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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1997
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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.
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(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 57-0962375
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7909 Parklane Road, Columbia, SC 29223
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(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (803)741-3000
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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
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The number of shares of common stock of the Registrant outstanding as of October
31, 1997, was 20,320,046 (21,336,048 after giving effect to the 5% stock
dividend declared on October 31, 1997).
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 September 30, 1997
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements - (Unaudited)
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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
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Financial Condition and Results of Operations
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PART II. OTHER INFORMATION 24
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ITEM 6. Exhibits and Reports on Form 8-K 24
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SIGNATURES 25
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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)
September 30, December 31,
1997 1996
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ASSETS (Unaudited)
Cash $ 8,939 $ 2,492
Residual certificate 7,550
Receivables 96,882 60,668
Mortgage-backed securities 196,675 123,447
Mortgage loans held for sale 893,656 678,888
Mortgage servicing rights, net 128,713 109,815
Premises and equipment, net 24,287 21,135
Goodwill and other intangibles 8,221
Accrued interest on loans held for sale 4,004 4,491
Other assets 35,217 27,458
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Total assets $ 1,404,144 $ 1,028,394
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 1,129,065 $ 805,730
Long-term borrowings 6,485
Accrued expenses 13,438 11,386
Other liabilities 76,573 53,977
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Total liabilities 1,225,561 871,093
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Stockholders' equity
Common stock 210 193
Additional paid-in capital 171,151 149,653
Retained earnings 11,190 12,007
Unearned shares of employee stock ownership plan (3,968) (4,552)
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Total stockholders' equity 178,583 157,301
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Total liabilities and stockholders' equity $ 1,404,144 $ 1,028,394
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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 Nine Months Ended For the Three Months Ended
September 30, September 30,
------------------------------- --------------------------------
1997 1996 1997 1996
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REVENUES
Interest income $ 53,301 $ 49,809 $ 21,613 $ 14,508
Interest expense (39,115) (37,029) (17,078) (10,008)
------------ ------------ ------------ ------------
Net interest income 14,186 12,780 4,535 4,500
Net gain on sale of mortgage loans 71,578 59,348 29,328 19,312
Gain on sale of mortgage servicing rights 5,948 964 3,237 775
Loan servicing fees 23,049 21,379 7,711 7,520
Other income 572 404 146 106
------------ ------------ ------------ ------------
Total revenues 115,333 94,875 44,957 32,213
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EXPENSES
Salary and employee benefits 43,631 37,830 16,487 12,315
Occupancy expense 5,328 4,125 1,886 1,485
Amortization of mortgage servicing rights 13,673 11,064 4,840 3,748
General and administrative expenses 29,580 14,608 17,837 4,858
------------ ------------ ------------ ------------
Total expenses 92,212 67,627 41,050 22,406
------------ ------------ ------------ ------------
Income before income taxes 23,121 27,248 3,907 9,807
Income tax expense (8,713) (10,340) (1,340) (3,626)
------------ ------------ ------------ ------------
Net income $ 14,408 $ 16,908 $ 2,567 $ 6,181
============ ============ ============ ============
Weighted average shares (retroactively 20,902,473 18,916,081 21,260,707 19,914,160
adjusted for the 5% stock dividend declared ============ ============ ============ ============
on October 31, 1997)*
Net income per common share $ 0.69 $ 0.89 $ 0.12 $ 0.31
============ ============ ============ ============
* 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 third quarter of 1997 and the nine
months ended September 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.
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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
Nine Months Ended ----------------------- Paid-in Retained Stock Ownership
September 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
Stock dividend adjustment 1,261,332 13 17,115 (17,128)
Cash dividend (542) (542)
Shares committed to be
released under ESOP 111 300 411
Shares issued under Dividend
Reinvestment and Stock
Purchase Plan and Stock
Investment Plan 25,107 * 157 157
Loans to ESOP (2,365) (2,365)
Net income 16,908 16,908
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Balance, September 30, 1996 19,279,863 $ 193 $149,589 $ 9,963 $ (4,065) $155,680
========== ===== ======== ======== ======== ========
Unearned
Common Stock Additional Shares of Employee
Nine Months Ended ---------------------- Paid-in Retained Stock Ownership
September 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 (1,739) (1,739)
Acquisition of Meritage Mortgage
Corporation 673,197 6 7,162 7,168
Exercise of stock options 62,000 1 379 380
Shares committed to be
released under ESOP 213 584 797
Shares issued under Dividend
Reinvestment and Stock
Purchase Plan and Stock
Investment Plan 5,599 * 18 (78) (60)
Retroactive adjustment for the 5%
stock dividend declared on
October 31, 1997 1,002,467 10 13,398 (13,408)
Net income 14,408 14,408
---------- ----- -------- ------- ------- --------
Balance, September 30, 1997 21,051,811 $ 210 $171,151 $11,190 $(3,968) $178,583
========== ===== ======== ======= ======= ========
* 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)
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Nine Months Ended September 30,
1997 1996
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OPERATING ACTIVITIES:
Net income $ 14,408 $ 16,908
Adjustments to reconcile net
income to cash (used in) provided by operating activities:
Depreciation and amortization 16,191 12,980
Employee Stock Ownership Plan compensation 797 291
Provision for estimated foreclosure losses 2,605
Increase in receivables (36,214) (1,451)
Acquisition of mortgage loans (7,799,804) (7,928,301)
Proceeds from sales of mortgage loans and mortgage-backed securities 7,583,386 8,279,643
Acquisition of mortgage servicing rights (175,232) (174,941)
Sales of mortgage servicing rights 146,004 157,532
Net gain on sales of mortgage loans and servicing rights (77,526) (60,312)
Decrease in accrued interest on loans 487 4,757
Increase in other assets (6,679) (8,948)
Increase in residual certificates (7,550)
Increase in accrued expenses and other liabilities 24,648 3,162
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Net cash (used in) provided by operating activities (314,479) 301,320
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INVESTING ACTIVITIES:
Purchases of premises and equipment, net (5,500) (6,587)
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Net cash used in investing activities (5,500) (6,587)
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FINANCING ACTIVITIES:
Proceeds from borrowings 20,666,472 25,933,824
Repayment of borrowings (20,336,652) (26,272,671)
Issuance of restricted stock 328 256
Shares issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan (60) 157
Acquisition of Meritage Mortgage Corporation (1,750)
Debt issuance costs (553)
Cash dividends (1,739) (542)
Net proceeds of public offering 47,451
Exercise of stock options 380
Loans to Employee Stock Ownership Plan (1,954)
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Net cash provided by (used in) financing activities 326,426 (293,479)
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Net increase in cash 6,447 1,254
Cash, beginning of period 2,492 2,161
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Cash, end of period $ 8,939 $ 3,415
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See accompanying notes to consolidated financial statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 beginning in 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
third quarter of 1997 reported pursuant to the provisions of SFAS No. 128
after retroactive adjustment for a 5% stock dividend declared on October
31, 1997, would both be $0.12. Basic and diluted earnings per share for the
first nine months of 1997 reported pursuant to the provisions of SFAS No.
128 after retroactive adjustment for a 5% stock dividend declared on
October 31, 1997, would be $0.71 and $0.69, respectively. Adoption of SFAS
No. 128 should not result in any change in earnings per share for 1996 and
prior periods.
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 (564,738 after retroactive adjustment
for the 5% stock dividend declared on October 31, 1997) 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 (426,355 after retroactive adjustment for
the 5% stock dividend declared on October 31, 1997) 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. During the third quarter, 135,351 (142,118 after
retroactive adjustment for the 5% stock dividend declared on October 31,
1997) contingent shares of RBMG common stock were released. The fair
market value of
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the remaining contingent shares has been excluded from the purchase price
for purposes of recording 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. The 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. Goodwill and
other intangible assets are being amortized over a 20 year period using the
straight line method. Amortization expense for the third quarter and nine
month periods ended September 30, 1997 was approximately $103 and $181,
respectively. In connection with the acquisition, the following is a
schedule of the allocation of the purchase price:
Release of Through
At Acquisition Contingent September
on April 1, 1997 Shares 30, 1997
---------------- ---------- ---------
Cash paid $ 1,750 $ - $ 1,750
Estimated fair market value of
shares of RBMG common stock issued or released 4,748 2,441 7,189
Deferred merger cost 463 - 463
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Total purchase price 6,961 2,441 9,402
Fair value of net assets acquired 1,000 - 1,000
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Goodwill and intangibles $ 5,961 $ 2,441 $ 8,402
================ ========== =========
On April 18, 1997 the Company entered into separate definitive merger
agreements with Resource Bancshares Corporation (RBC) and Walsh Holding
Co., Inc. (Walsh) pursuant to which the Company, subject to approval by
shareholders of the Company and satisfaction of other terms and conditions,
would acquire all of the outstanding shares of RBC and Walsh. On November
3, 1997, the Company and Walsh announced mutual termination of their merger
agreement. Accordingly, during the third quarter of 1997, the Company
recorded a $2.3 million ($1.4 million after-tax) charge related
to joint termination of the Company's merger agreement with Walsh.
During the second quarter of 1997, the Company sold approximately $107
million of subprime mortgage loans to Walsh and recognized a gain of
approximately $3.7 million on those sales. Approximately $76 million of
such loans were included in a Walsh securitization which was completed in
June of 1997. The remaining loans were expected to be included in Walsh's
next securitization. However, during the third quarter the Company
repurchased the remaining $31 million of loans from Walsh and included
those loans in its first subprime securitization transaction which was
completed on September 29, 1997. Also during the third quarter, the
Company advanced approximately $3.8 million to Walsh in connection with
certain other transactions. In conjunction therewith at September 30,
1997, receivables of approximately $9.9 million are outstanding and due
from Walsh to the Company. Such receivables are cross-collateralized and
secured by an interest in a residual certificate and certain other assets.
The Company remains committed to completion of its pending merger with RBC.
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 September 30, 1997, owned approximately
36% of the Company's common stock. Pursuant to the terms of the definitive
merger agreement between RBC and the Company and subject to shareholder and
regulatory approvals, RBC will merge with the Company 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, 2.1 million after giving effect to the
5% stock dividend declared on October 31, 1997, (in addition to the 7.4
million shares of Company stock currently owned by RBC, 7.8 million shares
after giving effect to the 5% stock dividend declared on October 31, 1997)
to the shareholders of RBC. As of September 30, 1997 the Company has
deferred approximately $1.0 million of merger costs related to this
transaction.
During 1995 and 1996 the Company's scale of operations grew dramatically as
did the balances in its operating receivable accounts. The rapid growth
outpaced the Company's back-office capacities to timely process activities
and research, review, resolve and collect on the resultant items. During a
third quarter review it became apparent that $7.9 million of operating
receivables may be unrecoverable due to passage of time, an associated
practical inability to conduct further research and other reasons.
Accordingly, the Company recorded a special charge of $7.9 million ($4.8
million after-tax) to fully-reserve the items.
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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
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 September 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
September 30, 1997, RBC owns approximately 36% 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 Freddie Mac, Fannie Mae 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) Nine Months Ended September 30, Quarter Ended September 30,
(Unaudited) ------------------------------- -------------------------------
1997 1996 1997 1996
----------- ---------- ----------- -----------
Loan Production:
Correspondent Division $5,690,799 $6,310,198 $2,136,619 $1,725,329
Wholesale Division 1,349,408 1,077,812 501,239 341,116
Retail Division 509,528 503,654 195,655 193,235
Subprime 230,199 96,441
---------- ---------- ---------- ----------
Total Loan Production $7,779,934 $7,891,664 $2,929,954 $2,259,680
========== ========== ========== ==========
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A summary of key information relevant to industry loan production activity is
set forth below:
($ in thousands) At or For the Quarter Ended September 30,
(Unaudited) -----------------------------------------
1997 1996
---------------- -------------------
U. S. 1-4 Family Mortgage Originations Statistics (1)
U. S. 1-4 Family Mortgage Originations $239,000,000 $184,000,000
Adjustable Rate Mortgage Market Share 20.00% 32.00%
Estimated Fixed Rate Mortgage Originations $191,000,000 $125,000,000
Company Information
Loan Production $ 2,929,954 $ 2,259,680
Estimated Company Market Share 1.23% 1.23%
(1) Source: Mortgage Bankers Association of America, Economics Department.
Mortgage loan production increased 30% to $2.9 billion for the third quarter
of 1997 from $2.3 billion for the third quarter of 1996. The net increase in
loan production is primarily due to an estimated 53% increase in fixed rate
mortgage origination volume between the comparable periods.
Historically, the Company has been focused on purchasing loans through its
correspondents. In order to diversify its sources of loan volume, the Company
started a wholesale operation that purchased its first loan in May 1994, a
retail operation which originated its first loan in May 1995 and a subprime
division which was started in mid-1996, but did not commence significant
business operations until the first quarter of 1997.
Correspondent Loan Production
The Company purchases mortgage loans through a network of approved
correspondents, which handle the majority of the loan origination functions. The
Company's correspondents are primarily mortgage lenders, large mortgage brokers
and smaller savings and loan associations and commercial banks.
The Company continues to emphasize correspondent loan production as its
primary business focus because of the lower fixed expenses and capital
investment required of the Company. That is, the Company can develop a cost
structure that is more directly variable with loan production because the
correspondent incurs most of the fixed costs of operating and maintaining branch
office networks and of identifying and interacting directly with loan
applicants.
A summary of key information relevant to the Company's correspondent loan
production activities is set forth below:
($ in thousands) At or For the Nine Months Ended At or For the Quarter Ended
(Unaudited) September 30, September 30,
---------------------------------- ---------------------------------
1997 1996 1997 1996
---------------- ---------------- ----------------- --------------
Correspondent Loan Production $ 5,690,799 $ 6,310,198 $ 2,136,619 $ 1,725,329
Estimated Correspondent Market Share 0.88% 1.06% 0.89% 0.94%
Approved Correspondents 934 849 934 849
The 24% increase in correspondent loan production to $2.1 billion for the
third quarter of 1997 from $1.7 billion for the third quarter of 1996 was
primarily due to the nationwide increase in mortgage production which resulted
primarily from the improved mortgage interest rate environment during the third
quarter of
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1997 as compared to the same period of the previous year. The Company's
correspondent loan production increase is also attributable to the decline in
the adjustable rate mortgage (ARM) share of the U.S. market to an estimated 20%
for the third quarter of 1997 from an estimated 32% for the third quarter of
1996. The Company is primarily focused on the purchase and origination of fixed
rate 1-4 family residential mortgage loans and therefore is more competitively
advantaged in economic environments that favor fixed rate mortgages over ARMs.
The number of approved correspondents increased by 85 or 10% to 934 at September
30, 1997, from 849 at September 30, 1996.
Wholesale Loan Production
The Company receives loan applications at its wholesale branches from its
network of approved brokers, underwrites the loans, funds the loans at closing
and prepares all closing documentation. The wholesale branches also handle
shipping and follow-up procedures on these loans. Although the establishment of
wholesale branch offices involves the incurrence of the fixed expenses
associated with maintaining those offices, wholesale operations also provide for
higher profit margins than correspondent loan production. Additionally, each
branch office can serve a relatively sizable geographic area by establishing
relationships with large numbers of independent mortgage loan brokers who bear
much of the cost of identifying and interacting directly with loan applicants.
A summary of key information relevant to the Company's wholesale production
activities is set forth below:
($ in thousands) At or For the Nine Months At or For the Quarter
(Unaudited) Ended September 30, Ended September 30,
------------------------------------ ---------------------------------
1997 1996 1997 1996
--------------- ----------------- -------------- ---------------
Wholesale Loan Production $ 1,349,408 $ 1,077,812 $ 501,239 $ 341,116
Estimated Wholesale Market Share 0.21% 0.18% 0.21% 0.19%
Wholesale Division Direct
Operating Expenses $ 8,029 $ 6,363 $ 3,065 $ 2,107
Approved Brokers 2,956 2,147 2,956 2,147
Number of Branches 14 12 14 12
Number of Employees 126 118 126 118
The $160.1 million, or 47% increase in wholesale loan production to $501.2
million for the third quarter of 1997 from $341.1 million for the third quarter
of 1996 relates to the Company's addition of two new branches and over 800 new
brokers between September 30, 1996 and September 30, 1997. The increase is also
attributable to the overall nationwide increase in mortgage loan production for
the third quarter of 1997 compared to the third quarter of 1996.
Retail Loan Production
In order to further diversify its sources of revenue, the Company started a
retail division in May 1995. Each retail branch handles all aspects of loan
origination, from taking the application, to processing, underwriting and
closing the mortgage loan.
A summary of key information relevant to the Company's retail production
activities is set forth below:
($ in thousands) At or For the Nine Months At or For the Quarter
(Unaudited) Ended September 30, Ended September 30,
--------------------------------- ----------------------------------
1997 1996 1997 1996
----------------- -------------- -------------- -----------------
Retail Loan Production $ 509,528 $ 503,654 $ 195,655 $ 193,235
Estimated Retail Market Share 0.08% 0.08% 0.08% 0.11%
Retail Division Operating Expenses $ 12,700 $ 11,785 $ 4,407 $ 3,953
Number of Branches 6 6 6 6
Number of Employees 218 201 218 201
The Company's retail loan production remained generally consistent for the
quarter and nine months ended September 30, 1996 and September 30, 1997. The
division's operating expenses increased slightly for the
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third quarter and first nine months of 1997 compared to the same periods of the
prior year because of the increased number of employees at September 30, 1997
compared to September 30, 1996. The number of employees increased as a result
of the opening of four new satellite offices.
Strategically, the Company remains focused on accumulation of loan production
through third-party correspondent and wholesale broker channels because of the
relatively lower fixed expenses and capital investments required, among other
reasons. As part of its ongoing business processes, the Company in conjunction
with an investment banking firm, is currently reviewing the compatibility of
the retail operation with its primary business focus. A number of strategic
alternatives are being considered in by the Company.
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) At or For the Nine Months At or For the Quarter
(Unaudited) Ended September 30, Ended September 30,
---------------------------------- ----------------------------------
1997 1996 1997 1996
----------------- -------------- ----------------- ---------------
Subprime Loan Production $ 230,199 N/A $ 96,441 N/A
Subprime Division Operating Expenses $ 6,729 N/A $ 3,200 N/A
Number of Brokers 661 N/A 661 N/A
Number of Employees 116 N/A 116 N/A
During the third quarter of 1997, the Company originated/purchased
$96.4 million in subprime mortgage loans through its retail telemarketing and
wholesale broker channels. The subprime division served 661 brokers as of
September 30, 1997.
LOAN SERVICING
A summary of key information relevant to the Company's loan servicing
activities is set forth below:
($ in thousands) At or For the Nine Months At or For the Quarter
(Unaudited) Ended September 30, Ended September 30,
------------------------------------ --------------------------------
1997 1996 1997 1996
----------------- ----------------- -------------- ---------------
Underlying Unpaid Principal Balances:
Beginning Balance $ 6,670,267 $ 5,562,930 $ 7,239,065 $ 5,926,199
Loan Production (net of servicing
released production) 7,864,319 7,839,837 3,054,529 2,234,824
Net Change in Work-in-Process (379,131) 297,635 (142,736) 231,201
Bulk Acquisitions 774,097 1,354,592 1,293,705
Sales of Servicing (7,102,140) (7,744,335) (2,801,046) (2,778,861)
Paid-In-Full Loans (486,965) (331,688) (201,385) (85,349)
Amortization, Curtailments and Others, net (344,081) (438,897) (152,061) (281,645)
------------ ------------ ------------ ------------
Ending Balance $ 6,996,366 $ 6,540,074 $ 6,996,366 $ 6,540,074
------------ ------------ ------------ ------------
Subservicing Ending Balance 3,066,256 2,888,014 3,066,256 2,888,014
============ ============ ============ ============
Total Underlying Unpaid Principal Balances $ 10,062,622 $ 9,428,088 $ 10,062,622 $ 9,428,088
============ ============ ============ ============
Loan Servicing Fees $ 23,049 $ 21,379 $ 7,711 $ 7,520
Cash Operating Expenses 78,539 56,563 36,210 18,658
Coverage Ratio 29% 38% 21% 40%
Average Underlying Unpaid Principal
Balances (including subservicing) $ 9,225,094 $ 8,796,418 $ 9,683,313 $ 8,974,362
Weighted Average Note Rate* 7.82% 7.91% 7.82% 7.91%
Weighted Average Servicing Fee* 0.41% 0.39% 0.41% 0.39%
Delinquency (30+ days)* 3.76% 3.73% 3.76% 3.73%
Number of Servicing Division Employees 125 128 125 128
* These statistics apply to the Company's owned servicing portfolio.
The $709.0 million or 8% increase in the average underlying unpaid principal
balance of mortgage loans being serviced for the third quarter of 1997 as
compared to the third quarter of 1996 is primarily related to bulk acquisitions
of $774.1 million during the first nine months of 1997.
13
13
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997, COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1996
SUMMARY
Total revenues of the Company increased 22% to $115.3 million for the
first nine months of 1997 as compared to $94.9 million for the first nine months
of 1996. The $20.4 million increase in revenues was primarily due to a $17.2
million increase in gains on sales of loans and servicing rights. This increase
was offset by a $22.0 million increase in operating expenses (exclusive of
amortization of mortgage servicing rights and taxes). The increase in gains on
sales of loans and servicing rights is 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 a $2.3 million
pre-tax charge related to joint termination of the Company's merger agreement
with Walsh Holding Company, Inc. and a special charge of $7.9 million pre-tax
for nonrecoverable operating receivables. Higher operating costs associated with
increased loan servicing volumes and the Company's expansion of subprime
operations also contributed to the increase. Direct operating costs related to
the Company's expansion into subprime operations account for approximately $6.7
million, or 31%, of the total increase in operating expenses (exclusive of
amortization and taxes) for the first nine months 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 (the difference between interest rates earned
on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds) for the nine months ended September 30, 1997
and September 30, 1996. 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
$909,185 $864,901 7.82% 7.68% and Mortgage-Backed $53,301 $49,809 $3,492 $ 942 $2,550
- ---------------------------------------- Securities ------------------------------------------------
INTEREST EXPENSE
$436,248 $321,643 4.88% 4.60% Warehouse Line $15,916 $11,071 $4,845 $ 900 $3,945
446,697 516,397 5.59% 5.64% Gestation Line 18,680 21,788 (3,108) (167) (2,941)
20,486 8.19% Servicing Secured Line 1,256 (1,256) (1,256)
58,493 20,363 6.44% 5.87% Servicing Receivable Line 2,819 894 1,925 247 1,678
4,213 10,475 8.13% 8.50% Other Borrowings 256 667 (411) (12) (399)
Facility Fees & Other Charges 1,444 1,353 91 91
- ---------------------------------------- ------------------------------------------------
$945,651 $889,364 5.53% 5.56% Total Interest Expense $39,115 $37,029 $2,086 $ 968 $1,118
- ---------------------------------------- ------------------------------------------------
2.29% 2.12% Net Interest Income $14,186 $12,780 $1,406 $ (26) $1,432
================= ================================================
Net interest income increased 11% to $14.2 million for the first nine months
of 1997 compared to $12.8 million for the first nine months of 1996. The $1.4
million increase in net interest income is primarily attributable to an increase
of 17 basis points in the interest-rate spread to 229 basis points for 1997 as
compared to 212 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.
14
14
NET GAINS ON SALES OF MORTGAGE LOANS AND MORTGAGE SERVICING RIGHTS
Net gains on sales of mortgage loans and mortgage servicing rights increased
$17.2 million to $77.5 million for the first nine months of 1997 as compared to
$60.3 million for the first nine months of 1996. As further discussed below,
this increase is primarily due to increased profit margins on sales of mortgage
loans and mortgage servicing rights.
Net Gain on Sale of Mortgage Loans
A reconciliation of the gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
($ in thousands) For the Nine Months Ended
September 30,
------------------------------
(Unaudited) 1997 1996
----------- -----------
Gross proceeds on sales of mortgage loans $ 7,426,512 $ 8,279,643
Initial unadjusted acquisition cost of
mortgage loans sold, net
of hedge results 7,422,340 8,271,259
----------- -----------
Unadjusted gain on sale of mortgage loans 4,172 8,384
Loan origination and correspondent program
administrative fees
23,852 26,921
----------- -----------
Unadjusted aggregate margin 28,024 35,305
Acquisition basis allocated to mortgage
servicing rights (SFAS
No. 122 and SFAS No. 125) 32,661 24,338
Net change in deferred administrative fees 1,394 (295)
----------- -----------
Net gain on sale of agency-eligible
mortgage loans $ 62,079 $ 59,348
=========== ===========
The Company sold agency-eligible loans during the first nine months of 1997
with an aggregate unpaid principal balance of $7.4 billion compared to sales of
$8.3 billion for the first nine 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 (6 basis points) for the first nine months of
1997 as compared to $8.4 million (10 basis points) for the first nine months of
1996. The Company received administrative fees of $23.9 million (32 basis
points) on these loans during the first nine months of 1997 and $26.9 million
(33 basis points) during the first nine months of 1996. The Company allocated
$32.7 million (44 basis points) in the first nine months of 1997 to basis in
mortgage servicing rights versus $24.3 million (29 basis points) during the
first nine months of 1996 in accordance with SFAS No. 125 and SFAS No. 122. Net
gain on sale of mortgage loans increased to $62.1 million for the first nine
months of 1997 versus $59.3 million for the same period of 1996.
A reconciliation of the gain on sale of subprime mortgage loans for the
periods indicated follows:
($ in thousands) For the Nine Months Ended
September 30,
----------------------------
(Unaudited) 1997 1996
---------- ---------
Gross proceeds on sales of subprime mortgage $230,102 N/A
loans
Initial acquisition cost of subprime mortgage
loans sold, net of fees 228,153 N/A
-------- ---
Unadjusted gain on sale of subprime mortgage loans 1,949 N/A
Initial capitalization of residual certificate 7,550 N/A
-------- ---
Net gain on sale of subprime mortgage loans $ 9,499 N/A
======== ===
On September 29, 1997, the Company completed its first securitization of
subprime mortgage loans through its newly-formed and wholly-owned subsidiary,
RBMG Funding Co. The asset-backed transaction was collateralized by
$91.7 million of subprime mortgage loans. The residual certificate was valued
by an independent third party and will be marked to market on a quarterly
basis.
15
15
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing rights
for the periods indicated follows:
($ in thousands) For the Nine Months Ended
September 30,
----------------------------
(Unaudited) 1997 1996
----------- -----------
Underlying unpaid principal balances of
mortgage loans on which
servicing rights were sold
during the period $ 6,584,487 $ 7,751,124
=========== ===========
Gross proceeds from sales of mortgage
servicing rights $ 146,004 $ 157,532
Initial acquisition basis, net of
amortization and hedge results 113,158 132,628
----------- -----------
Unadjusted gain on sale of mortgage
servicing rights 32,846 24,904
Acquisition basis allocated from mortgage
loans, net of amortization (SFAS No. 122
and SFAS No. 125) (26,898) (23,940)
=========== ===========
Gain on sale of mortgage servicing rights $ 5,948 $ 964
=========== ===========
During the first nine months of 1997, the Company completed 25 sales of
mortgage servicing rights representing $6.6 billion of underlying unpaid
principal mortgage loan balances. This compares to 26 sales of mortgage
servicing rights representing $7.8 billion of underlying unpaid principal
mortgage loan balances in the first nine months of 1996. Unadjusted gain on sale
of mortgage servicing rights was $32.8 million for the first nine months of
1997, up from $24.9 million for the first nine months of 1996. The Company
reduced this unadjusted gain by $26.9 million (41 basis points) in the first
nine months of 1997 versus a $23.9 million (31 basis points) reduction in the
first nine months of 1996, in accordance with SFAS No. 125 and SFAS No. 122. The
$5.0 million increase in gain on sale of mortgage servicing rights is primarily
related to several bulk sales of available-for-sale mortgage servicing rights
during the first nine months of 1997.
NET SERVICING MARGIN
Loan servicing fees were $23.0 million for the first nine months of 1997,
compared to $21.4 million for the first nine months of 1996, an increase of 8%.
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 first nine months of 1997 from $8.8 billion during the first nine
months of 1996, an increase of 5%. Similarly, amortization of mortgage servicing
rights also increased to $13.7 million during the first nine months of 1997 from
$11.1 million during the first nine months of 1996, an increase of 23%. As a
result, net servicing margin decreased to $9.4 million during the first nine
months of 1997, compared to $10.3 million for the first nine months of 1996, a
decrease of 9%.
Included in loan servicing fees for the first nine months of 1997 and the
first nine months of 1996 are subservicing fees received by the Company of
$367,000 and $858,000, respectively. The subservicing fees are associated with
temporary subservicing agreements between the Company and purchasers of mortgage
servicing rights.
16
16
The following table summarizes the net servicing margin for the first nine
months of both 1997 and 1996:
($ in thousands) For the Nine Months Ended
September 30,
---------------------------
(Unaudited) 1997 1996
---------- ----------
Loan servicing fees $ 23,049 $ 21,379
Amortization of mortgage
servicing rights 13,673 11,064
---------- ----------
Net servicing margin $ 9,376 $ 10,315
========== ==========
Average underlying unpaid
principal balance of
mortgage loans serviced $9,225,094 $8,796,418
---------- ----------
EXPENSES
The $22.0 million increase in operating expenses (excluding amortization of
mortgage servicing rights) was centered in salary and employee benefits and
general and administrative expenses which increased $5.8 million, or 15% and
$15.0 million, or 102%, respectively. The Company increased its employee
headcount by 107 from 1,028 at September 30, 1996, to 1,135 at September 30,
1997. The increased employee headcount and associated increase in salary and
employee benefit costs are primarily attributable to expansion of subprime
operations through the Company's acquisition of Meritage Mortgage Corporation.
Overall, the subprime division accounted for 116 new positions and for $6.7
million of the total $22.0 million increase in operating expenses. The increase
in general and administrative expenses is primarily attributable to a $2.3
million pre-tax charge related to termination of the Company's merger agreement
with Walsh Holding Company, Inc. and the recording of a special charge of $7.9
million pre-tax relating to certain nonrecoverable operating receivables.
INCOME TAX EXPENSE
Income tax expense includes both federal and state income taxes. The
effective tax rates for the nine months ended September 30, 1997 and 1996 were
37.7% and 37.9%, respectively. Income tax expense decreased by 16% to $8.7
million for the first nine months of 1997 from $10.3 million for the first nine
months of 1996 due to the above-described factors that resulted in a 15% or
$4.1 million decrease in income before taxes.
RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 1997, COMPARED TO QUARTER
ENDED SEPTEMBER 30, 1996
SUMMARY
Total revenues of the Company increased 40% to $45.0 million for the third
quarter of 1997 as compared to $32.2 million for the third quarter of 1996. The
$12.7 million increase in revenues was primarily due to a $12.5 million increase
in gains on sales of loans and servicing rights, which was offset by a $17.6
million increase in operating expenses (exclusive of amortization of mortgage
servicing rights and taxes). The increase in gains on sales of loans and
servicing rights is attributable to the Company's increased loan production
volumes during the third quarter of 1997 and to improved production margins and
gains derived from the Company's growing subprime division. The increase in
operating expenses is primarily attributable to a $2.3 million pre-tax charge
related to termination of the Company's merger agreement with Walsh Holding
Company, Inc. and a special charge of $7.9 million pre-tax for nonrecoverable
operating receivables. Higher operating costs associated with increased loan
servicing volumes and the Company's expansion of subprime operations also
contributed to the increase. Direct operating costs related to the Company's
expansion into subprime operations account for approximately $3.2 million, or
18%, of the total increase in operating expenses (exclusive of amortization and
taxes) for the third quarter of 1997.
17
17
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 (the difference between interest rates earned
on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds) for the third quarter of 1997 and the third
quarter of 1996. 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
$1,102,862 $729,538 7.84% 7.95% Securities $21,613 $14,508 $7,105 $(318) $7,423
- ---------------------------------------- ------------------------------------------------
Interest Expense
$ 504,375 $291,280 5.03% 4.36% Warehouse Line $ 6,391 $ 3,192 $3,199 864 2,335
576,109 417,834 5.88% 5.64% Gestation Line 8,539 5,923 2,616 372 2,244
Servicing Secured Line
87,553 16,560 6.56% 5.98% Servicing Receivable Line 1,447 249 1,198 131 1,067
6,580 978 7.93% 8.95% Other Borrowings 132 22 110 (16) 126
Facility Fees & Other 569 622 (53) (53)
Charges
- ---------------------------------------- ------------------------------------------------
$1,174,617 $726,652 5.77% 5.47% Total Interest Expense $17,078 $10,008 $7,070 $1,351 $5,719
- ---------------------------------------- ------------------------------------------------
2.07% 2.48% Net Interest Income $ 4,535 $ 4,500 $ 35 $(1,669) $1,704
================= ================================================
Net interest income increased 1% to $4.5 million for the third quarter of
1997 compared to $4.5 million for the third quarter of 1996. The slight increase
in net interest income is attributable to the 51% increase in the average volume
of mortgages held for sale and mortgage-backed securities for the third quarter
of 1997 from that of the third quarter of 1996 offset by the 41 basis point
decrease in the interest rate spread from 248 basis points for the third quarter
of 1996 to 207 basis points for the third quarter of 1997. 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 indices, while earning asset yields are based upon
long-term rate indices. Thus, the decrease in interest-rate spread was primarily
the result of narrower spreads between long-term and short-term rates in the
third quarter of 1997 compared to the third quarter of 1996.
NET GAINS ON SALES OF MORTGAGE LOANS AND MORTGAGE SERVICING RIGHTS
Net gains on sales of mortgage loans and mortgage servicing rights increased
$12.5 million to $32.6 million for the third quarter of 1997 as compared to
$20.1 million for the third quarter of 1996. As further discussed below, this
increase is primarily due to improved profit margins on sales.
18
18
Net Gain on Sale of Mortgage Loans
A reconciliation of the gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
($ in thousands) For the Quarter Ended September 30,
-----------------------------------
(Unaudited) 1997 1996
------------ -----------
Gross proceeds on sales of mortgage loans $2,837,133 $2,223,612
Initial unadjusted acquisition cost of mortgage loans
sold, net of hedge results $2,837,111 $2,221,287
---------- ----------
Unadjusted gain on sale of mortgage loans 22 2,325
Loan origination and correspondent administrative fees 9,716 8,211
---------- ----------
Unadjusted aggregate margin 9,738 10,536
Acquisition basis allocated to mortgage servicing
rights (SFAS No. 122 and SFAS No. 125) 14,541 8,757
Net change in deferred administrative fees 332 19
---------- ----------
Net gain on sale of agency-eligible mortgage loans
$ 24,611 $ 19,312
========== ==========
The Company sold loans during the third quarter of 1997 with an aggregate
unpaid principal balance of $2.8 billion compared to sales of $2.2 billion for
the third quarter of 1996. The amount of proceeds received on sales of mortgage
loans exceeded the initial unadjusted acquisition cost of the loans sold by
$20 thousand for the third quarter of 1997 as compared to $2.3 million (10
basis points) for the third quarter of 1996. The Company received loan
origination and correspondent administrative fees of $9.7 million (34 basis
points) on these loans during the third quarter of 1997 and $8.2 million (37
basis points) during the third quarter of 1996. The Company allocated $14.5
million (51 basis points) in the third quarter of 1997 to basis in mortgage
servicing rights versus $8.8 million (39 basis points) during the third quarter
of 1996 in accordance with SFAS No. 125 and SFAS No. 122. As a result, net gain
on sale of mortgage loans increased to $24.6 million for the third quarter of
1997 versus $19.3 million for the third quarter of 1996.
A reconciliation of the gain on sale of subprime mortgage loans for the
periods indicated follows:
($ in thousands) For the Quarter Ended September 30,
-----------------------------------
(Unaudited) 1997 1996
--------------- ----------------
Gross proceeds on sales of subprime mortgage loans $ 110,893 N/A
Initial acquisition cost of subprime mortgage loans sold,
net of fees 113,726 N/A
--------------- ----------------
Unadjusted loss on sale of subprime mortgage loans (2,833) N/A
Initial capitalization of residual certificate 7,550 N/A
--------------- ----------------
Net gain on sale of subprime mortgage loans $ 4,717 N/A
=============== ================
19
19
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
($ in thousands) For the Quarter Ended September 30,
---------------------------------------
(Unaudited) 1997 1996
-------------- ---------------
Underlying unpaid principal balances of
mortgage loans on which servicing rights
were sold during the period $ 2,800,277 $ 2,778,998
=========== ===========
Gross proceeds from sales of mortgage
servicing rights $ 61,927 $ 54,977
Initial acquisition cost, net of
amortization and
hedge results 47,213 42,592
----------- -----------
Unadjusted gain on sale of mortgage
servicing rights 14,714 12,385
Acquisition basis allocated from mortgage
loans, net of amortization (SFAS No. 122
and SFAS No. 125) (11,477) (11,610)
=========== ===========
Gain on sale of mortgage servicing rights $ 3,237 $ 775
=========== ===========
During the third quarter of 1997, the Company completed seven sales of
mortgage servicing rights representing $2.8 billion of underlying unpaid
principal mortgage loan balances. This compares to ten sales of mortgage
servicing rights representing $2.8 billion of underlying unpaid principal
mortgage loan balances in the third quarter of 1996. Unadjusted gain on sale of
mortgage servicing rights was $14.7 million for the third quarter of 1997, up
from $12.4 million for the third quarter of 1996. The Company reduced this
unadjusted gain by $11.5 million (41 basis points) in the third quarter of 1997
versus an $11.6 million (42 basis points) reduction in the third quarter 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 a bulk sale of
$585 million of underlying unpaid principal balances of available-for-sale
mortgage servicing rights which accounts for $2.9 million of the total third
quarter of 1997 gain.
NET SERVICING MARGIN
Loan servicing fees were $7.7 million for the third quarter of 1997, compared
to $7.5 million for the third quarter of 1996, an increase of 3%. This increase
is primarily related to an increase in the average aggregate underlying unpaid
principal balance of mortgage loans serviced to $9.7 billion during the third
quarter of 1997 from $9.0 billion during the third quarter of 1996, an increase
of 8%. Similarly, amortization of mortgage servicing rights also increased to
$4.8 million during the third quarter of 1997 from $3.7 million during the third
quarter of 1996, an increase of 30%. As a result, net servicing margin
decreased 24% to $2.9 million for the third quarter of 1997 from $3.8 million
during the third quarter of 1996.
Included in loan servicing fees for the third quarter of 1997 and the third
quarter of 1996 are subservicing fees received by the Company of $140,000 and
$180,000, respectively. The subservicing fees are associated with temporary
subservicing agreements between the Company and purchasers of mortgage servicing
rights.
20
20
The following table summarizes the net servicing margin for the third
quarters of both 1997 and 1996:
($ in thousands) For the Quarter Ended September 30,
-----------------------------------
(Unaudited) 1997 1996
----------- ----------
Loan servicing fees $ 7,711 $ 7,520
Amortization of mortgage servicing rights 4,840 3,748
========== ==========
Net servicing margin $ 2,871 $ 3,772
========== ==========
Average underlying unpaid principal balance
of mortgage loans serviced $9,683,313 $8,974,362
---------- ----------
EXPENSES
The $17.6 million increase in operating expenses (excluding amortization of
mortgage servicing rights) was centered in salary and employee benefits and
general and administrative expenses which increased $4.2 million, or 34%, and
$13.0 million, or 267%, respectively. Through the end of the third quarter of
1997, the Company increased its employee headcount by 107 from 1,028 at
September 30, 1996, to 1,135 at September 30, 1997. The increased employee
headcount and associated increase in salary and employee benefit costs are
primarily attributable to expansion of subprime operations through the Company's
acquisition of Meritage Mortgage Corporation. Overall, the subprime division
accounted for 116 new positions and for $3.2 million, or 18%, of the total $17.6
million increase in operating expenses. The increase in general and
administrative expenses is primarily attributable to a $2.3 million pre-tax
charge related to termination of the Company's merger agreement with Walsh
Holding Company, Inc. and the recording of a special charge of $7.9 million
pre-tax relating to certain nonrecoverable operating receivables.
INCOME TAX EXPENSE
Income tax expense includes both federal and state income taxes. The
effective tax rates for the third quarter of 1997 and 1996 were 36.7% and 37.0%,
respectively. Income tax expense decreased by 63% to $1.3 million for the third
quarter of 1997 from $3.6 million for the third quarter of 1996 due to the
above-described factors that resulted in a 60% or $5.9 million decrease in
income before taxes.
21
21
FINANCIAL CONDITION
During the third quarter of 1997, the Company experienced a 9% increase in
the volume of mortgage loans originated and acquired compared to the second
quarter of 1997. Mortgage loan production increased to $2.9 billion during the
third quarter of 1997 from $2.7 billion during the second quarter of 1997. The
September 30, 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 third quarter of 1997. The number of correspondents approved to do business
in the Company's correspondent lending program increased to 934 at September 30,
1997, from 871 at December 31, 1996.
The Company continued expansion of the wholesale network between December
31, 1996, and September 30, 1997, with the addition of 1,524 brokers to the
Company's approved list, increasing the number of approved wholesale brokers
from 2,322 at December 31, 1996, to 2,956 at September 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 $1.1
billion at September 30, 1997, versus $802.3 million at December 31, 1996, an
increase of 36%. The Company's servicing portfolio (exclusive of loans under
subservicing agreements) increased to $7.0 billion at September 30, 1997, from
$6.7 billion at December 31, 1996, an increase of 5%.
Short-term borrowings, which are the Company's primary source of funds,
totaled $1.1 billion at September 30, 1997, compared with $805.7 million at
December 31, 1996, an increase of 40%. The increase in the balance outstanding
at September 30, 1997, resulted from the increased funding requirements related
to the increase in the balance of mortgage loans held for sale and
mortgage-backed securities at September 30, 1997, as compared to the balance at
December 31, 1996. Long-term borrowings totaled $6.5 million at September 30,
1997. There were no long-term borrowings at December 31, 1996.
22
22
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 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.
The Company was in compliance with the above-mentioned debt covenants at
September 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%.
23
23
Part II. OTHER INFORMATION
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) None.
24
24
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)
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: November 14, 1997
25
25
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
4.4 Amendment No. 1 dated as of July 30, 1997 to and under the --
Second Amended and Restated Secured Revolving/Term Credit
Agreement dated as of July 31, 1996, among the Registrant,
the Banks and Co-Agents named therein and The Bank of New
York as Collateral Agent
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
A
26
Exhibit No. Description Page
- ----------- ----------- ----
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
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, Jr., 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
B
27
Exhibit No. Description Page
- ----------- ----------- ----
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
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
C
28
Exhibit No. Description Page
- ----------- ----------- ----
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
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(A)Agreement of Merger dated April 18, 1997 between Resource
Bancshares Mortgage Group, Inc., RBC Merger Sub, Inc. and
Resource Bancshares Corporation incorporated by reference
to Annex A of the Registrant's Registration No.333-29245 *
(B)First Amendment to Agreement of Merger dated April 18, --
1997 between Resource Bancshares Mortgage Group, Inc., RBC
Merger Sub, Inc. and Resource Bancshares Corporation
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(A)Mutual Release and Settlement Agreement between the
Registrant, Lee E. Shelton and Constance P. Shelton dated
January 31, 1997 incorporated by reference to Exhibit 10.44
of the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1997 *
(B)Amendment to Mutual Release and Settlement Agreement --
between 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
incorporated by reference to Exhibit 10.45 of the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 1997 *
D
29
Exhibit No. Description Page
- ----------- ----------- ----
11.1 Statement re Computation of Net Income per Share
-----
27.1 Financial Data Schedule
-----
- ---------------------------------
* Incorporated by reference
E