-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C4MHw6mbvmuUse4rQu3H/fp0k8VsT294fyckuk4bX7qVFQzKq9lDIl94sMsUnZAo du31yAWqoGoC0ZE9+iJo2Q== 0000950144-98-009846.txt : 19980817 0000950144-98-009846.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950144-98-009846 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESOURCE BANCSHARES MORTGAGE GROUP INC CENTRAL INDEX KEY: 0000893817 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 570962375 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21786 FILM NUMBER: 98688593 BUSINESS ADDRESS: STREET 1: 7909 PARKLANE ROAD SUITE 150 CITY: COLUMBIA STATE: SC ZIP: 29223 BUSINESS PHONE: 8037413000 MAIL ADDRESS: STREET 1: 7909 PARKLANE RD SUITE 150 STREET 2: 7909 PARKLANE RD SUITE 150 CITY: COLUMBI STATE: SC ZIP: 29223 10-Q 1 RESOURCE BANCSHARES FORM 10-Q 6-30-1998 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 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7909 Parklane Road, Columbia, SC 29223 - -------------------------------------------------------------------------------- (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code (803)741-3000 Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the registrant was required to file reports) and has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The number of shares of common stock of the Registrant outstanding as of July 31, 1998, was 23,765,999. Page 1 Exhibit Index on Pages A to E 2 RESOURCE BANCSHARES MORTGAGE GROUP, INC. Form 10-Q for the quarter ended June 30, 1998 TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements - (Unaudited) Consolidated Balance Sheet 3 Consolidated Statement of Income 4 Consolidated Statement of Changes in Stockholders' Equity 5 Consolidated Statement of Cash Flows 6 Notes to Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of 10 Financial Condition and Results of Operations PART II. OTHER INFORMATION 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 2 3 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. 3 4 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. 4 5 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 $1 See accompanying notes to consolidated financial statements. 5 6 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS ($ 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. 6 7 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. 7 8 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 =======
8 9 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. 9 10 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. 10 11 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 $2.6 billion for the second quarter of 1997. The Company's 38% agency-eligible loan production increase is a direct result of the nationwide 56% increase in 1-4 family mortgage originations for the second quarter of 1998 as compared to the second quarter of 1997. The decrease in the Company's estimated market share of U.S. mortgage originations from 1.15% for the second quarter of 1997 to 1.02% for the second quarter of 1998 is primarily due to the Company's focus on improved agency-eligible profitability and expansion of its higher margined subprime, commercial mortgage and leasing production. 11 12 Correspondent Loan Production The Company purchases closed mortgage loans through its network of approved correspondent lenders. Correspondents are primarily mortgage lenders, larger mortgage brokers and smaller savings and loan associations and commercial banks, which have met the Company's approval requirements. The Company continues to emphasize correspondent loan production as its basic business focus because of the lower fixed expenses and capital investment required of the Company. That is, the Company has developed a cost structure that is more directly variable with loan production because the correspondent incurs most of the fixed costs of operating and maintaining branch offices and of identifying and interacting directly with loan applicants. A summary of key information relevant to the Company's correspondent residential loan production activities is set forth below:
($ 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 $2.8 billion for the second quarter of 1998 resulted primarily from the 56% increase in nationwide 1-4 family mortgage loan production. The number of approved correspondent lenders at the end of the second quarter of 1998 decreased slightly from that of the second quarter of 1997 as the Company focused on maintenance of those correspondent relationships most compatible with the Company's overall business strategies and profitability goals while continuing a disciplined and measured expansion through establishment of new correspondent relationships. Wholesale Loan Production The wholesale division receives loan applications through brokers, underwrites the loans, funds the loans at closing and prepares all closing documentation. The wholesale branches also handle all shipping and follow-up procedures on loans. Typically mortgage brokers are responsible for taking applications and accumulating the information precedent to the Company's processing of the loans. Although the establishment of wholesale branch offices involves the incurrence of fixed expenses associated with maintaining those offices, wholesale operations also provide for higher profit margins than correspondent loan production. Additionally, each branch office can serve a relatively sizable geographic area by establishing relationships with large numbers of independent mortgage loan brokers who bear much of the cost of identifying and interacting directly with loan applicants. 12 13 A summary of key information relevant to the Company's wholesale production activities is set forth below:
($ 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 $748.6 million during the second quarter of 1998, resulted from the 56% nationwide increase in loan production and the Company's addition of two new wholesale branches between the second quarter of 1997 and the second quarter of 1998. The increase in operating expenses for the wholesale division was primarily a result of the increased production. Wholesale division operating expenses as a percentage of production decreased 10% from 59 basis points in the second quarter of 1997 to 53 basis points in the second quarter of 1998. Strategically, management anticipates focusing in the near-term on significantly expanding its wholesale presence nationwide due to the relatively higher margins attributable to this channel. Management anticipates that the wholesale division will continue to account for an increasing percentage of the Company's total loan production. Retail Loan Production During late 1997, the Company began reviewing the compatibility of the retail operation with its primary business focus. On March 11, 1998, the Company signed a definitive agreement with CFS Bank under which the Company sold the retail production franchise of Intercounty Mortgage, Inc. to CFS Bank effective May 1, 1998. Historically, the Company has focused on accumulation of loan production through third-party correspondent and wholesale broker channels because of the relatively lower fixed expenses and capital investments required, among other reasons. Management believes the sale of the retail operation will allow the Company to refocus on its core competency as a correspondent and wholesale mortgage lender. 13 14 A summary of key information relevant to the Company's retail production activities is set forth below:
($ 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 $5.6 million of the Company's cash operating expenses for the first half of 1998. Without retail division operating expenses for the first six months of 1998, the Company's coverage ratio would have been 36%. 16 17 A summary of agency-eligible servicing statistics follows:
($ 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 ======== ======== ======== ======= ======= ======= =========
17 18
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 ========== ==========
18 19 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 $37.5 million for the first six months of 1997. Overall, the increase is attributed to better execution into the secondary markets. Subprime Mortgage Operations Following is an analysis of the revenues and expenses allocated to the Company's subprime mortgage production operations. 20 21
For the Six Months Ended June 30, --------------------------------- ($ 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 $3.4 million and the interest rate spread was 385 basis points, for the first six months of 1998. This was primarily the result of the larger interest rate spreads possible for subprime product. 21 22 Net Gain on Securitization and Sale of Subprime Mortgage Loans A reconciliation of the gain on securitization of subprime mortgage loans for the periods indicated follows:
($ 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 EX-10.14 2 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 1 EXHIBIT 10.14 ANY DISPUTE OR CONTROVERSY ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT SHALL BE SUBJECT TO ARBITRATION PURSUANT TO THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION AND THE SOUTH CAROLINA UNIFORM ARBITRATION ACT. RESOURCE BANCSHARES MORTGAGE GROUP, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN WHEREAS, Resource Bancshares Mortgage Group, Inc. (the "Corporation") desires to adopt and establish, effective as of January 1, 1998, a non-qualified unfunded supplemental executive retirement plan to be known as the Resource Bancshares Mortgage Group, Inc. Supplemental Executive Retirement Plan" for the purpose of providing certain benefits for eligible employees, all as more specifically provided for herein below; NOW THEREFORE, the Corporation does hereby adopt and establish effective as of January 1, 1998, the "Resource Bancshares Mortgage Group, Inc. Supplemental Executive Retirement Plan" consisting of the terms and provisions set forth in Articles I through VIII, inclusive, as follows: ARTICLE I NAME AND PURPOSE Section 1.1 Name. The plan, as defined below, shall be known as the Resource Bancshares Mortgage Group, Inc. Supplemental Executive Retirement Plan." Section 1.2 Purpose. The purpose of the plan is to provide Eligible Employees, as defined below, of the Participating Employers, as defined below, who become Participants, as defined below, in this Plan with certain retirement benefits in accordance with the provisions of the Plan. 2 ARTICLE II CONSTRUCTION, DEFINITIONS AND APPLICABLE LAW Section 2.1 Construction and Definitions. (a) Construction. Article, section and paragraph headings have been inserted for convenience of reference only in the Plan and are to be ignored in any construction of the provisions hereof. If any provision of the Plan shall for any reason be invalid or unenforceable, the remaining provisions shall nevertheless be valid, enforceable and fully effective. (b) Definitions. Whenever used in the Plan, unless the context clearly indicates otherwise, the following terms shall have the following meanings: (1) Affiliated Corporation means (A) any corporation more than fifty percent (50%) of whose outstanding voting capital stock is owned by Resource Bancshares Mortgage Group, Inc.; (B) any corporation at least eighty percent (80%) of whose outstanding voting capital stock and at least eighty percent (80%) of each class of whose outstanding non-voting capital stock is owned by a corporation more than fifty percent (50%) of whose outstanding voting capital stock is owned by Resource Bancshares Mortgage Group, Inc.; or (C) any corporation at least eighty percent (80%) of whose outstanding voting capital stock and at least eighty percent (80%) of each class of whose outstanding non-voting capital stock is owned by a corporation described in subparagraph (B) above. (2) Beneficiary means the Participant's spouse as of the date benefits become payable under this Plan. (3) Benefit Commencement Date means, with respect to a Participant who becomes eligible for Normal Retirement, Early Retirement or retirement pursuant to Section 4.4 the first day of the calendar quarter (January 1, April 1, July 1, and October 1) following the 2 3 day in which such Participant becomes eligible for Normal Retirement, Early Retirement or retirement pursuant to Section 4.4. (4) Claim means a claim for benefits under the Plan. (5) Claimant means a person making a Claim. (6) Code means the Internal Revenue Code of 1986, as amended from time to time, and references thereto shall include the valid Treasury regulations thereunder. (7) Corporation means Resource Bancshares Mortgage Group, Inc., a Delaware corporation. (8) Creditable Service means, with respect to a Participant as of any date, such Participant's "Benefit Accrual Service" as of such date determined in accordance with the provisions of the Retirement Plan. (9) Early Commencement Adjustment Factor means, with respect to a Participant eligible to receive Early Retirement Benefits, one less one-third of one percent (0.33%) for each month that the Participant's Benefit Commencement Date precedes the first day of the month coincident or immediately preceding the date upon which the Participant reaches Normal Retirement Age. (10) Early Retirement means, with respect to a Participant, such Participant's (1) having attained age fifty-five (55); (2) having completed at least ten years of Creditable Service; (3) having separated from Service; and (4) having elected to receive the Early Retirement Benefit. (11) Early Retirement Benefit means, with respect to a Participant eligible for Early Retirement, the difference between (1) the product of 60% of Final Average Pay 3 4 multiplied by the Early Commencement Adjustment Factor, minus (2) the sum of (a) Other Retirement Benefits, and (b) the Primary Insurance Benefit. (12) Earnings means, with respect to a Participant, as of any date, such Participants annual base salary of the Employee as shown by the personnel records of the Participating Employers plus cash bonuses (with the includible cash bonuses limited to $100,000) received by the Participant during the applicable calendar year. (13) Effective Date means, with respect to the Plan, January 1, 1998. (14) Eligible Employee means an Employee who is on the executive committee of the Corporation or who has been designated as eligible to become a Participant in the Plan pursuant to Section 3.1. (15) Employee means a person employed by any of the Participating Employers. (16) Final Average Pay means, with respect to a Participant as of any date, the highest amount obtainable by averaging the Earnings of a Participant in any five calendar years out of the last ten calendar years preceding the date of Retirement or termination of employment. In the case of a Participant without five complete calendar years of Earnings, Final Average Pay means, with respect to a Participant as of any date, the amount equal to twelve times the Average Monthly Earnings. For purposes of this section, Average Monthly Earnings means the quotient obtained by dividing (1) the sum of (a) Earnings for each consecutive full calendar year for which the Participant has been employed with a Participating Employer; (b) the product of Earnings for the calendar year preceding the calendar years described in (a) above multiplied by a fraction of which the numerator is the number of complete consecutive months (ending on December 31st) for which the Participant has been employed with a Participating Employer 4 5 during such calendar year and the denominator is twelve (12); and (c) the product of Earnings for the calendar year succeeding the calendar years described in (a) above multiplied by a fraction of which the numerator is the number of complete consecutive months (beginning on January 1st and ending on the date of Retirement of termination of employment) for which the Participant has been employed with a Participant Employer during such calendar year and the denominator is twelve (12); by (2) the number of complete consecutive months of employment to which such Earnings are attributable (i.e., twelve for each year described in (a) above plus the numerator of the fractions described in (b) and (c) above). (17) Management Compensation Committee means the Compensation Committee of the Board of Directors of the Company if no such Committee exists or is otherwise established then the Board of Directors of the Company shall be deemed to be the Management Compensation Committee. (18) Normal Retirement means, with respect to a Participant, such Participant's (1) having attained Normal Retirement Age; (2) having completed at least ten years of Creditable Service; (3) having separated from Service; and (4) having elected to receive the Normal Retirement Benefit. (19) Normal Retirement Age means, with respect to a Participant, the attainment of age sixty-two (62). (20) Normal Retirement Benefit means, with respect to a Participant eligible for Normal Retirement, 60% of Final Average Pay less the sum of (1) Other Retirement Benefits, and (2) the Primary Insurance Benefit. (21) Other Retirement Benefits means, with respect to a Participant, the benefit 5 6 payable by the Retirement Plan to such Participant expressed as an annual benefit payable as of the Benefit Commencement Date as a Qualified Joint and Survivor Annuity plus, with respect to a Participant, the benefit payable by the Pension Restoration Plan to such Participant expressed as an annual benefit payable as of the Benefit Commencement Date as a Qualified Joint and Survivor Annuity (whether or not the Participant elects to receive such benefits at Normal Retirement, Early Retirement or retirement pursuant to Section 4.4). The determination of the value of the joint and survivor annuities shall be based on the actuarial equivalence factors as defined in the Retirement Plan. (22) Participant means an Eligible Employee who has been designated a participant in the Plan as provided in Section 3.2 of the Plan. (23) Participating Employers means Resource Bancshares Mortgage Group, Inc. and those Affiliated Corporations of Resource Bancshares Mortgage Group, Inc. which in the future adopt the Plan pursuant to the provisions of Section 7.1 hereof. (24) Pension Restoration Plan means the RBMG, Inc. Pension Restoration Plan, as amended and restated effective as of January 1, 1995, as amended from time to time. (25) Plan means the Resource Bancshares Mortgage Group, Inc. Supplemental Executive Retirement Plan, as amended from time to time. (26) Plan Committee means the committee described in Article V hereof. (27) Plan Year means the twelve (12) month period beginning January 1 and ending December 31. (28) Primary Insurance Benefit means the monthly amount of benefits which a Participant is or would be entitled to receive at age 65, or later if his unreduced primary 6 7 insurance benefit commences at a later age, as a primary insurance amount under the federal Social Security Act, as amended, as determined in accordance with this subsection, whether or not he applies for such benefit, and even though he may lose part or all of such benefit through delay in applying for it, by making application for a reduced benefit, by entering into covered employment or for any other reason. The amount of such Primary Insurance Benefit to which the Participant is or would be entitled shall be estimated by the Plan Committee for the purposes of the Plan as of the January 1 of the year in which retirement or termination occurs on the following basis: (1) For a Participant entitled to a Normal Retirement Benefit, on the basis of the federal Social Security Act as in effect on the January 1 coincident with or next preceding his Normal Retirement Age (regardless of any retroactive changes made by legislation enacted after said January 1); or (2) For a Participant entitled to an Early Retirement Benefit, on the basis of (i) the federal Social Security Act as in effect on the January 1 coincident with or next preceding the time his employment with the Company terminates because of his early retirement (regardless of any retroactive changes made by legislation enacted after said January 1), and (ii) the benefit formula under the Social Security Act that would be applicable to him at the date his monthly benefits under the Social Security Act would equal the primary insurance amount under the Social Security Act, assuming no future compensation; or (3) For a Participant who has terminated with a vested benefit on the basis of (i) the federal Social Security Act as in effect on the January 1 coincident with or next preceding the time his employment with the Company terminates (regardless of any retroactive changes made by legislation enacted after said January 1), and (ii) the benefit formula under the Social Security Act that would be applicable to him at the date his monthly benefits under the Social Security Act would equal the primary insurance amount under the Social Security Act, assuming his employment, and Earnings in effect at his termination of employment, continued to the date his monthly benefits under the Social Security Act would equal the primary insurance amount under the Social Security Act. (29) Qualified Joint and Survivor Annuity means, for a married participant, a retirement benefit which equal quarterly installments are payable during the joint lifetime of the 7 8 retired Participant and the Participant's spouse, and under which, upon the earlier death of the retired Participant, 50% continues to be paid to the Participant's spouse for the Participant's spouse's lifetime. For a single Participant it shall mean a benefit payable in the form of an annuity for the life of the Participant. (30) Retirement Plan means the RBMG, Inc. Pension Plan (effective as of January 1, 1994), as amended from time to time. (31) Service means "Service" as defined in the Retirement Plan. Section 2.2. Applicable Law. The Plan shall be construed, administered, regulated and governed in all respects under and by the laws of the United States to the extent applicable, and to the extent such laws are not applicable, by the laws of the State of South Carolina. ARTICLE III PARTICIPATION Section 3.1. Eligibility. No person shall become a Participant unless or until such person is or becomes an Eligible Employee. The names of the initial Eligible Employees are contained on the attached Exhibit 3.2. In addition, the Plan Committee, in its discretion, shall determine which additional Employees of the Participating Employers shall become Eligible Employees. Designation of Eligible Employees shall be made in such manner as the Plan Committee shall determine from time to time. Section 3.2. Designation of Participants. The names of the initial Participants of the Plan are contained on the attached Exhibit 3.2. In addition, the Plan Committee, as applicable, may designate an Eligible Employee as a Participant for the purpose of permitting such individual to become a Participant in the Plan. 8 9 ARTICLE IV BENEFITS Section 4.1. General. The benefits to be provided by the Plan shall be determined in accordance with the provisions of the Plan subject to selected provisions of the Retirement Plan. Such benefits shall depend upon (i) the age of such Participant upon termination of employment or retirement, as the case may be, (ii) the amount of compensation of such Participant and (iii) such Participant's Creditable Service at the time such Participant separates from Service. A Participant with ten or more years of Creditable Service shall in all events be entitled to benefits under the Plan. A Participant shall elect to receive Early Retirement Benefits, Normal Retirement Benefits, or retirement benefits pursuant to Section 4.4 by giving written notice, in such form and manner as established by the Committee, to the Committee prior to the Benefit Commencement Date. Section 4.2. Normal Retirement. Subject to the provisions of Article VI, upon the Normal Retirement of a Participant such Participant shall become entitled to such Participant's Normal Retirement Benefit. Such Participant's Normal Retirement Benefit shall be expressed as an annual benefit payable as a Qualified Joint and Survivor Annuity payable for the lifetime of the Participant and the Participant's Beneficiary beginning on such Participant's Benefit Commencement Date. The total Normal Retirement Benefit payable for such period shall be payable in equal quarterly installments. Such quarterly installments shall commence on such Participant's Benefit Commencement Date and continue on the first day of each calendar quarter (January 1, April 1, July 1 and October 1) thereafter until the later of the death of the Participant or the death of the Participant's Beneficiary. 9 10 Section 4.3. Early Retirement. Subject to the provisions of Article VI, upon the Early Retirement of a Participant such Participant shall become entitled to such Participant's Early Retirement Benefit. Such Participant's Early Retirement Benefit shall be expressed as an annual benefit payable as a Qualified Joint and Survivor Annuity payable for the lifetime of the Participant and the Participant's Beneficiary beginning on such Participant's Benefit Commencement Date. The total Early Retirement Benefit payable for such period shall be payable in equal quarterly installments. Such quarterly installments shall commence on such Participant's Benefit Commencement Date and continue on the first day of each calendar quarter (January 1, April 1, July 1, and October 1) thereafter until the later of the death of the Participant or the death of the Participant's Beneficiary. Section 4.4. Certain Separations From Service after a Change in Control. In the event of a Change in Control (as described in Section 6.3) and the Participant is involuntarily terminated without Cause, the acquiring company terminates the Plan, or the Participant separates from service for Good Reason, such Participant shall be vested for benefits under this Plan according to the following schedule:
Creditable Service Vesting Percentage - ------------------ ------------------ 1 30% 2 40% 3 50% 4 60% 5 70% 6 80% 7 90% 8 100%
Upon the Participant's attaining age 62 and in the absence of the Participant's electing to receive the Optional Early Retirement Benefit (described below), the Participant shall be entitled to 10 11 receive a retirement benefit equal to the Normal Retirement Benefit multiplied by the applicable Vesting Percentage. This retirement benefit shall be paid in accordance with the provisions of Section 4.2. Upon the Participant's attaining age 55, the Participant shall be entitled to elect to receive an Optional Early Retirement Benefit equal to the Early Retirement Benefit multiplied by the applicable Vesting Percentage. This retirement benefit shall be paid in accordance with the provisions of Section 4.3. For purposes of this section, "Cause" shall mean (i) a material breach by the Participant of the Participant's obligation to the Corporation (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Participant's part, which is committed in bad faith or without reasonable belief that such breach is in the best interest of the Corporation and which is not remedied in a reasonable period of time after receipt of written notice from the Corporation specifying such breach or (ii) the conviction of the Participant of a felony involving moral turpitude. For purposes of this section, "Good Reason" shall mean the (i) Participant's determination that as a result of a change in circumstances occurring following a Change in Control significantly effecting his position, he can no longer adequately exercise his authority, power, functions or duties of his position; (ii) Participant's determination that he can no longer perform his duties by reason of a substantial diminution of his responsibilities, status, or position; or (iii) the Corporation requiring the Participant to relocate to an area 100 miles outside of the Participant's place of business as of the date of the Change in Control. Section 4.5. Death Benefits. (a) Death After Separation from Service. In the event a Participant separates from 11 12 Service after becoming eligible for Normal Retirement or Early Retirement, but such Participant dies prior to such Participant's Benefit Commencement Date, the benefits payable under the Qualified Joint and Survivor Annuity shall be paid to such Participant's Beneficiary, if any, commencing on the Benefit Commencement Date. In the event a Participant entitled to benefits pursuant to Section 4.4 dies prior to receipt of benefits under Section 4.4, the benefits shall be paid to such Participant's Beneficiary, if any, in accordance with the provisions of Section 4.5(b). (b) Death While in Service. In the event a Participant (having completed at least ten years of Creditable Service) dies while in Service, the Participant's Beneficiary shall be paid a death benefit equal to 50% of the Participant's Early Retirement Benefit or, if applicable, the Normal Retirement Benefit. In the event that the Participant had not yet attained age 55, the death benefit shall be equal to 50% of the Participant's Early Retirement Benefit. The death benefit provided herein shall be expressed as an annual benefit payable for life of the Beneficiary with the initial quarterly payment beginning on the first day of the calendar quarter (January 1, April 1, July 1, October 1) following the calendar quarter in which such Participant dies except that in the event the Participant had not yet attained age 55 such benefit shall not be payable until such time as the Participant would have attained age 55 but for his death. The total death benefit payable shall be payable in equal quarterly installments. Such quarterly installments shall commence on the first day of the calendar quarter following the quarter in which such Participant dies (or, in the event of a Participant dying before age 55, the date the Participant would have attained age 55) and continue on the first day of each calendar quarter thereafter until the death of the Beneficiary. 12 13 (c) Article VI Controlling. The provisions of this Section 4.5 shall be subject to the provisions of Article VI. Section 4.6. Additional Payments by Corporation. In the event it is determined that any payment or distribution under this Plan would be or is subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by a Participant with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the Excise Tax), the Corporation shall make an additional payment ("Gross-Up Payment") in an amount such that after payment by the Participant of all taxes (including any interest or penalties imposed with respect to such taxes), including without limitation, any income taxes (any interest and penalties imposed with respect thereto) and Excise Tax imposed on the Gross-Up Payment, the Participant retains an amount equal to the Excise Tax imposed on the benefit provided under the Plan. All determinations required to be made under this section, including, whether and when a Gross-Up Payment is required and the amount of the Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, shall be made by an accounting firm (the "Accounting Firm") selected by the members of the Plan Committee (as of the date of the Change in Control). Prior to or upon a Change in Control, the Plan Committee shall select an Accounting Firm and the Accounting Firm shall make appropriate computations of Gross-Up Payments for benefits paid and payable under the Plan after the Change in Control. All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment shall be paid by the Corporation within ten days of the Participant's and the Corporation's receipt of the computation of the amount of the Gross-Up Payment (including 13 14 detailed supporting calculations). If the Accounting Firm determines that no Excise Tax is payable by a Participant, the Accounting Firm shall furnish to the Participant a written confirmation that failure to report the Excise Tax on the Participant's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. The Participant shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of the Gross-Up Payment. ARTICLE V PLAN COMMITTEE Section 5.1. Appointment, Term of Office and Vacancy. The Plan Committee shall consist of the Chairman of the Compensation Committee of the Board of Directors, the Chief Executive Officer of the Corporation, the Vice Chairman of the Corporation, and any additional individuals appointed by the Board of Directors of the Corporation. The Board of Directors of the Corporation shall have the absolute right to remove any member of the Plan Committee at any time, with or without cause, and any member of the Plan Committee shall have the right to resign at any time. If a vacancy in the Plan Committee should occur, from death, resignation, removal or otherwise, a successor shall be appointed by the Board of Directors of the Corporation. Section 5.2. Organization of Plan Committee. The Plan Committee shall designate one of the members of the Plan Committee to serve as its Chairman, one member as its Vice-Chairman and one member as its Secretary. One person may hold more than one office. The Plan Committee, as it may deem necessary for the effective performance of its duties, may 14 15 designate one person as agent to act for the Plan Committee and may delegate to such agent such powers and duties, whether ministerial or discretionary, as the Plan Committee may delegate. The Plan Committee shall act by majority vote and may adopt such bylaws, rules and regulations as it deems desirable for the conduct of its affairs. The members of the Plan Committee shall serve as such without compensation. Section 5.3. Powers of the Plan Committee. The Plan Committee shall administer the Plan. The Plan Committee shall have all the powers to enable it to carry out its duties under the Plan properly. Not in limitation of the foregoing, the Plan Committee shall have the power to construe and interpret the Plan and determine all questions that shall arise thereunder. It shall decide all questions arising with respect to the interpretation of the Plan and shall have such other and further specified duties, powers, authority and discretion as are elsewhere in the Plan either expressly or by necessary implication conferred upon it. The decision of the Plan Committee upon all matters within the scope of its authority shall be final and conclusive on all persons, except to the extent otherwise provided by law. Section 5.4. Expenses of Plan Committee. The reasonable expenses of the Plan Committee incurred by the Plan Committee in the performance of its duties under the Plan, including without limitation, reasonable counsel fees and expenses of other agents, shall be paid by the Participating Employers. ARTICLE VI AMENDMENT AND TERMINATION Section 6.1. Amendment and Termination of the Plan. Except as provided in Section 6.3, the Participating Employers expressly reserve the right, at any time and from time to time, 15 16 to amend in whole or in part any of the terms and provisions of the Plan and to terminate the Plan for whatever reasons the Participating Employers may deem appropriate. The Management Compensation Committee shall have authority to so amend or terminate the Plan on behalf of the Participating Employers in all respects. Any such amendment or termination of the Plan shall be effected by an instrument in writing duly executed and acknowledged on behalf of the Participating Employers which amendment shall become a part of the Plan. Upon termination of the Plan the benefits accrued by each Participant as of the date of termination shall become vested in accordance with the schedule in Section 4.4 and the actuarial equivalent of such accrued benefits (utilizing the actuarial assumptions contained in Section 2.1(b)(21)) shall be paid to such Participants in a lump sum as if such Participant has separated from service immediately following the date of termination. Furthermore the Plan may not be amended to retroactively reduce or modify any Participant's accrued benefit as provided by the Plan. Section 6.2 Income Tax Aspects of the Plan. The Participating Employers have established the Plan and shall maintain the Plan based on certain "assumptions" regarding the income tax aspects of the Plan. Such "assumptions" include (i) the applicability of Section 451(a) of the Code to a participant's recognition of gross income as a result of participation in the Plan and (ii) the applicability of Section 404(a)(5) of the Code to the benefits paid by the Participating Employers to Participants under the Plan. Section 6.3. Change in Control. For purposes of this Agreement, the term "control" means the power to directly or indirectly direct or cause the direction of the management or indirectly direct or cause the direction of the management or policies of the Participating Employers. A change in control shall be deemed to have occurred for purposes of this 16 17 agreement: (i) upon the merger of the Participating Employers with or into or the consolidation of the Participating Employers with another corporation where, as a result of such merger or consolidation, the shareholders of the Participating Employers immediately prior to such merger or consolidation do not own at least a majority of the voting power of the resulting or surviving corporation or the corporation whose securities were issued in connection therewith, as the case may be; or (ii) upon the sale of all or substantially all the assets of the Participating Employers; or (iii) if any person is or becomes the beneficial owner, directly or indirectly, of securities of the Participating Employers representing 25% or more of the votes that could then be cast in an election for the Participating Employers' Board of Directors; or (iv) if less than a majority of the members of the Participating Employers' Board of Directors during any period of 24 consecutive months continues to be composed of persons who were serving as directors at the beginning of any such 24-month period or who were persons elected as directors by the vote of at least two-thirds of the directors then still in office who were directors at the beginning of such 24-month period. When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or disposing of securities of an issuer, such partnership, syndicate or group shall be deemed a "person" for the purposes of this definition of "change in control." For the purposes of the definition of "change in control" of the Participating Employer, a beneficial owner of a security includes any person, who directly or indirectly, pursuant to a contract, arrangement, understanding, relationship or otherwise has: (A) voting power which includes the power to vote, or to direct the voting of, such security; and/or (B) investment power which includes the power to dispose, or to direct the disposition of, such security. For purposes of this definition of change in control, the "Participating 17 18 Employers" shall mean only Resource Bancshares Mortgage Group, Inc. ARTICLE VII MISCELLANEOUS Section 7.1. Adoption by an Affiliated Corporation. An Affiliated Corporation may, with the approval of the Management Compensation Committee and the Board of Directors of such Affiliated Corporation, elect to adopt the Plan as of the date mutually agreeable to the Management Compensation Committee and the Board of Directors of such Subsidiary Corporation. Any such adoption of the Plan by a Subsidiary Corporation shall be evidenced by an appropriate instrument of adoption executed by such Subsidiary Corporation. Section 7.2. Authorization and Delegation to the Management Compensation Committee. Each Affiliated Corporation which is or hereafter becomes a Participating Employer authorizes and empowers the Management Compensation Committee or, if applicable, the Plan Committee (i) to amend or terminate the Plan without further action by said Affiliated Corporation as provided in Article VI and (ii) to perform such other acts and do such other things as the Management Compensation Committee or Plan Committee is expressly directed, authorized or permitted to perform or do as provided herein. Section 7.3. Spendthrift Clause. To the extent permitted by law, no benefits payable under the Plan shall be subject to the claim of any creditor of any Participant or to any legal process by any creditor of any Participant and no Participant entitled to benefits hereunder shall have any right whatsoever to alienate, commute, anticipate or assign any benefits under the Plan. Section 7.4. Benefits Payable From General Assets of the Participating Employers. All benefits payable hereunder shall be paid from the general assets of the Participating Employers. 18 19 No assets of the Participating Employers shall be segregated or placed in trust pursuant to the Plan in a manner which would put such assets beyond the reach of the general creditors of any Participating Employer. The right of any Participant (or Beneficiary) to receive any benefit hereunder shall be no greater than the right of any general, unsecured creditor of the Participating Employers. Nothing contained in the Plan shall create or be construed as creating a trust of any kind or any other fiduciary relationship between the Participating Employers and a Participant (or Beneficiary). In the event the Participating Employers purchase any insurance policies insuring the life of any Eligible Employee hereunder, no Eligible Employee shall have any rights whatsoever therein and the Participating Employers shall be the sole owner and beneficiary thereof and shall possess and exercise all incidents of ownership therein. Section 7.5. Successors and Assigns. This agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If the Participating Employers shall find that any person to whom a payment is payable under this Agreement, has been adjudicated incompetent or, by reason of illness or mental or physical disability, is unable properly to handle his or her own affairs, then (unless a claim for such payment has been made by a duly appointed guardian, committee or other legal representative) such payment may be made to a relative or friend for such persons' care or support, may be paid directly to a hospital, nursing home or other creditor for such persons' benefit, or may be paid in such other manner as the Participating Employers may determine, including payment to such person himself. Any such payment shall be a complete discharge of the Participating Employers' liability hereunder for such payment. Section 7.6. Other Compensation. No payments under this Agreement shall be deemed 19 20 salary or other compensation to the Employee for the purpose of computing benefits to which the Employee may be entitled under any pension plan or other arrangement which the Participating Employers may have for the benefit of its employees. Section 7.7. Successors in Interest. The Participating Employers will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Participating Employers or of any division or subsidiary thereof employing the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Participating Employers would be required to perform it if no such succession had taken place. Failure of the Participating Employers to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of the Agreement and shall entitle the Employee to compensation from the Participating Employers in the same amount and on the same terms as the Employee would be entitled hereunder if the Employee terminated employment, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of termination. Section 7.8 Arbitration. After the claimant has exhausted his administrative remedies provided by the Plan, any dispute or controversy arising under, or in connection with, this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Section 7.9. Allocation of Costs of Benefits Among the Participating Employers. The cost of benefits to be provided a Participant (or Beneficiary) pursuant to this Plan shall be paid 20 21 by the Participating Employer of such Participant. In the case of a transfer of a Participant between Participating Employers, the Participating Employer to whom such Participant is transferred shall assume the responsibility of the Participating Employer from which such Participant is transferred without further action, and the cost of benefits provided pursuant to the Plan shall be allocated among the Participating Employers in proportion to the benefits payable by each such Participating Employer pursuant to the Plan. Section 7.10. Benefits Limited to the Plan. Participation in the Plan shall not give a Participant any right to be retained in the employ of any one or more of the Participating Employers nor, upon dismissal, any right or interest in the Plan except as expressly provided herein. ARTICLE VIII CLAIMS PROCEDURE Section 8.1 Claims Procedure. (a) General. In the event that a Claimant has a Claim under the Plan, such Claim shall be made by the Claimant's filing notice thereof with the Plan Committee within ninety (90) days after such Claimant first has knowledge of such Claim. Each Claimant who has submitted a Claim to the Plan Committee shall be afforded a reasonable opportunity to state such Claimant's position and to present evidence and other material relevant to the Claim to the Plan Committee for its consideration in rendering its decision with respect thereto. The Plan Committee shall render it decision in writing within sixty (60) days after the Claim is referred to it, and a copy of such written decision shall be furnished to the Claimant. (b) Notice of Decision of Committee. Each Claimant whose Claim has been denied 21 22 by the Plan Committee shall be provided written notice thereof, which notice shall set forth: (i) the specific reason(s) for the denial; (ii) specific reference to pertinent provision(s) of the Plan upon which such denial is based; (iii) a description of any additional material or information necessary for the Claimant to perfect such Claim and an explanation of why such material or information is necessary; and (iv) an explanation of the procedure hereunder for review of such claim; all in a manner calculated to be understood by such Claimant. (c) Review of Decision of Plan Committee. Each such Claimant shall be afforded a reasonable opportunity for a full and fair review of the decision of the Plan Committee denying the Claim. Such review shall be by the Management Compensation Committee. Such appeal shall be made within ninety (90) days after the Claimant received the written decision of the Plan Committee and shall be made by the written request of the Claimant or such Claimant's duly authorized representative of the Management Compensation Committee. In the event of appeal, the Claimant or such Claimant's duly authorized representative may review pertinent documents and submit issues and comments in writing to the Management Compensation Committee. The Management Compensation Committee shall review the following: (i) the initial proceedings of the Plan Committee with respect to such Claim; (ii) such issues and comments as were submitted in writing by the Claimant or the Claimant's duly authorized representative; and (iii) such other material and information as the Management Compensation Committee, in its sole discretion, deems advisable for a full and fair review of the decision of the Plan Committee. The Management Compensation Committee may approve, disapprove or modify the decision of 22 23 the Plan Committee, in whole or in part, or may take such other action with respect to such appeal as it deems appropriate. The decision of the Management Compensation Committee with respect to such appeal shall be made promptly, and in no event later than sixty (60) days after receipt of such appeal, unless special circumstances require an extension of such time within which to render such decision, in which event such decision shall be rendered as soon as possible and in no event later than one hundred twenty (120) days following receipt of such appeal. The decision of the Management Compensation Committee shall be in writing and in an manner calculated to be understood by the Claimant and shall include specific reasons for such decision and set forth specific references to the pertinent provisions of the Plan upon which such decision is based. The Claimant shall be furnished a copy of the written decision of the Management Compensation Committee. Such decision shall be final and conclusive upon all persons interested therein, except to the extent otherwise provided by applicable law. IN WITNESS WHEREOF, the Corporation has caused this instrument to be executed by their duly authorized officers all as of the 20 day of May, 1998. RESOURCE BANCSHARES MORTGAGE GROUP, INC. [CORPORATE SEAL] ATTEST: By: /s/ Edward J. Sebastian ----------------------------- CHAIRMAN & C.E.O. ----------------------------- /s/ John W. Currie - --------------------------- John W. Currie, Secretary /s/ David W. Johnson, Jr. ----------------------------- Vice Chairman ----------------------------- 23 EX-11.1 3 STATEMENT RE COMPUTATION OF NET INCOME PER SHARE 1 EXHIBIT 11.1 RESOURCE BANCSHARES MORTGAGE GROUP, INC. STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE, BASIC and DILUTED EARNINGS PER SHARE ($ in thousands, except per share amounts)
For the Six Months Ended For the Quarter Ended June 30, 1998 June 30, 1998 --------------------------- ------------------------- Net Income $ 22,693 $ 13,112 Net Income per common share - basic (1) 0.98 0.57 Net income per common share - diluted (2) 0.97 0.56
1) The number of common shares outstanding used to compute net income per share - basic was 23,084,986 for the six months ended June 30, 1998, and 23,102,831 for the quarter ended June 30, 1998. 2) Diluted earnings per share for the six months and the quarter ended June 30, 1998, was calculated based on weighted average shares outstanding of 23,464,004 and 23,511,620, respectively, which assumes the exercise of options covering 1,844,555 shares and computes incremental shares using the treasury stock method. EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 15,494 30,442 155,835 0 1,212,514 1,656,392 44,243 13,508 1,703,932 1,460,136 6,414 0 0 315 237,067 1,703,932 49,640 117,072 59,296 79,956 20,660 4,016 39,889 37,116 14,423 37,116 0 0 0 22,693 0.98 0.97
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