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 September 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
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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
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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 October
31, 2001 was 16,599,864.
Page 1
Exhibit Index on Pages A to J
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Form 10-Q for the quarterly period ended September 30, 2001
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
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 19
Financial Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 79
PART II. OTHER INFORMATION 79
ITEM 6. Exhibits and Reports on Form 8-K 79
SIGNATURES 80
EXHIBIT INDEX A-J
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
September 30, December 31,
2001 2000
-------------- -------------
(Unaudited)
ASSETS
Cash $ 32,006 $ 15,205
Receivables 79,653 63,098
Mortgage loans held-for-sale 617,958 541,574
Lease receivables 195,263 191,777
Servicing rights, net 144,979 160,766
Premises and equipment, net 27,096 30,771
Accrued interest receivable 2,381 2,645
Goodwill and other intangibles 13,781 11,865
Other assets 45,344 52,052
----------- -----------
Total assets $ 1,158,461 $ 1,069,753
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 876,230 $ 811,750
Long-term borrowings 6,054 6,145
Accrued expenses 12,283 9,045
Other liabilities 112,939 91,044
----------- -----------
Total liabilities 1,007,506 917,984
----------- -----------
Common stock - par value $0.01 - 50,000,000 shares authorized;
31,637,331 shares issued at September 30, 2001
and December 31, 2000 316 316
Additional paid-in capital 298,155 297,996
Retained earnings 15,944 6,291
Common stock held by subsidiary at cost - 7,767,099 shares at
September 30, 2001 and December 31, 2000 (98,953) (98,953)
Treasury stock - 7,273,783 and 6,949,711 shares at September 30, 2001
and December 31, 2000, respectively (52,595) (50,050)
Unearned shares of employee stock ownership plan -
356,212 and 310,320 unallocated shares at at September 30, 2001
and December 31, 2000, respectively (4,313) (3,800)
Unearned variable option expense at September 30, 2001 and
December 31, 2000, respectively (7) (31)
Other comprehensive loss (7,592) --
----------- -----------
Total stockholders' equity 150,955 151,769
----------- -----------
Total liabilities and stockholders' equity $ 1,158,461 $ 1,069,753
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
For the Nine Months Ended For the Quarter Ended
September 30 September 30
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES
Interest income $ 57,952 $ 52,896 $ 18,421 $ 18,607
Interest expense (39,751) (39,469) (11,427) (14,457)
------------ ------------ ------------ ------------
Net interest income 18,201 13,427 6,994 4,150
Net gain on sale of mortgage loans 87,511 26,456 36,947 8,460
(Loss) gain on sale of mortgage servicing rights (2,329) 2,212 396 673
Servicing fees 26,446 26,351 9,214 8,471
Mark-to-market on residual interests in subprime
securitizations -- (39,338) -- (29,892)
Other (expense) income (822) 4,828 (1,765) 454
------------ ------------ ------------ ------------
Total revenues 129,007 33,936 51,786 (7,684)
------------ ------------ ------------ ------------
EXPENSES
Salary and employee benefits 38,497 38,302 12,885 13,432
Occupancy expense 13,799 10,469 5,709 3,633
Amortization and provision for impairment of
mortgage servicing rights 20,065 18,278 9,523 6,069
Provision expense 11,644 5,661 5,389 1,978
General and administrative expenses 20,581 19,452 7,792 7,358
------------ ------------ ------------ ------------
Total expenses 104,586 92,162 41,298 32,470
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income taxes 24,421 (58,226) 10,488 (40,154)
Income tax (expense) benefit (9,121) 21,389 (4,006) 14,859
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
transition adjustment 15,300 (36,837) 6,482 (25,295)
Cumulative effect of change in accounting
principles- SFAS No. 133, net of tax (149) -- -- --
------------ ------------ ------------ ------------
Income (loss) from continuing operations 15,151 (36,837) 6,482 (25,295)
Discontinued operations:
(Loss) gain on sale of operating assets of
Laureate Capital Corp. (less applicable income taxes
of $435 and $235 for the nine months and quarter
ended September 30, 2000, respectively) -- (1,607) -- 393
Operating (losses) of Laureate Capital Corp.
for the nine months ended September 30, 2000
(less applicable income tax benefit of $354) -- (660) -- --
------------ ------------ ------------ ------------
Net income (loss) $ 15,151 $ (39,104) $ 6,482 $ (24,902)
------------ ------------ ------------ ------------
Weighted average common shares outstanding -- Basic 16,368,382 18,034,854 16,273,761 17,435,701
------------ ------------ ------------ ------------
Net income (loss) per common share from
continuing operations-- Basic $ 0.93 $ (2.04) $ 0.40 $ (1.45)
------------ ------------ ------------ ------------
Net (loss) income per common share from
discontinued operations-- Basic -- $ (0.13) $ -- $ 0.02
------------ ------------ ------------ ------------
Weighted average common shares outstanding -- Diluted 16,609,335 18,034,854 16,552,512 17,435,701
------------ ------------ ------------ ------------
Net income (loss) per common share from
continuing operations-- Diluted 0.91 $ (2.04) $ 0.39 $ (1.45)
------------ ------------ ------------ ------------
Net (loss) income per common share from
discontinued operations-- Diluted -- $ (0.13) $ -- $ 0.02
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands, except share information)
(Unaudited)
Unearned
Shares
of Other
Common Employee Unearned Compre- Total
Common Stock Additional Stock Stock Variable hensive Stock-
Nine Months Ended ----------------- Paid-in Retained Held by Treasury Ownership Option Income holders'
September 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 (6,815) (6,815)
Treasury stock purchases (10,527) (10,527)
Exercise of stock options
Shares committed to be
released under Employee
Stock Ownership Plan 157 306 463
Purchase of shares by
Employee Stock
Ownership Plan
Shares issued or purchased
under Dividend
Reinvestment and Stock
Purchase Plan and Stock
Investment Plan (1,563) (46) 3,025 1,416
Net income (loss) (39,104) (39,104)
Total comprehensive income
---------- ----- -------- -------- -------- -------- ------- ---- ---- --------
Balance, September 30, 2000 31,637,331 $ 316 $298,543 $ 10,541 $(98,953) $(46,900) $(4,852) $ -- $ -- $158,695
========== ===== ======== ======== ======== ======== ======= ==== ==== ========
Unearned
Shares
of Other
Common Employee Unearned Compre- Total
Common Stock Additional Stock Stock Variable hensive Stock-
Nine Months Ended ----------------- Paid-in Retained Held by Treasury Ownership Option Income holders'
September 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
Issuance of restricted
stock
Cash dividends (5,487) (5,487)
Treasury stock purchases
(329,572 shares net of
issuances 542,728) (6,467) (6,467)
Exercise of Stock Options 83 3,473 3,556
Shares committed to be
released under Employee
Stock Ownership Plan 569 (513) 56
Purchase of share by
Employee Stock
Ownership Plan
Variable Option Exercises 109 50 24 183
Shares issued or
purchased under
Dividend Reinvestment
and Stock Purchase
Plan and Stock
Investment Plan (602) (11) 399 (214)
Net income (loss) 15,151 15,151
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) ** (3,641) (3,641)
---------- ----- -------- -------- -------- -------- -------- ---- ------- --------
Balance,
September 30, 2001 31,637,331 $ 316 $298,155 $ 15,944 $ (98,953) $(52,595) $ (4,313) $ (7) $(7,592) $150,955
========== ===== ======== ======== ======== ======== ======== ==== ======= ========
* Cumulative effect of change in accounting principle on other comprehensive
income is net of $1,948 in income tax benefit.
** Net change in other comprehensive income is net of $2,051 in income tax
benefit.
The accompanying notes are an integral part of these consolidated financial
statements.
5
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
------------ -----------
OPERATING ACTIVITIES
Net income (loss) $ 15,151 $ (36,837)
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 28,263 24,588
Employee Stock Ownership Plan compensation 56 463
Provision for estimated foreclosure losses and repurchased loans 11,644 5,661
(Increase) decrease in receivables (16,555) 11,554
Acquisition of mortgage loans (8,903,179) (4,590,507)
Proceeds from sales of mortgage loans
and mortgage-backed securities 8,906,311 4,576,826
Acquisition of mortgage servicing rights (205,416) (108,942)
Sales of mortgage servicing rights 198,809 110,321
Net gain on sales of mortgage loans and servicing rights (85,182) (28,668)
Decrease (increase) in accrued interest on loans 264 (1,103)
Increase in lease receivables (7,135) (32,112)
Decrease in other assets 4,227 556
Decrease in residual certificates -- 33,998
Increase (decrease) in accrued expenses and other liabilities 25,292 (8,754)
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) ** (3,641) --
------------ -----------
Net cash used in operating activities of continuing operations (35,042) (42,956)
------------ -----------
INVESTING ACTIVITIES
Purchases of premises and equipment (4,391) (2,392)
Disposition of premises and equipment 407 485
Loss on sale of fixed assets 26 --
------------ -----------
Net cash used in investing activities of continuing operations (3,958) (1,907)
------------ -----------
FINANCING ACTIVITIES
Proceeds from borrowings 13,609,589 5,651,248
Repayment of borrowings (13,545,200) (5,598,836)
Issuance of restricted stock -- 790
Shares (purchased) issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan (214) 1,416
Acquisition of treasury stock (6,467) (10,527)
Cash dividends (5,487) (6,815)
Exercise of stock options 3,556 --
Variable options expense 24 --
------------ -----------
Net cash provided by financing activities of continuing operations 55,801 37,276
------------ -----------
Discontinued operations -- (6,187)
------------ -----------
Net increase (decrease) in cash 16,801 (13,774)
Cash, beginning of period 15,205 30,478
------------ -----------
Cash, end of period $ 32,006 $ 16,704
------------ -----------
* Cumulative effect of change in accounting principle on other comprehensive
income is net of $1,948 in income tax benefit.
** Net change in other comprehensive income is net of $2,051 in income tax
benefit.
The accompanying notes are an integral part of these consolidated financial
statements.
6
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
Note 1 - Basis of Presentation:
The financial information included herein should be read in conjunction
with the consolidated financial statements and related notes of Resource
Bancshares Mortgage Group, Inc. (the Company), included in the Company's
December 31, 2000, Annual Report on Form 10-K. Certain financial information,
which is normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States, is not required
for interim financial statements and has been omitted. The accompanying interim
consolidated financial statements are unaudited. However, in the opinion of
management of the Company, all adjustments, consisting of normal recurring
items, necessary for a fair presentation of operating results for the periods
shown have been made.
Certain prior period amounts have been reclassified to conform to
current period presentation and for comparability purposes.
Note 2 - Earnings (Loss) and Dividends Per Share:
The following is a reconciliation of basic earnings (loss) per share
and diluted earnings (loss) per share for the quarter and nine months ended
September 30, 2001 and 2000, respectively:
($ in thousands except share information) FOR THE NINE MONTHS ENDED FOR THE QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
----------- ------------ ----------- -----------
CONTINUING OPERATIONS
Net Income (loss) $ 15,151 $ (36,837) $ 6,482 $ (25,295)
Weighted average common shares
outstanding - Basic 16,368,382 18,034,854 16,273,761
17,435,701
Net Income (loss) per common share
from continuing operations - Basic $ 0.93 $ (2.04) $ 0.40 $ (1.45)
Weighted average common shares
outstanding - Diluted 16,609,335 18,034,854 16,552,512
17,435,701
Net Income (loss) per common share
from continuing operations - Diluted $ 0.91 $ (2.04) $ 0.39 $ (1.45)
7
($ in thousands except share information) FOR THE NINE MONTHS ENDED FOR THE QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
----------- ------------ ----------- -----------
DISCONTINUED OPERATIONS
Net (loss) income from discontinued
operations* $ -- $ (2,267) $ -- $ 393
Weighted average common shares 16,368,382 18,034,854 16,273,761 17,435,701
Outstanding - Basic
Net (loss) income per common share
from discontinued operations - Basic $ -- $ (0.13) $ -- $ 0.02
Weighted average common shares 16,609,335 18,034,854 16,552,512 17,435,701
outstanding - Diluted
Net (loss) income per common share
from discontinued operations - Diluted $ -- $ (0.13) $ -- $ 0.02
* Net of applicable income tax expense of $0, $81, $0 and $235, respectively
($ in thousands except share information) FOR THE NINE MONTHS ENDED FOR THE QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
----------- ------------ ----------- -----------
SUPPLEMENTAL DISCLOSURE:
Cumulative effect of change in
accounting principles SFAS No. 133
on income per common share, $ (0.01) -- -- --
net of tax - Basic
Cumulative effect of change in
accounting principles
SFAS No. 133 on income per common share, $ (0.01) -- -- --
net of tax - Diluted
The supplemental disclosure above represents the cumulative effect of
adopting as of January 1, 2001 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. See Note 3 below for
additional information.
The Board of Directors approved a cash dividend of $0.11 per share on
August 2, 2001. This dividend was paid on September 12, 2001 to holders of
record as of August 15, 2001.
Note 3 - Change in Accounting Principles
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133. SFAS No. 133, as amended by SFAS Nos. 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
8
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 Company has
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 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,
9
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 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. Since the time of election, the Company has marked-to-market
the hedge instruments resulting in pre-tax charges of $5.3 million. Prior to the
election of hedge accounting, the offsetting increase in value of the underlying
servicing portfolio could not be recognized.
The Company enters into interest rate swaps to pay fixed rate and
receive floating rate as a cash flow hedge of its variable rate debt used to
finance its fixed rate lease receivables. Interest rate swaps are considered to
be derivatives under SFAS No. 133 and are to be carried at market value as
assets or liabilities in the balance sheet. Since this is a cash flow hedge
under SFAS No. 133, the after tax impact is charged to or credited to OCI.
Under the transition rules of SFAS No. 133, as of January 1, 2001, the
Company recognized the value of derivatives on its balance sheet. It recognized
in a separate line in its income statement the cumulative effect of changing to
SFAS No. 133. That cumulative effect is the difference between retained earnings
at December 31, 2000 and the amount of retained earnings that would have been
reported at that date if SFAS No. 133 had been retroactively applied to all
prior periods. The table below highlights the impact of this transition
adjustment.
($ 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 a decrease in net income net of tax of $1.5 million ($0.09 per
share) and $1.6 million ($0.09 per share), for the nine months and three months
ended September 30, 2001, respectively.
10
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 its commercial mortgage division, Laureate
Capital Corp., to BB&T Corporation of Winston-Salem, N.C.
Note 5 - Recently Issued Accounting Standard
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No.142, "Goodwill and Other Intangibles" (SFAS No. 142). SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". Under
SFAS No. 142, amortization of past and future intangible assets that have
indefinite useful lives will be eliminated, and, instead, such assets will be
subjected to an impairment assessment at least annually. The FASB has concluded
that goodwill has an indefinite useful life and will not be amortized under any
circumstances. SFAS No. 142 is effective for all fiscal quarters of all fiscal
years beginning after December 15, 2001. Consistent with the provisions of SFAS
No. 142, as of January 1, 2002, the Company will report on its balance sheet the
assessed value of its goodwill, will discontinue any further amortization of
goodwill, and will at least annually assess goodwill for further impairment.
Management does not at this time consider the forthcoming change in accounting
principle to be material to its financial statements.
Note 6 - 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 nine months
ended September 30, 2001 were $4,169, primarily resulting from the strength of
the Company's year-to-date performance. Likewise, in 2001 each of the Company's
full-time employees was granted incentive stock options to provide further
incentive to employees to "run it like they own it".
11
Note 7 - 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 8 - Purchase of Assets:
On September 14, 2001, the Company filed a report on Form 8-K reporting
under Item 5 the purchase of certain assets from Nations Credit Financial
Services Corporation ("EquiCredit"), a wholly owned subsidiary of Bank of
America Corporation, by Meritage Mortgage Corporation ("Meritage"), a wholly
owned subsidiary of the Company. The assets purchased included fixed assets of
15 of EquiCredit's offices and a service center in Jacksonville, Florida. The
purchase was structured as a cash transaction and funded from regular operating
funds of the Company. The transaction did not have a material effect upon the
Company's subprime financing arrangements.
Note 9 - 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, portfolio, servicing, 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 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.
12
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 quarter and nine months ended
September 30, 2001 and 2000, respectively, based upon traditional product
groupings:
13
AGENCY-ELIGIBLE
FOR THE QUARTER ENDED RE- TOTAL OTHER/ CON-
SEPTEMBER 30, 2001 (A) PRODUCTION SERVICING INSURANCE SUBPRIME LEASING SEGMENTS ELIMINATIONS SOLIDATED
---------- --------- --------- -------- ------- -------- ------------ ---------
(Unaudited) ($ in thousands)
Net interest income (expense) $ 2,739 $(1,119) $ 1 $ 2,788 $ 2,842 $ 7,251 $ (257) $ 6,994
Net gain on sale of mortgage loans 26,606 -- -- 10,341 -- 36,947 -- 36,947
Gain on sale of mortgage servicing rights -- 396 -- -- -- 396 -- 396
Servicing fees -- 9,127 -- -- 87 9,214 -- 9,214
Other income (expense) 14 (2,811) 748 (3) 286 (1,766) 1 (1,765)
------- ------- ------- -------- -------- -------- -------- -------
Total revenues 29,359 5,593 749 13,126 3,215 52,042 (256) 51,786
------- ------- ------- -------- -------- -------- -------- -------
Salary and employee benefits 6,711 1,035 -- 2,948 819 11,513 1,372 12,885
Occupancy expense 4,606 323 -- 792 127 5,848 (139) 5,709
Amortization and provision for impairment
of mortgage servicing rights -- 9,523 -- -- -- 9,523 -- 9,523
Provision expense 1,223 -- 51 2,383 1,732 5,389 -- 5,389
General and administrative expenses 2,696 1,640 (52) 1,533 289 6,106 1,686 7,792
------- ------- ------- -------- -------- -------- -------- -------
Total expenses 15,236 12,521 (1) 7,656 2,967 38,379 2,919 41,298
------- ------- ------- -------- -------- -------- -------- -------
Income (loss) before income taxes 14,123 (6,928) 750 5,470 248 13,663 (3,175) 10,488
Income tax benefit (expense) (5,280) 2,590 (264) (2,102) (106) (5,162) 1,156 (4,006)
------- ------- ------- -------- -------- -------- -------- -------
Income (loss) from continuing operations $ 8,843 $(4,338) $ 486 $ 3,368 $ 142 $ 8,501 $ (2,019) $ 6,482
======= ======= ======= ======== ======== ======== ======== =======
(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 RE- COMMERCIAL
SEPTEMBER 30, 2001 (A) PRODUCTION SERVICING INSURANCE SUBPRIME MORTGAGE LEASING
---------- --------- --------- -------- ---------- --------
(Unaudited) ($ in thousands)
Net interest income (expense) $ 339 $(1,345) $ (32) $ 3,233 $ -- $ 2,343
Net gain on sale of mortgage loans 4,438 -- -- 4,022 -- --
Gain on sale of mortgage
servicing rights -- 673 -- -- -- --
Servicing fees -- 8,335 -- -- -- 136
Mark-to-market on residual interests in
subprime securitizations -- -- -- (29,892) -- --
Other income (expense) 102 117 813 (776) -- 293
-------- ------- ----- -------- ---- --------
Total revenues 4,879 7,780 781 (23,413) -- 2,772
-------- ------- ----- -------- ---- --------
Salary and employee benefits 7,737 684 (90) 2,785 -- 669
Occupancy expense 2,961 35 -- 686 -- 127
Amortization and provision for
impairment of mortgage servicing rights -- 6,069 -- -- -- --
Provision expense 450 -- -- 841 -- 687
General and administrative expenses 3,134 1,148 73 2,166 -- --
-------- ------- ----- -------- ---- --------
Total expenses 14,282 7,936 (17) 6,478 -- 1,809
-------- ------- ----- -------- ---- --------
Income (loss) before income taxes (9,403) (156) 798 (29,891) -- 963
Income tax benefit (expense) 3,472 56 (281) 11,079 -- (378)
-------- ------- ----- -------- ---- --------
Income (loss) from continuing operations (5,931) (100) 517 (18,812) -- 585
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp.
(less applicable income taxes of $235) -- -- -- -- 393 --
-------- ------- ----- -------- ---- --------
Net income (loss) $ (5,931) $ (100) $ 517 $(18,812) $393 $ 585
TOTAL OTHER/ CON-
SEGMENTS ELIMINATIONS SOLIDATED
-------- ------------ ---------
Net interest income (expense) $ 4,538 $ (388) $ 4,150
Net gain on sale of mortgage loans 8,460 -- 8,460
Gain on sale of mortgage
servicing rights 673 -- 673
Servicing fees 8,471 -- 8,471
Mark-to-market on residual interests in
subprime securitizations (29,892) -- (29,892)
Other income (expense) 549 (95) 454
Total revenues (7,201) (483) (7,684)
Salary and employee benefits 11,785 1,647 13,432
Occupancy expense 3,809 (176) 3,633
Amortization and provision for
impairment of mortgage servicing rights 6,069 -- 6,069
Provision expense 1,978 -- 1,978
General and administrative expenses 6,847 511 7,358
-------- -------- --------
Total expenses 30,488 1,982 32,470
-------- -------- --------
Income (loss) before income taxes (37,689) (2,465) (40,154)
Income tax benefit (expense) 13,948 911 14,859
-------- -------- --------
Income (loss) from continuing operations (23,741) (1,554) (25,295)
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp.
(less applicable income taxes of $235) 393 -- 393
-------- -------- --------
Net income (loss) $(23,348) $ (1,554) $(24,902)
-------- -------- --------
(a) Revenues and expenses have been allocated on a direct basis to
the extent possible.
Management believes that these and all other revenues and expenses have been
allocated to the respective divisions on a reasonable basis.
14
AGENCY-ELIGIBLE
----------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) PRODUCTION SERVICING REINSURANCE
- ------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income (expense) $ 6,799 $ (3,467) $ (6)
Net gain on sale of mortgage loans 65,862 -- --
(Loss) on sale of mortgage servicing rights -- (2,329) --
Servicing fees -- 26,172 --
Other income (expense) 404 (4,750) 2,433
------------------------------------------
Total revenues 73,065 15,626 2,427
------------------------------------------
Salary and employee benefits 21,194 2,754 --
Occupancy expense 10,745 868 --
Amortization and provision for impairment
of mortgage servicing rights -- 20,065 --
Provision expense 2,822 -- 165
General and administrative expenses 7,615 5,471 10
------------------------------------------
Total expenses 42,376 29,158 175
------------------------------------------
Income (loss) before income taxes 30,689 (13,532) 2,252
Income tax benefit (expense) (11,478) 5,061 (792)
Income (loss) from continuing operations
before transition adjustment 19,211 (8,471) 1,460
------------------------------------------
Transition Adjustment - SFAS No. 133 -- -- --
------------------------------------------
Income (loss) from continuing operations $ 19,211 $ (8,471) $ 1,460
==========================================
OTHER /
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) SUBPRIME LEASING TOTAL SEGMENTS ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income (expense) $ 7,672 $ 8,405 $ 19,403 $(1,202) $ 18,201
Net gain on sale of mortgage loans 21,649 -- 87,511 -- 87,511
(Loss) on sale of mortgage servicing rights -- -- (2,329) -- (2,329)
Servicing fees -- 274 26,446 -- 26,446
Other income (expense) 7 932 (974) 152 (822)
---------------------------------------------------------------------
Total revenues 29,328 9,611 130,057 (1,050) 129,007
---------------------------------------------------------------------
Salary and employee benefits 8,021 2,355 34,324 4,173 38,497
Occupancy expense 2,249 379 14,241 (442) 13,799
Amortization and provision for impairment
of mortgage servicing rights -- -- 20,065 -- 20,065
Provision expense 5,008 3,649 11,644 -- 11,644
General and administrative expenses 3,618 1,107 17,821 2,760 20,581
---------------------------------------------------------------------
Total expenses 18,896 7,490 98,095 6,491 104,586
---------------------------------------------------------------------
Income (loss) before income taxes 10,432 2,121 31,962 (7,541) 24,421
Income tax benefit (expense) (4,078) (838) (12,125) 3,004 (9,121)
Income (loss) from continuing operations
before transition adjustment 6,354 1,283 19,837 (4,537) 15,300
---------------------------------------------------------------------
Transition Adjustment - SFAS No. 133 -- -- -- (149) (149)
---------------------------------------------------------------------
Income (loss) from continuing operations $ 6,354 $ 1,283 $ 19,837 $(4,686) $ 15,151
=====================================================================
(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 NINE MONTHS ENDED SEPTEMBER 30, 2000 (A) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income (expense) $ 1,252 $ (3,661) $ (71) $ 9,890 $ --
Net gain on sale of mortgage loans 16,255 -- -- 10,201 --
Gain on sale of mortgage servicing rights -- 2,212 -- -- --
Servicing fees -- 26,241 -- -- --
Mark-to-market on residual interests in subprime securitizations -- -- -- (39,338) --
Other income 534 365 2,408 544 --
--------------------------------------------------------------
Total revenues 18,041 25,157 2,337 (18,703) --
--------------------------------------------------------------
Salary and employee benefits 20,860 2,057 -- 9,911 --
Occupancy expense 8,484 146 -- 1,991 --
Amortization and provision for impairment
of mortgage servicing rights -- 18,278 -- -- --
Provision expense 1,702 -- -- 1,751 --
General and administrative expenses 8,271 3,168 245 5,311 --
--------------------------------------------------------------
Total expenses 39,317 23,649 245 18,964 --
--------------------------------------------------------------
Income (loss) before income taxes (21,276) 1,508 2,092 (37,667) --
Income tax benefit (expense) 7,841 (556) (735) 13,842
--------------------------------------------------------------
Income (loss) from continuing operations (13,435) 952 1,357 (23,825) --
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $261) -- -- -- -- (1,607)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $465) -- -- -- -- (660)
--------------------------------------------------------------
Net income (loss) $(13,435) $ 952 $ 1,357 $(23,825) $(2,267)
==============================================================
TOTAL OTHER /
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (A) LEASING SEGMENTS ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income (expense) $ 6,763 $ 14,173 $ (746) $ 13,427
Net gain on sale of mortgage loans -- 26,456 -- 26,456
Gain on sale of mortgage servicing rights -- 2,212 -- 2,212
Servicing fees 368 26,609 (258) 26,351
Mark-to-market on residual interests in subprime securitizations -- (39,338) -- (39,338)
Other income 859 4,710 118 4,828
---------------------------------------------------
Total revenues 7,990 34,822 (886) 33,936
---------------------------------------------------
Salary and employee benefits 2,107 34,935 3,367 38,302
Occupancy expense 373 10,994 (525) 10,469
Amortization and provision for impairment
of mortgage servicing rights -- 18,278 -- 18,278
Provision expense 2,208 5,661 -- 5,661
General and administrative expenses 948 17,943 1,509 19,452
---------------------------------------------------
Total expenses 5,636 87,811 4,351 92,162
---------------------------------------------------
Income (loss) before income taxes 2,354 (52,989) (5,237) (58,226)
Income tax benefit (expense) (934) 19,458 1,931 21,389
---------------------------------------------------
Income (loss) from continuing operations 1,420 (33,531) (3,306) (36,837)
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $261) -- (1,607) -- (1,607)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $465) -- (660) -- (660)
---------------------------------------------------
Net income (loss) $ 1,420 $(35,798) $ (3,306) $(39,104)
====================================================
(a) Revenues and expenses have been allocated on a direct basis to the extent
possible.
Management believes that these and all other revenues and expenses have been
allocated to the respective divisions on a reasonable basis.
15
Following is a summary of the allocated revenues and expenses for each of the
Company's operating divisions for the quarter and nine months ended September
30, 2001, based upon business processes.
16
CUSTOMER
FOR THE QUARTER ENDED SEPTEMBER 30, 2001 (A) SALES FULFILLMENT PORTFOLIO SERVICING LEASING
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income $ -- $ -- $ 4,412 $ -- $2,842
Net gain (loss) on sale of mortgage loans 2,476 (385) 40,495 (139) --
Gain on sale of mortgage servicing rights -- -- 396 -- --
Servicing fees -- -- 8,291 836 87
Other income (4) 2 (2,144) 99 286
------------------------------------------------------------------------
Total revenues (expense) 2,472 (383) 51,450 796 3,215
------------------------------------------------------------------------
Salary and employee benefits 6,223 6,709 1,437 1,600 819
Occupancy expense 347 2,576 227 508 127
Amortization and provision for impairment
of mortgage servicing rights -- -- 9,523 -- --
Provision expense -- -- 3,657 -- 1,732
General and administrative expenses 817 1,339 1,472 843 289
------------------------------------------------------------------------
Total expenses 7,387 10,624 16,316 2,951 2,967
------------------------------------------------------------------------
Income (loss) before income taxes (4,915) (11,007) 35,134 (2,155) 248
Income tax expense -- -- -- -- --
------------------------------------------------------------------------
Income (loss) before allocations and transfer pricing (4,915) (11,007) 35,134 (2,155) 248
Overhead allocations 1,084 2,867 523 1,093 --
------------------------------------------------------------------------
Income (loss) before transfer pricing (5,999) (13,874) 34,611 (3,248) 248
Transfer pricing 8,993 12,138 (24,365) 3,234 --
------------------------------------------------------------------------
Net income (expense) $ 2,994 $ (1,736) $ 10,246 $ (14) $ 248
========================================================================
(B) OTHER /
FOR THE QUARTER ENDED SEPTEMBER 30, 2001 (A) ADMINISTRATION ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income $ (260) $ -- $ 6,994
Net gain (loss) on sale of mortgage loans 492 (5,993) 36,946
Gain on sale of mortgage servicing rights -- -- 396
Servicing fees -- -- 9,214
Other income (3) -- (1,764)
-----------------------------------------------
Total revenues (expense) 229 (5,993) 51,786
-----------------------------------------------
Salary and employee benefits 3,344 (7,247) 12,885
Occupancy expense 1,924 -- 5,709
Amortization and provision for impairment
of mortgage servicing rights -- -- 9,523
Provision expense -- -- 5,389
General and administrative expenses 2,884 148 7,792
-----------------------------------------------
Total expenses 8,152 (7,099) 41,298
-----------------------------------------------
Income (loss) before income taxes (7,923) 1,106 10,488
Income tax expense -- (4,006) (4,006)
-----------------------------------------------
Income (loss) before allocations and transfer pricing (7,923) (2,900) 6,482
Overhead allocations (5,567) -- --
-----------------------------------------------
Income (loss) before transfer pricing (2,356) (2,900) 6,482
Transfer pricing -- -- --
-----------------------------------------------
Net income (expense) $(2,356) $(2,900) $ 6,482
===============================================
(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
CUSTOMER
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) SALES FULFILLMENT PORTFOLIO SERVICING LEASING
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income $ -- $ -- $ 11,003 $ -- $8,405
Net gain (loss) on sale of mortgage loans 7,118 (1,054) 96,497 (317) --
(Loss) on sale of mortgage servicing rights -- -- (2,329) -- --
Servicing fees -- -- 24,482 1,690 274
Other income 374 9 (2,666) 400 932
-------------------------------------------------------------------
Total revenues 7,492 (1,045) 126,987 1,773 9,611
-------------------------------------------------------------------
Salary and employee benefits 15,961 17,441 4,351 4,448 2,355
Occupancy expense 874 5,646 634 1,520 379
Amortization and provision for impairment
of mortgage servicing rights -- -- 20,065 -- --
Provision expense -- -- 7,995 -- 3,649
General and administrative expenses 2,247 3,493 3,726 3,664 1,107
-------------------------------------------------------------------
Total expenses 19,082 26,580 36,771 9,632 7,490
-------------------------------------------------------------------
Income (loss) before income taxes (11,590) (27,625) 90,216 (7,859) 2,121
Income tax expense -- -- -- -- --
-------------------------------------------------------------------
Income (loss) before transition adjustment,
allocations and transfer pricing (11,590) (27,625) 90,216 (7,859) 2,121
Transition adjustment - SFAS No. 133 -- -- -- -- --
-------------------------------------------------------------------
Income (loss) before allocations and transfer pricing (11,590) (27,625) 90,216 (7,859) 2,121
-------------------------------------------------------------------
Overhead allocations 3,138 7,791 1,643 3,311 --
-------------------------------------------------------------------
Income (loss) before transfer pricing (14,728) (35,416) 88,573 (11,170) 2,121
Transfer pricing 23,780 35,774 (69,371) 9,817 --
-------------------------------------------------------------------
Net income (expense) $ 9,052 $ 358 $ 19,202 $ (1,353) $2,121
-------------------------------------------------------------------
(B) OTHER /
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) ADMINISTRATION ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income $ (1,207) $ -- $ 18,201
Net gain (loss) on sale of mortgage loans 916 (15,649) 87,511
(Loss) on sale of mortgage servicing rights -- -- (2,329)
Servicing fees -- -- 26,446
Other income 129 -- (822)
-----------------------------------------
Total revenues (162) (15,649) 129,007
-----------------------------------------
Salary and employee benefits 11,394 (17,453) 38,497
Occupancy expense 4,746 -- 13,799
Amortization and provision for impairment
of mortgage servicing rights -- -- 20,065
Provision expense -- -- 11,644
General and administrative expenses 5,898 446 20,581
-----------------------------------------
Total expenses 22,038 (17,007) 104,586
-----------------------------------------
Income (loss) before income taxes (22,200) 1,358 24,421
Income tax expense -- (9,121) (9,121)
-----------------------------------------
Income (loss) before transition adjustment,
allocations and transfer pricing (22,200) (7,763) 15,300
Transition adjustment - SFAS No. 133 -- (149) (149)
-----------------------------------------
Income (loss) before allocations and transfer pricing (22,200) (7,912) 15,151
-----------------------------------------
Overhead allocations (15,883) -- --
-----------------------------------------
Income (loss) before transfer pricing (6,317) (7,912) 15,151
Transfer pricing -- -- --
-----------------------------------------
Net income (expense) $ (6,317) $ (7,912) $ 15,151
-----------------------------------------
(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
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) changes in interest rate, (v) 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) changes in accounting estimates, (xv) changes in federal
programs, the availability of an active secondary market, (xvi) the effect of
certain charter and bylaw provisions, the possible issuance of preferred stock
and (xvii) employee matters. 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.
19
LOAN AND LEASE PRODUCTION
A summary of production by source for the periods indicated is set forth
below:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Agency-Eligible Loan Production:
Correspondent $6,203,712 $3,277,105 $1,861,706 $1,249,462
Wholesale 1,824,573 831,451 558,896 288,230
---------- ---------- ---------- ----------
Total Agency-Eligible Loan Production 8,028,285 4,108,556 2,420,602 1,537,692
Subprime 874,895 481,951 417,796 160,637
Lease Production 65,636 78,215 19,486 24,915
---------- ---------- ---------- ----------
Total Mortgage Loan and Lease Production $8,968,816 $4,668,722 $2,857,884 $1,723,244
========== ========== ========== ==========
The Company purchases agency-eligible mortgage loans through its
correspondents and originates loans through its wholesale and subprime
divisions. The Company also has a small-ticket commercial equipment lease
operation. Correspondent operations accounted for 69% and 70% of the Company's
total production for the nine months ended September 30, 2001 and 2000,
respectively. Wholesale and subprime production accounted for 20% and 10%,
respectively, of the Company's production for the nine months ended September
30, 2001 and 18% and 10%, respectively, of the Company's production for the nine
months ended September 30, 2000. Lease production accounted for 1% and 2% of the
Company's total production for the nine months ended September 30, 2001 and
2000, respectively. A summary of key information relevant to industry loan
production activity is set forth below:
FOR THE NINE MONTHS
($ IN THOUSANDS) ENDED SEPTEMBER 30,
----------------------------------------
2001 2000
-------------- ---------------
U.S. 1-4 Family Mortgage Originations Statistics (1):
U.S. 1-4 Family Mortgage Originations $1,295,000,000 $ 763,000,000
Adjustable Rate Mortgage Market Share 11.89% 30.00%
Estimated Fixed Rate Mortgage Originations $1,141,000,000 $ 534,000,000
Company Information:
Residential Loan Production $ 8,903,180 $ 4,590,507
Estimated Company Market Share 0.69% 0.60%
(1) Source: Mortgage Bankers Association of America, Economics Department, (as
of October 10, 2001).
The Company's total residential mortgage production increased by 94% to $8.9
billion for the first nine months of 2001 from $4.6 billion for the first nine
months of 2000. Interest rates began falling in December of 2000 and remained
low during the first nine months of 2001 as compared to the first nine months of
2000, resulting in an increase in overall production levels industry-wide. Due
to expanded sales efforts and success in the secondary markets, the Company's
estimated market share for the first nine months of 2001 increased 0.09%
compared with the first nine months of 2000.
20
FOR THE QUARTER
($ IN THOUSANDS) ENDED SEPTEMBER 30,
--------------------------------------
2001 2000
------------ ---------------
U.S. 1-4 Family Mortgage Originations Statistics (1):
U.S. 1-4 Family Mortgage Originations $467,000,000 $ 290,000,000
Adjustable Rate Mortgage Market Share 13.00% 28.00%
Estimated Fixed Rate Mortgage Originations $406,000,000 $ 209,000,000
Company Information:
Residential Loan Production $ 2,838,398 $ 1,698,329
Estimated Company Market Share 0.61% 0.59%
(1) Source: Mortgage Bankers Association of America, Economics Department, (as
of October 10, 2001).
The Company's total residential mortgage production increased by 67% to
$2.8 billion for the third quarter of 2001 from $1.7 billion for the third
quarter of 2000. Interest rates began falling in December of 2000 and remained
low during the first nine months of 2001 as compared to the first nine months of
2000, resulting in an increase in overall production levels industry-wide. Due
to expanded sales efforts and success in the secondary markets, the Company's
estimated market share for third quarter 2001 increased 0.02% from third quarter
2000.
Correspondent Loan Production
The Company purchases closed mortgage loans through its network of
approved correspondent lenders. Correspondents are primarily mortgage lenders,
larger mortgage brokers and smaller savings and loan associations and commercial
banks that have met the Company's approval requirements. The Company continues
to emphasize correspondent loan production as its basic business focus because
of the lower fixed expenses and capital investment required of the Company. A
summary of key information relevant to the Company's correspondent loan
production activities is set forth below:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Correspondent Loan Production $6,203,713 $3,277,105 $1,861,706 $1,249,462
Estimated Correspondent Market Share (1) 0.48% 0.43% 0.40% 0.43%
Active Correspondents 721 918 721 918
Correspondent Division Expenses $ 31,106 $ 30,780 $ 11,430 $ 10,698
(1) Source: Mortgage Bankers Association of America, Economics Department, (as
of October 10, 2001).
The Company's correspondent loan production increased by 90% to $6.2
billion for the first nine months of 2001 from $3.3 billion for the first nine
months of 2000. Correspondent division expenses increased to $31.1 million for
the first nine months of 2001 from $30.8 million for the first nine months of
2000. However, these expenses as bps of production decreased by 44 bps to 50 bps
for the nine months ended September 30, 2001 from 94 bps for the nine months
ended
21
September 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 50% to $1.9
billion for the third quarter of 2001 from $1.2 billion for the third quarter of
2000. Mortgage interest rates were low during the third quarter of 2001 when
compared to the third quarter of 2000, resulting in an increase in overall
production levels industry-wide. Correspondent division expenses only increased
$0.7 million (7%) to $11.4 million for the third quarter of 2001 compared to
$10.7 million for the third quarter of 2000, despite a 50% increase ($621
million) in production. In bps these expenses decreased by 25 bps to 61 bps in
the third quarter of 2001 from 86 bps in the third quarter of 2000, primarily
due to gained efficiency as noted above in the nine months results analysis.
Wholesale Loan Production
The wholesale division receives loan applications through brokers,
underwrites the loans, funds the loans at closing and prepares all closing
documentation. The Company's operating centers handle all shipping and follow-up
procedures on loans. Typically, a mortgage broker is responsible for taking
applications and accumulating the information precedent to the Company's
processing and underwriting of the loans. Although the establishment of regional
operating centers involves the incurrence of fixed expenses associated with
maintaining those offices, wholesale operations also generally provide for
higher profit margins than correspondent loan production. Additionally, each
regional operating center can serve a relatively sizeable geographic area by
establishing relationships with large numbers of independent mortgage loan
brokers who bear much of the cost of identifying and interacting directly with
loan applicants. During 2000, the Company completed the process started in 1999
of consolidating from 18 branches into 4 regional operating centers to improve
operating cost efficiency levels. A summary of key information relevant to the
Company's wholesale production activities is set forth below:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Wholesale Loan Production $1,824,573 $831,451 $558,896 $288,230
Estimated Wholesale Market Share (1) 0.14% 0.11% 0.12% 0.10%
Wholesale Division Expenses $ 11,278 $ 8,537 $ 3,814 $ 3,584
Approved Brokers 4,718 4,128 4,718 4,128
Number of Regional Operating Centers (2) 4 6 4 6
Number of Employees 131 123 131 123
(1) Source: Mortgage Bankers Association of America, Economics Department, (as
of October 10, 2001).
(2) Regional operating centers were formerly known as branches
Wholesale loan production increased 118% ($1.0 billion) to $1.8 billion for
the first nine months of 2001 from $0.8 billion for the first nine months of
2000. This resulted in an increase in market share of 0.03% to 0.14% for the
first nine months of 2001 from 0.11% for the first nine months of 2000.
Wholesale loan production increased $0.3 billion to $0.6 billion for the third
quarter of 2001 from $0.3 billion for the third quarter of 2000.
22
Subprime Loan Production
The Company conducts subprime business through its wholly owned subsidiary,
Meritage Mortgage Corporation (Meritage). A summary of key information relevant
to the Company's subprime production activities is set forth below:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Subprime Loan Production $874,895 $481,951 $417,796 $160,637
Estimated Subprime Market Share (1) 0.07% 0.06% 0.09% 0.06%
Subprime Direct Operating Expenses $ 18,896 $ 18,964 $ 7,656 $ 6,478
Approved Brokers 4,612 2,925 4,612 2,925
Number of operating centers 4 3 4 3
Number of Employees 448 240 448 240
(1) Source: Mortgage Bankers Association of America, Economics Department, (as
of October 10, 2001).
Subprime loan production increased by 82% to $874.9 million for the nine
months ended September 30, 2001, compared to the nine months ended September 30,
2000. Despite the 82% increase in production, subprime costs rose by only 7%
(exclusive of a one-time charge of $1.3 million in 2000) to $18.9 million for
the nine month period ended September 30, 2001. 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. The addition of the fourth regional operating center,
related to the acquisition of 15 EquiCredit branches, occurred late in the third
quarter of 2001 and did not significantly impact direct operating expenses for
the nine months.
Subprime loan production increased by 160% to $417.8 million for the three
months ended September 30, 2001, as compared to $160.6 million during the three
months ended September 30, 2000. Due to this increase in production along with
the Company's expansion on the East Coast, subprime direct operating expenses
increased to $7.7 million for the third quarter of 2001 as compared to $6.5
million during the third quarter of 2000. These expenses, however, decreased in
bps by 220 bps to 183 bps in the third quarter of 2001 from 403 bps in the third
quarter of 2000. This drop in unit cost is largely the result of gained
efficiencies through the Company's efforts to centralize subprime processing,
underwriting and closing functions into three regional operating centers where a
critical mass of volume has been achieved for better operating efficiency. The
addition of the fourth regional operating center, related to the acquisition of
15 EquiCredit branches, occurred late in the third quarter of 2001 and did not
significantly impact direct operating expenses for the quarter.
23
Commercial Mortgage Production
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of its commercial mortgage division, Laureate
Capital Corp., to BB&T Corporation of Winston-Salem, N.C.
Lease Production
The Company's wholly owned subsidiary, Republic Leasing Company, Inc.
(Republic Leasing), originates and services small-ticket commercial equipment
leases. Substantially all of Republic Leasing's lease receivables are acquired
from independent brokers who operate throughout the continental United States. A
summary of key information relevant to the Company's lease production activities
is set forth below:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
Lease Production $65,636 $78,215 $19,486 $24,915
Lease Division Direct Operating Expenses $ 7,490 $ 5,636 $ 2,967 $ 1,809
Approved Brokers 235 193 235 193
Number of Employees 62 67 62 67
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.
24
A summary of key information relevant to the Company's agency-eligible loan
servicing activities is set forth below:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ----------- ------------ -----------
Underlying Unpaid Principal Balances:
Beginning Balance * $ 8,047,179 $ 7,822,394 $ 8,184,965 $ 8,529,100
Agency-Eligible Loan Production (net
of servicing- released production)* 7,786,042 3,989,019 2,326,823 1,506,323
Net Change in Work-in-Progress* 773,087 40,493 802,183 (1,119,163)
Sales of Servicing* (7,294,392) (3,928,087) (2,997,187) (1,348,268)
Paid-In-Full Loans* (1,352,097) (396,066) (463,161) (141,310)
Amortization, Curtailments and Other,
net* (181,054) (149,484) (74,858) (48,413)
------------ ----------- ------------ -----------
Ending Balance* 7,778,765 7,378,269 7,778,765 7,378,269
Subservicing Ending Balance 4,582,563 1,354,124 4,582,563 1,354,124
------------ ----------- ------------ -----------
Total Underlying Unpaid Principal Balances $ 12,361,327 $ 8,732,393 $ 12,361,327 $ 8,732,393
============ =========== ============ ===========
* 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 third quarter of 2001 and 2000 include $317,142 and
$194,016, respectively, of subprime loans being temporarily serviced until these
loans are sold.
Of the $7.8 billion and $7.4 billion unpaid principal balance at September
30, 2001 and 2000, $4.8 billion and $5.6 billion, respectively, of the related
mortgage servicing right asset is classified as available-for-sale, while $3.0
billion and $1.8 billion, respectively, of the related mortgage servicing right
asset is classified as held-for-sale.
A summary of servicing statistics follows:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ---------- ----------- ----------
Average Underlying Unpaid Principal Balances
(including subservicing) $10,389,983 $9,082,315 $11,565,875 $8,826,384
Weighted Average Note Rate* 7.43% 7.64% 7.43% 7.64%
Weighted Average Servicing Fee* 0.44% 0.42% 0.44% 0.42%
Delinquency (30+ days) Including Bankruptcies
and Foreclosures* 3.89% 2.40% 3.89% 2.40%
Number of Servicing Division Employees 108 71 108 71
* These numbers and statistics apply to the Company's owned servicing portfolio
The average underlying unpaid principal balance of agency-eligible mortgage
loans being serviced and subserviced for the first nine months of 2001 as
compared to the first nine months of 2000 increased $1.3 million, or 14.4%,
generally due to the 95% overall increase in agency-eligible production. The
increase in delinquencies and foreclosures is primarily due to delays in the
mail system and other payment delivery systems that were disrupted by the
September 11th terrorist attacks. The extent of the impact is not known.
25
The average underlying unpaid principal balance of agency-eligible mortgage
loans being serviced and subserviced for the third quarter of 2001 as compared
to the third quarter of 2000 increased $2.7 billion, or 31%, generally due to
the 57% overall increase in agency-eligible production and the addition of $0.9
billion in third party subservicing. The weighted average note rate decreased by
21 bps, to 7.43% in the third quarter of 2001 from 7.64% in the third quarter of
2000.
Lease Servicing
Republic Leasing services leases that are owned by it and also services
leases for investors. A summary of key information relevant to the Company's
lease servicing activity is set forth below:
($ IN THOUSANDS)
AS OF SEPTEMBER 30,
-----------------------
2001 2000
-------- --------
Owned Lease Servicing Portfolio $192,298 $182,444
Serviced For Investors Servicing Portfolio 846 5,392
-------- --------
Total Managed Lease Servicing Portfolio $193,144 $187,836
======== ========
Weighted Average Net Yield For
Managed Lease Servicing Portfolio 10.81% 10.73%
Delinquencies (30+ Days) Managed Lease
Servicing Portfolio 2.24% 2.27%
Consolidated Coverage Ratios
A summary of the Company's consolidated ratios of mortgage and lease
servicing fees and net interest income from owned leases to cash operating
expenses net of amortization and depreciation follows:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ----------------------
2001 2000 2001 2000
-------- --------- -------- -------
Total Company Servicing Fees $ 26,446 $ 26,351 $ 9,214 $ 8,471
Net Interest Income from Owned Leases 8,405 6,763 2,842 2,343
-------- -------- -------- -------
Total Servicing Fees and Interest from Owned Leases $ 34,851 $ 33,114 $ 12,056 $10,814
-------- -------- -------- -------
Total Company Operating Expenses $104,586 $ 92,162 $ 41,298 $32,470
Total Company Amortization and Depreciation (28,263) (24,588) (13,021) (7,391)
-------- -------- -------- -------
Total Company Operating Expenses, Net of
Amortization and Depreciation $ 76,323 $ 67,574 $ 28,277 $25,079
-------- -------- -------- -------
Coverage Ratio 46% 49% 43% 43%
======== ======== ======== =======
The Company's coverage ratios for the first nine months of 2001 and
2000 were 46% and 49%, respectively. The Company has a target level of between
50% and 80%. Opportunistically and as market conditions permit, management would
expect to move in line with the stated objective of maintaining a coverage ratio
of between 50% and 80%.
26
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED TO NINE
MONTHS ENDED SEPTEMBER 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 nine months of 2001 was $0.91 per share as compared to
($2.04) per share for the first nine months of 2000. Following is a summary of
the revenues and expenses for each of the Company's operating divisions for the
nine months ended September 30, 2001 and 2000, respectively:
27
AGENCY-ELIGIBLE
----------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) PRODUCTION SERVICING REINSURANCE
- ---------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income (expense) $ 6,799 $ (3,467) $ (6)
Net gain on sale of mortgage loans 65,862 -- --
(Loss) on sale of mortgage servicing rights -- (2,329) --
Servicing fees -- 26,172 --
Other income (expense) 404 (4,750) 2,433
-------------------------------------
Total revenues 73,065 15,626 2,427
-------------------------------------
Salary and employee benefits 21,194 2,754 --
Occupancy expense 10,745 868 --
Amortization and provision for impairment
of mortgage servicing rights -- 20,065 --
Provision expense 2,822 -- 165
General and administrative expenses 7,615 5,471 10
-------------------------------------
Total expenses 42,376 29,158 175
-------------------------------------
Income (loss) before income taxes 30,689 (13,532) 2,252
Income tax benefit (expense) (11,478) 5,061 (792)
Income (loss) from continuing operations
before transition adjustment 19,211 (8,471) 1,460
-------------------------------------
Transition Adjustment - SFAS No. 133 -- -- --
-------------------------------------
Income (loss) from continuing operations $ 19,211 $ (8,471) $ 1,460
=====================================
OTHER /
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) SUBPRIME LEASING TOTAL SEGMENTS ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income (expense) $ 7,672 $ 8,405 $ 19,403 $(1,202) $ 18,201
Net gain on sale of mortgage loans 21,649 -- 87,511 -- 87,511
(Loss) on sale of mortgage servicing rights -- -- (2,329) -- (2,329)
Servicing fees -- 274 26,446 -- 26,446
Other income (expense) 7 932 (974) 152 (822)
--------------------------------------------------------------------
Total revenues 29,328 9,611 130,057 (1,050) 129,007
--------------------------------------------------------------------
Salary and employee benefits 8,021 2,355 34,324 4,173 38,497
Occupancy expense 2,249 379 14,241 (442) 13,799
Amortization and provision for impairment
of mortgage servicing rights -- -- 20,065 -- 20,065
Provision expense 5,008 3,649 11,644 -- 11,644
General and administrative expenses 3,618 1,107 17,821 2,760 20,581
--------------------------------------------------------------------
Total expenses 18,896 7,490 98,095 6,491 104,586
--------------------------------------------------------------------
Income (loss) before income taxes 10,432 2,121 31,962 (7,541) 24,421
Income tax benefit (expense) (4,078) (838) (12,125) 3,004 (9,121)
Income (loss) from continuing operations
before transition adjustment 6,354 1,283 19,837 (4,537) 15,300
--------------------------------------------------------------------
Transition Adjustment - SFAS No. 133 -- -- -- (149) (149)
--------------------------------------------------------------------
Income (loss) from continuing operations $ 6,354 $ 1,283 $ 19,837 $(4,686) $ 15,151
====================================================================
(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 NINE MONTHS ENDED SEPTEMBER 30, 2000 (A) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE
- ---------------------------------------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income (expense) $ 1,252 $ (3,661) $ (71) $ 9,890 $ --
Net gain on sale of mortgage loans 16,255 -- -- 10,201 --
Gain on sale of mortgage servicing rights -- 2,212 -- -- --
Servicing fees -- 26,241 -- -- --
Mark-to-market on residual interests in subprime securitizations -- -- -- (39,338) --
Other income 534 365 2,408 544 --
----------------------------------------------------------
Total revenues 18,041 25,157 2,337 (18,703) --
----------------------------------------------------------
Salary and employee benefits 20,860 2,057 -- 9,911 --
Occupancy expense 8,484 146 -- 1,991 --
Amortization and provision for impairment
of mortgage servicing rights -- 18,278 -- -- --
Provision expense 1,702 -- -- 1,751 --
General and administrative expenses 8,271 3,168 245 5,311 --
----------------------------------------------------------
Total expenses 39,317 23,649 245 18,964 --
----------------------------------------------------------
Income (loss) before income taxes (21,276) 1,508 2,092 (37,667) --
Income tax benefit (expense) 7,841 (556) (735) 13,842
----------------------------------------------------------
Income (loss) from continuing operations (13,435) 952 1,357 (23,825) --
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $261) -- -- -- -- (1,607)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $465) -- -- -- -- (660)
----------------------------------------------------------
Net income (loss) $(13,435) $ 952 $ 1,357 $(23,825) $(2,267)
==========================================================
TOTAL OTHER /
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (A) LEASING SEGMENTS ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income (expense) $ 6,763 $ 14,173 $ (746) $ 13,427
Net gain on sale of mortgage loans -- 26,456 -- 26,456
Gain on sale of mortgage servicing rights -- 2,212 -- 2,212
Servicing fees 368 26,609 (258) 26,351
Mark-to-market on residual interests in subprime securitizations -- (39,338) -- (39,338)
Other income 859 4,710 118 4,828
---------------------------------------------------
Total revenues 7,990 34,822 (886) 33,936
---------------------------------------------------
Salary and employee benefits 2,107 34,935 3,367 38,302
Occupancy expense 373 10,994 (525) 10,469
Amortization and provision for impairment
of mortgage servicing rights -- 18,278 -- 18,278
Provision expense 2,208 5,661 -- 5,661
General and administrative expenses 948 17,943 1,509 19,452
---------------------------------------------------
Total expenses 5,636 87,811 4,351 92,162
---------------------------------------------------
Income (loss) before income taxes 2,354 (52,989) (5,237) (58,226)
Income tax benefit (expense) (934) 19,458 1,931 21,389
---------------------------------------------------
Income (loss) from continuing operations 1,420 (33,531) (3,306) (36,837)
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $261) -- (1,607) -- (1,607)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $465) -- (660) -- (660)
---------------------------------------------------
Net income (loss) $ 1,420 $(35,798) $ (3,306) $(39,104)
===================================================
(a) Revenues and expenses have been allocated on a direct basis to the extent
possible.
Management believes that these and all other revenues and expenses have been
allocated to the respective divisions on a reasonable basis.
28
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage production operations.
($ IN THOUSANDS) FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
2001 2000
---------- ----------
Net interest income $ 6,799 $ 1,252
Net gain on sale of mortgage loans 65,862 16,255
Other income 404 534
---------- ----------
Total production revenue 73,065 18,041
---------- ----------
Salary and employee benefits 21,194 20,860
Occupancy expense 10,745 8,484
Provision expense 2,822 1,702
General and administrative expenses 7,615 8,271
---------- ----------
Total production expenses 42,376 39,317
---------- ----------
Net pre-tax production margin $ 30,689 $ (21,276)
========== ==========
Production $8,028,285 $4,108,556
Pooled production and whole loan sales $8,007,639 $3,946,280
Total production revenue to pool delivery 91 bps 46 bps
Total production expenses to production 53 bps 96 bps
---------- ----------
Net pre-tax production margin 38 bps (50) bps
========== ==========
Summary
The production revenue to pool delivery ratio increased 45 bps for the
first nine months of 2001 as compared to the first nine months of 2000. Net gain
on sale of mortgage loans (82 bps for the first nine months of 2001 versus 41
bps for the first nine 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 8 bps in the first nine months of 2001 from 3 bps
in the first nine 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. Absent non-recurring
items ($1,206 for 2001 and $1,505 for 2000), the production expenses to
production ratio declined to 51 bps, a drop of 41 bps compared to 92 bps for the
first nine months of 2000. This decline was primarily due to the consolidation
of regional loan processing centers during the second half of 2000 and the
re-engineering of workflows within those processing centers. Likewise, with
higher production volumes, the Company has been able to better leverage its
fixed expenses. As a consequence of the foregoing, the Company's net
agency-eligible pre-tax production margin increased 88 bps from the first nine
months of 2000 to the first nine months of 2001.
29
Net Interest Income
The following table analyzes net interest income allocated to the
Company's agency-eligible mortgage production activities in terms of rate and
volume variances of the interest spread (the difference between interest rates
earned on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds) for the nine months ended September 30, 2001
and 2000, respectively:
($ 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
$507,953 $352,717 7.47% 8.14% Mortgage-Backed $28,472 $21,541 $ 6,931 $(2,549) $9,481
- --------------------------------------- Securities --------------------------------------------------
INTEREST EXPENSE
$281,209 $288,355 4.25% 5.38% Warehouse Lines * 8,966 11,633 (2,667) (2,379) (288)
198,157 54,631 4.80% 6.79% Gestation Line 7,134 2,781 4,353 (2,953) 7,306
131,686 126,053 5.33% 7.11% Servicing Secured Line 5,266 6,726 (1,460) (1,761) 301
Facility Fees & Other Charges 1,712 2,594 (882) -- (882)
- --------------------------------------- --------------------------------------------------
$611,052 $469,039 5.04% 6.75% Total Interest Expense 23,078 23,734 (656) (7,092) 6,436
- --------------------------------------- --------------------------------------------------
Net Interest Income Before
2.44% 1.40% Interdivisional Allocations 5,394 (2,193) $ 7,587 $ 4,543 $3,044
================= ==================================================
Allocation to Agency-Eligible
Servicing Division 3,467 3,661
-------------------
Net Interest Income 8,861 1,468
Intercompany Net Interest
Expense included in
Segmented Income statement (2,062) (216)
-------------------
Net Interest Income $6,799 $1,252
===================
* The interest-rate yield on the warehouse lines are net of the benefit of
escrow deposits.
The 104 bps increase in the interest-rate spread for the agency-eligible
segment was primarily a result of a steepening of the yield curve following the
short-term rate cuts made by the Federal Reserve at the end of 2000 and during
the first nine months of 2001. The Company's mortgages held-for-sale and
mortgage-backed securities are generally sold and replaced within 30 to 35 days.
Accordingly, the Company generally borrows at rates based upon short-term
indices, while its asset yields are primarily based upon long-term mortgage
rates.
30
Net Gain on Sale of Agency-Eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
($ IN THOUSANDS) FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------
2001 2000
----------- -----------
Gross proceeds on sales of mortgage loans $ 8,069,645 $ 4,042,380
Initial unadjusted acquisition cost of mortgage loans sold,
net of hedge results 8,046,433 4,048,534
----------- -----------
Unadjusted Gain (loss) on sale of mortgage loans
23,212 (6,154)
Loan origination and correspondent program
administrative fees 3,715 3,500
----------- -----------
Unadjusted aggregate margin 26,927 (2,654)
Acquisition basis allocated to mortgage servicing
rights (SFAS No. 140) 44,804 21,280
Net deferred costs and administrative fees recognized (5,869) (2,371)
----------- -----------
Net gain on sale of agency-eligible mortgage loans $ 65,862 $ 16,255
=========== ===========
Net gain on sale of agency-eligible mortgage loans increased $49.6
million to $65.9 million for the first nine months of 2001 from $16.3 million
for the first nine months of 2000. The increase is primarily due to a 103%
increase in sales volumes and a 45 bps improvement in margin on sale. Production
and sales volumes improved as a result of lower interest rates during the first
nine months of 2001 compared with the first nine months of 2000. The margin
increased as a result of an improvement in the competitive environment due to
the increase in 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 nine months of both 2001 and 2000, the Company
recognized premium and investment income of approximately $2.4 million that has
been included as other income in the agency-eligible reinsurance segment.
31
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
subprime mortgage production operations for the periods indicated:
($ IN THOUSANDS) FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
2001 2000
-------- ---------
Net interest income $ 7,672 $ 9,890
Net gain on sale of mortgage loans 21,649 10,201
Mark-to-Market on residual interests in subprime securitizations -- (39,338)
Other income 7 1,621
-------- ---------
Total production revenue 29,328 (18,703)
-------- ---------
Salary and employee benefits 8,021 9,911
Occupancy expense 2,249 1,991
Provision expense 5,008 1,751
General and administrative expenses 3,618 5,311
-------- ---------
Total production expenses 18,896 18,964
-------- ---------
Net pre-tax production margin $ 10,432 $ (37,667)
======== =========
Production $874,895 $ 481,951
Whole loan sales $818,738 $ 489,184
Total production revenue to whole loan sales 358 bps (382) bps
Total production expenses to production 216 bps 393 bps
-------- ---------
Net pre-tax production margin 142 bps (775) bps
======== =========
Summary
The subprime unit had production of $875 million during the first nine
months of 2001, an increase of $393 million over the same period in 2000. This
increase is primarily due to positive market-share increases ($327 million) and
the purchase of 15 East Coast Equicredit branches ($66 million).
During the first nine months of 2000 the subprime unit's results
included the following non-recurring items: 1) a ($39.3) million adjustment in
mark-to-market on residual interests in subprime securitizations, 2) a ($1.1)
million adjustment to the residual hedges included in other income, 3) a $1.5
million charge to salary and employee benefits and 4) $0.8 million charge to
general and administrative expenses. Absent these non-recurring items, the net
pre-tax production margin improved 45 bps to 142 bps for the first nine months
of 2001 from 97 bps for the first nine months of 2000. Net gain on sale of
mortgage loans increased by $11.4 million to $21.6 million for the first nine
months of 2001 from $10.2 million compared to the same period of 2000. This is
primarily due to positive variances in both volume of whole loan sales and
margin. Net interest income declined by $2.2 million due primarily to the
absence of $5.7 million of interest earned on subprime residuals that were sold
in 2000. Adjusted for the residual interest, net interest income would have
increased by $3.5 million for the first nine months of 2001 when compared to the
same period in 2000 due to positive variances in both volume of mortgages
held-for-sale and interest spread.
32
Absent these non-recurring items, total production expenses to
production improved by 131 bps to 216 bps for the first nine months of 2001
compared to 347 bps for the same period of 2000. This improvement was due
primarily to the consolidation of regional operating centers and the associated
reengineering efforts completed in 2000. Provision expense increased by $3.3
million, which is primarily attributable to the 82% increase in subprime
production.
Net Interest Income
The following table analyzes net interest income allocated to the
Company's subprime mortgage production activities in terms of rate and volume
variances of the interest spread (the difference between interest rates earned
on loans and residual certificates and interest rates paid on interest-bearing
sources of funds) for the nine months ended September 30, 2001 and 2000,
respectively.
($ IN THOUSANDS) Variance
Average Volume Average Rate Interest Attributable to
- -------------------------------------- ------------------ ----------------
2001 2000 2001 2000 2001 2000 Variance Rate Volume
- -------------------------------------- -----------------------------------------------
$157,595 $152,816 10.62% 9.98% Mortgages Held-for-Sale $12,550 $11,442 $ 1,108 $ 750 $ 358
-- 49,404 -- 15.49% Residual Certificates -- 5,739 (5,739) -- (5,739)
- -------------------------------------- -----------------------------------------------
157,595 202,220 10.62% 11.33% Total Interest Income 12,550 17,181 (4,631) 750 (5,381)
- -------------------------------------- -----------------------------------------------
$159,667 $141,309 6.08% 7.19% Total Interest Expense 7,282 7,615 (333) (1,322) 989
- -------------------------------------- -----------------------------------------------
4.54% 4.14% Net Interest Income $ 5,268 $ 9,566 $(4,298) $ 2,072 $(6,370)
================= ================
Intercompany Net Interest
Income included in
Segmented Income
Statement 2,404 324
-----------------
Net Interest Income $ 7,672 $ 9,890
=================
Net interest income from subprime products decreased $2.2 million for
the nine months ended September 30, 2001 compared to the nine months ended
September 30, 2000. This is primarily due to the absence of $5.7 million in
interest income associated with the residual certificates sold by the Company in
the fourth quarter of 2000. Net of this amount, net interest income increased by
$3.5 million. Interest income on mortgages held-for-sale increased by $1.1
million during the first nine months of 2001 from the first nine months of 2000,
due primarily to a 64 bps improvement in interest earned on mortgages
held-for-sale ($0.8 million) and a $4.8 million increase in the average volume
of mortgages held-for-sale ($0.4 million). Total interest expense declined
primarily due to the 111 bps drop in cost of funds ($1.3 million), which was
offset by an increase of warehouse borrowings outstanding ($0.9 million).
Net Gain on Sale of Subprime Mortgage Loans
The Company sold subprime mortgage loans for cash on a whole loan basis
during the first nine months of 2001 and 2000. Whole loans are generally sold,
without recourse, to third parties with the gain or loss being calculated based
on the difference between the carrying value of the loans sold and the gross
proceeds received from the purchaser less expenses. Generally, no interest in
these loans is retained by the Company.
33
A reconciliation of the gain on subprime mortgage whole loan sales for
the periods indicated follows:
($ IN THOUSANDS) FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
2001 2000
--------- ---------
Gross proceeds on whole loan sales of subprime mortgage loans $ 836,666 $ 506,278
Initial unadjusted acquisition cost of subprime mortgage loans
sold, net of fees 802,381 489,184
--------- ---------
Unadjusted gain on whole loan sales of subprime mortgage loans 34,285 17,094
Net deferred costs and administrative fees recognized (12,636) (6,893)
--------- ---------
Net gain on sale of subprime mortgage loans $ 21,649 $ 10,201
========= =========
The net gain on whole loan sales of subprime mortgage loans increased
$11.4 million to $21.6 million for the first nine months of 2001 from $10.2
million for the first nine months of 2000. Of this increase, $6.9 million is due
to the increase in volume, $2.7 million is due to the increased margin and $1.8
million is due to the mix of increased volume and increased margin.
Mark-to-Market on Residual Interests in Subprime Securitizations
Through late 2000, the Company retained residual certificates in
connection with the securitization of subprime loans. For both fiscal year 2000
and the first nine months of 2001, the Company executed no securitization
transactions of subprime loans. For the nine months ended September 30, 2000,
the mark-to-market loss on residuals was approximately $39.3 million. In the
fourth quarter of 2000, the Company further marked down its residual interests
in prior subprime securitizations as a result of signing a definitive agreement
to sell all of the residual interests remaining on its balance sheet at
September 30, 2000. The Company closed on that sale during the fourth quarter of
2000 and currently has no residuals on the balance sheet.
34
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage servicing operations:
($ IN THOUSANDS) FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------
2001 2000
----------- -----------
Net interest expense $ (3,467) $ (3,661)
Loan servicing fees 26,172 26,241
Other (expense) income (4,750) 365
----------- -----------
Servicing revenues 17,955 22,945
Salary and employee benefits 2,754 2,057
Occupancy expense 868 146
Amortization and provision for impairment of mortgage
servicing rights 20,065 18,278
General and administrative expenses 5,471 3,168
----------- -----------
Total loan servicing expenses 29,158 23,649
Net pre-tax servicing margin (11,203) (704)
(Loss) gain on sale of mortgage servicing rights (2,329) 2,212
----------- -----------
Net pre-tax servicing contribution $ (13,532) $ 1,508
=========== ===========
Average owned servicing portfolio $ 8,255,649 $ 7,964,645
Servicing sold $ 7,294,392 $ 3,928,087
Net pre-tax servicing margin to average servicing portfolio (18) bps (1) bps
(Loss) gain on sale of servicing to servicing sold (3) bps 6 bps
Summary
The $4.5 million decline in gain on sale of mortgage servicing rights
as compared to the first nine months of 2000 is due to the rapid decline in
interest rates during the first nine months of 2001, which triggered the
Company's servicing production to prepay at an unprecedented speed even before
it could be transferred to the takeout buyers. Net pre-tax servicing margin
decreased $10.5 million for the first nine months of 2001, compared to the same
period of 2000, primarily due to charges associated with reductions in value of
its servicing rights portfolio. Pursuant to the provisions of SFAS No. 133,
there were $5.3 million of charges arising from reductions in servicing value
that were not offset by appreciation in value of derivatives used to hedge the
selected risks during the first nine months of 2001. Furthermore, a $3.5 million
charge for impairment under SFAS No. 125 was taken in the third quarter 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.
35
Net Interest Expense
The net interest expense for the first nine months of 2001 and the
first nine months of 2000 is composed of benefits from escrow accounts of $4.9
million and $6.1 million, respectively, that are offset by $8.3 million and $9.8
million, respectively, in interest expense.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage
servicing rights for the periods indicated follows:
($ IN THOUSANDS) FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------
2001 2000
----------- -----------
Underlying unpaid principal balances of agency-eligible mortgage loans
on which servicing rights were sold during the period $ 7,294,392 $ 3,928,087
=========== ===========
Gross proceeds from sales of mortgage servicing rights $ 198,808 $ 110,321
Initial acquisition basis, net of amortization and hedge results 164,853 92,364
----------- -----------
Unadjusted gain on sale of mortgage servicing rights $ 33,955 $ 17,957
Acquisition basis allocated from mortgage loans,
net of amortization (SFAS No. 140) (36,284) (15,745)
----------- -----------
(Loss) gain on sale of mortgage servicing rights $ (2,329) $ 2,212
=========== ===========
(Loss) Gain on sale of mortgage servicing rights decreased $4.5 million
to $(2.3) million for the first nine months of 2001 from $2.2 million for the
first nine months of 2000. The decrease in the gain on sale of mortgage
servicing rights is primarily attributable to the rapid decline in interest
rates as described previously in the agency-eligible mortgage servicing
operations summary.
COMMERCIAL MORTGAGE OPERATIONS
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of its commercial mortgage division, Laureate
Capital Corp., to BB&T Corporation of Winston-Salem, N.C.
36
LEASING OPERATIONS
Following is a summary of the revenues and expenses of the Company's
small-ticket equipment leasing operations for the periods indicated:
($ IN THOUSANDS) FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
2001 2000
-------- --------
Net interest income $ 8,405 $ 6,763
Other income 932 859
-------- --------
Leasing production revenue 9,337 7,622
Salary and employee benefits 2,355 2,107
Occupancy expense 379 373
Provision expense 3,649 2,208
General and administrative expenses 1,107 948
-------- --------
Total lease operating expenses 7,490 5,636
Net pre-tax leasing production margin 1,847 1,986
Servicing fees 274 368
-------- --------
Net pre-tax leasing margin $ 2,121 $ 2,354
======== ========
Average owned leasing portfolio $192,947 $167,278
Average serviced leasing portfolio 2,062 9,348
-------- --------
Average managed leasing portfolio $195,009 $176,626
======== ========
Leasing production revenue to average owned portfolio 645 bps 608 bps
Leasing operating expenses to average owned portfolio 518 bps 449 bps
-------- --------
Net pre-tax leasing production margin 127 bps 159 bps
======== ========
The 23% increase in leasing production revenue for the first nine
months of 2001 as compared to the first nine months of 2000 is primarily
attributable to the 15% 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 decreased 32 bps in the first nine months of
2001 as compared to the first nine months of 2000 primarily as a result of the
65% increase in provision expense associated with the overall deterioration of
the credit worthiness of small businesses in today's economic environment.
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 including
the possible sale of Republic Leasing Company.
Net Interest Income
Net interest income for the first nine months of 2001 was $8.4 million
as compared to $6.8 million for the first nine months of 2000. This is
equivalent to an annualized net interest margin of 4.20% and 3.86% for the first
nine months of 2001 and 2000, respectively, based upon average lease receivables
owned of $193.0 million and $167.2 million, respectively, and average debt
outstanding of $164.6 and $142.3 million, respectively.
37
OTHER
The primary components of the other segment are holding company items
which mainly consist of 1) interest expense on the debt on the Company's
corporate headquarters; 2) salary and employee benefits of corporate personnel;
3) depreciation on the corporate headquarters and 4) income taxes.
UNUSUAL ITEMS
During the first nine months of 2001, the agency-eligible production
segment benefited from the reversal of $1.3 million of accrued employee benefit
expense. This consisted of $0.7 million relating to a one-time benefit due to
the Company's self-insured health plan experiencing lower than expected claims
and $0.5 million relating to other benefits, both following the reduction in
workforce completed in 2000.
During the first nine months of 2001, the Company accelerated
amortization of its mortgage production software and accelerated the
depreciation of furniture, fixtures and leasehold improvements for its existing
sites in Columbia, SC in anticipation of the migration to a new loan operating
system software in the second quarter of 2002 and the Company's forthcoming move
to a new and more cost efficient headquarters building in Columbia, SC. The
pre-tax impact of the accelerated amortization of software costs and accelerated
depreciation of furniture, fixtures and leasehold improvements was $0.8 and $1.1
million, respectively, for the nine months.
During the first nine months of 2001, the Company wrote-off its $1.5
million investment in Digital Lighthouse Corporation, formerly known as
"Etinuum, Inc." and or "Intek, Inc.", an information services company, which
filed for bankruptcy in the third quarter of 2001. The Company had held its
investment since August of 1996.
Additionally, during the first nine months of 2001, the Company took
charges aggregating $8.7 million related to reductions in the value of its
servicing rights portfolio. The Company hedges selected but not all of the risks
inherent in its servicing portfolio. Pursuant to the provisions of SFAS No. 133,
$5.3 million of the charge arose from reductions in servicing value that were
not offset by appreciation in value of derivatives used to hedge the selected
risks. The remaining $3.5 million relates to charges taken for impairment under
SFAS No.125.
38
The impact of the servicing valuation charges and other unusual items
for the nine months ended September 30, 2001, are summarized below by financial
statement component and business unit:
($ in thousands) AGENCY-ELIGIBLE
-------------------------
PRODUCTION SERVICING OTHER TOTAL
---------------------------------------------------------
Other expense $ -- $(5,221) $ -- $ (5,221)
Salary and employee benefits 1,271 -- -- 1,271
Occupancy expense (1,552) (337) -- (1,889)
Amortization and provision for impairment
of mortgage servicing rights -- (3,500) -- (3,500)
General and administrative expenses -- -- (1,475) (1,475)
---------------------------------------------------------
Net pre-tax effect on continuing operations (281) (9,058) (1,475) (10,814)
Estimated allocable income tax benefit 108 3,487 568 4,164
---------------------------------------------------------
Net after-tax impact on continuing
operations $ (173) $(5,571) $ (907) $ (6,651)
=========================================================
During the fourth quarter of 1999, the Company initiated a workforce
reduction. The workforce reduction became necessary as the Company adapted to a
smaller overall residential mortgage market and intensely competitive pricing
conditions. During the nine month period ended September 30, 2000, the Company
began reconsidering its positioning in the market and its corporate, management
and leadership structures. As a result, the Company continued its efforts during
the current period to reorganize around primary business processes
(production/sales, customer fulfillment, servicing and portfolio management) and
has thus made certain changes in organization at its agency-eligible and
subprime units. These changes resulted in a net increase in the previously
established reorganization reserves of $2.5 million during the nine month period
ending September 30, 2000. In connection with the planned reorganization, the
Company made certain changes in its senior management team and closed certain
regional processing offices.
Also, during the first nine months of 2000, the Company (1)
redesignated a lease of a former operations center as a nonoperating lease, (2)
marked down its residual interests in prior subprime securitizations as a result
of changes in valuation assumptions due to changing market conditions, (3)
marked down its residual interests in prior securitizations, and the associated
residual hedges (including hedge amortization expense) as a result of signing a
definitive agreement to sell all of the Company's residuals, (4) disposed of its
commercial mortgage operation, Laureate Capital Corp., (5) amended its defined
benefit pension plan to freeze benefits under the plan, (6) changed the benefits
available to employees under its 401(k) plan, (7) realized a gain on the sale of
a branch facility, (8) contributed to a fund that will benefit qualified
charitable organizations, (9) incurred expenses for consultants assisting
management in re-engineering work processes, (10) restructured and closed
certain regional processing offices and (11) made changes in the Company's
senior management team.
39
The net impact of these unusual items in the first nine months of 2000
is summarized below by financial statement component and operating division:
($ in thousands) AGENCY-ELIGIBLE
---------------------- COMMERCIAL
PRODUCTION SERVICING SUBPRIME MORTGAGE LEASING OTHER TOTAL
---------- --------- -------- ---------- ------- ------ --------
Mark-to-market on
residual interest in
subprime securitizations $ -- $ -- $ 39,338 $ -- $ -- $ -- $ 39,338
Residual hedge
mark-to-market and
amortization -- -- 1,077 -- -- -- 1,077
Salary and employee
benefits 307 (45) 1,454 -- (22) 234 1,928
Occupancy expense 171 -- -- -- -- -- 171
General and
administrative expenses 1,027 -- 796 -- -- 741 2,564
Other income -- -- -- -- -- (392) (392)
------- ----- -------- --------- ------ ----- --------
Net pre-tax effect on
continuing operations 1,505 (45) 42,665 -- (22) 583 44,686
Estimated allocable
income tax (563) 17 (15,771) -- 8 (219) (16,528)
------- ---- -------- --------- ------ ----- --------
Net after-tax impact on
continuing operations 942 (28) 26,894 -- (14) 364 28,158
Loss on sale of
operating assets of
Laureate Capital Corp. -- -- -- 1,607 -- -- 1,607
Operating loss of
Laureate Capital Corp. -- -- -- 660 -- -- 660
------- ---- -------- --------- ------ ----- --------
Net after-tax impact $ 942 $(28) $ 26,894 $ 2,267 $ (14) $ 364 $ 30,425
======= ==== ======== ========= ====== ===== ========
RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 2001, COMPARED TO QUARTER
ENDED SEPTEMBER 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 third quarter of 2001 was $0.39 per share as compared to a
loss of ($1.45 per share) for the third quarter of 2000. Following is a summary
of the revenues and expenses for each of the Company's operating divisions for
the quarters ended September 30, 2001 and 2000, respectively:
40
AGENCY-ELIGIBLE
FOR THE QUARTER ENDED ----------------------------------- TOTAL OTHER /
SEPTEMBER 30, 2001 (a) PRODUCTION SERVICING REINSURANCE SUBPRIME LEASING SEGMENTS ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income (expense) $ 2,739 $ (1,119) $ 1 $ 2,788 $ 2,842 $ 7,251 $ (257) $ 6,994
Net gain on sale of mortgage loans 26,606 -- -- 10,341 -- 36,947 -- 36,947
Gain on sale of mortgage
servicing rights -- 396 -- -- -- 396 -- 396
Servicing fees -- 9,127 -- -- 87 9,214 -- 9,214
Other income (expense) 14 (2,811) 748 (3) 286 (1,766) 1 (1,765)
------------------------------------------------------------------------------------------
Total revenues 29,359 5,593 749 13,126 3,215 52,042 (256) 51,786
------------------------------------------------------------------------------------------
Salary and employee benefits 6,711 1,035 -- 2,948 819 11,513 1,372 12,885
Occupancy expense 4,606 323 -- 792 127 5,848 (139) 5,709
Amortization and provision for
impairment of mortgage
servicing rights -- 9,523 -- -- -- 9,523 -- 9,523
Provision expense 1,223 -- 51 2,383 1,732 5,389 -- 5,389
General and administrative expenses 2,696 1,640 (52) 1,533 289 6,106 1,686 7,792
------------------------------------------------------------------------------------------
Total expenses 15,236 12,521 (1) 7,656 2,967 38,379 2,919 41,298
------------------------------------------------------------------------------------------
Income (loss) before income taxes 14,123 (6,928) 750 5,470 248 13,663 (3,175) 10,488
Income tax benefit (expense) (5,280) 2,590 (264) (2,102) (106) (5,162) 1,156 (4,006)
------------------------------------------------------------------------------------------
Income (loss) from continuing
operations $ 8,843 $ (4,338) $ 486 $ 3,368 $ 142 $ 8,501 $(2,019) $ 6,482
==========================================================================================
</Table>
(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 ------------------------------------ COMMERCIAL TOTAL
SEPTEMBER 30, 2000 (A) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE LEASING SEGMENTS
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income (expense) $ 339 $(1,345) $ (32) $ 3,233 $ -- $ 2,343 $ 4,538
Net gain on sale of mortgage loans 4,438 -- -- 4,022 -- 8,460
Gain on sale of mortgage servicing rights -- 673 -- -- -- 673
Servicing fees -- 8,335 -- -- 136 8,471
Mark-to-market on residual interests in
subprime securitizations -- -- -- (29,892) -- (29,892)
Other income (expense) 102 117 813 (776) 293 549
--------------------------------------------------------------------------------------
Total revenues 4,879 7,780 781 (23,413) -- 2,772 (7,201)
--------------------------------------------------------------------------------------
Salary and employee benefits 7,737 684 (90) 2,785 669 11,785
Occupancy expense 2,961 35 -- 686 127 3,809
Amortization and provision for impairment
of mortgage servicing rights -- 6,069 -- -- -- 6,069
Provision expense 450 -- -- 841 687 1,978
General and administrative expenses 3,134 1,148 73 2,166 326 6,847
--------------------------------------------------------------------------------------
Total expenses 14,282 7,936 (17) 6,478 -- 1,809 30,488
--------------------------------------------------------------------------------------
Income (loss) before income taxes (9,403) (156) 798 (29,891) -- 963 (37,689)
Income tax benefit (expense) 3,472 56 (281) 11,079 -- (378) 13,948
--------------------------------------------------------------------------------------
Income (loss) from continuing operations (5,931) (100) 517 (18,812) -- 585 (23,741)
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less
applicable income taxes of $235) 393 393
Net income (loss) $ (5,931) $ (100) $ 517 $(18,812) $ 393 $ 585 $(23,348)
======================================================================================
FOR THE QUARTER ENDED OTHER /
SEPTEMBER 30, 2000 (A) ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income (expense) $ (388) $ 4,150
Net gain on sale of mortgage loans -- 8,460
Gain on sale of mortgage servicing rights -- 673
Servicing fees -- 8,471
Mark-to-market on residual interests in
subprime securitizations -- (29,892)
Other income (expense) (95) 454
---------------------
Total revenues (483) (7,684)
---------------------
Salary and employee benefits 1,647 13,432
Occupancy expense (176) 3,633
Amortization and provision for impairment
of mortgage servicing rights -- 6,069
Provision expense -- 1,978
General and administrative expenses 511 7,358
---------------------
Total expenses 1,982 32,470
---------------------
Income (loss) before income taxes (2,465) (40,154)
Income tax benefit (expense) 911 14,859
---------------------
Income (loss) from continuing operations (1,554) (25,295)
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less
applicable income taxes of $235) 393
Net income (loss) $(1,554) $(24,902)
=====================
(a) Revenues and expenses have been allocated on a direct basis to the extent
possible.
Management believes that these and all other revenues and expenses have been
allocated to the respective divisions on a reasonable basis.
41
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage production operations.
($ IN THOUSANDS) FOR THE QUARTER
ENDED SEPTEMBER 30,
--------------------------
2001 2000
---------- -----------
Net interest income $ 2,739 $ 339
Net gain on sale of mortgage loans 26,606 4,438
Other income 14 102
---------- -----------
Total production revenue 29,359 4,879
---------- -----------
Salary and employee benefits 6,711 7,737
Occupancy expense 4,606 2,961
Provision expense 1,223 450
General and administrative expenses 2,696 3,134
---------- -----------
Total production expenses 15,236 14,282
---------- -----------
Net pre-tax production margin $ 14,123 $ (9,403)
========== ===========
Production $2,420,602 $ 1,537,692
Pooled production and whole loan sales $2,515,404 $ 1,457,191
Total production revenue to pool delivery 117 bps 33 bps
Total production expenses to production 63 bps 93 bps
---------- -----------
Net pre-tax production margin 54 bps (60) bps
========== ===========
Summary
The production revenue to pool delivery ratio increased 84 bps for the
third quarter of 2001 as compared to the third quarter of 2000. Net gain on sale
of mortgage loans (106 bps for the third quarter of 2001 versus 30 bps for the
third 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 11 bps in the third quarter of 2001 from 2 bps in the third 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. Absent non-recurring items ($1.0 million for 2001
and $1.6 million for 2000), the total production expenses to production ratio
for the current quarter declined to 59 bps, a drop of 24 bps compared to 83 bps
for the same quarter in 2000. This decline was primarily due to the
consolidation of regional loan processing centers during the second half of 2000
and the re-engineering of workflows within those processing centers. Likewise,
with higher production volumes, the Company was able to more effectively
leverage its fixed expenses. As a consequence of the foregoing, the Company's
net agency-eligible pre-tax production margin increased 108 bps, absent
non-recurring items, from the third quarter of 2000 to the third quarter of
2001.
42
Net Interest Income
The following table analyzes net interest income allocated to the
Company's agency-eligible mortgage production activities in terms of rate and
volume variances of the interest spread (the difference between interest rates
earned on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds) for the quarters ended September 30, 2001 and
2000, respectively:
($ 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
$ 432,911 $ 397,390 7.67% 8.21% Mortgage-Backed Securities $8,301 $8,155 $ 146 $ (583) $ 729
- -------------------------------------------- ------------------------------------------------
INTEREST EXPENSE
233,907 268,608 3.13% 5.98% Warehouse Lines* $1,833 $4,018 $(2,185) $(1,666) $(519)
171,289 121,138 4.36% 6.75% Gestation Line 1,868 2,045 (177) (1,024) 847
139,548 127,252 5.03% 6.99% Servicing Secured Line 1,756 2,223 (467) (682) 215
Facility Fees & Other Charges 587 750 (163) -- (163)
- -------------------------------------------- ------------------------------------------------
$ 544,744 $ 516,998 4.44% 6.99% Total Interest Expense $6,044 $9,036 $(2,992) $(3,371) $ 379
- -------------------------------------------- ------------------------------------------------
Net Interest Income Before
3.23% 1.22% Interdivisional Allocations $2,257 $ (881) $ 3,138 $ 2,788 $ 350
==================== ================================================
Allocation to Agency-Eligible
Servicing Division 1,119 1,345
---------------
Net Interest Income $3,376 $ 464
Intercompany Net Interest
Income (Expense) included in
Segmented
Income Statement (637) (125)
---------------
Net Interest Income $2,739 $ 339
===============
* The interest-rate yield on the warehouse lines are net of the benefit
of escrow deposits.
The 201 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 nine 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.
43
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 SEPTEMBER 30,
----------------------------
2001 2000
----------- -----------
Gross proceeds on sales of mortgage loans $ 2,542,661 $ 1,483,913
Initial unadjusted acquisition cost of mortgage loans sold,
net of hedge results 2,529,523 1,487,318
----------- -----------
Unadjusted gain (loss) on sale of mortgage loans 13,138 (3,405)
Loan origination and correspondent program
administrative fees 806 890
----------- -----------
Unadjusted aggregate margin 13,944 (2,515)
Acquisition basis allocated to mortgage servicing
rights (SFAS No. 140) 13,899 7,802
Net deferred costs and administrative fees recognized (1,237) (849)
----------- -----------
Net gain on sale of agency-eligible mortgage loans $ 26,606 $ 4,438
=========== ===========
Net gain on sale of agency-eligible mortgage loans increased $22.2
million to $26.6 million for the third quarter of 2001 from $4.4 million for the
third quarter of 2000. The increase is primarily due to increases in sales
volumes and an improvement in margin on sale. Sales volumes improved as a result
of lower interest rates during the third quarter of 2001 compared with the third
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 third quarter of both 2001 and 2000, the Company
recognized premium and investment income of approximately $0.7 million and $0.8
million, respectively, which has been included as other income in the
agency-eligible reinsurance segment.
44
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
subprime mortgage production operations for the periods indicated:
($ IN THOUSANDS) FOR THE QUARTER
ENDED SEPTEMBER 30,
---------------------------
2001 2000
--------- ---------
Net interest income $ 2,788 $ 3,233
Net gain on sale of mortgage loans 10,341 4,022
Mark-to-Market on residual interests in subprime securitizations (29,892)
Other income (3) (776)
--------- ---------
Total production revenue 13,126 (23,413)
--------- ---------
Salary and employee benefits 2,948 2,785
Occupancy expense 792 686
Provision expense 2,383 841
General and administrative expenses 1,533 2,166
--------- ---------
Total production expenses 7,656 6,478
--------- ---------
Net pre-tax production margin $ 5,470 $ (29,891)
========= =========
Production $ 417,796 $ 160,637
Whole loan sales $ 361,546 $ 182,606
Total production revenue to whole loan sales 363 bps (1,282)bps
Total production expenses to production 183 bps 403 bps
--------- ----------
Net pre-tax production margin 180 bps (1,685)bps
========= ==========
Summary
The subprime unit had production of $418 million during the current
quarter, an increase of $257 million compared to the same period of 2000. This
increase is due primarily to positive market-share increases in existing markets
($191 million) and the purchase of 15 Equicredit branches ($66 million) during
the third quarter.
The third quarter of 2000 results include non-recurring charges of 1)
$29.9 million in mark-to-market on residual interests in subprime
securitizations; 2) $1.1 million in other income; 3) $0.2 million in salary and
employee benefits and 4) $0.8 million in general and administrative expenses.
Absent these charges, the subprime unit increased its net pre-tax production
margin for the current quarter by 107 bps to 180 bps from an adjusted 73 bps for
the same period of 2000. Net gain on sale of mortgage loans for the current
quarter increased by $6.3 million compared to the same period of 2000 due
primarily to positive variances in both volume of whole-loan sales and margin.
Net interest income declined by $0.4 million due primarily to the absence of
$1.9 million of interest earned on subprime residuals that were sold in 2000.
Adjusted for the residual interest, net interest income would have increased by
$1.0 million for the current quarter compared to the same quarter of 2000 due to
positive variances in both volume of mortgages held-for-sale and interest
spread.
45
Absent non-recurring items, the total production expenses to production
ratio for the current quarter improved by 158 bps to 183 bps compared to 341 bps
for the same quarter of 2000. This improvement was due primarily to the
consolidation of regional operating centers and the associated reengineering
efforts completed in 2000. Provision expense increased by $1.5 million, which is
primarily attributable to the 160% increase in production.
Net Interest Income
The following table analyzes net interest income allocated to the
Company's subprime mortgage production activities in terms of rate and volume
variances of the interest spread (the difference between interest rates earned
on loans and residual certificates and interest rates paid on interest-bearing
sources of funds) for the three months ended September 30, 2001 and 2000,
respectively.
($ IN THOUSANDS) Variance
Average Volume Average Rate Interest Attributable to
- --------------------------------------- -----------------------------------------------------
2001 2000 2001 2000 2001 2000 Variance Rate Volume
- --------------------------------------- -----------------------------------------------------
$ 176,290 $ 145,184 10.34% 9.81% Mortgages Held-for-Sale $ 4,555 $ 3,562 $ 993 $ 230 $ 763
-- 45,322 16.56% Residual Certificates -- 1,876 (1,876) -- (1,876)
- --------------------------------------- -----------------------------------------------------
$ 176,290 $ 190,507 10.34% 11.42% Total Interest Income $ 4,555 $ 5,438 $ (883) $ 230 $ (1,113
$ 185,058 $ 133,789 5.15% 7.27% Total Interest Expense $ 2,382 $ 2,430 $ (48) $ (979) $ 931
- --------------------------------------- -----------------------------------------------------
5.19% 4.15% Net Interest Income $ 2,173 $ 3,008 $ (835) $ 1,209 $ (2,044)
=============== ===============================
Intercompany Net Interest
Income included in
Segmented Income
Statement 615 225
--------------------
Net Interest Income $ 2,788 $ 3,233
====================
Net interest income from subprime products decreased $0.4 million for
the quarter ended September 30, 2001 compared to the quarter ended September 30,
2000. This is primarily due to an absence of $1.9 million in interest income
because the Company sold its residual certificates during the fourth quarter of
2000. Net of this amount, net interest income increased by $1.0 million.
Interest income on mortgage loans held-for-sale increased by $1.0 million during
the third quarter of 2001 from the third quarter of 2000, due primarily to the
$31.1 million increase in the average volume of mortgages held-for-sale ($0.8
million) and an improvement of 53 bps in interest earned on mortgages
held-for-sale ($0.2 million). Total interest expense declined primarily due to
the 212 bps drop in cost of funds ($1.0 million), which was offset by an
increase in mortgages held-for-sale ($0.9 million).
Net Gain on Sale of Subprime Mortgage Loans
The Company sold subprime mortgage loans for cash on a whole loan basis
during the third quarters of 2001 and 2000. Whole loans are generally sold
without recourse to third parties with the gain or loss being calculated based
on the difference between the carrying value of the loans sold and the gross
proceeds received from the purchaser less expenses. Generally, no interest in
these loans is retained by the Company.
46
A reconciliation of the gain on subprime mortgage whole loan sales for
the periods indicated follows:
($ IN THOUSANDS) FOR THE QUARTER
ENDED SEPTEMBER 30,
---------------------------
2001 2000
------------- -------------
Gross proceeds on whole loan sales of subprime mortgage loans $ 372,694 $ 189,366
Initial unadjusted acquisition cost of subprime mortgage loans
sold, net of fees 357,142 182,606
--------- ---------
Unadjusted gain on whole loan sales of subprime mortgage loans 15,552 6,760
Net deferred costs and administrative fees recognized (5,211) (2,738)
--------- ---------
Net gain on sale of subprime mortgage loans $ 10,341 $ 4,022
========= =========
The net gain on whole loan sales of subprime mortgage loans increased
$6.3 million to $10.3 million for the third quarter of 2001 from $4.0 million
for the third quarter of 2000. Of this increase, $3.9 million is from a positive
increase in volume, $1.2 million is from a positive variance in margin and $1.2
million is from the mix of volume and margin.
Mark-to-Market on Residual Interests in Subprime Securitizations
Through late 2000, the Company retained residual certificates in
connection with the securitization of subprime loans. For both fiscal 2000 and
the third quarter of 2001, the Company executed no securitization transactions
of subprime loans. For the quarter ended September 30, 2000, the mark-to-market
loss on residuals was approximately $29.9 million. In the fourth quarter of
2000, the Company further marked down its residual interests in prior subprime
securitizations as a result of signing a definitive agreement to sell all of the
residual interests remaining on its balance sheet at September 30, 2000. The
Company closed on that sale during the fourth quarter of 2000 and currently has
no residuals on the balance sheet.
47
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage servicing operations:
($ IN THOUSANDS) FOR THE QUARTER
ENDED SEPTEMBER 30,
----------------------------------
2001 2000
----------- -----------
Net interest expense $ (1,119) $ (1,345)
Loan servicing fees 9,127 8,335
Other (expense) income (2,811) 117
----------- -----------
Servicing revenues 5,197 7,107
Salary and employee benefits 1,035 684
Occupancy expense 323 35
Amortization and provision for impairment of mortgage
servicing rights 9,523 6,069
General and administrative expenses 1,640 1,148
----------- -----------
Total loan servicing expenses 12,521 7,936
Net pre-tax servicing margin (7,324) (829)
Gain on sale of mortgage servicing rights 396 673
----------- -----------
Net pre-tax servicing contribution $ (6,928) $ (156)
=========== ===========
Average servicing portfolio $ 8,188,416 $ 7,722,359
Servicing sold $ 2,997,187 $ 1,348,268
Net pre-tax servicing margin to average servicing portfolio (36) bps (4) bps
Gain on sale of servicing to servicing sold 1 bps 5 bps
Summary
Net pre-tax servicing margin decreased $6.5 million from the third quarter
of 2000 to the same period of 2001 primarily due to $6.5 million in charges
associated with reductions in value of the servicing rights portfolio. Pursuant
to the provisions of SFAS No. 133, $3.0 million of the charges arose from
reductions in servicing value that were not offset by appreciation in value of
derivatives used to hedge the selected risks. The remaining $3.5 million relates
to charges taken for impairment under SFAS No.125. These charges were due
primarily to the continued rapid decline in interest rates causing the Company's
servicing assets to prepay at unusually high rates.
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.
48
Net Interest Expense
The net interest expense for the third quarter of 2001 and the third
quarter of 2000 is composed of benefits from escrow accounts of $1.1 million and
$2.0 million, respectively, that are offset by $2.2 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 SEPTEMBER 30,
--------------------------------------
2001 2000
----------- -----------
Underlying unpaid principal balances of agency-eligible mortgage loans
on which servicing rights were sold during the period $ 2,997,187 $ 1,348,268
=========== ===========
Gross proceeds from sales of mortgage servicing rights $ 83,720 $ 38,084
Initial acquisition basis, net of amortization and hedge results 67,618 31,860
----------- -----------
Unadjusted gain on sale of mortgage servicing rights $ 16,102 $ 6,224
Acquisition basis allocated from mortgage loans,
net of amortization (SFAS No. 140) (15,706) (5,551)
----------- -----------
Gain on sale of mortgage servicing rights $ 396 $ 673
=========== ===========
Gain on sale of mortgage servicing rights decreased $0.3 million to
$0.4 million for the third quarter of 2001 from $0.7 million for the third
quarter of 2000. The decrease in the gain on sale of mortgage servicing rights
is primarily attributable to the prepayment of loans as a result of lower
interest rates in 2001 compared to 2000.
COMMERCIAL MORTGAGE OPERATIONS
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of its commercial mortgage division, Laureate
Capital Corp., to BB&T Corporation of Winston-Salem, N.C.
49
LEASING OPERATIONS
Following is a summary of the revenues and expenses of the Company's
small-ticket equipment leasing operations for the periods indicated:
($ IN THOUSANDS) FOR THE QUARTER
ENDED SEPTEMBER 30,
------------------------------
2001 2000
-------- --------
Net interest income $ 2,842 $ 2,343
Other income 286 293
-------- --------
Leasing production revenue 3,128 2,636
Salary and employee benefits 819 669
Occupancy expense 127 127
Provision expense 1,732 687
General and administrative expenses 289 326
-------- --------
Total lease operating expenses 2,967 1,809
Net pre-tax leasing production margin 161 827
Servicing fees 87 136
-------- --------
Net pre-tax leasing margin $ 248 $ 963
-------- --------
Average owned leasing portfolio $193,187 $178,199
Average serviced leasing portfolio 1,140 6,445
-------- --------
Average managed leasing portfolio $194,327 $184,644
======== ========
Leasing production revenue to average owned portfolio 648 bps 592 bps
Leasing operating expenses to average owned portfolio 614 bps 406 bps
-------- --------
Net pre-tax leasing production margin 34 bps 186 bps
======== ========
The 19% increase in leasing production revenue for the third quarter of
2001 as compared to the third quarter of 2000 is primarily due to the 8%
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 decreased 152 bps in the third quarter of 2001 as compared to
the third quarter of 2000 primarily as a result of the 152% increase in
provision expense associated with the overall deterioration of the credit
worthiness of small businesses in today's economic environment. 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, including the possible sale of Republic
Leasing.
Net Interest Income
Net interest income for the third quarter of 2001 was $2.8 million as
compared to $2.3 million for the third quarter of 2000. This is equivalent to an
annualized net interest margin of 4.48% and 3.75% for the third quarters of 2001
and 2000, respectively, based upon average lease receivables owned of $198.6
million and $178.1 million, respectively, and average debt outstanding of $163.8
and $152.6 million, respectively.
50
OTHER
The primary components of the other segment are holding company items
which mainly consist of 1) interest expense on the debt on the Company's
corporate headquarters; 2) salary and employee benefits of corporate personnel;
3) depreciation on the corporate headquarters and 4) income taxes.
UNUSUAL ITEMS
During the third quarter of 2001, the Company accelerated amortization
of its mortgage production software and accelerated the depreciation of
furniture, fixtures and leasehold improvements for its existing sites in
Columbia, SC in anticipation of the migration to a new loan operating system
software in the second quarter of 2002 and the Company's forthcoming move to a
new and more cost efficient headquarters building in Columbia, SC. The pre-tax
impact of the accelerated amortization of software costs and accelerated
depreciation of furniture, fixtures and leasehold improvements was $0.8 and $1.1
million, respectively for the third quarter.
During the third quarter of 2001, the agency-eligible production
segment benefited from the reversal of over accrued employee benefits ($0.6
million).
During the third quarter of 2001, the Company wrote-off its $1.5
million investment in Digital Lighthouse Corporation, formerly known as
"Etinuum, Inc." also "Intek, Inc.", an information services company, which filed
for bankruptcy during the third quarter of 2001. The Company held this
investment since August of 1996.
Additionally, during the third quarter of 2001, the Company took
charges aggregating $6.5 million related to reductions in the value of its
servicing rights portfolio. The Company hedges selected but not all of the risks
inherent in its servicing portfolio. Pursuant to the provisions of SFAS No. 133,
$3.0 million of the charge arose from reductions in servicing value that were
not offset by appreciation in value of derivatives used to hedge the selected
risks. The remaining $3.5 million relates to charges taken for impairment under
SFAS No.125.
The impact of the servicing valuation charges and other unusual items
for the quarter ended September 30, 2001 are summarized below by financial
statement component and business unit:
($ in thousands) AGENCY-ELIGIBLE
-------------------------------
PRODUCTION SERVICING OTHER TOTAL
---------------------------------------------------------------------
Other expense $ -- $(3,002) $ -- $(3,002)
Salary and employee benefits 571 -- -- 571
Occupancy expense (1,552) (337) -- (1,889)
Amortization and provision for impairment
of mortgage servicing rights -- (3,500) -- (3,500)
General and administrative expenses -- -- (1,475) (1,475)
------- ------- ------- -------
Net pre-tax effect on continuing operations (981) (6,839) (1,475) (9,295)
Estimated allocable income tax benefit 378 2,633 568 3,579
------- ------- ------- -------
Net after-tax impact on continuing operations $ (603) $(4,206) $ (907) $(5,716)
======= ======= ======= =======
51
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 quarter ended September 30, 2000, the Company
continued to reconsider its positioning in the market and its corporate,
management and leadership structures. As a result, the Company continued its
efforts to reorganize around primary business processes (production/sales,
customer fulfillment, servicing and portfolio management) and has thus made
certain changes in organization at its agency-eligible and subprime units. These
changes resulted in a net increase in the previously established reorganization
reserves of $1.8 million during the period. In connection with the planned
reorganization, the Company made certain changes in its senior management team
and closed some regional processing offices.
During the third quarter of 2000, the Company (1) disposed of its
commercial mortgage operation, Laureate Capital Corp., (2) marked down its
residual interests in prior securitizations, and the associated residual hedges
(including hedge amortization expense) as a result of signing a definitive
agreement to sell all of the Company's residuals, (3) incurred expenses for
consultants who are assisting management in re-engineering work processes, (4)
restructured and closed certain regional processing offices and (5) made changes
in the Company's senior management team.
The net impact of these unusual items in the third quarter of 2000 is
summarized below by financial statement component and operating division:
($ in thousands) AGENCY-ELIGIBLE
--------------------- COMMERCIAL
PRODUCTION SERVICING SUBPRIME MORTGAGE LEASING OTHER TOTAL
---------------------------------------------------------------------------------------
Mark-to-market on
residual interest in
subprime securitizations $ -- $ 29,892 $ -- $ -- $ -- $ 29,892
Residual hedge
mark-to-market and amortization -- 1,077 -- -- -- 1,077
Salary and employee benefits 551 203 -- -- 213 967
General and administrative expenses 1,027 796 -- -- 289 2,112
-------- -------- ------ ------- ------ --------
Net pre-tax effect on
continuing operations 1,578 31,968 -- -- 502 34,048
Estimated allocable
income tax (592) (11,833) -- -- (188) (12,613)
-------- -------- ------ ------- ------ --------
Net after-tax impact on
continuing operations 986 20,135 -- -- 314 21,435
Loss on sale of
operating assets of
Laureate Capital Corp. -- -- (393) -- -- (393)
Operating profits of
Laureate Capital Corp. -- -- -- -- -- --
-------- -------- ------ ------- ------ --------
Net after-tax impact $ 986 $ 20,135 $ (393) -- $ 314 $ 21,042
======== ======== ====== ======= ====== ========
52
SUPPLEMENTAL RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2001,
COMPARED TO NINE MONTHS ENDED SEPTEMBER 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 nine months of 2001 was $0.91 per share as compared
to ($2.04) per share for the first nine months of 2000. Following is a summary
of the revenues and expenses for each of the Company's business process
divisions for the nine months ended September 30, 2001:
53
CUSTOMER
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) SALES FULFILLMENT PORTFOLIO
- ------------------------------------------------------------------------------------------------------------
(Unaudited) ($ in thousands)
Net interest income $ -- $ -- $ 11,003
Net gain (loss) on sale of mortgage loans 7,118 (1,054) 96,497
(Loss) on sale of mortgage servicing rights -- -- (2,329)
Servicing fees -- -- 24,482
Other income 374 9 (2,666)
-------- -------- ---------
Total revenues 7,492 (1,045) 126,987
-------- -------- ---------
Salary and employee benefits 15,961 17,441 4,351
Occupancy expense 874 5,646 634
Amortization and provision for impairment
of mortgage servicing rights -- -- 20,065
Provision expense -- -- 7,995
General and administrative expenses 2,247 3,493 3,726
-------- -------- ---------
Total expenses 19,082 26,580 36,771
-------- -------- ---------
Income (loss) before income taxes (11,590) (27,625) 90,216
Income tax expense -- -- --
Income (loss) before transition adjustment, allocations and
transfer pricing (11,590) (27,625) 90,216
Transition adjustment - SFAS No. 133 -- -- --
-------- -------- ---------
Income (loss) before allocations and transfer pricing (11,590) (27,625) 90,216
-------- -------- ---------
Overhead allocations 3,138 7,791 1,643
-------- -------- ---------
Income (loss) before transfer pricing (14,728) (35,416) 88,573
Transfer pricing 23,780 35,774 (69,371)
-------- -------- ---------
Net income (expense) $ 9,052 $ 358 $ 19,202
-------- -------- ---------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) (B) OTHER/
(Unaudited) ($ in thousands) SERVICING LEASING ADMINISTRATION ELIMINATIONS CONSOLIDATED
--------- ------- -------------- ------------ ------------
Net interest income $ -- $8,405 $ (1,207) $ -- $ 18,201
Net gain (loss) on sale of mortgage loans (317) -- 916 (15,649) 87,511
(Loss) on sale of mortgage servicing rights -- -- -- -- (2,329)
Servicing fees 1,690 274 -- -- 26,446
Other income 400 932 129 -- (822)
-------- ------ -------- -------- ---------
Total revenues 1,773 9,611 (162) (15,649) 129,007
-------- ------ -------- -------- ---------
Salary and employee benefits 4,448 2,355 11,394 (17,453) 38,497
Occupancy expense 1,520 379 4,746 -- 13,799
Amortization and provision for impairment
of mortgage servicing rights -- -- -- -- 20,065
Provision expense -- 3,649 -- -- 11,644
General and administrative expenses 3,664 1,107 5,898 446 20,581
-------- ------ -------- -------- ---------
Total expenses 9,632 7,490 22,038 (17,007) 104,586
-------- ------ -------- -------- ---------
Income (loss) before income taxes (7,859) 2,121 (22,200) 1,358 24,421
Income tax expense -- -- -- (9,121) (9,121)
-------- ------ -------- -------- ---------
Income (loss) before transition adjustment, allocations
and transfer pricing (7,859) 2,121 (22,200) (7,763) 15,300
Transition adjustment - SFAS No. 133 -- -- -- (149) (149)
-------- ------ -------- -------- ---------
Income (loss) before allocations and transfer pricing (7,859) 2,121 (22,200) (7,912) 15,151
Overhead allocations 3,311 -- (15,883) -- --
Income (loss) before transfer pricing (11,170) 2,121 (6,317) (7,912) 15,151
-------- ------ -------- -------- ---------
Transfer pricing 9,817 -- -- -- --
-------- ------ -------- -------- ---------
Net income (expense) $ (1,353) $2,121 $ (6,317) $ (7,912) $ 15,151
======== ====== ======== ======== =========
(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
54
REVENUE AND EXPENSE BY SEGMENT FOR THE NINE MONTHS ENDED SEPTEMBER 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 NINE MONTHS ENDED SEPTEMBER 30, 2001
($ in thousands) (unaudited)
REVENUES DIRECT NVA
Sales $ 7,492 6% $ 31,272 24%
Customer Fulfillment (1,045) -1% 34,729 27%
Portfolio 126,987 98% 57,616 45%
Servicing 1,773 1% 11,590 9%
Leasing 9,611 8% 9,611 7%
Administration (162) 0% (162) 0%
Other/Eliminations (15,649) -12% (15,649) -12%
--------------------------- -------------------------
Total revenues 129,007 129,007
EXPENSES
Sales 19,082 18% 22,220 21%
Customer Fulfillment 26,580 26% 34,371 33%
Portfolio 36,771 35% 38,414 37%
Servicing 9,632 9% 12,943 12%
Leasing 7,490 7% 7,490 7%
Administration 22,038 21% 6,155 6%
Other/Eliminations (17,007) -16% (17,007) -16%
--------------------------- -------------------------
Total expenses 104,586 104,586
PRE-TAX INCOME (LOSS)
Sales $ (11,590) -47% $ 9,052 37%
Customer Fulfillment (27,625) -113% 358 1%
Portfolio 90,216 369% 19,202 79%
Servicing (7,859) -32% (1,353) -6%
Leasing 2,121 9% 2,121 9%
Administration (22,200) -91% (6,317) -26%
Other/Eliminations 1,358 5% 1,358 6%
--------------------------- -------------------------
Total pre-tax income (loss) $ 24,421 $ 24,421
========= =========
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 nine months ended
September 30, 2001:
55
SALES
- -------------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ 7,492
Transfer pricing 23,780
----------
Total revenues 31,272
Direct expenses 19,082
Overhead expense allocation 3,138
----------
Total expenses 22,220
----------
Income $ 9,052
==========
Production $8,903,180
Units 67,483
Revenue per unit $ 463
Expense per unit 329
----------
Net pre-tax sales margin $ 134
==========
Bps of revenue per unit 35
Bps of expense per unit 25
----------
Net pre-tax sales margin 10
==========
FTEs 233
Units per FTE 290
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 operations. As of September 30, 2001, there were 59
and 174 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 nine months ended September 30, 2001:
56
CUSTOMER FULFILLMENT
- --------------------------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ (1,045)
Transfer pricing 35,774
-----------
Total revenues 34,729
Direct expenses 26,580
Overhead expense allocation 7,791
-----------
Total expenses 34,371
-----------
Income (loss) $ 358
===========
Production $ 8,903,180
Units 67,483
Revenue per unit $ 515
Expenses per unit 509
-----------
Net pre-tax customer fulfillment margin $ 6
===========
Bps of revenue per unit 39
Bps of expense per unit 38
-----------
Net pre-tax customer fulfillment margin 1
===========
FTEs 515
Units per FTE 131
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 26% 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 September 30, 2001, there were 297
and 218 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 nine months ended September 30, 2001:
57
SECONDARY SERVICING TOTAL
PORTFOLIO MARKETING ASSETS PORTFOLIO
--------- ----------- ----------- ---------
($ in thousands except per unit)
(unaudited)
Direct revenues $ 113,451 $ 13,536 $ 126,987
Transfer pricing (63,021) (6,350) (69,371)
----------- ----------- ---------
Total revenues 50,430 7,186 57,616
Direct expenses 14,168 22,603 36,771
Overhead expense allocation 1,627 16 1,643
----------- ----------- ---------
Total expenses 15,795 22,619 38,414
----------- ----------- ---------
Income (loss) $ 34,635 $ (15,433) $ 19,202
=========== =========== =========
Production and average owned servicing
portfolio $ 8,903,180 $ 8,255,649
Production and average owned servicing
portfolio units 67,483 75,808
Revenue per unit $ 747 $ 95
Expenses per unit 234 298
----------- -----------
Net pre-tax portfolio margin $ 513 $ (203)
=========== ===========
Bps of revenue per unit 57 12
Bps of expense per unit 18 37
----------- -----------
Net pre-tax portfolio margin 39 (25)
=========== ===========
FTEs 92 n/a
Units per FTE 734 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
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 nine month pre-tax income of $34.6
million is primarily attributable to the actual margin exceeding the budgeted
margin due to an improved competitive environment during the first nine months
of 2001. As of September 30, 2001, there were 92 Portfolio employees.
The servicing assets unit contributed 2% of total NVA revenues and 22%
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
58
amortization and impairment expense ($20.1 million of the $22.6 million). The
nine month loss of $15.4 million is mainly attributable to the $2.3 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 three quarters, the $5.3
million charge related to reductions in servicing values under SFAS No. 133 and
a $3.5 million charge taken for impairment under SFAS No. 125.
SERVICING
The Servicing segment subservices loans on behalf of the Portfolio
segment and external subservicing customers. The Servicing segment also assists
the Portfolio segment in transferring loans and servicing to end investors and
obtains trailing documentation necessary for final pool certification (these
functions are referred to as "Portfolio Support"). Servicing charges Portfolio
fees for services rendered based upon the number of loans set-up, serviced and
transferred during the period. Fees for trailing documentation follow-up
services are charged on a per loan basis and are recognized by Servicing using
the "Rule of 78th" method over a 12 month period of time, approximating the
timing of the services performed. The following is a summary of Servicing's
revenues and expenses and key operating statistics for the nine months ended
September 30, 2001:
($ in thousands except per unit) SERVICING PORTFOLIO
SERVICING FACTORY SUPPORT TOTAL
---------------------------------------------------------------------------------------------
(unaudited)
Direct revenues $ 1,791 $ (18) $ 1,773
Transfer pricing 7,080 2,737 9,817
----------- ----------- --------
Total revenues 8,871 2,719 11,590
Direct expenses 6,555 3,077 9,632
Overhead expense allocation 1,781 1,530 3,311
----------- ----------- --------
Total expenses 8,336 4,607 12,943
----------- ----------- --------
Income (loss) $ 535 $ (1,888) $ (1,353)
Average UPB serviced/Production $10,389,983 $ 8,903,180
Average units serviced/units produced 92,525 67,483
Revenue per unit $ 96 $ 40
Expenses per unit 90 68
----------- -----------
Net pre-tax servicing margin $ 6 $ (28)
Bps of revenue per unit 11 3
Bps of expense per unit 11 5
----------- -----------
Net pre-tax servicing margin 0 (2)
FTEs 108 73
Units per FTE 857 924
Summary
As presented in the revenue and expense by segment table, the Servicing
segment contributed 1% of direct revenues and 9% of NVA revenues. Servicing
contributed 9% and 12% of direct expenses and NVA expenses, respectively.
59
The Servicing Factory, which is responsible for subservicing loans on
behalf of the Portfolio segment, contributed 7% of NVA revenues and 8% of NVA
expenses. The Servicing Factory's direct revenues are comprised of miscellaneous
servicing fees, third party subservicing fees and other ancillary income related
to servicing. Servicing Factory had 108 employees as of September 30, 2001.
Portfolio Support, which aids Secondary Marketing with the transfer of
loans and servicing to end investors and obtaining trailing documents,
contributed 2% of NVA revenues and 4% of NVA expenses. Portfolio Support had 73
employees as of September 30, 2001.
LEASING OPERATIONS
See page 37 in the Results of Operations for a discussion of Leasing's
operating statistics for the nine months ended September 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 nine months ended
September 30, 2001:
ADMINISTRATION
------------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ (162)
-----------
Total revenues (162)
Direct expenses 22,038
Overhead expense allocation (15,883)
-----------
Total expenses 6,155
-----------
(Loss) $ (6,317)
Production $ 8,903,180
Units 67,483
Expenses per unit 91
Bps of expense per unit 7
FTEs 192
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
60
business segments are set each quarter based on forecasted expenses and
headcount. The $6.3 million dollar 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 profitability; 2) the Company
wrote off its $1.5 million investment in Digital Lighthouse Corporation, an
information services company, which filed for bankruptcy in the third quarter
and 3) a $1.6 million charge in the third quarter relating to accelerated
amortization of its mortgage production software and accelerated depreciation of
furniture, fixtures, and leasehold improvements in anticipation of the Company's
move to a new headquarters building and new loan operating system.
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.
61
SUPPLEMENTAL RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 2001, COMPARED
TO QUARTER ENDED SEPTEMBER 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 third quarter of 2001 was $0.39 per share as compared to
($1.45) per share for the third quarter of 2000. Following is a summary of the
revenues and expenses for each of the Company's business process divisions for
the quarter ended September 30, 2001:
62
CUSTOMER ADMINIS- (B)OTHER/ELI- CONSO-
FOR THE QUARTER ENDED SEPTEMBER 30, 2001 (A) SALES FULFILLMENT PORTFOLIO SERVICING LEASING TRATION MINATIONS LIDATED
- -------------------------------------------- ------- ----------- --------- --------- ------- -------- ------------- -------
(Unaudited) ($ in thousands)
Net interest income $ -- $ -- $ 4,412 $ -- $2,842 $ (260) $ -- $ 6,994
Net gain (loss) on sale of mortgage loans 2,476 (385) 40,495 (139) -- 492 (5,993) 36,946
Gain on sale of mortgage servicing rights -- -- 396 -- -- -- -- 396
Servicing fees -- -- 8,291 836 87 -- -- 9,214
Other income (4) 2 (2,144) 99 286 (3) -- (1,764)
-------- -------- -------- ------- ------ ------- ------- --------
Total revenues (expense) 2,472 (383) 51,450 796 3,215 229 (5,993) 51,786
-------- -------- -------- ------- ------ ------- ------- --------
Salary and employee benefits 6,223 6,709 1,437 1,600 819 3,344 (7,247) 12,885
Occupancy expense 347 2,576 227 508 127 1,924 -- 5,709
Amortization and provision for impairment
of mortgage servicing rights -- -- 9,523 -- -- -- -- 9,523
Provision expense -- -- 3,657 -- 1,732 -- -- 5,389
General and administrative expenses 817 1,339 1,472 843 289 2,884 148 7,792
-------- -------- -------- ------- ------ ------- ------- --------
Total expenses 7,387 10,624 16,316 2,951 2,967 8,152 (7,099) 41,298
-------- -------- -------- ------- ------ ------- ------- --------
Income (loss) before income taxes (4,915) (11,007) 35,134 (2,155) 248 (7,923) 1,106 10,488
Income tax expense -- -- -- -- -- -- (4,006) (4,006)
Income (loss) before allocations and transfer
pricing (4,915) (11,007) 35,134 (2,155) 248 (7,923) (2,900) 6,482
Overhead allocations 1,084 2,867 523 1,093 -- (5,567) -- --
-------- -------- -------- ------- ------ ------- ------- --------
Income (loss) before transfer pricing (5,999) (13,874) 34,611 (3,248) 248 (2,356) (2,900) 6,482
Transfer pricing 8,993 12,138 (24,365) 3,234 -- -- -- --
-------- -------- -------- ------- ------ ------- ------- --------
Net income (expense) $ 2,994 $ (1,736) $ 10,246 $ (14) $ 248 $(2,356) $(2,900) $ 6,482
======= ======== ======== ======= ====== ======= ======= ========
(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
63
REVENUE AND EXPENSE BY SEGMENT FOR THE THREE MONTHS ENDED SEPTEMBER 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 SEPTEMBER 30, 2001
($ in thousands) (unaudited)
REVENUES DIRECT NVA
Sales $ 2,472 5% $ 11,465 22%
Customer Fulfillment (383) -1% 11,755 23%
Portfolio 51,450 99% 27,085 52%
Servicing 796 2% 4,030 8%
Leasing 3,215 6% 3,215 6%
Administration 229 1% 229 1%
Other / Eliminations (5,993) -12% (5,993) -12%
------------------------ ------------------------
Total revenues 51,786 51,786
EXPENSES
Sales 7,387 18% 8,471 20%
Customer Fulfillment 10,624 26% 13,491 33%
Portfolio 16,316 39% 16,839 41%
Servicing 2,951 7% 4,044 10%
Leasing 2,967 7% 2,967 7%
Administration 8,152 20% 2,585 6%
Other / Eliminations (7,099) -17% (7,099) -17%
-------------------------- -----------------------
Total expenses 41,298 41,298
PRE-TAX INCOME (LOSS)
Sales $ (4,915) -47% $ 2,994 29%
Customer Fulfillment (11,007) -105% (1,736) -17%
Portfolio 35,134 335% 10,246 98%
Servicing (2,155) -20% (14) 0%
Leasing 248 2% 248 2%
Administration (7,923) -76% (2,356) -22%
Other / Eliminations 1,106 11% 1,106 10%
-------------------------- -----------------------
Total pre-tax income $ 10,488 $10,488
======== =======
SALES
The Sales segment includes the sales forces of both the agency-eligible
and subprime units. Under the Company's net value added (NVA) accounting, Sales
is responsible for establishing and maintaining relationships with
correspondents and brokers. The Customer Fulfillment segment processes loans on
behalf of Sales, and Portfolio funds the closing or acquisition of the loans.
Customer Fulfillment charges Sales fees for specific services based upon loan
and channel type. The transfer pricing between Sales and Portfolio is based on
Portfolio's budgeted margin on sale of loans and budgeted expenses per loan
times the actual number of loans produced. The following is a summary of Sale's
revenues and expenses and key operating statistics for the quarter ended
September 30, 2001:
64
SALES
-----------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ 2,472
Transfer pricing 8,993
----------
Total revenues 11,465
Direct expenses 7,387
Overhead expense allocation 1,084
----------
Total expenses 8,471
----------
Income $ 2,994
==========
Production $2,838,398
Units 22,290
Revenue per unit $ 514
Expenses per unit 380
----------
Net pre-tax sales margin $ 134
==========
Bps of revenue per unit 40
Bps of expense per unit 30
----------
Net pre-tax sales margin 10
==========
FTEs 233
Units per FTE 96
Summary
As presented previously in the revenue and expense by segment report,
the Sales segment contributed 5% of direct revenues and 22% of NVA revenues.
Sales contributed 18% and 20% 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 September 30, 2001, there were 59 and
174 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 September 30, 2001:
65
CUSTOMER FULFILLMENT
------------------------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ (383)
Transfer pricing 12,138
-----------
Total revenues 11,755
Direct expenses 10,624
Overhead expense allocation 2,867
-----------
Total expenses 13,491
-----------
Income (loss) $ (1,736)
===========
Production $ 2,838,398
Units 22,290
Revenue per unit $ 527
Expenses per unit 605
-----------
Net pre-tax customer fulfillment margin $ (78)
===========
Bps of revenue per unit 41
Bps of expense per unit 47
-----------
Net pre-tax customer fulfillment margin (6)
===========
FTEs 515
Units per FTE 43
Summary
As presented in the revenue and expense by segment table, the Customer
Fulfillment segment contributed (1%) of direct revenues and 23% of NVA revenues.
Customer Fulfillment contributed 26% 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 that are
classified in gain on sale of mortgage loans in the revenue section of the
consolidated statement of operations. As of September 30, 2001, there were 297
and 218 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 September 30, 2001:
66
SECONDARY SERVICING TOTAL
PORTFOLIO MARKETING ASSETS PORTFOLIO
- --------- ----------- ----------- ---------
($ in thousands except per unit)
(unaudited)
Direct revenues $ 46,791 $ 4,659 $ 51,450
Transfer pricing (22,159) (2,206) (24,365)
----------- ----------- --------
Total revenues 24,632 2,453 27,085
Direct expenses 5,662 10,654 16,316
Overhead expense allocation 511 12 523
----------- ----------- --------
Total expenses 6,173 10,666 16,839
----------- ----------- --------
Income (loss) $ 18,459 $ (8,213) $ 10,246
=========== =========== ========
Production and average owned servicing $ 2,838,398 $ 8,188,416
portfolio
Production and average owned servicing
portfolio units 22,290 74,728
Revenue per unit $ 1,105 $ 33
Expenses per unit 277 143
----------- -----------
Net pre-tax portfolio margin $ 828 $ (110)
=========== ===========
Bps of revenue per unit 87 12
Bps of expense per unit 22 52
----------- -----------
Net pre-tax portfolio margin 65 (40)
=========== ===========
FTEs 92 n/a
Units per FTE 242 n/a
Summary
As presented in the revenue and expense by segment table, the Portfolio
segment contributed 99% of direct revenues and 52% of NVA revenues.
The secondary marketing unit contributed 48% 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 expenses per loan. Secondary marketing's direct expenses include
provision expense. The segment's third quarter pre-tax income of $18.5 million
is primarily attributable to the actual margin exceeding the budgeted margin due
to an improved competitive environment during the third quarter of 2001. As of
September 30, 2001, there were 92 Portfolio employees.
The servicing assets unit contributed 5% of total NVA revenues and 26%
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 ($9.5 million of the $10.7 million). The
third
67
quarter loss of $8.2 million is mainly attributable to the $6.5 million dollar
charge related to reductions in the value of its servicing rights portfolio.
Pursuant to the provisions of SFAS No. 133, $3.0 million of the charge arose
from reductions in servicing value that were not offset by appreciation in value
of derivatives used to hedge the selected risks. The remaining $3.5 million
relates to charges taken for impairment under SFAS No. 125.
SERVICING
The Servicing segment subservices loans on behalf of the Portfolio
segment and external subservicing customers. The Servicing segment also assists
the Portfolio segment in transferring loans and servicing to end investors and
obtains trailing documentation necessary for final pool certification (these
functions are referred to as "Portfolio Support"). Servicing charges Portfolio
fees for services rendered based upon the number of loans set-up, serviced and
transferred during the month. Fees for trailing documentation follow-up services
are charged on a per loan basis and are recognized by Servicing using the "Rule
of 78th" method over a 12 month period of time, approximating the timing of the
services performed. The following is a summary of Servicing's revenues and
expenses and key operating statistics for the quarter ended September 30, 2001:
($ in thousands except per unit) SERVICING PORTFOLIO
SERVICING FACTORY SUPPORT TOTAL
- ------------------------------- ----------- ----------- -------
(unaudited)
Direct revenues $ 797 $ (1) $ 796
Transfer pricing 2,502 732 3,234
----------- ----------- -------
Total revenues 3,299 731 4,030
Direct expenses 1,867 1,084 2,951
Overhead expense allocation 648 445 1,093
----------- ----------- -------
Total expenses 2,515 1,529 4,044
----------- ----------- -------
Income (loss) $ 784 $ (798) $ (14)
=========== =========== =======
Average UPB serviced/Production $11,565,875 $ 2,838,398
Average units serviced/units produced 100,809 22,290
Revenue per unit $ 33 $ 33
Expenses per unit 25 69
----------- -----------
Net pre-tax servicing margin $ 8 $ (36)
=========== ===========
Bps of revenue per unit 11 2
Bps of expense per unit 9 5
----------- -----------
Net pre-tax servicing margin 2 (3)
=========== ===========
FTEs 108 73
Units per FTE 933 305
Summary
As presented in the revenue and expense by segment table, the Servicing
segment contributed 2% of direct revenues and 8% of NVA revenues. Servicing
contributed 7% and 10% of direct expenses and NVA expenses, respectively.
68
The Servicing Factory, which is responsible for subservicing loans on
behalf of the Portfolio silo, contributed 6% of NVA revenues and 6% of NVA
expenses. The Servicing Factory's direct revenues are comprised of miscellaneous
servicing fees, third party subservicing fees and other ancillary income related
to servicing. Servicing Factory had 108 employees as of September 30, 2001.
Portfolio Support, which aids Secondary Marketing with the transfer of
loans and servicing to end investors and obtaining trailing documents,
contributed 1% of NVA revenues and 4% of NVA expenses. Portfolio Support had 73
employees as of September 30, 2001.
LEASING OPERATIONS
See page 50 in the Results of Operations for a discussion of Leasing's
operating statistics for the three months ended September 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
September 30, 2001:
ADMINISTRATION
---------------------------------------------------
($ in thousands except per unit)
(unaudited)
Direct revenues $ 229
-----------
Total revenues 229
Direct expenses 8,152
Overhead expense allocation (5,567)
-----------
Total expenses 2,585
-----------
Income (loss) $ (2,356)
Production $ 2,838,398
Units 22,290
Expenses per unit 116
Bps of expense per unit 9
FTEs 192
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
69
segments are set each quarter based on forecasted expenses and headcount. The
$2.4 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 profitability; 2) the Company wrote off its $1.5
million investment in Digital Lighthouse Corporation, which filed for bankruptcy
in the third quarter and 3) a $1.6 million charge for the third quarter relating
to accelerated amortization of its mortgage production software and accelerated
depreciation of furniture, fixtures, and leasehold improvements in anticipation
of the Company's move to a new headquarters building and new loan operating
system.
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.
70
FINANCIAL CONDITION
The Company experienced a 66% increase in the volume of loans and leases
produced to $2.9 billion for the third quarter of 2001 from $1.7 billion in the
third quarter of 2000. Loan production for the third quarter of 2001 declined by
15% compared to loan production of $3.4 billion for the second quarter of 2001.
The September 30, 2001, locked residential mortgage application pipeline
(mortgage loans not yet closed but for which the interest rate has been locked)
was approximately $1.0 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 $0.8 billion and a
$0.6 billion application pipeline at June 30, 2001.
Mortgage loans held-for-sale and mortgage-backed securities totaled $0.6
billion at September 30, 2001 and $0.5 billion at December 31, 2000. The
Company's servicing portfolio (exclusive of loans serviced under subservicing
agreements) decreased to $7.8 billion at September 30, 2001 from $8.0 billion at
December 31, 2000, a decrease of 3%.
Short-term borrowings, which are the Company's primary source of funds,
totaled $0.9 billion at September 30, 2001 and $0.8 billion at December 31,
2000. At September 30, 2001 and December 31, 2000, there were $6.1 million in
long-term borrowings. Other liabilities totaled $112.9 million as of September
30, 2001, compared to the December 31, 2000 balance of $91.0 million, an
increase of $21.9 million, or 24%.
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, MG Reinsurance Company and RBMG Asset Management Company, Inc. (not
including the Company, the Restricted Group), entered into a $321.5 million, as
amended, revolving credit agreement 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 for each quarter
commencing with the quarter ending June 30, 2001, plus 90% of capital
contributions to the Restricted Group after July 25, 2001, minus restricted
payments, (ii) a minimum tangible net worth of $140 million, plus 65% of the
Restricted Group's positive net income for each quarter commencing with the
quarter ending June 30, 2001, plus 90% of capital contributions to the
Restricted Group after July 25, 2001, minus restricted payments, (iii) a ratio
of total Restricted Group liabilities to tangible net
71
worth of not more than 8.0 to 1.0, excluding debt incurred pursuant to certain
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 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 agreement) 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's consolidated net income.
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's subsidiaries, RBMG, Inc. and Meritage Mortgage
Corporation, entered into a $75 million warehouse line of credit that expires in
July 2002. The credit agreement includes covenants similar to those described
above.
Meritage Mortgage Corporation, RBMG, Inc. and a bank are parties to a
master repurchase agreement, pursuant to which Meritage and RBMG, Inc. may
deliver eligible subprime mortgage loans in an aggregate principal amount of up
to $300 million to the bank. The master repurchase agreement expires in July
2002.
RBMG, Inc., Meritage Mortgage Corporation and RBMG PFC are party to a $100
million commercial paper conduit facility that expires in April 2002. The
facility has covenants similar to those discussed previously.
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.
RBMG, Inc. has entered into a $10.0 million unsecured line of credit
agreement that expires in September 2002. The interest rate on funds borrowed is
based upon the prime rate announced by a major money center bank.
The Company executed a $6.6 million note in May 1997. This debt is secured
by the Company's corporate headquarters. The terms of the related agreement
require the Company to make 120 equal monthly principal and interest payments
based upon a fixed interest rate of 8.07%. The note contains covenants similar
to those previously described.
The Company and its subsidiaries were in compliance with the various debt
covenants in place at September 30, 2001. Although management anticipates
continued compliance with current debt covenants, there can be no assurance that
the Company and its subsidiaries 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.
72
Republic Leasing has a $200 million credit facility to provide financing for
its leasing portfolio. The credit agreement matures in December 2001 and
contains various covenants regarding characteristics of the collateral and the
performance of the leases originated and serviced by Republic Leasing. The
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 Leasing.
The Company has been repurchasing its stock pursuant to Board authority
since March 1998, and, as of September 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. Certain of the Company's financing
arrangements contain covenants that prevent the Company from repurchasing its
stock at this time. Shares repurchased are maintained in the Company's treasury
account and are not retired. At September 30, 2001, there were 7,273,783 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 Company has
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
73
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 the 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, however, the Company
chose to elect hedge accounting treatment for its servicing hedges. Since the
time of election, the Company has marked-to-market the hedge instruments
resulting in pre-tax charges of $5.3 million. Prior to the election of hedge
accounting, the offsetting increase in value of the underlying servicing
portfolio could not be recognized.
The Company enters into interest rate swaps to pay fixed rate and receive
floating rate as a cash flow hedge of its variable rate debt used to finance its
fixed rate lease receivables. Interest
74
rate swaps are considered to be derivatives under SFAS No. 133 and are to be
carried at market value as assets or liabilities in the balance sheet. Since
this is a cash flow hedge under SFAS No. 133, the after tax impact is charged to
or credited to OCI.
Under the transition rules of SFAS No. 133, as of January 1, 2001, the
Company recognized the value of derivatives on its balance sheet. It recognized
in a separate line in its income statement the cumulative effect of changing to
SFAS No. 133. That cumulative effect is the difference between retained earnings
at December 31, 2000 and the amount of retained earnings that would have been
reported at that date if SFAS No. 133 had been retroactively applied to all
prior periods. The table below highlights the impact of this transition
adjustment.
($ 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 a decrease in net income net of tax of $1.5 million and $1.6 million
($0.09 per share), for the nine months and third quarter, respectively.
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 nine months ended September 30,
2001 and 2000, the Company generated approximately $79.1 million and $14.2
million, respectively, of positive funds from continuing operations.
75
($ in thousands) FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2001 2000
------- --------
Agency-eligible production $34,450 $(16,151)
Agency-eligible servicing 9,562 17,673
Subprime production 29,092 7,849
Leasing 5,986 4,810
------- --------
$79,090 $ 14,181
======= ========
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 nine months 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 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 NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
-------- --------
Income (loss) before income taxes $ 30,689 $(21,276)
Deduct:
Net gain on sale of mortgage loans, as (65,862) (16,255)
reported
Add back:
Cash gains (losses) on sale of mortgage loans 26,927 (2,654)
Cash gains on sale of mortgage servicing rights 33,955 17,957
Depreciation and amortization 5,919 4,375
Provision expense 2,822 1,702
-------- --------
$ 34,450 $(16,151)
======== ========
76
AGENCY-ELIGIBLE SERVICING
The Company's current strategy is to position itself as a national supplier
of agency-eligible servicing rights to the still consolidating mortgage
servicing industry. Accordingly, the Company generally sells a significant
percentage of its produced mortgage servicing rights to other approved servicers
under forward committed bulk purchase agreements. However, the Company maintains
a relatively small mortgage servicing portfolio. As discussed above, mortgage
servicing rights produced or purchased are initially capitalized and
subsequently must be amortized to expense. Much like depreciation, such
amortization charges are "non-cash". In this context, the table below reconciles
the major elements of pre-tax operating funds flow of the Company's
agency-eligible mortgage servicing activities.
($ in thousands) FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
-------- --------
(Loss) income before income taxes $(13,532) $ 1,508
Deduct:
Net loss (gain) on sale of mortgage servicing
rights, as reported 2,329 (2,212)
Add back:
Amortization and provision for impairment of
Mortgage servicing rights 20,065 18,278
Depreciation and amortization 700 99
-------- --------
$ 9,562 $ 17,673
======== ========
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 nine months of
2001 and 2000, the Company sold all of its loans to the cash markets. In this
context, the table below reconciles the major elements of pre-tax operating
funds flow of the Company's subprime mortgage production activities.
77
($ in thousands) FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
-------- --------
Income (loss) before income taxes $ 10,432 $(37,667)
Deduct:
Net gain on sale of subprime loans, as reported (21,649) (10,201)
Accretion income on residuals -- (5,634)
Add back:
Cash gains on sale of whole subprime loans 34,285 17,094
Cash received from investments in residual certificates -- 1,922
Depreciation and amortization
of goodwill and intangibles 1,016 1,246
Provision expense 5,008 1,751
Mark-to-market on residuals -- 39,338
-------- --------
$ 29,092 $ 7,849
======== ========
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 NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
------ ------
Income before income taxes $2,121 $2,354
Add back:
Depreciation and amortization of
goodwill and intangibles 216 248
Provision expense 3,649 2,208
------ ------
$5,986 $4,810
====== ======
78
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 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) On September 14, 2001, the Company filed a report on Form 8-K
reporting under Item 5 the purchase of certain assets from Nations Credit
Financial Services Corporation ("EquiCredit"), a wholly owned subsidiary of Bank
of America Corporation, by Meritage Mortgage Corporation ("Meritage"), a wholly
owned subsidiary of the Company. The assets purchased included fixed assets of
15 of EquiCredit's offices and a service center in Jacksonville, Florida.
79
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)
80
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) 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 incorporated by reference to Exhibit 10.1(B) of the
Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 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
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 incorporated by
reference to Exhibit 10.5(B) of the Registrant's Quarterly Report
on Form 10-Q for the period ended June 30, 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 incorporated by
reference to Exhibit 10.6(C) of the Registrant's Quarterly Report
of Form 10-Q for the period ended June 30, 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 incorporated by reference
to Exhibit 10.7(C) of the Registrant's Quarterly Report of Form
10-Q for the period ended June 30, 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
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 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
10.11 (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
10.13 (A) Stock Investment Plan incorporated by reference to Exhibit *
4.1 of the Registrant's Registration No. 33-87536
C
EXHIBITS DESCRIPTION PAGE
(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
incorporated by reference to Exhibit 10.14(E) of the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 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
incorporated by reference to Exhibit 10.14(F) of the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 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
incorporated by reference to Exhibit 10.14(G) of the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 2001
D
EXHIBITS DESCRIPTION PAGE
(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
incorporated by reference to Exhibit 10.14(H) of the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 2001
(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
incorporated by reference to Exhibit 10.14(I) of the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 2001
(J) Amendment to Change of Control Agreement between Douglas K. *
Freeman and the Company dated May 2, 2001 incorporated by
reference to Exhibit 10.14(J) of the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 2001
(K) Amendment to employment agreement between Douglas K. Freeman *
and the Company dated June 25, 2001 incorporated by reference to
Exhibit 10.14(K) of the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 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 incorporated by reference to Exhibit 10.15(E) of the
Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 2001
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
E
EXHIBITS DESCRIPTION PAGE
(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
(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
10.32(D) 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 incorporated by reference to Exhibit 10.33 of the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 2000
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EXHIBITS DESCRIPTION PAGE
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 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 Omnibus Stock Award Plan adopted May 2, *
2001 incorporated by reference to Exhibit 10.20(E) of the
Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 2001
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) incorporated
by reference to Exhibit 10.21(D) of the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 2001
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
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EXHIBITS DESCRIPTION PAGE
(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
(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
H
EXHIBITS DESCRIPTION PAGE
(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 10.48 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
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
11.1 Statement re: Computation of Net Income per Common Share ______
* Incorporated by reference
I