-----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, ANehGjJQON+wlZXdaLhZMnc1GmOXaQ03jMbg5BqDBs8fstuXXh2zIjw6rZAPFtH6 aiCcW1FGlzeMX1NZkL9HuA== 0000950144-00-004234.txt : 20000331 0000950144-00-004234.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950144-00-004234 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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-K SEC ACT: SEC FILE NUMBER: 000-21786 FILM NUMBER: 587321 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-K 1 RESOURCE BANCSHARES MORTGAGE GROUP 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1999 Commission File Number 000-21786 RESOURCE BANCSHARES MORTGAGE GROUP, INC. (Exact name of registrant as specified in its charter) --------------------- Delaware 57-0962375 - -------------------------------------------------------------------------------- (State of Incorporation) (IRS Employer Identification Number) 7909 Parklane Road Columbia, South Carolina 29223 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (803) 741-3000 - -------------------------------------------------------------------------------- (Registrant's telephone no., including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of class Common Stock, par value $.01 per share Preferred Stock Purchase Rights Indicate by check mark whether the registrant (1) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. [ ] 2 The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $70,454,162 as of March 6, 2000, based on the closing price of $3.81 per share of the registrant's Common Stock , par value $.01 per share, on the NASDAQ National Market System on such date. As of March 6, 2000, 19,168,376 shares of the registrant's Common Stock, par value $.01 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Document of the Registrant Form 10-K Reference Locations 1999 Annual Report to Shareholders Parts II and IV 2000 Proxy Statement Part III 3 RESOURCE BANCSHARES MORTGAGE GROUP, INC. Form 10-K for the year ended December 31, 1999 TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE ---- PART I. Item 1. Business 1 Executive Officers of the Registrant 22 Item 2. Properties 22 Item 3. Legal Proceedings 23 Item 4. Submission of Matters to a Vote of Security Holders 23 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 23 Item 6. Selected Financial Data 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results 23 of Operations Item 7a. Quantitative and Qualitative Disclosures About Market Risk 23 Item 8. Financial Statements and Supplementary Data 23 Item 9. Changes in and Disagreements With Accountants on Accounting and 24 Financial Disclosure PART III. Item 10. Directors and Executive Officers of the Registrant 24 Item 11. Executive Compensation 24 Item 12. Security Ownership of Certain Beneficial Owners and Management 24 Item 13. Certain Relationships and Related Transactions 24 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25 SIGNATURES 26 INDEX TO EXHIBITS A
4 PART I ITEM 1. BUSINESS General The Company is a diversified financial services company engaged through wholly-owned subsidiaries primarily in the business of mortgage banking, through the purchase (via a nationwide network of correspondents and brokers), sale and servicing of agency-eligible and subprime residential, single-family (i.e., one-four family), first lien and second lien mortgage loans and the purchase and sale of servicing rights associated with agency-eligible loans. In addition, two of the Company's wholly-owned subsidiaries originate, sell and service small-ticket commercial equipment leases and originate, sell, underwrite for investors and service commercial mortgage loans. As part of its primary business focus, residential mortgage banking, the Company purchases agency-eligible mortgage loans through its correspondents and funds loans through its wholesale division. The Company also purchases and originates residential mortgage loans through its subprime division. Substantially all of the residential mortgage loans purchased and originated by the Company are sold to institutional purchasers, including national and regional broker/dealers, as mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae or are securitized. Substantially all the agency-eligible mortgage loans are sold with the rights to service the loans being retained by the Company. The retained servicing is then either held in the Company's portfolio or sold separately. The Company receives loan servicing fees and subservicing fees with respect to the agency-eligible loans it funds through its wholesale channel and purchases through its correspondent channel. The Company also receives loan servicing fees with respect to agency-eligible loans the mortgage servicing rights for which were acquired through bulk acquisitions of servicing rights related to agency-eligible loans originated by other lenders. During 1999, mortgage rates rose causing a significant decline in nationwide mortgage refinance activity. Production volumes declined and the resultant industry overcapacity led to an increasingly intense competitive pricing environment. The Company was not immune from these cyclical trends as its volumes and gross production margins were adversely affected. Accordingly, the Company reported net operating losses for the latter half of 1999. In response, on December 1, 1999 the Company announced a planned reorganization and workforce reduction which involved (1) consolidation of 18 existing agency-eligible wholesale branch locations into six regional operating centers, (2) closure of three subprime branches, and (3) reduction of overall agency-eligible production support and administrative staffing levels. In connection with execution of the plan, 208 agency-eligible employees (out of 907) and 34 subprime employees (out of 320) were terminated. Although implementation of the above described reorganization and workforce reduction achieved the expected cost savings levels, its scope may prove inadequate to return the Company to profitability in the short-term due primarily to continued erosion of gross production margins during the latter portion of 1999. On January 10, 2000 the Company named Douglas K Freeman as its new Chief Executive Officer. On February 12 through 14, 2000 the senior management team met and restated its corporate strategy, mission, goals, business principles and core values. The Company's strategy is to become a customer centric financial intermediary that combines the best of product depth, relationship management and service quality. In order to realize this vision, the Company plans to: (1) diversify its product array, (2) utilize and deploy advanced technology to support a more effective order fulfillment process and (3) to integrate enhanced customer relationship management systems and disciplines into its ongoing sales and marketing operations. The Company also intends to continue expansion of its small-ticket commercial equipment lease portfolio. The Company does not hold any material trademarks, licenses, franchises or concessions. 1 5 During 1999, mortgage rates rose causing a significant decline in nationwide mortgage refinance activity. Production volumes declined and the resultant industry overcapacity led to an increasingly intense competitive pricing environment. The Company was not immune from these cyclical trends as its volumes and gross production margins were adversely affected. Accordingly, the Company reported net operating losses for the latter half of 1999. In response, on December 1, 1999 the Company announced a planned reorganization and workforce reduction which involved (1) consolidation of 18 existing agency-eligible wholesale branch locations into six regional operating centers, (2) closure of three subprime branches, and (3) reduction of overall agency-eligible production support and administrative staffing levels. In connection with execution of the plan, 208 agency-eligible employees (out of 907) and 34 subprime employees (out of 320) were terminated. Although implementation of the above described reorganization and workforce reduction achieved the expected cost savings levels, its scope may prove inadequate to return the Company to profitability in the short-term due primarily to continued erosion of gross production margins during the latter portion of 1999. On January 10, 2000 the Company named Douglas K Freeman as its new Chief Executive Officer. On February 12 through 14, 2000 the senior management team met and restated its corporate strategy, mission, goals, business principles and core values. The Company's strategy is to become a customer centric financial intermediary that combines the best of product depth, relationship management and service quality. In order to realize this vision, the Company plans to: (1) diversify its product array, (2) utilize and deploy advanced technology to support a more effective order fulfillment process and (3) to integrate enhanced customer relationship management systems and disciplines into its ongoing sales and marketing operations. 6 Segmented Income Statements The Company operates under wholly-owned subsidiaries that are engaged in the following lines of business: (a) agency-eligible production; (b) agency-eligible servicing; (c) agency-eligible reinsurance; (d) subprime residential production; (e) commercial mortgage lending; and (f) small-ticket equipment leasing. Tables set forth under Note 17 in the Consolidated Financial Statements in the Company's accompanying 1999 Annual Report to Shareholders present a summary of the revenues and expenses for each of the Company's subsidiaries for the years ended December 31, 1999, 1998 and 1997, respectively and are hereby incorporated herein by reference. The following represents the percentage and amount of total Company revenues as contributed by the various operating divisions for the years ended December 31, 1999, 1998 and 1997: ($ in thousands)
1999 1999 1998 1998 1997 1997 $ Amount Percentage $ Amount Percentage $ Amount Percentage --------- ---------- --------- ---------- --------- ---------- Agency-eligible production $ 72,613 42% $ 143,650 59% $ 107,302 67% Agency-eligible servicing 45,080 26% 40,064 16% 38,824 24% Agency-eligible reinsurance 1,649 1% 1,189 1% -- -- Subprime 31,351 18% 38,277 16% 15,280 9% Commercial mortgage 14,297 8% 13,335 5% -- -- Leasing 9,285 5% 6,404 3% -- -- Other /eliminations (483) 0% 807 0% (388) 0% --------- --------- --------- --------- --------- --------- Total $ 173,792 100% $ 243,726 100% $ 161,018 100% --------- --------- --------- --------- --------- ---------
Residential Loan Production Correspondent The Company purchases closed agency-eligible mortgage loans through its network of approved correspondent lenders. Correspondents are primarily mortgage lenders, mortgage brokers, savings and loan associations and small commercial banks. At December 31, 1999, the Company had 909 correspondents originating mortgage loans in 49 states and the District of Columbia. Agency-eligible residential loan production for the Company by correspondents is widely dispersed, with the top 20 correspondents supplying the Company with 34% of its dollar volume of correspondent loans during 1999 compared to 27% in 1998. During 1999, the top five correspondents accounted for approximately 16% of the year's mortgage loan correspondent purchase volume. This compares to the top five correspondents accounting for approximately 12% and 13% of the mortgage loan purchase volume during 1998 and 1997, respectively. No single correspondent accounted for more than 5.8% of the Company's agency-eligible mortgage loan purchase volume in 1999. In 1998 and 1997, 3.9% and 3.3%, respectively, of the Company's total agency-eligible mortgage loan purchase volume was acquired from the Company's highest-volume correspondent. The Company continues to emphasize correspondent loan production as its basic business focus. By emphasizing correspondent lending, the Company can match its costs more directly with the volume 2 7 of agency-eligible loans purchased, so that a substantial portion of the Company's cost is variable rather than fixed. By emphasizing the correspondent origination approach, the Company has greater flexibility to adjust to varying market conditions. As conditions change, the Company can expand into new geographic markets without incurring significant additional costs by utilizing existing and new correspondents that operate in each new market. The use of correspondents also enables the Company to exit markets easily if circumstances dictate. The Company attracts and maintains relationships with correspondents by offering a variety of services that provide incentives for the correspondents to sell agency-eligible mortgage loans to the Company. The Company's strategy with respect to its correspondents is to provide a high level of service rather than the lowest price. Services provided include timely underwriting and approval or rejection of a loan (within approximately 48 hours after receipt of a completed loan application), timely purchase of loans (within 96 hours after being approved for acquisition), seminars on how to process and prepare a loan application, and updates on current underwriting practices. In addition, the Company provides correspondents with a variety of products and delivery capabilities and multiple means of funding loans. As the mortgage lending market increases in sophistication and loan-price differentials narrow among mortgage bankers, the Company believes that the level of service and commitment it provides to its correspondents will be paramount to its success. Management believes that through correspondent lending it can manage risks and maintain good quality control. Correspondents have to meet established standards to be approved by the Veteran's Administration (VA), the U. S. Department of Housing and Urban Development (HUD) or private mortgage insurance companies. A correspondent qualifies to participate in the Company's correspondent program only after a thorough review of its reputation and mortgage lending expertise, including a review of references and financial statements and a personal visit by one or more representatives of the Company. After a correspondent qualifies for the Company's program, the Company closely monitors the correspondent's performance in terms of delinquency ratios, document exceptions and other pertinent data. Furthermore, all mortgage loans purchased by the Company through correspondents are subject to various aspects of the Company's underwriting criteria, and correspondents are required to repurchase loans or otherwise indemnify the Company for its losses in the event of fraud or misrepresentation in the origination process and for certain other reasons, including noncompliance with underwriting standards. All loan applications are subject to the Company's underwriting criteria and the guidelines set forth by the Federal Housing Authority (FHA), the VA, Ginnie Mae, Fannie Mae, Freddie Mac or private investors, as applicable. The Company or the correspondent, in the case of a correspondent with delegated underwriting authority, verifies each applicant's income and bank deposits, as well as the accuracy of the other information submitted by the applicant, and obtains and reviews a credit report from a credit reporting agency, a preliminary title report and a real estate appraisal. Generally, delegated underwriting authority is granted by the Company to its larger correspondents that meet certain financial strength, delinquency ratio, underwriting and quality control standards. With respect to FHA and VA loans, HUD and the VA, respectively, have established approval guidelines for the underwriting of loans to be covered by FHA insurance or a VA guaranty. The Company is approved by both HUD and the VA to underwrite FHA and VA loans submitted by specified correspondents and wholesale brokers. The Company purchases FHA and VA loans only from those correspondents who are approved to underwrite FHA and VA loans and from those correspondents for whom the Company has been approved to underwrite FHA and VA loans. The Company has implemented a quality control program to monitor compliance with the Company's established lending and servicing policies and procedures, as well as with applicable laws 3 8 and regulatory guidelines. The Company believes that the implementation and enforcement of its comprehensive underwriting criteria and its quality control program are significant elements in the Company's efforts to purchase high-quality mortgage loans and servicing rights. The Company's quality control department examines loans in order to evaluate the loan purchasing function for compliance with underwriting criteria. The quality control department also reviews loan applications for compliance with federal and state lending standards, which may involve re-verifying employment and bank information and obtaining separate credit reports and property appraisals. Wholesale The wholesale division receives loan applications through brokers, underwrites the loans, funds the loans at closing and prepares all closing documentation. The wholesale branches and regional operating centers 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. All loan applications processed by the wholesale division are subject to underwriting and quality control comparable to the standards used in the Company's correspondent lending program. Although the establishment of wholesale branch offices and regional operating centers involves the incurrence of fixed expenses associated with maintaining those offices, wholesale operations also generally provide for higher profit margins than correspondent loan production. Additionally, each branch office and regional operating center 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. In 1999, the Company closed several branch offices and established regional operations centers to better facilitate service to a larger geographic area. At December 31, 1999, the Company had 2 wholesale branches and 5 regional operating centers serving approximately 4,300 brokers. The offices are located in California (1), Colorado (1), Georgia (1), Massachusetts (1), Minnesota (1), Missouri (1) and Utah (1). Subprime Subprime loan production increased by 20% to $728.4 million for 1999 as compared to $607.7 million during 1998 as the Company has expanded its operations. Between 1998 and 1999 the Company increased the number of its subprime brokers by 1,265. The number of branches declined from 19 in 1998 to 10 at the end of 1999 as the Company reassessed the geographic regions that each branch covers. The following table shows residential production volume by source for each of the three years in the period ended December 31, 1999.
RESIDENTIAL LOAN PRODUCTION VOLUME Year Ended December 31, --------------------------------------------- ($ in Thousands) 1999 1998 1997 ----------- ----------- ----------- Correspondent $ 6,363,936 $11,666,560 $ 7,893,583 Wholesale 1,748,415 3,023,961 1,868,726 Retail -- 264,059 675,411 ----------- ----------- ----------- Total Agency-Eligible Loan Production $ 8,112,351 $14,954,580 $10,437,720 Subprime Production 728,410 607,664 339,574 ----------- ----------- ----------- Total Residential Production $ 8,840,761 $15,562,244 $10,777,294 =========== =========== ===========
4 9 The Company purchases and originates conventional and subprime mortgage loans and mortgage loans insured by the FHA or partially guaranteed by the VA. All mortgage loans purchased or originated by the Company are purchased or originated for resale. The majority of the Company's loans are conforming loans, i.e., mortgage loans that qualify for inclusion in purchase and guarantee programs sponsored by Fannie Mae, Freddie Mac and Ginnie Mae. The Company purchases and originates a variety of mortgage loan products that are designed, in conjunction with the requirements of prospective purchasers of such loans, to respond to consumer needs and competitive factors. In addition to 15-year and 30-year conventional mortgage loans and 15-year and 30-year FHA loans and VA loans, the Company purchases and originates products designed to provide lower interest rates to borrowers or lower principal and interest payments by borrowers, including balloon mortgage loans that have relatively short terms (e.g., five or seven years) and longer amortization schedules (e.g., 25 or 30 years) and adjustable rate mortgage loans. The Company also purchases and originates mortgage loans featuring a variety of combinations of interest rates and discount points so that borrowers may elect to pay higher points at closing and less interest over the life of the loan, or pay a higher interest rate and reduce or eliminate points payable at closing. The portion of total loans held for sale at any time that consists of a particular product type depends upon the interest rate environment at the time such loans are made. The following table shows residential mortgage loan production volume by type of loan for each of the three years in the period ended December 31, 1999.
Year Ended December 31, ------------------------------------------- ($ in Millions except as indicated) 1999 1998 1997 ---------- ---------- ---------- CONVENTIONAL LOANS: Volume $ 4,892.9 $ 10,674.1 $ 6,126.8 Percentage of total volume 55% 68% 57% FHA / VA LOANS: Volume $ 3,219.5 $ 4,280.4 $ 4,310.9 Percentage of total volume 37% 28% 40% SUBPRIME LOANS Volume $ 728.4 $ 607.7 $ 339.6 Percentage of total volume 8% 4% 3% TOTAL LOANS: Volume $ 8,840.8 $ 15,562.2 $ 10,777.3 Number of loans 79,322 131,630 99,349 Average loan size ($ in Thousands) $ 111.5 $ 118.2 $ 108.5
The following table shows residential loan production volume by state for the year ended December 31, 1999, for each state that represented 5% or more of the Company's total residential loan production volume for 1999. 5 10 Year Ended December 31, 1999 ------------------------------------- ($ in Thousands) Percent of State Amount Total ------------------------------ ---------------- --------------- California $ 890,638 10.07% Minnesota 746,244 8.44% Illinois 733,646 8.30% Colorado 674,314 7.63% Ohio 541,283 6.12% Massachusetts 444,982 5.03% Georgia 442,624 5.01% All Other 4,367,030 49.40% ---------------- --------------- TOTAL $ 8,840,761 100.00% ================ =============== Sale of Residential Loans The Company customarily sells all agency-eligible mortgage loans that it originates or purchases, retaining the mortgage servicing rights, which currently are sold separately. Under ongoing programs established with Fannie Mae and Freddie Mac, the Company aggregates its conforming conventional loans into pools that are assigned to Fannie Mae or Freddie Mac in exchange for mortgage-backed securities. The Company's FHA mortgage loans and VA mortgage loans are generally pooled and sold in the form of Ginnie Mae mortgage-backed securities. The Company pays certain fees to Freddie Mac, Fannie Mae or Ginnie Mae, as applicable, in connection with these programs. The Company then sells Freddie Mac, Fannie Mae and Ginnie Mae securities to securities dealers. Substantially all of the Company's agency-eligible mortgage loans qualify under the various Fannie Mae, Freddie Mac and Ginnie Mae program guidelines, which include specific property and credit standards, including a loan size limit. Subprime and non-conforming conventional residential mortgage loans are sold to private investors through whole loan sales or securitizations. In the case of conventional loans, subject to the obligations of any primary mortgage insurer, the Company is generally at risk for any mortgage loan default until the loan is sold (typically less than 45 days). Once the Company sells the loan, the risk of loss from mortgage loan default and foreclosure generally passes to the purchaser or insurer of the loan. In the case of FHA and VA loans, the Company has, from the time such a loan is originated or purchased until the first borrower payment is due, a minimum of 31 days, to request insurance or a guarantee certificate. Once the insurance or the guarantee certificate is issued, the Company has no risk of default, except with respect to certain losses related to foreclosures of FHA mortgage loans and losses that exceed the VA's guarantee limitations. In connection with the Company's loan exchanges and sales, the Company makes representations and warranties customary in the industry relating to, among other things, compliance with laws, regulations and program standards and as to accuracy of information. In the event of a breach of these representations and warranties, the Company may become liable for certain damages or may be required to repurchase such loans and bear any potential related loss on the disposition of those loans. Typically, with respect to loans that the Company repurchases, the Company corrects the flaws that had resulted in the repurchase and the loans are resold in the market or are repurchased by the original correspondent pursuant to prior agreement. The Company uses hedging techniques to reduce its exposure to interest rate risk in connection with loans not yet sold or securitized. The Company projects the portion of the pipeline loans that the Company anticipates will close. The Company assesses the interest-rate risk associated with the commitments that it has extended to originate or purchase loans and evaluates the interest-rate risk of 6 11 these commitments based upon a number of factors, including the remaining term of the commitment, the interest rate at which the commitment was provided, current interest rates and interest-rate volatility. The Company constantly monitors these factors and adjusts its hedging when appropriate throughout each business day. The Company's hedging currently consists of utilizing a combination of mandatory forward sales commitments on mortgage-backed securities and mortgage loans and options on mortgage-backed securities. The sale of mortgage loans may generate a gain or loss to the Company. Gains or losses result primarily from two factors. First, the Company may originate or purchase a loan at a price (i.e., interest rate and discount) that may be higher or lower than the Company would receive if it immediately sold the loan in the secondary market. These pricing differences occur principally as a result of competitive pricing conditions in the primary loan origination market. Second, gains or losses upon the sale of loans may result from changes in interest rates, which cause changes in the market value of the loans, or commitments to originate or purchase loans, from the time the price commitment is given to the customer until the time that the loan is sold by the Company to the investor. To reduce the effect of interest-rate changes on the gain and loss on loan sales, the Company generally commits to sell all its agency-eligible warehouse loans and a portion of its pipeline loans to investors for delivery at a future time for a stated price. In connection with its agency-eligible loan sale program, which involves the sale of mortgage loans and mortgage-backed securities on a forward or other deferred delivery and payment basis, the Company has credit risk exposure to the extent purchasers are unable to meet the terms of their forward purchase contracts. As is customary in the marketplace, none of the forward payment obligations of any of the Company's counterparties is secured or subject to margin requirements; however, the Company attempts to limit its credit exposure on forward sales arrangements by entering into forward sales contracts solely with institutions that the Company believes are sound credit risks, and by limiting exposure to any single counterparty by selling to a number of investors. For example, it is the Company's current policy that not more than the lesser of (i) $350 million or (ii) 40% of the total forward purchase contracts outstanding at any time be with any single counterparty. All counterparties are obligated to settle such sales in accordance with the terms of the related forward sale agreement. 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 of the mortgaged premises as required, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, and generally administering agency-eligible mortgage loans. Failure to service mortgage loans in accordance with contract requirements may lead to the termination of the servicing rights and the loss of future servicing fees. The Company's current strategy is to pool and sell substantially all of its produced agency-eligible mortgage servicing rights to other approved servicers. The Company retains a relatively small portion of its produced agency-eligible servicing rights and sells available-for-sale servicing rights in bulk transactions. The Company's credit facilities require it to maintain at all times a mortgage servicing rights portfolio with an underlying unpaid principal balance of at least $5.0 billion. The Company's policy with respect to the sale, purchase or retention of mortgage servicing rights may change in the future. 7 12 In addition to servicing its agency-eligible mortgage servicing rights portfolios, the Company also subservices agency-eligible mortgage servicing rights portfolios during the period of approximately 90 days between the date the Company has sold the related servicing rights and the date such servicing rights are actually transferred to the purchaser. The Company receives fees for servicing residential mortgage loans, ranging generally from 0.25% to 0.44% per annum on the declining unpaid principal balances of the loans. Servicing fees are collected by the Company from monthly mortgage loan payments. Other sources of loan servicing revenues include fees incidental to the services provided. As a servicer of mortgage loans underlying mortgage-backed securities, the Company is obligated to make timely payments of principal and interest to security holders, whether or not such payments have been made by mortgagors on the underlying mortgage loans. Similarly, in the event of foreclosure, the Company is responsible for covering with its own funds principal and foreclosure costs to the extent not covered by FHA insurance or a VA guarantee. The following table shows the delinquency percentages (excluding bankruptcies and foreclosures) of the Company's residential mortgage servicing rights portfolio (excluding loans serviced under subservicing agreements) at December 31, 1999. Days Delinquent --------------- 30 1.65% 60 0.30% 90+ days 0.17% ------------- Total Delinquencies 2.12% ============= At December 31, 1999, the Company's owned mortgage servicing rights portfolio had an underlying unpaid principal balance of $7.8 billion. The portfolio generally reflected characteristics representative of the then-current market conditions and had a weighted average note rate of 7.50%. In 1999, the Company produced or purchased servicing rights associated with agency-eligible residential loans having an aggregate underlying unpaid principal balance of $8.1 billion and had an average aggregate underlying unpaid principal balance of loans being serviced of $11.8 billion. Typically, the Company sells the majority of its produced agency-eligible mortgage servicing rights between 90 days and 180 days of purchase. Nevertheless, certain market and operating characteristics, including origination costs, adjusted basis, market values, coupon rates, delinquency rates and current prepayment rates are considered to determine whether mortgage servicing rights should be held for longer periods of time. The following table provides certain information regarding the Company's agency-eligible mortgage servicing rights portfolio at December 31, 1999. * 8 13
($ in Thousands) Percentage of Aggregate Total Unpaid Year of Number of Percentage of Unpaid Principal Principal Origination Loans Total Loans Balance Balance - ------------------------ ----------------- ----------------- ----------------------- ----------------- 1992 or earlier 4,893 6.3% $ 264,255 3.4% 1993 6,412 8.3% 457,650 5.9% 1994 4,451 5.8% 366,708 4.7% 1995 1,520 2.0% 119,121 1.5% 1996 3,168 4.1% 314,113 4.0% 1997 11,689 15.1% 1,214,602 15.5% 1998 22,370 28.9% 2,592,733 33.2% 1999 22,810 29.5% 2,493,212 31.8% ----------------- ----------------- ----------------------- ----------------- Total 77,313 100.00% $ 7,822,394 100.00% ================= ================= ======================= =================
* Includes $139,376 (1,496 loans) of subprime loans as of December 31, 1999 being temporarily serviced until these loans are sold. The following table sets forth the Company's agency-eligible mortgage servicing rights portfolio by loan type:
($ in Thousands) At December 31, 1999 ------------------------------------------------------------------------------- Aggregate Unpaid Weighted Weighted Number Principal Average Average Loan Type of Loans Balance Coupon Service Fee - ------------------------------- ------------- --------------- ----------------- ---------------- FHA 9,146 $ 751,604 8.19% 0.5610% VA 2,326 200,464 8.17% 0.5405% Fannie Mae 39,596 4,112,007 7.38% 0.4568% Freddie Mac 21,275 2,243,786 7.38% 0.3622% Private 523 31,880 8.11% 0.3696% Other 4,448 482,653 7.89% 0.3621% ------------- --------------- ----------------- ---------------- TOTAL 77,313 $ 7,822,394 7.50% 0.4342% ============= =============== ================= ================
* Includes $139,376 (1,496 loans) of subprime loans as of December 31, 1999 being temporarily serviced until these loans are sold. The Company's agency-eligible mortgage servicing rights portfolio is generally divided into two segments. The portion of the portfolio that is generated by current loan production is classified as "held-for-sale," and the portion of the portfolio that was acquired through bulk acquisitions or retained for production of servicing income is classified as "available-for-sale." The Company's held-for-sale portfolio had an aggregate underlying unpaid principal balance of $1,499.8 million at December 31, 1999. The Company's available-for-sale portfolio had an aggregate underlying unpaid principal balance of $6,322.6 million at December 31, 1999. As the servicing rights of the available-for-sale portfolio are generally held as a longer-term investment, there are certain prepayment risks inherent to it that do not attach to the portion of the portfolio held-for-sale (the portfolio held-for-sale is generally sold within 90 to 180 days). During periods of declining interest rates, prepayments of mortgage loans increase as homeowners seek to refinance at lower rates, resulting in a decrease in the value of the Company's available-for-sale portfolio. Mortgage loans with higher interest rates are more likely to result in prepayments. The following table sets forth certain information regarding the aggregate underlying unpaid principal balance of mortgage 9 14 loans in the available-for-sale portfolio serviced by the Company. The table includes both fixed and adjustable rate loans. AVAILABLE-FOR-SALE PORTFOLIO
($ in Thousands) At December 31, 1999 ---------------------------------------------------- Aggregate Percentage of Total Unpaid Principal Unpaid Principal Mortgage Interest Rate Balance Balance - -------------------------------- ----------------------- ----------------------- Less than 7.00% $ 1,691,167 26.74% 7.00% - 7.49% 2,199,795 34.79% 7.50% - 7.99% 1,435,872 22.71% 8.00% - 8.49% 599,273 9.48% 8.50% - 8.99% 305,078 4.83% 9.00% - 9.49% 58,032 0.92% Greater than 9.49% 33,374 0.53% ----------------------- ----------------------- TOTAL $ 6,322,591 100.00% ======================= =======================
The following table sets forth the geographic distribution of the Company's available-for-sale portfolio for those states representing more than 3% of the portfolio:
($ in Thousands) At December 31, 1999 -------------------------------------------------------- Aggregate Percent of Unpaid Principal Total Unpaid State Balance Principal Balance - ------------------------ ------------------- ---------------------------------- Massachusetts $ 642,480 10.16% Minnesota 472,983 7.48% California 462,769 7.32% Illinois 378,865 5.99% New York 363,734 5.75% Ohio 316,845 5.01% Texas 302,442 4.78% Connecticut 283,421 4.48% Colorado 250,098 3.96% Michigan 242,784 3.84% Georgia 206,637 3.27% Florida 201,469 3.19% All others 2,198,064 34.77% ------------------- ---------------------------------- TOTAL $6,322,591 100.00% =================== ==================================
The following table sets forth certain information regarding the aggregate underlying unpaid principal balance of the mortgage loans in the held-for-sale portfolio serviced by the Company. The table includes both fixed and adjustable rate loans. 10 15 HELD-FOR-SALE PORTFOLIO
($ in Thousands) At December 31, 1999 -------------------------------------------------- Aggregate Percentage of Unpaid Principal Total Unpaid Mortgage Interest Rate Balance Principal Balance - -------------------------------- ------------------------ ----------------------- Less than 7.00% $ 49,023 3.27% 7.00% - 7.49% 98,276 6.55% 7.50% - 7.99% 569,928 38.00% 8.00% - 8.49% 478,885 31.93% 8.50% - 8.99% 185,589 12.37% 9.00% - 9.49% 20,178 1.35% Greater than 9.50% 97,924 6.53% ------------------------ ----------------------- TOTAL $1,499,803 100.00% ======================== =======================
To help the Company manage its risk related to prepayments of its servicing portfolio, the Company has purchased interest-rate floor contracts, which provide an interest rate differential on a fixed portion of the portfolio in the event interest rates fall below a certain level. For a more detailed discussion of interest rate floor contracts, see Note 16 of the Company's Consolidated Financial Statements, found in the Company's accompanying 1999 Annual Report to shareholders included herein and hereby incorporated by reference. Leasing Operations The Company's wholly-owned subsidiary, Republic Leasing Company, Inc. (Republic Leasing), originates and services small-ticket commercial equipment leases. Substantially all of Republic Leasing's lease receivables are acquired from independent brokers who operate throughout the continental United States. At December 31, 1999 the leasing division had 184 brokers. Lease production was $100.2 million or 1.0% of the Company's total production volume during 1999. At December 31, 1999 Republic Leasing managed a lease servicing portfolio of $166.6 million. Of this managed lease portfolio, $152.3 million was owned and $14.3 million was serviced for investors. The weighted average net yield for the managed lease servicing portfolio at December 31, 1999 was 10.61%. Delinquencies for the managed lease servicing portfolio at December 31, 1999 were 2.76%. Commercial Mortgage Operations The Company's wholly-owned subsidiary, Laureate Capital Corp. (Laureate) originates commercial mortgage loans for various insurance companies and other investors, primarily in Alabama, Florida, Indiana, North Carolina, Pennsylvania, South Carolina, Tennessee and Virginia. Commercial mortgage loans are generally originated in the name of the investor and, in most instances, Laureate retains the right to service the loans under a servicing agreement. Laureate produced $845.0 million or 9% of the Company's total production volume during 1999 through 13 commercial mortgage branches. At December 31, 1999, Laureate was servicing a commercial mortgage loan servicing portfolio of approximately $4.1 billion. The weighted average note rate for the commercial mortgage loan servicing portfolio was 7.94% at December 31, 1999. Delinquencies for the commercial mortgage loan servicing portfolio were 0.29% at December 31, 1999. 11 16 Seasonality The residential mortgage banking industry is generally subject to seasonal trends. These trends reflect the general pattern of resale of homes, which typically peaks during the spring and summer seasons and declines to lower levels from mid-November through January. Refinancings tend to be less seasonal and more closely related to changes in interest rates. The commercial mortgage and small-ticket equipment leasing industries are generally not considered seasonal industries. Changes in Economic Conditions The Company's business is subject to various business risks, including competition from other mortgage banking companies and other financial institutions. Economic conditions affect the consumer's decision to buy or sell residences as well as the number of residential mortgage loan delinquencies and foreclosures, the value of collateral supporting loan portfolios, administrative costs in evaluating and processing mortgage loan applications, and the cost and availability of funds that mortgage banking companies rely upon to make or purchase loans. Changes in the level of consumer confidence, tax laws, real estate values, prevailing interest rates and investment returns expected by the financial community could make mortgage loans of the types originated or purchased by the Company less attractive to borrowers or investors. Competition also may be affected by fluctuations in interest rates, general economic conditions and localized economic conditions. The Company continues to face the same challenges as other companies within the mortgage banking industry and, therefore, is not immune from significant volume declines precipitated by changes in interest rates or other factors beyond its control. Competition The mortgage banking industry is highly competitive. The Company competes with financial institutions, mainly mortgage banking companies, commercial banks and savings and loan associations and, to a lesser extent, credit unions and insurance companies. The Company competes principally by purchasing or originating a variety of mortgage loans, emphasizing the quality of its service and pricing the loans at competitive rates. Many of the Company's competitors may have greater financial resources, better operating efficiencies and longer operating histories than the Company. Many of the nation's largest mortgage banking companies and commercial banks have a significant number of branch offices in areas in which the Company's correspondents and wholesale branches operate. Increased competition for mortgage loans from larger lenders may result in a decrease in the volume of loans purchased or originated by the Company, thereby likely reducing the Company's revenues. At the same time, Fannie Mae and Freddie Mac are developing technologies and business practices that could reduce their reliance on large mortgage banking companies for loan production and enable them to access smaller producers for volume. Due to the current highly competitive market pricing environment, the Company may be unable to achieve its planned level of originations or consummate acquisitions of servicing rights at a satisfactory cost. The Company does not have a significant market share of mortgage banking activities in the areas in which it conducts operations. Both the small-ticket commercial equipment leasing industry and the commercial mortgage banking industry are highly competitive. The Company is subject to competition from other equipment leasing and commercial mortgage banking companies, some of which may be better capitalized. The Company does not have a significant market share of equipment leasing or commercial mortgage banking in the areas in which it conducts operations. 12 17 Due to the foregoing considerations, there can be no assurance that the Company will be able to continue to compete successfully in the markets it serves. Inability to compete successfully would have a material adverse effect on the results of operations and financial condition of the Company. Concentration The Company typically sells the mortgage servicing rights associated with its mortgage production into forward sales contracts. Additionally, from time to time, the Company will sell residential mortgage servicing rights from its available-for-sale portfolio. In 1999 approximately 79% of its sales under these forward sales contracts were to four major customers. In 1998 approximately 97% of its sales under these forward sales contracts were to three major customers. The loss of these purchasers would have a material adverse effect on the Company's business if no suitable replacement could be found. The growth and profitability of the Company's equipment leasing business are dependent to a large extent on the ability to finance an increasing balance of leases held in its portfolio or to sell leases to and service leases for third parties. Currently, Republic Leasing has in place a $200 million lease financing facility and an agreement to offer to sell equipment leases to only one purchaser; however, neither party is obligated to buy or sell. The purchaser has acquired leases on a regular basis from Republic Leasing since December 1997, but there is no assurance of future sales. At December 31, 1999, approximately 9% and 9% of the Company's net lease receivables were located in the states of California and Florida, respectively. At December 31, 1999, approximately 7% and 9% of the Company's net lease receivables were collateralized by computer equipment and titled equipment, respectively. At December 31, 1999, 27% of commercial mortgage loans serviced were for a single customer. In addition, at December 31, 1999, the Company was servicing approximately $14.3 million of leases for a third party. Interest Rate Risks The Company's loans held for sale are generally funded by borrowings under its revolving warehouse credit line. The Company's net warehouse interest income is the difference between the interest income it earns on loans held for sale (generally based on long-term interest rates) and the interest it pays on its borrowings (generally based on short-term interest rates). The factors that can affect this spread include interest rates charged by lenders, the relationship between long-term and short-term interest rates and the use of compensating balances (escrow funds held on deposit with lending banks) to decrease interest rates charged on borrowed funds. There can be no assurance that this spread will not decrease from its current level. A decrease in the spread would have a negative effect on the Company's net interest income. The Company's net income reflects a reduction in interest expense on its borrowings with depository institutions for escrow funds placed with such institutions. Net income could be adversely affected to the extent that any revisions of applicable bank regulations cause these escrow accounts to be recharacterized as demand deposit accounts, thereby requiring reserves to be established with Federal Reserve Banks, which would reduce the amount of the reduction in the Company's interest expense on its borrowings. Other regulatory changes or interpretations that change the ability of the Company to receive credit for escrow balances would adversely affect the Company. 13 18 Certain states require that interest be paid to mortgagors on escrow funds deposited by them to cover mortgage-related payments such as property taxes and insurance premiums. Federal legislation has in the past been introduced that would, if enacted, revise current escrow regulations and establish a uniform interest payment requirement in all states. If such federal legislation were enacted or if additional states enact legislation relating to payment of, or increases in the rate of, interest on escrow balances, or if such legislation were retroactively applied to loans in the Company's servicing portfolio, the Company's earnings would be adversely affected. Regulation The operations of the Company are subject to extensive regulation by federal and state governmental authorities and are subject to various laws and judicial and administrative decisions that, among other things, regulate credit-granting activities, require disclosures to customers, govern secured transactions and establish collection, repossession and claims handling procedures and other trade practices. The Company is subject to the rules and regulations of the FHA, Freddie Mac, Fannie Mae, Ginnie Mae, HUD, the VA and state regulatory authorities with respect to originating, processing, underwriting, selling, securitizing and servicing mortgage loans. In addition, there are other federal and state statutes and regulations, as well as judicial decisions, affecting such activities. Those rules and regulations, among other things, impose licensing obligations on the Company, establish eligibility criteria for mortgage loans, prohibit discrimination and establish underwriting guidelines that include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts, and with respect to VA loans, fix maximum interest rates. Moreover, lenders such as the Company are required to submit annually to the FHA, Freddie Mac, Fannie Mae, Ginnie Mae and the VA audited financial statements, and each regulatory entity has its own financial requirements. The Company's affairs also are subject to examination by the FHA, Freddie Mac, Fannie Mae, Ginnie Mae and the VA at all times to assure compliance with applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act and its related regulations, which prohibit discrimination, and the Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the regulations promulgated thereunder, which require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs, respectively. Many of the aforementioned regulatory requirements are designed to protect the interests of consumers, while others protect the owners or insurers of mortgage loans. Failure to comply with these requirements can lead to loss of approved status, termination of servicing contracts without compensation to the servicer, demands for indemnification or loan repurchases, class-action lawsuits and administrative enforcement actions. Such regulatory requirements are subject to change from time to time and may in the future become more restrictive, thereby making compliance more difficult or expensive or otherwise restricting the ability of the Company to conduct its business as such business is now conducted. There are various state and local laws and regulations affecting the Company's operations. The Company is in possession of licenses in all states in which it does business that require such licenses. Mortgage loans also may be subject to state usury statutes. Litigation In recent years, the mortgage banking industry has been subject to class action lawsuits that allege violations of federal and state laws and regulations, including the propriety of collecting and paying various fees and charges and the calculation of escrow amounts. Most recently, at least 170 purported class action lawsuits have been commenced against various mortgage banking companies, 14 19 including the Company, alleging, inter alia, that the payment of certain fees to mortgage brokers violates the anti-kickback provisions of RESPA. If these cases are resolved against the lenders, it may cause an industry-wide change in the way independent mortgage brokers are compensated. Such a change could have a material adverse effect on the Company and the entire mortgage lending industry. The Company's broker compensation and table-funded correspondent purchase programs permit such payments. Although the Company believes these programs comply with all applicable laws and are consistent with long-standing industry practice and regulatory interpretations, in the future new regulatory interpretations or judicial decisions may require the Company to change its broker compensation and table-funded correspondent purchase practices. Class action lawsuits may continue to be filed in the future against the mortgage banking industry generally. No prediction can be made as to whether the ultimate decisions in any of these class actions will be adverse to the defendant mortgage banking companies. Delinquency and Default The Company's profitability may be negatively impacted by economic downturns because during such periods the frequency of loan defaults tends to increase, thereby increasing the cost to service the loans in the Company's portfolio. Also, the Company is generally at risk for delinquency or default of newly originated or purchased loans. In the case of conventional loans, the Company is generally at risk for any mortgage loan default from origination or purchase by the Company, as the case may be, until the loan is sold (typically less than 45 days). Once the Company sells the loan, the risk of loss from mortgage loan default and foreclosure generally passes to the purchaser or insurer of the loan. The Company has from the time an FHA or VA mortgage loan is originated or purchased until the first payment is due, a minimum of 31 days, to request insurance or a guarantee certificate from the FHA and the VA, respectively. Once the insurance or the guarantee certificate is issued, The Company has no risk of default or foreclosure except with respect to certain losses related to foreclosures of FHA mortgage loans and losses that exceed the VA's guarantee limitation. Moreover, under certain types of servicing contracts, particularly contracts to service loans that have been pooled or securitized, the servicer must advance all or part of the scheduled payments to the owner of the loan, even when loan payments are delinquent. Also, to protect their liens on mortgaged properties, owners of mortgage loans usually require the servicer to advance mortgage and hazard insurance and tax payments on schedule even if sufficient escrow funds are unavailable. Prior to the liquidation of a loan, the servicer must absorb the cost of funds advanced during the time the advance is outstanding. Further, the servicer must bear the increased costs of attempting to collect on delinquent and defaulted mortgage loans. The servicer generally is reimbursed ultimately by the mortgage loan owner or from liquidation proceeds. In addition, if a default is not cured, the mortgage loan will be extinguished as a result of foreclosure proceedings and any servicing income will cease. As a consequence, the Company will forego servicing income from the time such loan becomes delinquent until it is foreclosed upon or is brought current. The Company maintains a reserve for possible losses at a level considered adequate to provide for known and inherent risks related to foreclosure and disposition losses. The Company's evaluation of an adequate level of foreclosure reserves considers past loss experience, industry loss experience, geographic and product concentrations, delinquency trends, economic conditions and other relevant factors. The Company uses currently available information to make such evaluation, therefore future adjustments to the foreclosure reserve will be required as conditions and assumptions are revised in response to changes in trends and the other factors and assumptions relevant to the Company's evaluation. 15 20 With respect to VA loans, the VA guarantees the initial losses on a loan. The guaranteed amount generally ranges from 20% to 35% of the original principal balance. Before each foreclosure sale, the VA determines whether to bid to purchase the foreclosed loan by comparing the estimated net sale proceeds to the outstanding principal balance and the servicer's accumulated reimbursable costs and fees. If this amount is a loss and exceeds the guaranteed amount, the VA typically issues a no-bid and pays the servicer the guaranteed amount. Whenever a no-bid is issued, the servicer absorbs the loss, if any, in excess of the sum of the guaranteed principal and amounts recovered at the foreclosure sale. The Company's historical delinquency and foreclosure rate experience on VA loans has generally been consistent with that of the industry. In the case of loans insured by the FHA, the Company will not be reimbursed for certain amounts if foreclosure becomes necessary. Such amounts include interest on the mortgage loan for the first two months subsequent to the loan becoming delinquent and a portion of the costs of foreclosure (generally the unreimbursed amount of such costs is limited to one-third of such costs). Financing of Operations The Company's primary cash-flow requirement involves the funding of loan production, which is met primarily through external borrowings. In August 1999, the Company and its wholly owned subsidiaries RBMG, Inc., Meritage Mortgage Corporation (Meritage) and RBMG Asset Management Company, Inc. (not including the Company, the Restricted Group), entered into a $540 million warehouse line of credit provided by a syndicate of unaffiliated banks that expires in July 2000. The credit agreement includes covenants requiring the Restricted Group to maintain (i) a minimum net worth of $170 million, plus the Restricted Group's net income subsequent to June 30, 1999, plus 90% of capital contributions to the Restricted Group and minus restricted payments, (ii) a ratio of total Restricted Group liabilities to tangible net worth of not more than 8.0 to 1.0, excluding debt incurred pursuant to gestation and repurchase financing agreements, (iii) RBMG, Inc.'s eligibility as a servicer of Ginnie Mae, FHA, VA, Fannie Mae and Freddie Mac mortgage loans (iv) a mortgage servicing rights portfolio with an underlying unpaid principal balance of at least $5 billion and (v) a ratio of consolidated cash flow to consolidated interest expense (these terms are defined in the loan agreements) of at least 1.50 to 1.00 (the interest rate coverage ratio). The provisions of the agreement also restrict the Restricted Group's ability to engage significantly in any type of business unrelated to the mortgage banking and lending business and the servicing of mortgage loans. In August 1999, the Company and the Restricted Group also entered into a $210 million subprime revolving credit facility and a $250 million servicing revolving credit facility, which expire in July 2000. These facilities include covenants identical to those described above with respect to the warehouse line of credit. The Restricted Group was in compliance with the debt covenants in place at December 31, 1999 after it obtained an amendment and waiver dated February 1, 2000. The covenant that had been violated was the interest rate coverage ratio. The syndicate of unaffiliated banks waived the violation and amended the agreements. The amended agreements require the Restricted Group to maintain an interest rate coverage ratio of 1.10 to 1.00 for the quarter ending March 31, 2000; and 1.20 to 1.00 for any period of two consecutive fiscal quarters thereafter. Although management anticipates continued compliance with current debt covenants, there can be no assurance that the Restricted Group 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. 16 21 RBMG Asset Management Company, Inc., a wholly-owned subsidiary of Meritage, and a bank are parties to a master repurchase agreement, pursuant to which RBMG Asset Management Company, Inc. is entitled from time to time to deliver to the bank eligible subprime mortgage loans in an aggregate principal amount of up to $200 million. The master repurchase agreement has been extended through July 2000. The Company has 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 executed a $6.6 million note in May 1997. This debt is secured by the Company's corporate headquarters. The terms of the related 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 previously described. The Company has entered into a $10.0 million unsecured line of credit agreement that expires in July 2000. The interest rate on funds borrowed is based upon the prime rate announced by a major money center bank. Republic Leasing Company, Inc., a wholly-owned subsidiary of the Company, has a $200 million credit facility to provide financing for its leasing portfolio. The warehouse credit agreement matures in August 2000 and contains various covenants regarding characteristics of the collateral and the performance of the leases originated and serviced by Republic Leasing and that require the Company to maintain a minimum net worth of $60 million and Republic Leasing to maintain a ratio of total liabilities to net worth of no more than 10.0 to 1.0. There can be no assurance that the Company will be able to comply with the covenants in its various credit facilities, and failure to comply could result in the loss of the related financing. In addition, there can be no assurance that the Company will be able to renew these arrangements at the end of their terms or obtain replacement financing on terms acceptable to the Company. To the extent that the Company loses its financing sources, or if the Company experiences difficulty in selling its mortgage loans or mortgage-backed securities, it may have to curtail its mortgage loan origination and purchase activities, which would have a material adverse effect on the Company's operations and financial condition. Changes in the Market for Servicing Rights, Mortgage Loans and Lease Receivables Volume of Mortgage Loans Produced During periods of declining interest rates, the Company typically experiences an increase in loan originations because of increased home purchases and, particularly, increased refinancing activity. Increases in interest rates typically adversely affect refinancing activity, which has an adverse effect on the Company's origination revenues. Sales of Mortgage Loans Gains or losses on sales of mortgage loans may result from changes in interest rates from the time the interest rate on a customer's mortgage loan application is established to the time the company sells the loan. At any given time, the Company has committed to sell substantially all of its agency-eligible mortgage loans that are closed and a percentage of the agency-eligible mortgage loans that are 17 22 not yet closed but for which the interest rate has been established ("pipeline loans"). To manage the interest rate risk of the Company's pipeline loans, the Company continuously projects the percentage of the pipeline loans it expects to close and, on the basis of such projections, enters into forward sales commitments to sell such loans. To reduce the effect of such interest rate changes, the Company employs a variety of techniques, currently consisting of a combination of mandatory forward sales commitments for mortgage-backed securities and put and call option contracts on treasuries. If interest rates make an unanticipated change, the actual percentage of pipeline loans that close may differ from the projected percentage. A sudden increase in interest rates can cause a higher percentage of pipeline loans to close than projected. To the degree that this may not have been anticipated, the Company may not have made forward sales commitments to sell these additional loans and consequently may incur significant losses upon their sale at current market prices, adversely affecting results of operations. Likewise, if a lower percentage of pipeline loans closes than was projected, due to a sudden decrease in interest rates or otherwise, the Company may have committed to sell more loans than actually close and as a result may incur significant losses in fulfilling these commitments, adversely affecting results of operations. This risk is greater during times of volatility of interest rates. Value of Mortgage Servicing Rights The value of the Company's servicing portfolio may be adversely affected if mortgage interest rates decline and loan prepayments increase. In periods of declining interest rates, the economic advantages to borrowers of refinancing their mortgage loans become greater. Increases in the rate of mortgage loan prepayments reduce the period during which the Company receives servicing income from such loans. The Company capitalizes the cost of the acquisition of servicing rights from third parties and capitalizes estimated servicing rights on loans that it originates. The value of servicing rights is based upon the net present value of estimated future cash flows. If the rate of prepayment of the related loans exceeds the rate assumed by the Company, due to a significant reduction in interest rates or otherwise, the value of the Company's servicing portfolio will decrease and accelerated amortization of servicing rights or recognition of an impairment provision may become necessary, thereby decreasing earnings. The Company attempts to mitigate these risks with respect to the value of its servicing rights by maintaining a portfolio of interest rate option contracts whose value tends to increase in periods of declining interest rates thus mitigating the decline in value typical during the same period with respect to servicing rights. However, there can be no assurance that the Company's efforts to mitigate these risks will prevent value loss or impairment provisions. Sales of Mortgage Servicing Rights The prices obtained by the Company upon the sale of its mortgage servicing rights depend upon a number of factors, including the general supply of and demand for mortgage servicing rights, as well as prepayment and delinquency rates on the portfolio of mortgage servicing rights being sold. Interest rate changes can affect the ability to sell, or the profitability of a sale of, mortgage servicing rights. Purchasers of mortgage servicing rights analyze a variety of factors, including prepayment sensitivity of loans underlying servicing rights, to determine the purchase price they are willing to pay. Thus, in periods of declining interest rates, sales of mortgage servicing rights related to higher interest rate loans may be less profitable than sales of mortgage servicing rights related to lower interest rate loans because it is possible that the loans bearing higher interest rates will be refinanced. Because these factors are largely beyond the control of the Company, there can be no assurance that the current level of profitability from the sale of mortgage servicing rights will be maintained. 18 23 Liabilities Under Representations and Warranties In the ordinary course of business, the Company makes representations and warranties to the purchasers and insurers of its mortgage loans and the purchasers of mortgage servicing rights regarding compliance with laws, regulations and program standards and as to accuracy of information. Under certain circumstances, the Company may become liable for certain damages or may be required to repurchase a loan if there has been a breach of representations or warranties. The Company generally receives similar representations and warranties from the correspondents from whom it purchases loans. However, in the event of breaches of such representations and warranties, the Company is subject to the risk that a correspondent may not have the financial capacity to repurchase loans when called upon to do so by the Company or otherwise may not respond to demands made by the Company. Environmental Matters In the course of its business, through the foreclosure process, the Company has acquired, and may acquire in the future, properties securing loans that are in default. Although the Company lends to owners of residential properties, there is a risk that the Company could be required to investigate and cleanup hazardous or toxic substances or chemical releases at such properties after its acquisition and might be held liable to a governmental entity or to third-parties for property damage, personal injury and investigation cleanup costs incurred by such parties in connection with the contamination. To date, the Company has not been required to perform any investigation or cleanup activities of any material nature, nor has the Company been subject to any environmental claims. No assurance can be given, however, that this will remain the case in the future. Changes in the Demand for Mortgage Loans and Leases The Company's operating results can fluctuate substantially from period to period as a result of a number of factors, including the volume of loan and lease production, the level of interest rates, the level of amortization of mortgage servicing rights required by prepayment rates and the performance of the Company's servicing portfolio hedge, which currently consists primarily of interest rate option contracts for ten year Constant Maturity Treasury and Constant Maturity Swap floors. In particular, the Company's results are strongly influenced by the level of loan and lease production, which is influenced by the interest rate environment and other economic factors. Accordingly, it is likely that the net income of the Company will fluctuate substantially from period to period. Changes in the Value of Residual Interests in Subprime Securitizations Residual certificates are classified as trading securities and changes in their value 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 available to the holder of the residual certificate. Significant assumptions used in this valuation include the discount rate, prepayment speed and credit loss estimates. Each of these factors can be significantly affected by, among other things, changes in the interest rate environment and general economic conditions and expose the Company to prepayment, basis and rate risks. Other factors evaluated in the determination of fair value include, but are not necessarily limited to, the 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 19 24 actual prepayment speed and loss experience and other assumptions from those applied for valuation purposes could have a significant effect on the estimated fair value of the residual certificates. Prepayment Risks The market value of servicing rights acquired in bulk transactions, rather than as a by-product of the Company's loan production activities, is initially capitalized at the lower of cost or the estimated present value of future expected net servicing income. Amounts capitalized as mortgage servicing rights are amortized over the period of, and in proportion to, estimated future net servicing income. The Company assesses its capitalized mortgage servicing rights for impairment (on a stratified basis) based on the estimated market values of those rights. Impairments are recognized as a valuation allowance for each impaired stratum. Market value is estimated by an internal valuation which is substantiated for reasonableness by reference to a third-party analysis. Both analyses value such rights in consideration of current forward committed delivery prices, prevailing interest, prepayment and default rates, mortgage to treasury spreads and other relevant factors as appropriate or allocable to each valuation stratum. Dependence Upon Independent Mortgage Brokers and Mortgage Bankers The Company depends largely upon independent mortgage bankers, including smaller mortgage companies and commercial banks, and, to a lesser extent, upon independent mortgage brokers, for its originations and purchases of mortgage loans. Substantially all of the independent mortgage brokers and mortgage bankers with whom the Company does business deal with multiple loan originators for each prospective borrower. Wholesale lenders, such as the Company, compete for business based upon pricing, service, loan fees and costs and other factors. The Company's competitors also seek to establish relationships with the same independent mortgage bankers and mortgage brokers with whom the Company seeks to do business, none of whom is obligated by contract or otherwise to continue to do business with the Company. Future operating and financial results of the Company will be susceptible to fluctuations in the volume and cost of its broker and mortgage banker-sourced loans resulting from, among other things, competition from other purchasers of such loans. Possible Changes in Accounting Estimates In preparing the financial statements, management is required to make estimates based on available information that can affect the reported amounts of assets, liabilities and disclosures as of the balance sheet date and revenues and expenses for the related periods. Such estimates relate principally to the Company's allowance for foreclosure losses and repurchased loans, its allowance for lease losses and the fair values of its residual certificates. Additionally, estimates concerning the fair values of mortgage loans held-for-sale, lease receivables, servicing rights, servicing hedges and the Company's other hedging instruments are all relevant to ensuring that leases and mortgage loans are carried at the lower of cost or market, and that potential impairments of servicing rights are recognized as and if required. Because of the inherent uncertainties associated with any estimation process and due to possible future changes in market and economic conditions that will affect fair values, it is possible that actual future results in realization of the underlying assets and liabilities could differ significantly from the amounts reflected as of the balance sheet date. 20 25 Federal Programs; Availability of Active Secondary Market The Company's ability to generate funds by sales of mortgage-backed securities is largely dependent upon the continuation of programs administered by Fannie Mae, Freddie Mac and Ginnie Mae, which facilitate the issuance of such securities, as well as the Company's continued eligibility to participate in such programs. Although the Company is not aware of any proposed discontinuation of, or significant reduction in, the operation of such programs, any such changes could have a material adverse effect on the Company's operations. The Company anticipates that it will continue to remain eligible to participate in such programs, but any significant impairment of such eligibility would materially adversely affect its operations. In addition, the mortgage loan products eligible for such programs may be changed from time to time by the sponsor. The profitability of specific types of mortgage loan products may vary depending on a number of factors, including the administrative costs to the Company of originating or purchasing such types of mortgage loans. There can be no assurance that the Company will be successful in effecting the sale of mortgage loans at the historic price or volume levels in any particular future periods. Any significant change in the secondary market level of activity or underwriting criteria of Fannie Mae, Freddie Mac or private investors could have a material adverse effect on the gain or loss on sales of mortgage loans recorded by the Company and therefore on the Company's results of operations. Effect of Certain Charter and Bylaw Provisions; Possible Issuance of Preferred Stock Certain provisions of the Company's Certificate of Incorporation and the Company's Bylaws could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving the Company, even if such events could be beneficial to the interests of the Company's stockholders. For example, the Company's Certificate of Incorporation and the Company's Bylaws provide certain limitations on the calling of a special meeting of stockholders, and the Company's Bylaws require advance notice before certain proposals can be considered at stockholder meetings. Pursuant to the Company's Certificate of Incorporation, shares of preferred stock may be issued in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The ability to issue preferred stock provides desirable flexibility in connection with acquisitions and other corporate transactions. However, the rights of the holders of the Company's common stock will be subject to, and may be adversely affected by, any preferred stock that may be issued in the future, and the issuance of preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of preferred stock; however, the Company has adopted a Rights Agreement which provides that if a person or group acquires 15% or more of the Company's Common Stock, shareholders would have the right to acquire shares of preferred stock. The existence of the Rights Agreement has anti-takeover effects because it may deter certain potential acquirors from making takeover proposals or tender offers. Year 2000 Risks The Company's growth motivated a generalized review of the adequacy of its existing software environment and technological infrastructure to meet the Company's long-term operating requirements. The Company completed implementation of LoanXchange and other mission critical systems discussed in previous filings prior to December 31, 1999. All required modifications to existing systems or systems provided by third parties were completed prior to December 31, 1999. The Company has had no significant Year 2000 system problems to date. 21 26 Employees As of December 31, 1999, the Company had 1,127 employees, substantially all of whom were full-time employees. None of the Company's employees are represented by a union. The Company considers its relations with its employees to be good. Executive Officers of the Registrant DOUGLAS K. FREEMAN, age 49, has been Chief Executive Officer of the Company since January 2000. Mr. Freeman was President of Bank of America's Consumer Finance Group, a major division of Bank of America. Mr. Freeman was employed as Consumer Corporate Bank Executive with Barnett Bank, Inc. from 1991 through March 1996. He was then promoted to Chief Consumer Bank Executive in March 1996 and held that position with Barnett Bank, Inc. until March 1998. NationsBank, N.A. acquired Barnett Bank, Inc. in March 1998 and Mr. Freeman became President of the Consumer Finance Division of NationsBank, N.A. until April 1999. Bank of America merged with NationsBank, N.A. in April 1999 and Mr. Freeman became the President of the Consumer Finance Group from April 1999 through January 2000. DAVID W. JOHNSON, JR., age 51, has been President of the Company since July 1999. Previously he had been Chief Executive Officer of the Company since October 1999, Vice Chairman since October 1992 and Managing Director since July 1993. RICHARD M. DUNCAN, age 52, has been President and Chief Executive Officer of RBMG, Inc. (the Company's wholly-owned subsidiary handling agency-eligible operations) since July 1999. Previously, Mr. Duncan had been Senior Executive Vice President of Production since January 1997 and Executive Vice President of Production since January 1995. STEVEN F. HERBERT, age 43, has been Corporate Senior Executive Vice President and Corporate Chief Financial Officer of the Company since July 1999. Previously, he had been Senior Executive Vice President and Chief Financial Officer of the Company since January 1997 and Executive Vice President and Chief Financial Officer since July 1995. From September 1985 through June 1995, Mr. Herbert was employed by Price Waterhouse LLP, most recently as the Client Services Director of the Columbia, South Carolina office. LARRY W. REED, age 54, has been President and Chief Executive Officer of Meritge Mortgage Corporation (the Company's wholly-owned subsidiary handling subprime operations) since July 1999. Prior to that he was President of Meritage Mortgage Corporation since 1997. In August 1996 Mr. Reed came to the Company as a Senior Vice President and Director of Subprime Lending. Mr. Reed was the founder, President, and Chief Executive Officer of B First Residential, a subprime mortgage lender in the Northeast, from 1992 until its sale in 1995. ITEM 2. PROPERTIES The Company's corporate and administrative headquarters, which is owned by the Company, is located in Columbia, South Carolina and is subject to a mortgage in the amount of $6.4 million as of December 31, 1999. This facility comprises a building having approximately 120,000 square feet which houses the Company's loan production and administrative operating groups and 16.5 acres of land. The Company purchased an additional 17.9 acres of land adjacent to this property in January 1996. In addition, the Company leases a 56,000 square foot facility in Columbia, South Carolina which houses its loan servicing operations. The Company has leased smaller amounts of office space in Columbia, South Carolina and in 24 other states, consisting primarily of its leasing, commercial mortgage, wholesale and subprime branch offices and regional underwriting centers. 22 27 The Company's primary computer data system is provided through ALLTEL Information Services, Mortgage Division (ALLTEL) (formerly Computer Power, Inc. of Jacksonville, Florida). Company personnel enter data on computer hardware located in-house. The data are transmitted directly to ALLTEL where it is processed. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of its business, the Company and its subsidiaries are from time to time subject to litigation. The Company and its subsidiaries are not parties to any material pending legal proceedings other than ordinary routine litigation incidental to their respective businesses. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the NASDAQ. Additional information required by this item is set forth under the caption "Stock Data" in the Company's accompanying 1999 Annual Report to Shareholders and is hereby incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Financial Highlights" in the Company's accompanying 1999 Annual Report to Shareholders is hereby incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" (including all tables presented under that caption) in the Company's accompanying 1999 Annual Report to Shareholders is hereby incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information set forth under the caption "Quantitative and Qualitative Disclosure About Market Risk" in the Company's accompanying 1999 Annual Report to Shareholders is hereby incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following information set forth in the Company's accompanying 1999 Annual Report to shareholders is hereby incorporated herein by reference: 23 28 The Consolidated Financial Statements of Resource Bancshares Mortgage Group, Inc., together with the report thereon of PricewaterhouseCoopers LLP dated February 7, 2000, including all Notes to such Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in accountants or disagreements with accountants on accounting and financial disclosure matters that require disclosure pursuant to Item 304 of Regulation S-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information set forth (i) under the caption "Proposal No. 1: Election of Directors" in the definitive 2000 Proxy Statement of the Company furnished to shareholders in connection with its 2000 Annual Meeting (the "2000 Proxy Statement"), with respect to the name of each nominee or director, his age, his positions and offices with the registrant, his business experience, his directorships in other public companies and his service on the registrant's Board of Directors, and (ii) under the caption "Beneficial Ownership--Section 16(a) Beneficial Ownership Reporting Compliance" in the 2000 Proxy Statement with respect to Section 16 matters is hereby incorporated herein by reference. Information with respect to executive officers is set forth in Item 1 of this Report on Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information with respect to the remuneration of executive officers and directors and certain other matters set forth in the 2000 Proxy Statement (i) under the caption "Compensation of Officers and Directors" and (ii) under the caption "Compensation Committee Interlocks and Insider Participation" to the extent such information is required by Item 402 of Regulation S-K to be set forth herein is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to the security ownership of (i) persons who beneficially own 5% or more of the outstanding shares of the Company's common stock, par value $.01 per share, (ii) directors, nominees and named executive officers individually and (iii) directors and executive officers as a group set forth in the 2000 Proxy Statement under the caption "Beneficial Ownership - --Beneficial Owners of 5% or more of the Common Stock and --Stock Ownership of the Company's Directors, Nominees and Executive Officers" is, to the extent such information is required by Item 403 of Regulation S-K to be set forth herein, hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to relationships and related transactions between the Company and any director, nominee for director, executive officer, security holder owning 5% or more of the Company's voting securities or any associate or member of the immediate family of any of the above, as set forth in the 2000 Proxy Statement under the caption "Compensation Committee Interlocks and Insider Participation" is, to the extent such information is required by Item 404 of Regulation S-K to be set forth herein, hereby incorporated herein by reference. 24 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a. The following documents are filed as part of this report: Page In Annual Report* (1) Consolidated Financial Statements as of December 31, 1999: Consolidated Balance Sheet at December 31, 1999 and 1998 .................................. Consolidated Statement of Income for each of the three years in the period ended December 31, 1999 ............................................................... Consolidated Statement of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1999 ............... Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 1999 ............................................................... Notes to Consolidated Financial Statements ...............................................
* Incorporated by reference from the indicated pages of the Company's 1999 Annual Report to Shareholders. (2) All other schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. (3) The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index to Exhibits to this Annual Report on Form 10-K (pages A to F). b. Not applicable c. The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index to Exhibits to this Annual Report on Form 10-K (pages A to F). d. Not applicable With the exception of the information herein expressly incorporated by reference, the Company's 1999 Annual Report to Shareholders and 2000 Proxy Statement shall not be deemed filed as part of this Annual Report on Form 10-K. 25 30 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) 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. Date: March 29, 2000 By: s/ Douglas K. Freeman ---------------------------------------- Douglas K. Freeman Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- s/ Boyd M. Guttery Chairman of the Board March 29, 2000 - -------------------------- Boyd M. Guttery s/ Douglas K. Freeman Chief Executive Officer March 29, 2000 - -------------------------- (principal executive officer) Douglas K. Freeman and Director s/ David W. Johnson, Jr. President and Director March 29, 2000 - -------------------------- David W. Johnson, Jr. s/ Steven F. Herbert Corporate Senior Executive March 29, 2000 - -------------------------- Vice President and Corporate Steven F. Herbert Chief Financial Officer (principal financial and accounting officer) Director March __, 2000 - -------------------------- Stuart M. Cable Director March __, 2000 - -------------------------- Robin C. Kelton s/ John. O. Wolcott Director March 29, 2000 - -------------------------- John O. Wolcott 26 31 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 3.5 Amendment to Bylaws of Resource Bancshares Mortgage Group, Inc. dated January 28, 1999 * incorporated by reference to Exhibit 3.5 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 3.6 Amendment to Bylaws of Resource Bancshares Mortgage Group, Inc. incorporated by * reference to Exhibit 3.1 of the Registrant's Registration No. 333-82105 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 Plan 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 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 10.1 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 (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 10.3 Termination Agreement dated June 3, 1993, between the Registrant and * David W. Johnson, Jr. incorporated by reference to Exhibit 10.9 (A) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993
A 32
EXHIBIT NO. DESCRIPTION PAGE - ----------- ----------- ---- 10.4 (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 Registrant 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 10.5 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 10.6 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 10.7 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 10.8 Assignment and Assumption of Office Lease incorporated by reference to Exhibit 10.6 * of the Registrant's Registration No. 33-53980 10.9 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 10.10 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 10.11 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 10.12 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 10.13 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 10.14 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 10.15 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
B 33
EXHIBIT NO. DESCRIPTION PAGE - ----------- ----------- ---- 10.16 Amendment to Pension Plan effective January 1, 1995 incorporated by * reference to Exhibit 10.42 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 10.17 (A) Phantom 401(k) Plan incorporated by reference to Exhibit 10.24 of * the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (B) Amendment to Phantom 401(k) Plan incorporated by reference to Exhibit * 10.17(B) of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1999 (C) Merger and Transfer Agreement Between The Resource Bancshares * Mortgage Group, Inc. and Fidelity Management Trust Company incorporated by reference to Exhibit 10.53 of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1999. 10.18 Resource Bancshares Mortgage Group, Inc. Supplemental Executive Retirement Plan * incorporated by reference to Exhibit 10.14 of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1998. 10.19 First Amendment to Resource Bancshares Mortgage Group, Inc. Supplemental Executive * Retirement Plan dated October 28, 1998 incorporated by reference to Exhibit 10.19 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 10.20 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 10.21 Stock Investment Plan incorporated by reference to Exhibit 4.1 of the Registrant's * Registration No. 33-87536 10.22 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 10.23 Amendment II to Stock Investment Plan dated November 30, 1998 * incorporated by reference To Exhibit 4.1(c) of the Registrant's Registration Statement No. 333-68909 10.24 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 10.25 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 10.26 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 10.27 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
C 34
EXHIBIT NO. DESCRIPTION PAGE - ----------- ----------- ---- 10.28 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 10.29 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 10.30 (A) ESOP Notes dated January 20, 1998, April 1, 1998, July 1, 1998 and October 1, * 1998 between the Registrant and The Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust incorporated by reference to Exhibit 10.30 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (B) ESOP Notes dated March 8, 1999, April 26, 1999, July 1, 1999 and October 1, ______ 1999 between the Registrant and The Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust 10.31 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 10.32 Amendment to Resource Bancshares Mortgage Group, Inc. Formula Stock * Option Plan and Non-Qualified Stock Option Plan incorporated by reference to Exhibit 10.42 of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997 10.33 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 10.34 Second Amendment to Resource Bancshares Mortgage Group, Inc. Formula Stock * Option Plan dated October 28, 1998 incorporated by reference to Exhibit 10.34 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 10.35 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 10.36 First Amendment to Omnibus Stock Award Plan and form of Incentive Stock Option * Agreement and Release to the Omnibus Stock Award Plan incorporated by reference to Exhibit 10.44 of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1998. 10.37 Second Amendment to Resource Bancshares Mortgage Group, Inc. Omnibus * Stock Award Plan dated October 29, 1998 incorporated by reference to Exhibit 10.37 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 10.38 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 10.39 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
D 35
EXHIBIT NO. DESCRIPTION PAGE - ----------- ----------- ---- 10.40 Form of Non-Qualified Stock Option Agreement (Non-Qualified Stock * Option Plan), incorporated by reference to Exhibit 10.41 of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997 10.41 First Amendment to Resource Bancshares Mortgage Group, Inc. * Non-Qualified Stock Option Plan dated January 29, 1997 incorporated by reference to Exhibit 10.41 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 10.42 Second Amendment to the Non-Qualified Stock Option Plan 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 10.43 Third Amendment to Resource Bancshares Mortgage Group, Inc. * Non-Qualified Stock Option Plan dated October 28, 1998 incorporated by reference to Exhibit 10.43 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 10.44 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 10.45 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 10.46 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 10.47 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 10.48 (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 10.49 (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 Registrant, Lee * E. Shelton and Constance P. Shelton dated January 31, 1997 incorporated by reference to
E 36
EXHIBIT NO. DESCRIPTION PAGE - ----------- ----------- ---- Exhibit 10.44 of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997 10.50 Preferred Provider Organization Plan for Retired Executives incorporated by reference to * Exhibit 10.43 of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1998 10.51 Resource Bancshares Mortgage Group, Inc. Flexible Benefits Plan Amended and * Restated as of January 1, 1998 incorporated by reference to Exhibit 10.51 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 10.52 The Resource Bancshares Mortgage Group, Inc. Nonqualified Deferred Compensation * Plan effective April 1, 1999 incorporated by reference to Exhibit 10.52 of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1999 10.53 (B) Voluntary Employees' Beneficiary Association Trust for the Employees of Resource Bancshares Mortgage Group, Inc. _____ 11.1 Statement re: Computation of Net Income per Common Share _____ 13.1 1999 Annual Report to Shareholders _____ 21.1 Subsidiaries of the Registrant _____ 23.1 Consents of PricewaterhouseCoopers LLP _____ 27.1 Financial Data Schedule _____
- ---------------------------------- * Incorporated by reference F EX-10.30B 2 ESOP NOTES 1 EXHIBIT 10.30(b) THIS ESOP NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM. ESOP NOTE $749,998.50 March 8, 1999 FOR VALUE RECEIVED, the undersigned, RESOURCE BANCSHARES MORTGAGE GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST ("Borrower"), promises to pay to the order of RESOURCE BANCSHARES MORTGAGE GROUP, INC. ("Lender") the principal sum of Seven Hundred Forty Nine Thousand Nine Hundred Ninety Eight and 50/100 Dollars ($749,998.50) together with interest thereon described herein, in accordance with the terms and conditions of that certain ESOP Loan and Security Agreement by and between Borrower and Lender, dated May 3, 1996 ("Loan Agreement"). Borrower also promises to pay interest on the unpaid principal balance hereof, commencing as of the date of disbursement of funds hereunder, at the rate of 6.25% per annum. The principal amount of this Note shall be due and payable in eight annual installments on the anniversary date of this Note occurring in each of the succeeding eight years following the date of this Note. The first seven annual principal installments shall be in the amount of $100,000, with the eighth annual principal installment of $49,998.50. Accrued interest shall be payable in arrears at the same time that payments of principal are made. Borrower waives presentment for payment, demand, notice of nonpayment, notice of protest and protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default, dishonor or enforcement of the payment of this Note or by the Loan Agreement, and shall not be in any manner affected by any extension of time, renewal, waiver or modification granted or consented by Lender. Borrower consents to any and all extensions of time, renewals, waivers or modifications that may be granted by Lender with respect to payment or other provisions of this Note and the 1 2 Loan Agreement, and to the release of any property now or hereafter securing this Note with or without substitution. This Note is the ESOP Note referred to in the Loan Agreement and is entitled to all of the benefits and obligations specified in the Loan Agreement, including but not limited to any Pledged Shares held as collateral. This Note is without recourse to Borrower and is payable solely from the sources specified in the Loan Agreement. Terms defined in the Loan Agreement are used herein with the same meanings. RESOURCE BANCSHARES MORTGAGE GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST By: HBSC BANK, USA TRUSTEE By: ________________________________________ Stephen J. Hartman, Jr., solely in his capacity as authorized signer for the Trustee of the Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust, and not in his individual capacity 2 3 THIS ESOP NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM. ESOP NOTE $749,955.73 April 26, 1999 FOR VALUE RECEIVED, the undersigned, RESOURCE BANCSHARES MORTGAGE GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST ("Borrower"), promises to pay to the order of RESOURCE BANCSHARES MORTGAGE GROUP, INC. ("Lender") the principal sum of Seven Hundred Forty Nine Thousand Nine Hundred Fifty Five and 73/100 Dollars ($749,955.73) together with interest thereon described herein, in accordance with the terms and conditions of that certain ESOP Loan and Security Agreement by and between Borrower and Lender, dated May 3, 1996 ("Loan Agreement"). Borrower also promises to pay interest on the unpaid principal balance hereof, commencing as of the date of disbursement of funds hereunder, at the rate of 6.25% per annum. The principal amount of this Note shall be due and payable in eight annual installments on the anniversary date of this Note occurring in each of the succeeding eight years following the date of this Note. The first seven annual principal installments shall be in the amount of $100,000, with the eighth annual principal installment of $49,955.73. Accrued interest shall be payable in arrears at the same time that payments of principal are made. Borrower waives presentment for payment, demand, notice of nonpayment, notice of protest and protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default, dishonor or enforcement of the payment of this Note or by the Loan Agreement, and shall not be in any manner affected by any extension of time, renewal, waiver or modification granted or consented by Lender. Borrower consents to any and all extensions of time, renewals, waivers or modifications that may be granted by Lender with respect to payment or other provisions of this Note and the 1 4 Loan Agreement, and to the release of any property now or hereafter securing this Note with or without substitution. This Note is the ESOP Note referred to in the Loan Agreement and is entitled to all of the benefits and obligations specified in the Loan Agreement, including but not limited to any Pledged Shares held as collateral. This Note is without recourse to Borrower and is payable solely from the sources specified in the Loan Agreement. Terms defined in the Loan Agreement are used herein with the same meanings. RESOURCE BANCSHARES MORTGAGE GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST By: HSBC BANK, USA, TRUSTEE By: __________________________ Stephen J. Hartman, Jr., solely in his capacity as authorized signer for the Trustee of the Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust, and not in his individual capacity 2 5 THIS ESOP NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM. ESOP NOTE $749,924.78 July 1, 1999 FOR VALUE RECEIVED, the undersigned, RESOURCE BANCSHARES MORTGAGE GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST ("Borrower"), promises to pay to the order of RESOURCE BANCSHARES MORTGAGE GROUP, INC. ("Lender") the principal sum of Seven Hundred Forty Nine Thousand Nine Hundred Twenty Four and 78/100 Dollars ($749,924.78) together with interest thereon described herein, in accordance with the terms and conditions of that certain ESOP Loan and Security Agreement by and between Borrower and Lender, dated May 3, 1996 ("Loan Agreement"). Borrower also promises to pay interest on the unpaid principal balance hereof, commencing as of the date of disbursement of funds hereunder, at the rate of 6.50% per annum. The principal amount of this Note shall be due and payable in eight annual installments on the anniversary date of this Note occurring in each of the succeeding eight years following the date of this Note. The first seven annual principal installments shall be in the amount of $100,000, with the eighth annual principal installment of $49,924.78. Accrued interest shall be payable in arrears at the same time that payments of principal are made. Borrower waives presentment for payment, demand, notice of nonpayment, notice of protest and protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default, dishonor or enforcement of the payment of this Note or by the Loan Agreement, and shall not be in any manner affected by any extension of time, renewal, waiver or modification granted or consented by Lender. Borrower consents to any and all extensions of time, renewals, waivers or modifications that may be granted by Lender with respect to payment or other provisions of this Note and the 1 6 Loan Agreement, and to the release of any property now or hereafter securing this Note with or without substitution. This Note is the ESOP Note referred to in the Loan Agreement and is entitled to all of the benefits and obligations specified in the Loan Agreement, including but not limited to any Pledged Shares held as collateral. This Note is without recourse to Borrower and is payable solely from the sources specified in the Loan Agreement. Terms defined in the Loan Agreement are used herein with the same meanings. RESOURCE BANCSHARES MORTGAGE GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST By: HSBC BANK, USA, TRUSTEE By: __________________________ Stephen J. Hartman, Jr., solely in his capacity as authorized signer for the Trustee of the Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust, and not in his individual capacity 2 7 THIS ESOP NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM. ESOP NOTE $749,988.05 October 1, 1999 FOR VALUE RECEIVED, the undersigned, RESOURCE BANCSHARES MORTGAGE GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST ("Borrower"), promises to pay to the order of RESOURCE BANCSHARES MORTGAGE GROUP, INC. ("Lender") the principal sum of Seven Hundred Forty Nine Thousand Nine Hundred Eighty Eight and 05/100 Dollars ($749,988.05) together with interest thereon described herein, in accordance with the terms and conditions of that certain ESOP Loan and Security Agreement by and between Borrower and Lender, dated May 3, 1996 ("Loan Agreement"). Borrower also promises to pay interest on the unpaid principal balance hereof, commencing as of the date of disbursement of funds hereunder, at the rate of 6.75% per annum. The principal amount of this Note shall be due and payable in eight annual installments on the anniversary date of this Note occurring in each of the succeeding eight years following the date of this Note. The first seven annual principal installments shall be in the amount of $100,000, with the eighth annual principal installment of $49,988.05. Accrued interest shall be payable in arrears at the same time that payments of principal are made. Borrower waives presentment for payment, demand, notice of nonpayment, notice of protest and protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default, dishonor or enforcement of the payment of this Note or by the Loan Agreement, and shall not be in any manner affected by any extension of time, renewal, waiver or modification granted or consented by Lender. Borrower consents to any and all extensions of time, renewals, waivers or modifications that may be granted by Lender with respect to payment or other provisions of this Note and the 1 8 Loan Agreement, and to the release of any property now or hereafter securing this Note with or without substitution. This Note is the ESOP Note referred to in the Loan Agreement and is entitled to all of the benefits and obligations specified in the Loan Agreement, including but not limited to any Pledged Shares held as collateral. This Note is without recourse to Borrower and is payable solely from the sources specified in the Loan Agreement. Terms defined in the Loan Agreement are used herein with the same meanings. RESOURCE BANCSHARES MORTGAGE GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST By: HSBC BANK, USA, TRUSTEE By: __________________________ Stephen J. Hartman, Jr., solely in his capacity as authorized signer for the Trustee of the Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust, and not in his individual capacity 2 EX-10.53B 3 VOL EMPLOY BENEFICIARIES ASSOC TRUST 1 EXHIBIT 10.53 VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATION TRUST FOR THE EMPLOYEES OF RESOURCE BANCSHARES MORTGAGE GROUP, INC. 2 TABLE OF CONTENTS Page ---- ARTICLE I TRUSTEE AND TRUST FUND 1.1 NAME OF TRUST 2 1.2 TRUST FUND 2 1.3 QUALIFIED TRUST 2 ARTICLE II PLAN 2.1 DELIVERY OF PLAN TO TRUSTEE 3 2.2 PARTICIPANT'S AND BENEFICIARY'S RIGHTS 3 ARTICLE III ADMINISTRATOR 3.1 NOTIFICATION OF NAME OF ADMINISTRATOR 4 3.2 PLAN ADMINISTRATOR DIRECTIONS 4 ARTICLE IV CONTRIBUTIONS 4.1 RECEIPT OF CONTRIBUTIONS 5 ARTICLE V TRUSTEE 5.1 BASIC RESPONSIBILITIES OF THE TRUSTEE 6 5.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE 6 5.3 OTHER POWERS OF THE TRUSTEE 7 5.4 DUTIES OF THE TRUSTEE REGARDING PAYMENTS 10 5.5 POST-RETIREMENT BENEFITS TO KEY EMPLOYEES 10 5.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES 10 5.7 ANNUAL REPORT OF THE TRUSTEE 10 5.8 AUDIT 11 5.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE 12 i 3 ARTICLE VI AMENDMENT, TERMINATION, AND MERGERS 6.1 AMENDMENT 13 6.2 TERMINATION 13 ARTICLE VII MISCELLANEOUS 7.1 ALIENATION 14 7.2 CONSTRUCTION OF AGREEMENT 14 7.3 GENDER AND NUMBER 14 7.4 LEGAL ACTION 15 7.5 PROHIBITION AGAINST DIVERSION OF FUNDS 15 7.6 BONDING 15 7.7 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE 15 7.8 INSURER'S PROTECTIVE CLAUSE 15 7.9 RECEIPT AND RELEASE FOR PAYMENTS 16 7.10 HEADINGS 16 ii 4 VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATION TRUST FOR THE EMPLOYEES OF RESOURCE BANCSHARES MORTGAGE GROUP, INC. THIS AGREEMENT, made and entered into this day of November, 1999, by and between RESOURCE BANCSHARES MORTGAGE GROUP, INC. (herein referred to as the "Employer") and HSBC BANK, USA (herein referred to as the "Trustee"). W I T N E S S E T H : WHEREAS, the Employer has concurrently herewith adopted a 501(c)(9) plan known as the VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATION PLAN FOR THE EMPLOYEES OF RESOURCE BANCSHARES MORTGAGE GROUP, INC. (herein referred to as the "Plan"); and WHEREAS, under the terms of the Plan, funds will from time to time be contributed to the Trust which funds as and when received by the Trustee, will constitute a trust fund to be held by said Trustee under the Plan for the benefit of the Participants and of their Beneficiaries; and WHEREAS, the Employer desires the Trustee to hold and administer such funds and the Trustee is willing to hold and administer such funds pursuant to the terms of this Agreement; and WHEREAS, the Employer intends that this Trust (and the Plan attached hereto) shall constitute an employee welfare benefit plan under Section 3(1) of the Employee Retirement Income Security Act of 1974 (ERISA) and as such shall be subject to the requirements of Parts 1 and 4 of Subtitle B, Title I of ERISA; NOW, THEREFORE, for and in consideration of the premises and of the mutual covenants herein contained, the Employer and the Trustee do hereby covenant and agree as follows: 1 5 ARTICLE I TRUSTEE AND TRUST FUND 1.1 NAME OF TRUST This trust shall be entitled the "VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATION TRUST FOR THE EMPLOYEES OF RESOURCE BANCSHARES MORTGAGE GROUP, INC." (hereinafter referred to as the "Trust"), and shall carry into effect the provisions of the Plan created prior to, or concurrently herewith and forming a part hereof. With the exception of the terms "Employer", "Plan", "Trustee" and "Trust" which are defined in this Agreement, the definitions in such Plan are hereby incorporated herein by reference. The Trustee hereby agrees to act as Trustee of the Trust, and to take, hold, invest, administer and distribute in accordance with the following provisions, any and all contributions and assets paid or delivered to the Trustee pursuant to the Plan. 1.2 TRUST FUND All of the assets at any time held hereunder by the Trustee are hereinafter referred to collectively as the "Trust Fund". All right, title and interest in and to the assets of the Trust Fund shall be at all times, vested exclusively in the Trustee. The Trustee shall receive, take and hold any contributions paid to the Trustee in cash or in other property acceptable to the Trustee. All contributions so received together with the income therefrom and any other increment thereon shall be held, managed and administered by the Trustee pursuant to the terms of this Agreement without distinction between principal and income and without liability for the payment of interest thereon. The Trustee shall not be responsible for collection of any contributions to the Plan. 1.3 QUALIFIED TRUST The Trust is hereby designated as constituting a part of the Plan which is intended to continue to qualify and to be tax exempt under Section 501(c)(9) of the Code, as amended from time to time. Until advised otherwise, the Trustee may conclusively presume that this Trust is qualified under Section 501(c)(9) of the Code as amended from time to time, and that this Trust is exempt from federal income taxes. 2 6 ARTICLE II PLAN 2.1 DELIVERY OF PLAN TO TRUSTEE The Employer shall deliver to the Trustee a copy of the Plan and of any amendments thereto for convenience of reference, but rights, powers, titles, duties, discretion and immunities of the Trustee shall be governed solely by this instrument without reference to the Plan. 2.2 PARTICIPANT'S AND BENEFICIARY'S RIGHTS This Plan shall not be deemed to constitute a contract between the Employer and any Participant or Beneficiary or to be a consideration or an inducement for the employment of any Participant or Employee. Nothing contained in this Plan shall be deemed to give any Participant or Employee the right to be retained in the service of the Employer or to interfere with the right of the Employer to discharge any Participant of Employee at any time regardless of the effect which such discharge shall have upon him as a Participant of this Plan. 3 7 ARTICLE III ADMINISTRATOR 3.1 NOTIFICATION OF NAME OF ADMINISTRATOR The Plan provides for the appointment of an Administrator or Administrators to administer the Plan. The Employer shall notify the Trustee in writing of the name of the Administrator, and of any change in the identity of such Administrator. Until notified of the change, the Trustee shall be fully protected in acting upon the assumption that the identity of the Administrator has not been changed. 3.2 PLAN ADMINISTRATOR DIRECTIONS The Administrator shall have sole responsibility for determining the existence, non-existence, nature and amount of the rights and interests of all persons in the Trust Fund. All directions by the Administrator to the Trustee shall be in writing signed by such Administrator. The Employer shall furnish to the Trustee a specimen signature of the Administrator or Administrators at the time he or they are appointed. 4 8 ARTICLE IV CONTRIBUTIONS 4.1 RECEIPT OF CONTRIBUTIONS The Trustee shall receive all contributions paid in cash or other property and all contributions so received together with the income therefrom and any increment thereon shall be held, managed and administered by the Trustee pursuant to this Agreement without distinction between principal and income. The Trustee shall have no duty to require any contributions to be made to the Trust by the Employer or to determine that the amounts received comply with the Plan, or to determine that the Trust Fund is adequate to provide the benefits payable pursuant to the Plan. 5 9 ARTICLE V TRUSTEE 5.1 BASIC RESPONSIBILITIES OF THE TRUSTEE The Trustee shall have the following categories of responsibilities: (a) Consistent with the "funding policy and method" determined by the Employer to invest, manage, and control the Plan assets subject, however, to the direction of an Investment Manager if the Employer should appoint such manager as to all or a portion of the assets of the Plan in accordance with the provisions of the Plan; (b) At the direction of the Administrator, to pay benefits required under the Plan to be paid to Participants or Beneficiaries. (c) To maintain records of receipts and disbursements and furnish to the Employer and/or Administrator for each Plan Year a written annual report per Section 5.7. If there shall be more than one Trustee, they shall act by a majority of their number, but may authorize one or more of them to sign papers on their behalf. 5.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE (a) The Trustee shall invest and reinvest the Trust Fund to keep the Trust Fund invested without distinction between principal and income and in such securities or property, real or personal, wherever situated, as the Trustee shall deem advisable, including, but not limited to, stocks, common or preferred, bonds and other evidences of indebtedness or ownership, and real estate or any interest therein. The Trustee shall at all times in making investments of the Trust Fund consider, among other factors, the short and long-term financial needs of the Plan on the basis of information furnished by the Employer. In making such investments, the Trustee shall not be restricted to securities or other property of the character expressly authorized by the applicable law for trust investments; however, the Trustee shall give due regard to any limitations imposed by the Code or the Act so that at all times this Plan may qualify as both an employee welfare benefit plan and a voluntary employees' beneficiary association. (b) The Trustee may, from time to time with the consent of the Employer, transfer to a common, collective, or pooled trust fund maintained by any corporate Trustee hereunder, all or such part of the Trust Fund as the Trustee may deem advisable, and such part or all of the Trust Fund so transferred shall be subject to all the terms and provisions of the common, collective, or pooled trust fund which contemplate the commingling for investment purposes of such Trust assets with trust assets of other trusts. The Trustee may, from time to time with the consent of the Employer, withdraw from such common, collective, or pooled trust fund all or such part of the Trust Fund as the Trustee may deem advisable. 6 10 (c) If life insurance policies have been issued under the Plan, the Trustee, at the direction of the Administrator, shall apply for, own, and pay premiums on such life insurance policies. 5.3 OTHER POWERS OF THE TRUSTEE The Trustee, in addition to all powers and authorities under common law, statutory authority, including the Act, and other provisions of this Agreement, shall have the following powers and authorities, to be exercised in the Trustee's sole discretion: (a) To purchase, or subscribe for, any securities or other property and to retain the same. In conjunction with the purchase of securities, margin accounts may be opened and maintained; (b) To sell, exchange, convey, transfer, grant options to purchase, or otherwise dispose of any securities or other property held by the Trustee, by private contract or at public auction. No person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency, or propriety of any such sale or other disposition, with or without advertisement; (c) To vote upon any stocks, bonds, or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or other options, and to make any payments incidental thereto; to oppose, or to consent to, or otherwise participate in, corporate reorganizations or other changes affecting corporate securities, and to delegate discretionary powers, and to pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities, or other property; (d) To cause any securities or other property to be registered in the Trustee's own name or in the name of one or more of the Trustee's nominees, and to hold any investments in bearer form, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund; (e) To borrow or raise money for the purposes of the Plan in such amount, and upon such terms and conditions, as the Trustee shall deem advisable; and for any sum so borrowed, to issue a promissory note as Trustee, and to secure the repayment thereof by pledging all, or any part, of the Trust Fund; and no person lending money to the Trustee shall be bound to see to the application of the money lent or to inquire into the validity, expediency, or propriety of any borrowing; (f) To keep such portion of the Trust Fund in cash or cash balances as the Trustee may, from time to time, deem to be in the best interests of the Plan, without liability for interest thereon; 7 11 (g) To accept and retain, for such time as it may deem advisable, any securities or other property received or acquired by it as Trustee hereunder, whether or not such securities or other property would normally be purchased as investments hereunder; (h) To make, execute, acknowledge, and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted. (i) To settle, compromise, or submit to arbitration any claims, debts or damages due or owing to or from the Plan, to commence or defend suits or legal or administrative proceedings, and to represent the Plan in all suits and legal and administrative proceedings; (j) To employ suitable agents and counsel and to pay their reasonable expenses and compensation, and such agent or counsel may or may not be agent or counsel for the Employer; (k) To do all such acts and exercise all such rights and privileges, although not specifically mentioned herein, as the Trustee may deem necessary to carry out the purposes of the Plan; (l) To apply for and procure from responsible insurance companies, to be selected by the Administrator, such endowment or other insurance contracts on the life of any Participant or Beneficiaries as required to insure or protect the benefits under the Plan as the Administrator shall deem proper; to exercise, at any time or from time to time, whatever rights and privileges may be granted under such endowment or other insurance contracts; to collect, receive, and settle for the proceeds of all such endowment or other insurance contracts as and when entitled to do so under the provisions thereof; (m) To invest funds of the Trust in time deposits or savings accounts bearing a reasonable rate of interest in the Trustee's bank; (n) To invest in Treasury Bills and other forms of United States government obligations; (o) Except as hereinafter expressly authorized, the Trustee is prohibited from selling or purchasing stock options. The Trustee is expressly authorized to write and sell call options under which the holder of the option has the right to purchase shares of stock held by the Trustee as a part of the assets of this Trust, if such options are traded on and sold through a national securities exchange registered under the Securities Exchange Act of 1934, as amended, which exchange has been authorized to provide a market for option contracts pursuant to Rule 9B-1 promulgated under such Act, and so long as the Trustee at all times up to and including the time of exercise or expiration of any such option holds sufficient stock in the assets of this Trust to meet the obligations under such option of exercised. In addition, the Trustee is expressly authorized to 8 12 purchase and acquire call options for the purchase of shares of stock covered by such options if the options are traded on and purchased through a national securities exchange as described in the immediately preceding sentence, and so long as any such option is purchased solely in a closing purchase transaction, meaning the purchase of exchange traded call option the effect of which is to reduce or eliminate the obligations of the Trustee with respect to a stock option contract or contracts which it has previously written and sold in a transaction authorized under the immediately preceding sentence. (p) To deposit monies in federally insured savings accounts or certificates of deposit in banks or savings and loan associations; (q) To pool all or any of the Trust Fund, from time to time, with assets belonging to any other qualified employee benefit trust or created by the Employer, and to commingle such assets and make joint or common investments and carry joint accounts on behalf of this Plan and such other trust or trusts, allocating undivided shares or interests in such investments or accounts or any pooled assets of the two or more trusts in accordance with their respective interests. (r) To acquire by lease, purchase or rent, property, real or personal, at public or private sale, with or without security, in such manner, at such time or times, for such purposes, for such prices and upon such terms, credits and conditions as the Trustee may deem advisable. (s) To retain such real or personal property for any period, whether or not the same be of the character permissible for investments by fiduciaries under any applicable law, and without regard to any effect the retention may have upon the diversification of the investments. (t) To sell, transfer, exchange, convert or otherwise dispose of, or grant options with respect to any property, real or personal, held in the trust fund, at public or private sale, with or without security, in such manner, at such time or times, for such purposes, for such prices and upon such terms, credits and conditions as the Trustee may deem advisable. (u) To possess, manage, insure against loss by fire or other casualties, develop, subdivide, control, partition, mortgage, lease (to Participants or their Beneficiaries) or otherwise deal with any and all real property; to satisfy and discharge or extend the term of any mortgage thereon; to execute the necessary instruments and covenants to effectuate the foregoing powers, including the giving or granting of options in connection therewith; to make improvements, structural or otherwise, or abandon the same if deemed to be worthless or not of sufficient value to warrant keeping or protecting; to abstain from the payment of taxes, water rents, assessments, repairs, maintenance and upkeep of the same; to permit to be lost by tax sale or other proceeding or to convey the same for a nominal consideration or without consideration; to set up appropriate reserves out of income for repairs, modernization and upkeep of buildings, including reserves for depreciation and obsolescence, and to add such reserves to principal, and, if the income from the property itself should not suffice for such purposes, to advance out of the other income any sums needed therefor, and, to advance any income of the Trust for the amortization of any mortgage on 9 13 property held in the Trust. 5.4 DUTIES OF THE TRUSTEE REGARDING PAYMENTS At the direction of the Administrator, the Trustee shall, from time to time, in accordance with the terms of the Plan, make payments out of the Trust Fund. The Trustee shall not be responsible in any way for the application of such payments. 5.5 POST-RETIREMENT BENEFITS TO KEY EMPLOYEES The Trustee shall establish separate accounts for each key employee (as defined in Section 416(i) of the Code) for any medical benefits or life insurance to be provided to such key employee after retirement. The key employee's post-retirement medical and life insurance benefits may only be paid from such separate account. 5.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES The Trustee shall be paid such reasonable compensation as shall from time to time be agreed upon in writing by the Employer and the Trustee. In addition, the Trustee shall be reimbursed for any reasonable expenses, including reasonable counsel fees incurred by it as Trustee. Such compensation and expenses shall be paid from the Trust Fund unless paid or advanced by the Employer. All taxes of any kind and all kinds whatsoever that may be levied or assessed under existing or future laws upon, or in respect of, the Trust Fund or the income thereof, shall be paid from the Trust Fund. 5.7 ANNUAL REPORT OF THE TRUSTEE Within ninety (90) days after the end of each Plan Year, the Trustee shall furnish to the Employer and Administrator a written statement of the account with respect to the Fiscal Year for which such contribution was made setting forth: (1) the net income, or loss, of the Trust Fund; (2) the gains, or losses, realized by the Trust Fund upon sales or other disposition of the assets; (3) the increase, or decrease, in the value of the Trust Fund; (4) all payments and distributions made from the Trust Fund; and (5) such further information as the Trustee and/or Administrator deems appropriate. 10 14 The Employer, forthwith upon its receipt of each such statement of account, shall acknowledge receipt thereof in writing and advise the Trustee and/or Administrator of its approval or disapproval thereof. Failure by the Employer to disapprove any such statement of account within sixty (60) days after its receipt thereof shall be deemed an approval thereof. The approval by the Employer of any statement of account shall be binding as to all matters embraced therein as between the Employer and the Trustee to the same extent as if the account of the Trustee had been settled by judgment or decree in an action for a judicial settlement of its account in a court of competent jurisdiction in which the Trustee, the Employer and all persons having or claiming an interest in the Plan were parties; provided, however, that nothing herein contained shall deprive the Trustee of its right to have its accounts judicially settled if the Trustee so desires. 5.8 AUDIT (a) If an audit of the Plan's records shall be required by the Act and the regulations thereunder for any Plan Year, the Administrator shall engage an independent certified public accountant for that purpose. Such accountant shall, after an audit of the books and records of the Plan in accordance with generally accepted auditing standards, within a reasonable period after the close of the Plan Year, furnish to the Administrator and the Trustee a report of his audit setting forth his opinion as to whether each of the following statements, schedules, or lists, or any others that are required by Section 103 of the Act or the Secretary of Labor to be filed with the Plan's annual report, are presented fairly in conformity with generally accepted accounting principles applied consistently: (1) statement of the assets and liabilities of the Plan; (2) statement of changes in net assets available to the Plan; (3) statement of receipts and disbursements, a schedule of all assets held for investment purposes, a schedule of all loans or fixed income obligations in default at the close of the Plan Year; (4) a list of all loans in default or uncollectible during the Plan Year; (5) the most recent annual statement of assets and liabilities of any bank common or collective trust fund in which Plan assets are invested or such information regarding separate accounts or trusts with a bank or insurance company as the Trustee, and (6) a schedule of each transaction or series of transactions involving an amount in excess of five percent (5%) of Plan assets. All auditing and accounting fees shall be an expense of and may, at the election of the 11 15 Administrator, be paid from the Trust Fund. (b) If some or all of the information necessary to enable the Administrator to comply with Section 103 of the Act is maintained by a bank, insurance company, or similar institution, regulated and supervised and subject to periodic examination by a state or federal agency, it shall transmit and certify the accuracy of that information to the Administrator as provided in Section 103(b) of the Act within one hundred twenty (120) days after the end of the Plan Year or such other date as may be prescribed under regulations of the Secretary of Labor. 5.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE (a) The Trustee may resign at any time by delivering to the Employer, at least thirty (30) days before its effective date, a written notice of his resignation. (b) The board of directors of the Employer may remove the Trustee by mailing by registered or certified mail, addressed to such Trustee at his last known address, at least thirty (30) days before its effective date, a written notice of his removal and a copy, certified by the Secretary of the Employer, of the resolution adopted by such board of directors effecting his removal. (c) Upon the death, resignation, incapacity, or removal of any Trustee, a successor may be appointed by resolution of the board of directors of the Employer; and such successor, upon accepting such appointment in writing and delivering same to the Employer, shall, without further act, become vested with all the estate, rights, powers, discretions, and duties of his predecessor with like respect as if he were originally named as Trustee herein. Until such a successor is appointed, the remaining Trustee or Trustees shall have full authority to act under the terms of this Agreement. (d) The board of directors may designate one or more successors prior to the death, resignation, incapacity, or removal of a Trustee. In the event a successor is so designated by the board of directors of the Employer and accepts such designation, the successor shall, without further act, become vested with all the estate, rights, powers, discretions, and duties of his predecessor with the like effect as if he were originally named as Trustee herein immediately upon the death, resignation, incapacity, or removal of his predecessor. (e) Whenever any Trustee hereunder ceases to serve as such, he shall furnish to the Employer and Administrator a written statement of account with respect to the portion of the Plan Year during which he served as Trustee. This statement shall be either (i) included as part of the annual statement of account for the Plan Year required under Section 5.7 or (ii) set forth in a special statement. Any such special statement of account should be rendered to the Employer no later than the due date of the annual statement of account for the Plan Year. The procedures set forth in Section 5.7 for the approval by the Employer of annual statements of account shall apply to any special statement of account rendered hereunder and approval by the Employer of any such special statement in the manner provided in Section 5.7 shall have the same effect upon the statement as the Employer's approval of an annual statement of account. No successor to the Trustee shall have any duty or responsibility to investigate the acts or transactions of any predecessor who has 12 16 rendered all statements of account required by Section 5.7 and this subparagraph. 13 17 ARTICLE VI AMENDMENT, TERMINATION AND MERGERS 6.1 AMENDMENT The Employer shall have the right at any time and from time to time to amend, in whole or in part, any or all of the provisions of this Agreement. However, no such amendment shall authorize or permit any part of the Trust Fund (other than such part as is required to pay taxes and administration expenses) to be used for or diverted to purposes other than for the exclusive benefit of the Participants or their Beneficiaries or estates; no such amendment shall cause or permit any portion of the Trust Fund to revert to or become the property of the Employer; and no such amendment which affects the rights, duties or responsibilities of the Trustee and Administrator may be made without the Trustee's and Administrator's written consent. Any such amendment shall become effective upon delivery of a duly executed instrument to the Trustee, provided that the Trustee shall in writing consent to the terms of such amendment. 6.2 TERMINATION The Employer shall have the right at any time to terminate the Plan by delivering to the Trustee and Administrator written notice of such termination. Upon such termination of the Plan, the Employer, by written notice to the Trustee and Administrator, may direct either: (a) complete distribution of the assets in the Trust Fund to the Participants or their Beneficiaries as soon as the Trustee deems it to be in the best interests of the Participants or their Beneficiaries, except however, such distribution shall only be made (1) pursuant to the terms of a collective bargaining agreement or (2) on the basis of objective and reasonable standards which do not result in unequal payments to similarly situated Participants or their Beneficiaries or in disproportionate payments to officers, shareholders, or highly compensated Employees of an Employer contributing to or otherwise funding this Plan; or (b) that any assets remaining in the Plan, after the satisfaction of all liabilities to existing Participants or their Beneficiaries, be applied to provide such Participants or their Beneficiaries with the benefits set forth in the Plan, provided, however, that such benefits shall not be provided in disproportionate amounts to officers, shareholders, or highly compensated Employees of the Employer. 14 18 ARTICLE VII MISCELLANEOUS 7.1 ALIENATION No benefit which shall be payable out of the Trust Fund to any person (including a Participant or Beneficiary) shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any such person, nor shall it be subject to attachment or legal process for or against such person, and the same shall not be recognized by the Trustee, except to such extent as may be required by law. Except, however, this provision shall not apply to the extent a Participant or Beneficiary is indebted to the Plan, for any reason, under any provision of this Agreement and at the time a distribution is to be made or for his benefit, such proportion of the amount distributed as shall equal such indebtedness shall be paid by the Trustee to the Trustee or the Administrator, at the direction of the Administrator, to apply against or discharge such indebtedness. Prior to making a payment, however, the Participant or Beneficiary must be given written notice by the Administrator that such indebtedness is to be deducted in whole or part from his benefits. If the Participant or Beneficiary does not agree that the indebtedness is a valid claim against his benefits, he shall be entitled to a review of the validity of the claim by the Administrator. In the event a Participant 's or Beneficiary's benefits are garnished or attached by order of any court, the Administrator may bring an action for a declaratory judgment in a court of competent jurisdiction to determine the proper recipient of the benefits to be paid by the Plan. During the pendency of said action, any benefits that become payable shall be paid into the court as they become payable, to be distributed by the court to the recipient it deems proper at the close of said action. 7.2 CONSTRUCTION OF AGREEMENT This Plan shall be construed and enforced according to the Act and the laws of the State of South Carolina to the extent not preempted by the Act. 7.3 GENDER AND NUMBER Wherever any words are used herein in the masculine, feminine or neuter gender, they shall be construed as though they were also used in another gender in all cases where they would so apply, and whenever any words are used herein in the singular or plural form, they shall be construed as though they were also used in the other form in all cases where they would so apply. 15 19 7.4 LEGAL ACTION In the event any claim, suit, or proceeding is brought regarding the Trust and/or Plan established hereunder to which the Trustee or the Administrator may be a party, not arising out of any willful action of such Trustee or Administrator they shall be entitled to be reimbursed from the Trust Fund for any and all costs, attorney's fees, and other expenses pertaining thereto incurred by them for which they shall have become liable. 7.5 PROHIBITION AGAINST DIVERSION OF FUNDS It shall be impossible by operation of the Plan or of the Trust, by termination of either, by power of revocation or amendment, by the happening of any contingency, by collateral arrangement or by any other means, for any part of the corpus or income of any trust fund maintained pursuant to the Plan or any funds contributed thereto to be used for, or diverted to, purposes other than the exclusive benefit of Participants or their Beneficiaries. 7.6 BONDING Every Fiduciary, except a bank or an insurance company, unless exempted by the Act and regulations thereunder, shall be bonded in an amount not less than 10% of the amount of the funds such Fiduciary handles; provided, however, that the minimum bond shall be $1,000 and the maximum bond, $500,000. The amount of funds handled shall be determined at the beginning of each Plan Year by the amount of funds handled by such person, group, or class to be covered and their predecessors, if any, during the preceding Plan Year, or if there is no preceding Plan Year, then by the amount of the funds to be handled during the then current year. The bond shall provide protection to the Plan against any loss by reason of acts of fraud or dishonesty by the Fiduciary alone or in connivance with others. The surety shall be a corporate surety company (as such term is used in Section 412(a)(2) of the Act), and the bond shall be in a form approved by the Secretary of Labor. Notwithstanding anything in this Agreement to the contrary, the cost of such bonds shall be an expense of and may, at the election of the Administrator, be paid from the Trust Fund or by the Employer. 7.7 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE Neither the Employer nor the Trustee, nor their successors, shall be responsible for the validity of any contract of insurance issued hereunder or for the failure on the part of the insurer to make payments provided by any such contract, or for the action of any person which may delay payment or render a contract null and void or unenforceable in whole or in part. 7.8 INSURER'S PROTECTIVE CLAUSE Any insurer who shall issue contracts of insurance hereunder shall not have any 16 20 responsibility for the validity of this Plan or for the tax or legal aspects of this Plan. The insurer shall be protected and held harmless in acting in accordance with any written direction of the Trustee, and shall have no duty to see to the application of any funds paid to the Trustee, nor be required to question any actions directed by the Trustee. Regardless of any provision of this Plan, the insurer shall not be required to take or permit any action or allow any benefit or privilege contrary to the terms of any Contract which it issues hereunder, or the rules of the insurer. 7.9 RECEIPT AND RELEASE FOR PAYMENTS Any payment to any Participant, his legal representative, Beneficiary, or to any guardian or committee appointed for such Participant or Beneficiary in accordance with the provisions of this Agreement, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Trustee and the Employer, either of whom may require such Participant, legal representative, Beneficiary, guardian or committee, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the Trustee or Employer. 7.10 HEADINGS The headings and subheadings of this Agreement have been inserted for convenience of reference and are to be ignored in any construction of the provisions hereof. 17 21 IN WITNESS WHEREOF, this Agreement has been executed the day and year first above written. RESOURCE BANCSHARES MORTGAGE GROUP, INC. WITNESS: By:_______________________________ - ------------------------- HSBC BANK, USA WITNESS: By:________________________________ - ------------------------- 18 EX-11.1 4 COMP OF NET INCOME PER COMMON SHARE 1 EXHIBIT 11.1 RESOURCE BANCSHARES MORTGAGE GROUP, INC. STATEMENT RE: COMPUTATION OF NET INCOME PER COMMON SHARE, BASIC AND DILUTED EARNINGS PER SHARE ($ in thousands, except per share amounts) For the Year Ended December 31, 1999 -------------------------- Net income $ 5,922 Net income per common share - basic (1) $ 0.29 Net income per common share - diluted (2) $ 0.28 1) The number of common shares outstanding used to compute net income per share-basic was 20,643,166 for the year ended December 31, 1999, respectively. 2) Diluted earnings per common share for the year ended December 31, 1999, was calculated based on weighted average common shares outstanding of 20,799,502 which assumes the exercise of options covering 717,035 shares and computes incremental shares using the treasury stock method for the year ended December 31, 1999, respectively. EX-13.1 5 1999 ANNUAL REPORT 1 Resource Bancshares Mortgage Group, Inc. 1999 Annual Report A Company with a New Strategy and Mission Charting the Course for the Future Description of RBMG Resource Bancshares Mortgage Group, Inc. is a diversified financial services company engaged through wholly-owned subsidiaries primarily in the business of mortgage banking, through the purchase (via 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 agency-eligible loans. In addition, two of the Company's wholly-owned subsidiaries originate, sell and service small-ticket commercial equipment leases and originate, sell, underwrite for investors and service commercial mortgage loans. Table of Contents: Selected Financial Highlights Letter to Our Shareholders, Customers and Employees Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosure About Market Risk Consolidated Financial Statements and Notes Report of Independent Accountants Stock Data Directors and Executive Officers Corporate Information SELECTED FINANCIAL HIGHLIGHTS ($ IN THOUSANDS, EXCEPT SHARE INFORMATION)
- ------------------------------------------------------------------------------------------------------------------------------------ AT OR FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT Net interest income $ 26,162 $ 21,778 $ 17,644 $ 16,902 $ 8,635 Net gain on sale of mortgage loans 93,560 171,463 103,370 79,178 33,822 Gain on sale of mortgage servicing rights 7,262 1,753 7,955 1,105 7,346 Servicing fees 46,958 43,156 30,869 28,763 24,205 Total revenues 173,792 243,726 (2) 161,018 126,617 76,697 Salary and employee benefits 72,868 (1) 82,406 62,235 55,578 (4) 31,199 Total expenses (including taxes) 167,870 (1) 195,055 (2) 139,220 (3) 106,994 (4) 62,478 Net income 5,922 (1) 48,671 (2) 21,798 (3) 19,623 (4) 14,219 PER COMMON SHARE DATA Net income per common share - basic $ 0.29 (1)$ 2.10 (2) $ 1.07 (3)$ 1.02 (4) $ 0.88 Net income per common share - diluted 0.28 (1) 2.07 (2) 1.05 (3) 1.00 (4) 0.86 Market price per common share at year-end(5) 4.53 16.56 16.31 13.57 12.68 Book value per common share at year-end 11.08 10.96 9.21 7.77 5.71 Cash dividends paid per common share 0.43 0.29 0.13 0.06 -
2 BALANCE SHEET Mortgage loans held for sale and mortgage-backed securities $ 480,504 $ 1,441,458 $ 1,179,188 $ 802,335 $ 1,035,229 Lease receivables 155,559 102,029 51,494 - - Mortgage servicing rights, net 177,563 191,022 127,326 109,815 99,912 Residual interests in subprime securitizations 54,382 45,782 19,684 - - Total assets 1,027,182 1,969,635 1,556,929 1,028,394 1,231,097 Total long-term borrowings 6,259 6,364 6,461 - 65,530 Total liabilities 814,710 1,717,477 1,341,790 871,093 1,137,693 Stockholders' equity 212,472 252,158 215,139 157,301 93,404 STATISTICS Total mortgage loan and lease production $ 9,785,966 $ 16,540,016 $ 10,777,294 $ 9,995,725 $ 7,135,774 Total agency-eligible servicing Portfolio (including subservicing) 9,078,226 13,595,736 10,195,354 8,658,742 7,821,736 Commercial mortgage loan servicing portfolio 4,104,095 3,255,458 2,760,238 - - Managed lease servicing portfolio 166,572 (6) 136,521 (6) 123,509 (6) - - Return on average assets 0.47% (1) 2.73% (2) 1.78% (3) 1.91% (4) 1.95% Return on average equity 2.52% (1) 21.01% (2) 12.82% (3) 14.43% (4) 17.00%
(1) Includes work force reduction charge totaling $3,789 pre-tax or $2,377 after-tax. Exclusive thereof, salary and employee benefits, total expenses (including taxes), net income, net income per common share-basic, net income per common share-diluted, return on average assets and return on average equity would have been $71,849, $165,493, $8,299. $0.41, $0.39, 0.67% and 3.53%, respectively. (2) Includes a non-recurring gain relating to sale of retail operations totaling $1,490 pre-tax or $917 after-tax. Exclusive thereof, total revenues, total expenses, net income, net income per common share - basic, net income per common share - diluted, return on average assets and return on average equity would Have been $242,236, $194,482, $47,754, $2.07, $2.03, 2.68% and 20.61%, respectively. (3) Includes non-recurring and special charges relating to a terminated merger agreement and a special charge relating to certain non-recoverable operating receivables totaling $10,147 pre-tax or $6,241 after-tax. Exclusive thereof, total expenses, net income, net income per common share - basic, net income per common share - diluted, return on average assets and return on average equity would have been $132,979, $28,039, $1.37, $1.35, 2.29% and 16.34%, respectively. (4) Includes a non-recurring charge related to certain contractual employment obligations totaling $5,190 pre-tax or $3,192 after-tax. Exclusive thereof, salary and employee benefits, total expenses, net income, net income per common share - basic, net income per common share - diluted, return on average assets and return on average equity would have been $50,388, $103,802, $22,815, $1.19, $1.17, 2.22% and 16.78%, respectively. (5) Source of market price is Nasdaq. (6) Managed lease servicing portfolio consists of $152,300, $98,956 and $49,104 of leases owned by the Company and $14,272, $37,565 and $74,405 of leases serviced for investors as of December 31, 1999, 1998 and 1997, respectively. 3 To our stockholders, customers and employees: Just a few short months ago, I assumed responsibility as Chief Executive Officer. Since that time, the Board, management and I have met extensively to review your Company's current positioning in the eyes of its customers, colleagues and investors. We have reconsidered our market function, chosen markets, and product depth. We have re-assessed our corporate, management and leadership structures. As a team we have restated the strategy, mission, goals, business principles and core values which will chart this Company's course into the future. In this, my first letter to you, I want to articulate this new vision for your Company. We cannot successfully compete against better-capitalized industry giants by providing customers an undifferentiated product at comparable cost. Instead, we must strive to out-perform our rivals by delivering greater value at lower cost to us. We believe we can realize this vision by merging world-class customer relationship management with a diverse product array and a state-of-the-art order fulfillment process. We have already launched E-RBMG as part of our larger efforts to develop leading edge order fulfillment processes. This sophisticated on-line resource significantly improves the way current and potential customers interact with us. It accelerates the loan transaction cycle, virtually eliminates data re-keying, creates a faster feedback loop on loan status inquiries and allows us to provide faster, more accurate loan origination services. In our view, the capabilities offered by E-RBMG are unmatched and position us as a leader in Internet based business-to-business offerings within our industry. We are ahead of the curve and intend to remain there. By mid-year the Phase II version of E-RBMG will be on-line, offering a dramatically enhanced set of features and customer benefits. 4 We have already finalized processes that enable us to offer both prime and non-prime mortgage products to our customers irrespective of the channel through which they were originally acquired. We plan to rapidly expand our product offerings to include competitively priced ARMs, jumbos, seconds and home equity lines. And, to support these efforts, we will re-engineer our critical loan origination processes with switch-in front technologies that support seamless delivery of multiple products across all channels at significantly lower all-in costs. In the days ahead, we will continue to implement our bold new vision by undertaking a company-wide reorganization designed to support effective pursuit of our new goals. We will reorganize around business processes rather than traditional product groupings. Specifically, we will reorganize around four primary business processes which we believe are critical to achievement of our goals: production/sales; order fulfillment; servicing; and portfolio management. These business units will continue to be centrally supported by the traditional corporate functions. Finally, we will rapidly deploy new internal reporting models which measure "net value added" across products, customers, salespeople and the newly defined business units. Deployment of this new tool in tandem with implementation of risk-based internal pricing processes will make us better managers as we measure the alignment of business units, products, customers and sales staff with our broader strategic objectives. In the months ahead, you will see E-business becoming a primary channel for our growth. In fact, I believe we have the core competencies, deep experience and core customer base that uniquely position this Company for success within that market space. We are mortgage professionals in search of technological solutions rather than technologists in search of mortgage professionals. In my view, the electronic mortgage is coming and the next few years will see the traditional mortgage business radically re-defined. By way of handling that transition, our size is an advantage. We can move quickly while effecting process changes rapidly. Ultimately, the market will search out a financial intermediary with a rich product line, advanced origination technology and the highest levels of service. We will be that intermediary. Before closing, I want to acknowledge the many contributions of our former Chairman and CEO, Ed Sebastian, who retired at the end of 1999. Ed provided leadership during the critical decade that saw the Company move from its infancy to its initial public capitalization and on toward maturity. His entrepreneurial spirit and wisdom will be sorely missed as we build upon the solid foundation that is his legacy. Your Board, management, employees and I are all working with enthusiasm to implement this new vision. I am confident that your Company has great potential. I thank you for the opportunity to serve as your CEO as we Chart our Course into the future and as we work together to create a new RBMG. Douglas K. Freeman Chief Executive Officer March 22, 2000 5 Strategy Mission Goals Business Principles Core Values Tactics Top Mortgage Originators For the Year Ended December 31, 1999 (dollars in billions) MARKET RANK LENDER VOLUME SHARE - --------------------------------------------------------------------------- 1 Chase Home Finance $93.42 7.3% 2 Norwest Mortgage 81.99 6.4% 3 Countrywide Credit Industries 75.37 5.9% 4 Bank of America Mortgage and Affiliates 63.22 5.0% 5 Washington Mutual 41.50 3.3% 28 Resource Bancshares Mortgage Group 8.84 0.7% Source: Inside Mortgage Finance, January 21, 2000 Our Strategic Focus Will Move: FROM TO - ---- -- Volume Value Market Share Customer Wallet Share Volume Driven Price Profit Driven Pricing Product Profitability Lifetime Customer Value Undifferentiated Services Differentiated Services Transaction Oriented Decisions Relationship Driven Decisions 1999 REVENUE BY DIVISION Prime 69% Nonprime 18% Commercial 8% Leasing 5% OUR MARKET FUNCTION Customers Consumers Small businesses Middle market companies Large corporations Distribution Networks 6 Direct Broker Bankers Savings & Loans Financial Intermediaries Finance, human resources etcetera Production Order fulfillment Servicing Portfolio Products 30 year fixed 15 year fixed ARMs Home equity Non-prime Investors GSEs Insurance Companies Finance Companies Banks Wall Street Positioning Customers High quality sales and service Value-speed, flexibility, simple to do business with Rich product line Technology company Positioning Colleagues Market value leader Most professional status Personal wealth creation via work and ownership in Resource Bancshares Mortgage Group, Inc. Positioning Investors Niche player Financial intermediary characteristics- low credit risk, low volume risk Technology play 7 Strategy Our strategy is to be a customer centric financial intermediary, which combines the best of product depth, relationship management and service quality. The resulting company has world-class operational effectiveness and delivers greater value to our customers. Mission Statement The mission of Resource Bancshares Mortgage Group, Inc. is to be the premiere provider of financial products and services to our chosen market segments. We will be our customer's first choice of a financial intermediary by providing depth, world class relationship management and exceptional customer service. Resource Bancshares Mortgage Group, Inc.'s mission is to be our customers value added provider. Goals To be in the top decile of like companies in ROE To be in the top decile of like companies in EPS To be a .com company To exceed our customers expectations To be the best managed business in the industry To be the place where the best and brightest colleagues want to work To be a business where our colleagues like each other and we have fun Business Principles Run it like you own it Know your numbers Know your customers Develop good people Manage expenses Core Values Teamwork and trust A commitment to winning Customers are our main focus We have pride in our company Do the right thing We play win/win with our teammates We are open and honest in our communications 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with 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 1999 Annual Report on Form 10-K. Statements included in this discussion and analysis (or elsewhere in this annual report) 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 herein or in the Company's Annual Report on Form 10-K for the year ended December 31, 1999: (i) interest rate risks, (ii) changes in economic conditions, (iii) competition, (iv) possible 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 leases, (x) changes in the value of residual interests in subprime securitizations, (xi) prepayment risks, (xii) possible changes in accounting estimates and (xiii) availability of funding sources and other risks and uncertainties. The Company disclaims any obligation to update any forward-looking statements. THE COMPANY The Company is a diversified financial services company engaged through wholly-owned subsidiaries primarily in the business of mortgage banking, through the purchase (via a nationwide network of correspondents and brokers), sale and servicing of agency-eligible and subprime residential, single-family (i.e. one-four family), first-mortgage loans and the purchase and sale of servicing rights associated with agency-eligible loans. In addition, two of the Company's wholly-owned subsidiaries originate, sell and service small-ticket commercial equipment leases and originate, sell, underwrite for investors and service commercial mortgage loans. 7 9 LOAN AND LEASE PRODUCTION A summary of production by source for the periods indicated is set forth below:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Agency-Eligible Loan Production: Correspondent $ 6,363,936 $11,666,560 $ 7,893,583 Wholesale 1,748,415 3,023,961 1,868,726 Retail -- 264,059 675,411 ----------- ----------- ----------- Total Agency-Eligible Loan Production 8,112,351 14,954,580 10,437,720 Subprime Loan Production 728,410 607,664 339,574 Commercial Mortgage (for Investors and Conduits) Loan Production 844,975 899,674 -- Lease Production 100,230 78,098 -- ----------- ----------- ----------- Total Mortgage Loan and Lease Production $ 9,785,966 $16,540,016 $10,777,294 =========== =========== ===========
Initially, the Company was focused exclusively on purchasing agency-eligible mortgage loans through its correspondents. To diversify its sources of residential loan volume, the Company started a wholesale operation in 1994, a retail operation in 1995 (which was sold in 1998) and a subprime operation in 1997. To further diversify its sources of production and revenue, the Company acquired a small-ticket commercial equipment lease operation and a commercial mortgage loan business. These two newer sources of production accounted for approximately 10% and 6% of the Company's total production for 1999 and 1998, respectively. Historically, correspondent operations have accounted for a diminishing percentage of the Company's total production (65% for 1999, 71% for 1998 and 73% for 1997). Wholesale and subprime production accounted for 18% and 7%, respectively, of the Company's 1999 total production. A summary of key information relevant to industry loan production activity is set forth below:
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 -------------- -------------- --------------- U. S. 1-4 Family Mortgage Originations Statistics (1): U. S. 1-4 Family Mortgage Originations $1,287,000,000 $1,470,000,000 $ 857,000,000 Adjustable Rate Mortgage Market Share 21% 14% 22% Estimated Fixed Rate Mortgage Originations 1,017,000,000 1,264,000,000 668,000,000 Company Information: Residential Loan Production $ 8,840,761 $ 15,562,244 $ 10,777,294 Estimated Company Market Share 0.69% 1.06% 1.26%
(1) Source: Mortgage Bankers Association of America, Economics Department. The Company's total residential mortgage production decreased by 43% to $8.8 billion for 1999 from $15.6 billion for 1998. This decrease is primarily due to (1) the increase in competition in the market place; (2) an estimated 12% decline in residential originations within 8 10 the industry; (3) the increased ARM market share in 1999 (the Company offers primarily fixed rate products); and (4) the rise in mortgage interest rates during 1999. The Company's 44% production increase from 1997 to 1998 was primarily attributed to a 72% nationwide production increase for the same period. Correspondent Loan Production The Company purchases closed mortgage loans through its network of approved correspondent lenders. Correspondents are primarily mortgage lenders, larger mortgage brokers and smaller savings and loan associations and commercial banks that have met the Company's approval requirements. The Company continues to emphasize correspondent loan production as its basic business focus because of the lower fixed expenses and capital investment required of the Company. A summary of key information relevant to the Company's correspondent loan production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------- 1999 1998 1997 ------------ ----------- ----------- Correspondent Loan Production $ 6,363,936 $11,666,560 $ 7,893,583 Estimated Correspondent Market Share(1) 0.49% 0.79% 0.92% Approved Correspondents 909 852 919 Correspondent Division Expenses $ 55,438 $ 68,975 $ 47,618
(1) Source: Mortgage Bankers Association of America, Economics Department. The Company's correspondent loan production decreased by 45% to $6.4 billion for 1999 from $11.7 billion for 1998. This decrease in production is primarily due to (1) the increase in competition in the market place; (2) an estimated 12% decline in residential originations within the industry; (3) the increased ARM market share in 1999 (the Company primarily offers fixed rate products); and (4) the rise in mortgage interest rates during 1999. This decline in production is the primary reason for the increase in correspondent division expenses as a percentage of production which increased from 59 basis points for 1998 to 87 basis points for 1999 despite the reduction in correspondent division expenses. The number of approved correspondent lenders increased 7% from 1998 to 1999. The Company's correspondent loan production increased by 48% to $11.7 billion for 1998 from $7.9 billion for 1997. This increase is primarily a result of the 72% increase in nationwide mortgage originations for 1998. Wholesale Loan Production The wholesale division receives loan applications through brokers, underwrites the loans, funds the loans at closing and prepares all closing documentation. The wholesale branches and regional operating centers handle all shipping and follow-up procedures on loans. Typically, mortgage brokers are responsible for taking applications and accumulating the information precedent to the Company's processing of the loans. Although the establishment of wholesale branch offices and regional operating centers involves the incurrence of fixed expenses associated with maintaining those offices, wholesale operations also generally provide for higher profit margins than correspondent loan production. Additionally, each branch office and regional 9 11 operating center can serve a relatively sizable geographic area by establishing relationships with large numbers of independent mortgage loan brokers who bear much of the cost of identifying and interacting directly with loan applicants. In 1999, the Company established regional operations centers to better facilitate service to a larger geographic area. The Company's nationwide salesforce is supported by these regional operating centers. A summary of key information relevant to the Company's wholesale production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Wholesale Loan Production $1,748,415 $3,023,961 $1,868,726 Estimated Wholesale Market Share (1) 0.14% 0.21% 0.22% Wholesale Division Direct Operating Expenses $ 16,362 $ 16,037 $ 11,540 Approved Brokers 4,284 3,401 3,046 Regional Operation Centers 5 -- -- Number of Branches 2 15 15 Number of Employees 107 161 146
(1) Source: Mortgage Bankers Association of America, Economics Department. Wholesale loan production decreased 42% ($1.3 billion) from $3.0 billion for 1998 to $1.8 billion for 1999 primarily due to (1) the increase in competition in the market place in 1999; (2) an estimated 12% decline in residential originations within the industry; (3) the increased ARM market share in 1999 (the Company offers primarily fixed rate products); and (4) the rise in mortgage interest rates during 1999. Wholesale division operating expenses as a percentage of production increased from 53 basis points in 1998 to 94 basis points in 1999 primarily as a result of the decline in production. The 62% ($1.2 billion) increase in wholesale loan production, from $1.9 billion in 1997 to $3.0 billion in 1998, resulted primarily from the Company's expansion of its wholesale production channel and the 72% nationwide increase in loan production. The Company's wholesale market share remained relatively constant for 1998. The increase in direct operating expenses for the wholesale division was primarily a result of the increased production. Wholesale division direct operating expenses as a percentage of production decreased from 62 basis points in 1997 to 53 basis points in 1998 as higher volumes better leveraged the direct operating expenses. Retail Loan Production Effective May 1, 1998, the Company sold its retail production franchise. Retail loan production and retail divisional direct operating expenses for the year ended December 31, 1998 were $264.1 million and $6.0 million, respectively. Subprime Loan Production 10 12 In 1997, the Company began its initial expansion into subprime lending activities. The Company does subprime business through its wholly-owned subsidiary, Meritage Mortgage Corporation (Meritage). A summary of key information relevant to the Company's subprime production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997 -------- -------- -------- Subprime Loan Production $728,410 $607,664 $339,574 Subprime Division Direct Operating Expenses $ 28,760 $ 19,896 $ 10,486 Number of Brokers 3,095 1,830 661 Number of Employees 293 271 139 Number of Branches 10 19 14
Subprime loan production increased by 20% to $728.4 million for 1999 as compared to $607.7 million during 1998 as the Company has expanded its operations. Between 1998 and 1999 the Company increased the number of its subprime brokers by 1,265. The number of branches declined from 19 in 1998 to 10 at the end of 1999 as the Company reassessed the geographic regions that each branch covers. Subprime loan production increased by 79% to $607.7 million for 1998 as compared to $339.6 million during 1997. This increase is partially attributable to a 28% increase in nationwide subprime originations in 1998, but is primarily due to expansion of the Company's subprime operations during 1998. Commercial Mortgage Production The Company's subsidiary, Laureate Capital Corp. (Laureate), originates commercial mortgage loans for various insurance companies and other investors. Commercial mortgage loans are generally originated in the name of the investor and, in most instances, Laureate retains the right to service the loans under a servicing agreement. A summary of key information relevant to the Company's commercial mortgage production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE PERIOD ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 -------- -------- ------ Commercial Mortgage Production $844,975 $899,674 N/A Commercial Mortgage Division Operating Expenses $ 13,474 $ 11,231 N/A Number of Branches 13 12 N/A Number of Employees 88 81 N/A
Lease Production The Company's wholly-owned subsidiary, Republic Leasing Company, Inc. (Republic Leasing), originates and services small-ticket commercial equipment leases. Substantially all of 11 13 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 PERIOD ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 -------- -------- ------ Lease Production $100,230 $ 78,098 N/A Lease Division Operating Expenses $ 6,275 $ 5,307 N/A Number of Brokers 184 218 N/A Number of Employees 61 66 N/A
SERVICING 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. 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. A summary of key information relevant to the Company's agency-eligible loan servicing activities is set forth below: 12 14
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Underlying Unpaid Principal Balances: Beginning Balance * $ 9,865,100 $ 7,125,222 $ 6,670,267 Agency-Eligible Loan Production (net of servicing-released production) 8,097,749 14,917,193 10,557,994 Net Change in Work-in-Process 228,712 604,131 26,007 Bulk Acquisitions -- 122,467 774,097 Sales of Servicing (9,104,706) (10,922,288) (9,699,058) Paid-In-Full Loans (973,780) (1,639,776) (709,052) Amortization, Curtailments and Other, net (290,681) (341,849) (495,033) ------------ ------------ ------------ Ending Balance* 7,822,394 9,865,100 7,125,222 Subservicing Ending Balance 1,255,832 3,730,636 3,070,132 ------------ ------------ ------------ Total Underlying Unpaid Principal Balances $ 9,078,226 $ 13,595,736 $ 10,195,354 ============ ============ ============
* These numbers and statistics apply to the Company's owned agency-eligible servicing portfolio and, therefore, exclude the subservicing portfolio. The 1999, 1998 and 1997 ending balance includes $139,376, $138,619 and -0- of subprime loans being temporarily serviced until these loans are sold. Of the $7.8 billion, $9.9 billion and $7.1 billion unpaid principal balance at December 31, 1999, 1998 and 1997, approximately $6.3 billion, $5.5 billion and $4.2 billion, respectively, of the related mortgage servicing right asset is classified as available-for-sale, while $1.5 billion, $4.4 billion and $2.9 billion, respectively, of the related mortgage servicing right asset is classified as held-for-sale. A summary of agency-eligible servicing statistics follows:
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1999 1998 1997 -------------- -------------- -------------- Average Underlying Unpaid Principal Balances (including subservicing) $ 11,820,861 $ 11,864,513 $ 9,468,730 Weighted Average Note Rate* 7.50% 7.20% 7.69% Weighted Average Servicing Fee* 0.43% 0.42% 0.40% Delinquency (30+ days) Including Bankruptcies and Foreclosures* 2.78% 2.01% 3.66% Number of Servicing Division Employees 86 151 143
* These numbers and statistics apply to the Company's owned agency-eligible servicing portfolio and, therefore, exclude the subservicing portfolio. The $0.04 billion, or 0.4%, decrease in the average underlying unpaid principal balance of agency-eligible mortgage loans being serviced and subserviced for 1999 as compared to 1998 is primarily related to the Company's decreased loan production volumes during 1999. Since the Company generally sells servicing rights related to the agency-eligible loans it produces within 13 15 90 to 180 days of purchase or origination, decreased production volumes generally result in a lower volume of mortgage servicing rights held in inventory pending sale. Commercial Mortgage Servicing Laureate originates commercial mortgage loans for investors and in most cases, Laureate retains the right to service the loans. A summary of key information relevant to the Company's commercial mortgage servicing activities is set forth below:
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------ ($ IN THOUSANDS) 1999 1998 1997 ---------- ---------- ---------- Commercial Mortgage Loan Servicing Portfolio $4,104,095 $3,255,458 $2,760,238 Weighted Average Note Rate 7.94% 8.11% 8.41% Delinquencies (30+ Days) 0.29% 0.42% 0.60%
Lease Servicing Republic Leasing services leases that are owned by it and also services leases for investors. A summary of key information relevant to the Company's lease servicing activity is set forth below:
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------ ($ IN THOUSANDS) 1999 1998 1997 -------- -------- -------- Owned Lease Servicing Portfolio $152,300 $ 98,956 $ 49,104 Serviced For Investors Servicing Portfolio 14,272 37,565 74,405 -------- -------- -------- Total Managed Lease Servicing Portfolio $166,572 $136,521 $123,509 ======== ======== ======== Weighted Average Net Yield For Managed Lease Servicing Portfolio 10.61% 10.81% 10.77% Delinquencies (30+ Days) Managed Lease Servicing Portfolio 2.76% 2.00% 3.35%
Consolidated Coverage Ratios A summary of the Company's consolidated ratios of servicing fees and interest income from owned leases to cash operating expenses net of amortization and depreciation follows: 14 16
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 --------- --------- --------- Total Company Servicing Fees $ 46,958 $ 43,156 $ 30,869 Net Interest Income from Owned Leases 7,270 4,637 N/A --------- --------- --------- Total Servicing Fees and Interest from Owned Leases $ 54,228 $ 47,793 $ 30,869 Total Company Operating Expenses $ 165,158 $ 167,123 $ 125,931 Total Company Amortization and Depreciation (39,249) (34,570) (21,859) --------- --------- --------- Total Company Operating Expenses, Net of Amortization and Depreciation $ 125,909 $ 132,553 $ 104,072 --------- --------- --------- Coverage Ratio 43% 36% 30% ========= ========= =========
The Company's coverage ratios for 1999, 1998 and 1997 at 43%, 36% and 30%, respectively, were lower than the Company's target level of between 50% and 80%. Effective May 1, 1998, the Company sold its retail production franchise, which accounted for $6.0 million of the Company's cash operating expenses for 1998. Without retail division operating expenses for 1998, the Company's coverage ratio would have been 38%. Although the servicing portfolio and servicing fees have increased, such increases have not kept pace with the pace of growth in cash operating expenses. 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 of maintaining a coverage ratio of between 50% and 80%. 15 17 RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998 SUMMARY BY OPERATING DIVISION Net income per common share on a diluted basis for 1999 was $0.28 as compared to $2.07 for 1998. This 86% decrease in net income per common share was less than the 88% decrease in net income due primarily to the impact of the Company's stock repurchase program, which reduced the number of weighted average shares outstanding across comparative periods. Following is a summary of the revenues and expenses for each of the Company's operating divisions for the years ended December 31, 1999 and 1998, respectively: 16 18
($ in thousands) Agency-Eligible For the year ended ---------------------------------------- Commercial Total December 31, 1999(1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments - ------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 8,240 $ (4,555) $ (12) $ 15,366 $ 323 $ 7,270 $ 26,632 Net gain on sale of mortgage loans 64,033 -- -- 20,357 9,170 -- 93,560 Gain on sale of mortgage servicing rights -- 7,262 -- -- -- -- 7,262 Servicing fees -- 41,791 -- -- 4,735 620 47,146 Other income 340 582 1,661 (4,372) 69 1,395 (325) --------------------------------------------------------------------------------------------- Total revenues 72,613 45,080 1,649 31,351 14,297 9,285 174,275 --------------------------------------------------------------------------------------------- Salary and employee benefits 38,751(2) 3,399(3) -- 15,840(4) 8,321 2,654 68,965 Occupancy expense 10,079(2) 419 -- 2,567(4) 1,123 453 14,641 Amortization and provision for impairment of mortgage servicing rights -- 29,580 -- -- 2,210 -- 31,790 General and administrative expenses 22,970(2) 5,984 221 10,353(4) 1,820 3,168 44,516 --------------------------------------------------------------------------------------------- Total expenses 71,800(2) 39,382(3) 221 28,760(4) 13,474 6,275 159,912 --------------------------------------------------------------------------------------------- Income before income taxes 813(2) 5,698(3) 1,428 2,591(4) 823 3,010 14,363 Income tax expense (207)(2) (1,448)(3) (356) (1,237)(4) (405) (1,196) (4,849) --------------------------------------------------------------------------------------------- Net income $ 606(2) $ 4,250(3) $ 1,072 $ 1,354(4) $ 418 $ 1,814 $ 9,514 =============================================================================================
For the year ended Other/ December 31, 1999(1) Eliminations Consolidated - ---------------------------------------------------------- (UNAUDITED) Net interest income $ (470) $ 26,162 Net gain on sale of mortgage loans -- 93,560 Gain on sale of mortgage servicing rights -- 7,262 Servicing fees (188) 46,958 Other income 175 (150) ------------------------------ Total revenues (483) 173,792 ------------------------------ Salary and employee benefits 3,903(5) 72,868(6) Occupancy expense 214(5) 14,855(6) Amortization and provision for impairment of -- mortgage servicing rights -- 31,790 General and administrative expenses 1,129(5) 45,645(6) ------------------------------ Total expenses 5,246(5) 165,158(6) ------------------------------ Income before income taxes (5,729)(5) 8,634(6) Income tax expense 2,137(5) (2,712)(6) ------------------------------ Net income $(3,592)(5) $ 5,922(6) ==============================
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. (2) Includes work force reduction charge totaling $3,048 pre-tax or $1,912 after-tax. Exclusive thereof, salary and employee benefits, occupancy expense, general and administrative expenses, total expenses, net income before income taxes, income tax expense and net income would have been $37,931, $8,299, $22,522, $68,752, $3,861, $1,343 and $2,518 respectively. (3) Includes work force reduction charge totaling $31 pre-tax or $19 after-tax. Exclusive thereof, salary and employee benefits, total expenses, net income before income taxes, income tax expense and net income would have been $3,368, $39,351, $5,729, $1,460 and $4,269 respectively. (4) Includes work force reduction charge totaling $516 pre-tax or $324 after-tax. Exclusive thereof, salary and employee benefits, occupancy expense, general and administrative expenses, total expenses, net income before income taxes, income tax expense and net income would have been $15,674, $2,381, $10,189, $28,244, $3,107, $1,429 and $1,678 respectively. (5) Includes work force reduction charge totaling $194 pre-tax or $122 after-tax. Exclusive thereof, salary and employee benefits, occupancy expense, general and administrative expenses, total expenses, net income before income taxes, income tax expense and net income would have been $3,901, $24, $1,127, $5,052, $(5,535), $(2,065) and $(3,470) respectively. (6) Includes work force reduction charge totaling $3,789 pre-tax or $2,377 after-tax. Exclusive thereof, salary and employee benefits, occupancy expense, general and administrative expenses, total expenses, net income before income taxes, income tax expense and net income would have been $71,849, $12,699, $45,031, $161,369, $12,423, $4,124 and $8,299 respectively.
($ in thousands) Agency-Eligible For the year ended ---------------------------------------- Commercial Total December 31, 1998(1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments - ------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 7,422 $ -- $ -- $ 9,565 $ 536 $ 4,637 $ 22,160 Net gain on sale of mortgage loans 134,472 -- -- 27,980 9,011 -- 171,463 Gain on sale of mortgage servicing rights -- 1,753 -- -- -- -- 1,753 Servicing fees -- 37,856 -- -- 3,777 1,014 42,647 Other income 1,756(2) 455 1,189 732 11 753 4,896 --------------------------------------------------------------------------------------------- Total revenues 143,650(2) 40,064 1,189 38,277 13,335 6,404 242,919 --------------------------------------------------------------------------------------------- Salary and employee benefits 53,158 3,449 -- 13,485 7,322 2,347 79,761 Occupancy expense 7,005 443 -- 1,921 840 376 10,585 Amortization and provision for impairment of mortgage servicing rights -- 27,897 -- -- 1,335 -- 29,232 General and administrative expenses 28,046 6,446 196 4,490 1,734 2,584 43,496 --------------------------------------------------------------------------------------------- Total expenses 88,209 38,235 196 19,896 11,231 5,307 163,074 --------------------------------------------------------------------------------------------- Income before income taxes 55,441(2) 1,829 993 18,381 2,104 1,097 79,845 Income tax expense (20,059)(2) (662) (351) (6,656) (952) (435) (29,115) --------------------------------------------------------------------------------------------- Net income $ 35,382(2) $ 1,167 $ 642 $ 11,725 $ 1,152 $ 662 $ 50,730 =============================================================================================
For the year ended Other/ December 31, 1998(1) Eliminations Consolidated - ---------------------------------------------------------- (UNAUDITED) Net interest income $ (382) $ 21,778 Net gain on sale of mortgage loans -- 171,463 Gain on sale of mortgage servicing rights -- 1,753 Servicing fees 509 43,156 Other income 680 5,576(2) --------------------------- Total revenues 807 243,726(2) --------------------------- Salary and employee benefits 2,645 82,406 Occupancy expense 634 11,219 Amortization and provision -- -- for impairment of mortgage servicing rights -- 29,232 General and administrative expenses 770 44,266 --------------------------- Total expenses 4,049 167,123 --------------------------- Income before income taxes (3,242) 76,603(2) Income tax expense 1,183 (27,932)(2) --------------------------- Net income $ (2,059) $ 48,671(2) ===========================
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. (2) Includes a non-recurring gain related to sale of retail operation totaling $1,490 pre-tax, or $917 after-tax. Exclusive thereof, the year ended December 31, 1998 residential mortgage agency-eligible other income, total revenues, income before taxes, income tax expense and net income and consolidated other income, total revenues, income before taxes, income tax expense and net income would have been $266, $142,160, $53,951, $19,486 and, $34,465; and $4,086, $242,236, $75,113, $27,359 and, $47,754, respectively. 17 19 AGENCY-ELIGIBLE MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage production operations.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ($ IN THOUSANDS) 1999 1998 ---------- ----------- Net interest income $ 8,240 $ 7,422 Net gain on sale of mortgage loans 64,033 134,472 Other income 340 1,756 ---------- ----------- Total production revenue 72,613 143,650 ---------- ----------- Salary and employee benefits 38,751 53,158 Occupancy expense 10,079 7,005 General and administrative expenses 22,970 28,046 ---------- ----------- Total production expenses 71,800 88,209 ---------- ----------- Net pre-tax production margin $ 813 $ 55,441 ---------- ----------- Production $8,112,351 $14,954,580 Pool delivery 8,642,639 14,713,137 Total production revenue to pool delivery 84 BPS 98 bps Total production expenses to production 89 BPS 59 bps ---------- ----------- Net pre-tax production margin (5)BPS 39 bps ========== ===========
Summary The production revenue to pool delivery ratio decreased 14 basis points for 1999 as compared to 1998. Generally, net gain on sale of mortgage loans (74 basis points for 1999 versus 91 basis points for 1998) declined primarily due to compressed margins attributable to an aggressive competitive pricing environment and lower overall agency-eligible production volume. Net interest income increased from 5 basis points in 1998 to 10 basis points in 1999 primarily as a result of the generally steeper yield curve environment. The production expenses to production ratio increased 30 basis points for 1999 as compared to 1998. This is primarily due to the 46% decline in production for 1999 as compared to 1998 which was partially offset by a $16.4 million decline in total production expenses for 1999 as compared to 1998. As a consequence of the foregoing, the Company's net agency-eligible pre-tax production margin declined 44 basis points. Absent workforce reduction charges (discussed in greater detail elsewhere within Management's Discussion and Analysis), total production expenses would have declined by $19.5 million. Net Interest Income The following table analyzes net interest income allocated to the Company's agency-eligible mortgage production activities in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and mortgage-backed securities and interest rates paid on interest-bearing sources of funds) for the years ended December 31, 1999 and 1998, respectively: 18 20 ($ IN THOUSANDS)
Variance Average Volume Average Rate Interest Attributable to - -------------------------------------- ------------------ --------------------- 1999 1998 1999 1998 1999 1998 Variance Rate Volume - -------------------------------------- ---------------------------------------------------- INTEREST INCOME --------------- Mortgages Held-for-Sale and Mortgage-Backed $656,291 $1,172,994 6.85% 6.74% Securities $ 44,982 $79,078 $(34,096) $ 739 $(34,835) - -------------------------------------- ---------------------------------------------------- INTEREST EXPENSE ---------------- $345,807 $ 457,967 4.14% 4.50% Warehouse Line * $ 14,313 $20,630 $ (6,317) $(1,265) $ (5,052) 303,092 689,711 5.21% 5.79% Gestation Line 15,779 39,958 (24,179) (1,780) (22,399) 110,380 97,422 6.21% 6.58% Servicing Secured Line 6,851 6,413 438 (415) 853 20,596 33,331 5.27% 5.75% Servicing Receivables 1,085 1,918 (833) (100) (733) Line 7,142 8,726 8.57% 8.50% Other Borrowings 612 742 (130) 5 (135) Facility Fees & Other 2,968 2,377 591 - 591 Charges - -------------------------------------- ---------------------------------------------------- $787,017 $ 1,287,157 5.29% 5.60% Total Interest Expense $ 41,608 $72,038 $(30,430) $(3,555) $(26,875) - -------------------------------------- ---------------------------------------------------- Net Interest Income Before 1.56% 1.14% Interdivisional $ 3,374 $ 7,040 $ (3,666) $ 4,294 $ (7,960) ================== Allocations ================================ Allocation to Other 470 382 Allocation to Agency- Eligible Servicing 4,396 - Division ------------------- Net Interest Income $ 8,240 $ 7,422 ===================
* The interest-rate yield on the warehouse line is net of the benefit of escrow deposits. The 42 basis point increase in the interest-rate spread was primarily the result of the steeper yield curve environment during 1999 compared to 1998. 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:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 ----------- ----------- Gross proceeds on sales of mortgage loans $ 8,853,967 $14,921,242 Initial unadjusted acquisition cost of mortgage loans sold, net of hedge results 8,861,915 14,917,751 ----------- ----------- Unadjusted gain (loss) on sale of mortgage loans (7,948) 3,491 Loan origination and correspondent program administrative fees 21,402 36,729 ----------- ----------- Unadjusted aggregate margin 13,454 40,220 Acquisition basis allocated to mortgage servicing rights (SFAS No. 125) 52,702 93,570 Net change in deferred administrative fees (2,123) 682 ----------- ----------- Net gain on sale of agency-eligible mortgage loans $ 64,033 $ 134,472 =========== ===========
Net gain on sale of agency-eligible mortgage loans decreased $70.4 million from $134.5 million for 1998 to $64.0 million for 1999. The decrease is primarily due to compressed margins attributable to an aggressive competitive pricing environment in the correspondent channel and lower overall agency-eligible production volume. 19 21 Other Income The $1.4 million decline in other income for 1999 as compared to 1998 is primarily attributable to the sale of the Company's retail production franchise in 1998, which resulted in a nonrecurring gain of approximately $1.4 million. AGENCY-ELIGIBLE REINSURANCE OPERATIONS In November 1998, the Company formed a captive insurance company, MG Reinsurance Company (MG Reinsurance). MG Reinsurance is licensed as a property and casualty insurer and operates as a monoline captive insurance company assuming reinsurance for PMI policies on agency-eligible mortgage loans initially purchased or produced by the Company. During 1999 and 1998, the Company recognized premium and investment income of approximately $1.7 million and $1.2 million, respectively, that has been included as other income in the agency-eligible reinsurance segment. SUBPRIME MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's subprime mortgage production operations:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ($ IN THOUSANDS) 1999 1998 --------- -------- Net interest income $ 15,366 $ 9,565 Net gain on sale of mortgage loans 20,357 27,980 Other income (4,372) 732 --------- -------- Total production revenue 31,351 38,277 --------- -------- Salary and employee benefits 15,840 13,485 Occupancy expense 2,567 1,921 General and administrative expenses 10,353 4,490 --------- -------- Total production expenses 28,760 19,896 --------- -------- Net pre-tax production margin $ 2,591 $ 18,381 --------- -------- Production $ 728,410 $607,664 Whole loan sales and securitizations 699,317 551,110 Total production revenue to whole loan sales and securitizations 448 BPS 695 bps Total production expenses to production 395 BPS 327 bps --------- -------- Net pre-tax production margin 53 BPS 368 bps ========= ========
Summary During 1999, subprime production volume of $728.4 million exceeded whole loan sales and securitizations of $699.3 million by $29.1 million. At December 31, 1999, the Company had unsold subprime mortgage loans of $128.8 million as compared to $97.9 million at December 31, 1998. Overall, the Company operated during 1999 at a 0.53% pre-tax subprime production 20 22 margin. The 315 basis point decline in the pre-tax subprime production margin is primarily due to the 217 basis point decline in net gain on the sale of subprime mortgage loans. This decline is primarily attributable to compressed margins in the subprime market during 1999 and the higher relative volumes of whole loan sales as compared to securitizations from year to year. Salary and employee benefit costs increased by 17%, or $2.4 million from 1998 to 1999. This was primarily due to an increase in production volume of 20%. Occupancy expense increased by $0.6 million primarily due to branch expansion cost and the workforce reduction charge of $0.2 million. Workforce reduction charges are discussed elsewhere in this Management's Discussion and Analysis. General and administrative expenses increased approximately $5.9 million primarily due to (1) an increase in provision expense of $2.6 million and (2) a 20% increase in production volume for 1999 as compared to 1998. Net Interest Income The following table analyzes net interest income allocated to the Company's subprime mortgage production activities in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and residual certificates and interest rates paid on interest-bearing sources of funds) for the years ended December 31, 1999 and 1998, respectively. ($ IN THOUSANDS) Variance Average Volume Average Rate Interest Attributable to - ------------------------------------- --------------------- --------------------- 1999 1998 1999 1998 1999 1998 Variance Rate Volume - ------------------------------------- ---------------------------------------------------- Mortgages Held-for-Sale and Residual $ 235,552 $142,685 10.62% 10.29% Certificates $ 25,026 $ 14,684 $ 10,342 $ 785 $ 9,557 - ------------------------------------- ---------------------------------------------------- $ 171,358 $ 97,534 5.73% 5.25% Total Interest Expense $ 9,819 $ 5,119 $ 4,700 $ 825 $ 3,875 - ------------------------------------- ---------------------------------------------------- 4.89% 5.04% Net Interest Income $ 15,207 $ 9,565 $ 5,642 $ (40) $ 5,682 ================= =============================== Allocation to Agency- Eligible Servicing Division 159 - --------------------- Net Interest Income $ 15,366 $ 9,565 =====================
Net interest income from subprime products increased to $15.4 million for 1999 as compared to $9.6 million for 1998. This was primarily the result of the increase in subprime loan production volume and an increase in accretion income earned on residual interests to $6.6 million for 1999 as compared to $3.4 for 1998. Net Gain on Sale and Securitization of Subprime Mortgage Loans A reconciliation of the gain on securitization of subprime mortgage loans for the periods indicated follows: 21 23
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 --------- --------- Gross proceeds on securitization of subprime mortgage loans $ 248,456 $ 318,040 Initial acquisition cost of subprime mortgage loans securitized, net of fees 252,162 324,549 --------- --------- Unadjusted loss on securitization of subprime mortgage loans (3,706) (6,509) Initial capitalization of residual certificates 16,394 22,240 Net deferred costs and administrative fees recognized (2,898) 357 --------- --------- Net gain on securitization of subprime mortgage loans $ 9,790 $ 16,088 ========= =========
The net gain on securitization of subprime mortgage loans declined by $6.3 million or 39% in 1999 as compared to 1998. This decline is primarily attributable to a 22% decrease in the volume of subprime loans securitized as well as compressed margins in the subprime market during 1999. The Company assesses the fair value of residual certificates quarterly, with assistance from an independent third party. This valuation is based on the discounted cash flows expected to be available to the holder of the residual certificates. Significant assumptions used at December 31, 1999 for residual certificates then held by the Company generally include a discount rate of 13%, a constant default rate of 3% and a loss severity rate of 25%, and ramping periods are based on prepayment penalty periods and adjustable rate mortgage first reset dates. Terminal prepayment rate assumptions specific to the individual certificates for purposes of the December 31, 1999 valuations are set forth below:
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 --------------------------------------------------------------- Prepayment Speeds Fixed rate mortgages 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr Adjustable rate mortgages 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr
Terminal prepayment rate assumptions specific to the individual certificates for purposes of the December 31, 1998 valuations are set forth below:
1997-1 1997-2 1998-1 1998-2 OTHER ------------ ------------- ------------ ------------ ------------ Prepayment speeds Fixed rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 32% cpr Adjustable rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 24% cpr
The assumptions used in the independent third party valuation referred to above are estimated based on current conditions for similar instruments that are subject to prepayment and credit risks. Other factors considered in the determination of fair value include credit and collateral quality of the underlying loans, current economic conditions and various fees and costs associated with ownership of the residual certificate including actual credit history of the individual residual certificates. 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 22 24 prepayment speed and loss experience from the assumptions used, could have a significant effect on the fair value of the residual certificates. As summarized in the following analysis, the recorded residual values imply that the Company's securitizations are valued at 1.55 times the implied excess yield at December 31, 1999, as compared to the 1.63 multiple implied at December 31, 1998. The table below represents balances as of December 31, 1999, unless otherwise noted. 23 25 Securitizations ---------------------------------------------------------------- 1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 Subtotal Other Total ------- ------- ------- -------- -------- -------- -------- ------- -------- ($ in thousands) Residual Certificates $ 5,971 $ 7,153 $10,334 $ 12,460 $ 9,566 $ 8,898 $ 54,382 $ -- $ 54,382 Bonds $22,763* $34,349* $74,099* $139,882* $121,887* $125,000* $517,980 $28,763* $546,743 ------- ------- ------- -------- -------- -------- -------- ------- -------- Subtotal $28,734 $41,502 $84,433 $152,342 $131,453 $133,898 $572,362 $28,763 $601,125 Unpaid Principal Balance $27,583* $39,203* $79,724* $144,894* $122,689* $125,329* $539,422 $31,253* $570,675 ------- ------- ------- -------- -------- -------- -------- ------- -------- Implied Price 104.17 105.86 105.91 105.14 107.14 106.84 106.11 92.03 105.34 ------- ------- ------- -------- -------- -------- -------- ------- -------- Collateral Yield 12.03 11.19 9.80 9.73 9.84 9.82 10.01 10.37 10.03 Collateral Equivalent Securitization Costs (0.71) (0.64) (0.59) (0.60) (0.62) (0.68) (0.63) (0.50) (0.62) Collateral Equivalent Bond Rate (5.10) (5.18) (5.55) (6.21) (5.98) (6.18) (5.92) (6.68) (5.96) ------- ------- ------- -------- -------- -------- -------- ------- -------- Implied Collateral Equivalent Excess Yield 6.22 5.37 3.66 2.92 3.24 2.96 3.46 3.19 3.45 ------- ------- ------- -------- -------- -------- -------- ------- -------- Implied Premium Above Par 4.17 5.86 5.91 5.14 7.14 6.84 6.11 -- 5.34 Implied Collateral Equivalent Excess Yield 6.22 5.37 3.66 2.92 3.24 2.96 3.46 3.19 3.45 ------- ------- ------- -------- -------- -------- -------- ------- -------- Multiple 0.67x 1.09x 1.61x 1.76x 2.20x 2.31x 1.76x --x 1.55x ------- ------- ------- -------- -------- -------- -------- ------- --------
* Amounts were based upon trustee statements dated January 25, 2000 that covered the period ended December 31, 1999. A summary of key information relevant to the subprime residual assets at December 31, 1999 is set forth below:
Securitizations ------------------------------------------------------------------ 1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 Other * Total ------- ------- -------- -------- ------ ------ -------- -------- ($ in thousands) Balance at December 31, 1998 $ 7,997 $ 9,702 $ 10,815 $ 12,569 $ -- $ -- $ 4,700 $ 45,783 Initial Capitalization of Residual Certificates -- -- -- -- 7,826 6,330 -- 14,156 Accretion 1,140 1,245 1,325 1,521 593 -- 752 6,576 Mark-to-Market (1,641) (1,130) (1,705) (1,630) 1,147 2,568 (5,452) (7,843) Cash Flow (1,525) (2,664) (101) -- -- -- -- (4,290) ------- ------- -------- -------- ------ ------ -------- -------- Balance at December 31, 1999 $ 5,971 $ 7,153 $ 10,334 $ 12,460 $9,566 $8,898 $ -- $ 54,382 ======= ======= ======== ======== ====== ====== ======== ========
* Represents a portion of a residual certificate the Company received in 1997 in settlement of an account receivable. In 1999 the Company decided to conservatively write off this receivable. A summary of key information relevant to the subprime residual assets at December 31, 1998 is set forth below:
Securitizations ------------------------------------------------------------------ 1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 Other Total ------- ------- -------- -------- ------ ------ -------- -------- ($ in thousands) Balance at December 31, 1997 $ 7,910 $ 6,507 $ -- $ -- $ -- $ -- $ 5,267 $ 19,684 Initial Capitalization of Residual Certificates -- 2,164 9,040 11,017 -- -- -- 22,221 Accretion 1,073 1,153 559 -- -- -- 661 3,446 Mark-to-Market (986) (122) 1,216 1,552 -- -- (1,225) 435 Cash Flow -- -- -- -- -- -- (3) (3) ------- ------- -------- -------- ------ ------ -------- -------- Balance at December 31, 1998 $ 7,997 $ 9,702 $ 10,815 $ 12,569 $ -- $ -- $ 4,700 $ 45,783 ======= ======= ======== ======== ====== ====== ======== ========
24 26 The Company sold subprime mortgage loans on a whole loan basis during 1999 and 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 less expenses. Generally, 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 YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 --------- -------- Gross proceeds on whole loan sales of subprime mortgage loans $ 463,443 $238,186 Initial acquisition cost of subprime mortgage loans sold, net of fees 447,155 226,561 --------- -------- Unadjusted gain on whole loan sales of subprime mortgage loans 16,288 11,625 Net deferred costs and administrative fees recognized (5,721) 267 --------- -------- Net gain on whole loan sales of subprime mortgage loans $ 10,567 $ 11,892 ========= ========
The $1.3 million decrease in the net gain on whole loan sales of subprime mortgage loans from the 1998 gain of $11.9 million to $10.6 million reported for 1999 is primarily due to compressed margins in the subprime market during 1999. Also, in response to the growth in the subprime division, management reassessed its application of estimates related to Statement of Financial Accounting Standard No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" in the fourth quarter of 1998. This resulted in a $5.7 million reduction in the net gain on whole loan sales of subprime mortgage loans in 1999 as compared to a $0.3 million increase for 1998. Other Income The Company generally retains residual certificates in connection with the securitization of subprime loans. These residual certificates are adjusted to approximate market value each quarter. For the years ended December 31, 1999 and 1998, respectively, mark-to-market gain (loss) on residuals was approximately $(7.8) million and $0.4 million, respectively. This amount is reflected as other income (loss) within the subprime division. This ($7.8) million other loss was partially offset by $3.4 million of other subprime income. This other subprime income consists primarily of prepayment penalties. AGENCY-ELIGIBLE MORTGAGE SERVICING Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage servicing operations for the years ended December 31, 1999 and 1998: 25 27
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ($ IN THOUSANDS) 1999 1998 ----------- ----------- Net interest expense $ (4,555) $ -- Loan servicing fees 41,791 37,856 Other income 582 455 ----------- ----------- Servicing revenues 37,818 38,311 Salary and employee benefits 3,399 3,449 Occupancy expense 419 443 Amortization and provision for impairment of mortgage servicing rights 29,580 27,897 General and administrative expenses 5,984 6,446 ----------- ----------- Total loan servicing expenses 39,382 38,235 ----------- ----------- Net pre-tax servicing margin (1,564) 76 Gain on sale of mortgage servicing rights 7,262 1,753 ----------- ----------- Net pre-tax servicing contribution $ 5,698 $ 1,829 =========== =========== Average servicing portfolio $ 9,279,848 $ 9,386,653 Servicing sold 9,104,706 10,922,288 Net pre-tax servicing margin to average servicing portfolio (2) BPS 0 bps Gain on sale of servicing to servicing sold 8 BPS 2 bps
Summary The ratio of net pre-tax servicing margin to the average servicing portfolio declined 2 basis points primarily due to the Company beginning during the first quarter of 1999 to allocate net interest expense to the agency-eligible servicing division. Had the $4.6 million in interest expense not been allocated to the agency-eligible servicing division in 1999, the net pre-tax servicing margin to average servicing portfolio would have been 3 basis points, a slight improvement over the 1998 margin. The 6 basis point increase in the gain on sale of servicing sold is primarily attributable to rising rates which benefited the execution of servicing sales in the marketplace. Loan servicing fees were $41.8 million for 1999, compared to $37.9 million for 1998, an increase of 10%, primarily due to an increase in the weighted average service fee on serviced portfolios. Amortization and provision for impairment of mortgage servicing rights increased to $29.6 million during 1999 from $27.9 million during 1998, an increase of 6%. The increase in amortization is primarily attributable to higher amortization charges associated with increased book carrying values of mortgage servicing rights resulting from the rising rate environment. Given current market conditions, management continually assesses market prepay trends and adjusts amortization accordingly. Management believes that the value of the Company's mortgage servicing rights are reasonable in light of current market conditions. However, there can be no guarantee that market conditions will not change such that mortgage servicing rights valuations will require additional amortization or impairment charges. 26 28 Net Interest Expense During the first quarter of 1999, the Company began to allocate interest expense to the agency-eligible servicing division. The net interest expense for 1999 is composed of benefits from escrow accounts of $8.0 million that is offset by $12.6 million in interest expense. Had the Company allocated interest expense to the agency-eligible servicing division during 1998, net interest expense would have been $4.6 million. The net interest expense would have been composed of benefit from escrows of $7.7 million that would have been offset by $12.3 in interest expense. Gain on Sale of Mortgage Servicing Rights A reconciliation of the components of gain on sale of mortgage servicing rights for the periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 ----------- ------------ Underlying unpaid principal balances of agency-eligible mortgage loans on which servicing rights were sold during the period $ 9,104,706 $ 10,922,288 =========== ============ Gross proceeds from sales of mortgage servicing rights $ 245,302 $ 256,292 Initial acquisition basis, net of amortization and hedge results 179,721 189,918 ----------- ------------ Unadjusted gain on sale of mortgage servicing rights 65,581 66,374 Acquisition basis allocated from mortgage loans, net of amortization (SFAS No. 125) (58,319) (64,621) ----------- ------------ Gain on sale of mortgage servicing rights $ 7,262 $ 1,753 =========== ============
Gain on sale of mortgage servicing rights increased $5.5 million from $1.8 million for 1998 to $7.3 million for 1999. The increase in the gain on sale of mortgage servicing rights is primarily attributable to rising rates which benefited the execution of servicing sales into the secondary markets. COMMERCIAL MORTGAGE OPERATIONS Following is a summary of the revenues and expenses of the Company's commercial mortgage production operations. 27 29
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ($ IN THOUSANDS) 1999 1998 ----------- ----------- Net interest income $ 323 $ 536 Net gain on sale of mortgage loans 9,170 9,011 Other income 69 11 ----------- ----------- Total production revenue 9,562 9,558 ----------- ----------- Salary and employee benefits 8,321 7,322 Occupancy expense 1,123 840 General and administrative expenses 1,820 1,734 ----------- ----------- Total production expenses 11,264 9,896 ----------- ----------- Net pre-tax production margin (1,702) (338) ----------- ----------- Servicing fees 4,735 3,777 Amortization of mortgage servicing rights 2,210 1,335 ----------- ----------- Net pre-tax servicing margin 2,525 2,442 ----------- ----------- Pre-tax income $ 823 $ 2,104 ----------- ----------- Production $ 844,975 $ 899,674 Whole loan sales 868,775 875,874 Average commercial mortgage servicing portfolio $ 3,799,251 $ 3,006,859 Total production revenue to whole loan sales 110 BPS 109 bps Total production expenses to production 133 BPS 110 bps ----------- ----------- Net pre-tax production margin (23) BPS (1) bps ----------- ----------- Servicing fees to average commercial mortgage servicing portfolio 12 BPS 13 bps Amortization of mortgage servicing rights to average commercial mortgage servicing portfolio 6 BPS 4 bps ----------- ----------- Net pre-tax servicing margin 6 BPS 9 bps ----------- -----------
The net pre-tax production margin declined for 1999 as compared to 1998 primarily due to an increase in production expenses. The production expense increase is primarily attributable to Laureate opening one new branch in 1999 and a 9% increase in the number of employees from year to year. Laureate originates commercial mortgage loans for various insurance companies and other investors, primarily in Alabama, Florida, Indiana, North Carolina, Pennsylvania, South Carolina, Tennessee and Virginia. Substantially all loans originated by Laureate have been originated in the name of the investor, and in most cases, Laureate 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. 28 30 Net Gain on Sale of Commercial Mortgage Loans A reconciliation of gain on sale of commercial mortgage loans for the periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 -------- -------- Gross proceeds on sales of commercial mortgage loans $868,775 $875,874 Initial unadjusted acquisition cost of commercial mortgage loans sold 868,775 875,874 -------- -------- Unadjusted gain on sale of commercial mortgage loans -- -- Commercial mortgage and origination fees 7,155 6,831 -------- -------- Unadjusted aggregate margin 7,155 6,831 Initial acquisition cost allocated to basis in commercial Mortgage servicing rights (SFAS No. 125) 2,015 2,180 -------- -------- Net gain on sale of commercial mortgage loans $ 9,170 $ 9,011 ======== ========
The net gain on sale of commercial mortgage loans increased $0.2 million (2%) from $9.0 million for 1998 to $9.2 million for 1999. The increase is primarily attributable to improved margins on sales of commercial mortgage loans. LEASING OPERATIONS Following is a summary of the revenues and expenses of the Company's small-ticket equipment leasing operations for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ($ IN THOUSANDS) 1999 1998 -------- -------- Net interest income $ 7,270 $ 4,637 Other income 1,395 753 -------- -------- Leasing production revenue 8,665 5,390 -------- -------- Salary and employee benefits 2,654 2,347 Occupancy expense 453 376 General and administrative expenses 3,168 2,584 -------- -------- Total lease operating expenses 6,275 5,307 -------- -------- Net pre-tax leasing production margin 2,390 83 Servicing fees 620 1,014 -------- -------- Net pre-tax leasing margin $ 3,010 $ 1,097 -------- -------- Average owned leasing portfolio $125,258 $ 73,508 Average serviced leasing portfolio 24,831 53,480 -------- -------- Average managed leasing portfolio $150,089 $126,988 ======== ======== Leasing production revenue to average owned portfolio 692 BPS 733 bps Leasing operating expenses to average owned portfolio 501 BPS 721 bps -------- -------- Net pre-tax leasing production margin 191 BPS 12 bps ======== ======== Servicing fees to average serviced leasing portfolio 250 BPS 190 bps ======== ========
29 31 The 61% increase in leasing production revenue for 1999 as compared to 1998 is primarily due to the 70% increase in the average owned leasing portfolio which is due to the policy of retaining originated leases on the balance sheet. The net pre-tax leasing margin improved in 1999 as compared to 1998 due to the increase in production revenue which was only partially offset by an 18% increase in lease operating expenses. Efficiencies in managing costs were able to be achieved in 1999 as the volume of leases owned substantially increased. 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. The Company has made an effort to increase the owned portfolio. As it has increased its owned portfolio more cost efficiencies have been achieved thereby increasing the net pre-tax leasing production margin. Net Interest Income Net interest income for 1999 was $7.3 million as compared to $4.6 million for 1998. This is equivalent to a net interest margin of 3.25% and 4.35% for 1999 and 1998, respectively, based upon average lease receivables owned of $125.3 million and $73.5 million, respectively, and average debt outstanding of $92.4 and $53.5 million, respectively. OTHER During the third quarter of 1999, the Company reorganized its reporting cost centers and is now reporting holding company costs as a reconciling item between the segmented income statement and the consolidated income statement. The primary components of holding company costs are 1) interest expense on the debt on the Company's corporate headquarters; 2) salary and employee benefits of corporate personnel; 3) depreciation on the corporate headquarters and 4) income taxes. The 1998 segmented income statement has been restated to conform with the 1999 segmented income statement presentation. WORKFORCE REDUCTION During the fourth quarter of 1999, the Company incurred a $3.8 million ($2.4 million after-tax) charge related to a workforce reduction. The workforce reduction became necessary as the Company continued to adapt to a smaller overall residential mortgage market and intensely competitive pricing conditions. The impact of the expense related to the workforce reduction is summarized below by financial statement component and operating division: 30 32
Agency-Eligible ---------------------- Other/ ($ in thousands) Production Servicing Subprime Eliminations Consolidated ---------- --------- -------- ------------ ------------ Salary and employee Benefits $ 820 $ 31 $ 166 $ 2 $ 1,019 Occupancy expense 1,780 -- 186 190 2,156 General and administrative expenses 448 -- 164 2 614 ------- ---- ----- ----- ------- Net pre-tax impact 3,048 31 516 194 3,789 Estimated allocable income tax expense (1,136) (12) (192) (72) (1,412) ------- ---- ----- ----- ------- Net after-tax Impact $ 1,912 $ 19 $ 324 $ 122 $ 2,377 ======= ==== ===== ===== =======
31 33 RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997 SUMMARY BY OPERATING DIVISION Following is a summary of the revenues and expenses for each of the Company's operating divisions (with non-recurring and special charges separately categorized) for the years ended December 31, 1998 and 1997, respectively: 32 34
Agency-Eligible ($ in thousands) -------------------------------------------- For the year ended Commercial Total Other/ December 31, 1998 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments Eliminations - ------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 7,422 $ -- $ -- $ 9,565 $ 536 $ 4,637 $ 22,160 $ (382) Net gain on sale of mortgage loans 134,472 -- -- 27,980 9,011 -- 171,463 -- Gain on sale of mortgage servicing rights -- 1,753 -- -- -- -- 1,753 -- Servicing fees -- 37,856 -- -- 3,777 1,014 42,647 509 Other income 1,756 (2) 455 1,189 732 11 753 4,896 680 ------------------------------------------------------------------------------------------ Total revenues 143,650 (2) 40,064 1,189 38,277 13,335 6,404 242,919 807 ------------------------------------------------------------------------------------------ Salary and employee benefits 53,158 3,449 -- 13,485 7,322 2,347 79,761 2,645 Occupancy expense 7,005 443 -- 1,921 840 376 10,585 634 Amortization and provision for impairment of mortgage -- servicing rights -- 27,897 -- -- 1,335 -- 29,232 -- General and administrative expenses 28,046 6,446 196 4,490 1,734 2,584 43,496 770 ------------------------------------------------------------------------------------------ Total expenses 88,209 38,235 196 19,896 11,231 5,307 163,074 4,049 ------------------------------------------------------------------------------------------ Income before income taxes 55,441 (2) 1,829 993 18,381 2,104 1,097 79,845 (3,242) Income tax expense (20,059)(2) (662) (351) (6,656) (952) (435) (29,115) 1,183 ------------------------------------------------------------------------------------------ Net income $ 35,382(2) $ 1,167 $ 642 $11,725 $ 1,152 $ 662 $ 50,730 $ (2,059) ==========================================================================================
Non-Recurring For the year ended and Special December 31, 1998 (1) Charges Consolidated - ---------------------------------------------------------- (UNAUDITED) Net interest income $ 21,778 Net gain on sale of mortgage loans 171,463 Gain on sale of mortgage servicing rights 1,753 Servicing fees 43,156 Other income 5,576 (2) --------------------------- Total revenues 243,726 (2) --------------------------- Salary and employee benefits 82,406 Occupancy expense 11,219 Amortization and provision for impairment of mortgage servicing rights 29,232 General and administrative expenses 44,266 --------------------------- Total expenses 167,123 --------------------------- Income before income taxes 76,603 (2) Income tax expense (27,932)(2) --------------------------- Net income $ 48,671(2) ===========================
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. (2) Includes a non-recurring gain related to sale of retail operation totaling $1,490 pre-tax, or $917 after-tax. Exclusive thereof, the year ended December 31, 1998 residential mortgage agency-eligible other income, total revenues, income before taxes, income tax expense and net income and consolidated other income, total revenues, income before taxes, income tax expense and net income would have been $266, $142,160, $53,951, $19,486 and $34,465; and $4,086, $242,236, $75,113, $27,359 and $47,754, respectively.
Agency-Eligible ($ in thousands) -------------------------------------------- For the year ended Commercial Total Other/ December 31, 1997 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments Eliminations - ------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 16,764 $ -- $ -- $ 1,268 $ -- $ -- $ 18,032 $ (388) Net gain on sale of mortgage loans 89,358 -- -- 14,012 -- -- 103,370 -- Gain on sale of mortgage servicing rights -- 7,955 -- -- -- -- 7,955 -- Servicing fees -- 30,869 -- -- -- -- 30,869 -- Other income 1,180 -- -- -- -- -- 1,180 -- ------------------------------------------------------------------------------------------ Total revenues 107,302 38,824 -- 15,280 -- -- 161,406 (388) ------------------------------------------------------------------------------------------ Salary and employee benefits 50,005 3,025 -- 7,754 -- -- 60,784 1,451 Occupancy expense 6,052 318 -- 711 -- -- 7,081 377 Amortization and provision for impairment of mortgage servicing rights -- 18,315 -- -- -- -- 18,315 -- General and administrative expenses 17,799 7,856 -- 2,021 -- -- 27,676 100 ------------------------------------------------------------------------------------------ Total expenses 73,856 29,514 -- 10,486 -- -- 113,856 1,928 ------------------------------------------------------------------------------------------ Income before income taxes 33,446 9,310 -- 4,794 -- -- 47,550 (2,316) Income tax expense (12,678) (3,537) -- (1,825) -- -- (18,040) 845 ------------------------------------------------------------------------------------------ Net income $ 20,768 $ 5,773 $ -- $ 2,969 $ -- $ -- $ 29,510 $ (1,471) ==========================================================================================
Non-Recurring For the year ended and Special December 31, 1997 (1) Charges Consolidated - ---------------------------------------------------------- (UNAUDITED) Net interest income $ 17,644 Net gain on sale of mortgage loans 103,370 Gain on sale of mortgage servicing rights 7,955 Servicing fees 30,869 Other income 1,180 --------------------------- Total revenues 161,018 --------------------------- Salary and employee benefits 62,235 Occupancy expense 7,458 Amortization and provision for impairment of mortgage servicing rights 18,315 General and administrative expenses 10,147 37,923(2) --------------------------- Total expenses 10,147 125,931(2) --------------------------- Income before income taxes (10,147) 35,087(2) Income tax expense 3,906 (13,289)(2) --------------------------- Net income $ (6,241) $ 21,798(2) ===========================
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. (2) Includes non-recurring and special charges related to a merger agreement that was terminated and certain nonrecoverable operating receivables totaling $10,147 pretax, or $6,241 after tax. Exclusive thereof, the December 31, 1997 consolidated general and administrative expenses, total expenses, income before income taxes, income tax expense and net income would have been $27,776, $115,784, $45,235, $17,195 and $28,039, respectively. 33 35 AGENCY-ELIGIBLE MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses allocated to the Company's agency-eligible mortgage production operations.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ($ IN THOUSANDS) 1998 1997 ----------- ----------- Net interest income $ 7,422 $ 16,764 Net gain on sale of mortgage loans 134,472 89,358 Other income 1,756 1,180 ----------- ----------- Total production revenue 143,650 107,302 ----------- ----------- Salary and employee benefits 53,158 50,005 Occupancy expense 7,005 6,052 General and administrative expenses 28,046 17,799 ----------- ----------- Total production expenses 88,209 73,856 ----------- ----------- Net pre-tax production margin $ 55,441 $ 33,446 ----------- ----------- Production $14,954,580 $10,437,720 Pool delivery 14,713,137 10,212,966 Total production revenue to pool delivery 98 BPS 105 bps Total production expenses to production 59 BPS 71 bps ----------- ----------- Net pre-tax production margin 39 BPS 34 bps =========== ===========
Summary Overall, the Company's net agency-eligible pre-tax production margin improved 5 basis points, or 15%, to 39 basis points while in absolute dollars it increased $22.0 million, or 66%. The production revenue to pool delivery ratio declined seven basis points, or 7%, for 1998 as compared to 1997. Generally, net gain on sale of mortgage loans (91 basis points for 1998 versus 88 basis points for 1997) improved due to better overall execution into the secondary markets. However, net interest income declined and offset this improvement due to the relatively flatter yield curve environment. The production expenses to production ratio decreased 12 basis points, or 17%, for 1998 as compared to 1997. Generally, this relates to better leverage of fixed operating expenses in the higher volume production environment for 1998 versus 1997. Net Interest Income The following table analyzes net interest income for the years ended December 31, 1998 and 1997, allocated to the Company's agency-eligible mortgage production activities in terms of rate and volume variances of the interest-rate spread (the difference between interest rates earned on loans and mortgage-backed securities and interest rates paid on interest-bearing sources of funds). 34 36
($ 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 Mortgage-Backed $1,172,994 $ 917,341 6.74% 7.62% Securities $79,078 $69,889 $ 9,189 $(10,288) $19,477 - --------------------------------------- ----------------------------------------------------- INTEREST EXPENSE $ 457,967 $ 430,727 4.50% 4.77% Warehouse Line * $20,630 $20,559 $ 71 $ (1,229) $ 1,300 689,711 461,467 5.79% 5.69% Gestation Line 39,958 26,245 13,713 732 12,981 97,422 48,199 6.58% 6.56% Servicing Secured Line 6,413 3,160 3,253 26 3,227 33,331 22,953 5.75% 6.10% Servicing Receivables 1,918 1,401 517 (116) 633 Line 8,726 4,804 8.50% 8.11% Other Borrowings 742 389 353 35 318 Facility Fees & Other Charges 2,377 1,759 618 618 - --------------------------------------- ----------------------------------------------------- $1,287,157 $ 968,150 5.60% 5.53% Total Interest Expense $72,038 $53,513 $18,525 $ (552) $19,077 - --------------------------------------- ----------------------------------------------------- Net Interest Income Before Interdivisional 1.14% 2.09% Allocations $ 7,040 $16,376 $(9,336) $(9,736) $ 400 ================== ================================ Allocation to Other 382 388 Allocation to Agency- Eligible Servicing Division - - ----------------- Net Interest Income $ 7,422 $16,764 =================
* The interest-rate yield on the warehouse line is net of the benefit of escrow deposits. Net interest income from agency-eligible products decreased 56% to $7.4 million for 1998 compared to $16.8 million for 1997. The 95 basis point decrease in the interest-rate spread was primarily the result of the narrower spreads between long and short-term rates in 1998 compared to 1997. The Company's mortgages and mortgage-backed securities are generally sold and replaced within 30 to 35 days. The Company generally borrows at rates based upon short-term indices, while its asset yields are primarily based upon long-term mortgage rates. Net Gain on Sale of Agency-Eligible Mortgage Loans A reconciliation of gain on sale of agency-eligible mortgage loans for the periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 ----------- ----------- Gross proceeds on sales of mortgage loans $14,921,242 $10,427,031 Initial unadjusted acquisition cost of mortgage loans sold, net of hedge results 14,917,751 10,422,340 ----------- ----------- Unadjusted gain on sale of mortgage loans 3,491 4,691 Loan origination and correspondent program administrative fees 36,729 34,448 ----------- ----------- Unadjusted aggregate margin 40,220 39,139 Acquisition basis allocated to mortgage servicing rights (SFAS No. 125) 93,570 49,170 Net change in deferred administrative fees 682 1,049 ----------- ----------- Net gain on sale of agency-eligible mortgage loans $ 134,472 $ 89,358 =========== ===========
The Company sold agency-eligible loans during 1998 with an aggregate unpaid principal balance of $14.9 billion compared to sales of $10.4 billion for 1997. The amount of proceeds received on sales of mortgage loans exceeded the initial unadjusted acquisition cost of the loans 35 37 sold by $3.5 million (2 basis points) for 1998 as compared to $4.7 million (4 basis points) for 1997. The Company received loan origination and correspondent program administrative fees of $36.7 million (25 basis points) on these loans during 1998 and $34.4 million (33 basis points) during 1997. The Company allocated $93.6 million (63 basis points) to basis in mortgage servicing rights for loans sold in 1998 as compared to $49.2 million (47 basis points) during 1997 in accordance with Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". Net gain on sale of agency-eligible mortgage loans increased to $134.5 million for 1998 versus $89.4 million for 1997. General and Administrative Expenses General and administrative expenses allocated to the production of agency-eligible mortgage loans increased $10.2 million to $28.0 million for 1998 as compared to $17.8 million for 1997. Provision for foreclosure and repurchase expenses increased by $5.1 million to approximately $9.7 million for 1998 primarily due to the increase in repurchase loan volumes in 1998 as compared to 1997. The balance of the increase was primarily due to the overall growth of the Company's production and servicing operations. AGENCY-ELIGIBLE REINSURANCE OPERATIONS During 1998, the Company formed a captive insurance company, MG Reinsurance Company (MG Reinsurance). MG Reinsurance is licensed as a property and casualty insurer and operates as a monoline captive insurance company assuming reinsurance for agency-eligible mortgage loans initially purchased or produced by the Company. During 1998, the Company recognized premium income of approximately $1.2 million categorized as other income in the agency-eligible production segment. SUBPRIME MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses allocated to the Company's subprime mortgage production operations.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ($ IN THOUSANDS) 1998 1997 -------- -------- Net interest income $ 9,565 $ 1,268 Net gain on sale of mortgage loans 27,980 14,012 Other income 732 -- -------- -------- Total production revenue 38,277 15,280 -------- -------- Salary and employee benefits 13,485 7,754 Occupancy expense 1,921 711 General and administrative expenses 4,490 2,021 -------- -------- Total production expenses 19,896 10,486 -------- -------- Net pre-tax production margin 18,381 $ 4,794 -------- -------- Production $607,664 $292,817 Whole loan sales and securitizations 551,110 284,841 Total production revenue to whole loan sales and securitizations 695 bps 536 bps Total production expenses to production 327 bps 358 bps -------- -------- Net pre-tax production margin 368 bps 178 bps ======== ========
36 38 Summary During 1998, the Company produced $607.7 million of subprime loans. The Company sold approximately $226.6 million (37%) of its 1998 production in whole loan transactions and delivered $324.5 million into the secondary markets through securitization transactions. Overall, the subprime division operated during 1998 at a 3.68% pre-tax production margin. At December 31, 1998 the Company had unsold subprime mortgage loans of $97.9 million. During 1997, the Company's subprime division was in its initial startup phase and $46.8 million of the subprime mortgage loan production for that period was purchased in bulk from Meritage prior to the Company's acquisition of Meritage. Net Interest Income The following table analyzes net interest income for the years ended December 31, 1998 and 1997 allocated to the Company's subprime mortgage production activities in terms of rate and volume variances of the interest rate spread (the difference between interest rates earned on loans and residual certificates and interest rates paid on interest-bearing sources of funds).
($ IN THOUSANDS) Variance Average Volume Average Rate Interest Attributable to - -------------------------------------- --------------------- --------------------- 1998 1997 1998 1997 1998 1997 Variance Rate Volume - -------------------------------------- ---------------------------------------------------- Mortgages Held-for-Sale and Residual $142,685 $19,512 10.29% 12.37% Certificates $ 14,684 $2,413 $12,271 $(2,961) $ 15,232 - -------------------------------------- ---------------------------------------------------- $ 97,534 $16,693 5.25% 6.86% Total Interest Expense $ 5,119 $1,145 $ 3,974 $(1,571) $ 5,545 - -------------------------------------- ---------------------------------------------------- 5.04% 5.51% Net Interest Income $ 9,565 $1,268 $ 8,297 $(1,390) $ 9,687 ================== ====================================================
Net interest income from subprime products increased 654% to $9.6 million for 1998 as compared to $1.3 million for 1997. This was primarily the result of increased subprime production volumes as subprime operations introduced and made available through the Company's existing agency-eligible wholesale network reached full year production levels. Net Gain on Sale and Securitization of Subprime Mortgage Loans A reconciliation of the gain on securitization of subprime mortgage loans for the periods indicated follows: 37 39
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 --------- --------- Gross proceeds on securitization of subprime mortgage loans $ 318,040 $ 164,787 Initial acquisition cost of subprime mortgage loans securitized, net of fees 324,549 171,802 --------- --------- Unadjusted loss on securitization of subprime mortgage loans (6,509) (7,015) Initial capitalization of residual certificates 22,240 13,946 Net change in deferred administrative fees 357 N/A --------- --------- Net gain on securitization of subprime mortgage loans $ 16,088 $ 6,931 ========= =========
The Company assesses the fair value of residual certificates quarterly, with assistance from an independent third party. This valuation is based on the discounted cash flows expected to be available to the holder of the residual certificates. Significant assumptions used at December 31, 1998 for all residual certificates then held by the Company include a discount rate of 13%, a constant default rate of 3% and a loss severity rate of 25%, and ramping periods are based on prepayment penalty periods and adjustable rate mortgage first reset dates. Constant prepayment rate assumptions specific to the individual certificates for purposes of the December 31, 1998 valuations are set forth below:
1997-1 1997-2 1998-1 1998-2 OTHER ------------ ------------- ------------ ------------ ------------ Prepayment speeds Fixed rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 32% cpr Adjustable rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 24% cpr
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 associated with ownership of the residual certificates. 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. As summarized in the following analysis, the recorded residual values imply that the Company's securitizations are valued at 1.63 times the implied excess yield at December 31, 1998. The table below represents balances as of December 31, 1998, unless otherwise noted. 38 40
($ IN THOUSANDS) SECURITIZATIONS ------------------------------------------------- 1997-1 1997-2 1998-1 1998-2 SUBTOTAL OTHER TOTAL --------- ----------- ----------- ---------- ---------- ----------- ------------ Residual Certificates $ 7,997 $ 9,702 $ 10,815 $ 12,569 $ 41,083 $ 4,700 $ 45,783 Bonds $ 51,778 * $ 75,504 * $ 117,977 * $ 169,514 * $ 414,773 $ 43,690 ** $ 458,463 --------- ----------- ----------- ---------- ---------- ----------- ------------ Subtotal $ 59,775 $ 85,206 $ 128,792 $ 182,083 $ 455,856 $ 48,390 $ 504,246 Unpaid Principal Balance $ 56,636 * $ 80,358 * $ 120,358 * $ 169,068 * $ 426,420 $ 46,686 ** $ 473,106 --------- ----------- ----------- ---------- ---------- ----------- ------------ Implied Price 105.54 106.03 107.01 107.70 106.90 103.65 106.58 --------- ----------- ----------- ---------- ---------- ----------- ------------ Collateral Yield 10.39 10.03 9.76 9.70 9.87 11.30 10.02 Collateral Equivalent Securitization Costs (0.72) (0.65) (0.60) (0.60) (0.63) (0.50) (0.61) Collateral Equivalent Bond Rate (4.74) (4.90) (5.02) (5.60) (5.19) (6.96) (5.37) --------- ----------- ----------- ---------- ---------- ----------- ------------ Implied Collateral Equivalent Excess Yield 4.93 4.48 4.14 3.50 4.05 3.84 4.04 --------- ----------- ----------- ---------- ---------- ----------- ------------ Implied Premium Above Par 5.54 6.03 7.01 7.70 6.90 3.65 6.58 Implied Collateral Equivalent Excess Yield 4.93 4.48 4.14 3.50 4.05 3.84 4.04 --------- ----------- ----------- ---------- ---------- ----------- ------------ Multiple 1.12 x 1.35 x 1.69 x 2.20 x 1.70 x 0.95 x 1.63 x --------- ----------- ----------- ---------- ---------- ----------- ------------
* Amounts were based upon trustee statements dated January 23, 1999 that covered the period ended December 31, 1998. ** Amounts were based upon trustee statements dated December 23, 1998 that covered the period ended November 30, 1998. The Company also sold subprime mortgage loans on a whole loan basis in 1998 and 1997. 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 and the gross proceeds received from the purchaser less expenses. Generally, 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 YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 -------- -------- Gross proceeds on whole loan sales of subprime mortgage loans $238,186 $118,817 Initial acquisition cost of subprime mortgage loans sold, net of fees 226,561 117,003 -------- -------- Unadjusted gain on whole loan sales of subprime mortgage loans 11,625 1,814 Residual certificate received from sale N/A 5,267 Net change in deferred administrative fees 267 N/A -------- -------- Net gain on whole loan sales of subprime mortgage loans $ 11,892 $ 7,081 ======== ========
Other Income During 1997 and 1998, the Company retained residual certificates in connection with the securitization of subprime loans. These residual certificates are adjusted to approximate market value each quarter. For the year ended December 31, 1998, mark-to-market income on residuals was approximately $0.4 million. This amount is reflected as other income within the subprime 39 41 division. Accretion income for 1998 and 1997 relating to residuals was approximately $3.4 million and $0.3 million, respectively, and is recorded as a component of net interest income. AGENCY-ELIGIBLE MORTGAGE SERVICING Following is a comparison of the revenues and expenses allocated to the Company's agency-eligible mortgage servicing operations for the years ended December 31, 1998 and 1997:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ($ IN THOUSANDS) 1998 1997 ----------- ---------- Loan servicing fees $ 37,856 $ 30,869 Other income 455 -- ----------- ---------- Servicing revenues 38,311 30,869 Salary and employee benefits 3,449 3,025 Occupancy expense 443 318 Amortization and provision for impairment of mortgage servicing rights 27,897 18,315 General and administrative expenses 6,446 7,856 ----------- ---------- Total loan servicing expenses 38,235 29,514 ----------- ---------- Net pre-tax servicing margin 76 1,355 Gain on sale of mortgage servicing rights 1,753 7,955 ----------- ---------- Net pre-tax servicing contribution $ 1,829 $ 9,310 =========== ========== Average servicing portfolio $ 9,386,653 $7,470,892 Servicing sold 10,922,288 9,699,058 Net pre-tax servicing margin to average servicing portfolio 0 BPS 2 bps Gain on sale of servicing to servicing sold 2 BPS 8 bps
Summary The ratio of net pre-tax servicing margin to the average servicing portfolio declined 2 basis points from 1997 to 1998 primarily due to relatively larger increases in amortization expense. The increased amortization expense is largely attributable to the generally higher volumes of mortgage servicing rights held-for-sale and increased prepayment speeds resulting from the generally low interest rate environment which required relatively higher periodic amortization charges. In the fourth quarter of 1998 the Company recorded a reserve for potential impairment of mortgage servicing rights of approximately $0.8 million. Overall, the servicing division contributed $1.8 million to 1998 pre-tax net income, a $7.5 million, or 80%, decrease over the $9.3 million contribution for 1997. Loan servicing fees were $37.9 million for 1998, compared to $30.9 million for 1997, an increase of 23%. This increase is primarily related to an increase in the average aggregate underlying unpaid principal balance of mortgage loans serviced to $9.4 billion during 1998 from $7.5 billion during 1997, an increase of 26%. Similarly, amortization and provision for impairment of mortgage servicing rights also increased to $27.9 million during 1998 from $18.3 million during 1997, an increase of 52%. The increase in amortization is primarily attributable to 40 42 the growth in the average balance of the mortgage loans serviced and the generally higher prepay speed environment. Management continually assesses market prepayment trends and adjusts amortization accordingly. Management believes that the carrying value of mortgage servicing rights is reasonable in light of current market conditions. However, there can be no guarantee that market conditions will not change such that mortgage servicing rights valuations will require additional amortization or impairment charges. Included in loan servicing fees for 1998 and 1997 are subservicing fees received by the Company of $733 thousand and $567 thousand, respectively. The subservicing fees are associated with temporary subservicing agreements between the Company and purchasers of mortgage servicing rights. Gain on Sale of Agency-Eligible Mortgage Servicing Rights A reconciliation of the components of gain on sale of agency-eligible mortgage servicing rights for the periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 ------------ ----------- Underlying unpaid principal balances of agency-eligible mortgage loans on which servicing rights were sold during the period $ 10,922,288 $ 9,181,405 ============ =========== Gross proceeds from sales of agency-eligible mortgage servicing rights $ 256,292 $ 206,868 Initial acquisition basis, net of amortization and hedge results 189,918 160,314 ------------ ----------- Unadjusted gain on sale of agency-eligible mortgage servicing rights 66,374 46,554 Acquisition basis allocated from mortgage loans, net of amortization (SFAS No. 125) (64,621) (38,599) ------------ ----------- Gain on sale of agency-eligible mortgage servicing rights $ 1,753 $ 7,955 ============ ===========
During 1998, the Company completed 25 sales of agency-eligible mortgage servicing rights representing $10.9 billion of underlying unpaid principal mortgage loan balances. This compares to 31 sales of agency-eligible mortgage servicing rights representing $9.2 billion of underlying unpaid principal mortgage loan balances in 1997. The unadjusted gain on the sale of agency-eligible mortgage servicing rights was $66.4 million (61 basis points) for 1998, up from $46.6 million (51 basis points) for 1997. The Company reduced this unadjusted gain by $64.6 million in 1998, versus a $38.6 million reduction in 1997, in accordance with SFAS No. 125. During 1997, certain seasoned available-for-sale agency-eligible mortgage servicing rights were sold at a relatively higher margin as compared to 1998, thus causing the decrease in gain on sale of agency-eligible mortgage servicing rights in 1998. 41 43 COMMERCIAL MORTGAGE OPERATIONS Following is a summary of the revenues and expenses allocated to the Company's commercial mortgage production operations:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ($ IN THOUSANDS) 1998 1997 ----------- ------ Net interest income $ 536 N/A Net gain on sale of mortgage loans 9,011 N/A Other income 11 N/A ----------- ------ Total production revenue 9,558 N/A ----------- ------ Salary and employee benefits 7,322 N/A Occupancy expense 840 N/A General and administrative expenses 1,734 N/A ----------- ------ Total production expenses 9,896 N/A ----------- ------ Net pre-tax production margin (338) N/A ----------- ------ Servicing fees 3,777 N/A Amortization of mortgage servicing rights 1,335 N/A ----------- ------ Net pre-tax servicing margin 2,442 N/A ----------- ------ Pre-tax income $ 2,104 N/A ----------- ------ Production $ 899,674 N/A Whole loan sales 875,874 N/A Average commercial mortgage servicing portfolio $ 3,006,859 N/A Total production revenue to whole loan sales 109 bps N/A Total production expenses to production 110 bps N/A ----------- ------ Net pre-tax production margin (1)bps N/A ----------- ------ Servicing fees to average commercial mortgage servicing portfolio 13 bps N/A Amortization of mortgage servicing rights to average commercial mortgage servicing portfolio 4 bps N/A ----------- ------ Net pre-tax servicing margin 9 bps N/A ----------- ------
42 44 Net Gain on Sale of Commercial Mortgage Loans A reconciliation of gain on sale of commercial mortgage loans for the periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 -------- ------ Gross proceeds on sales of commercial mortgage loans $875,874 N/A Initial unadjusted acquisition cost of commercial mortgage loans sold 875,874 N/A -------- ------ Unadjusted gain on sale of commercial mortgage loans -- N/A Commercial mortgage and origination fees 6,831 N/A -------- ------ Unadjusted aggregate margin 6,831 N/A Initial acquisition cost allocated to basis in commercial mortgage servicing rights (SFAS No. 125) 2,180 N/A -------- ------ Net gain on sale of commercial mortgage loans $ 9,011 N/A ======== ======
During 1998, the commercial mortgage division originated $899.7 million and sold approximately $875.9 million in commercial mortgage loans. Commercial mortgage fees on the loans sold were $6.8 million or 78 basis points. Origination fees are generally between 50 and 100 basis points of the loan amount. In addition, the commercial mortgage division allocated $2.2 million, or 25 basis points, to basis in servicing rights retained on commercial mortgage loans produced during the period. LEASING OPERATIONS Following is a summary of the revenues and expenses allocated to the Company's small- ticket equipment leasing operations for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ($ IN THOUSANDS) 1998 1997 -------- -------- Net interest income $ 4,637 N/A Other income 753 N/A -------- -------- Leasing production revenue 5,390 N/A -------- -------- Salary and employee benefits 2,347 N/A Occupancy expense 376 N/A General and administrative expenses 2,584 N/A -------- -------- Total lease operating expenses 5,307 N/A -------- -------- Net pre-tax leasing production margin 83 N/A -------- -------- Servicing fees 1,014 N/A -------- -------- Net pre-tax leasing margin $ 1,097 N/A -------- -------- Average owned leasing portfolio $ 73,508 N/A Average serviced leasing portfolio 53,480 N/A -------- -------- Average managed leasing portfolio $126,988 N/A ======== ======== Leasing production revenue to average owned portfolio 733 bps N/A Leasing operating expenses to average owned portfolio 721 bps N/A -------- -------- Net pre-tax leasing production margin 12 bps N/A ======== ======== Servicing fees to average serviced leasing portfolio 190 bps N/A ======== ========
43 45 At December 31, 1998, the Company's managed lease servicing portfolio was $136.5 million. Of this managed lease portfolio, $98.9 million was owned and $37.6 million was serviced for investors. Net Interest Income Net interest income for 1998 was $4.6 million. This is equivalent to a net interest margin of 4.35% based upon average lease receivables owned of $73.5 million and average leasing debt outstanding of $53.5 million. NON-RECURRING AND SPECIAL CHARGES During 1998, the Company recognized a $1.5 million pre-tax gain ($0.9 million after-tax) on the sale of its retail production platform. During the third quarter of 1997, the Company recorded a $2.3 million pre-tax charge ($1.4 million after-tax) related to a merger agreement that was terminated, and a special pre-tax charge of $7.9 million ($4.8 million after-tax) relating to certain nonrecoverable operating receivables. 44 46 FINANCIAL CONDITION During 1999, the Company experienced a 41% decrease in the volume of production originated and acquired compared to 1998. Production decreased to $9.8 billion during 1999 from $16.5 billion during 1998. The December 31, 1999, locked residential mortgage application pipeline (mortgage loans not yet closed but for which the interest rate has been locked) was approximately $0.4 billion and the application pipeline (mortgage loans for which the interest rate has not yet been locked) was approximately $0.3 billion. This compares to a locked mortgage application pipeline of $1.1 billion and a $0.6 billion application pipeline at December 31, 1998 Mortgage loans held-for-sale and mortgage-backed securities totaled $0.5 billion at December 31, 1999, versus $1.4 billion at December 31, 1998, a decrease of 67%. The Company's servicing portfolio (exclusive of loans under subservicing agreements) decreased to $7.8 billion at December 31, 1999, from $9.9 billion at December 31, 1998, a decrease of 21%. Short-term borrowings, which are the Company's primary source of funds, totaled $0.7 billion at December 31, 1999, compared to $1.6 billion at December 31, 1998, a decrease of 55%. The decrease in the balance outstanding at December 31, 1999, resulted from decreased funding requirements related to the decrease in the balance of mortgage loans held-for-sale and mortgage-backed securities. At December 31, 1999, there were $6.3 million in long-term borrowings, compared to $6.4 million at December 31, 1998. Other liabilities totaled $84.8 million as of December 31, 1999, compared to the December 31, 1998 balance of $114.7 million, a decrease of $29.9 million, or 26%. In general the declines in production, the pipeline, mortgage loans held-for-sale, the servicing portfolio and short-term borrowings are primarily attributed to (1) the current level of competition in the marketplace; (2) an estimated 12% decline in estimated residential originations within the industry; (3) the increased ARM market share (the Company offers primarily fixed rate products); and (4) the rise in mortgage interest rates during 1999. The Company continues to face the same challenges as other production-oriented companies within the mortgage banking industry and as such is not immune from significant volume declines precipitated by competitive pricing, a rise in interest rates and other factors beyond the Company's control. These and other important factors that could cause actual results to differ materially from those reported are listed under the Risk Factors section in the Company's 1999 Form 10K. LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash-flow requirement involves the funding of loan production, which is met primarily through external borrowings. In August 1999, the Company and its wholly owned subsidiaries RBMG, Inc., Meritage Mortgage Corporation and RBMG Asset Management Company, Inc. (not including the Company, the Restricted Group), entered into a 45 47 $540 million warehouse line of credit provided by a syndicate of unaffiliated banks that expires in July 2000. The credit agreement includes covenants requiring the Restricted Group to maintain (i) a minimum net worth of $170 million, plus the Restricted Group's net income subsequent to June 30, 1999, plus 90% of capital contributions to the Restricted Group and minus restricted payments, (ii) a ratio of total Restricted Group liabilities to tangible net worth of not more than 8.0 to 1.0, excluding debt incurred pursuant to gestation and repurchase financing agreements, (iii) RBMG, Inc.'s eligibility as a servicer of Ginnie Mae, FHA, VA, Fannie Mae and Freddie Mac mortgage loans (iv) a mortgage servicing rights portfolio with an underlying unpaid principal balance of at least $5 billion and (v) a ratio of consolidated cash flow to consolidated interest expense (these terms are defined in the loan agreements) of at least 1.50 to 1.00 (the interest rate coverage ratio). The provisions of the agreement also restrict the Restricted Group's ability to engage significantly in any type of business unrelated to the mortgage banking and lending business and the servicing of mortgage loans. In August of 1999, the Company and the Restricted Group also entered into a $210 million subprime revolving credit facility and a $250 million servicing revolving credit facility, which expire in July 2000. These facilities include covenants identical to those described above with respect to the warehouse line of credit. The Restricted Group was in compliance with the debt covenants in place at December 31, 1999 after it obtained an amendment and waiver dated February 1, 2000. The covenant that had been violated was the interest rate coverage ratio. The syndicate of unaffiliated banks waived the violation and amended the agreements. The amended agreements now call for the Restricted Group to maintain an interest rate coverage ratio of 1.10 to 1.00 for the quarter ending March 31, 2000; and 1.20 to 1.00 for any period of two consecutive fiscal quarters thereafter. Although management anticipates continued compliance with current debt covenants, there can be no assurance that the Restricted Group 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. RBMG Asset Management Company, Inc., a wholly-owned subsidiary of Meritage and a bank are parties to a master repurchase agreement, pursuant to which RBMG Asset Management Co. is entitled from time to time to deliver eligible subprime mortgage loans in an aggregate principal amount of up to $200 million to the bank. The master repurchase agreement has been extended through July 26, 2000. The Company has 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 executed a $6.6 million note in May 1997. This debt is secured by the Company's corporate headquarters. The terms of the related 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 previously described. 46 48 The Company has entered into a $10.0 million unsecured line of credit agreement that expires in July 2000. The interest rate on funds borrowed is based upon the prime rate announced by a major money center bank. Republic Leasing, a wholly-owned subsidiary of the Company, has a $200 million credit facility to provide financing for its leasing portfolio. The warehouse credit agreement matures in August 2000 and contains various covenants regarding characteristics of the collateral and the performance of the leases originated and serviced by Republic Leasing and that require the Company to maintain a minimum net worth of $60 million and Republic Leasing to maintain a ratio of total liabilities to net worth of no more than 10.0 to 1.0. The Company has been repurchasing its stock pursuant to Board authority since March 1998 and as of December 31, 1999 the Company had remaining authority to repurchase up to $2.5 million of the Company's common stock in either open market transactions or in private or block trades. Decisions regarding the amount and timing of repurchases will be made by management based upon market conditions and other factors. The repurchase authority will enable the Company to repurchase shares to meet the Company's obligations pursuant to existing bonus, stock option, dividend reinvestment and employee stock purchase and ESOP plans. Shares repurchased are maintained in the Company's treasury account and are not retired. At December 31, 1999, there were 4,686,391 shares held in the Company's treasury account at an average cost of $8.78 per share. YEAR 2000 The Company's growth motivated a generalized review of the adequacy of its existing software environment and technological infrastructure to meet the Company's long-term operating requirements. The Company completed implementation of LoanXchange and other mission critical systems prior to December 31, 1999. All required modifications to existing systems or systems provided by third parties were completed prior to December 31, 1999. The Company has had no significant Year 2000 system problems to date. The amount spent on Year 2000 issues was approximately $1.0 million, which was within the range budgeted. NEW ACCOUNTING STANDARDS 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 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security or a foreign-currency denominated forecasted transaction. SFAS No. 133 is effective for all fiscal quarters of 47 49 all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). However, early adoption is permitted. The Company has not yet determined either the impact that the adoption of SFAS 133 will have on its earnings or statement of financial position or the period in which the statement will be implemented. In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This statement requires that any retained interests in mortgage-backed securities be classified in accordance with the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard had no material impact on the Company's financial position. DIVISIONAL ANALYSIS OF PRE-TAX FUNDS GENERATED FROM OPERATIONS The analyses which follow are included solely to assist investors in obtaining a better understanding of the material elements of the Company's funds generated by operations at a divisional level. It is intended as a supplement, and not an alternative to, and should be read in conjunction with, the Consolidated Statement of Cash Flows, which provides information concerning elements of the Company's cash flows. SUMMARY On a combined divisional basis, during the years ended December 31, 1999 and 1998, the Company generated approximately $55.6 million and $54.9 million, respectively, of positive funds from operations. ($ in thousands) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 ------- -------- Agency-eligible production $20,626 $ 31,104 Agency-eligible servicing 28,623 28,282 Subprime production 1,624 (7,505) Commercial mortgage 1,401 1,582 Leasing 3,316 1,407 ------- -------- $55,590 $ 54,870 ======= ======== Each of the Company's divisions produced positive operating funds during both periods except for subprime production in 1998. The combined positive operating funds were invested to reduce indebtedness, pay dividends, repurchase stock and purchase fixed assets. AGENCY-ELIGIBLE PRODUCTION Generally, the Company purchases agency-eligible mortgage loans which are resold with the rights to service the loans being retained by the Company. The Company then separately sells a large percentage of the servicing rights so produced. When the loans are sold, current accounting 48 50 principles require that the Company capitalize the estimated fair value of the retained mortgage servicing rights sold and subsequently amortize the servicing rights retained to expense. Accordingly, amounts reported as gains on sale of agency-eligible mortgage loans may not represent positive funds flow to the extent that the associated servicing rights are not sold for cash but are instead retained and capitalized. In this context, the table below reconciles the major elements of pre-tax operating funds flow of the Company's agency-eligible production activities.
($ in thousands) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 -------- --------- Income (loss) before income taxes $ 813 $ 55,441 Deduct: Net gain on sale of mortgage loans, as reported (64,033) (134,472) Add back: Cash gains on sale of mortgage loans 13,454 40,220 Cash gains on sale of mortgage servicing rights 65,581 66,374 Depreciation 4,811 3,541 -------- --------- $ 20,626 $ 31,104 ======== =========
AGENCY-ELIGIBLE SERVICING The Company's current strategy is to position itself as a national supplier of agency-eligible servicing rights to the still consolidating mortgage servicing industry. Accordingly, the Company generally sells a significant percentage of its produced mortgage servicing rights to other approved servicers under forward committed bulk purchase agreements. However, the Company maintains a relatively small mortgage servicing portfolio. As discussed above, mortgage servicing rights produced or purchased are initially capitalized and subsequently must be amortized to expense. Much like depreciation, such amortization charges are "non-cash." In this context, the table below reconciles the major elements of pre-tax operating funds flow of the Company's agency-eligible mortgage servicing activities.
($ in thousands) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 -------- -------- Income before income taxes $ 5,698 $ 1,829 Deduct: Net gain on sale of mortgage servicing rights, as reported (7,262) (1,753) Add back: Amortization and impairment of mortgage servicing rights 29,580 27,897 Depreciation 607 309 -------- -------- $ 28,623 $ 28,282 ======== ========
49 51 SUBPRIME PRODUCTION Generally, the Company purchases subprime loans through a wholesale broker network. The Company then separately sells or securitizes the loans so produced. Existing accounting principles require that at the time loans are securitized, the Company capitalize the estimated fair value of future cash flows to be received in connection with retention by the Company of a residual interest in the securitized loans. Accordingly, amounts reported as gains on sale of subprime mortgage loans may not represent cash gains to the extent that associated residual interests are retained and capitalized. In this context, the table below reconciles the major elements of pre-tax operating funds flow of the Company's subprime mortgage production activities.
($ in thousands) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 -------- -------- Income before income taxes $ 2,591 $ 18,381 Deduct: Net gain on sale of subprime loans, as reported (20,357) (27,980) Cash losses on securitization of subprime loans (3,706) (6,509) Accretion income on residuals (6,576) (3,446) Add back: Cash gains on sale of whole subprime loans 16,288 11,625 Cash received from investments in residual certificates 4,290 3 Depreciation and amortization of goodwill and intangibles 1,251 856 Mark to market on residuals 7,843 (435) -------- -------- $ 1,624 $ (7,505) ======== ========
COMMERCIAL MORTGAGE Generally, the Company originates commercial mortgage loans for conduits, insurance companies and other investors. The Company either table funds the loans or originates the loans pursuant to pre-existing investor commitments to purchase the loans so originated. Similar to the agency-eligible operation, the Company generally retains the right to service the loans under various servicing agreements. Current accounting principles require that the Company capitalize the estimated fair value of mortgage servicing rights produced at the time the related loans are sold and subsequently amortize the servicing rights retained to expense. Accordingly, amounts reported as gains on sale of commercial mortgage loans may not represent cash gains to the extent that the associated servicing rights are not sold for cash but are instead retained and capitalized. Mortgage servicing rights initially capitalized must be amortized subsequently to expense. Much like depreciation, such amortization charges are "non-cash." In this context, the table below reconciles the major elements of pre-tax operating funds flow of commercial mortgage production and servicing activities. 50 52
($ in thousands) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 ------- ------- Income before income taxes $ 823 $ 2,104 Deduct: Net gain on sale of commercial loans, as reported (9,170) (9,011) Add back: Cash gains on sale of whole commercial loans 7,155 6,831 Amortization and impairment of commercial mortgage servicing rights 2,210 1,335 Depreciation and amortization of goodwill and intangibles 383 323 ------- ------- $ 1,401 $ 1,582 ======= =======
LEASING Generally, the Company originates small-ticket equipment leases for commercial customers that are retained as investments by the Company. Investments in leases originated and retained are financed through a borrowing facility at draw rates that approximate the net cash investment in the related lease. Accordingly, financing activities related to growth in the balance of leases held for investment do not significantly impact operating cash flow. In this context, the table below reconciles the major elements of operating funds flow allocable to leasing activities.
($ in thousands) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 ------ ------ Income before income taxes $3,010 $1,097 Add back: Depreciation and amortization of goodwill and intangibles 306 310 ------ ------ $3,316 $1,407 ====== ======
Quantitative and Qualitative Disclosure About Market Risk A primary market risk facing the Company is interest rate risk. The Company attempts to manages this risk by striving to balance its loan origination and loan servicing business segments, which are countercyclical in nature. In addition, the Company uses various financial instruments, including derivatives contracts, to manage the interest rate risk related specifically to its committed pipeline, mortgage loan inventory, mortgage backed securities held for sale, servicing rights, leases and residual interests retained in securitizations. The overall objective of the Company's interest rate risk management policies is to mitigate potentially significant adverse effects that changes in the values of these items; resulting from changes in interest rates; might have on the Company's consolidated balance sheet. The Company does not speculate on the direction of interest rates in its management of interest rate risk. 51 53 For purposes of this disclosure, the Company has performed various sensitivity analyses that quantify the net financial impact of changes in interest rates on its interest rate-sensitive assets, liabilities and commitments. These analyses presume an instantaneous parallel shift of the yield curve. Various techniques are employed to value the underlying financial instruments and rely upon a number of critical assumptions. The scenarios presented are illustrative. Actual experience may differ materially from the estimated amounts presented for each scenario. To the extent that yield curve shifts are non-parallel and to the extent that actual variations in significant assumptions differ from those applied for purposes of the valuations, the resultant valuations can also be expected to vary. Such variances may prove material.
1999 If interest rates were to ------------------------- ------------------------------------------------------- Carrying Estimated Increase Decrease Increase Decrease Amount Fair Value ------------------------- ------------------------- ---------- ---------- 50 basis points 100 basis points Estimated Fair Value Estimated Fair Value ------------------------- ------------------------- Mortgage loans held-for-sale and mortgage backed securities $ 482,307 a $ 483,606 a $ 483,183 a $ 484,113 a $ 482,940 a $ 484,583 a Servicing rights, net 183,832 b 201,068 b 206,215 b 196,345 b 209,773 b 192,980 b Lease receivables 155,559 160,125 c 157,849 c 162,429 c 162,256 c 164,764 c Residual interests in subprime securitizations 54,382 54,382 53,547 54,982 52,602 55,492 Other assets 151,102 152,562 152,562 152,562 152,562 152,562 ---------- ---------- ---------- ---------- ---------- ---------- Total assets $1,027,182 $1,051,743 $1,053,356 $1,050,431 $1,060,133 $1,050,381 ---------- ---------- ---------- ---------- ---------- ---------- Long-term borrowings $ 6,259 $ 6,190 $ 6,190 $ 6,190 $ 6,190 $ 6,190 Other liabilities 808,451 808,451 808,451 808,451 808,451 808,451 ---------- ---------- ---------- ---------- ---------- ---------- Total liabilities $ 814,710 $ 814,641 $ 814,641 $ 814,641 $ 814,641 $ 814,641 ---------- ---------- ---------- ---------- ---------- ---------- Net equity value $ 212,472 $ 237,102 $ 238,715 $ 235,790 $ 245,492 $ 235,740 ========== ========== ========== ========== ========== ==========
a Estimated fair value has been adjusted to include $(840), $2,209, and $343 for estimated fair value of mortgage purchase commitments, mandatory delivery commitments and purchase option contracts, respectively, which have been allocated as hedges against mortgage loans-held-for-sale and mortgage backed securities. In addition, $1,803 of carrying value relating to purchase option contracts has been classified as mortgage loans held-for-sale and mortgage backed securities. b Estimated fair value and carrying value has been adjusted to include $6,269 of interest rate floor contracts for 1999 which has been allocated as hedges against servicing rights, net. For the 50 bps increase, the 50 bps decrease, 100 bps increase and 100 bps decrease, respectively, the estimated fair value has been adjusted to include $3,754, $10,240, $2,506 and $16,517, respectively, of interest rate floor contracts which have been allocated as hedges against servicing rights, net. c Estimated fair value has been adjusted to include $(1,358), $(2,349), $(355), $3,327 and $663, respectively, of interest rate floor contracts for 1999, 50 bps increase, 50 bps decrease, 100 bps increase and 100 bps decrease, respectively, which have been allocated as hedges against lease receivables.
1998 If interest rates were to ------------------------- ------------------------------------------------------- Carrying Estimated Increase Decrease Increase Decrease Amount Fair Value ------------------------- ------------------------- ---------- ---------- 50 basis points 100 basis points Estimated Fair Value Estimated Fair Value ------------------------- ------------------------- Mortgage loans held-for-sale and mortgage backed securities $1,444,281 a $1,445,864 a $1,439,874 a $1,443,160 a $1,439,183 a $1,444,857 a Servicing rights, net 211,070 b 211,070 b 223,869 b 206,815 b 229,949 b 206,549 b Lease receivables 102,029 106,531 c 106,359 c 106,734 c 106,172 c 106,923 c Residual interests in subprime securitizations 45,782 45,782 44,745 45,281 43,685 46,384 Other assets 166,473 168,113 168,113 168,113 168,113 168,113 ---------- ---------- ---------- ---------- ---------- ---------- Total assets $1,969,635 $1,977,360 $1,982,960 $1,970,103 $1,987,102 $1,972,826 ---------- ---------- ---------- ---------- ---------- ---------- Long-term borrowings $ 6,364 $ 6,371 $ 6,371 $ 6,371 $ 6,371 $ 6,371 Other liabilities 1,711,113 1,711,113 1,711,113 1,711,113 1,711,113 1,711,113 ---------- ---------- ---------- ---------- ---------- ---------- Total liabilities $1,717,477 $1,717,484 $1,717,484 $1,717,484 $1,717,484 $1,717,484 ---------- ---------- ---------- ---------- ---------- ---------- Net equity value $ 252,158 $ 259,876 $ 265,476 $ 252,619 $ 269,618 $ 255,342 ========== ========== ========== ========== ========== ==========
a Estimated fair value has been adjusted to include $2,600, $(451), and $1,183 for estimated fair value of mortgage purchase commitments, mandatory delivery commitments and purchase option contracts, respectively, which have been allocated as hedges against mortgage loans-held-for-sale and mortgage backed securities. In addition, $2,823 of carrying value relating to purchase option contracts has been classified as mortgage loans held-for-sale and mortgage backed securities. b Estimated fair value and carrying value has been adjusted to include $20,048 of interest rate floor contracts for 1998 which has been allocated as hedges against servicing rights, net. For the 50 bps increase, the 50 bps decrease, 100 bps increase and 100 bps decrease, respectively, the estimated fair value has been adjusted to include $15,234, $26,995, $10,325 and $36,401, respectively, of interest rate floor contracts which have been allocated as hedges against servicing rights, net. c Estimated fair value has been adjusted to include $(759), $(63), $(1,436), $609, $(2,138), respectively, of interest rate floor contracts for 1998, 50 bps increase, 50 bps decrease, 100 bps increase and 100 bps decrease, respectively, which have been allocated as hedges against lease receivables. 52 54 These analyses are limited by the fact that they are performed at a particular point in time and do not incorporate other factors that would impact the Company's financial performance in each such scenario. Consequently, the preceding estimates should not be viewed as a forecast. Qualitative disclosures about market risk are further discussed in Note 16 of the accompanying financial statements. 53 55 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED BALANCE SHEET ($ in thousands, except share information)
- --------------------------------------------------------------------------------------------------------------------- December 31, 1999 1998 - --------------------------------------------------------------------------------------------------------------------- ASSETS Cash $ 30,478 $ 18,124 Receivables 40,219 80,248 Trading securities: Mortgage-backed securities -- 385,055 Residual interests in subprime securitizations 54,382 45,782 Mortgage loans held-for-sale 480,504 1,056,403 Lease receivables 155,559 102,029 Servicing rights, net 177,563 191,022 Premises and equipment, net 36,294 35,338 Accrued interest receivable 1,691 3,642 Goodwill and other intangibles 15,478 16,363 Other assets 35,014 35,629 ----------- ----------- Total assets $ 1,027,182 $ 1,969,635 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Short-term borrowings $ 699,803 $ 1,566,287 Long-term borrowings 6,259 6,364 Accrued expenses 23,826 30,098 Other liabilities 84,822 114,728 ----------- ----------- Total liabilities 814,710 1,717,477 ----------- ----------- Stockholders' equity Preferred stock - par value $.01 - 5,000,000 shares authorized; no shares issued or outstanding Common stock - par value $.01 - 50,000,000 shares authorized; 31,637,331 shares issued and outstanding at December 31, 1999 and 1998 316 316 Additional paid-in capital 300,909 307,114 Retained earnings 56,506 59,599 Treasury stock at cost-4,686,391 and 869,378 shares at December 31, 1999 and 1998, respectively (41,148) (11,499) Common stock held by subsidiary at cost- 7,767,099 shares at December 31, 1999 and 1998 (98,953) (98,953) Unearned shares of employee stock ownership plan 537,084 and 353,641 unallocated shares at December 31, 1999 and December 31, 1998, respectively (5,158) (4,419) ----------- ----------- Total stockholders' equity 212,472 252,158 ----------- ----------- Commitments and contingencies (Notes 7 and 12) ----------- ----------- Total liabilities and stockholders' equity $ 1,027,182 $ 1,969,635 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 54 56 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED STATEMENT OF INCOME ($ in thousands, except share information)
For the Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------- REVENUES Interest income $84,617 $102,446 $72,302 Interest expense (58,455) (80,668) (54,658) - -------------------------------------------------------------------------------------------------- Net interest income 26,162 21,778 17,644 Net gain on sale of mortgage loans 93,560 171,463 103,370 Gain on sale of mortgage servicing rights 7,262 1,753 7,955 Servicing fees 46,958 43,156 30,869 Other income (150) 5,576 1,180 - -------------------------------------------------------------------------------------------------- Total revenues 173,792 243,726 161,018 - -------------------------------------------------------------------------------------------------- EXPENSES Salary and employee benefits 72,868 82,406 62,235 Occupancy expense 14,855 11,219 7,458 Amortization and provision for impairment of mortgage servicing rights 31,790 29,232 18,315 General and administrative expenses 45,645 44,266 37,923 - -------------------------------------------------------------------------------------------------- Total expenses 165,158 167,123 125,931 - -------------------------------------------------------------------------------------------------- Income before income taxes 8,634 76,603 35,087 Income tax expense (2,712) (27,932) (13,289) - -------------------------------------------------------------------------------------------------- Net income $5,922 $48,671 $21,798 - -------------------------------------------------------------------------------------------------- Weighted average common shares outstanding - Basic 20,643,166 23,122,835 20,396,428 Net income per common share - Basic $0.29 $2.10 $ 1.07 Weighted average common shares outstanding - Diluted 20,799,502 23,501,108 20,800,828 Net income per common share - Diluted $0.28 $2.07 $ 1.05
The accompanying notes are an integral part of these consolidated financial statements. 55 57 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ($ in thousands, except share information)
Additional Unearned Common Total Common Stock Paid-in Retained ESOP Treasury Stock Held by Stockholders' Shares Amount Capital Earnings Shares Stock Subsidiary 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 Cash dividends (2,536) (2,536) Acquisition of Meritage Mortgage Corporation 808,548 8 8,692 8,700 Acquisition of Resource Bancshares Corporation 9,894,889 99 125,962 ($98,953) 27,108 Exercise of stock options 62,000 1 629 630 Shares committed to be released under Employee Stock Ownership Plan 426 1,054 1,480 Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan 37,163 * 428 (98) 330 Adjustment for the 5% stock dividend declared on October 31, 1997 1,009,235 10 13,398 (13,408) Net income 21,798 Total comprehensive income 21,798 ------------------------------------------------------------------------------------------------ Balance, December 31, 1997 31,120,470 311 299,516 17,763 (3,498) (98,953) 215,139 ------------------------------------------------------------------------------------------------ Issuance of restricted stock 20,056 * 328 328 Cash dividends (6,714) (6,714) Treasury stock purchases (1,201,500 shares net of issuances 332,122 shares) (16,280) (16,280) Exercise of stock options 155,965 2 1,537 3,034 4,573 Shares committed to be released under Employee Stock Ownership Plan 544 1,079 1,623 Purchase of shares by Employee Stock Ownership Plan (2,000) (2,000) Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan 198,722 2 3,425 (121) 1,747 5,053 Acquisition of Meritage Mortgage Corporation 142,118 1 1,764 1,765 Net income 48,671 Total comprehensive income 48,671 ------------------------------------------------------------------------------------------------ Balance, December 31, 1998 31,637,331 316 307,114 59,599 (4,419) (11,499) (98,953) 252,158 ------------------------------------------------------------------------------------------------ Issuance of restricted stock 116 1,285 1,401 Cash dividends (8,902) (8,902) Treasury stock purchases (5,051,896 shares net of issuances 1,234,883 shares) (43,216) (43,216) Exercise of stock options (3) 7 4 Shares committed to be released under Employee Stock Ownership Plan (1,017) 2,261 1,244 Purchase of shares by Employee Stock Ownership Plan (3,000) (3,000) Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan (5,301) (113) 12,275 6,861 Net income 5,922 Total comprehensive income 5,922 ------------------------------------------------------------------------------------------------ Balance, December 31, 1999 31,637,331 $316 $300,909 $56,506 ($5,158) ($41,148) ($98,953) $212,472 ================================================================================================
* - Amounts less than $1. The accompanying notes are an integral part of these consolidated financial statements. 56 58 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS ($ in thousands)
- ------------------------------------------------------------------------------------------------------------------------ For the Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 5,922 $ 48,671 $ 21,798 Adjustments to reconcile net income to cash (used in) provided by operating activities: Depreciation and amortization 39,249 34,570 21,859 Deferred income tax expense (benefit) 1,585 31,169 3,862 Employee Stock Ownership Plan compensation 1,244 1,623 1,480 Provision for estimated foreclosure losses and repurchased loans 10,608 11,023 4,615 Decrease (increase) in receivables 40,029 7,454 (24,303) Acquisition of mortgage loans (9,300,681) (16,461,918) (10,777,294) Proceeds from sales of mortgage loans and mortgage-backed securities 10,346,580 16,358,939 10,503,811 Acquisition of mortgage servicing rights (252,450) (344,341) (230,503) Sales of mortgage servicing rights 245,302 256,292 206,868 Net gain on sales of mortgage loans and servicing rights (100,822) (173,216) (111,325) Decrease in accrued interest on loans 1,951 730 341 Increase in lease receivables (55,438) (50,535) - Increase in other assets (3,078) (6,879) (764) Increase in residual certificates (8,600) (26,098) (19,684) Increase (decrease) in accrued expenses and other liabilities (37,763) 2,817 17,179 - ------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by operating activities 933,638 (309,699) (382,060) - ------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Cash assets acquired from Resource Bancshares Corporation - - 6,535 Acquisition of Meritage Mortgage Corporation - - (1,750) Purchases of premises and equipment (8,363) (13,608) (8,613) Disposition of premises and equipment 520 1,507 - - ------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (7,843) (12,101) (3,828) - ------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Proceeds from borrowings 26,248,644 42,977,794 28,328,222 Repayment of borrowings (27,115,233) (42,636,093) (27,929,479) Debt issuance costs - (283) (553) Issuance of restricted stock 1,401 328 328 Shares issued under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan 6,861 5,053 330 Acquisition of treasury stock (43,216) (16,280) - Cash dividends (8,902) (6,714) (2,536) Exercise of stock options 4 4,573 630 Loans to Employee Stock Ownership Plan (3,000) (2,000) - - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (913,441) 326,378 396,942 - ------------------------------------------------------------------------------------------------------------------------ Net increase in cash 12,354 4,578 11,054 Cash, beginning of year 18,124 13,546 2,492 - ------------------------------------------------------------------------------------------------------------------------ Cash, end of year $ 30,478 $ 18,124 $ 13,546 - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL ACTIVITIES Interest paid $ 58,361 $ 80,219 $ 55,762 Taxes paid net of refunds received 4,112 (3,595) 10,253 Non-cash activity acquisition of Resource Bancshares Corporation - - 20,573 Non-cash activity acquisition of Meritage Mortgage Corporation - 1,765 8,700
The accompanying notes are an integral part of these consolidated financial statements. 57 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Note 1 - The Company: Resource Bancshares Mortgage Group, Inc. (the Company) was organized to acquire and operate the residential mortgage banking business of Resource Bancshares Corporation (RBC), which commenced operations in May 1989. The assets and liabilities of the residential mortgage banking business of RBC were transferred to the Company on June 3, 1993, when the Company sold 58% of its common stock in an initial public offering. Following the offering RBC retained a significant ownership interest in the Company. On December 31, 1997, the Company acquired RBC in a transaction in which it exchanged 9,894,889 shares of the Company's common stock for all of the outstanding stock of RBC. The Company is a diversified financial services company engaged through wholly-owned subsidiaries primarily in the business of mortgage banking, through the purchase (via 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 agency-eligible loans. In addition, two of the Company's wholly-owned subsidiaries originate, sell and service small-ticket commercial equipment leases and originate, sell, underwrite for investors and service commercial mortgage loans. Note 2 - Summary of Significant Accounting Policies: The accounting and reporting policies of the Company reflect industry practices and conform in all material respects with generally accepted accounting principles. Certain amounts from prior years have been reclassified to conform to current period presentation. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Significant Estimates In preparing the financial statements, management is required to make estimates based on available information that can affect the reported amounts of assets, liabilities and disclosures as of the balance sheet date and revenues and expenses for the related periods. Such estimates relate principally to the Company's allowance for foreclosure losses and repurchased loans, its allowance for lease losses and fair values of residual certificates. Additionally, estimates concerning the fair values of mortgage loans held-for-sale, lease receivables, servicing rights, servicing hedges and the Company's other hedging instruments are all relevant to ensuring that leases and mortgage loans are carried at the lower of cost or market, and that potential impairments of servicing rights are recognized as and if required. Because of the inherent uncertainties associated with any estimation process and due to possible future changes in market 58 60 and economic conditions that will affect fair values, it is possible that actual future results in realization of the underlying assets and liabilities could differ significantly from the amounts reflected as of the balance sheet date. Investment Securities Substantially all of the Company's investments are in the form of mortgage-backed securities and residuals that are held in conjunction with the Company's mortgage banking activities. Such securities are classified as trading securities as defined by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The cost of securities sold is based on the specific identification method. Mortgage Loans Held-for-Sale Mortgage loans held-for-sale are stated at the lower of aggregate cost or market. As a servicer of mortgage loans and small-ticket equipment leases, the Company will incur certain losses in the event it becomes necessary to carry out foreclosure actions on loans and leases serviced. Substantially all other serviced agency-eligible loans are fully guaranteed against such losses by the securitizing government sponsored enterprise. The allowance for estimated losses on foreclosure, which is part of the mortgage servicing rights basis, is determined based on delinquency trends and management's evaluation of the probability that foreclosure actions will be necessary. The allowance for estimated losses on foreclosure was $401 and $851 at December 31, 1999 and 1998, respectively. On occasions the Company has to repurchase certain non-performing loans. Upon repurchase of a loan, the Company initially capitalizes the current unpaid principal balance and related advances and any other related costs are charged against the allowance. The Company subsequently estimates the net realizable value of the repurchased loan portfolio and records an estimate of the allowance for losses on repurchases. The allowance for estimated losses on repurchases was $1,798 and $2,330 at December 31, 1999 and 1998, respectively. The inventory of actual and pending repurchases to which these reserves relate aggregated $20,700 and $46,586 at December 31, 1999 and 1998, respectively. Mortgage Servicing Rights The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which superseded SFAS No. 122 effective January 1, 1997. The provisions of SFAS No. 125 did not materially alter the Company's accounting for mortgage servicing rights. As required by SFAS No. 125, and as required by SFAS No. 122, the Company allocates the total cost of a whole mortgage loan to the mortgage servicing rights and the loan (without servicing rights) based on relative fair values. The market value of servicing rights acquired in bulk transactions, rather than as a by-product of the Company's loan production activities, is initially capitalized at the lower of cost or the estimated present value of future expected net servicing income. Amounts capitalized as mortgage servicing rights are amortized over the period of, and in proportion to, estimated future net servicing income. The Company assesses its capitalized mortgage servicing rights for impairment (on a stratified basis) based on the estimated market values of those rights. Impairments are recognized as a valuation 59 61 allowance for each impaired stratum. The analysis values such rights in consideration of current forward committed delivery prices, prevailing interest, prepayment and default rates, and other relevant factors as appropriate or allocable to each valuation stratum. Fees for servicing loans and leases are recognized monthly on an accrual basis based upon the terms of the underlying agreement. Generally, such agreements provide for fees based upon a percentage of the outstanding balance. Residual Certificates in Subprime Securitizations Residual certificates are classified as trading securities (as defined in SFAS No. 115), and changes in their value are recorded as adjustments to income in the period of change. The Company assesses the fair value of the residual certificates quarterly, with assistance from an independent third party. This valuation is based on the discounted cash flows available to the holder of the residual certificate. Significant assumptions used in this valuation include discount rate, prepayment speed and credit loss estimates. Each of these factors can be significantly affected by, among other things, changes in the interest rate environment and general economic conditions, and expose the Company to prepayment, basis and rate risks. Other factors evaluated in the determination of fair value include, but are not necessarily limited to, the credit and collateral quality of the underlying loans, current economic conditions and various fees and costs 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 and other assumptions from those applied for valuation purposes, could have a significant effect on the estimated fair value of the residual certificates. Significant assumptions used at December 31, 1999 for residual certificates then held by the Company generally include a discount rate of 13%, a constant default rate of 3% and a loss severity rate of 25%, and ramping behaviors are based on prepayment penalty periods and adjustable rate mortgage first reset dates. Terminal prepayment rate assumptions specific to the individual certificates for purposes of the December 31, 1999 valuations are set forth below:
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 --------------------------------------------------------------- Prepayment Speeds Fixed rate mortgages 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr Adjustable rate mortgages 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr
Terminal prepayment rate assumptions specific to the individual certificates for purposes of the December 31, 1998 valuations are set forth below:
1997-1 1997-2 1998-1 1998-2 OTHER ------------ ------------- ------------ ------------ ------------ Prepayment speeds Fixed rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 32% cpr Adjustable rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 24% cpr
60 62 Loan Origination and Correspondent Program Administration Fees Fees charged in connection with loan origination and net fees charged to loan correspondents in conjunction with certain administrative functions performed by the Company in connection with the acquisition of mortgage loans are deferred and reduce the carrying value of the underlying mortgage loans. Allocable portions of such fees are included in the determination of the gain or loss when the related mortgage loans or servicing rights are sold. Sales of Mortgage Loans and Mortgage Servicing Rights Gains or losses on sales of agency-eligible loans and on whole loan sales of subprime mortgage loans are determined at settlement date and are measured by the difference between the net proceeds and the carrying amount of the underlying mortgage loans. Gains and losses on sales of mortgage servicing rights are recognized at the sale date, which is the date the sales contract is closed and substantially all risks and rewards of ownership pass to the buyer. During 1997, 1998 and 1999, the Company completed six securitizations of subprime mortgage loans. These securitizations were in the form of a sale of loans to a trust. The trust took the form of a multi-class security structure collateralized by a pool of subprime residential mortgage loans. The owners of each security receive their monthly principal and interest payments from income received from the underlying mortgage loans. As discussed above, effective January 1, 1997, the Company adopted SFAS No. 125. Under this pronouncement, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. As a result, the Company capitalizes the estimated fair value of the subordinated classes of securities formed upon sale of the loans to the trust. The subordinated classes held by the Company are in the form of residual certificates. The gain on the securitization is the sum of (a) the proceeds received from the securitization plus (b) the fair value of the residual certificates minus (c) the carrying value of the mortgage loans and minus (d) the costs of the sale. Lease Receivables Lease receivables consist of direct finance equipment leases which are carried at the lower of aggregate cost or market value. Interest income is recognized monthly based on the net lease outstanding balance. Residuals are recognized monthly based on the estimated end-of-lease value and are included as an adjustment to interest income. Lease receivables are charged-off at the earlier of the date they are deemed uncollectible or they become 120 days past due. Certain direct costs to originate lease receivables are deferred and recognized as an adjustment to interest income over the estimated life of the lease. The allowance for lease losses is established through a provision charged to operations. The allowance is reviewed and adjusted as needed based upon management's evaluation of factors affecting the lease receivables portfolio such as economic conditions, growth and composition of the portfolio, historical loss experience and analysis of the collectibility of specific lease receivables. The allowance is established at an amount that management believes will be adequate to absorb probable losses on outstanding leases that may become uncollectible. At December 31, 1999 and 1998, the allowance for lease losses was $3,046 and $1,976, respectively. The inventory of lease receivables to which these reserves 61 63 relate aggregated $158,605 and $104,005 at December 31, 1999 and 1998, respectively. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred. Goodwill and Other Intangible Assets Goodwill arising from the acquisitions of RBC and Meritage Mortgage Corporation (Meritage) is being amortized over 20 years using the straight-line method. Amortization expense for both acquisitions totaled $884 and $853 for the years ended December 31, 1999 and 1998, respectively. Income Taxes The Company records taxes under an asset and liability approach, recognizing deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. Current taxes payable (receivable) of $1,127 and $(3,237) for the years ended December 31, 1999 and 1998, are included in other assets and liabilities. Statement of Cash Flows The Company has adopted the indirect method of reporting cash flows. Note 3 - Receivables: Receivables consist primarily of amounts due to the Company related to sales of mortgage servicing rights and advances of delinquent principal, interest, tax and insurance payments related to loans serviced. Management does not anticipate losses on realization of the receivables. Receivables consist of the following at: DECEMBER 31, -------------------- 1999 1998 ------- ------- Mortgage servicing rights sales, net of reserves $26,998 $55,618 Servicing advances 7,613 12,780 Other 5,608 11,850 ------- ------- $40,219 $80,248 ======= ======= Note 4 - Lease Receivables: Lease receivables are summarized as follows: 62 64 DECEMBER 31, ------------------------- 1999 1998 --------- --------- Lease receivables $ 194,422 $ 129,585 Less-Unearned discount (35,817) (25,580) Less-Allowance for lease losses (3,046) (1,976) --------- --------- $ 155,559 $ 102,029 ========= ========= The components of the Company's investment in lease receivables are summarized as follows: DECEMBER 31, ---------------------- 1999 1998 -------- -------- Minimum lease payments due from lessees $180,164 $119,756 Estimated residuals 6,102 4,167 Initial direct costs, net 8,156 5,662 -------- -------- $194,422 $129,585 ======== ======== At December 31, 1999, the maturities of minimum lease receivables, including lease residuals, are as follows: 2000 $ 62,922 2001 53,264 2002 38,772 2003 22,511 2004 8,529 2005 and thereafter 268 -------- $186,266 ======== Leases represent unconditional obligations of the lessees to pay all scheduled payments and require the lessees to assume all responsibility with respect to the equipment, including the obligation to pay all costs relating to its operation, maintenance, repair, sales and property taxes, and insurance. At December 31, 1999 and 1998, the average lease size was approximately $26 and $27, respectively, and there were 31 leases and 16 leases, respectively, with a current lease receivable in excess of $250. At December 31, 1999 and 1998, respectively, the equipment covered by approximately 16% and 17% of the Company's net lease receivables were located in the state of California and approximately 9% and 9% were located in the state of Florida. At December 31, 1999 and 1998, respectively, approximately 20% and 19% of the Company's net lease receivables were collateralized by computer equipment and 7% and 9% were collateralized by titled equipment. 63 65 The Company's leases are collateralized by the equipment subject to the leases. In most instances, the Company requires a security deposit equal to one monthly payment and personal guarantees. In addition, where considered necessary, other credit enhancements are obtained. At December 31, 1999, the Company held security deposits and sales and property taxes for the benefit of lessees of $6,119. Note 5 - Fair Value and Impairments of Mortgage Servicing Rights: For purposes of evaluating its mortgage servicing portfolio for impairment, the Company disaggregates its portfolio into two primary segments: available-for-sale and held-for-sale. The segment of the portfolio designated as available-for-sale is composed of servicing rights that were purchased in bulk transactions or that were retained out of production pursuant to individual portfolio retention decisions. The available-for-sale portfolio is disaggregated for purposes of measuring potential impairments according to defined risk tranches. The Company has defined its risk tranches based upon interest rate band and product type. With respect to each such risk tranche, the fair value thereof, which is based upon an internal analysis that considers current market conditions, prevailing interest, prepayment and default rates and other relevant factors, together with the fair value of hedges allocated thereto (which is based upon an independent third party estimate of value) is compared to amortized carrying values of the mortgage servicing rights for purposes of measuring potential impairment. The Company uses Constant Maturity Treasury rate (CMT) and Constant Maturity Swap rate (CMS) floors and Callable Pass Through Certificates (CPC's) to protect itself against interest and prepayment risk on its available-for-sale portfolio. At December 31, 1999 and 1998 the following amounts related to the available-for-sale portfolio:
RESIDENTIAL MORTGAGE SERVICING AT DECEMBER 31, 1999 AT DECEMBER 31, 1998 - -------------------------------------------------------------------------- -------------------- Underlying unpaid principle balance $ 6,322,591 $ 5,458,334 Fair value of related mortgage servicing rights $ 146,476 $ 102,454 Fair value/underlying unpaid principle balance 2.31% 1.88% Net carrying value of related mortgage servicing rights $ 137,419 $101,533 Net carrying value/underlying unpaid principle balance 2.17% 1.86% Weighted average note rate 7.35% 7.49% Weighted average service fee 0.43% 0.39% Net basis expressed as a multiple of weighted average service fee 5.05 x 4.77 x
64 66
COMMERCIAL MORTGAGE SERVICING AT DECEMBER 31, 1999 AT DECEMBER 31, 1998 - -------------------------------------------------------------------------- -------------------- Underlying unpaid principle balance $ 4,104,095 $ 3,255,458 Fair value of related mortgage servicing rights $ 17,236 $ 8,096 Fair value/underlying unpaid principle balance 0.42% 0.25% Carrying value of related mortgage servicing rights $ 9,243 $ 8,096 Net carrying value/underlying unpaid principle balance 0.23% 0.25% Weighted average note rate 7.94% 8.11% Weighted average service fee 0.09% 0.09% Net basis expressed as a multiple of weighted average service fee 2.56 x 2.78 x
The segment of the portfolio designated as held-for-sale is composed of recently produced servicing rights that are scheduled for sale and have been allocated to specific forward servicing sales contracts. The held-for-sale portfolio is disaggregated for purposes of measuring possible impairments according to the specific forward sales contracts to which allocated, which the Company has determined to be the appropriate approach to disaggregation by predominant risk characteristic for this portfolio segment. For each such risk tranche, the fair value is based upon the allocated forward committed delivery price, which is compared to amortized carrying value for purposes of measuring potential impairment. At December 31, 1999 and 1998 the following amounts related to the held-for-sale portfolio:
RESIDENTIAL MORTGAGE SERVICING AT DECEMBER 31, 1999 AT DECEMBER 31, 1998 - -------------------------------------------------------------------------- -------------------- Underlying unpaid principle balance $ 1,499,803 $ 4,406,766 Fair value of related mortgage servicing rights $ 31,087 $ 89,489 Fair value/underlying unpaid principle balance 2.07% 2.03% Net carrying value of related mortgage servicing rights $30,901 $ 89,489 Net carrying value/underlying unpaid principle balance 2.06% 2.03% Weighted average note rate 7.90% 6.81% Weighted average service fee 0.49% 0.45% Net basis expressed as a multiple of weighted average service fee 4.20 x 4.51 x
Note 6 - Premises and Equipment: Premises and equipment are summarized as follows: 65 67
Estimated DECEMBER 31, Useful Lives 1999 1998 ------------ -------- ------- Building 25 years $ 7,657 $ 7,657 Building improvements 10-15 years 1,682 1,489 Furniture, fixtures and equipment 5-10 years 41,418 39,038 -------- ------- 50,757 48,184 Less-Accumulated depreciation (17,560) (15,943) -------- ------- 33,197 32,241 Land 3,097 3,097 -------- ------- $ 36,294 $35,338 ======== =======
Depreciation expense was $6,887 in 1999, $4,486 in 1998, $3,275 in 1997. Note 7 - Lease Commitments: The Company has entered into various non-cancelable operating lease agreements, primarily for office space. Certain of these leases contain renewal options and escalation clauses. At December 31, 1999, the annual minimum rental commitments for non-cancelable leases with remaining terms in excess of one year are as follows: 2000 $ 4,879 2001 4,289 2002 2,269 2003 1,488 2004 1,214 2005 and thereafter 910 --------- $ 15,049 ========= Minimum rental commitments have not been reduced by minimum sublease rentals of $553 due in the future under non-cancelable subleases. Rent expense for operating leases, net of sublease rental income of $387 for 1999, $387 for 1998 and $445 for 1997, was $4,304 in 1999, $3,106 in 1998 and $2,181 in 1997. Note 8 - Short-Term and Long-Term Borrowings: The Company's primary cash-flow requirement involves the funding of loan production, which is met primarily through external borrowings. In August 1999, the Company and its wholly owned subsidiaries RBMG, Inc., Meritage and RBMG Asset Management Company, Inc. (not including the Company, the Restricted Group), entered into a $540,000 warehouse line of credit provided by a syndicate of unaffiliated banks that expires in July 66 68 2000. The credit agreement includes covenants requiring the Restricted Group to maintain (i) a minimum net worth of $170,000, plus the Restricted Group's net income subsequent to June 30, 1999, plus 90% of capital contributions to the Restricted Group and minus restricted payments, (ii) a ratio of total Restricted Group liabilities to tangible net worth of not more than 8.0 to 1.0, excluding debt incurred pursuant to gestation and repurchase financing agreements, (iii) RBMG, Inc.'s eligibility as a servicer of Ginnie Mae, FHA, VA, Fannie Mae and Freddie Mac mortgage loans (iv) a mortgage servicing rights portfolio with an underlying unpaid principal balance of at least $5,000,000 and (v) a ratio of consolidated cash flow to consolidated interest expense (these terms are defined in the loan agreements) of at least 1.50 to 1.00 (the interest rate coverage ratio). The provisions of the agreement also restrict the Restricted Group's ability to engage significantly in any type of business unrelated to the mortgage banking and lending business and the servicing of mortgage loans. At December 31, 1999 and 1998, the total amounts outstanding under this facility and its predecessor were $329,600 and $468,600, respectively. In August of 1999, the Company and the Restricted Group also entered into a $210,000 subprime revolving credit facility and a $250,000 servicing revolving credit facility, which expire in July 2000. These facilities include covenants identical to those described above with respect to the warehouse line of credit. At December 31, 1999 and 1998, the total amount outstanding under these facilities and their predecessor were $108,200 and $85,000, respectively. The Restricted Group was in compliance with the debt covenants in place at December 31, 1999 after it obtained an amendment and waiver dated February 1, 2000. The covenant that had been violated was the interest rate coverage ratio. The syndicate of unaffiliated banks waived the violation and amended the agreements. The amended agreements now call for the Restricted Group to maintain an interest rate coverage ratio of 1.10 to 1.00 for the quarter ending March 31, 2000; and 1.20 to 1.00 for any period of two consecutive fiscal quarters thereafter. Although management anticipates continued compliance with current debt covenants, there can be no assurance that the Restricted Group 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. RBMG Asset Management Company, Inc., a wholly-owned subsidiary of Meritage and a bank are parties to a master repurchase agreement, pursuant to which RBMG Asset Management Co. is entitled from time to time to deliver eligible subprime mortgage loans in an aggregate principal amount of up to $200,000 to the bank. The master repurchase agreement has been extended through July 26, 2000. At December 31, 1999 and 1998, no amounts were outstanding under this facility or its predecessor. The Company has 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 $1,200,000. The total amounts outstanding under this facility and its predecessor at December 31, 1999 and 1998 were $0 and $753,684, respectively. The Company executed a $6,600 note in May 1997. This debt is secured by the Company's corporate headquarters. The terms of the related 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 previously described. The total amounts outstanding under this facility at December 31, 1999 and 1998 were $6,364 and $6,461, respectively. 67 69 The Company has entered into a $10,000 unsecured line of credit agreement that expires in July 2000. The interest rate on funds borrowed is based upon the prime rate announced by a major money center bank. Republic Leasing, a wholly-owned subsidiary of the Company, has a $200,000 credit facility to provide financing for its leasing portfolio. The warehouse credit agreement matures in August 2000 and contains various covenants regarding characteristics of the collateral and the performance of the leases originated and serviced by Republic Leasing and that require the Company to maintain a minimum net worth of $60,000 and Republic Leasing to maintain a ratio of total liabilities to net worth of no more than 10.0 to 1.0. At December 31, 1999 and 1998, the total amounts outstanding under this facility were $125,652 and $80,405, respectively. Note 9 - Capital Transactions: The Company issued five percent stock dividends on March 8, 1994, September 12, 1994, May 8, 1995, August 31, 1995 and December 31, 1997. A ten percent stock dividend was issued on June 30, 1995, and a seven percent stock dividend was issued on September 24, 1996. All of the above are collectively referred to as the Stock Dividends. Earnings per share and all other share numbers have been restated for the effects of the Stock Dividends. The Company began paying regular quarterly cash dividends of $0.03 per share in the third quarter of 1996. This quarterly cash dividend was increased to $0.04 per share in the fourth quarter of 1997, to $0.05 per share in the first quarter of 1998, to $0.07 per share in the second quarter of 1998 to $0.10 per share in the fourth quarter of 1998 and finally to $0.11 per share in the second quarter of 1999. During 1995, the Company established a dividend reinvestment plan (DRIP). The DRIP offers stockholders a method of reinvesting cash dividends in the Company's common stock at a 5% discount from market prices. The Company reserves the right to modify the pricing terms and any other provisions of the DRIP at any time. The DRIP agent purchases either original issue or treasury shares from the Company or the DRIP agent purchases shares on the open market. The Board of Directors has authorized the issuance of 4,099,984 shares under the DRIP. Through December 31, 1999, there were 1,673,989 shares issued under the DRIP. The Company's Board of Directors has authorized the repurchase of up to $62,000 of the Company's common stock in either open market transactions or in private or block trades as of 68 70 December 31, 1999. Through December 31, 1999, $59,496 of the Company's common stock has been purchased. At December 31, 1999, there were 4,686,391 shares held in the Company's treasury account at an average cost of $8.78 per share. Note 10 - Income Taxes: Income tax expense (benefit) consists of the following: FOR THE YEAR ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 ------- -------- ------- Current: Federal $ 1,871 $ (3,482) $ 8,885 State (744) 245 542 ------- -------- ------- Total current 1,127 (3,237) 9,427 ------- -------- ------- Deferred: Federal 821 30,202 3,327 State 764 967 535 ------- -------- ------- Total deferred 1,585 31,169 3,862 ------- -------- ------- Total tax expense $ 2,712 $ 27,932 $13,289 ======= ======== ======= Current income tax expense (benefit) represents the approximate amount payable for each of the respective years. The above current and deferred balances reflect certain reclassifications made as a result of prior year returns. During 1999, 1998 and 1997, the Company qualified for state tax credits of $275, $300 and $202, respectively, reducing current state tax expense that otherwise would have been payable for each year. The effective tax rate varied from the statutory federal tax rate of 35% for 1999, 1998 and 1997 due to the following:
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 1999 1998 1997 --------------------- ---------------------- -------------------- % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income ------- ------ -------- ------ ------- ------ Tax expense at statutory rate $ 3,022 35.0% $ 26,811 35.0% $12,280 35.0% State tax, net of federal benefit 64 0.8% 1,571 2.1% 887 2.5% Other, net (374) (4.3%) (450) (0.6)% 122 0.4% ------- ---- -------- ---- ------- ---- $ 2,712 31.5% $ 27,932 36.5% $13,289 37.9% ======= ==== ======== ==== ======= ====
Deferred tax (assets) liabilities are summarized as follows: 69 71 DECEMBER 31, ------------------------ 1999 1998 -------- -------- Mark to market $ (1,755) $ (1,864) Deferred compensation (3,422) (3,235) Deferred book income -- (4,833) Foreclosure and repurchase reserves (3,522) (3,672) State NOL carryforwards (668) (794) Other, net (19) (45) -------- -------- (9,386) (14,443) -------- -------- Intangible Assets 42,632 49,608 Depreciation 6,756 4,864 Securitizations 8,970 7,231 Deferred tax income 7,094 7,094 Other, net 485 612 -------- -------- 65,937 69,409 -------- -------- Net deferred tax liability $ 56,551 $ 54,966 ======== ======== There are no valuation allowances provided for any of the Company's deferred tax assets based on management's belief that it is more likely than not that deferred tax assets will be realized. During 1999 and 1998, non-qualified stock options were exercised generating a tax benefit of $0 and $1,562, respectively. This benefit is reflected in additional paid-in capital. Note 11 - Stock Options and Restricted Stock Plan: Contemporaneous with the Company's initial public offering, certain executives of the Company were granted options to purchase 901,310 shares of common stock of the Company at the initial offering price of $5.83 per share. The options have a term of ten years and expire in June 2003. At December 31, 1999 all the remaining outstanding executive options were exercisable. No additional options have been granted and none have been forfeited. During 1999 and 1998, no options and 299,250 options, respectively, were exercised. In addition, certain executive officers, in connection with their recruitment, became entitled to receive restricted stock as part of their compensation. Costs associated with these grants are included as compensation expense of the Company in the accompanying consolidated financial statements. In connection therewith, the Company issued restricted shares at the issuance prices summarized as follows: 70 72 RESTRICTED SHARES ISSUANCE PRICE PER ISSUANCE DATE ISSUED SHARE --------------------------------------------------------------- January 21, 1994 13,336 $ 6.93 January 26, 1995 59,136 6.87 January 27, 1996 18,438 13.87 February 1, 1997 24,704 13.27 January 30, 1998 20,048 16.35 February 1, 1999 93,520 15.01 On October 21, 1993, the Company adopted a phantom stock plan that provided for the awarding of up to 450,655 deferred compensation units to officers and certain key employees. The plan specified a five-year vesting schedule. In addition, from time to time the Board of Directors approved participation in a special phantom stock plan for certain officers of the Company. During 1996, the Company terminated all of its phantom stock plans and canceled all outstanding grants thereunder. In connection therewith, each former participant in the phantom stock plans was awarded an option under a new non-qualified stock option plan for each unit canceled under the phantom stock plans. Other terms of the awarded options were substantially similar to the underlying canceled units. The number of initially authorized units under the non-qualified stock option plan was 223,817. Since forfeited units under the plan do not become available for reissuance, no units are available for future grants under this plan. Activity in the non-qualified stock option plan is summarized below:
UNITS UNITS NON-QUALIFIED STOCK OPTION PLAN: GRANTED UNITS EXERCISED UNITS FORFEITED OUTSTANDING - --------------------------------------------------------------------------------------- Balance at December 31, 1997 223,817 -- -- 223,817 - 1998 activity -- (60,815) (38,801) (99,616) ------- ------- -------- -------- Balance at December 31, 1998 223,817 (60,815) (38,801) 124,201 ------- ------- -------- -------- - 1999 activity -- (545) (135) (680) ------- ------- -------- -------- Balance at December 31, 1999 223,817 (61,360) (38,936) 123,521 ======= ======= ======== ========
Of the 123,521 units outstanding at December 31, 1999 under the non-qualified stock option plan, the following are exercise prices and percents vested: EXPIRATION UNITS EXERCISE PERCENT DATE OUTSTANDING PRICE VESTED - -------------------------------------------------------------------- January 21, 2004 46,419 $ 6.93 100% January 26, 2005 20,438 6.85 80% January 26, 2005 38,968 6.87 80% July 1, 2005 17,696 10.64 80% During 1995, the Company established an Omnibus Employee Stock Award Plan (the Omnibus Plan). The Omnibus Plan was amended and restated in its entirety effective October 31, 1997 primarily to increase the number of authorized shares under the plan. The purpose of 71 73 this plan is to provide key employees who are largely responsible for the Company's growth and continued success with the opportunity to have or increase their proprietary interest in the Company through the granting of any one or any combination of options, stock appreciation rights, restricted stock and unrestricted stock. This plan is authorized to issue up to 1,510,635 units. All options vest 20% on the date of grant and 20% each year thereafter on the anniversary date of the grant and expire 10 years after the grant date. Activity in the Omnibus Plan is summarized below:
UNITS UNITS OMNIBUS PLAN: GRANTED UNITS EXERCISED UNITS FORFEITED OUTSTANDING - ---------------------------------------------------------------------------------------- Balance at December 31, 1997 593,293 -- -- 593,293 - 1998 activity 430,500 (32,700) (10,150) 387,650 --------- ------- ------- -------- Balance at December 31, 1998 1,023,793 (32,700) (10,150) 980,943 - 1999 activity 25,000 (55,875) -- (30,875) --------- ------- ------- -------- Balance at December 31, 1999 1,048,793 (88,575) (10,150) 950,068 ========= ======= ======= ========
Of the 950,068 units outstanding at December 31, 1999 under the Omnibus Employee Stock Award Plan, the following are exercise prices and percents vested: EXPIRATION UNITS EXERCISE PERCENT DATE OUTSTANDING PRICE VESTED - ---------------------------------------------------------------- October 30, 2005 112,350 $14.25 100% January 26, 2006 24,718 13.87 80% March 21, 2006 56,175 13.36 80% November 8, 2006 17,850 14.31 80% December 3, 2006 7,875 13.87 80% December 30, 2006 5,250 13.85 80% September 3, 2007 5,250 15.91 60% August 26, 2007 6,300 16.27 60% September 16, 2007 6,300 15.94 60% January 29, 2007 258,300 13.20 60% April 11, 2007 10,500 14.73 60% April 18, 2007 31,500 14.53 60% May 1, 2007 6,300 13.57 60% April 14, 2008 375,400 16.44 40% May 1, 2008 6,000 17.75 40% February 19, 2009 20,000 14.13 20% During 1995, the Company established a Formula Stock Option Plan. The purpose of this plan is to provide annually (on each September 1) to the non-employee directors of the Company options to purchase 10,000 shares of the common stock of the Company. All options 72 74 vest 20% on the date of grant and 20% each year thereafter on the anniversary date of the grant and expire 10 years after the grant date. The plan is authorized to issue up to 420,000 shares of common stock. Options granted include: GRANT DATE UNITS GRANTED EXERCISE PRICE - -------------------------------------------------------------------------- September 1, 1995 56,175 $14.16 September 1, 1996 56,175 11.79 September 1, 1997 52,500 15.91 September 1, 1998 60,000 15.75 September 1, 1999 60,000 6.00 The Company's current option plans are considered fixed stock award plans for accounting purposes. Accordingly, total compensation expense for these fixed plans is measured as the difference between the market value on the date of the grant over the exercise price which fixed total expense is then recognized over the vesting period. The Company recognized compensation expense related to the aforedescribed plans (exclusive of the restricted stock plan which is expensed as incurred) of $351, $(102), and $408 for 1999, 1998 and 1997, respectively. The Company accounts for options using APB No. 25, "Accounting for Stock Issued to Employees." For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair value of stock options granted in 1999, 1998 and 1997 was estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option pricing model was originally developed for use in estimating the fair value of traded options which have different characteristics than the Company's employee stock options. The model is also sensitive to changes in the subjective assumptions which can materially affect fair value estimates. As a result, management believes that the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options. For purposes of SFAS No. 123, each award was separately valued using the 10 year CMT rate on the date of grant as the risk-free interest rate. The expected life of each grant was assumed to be equal to the term to expiration as of the grant date. The expected dividend yield was established based upon the dividend policies of the Company as of the date of award. Finally, for purposes of assigning a volatility factor, the historical 100 day volatility factor was reviewed for selected points in time over the past and a range of 36% to 65% was assigned to the 1999, 1998 and 1997 awards for purposes of the SFAS No. 123 valuation. The following is a summary of the significant assumptions used in the SFAS No. 123 valuation and the average fair value of the options granted: 73 75 1999 1998 1997 -------- -------- -------- Average risk free interest rate 5.754% 5.565% 6.494% Average expected life of grants 10 years 10 years 10 years Average expected dividend yield $ 0.43 $ 0.21 $ 0.12 Average volatility factor 68.42% 49.30% 56.80% Average fair value of options granted $ 4.39 $ 9.93 $ 9.76 For purposes of the required pro forma disclosures, SFAS No. 123 permits straight-line amortization of the estimated fair value of the options over the vesting period. Had compensation cost for the Company's 1999, 1998 and 1997 stock-based option awards been determined consistent with the requirements of SFAS No. 123, net income and earnings per share would have been reported as follows for 1999, 1998 and 1997.
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------- 1999 1998 1997 ------- -------- --------- Net income as reported $ 5,922 $ 48,671 $ 21,798 After-tax adjustment for SFAS No. 123 (1,485) (1,968) (737) ------- -------- --------- Pro forma net income as adjusted $ 4,437 $ 46,703 $ 21,061 ======= ======== ========= Pro forma net income per common share - basic $ 0.22 $ 2.02 $ 1.03 Pro forma net income per common share - diluted $ 0.21 $ 1.99 $ 1.01
Due to the inclusion of only 1999, 1998 and 1997 option grants, the effects of applying SFAS No. 123 in 1999, 1998 and 1997 may not be representative of the pro forma impact in future years. Note 12 - Commitments and Contingencies: The Company was servicing and subservicing 87,810, 125,686 and 110,641, residential loans owned by others, with unpaid balances aggregating approximately $9,090,000, $13,600,000 and $10,200,000, at December 31, 1999, 1998 and 1997, respectively. Related escrow funds totaled approximately $44,714, $80,300 and $72,100 as of December 31, 1999, 1998 and 1997, respectively. Loans serviced for others and the related escrow funds are not included in the accompanying consolidated balance sheet. The Company has issued mortgage-backed securities under programs sponsored by Ginnie Mae, Freddie Mac and Fannie Mae. In connection with servicing mortgage-backed securities guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae, the Company advances certain principal and interest payments to security holders prior to their collection from specific mortgagors. Additionally, the Company must remit certain payments of property taxes and insurance premiums in advance of collecting them from specific mortgagors and make certain payments of 74 76 attorney's fees and other costs related to loans in foreclosure. These amounts are included in servicing advances under the caption receivables in the accompanying consolidated financial statements. The Company was servicing commercial mortgage loans of $4,104,095 and $3,255,458 at December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, respectively, 27% and 35% of commercial mortgage loans outstanding were being serviced for a single customer. In addition, at December 31, 1999 and 1998, respectively, the Company was servicing $14,272 and $37,565 of leases for third parties, 100% and 98% of this portfolio was serviced for a single customer. Commercial mortgage loans and leases serviced for others are not included in the accompanying balance sheet. The Company typically sells the residential mortgage servicing rights associated with its mortgage production into forward sales contracts. Additionally, from time to time, the Company will sell residential mortgage servicing rights from its available-for-sale portfolio. In 1999, approximately 79% of its total sales under these forward sales contracts were to four major customers. In 1998, approximately 97% of its total sales under these forward sales contracts were to four major customers. In the ordinary course of business, the Company is exposed to liability under representations and warranties made to purchasers and insurers of mortgage loans and the purchasers of servicing rights. Under certain circumstances, the Company may be required to repurchase mortgage loans or indemnify the purchasers of loans or servicing rights for losses if there has been a breach of representations or warranties. Repurchased loans are carried at the lower of cost or estimated recoverable value. At December 31, 1999, $17,255 of these repurchased loans are included in mortgage loans held-for-sale net of a loss allowance of $1,798. At December 31, 1998, $33,285 of these repurchased loans are included in mortgage loans held-for-sale net of a loss allowance of $2,330. At December 31, 1997, $9,213 of these repurchased loans are included in mortgage loans held-for-sale net of a loss allowance of $3,399. Provision for losses related to the repurchases of loans for the years ended December 31, 1999, 1998 and 1997 totaled $5,795, $9,783 and $4,615 respectively. The total number of loans repurchased for the year ended December 31, 1999, 1998 and 1997 was 356, 479 and 268, respectively. During 1999, 1998 and 1997 the Company repurchased approximately $34,865, $46,586 and $26,800 of unpaid principal balances, respectively. In the ordinary course of its business, the Company is from time to time subject to litigation. The Company is not a party to any material legal proceedings. Note 13 - Work Force Reduction Charges and Non-recurring Charges: During the fourth quarter of 1999, the Company incurred a $3.8 million ($2.4 million after-tax) charge related to a workforce reduction. At December 31, 1999 approximately $2.0 million remained in the accrual related to these workforce reduction charges. The workforce reduction is summarized below by financial statement component and operating division: 75 77
AGENCY-ELIGIBLE ---------------------- ($ in thousands) Production Servicing Subprime Other CONSOLIDATED ---------- --------- -------- ----- ------------ Salary and employee benefits $ 820 $ 31 $ 166 $ 2 $ 1,019 Occupancy expense 1,780 -- 186 190 2,156 General and administrative expenses 448 -- 164 2 614 ------- ---- ----- ----- ------- Net pre-tax impact 3,048 31 516 194 3,789 Estimated allocable income tax expense (1,136) (12) (192) (72) (1,412) ------- ---- ----- ----- ------- Net after-tax impact $ 1,912 $ 19 $ 324 $ 122 $ 2,377 ======= ==== ===== ===== =======
During the second quarter of 1998, the Company sold its retail production franchise and recognized a $1,490 pre-tax ($917 after-tax) gain on the sale. This gain is included in other income. During the third quarter of 1997, the Company recorded a $2,279 pre-tax charge ($1,401 after-tax) related to a terminated merger agreement and a special charge of $7,869 pre-tax ($4,839 after-tax) relating to certain nonrecoverable operating receivables. These charges are included in general and administrative expenses. Note 14 - Employee Benefits: On July 1, 1993, the Company established a 401(k) Retirement Savings Plan which is available to all regular, full-time active employees with six months continuous service. The plan allows employees to contribute up to 15% of their gross earnings on a before-tax basis annually, subject to the maximum established by law. Employees become eligible to participate in the plan as of the January 1 or July 1, following the completion of six months continuous service. The Company contributes to the plan on a matching basis in an amount determined annually by the Board of Directors. In 1998 and 1999 the Company's match percentage was 100% of the employee's contribution up to the first 3% of the employee's gross earnings and a 50% match on the second 3% of the employee's gross earnings. An employee vests in the Company's matching contribution at a rate of 25% per year. The Company recorded $1,136, $980 and $958 of matching contributions as compensation expense during 1999, 1998 and 1997, respectively. On January 1, 1994, the Company established a defined benefit pension plan covering substantially all employees. Under the plan, retirement benefits are based upon years of service and the employee's level of compensation during the last five years prior to retirement. It is the Company's funding policy to make, at a minimum, the annual contribution required by the Employee Retirement Income Security Act of 1974, as amended. Effective January 1, 1995, the Company established a non-qualified unfunded Pension Restoration Plan (Restoration Plan). The purpose of the Restoration Plan is to provide certain 76 78 retirement benefits for eligible employees. Under the Restoration Plan, retirement benefits are based upon years of service and the employee's level of compensation during the last five years prior to retirement. Effective January 1, 1998, the Company established a non-qualified unfunded Supplemental Executive Retirement Plan (SERP). The purpose of the SERP is to provide certain retirement benefits for eligible employees. Under the SERP, retirement benefits are based upon the employee's level of compensation during the high five years of the last 10 years prior to retirement. The combined pension expense for all three defined benefit plans included the following: FOR THE YEAR ENDED DECEMBER 31, ================================= 1999 1998 1997 ------- ------- ----- Service cost $ 1,900 $ 1,417 $ 555 Interest cost 786 563 186 Expected return on assets (204) (97) (46) Amortization of prior service cost 316 316 44 Amortization of actuarial loss 79 17 24 Curtailment credit (220) -- -- ------- ------- ----- $ 2,657 $ 2,216 $ 763 ======= ======= ===== Change in the combined projected benefit obligation under the plans at December 31, 1999 and 1998 is as follows: DECEMBER 31, ----------------------- 1999 1998 -------- -------- Net benefit obligation at beginning of year $ 8,826 $ 3,010 Service cost 1,900 1,417 Interest cost 786 563 Plan amendments -- 3,696 Actuarial (gain) loss (994) 649 Curtailments (258) (477) Benefits paid (40) (32) -------- -------- Net benefit obligation at end of year $ 10,220 $ 8,826 ======== ======== 77 79 The combined change in the plans' assets for the years ended December 31, 1999 and 1998 were: DECEMBER 31, --------------------- 1999 1998 ------- ------- Fair value of plan assets at beginning of year $ 1,862 $ 788 Actual return on plan assets 272 100 Employer contributions 1,349 1,006 Benefits paid (40) (32) ------- ------- Fair value of plan assets at end of year $ 3,443 $ 1,862 ======= ======= Funded status at end of year $(6,777) $(6,965) Unrecognized net actuarial (gain) loss (190) 951 Unrecognized prior service cost 3,451 3,805 ------- ------- Net amount recognized at end of year $(3,516) $(2,209) ======= ======= Amounts recognized in the statement of financial position for the combined plans consist of: DECEMBER 31, --------------------- 1999 1998 ------- ------- Accrued benefit cost $(5,630) $(4,315) Intangible asset 2,114 2,106 ------- ------- Net amount recognized at end of year $(3,516) $(2,209) ======= ======= Weighted-average assumptions used in accounting for the plans as of fiscal year-end were: 1999 1998 1997 ----- ----- ----- Discount rate 8.00% 6.75% 7.00% Expected return on plan assets 8.00% 8.00% 8.00% Rates of compensation increase-SERP 3.30% 3.30% 3.30% Rates of compensation increase all other plans 4.00% 4.00% 4.00% On January 1, 1995, the Company established the Stock Investment Plan (the Stock Plan) covering substantially all employees. Under the Stock Plan, eligible employees may make contributions, through payroll deductions, to acquire common stock of the Company. The purchase price of such stock will be equal to 85% of the fair market value on the purchase date with the Company subsidizing the remaining 15% of the cost. The Company is responsible for custodian charges (including brokerage expenses incurred in connection with the purchase of shares) and all costs of maintaining and executing transfers. This plan will continue until 425,528 shares of stock have been purchased by employees. The Company has subsidized approximately $113, $121 and $108 relating to the noncompensatory Stock Plan discount for 1999, 1998 and 1997, respectively. Through December 31, 1999, there were 255,287 shares issued under the Stock Plan. 78 80 On January 1, 1995, the Company established the Employee Stock Ownership Plan (ESOP) covering substantially all employees. Contributions to the ESOP, which are at the discretion of and determined annually by the Board of Directors, are not to exceed the maximum amount deductible under the applicable sections of the Internal Revenue Code and are funded annually. However, such contributions must be adequate to meet the required principal and interest payments on the underlying loans discussed below. During 1999 and 1998, the ESOP borrowed $3,000 and $2,000, respectively, from the Company to purchase shares of the Company's common stock and pledged those shares to secure loans outstanding. The principal amount of the 1999 loan is repayable in annual installments of $500 commencing in March 2000. The principal amount of the 1998 loan is repayable in annual installments of $500 commencing in January 1999. In accordance with other loan agreements, the ESOP repaid $1,400 and $1,000 to the Company in 1999 and 1998, respectively. An additional $221 and $108 was paid on these loans in 1999 and 1998, respectively, from the cash dividends paid on the unallocated ESOP shares. For the years ended December 31, 1999, 1998, and 1997 135,355, 94,593 and 99,545 shares, respectively were released. Compensation expense related to the ESOP was $1,244, $1,623 and $1,480 for the years ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, the fair market value of the unallocated shares of stock held under the ESOP Plan was $2,434. Note 15 - Net Income Per Common Share: The following is a reconciliation of basic earnings per share to diluted earnings per share as calculated under SFAS No. 128 for the years ended December 31, 1999, 1998 and 1997, respectively:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Net income $ 5,922 $ 48,671 $ 21,798 ----------- ----------- ----------- Average common shares outstanding 20,643,166 23,122,835 20,396,428 ----------- ----------- ----------- Earnings per share - basic $ 0.29 $ 2.10 $ 1.07 ----------- ----------- ----------- Dilutive stock options 156,336 378,273 404,400 Average common and common equivalent shares outstanding 20,799,502 23,501,108 20,800,828 ----------- ----------- ----------- Earnings per share - diluted $ 0.28 $ 2.07 $ 1.05 ----------- ----------- -----------
Options to purchase a total of 1,136,439 shares of common stock at prices ranging from $10.64 to $17.75 per share were outstanding during 1999 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 were still outstanding at December 31, 1999. Options to purchase 6,000 shares of common stock at $17.75 per share were outstanding during 1998 but were not included in the computation of diluted earnings per share because the 79 81 options' exercise price was greater than the average market price of the common shares. The options, which will expire on May 1, 2008, were still outstanding at December 31, 1998. Options to purchase 6,300 shares of common stock at $16.27 per share were outstanding during 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 August 26, 2007, were still outstanding at December 31, 1997. Note 16 - Financial Instruments and Risk Management: The Company is a party to various derivative financial instruments and financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to risks related to fluctuating interest rates. These financial instruments include mortgage purchase commitments, mandatory delivery commitments, put and call option contracts, swaps, futures contracts and interest rate floor contracts. The Company uses these financial instruments exclusively for purposes of managing its resale pricing and interest rate risks. The Company's mortgage loans held-for-sale are acquired or originated through a network of correspondents and wholesale brokers. In connection therewith, the Company routinely enters into optional mortgage purchase commitments to acquire or originate specific in-process mortgage loans when and if closed by the counterparty, at the option of the mortgagor. Mortgage purchase commitments obligate the Company to acquire mortgage loans on a delayed delivery basis, which may extend for a period of 60 days, at a price which is fixed as of the date of the contract. Accordingly, the Company is subject to the risk that the market value of its on-balance sheet mortgage loans held-for-sale and the mortgage loans it is obligated to purchase under its mortgage purchase commitments may change significantly prior to resale. In order to limit its resale price exposure for agency-eligible mortgage loans, the Company enters into mandatory delivery commitments which are contracts for delayed delivery of mortgage loans to third parties. Mandatory delivery commitments obligate the Company to sell agency-eligible mortgage loans on a delayed delivery basis at a price which is fixed as of the date of the contract. Since mandatory delivery commitments enable the Company to fix its resale prices for both on-balance sheet mortgage loans held for sale (for which a fixed price has already been paid) and for anticipated loan closures subject to mortgage purchase commitments (which fix the delayed purchase price for the resultant mortgage loans), these instruments can effectively limit the Company's resale price exposures. The percentages of anticipated agency-eligible loan closures under mortgage purchase commitments that are covered by mandatory delivery commitments not allocated to on-balance sheet mortgages held-for-sale are monitored continuously. The Company's resultant expected exposure to resale pricing risk is continuously adjusted to consider changing expectations regarding anticipated loan closure percentages and other market conditions. Generally, the 80 82 Company buys put and call option contracts on U.S. Government Securities to effect modest adjustments of its overall exposure to resale pricing changes. Purchased call option contracts enable the Company, at its option, to acquire an underlying financial security from a third party at a specified price for a fixed period of time. Purchased put option contracts enable the Company, at its option, to sell an underlying financial security to a third party at a specified price and for a fixed period of time. Since these financial instruments essentially enable the Company to fix the purchase or sale price on financial instruments whose changes in value have historically correlated closely with changes in value of mortgage loans, these instruments can be used effectively to adjust the Company's overall exposure to resale pricing risks. In addition, these instruments have the advantages of being available in smaller denominations than are typical of the Company's mandatory delivery commitments and of being traded in a highly liquid and efficient secondary market. Periodically, the Company, in addition to mandatory delivery commitments, also buys or sells swaps as part of its hedging activities for rate locked and closed subprime mortgage loans. Generally, swaps positions are outstanding for short periods of time and are used to hedge against price movements of another financial instrument while execution of that instrument is bid among brokers. Swaps also may be similarly used to hedge against price movements when another financial instrument is illiquid due to temporary market conditions. Because the changes in value of swaps contracts and the hedged items can be based on different indices, there is a risk that the changes in value may not correlate. There were no open futures positions as of December 31, 1999 or 1998. As discussed in Note 12, the Company typically sells its produced residential mortgage servicing rights between 90 and 180 days of origination or purchase of the related loan pursuant to committed prices under forward sales contracts. These forward sales contracts commit the Company to deliver mortgage servicing rights backed by contractual levels of unpaid principal balances. Outstanding commitments to deliver totaled $5,480,000 and $3,300,000 at December 31, 1999 and 1998, respectively. The Company also maintains a portfolio of residential mortgage servicing rights which, though available-for-sale, are not currently scheduled for sale pursuant to the Company's forward sales contracts. In connection therewith, the Company is subject to the risk that the economic value of such mortgage servicing rights may decline in the event of a significant decline in long-term interest rates. A significant decline in interest rates generally causes an increase in actual and expected mortgage loan prepayments (for example increased refinancing) which in turn tends to reduce the future expected cash flows (and economic value) of associated mortgage servicing rights. Additionally, the Company utilizes Callable Pass Through Certificates (CPC) to diversify basis risk and improve hedge efficacy. The Company purchases a long-term call option on a large pool of mortgage backed securities. When the price of the mortgage backed securities rises, the value of the CPC will rise. This hedge offers performance based upon the price and prepayment behavior of mortgage backed securities, instead of either CMT or CMS basis. Interest rate floor contracts provide for the Company to receive an interest rate differential on a notional amount of outstanding principal to the extent that interest rates decline below a specified 81 83 rate which is fixed as of the date of the contract. Accordingly, the value of an interest rate floor contract increases while the value of a mortgage servicing right decreases in a declining interest rate environment. As such, interest rate floor contracts can potentially effectively mitigate the Company's exposure to declines in the economic value of its servicing rights in a declining interest rate environment. The Company uses an amortizing interest rate swap agreement to fix the interest rate on its floating rate credit facility, which finances its fixed rate leasing portfolio. Under this agreement, the Company makes or receives payments based on the difference between a fixed rate paid by the Company and a floating rate paid by the counterparty, applied to a notional amount of outstanding principal. The interest rate swap agreement is valued based on the difference between the fixed rate and the floating rate at year end. The above described financial instruments involve, to varying degrees, elements of credit and interest rate risk which are in excess of the amounts recognized in the balance sheet. The Company believes that these instruments do not represent a significant exposure to credit loss since the amounts subject to credit risks are controlled through collateral requirements, credit approvals, limits and monitoring procedures. The Company is exposed to credit losses in the event of non-performance by counterparties to certain of its financial instruments, but it does not expect any counterparties to fail since such risks are managed through limits and monitoring procedures. The Company does not have a significant exposure to any individual customer, correspondent or counterparty in connection with these financial instruments. Except for mortgage purchase commitments, the Company does not require collateral or other security to support the financial instruments with credit risk whose contract or notional amounts are summarized as follows:
CONTRACT AMOUNT AT DECEMBER 31, ------------------------------- 1999 1998 ---------- ---------- Financial instruments whose contract amounts represent credit risk: Mortgage loan purchase commitments $ 363,402 $1,089,539 Financial instruments whose contract amounts exceed the amount of credit risk: Mandatory delivery commitments (allocated against mortgages held-for-sale) 484,752 1,263,861 Mandatory delivery commitments (allocated against mortgage purchase commitments) 273,748 402,139 Purchased option contracts 160,000 310,000 Forward servicing sales contracts 5,480,000 3,300,000 Interest rate floor contracts 2,100,000 1,482,000 Interest rate swaps 125,733 81,147 Callable pass-through certificates 376,100 --
Mortgage loan purchase commitments expose the Company to credit loss in the event the purchase commitments are funded as mortgage loans and the Company's counterparties default prior to resale. The maximum credit loss to which the Company is exposed is the notional amount of the commitments. However, the Company does not believe the commitments 82 84 represent a significant exposure to credit loss because the related loans are secured by 1-4 family homes, most loans are insured or guaranteed through private mortgage insurance or government approval programs and subjected to underwriting standards specified by government agencies or private mortgage insurance companies. The estimated credit exposure on financial instruments whose contract amounts exceed the amount of credit risk is the increase in market value of the instrument. The Company generally does not charge a premium to its correspondents in connection with issuance of its mortgage purchase commitments nor is a premium charged to the Company in connection with its acquisition of mandatory delivery or forward servicing sales contracts. Premiums paid for purchased put and call option and futures contracts are initially deferred and included in other assets in the balance sheet. Other assets included $1,803 and $2,823 at December 31, 1999 and 1998, respectively, of such deferred premiums. Ultimately, such deferred premiums and related realized gains or losses from these activities are recorded as a component of gains and losses on sales of mortgage loans at the earlier of the expiration of the underlying contract or when exercise of the contract is deemed remote. The Company uses CMT floors and CMS floors and Callable Pass-Through Certificates to protect itself against interest and prepayment risk on its available-for-sale portfolio. The Company monitors the changes in the fair value of the CMT and CMS floors and the hedged mortgage servicing rights on an ongoing basis. Premiums paid for interest rate floor contracts are initially deferred and included in other assets in the balance sheet and are amortized over the term of the underlying contract. Amounts received as interest rate differentials under floor contracts as well as changes in the fair value of the contracts are recorded as a reduction or increase of basis in mortgage servicing rights to the extent that such changes generally correlate with changes in fair value of mortgage servicing rights. Included in the mortgage servicing right basis are deferred (losses) gains of $(5,059) and $13,509 and unamortized floor premiums of $6,349 and $9,000 for 1999 and 1998, respectively. Other assets included $11,318 and $6,539 at December 31, 1999 and 1998, respectively, of unamortized premiums. For the years ended December 31, 1999 and 1998, respectively, $3,608 and $1,976 of deferred premiums paid for interest rate floor contracts were amortized to expense. The current variable rate index (CMT Treasury rate) was 6.437% and 4.65% at December 31, 1999 and 1998, respectively. Other terms of the CMT interest rate floor contracts outstanding at December 31, 1999, are summarized as follows: 83 85 Notional Contract Date Expiration Date Amount Floor Rate - ------------------------------------------------------------------------------- February 13, 1995 February 13, 2000 $20,000 7.067% February 13, 1995 February 13, 2000 45,000 6.567% August 20, 1996 August 20, 2001 60,000 5.570% April 22, 1997 April 22, 2000 125,000 6.750% April 22, 1997 April 22, 2000 150,000 6.500% April 22, 1997 April 22, 2000 375,000 6.250% July 9, 1998 July 9, 2005 55,000 4.910% July 9, 1998 July 9, 2001 125,000 5.160% September 15, 1998 September 15, 2003 75,000 4.500% October 13, 1998 October 13, 2003 150,000 4.500% November 10, 1998 November 10, 2003 120,000 5.410% January 19, 1999 January 19, 2002 200,000 4.200% March 15, 1999 March 15, 2002 200,000 4.950% May 15, 1999 May 15, 2006 200,000 7.000% September 1, 1999 September 30, 2006 200,000 7.500% ------------ $ 2,100,000 ============ During 1999, the Company purchased four CMT interest-rate floors contracts for $8,388 with contract dates as listed above. The notional amounts of these interest rate floors totaled $800,000. Two interest rate floors with a notional amounts totaling $132,000 and a contract date of September 19, 1994, expired on September 19, 1999. 84 86 Note 17 - Segment Income Statement: In accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" the Company adopted segment reporting in 1998. The following tables present a summary of the revenues and expenses for each of the Company's operating divisions for the years ended December 31, 1999, 1998 and 1997, respectively. Total assets of the operating divisions at December 31, 1999 are also presented. Revenues and expenses for each of the Company's operating divisions for the years ended December 31, 1998 and 1997 have been restated to conform to the 1999 presentation. For purposes of segment reporting the Company operates through five operating divisions. The agency-eligible production division purchases and sells agency-eligible residential mortgage loans. The agency-eligible servicing division services agency-eligible residential mortgage loans and also purchases and sells servicing rights associated with these agency eligible loans. Mortgage servicing includes collecting and remitting mortgage loans 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 subprime division purchases and sells subprime residential mortgage loans. The commercial mortgage division originates commercial mortgage loans for various insurance companies and other investors. Commercial mortgage loans are generally originated in the name of the investor and, in most instances, the rights to service the loans under a servicing agreement are retained by the Company. The leasing division originates and services small-ticket commercial equipment leases. Substantially all of the leasing division's receivables are acquired from independent brokers who operate throughout the continental United States. The agency-eligible reinsurance division operates as a licensed, property and casualty monoline captive insurance company assuming reinsurance for PMI policies on agency-eligible mortgage loans initially purchased or produced by the Company. Of the total 1999 agency-eligible production and agency-eligible servicing revenues, $1.0 million and $0.2 million, respectively, are intercompany revenues. The remaining revenues for the agency-eligible production and agency-eligible servicing divisions and for all other operating divisions on the 1999 Segmented Income Statement are from external sources. 85 87
Agency-Eligible ------------------------------------------- For the year ended Commercial Total December 31, 1999 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments - ---------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 8,240 $ (4,555) $ (12) $ 15,366 $ 323 $ 7,270 $ 26,632 Net gain on sale of mortgage loans 64,033 -- -- 20,357 9,170 -- 93,560 Gain on sale of mortgage servicing rights -- 7,262 -- -- -- -- 7,262 Servicing fees -- 41,791 -- -- 4,735 620 47,146 Other income 340 582 1,661 (4,372) 69 1,395 (325) --------------------------------------------------------------------------------------------------- Total revenues 72,613 45,080 1,649 31,351 14,297 9,285 174,275 --------------------------------------------------------------------------------------------------- Salary and employee benefits 38,751(2) 3,399(3) -- 15,840(4) 8,321 2,654 68,965 Occupancy expense 10,079(2) 419 -- 2,567(4) 1,123 453 14,641 Amortization and provision for impairment of mortgage servicing rights -- 29,580 -- -- 2,210 -- 31,790 General and administrative expenses 22,970(2) 5,984 221 10,353(4) 1,820 3,168 44,516 --------------------------------------------------------------------------------------------------- Total expenses 71,800(2) 39,382(3) 221 28,760(4) 13,474 6,275 159,912 --------------------------------------------------------------------------------------------------- Income before income taxes 813(2) 5,698(3) 1,428 2,591(4) 823 3,010 14,363 Income tax expense (207)(2) (1,448)(3) (356) (1,237)(4) (405) (1,196) (4,849) --------------------------------------------------------------------------------------------------- Net income $ 606(2) $ 4,250(3) $ 1,072 $ 1,354(4) $ 418 $ 1,814 $ 9,514 =================================================================================================== Total Assets $ 446,216 $ 168,320 $ 5,153 $ 213,573 $ 26,533 $ 167,088 $ 1,026,883 ========= ========= ======== ========= ======== ========= ===========
For the year ended Other/ December 31, 1999 (1) Eliminations Consolidated - ------------------------------------------------------------------------- (UNAUDITED) Net interest income $ (470) $ 26,162 Net gain on sale of mortgage loans -- 93,560 Gain on sale of mortgage servicing rights -- 7,262 Servicing fees (188) 46,958 Other income 175 (150) ----------------------------------------- Total revenues (483) 173,792 ----------------------------------------- Salary and employee benefits 3,903(5) 72,868(6) Occupancy expense 214(5) 14,855(6) Amortization and provision for impairment of mortgage servicing rights -- 31,790 General and administrative expenses 1,129(5) 45,645(6) ----------------------------------------- Total expenses 5,246(5) 165,158(6) ----------------------------------------- Income before income taxes (5,729)(5) 8,634(6) Income tax expense 2,137(5) (2,712)(6) ----------------------------------------- Net income $ (3,592)(5) $ 5,922(6) ========================================= Total Assets $ 299 $ 1,027,182 ========= ===========
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. (2) Includes work force reduction charge totaling $3,048 pre-tax or $1,912 after-tax. Exclusive thereof, salary and employee benefits, occupancy expense, general and administrative expenses, total expenses, net income before income taxes, income tax expense and net income would have been $37,931, $8,299, $22,522, $68,752, $3,861, $1,343 and $2,518 respectively. (3) Includes work force reduction charge totaling $31 pre-tax or $19 after-tax. Exclusive thereof, salary and employee benefits, total expenses, net income before income taxes, income tax expense and net income would have been $3,368, $39,351, $5,729, $1,460 and $4,269 respectively. (4) Includes work force reduction charge totaling $516 pre-tax or $324 after-tax. Exclusive thereof, salary and employee benefits, occupancy expense, general and administrative expenses, total expenses, net income before income taxes, income tax expense and net income would have been $15,674, $2,381, $10,189, $28,244, $3,107, $1,429 and $1,678 respectively. (5) Includes work force reduction charge totaling $194 pre-tax or $122 after-tax. Exclusive thereof, salary and employee benefits, occupancy expense, general and administrative expenses, total expenses, net income before income taxes, income tax expense and net income would have been $3,901, $24, $1,127, $5,052, $(5,535), $(2,065) and $(3,470) respectively. (6) Includes work force reduction charge totaling $3,789 pre-tax or $2,377 after-tax. Exclusive thereof, salary and employee benefits, occupancy expense, general and administrative expenses, total expenses, net income before income taxes, income tax expense and net income would have been $71,849, $12,699, $45,031, $161,369, $12,423, $4,124 and $8,299 respectively. 88
Agency-Eligible ------------------------------------------- For the year ended Commercial Total December 31, 1998 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments - ---------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 7,422 $ -- $ -- $ 9,565 $ 536 $ 4,637 $ 22,160 Net gain on sale of mortgage loans 134,472 -- -- 27,980 9,011 -- 171,463 Gain on sale of mortgage servicing rights -- 1,753 -- -- -- -- 1,753 Servicing fees -- 37,856 -- -- 3,777 1,014 42,647 Other income 1,756(2) 455 1,189 732 11 753 4,896 --------------------------------------------------------------------------------------------------- Total revenues 143,650(2) 40,064 1,189 38,277 13,335 6,404 242,919 --------------------------------------------------------------------------------------------------- Salary and employee benefits 53,158 3,449 -- 13,485 7,322 2,347 79,761 Occupancy expense 7,005 443 -- 1,921 840 376 10,585 Amortization and provision for impairment of -- -- mortgage servicing rights -- 27,897 -- -- 1,335 -- 29,232 General and administrative expenses 28,046 6,446 196 4,490 1,734 2,584 43,496 --------------------------------------------------------------------------------------------------- Total expenses 88,209 38,235 196 19,896 11,231 5,307 163,074 --------------------------------------------------------------------------------------------------- Income before income taxes 55,441(2) 1,829 993 18,381 2,104 1,097 79,845 Income tax expense (20,059)(2) (662) (351) (6,656) (952) (435) (29,115) --------------------------------------------------------------------------------------------------- Net income $ 35,382(2) $ 1,167 $ 642 $ 11,725 $ 1,152 $ 662 $ 50,730 ===================================================================================================
For the year ended Other/ December 31, 1998 (1) Eliminations Consolidated - ------------------------------------------------------------------------- (UNAUDITED) Net interest income $ (382) $ 21,778 Net gain on sale of mortgage loans 171,463 Gain on sale of mortgage servicing rights -- 1,753 Servicing fees 509 43,156 Other income 680 5,576(2) ----------------------------------------- Total revenues 807 243,726(2) ----------------------------------------- Salary and employee benefits 2,645 82,406 Occupancy expense 634 11,219 Amortization and provision for impairment of mortgage servicing rights -- 29,232 General and administrative expenses 770 44,266 ----------------------------------------- Total expenses 4,049 167,123 ----------------------------------------- Income before income taxes (3,242) 76,603(2) Income tax expense 1,183 (27,932)(2) ----------------------------------------- Net income $ (2,059) $ 48,671(2) =========================================
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. (2) Includes a non-recurring gain related to sale of retail operation totaling $1,490 pre-tax, or $917 after-tax. Exclusive thereof, the year ended December 31, 1998 residential mortgage agency-eligible other income, total revenues, income before taxes, income tax expense and net income and consolidated other income, total revenues, income before taxes, income tax expense and net income would have been $266, $142,160, $53,951, $19,486 and, $34,465; and $4,086, $242,236, $75,113, $27,359 and, $47,754, respectively.
Agency-Eligible ------------------------------------------- For the year ended Commercial Total December 31, 1997 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments - --------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 16,764 $ -- $ -- $ 1,268 $ -- $ -- $ 18,032 Net gain on sale of mortgage loans 89,358 -- 14,012 -- -- 103,370 Gain on sale of mortgage servicing rights -- 7,955 -- -- -- -- 7,955 Servicing fees -- 30,869 -- -- -- -- 30,869 Other income 1,180 -- -- -- -- -- 1,180 -------------------------------------------------------------------------------------------------- Total revenues 107,302 38,824 -- 15,280 -- -- 161,406 -------------------------------------------------------------------------------------------------- Salary and employee benefits 50,005 3,025 -- 7,754 -- -- 60,784 Occupancy expense 6,052 318 -- 711 -- -- 7,081 Amortization and provision for impairment of -- -- mortgage servicing rights -- 18,315 -- -- -- -- 18,315 General and administrative expenses 17,799 7,856 -- 2,021 -- -- 27,676 -------------------------------------------------------------------------------------------------- Total expenses 73,856 29,514 -- 10,486 -- -- 113,856 -------------------------------------------------------------------------------------------------- Income before income taxes 33,446 9,310 -- 4,794 -- -- 47,550 Income tax expense (12,678) (3,537) -- (1,825) -- -- (18,040) -------------------------------------------------------------------------------------------------- Net income $ 20,768 $ 5,773 $ -- $ 2,969 $ -- $ -- $ 29,510 ==================================================================================================
89
Non-Recurring and For the year ended Other/ Special December 31, 1997 (1) Eliminations Charges Consolidated - ------------------------------------------------------------------------ (UNAUDITED) Net interest income $ (388) $ 17,644 Net gain on sale of mortgage loans 103,370 Gain on sale of mortgage servicing rights -- 7,955 Servicing fees -- 30,869 Other income -- 1,180 ---------------------------------------- Total revenues (388) 161,018 ---------------------------------------- Salary and employee benefits 1,451 62,235 Occupancy expense 377 7,458 Amortization and provision for impairment of mortgage servicing rights -- 18,315 General and administrative expenses 100 10,147 37,923(2) ---------------------------------------- Total expenses 1,928 10,147 125,931(2) ---------------------------------------- Income before income taxes (2,316) (10,147) 35,087(2) Income tax expense 845 3,906 (13,289)(2) ---------------------------------------- Net income $ (1,471) $ (6,241) $ 21,798(2) ========================================
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. (2) Includes non-recurring and special charges related to a merger agreement that was terminated and certain nonrecoverable operating receivables totaling $10,147 pretax, or $6,241 after tax. Exclusive thereof, the December 31, 1997 consolidated general and administrative expenses, total expenses, income before income taxes, income tax expense and net income would have been $27,776, $115,784, $45,235, $17,195 and $28,039, respectively. 86 90 Note 18 - Quarterly Financial Data (Unaudited):
First Second Third Fourth 1999 Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------------------------------- Net interest income $ 7,474 $ 7,423 $ 6,461 $ 4,804 $ 26,162 Net gain on sale of mortgage loans 37,289 26,188 16,823 13,260 93,560 Gain on sale of mortgage servicing rights 2,998 1,825 1,494 945 7,262 Servicing fees 12,998 11,997 10,898 11,065 46,958 Other income 129 (312) 488 (455) (150) - ------------------------------------------------------------------------------------------------------- Total revenues 60,888 47,121 36,164 29,619 173,792 - ------------------------------------------------------------------------------------------------------- Salary and employee benefits 20,497 16,714 19,511 16,146 (2) 72,868 (2) Occupancy expense 3,173 3,465 4,062 4,155 (2) 14,855 (2) Amortization and provision for impairment of mortgage servicing rights 8,897 9,405 6,280 7,208 31,790 Provision for foreclosure losses and repurchased loans 3,055 2,341 2,535 2,677 10,608 General and administrative expenses 7,908 9,879 6,935 10,315 (2) 35,037 (2) - ------------------------------------------------------------------------------------------------------- Total expenses 43,530 41,804 39,323 40,501 (2) 165,158 (2) - ------------------------------------------------------------------------------------------------------- Income before income taxes 17,358 5,317 (3,159) (10,882)(2) 8,634 (2) Income tax expense (6,197) (1,981) 1,484 3,982 (2) (2,712)(2) - ------------------------------------------------------------------------------------------------------- Net income 11,161 3,336 (1,675) (6,900)(2) 5,922 (2) - ------------------------------------------------------------------------------------------------------- Net income per common share-basic $ 0.50 $ 0.16 $ (0.08) $ (0.36)(2) $ 0.29 (2) Net income per common share-diluted $ 0.50 $ 0.16 $ (0.08) $ (0.36)(2) $ 0.28 (2)
First Second Third Fourth 1998 Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------------------------------- Net interest income $ 4,292 $ 5,459 $ 4,601 $ 7,426 $ 21,778 Net gain on sale of mortgage loans 39,174 44,455 45,597 42,237 171,463 Gain on sale of mortgage servicing rights 628 452 533 140 1,753 Servicing fees 9,303 10,412 11,419 12,022 43,156 Other income 974 1,923 (1) 487 2,192 5,576 (1) - ------------------------------------------------------------------------------------------------------- Total revenues 54,371 62,701 (1) 62,637 64,017 243,726 (1) - ------------------------------------------------------------------------------------------------------- Salary and employee benefits 20,714 20,848 20,479 20,365 82,406 Occupancy expense 2,780 2,651 2,627 3,161 11,219 Amortization and provision for impairment of mortgage servicing rights 5,629 6,674 7,750 9,179 29,232 Provision for foreclosure losses and repurchased loans 1,962 2,054 2,436 4,571 11,023 General and administrative expenses 7,830 8,814 7,959 8,640 33,243 - ------------------------------------------------------------------------------------------------------- Total expenses 38,915 41,041 41,251 45,916 167,123 - ------------------------------------------------------------------------------------------------------- Income before income taxes 15,456 21,660 (1) 21,386 18,101 76,603 (1) Income tax expense (5,875) (8,548)(1) (8,134) (5,375) (27,932)(1) - ------------------------------------------------------------------------------------------------------- Net income 9,581 13,112 (1) 13,252 12,726 48,671 (1) - ------------------------------------------------------------------------------------------------------- Net income per common share-basic $ 0.42 $ 0.57 (1) $ 0.57 $ 0.56 $ 2.10 (1) Net income per common share-diluted $ 0.41 $ 0.56 (1) $ 0.56 $ 0.55 $ 2.07 (1)
(1) Includes a non-recurring gain relating to sale of retail operation totaling $1,490 pre-tax, or $917 after-tax. Exclusive thereof, second quarter 1998 and full year 1998 other income, total revenue, income before income taxes, income tax expense, net income, net income per common share - basic and net income per common share - diluted would have been $433, $61,211, $20,170, $7,975, $12,195, $0.56 and $0.52; and $4,086, $242,236, $75,113, $27,359, $47,754, $2.07 and $2.03, respectively. (2) Includes work force reduction charge totaling $3,789 pre-tax or $2,377 after-tax. Exclusive thereof, fourth quarter 1999 and full year 1999 salary and employee benefits, occupancy expense, general and administrative expenses, total expenses, net income before income taxes, income tax expense, net income, net income per common share - basic and net income per common share - diluted would have been $15,127, $1,999, $9,701, $36,712, ($7,093), ($2,570), $(4,523), ($0.24) and ($0.24) ; and $71,849, $12,699, $34,432, $161,369, $12,423, $4,124, $8,299 and ($0.40) and ($0.40), respectively. 87 91 Note 19 - Fair Value of Financial Instruments: The following table presents the carrying amounts and fair values of the Company's financial instruments at December 31, 1999 and 1998.
1999 1998 -------------------------- -------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ---------- ---------- ---------- ---------- Assets Cash $ 30,478 $ 30,478 $ 18,124 $ 18,124 Receivables 40,219 40,219 80,248 80,248 Lease receivables 155,559 161,483 102,029 107,290 Residual interests in subprime securitizations 54,382 54,382 45,782 45,782 Mortgage loans held-for-sale and mortgage-backed securities 480,504 481,894 1,441,458 1,442,532 Liabilities Short-term borrowings 699,803 699,803 1,566,287 1,566,287 Long-term borrowings 6,259 6,190 6,364 6,371
1999 1998 -------------------------------------- -------------------------------------- Notional Carrying Estimated Notional Carrying Estimated Amount Value Fair Value Amount Value Fair Value ---------- ---------- ---------- ---------- ---------- ---------- Off-balance sheet instruments Mortgage purchase commitments $ 363,402 -- $ (840) $1,089,539 -- $ 2,600 Mandatory delivery commitments (allocated to mortgage purchase commitments) 273,748 -- 2,209 402,139 -- (451) Purchased option contracts 160,000 $ 1,803 343 310,000 $ 2,823 1,183 Interest rate floor contracts 2,100,000 6,269 6,269 1,482,000 20,048 20,048 Interest rate swaps 125,733 -- 1,358 81,147 -- (759) Callable pass-through certificates 376,100 4,621 4,621 -- -- --
The following notes summarize the significant methods and assumptions used in estimating the fair values of financial instruments. Cash and receivables are short-term in nature. Accordingly, they are valued at their carrying amounts which are a reasonable estimation of fair value. Lease receivables are valued by management for each homogenous category of leases by discounting future expected cash flows. Lease receivables held-for-sale are valued by management based upon recent sales with consideration given to differences between those leases and leases sold. The implicit discount rate applied for purposes of determining the 88 92 aggregate discounted lease balance was obtained from an investment banker based on recent market rates. Mortgage loans held-for-sale and mortgage-backed securities covered by mandatory delivery commitments allocated thereto are valued based upon commitment delivery prices. Uncommitted mortgage loans held-for-sale are valued by reference to quoted market prices for mortgage-backed securities, after appropriate adjustments thereto. For purposes of developing the estimated fair value, the portfolio has been segregated by product type, term and interest rate. Short-term borrowings are all tied to near term variable rate indices. Accordingly they are valued at their carrying amounts, which are a reasonable estimation of fair values. Long-term borrowings are at a fixed rate of 8.07% and were valued based upon the net present value of the borrowings using an estimated current rate of 8.50% and a rate of 7.375% for the prior year. Mortgage purchase commitments are valued based upon the difference between quoted mandatory delivery commitment prices (which are used by the Company to price its mortgage purchase commitments) and the committed prices. Mandatory delivery commitments are valued based upon the difference between quoted prices for such commitments and the prices applicable to the underlying commitment. Purchased option contracts are valued based upon quoted prices for such option contracts. Interest rate floor contracts are valued based upon an independent third party valuation. Interest rate swaps are valued based upon the present value of future cash flows based on the interest rate spread between the fixed rate and floating rate. 89 93 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Resource Bancshares Mortgage Group, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of changes in stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of Resource Bancshares Mortgage Group, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Columbia, South Carolina February 7, 2000 90 94 STOCK DATA Information pertaining to high and low stock prices for each quarter during 1999 and 1998 is given in the following chart. 1999 1998 ------------------------------------------------ QUARTER HIGH LOW HIGH LOW - -------------------------------------------------------------------- First $17.00 $11.81 $18.00 $13.50 Second 13.63 9.00 19.63 15.06 Third 11.00 4.50 23.25 15.06 Fourth 6.50 4.44 17.13 9.50 Source: Nasdaq The Company began paying cash dividends in 1996. The following chart summarizes cash dividends declared and paid during 1998 and 1999. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for restrictions on the Company's ability to pay cash dividends.) RECORD DATE PAYMENT DATE CASH DIVIDEND - ----------------------------------------------------------------------------- February 16, 1998 March 18, 1998 0.05 June 1, 1998 June 30, 1998 0.07 July 31, 1998 August 31, 1998 0.07 November 6, 1998 December 4, 1998 0.10 February 10, 1999 March 10, 1999 0.10 May 20, 1999 June 21, 1999 0.11 August 17, 1999 September 17, 1999 0.11 November 16, 1999 December 14, 1999 0.11 As of March 6, 2000, there were approximately 630 record holders of the Company's common stock. 91 95 DIRECTORS - --------- Boyd M. Guttery * Chairman of the Board Resource Bancshares Mortgage Group, Inc. Atlanta, Georgia Stuart M. Cable Attorney Goodwin, Proctor, & Hoar LLP law firm Boston, Massachusetts Douglas K. Freeman Chief Executive Officer Resource Bancshares Mortgage Group, Inc. Columbia, South Carolina David W. Johnson, Jr. President Resource Bancshares Mortgage Group, Inc. Columbia, South Carolina Robin C. Kelton Chairman Kelton International Ltd. investment bank London, England John O. Wolcott * Executive Vice President Olayan America Corporation investment company New York, New York EXECUTIVE OFFICERS - ------------------ Douglas K. Freeman Chief Executive Officer David W. Johnson, Jr. President Steven F. Herbert Corporate Senior Executive Vice President And Corporate Chief Financial Officer Richard M. Duncan President of RBMG, Inc. Larry W. Reed President and Chief Executive Officer Meritage Mortgage Corporation * Audit Committee 92 96 CORPORATE INFORMATION Exchange: NASDAQ Symbol: RBMG Internet Address: http://www.rbmg.com/ Investor Relations Contact Steven F. Herbert Corporate Senior Executive Vice President and Corporate Chief Financial Officer 7909 Parklane Road Columbia, South Carolina 29223 Tel: (803) 741-3539 Fax: (803) 741-3586 E-mail : investors@rbmg.com 1-800-933-2890 Dividend Reinvestment Plan Resource Bancshares Mortgage Group, Inc. has an optional dividend reinvestment plan. Shareholders interested in participating should contact Steven F. Herbert at the address set forth above. Form 10K and Other Information Copies of the Resource Bancshares Mortgage Group, Inc. Annual Report on Form 10K, as filed with the Securities and Exchange Commission, will be furnished without charge to shareholders upon written request to Steven F. Herbert at the address set forth above. TRANSFER AGENT AND REGISTRAR First Chicago Trust Company, a division of EquiServe Telephone Inside the US: 1-800-446-2617 Outside the US: 1-201-324-0498 TDD/TTY for hearing impaired: 1-201-222-4955 Operators are available Monday - Friday, 8:30 a.m. to 7:00 p.m. Eastern time. An interactive automated system is available around the clock everyday. Internet Internet: http://www.equiserve.com General Correspondence EquiServe P.O. Box 2500 Jersey City, NJ 07303-2500 For questions regarding stock transfers, change of address or lost certificates. Certificate Transfers by Mail EquiServe P.O. Box 2506 Jersey City, NJ 07303-2506 Dividend Reinvestment Plan EquiServe Dividend Reinvestment Service P.O. Box 2598 Jersey City, NJ 07303-2598 Attn: Resource Bancshares Mortgage Group, Inc. DRP Access Account Information Via Internet http://gateway.equiserve.com Internet Helpline: 1-877-843-9327 Operators are available Monday-Friday, 8:30 a.m. to 7:00 p.m. Eastern time. 93 97 RETURN ON ASSETS / RETURN ON EQUITY* ROA - ROE - (RETURN ON (RETURN ON YEAR ASSETS) EQUITY) - -------------------------------------------------- 1993 4.81% 38.5% 1994 5.25% 25.98% 1995 1.95% 17.00% 1996 2.22% 16.78% 1997 2.29% 16.34% 1998 2.68% 20.61% 1999 0.67% 3.53% NET OPERATING INCOME* Year CONSOLIDATED - ------------- -------------------------- 1993 $ 17,580 1994 18,043 1995 14,219 1996 22,815 1997 28,039 1998 47,754 1999 8,299 DILUTED OPERATING EARNINGS PER SHARE * Year CONSOLIDATED - -------------- ------------------ 1993 $ 0.76 1994 1.10 1995 0.86 1996 1.17 1997 1.35 1998 2.03 1999 0.39 * Amounts reflect operating amounts only. Excluded are the impact of nonrecurring charges reported in 1996 and 1997 and non-recurring income reported in 1998, and workforce reduction charges reported in 1999. EX-21.1 6 SUBSIDIARIES 1 EXHIBIT 21.1 RESOURCE BANCSHARES MORTGAGE GROUP, INC. SUBSIDIARIES OF THE REGISTRANT 1. RBMG, Inc., a wholly owned subsidiary of the Registrant, was formed by the Registrant in February 1999 and is incorporated in the state of Delaware. 2. Meritage Mortgage Corporation, a wholly-owned subsidiary of the Registrant, was acquired by the Registrant in April 1997 and is incorporated in the state of Oregon. 3. Resource Bancshares Corporation, a wholly-owned subsidiary of the Registrant was acquired by the Registrant in December 1997 and is incorporated in the state of South Carolina. 4. Laureate Capital Corp. (f/k/a Laureate Realty Services, Inc.), a wholly-owned subsidiary of Laureate Holdings, Inc., was acquired by the Registrant in December 1997 and is incorporated in the state of South Carolina. 6. RBMG Asset Management Company, Inc., a wholly-owned subsidiary of Meritage Mortgage Corporation, was formed by the Registrant in November 1997 and is incorporated in the state of Nevada. 7. RBMG Funding Co., Inc., a wholly-owned subsidiary of RBMG Asset Management Company, Inc., was formed by RBMG Asset Management, Inc. in September 1997 and is incorporated in the state of Nevada. 9. TFP Funding III, Inc., a wholly-owned subsidiary of Republic Leasing Company, Inc. was formed by Resource Bancshares Corporation in June 1998 and is incorporated in the state of Delaware. 10. MG Reinsurance Company, a wholly-owned subsidiary of the Registrant, was formed by the Registrant in November 1998 and is incorporated in the state of Vermont. 11. Republic Leasing Company, Inc., a wholly-owned subsidiary of the Registrant, was acquired by the Registrant in December 1997 and is incorporated in the state of South Carolina. EX-23.1 7 CONSENTS OF PRICEWATERHOUSECOOPERS 1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (Nos. 333-82105, 333-94863) of Resource Bancshares Mortgage Group, Inc. of our report dated February 7, 2000 relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP Columbia, South Carolina March 29, 2000 2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-25613, 333-25611, 333-25885, 333-44289, 333-68909) of Resource Bancshares Mortgage Group, Inc. of our report dated February 7, 2000 relating to the financial statements, which appears in the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP Columbia, South Carolina March 29, 2000 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 30,478 54,382 195,778 0 480,504 975,410 53,854 17,560 1,027,182 808,451 6,259 0 0 316 212,156 1,027,182 84,617 173,792 119,513 165,158 45,645 10,608 58,455 8,634 2,712 8,634 0 0 0 5,922 0.29 0.28
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