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, 1998
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
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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
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, 1998, was 23,765,999.
Page 1
Exhibit Index on Pages A to E
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Form 10-Q for the quarter ended June 30, 1998
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
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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 43
ITEM 2. Changes in Securities and Use of Proceeds 43
ITEM 4. Submission of Matters to a Vote of Security Holders 43
ITEM 6. Exhibits and Reports on Form 8-K 43
SIGNATURES 44
EXHIBIT INDEX A-E
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Part I. Financial Information
Item 1. Financial Statements
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED BALANCE SHEET
($ in thousands)
June 30, December 31,
1998 1997
----------- -----------
(Unaudited)
ASSETS
Cash $ 15,494 $ 13,546
Receivables 83,218 87,702
Trading securities:
Mortgage-backed securities 201,925 334,598
Residual interest in subprime securitizations 30,442 19,684
Mortgage loans held-for-sale 1,048,596 844,590
Lease receivables 72,617 51,494
Mortgage servicing rights, net 163,918 127,326
Premises and equipment, net 30,735 27,723
Accrued interest receivable 4,550 4,372
Goodwill and other intangibles 16,805 15,519
Other assets 35,632 30,375
----------- -----------
Total assets $ 1,703,932 $ 1,556,929
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 1,292,768 $ 1,224,489
Long-term borrowings 6,414 6,461
Accrued expenses 23,783 24,262
Other liabilities 143,585 86,578
----------- -----------
Total liabilities 1,466,550 1,341,790
----------- -----------
Stockholders' equity
Common stock (31,451,448 and 31,120,383 shares outstanding
at June 30, 1998 and December 31, 1997, respectively) 315 311
Additional paid-in capital 302,474 299,516
Retained earnings 37,606 17,763
Common stock held by subsidiary at cost (7,767,099 shares
outstanding at June 30, 1998 and December 31, 1997) (98,953) (98,953)
Unearned shares of employee stock ownership plan (4,060) (3,498)
----------- -----------
Total stockholders' equity 237,382 215,139
----------- -----------
Total liabilities and stockholders' equity $ 1,703,932 $ 1,556,929
=========== ===========
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 Six Months Ended For the Quarter Ended
June 30, June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
REVENUES
Interest income $ 49,640 $ 31,688 $ 26,659 $ 18,233
Interest expense (39,889) (22,037) (21,200) (12,317)
------------ ------------ ------------ ------------
Net interest income 9,751 9,651 5,459 5,916
Net gain on sale of mortgage loans 83,629 42,250 44,455 25,223
Gain on sale of mortgage servicing rights 1,080 2,711 452 1,220
Servicing fees 19,715 15,338 10,412 7,803
Gain on sale of retail production franchise 1,490 1,490
Other income 1,407 426 433 157
------------ ------------ ------------ ------------
Total revenues 117,072 70,376 62,701 40,319
------------ ------------ ------------ ------------
EXPENSES
Salary and employee benefits 41,562 27,144 20,848 14,880
Occupancy expense 5,431 3,442 2,651 1,850
Amortization of mortgage servicing rights 12,303 8,833 6,674 4,725
General and administrative expenses 20,660 11,743 10,868 6,868
------------ ------------ ------------ ------------
Total expenses 79,956 51,162 41,041 28,323
------------ ------------ ------------ ------------
Income before income taxes 37,116 19,214 21,660 11,996
Income tax expense (14,423) (7,373) (8,548) (4,625)
------------ ------------ ------------ ------------
Net income $ 22,693 $ 11,841 $ 13,112 $ 7,371
============ ============ ============ ============
Weighted average common shares
outstanding -- Basic 23,084,986 20,133,317 23,102,831 20,424,696
============ ============ ============ ============
Net income per common share -- Basic $ 0.98 $ 0.59 $ 0.57 $ 0.36
============ ============ ============ ============
Weighted average common shares
outstanding -- Diluted 23,464,004 20,526,628 23,511,620 20,817,835
============ ============ ============ ============
Net income per common share -- Diluted $ 0.97 $ 0.58 $ 0.56 $ 0.35
============ ============ ============ ============
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
Common Stock Additional Shares of Employee Stock Total
Six Months Ended ------------------ Paid-in Retained Stock Ownership Held by Treasury Stockholders'
June 30, 1997 Shares Amount Capital Earnings Plan Subsidiary Stock Equity
- ----------------------------- ----------- -------- ---------- ---------- ----------------- ---------- --------- --------------
Balance, December 31, 1996 19,285,020 $ 193 $ 149,653 $ 12,007 $ (4,552) $ 157,301
Issuance of restricted stock 23,528 * 328 328
Shares issued under Dividend
Reinvestment and Stock
Purchase Plan and Stock
Investment Plan 3,709 * 43 (51) (8)
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
Net income 11,841
Total comprehensive income 11,841
---------- -------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1997 19,850,103 $ 198 $ 154,825 $ 22,611 $ (4,330) $ 173,304
========== ======== ========= ========= ========= ========= ========= =========
Unearned Common
Common Stock Additional Shares of Employee Stock Total
Six Months Ended ------------------ Paid-in Retained Stock Ownership Held by Treasury Stockholders'
June 30, 1998 Shares Amount Capital Earnings Plan Subsidiary Stock Equity
- ----------------------------- ----------- -------- ---------- ---------- ----------------- ---------- --------- --------------
Balance, December 31, 1997 31,120,383 $ 311 $ 299,516 $ 17,763 $ (3,498) $ (98,953) $ 215,139
Issuance of restricted stock 20,056 * 328 328
Cash dividends (2,783) (2,783)
Exercise of stock options 274,215 1 (880) $ 3,034 2,155
Shares committed to be
released under ESOP 214 438 652
Loans to Employee Stock
Ownership Plan (1,000) (1,000)
Shares issued under Dividend
Reinvestment and Stock
Purchase Plan and Stock
Investment Plan 94,676 1 1,532 (67) 1,466
Acquisition of Meritage
Mortgage Corporation 142,118 2 1,764 1,766
Treasury stock purchased (200,000) (3,034) (3,034)
Net income 22,693
Total comprehensive income 22,693
---------- -------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1998 31,451,448 $ 315 $ 302,474 $ 37,606 $ (4,060) $ (98,953) $ 237,382
========== ======== ========= ========= ========= ========= ========= =========
* 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)
Six Months Ended June 30,
1998 1997
------------ ------------
OPERATING ACTIVITIES:
Net income $ 22,693 $ 11,841
Adjustments to reconcile net
income to cash used in operating activities:
Depreciation and amortization 14,886 10,453
Employee Stock Ownership Plan compensation 652 281
Provision for estimated foreclosure losses 4,016 1,093
Decrease (increase) in receivables 4,484 (18,236)
Acquisition of mortgage loans (8,021,762) (4,853,760)
Proceeds from sales of mortgage loans and mortgage-backed securities 7,862,252 4,754,990
Acquisition of mortgage servicing rights (159,251) (112,051)
Sales of mortgage servicing rights 110,661 84,077
Net gain on sales of mortgage loans and servicing rights 84,709 (44,961)
Increase in accrued interest on loans (178) (1,007)
Increase in lease receivables (21,123)
Increase in other assets (6,043) (10,976)
Increase in residual certificates (10,758)
Increase in accrued expenses and other liabilities 56,528 38,694
------------ ------------
Net cash used in operating activities (58,234) (139,562)
------------ ------------
INVESTING ACTIVITIES:
Purchases of premises and equipment, net (5,182) (2,267)
------------ ------------
Net cash used in investing activities (5,182) (2,267)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings 17,043,955 12,814,396
Repayment of borrowings (16,975,723) (12,669,867)
Issuance of restricted stock 328 328
Shares issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan 1,466 (8)
Acquisition of Meritage Mortgage Corporation (1,750)
Debt issuance costs (257)
Cash dividends (2,783) (1,186)
Acquisition of treasury stock (3,034)
Issuance of treasury stock 1,674
Exercise of stock options 481
Loans to Employee Stock Ownership Plan (1,000)
------------ ------------
Net cash provided by financing activities 65,364 141,656
------------ ------------
Net increase in cash 1,948 (173)
Cash, beginning of period 13,546 2,492
------------ ------------
Cash, end of period $ 15,494 $ 2,319
============ ============
See accompanying notes to consolidated financial statements.
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RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
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, 1997, Annual Report on Form 10-K. Certain financial information,
which is normally included in financial statements prepared in accordance with
generally accepted accounting principles, is not required for interim financial
statements and has been omitted. The accompanying interim consolidated financial
statements are unaudited. However, in the opinion of management of the Company,
all adjustments, consisting of normal recurring items, necessary for a fair
presentation of operating results for the periods shown have been made. Certain
prior period amounts have been reclassified to conform to current period
presentation.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
No. 128), which is effective for financial statements issued for periods ending
after December 15, 1997. The Company adopted SFAS No. 128 in December 1997 and
has retroactively restated to report its earnings per share on a comparable
basis for all periods presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which requires that changes in the amounts of comprehensive income
items, currently reported as separate components of equity, be shown in a
financial statement, displayed as prominently as other financial statements. The
most common components of other comprehensive income include foreign currency
translation adjustments, minimum pension liability adjustments and/or unrealized
gains and losses on available-for-sale securities. SFAS No. 130 does not require
a specific format for the new statement, but does require that an amount
representing total comprehensive income be reported. SFAS No. 130 is required to
be adopted for fiscal years beginning after December 15, 1997. The Company
has adopted SFAS No. 130 in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes new standards for
business segment reporting. Requirements of SFAS No. 131 include reporting of
(a) financial and descriptive information about reportable operating segments,
(b) a measure of segment profit or loss, certain specific revenue and expense
items and segment assets with reconciliations of such amounts to the Company's
financial statements and (c) information regarding revenues derived from the
Company's products and services, information about major customers and
information related to geographic areas. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The Company plans to adopt SFAS No. 131
for the full-year 1998.
In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits" which revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. The statement is effective for fiscal years beginning after
December 15, 1997. The Company plans to adopt SFAS No. 132 for the full-year
1998.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and , if it is, the type of hedge
transaction. For fair value hedge transactions in which the Company is hedging
changes in an asset's, liability's or firm commitment's fair value, changes in
the fair value of the derivative instrument will generally be offset in the
income statement by changes in the hedged item's fair value. For cash-flow hedge
transactions, in which the Company is hedging the variability of cash flows
related to a variable-rate asset, liability or a forecasted transaction, changes
in the fair value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative instrument that are
reported in other comprehensive income will be reclassified as earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. The ineffective portion of all hedges will be recognized in
current period earnings. SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999 (January 1, 2000 for the
Company). However, early adoption is permitted. The Company has not yet
determined either the impact that the adoption of FAS 133 will have on its
earnings or statement of financial position or the period in which the statement
will be implemented.
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Certain amounts in prior period statements have been reclassified in
order to conform to current period presentation. Specifically, first quarter of
1998 salary and employee benefits was decreased by $1.4 million, net gain on
sale of mortgage loans was decreased by $1.1 million and servicing fees were
increased by $223 thousand. These reclassifications of previously reported
first quarter of 1998 amounts had no net effect on pre-tax or after-tax net
income of the previously reported interim period.
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
certain periods following closing. During the second quarter of 1998, 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. All the
contingent shares have now been released. The fair market value of contingent
shares had 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 was achieved, the corresponding fair market value of the associated
contingent shares released was recorded as additional goodwill and such shares
were prospectively 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 second quarter and six month
periods ended June 30, 1998 was approximately $141 and $265, respectively. The
following is a schedule of the allocation of the purchase price:
At Release
Acquisition of
on April 1, Contingent June 30,
1997 Shares 1998
---- ------ ----
Cash paid $1,750 $ 1,750
Estimated fair market value of shares of
RBMG common stock issued or released 4,748 $5,748 10,496
Deferred merger cost 463 463
------ ------ -------
Total purchase price 6,961 5,748 12,709
Fair value of net assets acquired 1,000 1,000
------ ------ -------
Goodwill and intangibles $5,961 $5,748 $11,709
====== ====== =======
Effective May 1, 1998 the Company sold the retail production franchise
of Intercounty Mortgage, Inc. to CFS Bank. Historically, the Company has
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. Management believes the
sale of the retail operation will allow the Company to refocus on its core
competency as a correspondent and wholesale mortgage lender. The following is a
schedule of the gain recognized on the sale of the retail production franchise:
Cash proceeds $ 5,503
Investment banking, legal and other advisory fees (533)
Severance and other transaction costs (1,980)
-------
Net proceeds 2,990
Basis in assets sold (1,500)
-------
Net pre-tax gain on sale of retail production franchise $ 1,490
=======
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Earnings Per Share
The following is a reconciliation of basic earnings per share to diluted
earnings per share as calculated under SFAS No. 128 for the six months ended
June 30, 1998 and 1997, respectively:
Income
(Numerator) Shares Per Share
For the Six Months Ended June 30, 1998 ($ in thousands) (Denominator) Amount
- -------------------------------------------------- ----------------- -------------------- ----------------
Net Income Per Common Share - Basic
Income available to common stockholders $ 22,693 23,084,986 $ 0.98
================
Effect of Dilutive Securities
Stock options 379,018
----------------- --------------------
Net Income Per Common Share - Diluted
Income available to common stockholders
plus assumed conversions $ 22,693 23,464,004 $ 0.97
================= ==================== ================
The prices of all options outstanding at June 30, 1998 were less than the
average market price of the common shares for the first six months of 1998,
therefore all options were included in the computation of diluted earnings per
share.
Income
(Numerator) Shares Per Share
For the Six Months Ended June 30, 1997 ($ in thousands) (Denominator) Amount
- -------------------------------------------------- ------------------ -------------------- ----------------
Net Income Per Common Share - Basic
Income available to common stockholders $ 11,841 20,133,317 $ 0.59
================
Effect of Dilutive Securities
Stock options 393,311
------------------ --------------------
Net Income Per Common Share - Diluted
Income available to common stockholders
plus assumed conversions $ 11,841 20,526,628 $ 0.58
================== ==================== ================
Options to purchase 112,350 shares of common stock at $14.25 per share,
17,850 shares of common stock at $14.31 per share and 7,875 shares of common
stock at $14.27 per share were outstanding during the first six months of 1997
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common shares.
The following is a reconciliation of basic earnings per share to diluted
earnings per share as calculated under SFAS No. 128 for the quarters ended June
30, 1998 and 1997, respectively:
Income
(Numerator) Shares Per Share
For the Quarter Ended June 30, 1998 ($ in thousands) (Denominator) Amount
- ------------------------------------------------- ----------------- -------------------- ------------------
Net Income Per Common Share - Basic
Income available to common stockholders $ 13,112 23,102,831 $ 0.57
==================
Effect of Dilutive Securities
Stock options 408,789
----------------- --------------------
Net Income Per Common Share - Diluted
Income available to common stockholders
plus assumed conversions $ 13,112 23,511,620 $ 0.56
================= ==================== ==================
The prices of all options outstanding at June 30, 1998 were less than the
average market price of the common shares for the second quarter of 1998,
therefore all options were included in the computation of diluted earnings per
share.
Income
(Numerator) Shares Per Share
For the Quarter Ended June 30, 1997 ($ in thousands) (Denominator) Amount
- ------------------------------------------------- ----------------- ------------------- -----------------
Net Income Per Common Share - Basic
Income available to common stockholders $ 7,371 20,424,696 $ 0.36
=================
Effect of Dilutive Securities
Stock options 393,139
----------------- -------------------
Net Income Per Common Share - Diluted
Income available to common stockholders
plus assumed conversions $ 7,371 20,817,835 $ 0.35
================= =================== =================
Options to purchase 112,350 shares of common stock at $14.25 per share,
17,850 shares of common stock at $14.31 per share and 7,875 shares of common
stock at $14.27 per share were outstanding during the second quarter of 1997 but
were not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares. The options, which will expire on October 30, 2005, November 8, 2006
and, November 12, 2006, respectively, were still outstanding at June 30, 1997.
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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
Resource Bancshares Mortgage Group, Inc. (the Company) (and the notes thereto)
and the other information included or incorporated by reference into the
Company's 1997 Annual Report on Form 10-K and the interim Consolidated Financial
Statements contained herein. Statements included in this discussion and analysis
(or elsewhere in this document) which are not statements of historical fact are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve a number of risks and
uncertainties, and that actual results could differ materially from those
indicated by such forward-looking statements. Important factors that could cause
actual results to differ materially from those indicated by such forward-looking
statements include, but are not limited to, the following which are described in
the Company's Joint Proxy Statement/Prospectus dated December 2, 1997: (i)
interest rate risks; (ii) changes in economic conditions; (iii) competition;
(iv) changes in regulations and related matters; (v) litigation
affecting the mortgage banking business; (vi) delinquency and default risks;
(vii) changes in the market for servicing rights, mortgage loans and lease
receivables; (viii) environmental matters; (ix) changes in the demand for
mortgage loans and (x) availability of funding sources and other risks and
uncertainties, discussed elsewhere herein, in the Company's Joint Proxy
Statement/Prospectus dated December 2, 1997 or from time to time in the
Company's periodic reports filed with the Securities and Exchange Commission.
The Company disclaims any obligation to update any forward-looking statements.
THE COMPANY
The Company is a diversified financial services company engaged
primarily in the business of mortgage banking, through the purchase (through a
nationwide network of correspondents and brokers), sale and servicing of
agency-eligible and subprime residential, single-family first-mortgage loans and
the purchase and sale of servicing rights associated with such loans. In
addition, the Company originates, sells and services small ticket commercial
equipment leases and originates, sells, underwrites for investors and services
commercial mortgage loans.
PRODUCTION
The Company purchases residential mortgage loans from its
correspondents and through its wholesale division and, until the sale of its
retail production platform in May 1998, originated mortgage loans through its
retail division. The Company also purchases and originates subprime mortgage
loans through a separate division. In addition, the Company originates
commercial mortgage loans and leases small ticket equipment items.
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A summary of production by source for the periods indicated is set
forth below:
($ in thousands) At or For the Six Months At or For the Quarter Ended
Ended June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Loan Production:
Correspondent Division $5,659,460 $3,554,180 $2,764,060 $1,948,454
Wholesale Division 1,483,489 848,169 748,629 459,264
Retail Division 264,059 313,873 76,178 185,973
---------- ---------- ---------- ----------
Total Agency-Eligible Loan Production 7,407,008 4,716,222 3,588,867 2,593,691
Subprime Division 252,132 133,758 146,146 87,001
Commercial Mortgage (for Investors
and Conduits) 362,622 170,107
Leases 33,543 20,703
---------- ---------- ---------- ----------
Total Production $8,055,305 $4,849,980 $3,925,823 $2,680,692
========== ========== ========== ==========
Initially, the Company was exclusively focused on purchasing
agency-eligible mortgage loans through its correspondents. In order to diversify
its sources of loan volume, the Company started a wholesale operation in 1994, a
retail operation in 1995 and a subprime division in 1997. Management anticipates
that its higher margin wholesale and subprime production will continue to
account for an increasing percentage of total mortgage loan production as those
divisions are expanded more rapidly than correspondent operations. In general,
management has targeted as a near-term goal a residential mortgage production
mix of approximately 70% correspondent, 25% wholesale and 5% subprime. In order
to further diversify its sources of production and revenue, the Company acquired
Resource Bancshares Corporation (RBC) in December 1997. Through RBC, the Company
originates small ticket commercial equipment leases and commercial mortgage
loans. These two new sources of production accounted for 4.9% of the Company's
total second quarter 1998 production.
A summary of key information relevant to industry residential mortgage
loan production activity is set forth below:
($ in thousands) At or For the Quarter Ended June 30,
------------------------------------
1998 1997
------------ ------------
U. S. 1-4 Family Mortgage Originations Statistics (1):
U. S. 1-4 Family Mortgage Originations $352,000,000 $225,000,000
Adjustable Rate Mortgage Market Share 14.00% 26.00%
Estimated Fixed Rate Mortgage Originations $303,000,000 $167,000,000
Company Information:
Agency-Eligible Loan Production $ 3,588,867 $ 2,593,691
Estimated Company Market Share 1.02% 1.15%
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's total agency-eligible residential mortgage production
increased by 38% to $3.6 billion for the second quarter of 1998 from $2.6
billion for the second quarter of 1997. The Company's 38% agency-eligible loan
production increase is a direct result of the nationwide 56% increase in 1-4
family mortgage originations for the second quarter of 1998 as compared to the
second quarter of 1997. The decrease in the Company's estimated market share of
U.S. mortgage originations from 1.15% for the second quarter of 1997 to 1.02%
for the second quarter of 1998 is primarily due to the Company's focus on
improved agency-eligible profitability and expansion of its higher margined
subprime, commercial mortgage and leasing production.
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Correspondent Loan Production
The Company purchases closed mortgage loans through its network of approved
correspondent lenders. Correspondents are primarily mortgage lenders, larger
mortgage brokers and smaller savings and loan associations and commercial banks,
which have met the Company's approval requirements.
The Company continues to emphasize correspondent loan production as its
basic business focus because of the lower fixed expenses and capital investment
required of the Company. That is, the Company has developed a cost structure
that is more directly variable with loan production because the correspondent
incurs most of the fixed costs of operating and maintaining branch offices and
of identifying and interacting directly with loan applicants.
A summary of key information relevant to the Company's correspondent
residential loan production activities is set forth below:
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Correspondent Loan Production $5,659,460 $3,554,180 $2,764,060 $1,948,454
Estimated Correspondent Market Share (1) 0.85% 0.88% 0.79% 0.87%
Approved Correspondents 901 920 901 920
(1) Source: Mortgage Bankers Association of America, Economics Department.
The 42% increase in the Company's correspondent loan production from $1.9
billion for the second quarter of 1997 to $2.8 billion for the second quarter of
1998 resulted primarily from the 56% increase in nationwide 1-4 family mortgage
loan production. The number of approved correspondent lenders at the end of the
second quarter of 1998 decreased slightly from that of the second quarter of
1997 as the Company focused on maintenance of those correspondent relationships
most compatible with the Company's overall business strategies and profitability
goals while continuing a disciplined and measured expansion through
establishment of new correspondent relationships.
Wholesale Loan Production
The wholesale division receives loan applications through brokers,
underwrites the loans, funds the loans at closing and prepares all closing
documentation. The wholesale branches also handle all shipping and follow-up
procedures on loans. Typically mortgage brokers are responsible for taking
applications and accumulating the information precedent to the Company's
processing of the loans. Although the establishment of wholesale branch offices
involves the incurrence of fixed expenses associated with maintaining those
offices, wholesale operations also provide for higher profit margins than
correspondent loan production. Additionally, each branch office can serve a
relatively sizable geographic area by establishing relationships with large
numbers of independent mortgage loan brokers who bear much of the cost of
identifying and interacting directly with loan applicants.
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13
A summary of key information relevant to the Company's wholesale production
activities is set forth below:
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
----------------------------- --------------------------
1998 1997 1998 1997
---------- -------- -------- --------
Wholesale Loan Production $1,483,489 $848,169 $748,629 $459,264
Estimated Wholesale Market Share (1) 0.22% 0.21% 0.21% 0.20%
Wholesale Division Operating Expenses $ 7,740 $ 4,964 $ 3,943 $ 2,730
Approved Brokers 3,085 2,758 3,085 2,758
Number of Branches 15 13 15 13
Number of Employees 153 136 153 136
(1) Source: Mortgage Bankers Association of America, Economics Department.
The 63% ($289 million) increase in wholesale loan production, from $459.3
million for the second quarter of 1997 to $748.6 million during the second
quarter of 1998, resulted from the 56% nationwide increase in loan production
and the Company's addition of two new wholesale branches between the second
quarter of 1997 and the second quarter of 1998. The increase in operating
expenses for the wholesale division was primarily a result of the increased
production. Wholesale division operating expenses as a percentage of production
decreased 10% from 59 basis points in the second quarter of 1997 to 53 basis
points in the second quarter of 1998.
Strategically, management anticipates focusing in the near-term on
significantly expanding its wholesale presence nationwide due to the relatively
higher margins attributable to this channel. Management anticipates that the
wholesale division will continue to account for an increasing percentage of the
Company's total loan production.
Retail Loan Production
During late 1997, the Company began reviewing the compatibility of the
retail operation with its primary business focus. On March 11, 1998, the Company
signed a definitive agreement with CFS Bank under which the Company sold the
retail production franchise of Intercounty Mortgage, Inc. to CFS Bank effective
May 1, 1998. Historically, the Company has focused on accumulation of loan
production through third-party correspondent and wholesale broker channels
because of the relatively lower fixed expenses and capital investments required,
among other reasons. Management believes the sale of the retail operation will
allow the Company to refocus on its core competency as a correspondent and
wholesale mortgage lender.
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14
A summary of key information relevant to the Company's retail production
activities is set forth below:
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
---------------------------- -------------------------
1998 1997 1998 1997
-------- -------- ------- --------
Retail Loan Production $264,059 $313,873 $76,178 $185,973
Estimated Retail Market Share (1) 0.04% 0.08% 0.02% 0.08%
Retail Division Operating Expenses $ 5,595 $ 8,263 $ 1,676 $ 4,170
Number of Branches 6 6
Number of Employees 206 206
(1) Source: Mortgage Bankers Association of America, Economics Department.
The primary cause of the variations observed above relate to the sale of
the retail production platform effective May 1, 1998.
Subprime Loan Production
In 1997, the Company began its initial expansion into subprime lending
activities. In connection therewith, the Company acquired Meritage Mortgage
Corporation (Meritage), a wholesale producer of subprime mortgage loans, in
April 1997. The Company's subprime division produced $252.1 million during the
first six months of 1998, 89% more than for the comparable prior year period.
Management anticipates continuing significant expansion of its subprime
division during the remainder of 1998 as subprime branches recently opened or
acquired in 1997 reach full year production levels, as additional wholesale
subprime branches are opened and as subprime operations are introduced and made
available through the Company's existing 15 branch agency-eligible wholesale
network. In the future, the Company plans to offer select subprime loan products
through the existing nationwide correspondent production channel.
A summary of key information relevant to the Company's subprime production
activities is set forth below:
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
------------------------- ------------------------
1998 1997 1998 1997
-------- -------- -------- -------
Subprime Loan Production $252,132 $133,758 $146,146 $87,001
Subprime Division Operating Expenses $ 10,575 $ 3,607 $ 5,952 $ 3,165
Number of Brokers 1,659 522 1,659 522
Number of Employees 220 116 220 116
Subprime loan production increased by 68% to $146.1 million for the
second quarter of 1998 as compared to $87.0 million during the second quarter of
1997.
Commercial Mortgage Production
In connection with its acquisition of RBC on December 31, 1997, the Company
acquired RBC's subsidiary, Laureate Realty. Laureate Realty originates
commercial mortgage loans for various
14
15
insurance companies and other investors. Commercial mortgage loans are generally
originated in the name of the investor and, in most instances, Laureate Realty
retains the right to service the loans under a servicing agreement.
A summary of key information relevant to the Company's commercial mortgage
production activities is set forth below:
($ in thousands) At or For the Six Months At or for the Quarter
Ended June 30, Ended June 30,
-------------------- ----------------------
1998 1997 1998 1997
-------- ---- -------- -----
Commercial Mortgage Production $362,622 N/A $170,107 N/A
Commercial Mortgage Division Operating N/A N/A
Expenses $ 4,806 $ 2,356
Number of Branches 11 N/A 11 N/A
Number of Employees 75 N/A 75 N/A
Lease Production
Through RBC's leasing division, Republic Leasing, acquired on December 31,
1997, the Company originates and services small-ticket equipment leases.
Substantially all of Republic Leasing's lease receivables are acquired from
independent brokers who operate throughout the continental United States.
A summary of key information relevant to the Company's lease production
activities is set forth below:
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
-------------------- ---------------------
1998 1997 1998 1997
------ ---- ------ ----
Lease Production $33,543 N/A $20,703 N/A
Lease Division Operating Expenses $ 2,460 N/A $ 1,240 N/A
Number of Brokers 210 N/A 210 N/A
Number of Employees 61 N/A 61 N/A
AGENCY-ELIGIBLE MORTGAGE SERVICING
Agency-eligible mortgage servicing includes collecting and remitting
mortgage loan payments, accounting for principal and interest, holding escrow
funds for payment of mortgage-related expenses such as taxes and insurance,
making advances to cover delinquent payments, making inspections as required of
the mortgaged premises, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults and
generally administering mortgage loans.
The Company is somewhat unique in that its strategy is to sell
substantially all of its produced agency-eligible mortgage servicing rights to
other approved servicers. In that regard, the Company believes it is the largest
national supplier of agency-eligible servicing rights to the still-consolidating
mega-servicers. Typically, the Company sells its agency-eligible mortgage
servicing rights within 90 to 180 days of purchase or origination. However, for
strategic reasons, the Company also strives to maintain a servicing portfolio
whose size is determined by reference to the Company's cash operating costs
which, in turn, are largely determined by the size of its loan production
platform. By continuing to focus on the low-cost correspondent and wholesale
production channels, the Company is able to
15
16
minimize the cash operating costs of its loan production platform and thus the
strategically required size of its agency-eligible loan servicing operation.
A summary of key information relevant to the Company's loan servicing
activities is set forth below:
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
--------------------------------- --------------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
Underlying Unpaid Principal Balances:
Beginning Balance* $ 7,125,222 $ 6,670,267 $ 7,980,181 $ 7,420,783
Loan Production (net of servicing-
released production) 7,831,922 4,809,790 3,589,235 2,482,601
Net Change in Work-in-Process (67,610) (236,395) 337,045 24,765
Bulk Acquisitions 122,467 774,097 122,467 168,336
Sales of Servicing (4,804,235) (4,301,094) (2,269,219) (2,589,818)
Paid-In-Full Loans (650,891) (285,580) (284,255) (152,684)
Amortization, Curtailments and Other, net (187,549) (192,020) (106,128) (114,918)
------------ ----------- ------------ -----------
Ending Balance* $ 9,369,326 $ 7,239,065 $ 9,369,326 $ 7,239,065
Subservicing Ending Balance 2,624,893 2,368,709 2,624,893 2,368,709
------------ ----------- ------------ -----------
Total Underlying Unpaid Principal Balances $ 11,994,219 $ 9,607,774 $ 11,994,219 $ 9,607,774
============ =========== ============ ===========
Total Company Servicing Fees $ 19,715 $ 15,338 $ 10,412 $ 7,803
Net Interest Income from Owned Leases 1,982 1,036
------------ ----------- ------------ -----------
21,697 15,338 11,448 7,803
------------ ----------- ------------ -----------
Total Company Operating Expenses 79,956 51,162 41,041 28,323
Total Company Amortization and
Depreciation (14,886) (10,453) (7,902) (5,597)
------------ ----------- ------------ -----------
Total Company Cash Operating Expenses $ 65,070 $ 40,709 $ 33,139 $ 22,726
------------ ----------- ------------ -----------
Coverage Ratio 33% 38% 35% 34%
============ =========== ============ ===========
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and therefore exclude the subservicing portfolio.
The Company's coverage ratio for the first half of 1998 at 33% was lower
than the Company's target level of between 50% and 80%. The Company's expansion
into the relatively high cost subprime production channel and diversification
into the commercial mortgage and small ticket equipment leasing businesses,
together with normal inflationary pressures on costs, have combined to increase
cash operating costs at a 60% pace for the first six months of 1998 over that
for the first six months of 1997. Although the servicing portfolio and servicing
fees have increased during the same period, such increases have not kept pace
with the rate of growth in cash operating expenses. Strategically, and in the
opinion of the Company's management, market prices for servicing rights have
been attractive throughout this period. Accordingly, management has consciously
determined on a risk versus return basis to allow this ratio to move below its
stated goals. Opportunistically and as market conditions permit, management
would expect to bring this ratio back in line with the stated objective.
Effective May 1, 1998, the Company sold its retail production franchise, which
accounted for $5.6 million of the Company's cash operating expenses for the
first half of 1998. Without retail division operating expenses for the first six
months of 1998, the Company's coverage ratio would have been 36%.
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A summary of agency-eligible servicing statistics follows:
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- -------------
Average Underlying Unpaid Principal Balances
(including subservicing) $ 10,888,995 $ 9,067,404 $ 11,451,709 $ 9,248,663
Weighted Average Note Rate* 7.44% 7.84% 7.44% 7.84%
Weighted Average Servicing Fee* 0.39% 0.40% 0.39% 0.40%
Delinquency (30+ days) Including
Bankruptcies and Foreclosures* 2.29% 3.39% 2.29% 3.39%
Number of Servicing Division Employees 160 122 160 122
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and therefore exclude the subservicing portfolio.
The $2.2 billion, or 24%, increase in the average underlying unpaid
principal balance of agency-eligible mortgage loans being serviced for the
second quarter of 1998 as compared to the second quarter of 1997 is primarily
related to the Company's decision to retain a larger percentage of its
production during the first half of 1998. Additionally, the Company's increased
loan production volumes during the latter half of 1997 and the first half of
1998 compared to the same periods of the prior years contributed to the
increase. Since the Company generally sells servicing rights related to the
agency-eligible loans it produces within 90 to 180 days of purchase or
origination, increased production volumes generally result in a higher volume of
mortgage servicing rights held in inventory pending sale.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998,
COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Summary by Operating Division
Following is a summary of the allocated revenues and expenses for each of
the Company's operating divisions for the six months ended June 30, 1998 and
1997, respectively:
Residential
---------------------------------
($ in thousands) Mortgage Production
--------------------- Agency -
Agency- Eligible Commercial
For the Six Months Ended June 30, 1998* Eligible Subprime Servicing Mortgage Leasing Other Consolidated
- ----------------------------------------- -------- -------- --------- ---------- ------- ------- ------------
Net interest income $ 3,869 $ 3,413 $ 260 $ 1,982 $ 227 $ 9,751
Net gain on sale of mortgage loans 66,765 13,382 3,482 83,629
Gain on sale of mortgage servicing rights $ 1,080 1,080
Servicing fees 17,230 1,812 509 164 19,715
Other income 1,695 137 141 (2) 425 501 2,897
-------- -------- -------- ------- ------- ------- ---------
Total revenues 72,329 16,932 18,451 5,552 2,916 892 117,072
-------- -------- -------- ------- ------- ------- ---------
Salary and employee benefits 28,031 7,589 1,648 2,920 1,030 344 41,562
Occupancy expense 3,692 871 218 389 166 95 5,431
Amortization of mortgage servicing rights 11,649 654 12,303
General and administrative expenses 12,945 2,115 3,117 843 1,264 376 20,660
-------- -------- -------- ------- ------- ------- ---------
Total expenses 44,668 10,575 16,632 4,806 2,460 815 79,956
-------- -------- -------- ------- ------- ------- ---------
Income before income taxes 27,661 6,357 1,819 746 456 77 37,116
Income tax expense (10,940) (2,249) (710) (282) (188) (54) (14,423)
-------- -------- -------- ------- ------- ------- ---------
Net income $ 16,721 $ 4,108 $ 1,109 $ 464 $ 268 $ 23 $ 22,693
======== ======== ======== ======= ======= ======= =========
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Residential
---------------------------------
($ in thousands) Mortgage Production
--------------------- Agency -
Agency- Eligible Commercial
For the Six Months Ended June 30, 1997* Eligible Subprime Servicing Mortgage Leasing Other Consolidated
- ----------------------------------------- -------- -------- --------- ---------- ------- ------- ------------
Net interest income $ 9,651 $ 9,651
Net gain on sale of mortgage loans 37,468 $ 4,782 42,250
Gain on sale of mortgage servicing rights $ 2,711 2,711
Servicing fees 15,338 15,338
Other income 426 426
-------- ------- -------- --- --- --- ------- --------
Total revenues 47,545 4,782 18,049 70,376
-------- ------- -------- --- --- --- ------- --------
Salary and employee benefits 23,174 2,587 1,383 27,144
Occupancy expense 3,050 236 156 3,442
Amortization of mortgage servicing rights 8,833 8,833
General and administrative expenses 8,274 706 2,763 11,743
-------- ------- -------- --- --- --- ------- --------
Total expenses 34,498 3,529 13,135 51,162
-------- ------- -------- --- --- --- ------- --------
Income before income taxes 13,047 1,253 4,914 19,214
Income tax expense (5,008) (485) (1,880) (7,373)
-------- ------- -------- --- --- --- ------- --------
Net income $ 8,039 $ 768 $ 3,034 $ 11,841
======== ======= ======== === === === ======= ========
* Revenues and expenses have been recorded on a direct basis to the extent
possible. Other than direct charges, management believes that revenues and
expenses have been allocated to the respective divisions on a reasonable
basis.
Agency-Eligible Mortgage Operations
Following is a comparison of the revenues and expenses allocated to the
Company's agency-eligible mortgage production operations.
For the Six Months Ended June 30,
---------------------------------
($ in thousands) 1998 1997
---------- ----------
Net interest income $ 3,869 $ 9,651
Net gain on sale of mortgage loans 66,765 37,468
Other income 1,695 426
---------- ----------
Total production revenue 72,329 47,545
---------- ----------
Salary and employee benefits 28,031 23,174
Occupancy expense 3,692 3,050
General and administrative expenses 12,945 8,274
---------- ----------
Total production expenses 44,668 34,498
---------- ----------
Net pre-tax production margin $ 27,661 $ 13,047
---------- ----------
Production $7,407,008 $4,716,222
Pool delivery 7,171,373 4,499,563
Total production revenue to pool delivery 101 bps 106 bps
Total production expenses to production 60 bps 73 bps
---------- ----------
Net pre-tax production margin 41 bps 33 bps
========== ==========
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Summary
The production revenue to pool delivery ratio declined five basis points,
or 5%, for the first six months of 1998 as compared to the first six months of
1997. Generally, net gain on sale of mortgage loans (93 basis points for 1998
versus 83 basis points for 1997) improved due to better overall execution into
the secondary markets. However, net interest income declined and offset this
improvement due to the relatively flatter yield curve environment. The
production expenses to production ratio decreased 13 basis points, or 18%, for
the first six months of 1998 as compared to the first six months of 1997.
Generally, this relates to better leverage of fixed operating expenses in the
higher volume production environment for the first six months of 1998 versus the
comparable period of 1997. As a consequence of the foregoing, the Company's net
agency-eligible pre-tax production margin improved 8 basis points, or 24%, to 41
basis points while in absolute dollars it increased $14.6 million, or 112%.
Net Interest Income
The following table analyzes net interest income allocated to the Company's
agency-eligible mortgage production activities in terms of rate and volume
variances of the interest spread (the difference between interest rates earned
on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds).
($ in thousands) Variance
Average Volume Average Rate Interest Attributable to
- ----------------------------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997 Variance Rate Volume
- ----------------------------------------- ----------------------------------------------------
Interest Income
Mortgages Held for Sale and
$1,178,375 $ 810,759 6.89% 7.82% Mortgage-Backed Securities $ 40,592 $ 31,688 $ 8,904 ($ 5,464) $ 14,368
- ----------------------------------------- ----------------------------------------------------
Interest Expense
$ 464,620 $ 401,637 4.62% 4.78% Warehouse Line $ 10,643 $ 9,524 1,119 (375) 1,494
681,723 380,918 5.88% 5.37% Gestation Line 19,869 10,142 9,727 1,719 8,008
94,282 6.79% Servicing Secured Line 3,174 3,174 3,174
33,067 43,722 5.89% 6.33% Servicing Receivable Line 966 1,372 (406) (72) (334)
6,731 3,010 7.88% 8.22% Other Borrowings 263 124 139 (14) 153
Facility Fees & Other Charges 1,808 875 933 933
- ----------------------------------------- ----------------------------------------------------
$1,280,423 $ 829,287 5.78% 5.36% Total Interest Expense $ 36,723 $ 22,037 $ 14,686 $ 4,432 $ 10,254
- ----------------------------------------- ----------------------------------------------------
1.11% 2.46% Net Interest Income $ 3,869 $ 9,651 ($ 5,782) ($ 9,896) $ 4,114
================== ====================================================
Net interest income from agency-eligible product decreased 60% to $3.9
million for the first six months of 1998 compared to $9.7 million for the first
six months of 1997. The 135 basis point decrease in the interest-rate spread was
primarily the result of the narrower spreads between long and short-term rates
in the first six months of 1998 compared to the first six months of 1997. The
Company's mortgages and mortgage-backed securities are generally sold and
replaced within 30 to 35 days. Accordingly, the Company generally borrows at
rates based upon short-term indices, while its asset yields are primarily based
upon long-term mortgage rates.
Net Gain on Sale of Agency-eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for the
periods indicated follows:
19
20
($ in thousands) For the Six Months Ended June 30,
---------------------------
1998 1997
---------- ----------
Gross proceeds on sales of mortgage loans $7,239,752 $4,589,379
Initial unadjusted acquisition cost of mortgage loans sold, net of
hedge results 7,237,275 4,585,229
---------- ----------
Unadjusted gain on sale of mortgage loans 2,477 4,150
Loan origination and correspondent program administrative fees 19,836 14,136
---------- ----------
Unadjusted aggregate margin 22,313 18,286
Acquisition basis allocated to mortgage servicing rights (SFAS No 125) 43,856 18,120
Net change in deferred administrative fees 596 1,062
---------- ----------
Net gain on sale of agency-eligible mortgage loans $ 66,765 $ 37,468
========== ==========
The Company sold agency-eligible loans during the first six months of 1998
with an aggregate unpaid principal balance of $7.2 billion compared to sales of
$4.6 billion for the first six months of 1997. The amount of proceeds received
on sales of mortgage loans exceeded the initial unadjusted acquisition cost of
the loans sold by $2.5 million (3 basis points) for the first half of 1998 as
compared to $4.2 million (9 basis points) for the comparable period of the prior
year. The Company received loan origination and correspondent program
administrative fees of $19.8 million (27 basis points) on these loans during the
first six months of 1998 and $14.1 million (31 basis points) during the first
six months of 1997. The Company allocated $43.9 million (61 basis points) to
basis in mortgage servicing rights for loans sold in the first six months of
1998 as compared to $18.1 million (39 basis points) during the first six months
of 1997 in accordance with Statement of Financial Accounting Standards (SFAS)
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". Consequently, net gain on sale of
agency-eligible mortgage loans increased to $66.8 million for the first six
months of 1998 versus $37.5 million for the first six months of 1997. Overall,
the increase is attributed to better execution into the secondary markets.
Subprime Mortgage Operations
Following is an analysis of the revenues and expenses allocated to the
Company's subprime mortgage production operations.
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21
For the Six Months Ended June 30,
---------------------------------
($ in thousands) 1998 1997
-------- --------
Net interest income $ 3,413
Net gain on sale of mortgage loans 13,382 $ 4,782
Other income 137
-------- --------
Total production revenue 16,932 4,782
-------- --------
Salary and employee benefits 7,589 2,587
Occupancy expense 871 236
General and administrative expenses 2,115 706
-------- --------
Total production expenses 10,575 3,529
-------- --------
Net pre-tax production margin $ 6,357 $ 1,253
======== ========
Production $252,132 $133,758
Whole loan sales and securitizations 214,971 114,427
Total production revenue to whole loan sales and securitizations 788 bps 418 bps
Total production expenses to production 419 bps 264 bps
-------- --------
Net pre-tax production margin 369 bps 154 bps
======== ========
Summary
During the first six months of 1998, the Company produced $252.1 million of
subprime loans. The Company sold approximately $89.7 million (36%) of its first
six months 1998 production in whole loan transactions and delivered $125.2
million into the secondary markets through securitization transactions. Overall,
the Company operated during the first six months of 1998 at a 3.69% pre-tax
subprime production margin. At June 30, 1998, the Company had unsold subprime
mortgage loans of $80.2 million. During the first six months of 1997, the
Company's subprime division was in its initial startup phase and $46.8 million
of the subprime mortgage loan production for that period was purchased in bulk
from Meritage prior to the Company's acquisition of Meritage.
Net Interest Income
($ in thousands) Variance
Average Volume Average Rate Interest Attributable to
- ----------------------------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997 Variance Rate Volume
- ----------------------------------------- ----------------------------------------------------
Interest Income
Mortgages Held for Sale and
$ 111,877 9.72% Residual Certificates $ 5,439 $ 5,439 $ 5,439
- ----------------------------------------- ----------------------------------------------------
Interest Expense
$ 69,590 5.87% Total Interest Expense $ 2,026 $ 2,026 $ 2,026
- ----------------------------------------- ----------------------------------------------------
3.85% Net Interest Income $ 3,413 $ 3,413 $ 3,413
================== ====================================================
Net interest income on subprime loans and accretion income on residuals was
$3.4 million and the interest rate spread was 385 basis points, for the first
six months of 1998. This was primarily the result of the larger interest rate
spreads possible for subprime product.
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22
Net Gain on Securitization and Sale of Subprime Mortgage Loans
A reconciliation of the gain on securitization of subprime mortgage loans
for the periods indicated follows:
($ in thousands) For the Six Months Ended June 30,
---------------------------------
1998 1997
--------- -------
Gross proceeds on securitization of subprime mortgage loans $ 124,237
Initial acquisition cost of subprime mortgage loans securitized, net
of fees 126,975
--------- -------
Unadjusted loss on securitization of subprime mortgage loans (2,738)
Initial capitalization of residual certificates 9,262
--------- -------
Net gain on securitization of subprime mortgage loans $ 6,524
========= =======
Residual certificates arising from subprime securitizations are classified
as trading securities (as defined in SFAS No. 115), and changes in the fair
value of such certificates are recorded as adjustments to income in the period
of change. The Company assesses the fair value of the residual certificates
quarterly, based on an independent third party valuation. This valuation is
based on the discounted cash flows expected to be available to the holder of the
residual certificate. Significant assumptions used for purposes of the June 30,
1998 valuations are set forth below:
Discount Rate 13.00%
Prepayment Speeds
Fixed rate mortgages 4.8% to 28% constant prepayment rate
Adjustable rate mortgages 4.8% to 28% constant prepayment rate
Ramp to Full Prepayment Speeds Ramping period based on prepayment penalty
period and adjustable rate mortgage first
reset dates.
Constant Default Rate 3%
Loss Severity 25%
The assumptions above are estimated based on current conditions for similar
instruments that are subject to prepayment and credit risks. Other factors
evaluated in the determination of fair value include credit and collateral
quality of the underlying loans, current economic conditions and various fees
and costs (such as prepayment penalties) associated with ownership of the
residual certificate. Although the Company believes that the fair values of its
residual certificates are reasonable given current market conditions, the
assumptions used are estimates and actual experience may vary from these
estimates. Differences in the actual prepayment speed and loss experience from
the assumptions used, could have a significant effect on the fair value of the
residual certificates.
The Company also sold subprime mortgage loans on a whole loan basis during
the first six months of 1998. Whole loans are generally sold without recourse to
third parties with the gain or loss being calculated based on the difference
between the carrying value of the loans sold and the gross proceeds received
from the purchaser. No interest in these loans is retained by the Company.
A reconciliation of the gain on subprime mortgage whole loan sales for the
periods indicated follows:
22
23
($ in thousands) For the Six Months Ended June 30,
---------------------------------
1998 1997
------- --------
Gross proceeds on whole loan sales of subprime mortgage loans $96,577 $119,209
Initial acquisition cost of subprime mortgage loans sold, net of fees 89,719 114,427
------- --------
Net gain on whole loan sales of subprime mortgage loans $ 6,858 $ 4,782
======= ========
As summarized in the following analysis, the recorded residual values imply
that the Company's securitizations are valued at 1.75 times the implied excess
yield at June 30, 1998, as compared to the 1.73 multiple implied at March 31,
1998. The table below represents balances as of June 30, 1998 unless otherwise
noted.
($ in thousands) Securitizations
---------------------------------------
1997-1 1997-2 1998-1 Subtotal Other Total
---------- ----------- ------------ ------------ ----------- ------------
Residual Certificates $ 9,034 $ 9,383 $ 7,075 $ 25,492 $ 4,950 $ 30,442
Bonds $ 75,901 * $ 93,721 * $ 99,795 * $ 269,417 $ 56,009 ** $ 325,426
---------- ----------- ------------ ------------ ----------- ------------
Subtotal $ 84,935 $ 103,104 $ 106,870 $ 294,909 $ 60,959 $ 355,868
Unpaid Principal Balance $ 79,504 * $ 97,188 * $ 99,944 * $ 276,636 $ 58,253 ** $ 334,889
---------- ----------- ------------ ------------ ----------- ------------
Implied Price 106.83 106.09 106.93 106.61 104.65 106.26
---------- ----------- ------------ ------------ ----------- ------------
* Amounts were based upon trustee statements dated July 27,1998 that covered
the period ended June 30,1998.
** Amounts were based upon trustee statements dated June 30, 1998 that covered
the period ended May 31, 1998.
Collateral Yield 10.38 9.98 9.71 10.00 11.08 10.36
Collateral Equivalent
Securitization Costs (0.73) (0.66) (0.64) (0.67) (0.50) (0.64)
Collateral Equivalent
Bond Rate (5.63) (5.74) (5.83) (5.74) (7.16) (6.15)
---------- ----------- ------------ ------------ ----------- ------------
4.02 3.58 3.24 3.59 3.42 3.57
---------- ----------- ------------ ------------ ----------- ------------
Implied Premium Above Par 6.83 6.09 6.93 6.61 4.65 6.26
Implied Collateral
Equivalent Excess Yield 4.02 3.58 3.24 3.59 3.42 3.57
---------- ----------- ------------ ------------ ----------- ------------
Multiple 1.70 x 1.70 x 2.14 x 1.84 x 1.36 x 1.75 x
---------- ----------- ------------ ------------ ----------- ------------
23
24
Agency-Eligible Mortgage Servicing
Following is a summary of the revenues and expenses allocated to the
Company's agency-eligible mortgage servicing operations for the six months ended
June 30, 1998 and 1997:
For the Six Months Ended June 30,
---------------------------------
($ in thousands) 1998 1997
---------- ----------
Servicing fees $ 17,230 $ 15,338
Other income 141
---------- ----------
Servicing revenues 17,371 15,338
---------- ----------
Salary and employee benefits 1,648 1,383
Occupancy expense 218 156
Amortization of mortgage servicing rights 11,649 8,833
General and administrative expenses 3,117 2,763
---------- ----------
Total loan servicing expenses 16,632 13,135
---------- ----------
Net pre-tax servicing margin 739 2,203
Gain on sale of mortgage servicing rights 1,080 2,711
---------- ----------
Net pre-tax servicing contribution $ 1,819 $ 4,914
========== ==========
Average owned servicing portfolio $8,519,521 $7,307,094
Servicing sold 4,804,235 3,784,210
Net pre-tax servicing margin to average servicing portfolio 2 bps 6 bps
Gain on sale of servicing to servicing sold 2 bps 7 bps
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio declined four basis points primarily due to relatively larger
increases in amortization and general and administrative expenses. The increased
amortization expense is attributable to generally higher levels of mortgage
servicing rights held for sale and the generally higher amortization expenses
required in the current higher prepay speed environment.
Overall, the servicing division contributed $1.8 million to the first six
months of 1998 pre-tax net income, a $3.1 million, or 63%, decrease from the
$4.9 million contribution for the first six months of 1997.
Loan servicing fees were $17.2 million for the first six months of 1998,
compared to $15.3 million for the first six months of 1997, an increase of 12%.
This increase is primarily related to an increase in the average aggregate
underlying unpaid principal balance of mortgage loans serviced to $8.5 billion
during the first six months of 1998 from $7.3 billion during the first six
months of 1997, an increase of 17%. Similarly, amortization of mortgage
servicing rights also increased to $11.6 million during the first six months of
1998 from $8.8 million during the first six months of 1997, an increase of 32%.
The increase in amortization is primarily attributable to the growth in the
average balance of the mortgage loans serviced and the current generally higher
prepay speed environment.
Included in loan servicing fees for the first six months of 1998 and 1997
are subservicing fees received by the Company of $422 thousand and $227
thousand, respectively. The subservicing fees are associated with temporary
subservicing agreements between the Company and purchasers of mortgage servicing
rights.
24
25
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
($ in thousands) For the Six Months Ended June 30,
---------------------------------
1998 1997
----------- -----------
Underlying unpaid principal balances of mortgage loans on
which servicing rights were sold during the period $ 4,804,235 $ 3,784,210
=========== ===========
Gross proceeds from sales of mortgage servicing rights $ 110,661 $ 84,077
Initial acquisition basis, net of amortization and hedge results 85,940 65,945
----------- -----------
Unadjusted gain on sale of mortgage servicing rights 24,721 18,132
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 125) (23,641) (15,421)
----------- -----------
Gain on sale of mortgage servicing rights $ 1,080 $ 2,711
=========== ===========
During the first six months of 1998, the Company completed 13 sales of
mortgage servicing rights representing $4.8 billion of underlying unpaid
principal mortgage loan balances. This compares to 18 sales of mortgage
servicing rights representing $3.8 billion of underlying unpaid principal
mortgage loan balances in the first six months of 1997. The unadjusted gain on
the sale of mortgage servicing rights was $24.7 million (51 basis points) for
the first six months of 1998, up from $18.1 million (48 basis points) for the
first six months of 1997. The Company reduced this unadjusted gain by $23.6
million in the first half of 1998, versus a $15.4 million reduction during the
first six months of 1997, in accordance with SFAS No. 125.
Commercial Mortgage Operations
Following is a summary of the revenues and expenses allocated to the
Company's commercial mortgage production operations.
25
26
For the Six Months ended June 30,
-----------------------------------------
($ in thousands) 1998 1997
---------------- ---------------
Net interest income $ 260
Net gain on sale of mortgage loans 3,482
Other income (2)
---------------- ---------------
Total production revenue 3,740
---------------- ---------------
Salary and employee benefits 2,920
Occupancy expense 389
General and administrative expenses 843
---------------- ---------------
Total production expenses 4,152
---------------- ---------------
Net pre-tax production margin (412)
---------------- ---------------
Servicing fees 1,812
Amortization of mortgage servicing rights 654
---------------- ---------------
Net pre-tax servicing margin 1,158
---------------- ---------------
Pre-tax income $ 746
---------------- ---------------
Production $ 362,622
Whole loan sales 362,622
Average commercial mortgage servicing portfolio $ 2,862,729
Total production revenue to whole loan sales 103 bps
Total production expenses to production 114 bps
---------------- ---------------
Net pre-tax production margin (11 bps)
---------------- ---------------
Servicing fees to average commercial mortgage servicing portfolio 13 bps
Amortization of mortgage servicing rights to average commercial
mortgage servicing portfolio 5 bps
---------------- ---------------
Net pre-tax servicing margin to average servicing portfolio 8 bps
---------------- ---------------
Laureate Realty originates commercial mortgage loans for various insurance
companies and other investors, primarily in Alabama, Florida, Indiana, North
Carolina, South Carolina, Tennessee and Virginia. Substantially all loans
originated by Laureate Realty have been originated in the name of the investor,
and in most cases, Laureate Realty has retained the right to service the loans
under a servicing agreement with the investor. Most commercial mortgage loan
servicing agreements are short-term, and retention of the servicing contract is
dependent on maintaining the investor relationship.
Net Gain on Sale of Commercial Mortgage Loans
A reconciliation of gain on sale of commercial mortgage loans for the
periods indicated follows:
26
27
($ in thousands) For the Six Months Ended June 30,
-------------------------------------------
1998 1997
---------------- ----------------
Gross proceeds on sales of commercial mortgage loans $ 362,622
Initial unadjusted acquisition cost of commercial mortgage loans
sold 362,622
---------------- ----------------
Unadjusted gain on sale of commercial mortgage loans
Commercial mortgage and origination fees 2,981
---------------- ----------------
Unadjusted aggregate margin 2,981
Initial acquisition cost allocated to basis in commercial
mortgage servicing rights (SFAS No. 125) 501
---------------- ----------------
Net gain on sale of commercial mortgage loans $ 3,482
================ ================
During the first six months of 1998, the commercial mortgage division
originated and sold approximately $363 million in commercial mortgage loans.
Commercial mortgage fees on these loans were $3.0 million or 82 basis points.
Origination fees are generally between 50 and 100 basis points on the loan
amount. In addition the commercial mortgage division allocated $500 thousand,
or 14 basis points, to basis in servicing rights retained on commercial
mortgage loans produced during the period.
Leasing Operations
Following is a summary of the revenues and expenses allocated to the
Company's small ticket equipment leasing operations for the periods indicated:
For the Six Months Ended June 30,
-------------------------------------------------
($ in thousands) 1998 1997
-------------------- --------------------
Net interest income $ 1,982
Other income 425
-------------------- --------------------
Leasing production revenue 2,407
-------------------- --------------------
Salary and employee benefits 1,030
Occupancy expense 166
General and administrative expenses 1,264
-------------------- --------------------
Total lease operating expenses 2,460
-------------------- --------------------
Net pre-tax leasing production margin (53)
-------------------- --------------------
Servicing fees 509
-------------------- --------------------
Net pre-tax leasing margin $ 456
-------------------- --------------------
Average owned leasing portfolio $ 59,129
Average serviced leasing portfolio 62,595
==================== ====================
Average leasing portfolio $ 121,724
==================== ====================
Leasing production revenue to average owned portfolio 814 bps
Leasing operating expenses to average owned portfolio 832 bps
==================== ====================
Net pre-tax leasing production margin (18 bps)
==================== ====================
Servicing fees to average serviced leasing portfolio 163 bps
27
28
Substantially all of the Company's lease receivables are acquired from
independent brokers who operate throughout the continental United States and
referrals from independent banks. At June 30, 1998 the Company's managed lease
servicing portfolio was $125.0 million. Of this managed lease portfolio, $70.6
million was owned and $54.4 million was serviced for investors. The negative net
pre-tax leasing margin is primarily attributable to the size of the Company's
owned leasing portfolio. As this owned leasing portfolio is expanded,
management expects the net pre-tax leasing margin to improve.
Net Interest Income
Net interest income for the first six months of 1998 was $2.0 million. This
is an annualized net interest margin of 3.74% based upon average lease
receivables owned of $60.0 million and average debt outstanding of $34.4
million.
28
29
The options, which will expire on October 30, 2005, November 8, 2006 and
November 12, 2006, respectively, were still outstanding at June 30, 1997.
RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 1998, COMPARED TO QUARTER ENDED
JUNE 30, 1997
Summary by Operating Division
Following is a summary of the allocated revenues and expenses for each of
the Company's operating divisions for the quarters ended June 30, 1998 and 1997,
respectively:
Residential
--------------------------------
($ in thousands) Mortgage Production
--------------------- Agency-
Agency- Eligible Commercial
For the Quarter Ended June 30, 1998* Eligible Subprime Servicing Mortgage Leasing Other Consolidated
- ----------------------------------------- -------- -------- --------- ---------- ------- ----- ------------
Net interest income $ 2,133 $ 2,066 $ 131 $ 1,036 $ 93 $ 5,459
Net gain on sale of mortgage loans 35,724 7,211 1,520 44,455
Gain on sale of mortgage servicing rights $ 452 452
Servicing fees 9,110 897 241 164 10,.412
Other income 1,608 (258) 48 (4) 206 323 1,923
-------- ------- ------- ------- ------- ----- --------
Total revenues 39,465 9,019 9,610 2,544 1,483 580 62,701
-------- ------- ------- ------- ------- ----- --------
Salary and employee benefits 13,690 4,290 820 1,399 477 172 20,848
Occupancy expense 1,720 499 98 203 86 45 2,651
Amortization of mortgage servicing rights 6,347 327 6,674
General and administrative expenses 6,803 1,163 1,597 427 677 201 10,868
-------- ------- ------- ------- ------- ----- --------
Total expenses 22,213 5,952 8,862 2,356 1,240 418 41,041
-------- ------- ------- ------- ------- ----- --------
Income before income taxes 17,252 3,067 748 188 243 162 21,660
Income tax expense (6,983) (998) (303) (70) (107) (87) (8,548)
-------- ------- ------- ------- ------- ----- --------
Net income $ 10,269 $ 2,069 $ 445 $ 118 $ 136 $ 75 $ 13,112
======== ======= ======= ======= ======= ===== ========
29
30
Residential
--------------------------------
($ in thousands) Mortgage Production
--------------------- Agency-
Agency- Eligible Commercial
For the Quarter Ended June 30, 1997* Eligible Subprime Servicing Mortgage Leasing Other Consolidated
- ------------------------------------ -------- -------- --------- ---------- ------- ----- ------------
Net interest income $ 5,916 $ 5,916
Net gain on sale of mortgage loans 20,441 $ 4,782 25,223
Gain on sale of mortgage servicing rights $ 1,220 1,220
Servicing fees 7,803 7,803
Other income 157 157
-------- ------- ------- --- --------- ---- --------
Total revenues 26,514 4,782 9,023 40,319
-------- ------- ------- --- --------- ---- --------
Salary and employee benefits 11,935 2,263 682 14,880
Occupancy expense 1,576 196 78 1,850
Amortization of mortgage servicing rights 4,725 4,725
General and administrative expenses 4,619 629 1,620 6,868
-------- ------- ------- --- --------- ---- --------
Total expenses 18,130 3,088 7,105 28,323
-------- ------- ------- --- --------- ---- --------
Income before income taxes 8,384 1,694 1,918 11,996
Income tax expense (3,233) (653) (739) (4,625)
-------- ------- ------- --- --------- ---- --------
Net income $ 5,151 $ 1,041 $ 1,179 7,371
======== ======= ======= === ========= ==== ========
* Revenues and expenses have been recorded on a direct basis to the extent
possible. Other than direct charges, management believes that revenues and
expenses have been allocated to the respective divisions on a reasonable
basis.
Agency-Eligible Mortgage Operations
Following is a comparison of the revenues and expenses allocated to the
Company's agency-eligible mortgage production operations.
For the Quarter Ended June 30,
------------------------------
($ in thousands) 1998 1997
---------- ----------
Net interest income $ 2,133 $ 5,916
Net gain on sale of mortgage loans 35,724 20,441
Other income 1,608 157
---------- ----------
Total production revenue 39,465 26,514
---------- ----------
Salary and employee benefits 13,690 11,935
Occupancy expense 1,720 1,576
General and administrative expenses 6,803 4,619
---------- ----------
Total production expenses 22,213 18,130
---------- ----------
Net pre-tax production margin $ 17,252 $ 8,384
---------- ----------
Production $3,588,867 $2,593,691
Pool delivery 3,851,991 2,468,038
Total production revenue to pool delivery 102 bps 107 bps
Total production expenses to production 62 bps 70 bps
---------- ----------
Net pre-tax production margin 40 bps 37 bps
========== ==========
30
31
Summary
The production revenue to pool delivery ratio declined five basis
points, or 5%, for the second quarter of 1998 as compared to the second quarter
of 1997. Generally, net gain on sale of mortgage loans (93 basis points for 1998
versus 83 basis points for 1997) improved due to better overall execution into
the secondary markets. However, net interest income declined and offset this
improvement due to the relatively flatter yield curve environment. The
production expenses to production ratio decreased 8 basis points, or 11%, for
the second quarter of 1998 as compared to the second quarter of 1997. Generally,
this relates to better leverage of fixed operating expenses in the higher volume
production environment for the second quarter of 1998 versus the comparable
period of 1997. As a consequence of the foregoing, the Company's net
agency-eligible pre-tax production margin improved 3 basis points, or 8%, to 40
basis points while in absolute dollars it increased $8.9 million, or 106%.
Net Interest Income
The following table analyzes net interest income allocated to the Company's
agency-eligible mortgage production activities in terms of rate and volume
variances of the interest spread (the difference between interest rates earned
on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds).
($ in thousands) Variance
Average Volume Average Rate Interest Attributable to
- ----------------------------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997 Variance Rate Volume
- ----------------------------------------- ----------------------------------------------------
Interest Income
Mortgages Held for Sale and
$1,217,037 $ 898,274 7.05% 8.12% Mortgage-Backed Securities $ 21,461 $ 18,233 $ 3,228 ($ 3,242) $ 6,470
--------------------------------------- ----------------------------------------------------
Interest Expense
$ 446,797 $ 427,889 4.67% 4.94% Warehouse Line $ 5,200 $ 5,267 (67) (300) 233
738,672 431,384 5.91% 5.41% Gestation Line 10,884 5,817 5,067 923 4,144
98,038 6.89% Servicing Secured Line 1,684 1,684 1,684
30,066 48,579 5.86% 6.47% Servicing Receivable Line 439 784 (345) (46) (299)
6,927 5,987 7.59% 8.28% Other Borrowings 131 124 7 (12) 19
Facility Fees & Other Charges 990 325 665 665
--------------------------------------- ----------------------------------------------------
$1,320,500 $ 913,839 5.87% 5.41% Total Interest Expense $ 19,328 $ 12,317 $ 7,011 $ 2,249 $ 4,762
--------------------------------------- ----------------------------------------------------
1.18% 2.71% Net Interest Income $ 2,133 $ 5,916 ($ 3,783) ($ 5,491) $ 1,708
================== ====================================================
Net interest income from agency-eligible product decreased 64% to $2.1
million for the second quarter of 1998 compared to $5.9 million for the second
quarter of 1997. The 153 basis point decrease in the interest-rate spread was
primarily the result of the narrower spreads between long and short-term rates
in the second quarter of 1998 compared to the second quarter of 1997. The
Company's mortgages and mortgage-backed securities are generally sold and
replaced within 30 to 35 days. Accordingly, the Company generally borrows at
rates based upon short-term indices, while its asset yields are primarily based
upon long-term mortgage rates.
31
32
Net Gain on Sale of Agency-eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for the
periods indicated follows:
($ in thousands) For the Quarter Ended June 30,
------------------------------
1998 1997
----------- ----------
Gross proceeds on sales of mortgage loans $ 3,877,635 $2,584,544
Initial unadjusted acquisition cost of mortgage loans sold, net of
hedge results 3,875,380 $2,582,193
----------- ----------
Unadjusted gain on sale of mortgage loans 2,255 2,351
Loan origination and correspondent program administrative fees 10,866 7,635
----------- ----------
Unadjusted aggregate margin 13,121 9,986
Acquisition basis allocated to mortgage servicing rights (SFAS No. 125) 23,216 9,614
Net change in deferred administrative fees (613) 841
----------- ----------
Net gain on sale of agency-eligible mortgage loans $ 35,724 $ 20,441
=========== ==========
The Company sold agency-eligible loans during the second quarter of 1998
with an aggregate unpaid principal balance of $3.9 billion compared to sales of
$2.6 billion for the second quarter of 1997. The amount of proceeds received on
sales of mortgage loans exceeded the initial unadjusted acquisition cost of the
loans sold by $2.3 million (6 basis points) for the second quarter of 1998 as
compared to $2.4 million (9 basis points) for the comparable period of the prior
year. The Company received loan origination and correspondent program
administrative fees of $10.9 million (28 basis points) on these loans during the
second quarter of 1998 and $7.6 million (30 basis points) during the second
quarter of 1997. The Company allocated $23.2 million (60 basis points) to basis
in mortgage servicing rights for loans sold in the second quarter of 1998 as
compared to $9.6 million (37 basis points) during the second quarter of 1997 in
accordance with Statement of Financial Accounting Standards (SFAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". Consequently, net gain on sale of agency-eligible mortgage
loans increased to $35.7 million for the second quarter of 1998 versus $20.4
million for the second quarter of 1997. The increase is primarily attributed to
better execution into the secondary markets.
32
33
Subprime Mortgage Operations
Following is an analysis of the revenues and expenses allocated to the
Company's subprime mortgage production operations.
For the Quarter Ended June 30,
------------------------------
($ in thousands) 1998 1997
--------- --------
Net interest income $ 2,066 $ 4,782
Net gain on sale of mortgage loans 7,211
Other income (258)
--------- --------
Total production revenue 9,019 4,782
--------- --------
Salary and employee benefits 4,290 2,263
Occupancy expense 499 196
General and administrative expenses 1,163 629
--------- --------
Total production expenses 5,952 3,088
--------- --------
Net pre-tax production margin $ 3,067 $ 1,694
--------- --------
Production $ 146,146 $ 87,001
Whole loan sales and securitizations 128,268 114,427
Total production revenue to whole loan sales and securitizations 703 bps 418 bps
Total production expenses to production 407 bps 355 bps
--------- --------
Net pre-tax production margin 296 bps 63 bps
========= ========
Summary
During the second quarter of 1998, the Company produced $146.1 million of
subprime loans. The Company sold approximately $28.3 million (19%) of its second
quarter 1998 subprime production in whole loan transactions and delivered $100.0
million into the secondary markets through securitization transactions. Overall,
the Company operated during the second quarter of 1998 at a 2.96% pre-tax
subprime production margin. This compares to a 0.63% pre-tax subprime
production margin for the second quarter of 1997. The second quarter of 1997
was the first full quarter of operations for the subprime division.
Net Interest Income
($ in thousands) Variance
Average Volume Average Rate Interest Attributable to
- ----------------------------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997 Variance Rate Volume
- ----------------------------------------- ----------------------------------------------------
Interest Income
Mortgages Held for Sale and
$ 140,149 9.83% Residual Certificates $ 3,445 $ 3,445 $ 3,445
- ----------------------------------------- ----------------------------------------------------
Interest Expense
$ 94,883 5.83% Total Interest Expense $ 1,379 $ 1,379 $ 1,379
- ----------------------------------------- ----------------------------------------------------
4.00% Net Interest Income $ 2,066 $ 2,066 $ 2,066
================== ====================================================
Net interest income on subprime loans and accretion income on residuals was
$2.1 million, and the interest rate spread was 400 basis points, for the second
quarter of 1998. This was primarily the result of the larger interest rate
spreads possible for subprime product.
33
34
Net Gain on Securitization and Sale of Subprime Mortgage Loans
A reconciliation of the gain on securitization of subprime mortgage loans
for the periods indicated follows:
($ in thousands) For the Quarter Ended June 30,
------------------------------
1998 1997
--------- -------
Gross proceeds on securitization of subprime mortgage loans $ 99,370
Initial acquisition cost of subprime mortgage loans securitized, net
of fees 101,599
--------- -------
Unadjusted loss on securitization of subprime mortgage loans (2,229)
Initial capitalization of residual certificates 7,075
--------- -------
Net gain on securitization of subprime mortgage loans $ 4,846
========= =======
The Company also sold subprime mortgage loans on a whole loan basis during
the first quarter of 1998. Whole loans are generally sold without recourse to
third parties with the gain or loss being calculated based on the difference
between the carrying value of the loans sold and the gross proceeds received
from the purchaser. No interest in these loans is retained by the Company.
A reconciliation of the gain on subprime mortgage whole loan sales for the
periods indicated follows:
($ in thousands) For the Quarter Ended June 30,
------------------------------
1998 1997
-------- --------
Gross proceeds on whole loan sales of subprime mortgage loans $ 30,620 $119,209
Initial acquisition cost of subprime mortgage loans sold, net of fees 28,255 114,427
-------- --------
Net gain on whole loan sales of subprime mortgage loans $ 2,365 $ 4,782
======== ========
34
35
Agency-Eligible Mortgage Servicing
Following is a summary of the revenues and expenses allocated to the
Company's agency-eligible mortgage servicing operations for the quarters ended
June 30, 1998 and 1997:
For the Quarter Ended June 30,
------------------------------
($ in thousands) 1998 1997
---------- ----------
Servicing fees $ 9,110 $ 7,803
Other income 48
---------- ----------
Servicing revenues 9,158 7,803
---------- ----------
Salary and employee benefits 820 682
Occupancy expense 98 78
Amortization of mortgage servicing rights 6,347 4,725
General and administrative expenses 1,597 1,620
---------- ----------
Total loan servicing expenses 8,862 7,105
---------- ----------
Net pre-tax servicing margin 296 698
Gain on sale of mortgage servicing rights 452 1,220
---------- ----------
Net pre-tax servicing contribution $ 748 $ 1,918
========== ==========
Average owned servicing portfolio $9,107,296 $7,523,779
Servicing sold 2,269,219 2,071,902
Net pre-tax servicing margin to average servicing portfolio 1 bps 4 bps
Gain on sale of servicing to servicing sold 2 bps 6 bps
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio declined three basis points primarily due to relatively larger
increases in amortization and general and administrative expenses. The increased
amortization expense is attributable to generally higher levels of mortgage
servicing rights held for sale which are carried at a higher basis than older
available-for-sale mortgage servicing rights and thus require a relatively
higher periodic amortization charge.
Overall, the servicing division contributed $0.7 million to second quarter
1998 pre-tax net income, a $1.2 million, or 61%, decrease from the $1.9 million
contribution for the second quarter of 1997.
Loan servicing fees were $9.1 million for the second quarter of 1998,
compared to $7.8 million for the second quarter of 1997, an increase of 17%.
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 second quarter of 1998 from $7.5 billion during the second quarter of
1997, an increase of 21%. Similarly, amortization of mortgage servicing rights
also increased to $6.3 million during the second quarter of 1998 from $4.7
million during the second quarter of 1997, an increase of 34%. The increase in
amortization is primarily attributable to the growth in the average balance of
the mortgage loans serviced and the higher basis in the servicing rights. As a
result, net servicing margin decreased 10% to $2.8 million during the second
quarter of 1998, from $3.1 million during the second quarter of 1997.
Included in loan servicing fees for the first quarters of 1998 and 1997 are
subservicing fees received by the Company of $154 thousand and $79 thousand,
respectively. The subservicing fees are associated with temporary subservicing
agreements between the Company and purchasers of mortgage servicing rights.
35
36
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
($ in thousands) For the Quarter Ended June 30,
------------------------------
1998 1997
----------- -----------
Underlying unpaid principal balances of mortgage loans on
which servicing rights were sold during the period $ 2,269,219 $ 2,071,902
=========== ===========
Gross proceeds from sales of mortgage servicing rights $ 54,294 $ 44,918
Initial acquisition basis, net of amortization and hedge results 42,909 37,200
----------- -----------
Unadjusted gain on sale of mortgage servicing rights 11,385 7,718
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 125) (10,933) (6,498)
----------- -----------
Gain on sale of mortgage servicing rights $ 452 $ 1,220
=========== ===========
During the second quarter of 1998, the Company completed seven sales of
mortgage servicing rights representing $2.3 billion of underlying unpaid
principal mortgage loan balances. This compares to ten sales of mortgage
servicing rights representing $2.1 billion of underlying unpaid principal
mortgage loan balances in the second quarter of 1997. The unadjusted gain on the
sale of mortgage servicing rights was $11.4 million (50 basis points) for the
second quarter of 1998, compared to $7.7 million (37 basis points) for the
second quarter of 1997. The Company reduced this unadjusted gain by $10.9
million in the second quarter of 1998, versus a $6.5 million reduction during
the second quarter of 1997, in accordance with SFAS No. 125.
Commercial Mortgage Operations
Following is a summary of the revenues and expenses allocated to the
Company's commercial mortgage production operations.
36
37
For the Quarter Ended June 30,
---------------------------------------
($ in thousands) 1998 1997
---------------- ---------------
Net interest income $ 131
Net gain on sale of mortgage loans 1,520
Other income (4)
---------------- ---------------
Total production revenue 1,647
---------------- ---------------
Salary and employee benefits 1,399
Occupancy expense 203
General and administrative expenses 427
---------------- ---------------
Total production expenses 2,029
---------------- ---------------
Net pre-tax production margin ($ 382)
================ ===============
Servicing fees $ 897
Amortization of mortgage servicing rights 327
---------------- ---------------
Net pre-tax servicing margin 570
---------------- ---------------
Pre-tax income $ 188
================ ===============
Production $ 170,107
Whole loan sales 170,107
Average commercial mortgage servicing portfolio 2,907,213
Total production revenue to whole loan sales 97 bps
Total production expenses to production 119 bps
---------------- ---------------
Net pre-tax production margin (22 bps)
================ ===============
Servicing fees to average commercial mortgage servicing portfolio 12 bps
Amortization of mortgage servicing rights to average commercial
mortgage servicing portfolio 4 bps
---------------- ---------------
Net pre-tax servicing margin to average servicing portfolio 8 bps
================ ===============
Laureate Realty originates commercial mortgage loans for various insurance
companies and other investors, primarily in Alabama, Florida, Indiana, North
Carolina, South Carolina, Tennessee and Virginia. Substantially all loans
originated by Laureate Realty have been originated in the name of the investor,
and in most cases, Laureate Realty has retained the right to service the loans
under a servicing agreement with the investor. Most commercial mortgage loan
servicing agreements are short-term, and retention of the servicing contract is
dependent on maintaining the investor relationship.
Net Gain on Sale of Commercial Mortgage Loans
A reconciliation of gain on sale of commercial mortgage loans for the
periods indicated follows:
37
38
($ in thousands) For the Quarter Ended June 30,
-------------------------------------------
1998 1997
---------------- ----------------
Gross proceeds on sales of commercial mortgage loans $ 170,107
Initial unadjusted acquisition cost of commercial mortgage loans
sold 170,107
---------------- ----------------
Unadjusted gain on sale of commercial mortgage loans
Commercial mortgage and transaction processing fees 1,316
---------------- ----------------
Unadjusted aggregate margin 1,316
Initial acquisition cost allocated to basis in commercial
mortgage servicing rights (SFAS No. 125) 204
---------------- ----------------
Net gain on sale of commercial mortgage loans $ 1,520
================ ================
During the second quarter of 1998, the commercial mortgage division
originated and sold approximately $170 million in commercial loans. Commercial
mortgage fees on these loans were $1.3 million, or 77 basis points. Origination
fees on commercial mortgages are generally between 50 and 100 basis points on
the loan amount. In addition the commercial mortgage division allocated $204
thousand, or 12 basis points, to basis in servicing rights retained on
commercial mortgage loans.
Leasing Operations
Following is a summary of the revenues and expenses allocated to the
Company's small ticket equipment leasing operations for the periods indicated:
For the Quarter Ended June 30,
-------------------------------------------------
($ in thousands) 1998 1997
-------------------- --------------------
Net interest income $ 1,036
Other income 206
-------------------- --------------------
Leasing production revenue 1,242
-------------------- --------------------
Salary and employee benefits 477
Occupancy expense 86
General and administrative expenses 677
-------------------- --------------------
Total lease operating expenses 1,240
-------------------- --------------------
Net pre-tax leasing production margin $ 2
-------------------- --------------------
Servicing fees 241
-------------------- --------------------
Net pre-tax leasing margin $ 243
-------------------- --------------------
Average owned leasing portfolio $ 62,702
Average serviced leasing portfolio 59,249
-------------------- --------------------
Average leasing portfolio 121,951
==================== ====================
Leasing production revenue to average owned portfolio 792 bps
Lease operating expenses to average owned portfolio 791 bps
-------------------- --------------------
Net pre-tax leasing production margin 1 bps
==================== ====================
Servicing fees to average serviced portfolio 163 bps
38
39
Substantially all of the Company's lease receivables are acquired from
independent brokers who operate throughout the continental United States and
referrals from independent banks. At June 30, 1998 the Company's managed lease
servicing portfolio was $125.0 million. Of this managed lease portfolio, $70.6
million was owned and $54.4 million was serviced for investors. The one basis
point net pre-tax leasing margin is primarily attributable to the size of the
Company's owned leasing portfolio. As this owned leasing portfolio is expanded,
management expects the net pre-tax leasing margin to improve.
Net Interest Income
Net interest income for the second quarter of 1998 was $1.0 million. This
is an annualized net interest margin of 3.69% based upon average lease
receivables owned of $64.6 million and average debt outstanding of $38.6
million.
39
40
FINANCIAL CONDITION
During the second quarter of 1998, the Company experienced a 5% decrease in
total production originated and acquired compared to the first quarter of 1998,
from $4.1 billion during the first quarter of 1998 to $3.9 billion during the
second quarter of 1998. The June 30, 1998, locked mortgage application pipeline
(mortgage loans not yet closed but for which the interest rate has been locked)
was approximately $1.3 billion and the application pipeline (mortgage loans for
which the interest rate has not yet been locked) was approximately $0.5 billion.
Mortgage loans held for sale and mortgage-backed securities totaled $1.3
billion at June 30, 1998, versus $1.2 billion at December 31, 1997, an increase
of 8%. The Company's servicing portfolio (exclusive of loans under subservicing
agreements) increased to $9.4 billion at June 30, 1998, from $7.1 billion at
December 31, 1997, an increase of 32%.
Short-term borrowings, which are the Company's primary source of funds,
totaled $1.3 billion at June 30, 1998, compared to $1.2 billion at December 31,
1997, an increase of 8%. The increase in the balance outstanding at June 30,
1998, resulted from increased funding requirements related to the increase in
the balance of mortgage loans held for sale and mortgage-backed securities.
There were $6.4 million in long-term borrowings at June 30, 1998, compared to
6.5 million at December 31, 1997, a decrease of 2%.
Other liabilities totaled $144 million as of June 30, 1998, compared to the
December 31, 1997, balance of $87 million, an increase of $57 million, or 66%.
The increase in other liabilities resulted primarily from an increase in the
volume of loans acquired through certain correspondent funding programs of the
Company.
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 mortgage servicing rights
and residual certificate valuation declines resulting from changes in interest
rates that can lead to changing prepayment speeds or other factors beyond the
Company's control. Management of the Company recognizes these challenges and
intends to continue to manage the Company accordingly.
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, $670 million warehouse line of credit provided by a
syndicate of unaffiliated banks that expires in July 1999. The credit agreement
includes covenants requiring the Company to maintain (i) a minimum net worth of
$185 million, plus net income subsequent to July 31, 1998, 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 Ginnie Mae, FHA, VA, Fannie Mae and Freddie Mac 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
40
41
Company's ability (i) to pay dividends in any fiscal quarter which exceed 50% of
the Company's net income for the quarter or (ii) to engage significantly in any
type of business unrelated to the mortgage banking business, the servicing of
mortgage loans or equipment leasing.
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 in July 1999, 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 in
July 1999, and is secured by the Company's servicing portfolio designated as
"held-for-sale". A $50 million portion of the revolver facility matures in July
1999, 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 1999. 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, 1998. 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 note contains covenants
similar to those described above.
RBC has a 364-day $75 million revolving credit facility to provide financing
for its leasing portfolio. The warehouse credit agreement matures in July 1999,
and contains various covenants regarding characteristics of the collateral and
the performance of the leases originated and serviced by RBC and which restrict
RBC's ability to incur debt, encumber assets, other than as collateral for the
facility, sell assets, merge, declare or pay any dividends or change its
corporate by-laws or articles of incorporation.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems. For
reasons independent from the Year 2000 issue, the Company had already undertaken
an initiative to replace significant portions of its enterprise wide mortgage
systems. The new systems are Year 2000 compliant. This effort encompasses the
major systems that perform our mission
41
42
critical functions. Several components have been installed and management has
targeted to complete these installations by December 31, 1998. The Company does
not believe that Year 2000 issues will have a material impact on its
correspondent and broker relationships. The Company is also communicating with
suppliers, dealers, financial institutions and others with which it does
business to coordinate Year 2000 conversion. The Company does not foresee a
material impact to the Company surrounding the Year 2000 compliance with such
correspondents, brokers, suppliers, dealers, financial institutions and others.
Direct costs associated exclusively with achieving Year 2000 compliance is not
expected to be material to the Company and will be incurred through 1999.
42
43
Part II. OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds
Effective April 1, 1997, the Company issued 943,899 shares of its common
stock, par value $0.01 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 certain periods following the merger. All of the
contingent shares have been released as of June 30, 1998.
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 4. - Submission of Matters to a Vote of Security Holders
During the period of April 1, 1998, through June 30, 1998, the following
matters were submitted to a vote of security holders:
At the annual meeting of the shareholders of the Company on May 20,
1998, the shareholders elected Boyd M. Guttery, David W. Johnson, Jr.,
and Edward J. Sebastian to serve as directors of the Company for three
year terms expiring at the 2001 annual meeting of shareholders.
Mr. Guttery received 18,714,907 votes, 608,034 votes were withheld
with no votes against. Mr. Johnson received 18,715,433 votes, 607,508
votes were withheld with no votes against. Mr. Sebastian received
18,715,588 votes, 607,353 votes were withheld with no votes against.
Item 6. - Exhibits and Reports on Form 8-K
- (a) A list of exhibits filed with this Form 10-Q, along with the
exhibit index can be found on pages A to E following the
signature page.
- (b) none
43
44
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, 1998
44
45
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 Certificate of Amendment of Certificate of Incorporation of *
the Registrant incorporated by reference to Exhibit 3.2 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997
3.3 Certificate of Designation of the Preferred Stock of the *
Registrant incorporated by reference to Exhibit 4.1 of the
Registrant's Form 8-A filed on February 8, 1998
3.4 Amended and Restated Bylaws of the Registrant 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 Rights Agreement dated as of February 6, 1998 between the *
Registrant and First Chicago Trust Company of New York
incorporated by reference to Exhibit 4.1 of the Registrant's
Form 8-A filed on February 8, 1998
4.3 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
4.4 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
4.5 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 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
10.3 Assignment and Assumption of Office Lease incorporated by *
reference to Exhibit 10.6 of the Registrant's Registration No.
33-53980
A
46
Exhibit No. Description Page
- ----------- ----------- ----
10.4 (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
10.5 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
10.6 (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
10.7 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
10.8 Section 125 Plan incorporated by reference to Exhibit 10.17 of *
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993
10.9 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
10.10 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
10.11 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
10.12 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
10.13 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
10.14 Resource Bancshares Mortgage Group, Inc. Supplemental Executive ___
Retirement Plan
B
47
Exhibit No. Description Page
- ----------- ----------- ----
10.15 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
10.16 Stock Investment Plan incorporated by reference to Exhibit 4.1 *
of the Registrant's Registration No. 33-87536
10.17 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
10.18 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
10.19 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
10.20 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
10.21 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
10.22 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
10.23 Amended and Restated Omnibus Stock Award Plan incorporated by *
reference to Exhibit 99.10 of the Registrant's Registration No.
333-29245 filed on December 1, 1997
10.24 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
10.25 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
10.26 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
10.27 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
C
48
Exhibit No. Description Page
- ----------- ----------- ----
10.28 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
10.29 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
10.30 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
10.31 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
10.32 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
10.33 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
10.34 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
10.35 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
10.36 First Amendment to the Formula Stock Option Plan incorporated *
by reference to Exhibit 99.8 of the Registrant's
Registration No. 333-29245 as filed on December 1, 1997
10.37 (A) Agreement of Merger dated April 18, 1997 between Resource *
Bancshares Mortgage Group, Inc., RBC Merger Sub, Inc. and
Resource Bancshares Corporation incorporated by reference to
Annex A of the Registrant's Registration No.333-29245
(B) First Amendment to Agreement of Merger dated April 18, *
1997 between Resource Bancshares Mortgage Group, Inc., RBC
Merger Sub, Inc. and Resource Bancshares Corporation
incorporated by reference to Exhibit 10.42 of the Registrant's
Quarterly Report on Form 10-Q for the period ended September
30, 1997
(C) Second Amendment to Agreement of Merger dated April 18, *
1997 between Resource Bancshares Mortgage Group, Inc., RBC
Merger Sub, Inc. and Resource Bancshares Corporation
incorporated by reference to Annex A of the Registrant's
Registration No. 333-29245
D
49
Exhibit No. Description Page
- ----------- ----------- ----
10.38 (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 incorporated by reference to
Exhibit 10.44 of the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1997
10.39 Note Agreement between the Registrant and UNUM Life Insurance *
Company of America dated May 16, 1997 incorporated by
reference to Exhibit 10.45 of the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1997
10.40 Second Amendment to the Non-Qualified Stock Option Agreement *
dated February 6, 1998 incorporated by reference to Exhibit
10.40 of the Registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 1998
10.41 Agreement and Release Form of Non-Qualified Stock Option *
Agreement incorporated by reference to Exhibit 10.41 of the
Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 1998
11.1 Statement re: Computation of Net Income per Share ___
27.1 Financial Data Schedule ___
- ----------------------------------
* Incorporated by reference
E