identical to those described above with respect to the warehouse line
of credit. At December 31, 2000 and 1999, the total amounts outstanding under
these facilities and their predecessors were $265,679 and $108,200,
respectively.
The Restricted Group was in compliance with the debt covenants in place
at December 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.
Meritage, RBMG and a bank are parties to a master repurchase agreement,
pursuant to which Meritage and RBMG are entitled from time to time to deliver
eligible subprime mortgage loans in an aggregate principal amount of up to $150
million to the bank. The master repurchase agreement has been extended through
July 2001.
RBMG and Prime Funding Company entered into a $50 million commercial
paper conduit facility in November 2000. The facility expires in November 2001.
At December 31, 2000 there was no debt outstanding under this facility.
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 total amounts outstanding under this facility
and its predecessor at December 31, 2000 and 1999 were $128,287 and $0,
respectively.
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 total amounts outstanding under this
facility at December 31, 2000 and 1999 were $6,259 and $6,364, respectively.
The Company has entered into a $10 million unsecured line of credit
agreement that expires in July 2001. 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 February 2001 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. At December 31, 2000 and 1999, the total
amounts outstanding under this facility were $161,250 and $125,652,
respectively.
NOTE 10--CAPITAL TRANSACTIONS:
The Company began paying regular quarterly cash dividends of $0.03 per
share in the third quarter of 1996. This quarterly cash dividend was increased
to $0.04 per share in the fourth quarter of 1997, to $0.05 per share in the
first quarter of 1998, to $0.07 per share in the second quarter of 1998, to
$0.10 per share in the fourth quarter of 1998 and finally to $0.11 per share in
the second quarter of 1999. The Company has continued to pay a quarterly cash
dividend of $0.11 per share through the fourth quarter of 2000.
During 1995, the Company established a dividend reinvestment plan
(DRIP). The DRIP offers stockholders a method of reinvesting cash dividends in
the Company common stock at a five percent discount from market prices. The
Company reserves the right to modify the pricing terms and any other provisions
of the DRIP at any time. The DRIP agent purchases either original issue or
treasury shares from the Company or the DRIP agent purchases shares on the open
market. The Board of Directors has authorized the issuance of 4,099,985 shares
under the DRIP. Through December 31, 2000, there were 1,947,073 shares issued
under the DRIP.
Resource Bancshares Mortgage Group, Inc. 41
44
The Company's Board of Directors has authorized the repurchase of up to
$77,000 of the Company's common stock in either open market transactions or in
private or block trades as of December 31, 2000. Through December 31, 2000,
$73,472 of the Company's common stock has been purchased. At December 31, 2000,
there were 6,949,711 shares held in the Company's treasury account at an average
cost of $7.20 per share.
NOTE 11--INCOME TAXES:
Income tax expense (benefit) consists of the following:
For the Year Ended December 31,
-------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Current:
Federal ......................................................... $ (10,045) $ 1,871 $ (3,482)
State ........................................................... (651) (744) 245
- ------------------------------------------------------------------------------------------------------------------------------
Total current ..................................................... (10,696) 1,127 (3,237)
- ------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal ......................................................... (11,259) 821 30,202
State ........................................................... (2,238) 764 967
- ------------------------------------------------------------------------------------------------------------------------------
Total deferred .................................................... (13,497) 1,585 31,169
- ------------------------------------------------------------------------------------------------------------------------------
Total tax (benefit) expense ....................................... $ (24,193) $ 2,712 $ 27,932
==============================================================================================================================
Income tax (benefit) expense is included in the financial statements as
follows:
For the Year Ended December 31,
-------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Continuing operations ............................................. $ (24,100) $ 2,307 $ 26,980
Discontinued operations ........................................... (93) 405 952
- ------------------------------------------------------------------------------------------------------------------------------
Total tax (benefit) expense ....................................... $ (24,193) $ 2,712 $ 27,932
==============================================================================================================================
Current income tax expense (benefit) represents the approximate amount
payable (receivable) for each of the respective years. The above current and
deferred balances reflect certain reclassifications made as a result of prior
year returns. During 2000, 1999 and 1998, the Company qualified for state tax
credits of $0, $275 and $300, respectively, reducing current state tax expense
that otherwise would have been payable for each year.
The effective tax rate varied from the statutory federal tax rate of
35% for 2000, 1999 and 1998 due to the following:
For the Year Ended December 31,
--------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------
% OF % of % of
PRETAX Pretax Pretax
AMOUNT INCOME Amount Income Amount Income
- -----------------------------------------------------------------------------------------------------------------------------
Tax expense at statutory rate ............... $ (23,272) 35.0% $ 3,022 35.0% $ 26,811 35.0%
State tax, net of federal benefit ........... (1,874) 2.8% 64 0.8% 1,571 2.1%
Other, net .................................. 953 (1.4%) (374) (4.3%) (450) (0.6%)
- ----------------------------------------------------------------------------------------------------------------------------
$ (24,193) 36.4% $ 2,712 31.5% $ 27,932 36.5%
============================================================================================================================
Deferred tax (assets) liabilities are summarized as follows:
December 31,
--------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Mark-to-market ............................................................ $ (260) $ (1,755)
Deferred compensation ..................................................... (2,764) (3,422)
Branch closing expenses ................................................... (1,213) --
Foreclosure and repurchase reserves ....................................... (2,432) (3,522)
NOL carryforwards ......................................................... (17,050) (668)
Other, net ................................................................ (279) (19)
- ------------------------------------------------------------------------------------------------------------------------
(23,998) (9,386)
- ------------------------------------------------------------------------------------------------------------------------
Mortgage servicing rights ................................................. 52,757 42,632
Depreciation .............................................................. 7,146 6,756
Securitizations ........................................................... -- 8,970
Deferred tax income ....................................................... -- 7,094
Other, net ................................................................ 55 485
- ------------------------------------------------------------------------------------------------------------------------
59,958 65,937
- ------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability ................................................ $ 35,960 $ 56,551
========================================================================================================================
42
45
There are no valuation allowances provided for any of the Company's
deferred tax assets based on management's belief that it is more likely than not
that deferred tax assets will be realized. During 2000 and 1999, non-qualified
stock options were exercised generating a tax benefit of $10 and $0,
respectively. This benefit is reflected in additional paid-in capital.
A tax net operating loss of approximately $35,000 is available for
carryforward to future years. This carryforward expires in 2020.
NOTE 12--STOCK OPTIONS AND RESTRICTED STOCK PLAN:
Contemporaneous with the Company's initial public offering, certain
executives of the Company were granted options to purchase 901,310 shares of
common stock of the Company at the initial offering price of $5.83 per share.
The options have a term of ten years and expire in June 2003. At December 31,
2000 550,210 of the outstanding executive options were exercisable. No
additional options have been granted since inception. During 2000 and 1999, no
options were exercised.
In addition, certain executive officers, in connection with their
recruitment, became entitled to receive restricted stock as part of their
compensation. Costs associated with these grants are included as compensation
expense of the Company in the accompanying consolidated financial statements. In
connection therewith, the Company issued restricted shares at the issuance
prices summarized as follows:
Restricted Issuance Price
Issuance Date Shares Issued Per Share
- -----------------------------------------------------------------------------------------------------------------------------
January 21, 1994 .......................................................... 13,336 $ 6.93
January 26, 1995 .......................................................... 59,136 6.87
January 27, 1996 .......................................................... 18,438 13.87
February 1, 1997 .......................................................... 24,704 13.27
January 30, 1998 .......................................................... 20,048 16.35
February 1, 1999 .......................................................... 93,520 15.01
===========================================================================================================================
On October 21, 1993, the Company adopted a phantom stock plan that
provided for the awarding of up to 450,655 deferred compensation units to
officers and certain key employees. The plan specified a five-year vesting
schedule. In addition, from time to time the Board of Directors approved
participation in a special phantom stock plan for certain officers of the
Company. During 1996, the Company terminated all of its phantom stock plans and
canceled all outstanding grants thereunder. In connection therewith, each former
participant in the phantom stock plan was awarded an option under a new
non-qualified stock option plan for each unit canceled under the phantom stock
plans. Other terms of the awarded options were substantially similar to the
underlying canceled units. The number of initially authorized units under the
non-qualified stock option plan was 223,817. Since forfeited units under the
plan do not become available for reissuance, no units are available for future
grants under this plan.
Activity in the non-qualified stock option plan is summarized below:
Units Units Units Units
Non-qualified Stock Option Plan: Granted Exercised Forfeited Outstanding
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 .................................... 223,817 -- -- 223,817
- --1998 activity ................................................. -- (60,815) (38,801) (99,616)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 .................................... 223,817 (60,815) (38,801) 124,201
- --1999 activity ................................................. -- (545) (135) (680)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 .................................... 223,817 (61,360) (38,936) 123,521
- --2000 activity ................................................. -- -- (35,036) (35,036)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 .................................... 223,817 (61,360) (73,972) 88,485
===============================================================================================================================
Of the 88,485 units outstanding at December 31, 2000 under the
non-qualified stock option plan, the following are exercise prices and percents
vested:
Units Exercise Percent
Expiration Date Outstanding Price Vested
- -------------------------------------------------------------------------------------------------------------------------------
January 21, 2004 .................................................. 27,189 $ 6.93 100%
January 26, 2005 .................................................. 20,438 6.85 100%
January 26, 2005 .................................................. 23,162 6.87 100%
July 1, 2005 ...................................................... 17,696 10.64 100%
==============================================================================================================================
During 1995, the Company established an Omnibus Employee Stock Award
Plan (the Omnibus Plan). The Omnibus Plan was amended and restated in its
entirety effective October 31, 1997 primarily to increase the number of
authorized shares under the plan. The purpose of this plan is to provide key
employees who are largely responsible for the Company's growth and continued
success with the opportunity to have or increase their proprietary interest in
the Company through the granting of any one, or any combination, of options,
stock appreciation rights, restricted stock and unrestricted stock. This plan is
authorized to issue up to 1,510,635 units. All options vest 20% on the date of
grant and 20% each year thereafter on the anniversary date of the grant and
expire 10 years after the grant date.
Resource Bancshares Mortgage Group, Inc. 43
46
Activity in the Omnibus Plan is summarized below:
Units Units Units Units
Omnibus Plan: Granted Exercised Forfeited Outstanding
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 .................................... 593,293 -- -- 593,293
- --1998 activity ................................................. 430,500 (32,700) (10,150) 387,650
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 .................................... 1,023,793 (32,700) (10,150) 980,943
- --1999 activity ................................................. 25,000 (55,875) -- (30,875)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 .................................... 1,048,793 (88,575) (10,150) 950,068
- --2000 activity ................................................. 828,549 (22,316) (829,894) (23,661)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 .................................... 1,877,342 (110,891) (840,044) 926,407
================================================================================================================================
Of the 926,407 units outstanding at December 31, 2000 under the Omnibus
Employee Stock Award Plan, the following are exercise prices and percents
vested:
Units Exercise Percent
Expiration Date Outstanding Price Vested
- --------------------------------------------------------------------------------------------------------------------------------
January 26, 2006 .................................................. 16,853 $ 13.87 100%
December 30, 2006 ................................................. 5,250 13.85 100%
August 26, 2007 ................................................... 6,300 16.27 80%
September 16, 2007 ................................................ 6,300 15.94 80%
January 29, 2007 .................................................. 94,500 13.20 80%
April 18, 2007 .................................................... 15,750 14.53 80%
April 14, 2008 .................................................... 49,400 16.44 60%
February 19, 2009 ................................................. 5,000 14.13 40%
January 3, 2010 ................................................... 5,000 4.56 20%
January 10, 2010 .................................................. 100,000 4.50 20%
Various ........................................................... 155,024 4.63 Various
May 15, 2010 ...................................................... 3,000 4.81 20%
June 1, 2010 ...................................................... 321,030 4.75 20%
July 10, 2010 ..................................................... 20,000 4.13 20%
July 27, 2010 ..................................................... 40,000 4.00 20%
September 1, 2010 ................................................. 8,000 5.19 20%
September 19, 2010 ................................................ 61,000 5.69 20%
October 25, 2010 .................................................. 12,500 5.88 20%
November 15, 2010 ................................................. 1,500 6.06 20%
==============================================================================================================================
During 1995, the Company established a Formula Stock Option Plan. The
purpose of this plan is to provide annually (on each September 1) to the
non-employee directors of the Company options to purchase 10,000 shares of the
common stock of the Company. All options vest 20% on the date of grant and 20%
each year thereafter on the anniversary date of the grant and expire ten years
after the grant date. The plan is authorized to issue up to 420,000 shares of
common stock. Options granted include:
Grant Date Units Granted Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
September 1, 1995 ......................................................... 56,175 $ 14.16
September 1, 1996 ......................................................... 56,175 11.79
September 1, 1997 ......................................................... 52,500 15.91
September 1, 1998 ......................................................... 60,000 15.75
September 1, 1999 ......................................................... 60,000 6.00
===========================================================================================================================
Through 1999 the Company's option plans were considered fixed stock
award plans for accounting purposes. Accordingly, total compensation expense for
these fixed plans is measured as the difference between the market value on the
date of the grant over the exercise price which fixed total expense is then
recognized over the vesting period. Compensation expense related to fixed stock
awards (exclusive of the restricted stock plan which is expensed as incurred)
was $(14), $351 and $(102) for 2000, 1999 and 1998, respectively. As a result of
the decrease in market price for the Company's stock during 1999 and 2000, many
outstanding options were priced far "out of the money", providing little
incentive to recipients. Accordingly, during the second quarter of 2000, the
Company repriced to current market price and simultaneously reduced the number
of options of certain officers. Accounting principles require that once an
option has been repriced, it must be accounted for as a variable option until it
is exercised, forfeited or expires unexercised. For vesting purposes the
original grant date will be used for these options. For variable options,
compensation is adjusted for subsequent increases in intrinsic value (i.e.,
measured by changes in the quoted market price of the stock) in each reporting
period after the repricing date. This additional compensation is recognized over
the remaining vesting period (from repricing date to vesting date). If the
market price subsequently declines, previously recognized compensation would be
reversed. After awards vest, adjustments to additional compensation for changes
in intrinsic value are recognized as compensation expense immediately. The
compensation expense recognized during 2000 related to variable options was
$286. At December 31, 2000, 130,024 of the Company's outstanding options were
accounted for as variable options.
On February 22, 2000, the Company made special awards of 30,768 options
at an exercise price of $4.0625 to two members of the Board of Directors under
the MSC Stock Option Agreement. Such options are exercisable, in whole or in
part, at any time and from time
44
47
to time during the option period, but not thereafter. The option period begins
on February 22, 2000 and expires ten years from such date. At December 31, 2000
none of these options had been exercised.
The Company accounts for options using APB No. 25, "Accounting for
Stock Issued to Employees." For purposes of providing the pro forma disclosures
required under SFAS No. 123, the fair value of stock options granted in 2000,
1999 and 1998 was estimated at the date of grant using a Black-Scholes
option-pricing model. The Black-Scholes option-pricing model was originally
developed for use in estimating the fair value of traded options which have
different characteristics than the Company's employee stock options. The model
is also sensitive to changes in the subjective assumptions which can materially
affect fair value estimates. As a result, management believes that the
Black-Scholes model may not necessarily provide a reliable single measure of the
fair value of employee stock options.
For purposes of SFAS No. 123, each award was separately valued using
the 10 year CMT rate on the date of grant as the risk-free interest rate. The
expected life of each grant was assumed to be equal to the term to expiration as
of the grant date. The expected dividend yield was established based upon the
dividend policies of the Company as of the date of award. Finally, for purposes
of assigning a volatility factor, the historical 100 day volatility factor was
reviewed for selected points in time over the past and a range of 36% to 65% was
assigned to the 2000, 1999 and 1998 awards for purposes of the SFAS No. 123
valuation. The following is a summary of the significant assumptions used in the
SFAS No. 123 valuation and the average fair value of the options granted:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Average risk-free interest rate ................................... 6.23% 5.75% 5.57%
Average expected life of grants ................................... 10 years 10 years 10 years
Average expected dividend yield ................................... $ 0.44 $ 0.43 $ 0.21
Average volatility factor ......................................... 76.20% 68.42% 49.30%
Average fair value of options granted ............................. $ 1.95 $ 4.39 $ 9.93
==============================================================================================================================
For purposes of the required pro forma disclosures, SFAS No. 123
permits straight-line amortization of the estimated fair value of the options
over the vesting period. Had compensation cost for the Company's 2000, 1999 and
1998 stock-based option awards been determined consistent with the requirements
of SFAS No. 123, net income and earnings per share would have been reported as
follows for 2000, 1999 and 1998.
For the Year Ended December 31,
-------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Net income as reported ............................................ $ (42,298) $ 5,922 $ 48,671
After-tax adjustment for SFAS No. 123 ............................. (1,631) (1,485) (1,968)
- ------------------------------------------------------------------------------------------------------------------------------
Pro forma net income as adjusted .................................. $ (43,929) $ 4,437 $ 46,703
==============================================================================================================================
Pro forma net income per common share--basic ...................... $ (2.48) $ 0.22 $ 2.02
Pro forma net income per common share--diluted .................... $ (2.48) $ 0.21 $ 1.99
==============================================================================================================================
Due to the inclusion of only 2000, 1999 and 1998 option grants, the
effects of applying SFAS No. 123 in 2000, 1999 and 1998 may not be
representative of the pro forma impact in future years.
NOTE 13--COMMITMENTS AND CONTINGENCIES:
The Company was servicing and subservicing 81,253, 87,810 and 125,686,
residential loans owned by others, with unpaid balances aggregating
approximately $8,690,000, $9,090,000 and $13,600,000, at December 31, 2000, 1999
and 1998, respectively. Related escrow funds totaled approximately $42,486,
$44,714 and $80,300 as of December 31, 2000, 1999 and 1998, respectively. Loans
serviced for others and the related escrow funds are not included in the
accompanying consolidated balance sheet.
The Company has issued mortgage-backed securities under programs
sponsored by Ginnie Mae, Freddie Mac and Fannie Mae. In connection with
servicing mortgage-backed securities guaranteed by Ginnie Mae, Freddie Mac or
Fannie Mae, the Company advances certain principal and interest payments to
security holders prior to their collection from specific mortgagors.
Additionally, the Company must remit certain payments of property taxes and
insurance premiums in advance of collecting them from specific mortgagors and
make certain payments of attorney's fees and other costs related to loans in
foreclosure. These amounts are included in servicing advances under the caption
receivables in the accompanying consolidated financial statements.
The Company typically sells the residential mortgage servicing rights
associated with its mortgage production into forward sales contracts.
Additionally, from time to time, the Company will sell residential mortgage
servicing rights from its available-for-sale portfolio. In 2000, approximately
94% of its total sales under these forward sales contracts were to two major
customers. In 1999, approximately 79% of its total sales under these forward
sales contracts were to four major customers.
In the ordinary course of business, the Company is exposed to liability
under representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights. Under certain circumstances, the
Company may be required to repurchase mortgage loans or indemnify the purchasers
of loans or servicing rights for losses if there has been a breach of
representations or warranties. Repurchased loans are carried at the lower of
cost or estimated recoverable value. At December 31, 2000, $6,474 of these
repurchased loans are included in mortgage loans held-for-sale net of a loss
allowance of $836. At December 31, 1999, $17,255 of these repurchased loans are
included in mortgage loans held-for-sale net of a loss allowance of $1,798. At
December 31, 1998, $33,285 of these repurchased loans are included in mortgage
loans held-for-sale net of a loss allowance of $2,330. Provision for losses
related to the repurchases of loans for the years ended December 31, 2000, 1999
and 1998 totaled $2,102, $5,795 and $9,783, respectively. The total number of
loans repurchased for the year ended December 31, 2000, 1999 and 1998 was 161,
356 and 479, respectively. During 2000, 1999 and 1998 the Company repurchased
approximately $15,687, $34,865 and $46,586 of unpaid principal balances,
respectively.
In the ordinary course of its business, the Company is from time to
time subject to litigation. The Company is not a party to any material legal
proceedings.
Resource Bancshares Mortgage Group, Inc. 45
48
NOTE 14--UNUSUAL ITEMS:
The Company continued its efforts during the current period to
reorganize around primary business processes (production/sales, customer
fulfillment, servicing and portfolio management) and has thus made certain
changes in organization at its agency-eligible and subprime units. These changes
resulted in a net increase in the previously established reorganization reserves
of $0.7 million during 2000. In connection with the planned reorganization, the
Company has made certain changes in its senior management team and has closed
certain regional processing offices.
Also, during 2000, the Company (1) marked down its residual interests
in prior subprime securitizations as a result of changes in valuation
assumptions due to changing market conditions; (2) marked down its residual
interests in prior securitizations, and the associated residual hedges
(including hedge amortization expense) as a result of signing a definitive
agreement to sell all of the Company's residuals; (3) disposed of its commercial
mortgage operation, Laureate Capital Corp.; (4) restructured and closed certain
regional processing offices; (5) amended its defined benefit pension plan to
freeze benefits under the plan; (6) changed the benefits available to employees
under its 401(k) plan; (7) realized a gain on sale of a branch facility; (8)
contributed to a fund that will benefit qualified charitable organizations; (9)
incurred expenses for consultants who are assisting management in re-engineering
work processes; and (10) redesignated a lease of a former operations center as a
nonoperating lease.
The net impact of these unusual items in 2000 is summarized below by
financial statement component and operating division:
Agency-Eligible
--------------------- Commercial
Production Servicing Subprime Mortgage Leasing Other Total
- ---------------------------------------------------------------------------------------------------------------------------------
Mark-to-market on residual interest in
subprime securitizations .................... $ -- $ -- $ 39,338 $ -- $ -- $ -- $ 39,338
Residual hedge mark-to-market
and amortization ............................ -- -- 1,077 -- -- -- 1,077
Salary and employee benefits .................. 678 (45) 1,459 -- (22) 234 2,304
Occupancy expense ............................. 171 -- -- -- -- -- 171
General and administrative expenses ........... 1,027 -- 796 -- -- 1,040 2,863
Other income .................................. -- -- -- -- -- (392) (392)
- ---------------------------------------------------------------------------------------------------------------------------------
Net pre-tax effect on continuing operations.... 1,876 (45) 42,670 -- (22) 882 45,361
Estimated allocable income tax ................ (700) 17 (15,773) -- 8 (330) (16,778)
- ---------------------------------------------------------------------------------------------------------------------------------
Net after-tax impact on continuing operations.. 1,176 (28) 26,897 -- (14) 552 28,583
Loss on sale of operating assets of
Laureate Capital Corp. ...................... -- -- -- 1,448 -- -- 1,448
Operating loss of Laureate Capital Corp. ...... -- -- -- 660 -- -- 660
- ---------------------------------------------------------------------------------------------------------------------------------
Net after-tax impact .......................... $ 1,176 $ (28) $ 26,897 $ 2,108 $ (14) $ 552 $ 30,691
=================================================================================================================================
During the fourth quarter of 1999, the Company incurred a $3.8 million
($2.4 million after-tax) charge related to a workforce reduction. At December
31, 1999 approximately $2.0 million remained in the accrual related to these
workforce reduction charges. For the period ending December 31, 1999, the
workforce reduction is summarized below by financial statement component and
operating division:
Agency-Eligible
-----------------------
($ in thousands) Production Servicing Subprime Other Consolidate
- -----------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits ............................. $ 820 $ 31 $ 166 $ 2 $ 1,019
Occupancy expense ........................................ 1,780 -- 186 190 2,156
General and administrative expenses ...................... 448 -- 164 2 614
- ----------------------------------------------------------------------------------------------------------------------------
Net pre-tax impact ....................................... 3,048 31 516 194 3,789
Estimated allocable income tax expense ................... (1,136) (12) (192) (72) (1,412)
- ----------------------------------------------------------------------------------------------------------------------------
Net after-tax impact ..................................... $ 1,912 $ 19 $ 324 $ 122 $ 2,377
============================================================================================================================
During the second quarter of 1998, the Company sold its retail
production franchise and recognized a $1,490 pre-tax ($917 after-tax) gain on
the sale. This gain is included in other income.
NOTE 15--EMPLOYEE BENEFITS:
On July 1, 1993, the Company established a 401(k) Retirement Savings
Plan which is available to all regular, full-time active employees with six
months continuous service. The plan allows employees to contribute up to 15% of
their gross earnings on a before-tax basis annually, subject to the maximum
established by law. Employees become eligible to participate in the plan as of
January 1 or July 1, following the completion of six months continuous service.
The Company contributes to the plan on a matching basis in an amount determined
annually by the Board of Directors. In 1999 and through May 14, 2000, the
Company's match percentage was 100% of the employee's contribution up to the
first 3% of the employee's gross earnings and a 50% match on the second 3% of
the employee's gross earnings and the employee vested in the Company's matching
contribution at a rate of 25% per year. Effective May 15, 2000, the Plan was
amended to (1) establish an additional employer contribution equal to 2% of the
participant's compensation earned after January 1, 2000, (2) delete the
employment on the last day of the Plan year and 1,000 hours of service
requirements for employer contributions, (3) permit the Company to make
quarterly employer contributions, and (4) change the vesting requirements for
employer profit sharing contributions from five year cliff vesting to five year
graded vesting. The Company recorded $1,843, $1,136 and $980 of matching
contributions as compensation expense during 2000, 1999 and 1998, respectively.
46
49
On January 1, 1994, the Company established a defined benefit pension
plan covering substantially all employees. As of May 31, 2000, the Company
amended its defined benefit pension plan to freeze benefits under the plan. The
impact of the curtailment of pension plan benefits and the change of 401(k)
benefits was to reduce pension expense for 2000 by $950.
Effective January 1, 1995, the Company established a non-qualified
unfunded Pension Restoration Plan (Restoration Plan). The purpose of the
Restoration Plan is to provide certain retirement benefits for eligible
employees. Under the Restoration Plan, retirement benefits are based upon years
of service and the employee's level of compensation during the last five years
prior to retirement.
Effective January 1, 1998, the Company established a non-qualified
unfunded Supplemental Executive Retirement Plan (SERP). The purpose of the SERP
is to provide certain retirement benefits for eligible employees. Under the
SERP, retirement benefits are based upon the employee's level of compensation
during the high five years of the last 10 years prior to retirement.
The combined pension expense for all three defined benefit plans
included the following:
For the Year Ended December 31,
---------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Service cost ...................................................... $ 881 $ 1,900 $ 1,417
Interest cost ..................................................... 784 786 563
Expected return on assets ......................................... (313) (204) (97)
Amortization of prior service cost ................................ 249 316 316
Amortization of actuarial loss .................................... (18) 79 17
Curtailment credit ................................................ (950) (220) --
- ------------------------------------------------------------------------------------------------------------------------------
$ 633 $ 2,657 $ 2,216
==============================================================================================================================
Change in the combined projected benefit obligation under the plans at
December 31, 2000 and 1999 is as follows:
December 31,
--------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Net benefit obligation at beginning of year ............................... $ 10,220 $ 8,826
Service cost .............................................................. 881 1,900
Interest cost ............................................................. 784 786
Actuarial (gain) loss ..................................................... (32) (994)
Curtailments .............................................................. (2,043) (258)
Benefits paid ............................................................. (156) (40)
- ------------------------------------------------------------------------------------------------------------------------
Net benefit obligation at end of year ..................................... $ 9,654 $ 10,220
========================================================================================================================
The combined change in the plans' assets for the years ended December
31, 2000 and 1999 were:
December 31,
--------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year ............................ $ 3,443 $ 1,862
Actual return on plan assets .............................................. (324) 272
Employer contributions .................................................... 703 1,349
Benefits paid ............................................................. (156) (40)
- ------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year .................................. $ 3,666 $ 3,443
- ------------------------------------------------------------------------------------------------------------------------
Funded status at end of year .............................................. $ (5,997) $ (6,777)
Unrecognized net actuarial (gain) loss .................................... 441 (190)
Unrecognized prior service cost ........................................... 2,110 3,451
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized at end of year ...................................... $ (3,446) $ (3,516)
========================================================================================================================
Amounts recognized in the statement of financial position for the
combined plans consist of:
December 31,
--------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Prepaid benefit cost ...................................................... $ 188 $ --
Accrued benefit cost ...................................................... (3,634) (5,630)
Additional minimum liability .............................................. (1,791) --
Intangible asset .......................................................... 1,791 2,114
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized at end of year ...................................... $ (3,446) $ (3,516)
========================================================================================================================
Weighted average assumptions used in accounting for the plans as of fiscal
year-end were:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Discount rate ..................................................... 7.75% 8.00% 6.75%
Expected return on plan assets .................................... 8.00% 8.00% 8.00%
Rates of compensation increase--SERP .............................. 3.30% 3.30% 3.30%
Rates of compensation increase all other plans .................... 4.00% 4.00% 4.00%
==============================================================================================================================
Resource Bancshares Mortgage Group, Inc. 47
50
On January 1, 1995, the Company established the Stock Investment Plan
(the Stock Plan) covering substantially all employees. Under the Stock Plan,
eligible employees may make contributions, through payroll deductions, to
acquire common stock of the Company. The purchase price of such stock will be
equal to 85% of the fair market value on the purchase date with the Company
subsidizing the remaining 15% of the cost. The Company is responsible for
custodian charges (including brokerage expenses incurred in connection with the
purchase of shares) and all costs of maintaining and executing transfers. This
plan will continue until 725,529 shares of stock have been purchased by
employees. The Company has subsidized approximately $46, $113 and $121 relating
to the noncompensatory Stock Plan discount for 2000, 1999 and 1998,
respectively. Through December 31, 2000, there were 370,979 shares issued under
the Stock Plan.
On January 1, 1995, the Company established the Employee Stock
Ownership Plan (ESOP) covering substantially all employees. Contributions to the
ESOP, which are at the discretion of and determined annually by the Board of
Directors, are not to exceed the maximum amount deductible under the applicable
sections of the Internal Revenue Code and are funded annually. However, such
contributions must be adequate to meet the required principal and interest
payments on the underlying loans discussed below.
During 2000 and 1999, the ESOP borrowed $-0- and $3,000, respectively,
from the Company to purchase shares of the Company's common stock and pledged
those shares to secure loans outstanding. The principal amount of the 1999 loan
is repayable in annual installments of $500 commencing in March 2000. In
accordance with other loan agreements, the ESOP repaid $1,603 and $1,400 to the
Company in 2000 and 1999, respectively. An additional $236 and $221 was paid on
these loans in 2000 and 1999, respectively, from the cash dividends paid on the
unallocated ESOP shares. For the years ended December 31, 2000, 1999 and 1998,
180,432, 135,355 and 94,593 shares, respectively, were released. Compensation
expense related to the ESOP was $1,083, $1,244 and $1,623 for the years ended
December 31, 2000, 1999 and 1998, respectively. At December 31, 2000, the fair
market value of the unallocated shares of stock held under the ESOP Plan was
$2,516.
NOTE 16 -- NET INCOME (LOSS) PER COMMON SHARE:
The following is a reconciliation of basic earnings per share to
diluted earnings per share as calculated under SFAS No. 128 for the years ended
December 31, 2000, 1999 and 1998, respectively:
CONTINUING OPERATIONS:
For the Year Ended December 31,
-----------------------------------------------
($ in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) from continuing operations ......................... $ (40,190) $ 5,504 $ 47,519
- --------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding .................................... 17,727,445 20,643,166 23,122,835
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share--basic ..................................... $ (2.27) $ 0.27 $ 2.06
- --------------------------------------------------------------------------------------------------------------------------
Dilutive stock options ............................................... -- 156,336 378,273
Average common and common equivalent shares outstanding .............. 17,727,445 20,799,502 23,501,108
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share--diluted ................................... $ (2.27) $ 0.26 $ 2.02
==========================================================================================================================
DISCONTINUED OPERATIONS:
For the Year Ended December 31,
-----------------------------------------------
($ in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) from discontinued operations ....................... $ (2,108) $ 418 $ 1,152
- --------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding .................................... 17,727,445 20,643,166 23,122,835
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share--basic ..................................... $ (0.12) $ 0.02 $ 0.04
- --------------------------------------------------------------------------------------------------------------------------
Dilutive stock options ............................................... -- 156,336 378,273
Average common and common equivalent shares outstanding .............. 17,727,445 20,799,502 23,501,108
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share--diluted ................................... $ (0.12) $ 0.02 $ 0.05
==========================================================================================================================
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of Laureate to BB&T Corporation of
Winston-Salem, N.C. Accordingly, the Company recorded a $1.4 million after-tax
charge during the period primarily related to the write-off of intangible assets
of Laureate.
COMBINED:
For the Year Ended December 31,
-----------------------------------------------
($ in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) from operations .................................... $ (42,298) $ 5,922 $ 48,671
- --------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding .................................... 17,727,445 20,643,166 23,122,835
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share--basic ..................................... $ (2.39) $ 0.29 $ 2.10
- --------------------------------------------------------------------------------------------------------------------------
Dilutive stock options ............................................... -- 156,336 378,273
Average common and common equivalent shares outstanding .............. 17,727,445 20,799,502 23,501,108
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share--diluted ................................... $ (2.39) $ 0.28 $ 2.07
==========================================================================================================================
48
51
NOTE 17--FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
The Company is a party to various derivative financial instruments and
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers and to reduce its own
exposure to risks related to fluctuating interest rates. These financial
instruments include mortgage purchase commitments, mandatory delivery
commitments, put and call option contracts, swaps, futures contracts and
interest rate floor contracts. The Company uses these financial instruments
exclusively for purposes of managing its resale pricing and interest rate risks.
The Company's mortgage loans held-for-sale are acquired or originated
through a network of correspondents and wholesale brokers. In connection
therewith, the Company routinely enters into optional mortgage purchase
commitments to acquire or originate specific in-process mortgage loans when and
if closed by the counterparty, at the option of the mortgagor. Mortgage purchase
commitments obligate the Company to acquire mortgage loans on a delayed delivery
basis, which may extend for a period of 60 days, at a price which is fixed as of
the date of the contract.
Accordingly, the Company is subject to the risk that the market value
of its on-balance sheet mortgage loans held-for-sale and the mortgage loans it
is obligated to purchase under its mortgage purchase commitments may change
significantly prior to resale. In order to limit its resale price exposure for
agency-eligible mortgage loans, the Company enters into mandatory delivery
commitments which are contracts for delayed delivery of mortgage loans to third
parties. Mandatory delivery commitments obligate the Company to sell
agency-eligible mortgage loans on a delayed delivery basis at a price which is
fixed as of the date of the contract. Since mandatory delivery commitments
enable the Company to fix its resale prices for both on-balance sheet mortgage
loans held-for-sale (for which a fixed price has already been paid) and for
anticipated loan closures subject to mortgage purchase commitments (which fix
the delayed purchase price for the resultant mortgage loans), these instruments
can effectively limit the Company's resale price exposures.
The percentages of anticipated agency-eligible loan closures under
mortgage purchase commitments that are covered by mandatory delivery commitments
not allocated to on-balance sheet mortgages held-for-sale are monitored
continuously. The Company's resultant expected exposure to resale pricing risk
is continuously adjusted to consider changing expectations regarding anticipated
loan closure percentages and other market conditions. Generally, the Company
buys put and call option contracts on U.S. Government Securities to effect
modest adjustments of its overall exposure to resale pricing changes.
Purchased call option contracts enable the Company, at its option, to
acquire an underlying financial security from a third party at a specified price
for a fixed period of time. Purchased put option contracts enable the Company,
at its option, to sell an underlying financial security to a third-party at a
specified price and for a fixed period of time. Since these financial
instruments essentially enable the Company to fix the purchase or sale price on
financial instruments whose changes in value have historically correlated
closely with changes in value of mortgage loans, these instruments can be used
effectively to adjust the Company's overall exposure to resale pricing risks. In
addition, these instruments have the advantages of being available in smaller
denominations than are typical of the Company's mandatory delivery commitments
and of being traded in a highly liquid and efficient secondary market.
Periodically, the Company, in addition to mandatory delivery
commitments, also buys or sells futures contracts as part of its hedging
activities for rate locked and closed subprime mortgage loans. Generally,
futures positions are outstanding for short periods of time and are used to
hedge against price movements of another financial instrument while execution of
that instrument is bid among brokers. Futures contracts also may be similarly
used to hedge against price movements when another financial instrument is
illiquid due to temporary market conditions. Because the changes in value of
futures contracts and the hedged items can be based on different indices, there
is a risk that the changes in value may not correlate. There were no open
futures positions as of December 31, 2000 or 1999.
As discussed in Note 13, the Company typically sells its produced
residential mortgage servicing rights between 90 and 180 days of origination or
purchase of the related loan pursuant to committed prices under forward sales
contracts. These forward sales contracts commit the Company to deliver mortgage
servicing rights backed by contractual levels of unpaid principal balances.
Outstanding commitments to deliver totaled $797,000 and $5,480,000 at December
31, 2000 and 1999, respectively.
The Company also maintains a portfolio of residential mortgage
servicing rights which, though available-for-sale, are not currently scheduled
for sale pursuant to the Company's forward sales contracts. In connection
therewith, the Company is subject to the risk that the economic value of such
mortgage servicing rights may decline in the event of a significant decline in
long-term interest rates. A significant decline in interest rates generally
causes an increase in actual and expected mortgage loan prepayments (for example
increased refinancing) which in turn tends to reduce the future expected cash
flows (and economic value) of associated mortgage servicing rights. Interest
rate floor contracts provide for the Company to receive an interest rate
differential on a notional amount of outstanding principal to the extent that
interest rates decline below a specified rate which is fixed as of the date of
the contract. Accordingly, the value of an interest rate floor contract
increases while the value of a mortgage servicing right decreases in a declining
interest rate environment. As such, interest rate floor contracts can
potentially effectively mitigate the Company's exposure to declines in the
economic value of its servicing rights in a declining interest rate environment.
Additionally, the Company utilizes Callable Pass Through Certificates (CPC) to
diversify basis risk and improve hedge efficacy. The Company purchases a
long-term call option on a large pool of mortgage-backed securities. When the
price of the mortgage-backed securities rises, the value of the CPC will rise.
This hedge offers performance based upon the price and prepayment behavior of
mortgage-backed securities, instead of either CMT or CMS basis.
The Company uses an amortizing interest rate swap agreement to fix the
interest rate on its floating rate credit facility, which finances its fixed
rate leasing portfolio. Under this agreement, the Company makes or receives
payments based on the difference between a fixed rate paid by the Company and a
floating rate paid by the counterparty, applied to a notional amount of
outstanding principal. The interest rate swap agreement is valued based on the
difference between the fixed rate and the floating rate at year end.
Resources Bancshares Mortgage Group, Inc. 49
52
The above described financial instruments involve, to varying degrees,
elements of credit and interest rate risk which are in excess of the amounts
recognized in the balance sheet. The Company believes that these instruments do
not represent a significant exposure to credit loss since the amounts subject to
credit risks are controlled through collateral requirements, credit approvals,
limits and monitoring procedures. The Company does not have a significant
exposure to any individual customer, correspondent or counterparty in connection
with these financial instruments. Except for mortgage purchase commitments, the
Company does not require collateral or other security to support the financial
instruments with credit risk whose contract or notional amounts are summarized
as follows:
Contract Amount at December 31,
-------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
Mortgage loan purchase commitments ..................................................... $ 742,469 $ 363,402
Financial instruments whose contract amounts exceed the amount of credit risk:
Mandatory delivery commitments (allocated against mortgages held-for-sale) ............. 395,011 484,752
Mandatory delivery commitments (allocated against mortgage purchase commitments) ....... 502,089 273,748
Purchased option contracts ............................................................. 30,000 160,000
Forward servicing sales contracts ...................................................... 797,000 5,480,000
Interest rate floor contracts .......................................................... 1,185,000 1,700,000
Interest rate swaps .................................................................... 158,501 125,733
Callable Pass-Through Certificates ..................................................... 343,022 380,000
=============================================================================================================================
Mortgage loan purchase commitments expose the Company to credit loss in
the event the purchase commitments are funded as mortgage loans and the
Company's counterparties default prior to resale. The maximum credit loss to
which the Company is exposed is the notional amount of the commitments. However,
the Company does not believe the commitments represent a significant exposure to
credit loss because the related loans are secured by 1-4 family homes, most
loans are insured or guaranteed through private mortgage insurance or government
approval programs and subjected to underwriting standards specified by
government agencies or private mortgage insurance companies. The estimated
credit exposure on financial instruments whose contract amounts exceed the
amount of credit risk is the increase in market value of the instrument.
The Company generally does not charge a premium to its correspondents
in connection with issuance of its mortgage purchase commitments nor is a
premium charged to the Company in connection with its acquisition of mandatory
delivery or forward servicing sales contracts.
Premiums paid for purchased put and call option and futures contracts
are initially deferred and included in other assets in the balance sheet. Other
assets included $210 and $1,803 at December 31, 2000 and 1999, respectively, of
such deferred premiums. Ultimately, such deferred premiums and related realized
gains or losses from these activities are recorded as a component of gains and
losses on sales of mortgage loans at the earlier of the expiration of the
underlying contract or when exercise of the contract is deemed remote.
The Company uses CMT floors and CMS floors and Callable Pass-Through
Certificates to protect itself against interest rate and prepayment risk on its
available-for-sale portfolio. The Company monitors the changes in the fair value
of these instruments and the hedged mortgage servicing rights on an ongoing
basis. Premiums paid for these instruments are initially deferred and included
in other assets in the balance sheet and are amortized over the term of the
underlying contract. Amounts received as interest rate differentials under floor
contracts as well as changes in the fair value of all of these instruments are
recorded as a reduction or increase of basis in mortgage servicing rights to the
extent that such changes generally correlate with changes in fair value of
mortgage servicing rights. Included in the mortgage servicing right basis are
deferred gains (losses) of $5,659 and $(5,050) at December 31, 2000 and 1999,
respectively. Other assets included $9,970 and $11,318 at December 31, 2000 and
1999, respectively, of unamortized premiums. For the years ended December 31,
2000 and 1999, respectively, $3,336 and $3,608 of deferred premiums paid for
interest rate floor contracts were amortized to expense.
The current variable rate index for 10 year CMT and 10 year CMS were
5.11% and 6.168%, respectively, at December 31, 2000. Other terms of the
interest rate floor contracts and Callable Pass-Through Certificates outstanding
at December 31, 2000, are summarized as follows:
Contract Type(a) Contract Date Expiration Date Notional Amount Strike
- -------------------------------------------------------------------------------------------------------------------
CMT .......................... August 20, 1996 August 20, 2001 $ 60,000 5.570%
CMT .......................... July 9, 1998 July 9, 2005 55,000 4.910%
CMT .......................... July 9, 1998 July 9, 2001 125,000 5.160%
CMT .......................... September 15, 1998 September 15, 2003 75,000 4.500%
CMT .......................... October 13, 1998 October 13, 2003 150,000 4.500%
CMS .......................... November 10, 1998 November 10, 2003 120,000 5.410%
CMT .......................... January 19, 1999 January 19, 2002 200,000 4.200%
CMT .......................... March 15, 1999 March 15, 2002 200,000 4.950%
CPC .......................... May 15, 1999 May 15, 2006 164,443 N/A
CPC .......................... September 1, 1999 September 30, 2006 178,579 N/A
CMS .......................... March 15, 2000 March 15, 2005 200,000 6.690%
----------
$1,528,022
==========
(a) Contract types: CMT--Constant Maturity Treasury floor, CMS--Constant
Maturity Swap floor, and CPC--Callable Pass-Through Certificate.
50
53
During 2000, the Company purchased one CMS interest-rate floor contract
for $1,988 with the contract and expiration dates as listed above. The notional
amount of this interest rate floor totaled $200,000. Five interest rate floors
with notional amounts totaling $715,000 expired during 2000.
NOTE 18--SEGMENT INCOME STATEMENTS:
In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", the Company adopted segment reporting in
1998. The following tables present a summary of the revenues and expenses for
each of the Company's operating divisions for the years ended December 31, 2000,
1999 and 1998, respectively. Total assets of the operating divisions at December
31, 2000 are also presented. Revenues and expenses for each of the Company's
operating divisions for the years ended December 31, 1999 and 1998 have been
restated to conform to the 2000 presentation.
For purposes of segment reporting the Company operates through five
operating divisions. The agency-eligible production division purchases and sells
agency-eligible residential mortgage loans. The agency-eligible servicing
division services agency-eligible residential mortgage loans and also purchases
and sells servicing rights associated with these agency-eligible loans. Mortgage
servicing includes collecting and remitting mortgage 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
subprime division purchases and sells subprime residential mortgage loans. The
leasing division originates and services small-ticket commercial equipment
leases. The agency-eligible reinsurance division operates as a licensed,
property and casualty monoline captive insurance company assuming reinsurance
for PMI policies on agency-eligible mortgage loans initially purchased or
produced by the Company.
FOR THE YEAR ENDED DECEMBER 31, 2000(1)(2)
- --------------------------------------------------------------------------------------------------------------------------------
Agency-Eligible
------------------------------------------------
(Unaudited)($ in thousands) Production Servicing Reinsurance Subprime
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income ................................... $ 1,867 $ (5,326) $ (92) $ 11,439
Net gain on sale of mortgage loans .................... 24,194 -- -- 13,149
Gain on sale of mortgage servicing rights ............. -- 2,222 -- --
Servicing fees ........................................ -- 34,738 -- --
Mark-to-market on residual interests in
subprime securitizations ............................ -- -- -- (39,338)
Other income .......................................... 563 517 3,142 579
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues ...................................... 26,624 32,151 3,050 (14,171)
- ---------------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits .......................... 28,333 2,904 -- 11,682
Occupancy expense ..................................... 11,332 191 -- 2,670
Amortization and provision for impairment
of mortgage servicing rights ........................ -- 24,560 -- --
Provision expense ..................................... 2,102 -- -- 2,453
General and administrative expenses ................... 10,487 4,408 316 6,257
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses ...................................... 52,254 32,063 316 23,062
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes ................................. (25,630) 88 2,734 (37,233)
Income tax benefit (expense) .......................... 9,875 (34) (960) 13,616
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations .............. (15,755) 54 1,774 (23,617)
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $261) ........................... -- -- -- --
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit
of $354) .......................................... -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ..................................... $ (15,755) $ 54 $ 1,774 (23,617)
=================================================================================================================================
Total Assets .......................................... $ 495,701 $ 194,344 $ 8,046 $ 167,604
=================================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 2000(1)(2)
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial Total Other/
(Unaudited) ($in thousands) Mortgage Leasing Segments Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income ................................... $ -- $ 9,176 $ 17,064 $(1,188) $ 15,876
Net gain on sale of mortgage loans .................... -- -- 37,343 -- 37,343
Gain on sale of mortgage servicing rights ............. -- -- 2,222 -- 2,222
Servicing fees ........................................ -- 501 35,239 (258) 34,981
Mark-to-market on residual interests in
subprime securitizations ............................ -- -- (39,338) -- (39,338)
Other income .......................................... -- 1,229 6,030 120 6,150
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues ...................................... -- 10,906 58,560 (1,326) 57,234
- ----------------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits .......................... -- 2,901 45,820 4,460 50,280
Occupancy expense ..................................... -- 497 14,690 (683) 14,007
Amortization and provision for impairment
of mortgage servicing rights ........................ -- -- 24,560 -- 24,560
Provision expense ..................................... -- 3,133 7,688 -- 7,688
General and administrative expenses ................... -- 1,370 22,838 2,151 24,989
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses ...................................... -- 7,901 115,596 5,928 121,524
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes ................................. -- 3,005 (57,036) (7,254) (64,290)
Income tax benefit (expense) .......................... -- (1,192) 21,305 2,795 24,100
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations .............. -- 1,813 (35,731) (4,459) (40,190)
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $261) ........................... (1,448) -- (1,448) -- (1,448)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit
of $354) .......................................... (660) -- (660) -- (660)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ..................................... $(2,108) $ 1,813 $ 37,839) $(4,459) $ (42,298)
==================================================================================================================================
Total Assets .......................................... $ -- $ 202,583 $ 1,068,278 $ 1,475 $ 1,069,753
==================================================================================================================================
(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) See discussion of unusual items in Management's Discussion and
Analysis.
Resource Bancshares Mortgage Group, Inc. 51
54
FOR THE YEAR ENDED DECEMBER 31, 1999(1)(2)
- --------------------------------------------------------------------------------------------------------------------------------
Agency-Eligible
------------------------------------------------
(Unaudited)($ in thousands) Production Servicing Reinsurance Subprime
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income ................................... $ 8,240 $ (4,555) $ (12) $ 15,366
Net gain on sale of mortgage loans .................... 64,033 -- -- 20,357
Gain on sale of mortgage servicing rights ............. -- 7,262 -- --
Servicing fees ........................................ -- 41,791 -- --
Mark-to-market on residual interests in
subprime securitizations ............................ -- -- -- (7,843)
Other income .......................................... 340 582 1,661 3,471
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues ...................................... 72,613 45,080 1,649 31,351
- ----------------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits .......................... 38,751 3,399 -- 15,840
Occupancy expense ..................................... 10,079 419 -- 2,567
Amortization and provision for impairment
of mortgage servicing rights ........................ -- 29,580 -- --
Provision expense ..................................... 5,722 -- 85 2,893
General and administrative expenses ................... 17,248 5,984 136 7,460
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses ...................................... 71,800 39,382 221 28,760
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes ................................. 813 5,698 1,428 2,591
Income tax benefit (expense) .......................... (207) (1,448) (356) (1,237)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations .............. 606 4,250 1,072 1,354
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $-0-) ............................ -- -- -- --
Operating net income of Laureate Capital
Corp. (less applicable income tax expense
of $405) ......................................... -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) ..................................... $ 606 $ 4,250 $ 1,072 $ 1,354
==================================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1999(1)(2)
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial Total Other/
(Unaudited) ($in thousands) Mortgage Leasing Segments Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income ................................... $ -- $ 7,270 $ 26,309 $ (470) $ 25,839
Net gain on sale of mortgage loans .................... -- -- 84,390 -- 84,390
Gain on sale of mortgage servicing rights ............. -- -- 7,262 -- 7,262
Servicing fees ........................................ -- 620 42,411 (188) 42,223
Mark-to-market on residual interests in
subprime securitizations ............................ -- -- (7,843) -- (7,843)
Other income .......................................... -- 1,395 7,449 175 7,624
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues ...................................... -- 9,285 159,978 (483) 159,495
- ----------------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits .......................... -- 2,654 60,644 3,903 64,547
Occupancy expense ..................................... -- 453 13,518 214 13,732
Amortization and provision for impairment
of mortgage servicing rights ........................ -- -- 29,580 -- 29,580
Provision expense ..................................... -- 1,908 10,608 -- 10,608
General and administrative expenses ................... -- 1,260 32,088 1,129 33,217
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses ...................................... -- 6,275 146,438 5,246 151,684
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes ................................. -- 3,010 13,540 (5,729) 7,811
Income tax benefit (expense) .......................... -- (1,196) (4,444) 2,137 (2,307)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations .............. -- 1,814 9,096 (3,592) 5,504
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $-0-) ............................ -- -- -- -- --
Operating net income of Laureate Capital
Corp. (less applicable income tax expense
of $405) ......................................... 418 -- 418 -- 418
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) ..................................... $ 418 $ 1,814 $ 9,514 $(3,592) $ 5,922
==================================================================================================================================
(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) See discussion of unusual items in Management's Discussion and
Analysis.
FOR THE YEAR ENDED DECEMBER 31, 1998(1)(2)
- ---------------------------------------------------------------------------------------------------------------------------------
Agency-Eligible
------------------------------------------------
(Unaudited)($ in thousands) Production Servicing Reinsurance Subprime
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income ................................... $ 7,422 $ -- $ -- $ 9,565
Net gain on sale of mortgage loans .................... 134,472 -- -- 27,980
Gain on sale of mortgage servicing rights ............. -- 1,753 -- --
Servicing fees ........................................ -- 37,856 -- --
Mark-to-market on residual interests in
subprime securitizations ............................ -- -- -- 435
Other income .......................................... 1,756 455 1,189 297
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues ...................................... 143,650 40,064 1,189 38,277
- ---------------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits .......................... 53,158 3,449 -- 13,485
Occupancy expense ..................................... 7,005 443 -- 1,921
Amortization and provision for impairment
of mortgage servicing rights ........................ -- 27,897 -- --
Provision expense ..................................... 7,453 -- 119 2,330
General and administrative expenses ................... 20,593 6,446 77 2,160
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses ...................................... 88,209 38,235 196 19,896
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes ................................. 55,441 1,829 993 18,381
Income tax benefit (expense) .......................... (20,059) (662) (351) (6,656)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations .............. 35,382 1,167 642 11,725
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $-0-) ............................. -- -- -- --
Operating net income of Laureate Capital
Corp. (less applicable income tax
expense of $952) .................................. -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) ..................................... $ 35,382 $ 1,167 $ 642 $ 11,725
=================================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1998(1)(2)
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial Total Other/
(Unaudited) ($in thousands) Mortgage Leasing Segments Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income ................................... $ -- $ 4,637 $ 21,624 $ (382) $ 21,242
Net gain on sale of mortgage loans .................... -- -- 162,452 -- 162,452
Gain on sale of mortgage servicing rights ............. -- -- 1,753 -- 1,753
Servicing fees ........................................ -- 1,014 38,870 509 39,379
Mark-to-market on residual interests in
subprime securitizations ............................ -- -- 435 -- 435
Other income .......................................... -- 753 4,450 680 5,130
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues ...................................... -- 6,404 229,584 807 230,391
- ----------------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits .......................... -- 2,347 72,439 2,645 75,084
Occupancy expense ..................................... -- 376 9,745 634 10,379
Amortization and provision for impairment
of mortgage servicing rights ........................ -- -- 27,897 -- 27,897
Provision expense ..................................... -- 1,121 11,023 -- 11,023
General and administrative expenses ................... -- 1,463 30,739 770 31,509
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses ...................................... -- 5,307 151,843 4,049 155,892
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes ................................. -- 1,097 77,741 (3,242) 74,499
Income tax benefit (expense) .......................... -- (435) (28,163) 1,183 (26,980)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations .............. -- 662 49,578 (2,059) 47,519
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $-0-) ............................. -- -- -- -- --
Operating net income of Laureate Capital
Corp. (less applicable income tax
expense of $952) .................................. 1,152 -- 1,152 -- 1,152
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) ..................................... $ 1,152 $ 662 $ 50,730 $(2,059) $ 48,671
==================================================================================================================================
(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) See discussion of unusual items in Management's Discussion and
Analysis.
52
55
NOTE 19 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Interest income ............................................. $ 15,294 $ 18,995 $ 18,607 $ 16,573 $ 69,469
Interest expense ............................................ (11,178) (13,834) (14,457) (14,124) (53,593)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income ......................................... 4,116 5,161 4,150 2,449 15,876
Net gain on sale of mortgage loans .......................... 8,647 9,349 8,460 10,887 37,343
Gain on sale of mortgage servicing rights ................... 808 731 673 10 2,222
Servicing fees .............................................. 9,315 8,565 8,471 8,630 34,981
Mark-to-market on residual interests in subprime
securitizations ........................................... (7,675) (1,771) (29,892) -- (39,338)
Other income ................................................ 2,056 2,318 454 1,322 6,150
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues ............................................ 17,267 24,353 (7,684) 23,298 57,234
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Salary and employee benefits ................................ 14,753 10,117 13,432 11,978 50,280
Occupancy expense ........................................... 3,320 3,516 3,633 3,538 14,007
Amortization and provision for impairment of mortgage
servicing rights .......................................... 6,277 5,932 6,069 6,282 24,560
Provision expense ........................................... 2,001 1,682 1,978 2,027 7,688
General and administrative expenses ......................... 5,449 6,645 7,358 5,537 24,989
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses ............................................ 31,800 27,892 32,470 29,362 121,524
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes .............................................. (14,533) (3,539) (40,154) (6,064) (64,290)
Income tax benefit .......................................... 5,331 1,199 14,859 2,711 24,100
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations .................... (9,202) (2,340) (25,295) (3,353) (40,190)
Discontinued operations:
Loss on sale of operating assets of Laureate
Capital Corp. (less applicable income tax expense
(benefit) of $-0-, $200, $235, ($174) and $261 for
the first, second, third, fourth quarters and the
twelve months, respectively) ............................ -- (2,000) 393 159 (1,448)
Operating profits (losses) of Laureate Capital Corp. ......
(less applicable income tax expense (benefit) of
($465), $111, $-0-, $-0- and ($354) for the first,
second, third, fourth quarters and the twelve months,
respectively) ........................................... (765) 105 -- -- (660)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ........................................... $ (9,967) $ (4,235) $ (24,902) $ (3,194) $ (42,298)
===================================================================================================================================
Weighted average common shares outstanding--Basic ........... 18,657,683 18,017,764 17,435,701 16,811,898 17,727,445
===================================================================================================================================
Net income (loss) per common share from continuing
operations--Basic ......................................... $ (0.49) $ (0.13) $ (1.45) $ (0.20) $ (2.27)
===================================================================================================================================
Net income (loss) per common share from discontinued
operations--Basic ......................................... $ (0.04) $ (0.11) $ 0.02 $ 0.01 $ (0.12)
===================================================================================================================================
Weighted average common shares outstanding--Diluted ......... 18,657,683 18,017,764 17,435,701 16,811,898 17,727,445
===================================================================================================================================
Net income (loss) per common share from continuing
operations--Diluted ....................................... $ (0.49) $ (0.13) $ (1.45) $ (0.20) $ (2.27)
===================================================================================================================================
Net income (loss) per common share from discontinued
operations--Diluted ....................................... $ (0.04) $ (0.11) $ 0.02 $ 0.01 $ (0.12)
===================================================================================================================================
* See discussion of unusual items in Management's Discussion & Analysis of
Financial Condition and Results of Operations.
Resource Bancshares Mortgage Group, Inc. 53
56
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Interest income ............................................. $ 25,574 $ 21,959 $ 19,314 $ 16,302 $ 83,149
Interest expense ............................................ (18,194) (14,656) (12,924) (11,536) (57,310)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income ......................................... 7,380 7,303 6,390 4,766 25,839
Net gain on sale of mortgage loans .......................... 36,050 24,402 13,490 10,448 84,390
Gain on sale of mortgage servicing rights ................... 2,998 1,825 1,494 945 7,262
Servicing fees .............................................. 12,023 10,839 9,631 9,730 42,223
Mark-to-market on residual interests in subprime
securitizations ........................................... (1,349) (2,618) (929) (2,947) (7,843)
Other income ................................................ 1,467 2,286 1,399 2,472 7,624
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues ............................................ 58,569 44,037 31,475 25,414 159,495
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Salary and employee benefits ................................ 18,759 15,204 17,077 13,507 64,547
Occupancy expense ........................................... 2,910 3,187 3,773 3,862 13,732
Amortization and provision for impairment of mortgage
servicing rights .......................................... 8,433 8,887 5,665 6,595 29,580
Provision expense ........................................... 3,055 2,341 2,535 2,677 10,608
General and administrative expenses ......................... 7,478 9,376 6,507 9,856 33,217
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses ............................................ 40,635 38,995 35,557 36,497 151,684
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes ............................................. 17,934 5,042 (4,082) (11,083) 7,811
Income tax benefit (expense) ................................ (6,416) (1,853) 1,873 4,089 (2,307)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations .................... 11,518 3,189 (2,209) (6,994) 5,504
Discontinued operations:
Operating profits (losses) of Laureate
Capital Corp. (less applicable income tax expense
(benefit) of ($219), $128, $389, $107 and $405 for
the first, second, third, fourth quarters and the
twelve months, respectively) ............................ (357) 147 534 94 418
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ........................................... $ 11,161 $ 3,336 $ (1,675) $ (6,900) $ 5,922
===================================================================================================================================
Weighted average common shares outstanding--Basic ........... 22,224,610 20,958,060 20,310,289 19,113,328 20,643,166
===================================================================================================================================
Net income (loss) per common share from continuing
operations--Basic ......................................... $ 0.52 $ 0.15 $ (0.11) $ (0.37) $ 0.27
===================================================================================================================================
Net income (loss) per common share from discontinued
operations--Basic ......................................... $ (0.02) $ 0.01 $ 0.03 $ 0.01 $ 0.02
===================================================================================================================================
Weighted average common shares
outstanding--Diluted ...................................... 22,477,224 21,138,487 20,310,289 19,113,328 20,799,502
===================================================================================================================================
Net income (loss) per common share from continuing
operations--Diluted ....................................... $ 0.51 $ 0.15 $ (0.11) $ (0.37) $ 0.26
===================================================================================================================================
Net income (loss) per common share from discontinued
operations--Diluted ....................................... $ (0.02) $ 0.01 $ 0.03 $ 0.00 $ 0.02
===================================================================================================================================
* See discussion of unusual items in Management's Discussion & Analysis of
Financial Condition and Results of Operations.
NOTE 20 -- FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 2000 and 1999.
2000 1999
---------------------------------------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Cash ........................................................... $ 15,205 $ 15,205 $ 30,478 $ 30,478
Receivables .................................................... 63,098 63,098 40,219 40,219
Lease receivables .............................................. 191,777 195,035 155,559 161,483
Residual interests in subprime securitizations ................. -- -- 54,382 54,382
Mortgage loans held-for-sale and mortgage-backed securities .... 541,574 548,075 480,504 481,894
Liabilities
Short-term borrowings .......................................... 811,750 811,750 699,803 699,803
Long-term borrowings ........................................... 6,145 6,361 6,259 6,190
===========================================================================================================================
54
57
2000 1999
--------------------------------------------------------------------------------
NOTIONAL CARRYING ESTIMATED Notional Carrying Estimated
AMOUNT VALUE FAIR VALUE Amount Value Fair Value
- ------------------------------------------------------------------------------------------------------------------------------
Off-balance sheet instruments
Mortgage purchase commitments ........ $ 742,469 $ -- $ 1,366 $ 363,402 $ -- $ (840)
Mandatory delivery commitments
(allocated to mortgage purchase
commitments) ........................... 502,089 -- (6,347) 273,748 -- 2,209
Purchased option contracts ............. 30,000 211 434 160,000 1,803 343
Interest rate floor contracts .......... 1,185,000 5,122 6,377 2,100,000 6,269 6,269
Interest rate swaps .................... 158,501 -- 1,745 125,733 -- 1,358
Callable Pass-Through Certificates ..... 343,022 5,027 9,252 376,100 4,621 4,621
==============================================================================================================================
The following notes summarize the significant methods and assumptions
used in estimating the fair values of financial instruments.
CASH and RECEIVABLES are short-term in nature. Accordingly, they are
valued at their carrying amounts which are a reasonable estimation of fair
value.
LEASE RECEIVABLES are valued by management for each homogenous category
of leases by discounting future expected cash flows. Lease receivables
available-for-sale are valued by management based upon recent sales with
consideration given to differences between those leases and leases sold. The
implicit discount rate applied for purposes of determining the aggregate
discounted lease balance was obtained from an investment banker based on recent
market rates.
MORTGAGE LOANS HELD-FOR-SALE and MORTGAGE-BACKED securities covered by
mandatory delivery commitments allocated thereto are valued based upon
commitment delivery prices. Uncommitted mortgage loans held-for-sale are valued
by reference to quoted market prices for mortgage-backed securities, after
appropriate adjustments thereto. For purposes of developing the estimated fair
value, the portfolio has been segregated by product type, term and interest
rate.
SHORT-TERM BORROWINGS are all tied to short-term variable rate indices.
Accordingly, they are valued at their carrying amounts, which are a reasonable
estimation of fair values.
LONG-TERM BORROWINGS are at a fixed rate of 8.07% and were valued based
upon the net present value of the borrowings using an estimated current rate of
7.35% and a rate of 8.50% for the prior year.
MORTGAGE PURCHASE COMMITMENTS are valued based upon the difference
between quoted mandatory delivery commitment prices (which are used by the
Company to price its mortgage purchase commitments) and the committed prices.
MANDATORY DELIVERY COMMITMENTS are valued based upon the difference
between quoted prices for such commitments and the prices applicable to the
underlying commitment.
PURCHASED OPTION CONTRACTS are valued based upon quoted prices for such
option contracts.
INTEREST RATE FLOOR CONTRACTS are valued based upon an independent
third party valuation.
INTEREST RATE SWAPS are valued based upon the present value of future
cash flows based on the interest rate spread between the fixed rate and floating
rate.
NOTE 21 -- DISCONTINUED OPERATIONS:
During 2000, the Company sold substantially all of the assets of
Laureate Capital Corp. (Laureate), its commercial mortgage banking firm, to BB&T
Corporation. The Company recorded a loss on the sale of $1.4 million net of
taxes of $0.3 million. The loss on sale related primarily to the writeoff of
intangible assets of Laureate.
The accompanying financial statements present the results of operations
of Laureate, previously reported as the commercial mortgage segment, as
discontinued operations. Laureate's revenues through the sale date in 2000 were
$9.1 million. Revenues for 1999 and 1998 were $14.3 million and $13.3 million,
respectively. Operating (losses) profits of Laureate were ($0.7) million, $0.4
million, and $1.2 million for the partial year 2000 and the years 1999 and 1998,
respectively. Net cash (used in) provided by operating activities of
discontinued operations was ($6,979), $3,885 and $2,306 for the years ended
December 31, 2000, 1999 and 1998, respectively. Net cash (used in) provided by
investing activities of discontinued operations was $792, ($292) and ($426) for
the years ended December 31, 2000, 1999 and 1998, respectively. Net cash (used
in) provided by financing activities of discontinued operations was $0, $0 and
($709) for the years ended December 31, 2000, 1999 and 1998, respectively.
Resource Bancshares Mortgage Group, Inc. 55
58
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Resource Bancshares Mortgage Group, Inc.
We have audited the accompanying consolidated balance sheet of Resource
Bancshares Mortgage Group, Inc. and subsidiaries as of December 31, 2000 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of
Resource Bancshares Mortgage Group, Inc. and its subsidiaries for the year ended
December 31, 1999, were audited by other auditors whose report dated February 7,
2000, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 2000 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Resource Bancshares Mortgage Group, Inc. and subsidiaries at
December 31, 2000, and the consolidated results of their operations and their
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
January 31, 2001
Atlanta, Georgia
STOCK DATA
Information pertaining to high and low stock prices for each quarter
during 2000 and 1999 is given in the following chart.
2000 1999
------------------------------------------
Quarter HIGH LOW High Low
- ----------------------------------------------------------------------------------------
First .................................. $ 4.81 $ 3.50 $17.00 $11.81
Second ................................. 5.06 3.00 13.63 9.00
Third .................................. 6.06 3.88 11.00 4.50
Fourth ................................. 7.06 5.56 6.50 4.44
Source: Nasdaq
The Company began paying cash dividends in 1996. The following chart
summarizes cash dividends declared and paid during 1999 and 2000. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for restrictions on the Company's ability to pay cash dividends.)
Record Date Payment Date Cash Dividend
- -------------------------------------------------------------------------------
February 10, 1999 March 10, 1999 $ 0.10
May 20, 1999 June 21, 1999 0.11
August 17, 1999 September 17, 1999 0.11
November 16, 1999 December 14, 1999 0.11
February 16, 2000 March 15, 2000 0.11
May 17, 2000 June 15, 2000 0.11
August 16, 2000 September 15, 2000 0.11
November 22, 2000 December 20, 2000 0.11
As of March 15, 2001, there were approximately 541 record holders of
the Company's common stock.
56
59
SELECTED FINANCIAL HIGHLIGHTS
At or for the Year Ended December 31,
--------------------------------------------------------------------------
($ in thousands, except share information) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 15,876 $ 25,839 $ 21,242 $ 17,644 $ 16,902
Net gain on sale of mortgage loans 37,343 84,390 162,452 103,370 79,178
Gain on sale of mortgage servicing rights 2,222 7,262 1,753 7,955 1,105
Servicing fees 34,981 42,223 39,379 30,869 28,763
Total revenues 57,234 159,495 230,391 161,018 126,617
Salary and employee benefits 50,280 64,547 75,084 62,235 55,578
Total expenses (including taxes) 121,524 151,684 182,872 139,220 106,994
Net income (loss) from continuing operations (40,190) 5,504 47,519 21,798 19,623
Net income (loss) from discontinued operations (2,108) 418 1,152 -- --
Net income (loss) (42,298) 5,922 48,671 -- --
PER COMMON SHARE DATA
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share from
continuing operations--Basic $ (2.27) $ 0.27 $ 2.06 $ 1.07 $ 1.02
Net income (loss) per common share from
discontinued operations--Basic (0.12) 0.02 0.04
Net income (loss) per common share from
continuing operations--Diluted (2.27) 0.26 2.02 1.05 1.00
Net income (loss) per common share from
discontinued operations--Diluted (0.12) 0.02 0.05
Market price per common share at year-end(2) 7.06 4.53 16.56 16.31 13.57
Book value per common share at year-end 8.97 11.08 10.96 9.21 7.77
Cash dividends paid per common share 0.44 0.43 0.29 0.13 0.06
BALANCE SHEET
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage loans held for sale and
mortgage-backed securities $ 541,574 $ 480,504 $ 1,441,458 $ 1,179,188 $ 802,335
Lease receivables 191,777 155,559 102,029 51,494 --
Mortgage servicing rights, net 160,766 177,563 191,022 127,326 109,815
Residual interests in subprime securitizations -- 54,382 45,782 19,684 --
Total assets 1,069,753 1,027,182 1,969,635 1,556,929 1,028,394
Total long-term borrowings 6,145 6,259 6,364 6,461 --
Total liabilities 917,984 814,710 1,717,477 1,341,790 871,093
Stockholders' equity 151,769 212,472 252,158 215,139 157,301
STATISTICS
- ----------------------------------------------------------------------------------------------------------------------------
Total mortgage loan and lease production $ 6,403,980 $8,940,991 $15,640,342 $10,777,294 $9,995,725
Total agency-eligible servicing portfolio
(including subservicing) 8,672,296 9,078,226 13,595,736 10,195,354 8,658,742
Managed lease servicing portfolio(3) 192,641 166,572 136,521 123,509 --
Return on average assets (4.01)% 0.47% 2.73% 1.78% 1.91%
Return on average equity (22.86)% 2.52% 21.01% 12.82% 14.43%
============================================================================================================================
(1) See discussion of unusual items in Management's Discussion and
Analysis.
(2) Source of market price is Nasdaq.
(3) Managed lease servicing portfolio consists of $188,912, $152,300,
$98,956 and $49,104 of leases owned by the Company and $3,729, $14,272,
$37,565 and $74,405 of leases serviced for investors as of December 31,
2000, 1999, 1998 and 1997, respectively.
CONTENTS
Selected Financial Highlights IFC To Our Stockholders, Customers and Colleagues
1 Management's Discussion and Analysis of Financial Condition and Results of
Operations 7 Consolidated Balance Sheet 30 Consolidated Statement of Income 31
Consolidated Statement of Changes in Stockholders' Equity 32 Consolidated
Statement of Cash Flows 33 Notes to Consolidated Financial Statements 34
Report of Independent Accountants 54 Stock Data 54 Corporate Information IBC
60
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
[MAP]
7909 Parklane Road (Zip 29223) - Post Office Box 7486
Columbia, South Carolina 29202-7486