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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission File Number 000-21786
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 57-0962375
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7909 Parklane Road, Columbia, SC 29223
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803)741-3000
----------------------------
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (ii) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of common stock of the registrant outstanding as of July
31, 2001 was 16,583,957.
Page 1
Exhibit Index on Pages A to I
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Form 10-Q for the three and six months ended June 30, 2001
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements - (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of 18
Financial Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 75
PART II. OTHER INFORMATION 75
ITEM 4. Submission of Matters to a Vote of Security Holders 75
ITEM 6. Exhibits and Reports on Form 8-K 76
SIGNATURES 77
EXHIBIT INDEX A-I
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
June 30 December 31,
2001 2000
----------- ------------
(Unaudited)
ASSETS
Cash $ 20,011 $ 15,205
Receivables 35,728 63,098
Mortgage loans held-for-sale 648,980 541,574
Lease receivables 197,465 191,777
Servicing rights, net 182,583 160,766
Premises and equipment, net 28,473 30,771
Accrued interest receivable 3,011 2,645
Goodwill and other intangibles 11,504 11,865
Other assets 43,798 52,052
----------- -----------
Total assets $ 1,171,553 $ 1,069,753
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 888,553 $ 811,750
Long-term borrowings 6,085 6,145
Accrued expenses 10,484 9,045
Other liabilities 114,176 91,044
----------- -----------
Total liabilities 1,019,298 917,984
=========== ===========
Preferred stock - par value $0.01 - 5,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock - par value $0.01 - 50,000,000 shares authorized;
31,637,331 shares issued and outstanding at June 30, 2001
and December 31, 2000 316 316
Additional paid-in capital 297,891 297,996
Retained earnings 11,274 6,291
Common stock held by subsidiary at cost - 7,767,099 shares at
June 30, 2001 and December 31, 2000 (98,953) (98,953)
Treasury stock - 7,301,985 and 6,949,711 shares at June 30, 2001
and December 31, 2000, respectively (52,787) (50,050)
Unearned shares of employee stock ownership plan - 356,212 and 310,320
unallocated shares at June 30, 2001 and December 31, 2000, respectively (4,313) (3,800)
Unearned variable option expense at June 30, 2001 and
December 31, 2000, respectively (9) (31)
Other comprehensive loss (1,164) --
----------- -----------
Total stockholders' equity 152,255 151,769
----------- -----------
Total liabilities and stockholders' equity $ 1,171,553 $ 1,069,753
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
For the Six Months Ended For the Quarter Ended
June 30 June 30
--------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
REVENUES
Interest income $ 39,532 $ 34,289 $ 19,931 $ 18,995
Interest expense (28,324) (25,012) (13,332) (13,834)
----------- ----------- ----------- -----------
Net interest income 11,208 9,277 6,599 5,161
Net gain on sale of mortgage loans 50,564 17,996 32,708 9,349
(Loss) Gain on sale of mortgage servicing rights (2,725) 1,539 (360) 731
Servicing fees 17,231 17,880 9,016 8,565
Mark-to-market on residual interests in subprime securitizations -- (9,446) -- (1,771)
Other income (expense) 942 4,374 (758) 2,318
----------- ----------- ----------- -----------
Total revenues 77,220 41,620 47,205 24,353
----------- ----------- ----------- -----------
EXPENSES
Salary and employee benefits 25,611 24,870 14,786 10,117
Occupancy expense 8,090 6,836 4,282 3,516
Amortization and provision for impairment
of mortgage servicing rights 10,543 12,209 5,327 5,932
Provision expense 6,255 3,683 3,715 1,682
General and administrative expenses 12,788 12,094 6,756 6,645
----------- ----------- ----------- -----------
Total expenses 63,287 59,692 34,866 27,892
----------- ----------- ----------- -----------
Income (loss) from continuing operations before income taxes 13,933 (18,072) 12,339 (3,539)
Income tax (expense) benefit (5,115) 6,530 (4,589) 1,199
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before transition adjustment 8,818 (11,542) 7,750 (2,340)
Cumulative effect of change in accounting principles-
SFAS No. 133, net of tax (149) -- -- --
----------- ----------- ----------- -----------
Income (loss) from continuing operations 8,669 (11,542) 7,750 (2,340)
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income tax expense of $200) -- (2,000) -- (2,000)
Operating profits (losses) of Laureate Capital Corp.
for the six months and quarter ended June 30, 2000 less
applicable income tax (benefit) expense of ($354)
and $111, respectively. -- (660) -- 105
----------- ----------- ----------- -----------
Net income (loss) $ 8,669 $ (14,202) $ 7,750 $ (4,235)
=========== =========== =========== ===========
Weighted average common shares outstanding -- Basic 16,416,477 18,337,723 16,289,254 18,017,764
=========== =========== =========== ===========
Net income (loss) per common share from
continuing operations -- Basic $ 0.53 $ (0.63) $ 0.48 $ (0.13)
=========================== ============================
Net income (loss) per common share from
discontinued operations -- Basic $ -- $ (0.15) $ -- $ (0.11)
=========== =========== =========== ===========
Weighted average common shares outstanding -- Diluted 16,615,330 18,337,723 16,482,219 18,017,764
=========== =========== =========== ===========
Net income (loss) per common share from
continuing operations -- Diluted $ 0.52 $ (0.63) $ 0.47 $ (0.13)
=========== =========== =========== ===========
Net income (loss) per common share
from discontinued operations -- Diluted $ -- $ (0.15) $ -- $ (0.11)
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands, except share information)
(Unaudited)
Unearned Other
Common Shares of Unearned Compre- Total
Common Stock Additional Stock Employee Variable hensive Stock-
Six Months Ended ------------------ Paid-in Retained Held by Treasury Stock Option Income holders'
June 30, 2000 Shares Amount Capital Earnings Subsidiary Stock Plan Expense (loss) Equity
- -------------------------------- ---------- ------ ---------- -------- ---------- --------- --------- -------- ------- -------
Balance, January 1, 2000 31,637,331 $316 $300,909 $56,506 $(98,953) $(41,148) $(5,158) $ -- $ -- 212,472
Issuance of restricted stock (960) 1,750 790
Cash dividends (4,046) (4,046)
Treasury stock purchases (6,212) (6,212)
Exercise of stock options 0
Shares committed to be released
under Employee Stock Ownership
Plan 162 (89) 73
Purchase of shares by Employee
Stock Ownership Plan 0
Shares issued or purchased under
Dividend Reinvestment and
Stock Purchase Plan and Stock
Investment Plan (1,510) (33) 2,732 1,189
Net loss (14,202) (14,202)
Total comprehensive income
---------- ---- -------- ------- -------- -------- ------- ---- ---- ---------
Balance, June 30, 2000 31,637,331 $316 $298,601 $38,225 $(98,953) $(42,878) $(5,247) $ -- $ -- $ 190,064
========== ==== ======== ======= ======== ======== ======= ==== ==== =========
Unearned Other
Common Shares of Unearned Compre- Total
Common Stock Additional Stock Employee Variable hensive Stock-
Six Months Ended ------------------ Paid-in Retained Held by Treasury Stock Option Income holders'
June 30, 2001 Shares Amount Capital Earnings Subsidiary Stock Plan Expense (loss) Equity
- -------------------------------- ---------- ------ ---------- -------- ---------- --------- --------- -------- ------- -------
Balance, January 1, 2001 31,637,331 $316 $297,996 $ 6,291 $(98,953) $(50,050) $ (3,800) $(31) $ -- $151,769
Cash dividends (3,659) (3,659)
Treasury stock purchases (357,774
shares net of issuances 514,526) (6,467) (6,467)
Exercise of Stock Options (162) 3,445 3,283
Shares committed to be released
under Employee Stock Ownership
Plan 569 (513) 56
Variable Option Exercises 110 22 132
Shares issued or purchased under
Dividend Reinvestment and
Stock Purchase Plan and Stock
Investment Plan (622) (27) 285 (364)
Net income 8,669 8,669
Cumulative effect of change in
accounting principle on other
comprehensive income
(net of tax)* (3,951) (3,951)
Change in other comprehensive
income (net of tax)** 2,787 2,787
---------- ---- -------- ------- -------- -------- ------- ---- -------- --------
Balance, June 30, 2001 31,637,331 $316 $297,891 $11,274 $(98,953) $(52,787) $(4,313) $ (9) $ (1,164) $152,255
========== ==== ======== ======= ======== ======== ======= ==== ======== ========
* Cumulative effect of change in accounting principle on other
comprehensive income is net of $1,948 in income tax.
** Net change in other comprehensive income is net of ($717) in income
tax benefit.
The accompanying notes are an integral part of these consolidated financial
statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 8,669 $ (11,542)
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 15,068 17,197
Employee Stock Ownership Plan compensation 56 73
Provision for estimated foreclosure losses and repurchased loans 6,255 3,683
Decrease (increase) in receivables 27,370 (59,920)
Acquisition of mortgage loans (6,064,781) (2,431,376)
Proceeds from sales of mortgage loans
and mortgage-backed securities 6,003,601 2,429,866
Acquisition of mortgage servicing rights (150,174) (71,133)
Sales of mortgage servicing rights 115,089 72,237
Net gain on sales of mortgage loans and servicing rights (47,838) (16,457)
Increase in accrued interest on loans (366) (597)
Increase in lease receivables (7,605) (23,372)
Decrease in other assets 8,232 4,077
Decrease in residual certificates -- 5,504
Increase in accrued expenses and other liabilities 24,681 1,481
Cumulative effect of change in accounting
principle on other comprehensive loss (net of tax) * (3,951) --
Net change in other comprehensive income (net of tax) ** 2,787 --
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities of continuing operations (62,907) (80,279)
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of premises and equipment (2,010) (1,857)
Disposition of premises and equipment 185 652
Gain on sale of fixed assets (20) --
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities of continuing operations (1,845) (1,205)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings 8,979,053 3,802,900
Repayment of borrowings (8,902,310) (3,719,836)
Issuance of restricted stock -- 790
Shares (purchased) issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan (364) 1,189
Acquisition of treasury stock (6,467) (6,212)
Cash dividends (3,659) (4,046)
Exercise of stock options 3,283 --
Variable options expense 22 --
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities of continuing operations 69,558 74,785
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Discontinued operations -- (1,706)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 4,806 (8,405)
Cash, beginning of period 15,205 30,478
- ------------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 20,011 $ 22,073
==============================================================================================================================
* Cumulative effect of change in accounting principle on other
comprehensive income is net of $1,948 in income tax.
** Net change in other comprehensive income is net of ($717) in income
tax benefit.
The accompanying notes are an integral part of these consolidated financial
statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(unaudited)
Note 1 - Basis of Presentation:
The financial information included herein should be read in
conjunction with the consolidated financial statements and related notes of
Resource Bancshares Mortgage Group, Inc. (the Company), included in the
Company's December 31, 2000, Annual Report on Form 10-K. Certain financial
information, which is normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States,
is not required for interim financial statements and has been omitted. The
accompanying interim consolidated financial statements are unaudited. However,
in the opinion of management of the Company, all adjustments, consisting of
normal recurring items, necessary for a fair presentation of operating results
for the periods shown have been made.
Certain prior period amounts have been reclassified to conform to
current period presentation and for comparability purposes.
Note 2 - Earnings (Loss) and Dividends Per Share:
The following is a reconciliation of basic earnings (loss) per share
and diluted earnings (loss) per share for the three and six months ended June
30, 2001 and 2000, respectively:
($ in thousands except share information) FOR THE SIX MONTHS ENDED FOR THE QUARTER ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
CONTINUING OPERATIONS
Net Income (loss) $ 8,669 $ (11,542) $ 7,750 $ (2,340)
Weighted average common shares
Outstanding - Basic 16,416,477 18,337,723 16,289,254 18,017,764
Net Income (loss) per common share
From continuing operations - Basic $ 0.53 $ (0.63) $ 0.48 $ (0.13)
Weighted average common shares
Outstanding - Diluted 16,615,330 18,337,723 16,482,219 18,017,764
Net Income (loss) per common share
From continuing operations - Diluted $ 0.52 $ (0.63) $ 0.47 $ (0.13)
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($ in thousands except share information) FOR THE SIX MONTHS ENDED FOR THE QUARTER ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
DISCONTINUED OPERATIONS
Net Income (loss) from $ -- $ (2,660) $ -- $ (1,895)
discontinued
operations*
Weighted average common shares 16,416,477 18,337,723 16,289,254 18,017,764
Outstanding - Basic
Net Income (loss) per common share
From discontinued operations - Basic $ -- $ (0.15) $ -- $ (0.11)
Weighted average common shares 16,615,330 18,337,723 16,482,219 18,017,764
Outstanding - Diluted
Net Income (loss) per common share
From discontinued operations - Diluted $ -- $ (0.15) $ -- $ (0.11)
* Net of applicable income tax expense (benefit) of $0, $(154), $0, and
$311, respectively
SUPPLEMENTAL DISCLOSURE: FOR THE SIX MONTHS FOR THE QUARTER
ENDED ENDED
($ in thousands except share information) JUNE 30, JUNE 30,
--------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Cumulative effect of change in accounting principles
SFAS No. 133, net of tax - Basic $ (0.01) -- -- --
Cumulative effect of change in accounting principles
SFAS No. 133, net of tax - Diluted $ (0.01) -- -- --
The supplemental disclosure above represents the cumulative effect of
adopting Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133) on basic and
diluted earnings (loss) per share as of January 1, 2001. See Note 3 below for
additional information.
The Board of Directors approved a cash dividend of $0.11 per share on
May 4, 2001. This dividend was paid on June 13, 2001 to holders of record as of
May 16, 2001.
Note 3 - Change in Accounting Principle
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133. SFAS No. 133, as amended by SFAS No.s 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
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forecasted transaction. SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company adopted 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 records 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 are 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 are
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 records a charge to earnings. Simultaneously, the Company takes out of
OCI a like amount and records 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
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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. During May 2001, the Company chose to elect hedge accounting treatment
for its servicing hedges. At the time of election, the Company marked-to-market
its hedge instruments resulting in a pre-tax charge of $2.2 million. Prior to
the election of hedge accounting, the offsetting increase in value of the
underlying servicing portfolio could not be recognized, so the $2.2 million
charge is included in the Company's second quarter operating results.
The Company enters into interest rate swaps to pay fixed rate and
receive floating rate as a cash flow hedge of its variable rate debt used to
finance its fixed rate lease receivables. Interest rate swaps are considered to
be derivatives under SFAS No. 133 and are to be carried at market value as
assets or liabilities in the balance sheet. Since this is a cash flow hedge
under SFAS No. 133, the after tax impact is charged to or credited to OCI.
Under the transition rules of SFAS No. 133, as of January 1, 2001, the
Company recognized the value of derivatives on its balance sheet. It recognized
in a separate line in its income statement the cumulative effect of changing to
SFAS No. 133. That cumulative effect is the difference between retained
earnings at December 31, 2000 and the amount of retained earnings that would
have been reported at that date if SFAS No. 133 had been retroactively applied
to all prior periods. The table below highlights the impact of this transition
adjustment.
($ IN THOUSANDS) BALANCE SHEET
-------------- CUMULATIVE
DERIVATIVE TAX DERIVATIVE TAX EFFECT OF
ASSETS ASSET LIABILITIES LIABILITY OCI CHANGE
---------- ------ ----------- --------- -------- ----------
Rate lock commitments $1,366 $ $ $509 $ $ 857
Derivatives hedging rate lock
Commitments 308 663 1,779 115 (923)
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 $8,279 $645 $ (3,951) $(149)
====== ====== ====== ==== ======== =====
In addition to the cumulative effect adjustment above, SFAS No. 133
resulted in an increase in net income net of tax of $84 thousand for the six
months ($0.01 per share), and a decrease of $517 thousand for the second
quarter ($0.03 per share).
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Note 4 - Disposal of Commercial Mortgage Segment:
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.
Note 5 - Employee Benefit and Incentive Programs
The Company performs an annual review of the costs and merits of each
of its benefit programs. During 2001, the Company completed its review of the
Employee Stock Ownership Plan ("ESOP") and determined that there are
alternative programs that are more easily understood by and more beneficial to
the participants than a leveraged employee stock ownership plan. Pursuant to
this, the Board of Directors has instructed management to suspend further
contributions to the ESOP pending an anticipated termination of the plan. Upon
suspension of contributions, participants will vest 100% in their respective
account balances. The Company's expense under the plan will be substantially
reduced for 2001. Expenses were $1,083, $1,244 and $1,623 for the years ended
December 31, 2000, 1999 and 1998, respectively.
During 2001, the Company implemented incentive compensation programs
to more effectively encourage employees to "run it like they own it". These
programs include cash incentives based upon achievement of 1) corporate level
goals (EPS and efficiency ratio goals) and 2) individual goals related to cost
control and other strategic objectives for the respective operating divisions
and departments. The costs accrued under these programs for the six months
ended June 30, 2001 were $3,400, primarily resulting from strength of the
Company's year-to-date performance. Likewise, in 2001 each of the Company's
full-time employees were granted incentive stock options to provide further
incentive to employees to "run it like they own it".
Note 6 - Dividend Restrictions:
The covenant of the Company's syndicated warehouse credit facility,
renewed July 25, 2001, contains a limit on cash dividends to 35% of reported
earnings for the prior quarter and prohibits repurchases of common stock.
Note 7 - Allocated Revenues and Expenses:
Through 2000, the Company reported segment data using agency-eligible
production, servicing, reinsurance, subprime production and leasing as its
segments. During the second half of 2000, the Company completed a company-wide
reorganization designed around business processes rather than traditional
product groupings to help the Company to become more customer-centric. The new
segments are sales, customer fulfillment, servicing, portfolio, leasing and
administration. The sales segment includes the sales forces of the
agency-eligible and subprime units. The customer fulfillment segment includes
all the personnel responsible for underwriting, processing and closing or
purchasing loans. The portfolio segment is assumed to own the Company's balance
sheet
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and is responsible for managing the pipeline and inventory of loans, the
liquidity of the Company, and the servicing portfolio as well as performance of
secondary marketing activities. Servicing subservices the loans on behalf of
the portfolio segment and external subservicing customers, assists the
portfolio segment in transferring loans and servicing to end investors and
obtains trailing documentation necessary for final pool certification. Leasing
includes all of the sales and operating functions of the Company's leasing
operation. Administration includes corporate administration, information
systems, finance, administrative services, legal, human resources and internal
audit.
Each item of revenue and expense is initially charged or credited to
the segment that has the most control over the respective revenues and
expenses. The new segment reporting recognizes the existence of internal
customer relationships, and the resulting accounting includes transfer pricing
based on net value added for billings between segments. Overhead from
administration is allocated to the other segments based on headcount and
budgeted overhead expenses.
During 2001, the Company will present both the old and the new
segments to facilitate investor transition to the new view of the Company.
Prior period comparative information for the new segments is not available.
Following is a summary of the allocated revenues and expenses for each
of the Company's operating divisions for the three and six months ended June
30, 2001 and 2000, respectively, based upon traditional product groupings:
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AGENCY-ELIGIBLE
FOR THE SIX MONTHS ENDED ----------------------------------
JUNE 30, 2001(A) OTHER/ CONSO-
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME LEASING TOTAL SEGMENTS ELIMINATIONS LIDATED
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) $ 4,060 $ (2,348) $ (8) $ 4,884 $ 5,563 $ 12,151 $ (943) $ 11,208
Net gain on sale of mortgage loans 39,256 -- -- 11,308 -- 50,564 -- 50,564
Loss on sale of mortgage
servicing rights -- (2,725) -- -- -- (2,725) -- (2,725)
Servicing fees -- 17,045 -- -- 186 17,231 -- 17,231
Other income 390 (1,939) 1,685 9 646 791 151 942
-----------------------------------------------------------------------------------------
Total revenues 43,706 10,033 1,677 16,201 6,395 78,012 (792) 77,220
-----------------------------------------------------------------------------------------
Salary and employee benefits 14,483 1,719 -- 5,073 1,536 22,811 2,800 25,611
Occupancy expense 6,140 545 -- 1,456 252 8,393 (303) 8,090
Amortization and provision
for impairment
of mortgage servicing rights -- 10,543 -- -- -- 10,543 -- 10,543
Provision expense 1,599 -- 113 2,626 1,917 6,255 -- 6,255
General and administrative expenses 4,918 3,831 62 2,085 818 11,714 1,074 12,788
-----------------------------------------------------------------------------------------
Total expenses 27,140 16,638 175 11,240 4,523 59,716 3,571 63,287
-----------------------------------------------------------------------------------------
Income (loss) before income taxes 16,566 (6,605) 1,502 4,961 1,872 18,296 (4,363) 13,933
Income tax benefit (expense) (6,198) 2,471 (528) (1,976) (732) (6,963) 1,848 (5,115)
-----------------------------------------------------------------------------------------
Income (loss) from continuing
operations before
transition adjustment 10,368 (4,134) 974 2,985 1,140 11,333 (2,515) 8,818
Transition Adjustment - FAS 133 (149) (149)
Income (loss) from continuing -----------------------------------------------------------------------------------------
operations $ 10,368 $ (4,134) $ 974 $ 2,985 $ 1,140 $ 11,333 $(2,664) $ 8,669
=========================================================================================
(a) 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.
AGENCY-ELIGIBLE
---------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2000(A) COMMERCIAL TOTAL OTHER/ CONSO-
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE LEASING SEGMENTS ELIMINATIONS LIDATED
-------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income (expense) $ 913 $ (2,316) $ (39) $ 6,657 $ -- $4,420 $ 9,635 $ (358) $ 9,277
Net gain on sale of mortgage
loans 11,817 -- -- 6,179 -- -- 17,996 -- 17,996
Gain on sale of mortgage
servicing rights -- 1,539 -- -- -- -- 1,539 -- 1,539
Servicing fees -- 17,906 -- -- -- 232 18,138 (258) 17,880
Mark-to-market on residual
interests in subprime
securitizations -- -- -- (9,446) -- -- (9,446) -- (9,446)
Other income 432 248 1,595 1,320 -- 566 4,161 213 4,374
-------------------------------------------------------------------------------------------
Total revenues 13,162 17,377 1,556 4,710 -- 5,218 42,023 (403) 41,620
-------------------------------------------------------------------------------------------
Salary and employee benefits 13,123 1,373 90 7,126 -- 1,438 23,150 1,720 24,870
Occupancy expense 5,523 111 -- 1,305 -- 246 7,185 (349) 6,836
Amortization and provision
for impairment
of mortgage servicing rights -- 12,209 -- -- -- -- 12,209 -- 12,209
Provision expense 1,252 -- -- 910 -- 1,521 3,683 -- 3,683
General and administrative expenses 5,137 2,020 172 3,145 -- 622 11,096 998 12,094
-------------------------------------------------------------------------------------------
Total expenses 25,035 15,713 262 12,486 -- 3,827 57,323 2,369 59,692
-------------------------------------------------------------------------------------------
Income (loss) before income taxes (11,873) 1,664 1,294 (7,776) -- 1,391 (15,300) (2,772) (18,072)
Income tax benefit (expense) 4,369 (612) (454) 2,763 (556) 5,510 1,020 6,530
-------------------------------------------------------------------------------------------
Income (loss) from continuing operations (7,504) 1,052 840 (5,013) -- 835 (9,790) (1,752) (11,542)
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less
applicable income taxes of $261) (2,000) (2,000) (2,000)
Operating losses of Laureate Capital
Corp. (plus applicable income
tax benefit of $465) (660) (660) (660)
-------------------------------------------------------------------------------------------
Net income (loss) $ (7,504) $ 1,052 $ 840 $ (5,013) $(2,660) $ 835 $(12,450) $(1,752) $(14,202)
===========================================================================================
(a) Revenues and expenses have been allocated on a direct basis to the
extent possible. Management believes that these and all other revenues and
expenses have been allocated to the respective divisions on a reasonable basis.
13
14
AGENCY-ELIGIBLE
---------------------------------
FOR THE QUARTER ENDED JUNE 30, 2001(A) TOTAL OTHER CONSO-
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME LEASING SEGMENTS ELIMINATIONS LIDATED
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) $ 2,719 $(1,065) $ 2 $ 2,490 $ 2,883 $ 7,029 $ (430) $ 6,599
Net gain on sale of mortgage loans 26,101 -- -- 6,607 -- 32,708 -- 32,708
Loss on sale of mortgage servicing rights -- (360) -- -- -- (360) -- (360)
Servicing fees -- 8,926 -- -- 90 9,016 -- 9,016
Other income 184 (2,220) 785 -- 359 (892) 134 (758)
---------------------------------------------------------------------------------------
Total revenues 29,004 5,281 787 9,097 3,332 47,501 (296) 47,205
---------------------------------------------------------------------------------------
Salary and employee benefits 7,991 944 -- 2,551 768 12,254 2,532 14,786
Occupancy expense 3,332 255 -- 707 128 4,422 (140) 4,282
Amortization and provision for impairment
of mortgage servicing rights -- 5,327 -- -- -- 5,327 -- 5,327
Provision expense 1,302 -- 53 1,529 831 3,715 -- 3,715
General and administrative expenses 2,579 2,028 31 1,080 406 6,124 632 6,756
---------------------------------------------------------------------------------------
Total expenses 15,204 8,554 84 5,867 2,133 31,842 3,024 34,866
---------------------------------------------------------------------------------------
Income (loss) before income taxes 13,800 (3,273) 703 3,230 1,199 15,659 (3,320) 12,339
Income tax benefit (expense) (5,155) 1,223 (247) (1,268) (466) (5,913) 1,324 (4,589)
---------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 8,645 $(2,050) $ 456 $ 1,962 $ 733 $ 9,746 $(1,996) $ 7,750
=======================================================================================
(a) 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.
AGENCY-ELIGIBLE
---------------------------------
FOR THE QUARTER ENDED
JUNE 30, 2000(A) COMMERCIAL TOTAL OTHER/ CONSO-
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE LEASING SEGMENTS ELIMINATIONS LIDATED
- ---------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income (expense) $ 675 $(1,019) $ (23) $ 3,571 $ -- $ 2,293 $ 5,497 $ (336) $ 5,161
Net gain on sale of mortgage loans 5,611 -- -- 3,738 -- 9,349 -- 9,349
Gain on sale of mortgage
servicing rights -- 731 -- -- -- 731 -- 731
Servicing fees -- 8,541 -- -- 133 8,674 (109) 8,565
Mark-to-market on residual interests
in subprime securitizations -- -- -- (1,771) -- (1,771) -- (1,771)
Other income 312 120 849 427 304 2,012 306 2,318
-------------------------------------------------------------------------------------------
Total revenues 6,598 8,373 826 5,965 -- 2,730 24,492 (139) 24,353
-------------------------------------------------------------------------------------------
Salary and employee benefits 6,235 680 48 1,581 678 9,222 895 10,117
Occupancy expense 2,833 56 -- 676 126 3,691 (175) 3,516
Amortization and provision
for impairment of mortgage
servicing rights -- 5,932 -- -- -- 5,932 -- 5,932
Provision expense 352 -- -- 168 1,162 1,682 -- 1,682
General and administrative expenses 2,623 1,082 83 1,691 328 5,807 838 6,645
-------------------------------------------------------------------------------------------
Total expenses 12,043 7,750 131 4,116 -- 2,294 26,334 1,558 27,892
-------------------------------------------------------------------------------------------
Income (loss) before income taxes (5,445) 623 695 1,849 -- 436 (1,842) (1,697) (3,539)
Income tax benefit (expense) 1,986 (226) (244) (758) -- (180) 578 621 1,199
-------------------------------------------------------------------------------------------
Income (loss) from
continuing operations (3,459) 397 451 1,091 -- 256 (1,264) (1,076) (2,340)
Discontinued operations:
Loss on sale of operating
assets of Laureate Capital
Corp. (less applicable
income taxes of $200) (2,000) (2,000) (2,000)
Operating losses of Laureate
Capital Corp. (plus
applicable income tax
benefit of $111) 105 105 105
-------------------------------------------------------------------------------------------
Net income (loss) $ (3,459) $ 397 $ 451 $ 1,091 $(1,895) $ 256 $ (3,159) $ (1,076) $ (4,235)
===========================================================================================
(a) 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.
14
15
Following is a summary of the allocated revenues and expenses for each
of the Company's operating divisions for the three and six months ended June
30, 2001, based upon business processes:
15
16
FOR THE SIX MONTHS ENDED
JUNE 30, 2001(A) CUSTOMER ADMINI- (B)OTHER/ CONSO-
($ IN THOUSANDS) SALES FULFILLMENT PORTFOLIO SERVICING LEASING STRATION ELIMINATIONS LIDATED
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) $ -- $ -- $ 6,591 $ -- $5,563 $ (946) $ -- $ 11,208
Net gain (loss) on sale of
mortgage loans 4,641 (669) 55,824 -- -- 424 (9,656) 50,564
Loss on sale of mortgage
servicing rights -- -- (2,725) -- -- -- -- (2,725)
Servicing fees -- -- 16,191 854 186 -- -- 17,231
Other income 378 7 (522) 301 646 132 -- 942
----------------------------------------------------------------------------------------
Total revenues 5,019 (662) 75,359 1,155 6,395 (390) (9,656) 77,220
----------------------------------------------------------------------------------------
Salary and employee benefits 9,738 10,732 2,913 2,847 1,536 8,050 (10,205) 25,611
Occupancy expense 527 3,069 408 1,012 252 2,822 -- 8,090
Amortization and provision
for impairment of mortgage
servicing rights -- -- 10,543 -- -- -- -- 10,543
Provision expense -- -- 4,338 -- 1,917 -- -- 6,255
General and administrative expenses 1,430 2,154 2,254 2,821 818 3,014 297 12,788
----------------------------------------------------------------------------------------
Total expenses 11,695 15,955 20,456 6,680 4,523 13,886 (9,908) 63,287
----------------------------------------------------------------------------------------
Income (loss) before income taxes (6,676) (16,617) 54,903 (5,525) 1,872 (14,276) 252 13,933
Income tax expense (5,115) (5,115)
----------------------------------------------------------------------------------------
Income (loss) before transition
adjustment, allocations and
transfer pricing (6,676) (16,617) 54,903 (5,525) 1,872 (14,276) (4,863) 8,818
Transition adjustment - FAS 133 -- -- -- -- -- -- (149) (149)
----------------------------------------------------------------------------------------
Income (loss) before allocations
and transfer pricing (6,676) (16,617) 54,903 (5,525) 1,872 (14,276) (5,012) 8,669
----------------------------------------------------------------------------------------
Overhead allocations 2,053 4,924 1,121 2,218 -- (10,316) -- --
----------------------------------------------------------------------------------------
Income (loss) before transfer
pricing (8,729) (21,541) 53,782 (7,743) 1,872 (3,960) (5,012) 8,669
Transfer pricing 14,786 23,637 (45,006) 6,583 -- -- -- --
----------------------------------------------------------------------------------------
Net income (expense) $ 6,057 $ 2,096 $ 8,776 $(1,160) $1,872 $ (3,960) $ (5,012) $ 8,669
----------------------------------------------------------------------------------------
(a) 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.
(b) Includes consolidation eliminations, SFAS No. 91 and No. 133
16
17
FOR THE QUARTER ENDED
JUNE 30, 2001(A) CUSTOMER ADMINI- (B)OTHER/ CONSO-
($ IN THOUSANDS) SALES FULFILLMENT PORTFOLIO SERVICING LEASING STRATION ELIMINATIONS LIDATED
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) $ -- $ -- $ 4,558 $ -- $2,883 $ (842) $ -- $ 6,599
Net gain (loss) on sale of
mortgage loans 2,730 (397) 35,027 -- -- 429 (5,081) 32,708
Loss on sale of mortgage
servicing rights -- -- (360) -- -- -- -- (360)
Servicing fees -- -- 8,533 393 90 -- -- 9,016
Other income 153 1 (1,528) 125 359 (1,632) 1,764 (758)
---------------------------------------------------------------------------------------
Total revenues 2,883 (396) 46,230 518 3,332 (2,045) (3,317) 47,205
---------------------------------------------------------------------------------------
Salary and employee benefits 5,432 5,915 1,512 1,430 768 5,751 (6,022) 14,786
Occupancy expense 229 1,609 190 455 128 1,344 327 4,282
Amortization and provision
for impairment of mortgage
servicing rights -- -- 5,327 -- -- -- -- 5,327
Provision expense -- -- 2,884 -- 831 -- -- 3,715
General and administrative expenses 740 943 1,650 994 406 1,874 149 6,756
---------------------------------------------------------------------------------------
Total expenses 6,401 8,467 11,563 2,879 2,133 8,969 (5,546) 34,866
---------------------------------------------------------------------------------------
Income (loss) before income taxes (3,518) (8,863) 34,667 (2,361) 1,199 (11,014) 2,229 12,339
Income tax expense (4,589) (4,589)
---------------------------------------------------------------------------------------
Income (loss) before allocations
and transfer pricing (3,518) (8,863) 34,667 (2,361) 1,199 (11,014) (2,360) 7,750
Overhead allocations 888 2,398 497 964 -- (4,747) -- --
---------------------------------------------------------------------------------------
Income (loss) before
transfer pricing (4,406) (11,261) 34,170 (3,325) 1,199 (6,267) (2,360) 7,750
Transfer pricing 8,529 13,308 (25,186) 3,349 -- -- -- --
---------------------------------------------------------------------------------------
Net income (expense) $ 4,123 $ 2,047 $ 8,984 $ 24 $1,199 $ (6,267) $(2,360) $ 7,750
---------------------------------------------------------------------------------------
(a) 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.
(b) Includes consolidation eliminations, SFAS No. 91 and No. 133
17
18
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 in 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 quarterly 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) changes in economic conditions, (ii) competition, (iii)
concentration, (iv) interest rate risks, (v) possible changes in regulations and
related matters, (vi) litigation affecting the mortgage banking business, (vii)
delinquency and default risks, (viii) financing of operations, (ix) changes in
the market for servicing rights, mortgage loans and lease receivables, (x)
environmental matters, (xi) changes in the demand for mortgage loans and leases,
(xii) prepayment risks, (xiii) dependence upon independent mortgage brokers and
mortgage bankers, (xiv) possible changes in accounting estimates (xv) federal
programs; availability of active secondary market, (xvi) effect of certain
charter and bylaw provisions; possible issuance of preferred stock, (xvii)
employees. 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.
18
19
LOAN AND LEASE PRODUCTION
A summary of production by source for the periods indicated is set
forth below:
($ IN THOUSANDS) FOR THE SIX MONTHS FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Agency-Eligible Loan Production:
Correspondent $4,342,006 $2,027,643 $2,368,484 $1,113,609
Wholesale 1,265,677 543,221 717,451 295,133
---------- ---------- ---------- ----------
Total Agency-Eligible Loan Production 5,607,683 2,570,864 3,085,935 1,408,742
Subprime 457,099 321,314 268,103 168,830
Lease Production 46,150 53,300 15,165 29,054
Total Mortgage Loan and Lease
---------- ---------- ---------- ----------
Production $6,110,932 $2,945,478 $3,369,203 $1,606,626
========== ========== ========== ==========
The Company purchases agency-eligible mortgage loans through its
correspondents and originates loans through its wholesale and subprime
divisions. The Company also has a small-ticket commercial equipment lease
operation. Correspondent operations accounted for 71% and 69% of the Company's
total production for the six months ended June 30, 2001 and 2000, respectively.
Wholesale and subprime production accounted for 21% and 7%, respectively, of the
Company's production for the six months ended June 30, 2001 and 18% and 11%,
respectively, of the Company's production for the six months ended June 30,
2000. Lease production accounted for 1% and 2% of the Company's total production
for the six months ended June 30, 2001 and 2000, respectively. A summary of key
information relevant to industry loan production activity is set forth below:
($ IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2001 2000
------------ ------------
U. S. 1-4 Family Mortgage Originations Statistics(1):
U. S. 1-4 Family Mortgage Originations $828,000,000 $473,000,000
Adjustable Rate Mortgage Market Share 11.50% 31.50%
Estimated Fixed Rate Mortgage Originations $734,000,000 $325,000,000
Company Information:
Residential Loan Production $ 6,064,782 $ 2,892,178
Estimated Company Market Share 0.73% 0.61%
(1) Source: Mortgage Bankers Association of America, Economics Department,
(as of June 12, 2001).
The Company's total residential mortgage production increased by 110%
to $6.1 billion for the first six months of 2001 from $2.9 billion for the first
six months of 2000. Interest rates began falling in December of 2000 and
remained low during the first six months of 2001 as compared to the first six
months of 2000, resulting in an increase in overall production levels
industry-wide. Due to expanded sales efforts and success in the secondary
markets, the Company's
19
20
estimated market share for the first six months of 2001 increased by 0.12% from
the first six months of 2000.
($ IN THOUSANDS) FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------
2001 2000
--------------- ---------------
U. S. 1-4 Family Mortgage Originations Statistics (1):
U. S. 1-4 Family Mortgage Originations $477,000,000 $276,000,000
Adjustable Rate Mortgage Market Share 10.00% 31.00%
Estimated Fixed Rate Mortgage Originations $429,000,000 $191,000,000
Company Information:
Residential Loan Production $ 3,354,038 $ 1,577,572
Estimated Company Market Share 0.70% 0.57%
(1) Source: Mortgage Bankers Association of America, Economics Department,
(as of June 12, 2001).
The Company's total residential mortgage production increased by 113%
to $3.4 billion for the second quarter of 2001 from $1.6 billion for the second
quarter of 2000. Interest rates began falling in December of 2000 and remained
low during the first six months of 2001 as compared to the first six months of
2000, resulting in an increase in overall production levels industry-wide. Due
to expanded sales efforts and success in the secondary markets, the Company's
estimated market share for second quarter 2001 increased by 0.13% from second
quarter 2000.
Correspondent Loan Production
The Company purchases closed mortgage loans through its network of
approved correspondent lenders. Correspondents are primarily mortgage lenders,
larger mortgage brokers and smaller savings and loan associations and commercial
banks that have met the Company's approval requirements. The Company continues
to emphasize correspondent loan production as its basic business focus because
of the lower fixed expenses and capital investment required of the Company. A
summary of key information relevant to the Company's correspondent loan
production activities is set forth below:
($ IN THOUSANDS) FOR THE SIX MONTHS FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Correspondent Loan Production $4,342,006 $2,027,643 $2,368,484 $1,113,609
Estimated Correspondent Market Share(1) 0.52% 0.43% 0.50% 0.40%
Active Correspondents 691 923 691 923
Correspondent Division Expenses $ 19,676 $ 20,082 $ 11,219 $ 9,515
(1) Source: Mortgage Bankers Association of America, Economics Department,
(as of June 12, 2001).
The Company's correspondent loan production increased by 114% to $4.3
billion for the first six months of 2001 from $2.0 billion for the first six
months of 2000. Correspondent division
20
21
expenses decreased to $19.7 million for the first six months of 2001 from $20.1
million for the first six months of 2000. Additionally, these expenses decreased
by 54 bps to 45 bps for the six months ended June 30, 2001 from 99 bps for the
six months ended June 30, 2000. This gained efficiency is a result of the
Company's continued efforts to reduce operating expenses through automation and
re-engineering of work processes.
The Company's correspondent loan production increased by 113% to $2.4
billion for the second quarter of 2001 from $1.1 billion for the second quarter
of 2000. Mortgage interest rates were low during the second quarter of 2001 when
compared to the second quarter of 2000, resulting in an increase in overall
production levels industry-wide. Correspondent division expenses increased to
$11.2 million for the second quarter of 2001 from $9.5 million for the second
quarter of 2000, primarily due to $3.4 million of accrued costs related to the
Company's incentive compensation program, which was implemented in the second
quarter of 2001. In bps these expenses decreased by 38 bps to 47 bps in the
second quarter of 2001 from 85 bps in the second quarter of 2000, primarily due
to gained efficiency as noted above in the six months results analysis.
Wholesale Loan Production
The wholesale division receives loan applications through brokers,
underwrites the loans, funds the loans at closing and prepares all closing
documentation. The Company's operating centers handle all shipping and follow-up
procedures on loans. Typically, a mortgage broker is responsible for taking
applications and accumulating the information precedent to the Company's
processing and underwriting of the loans. Although the establishment of regional
operating centers involves the incurrence of fixed expenses associated with
maintaining those offices, wholesale operations also generally provide for
higher profit margins than correspondent loan production. Additionally, each
regional operating center can serve a relatively sizeable geographic area by
establishing relationships with large numbers of independent mortgage loan
brokers who bear much of the cost of identifying and interacting directly with
loan applicants. During 2000, the Company completed the process started in 1999
of consolidating from 18 branches into 4 regional operating centers to improve
operating cost efficiency levels. A summary of key information relevant to the
Company's wholesale production activities is set forth below:
($ IN THOUSANDS) FOR THE SIX MONTHS FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
----------------------- --------------------
2001 2000 2001 2000
---------- -------- -------- --------
Wholesale Loan Production $1,265,677 $543,221 $717,451 $295,133
Estimated Wholesale Market Share(1) 0.15% 0.11% 0.15% 0.11%
Wholesale Division Expenses $ 7,464 $ 4,953 $ 3,984 $ 2,528
Approved Brokers 4,635 4,123 4,635 4,123
Number of Regional Operating Centers(2) 4 7 4 7
Number of Employees 142 96 142 96
(1) Source: Mortgage Bankers Association of America, Economics Department,
(as of June 12, 2001).
(2) Regional operating centers were formerly known as branches
Wholesale loan production increased 133% ($0.7 billion) to $1.3 billion
for the first six months of 2001 from $0.5 billion for the first six months of
2000. This resulted in an increase in market share of 0.04%, to 0.15% for the
first six months of 2001 from 0.11% for the first six
21
22
months of 2000. Wholesale loan production increased 143% ($0.4 billion) to $0.7
billion for the second quarter of 2001 from $0.3 billion for the second quarter
of 2000. Commencing in December 2000, interest rates began to fall and remained
low during the first six months of 2001 when compared to those during 2000,
resulting in an increase in overall production levels industry-wide.
Subprime Loan Production
The Company conducts subprime business through its wholly-owned subsidiary,
Meritage Mortgage Corporation (Meritage). A summary of key information relevant
to the Company's subprime production activities is set forth below:
($ IN THOUSANDS) FOR THE SIX MONTHS FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Subprime Loan Production $457,099 $321,314 $268,103 $168,830
Estimated Subprime Market Share(1) 0.06% 0.07% 0.06% 0.06%
Subprime Direct Operating Expenses $ 11,240 $ 12,486 $ 5,867 $ 4,116
Approved Brokers 3,830 3,711 3,830 3,711
Number of Branches 3 10 3 10
Number of Employees 284 261 284 261
(1) Source: Mortgage Bankers Association of America, Economics Department,
(as of June 12, 2001).
Subprime loan production increased by 42% to $457.1 million for the six
months ended June 30, 2001, compared to the six months ended June 30, 2000.
Despite the 42% increase in production, subprime costs fell by $2.5 million
(exclusive of a one-time charge of $1.3 in 2000). These cost savings were
largely the result of gained efficiencies through the Company's efforts to
centralize subprime processing, underwriting and closing functions into three
regional operating centers where a critical mass of volume has been achieved for
better operating efficiency.
Subprime loan production increased by 59% to $268.1 million for the
three months ended June 30, 2001, as compared to $168.8 million during the three
months ended June 30, 2000. Due to this increase in production along with the
Company's expansion on the East Coast, subprime direct operating expenses
increased to $5.9 million for the second quarter of 2001 as compared to $4.1
million during the second quarter of 2000. These expenses, however, decreased by
25 bps to 219 bps in the second quarter of 2001 from 244 bps in the second
quarter of 2000. This drop in unit cost is largely the result of gained
efficiencies through the Company's efforts to centralize subprime processing,
underwriting and closing functions into three regional operating centers where a
critical mass of volume has been achieved for better operating efficiency.
Commercial Mortgage Production
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of its commercial mortgage division, Laureate
Capital Corp., to BB&T Corporation of Winston-Salem, N.C.
22
23
Lease Production
The Company's wholly-owned subsidiary, Republic Leasing Company, Inc.
(Republic Leasing), originates and services small-ticket commercial equipment
leases. Substantially all of Republic Leasing's lease receivables are acquired
from independent brokers who operate throughout the continental United States. A
summary of key information relevant to the Company's lease production activities
is set forth below:
($ IN THOUSANDS) FOR THE SIX MONTHS FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Lease Production $ 46,150 $ 53,300 $ 15,165 $ 29,054
Lease Division Direct Operating Expenses $ 4,523 $ 3,827 $ 2,133 $ 2,294
Approved Brokers 210 173 210 173
Number of Employees 66 70 66 70
SERVICING
Residential Mortgage Servicing
Residential mortgage servicing includes collecting and remitting
mortgage loan payments, accounting for principal and interest, holding escrow
funds for payment of mortgage-related expenses such as taxes and insurance,
making advances to cover delinquent payments, making inspections as required of
the mortgaged premises, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults and
generally administering mortgage loans.
The Company is somewhat unique in that its strategy is to sell
substantially all of its produced agency-eligible mortgage servicing rights to
other approved servicers. Typically, the Company sells its agency-eligible
mortgage servicing rights within 90 to 180 days of purchase or origination.
However, for strategic reasons, the Company also strives to maintain a servicing
portfolio whose size is determined by reference to the Company's cash operating
costs which, in turn, are largely determined by the size of its loan production
platform.
23
24
A summary of key information relevant to the Company's agency-eligible loan
servicing activities is set forth below:
($ IN THOUSANDS) FOR THE SIX MONTHS FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Underlying Unpaid Principal Balances:
Beginning Balance* $ 8,047,179 $ 7,822,394 $ 7,980,429 $ 7,713,046
Agency-Eligible Loan Production (net
of servicing-released production)* 5,459,219 2,482,696 3,036,351 1,382,399
Net Change in Work-in-Progress* (29,096) 70,642 (193,511) (6,497)
Sales of Servicing* (4,297,205) (2,579,819) (2,120,668) (1,451,283)
Paid-In-Full Loans* (888,936) (254,756) (462,584) (147,947)
Amortization, Curtailments and Other, net* (106,196) (101,071) (55,052) (49,632)
------------ ------------ ------------ ------------
Ending Balance* 8,184,965 7,440,086 8,184,965 7,440,086
Subservicing Ending Balance 2,127,818 1,089,014 2,127,818 1,089,014
------------ ------------ ------------ ------------
Total Underlying Unpaid Principal Balances $ 10,312,783 $ 8,529,100 $ 10,312,783 $ 8,529,100
============ ============ ============ ============
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and, therefore, exclude the subservicing portfolio. The
ending balance for the second quarter of 2001 and 2000, respectively, includes
$202,241 and $194,553, respectively, of subprime loans being temporarily
serviced until these loans are sold.
Of the $8.2 billion and $7.4 billion unpaid principal balance at June
30, 2001 and 2000, $5.0 billion and $5.7 billion, respectively, of the related
mortgage servicing right asset is classified as available-for-sale, while $3.0
billion and $1.7 billion, respectively, of the related mortgage servicing right
asset is classified as held-for-sale.
A summary of agency-eligible servicing statistics follows:
($ IN THOUSANDS) FOR THE SIX MONTHS FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Average Underlying Unpaid Principal Balances
(including subservicing) $ 9,707,016 $ 9,163,193 $ 10,177,835 $ 9,024,206
Weighted Average Note Rate* 7.36% 7.64% 7.36% 7.64%
Weighted Average Servicing Fee* 0.44% 0.43% 0.44% 0.43%
Delinquency (30+ days) Including Bankruptcies
and Foreclosures* 2.73% 2.22% 2.73% 2.22%
Number of Servicing Division Employees 94 80 94 80
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and, therefore, exclude the subservicing portfolio.
The average underlying unpaid principal balance of agency-eligible
mortgage loans being serviced and subserviced for the first six months of 2001
as compared to the first six months of 2000 increased $544 million, or 5.9%,
generally due to the 110% overall increase in production.
24
25
The average underlying unpaid principal balance of agency-eligible
mortgage loans being serviced and subserviced for the second quarter of 2001 as
compared to the second quarter of 2000 increased $1.2 billion, or 13%, generally
due to the 113% overall increase in production. The weighted average note rate
decreased by 28 bps, to 7.36% in the second quarter of 2001 from 7.64% in the
second quarter of 2000.
Lease Servicing
Republic Leasing services leases that are owned by it and also services
leases for investors. A summary of key information relevant to the Company's
lease servicing activity is set forth below:
($ IN THOUSANDS) AS OF JUNE 30,
---------------------
2001 2000
-------- --------
Owned Lease Servicing Portfolio $194,569 $174,344
Serviced For Investors Servicing Portfolio 1,468 7,588
-------- --------
Total Managed Lease Servicing Portfolio $196,037 $181,932
======== ========
Weighted Average Net Yield For
Managed Lease Servicing Portfolio 10.80% 10.67%
Delinquencies (30+ Days) Managed Lease
Servicing Portfolio 2.62% 2.24%
Consolidated Coverage Ratios
A summary of the Company's consolidated ratios of servicing fees and
net interest income from owned leases to cash operating expenses net of
amortization and depreciation follows:
($ IN THOUSANDS) FOR THE SIX MONTHS FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Total Company Servicing Fees $ 17,231 $ 17,880 $ 9,016 $ 8,565
Net Interest Income from Owned Leases 5,563 4,420 2,883 2,293
-------- -------- -------- --------
Total Servicing Fees and Interest from Owned Leases $ 22,794 $ 22,300 $ 11,899 $ 10,858
-------- -------- -------- --------
Total Company Operating Expenses $ 63,287 $ 59,692 $ 34,866 $ 27,892
Total Company Amortization and Depreciation (15,068) (17,197) (7,845) (7,697)
-------- -------- -------- --------
Total Company Operating Expenses, Net of
Amortization and Depreciation $ 48,219 $ 42,495 $ 27,021 $ 20,195
-------- -------- -------- --------
Coverage Ratio 47% 52% 44% 54%
======== ======== ======== ========
The Company's coverage ratios for the first six months of 2001 and 2000
were 47% and 52%, respectively. The Company has a target level of between 50%
and 80%. In the opinion of the Company's management, market prices for servicing
rights were attractive throughout that period. Opportunistically and as market
conditions permit, management would expect to remain in line with the stated
objective of maintaining a coverage ratio of between 50% and 80%.
25
26
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2001, COMPARED TO SIX MONTHS
ENDED JUNE 30, 2000
SUMMARY BY OPERATING DIVISION (USING TRADITIONAL PRODUCT GROUPINGS)
Net income (loss) from continuing operations per common share on a
diluted basis for the first six months of 2001 was $0.53 as compared to ($0.63)
for the first six months of 2000. Following is a summary of the revenues and
expenses for each of the Company's operating divisions for the six months ended
June 30, 2001 and 2000, respectively:
26
27
AGENCY-ELIGIBLE
----------------------------------
OTHER/
FOR THE SIX MONTHS ENDED JUNE 30, 2001(A) PRODUCTION SERVICING REINSURANCE SUBPRIME LEASING TOTAL SEGMENTS ELIMINATIONS
($ IN THOUSANDS)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) $ 4,060 $ (2,348) $ (8) $ 4,884 $ 5,563 $ 12,151 $ (943)
Net gain on sale of mortgage loans 39,256 -- -- 11,308 -- 50,564 --
Loss on sale of mortgage servicing rights -- (2,725) -- -- -- (2,725) --
Servicing fees -- 17,045 -- -- 186 17,231 --
Other income 390 (1,939) 1,685 9 646 791 151
------------------------------------------------------------------------------------
Total revenues 43,706 10,033 1,677 16,201 6,395 78,012 (792)
------------------------------------------------------------------------------------
Salary and employee benefits 14,483 1,719 -- 5,073 1,536 22,811 2,800
Occupancy expense 6,140 545 -- 1,456 252 8,393 (303)
Amortization and provision for impairment
of mortgage servicing rights -- 10,543 -- -- -- 10,543 --
Provision expense 1,599 -- 113 2,626 1,917 6,255 --
General and administrative expenses 4,918 3,831 62 2,085 818 11,714 1,074
------------------------------------------------------------------------------------
Total expenses 27,140 16,638 175 11,240 4,523 59,716 3,571
------------------------------------------------------------------------------------
Income (loss) before income taxes 16,566 (6,605) 1,502 4,961 1,872 18,296 (4,363)
Income tax benefit (expense) (6,198) 2,471 (528) (1,976) (732) (6,963) 1,848
------------------------------------------------------------------------------------
Income (loss) from continuing operations
before transition adjustment 10,368 (4,134) 974 2,985 1,140 11,333 (2,515)
Transition Adjustment - FAS 133 (149)
------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 10,368 $ (4,134) $ 974 $ 2,985 $ 1,140 $ 11,333 $ (2,664)
====================================================================================
FOR THE SIX MONTHS ENDED JUNE 30, 2001(A) CONSOLIDATED
($ IN THOUSANDS)
(UNAUDITED)
- ---------------------------------------------------------
Net interest income (expense) $ 11,208
Net gain on sale of mortgage loans 50,564
Loss on sale of mortgage servicing rights (2,725)
Servicing fees 17,231
Other income 942
-----------
Total revenues 77,220
-----------
Salary and employee benefits 25,611
Occupancy expense 8,090
Amortization and provision for impairment
of mortgage servicing rights 10,543
Provision expense 6,255
General and administrative expenses 12,788
-----------
Total expenses 63,287
-----------
Income (loss) before income taxes 13,933
Income tax benefit (expense) (5,115)
-----------
Income (loss) from continuing operations
before transition adjustment 8,818
Transition Adjustment - FAS 133 (149)
-----------
Income (loss) from continuing operations $ 8,669
===========
(a) 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.
AGENCY-ELIGIBLE
---------------------------------------
COMMERCIAL
FOR THE SIX MONTHS ENDED JUNE 30, 2000(A) ($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE
----------------------------------------------------------------
(UNAUDITED)
Net interest income (expense) $ 913 $ (2,316) $ (39) $ 6,657 $ --
Net gain on sale of mortgage loans 11,817 -- -- 6,179 --
Gain on sale of mortgage servicing rights -- 1,539 -- -- --
Servicing fees -- 17,906 -- -- --
Mark-to-market on residual interests in subprime securitizations -- -- -- (9,446) --
Other income 432 248 1,595 1,320 --
----------------------------------------------------------------
Total revenues 13,162 17,377 1,556 4,710 --
----------------------------------------------------------------
Salary and employee benefits 13,123 1,373 90 7,126 --
Occupancy expense 5,523 111 -- 1,305 --
Amortization and provision for impairment
of mortgage servicing rights -- 12,209 -- -- --
Provision expense 1,252 -- -- 910 --
General and administrative expenses 5,137 2,020 172 3,145 --
----------------------------------------------------------------
Total expenses 25,035 15,713 262 12,486 --
----------------------------------------------------------------
Income (loss) before income taxes (11,873) 1,664 1,294 (7,776) --
Income tax benefit (expense) 4,369 (612) (454) 2,763
----------------------------------------------------------------
Income (loss) from continuing operations (7,504) 1,052 840 (5,013) --
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $261) (2,000)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $465) (660)
----------------------------------------------------------------
Net income (loss) $ (7,504) $ 1,052 $ 840 $ (5,013) $ (2,660)
================================================================
OTHER/
FOR THE SIX MONTHS ENDED JUNE 30, 2000(A) ($ IN THOUSANDS) LEASING TOTAL SEGMENTS ELIMINATIONS CONSOLIDATED
----------------------------------------------------
(UNAUDITED)
Net interest income (expense) $ 4,420 $ 9,635 $ (358) $ 9,277
Net gain on sale of mortgage loans -- 17,996 -- 17,996
Gain on sale of mortgage servicing rights -- 1,539 -- 1,539
Servicing fees 232 18,138 (258) 17,880
Mark to market on residual interests in subprime securitizations -- (9,446) -- (9,446)
Other income 566 4,161 213 4,374
----------------------------------------------------
Total revenues 5,218 42,023 (403) 41,620
----------------------------------------------------
Salary and employee benefits 1,438 23,150 1,720 24,870
Occupancy expense 246 7,185 (349) 6,836
Amortization and provision for impairment
of mortgage servicing rights -- 12,209 -- 12,209
Provision expense 1,521 3,683 -- 3,683
General and administrative expenses 622 11,096 998 12,094
----------------------------------------------------
Total expenses 3,827 57,323 2,369 59,692
----------------------------------------------------
Income (loss) before income taxes 1,391 (15,300) (2,772) (18,072)
Income tax benefit (expense) (556) 5,510 1,020 6,530
----------------------------------------------------
Income (loss) from continuing operations 835 (9,790) (1,752) (11,542)
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $261) (2,000) (2,000)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $465) (660) (660)
----------------------------------------------------
Net income (loss) $ 835 $(12,450) $ (1,752) $(14,202)
====================================================
(a) Revenues and expenses have been allocated on a direct basis to the extent
possible.
Management believes that these and all other revenues and expenses have been
allocated to the respective divisions on a reasonable basis.
27
28
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage production operations.
($ IN THOUSANDS) FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------------
2001 2000
------------ ------------
Net interest income $ 4,060 $ 913
Net gain on sale of mortgage loans 39,256 11,817
Other income 390 432
------------ ------------
Total production revenue 43,706 13,162
------------ ------------
Salary and employee benefits 14,483 13,123
Occupancy expense 6,140 5,523
Provision expense 1,599 1,252
General and administrative expenses 4,918 5,137
------------ ------------
Total production expenses 27,140 25,035
------------ ------------
Net pre-tax production margin $ 16,566 $ (11,873)
============ ============
Production $ 5,607,683 $ 2,570,864
Pooled production and whole loan sales $ 5,492,235 $ 2,489,089
Total production revenue to pool delivery 80 bps 53 bps
Total production expenses to production 48 bps 97 bps
------------ ------------
Net pre-tax production margin 32 bps (44) bps
============ ============
Summary
The production revenue to pool delivery ratio increased 27 bps for the
first six months of 2001 as compared to the first six months of 2000. Net gain
on sale of mortgage loans (71 bps for the first six months of 2001 versus 47 bps
for the first six months of 2000) increased primarily due to an improvement in
the competitive environment as a result of reduced mortgage interest rates and
the resulting increase in industry-wide loan production volumes. Net interest
income increased to 7 bps in the first six months of 2001 from 4 bps in the
first six months of 2000 primarily as a result of a steepening of the yield
curve. The Company earns long-term interest rates on loans held-for-sale and
borrows funds based on short-term interest indices. The production expenses to
production ratio decreased 49 bps from the first six months of 2000 to the first
six months of 2001. This was primarily due to the further consolidation of
regional loan processing centers during the second half of 2000 and the
re-engineering of workflows within those processing centers. Likewise, the
Company has been able to leverage its fixed expenses better as a result of
increased production. As a consequence of the foregoing, the Company's net
agency-eligible pre-tax production margin increased 76 bps from the first six
months of 2000 to the first six months of 2001.
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
28
29
difference between interest rates earned on loans and mortgage-backed securities
and interest rates paid on interest-bearing sources of funds) for the six months
ended June 30, 2001 and 2000, respectively:
($ IN THOUSANDS) Variance
Average Volume Average Rate Interest Attributable to
- ------------------------------------- -------------------- ---------------------
2001 2000 2001 2000 2001 2000 Variance Rate Volume
- ------------------------------------- ---------------------------------------------------------
INTEREST INCOME
Mortgages Held-for-Sale and
$545,477 $330,381 7.40% 8.10% Mortgage-Backed Securities $ 20,171 $ 13,386 $ 6,785 $ (1,930) $ 8,715
- ------------------------------------- --------------------------------------------------------
INTEREST EXPENSE
$303,620 $298,229 4.70% 5.11% Warehouse Line 7,133 7,616 (483) (621) 138
209,395 21,378 5.03% 6.88% Gestation Line 5,266 735 4,531 (1,933) 6,464
118,516 121,503 5.51% 7.22% Servicing Secured Line 3,264 4,385 (1,121) (1,013) (108)
8,285 3,950 5.94% 5.92% Servicing Receivable Line 246 117 129 1 128
Facility Fees & Other Charges 1,125 1,845 (720) -- (720)
- ------------------------------------- --------------------------------------------------------
$639,816 $445,060 5.32% 6.60% Total Interest Expense 17,034 14,698 2,336 (3,567) 5,903
- ------------------------------------- --------------------------------------------------------
Net Interest Income Before
2.07% 1.50% Interdivisional Allocations 3,137 (1,312) $ 4,449 $ 1,637 $ 2,812
============= ========================================================
Allocation to Agency-Eligible
Servicing Division 2,348 2,316
---------------------
Net Interest Income 5,485 1,004
Intercompany Net Interest
(Expense) included in
Segmented Income statement (1,425) (91)
---------------------
Net Interest Income $ 4,060 $ 913
=====================
* The interest-rate yield on the warehouse line is net of the benefit of escrow
deposits.
The 57 bps increase in the interest-rate spread for the agency-eligible
segment was primarily a result of a steepening of the yield curve following the
short-term rate cuts made by the Federal Reserve at the end of 2000 and during
the first six months of 2001. The Company's mortgages held-for-sale 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.
29
30
Net Gain on Sale of Agency-Eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
($ IN THOUSANDS) FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------------
2001 2000
------------ ------------
Gross proceeds on sales of mortgage loans $ 5,532,238 $ 2,558,467
Initial unadjusted acquisition cost of mortgage loans sold,
net of hedge results 5,530,560 2,563,602
------------ ------------
Unadjusted Gain (loss) on sale of mortgage loans 1,678 (5,135)
Loan origination and correspondent program
administrative fees 11,306 4,996
------------ ------------
Unadjusted aggregate margin 12,984 (139)
Acquisition basis allocated to mortgage servicing
rights (SFAS No. 140) 30,905 13,478
Net deferred costs and administrative fees recognized (4,633) (1,522)
------------ ------------
Net gain on sale of agency-eligible mortgage loans $ 39,256 $ 11,817
============ ============
Net gain on sale of agency-eligible mortgage loans increased $27.4
million to $39.3 million for the first six months of 2001 from $11.8 million for
the first six months of 2000. The increase is primarily due to a 118% and 120%
increase in production and sales volumes, respectively and an improvement in
margin on sale. Production and sales volumes improved as a result of lower
interest rates during the first six months of 2001 compared with the first six
months of 2000. The margin increased as a result of an improvement in the
competitive environment due to the increase of overall industry production.
AGENCY-ELIGIBLE REINSURANCE OPERATIONS
The Company has a captive insurance company, MG Reinsurance Company (MG
Reinsurance). MG Reinsurance is licensed as a property and casualty insurer and
operates as a monoline captive insurance company assuming reinsurance for PMI
policies on agency-eligible mortgage loans initially purchased or produced by
the Company. During the first six months of 2001 and 2000, the Company
recognized premium and investment income of approximately $1.7 million and $1.6
million, respectively, that has been included as other income in the
agency-eligible reinsurance segment.
30
31
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
subprime mortgage production operations for the periods indicated:
($ IN THOUSANDS) FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------
2001 2000
---------- ----------
Net interest income $ 4,884 $ 6,657
Net gain on sale of mortgage loans 11,308 6,179
Mark-to-Market on residual interests in subprime securitizations -- (9,446)
Other income 9 1,320
---------- ----------
Total production revenue 16,201 4,710
---------- ----------
Salary and employee benefits 5,073 7,126
Occupancy expense 1,456 1,305
Provision expense 2,626 910
General and administrative expenses 2,085 3,145
---------- ----------
Total production expenses 11,240 12,486
---------- ----------
Net pre-tax production margin $ 4,961 $ (7,776)
========== ==========
Production $ 457,099 $ 321,314
Whole loan sales $ 457,192 $ 306,578
Total production revenue to whole loan sales 354 bps 154 bps
Total production expenses to production 246 bps 389 bps
---------- ----------
Net pre-tax production margin 108 bps (235) bps
========== ==========
Summary
During the first six months of 2001 the subprime unit generated a 108
bps net pre-tax production margin, a 343 bps improvement over the same period of
2000 (277 bps net of a one-time $2.1 million charge related to the Company's
reorganization and reengineering in 2000). The $11.5 million increase in
production revenues is partially attributable to the $5.1 million increase in
gain on sale of mortgage loans due to the 49% increase in whole loan sales. It
is also attributable to the absence of the $9.4 million mark-to-market of the
residual interest in subprime securitizations. Net of this amount, the total
production revenue to whole loan sales decreased 108 bps, to 354 bps for the
first six months ended 2001 from 462 bps for the first six months of 2000. This
is due to a $1.3 million decrease in other income for the first six months of
2001 compared to 2000, primarily consisting of prepayment fees on securitized
loans. Also, net interest income is $1.8 million lower for the six months ended
June 30, 2001. This is because during the first six months of 2000, interest of
$3.9 million was earned on residuals, which were sold at the end of 2000. Net of
this amount, net interest income increased by $2.1 million dollars.
Due to the reorganization and reengineering efforts completed in 2000,
total production expenses to production improved by 143 bps (77 bps or $0.9
million increase net of the $2.1 million reorganization charge in 2000). Despite
the 42% increase in production, salary and employee benefits, net of the
reorganization charge, remained constant while general and
31
32
administrative expenses decreased $1.1 million. These savings were partially
offset by the $0.2 million increase in occupancy expense and the $1.7 million
increase in provision expense.
Net Interest Income
The following table analyzes net interest income allocated to the
Company's subprime mortgage production activities in terms of rate and volume
variances of the interest spread (the difference between interest rates earned
on loans and residual certificates and interest rates paid on interest-bearing
sources of funds) for the six months ended June 30, 2001 and 2000, respectively.
($ IN THOUSANDS) Variance
Average Volume Average Rate Interest Attributable to
- --------------------------------------- -------------------- ---------------------
2001 2000 2001 2000 2001 2000 Variance Rate Volume
- --------------------------------------- ---------------------------------------------------------
$148,248 $155,366 10.79% 10.14% Mortgages Held-for-Sale $ 7,995 $ 7,880 $ 115 $ 476 $ (361)
-- 51,915 -- 14.88% Residual Certificates -- 3,863 (3,863) -- (3,863)
- --------------------------------------- ---------------------------------------------------------
$148,248 $207,281 10.79% 11.33% Total Interest Income $ 7,995 $ 11,743 $ (3,748) $ 476 $ (4,224)
- --------------------------------------- ---------------------------------------------------------
$147,732 $145,068 6.63% 7.15% Total Interest Expense $ 4,900 $ 5,185 $ (285) $ (380) $ 95
- --------------------------------------- ---------------------------------------------------------
4.15% 4.18% Net Interest Income $ 3,095 $ 6,558 $ (3,463) $ 856 $ (4,319)
================ =====================
Intercompany Net Interest
Income included in Segmented
Income Statement 1,789 99
--------------------
Net Interest Income $ 4,884 $ 6,657
====================
Net interest income from subprime products decreased $1.8 million for
the six months ended June 30, 2001 compared to the six months ended June 30,
2000. This is primarily because the Company sold its residual certificates
during the fourth quarter of 2000 resulting in a reduction in interest income of
$3.9 million. Net of this amount, net interest income increased by $2.1 million.
Interest on mortgages held-for-sale realized a $0.4 million unfavorable
variance, due to lower average volumes, which was offset by a $0.5 million
favorable variance, attributable to a 65 bps increase in average interest rates.
Interest expense decreased by $0.3 million from the first six months of 2000 to
the first six months of 2001, primarily due to a 52 bps decrease in average
rates.
Net Gain on Sale of Subprime Mortgage Loans
The Company sold subprime mortgage loans for cash on a whole loan basis
during the first six months of 2001 and 2000. Whole loans are generally sold
without recourse to third parties with the gain or loss being calculated based
on the difference between the carrying value of the loans sold and the gross
proceeds received from the purchaser less expenses. Generally, no interest in
these loans is retained by the Company.
32
33
A reconciliation of the gain on subprime mortgage whole loan sales for the
periods indicated follows:
($ IN THOUSANDS) FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------
2001 2000
---------- ----------
Gross proceeds on whole loan sales of subprime mortgage loans $ 471,363 $ 316,912
Initial unadjusted acquisition cost of subprime mortgage loans sold,
net of fees 452,630 306,578
---------- ----------
Unadjusted gain on whole loan sales of subprime mortgage loans 18,733 10,334
Net deferred costs and administrative fees recognized (7,425) (4,155)
---------- ----------
Net gain on sale of subprime mortgage loans $ 11,308 $ 6,179
========== ==========
The net gain on whole loan sales of subprime mortgage loans increased
$5.1 million to $11.3 million for the first six months of 2001 from $6.2 million
for the first six months of 2000. $3.0 million of this increase is due to the
increase in volume, $1.4 million is due to the increased margin and
$0.7 million is due to the mix of increased volume and increased margin. 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" (SFAS No. 91), the Company
reduced its net gain on whole loan sales of subprime mortgage loans by
$7.4 million in the first six months of 2001 as compared to $4.2 million in the
first six months of 2000.
Mark-to-Market on Residual Interests in Subprime Securitizations
The Company historically has retained residual certificates in
connection with the securitization of subprime loans. For both fiscal year 2000
and the first six months of 2001, the Company executed no securitization
transactions of subprime loans. For the six months ended June 30, 2000, the
mark-to-market loss on residuals was approximately $9.4 million. Over the
remaining quarters of 2000, the Company further marked down its residual
interests in prior subprime securitizations as a result of signing a definitive
agreement to sell all of the residual interests remaining on its balance sheet
at September 30, 2000. The Company closed on that sale during the fourth quarter
of 2000 and currently has no residuals on the balance sheet.
33
34
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage servicing operations:
($ IN THOUSANDS) FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------------
2001 2000
------------ ------------
Net interest expense $ (2,348) $ (2,316)
Loan servicing fees 17,045 17,906
Other income (1,939) 248
------------ ------------
Servicing revenues 12,758 15,838
Salary and employee benefits 1,719 1,373
Occupancy expense 545 111
Amortization and provision for impairment of mortgage
servicing rights 10,543 12,209
General and administrative expenses 3,831 2,020
------------ ------------
Total loan servicing expenses 16,638 15,713
Net pre-tax servicing margin (3,880) 125
Gain (Loss) on sale of mortgage servicing rights (2,725) 1,539
------------ ------------
Net pre-tax servicing contribution $ (6,605) $ 1,664
============ ============
Average owned servicing portfolio $ 8,283,969 $ 8,028,158
Servicing sold $ 4,297,205 $ 2,579,819
Net pre-tax servicing margin to average servicing portfolio (9) bps 0 bps
Gain (Loss) on sale of servicing to servicing sold (6) bps 6 bps
Summary
The $4.3 million decline in gain on sale of mortgage servicing rights
as compared to the first six months of 2000 is due to the rapid decline in
interest rates during the first six months of 2001, which triggered the
Company's fourth quarter servicing production to prepay at an unprecedented
speed even before it could be transferred to the takeout buyers. Net pre-tax
servicing margin decreased $4.0 million for the first six months of 2001,
compared to the same period of 2000. The $1.8 million increase in general and
administrative expenses results from lost interest from curtailments on prepaid
loans. Amortization and provision for impairment of mortgage servicing rights
decreased $1.7 million, which is attributable to the generally smaller size of
the available-for-sale pool. The $2.2 million decrease in other income is due to
the election of hedge accounting treatment for its servicing hedges, whereby the
Company marked-to-market its hedge instruments on the date of election.
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.
34
35
Net Interest Expense
The net interest expense for the six months of 2001 and the six months
of 2000 is composed of benefits from escrow accounts of $3.8 million and
$4.1 million, respectively, that are offset by $6.1 million and $6.4 million,
respectively, in interest expense.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage
servicing rights for the periods indicated follows:
($ IN THOUSANDS) FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------------
2001 2000
------------ ------------
Underlying unpaid principal balances of agency-eligible mortgage loans
on which servicing rights were sold during the period $ 4,297,205 $ 2,579,819
============ ============
Gross proceeds from sales of mortgage servicing rights $ 115,088 $ 72,237
Initial acquisition basis, net of amortization and hedge results 97,236 60,504
------------ ------------
Unadjusted gain on sale of mortgage servicing rights $ 17,852 $ 11,733
Acquisition basis allocated from mortgage loans,
net of amortization (SFAS No. 140) (20,577) (10,194)
------------ ------------
(Loss) gain on sale of mortgage servicing rights $ (2,725) $ 1,539
============ ============
(Loss) Gain on sale of mortgage servicing rights decreased $4.3 million
to $(2.7) million for the first six months of 2001 from $1.5 million for the
first six months of 2000. The decrease in the gain on sale of mortgage servicing
rights is primarily attributable to the rapid decline in interest rates as
described previously in the agency-eligible mortgage servicing operations
summary.
COMMERCIAL MORTGAGE OPERATIONS
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of its commercial mortgage division, Laureate
Capital Corp., to BB&T Corporation of Winston-Salem, N.C.
35
36
LEASING OPERATIONS
Following is a summary of the revenues and expenses of the Company's
small-ticket equipment leasing operations for the periods indicated:
($ IN THOUSANDS) FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------
2001 2000
-------- --------
Net interest income $ 5,563 $ 4,420
Other income 646 566
-------- --------
Leasing production revenue 6,209 4,986
Salary and employee benefits 1,536 1,438
Occupancy expense 252 246
Provision expense 1,917 1,521
General and administrative expenses 818 622
-------- --------
Total lease operating expenses 4,523 3,827
Net pre-tax leasing production margin 1,686 1,159
Servicing fees 186 232
-------- --------
Net pre-tax leasing margin $ 1,872 $ 1,391
======== ========
Average owned leasing portfolio $193,041 $162,047
Average serviced leasing portfolio 2,505 10,756
-------- --------
Average managed leasing portfolio $195,546 $172,803
======== ========
Leasing production revenue to average owned portfolio 643 bps 615 bps
Leasing operating expenses to average owned portfolio 469 bps 472 bps
-------- --------
Net pre-tax leasing production margin 174 bps 143 bps
======== ========
The 25% increase in leasing production revenue for the first six months
of 2001 as compared to the first six months of 2000 is primarily due to the 19%
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
production margin increased 31 bps in the first six months of 2001 as compared
to the first six months of 2000 primarily as a result of the increase in the
average owned leasing portfolio. 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. As previously
announced, the Company is currently evaluating strategic alternatives for its
leasing subsidiary, Republic Leasing Company, Inc. ("Republic"). Alternatives
being considered include the possible sale of Republic.
Net Interest Income
Net interest income for the first six months of 2001 was $5.6 million
as compared to $4.4 million for the first six months of 2000. This is equivalent
to an annualized net interest margin of 4.06% and 3.92% for the first six months
of 2001 and 2000, respectively, based upon average lease receivables owned of
$193.0 million and $162.0 million, respectively, and average debt outstanding of
$165.0 and $137.4 million, respectively.
36
37
UNUSUAL ITEMS
During the first six months of 2001, the agency-eligible production
segment benefited from the reversal of $700 thousand of accrued employee benefit
expense. This one-time benefit was due to the Company's self-insured health plan
experiencing lower than expected claims following the reduction in workforce
completed in 2000.
During the fourth quarter of 1999, the Company initiated a workforce
reduction. The workforce reduction became necessary as the Company continued to
adapt to a smaller overall residential mortgage market and intensely competitive
pricing conditions. During the six month period ended June 30, 2000, the Company
reconsidered its positioning in the market and its corporate, management and
leadership structures. As a result, the Company reorganized around primary
business processes, production/sales, customer fulfillment, servicing and
portfolio management and 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 $0.7 million during the
period.
During the first six months of 2000, the Company decided to dispose of
its commercial mortgage operation, Laureate Capital Corp. (Laureate). Based on
market indications at that time, the Company expected to realize net proceeds
equal to the tangible book value of Laureate. The Company amended its defined
benefit pension plan to freeze benefits under the plan, changed the benefits
available to employees under its 401(k) plan and realized a gain on sale of a
branch facility. The Company contributed to a fund that benefited qualified
charitable organizations. The Company incurred expenses for consultants who were
assisting management in re-engineering work processes.
The net impact of these unusual items in the first six months of 2000
is summarized below by financial statement component and operating division:
($ IN THOUSANDS) AGENCY-ELIGIBLE
---------------------
COMMERCIAL
PRODUCTION SERVICING SUBPRIME MORTGAGE LEASING OTHER TOTAL
---------- --------- -------- ----------- ------- ----- -------
Salary and employee
benefits $ (244) $ (45) $1,251 $ -- $ (22) $ 21 $ 961
General and
administrative expenses 171 452 623
Other income (392) (392)
------ ----- ----- ------- ----- ----- -------
Net pre-tax effect on
continuing operations (73) (45) 1,251 (22) 81 1,192
Estimated allocable
income tax 29 17 (458) 8 (31) (435)
------ ----- ----- ------- ----- ----- -------
Net after-tax impact on
continuing operations (44) (28) 793 (14) 50 757
Loss on sale of
operating assets of
Laureate Capital Corp. 2,000 2,000
Operating profits of
Laureate Capital Corp. (105) (105)
------ ----- ----- ------- ----- ----- -------
Net after-tax impact $ (44) $ (28) $ 793 $ 1,895 $ (14) $ 50 $ 2,652
====== ===== ===== ======= ===== ===== =======
37
38
RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 2001, COMPARED TO QUARTER ENDED
JUNE 30, 2000
SUMMARY BY OPERATING DIVISION (USING TRADITIONAL PRODUCT GROUPINGS)
Net income (loss) from continuing operations per common share on a
diluted basis for the second quarter of 2001 was $0.47 per share as compared to
($0.13 per share) for the second quarter of 2000. Following is a summary of the
revenues and expenses for each of the Company's operating divisions for the
quarters ended June 30, 2001 and 2000, respectively:
38
39
AGENCY-ELIGIBLE
-------------------------------------
FOR THE QUARTER ENDED
JUNE 30, 2001 (A)
TOTAL OTHER/
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME LEASING SEGMENTS ELIMINATIONS CONSOLIDATED
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income
(expense) $ 2,719 $(1,065) $ 2 $ 2,490 $ 2,883 $ 7,029 $ (430) $ 6,599
Net gain on sale of
mortgage loans 26,101 -- -- 6,607 -- 32,708 -- 32,708
Loss on sale of mortgage
servicing rights -- (360) -- -- -- (360) -- (360)
Servicing fees -- 8,926 -- -- 90 9,016 -- 9,016
Other income 184 (2,220) 785 -- 359 (892) 134 (758)
--------------------------------------------------------------------------------------------------
Total revenues 29,004 5,281 787 9,097 3,332 47,501 (296) 47,205
--------------------------------------------------------------------------------------------------
Salary and employee benefits 7,991 944 -- 2,551 768 12,254 2,532 14,786
Occupancy expense 3,332 255 -- 707 128 4,422 (140) 4,282
Amortization and provision
for impairment of
mortgage servicing rights -- 5,327 -- -- -- 5,327 -- 5,327
Provision expense 1,302 -- 53 1,529 831 3,715 -- 3,715
General and administrative
expenses 2,579 2,028 31 1,080 406 6,124 632 6,756
--------------------------------------------------------------------------------------------------
Total expenses 15,204 8,554 84 5,867 2,133 31,842 3,024 34,866
--------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 13,800 (3,273) 703 3,230 1,199 15,659 (3,320) 12,339
Income tax benefit
(expense) (5,155) 1,223 (247) (1,268) (466) (5,913) 1,324 (4,589)
--------------------------------------------------------------------------------------------------
Income (loss) from
continuing operations $ 8,645 $(2,050) $ 456 $ 1,962 $ 733 $ 9,746 $(1,996) $ 7,750
==================================================================================================
(a) 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.
AGENCY-ELIGIBLE
-----------------------------------------
FOR THE QUARTER ENDED JUNE 30, 2000 (A) COMMERCIAL
($ IN THOUSAND) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE
- ------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income (expense) $ 675 $(1,019) $ (23) $ 3,571 $ --
Net gain on sale of mortgage loans 5,611 -- -- 3,738
Gain on sale of mortgage servicing rights -- 731 -- --
Servicing fees -- 8,541 -- --
Mark to market on residual interests in
subprime securitizations -- -- -- (1,771)
Other income 312 120 849 427
----------------------------------------------------------------------
Total revenues 6,598 8,373 826 5,965 --
----------------------------------------------------------------------
Salary and employee benefits 6,235 680 48 1,581
Occupancy expense 2,833 56 -- 676
Amortization and provision for impairment
of mortgage servicing rights -- 5,932 -- --
Provision expense 352 -- -- 168
General and administrative expenses 2,623 1,082 83 1,691
----------------------------------------------------------------------
Total expenses 12,043 7,750 131 4,116 --
----------------------------------------------------------------------
Income (loss) before income taxes (5,445) 623 695 1,849 --
Income tax benefit (expense) 1,986 (226) (244) (758) --
----------------------------------------------------------------------
Income (loss) from continuing operations (3,459) 397 451 1,091 --
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp.
(less applicable income taxes of $200) (2,000)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $111) 105
----------------------------------------------------------------------
Net income (loss) $ (3,459) $ 397 $ 451 $ 1,091 $(1,895)
======================================================================
FOR THE QUARTER ENDED JUNE 30, 2000 (A) TOTAL OTHER /
($ IN THOUSANDS) LEASING SEGMENTS ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Net interest income (expense) $ 2,293 $ 5,497 $ (336) $ 5,161
Net gain on sale of mortgage loans -- 9,349 -- 9,349
Gain on sale of mortgage servicing rights -- 731 -- 731
Servicing fees 133 8,674 (109) 8,565
Mark to market on residual interests in
subprime securitizations -- (1,771) -- (1,771)
Other income 304 2,012 306 2,318
---------------------------------------------------------------
Total revenues 2,730 24,492 (139) 24,353
---------------------------------------------------------------
Salary and employee benefits 678 9,222 895 10,117
Occupancy expense 126 3,691 (175) 3,516
Amortization and provision for impairment
of mortgage servicing rights -- 5,932 -- 5,932
Provision expense 1,162 1,682 -- 1,682
General and administrative expenses 328 5,807 838 6,645
---------------------------------------------------------------
Total expenses 2,294 26,334 1,558 27,892
---------------------------------------------------------------
Income (loss) before income taxes 436 (1,842) (1,697) (3,539)
Income tax benefit (expense) (180) 578 621 1,199
---------------------------------------------------------------
Income (loss) from continuing operations 256 (1,264) (1,076) (2,340)
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable income
taxes of $200) (2,000) (2,000)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $111) 105 105
---------------------------------------------------------------
Net income (loss) $ 256 $ (3,159) $(1,076) $ (4,235)
===============================================================
(a) 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.
39
40
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage production operations.
($ IN THOUSANDS) FOR THE QUARTER
ENDED JUNE 30,
-------------------------------
2001 2000
---------- -----------
Net interest income $ 2,719 $ 675
Net gain on sale of mortgage loans 26,101 5,611
Other income 184 312
---------- -----------
Total production revenue 29,004 6,598
---------- -----------
Salary and employee benefits 7,991 6,235
Occupancy expense 3,332 2,833
Provision expense 1,302 352
General and administrative expenses 2,579 2,623
---------- -----------
Total production expenses 15,204 12,043
---------- -----------
Net pre-tax production margin $ 13,800 $ (5,445)
========== ===========
Production $3,085,935 $ 1,408,742
Pooled production and whole loan sales $3,085,002 $ 1,324,183
Total production revenue to pool delivery 94 bps 50 bps
Total production expenses to production 49 bps 85 bps
---------- -----------
Net pre-tax production margin 45 bps (35) bps
========== ===========
Summary
The production revenue to pool delivery ratio increased 44 bps for the
second quarter of 2001 as compared to the second quarter of 2000. Net gain on
sale of mortgage loans (85 bps for the second quarter of 2001 versus 42 bps for
the second quarter of 2000) increased primarily due to an improvement in the
competitive environment as a result of reduced mortgage interest rates and the
resulting increase in industry-wide loan production volumes. Net interest income
increased to 9 bps in the second quarter of 2001 from 5 bps in the second
quarter of 2000 primarily as a result of a steepening of the yield curve. The
Company earns long-term interest rates on loans held-for-sale and borrows funds
based on short-term interest indices. The production expenses to production
ratio decreased 36 bps from the second quarter of 2000 to the second quarter of
2001. This was primarily due to the further consolidation of regional loan
processing centers during the second half of 2000 and the re-engineering of
workflows within those processing centers. Likewise, with high production
volumes, the Company was able to more effectively leverage its fixed expenses.
As a consequence of the foregoing, the Company's net agency-eligible pre-tax
production margin increased 80 bps from the second quarter of 2000 to second
quarter of 2001.
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
40
41
difference between interest rates earned on loans and mortgage-backed securities
and interest rates paid on interest-bearing sources of funds) for the quarter
ended June 30, 2001 and 2000, respectively:
($ IN THOUSANDS) Variance
Average Volume Average Rate Interest Attributable to
--------------- ------------------
- -----------------------------------
2001 2000 2001 2000 2001 2000 Variance Rate Volume
- ----------------------------------- -----------------------------------------------
INTEREST INCOME
Mortgages Held-for-Sale and
$569,580 $393,064 7.34% 8.20% Mortgage-Backed Securities $10,447 $8,060 $ 2,387 $(1,233) $ 3,620
- ----------------------------------- ----------------------------------------------
INTEREST EXPENSE
$313,543 $337,325 4.02% 5.27% Warehouse Line* $ 3,155 $4,448 $(1,293) $ (979) $ (314)
226,962 42,756 4.52% 6.88% Gestation Line 2,562 735 1,827 (1,340) 3,167
126,121 119,698 5.09% 7.45% Servicing Secured Line 1,604 2,229 (625) (745) 120
8,312 3,538 7.41% 5.99% Servicing Receivable Line 154 53 101 29 72
Facility Fees & Other Charges 527 941 (414) -- (414)
- ----------------------------------- ----------------------------------------------
$674,938 $503,317 4.74% 6.68% Total Interest Expense $ 8,002 $8,406 $ (404) $(3,034) $ 2,630
- ----------------------------------- ----------------------------------------------
Net Interest Income Before
2.59% 1.52% Interdivisional Allocations $ 2,445 $ (346) $ 2,791 $ 1,802 $ 989
============== --------------- ============================
Allocation to Agency-Eligible
Servicing Division 1,065 1,019
---------------
Net Interest Income $ 3,510 $ 673
Intercompany Net Interest
Income (Expense) included in
Segmented Income Statement (791) 2
---------------
Net Interest Income $ 2,719 $ 675
===============
* The interest-rate yield on the warehouse line is net of the benefit of escrow
deposits.
The 107 basis point increase in the interest-rate spread for the
agency-eligible segment was primarily a result of a steepening of the yield
curve following the short-term rate cuts made by the Federal Reserve at the end
of 2000 and during the first six months of 2001. The Company's mortgages
held-for-sale 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.
41
42
Net Gain on Sale of Agency-Eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
($ IN THOUSANDS) FOR THE QUARTER
ENDED JUNE 30,
---------------------------
2001 2000
----------- -----------
Gross proceeds on sales of mortgage loans $ 3,120,770 $ 1,350,082
Initial unadjusted acquisition cost of mortgage loans sold,
net of hedge results 3,114,798 1,353,873
----------- -----------
Unadjusted gain (loss) on sale of mortgage loans 5,972 (3,791)
Loan origination and correspondent program
administrative fees 6,223 2,716
----------- -----------
Unadjusted aggregate margin 12,195 (1,075)
Acquisition basis allocated to mortgage servicing
rights (SFAS No. 125) 16,998 7,683
Net deferred costs and administrative fees recognized (3,092) (997)
----------- -----------
Net gain on sale of agency-eligible mortgage loans $ 26,101 $ 5,611
=========== ===========
Net gain on sale of agency-eligible mortgage loans increased $20.5
million to $26.1 million for the second quarter of 2001 from $5.6 million for
the second quarter of 2000. The increase is primarily due to an increase in
production and sales volumes and an improvement in margin on sale. Production
and sales volumes improved as a result of lower interest rates during the second
quarter of 2001 compared with the second quarter of 2000. The margin increased
as a result of an improvement in the competitive environment.
AGENCY-ELIGIBLE REINSURANCE OPERATIONS
The Company has a captive insurance company, MG Reinsurance Company (MG
Reinsurance). MG Reinsurance is licensed as a property and casualty insurer and
operates as a monoline captive insurance company assuming reinsurance for PMI
policies on agency-eligible mortgage loans initially purchased or produced by
the Company. During the second quarter of both 2001 and 2000, the Company
recognized premium and investment income of approximately $0.8 million, which
has been included as other income in the agency-eligible reinsurance segment.
42
43
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
subprime mortgage production operations for the periods indicated:
($ IN THOUSANDS) FOR THE QUARTER
ENDED JUNE 30,
---------------------------
2001 2000
-------- ---------
Net interest income $ 2,490 $ 3,571
Net gain on sale of mortgage loans 6,607 3,738
Mark-to-Market on residual interests in subprime securitizations -- (1,771)
Other income -- 427
-------- ---------
Total production revenue 9,097 5,965
-------- ---------
Salary and employee benefits 2,551 1,581
Occupancy expense 707 676
Provision expense 1,529 168
General and administrative expenses 1,080 1,691
-------- ---------
Total production expenses 5,867 4,116
-------- ---------
Net pre-tax production margin $ 3,230 $ 1,849
======== =========
Production $268,103 $ 168,830
Whole loan sales $245,561 $ 171,123
Total production revenue to whole loan sales 370 bps 349 bps
Total production expenses to production 219 bps 244 bps
-------- ---------
Net pre-tax production margin 151 bps 105 bps
======== =========
Summary
During the second quarter of 2001 the subprime unit generated a 151 bps
net pre-tax production margin, a 46 bps improvement over the same period of
2000. The $3.1 million increase in production revenues is primarily attributable
to the $2.9 million increase in gain on sale of mortgage loans due to the 43%
increase in whole loan sales. It is also attributable to the absence of the $1.8
million mark-to-market of the residual interest in subprime securitizations. Net
of this amount, the total production revenue to whole loan sales decreased 82
bps, from 452 bps for the second quarter of 2000 to 370 bps for the second
quarter ended 2001. This is due to a $0.4 million decrease in other income,
primarily consisting of prepayment fees on securitized loans. Also, net interest
income is $1.1 million higher for the quarter ended June 30, 2000. This is
because during the second quarter of 2000 interest of $1.9 million was earned on
residuals, which were sold at the end of 2000. Net of this amount, net interest
income increased by $0.9 million dollars.
Due to the reorganization and reengineering efforts completed in 2000,
total production expenses to production improved by 25 bps, from 244 bps at the
second quarter of 2000 to 219 bps at the second quarter of 2001. Due to the 59%
increase in production and the East Coast expansion, salary and employee
benefits increased by $0.9 million while general and administrative expenses
decreased $0.6 million. Provision expense increased by $1.4 million, which is
also attributable to the increase in production and whole loan sales.
43
44
Net Interest Income
The following table analyzes net interest income allocated to the
Company's subprime mortgage production activities in terms of rate and volume
variances of the interest spread (the difference between interest rates earned
on loans and residual certificates and interest rates paid on interest-bearing
sources of funds) for the three months ended June 30, 2001 and 2000,
respectively.
($ IN THOUSANDS) Variance
Average Volume Average Rate Interest Attributable to
- ----------------------------------------- --------------- -----------------
2001 2000 2001 2000 2001 2000 Variance Rate Volume
- ----------------------------------------- ---------------------------------------------
$143,593 $165,487 10.57% 10.19% Mortgages Held-for-Sale $3,793 $4,217 $ (424) $ 134 $ (558)
-- 48,147 -- 16.05% Residual Certificates -- 1,932 (1,932) -- (1,932)
- ---------------------------------------- ---------------------------------------------
$143,593 $213,634 10.57% 11.51% Total Interest Income $3,793 $6,149 $(2,356) $ 134 $(2,490)
$141,647 $154,173 6.18% 7.08% Total Interest Expense $2,188 $2,729 $ (541) $(319) $ (222)
- ---------------------------------------- ---------------------------------------------
4.39% 4.43% Net Interest Income $1,605 $3,420 $(1,815) $ 453 $(2,268)
============== =============================================
Intercompany Net Interest
Income included in
Segmented Income
Statement 884 151
---------------
Net Interest Income $2,490 $3,571
===============
Net interest income from subprime products decreased $1.1 million for
the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000.
This is primarily because the Company sold its residual certificates during the
fourth quarter of 2000 resulting in a reduction in interest income of $1.9
million. Net of this amount, net interest income increased by $0.9 million.
Interest income on mortgage loans held-for-sale decreased by $0.4 million during
the second quarter of 2001 from the second quarter of 2000, primarily due to a
$21.9 million decrease in the average volume of mortgages held-for-sale. During
2001, the Company was turning over its inventory of mortgages held-for-sale
faster than in 2000. Offsetting this decrease in interest income, interest
expense decreased by $0.5 million. This is attributable to a reduction in the
average volume of debt, resulting in a $0.2 million decrease, and a 90 bps
decrease in average rates, resulting in a $0.3 million decrease.
Net Gain on Sale of Subprime Mortgage Loans
The Company sold subprime mortgage loans for cash on a whole loan basis
during the second quarters of 2001 and 2000. Whole loans are generally sold
without recourse to third parties with the gain or loss being calculated based
on the difference between the carrying value of the loans sold and the gross
proceeds received from the purchaser less expenses. Generally, no interest in
these loans is retained by the Company.
44
45
A reconciliation of the gain on subprime mortgage whole loan sales for
the periods indicated follows:
($ IN THOUSANDS) FOR THE QUARTER
ENDED JUNE 30,
---------------------------
2001 2000
--------- ---------
Gross proceeds on whole loan sales of subprime mortgage loans $ 253,578 $ 177,477
Initial unadjusted acquisition cost of subprime mortgage loans
sold, net of fees 243,382 171,123
--------- ---------
Unadjusted gain on whole loan sales of subprime mortgage loans 10,196 6,354
Net deferred costs and administrative fees recognized (3,589) (2,616)
--------- ---------
Net gain on sale of subprime mortgage loans $ 6,607 $ 3,738
========= =========
The net gain on whole loan sales of subprime mortgage loans increased
$2.9 million to $6.6 million for the second quarter of 2001 from $3.7 million
for the second quarter of 2000. 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" (SFAS No. 91), the Company reduced its net gain on whole loan sales of
subprime mortgage loans by $3.6 million in the second quarter of 2001 as
compared to $2.6 million in the second quarter of 2000.
Mark-to-Market on Residual Interests in Subprime Securitizations
The Company historically has retained residual certificates in
connection with the securitization of subprime loans. For both fiscal 2000 and
the second quarter of 2001, the Company executed no securitization transactions
of subprime loans. For the quarter ended June 30, 2000, the mark-to-market loss
on residuals was approximately $1.8 million. Over the remaining quarters of
2000, the Company further marked down its residual interests in prior subprime
securitizations as a result of signing a definitive agreement to sell all of the
residual interests remaining on its balance sheet at September 30, 2000. The
Company closed on that sale during the fourth quarter of 2000 and currently has
no residuals on the balance sheet.
45
46
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage servicing operations:
($ IN THOUSANDS) FOR THE QUARTER
ENDED JUNE 30,
------------------------------
2001 2000
----------- -----------
Net interest expense $ (1,065) $ (1,019)
Loan servicing fees 8,926 8,541
Other (expense) income (2,220) 120
----------- -----------
Servicing revenues 5,641 7,642
Salary and employee benefits 944 680
Occupancy expense 255 56
Amortization and provision for impairment of mortgage
Servicing rights 5,327 5,932
General and administrative expenses 2,028 1,082
----------- -----------
Total loan servicing expenses 8,554 7,750
Net pre-tax servicing margin (2,913) (108)
Gain (Loss) on sale of mortgage servicing rights (360) 731
----------- -----------
Net pre-tax servicing contribution $ (3,273) $ 623
=========== ===========
Average servicing portfolio $ 8,403,472 $ 7,935,544
Servicing sold $ 2,120,668 $ 1,451,283
Net pre-tax servicing margin to average servicing (14) bps (1) bps
portfolio
Gain (Loss) on sale of servicing to servicing sold (2) bps 5 bps
Summary
The $1.1 million decline in gain on sale of mortgage servicing rights
as compared to the second quarter of 2000 is due to loans prepaying as a result
of interest rates remaining low during the second quarter 2001 after their rapid
decline in the first quarter of 2001. Net pre-tax servicing margin decreased
$2.8 million from the second quarter of 2000 to the same period of 2001. The
$0.9 million increase in general and administrative expenses results from lost
interest from curtailments on prepaid loans. Amortization and provision for
impairment of mortgage servicing rights decreased $0.6 million, which is
attributable to the generally smaller size of the available-for-sale pool. In
the second quarter of 2001, the Company elected hedge accounting treatment and
marked-to-market the hedge instruments resulting in a pre-tax charge of $2.2
million. Net of this amount, the net pre-tax servicing margin decreased $0.6
million dollars from the second quarter of 2000 to the same period of 2001.
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.
46
47
Net Interest Expense
The net interest expense for the second quarter of 2001 and the second
quarter of 2000 is composed of benefits from escrow accounts of $1.9 million and
$2.3 million, respectively, that are offset by $2.9 million and $3.3 million,
respectively, in interest expense.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage
servicing rights for the periods indicated follows:
($ IN THOUSANDS) FOR THE QUARTER
ENDED JUNE 30,
-------------------------------
2001 2000
----------- -----------
Underlying unpaid principal balances of agency-eligible mortgage loans
on which servicing rights were sold during the period $ 2,120,668 $ 1,451,283
=========== ===========
Gross proceeds from sales of mortgage servicing rights $ 56,396 $ 40,308
Initial acquisition basis, net of amortization and hedge results 47,581 34,976
----------- -----------
Unadjusted gain on sale of mortgage servicing rights $ 8,815 $ 5,332
Acquisition basis allocated from mortgage loans,
net of amortization (SFAS No. 125) 9,175 (4,601)
----------- -----------
Gain (loss) on sale of mortgage servicing rights $ (360) $ 731
=========== ===========
(Loss) Gain on sale of mortgage servicing rights decreased $1.1 million
to $(0.4) million for the second quarter of 2001 from $0.7 million for the
second quarter of 2000. The decrease in the gain on sale of mortgage servicing
rights is primarily attributable to the prepayment of loans as a result of lower
interest rates in 2001 compared to 2000.
COMMERCIAL MORTGAGE OPERATIONS
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of its commercial mortgage division, Laureate
Capital Corp., to BB&T Corporation of Winston-Salem, N.C.
47
48
LEASING OPERATIONS
Following is a summary of the revenues and expenses of the Company's
small-ticket equipment leasing operations for the periods indicated:
($ IN THOUSANDS) FOR THE QUARTER
ENDED JUNE 30,
------------------------
2001 2000
-------- --------
Net interest income $ 2,883 $ 2,293
Other income 359 304
-------- --------
Leasing production revenue 3,242 2,597
Salary and employee benefits 768 678
Occupancy expense 128 126
Provision expense 831 1,162
General and administrative expenses 406 328
-------- --------
Total lease operating expenses 2,133 2,294
Net pre-tax leasing production margin 1,109 303
Servicing fees 90 133
-------- --------
Net pre-tax leasing margin $ 1,199 $ 436
======== ========
Average owned leasing portfolio $194,581 $167,767
Average serviced leasing portfolio 1,909 9,085
-------- --------
Average managed leasing portfolio $196,037 $176,852
======== ========
Leasing production revenue to average owned portfolio 666 bps 619 bps
Leasing operating expenses to average owned portfolio 438 bps 547 bps
-------- --------
Net pre-tax leasing production margin 228 bps 72 bps
======== ========
The 25% increase in leasing production revenue for the second quarter
of 2001 as compared to the second quarter of 2000 is primarily due to the 16%
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
production margin increased 156 bps in the second quarter of 2001 as compared to
the second quarter of 2000 primarily as a result of the increase in the average
owned leasing portfolio. 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. As previously announced, the
Company is currently evaluating strategic alternatives for its leasing
subsidiary, Republic Leasing Company, Inc. ("Republic"). Alternatives being
considered include the possible sale of Republic
Net Interest Income
Net interest income for the second quarter of 2001 was $2.9 million as
compared to $2.3 million for the second quarter of 2000. This is equivalent to
an annualized net interest margin of 4.31% and 3.93% for the second quarters of
2001 and 2000, respectively, based upon average lease receivables owned of
$194.6 million and $167.8 million, respectively, and average debt outstanding of
$165.9 and $142.3 million, respectively.
48
49
UNUSUAL ITEMS
There were no unusual items for the quarter ended June 30, 2001.
During the fourth quarter of 1999, the Company initiated a workforce
reduction. The workforce reduction became necessary as the Company continued to
adapt to a smaller overall residential mortgage market and intensely competitive
pricing conditions. During the first quarter of 2000, the Company reconsidered
its positioning in the market and its corporate, management and leadership
structures. As a result, the Company reorganized 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 reduction in
the previously established reorganization reserves of $1.1 million for the
period.
During the second quarter of 2000, the Company decided to dispose of
its commercial mortgage operation, Laureate Capital Corp. (Laureate). Based on
market indications to date, the Company expected to realize net proceeds equal
to the tangible book value of Laureate. The Company amended its defined benefit
pension plan to freeze benefits under the plan. Simultaneously, the Company
changed the benefits available to employees under its 401(k) plan. The Company
realized a gain on sale of a branch facility. The Company contributed to a fund
that will benefit qualified charitable organizations. The Company incurred
expenses for consultants who were assisting management in re-engineering work
processes.
The net impact of these unusual items in the second quarter of 2000 is
summarized below by financial statement component and operating division:
($ in thousands) AGENCY-ELIGIBLE
--------------------
COMMERCIAL
PRODUCTION SERVICING SUBPRIME MORTGAGE LEASING OTHER TOTAL
----------- ---------- ----------- ------------- ----------- --------- ---------
Salary and employee
benefits $ (380) $ (45) $ (824) $ -- $ (22) $ 21 $(1,250)
General and
administrative expenses 452 452
Other income (392) (392)
-------------------------------------------------------------------------------
Net pre-tax effect on
continuing operations (380) (45) (824) (22) 81 (1,190)
Estimated allocable
income tax expense
(benefit) 142 17 305 8 (31) 441
-------------------------------------------------------------------------------
Net after-tax impact on
continuing operations (238) (28) (519) (14) 50 (749)
Loss on sale of operating
assets of Laureate
Capital Corp. 2,000 2,000
Operating profits of
Laureate Capital Corp. (105) (105)
-------------------------------------------------------------------------------
Net after-tax impact $ (238) $ (28) $ (519) $ 1,895 $ (14) $ 50 $ 1,146
===============================================================================
49
50
SUPPLEMENTAL RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2001, COMPARED TO
SIX MONTHS ENDED JUNE 30, 2000
SUMMARY BY BUSINESS PROCESS (USING SEGMENTS DEFINED BY BUSINESS PROCESS)
Net income (loss) from continuing operations per common share on a
diluted basis for the first six months of 2001 was $0.53 per share as compared
to ($0.63) per share the first six months of 2000. Following is a summary of the
revenues and expenses for each of the Company's business process divisions for
the six months ended June 30, 2001:
50
51
FOR THE SIX MONTHS ENDED JUNE 30, CUSTOMER ADMINI- (B) OTHER / CONSOLI-
2001 (A) ($ IN THOUSANDS) SALES FULFILLMENT PORTFOLIO SERVICING LEASING STRATION ELIMINATIONS DATED
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) $ -- $ -- $ 6,591 $ -- $5,563 $ (946) $ -- $ 11,208
Net gain on sale of mortgage loans 4,641 (669) 55,824 -- -- 424 (9,656) 50,564
Loss on sale of mortgage
servicing rights -- -- (2,725) -- -- -- -- (2,725)
Servicing fees -- -- 16,191 854 186 -- -- 17,231
Other income 378 7 (522) 301 646 132 -- 942
---------------------------------------------------------------------------------------------
Total revenues 5,019 (662) 75,359 1,155 6,395 (390) (9,656) 77,220
---------------------------------------------------------------------------------------------
Salary and employee benefits 9,738 10,732 2,913 2,847 1,536 8,050 (10,205) 25,611
Occupancy expense 527 3,069 408 1,012 252 2,822 -- 8,090
Amortization and provision for
impairment of mortgage
servicing rights -- -- 10,543 -- -- -- -- 10,543
Provision expense -- -- 4,338 -- 1,917 -- -- 6,255
General and administrative expenses 1,430 2,154 2,254 2,821 818 3,014 297 12,788
---------------------------------------------------------------------------------------------
Total expenses 11,695 15,955 20,456 6,680 4,523 13,886 (9,908) 63,287
---------------------------------------------------------------------------------------------
Income (loss) before income taxes (6,676) (16,617) 54,903 (5,525) 1,872 (14,276) 252 13,933
Income tax expense (5,115) (5,115)
---------------------------------------------------------------------------------------------
Income (loss) before transition
adjustment, allocations and
transfer pricing (6,676) (16,617) 54,903 (5,525) 1,872 (14,276) (4,863) 8,818
Transition adjustment - SFAS 133 -- -- -- -- -- -- (149) (149)
---------------------------------------------------------------------------------------------
Income (loss) before allocations
and transfer pricing (6,676) (16,617) 54,903 (5,525) 1,872 (14,276) (5,012) 8,669
---------------------------------------------------------------------------------------------
Overhead allocations 2,053 4,924 1,121 2,218 -- (10,316) -- --
---------------------------------------------------------------------------------------------
Income (loss) before transfer
pricing (8,729) (21,541) 53,782 (7,743) 1,872 (3,960) (5,012) 8,669
Transfer pricing 14,786 23,637 (45,006) 6,583 -- -- -- --
---------------------------------------------------------------------------------------------
Net income (expense) $ 6,057 $ 2,096 $ 8,776 $(1,160) $1,872 $ (3,960) $ (5,012) $ 8,669
==============================================================================================
(a) 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.
(b) Includes consolidation eliminations, SFAS No. 91 and No. 133
51
52
REVENUE AND EXPENSE BY SEGMENT FOR THE SIX MONTHS ENDED JUNE 30, 2001
The following table presents the percentage of revenues and expenses
contributed on a direct and NVA (transfer pricing basis) by each of the
Company's operating segments.
FOR THE SIX MONTHS ENDED JUNE 30, 2001
($ in thousands) (unaudited)
REVENUES DIRECT NVA
Sales $ 5,019 6% $ 19,805 26%
Customer Fulfillment (662) -1% 22,975 30%
Portfolio 75,359 98% 30,353 39%
Servicing 1,155 1% 7,738 10%
Leasing 6,395 8% 6,395 8%
Administration (390) 0% (390) -1%
Other / Eliminations (9,656) -12% (9,656) -12%
--------------------- -----------------
Total revenues 77,220 77,220
EXPENSES
Sales 11,695 18% 13,748 22%
Customer Fulfillment 15,955 25% 20,879 33%
Portfolio 20,456 32% 21,577 34%
Servicing 6,680 11% 8,898 14%
Leasing 4,523 7% 4,523 7%
Administration 13,886 22% 3,570 6%
Other / Eliminations (9,908) -15% (9,908) -16%
--------------------- -----------------
Total expenses 63,287 63,287
PRE-TAX INCOME (LOSS)
Sales $ (6,676) -48% $ 6,057 43%
Customer Fulfillment (16,617) -119% 2,096 15%
Portfolio 54,903 394% 8,776 63%
Servicing (5,525) -40% (1,160) -8%
Leasing 1,872 13% 1,872 13%
Administration (14,276) -102% (3,960) -28%
Other / Eliminations 252 2% 252 2%
--------------------- -----------------
Total pre-tax income (loss) $ 13,933 $13,933
======== =======
SALES
The sales segment includes the sales forces of both the agency-eligible
and subprime units. Under the Company's net value added (NVA) accounting, Sales
is responsible for establishing and maintaining relationships with
correspondents and brokers. The Customer Fulfillment segment processes loans on
behalf of Sales, and Portfolio funds the closing or acquisition of the loans.
Customer Fulfillment charges Sales fees for specific services based upon loan
and channel type. The transfer pricing between Sales and Portfolio is based on
Portfolio's budgeted margin on sale of loans and budgeted expenses per loan
times the actual number of loans produced. The following is a summary of Sale's
revenues and expenses and key operating statistics for the six months ended June
30, 2001:
52
53
SALES
- ----------------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ 5,019
Transfer pricing 14,786
----------
Total revenues 19,805
Direct expenses 11,695
Overhead expense allocation 2,053
----------
Total expenses 13,748
----------
Income $ 6,057
==========
Production $6,064,783
Units 45,194
Revenue per unit $ 438
Expense per unit 304
----------
Net pre-tax sales margin $ 134
==========
Bps of Revenue per unit 32.7
Bps of Expense per unit 22.7
----------
Net pre-tax sales margin 10.0
==========
FTEs 153
Units per FTE 295
Summary
As presented previously in the revenue and expense by segment report,
the Sales segment contributed 6% of direct revenues and 26% of NVA revenues.
Sales contributed 18% and 22% of direct expenses and NVA expenses, respectively.
The direct revenue of Sales is comprised of net fees less sales incentives. The
Sales segment is responsible for the pricing of fees and sales incentives, which
are included in gain on sale of mortgage loans as presented in the Company's
consolidated statement of operations. As of June 30, 2001 there were 48 and 105
employees related to agency-eligible and subprime sales, respectively.
CUSTOMER FULFILLMENT
The Customer Fulfillment segment processes, underwrites, closes and
performs certain post-closing functions on behalf of Sales. Customer Fulfillment
charges Sales fees for specific services based upon loan and channel type. The
following is a summary of Customer Fulfillment's revenues and expenses and key
operating statistics for the six months ended June 30, 2001:
53
54
CUSTOMER FULFILLMENT
- -----------------------------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ (662)
Transfer pricing 23,637
-----------
Total revenues 22,975
Direct expenses 15,955
Overhead expense allocation 4,924
-----------
Total expenses 20,879
-----------
Income (loss) $ 2,096
===========
Production $ 6,064,783
Units 45,194
Revenue per unit $ 508
Expenses per unit 462
-----------
Net pre-tax customer fulfillment margin $ 46
===========
Bps of Revenue per unit 37.9
Bps of Expense per unit 34.4
-----------
Net pre-tax customer fulfillment margin 3.5
===========
FTEs 427
Units per FTE 106
Summary
As presented in the revenue and expense by segment table, the Customer
Fulfillment segment contributed (1%) of direct revenues and 30% of NVA
revenues. Customer Fulfillment contributed 25% and 33% of direct expenses and
NVA expenses, respectively. The Customer Fulfillment segment does not have any
actual direct revenues. It is debited with certain acquisition expenses, which
are included in gain on sale of mortgage loans in the revenue section of the
consolidated statement of operations. As of June 30, 2001 there were 302 and 125
Customer Fulfillment employees related to agency-eligible and subprime,
respectively.
PORTFOLIO
Under the Company's NVA accounting, the Portfolio segment is assumed to
own the Company's balance sheet and is responsible for managing the pipeline and
inventory of loans, the liquidity of the Company, and the servicing portfolio as
well as performance of secondary marketing activities. Portfolio funds loans on
behalf of Sales and sells or securitizes loans for delivery into the secondary
market in the form of whole loans, mortgage-backed securities (MBS) and
servicing rights. In addition to owning loans, MBSs and servicing rights
held-for-sale, Portfolio owns servicing rights held-for-investment. The
Servicing segment subservices on behalf of the Portfolio segment. The following
is a summary of Portfolio's revenues and expenses and key operating statistics
for the six months ended June 30, 2001:
54
55
SECONDARY SERVICING TOTAL
PORTFOLIO MARKETING ASSETS PORTFOLIO
- ----------------------------------------------------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ 66,482 $ 8,877 $ 75,359
Transfer pricing (40,862) (4,144) (45,006)
------------------------------------------
Total revenues 25,620 4,733 30,353
Direct expenses 8,506 11,949 20,455
Overhead expense allocation 1,118 4 1,122
------------------------------------------
Total expenses 9,624 11,953 21,577
------------------------------------------
Income (loss) $ 15,996 $ (7,220) $ 8,776
==========================================
Production and average owned servicing $ 6,064,783 $ 8,283,969
portfolio
Production and average owned servicing 45,194 76,205
portfolio units
Revenue per unit $ 567 $ 62
Expenses per unit 213 157
----------------------------
Net pre-tax portfolio margin $ 354 $ (95)
============================
Bps of Revenue per unit 42.2 5.7
Bps of Expense per unit 15.9 14.4
----------------------------
Net pre-tax portfolio margin 26.4 (8.7)
============================
FTEs 85 n/a
Units per FTE 532 n/a
Summary
As presented in the revenue and expense by segment table, the Portfolio
segment contributed 98% of direct revenues and 39% of NVA revenues.
The secondary marketing unit contributed 33% of total NVA revenues and
15% of total NVA expenses. The secondary marketing unit is responsible for
managing the pipeline and inventory of loans, the liquidity of the Company and
selling/securitizing loans for delivery into the secondary markets. Secondary
marketing's major direct revenues are net interest income and gain on sale of
mortgage loans. Transferred pricing for secondary marketing is calculated using
the actual number of loans it "purchases" from Sales times the budgeted margin
and budgeted expense per loan. Secondary marketing's direct expenses include the
Company's provision expense. The segment's six month pre-tax income of $16.0
million is primarily attributable to the actual margin exceeding the budgeted
margin due to an improved competitive environment during the first six months of
2001. As of June 30, 2001 there were 85 Portfolio employees.
The servicing assets unit contributed 6% of total NVA revenues and 19%
of total NVA expenses. The servicing assets unit is responsible for the
management of the Company's owned servicing portfolio. Its direct revenues are
from the gain (loss) on sale of mortgage servicing rights and servicing fees
collected. Direct expenses of the Servicing assets unit are mainly amortization
and impairment expense ($10.5 million of the $11.9 million). The six month loss
55
56
of $7.2 million is mainly attributable to the $2.7 million loss on the sale of
mortgage servicing rights relating to high pre-payments on servicing
held-for-sale that was sold during the first and second quarter and the $2.2
million dollar charge for the election of hedge accounting under SFAS No. 133
during the second quarter.
SERVICING
The Servicing segment subservices loans on behalf of the Portfolio
segment and external subservicing customers. The Servicing segment also assists
the Portfolio segment in transferring loans and servicing to end investors and
obtains trailing documentation necessary for final pool certification (these
functions are referred to as "Portfolio Support"). Servicing charges Portfolio
fees for services rendered based upon the number of loans set-up, serviced and
transferred during the period. Fees for trailing documentation follow-up
services are charged on a per loan basis and are recognized by Servicing using
the "Rule of 78th" method over a 12 month period of time, approximating the
timing of the services performed. The following is a summary of Servicing's
revenues and expenses and key operating statistics for the six months ended June
30, 2001:
($ in thousands except per unit) SERVICING PORTFOLIO
SERVICING FACTORY SUPPORT TOTAL
- ----------------------------------------------------------------------------------------
(unaudited)
Direct revenues $ 1,172 $ (17) $ 1,155
Transfer pricing 4,579 2,004 6,583
-------------------------------------------
Total revenues 5,751 1,987 7,738
Direct expenses 4,688 1,992 6,680
Overhead expense allocation 1,131 1,087 2,218
-------------------------------------------
Total expenses 5,819 3,079 8,898
-------------------------------------------
Loss $ (68) $ (1,092) $(1,160)
Average UPB serviced / Production $ 9,707,016 $ 6,064,783
Average units serviced / units produced 87,445 45,194
Revenue per unit $ 66 $ 44
Expenses per unit 67 68
-----------------------------
Net pre-tax servicing margin $ (1) $ (24)
Bps of revenue per unit 11.8 3.3
Bps of expense per unit 12.0 5.1
-----------------------------
Net pre-tax servicing margin (0.1) (1.8)
FTEs 94 76
Units per FTE 930 595
Summary
As presented in the revenue and expense by segment table, the Servicing
segment contributed 1% of direct revenues and 10% of NVA revenues. Servicing
contributed 11% and 14% of direct expenses and NVA expenses, respectively.
The Servicing Factory, which is responsible for subservicing loans on
behalf of the Portfolio segment, contributed 7.4% of NVA revenues and 9.2% of
NVA expenses. The Servicing
56
57
Factory's direct revenues are comprised of miscellaneous servicing fees, third
party subservicing fees and other ancillary income related to servicing.
Servicing Factory had 94 employees as of June 30, 2001.
Portfolio Support, which aids Secondary Marketing with the transfer of
loans and servicing to end investors and obtaining trailing documents,
contributed 2.6% of NVA revenues and 4.9% of NVA expenses. Portfolio Support had
76 employees as of June 30, 2001.
LEASING OPERATIONS
See page 36 in the Results of Operations for a discussion of Leasing's
operating statistics for the six months ended June 30, 2001. Leasing is not
included in the new NVA accounting methodology, and only direct revenue and
expenses are presented.
ADMINISTRATION
Administration includes all corporate functions and support areas
including administrative services, information systems, finance, human
resources, legal and internal audit services. Administration's expenses are
allocated to Sales, Customer Fulfillment, Portfolio and Servicing based upon
budgeted administration expenses divided by budgeted headcount times the actual
headcount of those four segments. The following is a summary of Administration
revenues and expenses and key operating statistics for the six months ended June
30, 2001:
ADMINISTRATION
- ------------------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ (390)
-----------
Total revenues (390)
Direct expenses 13,886
Overhead expense allocation (10,316)
-----------
Total expenses 3,570
-----------
Income (loss) $ (3,960)
Production $ 6,064,783
Units 45,194
Expenses per unit $ 79
Bps of expense per unit 5.9
FTEs 196
Summary
As described above, the Administration segment is credited or debited
with revenues and expenses directly related to corporate and support area
functions. These costs are then allocated to the business segments based on
headcount. The per headcount rates that are charged to the business segments are
set each quarter based on forecasted expenses and headcount. The $4.0 million
dollar loss is attributable in part to: 1) the Administrative segment being
debited with
57
58
incentive compensation for the entire company tied to the increase in loan
volume and profitability; and 2) certain units from the production segments were
realigned during the quarter to the Administrative segment and the costs
associated with the aforementioned units are not reflected in the second quarter
transfer pricing, which is set at the beginning of each quarter.
To control their own costs, the business segments can attempt to
negotiate lower per headcount rates or to control their respective employee
headcount, which reduces their respective allocations. Both methods of cost
control create pressure upon the administrative segment to further control its
costs. Allocation of overhead expenses based on headcount serves to promote the
automation of work processes throughout the organization.
OTHER / ELIMINATION
Other / Elimination includes the impact of SFAS No. 91 and No. 133,
intercompany eliminations, amortization of goodwill, taxes and the transition
adjustment due to the implementation of SFAS No.133.
SUPPLEMENTAL RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 2001, COMPARED TO
QUARTER ENDED JUNE 30, 2000
SUMMARY BY BUSINESS PROCESS (USING SEGMENTS DEFINED BY BUSINESS PROCESS)
Net income (loss) from continuing operations per common share on a
diluted basis for the second quarter of 2001 was $0.47 per share as compared to
($0.13) per share for the second quarter of 2000. Following is a summary of the
revenues and expenses for each of the Company's business process divisions for
the quarter ended June 30, 2001:
58
59
FOR THE QUARTER ENDED JUNE 30, 2001 (A) CUSTOMER
($ IN THOUSANDS) SALES FULFILLMENT PORTFOLIO SERVICING LEASING ADMINISTRATION
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) $ -- $ -- $ 4,558 $ -- $ 2,883 $ (842)
Net gain on sale of mortgage loans 2,730 (397) 35,027 -- -- 429
Loss on sale of mortgage servicing rights -- -- (360) -- -- --
Servicing fees -- -- 8,533 393 90 --
Other income 153 1 (1,528) 125 359 (1,632)
---------------------------------------------------------------------------------
Total revenues 2,883 (396) 46,230 518 3,332 (2,045)
---------------------------------------------------------------------------------
Salary and employee benefits 5,432 5,915 1,512 1,430 768 5,751
Occupancy expense 229 1,609 190 455 128 1,344
Amortization and provision for impairment
of mortgage servicing rights -- -- 5,327 -- -- --
Provision expense -- -- 2,884 -- 831 --
General and administrative expenses 740 943 1,650 994 406 1,874
---------------------------------------------------------------------------------
Total expenses 6,401 8,467 11,563 2,879 2,133 8,969
---------------------------------------------------------------------------------
Income (loss) before income taxes (3,518) (8,863) 34,667 (2,361) 1,199 (11,014)
Income tax expense
---------------------------------------------------------------------------------
Income (loss) before allocations and
transfer pricing (3,518) (8,863) 34,667 (2,361) 1,199 (11,014)
Overhead allocations 888 2,398 497 964 -- (4,747)
---------------------------------------------------------------------------------
Income (loss) before transfer pricing (4,406) (11,261) 34,170 (3,325) 1,199 (6,267)
Transfer pricing 8,529 13,308 (25,186) 3,349 -- --
---------------------------------------------------------------------------------
Net income (expense) $ 4,123 $ 2,047 $ 8,984 $ 24 $ 1,199 $ (6,267)
=================================================================================
FOR THE QUARTER ENDED JUNE 30, 2001 (A) (B) OTHER/
($ IN THOUSANDS) ELIMINATIONS CONSOLIDATED
(UNAUDITED)
- -------------------------------------------------------------------------
Net interest income (expense) $ -- $ 6,599
Net gain on sale of mortgage loans (5,081) 32,708
Loss on sale of mortgage servicing rights -- (360)
Servicing fees -- 9,016
Other income 1,764 (758)
---------------------------
Total revenues (3,317) 47,205
---------------------------
Salary and employee benefits (6,022) 14,786
Occupancy expense 327 4,282
Amortization and provision for impairment
of mortgage servicing rights -- 5,327
Provision expense -- 3,715
General and administrative expenses 149 6,756
---------------------------
Total expenses (5,546) 34,866
---------------------------
Income (loss) before income taxes 2,229 12,339
Income tax expense (4,589) (4,589)
---------------------------
Income (loss) before allocations and
transfer pricing (2,360) 7,750
Overhead allocations -- --
---------------------------
Income (loss) before transfer pricing (2,360) 7,750
Transfer pricing -- --
---------------------------
Net income (expense) $ (2,360) $ 7,750
===========================
(a) 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.
(b) Includes consolidation eliminations, SFAS No. 91 and No. 133
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REVENUE AND EXPENSE BY SEGMENT FOR THE THREE MONTHS ENDED JUNE 30, 2001
The following table presents the percentage of revenues and expenses
contributed on a direct and NVA (transfer pricing basis) by each of the
Company's operating segments.
FOR THE THREE MONTHS ENDED JUNE 30, 2001
($ in thousands) (unaudited)
DIRECT NVA
REVENUES
Sales $ 2,883 6% $ 11,412 24%
Customer Fulfillment (396) -1% 12,912 27%
Portfolio 46,230 98% 21,044 45%
Servicing 518 1% 3,867 8%
Leasing 3,332 7% 3,332 7%
Administration (2,045) -4% (2,045) -4%
Other / Eliminations (3,317) -7% (3,317) -7%
-------- --- -------- ---
Total revenues 47,205 47,205
EXPENSES
Sales 6,401 18% 7,289 21%
Customer Fulfillment 8,467 24% 10,865 31%
Portfolio 11,563 33% 12,060 35%
Servicing 2,879 8% 3,843 11%
Leasing 2,133 6% 2,133 6%
Administration 8,969 26% 4,222 12%
Other / Eliminations (5,546) -15% (5,546) -16%
-------- --- -------- ---
Total expenses 34,866 34,866
PRE-TAX INCOME (LOSS)
Sales $ (3,518) -29% $ 4,123 33%
Customer Fulfillment (8,863) -72% 2,047 17%
Portfolio 34,667 281% 8,984 73%
Servicing (2,361) -19% 24 0%
Leasing 1,199 10% 1,199 10%
Administration (11,014) -89% (6,267) -51%
Other / Eliminations 2,229 18% 2,229 18%
-------- --- -------- ---
Total pre-tax income $ 12,339 $ 12,339
======== ========
SALES
The Sales segment includes the sales forces of both the agency-eligible
and subprime units. Under the Company's net value added (NVA) accounting, Sales
is responsible for establishing and maintaining relationships with
correspondents and brokers. The Customer Fulfillment segment processes loans on
behalf of Sales, and Portfolio funds the closing or acquisition of the loans.
Customer Fulfillment charges Sales fees for specific services based upon loan
and channel type. The transfer pricing between Sales and Portfolio is based on
Portfolio's budgeted margin on sale of loans and budgeted expenses per loan
times the actual number of loans produced. The following is a summary of Sale's
revenues and expenses and key operating statistics for the quarter ended June
30, 2001:
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SALES
- ---------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ 2,883
Transfer pricing 8,529
----------
Total revenues 11,412
Direct expenses 6,401
Overhead expense allocation 888
----------
Total expenses 7,289
----------
Income $ 4,123
==========
Production $3,354,038
Units 25,188
Revenue per unit $ 453
Expenses per unit 289
----------
Net pre-tax sales margin $ 164
==========
Bps of Revenue per unit 34.0
Bps of Expense per unit 21.7
----------
Net pre-tax sales margin 12.3
==========
FTEs 153
Units per FTE 165
Summary
As presented previously in the revenue and expense by segment report,
the Sales segment contributed 6% of direct revenues and 24% of NVA revenues.
Sales contributed 18% and 21% of direct expenses and NVA expenses, respectively.
The direct revenue of Sales is comprised of net fees less sales incentives. The
Sales segment is responsible for the pricing of fees and sales incentives, which
are included in gain on sale of mortgage loans as presented in the Company's
consolidated statement of income. As of June 30, 2001 there were 48 and 104
employees related to agency-eligible and subprime sales, respectively.
CUSTOMER FULFILLMENT
The Customer Fulfillment segment processes, underwrites, closes and
performs certain post-closing functions on behalf of Sales. Customer Fulfillment
charges Sales fees for specific services based upon loan and channel type. The
following is a summary of Customer Fulfillment's revenues and expenses and key
operating statistics for the quarter ended June 30, 2001:
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CUSTOMER FULFILLMENT
- ------------------------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ (396)
Transfer pricing 13,308
------------
Total revenues 12,912
Direct expenses 8,467
Overhead expense allocation 2,398
------------
Total expenses 10,865
------------
Income (loss) $ 2,047
============
Production $ 3,354,038
Units 25,188
Revenue per unit $ 513
Expenses per unit 431
------------
Net pre-tax customer fulfillment margin $ 81
============
Bps of Revenue per unit 38.5
Bps of Expense per unit 32.4
------------
Net pre-tax customer fulfillment margin 6.1
============
FTEs 427
Units per FTE 59
Summary
As presented in the revenue and expense by segment table, the Customer
Fulfillment segment contributed (1%) of direct revenues and 27% of NVA
revenues. Customer Fulfillment contributed 24% and 31% of direct expenses and
NVA expenses, respectively. The Customer Fulfillment segment does not have any
actual direct revenues. It is debited with certain acquisition expenses which
are classified in gain on sale of mortgage loans in the revenue section of the
consolidated statement of operations. As of June 30, 2001 there were 302 and 125
Customer Fulfillment employees related to agency-eligible and subprime,
respectively.
PORTFOLIO
Under the Company's NVA accounting, the Portfolio segment is assumed to
own the Company's balance sheet and is responsible for managing the pipeline and
inventory of loans, the liquidity of the Company, and the servicing portfolio as
well as performance of secondary marketing activities. Portfolio funds loans on
behalf of Sales and sells or securitizes loans for delivery into the secondary
market in the form of whole loans, mortgage-backed securities (MBS) and
servicing rights. In addition to owning loans, MBSs and servicing rights
held-for-sale, Portfolio owns servicing rights held-for-investment. The
Servicing segment subservices on behalf of the Portfolio segment. The following
is a summary of Portfolio's revenues and expenses and key operating statistics
for the quarter ended June 30, 2001:
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SECONDARY SERVICING TOTAL
PORTFOLIO MARKETING ASSETS PORTFOLIO
- ---------------------------------------------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ 41,468 $ 4,762 $ 46,230
Transfer pricing (23,001) (2,185) (25,186)
-------------------------------------
Total revenues 18,467 2,577 21,044
Direct expenses 4,983 6,580 11,563
Overhead expense allocation 493 4 497
-------------------------------------
Total expenses 5,476 6,584 12,060
-------------------------------------
Income (loss) $ 12,991 $ (4,007) $ 8,984
=====================================
Production and average owned servicing $3,354,038 $8,403,472
portfolio
Production and average owned servicing
portfolio units 25,188 76,280
Revenue per unit $ 733 $ 34
Expenses per unit 217 86
-------------------------
Net pre-tax portfolio margin $ 516 $ (53)
=========================
Bps of Revenue per unit 55.1 3.1
Bps of Expense per unit 16.3 7.8
-------------------------
Net pre-tax portfolio margin 38.7 (4.8)
=========================
FTEs 85 n/a
Units per FTE 296 n/a
Summary
As presented in the revenue and expense by segment table, the Portfolio
segment contributed 98% of direct revenues and 45% of NVA revenues.
The secondary marketing unit contributed 39% of total NVA revenues and
16% of total NVA expenses. The secondary marketing unit is responsible for
managing the pipeline and inventory of loans, the liquidity of the Company and
selling/securitizing loans for delivery into the secondary markets. Secondary
marketing's major direct revenues are net interest income and gain on sale of
mortgage loans. Transferred pricing for secondary marketing is calculated using
the actual number of loans it "purchases" from Sales times the budgeted margin
and budgeted expenses per loan. Secondary marketing's direct expenses include
provision expense. The segment's second quarter pre-tax income of $13.0 million
is primarily attributable to the actual margin exceeding the budgeted margin due
to an improved competitive environment during the second quarter of 2001. As of
June 30, 2001 there were 85 Portfolio employees.
The servicing assets unit contributed 5% of total NVA revenues and 19%
of total NVA expenses. The servicing assets unit is responsible for the
management of the Company's owned servicing portfolio. Its direct revenues are
from the gain (loss) on sale of mortgage servicing rights and servicing fees
collected. The direct expenses of the Servicing assets segment are mainly
amortization and impairment expense ($5.3 million of the $6.6 million). The
second
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quarter loss of $4.0 million is mainly attributable to the $2.2 million dollar
charge for the election of hedge accounting under SFAS No. 133 during the second
quarter.
SERVICING
The Servicing segment subservices loans on behalf of the Portfolio
segment and external subservicing customers. The Servicing segment also assists
the Portfolio segment in transferring loans and servicing to end investors and
obtains trailing documentation necessary for final pool certification (these
functions are referred to as "Portfolio Support"). Servicing charges Portfolio
fees for services rendered based upon the number of loans set-up, serviced and
transferred during the month. Fees for trailing documentation follow-up services
are charged on a per loan basis and are recognized by Servicing using the "Rule
of 78th" method over a 12 month period of time, approximating the timing of the
services performed. The following is a summary of Servicing's revenues and
expenses and key operating statistics for the quarter ended June 30, 2001:
($ in thousands except per unit) SERVICING PORTFOLIO
SERVICING FACTORY SUPPORT TOTAL
- ----------------------------------------------------------------------------
(unaudited)
Direct revenues $ 518 $ -- $ 518
Transfer pricing 2,406 943 3,349
-----------------------------------
Total revenues 2,924 943 3,867
Direct expenses 1,975 904 2,879
Overhead expense allocation 511 453 964
-----------------------------------
Total expenses 2,486 1,357 3,843
-----------------------------------
Income (loss) $ 438 $ (414) $ 24
===================================
Average UPB serviced/Production $10,177,835 $3,354,039
Average units serviced/units produced 90,041 25,188
Revenue per unit $ 32 $ 37
Expenses per unit 28 54
-------------------------
Net pre-tax servicing margin $ 5 $ (16)
=========================
Bps of revenue per unit 11.5 2.8
Bps of expense per unit 9.8 4.0
-------------------------
Net pre-tax servicing margin 1.7 (1.2)
=========================
FTEs 94 76
Units per FTE 958 331
Summary
As presented in the revenue and expense by segment table, the Servicing
segment contributed 1% of direct revenues and 8% of NVA revenues. Servicing
contributed 8% and 11% of direct expenses and NVA expenses, respectively.
The Servicing Factory, which is responsible for subservicing loans on behalf
of the Portfolio silo, contributed 6.2% of NVA revenues and 7.1% of NVA
expenses. The Servicing Factory's direct revenues are comprised of miscellaneous
servicing fees, third party subservicing fees and
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other ancillary income related to servicing. Servicing Factory had 94 employees
as of June 30, 2001.
Portfolio Support, which aids Secondary Marketing with the transfer of loans
and servicing to end investors and obtaining trailing documents, contributed
2.0% of NVA revenues and 3.9% of NVA expenses. Portfolio Support had 76
employees as of June 30, 2001.
LEASING OPERATIONS
See page 48 in the Results of Operations for a discussion of Leasing's
operating statistics for the three months ended June 30, 2001. Leasing is not
included in the new NVA accounting methodology, and only direct revenue and
expenses are presented.
ADMINISTRATION
Administration includes all corporate functions and support areas
including administrative services, information systems, finance, human
resources, legal and internal audit services. Administration's expenses are
allocated to Sales, Customer Fulfillment, Portfolio and Servicing based upon
budgeted administration expenses divided by budgeted headcount times the actual
headcount of those four segments. The following is a summary of Administration
revenues and expenses and key operating statistics for the quarter ended June
30, 2001:
ADMINISTRATION
- --------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ (2,045)
------------
Total revenues (2,045)
Direct expenses 8,969
Overhead expense allocation (4,747)
------------
Total expenses 4,222
------------
Income (loss) $ (6,267)
Production $ 3,354,038
Units 25,188
Expenses per unit $ 168
Bps of expense per unit 12.6
FTEs 196
Summary
As described above, the Administration segment is credited or debited
with revenues and expenses directly related to corporate and support area
functions. These costs are then allocated to the business segments based on
headcount. The per headcount rates that are charged to the business segments are
set each quarter based on forecasted expenses and headcount. The $6.3 million
loss is attributable in part to: 1) the Administrative segment being debited
with incentive compensation for the entire company tied to the increase in loan
volume and
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profitability; and 2) certain units from the production segments were realigned
during the quarter to the Administrative segment and the costs associated with
the aforementioned units are not reflected in the second quarter transfer
pricing, which is set at the beginning of each quarter.
To control their own costs, the business segments can attempt to
negotiate lower per headcount rates or to control their respective employee
headcount, which reduces their respective allocations. Both methods of cost
control create pressure upon the administrative segment to further control its
costs. Allocation of overhead expenses based on headcount serves to promote the
automation of work processes throughout the organization.
OTHER / ELIMINATION
Other / Elimination includes the impact of SFAS No. 91 and No. 133,
intercompany eliminations, amortization of goodwill, taxes and the transition
adjustment due to the implementation of SFAS No.133.
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FINANCIAL CONDITION
The Company experienced a 94% increase in the volume of production
originated and acquired, to $3.4 billion during the second quarter of 2001 from
$1.7 billion in the first quarter of 2001. The June 30, 2001, locked residential
mortgage application pipeline (mortgage loans not yet closed but for which the
interest rate has been locked) was approximately $0.8 billion and the
application pipeline (mortgage loans for which the interest rate has not yet
been locked) was approximately $0.6 billion. This compares to a locked mortgage
application pipeline of $0.6 billion and a $0.4 billion application pipeline at
December 31, 2001.
Mortgage loans held-for-sale and mortgage-backed securities totaled
$0.6 billion at June 30, 2001 and $0.5 billion at December 31, 2000. The
Company's servicing portfolio (exclusive of loans serviced under subservicing
agreements) increased to $8.2 billion at June 30, 2001 from $8.0 billion at
December 31, 2000 an increase of 2% resulting from the 94% increase in
production.
Short-term borrowings, which are the Company's primary source of funds,
totaled $0.9 billion at June 30, 2001 and $0.8 billion at December 31, 2000. At
June 30, 2001 and December 31, 2000, there were $6.1 million in long-term
borrowings. Other liabilities totaled $114.2 million as of June 30, 2001,
compared to the December 31, 2000 balance of $91.0 million, an increase of $23.1
million, or 25%.
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
Annual Report on 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
2001, 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 $301.5 million warehouse line of
credit provided by a syndicate of unaffiliated banks that expires in July 2002.
The credit agreement includes covenants requiring the Restricted Group to
maintain (i) a minimum net worth of $150 million, plus 65% of the Restricted
Group's positive net income subsequent to July 25, 2001, plus 90% of capital
contributions to the Restricted Group minus restricted payments, (ii) a minimum
tangible net worth of $140 million, plus 65% of the Restricted Group's positive
net income subsequent to July 25, 2001, plus 90% of capital contributions to the
Restricted Group minus restricted payments, (iii) 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, (iv)
RBMG, Inc.'s eligibility as a servicer of Ginnie Mae, FHA, VA, Fannie Mae and
Freddie Mac mortgage loans, (v) a mortgage servicing rights
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portfolio with an underlying unpaid principal balance of at least $4 billion and
(vi) 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 also is required to maintain $10 million of liquidity pursuant to
the agreement. The covenants also limit the Company's dividends to 35% of the
prior quarter consolidated net income commencing after the quarter ended June
30, 2001. 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 2001, 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 $75 million
warehouse line of credit that expires in July 2002. The credit agreement
includes covenants upon the Restricted Group similar to those described above.
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 $225
million to the bank. The master repurchase agreement has been extended through
July 2002.
RBMG, Inc. and Prime Funding Company entered into a $100 million
commercial paper conduit facility in July 2001. The facility expires in April
2002.
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 Restricted Group was in compliance with the debt covenants in place
at June 30, 2001. 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 of these financing agreements. Failure
to comply could result in the loss of the related financing.
The Company has entered into a $10.0 million unsecured line of credit
agreement that expires in August 2001. The interest rate on funds borrowed is
based upon the prime rate announced by a major money center bank.
Republic Leasing Corporation ("Republic Leasing"), a wholly-owned
subsidiary of the Company, has a $200 million credit facility to provide
financing for its leasing portfolio. The warehouse credit agreement matures in
August 2001 and contains various covenants regarding
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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 is currently evaluating strategic alternatives for its leasing
subsidiary. Alternatives being considered include the possible sale of Republic.
The Company has been repurchasing its stock pursuant to Board authority
since March 1998, and, as of June 30, 2001, the Company had remaining authority
to repurchase up to $2.1 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 June 30, 2001, there were 7,301,985
shares held in the Company's treasury account at an average cost of $7.23 per
share.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133. SFAS No. 133, as amended by SFAS No.'s 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. 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 records 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 are marked-to-market
at the balance sheet date, with the result being reported as an asset or
liability in the balance sheet.
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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 are
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 records
a charge to earnings. Simultaneously, the Company takes out of OCI a like amount
and records 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. During
May 2001, the Company chose to elect hedge accounting treatment for its
servicing hedges. At the time of election, the Company marked-to-market the
hedge instruments resulting in a pre-tax charge of $2.2 million. Prior to the
election of hedge accounting, the offsetting increase in value of the underlying
servicing portfolio could not be recognized, so the $2.2 million charge is
included in the Company's second quarter operating results.
The Company enters into interest rate swaps to pay fixed rate and
receive floating rate as a cash flow hedge of its variable rate debt used to
finance its fixed rate lease receivables. Interest rate swaps are considered to
be derivatives under SFAS No. 133 and are to be carried at market
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value as assets or liabilities in the balance sheet. Since this is a cash flow
hedge under SFAS No. 133, the after tax impact is charged to or credited to OCI.
Under the transition rules of SFAS No. 133, as of January 1, 2001, the
Company recognized the value of derivatives on its balance sheet. It recognized
in a separate line in its income statement the cumulative effect of changing to
SFAS No. 133. That cumulative effect is the difference between retained earnings
at December 31, 2000 and the amount of retained earnings that would have been
reported at that date if SFAS No. 133 had been retroactively applied to all
prior periods. The table below highlights the impact of this transition
adjustment.
($ IN THOUSANDS) BALANCE SHEET
----------------------------------------------------------
CUMULATIVE
DERIVATIVE TAX DERIVATIVE TAX EFFECT OF
ASSETS ASSET LIABILITIES LIABILITY OCI CHANGE
---------- ------ ----------- --------- ------- ----------
Rate lock commitments $1,366 $ $ $ 509 $ $ 857
Derivatives hedging rate lock
Commitments 308 663 1,779 115 (923)
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 $8,279 $ 645 $(3,951) $ (149)
====== ====== ====== ======= ======= ======
In addition to the cumulative effect adjustment above, SFAS No. 133
resulted in an increase in net income of $84 thousand net of tax for the six
months ($0.01 per share), and a decrease of $517 thousand net of tax for the
quarter ($0.03 per share).
DIVISIONAL ANALYSIS OF PRE-TAX FUNDS GENERATED FROM OPERATIONS
The analyses that 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 six months ended June 30,
2001 and 2000, the Company generated approximately $34.1 million and $13.6
million, respectively, of positive funds from continuing operations.
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($ in thousands) FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
2001 2000
-------- --------
Agency-eligible production $ 12,766 $ (7,897)
Agency-eligible servicing 1,647 12,407
Subprime production 15,706 5,993
Leasing 3,933 3,077
-------- --------
$ 34,052 $ 13,580
======== ========
Each of the Company's divisions produced positive operating funds
during both periods except for agency-eligible production which produced
negative operating funds in the first half of 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.
($ in thousands) FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2001 2000
-------- --------
Income (loss) before income taxes $ 16,566 $(11,873)
Deduct:
Net gain on sale of mortgage loans, as reported (39,256) (11,817)
Add back:
Cash gains on sale of mortgage loans 12,984 (139)
Cash gains on sale of mortgage servicing rights 17,852 11,733
Depreciation and amortization 3,021 2,947
Provision expense 1,599 1,252
-------- --------
$ 12,766 $ (7,897)
======== ========
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
72
73
maintains a relatively small mortgage servicing portfolio. As discussed above,
mortgage servicing rights produced or purchased are initially capitalized and
subsequently must be amortized to expense. Much like depreciation, such
amortization charges are "non-cash". In this context, the table below reconciles
the major elements of pre-tax operating funds flow of the Company's
agency-eligible mortgage servicing activities.
($ in thousands) FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2001 2000
-------- --------
Income (loss) before income taxes $ (6,606) $ 1,664
Deduct:
Net gain on sale of mortgage servicing
rights, as reported (2,725) (1,539)
Add back:
Amortization and provision for impairment of
Mortgage servicing rights 10,542 12,209
Depreciation and amortization 436 73
-------- --------
$ 1,647 $ 12,407
======== ========
SUBPRIME PRODUCTION
Generally, the Company purchases subprime loans through a wholesale
broker network. The Company then 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 the first six
months of 2000 and 2001, 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.
($ in thousands) FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2001 2000
-------- --------
Income (loss) before income taxes $ 4,961 $ (7,776)
Deduct:
Net gain on sale of subprime loans, as reported (11,308) (6,179)
Accretion income on residuals -- (3,786)
Add back:
Cash gains on sale of whole subprime loans 18,733 10,334
Cash received from investments in residual certificates -- 1,471
Depreciation and amortization 694 1,573
Provision expense 2,626 910
Mark-to-market on residuals -- 9,446
-------- --------
$ 15,706 $ 5,993
======== ========
73
74
LEASING
Generally, the Company originates small-ticket equipment leases for
commercial customers that are retained as investments by the Company.
Investments in leases originated and retained are financed through a borrowing
facility at draw rates that approximate the net cash investment in the related
lease. Accordingly, financing activities related to growth in the balance of
leases held-for-investment do not significantly impact operating cash flow. In
this context, the table below reconciles the major elements of operating funds
flow allocable to leasing activities.
($ in thousands) FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2001 2000
------ ------
Income before income taxes $1,872 $1,391
Add back:
Depreciation and amortization of
goodwill and intangibles 144 165
Provision expense 1,917 1,521
------ ------
$3,933 $3,077
====== ======
74
75
ITEM 3. 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 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 disclosure in the 2000 Annual Report on Form 10-K, the
Company performed various sensitivity analyses that quantify the net financial
impact of hypothetical changes in interest rates on its interest rate-sensitive
assets, liabilities and commitments. These analyses presume an instantaneous
parallel shift of the yield curve. Various techniques are employed to value the
underlying financial instruments which rely upon a number of critical
assumptions. Actual experience may differ materially from the estimated. To the
extent that yield curve shifts are non-parallel and to the extent that actual
variations in significant assumptions differ from those applied for purposes of
the valuations, the resultant valuations can also be expected to vary. Such
variances may prove material. The Company has procedures in place that monitor
whether material changes in market risk are likely to have occurred since
December 31, 2000. The Company does not believe that there have been any
material changes in market risk from those reported in the 2000 Annual Report on
Form 10-K.
PART II. OTHER INFORMATION
ITEM 4. - MATTERS SUBMITTED TO SHAREHOLDERS FOR VOTE
During the period of April 1, 2001, through June 30, 2001, the following matters
were submitted to a vote of security holders:
At the annual meeting of the shareholders of the Company on May 2, 2001, the
shareholders elected Roger O. Goldman, David W. Johnson, Jr., Robin C. Kelton
and Joel A. Smith III to serve as directors of the Company. Mr. Smith and
Mr. Kelton will serve for three year terms expiring at the 2004 annual meeting
of shareholders. Mr. Johnson and Mr. Goldman will serve for two year terms
expiring at the 2003 annual meeting. Mr. Smith received 12,339,716 votes,
1,619,708 votes were withheld with no votes against. Mr. Kelton received
10,821,774 votes, 3,137,650 votes were withheld with no votes against. Mr.
Johnson received 12,245,734 votes, 1,713,690 votes were withheld with no votes
against. Mr. Goldman received 10,669,514 votes, 3,289,910 votes were withheld
with no votes against.
At the annual meeting of the shareholders of the Company on May 2, 2001, the
shareholders voted to approve the Resource Bancshares Mortgage Group, Inc.
Outside Directors' Stock Option Plan. The approval received 11,736,144 votes,
39,127 shares abstained and 2,184,153 shares voted against.
At the annual meeting of the shareholders of the Company on May 2, 2001, the
shareholders voted to approve an amendment to the Amended and Restated Resource
Bancshares Mortgage Group, Inc. Omnibus Stock Award Plan to increase by 500,000
the number of shares of common stock of the Company available for issuance
thereunder. The approval received 10,950,972 votes, 39,048 shares abstained and
2,969,404 shares voted against.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- (a) A list of exhibits filed with this Form 10-Q, along with the
exhibit index can be found on pages A to I following the signature page.
- (b) No reports on Form 8-K were filed during the first six months of
2001.
75
76
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
----------------------------------------
(Registrant)
/s/ Steven F. Herbert
--------------------------------------------
Steven F. Herbert
Corporate Chief Financial Executive
(Signing in the capacity of (i) duly
authorized officer of the registrant and
(ii) principal financial officer of the
registrant)
76
77
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION PAGE
- -------- ----------- ----
3.1 Restated Certificate of Incorporation of the Registrant incorporated by *
reference to Exhibit 3.3 of the Registrant's Registration No. 33-53980
3.2 Certificate of Amendment of Certificate of Incorporation of the Registrant *
incorporated by reference to Exhibit 3.2 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997
3.3 Certificate of Designation of the Preferred Stock of the Registrant *
incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-A filed
on February 8, 1998
3.4 Amended and Restated Bylaws of the Registrant as amended through November 8, *
2000 incorporated by reference to Exhibit 4.2 of the Registrant's
Registration No. 333-55054.
4.1 Specimen Certificate of Registrant's Common Stock incorporated by reference *
to Exhibit 4.1 of the Registrant's Registration No. 33-53980
4.2 Rights Plan dated as of February 6, 1998 between the Registrant and First *
Chicago Trust Company of New York incorporated by reference to Exhibit 4.1 of
the Registrant's Form 8-A filed on February 8, 1998
4.3 Note Agreement between the Registrant and UNUM Life Insurance Company of *
America dated May 16, 1997 incorporated by reference to Exhibit 10.45 of the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997
10.1 (A) Outside Directors' Stock Option Plan (as amended through March 19, *
2001) is incorporated by reference to Exhibit 10.32 of the Registrant's
Annual Report on Form 10-K for the period ended December 31, 2000
(B) Amendment to the Outside Directors' Stock Option Plan adopted May 2, ----
2001
10.2 Stock Option Agreement between the Registrant and Lee E. Shelton incorporated *
by reference to Exhibit 10.8 (B) of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993
10.3 Director Deferred Compensation Plan dated June 2000 incorporated by reference *
to Exhibit 10.57 of the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2000
10.4 Outside Director Life Insurance Plan dated June 2000 incorporated by *
reference to the Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2000
A
78
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION PAGE
- -------- ----------- ----
10.5 (A) Change of Control Agreement by and between Resource Bancshares *
Mortgage Group, Inc. and Steven F. Herbert, dated as of July 27, 2000,
incorporated by reference to Exhibit 10.5 of the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 2000.
(B) Amendment to Change of Control Agreement between Steven F. Herbert ----
and the Company dated May 2, 2001
10.6 (A) Employment Agreement dated April 3, 2000, between Resource *
Bancshares Mortgage Group, Inc. and Harold Lewis, Jr. incorporated by
reference to Exhibit 10.6 (A) of the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 2000
(B) Change of Control Agreement dated May 3, 2000, by and between *
Resource Bancshares Mortgage Group, Inc. and Harold Lewis, Jr. incorporated
by reference to Exhibit 10.6 (B) of the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 2000
(C) Amendment to Change of Control Agreement between Harold Lewis, Jr. ----
and the Company dated May 2, 2001
10.7 (A) Change of Control Agreement dated November 8, 2000 by and between *
Resource Bancshares Mortgage Group, Inc. and William M. Ross incorporated by
reference to Exhibit 10.7 (A) of the Registrant's Annual Report on Form 10-K
for the period ended December 31, 2000
(B) Employment Agreement dated November 1, 2000 between Resource *
Bancshares Mortgage Group and William M. Ross incorporated by reference to
Exhibit 10.7 (B) of the Registrant's Annual Report on Form
10-K for the period ended December 31, 2000
(C) Amendment to Change of Control Agreement between William M. Ross and ----
the Company dated May 2, 2001
10.8 Section 125 Plan incorporated by reference to Exhibit 10.17 of the *
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993
10.9 (A) Pension Plan incorporated by reference to Exhibit 10.18 of the *
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993
(B) Amendment I to Pension Plan incorporated by reference to Exhibit 10.21 *
of the Registrant's Annual Report on Form 10-K for the year ended December
31, 1994
B
79
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION PAGE
- -------- ----------- ----
(C) Amendment II to Pension Plan incorporated by reference to Exhibit 10.22 *
of the Registrant's Annual Report on Form 10-K for the year ended December
31, 1994.
(D) Amendment to Pension Plan effective January 1, 1995 incorporated by *
reference to Exhibit 10.42 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995
(E) Amendment IV to Pension Plan effective May 31, 2000 incorporated by *
reference to Exhibit 10.16(B) of the Registrant's Quarterly Report on Form 10-
Q for the period ended June 30, 2000
10.10 (A) Phantom 401(k) Plan incorporated by reference to Exhibit 10.24 of the *
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994
(B) Amendment to Phantom 401(k) Plan incorporated by reference to Exhibit *
10.17(B) of the Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 1999
(C) Merger and Transfer Agreement Between The Resource Bancshares Mortgage *
Group, Inc. and Fidelity Management Trust Company incorporated by reference
to Exhibit 10.53 of the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1999.
10.11 (A) Resource Bancshares Mortgage Group, Inc. Supplemental Executive *
Retirement Plan incorporated by reference to Exhibit 10.14 of the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1998.
(B) First Amendment to Resource Bancshares Mortgage Group, Inc. Supplemental *
Executive Retirement Plan dated October 28, 1998 incorporated by reference to
Exhibit 10.19 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998
(C) Second Amendment to Resource Bancshares Mortgage Group, Inc. Supplemental *
Executive Retirement Plan dated May 31, 2000 incorporated by reference to Exhibit
10.19 (B) of the Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2000
10.12 (A) Pension Restoration Plan incorporated by reference to Exhibit 10.25 *
of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994
(B) Resolution of Board of Directors freezing additional accruals under *
the Pension Restoration Plan effective May 31, 2000 incorporated by reference
to Exhibit 10.20 (B) of the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2000
C
80
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION PAGE
- -------- ----------- ----
10.13 (A) Stock Investment Plan incorporated by reference to Exhibit 4.1 of the *
Registrant's Registration No. 33-87536
(B) Amendment I to Stock Investment Plan incorporated by reference to Exhibit *
10.27 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994
(C) Amendment II to Stock Investment Plan dated November 30, 1998 *
incorporated by reference to Exhibit 4.1(c) of the Registrant's Registration
Statement No. 333-68909
(D) Amendment III to Stock Investment Plan dated February 2, 2000 *
incorporated by reference to Exhibit 10.22 (C) of the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 2000
10.14 (A) Change of Control Agreement by and between Resource Bancshares
Mortgage Group, Inc. and Douglas K. Freeman, dated as of January 10, 2000 *
incorporated by reference to Exhibit 10.23 (A) of the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 2000
(B) Employment Agreement between Resource Bancshares Mortgage Group, *
Inc. and Douglas K. Freeman dated as of January 10, 2000 incorporated by
reference to Exhibit 10.23 (C) of the Registrant's Quarterly Report on Form
10- Q for the period ended March 31, 2000
(C) Incentive Stock Option Agreement pursuant to Resource Bancshares *
Mortgage Group, Inc. Omnibus Stock Award Plan between the Company and Douglas
K. Freeman dated January 10, 2000 incorporated by reference to Exhibit 10.14
(c) of the Registrant's Quarterly Report on Form 10-Q for the period ended
March 31, 2001
(D) Incentive Stock Option Agreement under the Resource Bancshares Mortgage *
Group, Inc. Omnibus Stock Award Plan between the Company and Douglas
K. Freeman dated February 1, 2001 incorporated by reference to Exhibit
10.14 (d) of the Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 2001
(E) Incentive Stock Option Agreement under the Resource Bancshares Mortgage
Group, Inc. Omnibus Stock Award Plan between the Company and Douglas
K. Freeman dated June 25, 2001 ----
(F) Incentive Stock Option Agreement under the Resource Bancshares Mortgage
Group, Inc. Omnibus Stock Award Plan between the Company and Douglas
K. Freeman dated June 25, 2001 ----
(G) Incentive Stock Option Agreement under the Resource Bancshares
Mortgage Group, Inc. Omnibus Stock Award Plan between the Company and Douglas
K. Freeman dated June 25, 2001 ----
(H) Incentive Stock Option Agreement under the Resource Bancshares ----
Mortgage Group, Inc. Omnibus Stock Award Plan between the Company and Douglas
K. Freeman dated June 25, 2001
D
81
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION PAGE
- -------- ----------- ----
(I) Incentive Stock Option Agreement under the Resource Bancshares ----
Mortgage Group, Inc. Omnibus Stock Award Plan between the Company and Douglas
K. Freeman dated June 25, 2001
(J) Amendment to Change of Control Agreement between Douglas K. Freeman ----
and the Company dated May 2, 2001
(K) Amendment to employment agreement between Douglas K. Freeman and the ----
Company dated June 25, 2001
10.15 (A) Employee Stock Ownership Plan incorporated by reference to Exhibit *
10.29 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994
(B) First Amendment to Employee Stock Ownership Plan dated October 31, *
1995 incorporated by reference to Exhibit 10.41 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995
(C) Second Amendment to Employee Stock Ownership Plan dated August 12, *
1996 incorporated by reference to Exhibit 10.45 of the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 1996
(D) Amended Resource Bancshares Mortgage Group, Inc. Successor Employee *
Stock Ownership Trust Agreement dated December 1, 1994, between the
Registrant and Marine Midland Bank incorporated by reference to Exhibit
10.30 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994
(E) Resolutions of the Board of Directors suspending contributions to ----
the Employee Stock Ownership Plan and directing officers to take steps
to terminate the Employee Stock Ownership Plan
10.16 (A) ESOP Loan and Security Agreement dated January 12, 1995 between the *
Registrant and The Resource Bancshares Mortgage Group, Inc. Employee Stock
Ownership Trust incorporated by reference to Exhibit 10.31 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995
(B) ESOP Loan and Security Agreement dated May 3, 1996, between the *
Registrant and The Resource Bancshares Mortgage Group, Inc. Employee Stock
Ownership Trust incorporated by reference to Exhibit 10.36 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996
10.17 (A) ESOP Notes dated January 20, 1998, April 1, 1998, July 1, 1998 and *
October 1, 1998 between the Registrant and The Resource Bancshares Mortgage
Group, Inc. Employee Stock Ownership Trust incorporated by reference to
Exhibit 10.30 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998
E
82
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION PAGE
- -------- ----------- ----
(B) ESOP Notes dated March 8, 1999, April 26, 1999, July 1, 1999 and October *
1, 1999 between the Registrant and The Resource Bancshares Mortgage Group,
Inc. Employee Stock Ownership Trust incorporated by reference to Exhibit 10.30
(B) of the Registrant's Annual Report on Form 10-K for the year ended December
31, 1999
10.18 (A) Formula Stock Option Plan incorporated by reference to Exhibit 10.36 of *
the Registrant's Quarterly Report on Form 10-Q for the period ended September
30, 1995
(B) Amendment to Resource Bancshares Mortgage Group, Inc. Formula Stock *
Option Plan and Non-Qualified Stock Option Plan incorporated by reference to
Exhibit 10.42 of the Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 1997
(C) First Amendment to the Formula Stock Option Plan incorporated by *
reference to Exhibit 99.8 of the Registrant's Registration No. 333-29245 as
filed on December 1, 1997
(D) Second Amendment to Resource Bancshares Mortgage Group, Inc. Formula *
Stock Option Plan dated October 28, 1998 incorporated by reference to Exhibit
10.34 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998
(E) Third Amendment to Resource Bancshares Mortgage Group, Inc. Formula *
Stock Option Plan by incorporated by reference to Exhibit 3.4 of the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 2000
10.19 Form of Indemnity Agreement by and between Resource Bancshares Mortgage *
Group, Inc. and Directors and/or Officers of the Corporation.
10.20 (A) Amended and Restated Omnibus Stock Award Plan incorporated by *
reference to Exhibit 99.10 of the Registrant's Registration No. 333-29245
filed on December 1, 1997
(B) First Amendment to Omnibus Stock Award Plan and form of Incentive *
Stock Option Agreement and Release to the Omnibus Stock Award Plan incorporated
by reference to Exhibit 10.44 of the Registrant's Quarterly Report on Form 10-Q
for the period ended September 30, 1998.
(C) Second Amendment to Resource Bancshares Mortgage Group, Inc. Omnibus Stock
Award Plan dated October 29, 1998 incorporated by reference to Exhibit *
10.37 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998
(D) Third Amendment to Omnibus Stock Award Plan is incorporated by
reference to Exhibit 10.20 (D) of the Registrant's Annual Report on Form 10-K *
for the period ended December 31, 2000
(E) Fourth Amendment to the Omnibus Stock Award Plan adopted May 2, 2001 ----
F
83
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION PAGE
- -------- ----------- ----
10.21 (A) Form of Incentive Stock Option Agreement (Omnibus Stock Award Plan) *
incorporated by reference to Exhibit 10.40 of the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 1997
(B) Form of Incentive Stock Option Agreement (Omnibus Stock Award Plan) *
effective June 2000 (officer vesting provisions) incorporated by reference
to Exhibit 10.38 (B) of the Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 2000
(C) Form of Incentive Stock Option Agreement (Omnibus Stock Award Plan) *
effective June 2000 ($16 vesting provisions) incorporated by reference to
Exhibit 10.38 (C) of the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2000
(D) Form of Incentive Stock Option Agreement (Omnibus Stock Award Plan) ----
effective June 2001 ($21 vesting provisions)
10.22 (A) Resource Bancshares Mortgage Group, Inc. Non-Qualified Stock Option Plan *
dated September 1, 1996 incorporated by reference to Exhibit 10.33 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996
(B) Form of Non-Qualified Stock Option Agreement (Non-Qualified Stock Option *
Plan), incorporated by reference to Exhibit 10.41 of the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 1997
(C) First Amendment to Resource Bancshares Mortgage Group, Inc. Non-Qualified *
Stock Option Plan dated January 29, 1997 incorporated by reference to Exhibit
10.41 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998
(D) Second Amendment to the Non-Qualified Stock Option Plan dated February 6, *
1998 incorporated by reference to Exhibit 10.40 of the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 1998
(E) Third Amendment to Resource Bancshares Mortgage Group, Inc. Non-Qualified *
Stock Option Plan dated October 28, 1998 incorporated by reference to Exhibit
10.43 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998
(F) Agreement and Release Form of Non-Qualified Stock Option Agreement *
incorporated by reference to Exhibit 10.41 of the Registrant's Quarterly Report
on Form 10-Q for the period ended March 31, 1998
10.23 (A) Amended and Restated Retirement Savings Plan dated April 1, 1996 *
incorporated by reference to Exhibit 10.34 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996
(B) First Amendment to Amended and Restated Retirement Savings Plan dated as *
of November 8, 1996 incorporated by reference to Exhibit 10.35 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996
G
84
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION PAGE
- -------- ----------- ----
(C) Second Amendment to Amended and Restated Retirement Savings Plan dated *
January 1997, incorporated by reference to Exhibit 10.38 of the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 1997
(D) Third Amendment to Amended and Restated Retirement Savings Plan dated May *
31, 2000 incorporated by reference to Exhibit 10.47 (B) of the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 2000
10.24 (A) Agreement of Merger dated April 18, 1997 between Resource Bancshares *
Mortgage Group, Inc., RBC Merger Sub, Inc. and Resource Bancshares
Corporation incorporated by reference to Annex A of the Registrant's
Registration No. 333-29245
(B) First Amendment to Agreement of Merger dated April 18, 1997 between *
Resource Bancshares Mortgage Group, Inc., RBC Merger Sub, Inc. and Resource
Bancshares Corporation incorporated by reference to Exhibit 10.42 of the
Registrant's Quarterly Report on Form 10-Q for the period ended September 30,
1997
(C) Second Amendment to Agreement of Merger dated April 18, 1997 between *
Resource Bancshares Mortgage Group, Inc., RBC Merger Sub, Inc. and Resource
Bancshares Corporation incorporated by reference to Annex A of the
Registrant's Registration No. 333-29245
10.25 (A) Mutual Release and Settlement Agreement between the Registrant, Lee E. *
Shelton and Constance P. Shelton dated January 31, 1997 incorporated by
reference to Exhibit 10.44 of the Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 1997
(B) Amendment to Mutual Release and Settlement Agreement between Registrant, *
Lee E. Shelton and Constance P. Shelton dated January 31, 1997 incorporated
by reference to Exhibit 10.44 of the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1997
10.26 Preferred Provider Organization Plan for Retired Executives incorporated by *
reference to Exhibit 10.43 of the Registrant's Quarterly Report on Form 10-Q
for the period ended September 30, 1998
10.27 Resource Bancshares Mortgage Group, Inc. Flexible Benefits Plan Amended and *
Restated as of January 1, 1998 incorporated by reference to Exhibit 10.51 of
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1998
10.28 The Resource Bancshares Mortgage Group, Inc. Nonqualified Deferred *
Compensation Plan effective April 1, 1999 incorporated by reference to
Exhibit 10.52 of the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1999
H
85
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION PAGE
- -------- ----------- ----
10.29 (A) Voluntary Employees' Beneficiary Association Trust for the Employees of *
Resource Bancshares Mortgage Group, Inc. incorporated by reference to Exhibit
10.53 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999
(B) Voluntary Employees' Beneficiary Association Plan for the Employees of *
Resource Bancshares Mortgage Group, Inc. incorporated by reference to Exhibit
10.54 of the Registrant's Quarterly Report on Form 10-Q for the period ended
March 31, 2000
10.30 MSC Stock Option Agreement between Resource Bancshares Mortgage Group, Inc. *
and Boyd M. Guttery dated February 2, 2000 incorporated by reference to
Exhibit 10.55 of the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2000
10.31 MSC Stock Option Agreement between Resource Bancshares Mortgage Group, Inc. *
and Stuart M. Cable dated February 2, 2000 incorporated by reference to
Exhibit 10.56 of the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2000
10.32 (A) Employment Agreement dated June 3, 1993, between the Registrant and *
David W. Johnson, Jr. as amended by amendment dated October 22, 1993
incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993
(B) Amendment to employment agreement between David W. Johnson, Jr. and the *
Company dated January 12, 2001 incorporated by reference to Exhibit 10.32(b)
of the Registrant's Quarterly Report on Form 10-Q for the period ended March
31, 2001
11.1 Statement re: Computation of Net Income per Common Share ----
*Incorporated by reference
I