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 June 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ -------------
Commission File Number 000-21786
----------
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 57-0962375
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7909 Parklane Road, Columbia, SC 29223
- --------------------------------------------------------------------------------
(Address of Principal Executive 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 July
31, 1997, was 19,850,103.
Page 1
Exhibit Index on Pages A to D
2
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Form 10-Q for the quarter ended June 30, 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 10
Financial Condition and Results of Operations
PART II. OTHER INFORMATION 24
ITEM 2. Changes in Securities 24
ITEM 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBIT INDEX A-D
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED BALANCE SHEET
($ in thousands)
June 30, December 31,
1997 1996
----------- -----------
(Unaudited)
ASSETS
Cash $ 2,319 $ 2,492
Receivables 78,904 60,668
Mortgage-backed securities 76,392 123,447
Mortgage loans held for sale 866,310 678,888
Mortgage servicing rights, net 131,227 109,815
Premises and equipment, net 21,854 21,135
Goodwill and other intangibles 5,883
Accrued interest on loans held for sale 5,498 4,491
Other assets 39,233 27,458
----------- -----------
Total assets $ 1,227,620 $ 1,028,394
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 943,752 $ 805,730
Long-term borrowings 6,507
Accrued expenses 13,538 11,386
Other liabilities 90,519 53,977
----------- -----------
Total liabilities 1,054,316 871,093
----------- -----------
Stockholders' equity
Common stock 198 193
Additional paid-in capital 154,825 149,653
Retained earnings 22,611 12,007
Unearned shares of employee stock ownership plan (4,330) (4,552)
----------- -----------
Total stockholders' equity 173,304 157,301
----------- -----------
Total liabilities and stockholders' equity $ 1,227,620 $ 1,028,394
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
4
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
($ in thousands, except share information)
(Unaudited)
For the Six Months Ended For the Three Months Ended
June 30, June 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
REVENUES
Interest income $ 31,688 $ 35,301 $ 18,233 $ 16,856
Interest expense (22,037) (27,021) (12,317) (11,819)
------------ ------------ ------------ ------------
Net interest income 9,651 8,280 5,916 5,037
Net gain on sale of mortgage loans 42,250 40,036 25,223 21,503
Gain on sale of mortgage servicing rights 2,711 189 1,220 123
Loan servicing fees 15,338 13,859 7,803 6,729
Other income 426 298 157 220
------------ ------------ ------------ ------------
Total revenues 70,376 62,662 40,319 33,612
------------ ------------ ------------ ------------
EXPENSES
Salary and employee benefits 27,144 25,515 14,880 12,849
Occupancy expense 3,442 2,640 1,850 1,364
Amortization of mortgage servicing rights 8,833 7,316 4,725 3,646
General and administrative expenses 11,743 9,750 6,868 5,563
------------ ------------ ------------ ------------
Total expenses 51,162 45,221 28,323 23,422
------------ ------------ ------------ ------------
Income before income taxes 19,214 17,441 11,996 10,190
Income tax expense (7,373) (6,714) (4,625) (3,923)
------------ ------------ ------------ ------------
Net income $ 11,841 $ 10,727 $ 7,371 $ 6,267
============ ============ ============ ============
Weighted average shares* 19,831,581 17,534,817 20,108,839 19,058,888
============ ============ ============ ============
Net income per common share $ 0.60 $ 0.61 $ 0.37 $ 0.33
============ ============ ============ ============
* The provisions of Accounting Principles Board Opinion No. 15, "Earnings per
Share" required 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 second quarter of 1997 and the six months ended June
30, 1997 includes common stock equivalents while such equivalents are
excluded for the comparable periods of the prior year.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
5
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands, except share information)
(Unaudited)
Unearned
Common Stock Additional Shares of Employee
Six Months Ended ------------------- Paid-in Retained Stock Ownership
June 30, 1996 Shares Amount Capital Earnings Plan Total
- ------------------------------- ---------- ------ ------- -------- ------------------ -----
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
Loans to ESOP (1,000) (1,000)
Shares committed to be
released under ESOP 97 200 297
Shares issued under Dividend
Reinvestment and Stock Purchase
Plan and Stock Investment Plan 24,691 * 272 272
Net income 10,727 10,727
---------- ---- -------- ------- ------- ---------
Balance, June 30, 1996 18,018,115 $180 $132,575 $21,452 ($2,800) $151,407
========== ==== ======== ======= ======= =========
Unearned
Common Stock Additional Shares of Employee
Six Months Ended ------------------- Paid-in Retained Stock Ownership
June 30, 1997 Shares Amount Capital Earnings Plan Total
- ------------------------------- ---------- ------ ------- -------- ------------------ -----
Balance, December 31, 1996 19,285,020 $193 $149,653 $12,007 ($4,552) $157,301
Issuance of restricted stock 23,528 * 328 328
Cash dividends (1,186) (1,186)
Acquisition of Meritage Mortgage
Corporation 537,846 5 4,742 4,747
Shares committed to be
released under ESOP 59 222 281
Shares issued under Dividend
Reinvestment and Stock
Purchase Plan and Stock
Investment Plan 3,709 * 43 (51) (8)
Net income 11,841 11,841
---------- ---- -------- ------- ------- ---------
Balance, June 30, 1997 19,850,103 $198 $154,825 $22,611 ($4,330) $173,304
========== ==== ======== ======= ======= =========
* Amount less than $1
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
6
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
Six Months Ended June 30,
----------------------------------
1997 1996
------------ ------------
OPERATING ACTIVITIES:
Net income $ 11,841 $ 10,727
Adjustments to reconcile net
income to cash (used in) provided by operating activities:
Depreciation and amortization 10,453 8,554
Employee Stock Ownership Plan compensation 281 297
Provision for estimated foreclosure losses 1,093 200
(Increase) decrease in receivables (18,236) 1,503
Acquisition of mortgage loans (4,853,760) (5,674,298)
Proceeds from sales of mortgage loans and mortgage-backed securities 4,754,990 6,056,032
Acquisition of mortgage servicing rights (112,051) (114,634)
Sales of mortgage servicing rights 84,077 102,555
Net gain on sales of mortgage loans and servicing rights (44,961) (40,225)
(Increase) decrease in accrued interest on loans (1,007) 1,938
Increase in other assets (10,976) (481)
Increase (decrease) in accrued expenses and other liabilities 38,694 (6,620)
------------ ------------
Net cash (used in) provided by operating activities (139,562) 345,548
------------ ------------
INVESTING ACTIVITIES:
Purchases of premises and equipment, net (2,267) (5,308)
------------ ------------
Net cash used in investing activities (2,267) (5,308)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings 12,814,396 19,805,491
Repayment of borrowings (12,669,867) (20,192,534)
Issuance of restricted stock 328 256
Shares issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan (8) 272
Acquisition of Meritage Mortgage Corporation (1,750)
Debt issuance costs (257)
Cash dividends (1,186)
Net proceeds of public offering 47,451
Loans to Employee Stock Ownership Plan (1,000)
------------ ------------
Net cash provided by (used in) financing activities 141,656 (340,064)
------------ ------------
Net increase in cash (173) 176
Cash, beginning of period 2,492 2,161
------------ ------------
Cash, end of period $ 2,319 $ 2,337
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
7
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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
and financial position 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 SFAS
No. 128, "Earnings per Share", 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 second quarter reported pursuant to the provisions of SFAS
No. 128 would be $0.38 and $0.36, respectively. Basic and diluted earnings
per share for the first six months of 1997 reported pursuant to the
provisions of SFAS No. 128 would be $0.62 and $0.59, respectively.
Effective April 1, 1997, the Company completed a merger with Meritage
Mortgage Corporation (Meritage), in which it exchanged approximately
$1.75 million of cash and 537,846 noncontingent shares of RBMG common
stock for all the outstanding stock of Meritage. This transaction was
accounted for under the purchase method of accounting. In addition,
406,053 shares of RBMG common stock were issued contingent upon Meritage
achieving specified increasingly higher levels of subprime mortgage
production during the 31 months following closing. The fair market value
of those contingent shares have been excluded from the purchase price for
purposes of estimating goodwill and from outstanding shares for purposes
of earnings per share computations. As each specified increasingly
higher subprime mortgage production level is achieved, the corresponding
fair market value of the associated contingent shares will be recorded as
additional goodwill and such shares will prospectively be treated as
outstanding for purposes of earnings per share computations.
7
8
The estimated total purchase price for the Meritage merger has been
allocated to tangible and identifiable assets and liabilities based upon
management's estimate of their respective fair values with the excess of
estimated cost over the fair value of the net assets acquired allocated to
goodwill. The estimated allocations of the purchase price are expected to
be revised as additional information concerning asset and liability
valuation is obtained and as specified increasingly higher production
levels are achieved resulting in recognition of additional goodwill related
to contingent shares of stock issued in the transaction. Management
believes the estimated asset and liability valuations utilized for the
acquisition, insofar as they are related to the noncontingent shares
issued, will not be materially different from the information presented
herein. Goodwill and other intangible assets are being amortized over a
20 year period using the straight line method. Amortization expense for
the second quarter of 1997 was approximately $78. In connection with the
acquisition, the following is a schedule of the allocation of the purchase
price:
Cash paid $ 1,750
Estimated fair market value of noncontingent shares of
RBMG common stock 4,748
Deferred merger cost 463
-------
Total purchase price 6,961
Fair value of net assets acquired 1,000
-------
Goodwill and intangibles $ 5,961
=======
On April 21, the Company announced the signing of separate definitive
merger agreements Resource Bancshares Corporation (RBC) and Walsh Holding
Co., Inc. (Walsh).
RBC, a financial services company, originates and purchases, sells and
services small-ticket equipment leases through its Republic Leasing Company
division and originates and services commercial mortgage loans through its
Laureate subsidiaries. RBC, as of June 30, 1997, owned approximately 37%
of the Company's common stock. Pursuant to the terms of a definitive merger
agreement between RBC and the Company and subject to shareholder and
regulatory approvals, RBC will merge with RBMG in a transaction that will
be accounted for under the purchase method of accounting. The agreement
provides for the Company to issue approximately 2 million additional
shares of common stock (in addition to the 7.4 million shares of Company
stock currently owned by RBC) to the shareholders of RBC. As of June 30,
1997, the Company has deferred approximately $0.9 million of merger costs
related to this transaction.
Walsh is a specialty finance mortgage company that, through its primary
operating subsidiary, Walsh Securities, Inc., specializes in the purchase
and origination of subprime mortgage loans. Walsh has eleven regional sales
offices located in nine states from California to Massachusetts. According
to the February 17, 1997 issue of Inside B&C Lending, Walsh was the
twenty-third largest nationwide B&C originator for 1996. Walsh also sells
and securitizes all originated and purchased loans and servicing rights
associated with such loans, substantially all of which are secured by first
mortgage liens on one-to-four family residences. Pursuant to the terms of a
definitive merger agreement between the Company and Walsh and subject to
shareholder and regulatory approvals, Walsh will merge with the Company in
a transaction that will be accounted for as a pooling-of-interests. The
agreement provides for the Company to issue approximately 21.4 million
shares of common stock to the shareholders of Walsh assuming the RBC merger
is completed first. Were the RBC merger not consummated, the agreement
provides that the shareholders of Walsh would be issued approximately 19.6
million shares of the Company's common stock. As of June 30, 1997, the
Company has deferred approximately $1.3 million of merger costs related to
this transaction. These costs would be expensed upon completion of the
pooling transaction.
During the second quarter of 1997, the Company sold approximately $107
million of subprime loans to Walsh and recognized a gain of approximately
$3.7 million on these sales. In conjunction therewith at June 30, 1997 the
outstanding receivable due from Walsh which arose was approximately $8.3
million. Such receivable is secured by an interest in a residual
certificate recently valued at approximately $28 million.
As of the date of the filing of this 10-Q, these acquisitions have been
delayed. Published news articles have reported that a subsidiary of Walsh
originated or purchased mortgage loans on residential properties in
transactions in which the purchase price may have been inflated. RBMG is
conducting an independent review of this matter to determine the nature and
scope of any irregularities. RBMG will take no action with respect to the
proposed merger with Walsh until RBMG's review has provided it with a more
complete understanding of this matter.
8
9
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
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 a
result, RBC retained a significant ownership interest in the Company. As of
June 30, 1997, RBC owns approximately 37% of the outstanding common stock of
the Company.
The Company is principally engaged in the purchase and origination of
mortgage loans, which it aggregates into mortgage-backed securities issued or
guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. 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 sold separately but may be held for
extended periods by the Company.
LOAN PRODUCTION
A summary of loan production by source for the periods indicated is set forth
below:
($ in thousands)
(Unaudited)
Six Months Ended June 30, Quarter Ended June 30,
----------------------------- -----------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Loan Production:
Correspondent Division $3,554,180 $4,584,869 $1,948,454 $2,028,118
Wholesale Division 848,169 736,696 459,264 368,056
Retail Division 313,873 310,419 185,973 192,250
Subprime 133,758 87,001
---------- ---------- ---------- ----------
Total Loan Production $4,849,980 $5,631,984 $2,680,692 $2,588,424
========== ========== ========== ==========
9
10
A summary of key information relevant to industry loan production activity is
set forth below:
($ in thousands)
(Unaudited)
At or For the Quarter Ended June 30,
------------------------------------
1997 1996
------------ ------------
U. S. 1-4 Family Mortgage Originations Statistics (1)
U. S. 1-4 Family Mortgage Originations $225,000,000 $195,000,000
Adjustable Rate Mortgage Market Share 26.00% 27.00%
Estimated Fixed Rate Mortgage Originations $167,000,000 $142,000,000
Company Information
Loan Production $ 2,680,692 $ 2,588,424
Estimated Company Market Share 1.19% 1.33%
(1) Source: Mortgage Bankers Association of America, Economics Department.
Mortgage loan production increased 4% to $2.7 billion for the second quarter
of 1997 from $2.6 billion for the second quarter of 1996. The net increase in
loan production is primarily due to an estimated 17% increase in fixed rate
mortgage origination volume between the comparable periods.
Historically, the Company has been focused on purchasing loans through its
correspondents. In order to diversify its sources of loan volume, the Company
started a wholesale operation that purchased its first loan in May 1994, a
retail operation which originated its first loan in May 1995 and a subprime
division which was started in mid-1996, but did not commence significant
business operations until the first quarter of 1997.
Correspondent Loan Production
Through its correspondents, the Company purchases loans that have been
originated by such correspondents. Correspondents are primarily mortgage
lenders, larger mortgage brokers and smaller savings and loan associations and
commercial banks.
The Company continues to emphasize correspondent loan production as its
primary business focus because of the lower fixed expenses and capital
investment required of the Company. That is, the Company can develop a cost
structure that is more directly variable with loan production because the
correspondent incurs most of the fixed costs of operating and maintaining branch
office networks and of identifying and interacting directly with loan
applicants.
A summary of key information relevant to the Company's correspondent loan
production activities is set forth below:
($ in thousands)
(Unaudited)
At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
------------------------------ ------------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Correspondent Loan Production $3,554,180 $4,584,869 $1,948,454 $2,028,118
Estimated Correspondent Market Share 0.88% 1.11% 0.87% 1.04%
Approved Correspondents 920 803 920 803
The 4% decrease in correspondent loan production to $1.9 billion for the
second quarter of 1997 from $2.0 billion for the second quarter of 1996 was
primarily due to the Company's increased concentration on diversification of its
sources of loan production, including the establishment of the new subprime
division. However, the Company is still concentrating efforts on expanding its
correspondent base, as can be
10
11
evidenced by the 15% increase in the number of approved correspondents from
803 at June 30, 1996 to 920 at June 30, 1997.
Wholesale Loan Production
The Company receives loan applications at its wholesale branches through
brokers, underwrites the loans, funds the loans at closing and prepares all
closing documentation. The wholesale branches also handle shipping and
follow-up procedures on loans. Although the establishment of wholesale branch
offices involves the incurrence of the fixed expenses associated with
maintaining those offices, wholesale operations also provide for higher profit
margins than correspondent loan production. Additionally, each branch office
can serve a relatively sizable geographic area by establishing relationships
with large numbers of independent mortgage loan brokers who bear much of the
cost of identifying and interacting directly with loan applicants.
A summary of key information relevant to the Company's wholesale production
activities is set forth below:
($ in thousands)
(Unaudited)
At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
-------------------------- --------------------------
1997 1996 1997 1996
-------- -------- -------- --------
Wholesale Loan Production $848,169 $736,696 $459,264 $368,056
Estimated Wholesale Market Share 0.21% 0.17% 0.20% 0.19%
Wholesale Division Direct
Operating Expenses $ 4,964 $ 4,255 $ 2,730 $ 2,382
Approved Brokers 2,758 1,694 2,758 1,694
Number of Branches 13 11 13 11
Number of Employees 136 118 136 118
The $91 million increase in wholesale loan production to $459 million for the
second quarter of 1997 from $368 million for the second quarter of 1996 relates
to the Company's addition of two new branches and over 1,000 new brokers between
June 30, 1996 and June 30, 1997. Similarly, the wholesale division's operating
expenses increased and the division's estimated market share rose.
Retail Loan Production
A summary of key information relevant to the Company's retail production
activities is set forth below:
($ in thousands)
(Unaudited)
At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
-------------------------- --------------------------
1997 1996 1997 1996
-------- -------- -------- --------
Retail Loan Production $313,873 $310,419 $185,973 $192,250
Estimated Retail Market Share 0.08% 0.07% 0.08% 0.10%
Retail Division Operating Expenses $ 8,263 $ 7,831 $ 4,170 $ 3,753
Number of Branches 6 6 6 6
Number of Employees 206 190 206 190
The Company's retail loan production and direct operating expenses remained
generally consistent for the quarter and six months ended June 30, 1996 and June
30, 1997.
11
12
Subprime Loan Production
A summary of key information relevant to the Company's subprime production
activities that were started in mid-1996, but did not commence significant
business operations until the first quarter of 1997 is set forth below:
($ in thousands)
(Unaudited)
At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
-------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
U. S. B&C Mortgage Originations
Statistics (2)
U. S. B&C Mortgage Originations $60,000,000 N/A $ 35,250,000 N/A
Company Information
Subprime Loan Production $ 133,758 N/A $ 87,001 N/A
Estimated Subprime Market Share 0.22% N/A 0.25% N/A
Subprime Division Operating Expenses $ 3,607 N/A $ 3,165 N/A
Number of Brokers 522 N/A 522 N/A
Number of Employees 116 N/A 116 N/A
(2) Source: August 4, 1997 issue of Inside B&C Lending
During the second quarter of 1997, the Company originated/purchased $87.0
million in subprime mortgage loans through retail and wholesale channels. The
subprime division served 522 brokers as of June 30,
1997.
LOAN SERVICING
A summary of key information relevant to the Company's loan servicing
activities is set forth below:
($ in thousands)
(Unaudited)
At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Underlying Unpaid Principal Balances:
Beginning Balance $ 6,670,267 $ 5,562,930 $ 7,420,783 $ 5,827,271
Loan Production (net of servicing
released production) 4,809,790 5,605,013 2,482,601 2,569,458
Net Change in Work-in-Process (236,395) 66,433 24,765 320,391
Bulk Acquisitions 774,097 60,887 168,336 60,887
Sales of Servicing (4,301,094) (4,965,473) (2,589,818) (2,608,374)
Paid-In-Full Loans (285,580) (246,339) (152,684) (108,007)
Amortization, Curtailments and
Others, net (192,020) (157,252) (114,918) (135,427)
----------- ----------- ----------- -----------
Ending Balance $ 7,239,065 $ 5,926,199 $ 7,239,065 $ 5,926,199
=========== =========== =========== ===========
Subservicing Ending Balance 2,368,709 2,890,396 2,368,709 2,890,709
----------- ----------- ----------- -----------
Total Underlying Unpaid Principal Balances $ 9,607,774 $ 8,816,595 $ 9,607,774 $ 8,816,595
=========== =========== =========== ===========
Loan Servicing Fees $ 15,338 $ 13,859 $ 7,803 $ 6,729
Cash Operating Expenses 42,329 37,905 23,598 19,776
Coverage Ratio 36% 37% 33% 34%
Average Underlying Unpaid Principal
Balances (including subservicing) $ 9,067,404 $ 8,754,039 $ 9,248,663 $ 8,833,350
Weighted Average Note Rate* 7.84% 7.80% 7.84% 7.80%
Weighted Average Servicing Fee* 0.40% 0.41% 0.40% 0.41%
Delinquency (30+ days)* 3.39% 2.84% 3.39% 2.84%
Number of Servicing Division Employees 122 129 122 129
* These statistics apply to the Company's owned servicing portfolio.
12
13
The $415.3 million or 5% increase in the average underlying unpaid principal
balance of mortgage loans being serviced for the second quarter of 1997 as
compared to the second quarter of 1996 is primarily related to the Company's
bulk acquisitions of approximately $1.3 billion during the latter half of 1996
and approximately $774 million during the first half of 1997.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX
MONTHS ENDED JUNE 30, 1996
SUMMARY
Total revenues of the Company increased 12% to $70.4 million for the first
six months of 1997 as compared to $62.7 million for the first six months of
1996. The $7.7 million increase in revenues was primarily due to a $1.5 million
increase in loan servicing fees and a $4.7 million increase in gains on sales of
loans and servicing rights, which were partially offset by a $4.4 million
increase in operating expenses (exclusive of amortization and taxes). The
increase in loan servicing fees is primarily due to the overall increase in the
Company's servicing portfolio. The increases in gains on sales of loans and
servicing rights are primarily due to improved production margins and gains
derived from the Company's growing subprime division. The increase in operating
expenses is primarily attributable to increased costs associated with increased
loan servicing volumes and the Company's expansion into subprime operations.
Direct operating costs related to the Company's expansion into subprime
operations account for approximately $3.6 million, or 82%, of the total
increase in operating expenses (exclusive of amortization and taxes) for the
first six months of 1997 compared to the same period of the prior year.
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 for the six months ended June 30, 1997 and
June 30, 1996 (the 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; 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 Mortgage-Backed
$ 810,759 $ 933,326 7.82% 7.56% Securities $ 31,688 $ 35,301 ($3,613) $1,023 ($4,636)
- ----------------------------------------- ----------------------------------------------------
INTEREST EXPENSE
$ 401,637 $ 336,991 4.78% 4.70% Warehouse Line $ 9,524 $ 7,879 $1,645 $ 134 $1,511
380,918 566,220 5.37% 5.63% Gestation Line 10,142 15,865 (5,723) (531) (5,192)
30,841 8.19% Servicing Secured Line 1,256 (1,256) (1,256)
43,722 22,285 6.33% 5.82% Servicing Receivable Line 1,372 645 727 106 621
3,010 15,276 8.22% 8.49% Other Borrowings 124 645 (521) (3) (518)
Facility Fees & Other 875 731 144 144
Charges
- ----------------------------------------- ----------------------------------------------------
$ 829,287 $ 971,613 5.36% 5.59% Total Interest Expense $ 22,037 $ 27,021 ($4,984) ($ 294) ($4,690)
- ----------------------------------------- ----------------------------------------------------
2.46% 1.97% Net Interest Income $ 9,651 $ 8,280 $1,371 $1,317 $ 54
================== ====================================================
Net interest income increased 17% to $9.7 million for the first six months of
1997 compared to $8.3 million for the first six months of 1996. The $1.4 million
increase in net interest income is primarily attributable to an increase in the
interest-rate spread of 49 basis points to 246 basis points for 1997 as compared
to 197 basis points for 1996. The increased spread is primarily attributed to
inclusion of higher yielding subprime production in the current year's inventory
of mortgages held for sale.
13
14
NET GAINS ON SALES OF MORTGAGE LOANS AND MORTGAGE SERVICING RIGHTS
Net gains on sales of mortgage loans and mortgage servicing rights increased
$4.7 million to $45.0 million for the first six months of 1997 as compared to
$40.2 million for the first six months of 1996. As further discussed below, this
increase is primarily due to increased profit margins on sales of mortgage loans
and mortgage servicing rights.
Net Gain on Sale of Mortgage Loans
A reconciliation of the gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
($ in thousands)
(Unaudited)
For the Six Months Ended June 30,
---------------------------------
1997 1996
---------- -----------
Gross proceeds on sales of mortgage loans $4,589,379 $ 6,056,032
Initial unadjusted acquisition cost of mortgage loans sold,
net of hedge results 4,585,229 6,049,973
---------- -----------
Unadjusted gain on sale of mortgage loans 4,150 6,059
Loan origination and correspondent program administrative fees 14,136 18,710
---------- -----------
Unadjusted aggregate margin 18,286 24,769
Acquisition basis allocated to mortgage servicing rights (SFAS
No. 122 and SFAS No. 125) 18,120 15,581
Net change in deferred administrative fees 1,062 (314)
---------- -----------
Net gain on sale of agency-eligible mortgage loans $ 37,468 $ 40,036
========== ===========
The Company sold agency-eligible loans during the first six months of 1997
with an aggregate unpaid principal balance of $4.6 billion compared to sales of
$6.0 billion for the first six months of 1996. The amount of proceeds received
on sales of mortgage loans exceeded the initial unadjusted acquisition cost of
the loans sold by $4.2 million (9 basis points) for the first six months of 1997
as compared to $6.1 million (10 basis points) for the first six months of 1996.
The Company received administrative fees of $14.1 million (31 basis points) on
these loans during the first six months of 1997 and $18.7 million (31 basis
points) during the first six months of 1996. The Company allocated $18.1 million
(39 basis points) in the first six months of 1997 to basis in mortgage servicing
rights, versus $15.6 million (26 basis points) during the first six months of
1996, was allocated to basis in mortgage servicing rights, in accordance with
SFAS No. 125 and SFAS No. 122. Net gain on sale of mortgage loans decreased to
$37.5 million for the first six months of 1997 versus $40.0 million for 1996.
This decrease was primarily due to the 24% decrease in the dollar volume of
mortgage loans sold during the first six months of 1997 compared to the first
six months of 1996.
A reconciliation of the gain on sale of subprime mortgage loans for the
periods indicated follows:
($ in thousands)
(Unaudited)
For the Six Months Ended June 30,
---------------------------------
1997 1996
-------- ----
Gross proceeds on sales of mortgage loans $119,209 N/A
Initial acquisition cost of mortgage loans sold, net of fees 114,427 N/A
-------- ----
Gain on sale of subprime mortgage loans $ 4,782 N/A
======== ====
The Company sold subprime loans during the first six months of 1997 with an
aggregate unpaid principal balance of $114 million. The amount of proceeds
received on sales of mortgage loans exceeded the initial acquisition cost of the
loans sold, net of fees by $4.8 million (418 basis points) for the first six
months of 1997.
14
15
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing rights
for the periods indicated follows:
($ in thousands)
(Unaudited)
For the Six Months Ended June 30,
---------------------------------
1997 1996
----------- -----------
Underlying unpaid principal balances of mortgage loans on which
servicing rights were sold during the period $ 3,784,210 $ 4,972,126
=========== ===========
Gross proceeds from sales of mortgage servicing rights $ 84,077 $ 102,555
Initial acquisition basis, net of amortization and hedge results 65,945 90,036
----------- -----------
Unadjusted gain on sale of mortgage servicing rights 18,132 12,519
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 122 and SFAS No. 125) (15,421) (12,330)
----------- -----------
Gain on sale of mortgage servicing rights $ 2,711 $ 189
=========== ===========
During the first six months of 1997, the Company completed 18 sales of
mortgage servicing rights representing $3.8 billion of underlying unpaid
principal mortgage loan balances. This compares to 16 sales of mortgage
servicing rights representing $5.0 billion of underlying unpaid principal
mortgage loan balances in the first six months of 1996. Unadjusted gain on sale
of mortgage servicing rights was $18.1 million for the first six months of 1997,
up from $12.5 million for the first six months of 1996. The Company reduced this
unadjusted gain by $15.4 million in the first six months of 1997 versus a $12.3
million reduction in the first six months of 1996, in accordance with SFAS No.
125 and SFAS No. 122. The $2.5 million increase in gain on sale of mortgage
servicing rights is primarily related to the increased margin in gain on sales
of mortgage servicing rights.
NET SERVICING MARGIN
Loan servicing fees were $15.3 million for the first six months of 1997,
compared to $13.9 million for the first six months of 1996, an increase of 11%.
This increase is primarily related to an increase in the average aggregate
underlying unpaid principal balance of mortgage loans serviced to $9.1 billion
during the first six months of 1997 from $8.8 billion during the first six
months of 1996, an increase of 4%. Similarly, amortization of mortgage servicing
rights also increased to $8.8 million during the first six months of 1997 from
$7.3 million during the first six months of 1996, an increase of 21%. The
increase in amortization is primarily attributable to the growth in the average
balance of the mortgage loans serviced. The corresponding increases in loan
servicing fees and amortization of mortgage servicing rights resulted in the net
servicing margin remaining constant at $6.5 million for the first six months of
1997 and 1996.
Included in loan servicing fees for the first six months of 1997 and the
first six months of 1996 are subservicing fees received by the Company of
$227,000 and $678,000, respectively. The subservicing fees are associated with
temporary subservicing agreements between the Company and purchasers of mortgage
servicing rights.
The following table summarizes the net servicing margin for the first six
months of both 1997 and 1996:
($ in thousands)
(Unaudited)
For the Six Months Ended June 30,
---------------------------------
1997 1996
---------- ----------
Loan servicing fees $ 15,338 $ 13,859
Amortization of mortgage servicing rights 8,833 7,316
---------- ----------
Net servicing margin $ 6,505 $ 6,543
========== ==========
Average underlying unpaid principal balance of
mortgage loans serviced $9,067,404 $8,754,039
---------- ----------
15
16
EXPENSES
The $4.4 million increase in operating expenses (excluding amortization of
mortgage servicing rights) was centered in salary and employee benefits; which
increased $1.6 million, or 6%. The Company increased its employee headcount by
104 from 1,037 at June 30, 1996, to 1,141 at June 30, 1997. The increased
employee headcount and associated increase in salary and employee benefit costs
were necessitated by the Company's expansion into subprime operations.
Establishment of the subprime division accounted for 116 new positions and for
$3.6 million of the total $4.4 million increase in operating expenses.
INCOME TAX EXPENSE
Income tax expense includes both federal and state income taxes. The
effective tax rates for the six months ended June 30, 1997 and 1996 were 38.4%
and 38.5%, respectively. Income tax expense increased by 10% to $7.4 million
for the first half of 1997 from $6.7 million for the first half of 1996 due to
the above-described factors that resulted in a 10% or $1.8 million increase in
income before taxes.
RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 1997, COMPARED TO QUARTER
ENDED JUNE 30, 1996
SUMMARY
Total revenues of the Company increased 20% to $40.3 million for the second
quarter of 1997 as compared to $33.6 million for the second quarter of 1996. The
$6.7 million increase in revenues was primarily due to a $1.1 million increase
in loan servicing fees and a $4.8 million increase in gains on sales of loans
and servicing rights, which were partially offset by a $3.8 million increase in
operating expenses (exclusive of amortization and taxes). The increase in loan
servicing fees is primarily due to the increased volume of loans held in the
Company's servicing portfolio. Similarly, the increase in gains on sales of
loans and servicing rights is primarily attributable to the Company's increased
loan production volumes during the second quarter of 1997. The increase in
operating expenses is primarily attributable to increased costs associated with
increased loan servicing volumes and increased costs associated with the
Company's expansion into subprime operations. Direct operating costs related to
the Company's expansion into subprime operations account for approximately $3.2
million, or 83%, of the total increase in operating expenses (exclusive of
amortization and taxes) for the second quarter of 1997.
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 for the second quarter of 1997 and 1996 (the
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; the information presented is unaudited.
16
17
Variance
Average Volume Average Rate Interest Attributable to
- ----------------------------------------- ------------------ --------------------
1997 1996 1997 1996 1997 1996 Variance Rate Volume
- ----------------------------------------- ----------------------------------------------------
INTEREST INCOME
Mortgages Held for Sale
and Mortgage-Backed
$ 898,274 $ 870,075 8.12% 7.75% Securities $ 18,233 $ 16,856 $1,377 $ 830 $ 547
- ----------------------------------------- ----------------------------------------------------
INTEREST EXPENSE
$ 427,889 $ 318,288 4.94% 4.57% Warehouse Line $ 5,267 $ 3,619 $1,648 $ 402 $1,246
431,384 520,654 5.41% 5.61% Gestation Line 5,817 7,259 (1,442) (198) (1,244)
4,033 7.38% Servicing Secured Line 74 (74) (74)
48,579 16,990 6.47% 5.75% Servicing Receivable Line 784 243 541 89 452
5,987 9,357 8.28% 9.07% Other Borrowings 124 211 (87) (11) (76)
Facility Fees & Other
Charges 325 413 (88) (88)
- ----------------------------------------- ----------------------------------------------------
$ 913,839 $ 869,322 5.41% 5.47% Total Interest Expense $ 12,317 $ 11,819 $ 498 $ 282 $ 216
- ----------------------------------------- ----------------------------------------------------
2.71% 2.28% Net Interest Income $ 5,916 $ 5,037 $ 879 $ 548 $ 331
================== ====================================================
Net interest income increased 17% to $5.9 million for the second quarter of
1997 compared to $5.0 million for the second quarter of 1996. The $0.9 million
increase in net interest income is partially attributable to the 3% increase in
the average volume of mortgages held for sale and mortgage-backed securities for
the second quarter of 1997 from that of the second quarter of 1996. Another
component of the net interest income increase is the increase in the
interest-rate spread of 43 basis points to 271 basis points for 1997 as compared
to 228 basis points for 1996. The increased spread is primarily attributed to
inclusion of higher yielding subprime production in the current year's inventory
of mortgages held for sale.
NET GAINS ON SALES OF MORTGAGE LOANS AND MORTGAGE SERVICING RIGHTS
Net gains on sales of mortgage loans and mortgage servicing rights increased
$4.8 million to $26.4 million for the second quarter of 1997 as compared to
$21.6 million for the second quarter of 1996. As further discussed below, this
increase is primarily due to improved profit margins on sales.
Net Gain on Sale of Mortgage Loans
A reconciliation of the gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
($ in thousands)
(Unaudited)
For the Quarter Ended June 30,
------------------------------
1997 1996
---------- -----------
Gross proceeds on sales of mortgage loans $2,584,544 $ 2,961,189
Initial unadjusted acquisition cost of
mortgage loans sold, net of hedge results $2,582,193 $ 2,956,794
---------- -----------
Unadjusted gain on sale of mortgage loans 2,351 4,395
Loan origination and correspondent
administrative fees 7,635 9,935
---------- -----------
Unadjusted aggregate margin 9,986 14,330
Acquisition basis allocated to mortgage servicing
rights (SFAS No. 122 and SFAS No. 125) 9,614 7,402
Net change in deferred administrative fees 841 (229)
---------- -----------
Net gain on sale of agency-eligible mortgage loans $ 20,441 $ 21,503
========== ===========
The Company sold loans during the second quarter of 1997 with an aggregate
unpaid principal balance of $2.6 billion compared to sales of $3.0 billion for
the second quarter of 1996. The amount of proceeds received on sales of mortgage
loans exceeded the initial unadjusted acquisition cost of the loans sold by $2.4
million (9 basis points) for the second quarter of 1997 as compared to $4.4
million (15 basis points) for the second quarter of 1996. The Company received
loan origination and correspondent administrative fees of $7.6 million (30 basis
points) on these loans during the second quarter of 1997 and $9.9 million (34
basis points) during the second quarter of 1996. The Company allocated $9.6
million (37 basis points) in the second quarter of 1997 to basis in mortgage
servicing rights versus $7.4 million (25 basis points) during the second quarter
of 1996 in accordance with SFAS No. 125 and SFAS No. 122.
17
18
As a result, net gain on sale of mortgage loans decreased to $20.4 million for
the second quarter of 1997 versus $21.5 million for the second quarter of 1996.
A reconciliation of the gain on sale of subprime mortgage loans for the
periods indicated follows:
($ in thousands)
(Unaudited)
For the Quarter Ended June 30,
------------------------------
1997 1996
----------- ----
Gross proceeds on sales of mortgage loans $ 119,209 N/A
Initial acquisition cost of mortgage loans, net of fees 114,427 N/A
=========== ====
Gain on sale of subprime mortgage loans $ 4,782 N/A
=========== ====
The Company sold subprime loans during the second quarter of 1997 with an
aggregate unpaid principal balance of $114 million. The amount of proceeds
received on sales of mortgage loans exceeded the initial acquisition cost of the
loans sold, net of fees by $4.8 million (418 basis points) for the second
quarter of 1997.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
($ in thousands)
(Unaudited)
For the Quarter Ended June 30,
--------------------------------
1997 1996
----------- -----------
Underlying unpaid principal balances
of mortgage loans on which
servicing rights
were sold during
the period $ 2,071,902 $ 2,615,027
=========== ===========
Gross proceeds from sales of
mortgage servicing rights $ 44,918 $ 52,523
Initial acquisition cost,
net of amortization and hedge results 37,200 45,756
----------- -----------
Unadjusted gain on sale of
mortgage servicing rights 7,718 6,767
Acquisition basis allocated from
mortgage loans, net
of amortization (SFAS
No. 122 and SFAS No. 125) (6,498) (6,644)
=========== ===========
Gain on sale of mortgage servicing rights $ 1,220 $ 123
=========== ===========
During the second quarter of 1997, the Company completed ten sales of
mortgage servicing rights representing $2.1 billion of underlying unpaid
principal mortgage loan balances. This compares to seven sales of mortgage
servicing rights representing $2.6 billion of underlying unpaid principal
mortgage loan balances in the second quarter of 1996. Unadjusted gain on sale of
mortgage servicing rights was $7.7 million for the second quarter of 1997, up
from $6.8 million for the second quarter of 1996. The Company reduced this
unadjusted gain by $6.5 million in the second quarter of 1997 versus a $6.6
million reduction in the second quarter of 1996 in accordance with SFAS No. 125
and SFAS No. 122. The $1.1 million increase in gain on sale of mortgage
servicing rights is primarily related to the increased margin in gain on sales
of mortgage servicing rights.
18
19
NET SERVICING MARGIN
Loan servicing fees were $7.8 million for the second quarter of 1997,
compared to $6.7 million for the second quarter of 1996, an increase of 16%.
This increase is primarily related to an increase in the average aggregate
underlying unpaid principal balance of mortgage loans serviced to $9.2 billion
during the second quarter of 1997 from $8.8 billion during the second quarter of
1996, an increase of 5%. Similarly, amortization of mortgage servicing rights
also increased to $4.7 million during the second quarter of 1997 from $3.6
million during the second quarter of 1996, an increase of 30%. The increase in
amortization is primarily attributable to the growth in the average balance of
the mortgage loans serviced. As a result, net servicing margin remained
constant at $3.1 million during the second quarter of 1997 and the second
quarter of 1996.
Included in loan servicing fees for the second quarter of 1997 and the second
quarter of 1996 are subservicing fees received by the Company of $79,000 and
$360,000, respectively. The subservicing fees are associated with temporary
subservicing agreements between the Company and purchasers of mortgage servicing
rights.
The following table summarizes the net servicing margin for the second
quarters of both 1997 and 1996:
($ in thousands)
(Unaudited)
For the Quarter Ended June 30,
------------------------------
1997 1996
---------- ----------
Loan servicing fees $ 7,803 $ 6,729
Amortization of mortgage servicing rights 4,725 3,646
========== ==========
Net servicing margin $ 3,078 $ 3,083
========== ==========
Average underlying unpaid principal balance
of mortgage loans serviced $9,248,663 $8,833,350
---------- ----------
EXPENSES
The $3.8 million increase in operating expenses (excluding amortization of
mortgage servicing rights) was centered in salary and employee benefits; which
increased $2.0 million, or 16%. Through the end of the second quarter of 1997,
the Company increased its employee headcount by 104 from 1,037 at June 30, 1996,
to 1,141 at June 30, 1997. The increased employee headcount and associated
increase in salary and employee benefit costs was necessitated by the Company's
expansion into subprime operations. Establishment of the subprime division
accounted for 116 new positions and for $3.2 million of the total $3.8 million
increase in operating expenses.
INCOME TAX EXPENSE
Income tax expense includes both federal and state income taxes. The
effective tax rates for the second quarter of 1997 and 1996 were 38.6% and
38.5%, respectively. Income tax expense increased by 18% to $4.6 million for
the second quarter of 1997 from $3.9 million for the second quarter of 1996 due
to the above-described factors that resulted in an 18% or $1.8 million increase
in income before taxes.
19
20
FINANCIAL CONDITION
During the second quarter of 1997, the Company experienced a 24% increase in
the volume of mortgage loans originated and acquired compared to the first
quarter of 1997. Mortgage loan production increased to $2.7 billion during the
second quarter of 1997 from $2.2 billion during the previous quarter. The June
30, 1997, mortgage application pipeline (mortgage loans not yet closed but for
which the interest rate has been locked) was approximately $967.4 million.
The Company continued to establish new correspondent relationships during
the second quarter of 1997. The number of correspondents approved to do business
in the Company's correspondent lending program increased to 920 at June 30,
1997, from 897 at March 31, 1997.
The Company continued expansion of the wholesale network between March 31,
1997, and June 30, 1997, with the addition of 335 brokers to the Company's
approved list, increasing the number of approved brokers from 2,423 at March 31,
1997, to 2,758 at June 30, 1997.
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 $942.7
million at June 30, 1997, versus $983.6 million at March 31, 1997, a decrease of
4%. The Company's servicing portfolio (exclusive of loans under subservicing
agreements) decreased to $7.2 billion at June 30, 1997, from $7.4 billion at
March 31, 1997, a decrease of 2%.
Short-term borrowings, which are the Company's primary source of funds,
totaled $943.8 million at June 30, 1997, compared with $1.0 billion at March 31,
1997, a decrease of 6%. The slight decrease in the balance outstanding at June
30, 1997, resulted from the decreased funding requirements related to the
decrease in the balance of mortgage loans held for sale and mortgage-backed
securities at June 30, 1997, as compared to the balance at March 31, 1997.
Long-term borrowings totaled $6.5 million at June 30, 1997. There were no
long-term borrowings at March 31, 1997.
20
21
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 1998. 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 31,1998, 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, 1998, 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, 1998, 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 June
30, 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 $1.2 billion.
The Company entered into a $6.6 million note agreement in May 1997. This debt
is secured by the Company's corporate headquarters. The terms of the agreement
require the Company to make 120 equal monthly principal and interest payments
based upon a fixed interest rate of 8.07%.
The Company has also entered into a $200 million, 364-day term subprime
revolving credit facility, which expires in July 1998. The facility includes
covenants substantially the same as those described above with respect to the
warehouse line of credit.
21
22
PART II. OTHER INFORMATION
ITEM 2. - Changes in Securities
Effective April 1, 1997, the Company issued 943,899 shares of its
common stock, par value $.01 per share, to those shareholders
of Meritage Mortgage Corporation, an Oregon corporation ("Meritage"),
that qualified as accredited investors within the meaning of
Regulation D under the Securities Act of 1933, as amended (the
"Securities Act"). The stock was issued as part of the consideration
paid by the Company in exchange for all of the common stock of
Meritage in connection with the Company's acquisition of Meritage by
means of a reverse subsidiary merger. The stock was valued at
$14.0375 per share for purposes of determining the number of shares
to be issued in connection with the merger. Of the 943,899 shares
issued in connection with the merger, 406,053 were issued contingent
on Meritage's achieving certain levels of subprime mortgage
production in the 31 months following the merger.
Because the stock was issued only to accredited investors in
connection with the merger, the Company claimed an exemption
from registration under the Securities Act pursuant to Rule 506 of
Regulation D.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
-(A) A LIST OF THE EXHIBITS REQUIRED BY THIS FORM 10-Q, ALONG WITH THE
EXHIBIT INDEX CAN BE FOUND ON PAGES A TO D FOLLOWING THE SIGNATURE
PAGE.
-(B) ON APRIL 21, 1997, THE COMPANY FILED A REPORT ON FORM 8-K
ANNOUNCING PROPOSED MERGERS WITH WALSH HOLDING CO., INC. AND
RESOURCE BANCSHARES CORPORATION.
22
23
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: August 14, 1997
23
24
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
25
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
26
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
27
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, incorporated by reference to Exhibit
10.38 of the Registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 1997 *
10.39 Form of Incentive Stock Option Agreement (Omnibus Stock Award
Plan) incorporated by reference to Exhibit 10.40 of the
Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 1997 *
10.40 Form of Non-Qualified Stock Option Agreement (Non-Qualified
Stock Option Plan), incorporated by reference to Exhibit
10.41 of the Registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 1997 *
10.41 Amendment to Resource Bancshares Mortgage Group, Inc. Omnibus
Stock Award Plan, Formula Stock Option Plan and Non-Qualified
Stock Option Plan, incorporated by reference to Exhibit 10.42
of the Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 1997 *
10.42 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 *
10.43 Agreement of Merger dated April 18, 1997 between Resource
Bancshares Mortgage Group, Inc., Carolina Merger Sub, Inc.
and Walsh Holding Co., Inc. incorporated by reference to
Annex B of the Registrant's Registration No. 333-29245 *
10.44 Mutual Release and Settlement Agreement between the
Registrant, Lee E. Shelton and Constance P. Shelton dated
January 31, 1997 _____
10.45 Note Agreement between the Registrant and UNUM Life
Insurance Company of America dated May 16, 1997 _____
11.1 Statement re Computation of Net Income per Share _____
27.1 Financial Data Schedule _____
- ---------------------------------
* Incorporated by reference
D