10-Q 1 e10-q.txt RESOURCE BANCSHARES MORTGAGE GROUP, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended June 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------- ------- Commission File Number 000-21786 RESOURCE BANCSHARES MORTGAGE GROUP, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) STATE OF DELAWARE 57-0962375 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7909 Parklane Road, Columbia, SC 29223 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (803)741-3000 Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the registrant was required to file reports) and (ii) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The number of shares of common stock of the Registrant outstanding as of July 31, 2000 was 18,090,177. Page 1 Exhibit Index on Pages A to G 2 RESOURCE BANCSHARES MORTGAGE GROUP, INC. Form 10-Q for the quarter ended June 30, 2000 TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements - (Unaudited) Condensed Consolidated Balance Sheet 3 Condensed Consolidated Statement of Income 4 Condensed Consolidated Statement of Changes in Stockholders' Equity 5 Condensed Consolidated Statement of Cash Flows 6 Notes to Condensed Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 50 PART II. OTHER INFORMATION 52 ITEM 4. Submission of Matters to a Vote of Security Holders 52 ITEM 6. Exhibits and Reports on Form 8-K 52 SIGNATURES 53 EXHIBIT INDEX A-G
2 3 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEET ($ IN THOUSANDS)
June 30, December 31, 2000 1999 ----------- ------------ (Unaudited) ASSETS Cash $ 22,073 $ 30,478 Receivable from sale of mortgage-backed securities 69,943 -- Receivables 29,212 40,219 Trading securities: Residual interests in subprime securitizations 48,878 54,382 Mortgage loans held for sale 573,338 480,504 Lease receivables 177,410 155,559 Servicing rights, net 164,979 177,563 Premises and equipment, net 33,826 36,294 Accrued interest receivable 2,305 1,691 Goodwill and other intangibles 12,743 15,478 Other assets 32,332 35,014 ----------- ----------- Total assets $ 1,167,039 $ 1,027,182 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term borrowings $ 869,133 $ 709,803 Long-term borrowings 6,203 6,259 Accrued expenses 10,006 13,826 Other liabilities 91,633 84,822 ----------- ----------- Total liabilities 976,975 814,710 =========== =========== Preferred stock - par value $0.01 - 5,000,000 shares authorized; no shares issued or outstanding -- -- Common stock - par value $0.01 - 50,000,000 shares authorized; 31,637,331 shares issued at June 30, 2000 and December 31, 1999 316 316 Additional paid-in capital 298,601 300,909 Retained earnings 38,225 56,506 Common stock held by subsidiary at cost - 7,767,099 shares at June 30, 2000 and December 31, 1999 (98,953) (98,953) Treasury stock - 5,641,804 and 4,686,391 shares at June 30, 2000 and December 31, 1999, respectively (42,878) (41,148) Unearned shares of employee stock ownership plan - 469,404 and 537,084 shares at June 30, 2000 and December 31, 1999, respectively (5,247) (5,158) ----------- ----------- Total stockholders' equity 190,064 212,472 =========== =========== Total liabilities and stockholders' equity $ 1,167,039 $ 1,027,182 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONDENSED CONSOLIDATED INCOME STATEMENT ($ IN THOUSANDS EXCEPT SHARE AMOUNTS) (UNAUDITED)
For the Six Months Ended For the Quarter Ended June 30, June 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ REVENUES Interest income $ 34,289 $ 47,533 $ 18,995 $ 21,959 Interest expense (25,012) (32,850) (13,834) (14,656) ------------ ------------ ------------ ------------ Net interest income 9,277 14,683 5,161 7,303 Net gain on sale of mortgage loans 17,996 60,452 9,349 24,402 Gain on sale of mortgage servicing rights 1,539 4,823 731 1,825 Servicing fees 17,880 22,862 8,565 10,839 Mark-to-market on residual interests in subprime securitizations (9,446) (3,967) (1,771) (2,618) Other income 4,374 3,753 2,318 2,286 ------------ ------------ ------------ ------------ Total revenues 41,620 102,606 24,353 44,037 ------------ ------------ ------------ ------------ EXPENSES Salary and employee benefits 24,870 33,963 10,117 15,204 Occupancy expense 6,836 6,097 3,516 3,187 Amortization and provision for impairment of mortgage servicing rights 12,209 17,320 5,932 8,887 Provision expense 3,683 5,396 1,682 2,341 General and administrative expenses 12,094 16,854 6,645 9,376 ------------ ------------ ------------ ------------ Total expenses 59,692 79,630 27,892 38,995 ------------ ------------ ------------ ------------ Income (loss) from continuing operations before income taxes (18,072) 22,976 (3,539) 5,042 Income tax benefit (expense) 6,530 (8,269) 1,199 (1,853) ------------ ------------ ------------ ------------ Income (loss) from continuing operations (11,542) 14,707 (2,340) 3,189 Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $200) (2,000) (2,000) Operating profits (losses) of Laureate Capital Corp. for the six months ended June 30, 2000 and 1999 and for the quarter ended June 30, 2000 and 1999, respectively (less applicable income tax expense (benefit) of $(354), $(91), $111 and $128, respectively) (660) (210) 105 147 ------------ ------------ ------------ ------------ Net income (loss) $ (14,202) $ 14,497 $ (4,235) $ 3,336 ------------ ------------ ------------ ------------ Weighted average common shares outstanding -- Basic 18,337,723 21,587,836 18,017,764 20,958,060 ------------ ------------ ------------ ------------ Net income (loss) per common share from continuing operations -- Basic $ (0.63) $ 0.68 $ (0.13) $ 0.15 ------------ ------------ ------------ ------------ Net income (loss) per common share from discontinued operations -- Basic $ (0.15) $ (0.01) $ (0.11) $ 0.01 ------------ ------------ ------------ ------------ Weighted average common shares outstanding -- Diluted 18,337,723 21,800,285 18,017,764 21,138,487 ------------ ------------ ------------ ------------ Net income (loss) per common share from continuing operations -- Diluted $ (0.63) $ 0.67 $ (0.13) $ 0.15 ------------ ------------ ------------ ------------ Net income (loss) per common share from discontinued operations -- Diluted $ (0.15) $ (0.01) $ (0.11) $ 0.01 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. 4 5 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ($ in thousands, except share information) (Unaudited)
Common Stock Additional Common Six Months Ended ------------------------ Paid-in Retained Stock Held by June 30, 1999 Shares Amount Capital Earnings Subsidiary ---------------- ---------- ------ ----------- -------- ------------- Balance, December 31, 1998 31,637,331 $ 316 $ 307,114 $ 59,599 $ (98,953) Issuance of restricted stock 116 Cash dividends (4,538) Treasury stock purchases Exercise of stock options (3) Shares committed to be released under Employee Stock Ownership Plan 56 Purchase of shares by Employee Stock Ownership Plan Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan (158) (60) Net income 14,497 Total comprehensive income ---------- ------ --------- -------- ---------- Balance, June 30, 1999 31,637,331 $ 316 $ 307,125 $ 69,498 $ (98,953) ========== ====== ========= ======== ========== Unearned Shares of Employee Total Treasury Stock Ownership Stockholders' Stock Plan Equity ------------------ ---------------- -------------- Balance, December 31, 1998 $(11,499) $ (4,419) 252,158 Issuance of restricted stock 1,285 1,401 Cash dividends (4,538) Treasury stock purchases (25,700) (25,700) Exercise of stock options 7 4 Shares committed to be released under Employee Stock Ownership Plan 670 726 Purchase of shares by Employee Stock Ownership Plan (1,500) (1,500) Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan 1,882 1,664 Net income Total comprehensive income 14,497 -------- -------- --------- Balance, June 30, 1999 $(34,025) $ (5,249) $ 238,712 ======== ======== =========
Common Stock Additional Common Six Months Ended ------------------------ Paid-in Retained Stock Held by June 30, 2000 Shares Amount Capital Earnings Subsidiary ---------------- ---------- ------ ----------- -------- ------------- Balance, December 31, 1999 31,637,331 $ 316 $ 300,909 $ 56,506 $ (98,953) Issuance of restricted stock (960) Cash dividends (4,046) Treasury stock purchases Shares committed to be released under Employee Stock Ownership Plan 162 Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan (1,510) (33) Net income (loss) (14,202) Total comprehensive income ---------- ------ --------- -------- ---------- Balance, June 30, 2000 31,637,331 $ 316 $ 298,601 $ 38,225 $ (98,953) ========== ====== ========= ======== ========== Shares of Total Treasury Employee Stock Stockholders' Stock Ownership Plan Equity ------------------ ---------------- -------------- Balance, December 31, 1999 $(41,148) $ (5,158) $ 212,472 Issuance of restricted stock 1,750 790 Cash dividends (4,046) Treasury stock purchases (6,212) (6,212) Shares committed to be released under Employee Stock Ownership Plan (89) 73 Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan 2,732 1,189 Net income (loss) Total comprehensive income (14,202) -------- -------- --------- Balance, June 30, 2000 $(42,878) $ (5,247) $ 190,064 ======== ======== =========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS ($ in thousands)
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- 2000 1999 ------------ ------------ OPERATING ACTIVITIES Net income $ (11,542) $ 14,707 Adjustments to reconcile net income to cash (used in) provided by operating activities: Depreciation and amortization 17,197 19,609 Employee Stock Ownership Plan compensation 73 726 Provision for estimated foreclosure losses and repurchased loans 3,683 5,396 Increase in receivables from sale of mortgage backed securities (69,942) 0 Decrease in receivables 10,022 14,818 Acquisition of mortgage loans (2,431,376) (5,646,110) Proceeds from sales of mortgage loans and mortgage-backed securities 2,396,952 6,338,641 Acquisition of mortgage servicing rights (71,133) (166,706) Sales of mortgage servicing rights 72,237 163,045 Net (loss) gain on sales of mortgage loans and servicing rights 16,457 (65,275) (Increase) decrease in accrued interest on loans (597) 703 Increase in lease receivables (23,372) (25,918) Decrease (increase) in other assets 4,077 (4,605) Decrease (increase) in residual certificates 5,504 (5,114) Increase in accrued expenses and other liabilities 1,481 11,754 ----------- ----------- Net cash (used in) provided by operating activities (80,279) 655,671 ----------- ----------- INVESTING ACTIVITIES Purchases of premises and equipment (1,857) (5,598) Disposition of premises and equipment 652 0 Discontinued operations (1,706) (1,502) ----------- ----------- Net cash used in investing activities (2,911) (7,100) ----------- ----------- FINANCING ACTIVITIES Proceeds from borrowings 3,802,900 18,649,983 Repayment of borrowings (3,719,836) (19,275,859) Issuance of restricted stock 790 1,401 Shares issued under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan 1,189 1,664 Acquisition of treasury stock (6,212) (25,700) Cash dividends (4,046) (4,538) Exercise of stock options 0 4 Loans to Employee Stock Ownership Plan 0 (1,500) ----------- ----------- Net cash provided by (used in) financing activities 74,785 (654,545) ----------- ----------- Net increase (decrease) in cash (8,405) (5,974) Cash, beginning of year 30,478 18,124 ----------- ----------- Cash, end of year $ 22,073 $ 12,150 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 6 7 RESOURCE BANCSHARES MORTGAGE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 Note 1 - Basis of Presentation: The financial information included herein should be read in conjunction with the consolidated financial statements and related notes of Resource Bancshares Mortgage Group, Inc. (the Company), included in the Company's December 31, 1999, Annual Report on Form 10-K. Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, is not required for interim financial statements and has been omitted. The accompanying interim consolidated financial statements are unaudited. However, in the opinion of management of the Company, all adjustments, consisting of normal recurring items, necessary for a fair presentation of operating results for the periods shown have been made. During the first six months of 2000, management and the Board of Directors reconsidered the Company's current positioning in the market and its corporate, management and leadership structures. As a result, the Company is reorganizing around the primary business processes that are critical to achieving its new vision: production/sales, customer fulfillment, servicing and portfolio management. These business units will continue to be centrally supported by traditional corporate functions. Segment reporting, which is done based upon the current holding company organization structure, will change in future periods when the new organization structure is fully implemented. Certain prior period amounts have been reclassified to conform to current period presentation and for comparability purposes. 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 all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). However, early adoption is permitted. The FASB has a Derivatives Implementation Group ("DIG") that is assisting various industry groups in interpreting SFAS No. 133. The DIG has numerous open issues relating to the mortgage banking industry. As a result, the Company has not yet determined 7 8 the impact that the adoption of SFAS 133 will have on its earnings or statement of financial position. Note 2 - Earnings (Loss) Per Share: The following is a reconciliation of basic earnings (loss) per share from continuing operations to diluted earnings (loss) per share from continuing operations for the six months and quarter ended June 30, 2000 and 1999, respectively:
($ IN THOUSANDS) FOR THE SIX MONTHS ENDED FOR THE QUARTER ENDED JUNE 30, JUNE 30, -------------------------------- -------------------------------- 2000 1999 2000 1999 ------------ ----------- ------------ ----------- Net income from continuing operations $ (11,542) $ 14,707 $ (2,340) $ 3,189 ------------ ----------- ------------ ----------- Average common shares outstanding 18,337,723 21,587,836 18,017,764 20,958,060 ------------ ----------- ------------ ----------- Earnings per share - basic $ (0.63) $ 0.68 $ (0.13) $ 0.15 ------------ ----------- ------------ ----------- Dilutive stock options -- 212,449 -- 180,427 Average common and common equivalent shares outstanding 18,337,723 21,800,285 18,017,764 21,138,487 ------------ ----------- ------------ ----------- Earnings per share - diluted $ (0.63) $ 0.67 $ (0.13) $ 0.15 ============ =========== ============ ===========
During the second quarter, the Company decided to dispose of its commercial mortgage operation, Laureate Capital, Corp. (Laureate). Based on market indications to date, the Company expects to realize net proceeds equal to the tangible book value of Laureate. Accordingly, the Company recorded a $2 million after-tax charge during the quarter, primarily related to the write-off of intangible assets of Laureate. The following is a reconciliation of basic earnings (loss) per share from discontinued operations to diluted earnings (loss) per share from discontinued operations for the six months and quarter ended June 30, 2000 and 1999, respectively:
($ IN THOUSANDS) FOR THE SIX MONTHS ENDED FOR THE QUARTER ENDED JUNE 30, JUNE 30, -------------------------------- -------------------------------- 2000 1999 2000 1999 ------------ ----------- ------------ ----------- Net income from discontinued operations $ (2,660) $ (210) $ (1,895) $ 147 ------------ ----------- ------------ ----------- Average common shares outstanding 18,337,723 21,587,836 18,017,764 20,958,060 ------------ ----------- ------------ ----------- Earnings per share - basic $ (0.15) $ (0.01) $ (0.11) $ 0.01 ------------ ----------- ------------ ----------- Dilutive stock options -- 212,449 -- 180,427 Average common and common equivalent shares outstanding 18,337,723 21,800,285 18,017,764 21,138,487 ------------ ----------- ------------ ----------- Earnings per share - diluted $ (0.15) $ (0.01) $ (0.11) $ 0.01 ============ =========== ============ ===========
8 9 The following is a reconciliation of combined basic earnings (loss) per share from operations to diluted earnings (loss) per share from operations for the six months and quarter ended June 30, 2000 and 1999, respectively:
($ IN THOUSANDS) FOR THE SIX MONTHS ENDED FOR THE QUARTER ENDED JUNE 30, JUNE 30, -------------------------------- -------------------------------- 2000 1999 2000 1999 ------------ ----------- ------------ ----------- Net income from operations $ (14,202) $ 14,497 $ (4,235) $ 3,336 ------------ ----------- ------------ ----------- Average common shares outstanding 18,337,723 21,587,836 18,017,764 20,958,060 ------------ ----------- ------------ ----------- Earnings per share - basic $ (0.78) $ 0.67 $ (0.24) $ 0.16 ------------ ----------- ------------ ----------- Dilutive stock options -- 212,449 -- 180,427 Average common and common equivalent shares outstanding 18,337,723 21,800,285 18,017,764 21,138,487 ------------ ----------- ------------ ----------- Earnings per share - diluted $ (0.78) $ 0.66 $ (0.24) $ 0.16 ============ =========== ============ ===========
Note 3 - Allocated Revenues and Expenses: Following is a summary of the allocated revenues and expenses for each of the Company's operating divisions for the six months and the quarter ended June 30, 2000 and 1999, respectively: 9 10
AGENCY-ELIGIBLE FOR THE SIX MONTHS ENDED JUNE 30, 2000 (1) (2) -------------------------------------------------- ($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME ----------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 913 $ (2,316) $ (39) $ 6,657 Net gain on sale of mortgage loans 11,817 -- -- 6,179 Gain on sale of mortgage servicing rights -- 1,539 -- -- Servicing fees -- 17,906 -- -- Mark to market on residual interests in subprime securitizations -- -- -- (9,446) Other income 432 248 1,595 1,320 -------- -------- ------- -------- Total revenues 13,162 17,377 1,556 4,710 -------- -------- ------- -------- Salary and employee benefits 13,123 1,373 90 7,126 Occupancy expense 5,523 111 -- 1,305 Amortization and provision for impairment of mortgage servicing rights -- 12,209 -- -- Provision expense 1,252 -- -- 910 General and administrative expenses 5,137 2,020 172 3,145 -------- -------- ------- -------- Total expenses 25,035 15,713 262 12,486 -------- -------- ------- -------- Income (loss) before income taxes (11,873) 1,664 1,294 (7,776) Income tax benefit (expense) 4,369 (612) (454) 2,763 -------- -------- ------- -------- Income (loss) from continuing operations $ (7,504) $ 1,052 $ 840 $ (5,013) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $200) Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $354) -------- -------- ------- -------- Net income (loss) $ (7,504) $ 1,052 $ 840 $ (5,013) ======== ======== ======= ======== FOR THE SIX MONTHS ENDED JUNE 30, 2000 (1) (2) COMMERCIAL ($ IN THOUSANDS) MORTGAGE LEASING TOTAL SEGMENTS OTHER/ELIMINATION CONSOLIDATED ----------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ -- $ 4,420 $ 9,635 $ (358) $ 9,277 Net gain on sale of mortgage loans -- -- 17,996 -- 17,996 Gain on sale of mortgage servicing rights -- -- 1,539 -- 1,539 Servicing fees -- 232 18,138 (258) 17,880 Mark to market on residual interests in subprime securitizations -- -- (9,446) -- (9,446) Other income -- 566 4,161 213 4,374 ------- ------- -------- ------- -------- Total revenues -- 5,218 42,023 (403) 41,620 ------- ------- -------- ------- -------- Salary and employee benefits -- 1,438 23,150 1,720 24,870 Occupancy expense -- 246 7,185 (349) 6,836 Amortization and provision for impairment of mortgage servicing rights -- -- 12,209 -- 12,209 Provision expense -- 1,521 3,683 -- 3,683 General and administrative expenses -- 622 11,096 998 12,094 ------- ------- -------- ------- -------- Total expenses -- 3,827 57,323 2,369 59,692 ------- ------- -------- ------- -------- Income (loss) before income taxes -- 1,391 (15,300) (2,772) (18,072) Income tax benefit (expense) -- (556) 5,510 1,020 6,530 ------- ------- -------- ------- -------- Income (loss) from continuing operations $ -- $ 835 $ (9,790) $(1,752) $(11,542) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $200) (2,000) (2,000) (2,000) Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $354) (660) (660) (660) ------- ------- -------- ------- -------- Net income (loss) $(2,660) $ 835 $(12,450) $(1,752) $(14,202) ======= ======= ======== ======= ========
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. Management believes that these and all other revenues and expenses have been allocated to the respective divisions on a reasonable basis. (2) See discussion of unusual items in Management's Discussion and Analysis.
AGENCY-ELIGIBLE FOR THE SIX MONTHS ENDED JUNE 30, 1999 (1) -------------------------------------------------- ($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME ----------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 6,412 $ (2,383) $ -- $ 7,456 Net gain on sale of mortgage loans 50,078 -- 10,374 -- Gain on sale of mortgage servicing rights -- 4,823 -- -- Servicing fees -- 22,535 -- -- Mark to market on residual interests in subprime securitizations (3,967) (3,967) (3,967) Other income 17 344 441 2,408 -------- -------- -------- -------- Total revenues 56,507 25,319 441 16,271 -------- -------- -------- -------- Salary and employee benefits 22,540 1,805 -- 6,784 Occupancy expense 3,693 207 -- 1,252 Amortization and provision for impairment -- -- of mortgage servicing rights -- 17,320 -- -- Provision expense 3,672 122 932 670 General and administrative expenses 8,884 3,478 82 3,529 -------- -------- -------- -------- Total expenses 38,789 22,810 204 12,497 -------- -------- -------- -------- Income (loss) before income taxes 17,718 2,509 237 3,774 Income tax benefit (expense) (6,277) (792) (84) (1,411) -------- -------- -------- -------- Income (loss) from continuing operations $ 11,441 $ 1,717 $ 153 $ 2,363 Discontinued operations: Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $91) -------- -------- -------- -------- Net income (loss) $ 11,441 $ 1,717 $ 153 $ 2,363 ======== ======== ======== ======== FOR THE SIX MONTHS ENDED JUNE 30, 1999 (1) COMMERCIAL ($ IN THOUSANDS) MORTGAGE LEASING TOTAL SEGMENTS OTHER/ELIMINATION CONSOLIDATED ----------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ -- $ 3,389 $ 14,874 $ (191) $ 14,683 Net gain on sale of mortgage loans -- 60,452 -- -- 60,452 Gain on sale of mortgage servicing rights -- -- 4,823 -- 4,823 Servicing fees -- 327 22,862 -- 22,862 Mark to market on residual interests in subprime securitizations Other income -- 534 3,744 9 3,753 ------- -------- --------- -------- --------- Total revenues -- 4,250 102,788 (182) 102,606 ------- -------- --------- -------- --------- Salary and employee benefits -- 1,353 32,482 1,481 33,963 Occupancy expense -- 214 5,366 731 6,097 Amortization and provision for impairment of mortgage servicing rights -- -- 17,320 -- 17,320 Provision expense 5,396 5,396 General and administrative expenses -- 686 16,659 195 16,854 ------- -------- --------- -------- --------- Total expenses -- 2,923 77,223 2,407 79,630 ------- -------- --------- -------- --------- Income (loss) before income taxes -- 1,327 25,565 (2,589) 22,976 Income tax benefit (expense) -- (543) (9,107) 838 (8,269) ------- -------- --------- -------- --------- Income (loss) from continuing operations $ -- $ 784 $ 16,458 $ (1,751) $ 14,707 Discontinued operations: Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $91) (210) (210) (210) ------- -------- --------- -------- --------- Net income (loss) $ (210) $ 784 $ 16,248 $ (1,751) $ 14,497 ======= ======== ========= ======== =========
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. Management believes that these and all other revenues and expenses have been allocated to the respective divisions on a reasonable basis. 10 11
AGENCY-ELIGIBLE FOR THE QUARTER ENDED JUNE 30, 2000 (1) (2) ------------------------------------------------ ($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME ----------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 675 $(1,019) $ (23) $ 3,571 Net gain on sale of mortgage loans 5,611 -- -- 3,738 Gain on sale of mortgage servicing rights -- 731 -- -- Servicing fees -- 8,541 -- -- Mark to market on residual interests in subprime securitizations -- -- -- (1,771) Other income 312 120 849 427 -------- ------- ------- ------- Total revenues 6,598 8,373 826 5,965 -------- ------- ------- ------- Salary and employee benefits 6,235 680 48 1,581 Occupancy expense 2,833 56 -- 676 Amortization and provision for impairment of mortgage servicing rights -- 5,932 -- -- Provision expense 352 -- -- 168 General and administrative expenses 2,623 1,082 83 1,691 -------- ------- ------- ------- Total expenses 12,043 7,750 131 4,116 -------- ------- ------- ------- Income (loss) before income taxes (5,445) 623 695 1,849 Income tax benefit (expense) 1,986 (226) (244) (758) -------- ------- ------- ------- Income (loss) from continuing operations $ (3,459) $ 397 $ 451 $ 1,091 Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $200) Operating profits of Laureate Capital Corp. (less applicable income taxes of $111) -------- ------- ------- ------- Net income (loss) $ (3,459) $ 397 $ 451 $ 1,091 ======== ======= ======= ======= FOR THE QUARTER ENDED JUNE 30, 2000 (1) (2) COMMERCIAL ($ IN THOUSANDS) MORTGAGE LEASING TOTAL SEGMENTS OTHER/ELIMINATION CONSOLIDATED ----------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ -- $ 2,293 $ 5,497 $ (336) $ 5,161 Net gain on sale of mortgage loans -- -- 9,349 -- 9,349 Gain on sale of mortgage servicing rights -- -- 731 -- 731 Servicing fees -- 133 8,674 (109) 8,565 Mark to market on residual interests in subprime securitizations -- -- (1,771) -- (1,771) Other income -- 304 2,012 306 2,318 ------- ------- -------- ------- -------- Total revenues -- 2,730 24,492 (139) 24,353 ------- ------- -------- ------- -------- Salary and employee benefits -- 678 9,222 895 10,117 Occupancy expense -- 126 3,691 (175) 3,516 Amortization and provision for impairment of mortgage servicing rights -- -- 5,932 -- 5,932 Provision expense -- 1,162 1,682 -- 1,682 General and administrative expenses -- 328 5,807 838 6,645 ------- ------- -------- ------- -------- Total expenses -- 2,294 26,334 1,558 27,892 ------- ------- -------- ------- -------- Income (loss) before income taxes -- 436 (1,842) (1,697) (3,539) Income tax benefit (expense) -- (180) 578 621 1,199 ------- ------- -------- ------- -------- Income (loss) from continuing operations $ -- $ 256 $ (1,264) $(1,076) $ (2,340) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $200) (2,000) (2,000) (2,000) Operating profits of Laureate Capital Corp. (less applicable income taxes of $111) 105 105 105 ------- ------- -------- ------- -------- Net income (loss) $(1,895) $ 256 $ (3,159) $(1,076) $ (4,235) ======= ======= ======== ======= ========
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. Management believes that these and all other revenues and expenses have been allocated to the respective divisions on a reasonable basis. (2) See discussion of unusual items in Management's Discussion and Analysis.
AGENCY-ELIGIBLE FOR THE QUARTER ENDED JUNE 30, 1999 (1) (2) ------------------------------------------------ ($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME ----------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 2,651 $ (994) $ -- $ 3,983 Net gain on sale of mortgage loans 16,885 -- -- 7,517 Gain on sale of mortgage servicing rights -- 1,825 -- -- Servicing fees -- 10,832 -- -- Mark to market on residual interests in subprime securitizations -- -- -- (2,618) Other income (65) 183 (211) 1,991 -------- -------- ----- -------- Total revenues 19,471 11,846 (211) 10,873 -------- -------- ----- -------- Salary and employee benefits 10,902 907 -- 3,483 Occupancy expense 1,759 100 -- 669 Amortization and provision for impairment of mortgage servicing rights -- 8,887 -- -- Provision expense 1,564 -- 57 433 General and administrative expenses 5,330 1,617 55 2,040 -------- -------- ----- -------- Total expenses 19,555 11,511 112 6,625 -------- -------- ----- -------- Income (loss) before income taxes (84) 335 (323) 4,248 Income tax benefit (expense) 90 (19) 113 (1,579) -------- -------- ----- -------- Income (loss) from continuing operations $ 6 $ 316 $(210) $ 2,669 Discontinued operations: Operating profits of Laureate Capital Corp. (less applicable income taxes of $128) -------- -------- ----- -------- Net income (loss) $ 6 $ 316 $(210) $ 2,669 ======== ======== ===== ======== FOR THE QUARTER ENDED JUNE 30, 1999 (1) (2) COMMERCIAL ($ IN THOUSANDS MORTGAGE LEASING TOTAL SEGMENTS OTHER/ELIMINATION CONSOLIDATED ----------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ -- $ 1,744 $ 7,384 $ (81) $ 7,303 Net gain on sale of mortgage loans -- -- 24,402 -- 24,402 Gain on sale of mortgage servicing rights -- -- 1,825 -- 1,825 Servicing fees -- 166 10,998 (159) 10,839 Mark to market on residual interests in subprime securitizations -- -- (2,618) -- (2,618) Other income -- 383 2,281 5 2,286 ---- ------- -------- ----- -------- Total revenues -- 2,293 44,272 (235) 44,037 ---- ------- -------- ----- -------- Salary and employee benefits -- 713 16,005 (801) 15,204 Occupancy expense -- 110 2,638 549 3,187 Amortization and provision for impairment of mortgage servicing rights -- -- 8,887 -- 8,887 Provision expense -- 287 2,341 -- 2,341 General and administrative expenses -- 316 9,358 18 9,376 ---- ------- -------- ----- -------- Total expenses -- 1,426 39,229 (234) 38,995 ---- ------- -------- ----- -------- Income (loss) before income taxes -- 867 5,043 (1) 5,042 Income tax benefit (expense) -- (351) (1,746) (107) (1,853) ---- ------- -------- ----- -------- Income (loss) from continuing operations $ -- $ 516 $ 3,297 $(108) $ 3,189 Discontinued operations: Operating profits of Laureate Capital Corp. (less applicable income taxes of $128) 147 147 147 ---- ------- -------- ----- -------- Net income (loss) $147 $ 516 $ 3,444 $(108) $ 3,336 ==== ======= ======== ===== ========
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. Management believes that these and all other revenues and expenses have been allocated to the respective divisions on a reasonable basis. 11 12 Note 4 - Proposed Disposal of Commercial Mortgage Segment: During the second quarter, the Company decided to dispose of its commercial mortgage operation, Laureate Capital Corp. (Laureate). Based on market indications to date, the Company expects to realize net proceeds equal to the tangible book value of Laureate. Accordingly, the Company recorded a $2 million after-tax charge during the quarter, primarily related to the write-off of intangible assets of Laureate. Note 4 - Changes to Benefit Plans: The Company amended its defined benefit pension plan to freeze benefits under the plan. Simultaneously, the Company changed the benefits available to employees under its 401(k) plan. The combined impact of the curtailment of pension plan benefits and the change of 401(k) benefits was to increase pre-tax income by $0.7 million. 12 13 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 quarterly 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) 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. 13 14 LOAN AND LEASE PRODUCTION A summary of production by source for the periods indicated is set forth below:
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER ENDED JUNE 30, ENDED JUNE 30, --------------------------- --------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Agency-Eligible Loan Production: Correspondent $ 2,027,643 $ 4,120,525 $ 1,113,609 $ 1,692,504 Wholesale 543,221 1,155,730 295,133 443,908 ----------- ----------- ----------- ----------- Total Agency-Eligible Loan Production 2,570,864 5,276,255 1,408,742 2,136,412 Subprime Loan Production 321,314 369,855 168,830 185,744 Commercial Mortgage (for Investors and Conduits) Loan Production 375,003 308,102 279,528 157,950 Lease Production 53,300 44,865 29,054 24,340 ----------- ----------- ----------- ----------- Total Mortgage Loan and Lease Production $ 3,320,481 $ 5,999,077 $ 1,886,154 $ 2,504,446 =========== =========== =========== ===========
The Company purchases agency-eligible mortgage loans through its correspondents and originates loans through its wholesale and subprime divisions. The Company also has a small-ticket commercial equipment lease operation and a commercial mortgage loan business. Correspondent operations accounted for 61% and 69% of the Company's total production for the six months ended June 30, 2000 and 1999. Wholesale and subprime production accounted for 16% and 10%, respectively, of the Company's production for the six months ended June 30, 2000 and 19% and 6%, respectively, of the Company's production for the six months ended June 30, 1999. Lease and commercial mortgage production accounted for 13% and 6% of the Company's total production for the first six months of 2000 and 1999, respectively. A summary of key information relevant to industry loan production activity is set forth below:
AT OR FOR THE QUARTER ENDED JUNE 30, ------------------------------------ 2000 1999 ------------- ------------- U.S. 1-4 Family Mortgage Originations Statistics (1): U.S. 1-4 Family Mortgage Originations $ 276,000,000 $ 368,000,000 Adjustable Rate Mortgage Market Share 31.00% 16.00% Estimated Fixed Rate Mortgage Originations $ 191,000,000 $ 309,000,000 Company Information: Residential Loan Production $ 1,577,572 $ 2,322,156 Estimated Company Market Share 0.57% 0.63%
(1) Source: Mortgage Bankers Association of America, Economics Department. The Company's total residential mortgage production decreased by 32% to $1.6 billion for the second quarter of 2000 from $2.3 billion for the second quarter of 1999. During the second quarter of 2000, interest rates were higher than during the second quarter of 1999, resulting in a decrease in industry wide residential loan originations of 25%. Likewise, the higher rate environment resulted in an increase in ARM market share in the second quarter of 2000. The Company has historically focused on fixed rate products, and only recently has 14 15 commenced offering a broader spectrum of mortgage products, including adjustable rate products. Further, as often happens in the mortgage banking industry, a rise in interest rates and resulting decrease in volumes prompted increasing price competition in the marketplace during the quarter. Correspondent Loan Production The Company purchases closed mortgage loans through its network of approved correspondent lenders. Correspondents are primarily mortgage lenders, larger mortgage brokers and smaller savings and loan associations and commercial banks that have met the Company's approval requirements. The Company continues to emphasize correspondent loan production as its basic business focus because of the lower fixed expenses and capital investment required of the Company. A summary of key information relevant to the Company's correspondent loan production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER ENDED JUNE 30, ENDED JUNE 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Correspondent Loan Production $ 2,027,643 $ 4,120,525 $ 1,113,609 $ 1,692,504 Estimated Correspondent Market Share (1) 0.43% 0.57% 0.40% 0.46% Approved Correspondents 923 867 923 867 Correspondent Division Expenses $ 20,082 $ 32,365 $ 9,515 $ 15,303
(1) Source: Mortgage Bankers Association of America, Economics Department. The Company's correspondent loan production decreased by 34% to $1.1 billion for the second quarter of 2000 from $1.7 billion for the second quarter of 1999. During the second quarter of 2000, interest rates were higher than during the second quarter of 1999, resulting in a decrease in industry wide residential loan originations of 25%. Likewise, the higher rate environment resulted in an increase in ARM market share in the second quarter of 2000. The Company has historically focused on fixed rate products, and only recently has commenced offering a broader spectrum of mortgage products, including adjustable rate products. Further, as often happens in the mortgage banking industry, a rise in interest rates and resulting decrease in volumes prompted increasing price competition in the market place during the quarter. The correspondent division expenses decreased by 38% to $9.5 million for the second quarter of 2000 from $15.3 million for the second quarter of 1999 primarily due to the decrease in correspondent production during the same period. Wholesale Loan Production The wholesale division receives loan applications through brokers, underwrites the loans, funds the loans at closing and prepares all closing documentation. The Company's wholesale branches and regional operating centers handle all shipping and follow-up procedures on loans. Typically, mortgage brokers are responsible for taking applications and accumulating the information precedent to the Company's processing and underwriting of the loans. Although the establishment of wholesale branch offices and regional operating centers involves the incurrence of fixed expenses associated with maintaining those offices, wholesale operations also generally provide for higher profit margins than correspondent loan production. Additionally, each branch office and regional operating center can serve a relatively sizable geographic area by establishing 15 16 relationships with large numbers of independent mortgage loan brokers who bear much of the cost of identifying and interacting directly with loan applicants. In 1999, the Company closed certain branches and established regional operations centers to better facilitate service to larger geographic areas. The Company's nationwide salesforce is supported by these regional operating centers. A summary of key information relevant to the Company's wholesale production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER ENDED JUNE 30, ENDED JUNE 30, ------------------------ ------------------------- 2000 1999 2000 1999 ------------------------ ------------------------- Wholesale Loan Production $ 543,221 $1,155,730 $ 295,133 $ 443,908 Estimated Wholesale Market Share (1) 0.11% 0.16% 0.11% 0.12% Wholesale Division Direct Operating Expenses $ 4,953 $ 8,474 $ 2,528 $ 3,917 Approved Brokers 4,123 3,669 4,123 3,669 Regional Operation Centers 5 -- 5 -- Number of Branches 2 17 2 17 Number of Employees 96 186 96 186
(1) Source: Mortgage Bankers Association of America, Economics Department. Wholesale loan production decreased 34% ($148.8 million) from $443.9 million for the second quarter of 1999 to $295.1 million for the second quarter of 2000. During the second quarter of 2000, interest rates were higher than during the second quarter of 1999, resulting in a decrease in industry wide residential loan origination of 25%. Likewise, the higher rate environment resulted in an increase in ARM market share in the second quarter of 2000. The Company has historically focused on fixed rate products, and only recently has commenced offering a broader spectrum of mortgage products, including adjustable rate products. Further, as often happens in the mortgage banking industry, a rise in interest rates and resulting decrease in volumes prompted increasing price competition in the market place during the quarter. Subprime Loan Production The Company conducts subprime business through its wholly-owned subsidiary, Meritage Mortgage Corporation (Meritage). A summary of key information relevant to the Company's subprime production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER ENDED JUNE 30, ENDED JUNE 30, ------------------------ ------------------------ 2000 1999 2000 1999 ------------------------ ------------------------ Subprime Loan Production $321,314 $369,855 $168,830 $185,744 Estimated Subprime Market Share (1) 0.07% 0.05% 0.06% 0.05% Subprime Division Direct Operating Expenses $ 12,486 $ 12,497 $ 4,116 $ 6,542 Number of Brokers 3,711 2,182 3,711 2,182 Number of Employees 261 332 261 332 Number of Branches 10 19 10 19
Subprime loan production decreased by 9% to $168.8 million for the second quarter of 2000 as compared to $185.7 million during the second quarter of 1999 primarily due to a decrease in industry wide residential loan originations of 25%. Subprime division direct operating expenses decreased by 37% to $4.1 million for the second quarter of 2000 as compared 16 17 to $6.5 million during the second quarter of 1999. This reduction in expenses is primarily due to a decrease in production between quarters. Also, the Company made certain changes in the organization at its subprime units resulting in a net reduction in previously established reorganization reserves. The Company amended its defined benefit pension plan to freeze benefits under the plan and simultaneously changed the benefits available to employees under its 401(k) plan. The combined effect of such changes resulted in a decrease of subprime division direct operating expenses of $0.8 million during the quarter. Between June 30, 1999 and 2000, respectively, the Company increased the number of its subprime brokers by 1,529. The number of branches declined from 19 at June 30, 1999 to 10 as of June 30, 2000 as the Company reassessed the geographic regions that each branch covers. Commercial Mortgage Production During the second quarter, the Company decided to dispose of its commercial mortgage operation, Laureate Capital Corp. (Laureate). Based on market indications to date, the Company expects to realize net proceeds equal to the tangible book value of Laureate. Accordingly, the Company recorded a $2 million after-tax charge during the quarter, primarily related to the write-off of intangible assets of Laureate. Lease Production The Company's wholly-owned subsidiary, Republic Leasing Company, Inc. (Republic Leasing), originates and services small-ticket commercial equipment leases. Substantially all of Republic Leasing's lease receivables are acquired from independent brokers who operate throughout the continental United States. A summary of key information relevant to the Company's lease production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER ENDED JUNE 30, ENDED JUNE 30, ------------------------ ------------------------ 2000 1999 2000 1999 ------------------------ ------------------------ Lease Production $ 53,300 $ 44,865 $ 29,054 $ 24,340 Lease Division Direct Operating Expenses $ 3,827 $ 2,923 $ 2,294 $ 1,426 Number of Brokers 173 198 173 198 Number of Employees 70 66 70 66
SERVICING Residential Mortgage Servicing Residential 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. 17 18 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:
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER ENDED JUNE 30, ENDED JUNE 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Underlying Unpaid Principal Balances: Beginning Balance * $ 7,822,394 $ 9,865,100 $ 7,713,046 $ 9,735,754 Agency-Eligible Loan Production (net of servicing- released production) * 2,482,696 5,265,702 1,382,399 2,132,353 Bulk Acquisitions* -- -- - - Net Change in Work-in-Progress* 70,642 196,507 (6,497) 6,052 Sales of Servicing* (2,579,819) (6,104,726) (1,451,283) (3,101,473) Paid-In-Full Loans* (254,756) (649,056) (147,947) (283,327) Amortization, Curtailments and Other, net* (101,071) (162,837) (49,632) (78,669) ------------ ------------ ------------ ------------- Ending Balance* 7,440,086 8,410,690 7,440,086 8,410,690 Subservicing Ending Balance 1,089,014 3,111,358 1,089,014 3,111,358 ------------ ------------ ------------ ------------ Total Underlying Unpaid Principal Balances $ 8,529,100 $ 11,522,048 $ 8,529,100 $ 11,522,048
* These numbers and statistics apply to the Company's owned agency-eligible servicing portfolio and, therefore, exclude the subservicing portfolio. The ending balance for the second quarter of 2000 and 1999, respectively, includes $194,553 and -0-, respectively, of subprime loans being temporarily serviced until these loans are sold. Of the $7.4 billion and $8.4 billion unpaid principal balance at June 30, 2000 and 1999, $5.7 billion and $5.9 billion, respectively, of the related mortgage servicing right asset is classified as available-for-sale, while $1.7 billion and $2.5 billion, respectively, of the related mortgage servicing right asset is classified as held-for-sale. A summary of agency-eligible servicing statistics follows:
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER ENDED JUNE 30, ENDED JUNE 30, ---------------------------- --------------------------- 2000 1999 2000 1999 ------------ ------------ ----------- ------------ Average Underlying Unpaid Principal Balances (including subservicing) $ 9,163,193 $ 13,110,771 $ 9,024,206 $ 12,739,230 Weighted Average Note Rate* 7.64% 7.30% 7.64% 7.30% Weighted Average Servicing Fee* 0.43% 0.43% 0.43% 0.43% Delinquency (30+ days) Including Bankruptcies and Foreclosures* 2.22% 2.27% 2.22% 2.27% Number of Servicing Division Employees 80 149 80 149
* These numbers and statistics apply to the Company's owned agency-eligible servicing portfolio and, therefore, exclude the subservicing portfolio. 18 19 The $3.7 billion, or 29%, decrease in the average underlying unpaid principal balance of agency-eligible mortgage loans being serviced and subserviced for the second quarter of 2000 as compared to the second quarter of 1999 is primarily related to the Company's decreased loan production volumes during the second quarter of 2000. Since the Company generally sells servicing rights related to the agency-eligible loans it produces within 90 to 180 days of purchase or origination, decreased production volumes generally result in a lower volume of mortgage servicing rights held in inventory pending sale. Lease Servicing Republic Leasing services leases that are owned by it and also services leases for investors. A summary of key information relevant to the Company's lease servicing activity is set forth below:
AT OR FOR THE QUARTER ENDED JUNE 30, ---------------------------------------- ($ IN THOUSANDS) 2000 1999 ------------ ------------ Owned Lease Servicing Portfolio $ 174,344 $ 124,139 Serviced For Investors Servicing Portfolio 7,588 24,068 ------------ ------------ Total Managed Lease Servicing Portfolio $ 181,932 $ 148,207 ============ ============ Weighted Average Net Yield For Managed Lease Servicing Portfolio 10.67% 10.76% Delinquencies (30+ Days) Managed Lease Servicing Portfolio 2.24% 1.49%
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:
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER ENDED JUNE 30, ENDED JUNE 30, ----------------------------- ----------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Total Company Servicing Fees $ 17,880 $ 24,995 $ 8,565 $ 11,997 Net Interest Income from Owned Leases 4,420 3,389 2,293 1,744 ----------- ----------- ----------- ----------- Total Servicing Fees and Interest from Owned Leases $ 22,300 $ 28,384 $ 10,858 $ 13,741 ----------- ----------- ----------- ----------- Total Company Operating Expenses $ 59,692 $ 79,630 $ 27,892 $ 38,995 Total Company Amortization and Depreciation (17,197) (20,778) (7,697) (10,240) ----------- ----------- ----------- ----------- Total Company Operating Expenses, Net of Amortization and Depreciation $ 42,495 $ 58,852 $ 20,195 $ 28,755 ----------- ----------- ----------- ----------- Coverage Ratio 52% 48% 54% 48% =========== =========== =========== ===========
The Company's coverage ratios for the second quarter of 2000 and 1999 were 54% and 48%, respectively, and for the first six months of 2000 and 1999 were 52% and 48% respectively. The coverage ratio for the second quarter and the first six months of 2000 met the Company's target level of between 50% and 80%. 19 20 RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 SUMMARY BY OPERATING DIVISION Net income (loss) from continuing operations per common share on a diluted basis for the first six months of 2000 was ($0.63) as compared to $0.67 for the first six months of 1999. Following is a summary of the revenues and expenses for each of the Company's operating divisions for the six months ended June 30, 2000 and 1999, respectively: 20 21
Agency-Eligible For the six months ended June 30, 2000 (1)(2) ------------------------------------------ Commercial ($ in thousands) Production Servicing Reinsurance Subprime Mortgage ------------------------------------------------------------------------------------------------------------------------------ (UNAUDITED) Net interest income $ 913 $ (2,316) $ (39) $ 6,657 $ -- Net gain on sale of mortgage loans 11,817 -- -- 6,179 -- Gain on sale of mortgage servicing rights -- 1,539 -- -- -- Servicing fees -- 17,906 -- -- -- Mark to market on residual interests in subprime securitizations -- -- -- (9,446) -- Other income 432 248 1,595 1,320 -- --------------------------------------------------------------------- Total revenues 13,162 17,377 1,556 4,710 -- --------------------------------------------------------------------- Salary and employee benefits 13,123 1,373 90 7,126 -- Occupancy expense 5,523 111 -- 1,305 -- Amortization and provision for impairment of mortgage servicing rights -- 12,209 -- -- -- Provision expense 1,252 -- -- 910 -- General and administrative expenses 5,137 2,020 172 3,145 -- --------------------------------------------------------------------- Total expenses 25,035 15,713 262 12,486 -- --------------------------------------------------------------------- Income (loss) before income taxes (11,873) 1,664 1,294 (7,776) -- Income tax benefit (expense) 4,369 (612) (454) 2,763 -- --------------------------------------------------------------------- Income (loss) from continuing operations $ (7,504) $ 1,052 $ 840 $ (5,013) $ -- Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $200) (2,000) Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $354) (660) --------------------------------------------------------------------- Net income (loss) $ (7,504) $ 1,052 $ 840 $ (5,013) $ (2,660) ===================================================================== For the six months ended June 30, 2000 (1)(2) ($ in thousands) Leasing Total Segment Other/Elimination Consolidated -------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 4,420 $ 9,635 $ (358) $ 9,277 Net gain on sale of mortgage loans -- 17,996 -- 17,996 Gain on sale of mortgage servicing rights -- 1,539 -- 1,539 Servicing fees 232 18,138 (258) 17,880 Mark to market on residual interests in subprime securitizations -- (9,446) -- (9,446) Other income 566 4,161 213 4,374 ------------------------------------------------------------- Total revenues 5,218 42,023 (403) 41,620 ------------------------------------------------------------- Salary and employee benefits 1,438 23,150 1,720 24,870 Occupancy expense 246 7,185 (349) 6,836 Amortization and provision for impairment of mortgage servicing rights -- 12,209 -- 12,209 Provision expense 1,521 3,683 -- 3,683 General and administrative expenses 622 11,096 998 12,094 ------------------------------------------------------------- Total expenses 3,827 57,323 2,369 59,692 ------------------------------------------------------------- Income (loss) before income taxes 1,391 (15,300) (2,772) (18,072) Income tax benefit (expense) (556) 5,510 1,020 6,530 ------------------------------------------------------------- Income (loss) from continuing operations $ 835 $ (9,790) $ (1,752) $ (11,542) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $200) (2,000) (2,000) Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $354) (660) (660) ------------------------------------------------------------- Net income (loss) $ 835 $ (12,450) $ (1,752) $ (14,202) =============================================================
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. Management believes that these and all other revenues and expenses have been allocated to the respective divisions on a reasonable basis. (2) See discussion of unusual items in Management's Discussion and Analysis.
Agency-Eligible Production For the six months ended June 30, 1999 (1) ---------------------------------------- Commercial ($ in thousands) Production Servicing Reinsurance Subprime Mortgage ------------------------------------------------------------------------------------------------------------------------------ (UNAUDITED) Net interest income $ 6,412 $ (2,383) $ -- $ 7,456 $ -- Net gain on sale of mortgage loans 50,078 -- -- 10,374 -- Gain on sale of mortgage servicing rights -- 4,823 -- -- -- Servicing fees -- 22,535 -- -- -- Mark to market on residual interests in subprime securitizations -- -- -- (3,967) -- Other income 17 344 441 2,408 -- -------------------------------------------------------------------- Total revenues 56,507 25,319 441 16,271 -- -------------------------------------------------------------------- Salary and employee benefits 22,540 1,805 -- 6,784 -- Occupancy expense 3,693 207 -- 1,252 -- Amortization and provision for impairment of mortgage servicing rights -- 17,320 -- -- -- Provision expense 3,672 -- 122 932 -- General and administrative expenses 8,884 3,478 82 3,529 -- -------------------------------------------------------------------- Total expenses 38,789 22,810 204 12,497 -- -------------------------------------------------------------------- Income (loss) before income taxes 17,718 2,509 237 3,774 -- Income tax benefit (expense) (6,277) (792) (84) (1,411) -- -------------------------------------------------------------------- Income (loss) from continuing operations $ 11,441 $ 1,717 $ 153 $ 2,363 $ -- Discontinued operations: Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $91) (210) -------------------------------------------------------------------- Net income (loss) $ 11,441 $ 1,717 $ 153 $ 2,363 $ (210) ==================================================================== For the six months ended June 30, 1999 (1) ($ in thousands) Leasing Total Segment Other/Elimination Consolidated -------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 3,389 $ 14,874 $ (191) $ 14,683 Net gain on sale of mortgage loans -- 60,452 -- 60,452 Gain on sale of mortgage servicing rights -- 4,823 -- 4,823 Servicing fees 327 22,862 -- 22,862 Mark to market on residual interests in subprime securitizations -- (3,967) -- (3,967) Other income 534 3,744 9 3,753 -------------------------------------------------------------- Total revenues 4,250 102,788 (182) 102,606 -------------------------------------------------------------- Salary and employee benefits 1,353 32,482 1,481 33,963 Occupancy expense 214 5,366 731 6,097 Amortization and provision for impairment of mortgage servicing rights -- 17,320 -- 17,320 Provision expense 670 5,396 -- 5,396 General and administrative expenses 686 16,659 195 16,854 -------------------------------------------------------------- Total expenses 2,923 77,223 2,407 79,630 -------------------------------------------------------------- Income (loss) before income taxes 1,327 25,565 (2,589) 22,976 Income tax benefit (expense) (543) (9,107) 838 (8,269) -------------------------------------------------------------- Income (loss) from continuing operations $ 784 $ 16,458 $ (1,751) $ 14,707 Discontinued operations: Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $91) (210) (210) -------------------------------------------------------------- Net income (loss) $ 784 $ 16,248 $ (1,751) $ 14,497 ==============================================================
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. Management believes that these and all other revenues and expenses have been allocated to the respective divisions on a reasonable basis. 21 22 AGENCY-ELIGIBLE MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage production operations.
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- ($ IN THOUSANDS) 2000 1999 ----------- ---------- Net interest income $ 913 $ 6,412 Net gain on sale of mortgage loans 11,817 50,078 Other income 432 17 ----------- ---------- Total production revenue 13,162 56,507 ----------- ---------- Salary and employee benefits 13,123 22,540 Occupancy expense 5,523 3,693 Provision expense 1,252 3,672 General and administrative expenses 5,137 8,884 ----------- ---------- Total production expenses 25,035 38,789 ----------- ---------- Net pre-tax production margin $ (11,873) $ 17,718 ----------- ---------- Production $ 2,570,864 $5,276,255 Pool delivery 2,489,089 5,710,345 Total production revenue to pool delivery 53 bps 99 bps Total production expenses to production 97 bps 74 bps ----------- ---------- Net pre-tax production margin (44)bps 25 bps =========== ==========
Summary The production revenue to pool delivery ratio decreased 46 basis points for the first six months of 2000 as compared to the first six months of 1999. Net gain on sale of mortgage loans (46 basis points for the first six months of 2000 versus 88 basis points for the first six months of 1999) declined primarily due to compressed margins attributable to an aggressive competitive pricing environment and lower overall agency-eligible production volume. Net interest income decreased from 11 basis points in the first six months of 1999 to 4 basis points in the first six months of 2000 primarily as a result of a flattened yield curve. The production expenses to production ratio increased 23 basis points from the first six months of 1999 to the first six months of 2000. This is primarily due to the 51% decline in production for the first six months of 2000 as compared to the first six months of 1999 which was only partially offset by a 36% decline in production expenses. The decline in production expenses included a $0.4 million reduction in salary and employee benefits as a result of (1) the curtailment of the Company's pension plan benefits, (2) changes in 401(k) benefits and (3) a reduction of the previously established reorganization reserves due to certain changes in the organization of the agency-eligible unit. As a consequence of the foregoing, the Company's net agency-eligible pre-tax production margin declined 69 basis points. Net Interest Income The following table analyzes net interest income allocated to the Company's agency-eligible mortgage production activities in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and mortgage-backed securities and interest 22 23 rates paid on interest-bearing sources of funds) for the six months ended June 30, 2000 and 1999, respectively:
($ IN THOUSANDS) Variance Average Volume Average Rate Interest Attributable to -------------------------------------- ------------------- ------------------- 2000 1999 2000 1999 2000 1999 Variance Rate Volume -------------------------------------- --------------------------------------------------------- INTEREST INCOME Mortgages Held-for-Sale and Mortgage-Backed $ 330,381 $ 889,631 8.13% 6.62% Securities $ 13,428 $ 29,454 $ (16,026) $ 2,490 $(18,516) -------------------------------------- ------------------------------------------------------- INTEREST EXPENSE $ 298,229 $ 386,100 5.12% 3.62% Warehouse Line * $ 7,616 $ 6,923 $ 693 $ 2,269 $ (1,576) 21,378 492,144 6.90% 5.15% Gestation Line 735 12,559 (11,824) 189 (12,013) 121,503 120,119 7.24% 5.85% Servicing Secured Line 4,385 3,486 899 859 40 3,950 29,790 5.94% 5.22% Servicing Receivables Line 117 771 (654) 15 (669) 7,673 7,728 8.68% 8.22% Other Borrowings 332 315 17 19 (2) Facility Fees & Other Charges 1,844 1,418 426 -- 426 -------------------------------------- -------------------------------------------------------- $ 452,733 $1,035,881 6.66% 4.96% Total Interest Expense $ 15,029 $ 25,472 $ (10,443) $ 3,351 $(13,794) -------------------------------------- -------------------------------------------------------- Net Interest Income Before 1.47% 1.66% Interdivisional Allocations $ (1,601) $ 3,982 $ (5,583) $ (861) $ (4,722) ============= ============================== Allocation to Agency-Eligible Servicing Division 2,316 2,239 Allocation to Other 289 191 Intercompany Net Interest Expense Included In Segment (91) -- --------------------- Net Interest Income $ 913 $ 6,412 =====================
* The interest-rate yield on the warehouse line is net of the benefit of escrow deposits. The 19 basis point decrease in the interest-rate spread was primarily a result of a flattened yield curve. 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 SIX MONTHS ENDED JUNE 30, --------------------------------- 2000 1999 ----------- ----------- Gross proceeds on sales of mortgage loans $ 2,558,467 $ 5,726,984 Initial unadjusted acquisition cost of mortgage loans sold, net of hedge results 2,563,602 5,724,786 ----------- ----------- Unadjusted gain (loss) on sale of mortgage loans (5,135) 2,198 Loan origination and correspondent program administrative fees 4,996 13,148 ----------- ----------- Unadjusted aggregate margin (139) 15,346 Acquisition basis allocated to mortgage servicing rights (SFAS No. 125) 13,478 35,782 Net deferred costs and administrative fees recognized (1,522) (1,050) ----------- ----------- Net gain on sale of agency-eligible mortgage loans $ 11,817 $ 50,078 =========== ===========
Net gain on sale of agency-eligible mortgage loans decreased $38.3 million from $50.1 million for the first six months of 1999 to $11.8 million for the first six months of 2000. The 23 24 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. Receivable from sale of mortgage-backed securities The company sold certain mortgage-backed securities during the first six months of 2000, for which it did not receive the cash settlement until early in the second quarter of 2000. This resulted in a $69.9 million receivable on the June 30, 2000 condensed consolidated balance sheet. AGENCY-ELIGIBLE REINSURANCE OPERATIONS The Company has 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 the first six months of 2000 and 1999, the Company recognized premium and investment income of approximately $1.6 million and $0.4 million, respectively, that has been included as other income in the agency-eligible reinsurance segment. SUBPRIME MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's subprime mortgage production operations:
FOR THE SIX MONTHS ENDED JUNE 30, -------------------------------- ($ IN THOUSANDS) 2000 1999 ---------- --------- Net interest income $ 6,657 $ 7,456 Net gain on sale of mortgage loans 6,179 10,374 Mark to market on residual interests in subprime securitizations (9,446) (3,967) Other income 1,320 2,408 --------- --------- Total production revenue 4,710 16,271 --------- --------- Salary and employee benefits 7,126 6,784 Occupancy expense 1,305 1,252 Provision expense 910 932 General and administrative expenses 3,145 3,529 --------- --------- Total production expenses 12,486 12,497 --------- --------- Net pre-tax production margin $ (7,776) $ 3,774 --------- --------- Production $ 321,314 $ 369,855 Whole loan sales and securitizations 306,578 322,910 Total production revenue to whole loan sales and securitizations 154 bps 504 bps Total production expenses to production 389 bps 338 bps --------- --------- Net pre-tax production margin (235) bps 166 bps ========= =========
24 25 Summary During the first six months of 2000, subprime production volume of $321.3 million exceeded whole loan sales and securitizations of $306.6 million by $14.7 million. At June 30, 2000, the Company had unsold subprime mortgage loans of $134.9 million as compared to $145.1 million at June 30, 1999. Overall, the Company operated during the first six months of 2000 at a (2.35)% pre-tax subprime production margin. The $11.6 million (401 basis point) decline in the pre-tax subprime production margin is primarily due to the ($9.4) million adjustment during the first six months of 2000 in the mark to market on residual interests in subprime securitizations. The Company is currently exploring options to extract cash in the short-term from these investments. Options being considered include the outright sale of certain securities and/or a re-REMIC of residual cash flows. Based upon initial market feedback, the Company reassessed the assumptions utilized in valuing these relatively illiquid securities, primarily the discount rate used in the valuation. Absent the ($9.4) million adjustment to residual interests, the margin on sale of subprime loans was 5%. Also contributing to the decline in the pre-tax subprime production margin during the first six months of 2000 is the $4.2 million decline in net gain on sale of subprime mortgage loans. This decline is primarily attributable to compressed margins as a result of an intensely competitive pricing environment. Salary and employee benefit costs increased by 5%, or $0.4 million, from the first six months of 1999 to the first six months of 2000. This was primarily due to recognition of severance benefits of $0.2 million associated with a planned reorganization of the Company around its primary business processes (production/sales, order fulfillment, servicing and portfolio management). The Company also amended its defined benefit pension plan to freeze benefits under the plan and simultaneously changed the benefits available to employees under its 401(k) plan. The impact of this was a decrease in salary and employee benefit expense of $0.4 million. The remaining production expenses remained relatively flat between periods. 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 six months ended June 30, 2000 and 1999, respectively. 25 26 $ IN THOUSANDS)
Variance Average Volume Average Rate Interest Attributable to ------------------------------------------ ----------------- -------------------- 2000 1999 2000 1999 2000 1999 Variance Rate Volume ------------------------------------------ ------------------------------------------------------ Mortgages Held-for-Sale $ 203,577 $ 232,845 11.54% 10.24% and Residual Certificates $ 11,743 $ 11,916 $ (173) $ 1,325 $ (1,498) ------------------------------------------ ------------------------------------------------------ $ 145,068 $ 170,984 7.17% 5.43% Total Interest Expense $ 5,185 $ 4,604 581 $ 1,279 $ (698) ------------------------------------------ ------------------------------------------------------ 4.37% 4.81% Net Interest Income $ 6,558 $ 7,312 $ (754) $ 46 $ (800) ================ ================================ Allocation to Agency-Eligible Servicing Division -- 144 Intercompany Net Interest Expense Included In Segment 99 -- ------------------- Net Interest Income $ 6,657 $ 7,456 ===================
Net interest income from subprime products decreased to $6.7 million for the first six months of 2000 as compared to $7.5 million for the first six months of 1999. This was primarily a result of a flattened yield curve and the decline in production volume, which was partially offset by $0.8 million increase in accretion income from $3.0 million for the first six months of 1999 to $3.8 million for the first six months of 2000. Net Gain on Sale and Securitization of Subprime Mortgage Loans The Company sold subprime mortgage loans on a whole loan basis during the first six months of 2000 and 1999. Whole loans are generally sold without recourse to third parties with the gain or loss being calculated based on the difference between the carrying value of the loans sold and the gross proceeds received from the purchaser less expenses. Generally, no interest in these loans is retained by the Company. A reconciliation of the gain on subprime mortgage whole loan sales for the periods indicated follows:
($ IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- 2000 1999 ---------- ------------ Gross proceeds on whole loan sales of subprime mortgage loans $ 316,912 $ 204,317 Initial acquisition cost of subprime mortgage loans sold, net of fees 306,578 196,867 ---------- ----------- Unadjusted gain on whole loan sales of subprime mortgage loans 10,334 7,450 Net deferred costs and administrative fees recognized (4,155) (2,134) ---------- ----------- Net gain on whole loan sales of subprime mortgage loans $ 6,179 $ 5,316 ========== ===========
The net gain on whole loan sales of subprime mortgage loans increased 16% from $5.3 for the first six months of 1999 to $6.2 million reported for the first six months of 2000. Also, in accordance with 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" the Company reduced its net gain on whole loan sales of subprime mortgage 26 27 loans by $4.2 million in the first six months of 2000 as compared to $2.1 million in the first six months of 1999. There were no securitization transactions during the first six months of 2000. A reconciliation of the gain on securitization of subprime mortgage loans for the six months ended June 30, 1999 follows:
($ IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- 2000 1999 ---------- -------- Gross proceeds on securitization of subprime mortgage loans N/A $124,242 Initial acquisition cost of subprime mortgage loans securitized, net of fees N/A 126,043 ---------- -------- Unadjusted loss on securitization of subprime mortgage loans N/A (1,801) Initial capitalization of residual certificates N/A 8,867 Net deferred costs and administrative fees recognized N/A (2,008) ---------- -------- Net gain on securitization of subprime mortgage loans N/A $ 5,058 ========== ========
Mark to Market on Residual Interests in Subprime Securitizations The Company historically has retained residual certificates in connection with the securitization of subprime loans. These residual certificates are adjusted to approximate market value each quarter. For the six months ended June 30, 2000 and 1999, respectively, mark-to-market gain (loss) on residuals was approximately ($9.4) million and ($4.0) million, respectively. Management has initiated a strategic change in the Company's intent to hold these instruments for the long-term. As a result, there has been a reassessment of the assumptions utilized for purposes of valuing these relatively illiquid securities, primarily the discount rate used in the valuation, as described below. See additional discussion regarding this reassessment elsewhere in this Management's Discussion and Analysis. 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 June 30, 2000 for residual certificates then held by the Company generally include a discount rate of 15%, a constant default rate of 3% (5% for 1997-1 and 1998-1) and a loss severity rate of 25%. 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 June 30, 2000 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 28% cpr 28% cpr 30% cpr Adjustable rate mortgages 34% cpr 32% cpr 32% cpr 28% cpr 28% cpr 30% cpr
Terminal prepayment rate assumptions specific to the individual certificates for purposes of the June 30, 1999 valuations are set forth below: 27 28
1997-1 1997-2 1998-1 1998-2 1999-1 OTHER ------------ ------------- ------------ ------------ --------- ----------- Prepayment speeds Fixed rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 28% cpr 32% cpr Adjustable rate mortgages 32% cpr 30% cpr 28% 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 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 1.69 times the implied excess yield at June 30, 2000, as compared to the 1.63 multiple implied at June 30, 1999. The table below represents balances as of June 30, 2000, unless otherwise noted. 28 29 SECURITIZATION SCHEDULES
SECURITIZATIONS ------------------------------------------------------------------------ 1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 TOTAL -------- -------- -------- --------- --------- -------- -------- ($ IN THOUSANDS) Residual Certificates $ 4,750 $ 5,545 $ 7,913 $ 12,423 $ 9,000 $ 9,247 $ 48,878 Bonds $ 13,422 $ 15,702 * $ 49,981 * $ 115,442 * $ 107,178 * $118,671 * $420,396 -------- -------- -------- --------- --------- -------- -------- Subtotal $ 18,172 $ 21,247 $ 57,894 $ 127,865 $ 116,178 $127,918 $469,274 Unpaid Principal Balance $ 18,142 $ 20,556 * $ 55,606 * $ 121,713 * $ 110,614 * $121,011 * $447,642 -------- -------- -------- --------- --------- -------- -------- Implied Price 100.17 103.36 104.11 105.05 105.03 105.71 104.83 -------- -------- -------- --------- --------- -------- -------- Collateral Yield 12.46 12.48 11.07 9.76 9.81 9.82 10.13 Collateral Equivalent Securitization Costs (0.69) (0.62) (0.59) (0.60) (0.62) (0.68) (0.63) Collateral Equivalent Bond Rate (5.37) (5.29) (6.14) (6.92) (6.71) (6.86) (6.65) -------- -------- -------- --------- --------- -------- -------- Implied Collateral Equivalent Excess Yield 6.40 6.57 4.34 2.24 2.48 2.28 2.86 -------- -------- -------- --------- --------- -------- -------- Implied Premium Above Par 0.17 3.36 4.11 5.05 5.03 5.71 4.83 Implied Collateral Equivalent Excess Yield 6.40 6.57 4.34 2.24 2.48 2.28 2.86 -------- -------- -------- --------- --------- -------- -------- Multiple 0.03 0.51 x 0.95 x 2.26 x 2.03 x 2.50 x 1.69 x -------- -------- -------- --------- --------- -------- --------
* Amounts were based upon trustee statements dated June 25, 2000 that covered the period ended May 31, 2000. A SUMMARY OF KEY INFORMATION RELEVANT TO THE SUBPRIME RESIDUAL ASSETS AT JUNE 30, 2000 IS SET FORTH BELOW:
SECURITIZATIONS -------------------------------------------------------------- ($ IN THOUSANDS) 1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 OTHER TOTAL -------- -------- --------- ---------- -------- ------- ----- -------- Balance at December 31,1999 $ 5,971 $ 7,153 $ 10,334 $ 12,460 $ 9,566 $ 8,898 $ -- $ 54,382 Initial Capitalization of Residual Certificates -- -- -- -- -- -- -- -- Accretion 511 579 728 836 631 501 -- 3,786 Mark-to-Market (1,526) (1,739) (2,332) (873) (2,053) (1,123) -- (9,646)* Cash Flow (206) (448) (817) -- -- -- -- (1,471) Prepayment Penalty Reclassed from MSR 856 971 -- 1,827 ------- ------- -------- -------- ------- ------- ----- -------- Balance at June 30, 2000 $ 4,750 $ 5,545 $ 7,913 $ 12,423 $ 9,000 $ 9,247 $ -- $ 48,878 ======= ======= ======== ======== ======= ======= ===== ========
* In 1999 the Company decided to conservatively write off the remaining portion of a residual certificate it received in 1997 in settlement of an account receivable. In the first quarter of 2000 the Company disposed of this residual certificate and recovered approximately $0.2 million, which had been previously reported as a mark-to-market loss. Thus the Company reported a total market-to-market loss for the first six months of 2000 of $9.4 million and a $9.6 million market -to-market loss on the residual interests remaining on the balance sheet at June 30, 2000. A SUMMARY OF KEY INFORMATION RELEVANT TO THE SUBPRIME RESIDUAL ASSETS AT JUNE 30, 1999 IS SET FORTH BELOW:
SECURITIZATIONS ------------------------------------------------------------ ($ IN THOUSANDS) 1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 OTHER * TOTAL ---------- -------- -------- --------- ---------- ------ --------- -------- Balance at December 31,1998 $ 7,997 $ 9,702 $10,815 $12,569 $ -- $-- $ 4,700 $ 45,783 Initial Capitalization of Residual Certificates -- -- -- -- 8,867 -- 8,867 Accretion 582 633 641 736 -- -- 363 2,955 Mark-to-Market (602) (92) 212 226 (648) -- (3,063) (3,967) Cash Flow (1,161) (1,581) -- -- -- -- -- (2,742) ------- ------- ------- ------- ------- --- ------- -------- Balance at June 30, 1999 $ 6,816 $ 8,662 $11,668 $13,531 $ 8,219 $-- $ 2,000 $ 50,896 ======= ======= ======= ======= ======= === ======= ========
* 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. 29 30 AGENCY-ELIGIBLE MORTGAGE SERVICING Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage servicing operations:
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- ($ IN THOUSANDS) 2000 1999 ----------- ------------ Net interest expense $ (2,316) $ (2,383) Loan servicing fees 17,906 22,535 Other income 248 344 ----------- ------------ Servicing revenues 15,838 20,496 Salary and employee benefits 1,373 1,805 Occupancy expense 111 207 Amortization and provision for impairment of mortgage Servicing rights 12,209 17,320 General and administrative expenses 2,020 3,478 ----------- ------------ Total loan servicing expenses 15,713 22,810 ----------- ------------ Net pre-tax servicing margin 125 (2,314) Gain on sale of mortgage servicing rights 1,539 4,823 =========== ============ Net pre-tax servicing contribution $ 1,664 $ 2,509 =========== ============ Average servicing portfolio $ 8,028,158 $ 10,004,227 Servicing sold 2,579,819 6,104,726 Net pre-tax servicing margin to average servicing portfolio 0bps (5) bps Gain on sale of servicing to servicing sold 6bps 8 bps
Summary The ratio of net pre-tax servicing margin to the average servicing portfolio increased 5 basis points primarily due to the $5.1 million reduction in amortization and provision for impairment of mortgage servicing rights from the first six months of 1999 to the first six months of 2000. This reduction in amortization and provision for impairment of mortgage servicing rights is primarily due to the generally smaller size of the portfolio and slowing prepayments due to higher interest rates. The $3.3 million decline in gain on sale of mortgage servicing rights is primarily due to the lower volume of sales. Loan servicing fees were $17.9 million for the first six months of 2000, compared to $22.5 million for the first six months of 1999, a decrease of 21%, primarily due to lower production volumes which resulted in a lower average balance of agency-eligible servicing rights held in inventory pending sale. Management regularly 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. 30 31 Net Interest Expense The net interest expense for the first six months of 2000 and the first six months of 1999 is composed of benefits from escrow accounts of $4.1 million and $4.1 million, respectively, that is offset by $6.4 million and $6.5 million, respectively, in interest expense. Gain on Sale of Mortgage Servicing Rights A reconciliation of the components of gain on sale of mortgage servicing rights for the periods indicated follows:
($ IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30, 2000, --------------------------------------- 2000 1999 ------------- --------------- Underlying unpaid principal balances of agency-eligible mortgage loans on which servicing rights were sold during the period $ 2,579,819 $ 6,104,726 ============= ============== Gross proceeds from sales of mortgage servicing rights $ 72,237 $ 163,046 Initial acquisition basis, net of amortization and hedge results 60,504 118,942 ------------- ============== Unadjusted gain on sale of mortgage servicing rights 11,733 44,104 Acquisition basis allocated from mortgage loans, net of amortization (SFAS No. 125) (10,194) (39,281) ------------- ============== Gain on sale of mortgage servicing rights $ 1,539 $ 4,823 ============= ==============
Gain on sale of mortgage servicing rights decreased $3.3 million from $4.8 million for the first six months of 1999 to $1.5 million for the first six months of 2000. The decrease in the gain on sale of mortgage servicing rights is primarily attributable to lower production volumes which resulted in a lower balance of agency-eligible servicing rights sold. COMMERCIAL MORTGAGE OPERATIONS During the second quarter, the Company decided to dispose of its commercial mortgage operation, Laureate Capital Corp. (Laureate). Based on market indications to date, the Company expects to realize net proceeds equal to the tangible book value of Laureate. Accordingly, the Company recorded a $2 million after-tax charge during the quarter, primarily related to the write-off of intangible assets of Laureate. LEASING OPERATIONS Following is a summary of the revenues and expenses of the Company's small-ticket equipment leasing operations for the periods indicated: 31 32
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- ($ IN THOUSANDS) 2000 1999 -------- --------- Net interest income $ 4,420 $ 3,389 Other income 566 534 -------- -------- Leasing production revenue 4,986 3,923 -------- -------- Salary and employee benefits 1,438 1,353 Occupancy expense 246 214 Provision expense 1,521 670 General and administrative expenses 622 686 -------- -------- Total lease operating expenses 3,827 2,923 -------- -------- Net pre-tax leasing production margin 1,159 1,000 Servicing fees 232 327 -------- -------- Net pre-tax leasing margin $ 1,391 $ 1,327 -------- -------- Average owned leasing portfolio $162,047 $110,948 Average serviced leasing portfolio 10,756 30,623 -------- -------- Average managed leasing portfolio $172,803 $141,571 ======== ======== Leasing production revenue to average owned portfolio 615 bps 707 bps Leasing operating expenses to average owned portfolio 472 bps 527 bps ======== ======== Net pre-tax leasing production margin 143 bps 180 bps ======== ======== Servicing fees to average serviced leasing portfolio 431 bps 214 bps ======== ========
The 27% increase in leasing production revenue for the first six months of 2000 as compared to the first six months of 1999 is primarily due to the 46% 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 decreased 37 bps in the first six months of 2000 as compared to the first six months of 1999 primarily as a result of the increased provision expenses associated with higher delinquencies as the small business sectors are beginning to exhibit signs of stress. 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. Net Interest Income Net interest income for the first six months of 2000 was $4.4 million as compared to $3.4 million for the first six months of 1999. This is equivalent to an annualized net interest margin of 3.92% and 4.29% for the first six months of 2000 and 1999, respectively, based upon average lease receivables owned of $162.0 million and $110.9 million, respectively, and average debt outstanding of $137.4 and $91.5 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) 32 33 income taxes. The segmented income statement for the first six months of 1999 has been restated to conform with the segmented income statement presentation for the first six months of 2000. UNUSUAL ITEMS During the fourth quarter of 1999, the Company initiated 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. During the six month period ended June 30, 2000, the Company began reconsidering it's current positioning in the market and its corporate, management and leadership structures. As a result, the Company is continuing its efforts during the current period to reorganize around primary business processes, production/sales, customer fulfillment, servicing and portfolio management and has thus made certain changes in organization at its agency-eligible and subprime units. These changes resulted in a net increase in the previously established reorganization reserves of $0.7 during the period. In connection with the planned reorganization, a number of senior management positions have been scheduled for elimination during the remainder of the year. During the first six months of 2000, the Company decided to dispose of its commercial mortgage operation, Laureate Capital Corp. (Laureate). Based on market indications to date, the Company expects to realize net proceeds equal to the tangible book value of Laureate. The Company amended its defined benefit pension plan to freeze benefits under the plan, changed the benefits available to employees under its 401(k) plan and realized a gain on sale of a branch facility. The Company contributed to a fund that will benefit qualified charitable organizations. The Company incurred expenses for consultants who are assisting management in re-engineering work processes. The net impact of these unusual items in the first six months of 2000 is summarized below by financial statement component and operating division:
AGENCY-ELIGIBLE -------------------------- COMMERCIAL PRODUCTION SERVICING SUBPRIME MORTGAGE LEASING OTHER TOTAL ---------- --------- ----------- -------- ------- ----- -------- Salary and employee benefits $ (244) $ (45) $ 1,251 $ (22) $ 21 $ 961 General and administrative expenses 171 452 623 Other income (392) (392) ------- ------- ------- ------- ------- ------ ------- Net pre-tax effect on continuing operations (73) (45) 1,251 (22) 81 1,192 Estimated allocable income tax 29 17 (458) 8 (31) (435) ------- ------- ------- ------- ------- ------ ------- Net after-tax impact on continuing operations (44) (28) 793 (14) 50 757 Loss on sale of operating assets of Laureate Capital Corp. $ 2,000 $ 2,000 Operating profits of Laureate Capital Corp. (105) (105) ======= ======= ======= ======= ======= ====== ======= Net after-tax impact $ (44) $ (28) $ 793 $ 1,895 $ (14) $ 50 $ 2,652 ======= ======= ======= ======= ======= ====== =======
33 34 RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 2000, COMPARED TO QUARTER ENDED JUNE 30, 1999 SUMMARY BY OPERATING DIVISION Net income (loss) from continuing operations per common share on a diluted basis for the second quarter of 2000 was ($0.13) as compared to $0.15 for the second quarter of 2000. Following is a summary of the revenues and expenses for each of the Company's operating divisions for the six months ended June 30, 2000 and 1999, respectively: 34 35
AGENCY-ELIGIBLE -------------------------------- FOR THE QUARTER ENDED JUNE 30, 2000 SUB- COMMERCIAL TOTAL OTHER/ CONSO- (1) (2)($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE PRIME MORTGAGE LEASING SEGMENTS ELIMINATIONS LIDATED ----------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 675 $(1,019) $ (23) $ 3,571 $ -- $2,293 $ 5,497 $ (336) $ 5,161 Net gain on sale of mortgage loans 5,611 -- -- 3,738 -- -- 9,349 -- 9,349 Gain on sale of mortgage servicing rights -- 731 -- -- -- -- 731 -- 731 Servicing fees -- 8,541 -- -- -- 133 8,674 (109) 8,565 Mark to market on residual interests in subprime securitizations -- -- -- (1,771) -- -- (1,771) -- (1,771) Other income 312 120 849 427 -- 304 2,012 306 2,318 ----------------------------------------------------------------------------------------- Total revenues 6,598 8,373 826 5,965 -- 2,730 24,492 (139) 24,353 ----------------------------------------------------------------------------------------- Salary and employee benefits 6,235 680 48 1,581 -- 678 9,222 895 10,117 Occupancy expense 2,833 56 -- 676 -- 126 3,691 (175) 3,516 Amortization and provision for impairment of mortgage servicing rights -- 5,932 -- -- -- -- 5,932 -- 5,932 Provision expense 352 -- -- 168 -- 1,162 1,682 -- 1,682 General and administrative expenses 2,623 1,082 83 1,691 -- 328 5,807 838 6,645 ----------------------------------------------------------------------------------------- Total expenses 12,043 7,750 131 4,116 -- 2,294 26,334 1,558 27,892 ----------------------------------------------------------------------------------------- Income (loss) before income taxes (5,445) 623 695 1,849 -- 436 (1,842) (1,697) (3,539) Income tax benefit (expense) 1,986 (226) (244) (758) -- (180) 578 621 1,199 ----------------------------------------------------------------------------------------- Income (loss) from continuing operations $(3,459) $ 397 $ 451 $ 1,091 $ -- $ 256 $(1,264) $(1,076) $(2,340) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $200) (2,000) (2,000) (2,000) Operating profits of Laureate Capital Corp. (less applicable income taxes of $111) 105 105 105 ----------------------------------------------------------------------------------------- Net income (loss) $ (3,459) $ 397(1) $ 451 $ 1,091 $(1,895) $ 256 $(3,159) $(1,076) $(4,235) =========================================================================================
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. Management believes that these and all other revenues and expenses have been allocated to the respective divisions on a reasonable basis. (2) See discussion of unusual items in Management's Discussion and Analysis.
AGENCY-ELIGIBLE -------------------------------- FOR THE QUARTER ENDED JUNE 30, 1999 SUB- COMMERCIAL TOTAL OTHER/ CONSO- (1) ($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE PRIME MORTGAGE LEASING SEGMENTS ELIMINATIONS LIDATED ----------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Net interest income $ 2,651 $ (994) $ -- $ 3,983 $ -- $ 1,744 $ 7,384 $ (81) $ 7,303 Net gain on sale of mortgage loans 16,885 -- -- 7,517 -- -- 24,402 -- 24,402 Gain on sale of mortgage servicing rights -- 1,825 -- -- -- -- 1,825 -- 1,825 Servicing fees -- 10,832 -- -- -- 166 10,998 (159) 10,839 Mark to market on residual interests in subprime securitizations -- -- -- (2,618) -- -- (2,618) -- (2,618) Other income (65) 183 (211) 1,991 -- 383 2,281 5 2,286 ----------------------------------------------------------------------------------------- Total revenues 19,471 11,846 (211) 10,873 -- 2,293 44,272 (235) 44,037 ----------------------------------------------------------------------------------------- Salary and employee benefits 10,902 907 -- 3,483 -- 713 16,005 (801) 15,204 Occupancy expense 1,759 100 -- 669 -- 110 2,638 549 3,187 Amortization and provision for impairment of mortgage servicing rights -- 8,887 -- -- -- -- 8,887 -- 8,887 Provision expense 1,564 -- 57 433 -- 287 2,341 -- 2,341 General and administrative expenses 5,330 1,617 55 2,040 -- 316 9,358 18 9,376 ----------------------------------------------------------------------------------------- Total expenses 19,555 11,511 112 6,625 -- 1,426 39,229 (234) 38,995 ----------------------------------------------------------------------------------------- Income (loss) before income taxes (84) 335 (323) 4,248 -- 867 5,043 (1) 5,042 Income tax benefit (expense) 90 (19) 113 (1,579) -- (351) (1,746) (107) (1,853) ----------------------------------------------------------------------------------------- Income (loss) from continuing operations $ 6 $ 316 $(210) $ 2,669 $ -- $ 516 $ 3,297 $ (108) $ 3,189 Discontinued operations: Operating profits of Laureate Capital Corp. (less applicable income taxes of $128) 147 147 147 ----------------------------------------------------------------------------------------- Net income (loss) $ 6 $ 316 $(210) $ 2,669 $ 147 $ 516 $ 3,444 $ (108) $ 3,336 =========================================================================================
(1) Revenues and expenses have been allocated on a direct basis to the extent possible. Management believes that these and all other revenues and expenses have been allocated to the respective divisions on a reasonable basis. 35 36 AGENCY-ELIGIBLE MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage production operations.
FOR THE QUARTER ENDED JUNE 30, --------------------------------- ($ IN THOUSANDS) 2000 1999 ----------- ----------- Net interest income $ 675 $ 2,651 Net gain on sale of mortgage loans 5,611 16,885 Other income 312 (65) ----------- ----------- Total production revenue 6,598 19,471 ----------- ----------- Salary and employee benefits 6,235 10,902 Occupancy expense 2,833 1,759 Provision expense 352 1,564 General and administrative expenses 2,623 5,330 ----------- ----------- Total production expenses 12,043 19,555 ----------- ----------- Net pre-tax production margin $ (5,445) $ (84) ----------- ----------- Production $ 1,408,742 $ 2,136,412 Pool delivery 1,324,183 2,292,046 Total production revenue to pool delivery 50 bps 85 bps Total production expenses to production 85 bps 92 bps =========== =========== Net pre-tax production margin (35) bps (7) bps =========== ===========
Summary The production revenue to pool delivery ratio decreased 35 basis points for the second quarter of 2000 as compared to the second quarter of 1999. Net gain on sale of mortgage loans (42 basis points for the first six months of 2000 versus 74 basis points for the second quarter of 1999) declined primarily due to compressed margins attributable to an aggressive competitive pricing environment and lower overall agency-eligible production volume. Net interest income decreased from 12 basis points in the second quarter of 1999 to 5 basis points in the second quarter of 2000 primarily as a result of a flattened yield curve. The production expenses to production ratio remained relatively flat from the second quarter of 1999 to the second quarter of 2000, in spite of a 34% decrease in production between periods. Total production expenses declined $7.5 million from $19.5 million for the second quarter of 1999 to $12.0 million for the second quarter of 2000. Such decline in production expenses included a $0.4 million reduction in salary and employee benefits as a result of the curtailment of the Company's pension plan benefits and changes in 401(k) benefits. As a consequence of the foregoing, the Company's net agency-eligible pre-tax production margin declined 28 basis points. Net Interest Income The following table analyzes net interest income allocated to the Company's agency-eligible mortgage production activities in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and mortgage-backed securities and interest rates paid on interest-bearing sources of funds) for the quarters ended June 30, 2000 and 1999, respectively: 36 37
($ IN THOUSANDS) Variance Average Volume Average Rate Interest Attributable to ------------------------------------------ ------------------ ------------------ 2000 1999 2000 1999 2000 1999 Variance Rate Volume ------------------------------------------ ---------------------------------------------------- INTEREST INCOME --------------- Mortgages Held-for-Sale and $393,064 $727,722 8.21% 6.50% Mortgage-Backed Securities $8,064 $11,826 $(3,762) $ 1,676 $(5,438) ------------------------------------------ ---------------------------------------------------- INTEREST EXPENSE $337,325 $337,058 5.29% 2.93% Warehouse Line * $4,448 $ 2,460 $ 1,988 $ 1,986 $ 2 42,756 380,946 6.90% 5.14% Gestation Line 735 4,882 (4,147) 187 (4,334) 119,698 112,631 7.47% 5.79% Servicing Secured Line 2,229 1,625 604 502 102 3,538 31,283 6.01% 5.23% Servicing Receivables Line 53 408 (355) 7 (362) 7,661 7,025 8.74% 8.16% Other Borrowings 167 143 24 11 13 Facility Fees & Other Charges 940 588 352 -- 352 ------------------------------------------ ---------------------------------------------------- $510,978 $868,943 6.73% 4.66% Total Interest Expense $8,572 $10,106 $(1,534) $ 2,693 $(4,227) ========================================== ==================================================== Net Interest Income Before 1.48% 1.84% Interdivisional Allocations $ (508) $ 1,720 $ (2,228) $(1,017) $(1,211) =================== ============================== Allocation to Agency-Eligible Servicing Division 1,019 850 Allocation to Other 162 81 Intercompany Net Interest Expense Included In Segment 2 -- -------------------- Net Interest Income $ 675 $ 2,651 ====================
* The interest-rate yield on the warehouse line is net of the benefit of escrow deposits. The 36 basis point decrease in the interest-rate spread was primarily as a result of a flattened yield curve. 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 QUARTER ENDED JUNE 30, ------------------------------------- 2000 1999 ----------- ----------- Gross proceeds on sales of mortgage loans $ 1,350,082 $ 2,297,236 Initial unadjusted acquisition cost of mortgage loans sold, net of hedge results 1,353,873 2,298,209 ----------- ----------- Unadjusted gain (loss) on sale of mortgage loans (3,791) (973) Loan origination and correspondent program administrative fees 2,716 4,810 ----------- ----------- Unadjusted aggregate margin (1,075) 3,837 Acquisition basis allocated to mortgage servicing rights (SFAS No. 125) 7,683 13,433 Net deferred costs and administrative fees recognized (997) (385) ----------- ----------- Net gain on sale of agency-eligible mortgage loans $ 5,611 $ 16,885 =========== ===========
Net gain on sale of agency-eligible mortgage loans decreased $11.3 million from $16.9 million for the second quarter of 1999 to $5.6 million for the second quarter of 2000. 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. 37 38 Receivable from sale of mortgage-backed securities The company sold certain mortgage-backed securities during the second quarter of 2000, for which it did not receive the cash settlement until early in the third quarter of 2000. This resulted in a $69.9 million receivable on the June 30, 2000 Balance Sheet. AGENCY-ELIGIBLE REINSURANCE OPERATIONS The Company has 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 the second quarter of 2000 and 1999, the Company recognized premium and investment income of approximately $0.8 million and ($0.2) million, respectively, that has been included as other income in the agency-eligible reinsurance segment. SUBPRIME MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's subprime mortgage production operations:
FOR THE QUARTER ENDED JUNE 30, --------------------------------- ($ IN THOUSANDS) 2000 1999 --------- --------- Net interest income $ 3,571 $ 3,983 Net gain on sale of mortgage loans 3,738 7,517 Mark to market on residual interests in subprime securitizations (1,771) (2,618) Other income 427 1,991 --------- --------- Total production revenue 5,965 10,873 --------- --------- Salary and employee benefits 1,581 3,483 Occupancy expense 676 669 Provision expense 168 433 General and administrative expenses 1,691 2,040 --------- --------- Total production expenses 4,116 6,625 --------- --------- Net pre-tax production margin $ 1,849 $ 4,248 --------- --------- Production $ 168,830 $ 185,744 Whole loan sales and securitizations 171,123 224,286 Total production revenue to whole loan sales and securitizations 349 bps 485 bps Total production expenses to production 244 bps 357 bps --------- --------- Net pre-tax production margin 105 bps 128 bps ========= =========
Summary During the second quarter of 2000, the Company produced $168.8 million of subprime loans and sold $171.1 million in whole loan transactions. At June 30, 2000, the Company had unsold 38 39 subprime mortgage loans of $134.9 million as compared to $145.1 million at June 30, 1999. Overall, the Company operated during the second quarter of 2000 at a 1.05% pre-tax subprime production margin. The $2.4 million (23 basis point) decline in the pre-tax subprime production margin is primarily due to lower volumes. The $3.8 million decline in net gain on sale of subprime mortgage loans is primarily attributable to lower volumes and lower margins attributable to exclusive execution of 2000 whole loan sales versus a combination of higher-margined securitizations and whole loan sales in the prior period. Salary and employee benefit costs decreased by 55%, or $1.9 million, from the second quarter of 1999 to the second quarter of 2000. The Company made certain changes in the organization at its subprime units resulting in a net reduction in previously established reorganization reserves of $0.9 million. The Company also amended its defined benefit pension plan to freeze benefits under the plan and simultaneously changed the benefits available to employees under its 401(k) plan. See discussion of these and other unusual items elsewhere in Management's Discussion and Analysis. Provision expense decreased by 61%, or $0.3 million, primarily due to the decreased level of nonsaleable loans between periods. The remaining production expenses remained relatively flat between periods. Net Interest Income The following table analyzes net interest income allocated to the Company's subprime mortgage production activities in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and residual certificates and interest rates paid on interest-bearing sources of funds) for the quarters ended June 30, 2000 and 1999, respectively.
($ IN THOUSANDS) Variance Average Volume Average Rate Interest Attributable to ------------------------------------------ ------------------ ------------------ 2000 1999 2000 1999 2000 1999 Variance Rate Volume ------------------------------------------ ---------------------------------------------------- Mortgages Held-for-Sale and $213,650 $259,927 11.51% 10.14% Residual Certificates $6,149 $6,590 $(441) $732 $(1,173) ------------------------------------------ ---------------------------------------------------- $154,173 $197,577 7.10% 5.58% Total Interest Expense $2,729 $2,751 $ (22) $582 $ (604) ------------------------------------------ ---------------------------------------------------- 4.41% 4.56% Net Interest Income $3,420 $3,839 $(419) $150 $ (569) =================== ============================= Allocation to Agency-Eligible Servicing Division -- 144 Intercompany Net Interest Expense Included In Segment 151 -- ------------------- Net Interest Income $3,571 $3,983 ===================
Net interest income from subprime products decreased to $3.6 million for the second quarter of 2000 as compared to $4.0 million for the second quarter of 1999. This was primarily a result of a flattened yield curve and the decline in production volume, which was partially offset by $0.4 million increase in accretion income from $1.5 million for the second quarter of 1999 to $1.9 million for the second quarter of 2000. 39 40 Net Gain on Sale and Securitization of Subprime Mortgage Loans The Company sold subprime mortgage loans on a whole loan basis during the second quarter of 2000 and 1999. Whole loans are generally sold without recourse to third parties with the gain or loss being calculated based on the difference between the carrying value of the loans sold and the gross proceeds received from the purchaser less expenses. Generally, no interest in these loans is retained by the Company. A reconciliation of the gain on subprime mortgage whole loan sales for the periods indicated follows:
($ IN THOUSANDS) FOR THE QUARTER ENDED JUNE 30, --------------------------------- 2000 1999 --------- --------- Gross proceeds on whole loan sales of subprime mortgage loans $ 177,477 $ 102,267 Initial acquisition cost of subprime mortgage loans sold, net of fees 171,123 98,243 --------- --------- Unadjusted gain on whole loan sales of subprime mortgage loans 6,354 4,024 Net deferred costs and administrative fees recognized (2,616) (1,565) --------- --------- Net gain on whole loan sales of subprime mortgage loans $ 3,738 $ 2,459 ========= =========
The net gain on whole loan sales of subprime mortgage loans increased 52% from $2.5 million for the second quarter of 1999 to $3.7 million reported for the second quarter of 2000. Also, in accordance with 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" the Company reduced its net gain on whole loan sales of subprime mortgage loans by $2.6 million in the second quarter of 2000 as compared to $1.6 million in the second quarter of 1999. There were no securitization transactions during the second quarter of 2000. A reconciliation of the gain on securitization of subprime mortgage loans for the quarter ended June 30, 1999 follows:
($ IN THOUSANDS) FOR THE QUARTER ENDED JUNE 30, ------------------------------ 2000 1999 --------- --------- Gross proceeds on securitization of subprime mortgage loans N/A $124,242 Initial acquisition cost of subprime mortgage loans securitized, net of fees N/A 126,043 -------- --------- Unadjusted loss on securitization of subprime mortgage loans N/A (1,801) Initial capitalization of residual certificates N/A 8,867 Net deferred costs and administrative fees recognized N/A (2,008) --------- --------- Net gain on securitization of subprime mortgage loans N/A $ 5,058 ======== =========
Mark to Market on Residual Interests in Subprime Securitizations The Company historically has retained residual certificates in connection with the securitization of subprime loans. These residual certificates are adjusted to approximate market 40 41 value each quarter. For the quarters ended June 30, 2000 and 1999, respectively, mark-to-market gain (loss) on residuals was approximately ($1.7) million and ($2.6) million, respectively. AGENCY-ELIGIBLE MORTGAGE SERVICING Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage servicing operations for the quarters ended June 30, 2000 and 1999:
FOR THE QUARTER ENDED JUNE 30, ----------------------------------- ($ IN THOUSANDS) 2000 1999 ----------- ----------- Net interest expense $ (1,019) $ (994) Loan servicing fees 8,541 10,832 Other income 120 183 ----------- ----------- Servicing revenues 7,642 10,021 Salary and employee benefits 680 907 Occupancy expense 56 100 Amortization and provision for impairment of mortgage Servicing rights 5,932 8,887 General and administrative expenses 1,082 1,617 ----------- ----------- Total loan servicing expenses 7,750 11,511 ----------- ----------- Net pre-tax servicing margin (108) (1,490) Gain on sale of mortgage servicing rights 731 1,825 =========== =========== Net pre-tax servicing contribution $ 623 $ 335 =========== =========== Average servicing portfolio $ 7,935,544 $ 9,623,230 Servicing sold 1,451,283 3,101,473 Net pre-tax servicing margin to average servicing portfolio (1) bp (6) bps Gain on sale of servicing to servicing sold 5 bps 6 bps
Summary The ratio of net pre-tax servicing margin to the average servicing portfolio increased 5 basis points primarily due to the $3.0 million reduction in amortization and provision for impairment of mortgage servicing rights from the second quarter of 1999 to the second quarter of 2000. This reduction in amortization and provision for impairment of mortgage servicing rights is primarily due to the generally smaller size of the portfolio and slowing prepayments due to higher rates. The 1 basis point decrease in the gain on sale of servicing sold is primarily attributable to compressed margins in an intensely competitive market during the second quarter of 2000. Loan servicing fees were $8.5 million for the second quarter of 2000, compared to $10.8 million for the second quarter of 1999, a decrease of 21%, primarily due to lower production volumes which resulted in a lower average balance of agency-eligible servicing rights held in inventory pending sale. Management regularly 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. 41 42 Net Interest Expense The net interest expense for the second quarter of 2000 and the second quarter of 1999 is composed of benefits from escrow accounts of $2.3 million and $2.1 million, respectively, that is offset by $3.3 million and $3.1 million, respectively, in interest expense. Gain on Sale of Mortgage Servicing Rights A reconciliation of the components of gain on sale of mortgage servicing rights for the periods indicated follows:
($ IN THOUSANDS) FOR THE QUARTER ENDED JUNE 30, ----------------------------- 2000 1999 ----------- ----------- Underlying unpaid principal balances of agency-eligible mortgage loans on which servicing rights were sold during the period $ 1,451,283 $ 3,101,473 =========== =========== Gross proceeds from sales of mortgage servicing rights $ 40,308 $ 84,158 Initial acquisition basis, net of amortization and hedge results 34,976 62,000 ----------- ----------- Unadjusted gain on sale of mortgage servicing rights 5,332 22,158 Acquisition basis allocated from mortgage loans, net of amortization (SFAS No. 125) (4,601) (20,333) ----------- ----------- Gain on sale of mortgage servicing rights $ 731 $ 1,825 =========== ===========
Gain on sale of mortgage servicing rights decreased $1.1 million from $1.8 million for the second quarter of 1999 to $0.7 million for the second quarter of 2000. The decrease in the gain on sale of mortgage servicing rights is primarily attributable to lower production volumes which resulted in a lower balance of agency-eligible servicing rights sold. COMMERCIAL MORTGAGE OPERATIONS During the second quarter, the Company decided to dispose of its commercial mortgage operation, Laureate Capital Corp. (Laureate). Based on market indications to date, the Company expects to realize net proceeds equal to the tangible book value of Laureate. Accordingly, the Company recorded a $2 million after-tax charge during the quarter, primarily related to the write-off of intangible assets of Laureate. LEASING OPERATIONS Following is a summary of the revenues and expenses of the Company's small-ticket equipment leasing operations for the periods indicated: 42 43
FOR THE QUARTER ENDED JUNE 30, ------------------------------ ($ IN THOUSANDS) 2000 1999 -------- -------- Net interest income $ 2,293 $ 1,744 Other income 304 383 -------- -------- Leasing production revenue 2,597 2,127 -------- -------- Salary and employee benefits 678 713 Occupancy expense 126 110 Provision expense 1,162 287 General and administrative expenses 328 316 -------- -------- Total lease operating expenses 2,294 1,426 -------- -------- Net pre-tax leasing production margin 303 701 Servicing fees 133 166 -------- -------- Net pre-tax leasing margin $ 436 $ 867 -------- -------- Average owned leasing portfolio $167,767 $117,344 Average serviced leasing portfolio 9,085 27,215 -------- -------- Average managed leasing portfolio $176,852 $144,559 ======== ======== Leasing production revenue to average owned portfolio 619 bps 725 bps Leasing operating expenses to average owned portfolio 547 bps 486 bps -------- -------- Net pre-tax leasing production margin 72 bps 239 bps ======== ======== Servicing fees to average serviced leasing portfolio 586 bps 243 bps ======== ========
The 22% increase in leasing production revenue for the second quarter of 2000 as compared to the second quarter of 1999 is primarily due to the 43% 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 decreased 167 bps in the second quarter of 2000 as compared to the second quarter of 1999 primarily as a result of the increased provision expenses associated with higher delinquencies as the small business sectors are beginning to exhibit signs of stress. 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. Net Interest Income Net interest income for the second quarter of 2000 was $2.3 million as compared to $1.7 million for the second quarter of 1999. This is equivalent to an annualized net interest margin of 3.93% and 2.72% for the second quarter of 2000 and 1999, respectively, based upon average lease receivables owned of $167.8 million and $117.3 million, respectively, and average debt outstanding of $142.3 and $80.3 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) 43 44 income taxes. The segmented income statement for the second quarter of 1999 has been restated to conform with the segmented income statement presentation for the second quarter of 2000. UNUSUAL ITEMS During the fourth quarter of 1999, the Company initiated 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. During the first quarter of 2000, the Company began reconsidering it's current positioning in the market and its corporate, management and leadership structures. As a result, the Company is continuing its efforts during the current period to reorganize around primary business processes, production/sales, customer fulfillment, servicing and portfolio management and has thus made certain changes in organization at its agency-eligible and subprime units. These changes resulted in a net reduction in the previously established reorganization reserves of $1.1 million during the period. In connection with the planned reorganization, a number of senior management positions have been scheduled for elimination during the remainder of the year. During the second quarter of 2000, the Company decided to dispose of its commercial mortgage operation, Laureate Capital Corp. (Laureate). Based on market indications to date, the Company expects to realize net proceeds equal to the tangible book value of Laureate. The Company amended its defined benefit pension plan to freeze benefits under the plan. Simultaneously, the Company changed the benefits available to employees under its 401(k) plan. The Company realized a gain on sale of a branch facility. The Company contributed to a fund that will benefit qualified charitable organizations. The Company incurred expenses for consultants who are assisting management in re-engineering work processes. The net impact of these unusual items in the second quarter of 2000 is summarized below by financial statement component and operating division:
AGENCY-ELIGIBLE ------------------------- COMMERCIAL PRODUCTION SERVICING SUBPRIME MORTGAGE LEASING OTHER TOTAL ------------------------------------------------------------------------------------ Salary and employee benefits $ (380) $ (45) $ (824) $ (22) $ 21 $(1,250) General and administrative expenses 452 452 Other income (392) (392) ------------------------------------------------------------------------------------ Net pre-tax effect on continuing operations (380) (45) (824) (22) 81 (1,190) Estimated allocable income tax 142 17 305 8 (31) 441 ------------------------------------------------------------------------------------ Net after-tax impact on continuing operations (238) (28) (519) (14) 50 (749) Loss on sale of operating assets of Laureate Capital Corp. $ 2,000 $ 2,000 Operating profits of Laureate Capital Corp. (105) (105) ------------------------------------------------------------------------------------ Net after-tax impact $ (238) $ (28) $ (519) $ 1,895 $ (14) $ 50 $ 1,146 ====================================================================================
44 45 FINANCIAL CONDITION During the second quarter of 2000, the Company experienced a 32% increase in the volume of production originated and acquired compared to the first quarter of 2000. Production increased from $1.4 billion during the first quarter of 2000 to $1.9 billion during the second quarter of 2000. The June 30, 2000, locked residential mortgage application pipeline (mortgage loans not yet closed but for which the interest rate has been locked) was approximately $0.6 billion and the application pipeline (mortgage loans for which the interest rate has not yet been locked) was approximately $0.5 billion. This compares to a locked mortgage application pipeline of $0.5 billion and a $0.4 billion application pipeline at March 31, 2000. Mortgage loans held-for-sale and mortgage-backed securities totaled $0.6 billion at June 30, 2000, versus $0.5 billion at December 31, 1999, an increase of 19%. The Company's servicing portfolio (exclusive of loans under subservicing agreements) decreased to $7.4 billion at June 30, 2000, from $7.8 billion at December 31, 1999, a decrease of 5%. The company sold certain mortgage-backed securities during the first six months of 2000, for which it did not receive the cash settlement until early in the second quarter of 2000. This resulted in a $69.9 million receivable on the June 30, 2000 condensed consolidated balance sheet. Short-term borrowings, which are the Company's primary source of funds, totaled $0.9 billion at June 30, 2000, compared to $0.7 billion at December 31, 1999, an increase of 22%. At June 30, 2000, there were $6.2 million in long-term borrowings, compared to $6.3 million at December 31, 1999. Other liabilities totaled $91.6 million as of June 30, 2000, compared to the December 31, 1999 balance of $84.8 million, an increase of $6.8 million, or 8%. 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 July 2000, 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 $325 million warehouse line of credit provided by a syndicate of unaffiliated banks that expires in July 2001. The credit agreement includes covenants requiring the Restricted Group to maintain (i) a minimum net worth of $165 million, plus the Restricted Group's net income subsequent to June 30, 2000, 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, 45 46 (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 1.25 to 1.00 for any period of two consecutive fiscal quarters. (the interest rate coverage ratio). The Company is required to maintain $10 million of liquidity pursuant to the agreement. 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 July 2000, the Company and the Restricted Group also entered into a $65 million subprime revolving credit facility and a $200 million servicing revolving credit facility, which expire in July 2001. 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 June 30, 2000. 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 Company, Inc. is entitled from time to time to deliver eligible subprime mortgage loans in an aggregate principal amount of up to $150 million to the bank. The master repurchase agreement has been extended through September 25, 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 August 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 February 2001 and contains various covenants regarding characteristics of the collateral and the performance of the leases originated and serviced by Republic Leasing. The warehouse credit agreement also requires the Company to maintain a minimum net worth of $60 million and 46 47 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 June 30, 2000, the Company had remaining authority to repurchase up to $1.3 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. Shares repurchased are maintained in the Company's treasury account and are not retired. At June 30, 2000, there were 5,641,804 shares held in the Company's treasury account at an average cost of $7.60 per share. 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 all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). However, early adoption is permitted. The FASB has a Derivatives Implementation Group ("DIG") that is assisting various industry groups in interpreting SFAS No. 133. The DIG has numerous open issues relating to the mortgage banking industry. As a result, the Company has not yet determined the impact that the adoption of SFAS 133 will have on its earnings or statement of 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. 47 48 SUMMARY On a combined divisional basis, during the six months ended June 30, 2000 and 1999, the Company generated approximately $13.6 million and $54.3 million, respectively, of positive funds from continuing operations.
($ in thousands) FOR THE SIX MONTHS ENDED JUNE 30, -------------------------------------- 2000 1999 --------- --------- Agency-eligible production $ (7,897) $ 32,776 Agency-eligible servicing 12,407 16,858 Subprime production 5,993 6,150 Leasing 3,077 2,150 --------- --------- $ 13,580 $ 57,934 ========= =========
Each of the Company's divisions produced positive operating funds during both periods except for agency-eligible production in the first six months of 2000. 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 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 SIX MONTHS ENDED JUNE 30, --------------------------------- 2000 1999 --------- --------- Income (loss) before income taxes $ (11,873) $ 17,718 Deduct: Net gain on sale of mortgage loans, as reported (11,817) (50,078) Add back: Cash gains on sale of mortgage loans (139) 15,346 Cash gains on sale of mortgage servicing rights 11,733 44,104 Depreciation 2,947 2,014 Provision expense 1,252 3,672 --------- --------- $ (7,897) $ 32,776 ========= =========
48 49 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 SIX MONTHS ENDED JUNE 30, --------------------------------- 2000 1999 ---------- ---------- Income before income taxes $ 1,664 $ 2,509 Deduct: Net gain on sale of mortgage servicing rights, as reported (1,539) (4,823) Add back: Amortization and provision for impairment of Mortgage servicing rights 12,209 17,320 Depreciation 73 1,852 ---------- ---------- $ 12,407 $ 16,858 ========== ==========
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. 49 50
($ in thousands) FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- 2000 1999 ---------- ---------- Income (loss) before income taxes $ (7,776) $ 3,774 Deduct: Net gain on sale of subprime loans, as reported (6,179) (10,374) Accretion income on residuals (3,786) (2,955) Add back: Cash gains on sale of whole subprime loans 10,334 7,450 Cash received from investments in residual certificates 1,471 2,742 Depreciation and amortization of goodwill and intangibles 1,573 614 Provision expense 910 932 Mark to market on residuals 9,446 3,967 ---------- ---------- $ 5,993 $ 6,150 ========== ==========
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 SIX MONTHS ENDED JUNE 30, --------------------------------- 2000 1999 -------- -------- Income before income taxes $ 1,391 $ 1,327 Add back: Depreciation and amortization of goodwill and intangibles 165 153 Provision expense 1,521 670 -------- -------- $ 3,077 $ 2,150 ======== ========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary market risk facing the Company is interest rate risk. The Company manages this risk by striving to balance its loan origination and loan servicing business segments, which are countercyclical in nature. In addition, the Company utilizes 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 50 51 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. For purposes of disclosure in the 1999 Annual Report on Form 10-K, the Company performed various sensitivity analyses that quantify the net financial impact of hypothetical 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 which rely upon a number of critical assumptions. Actual experience may differ materially from the estimated. 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. The Company has procedures in place that monitor whether material changes in market risk are likely to have occurred since December 31, 1999. The Company does not believe that there have been any material changes in market risk from those reported in the 1999 Annual Report on Form 10-K. 51 52 PART II. OTHER INFORMATION ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS DURING THE PERIOD OF APRIL 1, 2000, THROUGH JUNE 30, 2000, THE FOLLOWING MATTERS WERE SUBMITTED TO A VOTE OF SECURITY HOLDERS: AT THE ANNUAL MEETING OF THE SHAREHOLDERS OF THE COMPANY ON MAY 3, 2000, THE SHAREHOLDERS ELECTED ROBIN C. KELTON, BOYD M. GUTTERY, DOUGLAS K. FREEMAN AND JOHN O. WOLCOTT TO SERVE AS DIRECTORS OF THE COMPANY. MR. KELTON AND MR. FREEMAN WILL SERVE FOR THREE YEAR TERMS EXPIRING AT THE 2003 ANNUAL MEETING OF SHAREHOLDERS. MR. GUTTERY'S TERM EXPIRES AT THE 2001 ANNUAL MEETING. MR. WOLCOTT'S TERM EXPIRES AT THE 2002 ANNUAL MEETING. MR. KELTON RECEIVED 15,751,445 VOTES, 73,362 VOTES WERE WITHHELD WITH NO VOTES AGAINST. MR. GUTTERY RECEIVED 15,748,999 VOTES, 75,808 VOTES WERE WITHHELD WITH NO VOTES AGAINST. MR. FREEMAN RECEIVED 15,752,627 VOTES, VOTES WERE 72,180 WITHHELD WITH NO VOTES AGAINST. MR. WOLCOTT RECEIVED 15,750,246 VOTES, 74,561 VOTES WERE WITHHELD WITH NO VOTES AGAINST. AT THE ANNUAL MEETING OF THE SHAREHOLDERS OF THE COMPANY ON MAY 3, 2000, THE SHAREHOLDERS VOTED TO APPROVE AN AMENDMENT TO THE STOCK INVESTMENT PLAN. THE APPROVAL RECEIVED 15,384,538 VOTES, 44,624 SHARES ABSTAINED AND 395,645 SHARES VOTED AGAINST. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K - (A) A LIST OF EXHIBITS FILED WITH THIS FORM 10-Q, ALONG WITH THE EXHIBIT INDEX CAN BE FOUND ON PAGES A TO G FOLLOWING THE SIGNATURE PAGE. - (B) NO REPORTS ON FORM 8K WERE FILED DURING THE QUARTER ENDED JUNE 30, 2000. 52 53 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RESOURCE BANCSHARES MORTGAGE GROUP, INC. (Registrant) /s/ Steven F. Herbert --------------------------------------------- Steven F. Herbert Corporate Senior Executive Vice President and Corporate Chief Financial Officer (signing in the capacity of (i) duly authorized officer of the registrant and (ii) principal financial officer of the registrant) DATED: August 14, 2000 53 54 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 3.7 Amendment to Bylaws of Resource Bancshares Mortgage Group, Inc. dated _____ December 7, 1999 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
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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 (A) Employment Agreement dated April 3, 2000, between Resource _____ Bancshares Mortgage Group, Inc. and Harold Lewis, Jr. (B) Change of Control Agreement dated May 3 by and between Resource _____ Bancshares Mortgage Group, Inc. and Harold Lewis, Jr. 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
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EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- 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 10.16 (A) 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 (B) Amendment Four to Pension Plan effective May 31, 2000 _____ 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 (A) 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 (B) Second Amendment to Resource Bancshares Mortgage Group, Inc. Supplemental Executive Retirement Plan dated May 31, 2000 _____ 10.20 (A) Pension Restoration Plan incorporated by reference to Exhibit 10.25 * of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (B) Resolution of Board of Directors freezing additional accounts under the Pension Restoration Plan effective May 31, 2000 _____ 10.21 Stock Investment Plan incorporated by reference to Exhibit 4.1 of the * Registrant's Registration No. 33-87536 10.22 (A) 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 (B) 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 (C) Amendment III to Stock Investment Plan dated February 2, 2000 incorporated by reference to Exhibit 10.22 (C) of the Registrants Quarterly Report on Form 10-Q for the period ended March 31, 2000 *
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EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- 10.23 (A) Change of Control Agreement by and between Resource Bancshares * Mortgage Group, Inc. and Douglas K. Freeman, dated as of January 10, 2000 incorporated by reference to Exhibit 10.23 (A) of the Registrants Quarterly Report on Form 10-Q for the period ended March 31, 2000. (B) Incentive Stock Option Agreement pursuant to Resource Bancshares * Mortgage Group, Inc. Omnibus Stock Award Plan between Resource Bancshares Mortgage Group, Inc. and Douglas K. Freeman dated as of January 10, 2000 incorporated by reference to Exhibit 10.23 (B) of the Registrants Quarterly Report on Form 10-Q for the period ended March 31, 2000 (C) Employment Agreement between Resource Bancshares Mortgage Group, * Inc. and Douglas K. Freeman dated as of January 10, 2000 incorporated by reference to Exhibit 10.23 (C) of the Registrants Quarterly Report on Form 10-Q for the period ended March 31, 2000 (D) Indemnity Agreement between Resource Bancshares Mortgage Group, * Inc. and Douglas K. Freeman dated as of January 10, 2000 incorporated by reference to Exhibit 10.23 (D) of the Registrants Quarterly Report on Form 10-Q for the period ended March 31, 2000 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 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
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EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- (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 incorporated by reference to Exhibit 10.30(B) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 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 (A) 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 (B) Form of Incentive Stock Option Agreement (Omnibus Stock Award Plan) effective June 2000 (officer vesting provisions) _____ (C) Form of Incentive Stock Option Agreement (Omnibus Stock Award Plan) effective June 2000 ($16 vesting provisions) _____ 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 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
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EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- 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 (A) 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 (B) Third Amendment to Amended and Restated Retirement Savings Plan dated May 31, 2000 _____ 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 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
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EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- 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 Voluntary Employees' Beneficiary Association Trust for the Employees of Resource Bancshares Mortgage Group, Inc. incorporated by reference to Exhibit 10.53 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 * 10.54 Voluntary Employees' Beneficiary Association Plan for the Employees of Resource Bancshares Mortgage Group, Inc. incorporated by reference to Exhibit 10.54 of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2000 * 10.55 MSC Stock Option Agreement between Resource Bancshares Mortgage Group, Inc. and Boyd M. Guttery dated February 2, 2000 _____ 10.56 MSC Stock Option Agreement between Resource Bancshares Mortgage Group, Inc. and Stuart M. Cable dated February 2, 2000 _____ 10.57 Director Deferred Compensation Plan dated June 2000 _____ 10.58 Outside Director Life Insurance Plan dated June 2000 _____ 11.1 Statement re: Computation of Net Income per Common Share _____ 27.1 Financial Data Schedule _____
-------------- * Incorporated by reference G