1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934
For The Quarterly Period Ended March 31, 1997
--------------
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 Office) (Zip Code)
Registrant's telephone number, including area code (803)741-3000
Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for each shorter period that the registrant was
required to file reports) and has been subject to such filing requirements for
the past 90 days.
YES X NO
--- ---
The number of shares of common stock of the Registrant outstanding as of
April 30, 1997, was 20,255,737.
Page 1
Exhibit Index on Pages A to D
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Form 10-Q for the quarter ended March 31, 1997
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - (Unaudited)
Consolidated Balance Sheet 3
Consolidated Statement of Income 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
PART II. OTHER INFORMATION 18
ITEM 2. Changes in Securities 18
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX A-D
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Part I. Financial Information
Item 1. Financial Statements
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED BALANCE SHEET
($ in thousands)
March 31, December 31,
1997 1996
----------- -----------
ASSETS (Unaudited)
Cash $ 3,677 $ 2,492
Receivables 63,838 60,668
Mortgage-backed securities 194,525 123,447
Mortgage loans held for sale 789,097 678,888
Mortgage servicing rights, net 130,006 109,815
Premises and equipment, net 21,055 21,135
Accrued interest on loans held for sale 5,770 4,491
Other assets 26,723 27,458
----------- -----------
Total assets $ 1,234,691 $ 1,028,394
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 1,001,329 $ 805,730
Accrued expenses 10,205 11,386
Other liabilities 61,481 53,977
----------- -----------
Total liabilities 1,073,015 871,093
----------- -----------
Stockholders' equity
Common stock 193 193
Additional paid-in capital 150,052 149,653
Retained earnings 15,872 12,007
Unearned shares of employee stock ownership plan (4,441) (4,552)
----------- -----------
Total stockholders' equity 161,676 157,301
----------- -----------
Total liabilities and stockholders' equity $ 1,234,691 $ 1,028,394
=========== ===========
See accompanying notes to consolidated financial statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
($ in thousands, except share information)
(Unaudited)
For the Three Months Ended
March 31,
-------------------------------
1997 1996
------------ ------------
REVENUES
Interest income $ 13,455 $ 18,445
Interest expense (9,720) (15,202)
------------ ------------
Net interest income 3,735 3,243
Net gain on sale of mortgage loans 17,027 18,533
Gain on sale of mortgage servicing rights 1,491 66
Loan servicing fees 7,535 7,130
Other income 269 78
------------ ------------
Total revenues 30,057 29,050
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EXPENSES
Salary and employee benefits 12,264 12,666
Occupancy expense 1,592 1,276
Amortization of mortgage servicing rights 4,108 3,670
General and administrative expenses 4,875 4,187
------------ ------------
Total expenses 22,839 21,799
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Income before income taxes 7,218 7,251
Income tax expense (2,748) (2,791)
------------ ------------
Net income $ 4,470 $ 4,460
============ ============
Weighted average common shares outstanding* 19,553,072 16,010,745
============ ============
Net income per common share $ 0.23 $ 0.28
============ ============
* The provisions of Accounting Principles Board Opinion No. 15, "Earnings per
Share" requires that the Company, effective for the first quarter of 1997,
prospectively commence to report net income per common share on a primary
earnings per share basis. Accordingly, the weighted average shares
outstanding for the first quarter of 1997 includes common stock equivalents
while such equivalents are excluded for the comparable period of the prior
year.
See accompanying notes to consolidated financial statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands)
(Unaudited)
Unearned Shares of
Three Months Ended Additional Paid- Retained Employee Stock
March 31, 1997 Common Stock In Capital Earnings Ownership Plan Total
------------------ -------------------- ---------------- -------- -------------- ---------
Shares Amount
------ ------
Balance, December 31, 1996 19,285,020 $ 193 $ 149,653 $ 12,007 $ (4,552) $ 157,301
Issuance of restricted stock 23,528 * 328 328
Shares issued under Dividend
Reinvestment and Stock
Purchase Plan and Stock
Investment Plan 3,290 * 42 (26) 16
Cash dividends (579) (579)
Shares committed to be
released under ESOP 29 111 140
Net income 4,470 4,470
---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 1997 19,311,838 $ 193 $ 150,052 $ 15,872 $ (4,441) $ 161,676
========== ========== ========== ========== ========== ==========
Unearned Shares of
Three Months Ended Additional Paid- Retained Employee Stock
March 31, 1997 Common Stock In Capital Earnings Ownership Plan Total
------------------ -------------------- ---------------- -------- -------------- ---------
Shares Amount
------ ------
Balance, December 31, 1995 14,550,462 $ 146 $ 84,533 $ 10,725 $ (2,000) $ 93,404
Issuance of restricted stock 16,410 * 256 256
Net proceeds of public offering 3,426,552 34 47,417 47,451
Shares issued under Dividend
Reinvestment and Stock
Purchase Plan and Stock
Investment Plan 23,711 * 335 335
Shares committed to be
released under ESOP 47 100 147
Net income 4,460 4,460
---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 1996 18,017,135 $ 180 $ 132,588 $ 15,185 $ (1,900) $ 146,053
========== ========== ========== ========== ========== ==========
* Amount less than $1
See accompanying notes to consolidated financial statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
Three Months Ended March 31,
-----------------------------
1997 1996
------------ ------------
OPERATING ACTIVITIES:
Net income $ 4,470 $ 4,460
Adjustments to reconcile net
income to cash used in operating activities:
Depreciation and amortization 4,856 4,267
Employee Stock Ownership Plan compensation 140 147
Provision for estimated foreclosure losses 265 100
Increase in receivables (3,170) (10,019)
Acquisition of mortgage loans (2,169,288) (3,137,847)
Proceeds from sales of mortgage loans and mortgage-backed securities 2,004,835 3,094,843
Acquisition of mortgage servicing rights (62,007) (54,547)
Sales of mortgage servicing rights 39,159 50,032
Net gain on sales of mortgage loans and servicing rights (18,518) (18,599)
(Increase) decrease in accrued interest on loans (1,279) 817
Decrease (increase) in other assets 910 (22)
Increase in accrued expenses and other liabilities 6,323 6,217
------------ ------------
Net cash used in operating activities (193,304) (60,151)
------------ ------------
INVESTING ACTIVITIES:
Purchases of premises and equipment, net (700) (3,123)
------------ ------------
Net cash used in investing activities (700) (3,123)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings 5,891,276 10,663,502
Repayment of borrowings (5,695,677) (10,647,124)
Debt issuance costs (175)
Issuance of restricted stock 328 256
Net proceeds of public offering 47,451
Shares issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan 16 335
Cash dividends (579)
------------ ------------
Net cash provided by financing activities 195,189 64,420
------------ ------------
Net increase in cash 1,185 1,146
Cash, beginning of year 2,492 2,161
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Cash, end of year $ 3,677 $ 3,307
============ ============
See accompanying notes to consolidated financial statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
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, 1996, Annual Report on Form 10-K. Certain financial
information, which is normally included in financial statements prepared in
accordance with generally accepted accounting principles, is not required
for interim financial statements and has been omitted. The accompanying
interim consolidated financial statements are unaudited. However, in the
opinion of management of the Company, all adjustments, consisting of normal
recurring items, necessary for a fair presentation of operating results for
the periods shown have been made. Certain prior period amounts have been
reclassified to conform to current period presentation.
In June 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,"
which is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. SFAS No.
125 is based upon consistent application of a financial-components approach
that focuses on control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when
extinguished. The Company adopted SFAS No. 125 effective January 1, 1997,
as required. The requirements of SFAS No. 125 are substantially the same as
those which were previously applicable to the Company pursuant to the
provisions of SFAS No. 122, "Accounting for Mortgage Servicing Rights-An
Amendment of FASB Statement No. 65." Accordingly, adoption of SFAS No. 125
had no material impact on the Company.
As required by Accounting Principles Board Opinion No. 15, "Earnings per
Share," the Company has prospectively implemented a policy of reporting
primary earnings per share effective for the first quarter of 1997. In
February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128), which is effective for financial statements issued for
periods ending after December 15, 1997. Early adoption of SFAS No. 128 is
not permitted. Basic and diluted earnings per share for the first quarter
reported pursuant to the provisions of SFAS No. 128 would be $0.24 and
$0.23, respectively.
Note 2 - Subsequent Events
Effective April 1, 1997, the Company completed a merger with Meritage
Mortgage Corporation and on April 21, the Company announced the signing of
separate definitive merger agreements with Walsh Holding Co., Inc. and
Resource Bancshares Corporation.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Financial Information, the Consolidated Financial Statements of the Company (and
the notes thereto) and the other information included or incorporated by
reference into the Company's 1996 Annual Report on Form 10-K and the interim
Consolidated Financial Statements contained herein. Any statements made below
(or elsewhere in this document) that are not statements of historical fact and
could be considered forward-looking in nature within the meaning of the Private
Securities Litigation Reform Act of 1995 are subject to risks and uncertainties
that could cause actual results to differ materially. Such risks and
uncertainties include, but are not limited to, those related to overall
business conditions in the mortgage markets in which RBMG operates, fiscal and
monetary policy, competitive products and pricing, credit risk management,
changes in regulations affecting financial institutions and other risks and
uncertainties discussed from time to time in the Company's SEC filings,
including its 1996 Form 10-K. The Company disclaims any obligation to publicly
announce future events or developments that affect the forward-looking
statements herein.
THE COMPANY
Resource Bancshares Mortgage Group, Inc. (the Company), was organized under
Delaware law in 1992 to acquire and operate the mortgage banking business of
Resource Bancshares Corporation (RBC), which commenced operations in May 1989.
The assets and liabilities of the mortgage banking business of RBC were
transferred to the Company on June 3, 1993, when the Company sold 58% of its
common stock in an initial public offering. As of March 31, 1997, RBC owned
approximately 38% of the outstanding common stock of the Company.
The Company is principally engaged in the purchase and origination of
residential mortgage loans, which it aggregates into mortgage-backed securities
issued or guaranteed by the Federal Home Loan Mortgage Corporation (FHLMC), the
Federal National Mortgage Association (FNMA) and the Government National
Mortgage Association (GNMA). The Company sells the mortgage-backed securities it
creates to institutional purchasers with the rights to service the underlying
loans being retained by the Company. The servicing rights retained are generally
separately sold but may be held for extended periods by the Company.
LOAN PRODUCTION
The Company purchases mortgage loans from its correspondents and through its
wholesale division. The Company originates mortgage loans through its retail
division.
A summary of loan production by source for the periods indicated is set forth
below:
($ in thousands) Quarter Ended March 31,
-----------------------------
(Unaudited) 1997 1996
---------- ----------
Loan Production:
Correspondent Division $1,652,483 $2,556,751
Wholesale Division 388,905 368,640
Retail Division 127,900 118,169
========== ==========
Total Loan Production $2,169,288 $3,043,560
========== ==========
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A summary of key information relevant to industry loan production activity is
set forth below:
($ in thousands) At or For the Quarter Ended March 31,
-------------------------------------
(Unaudited) 1997 1996
------------ ------------
U. S. 1-4 Family Mortgage Originations Statistics (1)
U. S. 1-4 Family Mortgage Originations $183,000,000 $219,000,000
Adjustable Rate Mortgage (ARM) Market Share 26.00% 20.00%
Estimated Fixed Rate Mortgage Originations $135,000,000 $175,000,000
Company Information
Loan Production $ 2,169,288 $ 3,043,560
Estimated Company Market Share 1.19% 1.39%
(1) Source: Mortgage Bankers Association of America, Economics Department.
Mortgage loan production decreased 29% to $2.2 billion for the first quarter
of 1997 from $3.0 billion for the first quarter of 1996. The net decline in loan
production is primarily due to an estimated 22% decline in fixed rate mortgage
origination volume between the comparable periods. The Company is primarily
focused on the purchase and origination of fixed-rate, 1-4 family residential
mortgage loans. As such, the Company is competitively disadvantaged in economic
environments that tend to favor ARMs over fixed-rate mortgages. (Generally,
higher long-term fixed-rate and steeper yield-curve environments tend to favor
ARM originations.)
Historically, the Company has been exclusively focused on purchasing loans
through its correspondents. In order to diversify its sources of loan volume,
the Company started a wholesale operation that purchased its first loan in May
1994, a retail operation which originated its first loan in May 1995, and a
subprime division which originated its first loan in April 1996. Accordingly,
correspondent operations accounted for 76% of the Company's loan production for
the first quarter of 1997 as compared to 84% for the first quarter of 1996.
Correspondent Loan Production
Through its correspondents, the Company purchases loans that have been
originated by such correspondents. Correspondents are primarily mortgage
lenders, larger mortgage brokers and smaller savings and loan associations and
commercial banks.
The Company continues to emphasize correspondent loan production as its
primary business focus because of the lower fixed expenses and capital
investment required of the Company. That is, the Company can develop a cost
structure that is more directly variable with loan production because the
correspondent incurs most of the fixed costs of operating and maintaining branch
office networks and of identifying and interacting directly with loan
applicants.
A summary of key information relevant to the Company's correspondent loan
production activities is set forth below:
($ in thousands) At or For the Quarter Ended March 31,
-------------------------------------
(Unaudited) 1997 1996
---------- -----------
Correspondent Loan Production $1,652,483 $2,556,751
Estimated Correspondent Market Share 0.90% 1.17%
Approved Correspondents 897 787
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The 35% decrease in correspondent loan production from $2.6 billion for the
first quarter of 1996 to $1.7 billion for the first quarter of 1997 was
primarily due to nationwide increases in mortgage interest rates and the
increase in the ARM share of the U.S. market from 20% in the first quarter of
1996 to an estimated 26% for the first quarter of 1997. Offsetting effects of
the overall decline in national mortgage production, the Company increased its
number of approved correspondents by 110 or 14% from 787 at March 31, 1996, to
897 at March 31, 1997.
Wholesale Loan Production
In May 1994, the Company began its expansion into the wholesale mortgage
banking business. In connection therewith, the Company receives loan
applications through brokers, underwrites the loans, funds the loans at closing
and prepares all closing documentation. The wholesale branches also handle
shipping and follow-up procedures on loans. Although the establishment of
wholesale branch offices involves the incurrence of the fixed expenses
associated with maintaining those offices, wholesale operations also provide for
higher profit margins than correspondent loan production. Additionally, each
branch office can serve a relatively sizable geographic area by establishing
relationships with large numbers of independent mortgage loan brokers who bear
much of the cost of identifying and interacting directly with loan applicants.
A summary of key information relevant to the Company's wholesale production
activities is set forth below:
($ in thousands) At or For the Quarter Ended March 31,
---------------------------------------------
(Unaudited) 1997 1996
--------------------- ---------------------
Wholesale Loan Production $ 388,905 $ 368,640
Estimated Wholesale Market Share 0.21% 0.17%
Wholesale Division Direct Operating Expenses $ 2,234 $ 1,874
Approved Brokers 2,423 1,393
Number of Branches 13 11
Number of Employees 128 106
The $20 million increase in wholesale loan production from $369 million for
the first quarter of 1996 as compared to $389 million for the first quarter of
1997 relates to the Company's addition of two new branches and over 1,000 new
brokers between March 31, 1996, and March 31, 1997. Similarly, the wholesale
division's operating expenses increased and the division's estimated market
share rose in spite of the decrease in national mortgage production and related
increase in percentage of ARM loans originated.
Retail Loan Production
A summary of key information relevant to the Company's retail production
activities that commenced in May 1995 is set forth below:
($ in thousands) At or For the Quarter Ended March 31,
--------------------------------------------
(Unaudited) 1997 1996
------------------- -------------------
Retail Loan Production $ 127,900 $ 118,169
Estimated Retail Market Share 0.07% 0.05%
Retail Division Operating Expenses $ 4,093 $ 4,078
Number of Branches 6 6
Number of Employees 212 174
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The Company's retail loan production increased by $10 million or 8% for the
first quarter of 1997 as compared to the same period of the prior year. The 40%
increase in the retail division's estimated market share for the first quarter
of 1997 as compared to the same period of the prior year resulted primarily from
further development of the division.
LOAN SERVICING
A summary of key information relevant to the Company's loan servicing
activities is set forth below:
($ in thousands) At or For the Quarter Ended March 31,
-------------------------------------
(Unaudited) 1997 1996
----------- -----------
Underlying Unpaid Principal Balances:
Beginning Balance $ 6,670,267 $ 5,562,930
Loan Production (net of servicing released
production) 2,327,189 3,035,555
Net Change in Work-in-Process (261,160) (253,958)
Bulk Acquisitions 605,761
Sales of Servicing (1,711,276) (2,357,099)
Paid-In-Full Loans (132,896) (138,332)
Amortization, Curtailments, and Others, net (77,102) (21,825)
----------- -----------
Ending Balance $ 7,420,783 $ 5,827,271
Subservicing Ending Balance 1,992,983 3,321,714
----------- -----------
Total Underlying Unpaid Principal Balances 9,413,766 9,148,985
=========== ===========
Loan Servicing Fees $ 7,535 $ 7,130
Cash Operating Expenses 18,731 18,129
Coverage Ratio 40% 39%
Average Underlying Unpaid Principal Balances $ 8,886,145 $ 8,674,728
(including subservicing)
Weighted Average Note Rate* 7.78% 7.67%
Weighted Average Servicing Fee* 0.40% 0.41%
Delinquency (30+ days)* 3.74% 2.64%
Number of Servicing Division Employees 133 119
* These statistics apply to the Company's owned servicing portfolio.
The $211 million or 2% increase in the average underlying unpaid principal
balance of mortgage loans being serviced for the first quarter of 1997 as
compared to the first quarter of 1996 is primarily related to the Company's
acquisitions of approximately $2.0 billion of servicing between March 31, 1996,
and March 31, 1997.
RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 1997, COMPARED TO THE QUARTER
ENDED MARCH 31, 1996
Summary
Total revenues of the Company increased 3% to $30.1 million for the first
quarter of 1997 as compared to $29.1 million for the first quarter of 1996. The
$1.0 million increase in revenues was primarily due to a $0.5 million increase
in net interest income and a $0.4 million increase in loan servicing fees. The
$1.0 million increase in revenues was offset by a $1.0 million increase in
operating expenses. The increase in net interest
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income is primarily due to a 49 basis point increase in net interest margin
associated with the relatively steeper yield curve environment for the first
quarter of 1997. Increased loan servicing fees resulted from the 21% increase in
the average balance of the Company's owned servicing portfolio, which increased
as a combined result of approximately $2.0 billion in bulk acquisitions between
March 31, 1996, and March 31, 1997, as well as increased retention of servicing
rights associated with the Company's production. The increase in operating
expenses is primarily attributable to increased costs associated with increased
loan servicing volumes and with expansion into wholesale and subprime
operations.
The following sections discuss the components of the Company's results of
operations in greater detail.
NET INTEREST INCOME
The following table analyzes net interest income in terms of rate and volume
variances of the interest spread (difference between interest rates earned on
loans and mortgage-backed securities and interest rates paid on interest bearing
sources of funds). All dollars are in thousands and the information presented is
unaudited.
Variance
Average Volume Average Rate Interest Attributable to
- ----------------------------------------- --------------------- ---------------------
1997 1996 1997 1996 1997 1996 Variance Rate Volume
- ----------------------------------------- ----------------------------------------------------
Interest Income
Mortgages Held for Sale and
$722,308 $987,387 7.45% 7.47% Mortgage-Backed $13,455 $18,445 ($4,990) ($38) ($4,952)
Securities
- ----------------------------------------- ----------------------------------------------------
Interest Expense
375,129 355,757 4.60% 4.82% Warehouse Line 4,257 4,261 (4) (236) 232
329,892 589,994 5.32% 5.87% Gestation Line 4,325 8,604 (4,279) (486) (3,793)
57,694 8.24% Servicing Secured Line 1,183 (1,183) (1,183)
38,811 27,597 6.14% 5.85% Servicing Receivable Line 588 402 186 23 163
21,198 8.23% Other Borrowings 434 (434) (434)
Facility Fees & Other 550 318 232 232
Charges
- ----------------------------------------- ----------------------------------------------------
743,832 1,052,240 5.30% 5.81% Total Interest Expense 9,720 15,202 (5,482) (699) (4,783)
- ----------------------------------------- ----------------------------------------------------
2.15% 1.66% Net Interest Income $3,735 $3,243 $492 $661 ($169)
=================== ====================================================
Net interest income increased 15% to $3.7 million for the first quarter of
1997 as compared to $3.2 million for the first quarter of 1996. The $0.5 million
increase in net interest income is primarily attributable to a 49 basis point
increase in the interest rate spread to 215 basis points for 1997 as compared to
166 basis points for 1996. This increase in net interest spread is due primarily
to a relatively steeper 1997 yield curve environment. The Company's long-term
mortgages and mortgage-backed securities are generally sold and replaced within
30 to 35 days. Accordingly, the Company generally borrows at rates based upon
short-term indexes while its earning asset yields are based upon long-term rate
indexes. Thus, the increase in interest rate spread was primarily the result of
the steeper yield curve environment.
NET GAINS ON SALES OF MORTGAGE LOANS AND MORTGAGE SERVICING RIGHTS
Net gains on sales of mortgage loans and mortgage servicing rights remained
consistent for the first quarter of 1997 at $18.5 million as compared to $18.6
million for the first quarter of 1996. As further discussed below, in spite of
the decrease in the volumes of mortgage loans and mortgage servicing rights sold
during the first quarter of 1997 compared to the first quarter of 1996, gains on
sales remained consistent as a result of increased profit margins on sales.
Net Gain on Sale of Mortgage Loans
A reconciliation of the gain on sale of mortgage loans for the periods indicated
follows:
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($ in thousands) For the Quarter Ended March 31,
-------------------------------
(Unaudited) 1997 1996
----------- -----------
Gross proceeds on sale of mortgage loans $ 2,004,835 $ 3,094,843
Initial unadjusted acquisition cost of mortgage loans sold 2,003,036 3,093,179
----------- -----------
Unadjusted gain on sale of mortgage loans 1,799 1,664
Loan origination and correspondent program administrative fees 6,501 8,775
----------- -----------
Unadjusted aggregate margin 8,300 10,439
Acquisition basis allocated to mortgage servicing rights (SFAS
No. 122 and SFAS No. 125) 8,506 8,179
Net change in deferred administrative fees 221 (85)
----------- -----------
Net gain on sale of mortgage loans $ 17,027 $ 18,533
=========== ===========
The Company sold loans during the first quarter of 1997 with an aggregate
unpaid principal balance of $2.0 billion compared to sales of $3.1 billion for
the first quarter of 1996. The amount of proceeds received on sales of mortgage
loans exceeded the initial unadjusted acquisition cost of the loans sold by $1.8
million (9 basis points) for the first quarter of 1997 and $1.7 million (5 basis
points) for the first quarter of 1996. The Company received loan origination and
correspondent program administrative fees of $6.5 million (32 basis points) on
these loans during the first quarter of 1997 and $8.8 million (28 basis points)
during the first quarter of 1996. The Company allocated $8.5 million (42 basis
points) in the first quarter of 1997 to basis in mortgage servicing rights, in
accordance with SFAS No. 125, adopted effective January 1, 1997. During the
first quarter of 1996, $8.2 million (26 basis points) was allocated to basis in
mortgage servicing rights, in accordance with SFAS No. 122. Net gain on sale of
mortgage loans decreased to $17.0 million for the first quarter of 1997 versus
$18.5 million for 1996 primarily due to the 35% decrease in the volume of
mortgage loans sold which was partially offset by a 8 basis point increase in
the unadjusted aggregate margin and a 16 basis point increase in the acquisition
basis allocated to mortgage servicing rights for the first quarter of 1997.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing rights
for the periods indicated follows:
($ in thousands) For the Quarter Ended March 31,
-------------------------------
(Unaudited) 1997 1996
----------- -----------
Underlying unpaid principal balances of mortgage loans on which
servicing rights were sold during the period $ 1,712,308 $ 2,357,099
=========== ===========
Gross proceeds from sales of mortgage servicing rights 39,159 50,032
Initial acquisition basis, net of amortization 28,745 44,280
----------- -----------
Unadjusted gain on sale of mortgage servicing rights 10,414
5,752
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 122 and SFAS No. 125) (8,923) (5,686)
=========== ===========
Gain on sale of mortgage servicing rights $ 1,491 $ 66
=========== ===========
During the first quarter of 1997, the Company completed eight sales of
mortgage servicing rights representing $1.7 billion of underlying unpaid
principal mortgage loan balances compared to nine sales of mortgage servicing
rights representing $2.4 billion of underlying unpaid principal mortgage loan
balances in
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the first quarter of 1996. Unadjusted gain on sale of mortgage servicing rights
was $10.4 million (61 basis points) for the first quarter of 1997, compared to
$5.8 million (24 basis points) for the first quarter of 1996. The Company
reduced this unadjusted gain by $8.9 million in the first quarter of 1997, in
accordance with SFAS No. 125, adopted effective January 1, 1997, compared with a
$5.7 million reduction in the first quarter of 1996, in accordance with SFAS No.
122.
NET SERVICING MARGIN
Loan servicing fees were $7.5 million for the first quarter of 1997, compared
to $7.1 million for the first quarter of 1996, an increase of 6%. This increase
is primarily related to an increase in the average aggregate underlying unpaid
principal balance of mortgage loans serviced to $8.9 billion during the first
quarter of 1997 from $8.7 billion during the first quarter of 1996, an increase
of 2%. Similarly, amortization of mortgage servicing rights also increased to
$4.1 million during the first quarter of 1997 from $3.7 million during the first
quarter of 1996, an increase of 12%. The increase in amortization is primarily
attributed to the growth in the average balance of the mortgage loans serviced.
Net servicing margin remained consistent with the prior year at $3.4 million
during the first quarter of 1997 compared to $3.5 million during the first
quarter of 1996, a decrease of 1%.
Included in loan servicing fees for 1997 and 1996 are subservicing fees
received by the Company of $148,000 and $318,000, respectively. The subservicing
fees are associated with temporary subservicing agreements between the Company
and purchasers of mortgage servicing rights.
The following tables summarizes the net servicing margin for the first
quarter of both 1997 and 1996:
($ in thousands) For the Quarter Ended March 31,
-------------------------------
(Unaudited) 1997 1996
---------- ----------
Loan servicing fees $ 7,535 $ 7,130
Amortization of mortgage servicing rights 4,108 3,670
---------- ----------
Net servicing margin $ 3,427 $ 3,460
========== ==========
Average underlying unpaid principal balance
of mortgage loans serviced $8,886,145 $8,674,728
========== ==========
OTHER INCOME
Other income increased during the first quarter of 1997 compared to the first
quarter of 1996, primarily due to an increase in administrative fees received
from sales of servicing released loans during 1997 as compared to 1996.
EXPENSES
The $1.0 million increase in operating expenses was centered in occupancy
expense and general and administrative expenses, which increased $0.3 million
and $0.7 million, respectively. The increase in operating expenses is primarily
attributable to increased costs associated with increased loan servicing volumes
and with expansion into wholesale and subprime operations. Direct operating
costs related to the Company's expansion into subprime operations account for
approximately $442 thousand, or 43% of the total increase in operating expenses
for the first quarter of 1997. Direct operating costs related to the Company's
continuing expansion into wholesale operations account for approximately $360
thousand, or 35% of the total increase in operating expenses for the first
quarter of 1997.
INCOME TAX EXPENSE
14
15
Income tax expense includes both federal and state income taxes. The
effective tax rates for 1997 and 1996 were 38.1% and 38.5% respectively. Income
tax expense decreased by 2% to $2.7 million for the first quarter of 1997 from
$2.8 million for the first quarter of 1996 due to the above described factors
which resulted in a 0.5% or $33 thousand decrease in income before taxes.
15
16
FINANCIAL CONDITION
During the first quarter of 1997, the Company experienced a 3% increase in
the volume of mortgage loans originated and acquired compared to the fourth
quarter of 1996. Mortgage loan production increased to $2.2 billion during the
first quarter of 1997 from $2.1 billion during the previous quarter. The March
31, 1997, mortgage application pipeline (mortgage loans not yet closed but for
which the interest rate has been locked) was approximately $1.0 billion.
The Company continued to establish new correspondent relationships during
the first quarter of 1997. The number of correspondents approved to do business
in the Company's correspondent lending program increased to 897 at March 31,
1997, from 871 at December 31, 1996.
The Company continued expansion of the wholesale network between December
31, 1996, and March 31, 1997, with the addition of 101 brokers to the Company's
approved list, increasing the number of approved brokers from 2,322 at December
31, 1996, to 2,423 at March 31, 1997.
The Company's retail division, operating through its wholly-owned
subsidiary, Intercounty Mortgage, Inc., (IMI) employed 212 people at March 31,
1997, and has offices in New York (4), New Jersey and Pennsylvania.
The Company continues to face the same challenges as other companies within
the mortgage banking industry and as such is not immune from significant volume
declines precipitated by a rise in interest rates or other factors beyond the
Company's control. Management of the Company recognizes these challenges and
continues to manage the Company accordingly.
Mortgage loans held for sale and mortgage-backed securities totaled $983.6
million at March 31, 1997, versus $802.3 million at December 31, 1996, an
increase of 23%. The Company's servicing portfolio (exclusive of loans under
subservicing agreements) increased to $7.4 billion at March 31, 1997, from $6.7
billion at December 31, 1996, an increase of 11%.
Short-term borrowings, which are the Company's primary source of funds,
totaled $1.0 billion at March 31, 1997, compared with $805.7 million at December
31, 1996, an increase of 24%. The increase in the balance outstanding at March
31, 1997, resulted from increased funding requirements related to the increase
in the balance of mortgage loans held for sale and mortgage-backed securities at
March 31, 1997, as compared to the balance at December 31, 1996. There were no
long-term borrowings at March 31, 1997, or December 31, 1996.
Other liabilities totaled $61.5 million as of March 31, 1997, compared to
the December 31, 1996, balance of $54.0 million, an increase of $7.5 million, or
14%. The increase in other liabilities resulted primarily from an increase at
month end in the volume of loans acquired through certain correspondent funding
programs of the Company.
16
17
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash-flow requirement involves the funding of loan
production, which is met primarily through external borrowings. The Company has
entered into a 364-day, $570 million warehouse line of credit provided by a
syndicate of unaffiliated banks, which expires in July 1997. The credit
agreement includes covenants requiring the Company to maintain (i) a minimum net
worth of $130 million, plus net income subsequent to July 31, 1996, and capital
contributions and minus permitted dividends, (ii) a ratio of total liabilities
to net worth of not more than 8.0 to 1.0, excluding debt incurred pursuant to
gestation and repurchase financing agreements, (iii) its eligibility as a
servicer of GNMA, FHA, VA, FNMA and FHLMC mortgage loans and (iv) a mortgage
servicing rights portfolio with an underlying unpaid principal balance of at
least $4 billion. The provisions of the agreement also restrict the Company's
ability to (i) pay dividends in any fiscal quarter which exceed 50% of the
Company's net income for the quarter or (ii) engage significantly in any type of
business unrelated to the mortgage banking business and the servicing of
mortgage loans.
Additionally, the Company entered into a $200 million, 364-day term revolving
credit facility with a syndicate of unaffiliated banks. An $80 million portion
of the revolver facility converts on July 31,1997, into a four-year term loan.
The facility is secured by the Company's servicing portfolio designated as
"available-for-sale". A $70 million portion of the revolver facility matures on
July 31, 1997, and is secured by the Company's servicing portfolio designated as
"held-for-sale". A $50 million portion of the revolver facility matures on July
31, 1997, and is secured by a first-priority security interest in receivables on
servicing rights sold. The facility includes covenants identical to those
described above with respect to the warehouse line of credit.
The Company was in compliance with the above-mentioned debt covenants at
March 31, 1997. Although management anticipates continued compliance, there can
be no assurance that the Company will be able to comply with the debt covenants
specified for each of these financing agreements. Failure to comply could result
in the loss of the related financing.
The Company has also 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 $1.5 billion.
The Company entered into a $5 million unsecured line of credit in September
1996. The line of credit expires in September 1997.
17
18
Part II. OTHER INFORMATION
Item 2. - Changes in Securities
On February 1, 1997, the Company issued 23,528 shares of its common
stock, par value $0.01 per share, to David W. Johnson, Jr. These shares
were issued pursuant to the terms of Mr. Johnson's employment agreement
dated as of June 3, 1993 and represented a portion of his bonus for
1996. The fair market value of the shares on the date of issuance to
Mr. Johnson was $341,156 based on the closing price of $14.50 per share
on the NASDAQ Market System on such date. The Company believes that the
issuance of the shares to Mr. Johnson was exempt from the registration
requirements of the Securities and Exchange Act of 1993, as amended,
under Section 4 (2) by virtue of his position as Vice Chairman and
Managing Director of the Company.
Item 6. - Exhibits and Reports on Form 8-K
- (a) A list of the exhibits required with this Form 10-Q, along with
the exhibit index can be found on pages A to D following the
signature page.
- (b) There were no reports on Form 8-K filed during this reporting
period.
18
19
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
Senior Executive Vice President and
Chief Financial Officer
(signing in the capacity of (i) duly
authorized officer of the registrant and
(ii) principal financial officer of the
registrant)
DATED: May 12, 1997
19
20
INDEX TO EXHIBITS
Exhibit No. Description Page
- ----------- ----------- ----
3.1 Restated Certificate of Incorporation of the Registrant incorporated by reference to
Exhibit 3.3 of the Registrant's Registration No. 33-53980 *
3.2 Amended and Restated Bylaws of the Registrant incorporated by reference to
Exhibit 3.4 of the Registrant's Registration No. 33-53980 *
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 Second Amended and Restated Secured Revolving /Term Credit Agreement *
dated as of July 31, 1996, between the Registrant and the Banks
Listed on the Signature Pages Thereof, Bank One, Texas, National
Association, First Bank National Association, NationsBank of Texas,
N.A. and Texas Commerce Bank, National Association, as Co-agents and
the Bank of New York as Agent and Collateral Agent incorporated by
reference to Exhibit 4.2 of the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1996
4.3 Second Amended and Restated Revolving/Term Security Collateral Agency *
Agreement dated as of July 31, 1996, between the Registrant and The
Bank of New York as Collateral Agent and Secured Party incorporated by
reference to Exhibit 4.3 of the Registrant's Form 10-Q for the period
ended September 30, 1996
10.1 Employment Agreement dated June 3, 1993, between the Registrant and *
David W. Johnson, Jr. as amended by amendment dated October 22, 1993
incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993
10.2 Tax Agreement dated May 26, 1993, between Resource Bancshares Corporation (RBC) *
and the Registrant incorporated by reference to Exhibit 10.3 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993
10.3 Formation Agreement dated May 26, 1993, among Republic National Bank, the *
Registrant, RBC and 1st Performance National Bank incorporated by reference to
Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993
10.4 Office Building Lease dated March 8, 1991, as amended by Modification of Office *
Lease dated October 1, 1991, incorporated by reference to Exhibit 10.5 of the Registrant's
Registration No. 33-53980
10.5 Assignment and Assumption of Office Lease incorporated by reference to Exhibit 10.6 *
of the Registrant's Registration No. 33-53980
10.6 (A) Stock Option Agreement between the Registrant and David W. Johnson, Jr. *
incorporated by reference to Exhibit 10.8 (A) of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993
(B) Stock Option Agreement between the Registrant and Lee E. Shelton *
incorporated by reference to Exhibit 10.8 (B) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993
10.7 Termination Agreement dated June 3, 1993, between the Registrant and *
David W. Johnson, Jr. incorporated by reference to Exhibit 10.9 (A) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993
A
21
Exhibit No. Description Page
- ----------- ----------- ----
10.8 (A) Deferred Compensation Agreement dated June 3, 1993, between the Registrant and *
David W. Johnson, Jr. incorporated by reference to Exhibit 10.10 (A) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993
(B) Deferred Compensation Rabbi Trust, for David W. Johnson, dated *
January 19, 1994, between RBC and First Union National Bank of North
Carolina incorporated by reference to Exhibit 10.10 (C) of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993
10.9 Registration Rights Agreement dated May 26, 1993, between RBC and the *
Registrant incorporated by reference to Exhibit 10.11 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993
10.10 Flexible Benefits Plan incorporated by reference to Exhibit 10.16 of the Registrant's *
Annual Report on Form 10-K for the year ended December 31, 1993
10.11 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
10.12 Pension Plan incorporated by reference to Exhibit 10.18 of the Registrant's Annual *
Report on Form 10-K for the year ended December 31, 1993
10.13 Governmental Real Estate Sub-Lease-Office, between Resource Bancshares Mortgage *
Group, Inc. and the South Carolina Department of Labor, Licensing and Regulation
incorporated by reference to Exhibit 10.19 of the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1994
10.14 First Sub-Lease Amendment to Governmental Real Estate Sub-Lease-Office, *
between Resource Bancshares Mortgage Group, Inc. and the South Carolina Department
of Labor, Licensing and Regulation incorporated by reference to Exhibit 10.20 of the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1994
10.15 Amendment I to Pension Plan incorporated by reference to Exhibit 10.21 of the Registrant's *
Annual Report on Form 10-K for the year ended December 31, 1994
10.16 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
10.17 Phantom 401(k) Plan incorporated by reference to Exhibit 10.24 of the Registrant's *
Annual Report on Form 10-K for the year ended December 31, 1994
10.18 Pension Restoration Plan incorporated by reference to Exhibit 10.25 of the Registrant's *
Annual Report on Form 10-K for the year ended December 31, 1994
10.19 Stock Investment Plan incorporated by reference to Exhibit 4.1 of the Registrant's
Registration No. 33-87536
10.20 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
10.21 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
10.22 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
B
22
Exhibit No. Description Page
- ----------- ----------- ----
10.23 ESOP Loan and Security Agreement dated January 12, 1995, between the Registrant *
and The Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust
incorporated by reference to Exhibit 10.31 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994
10.24 Employment Agreement dated June 30, 1995, between the Registrant and Steven F. Herbert *
incorporated by reference to Exhibit 10.34 of the Registrant's Quarterly Report
on Form 10-Q for the period ended September 30, 1995
10.25 Formula Stock Option Plan incorporated by reference to Exhibit 10.36 of the Registrant's *
Quarterly Report on Form 10-Q for the period ended September 30, 1995
10.26 Omnibus Stock Award Plan incorporated by reference to Exhibit 10.37 of the Registrant's *
Quarterly Report on Form 10-Q for the period ended September 30, 1995
10.27 Employment Agreement dated September 25, 1995, between the Registrant *
and Richard M. Duncan incorporated by reference to Exhibit 10.38 of
the Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1995
10.28 Request for Extension of Governmental Real Estate Sub-Lease-Office, *
between the Registrant and the South Carolina Department of Labor,
Licensing and Regulation dated December 12, 1995 incorporated by
reference to Exhibit 10.39 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995
10.29 First Amendment to Registration Rights Agreement dated March 11, 1996, between *
the Registrant and RBC incorporated by reference to Exhibit 10.40 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
10.30 First Amendment to Employee Stock Ownership Plan dated October 31, 1995 *
incorporated by reference to Exhibit 10.41 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995
10.31 Amendment to Pension Plan effective January 1, 1995 incorporated by reference to *
Exhibit 10.42 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995
10.32 Amendment to Omnibus Stock Award Plan dated March 22, 1996 incorporated *
by reference to Exhibit 10.44 of the Registrant's Quarterly Report on
Form 10-Q for the period ended June 30, 1996
10.33 Second Amendment to Employee Stock Ownership Plan dated August 12, 1996 *
incorporated by reference to Exhibit 10.45 of the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1996
10.34 Resource Bancshares Mortgage Group, Inc. Non-Qualified Stock Option Plan *
dated September 1, 1996 incorporated by reference to Exhibit 10.33 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996
10.35 Amended and Restated Retirement Savings Plan dated April 1, 1996 *
incorporated by reference to Exhibit 10.34 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996
10.36 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
23
Exhibit No. Description Page
- ----------- ----------- ----
10.37 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
10.38 Second Amendment to Amended and Restated Retirement Savings Plan dated _____
January 1997
10.39 Form of Term Sheet for RBMG/Shelton Settlement, including Amendment to
Stock Option Agreement between the Registrant and Lee E. Shelton _____
10.40 Form of Incentive Stock Option Agreement (Omnibus Stock Award Plan) _____
10.41 Form of Non-Qualified Stock Option Agreement (Non-Qualified Stock Option Plan) _____
10.42 Amendment to Resource Bancshares Mortgage Group, Inc. Omnibus Stock Award
Plan, Formula Stock Ooption plan and Non-Qualified Stock Option Plan _____
11.1 Statement re Computation of Net Income per Share _____
27.1 Financial Data Schedule _____
- ---------------------------------
* Incorporated by reference
D