-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T4ocjAUww+Mi6TGK2RAkrzKEymgMmfjs7Fd45YiSQoWkc5PiCrLeKgFlNST197+A axA9IzTJCQFyreFiLwypxw== 0000950144-01-004583.txt : 20010409 0000950144-01-004583.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950144-01-004583 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESOURCE BANCSHARES MORTGAGE GROUP INC CENTRAL INDEX KEY: 0000893817 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 570962375 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21786 FILM NUMBER: 1589732 BUSINESS ADDRESS: STREET 1: 7909 PARKLANE ROAD SUITE 150 CITY: COLUMBIA STATE: SC ZIP: 29223 BUSINESS PHONE: 8037413000 MAIL ADDRESS: STREET 1: 7909 PARKLANE RD SUITE 150 STREET 2: 7909 PARKLANE RD SUITE 150 CITY: COLUMBI STATE: SC ZIP: 29223 10-K 1 g67742e10-k.txt RESOURCE BANCSHARES MORTGAGE GROUP 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2000 Commission File Number 000-21786 --------- RESOURCE BANCSHARES MORTGAGE GROUP, INC. (Exact name of registrant as specified in its charter) --------------------- Delaware 57-0962375 - -------------------------- ------------------------------------ (State of Incorporation) (IRS Employer Identification Number) 7909 Parklane Road Columbia, South Carolina 29223 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (803) 741-3000 ------------------------------------------------- (Registrant's telephone no., including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of class -------------- Common Stock, par value $.01 per share Preferred Stock Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. [ ] 2 The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $127,437,522 as of March 15, 2001, based on the closing price of $7.844 per share of the registrant's Common Stock , par value $.01 per share, on the NASDAQ National Market System on such date. As of March 15, 2001, 16,246,497 shares of the registrant's Common Stock, par value $.01 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Document of the Registrant Form 10-K Reference Locations 2000 Annual Report to Shareholders Parts II and IV 2001 Proxy Statement Part III 3 PART I ITEM 1. BUSINESS General Resource Bancshares Mortgage Group, Inc. (the Company) is a diversified financial services company engaged through wholly-owned subsidiaries primarily in the business of mortgage banking, through the purchase (via a nationwide network of correspondents and brokers), sale and servicing of agency-eligible and subprime residential, single-family (i.e., one-four family), first lien and second lien mortgage loans and the purchase and sale of servicing rights associated with agency-eligible loans. In addition, one of the Company's wholly-owned subsidiaries originates, sells and services small-ticket commercial equipment leases. As part of its primary business focus, residential mortgage banking, the Company purchases agency-eligible mortgage loans through its correspondents and funds loans through its wholesale division. The Company also purchases and originates residential mortgage loans through its subprime division. Substantially all of the residential mortgage loans purchased and originated by the Company are sold to institutional purchasers, including national and regional broker/dealers, as mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae or as whole loans. Substantially all the agency-eligible mortgage loans are sold with the rights to service the loans being retained by the Company. The majority of the retained servicing is sold separately with only a small portion held in the Company's servicing portfolio. The Company receives loan servicing fees and subservicing fees with respect to the agency-eligible loans it funds through its wholesale channel and purchases through its correspondent channel. The Company also receives loan servicing fees with respect to agency-eligible mortgage servicing rights which were acquired through bulk acquisitions of servicing rights related to agency-eligible loans originated by other lenders. During the second half of 1999 and 2000, mortgage rates rose causing a significant decline in nationwide mortgage refinance activity. Production volumes declined and the resultant industry overcapacity led to an increasingly intense competitive pricing environment. The Company was not immune from these cyclical trends as its volumes and gross production margins were adversely affected. Accordingly, the Company reported net operating losses throughout 2000. On December 1, 1999 the Company announced a planned reorganization and workforce reduction which involved (1) consolidation of 18 existing agency-eligible wholesale branch locations into six regional operating centers, (2) closure of three subprime branches and (3) reduction of overall agency-eligible production support and administrative staffing levels. During 2000, the Company further consolidated its six agency eligible regional operating centers into four centers and centralized processing of its subprime loans into three regional operating centers. Previously, the Company processed subprime loans in branch offices in major markets throughout the country. The Company also underwent a re-engineering of work processes at its regional operating centers and at its centralized post-closing operation resulting in additional cost savings. The Company was able to reduce its operating expenses (salaries and employee benefits, occupancy expenses, and general and administrative expenses) from $111.5 million in 1999 to $89.3 million in 2000. On January 10, 2000 the Company named Douglas K. Freeman as its new Chief Executive Officer. Soon thereafter, the senior management team met and restated its corporate strategy, mission, goals, business principles and core values. The Company's strategy is to become a customer centric financial intermediary that combines the best of product depth, relationship management and service quality. Pursuant to this strategy, during 2000 the Company: (1) diversified its product array, (2) began to utilize and deploy advanced technology to support a more 1 4 effective order fulfillment process and (3) integrated enhanced customer relationship management systems and disciplines into its ongoing sales and marketing operations. The Company does not hold any material trademarks, licenses, franchises or concessions. Segmented Income Statements The Company operates through wholly-owned subsidiaries that are engaged in the following lines of business: (a) agency-eligible production; (b) agency-eligible servicing; (c) agency-eligible reinsurance; (d) subprime residential production; and (e) small-ticket equipment leasing. During 2000, the Company sold substantially all of the assets of Laureate Capital Corp. (Laureate), which conducted its commercial mortgage operations (See Note 21 to the financial statements). The tables set forth under Note 18 in the Consolidated Financial Statements in the Company's accompanying 2000 Annual Report to Shareholders present a summary of the revenues and expenses for each of the Company's business segments for the years ended December 31, 2000, 1999 and 1998, respectively, and are hereby incorporated herein by reference. The following represents the percentage and amount of total Company revenues contributed by the various operating divisions for the years ended December 31, 2000, 1999 and 1998:
($ in thousands) 2000 2000 1999 1999 1998 1998 $ Amount Percentage $ Amount Percentage $ Amount Percentage --------- ---------- -------- ---------- -------- ---------- Agency-eligible production $ 26,624 47% $ 72,613 45% $ 143,650 62% Agency-eligible servicing 32,151 56% 45,080 28% 40,064 17% Agency-eligible reinsurance 3,050 5% 1,649 1% 1,189 1% Subprime (14,171) (25)% 31,351 20% 38,277 17% Leasing 10,906 19% 9,285 6% 6,404 3% Other /eliminations (1,326) (2)% (483) 0% 807 0% ------------------ -------------------- ------------------- Total $ 57,234 100% $ 159,495 100% $ 230,391 100% ================== ==================== ===================
Residential Loan Production Correspondent The Company purchases closed agency-eligible mortgage loans through its network of approved correspondent lenders. Correspondents are primarily mortgage lenders, mortgage brokers, savings and loan associations and small commercial banks. At December 31, 2000, the Company had 924 correspondents originating mortgage loans in 48 states and the District of Columbia. Agency-eligible residential loan production for the Company by correspondents is widely dispersed, with the top 20 correspondents supplying the Company with 39% of its dollar volume of correspondent loans during 2000 compared to 34% in 1999. During 2000, the top five correspondents accounted for approximately 20% of the year's mortgage loan correspondent purchase volume. This compares to the top five correspondents accounting for approximately 16% and 12% of the correspondent mortgage loan purchase volume during 1999 and 1998, respectively. No single correspondent accounted for more than 8.7% of the Company's agency-eligible mortgage loan purchase volume in 2000. In 1999 2 5 and 1998, 5.8% and 3.9%, respectively, of the Company's total agency-eligible mortgage loan purchase volume was acquired from the Company's highest-volume correspondent. The Company continues to emphasize correspondent loan production as its basic business focus. By emphasizing correspondent lending, the Company can match its costs more directly with the volume of agency-eligible loans purchased, so that a substantial portion of the Company's cost is variable rather than fixed. By emphasizing the correspondent origination approach, the Company has greater flexibility to adjust to varying market conditions. As conditions change, the Company can expand into new geographic markets without incurring significant additional costs by utilizing existing and new correspondents that operate in each new market. The use of correspondents also enables the Company to exit markets easily if circumstances dictate. The Company attracts and maintains relationships with correspondents by offering a variety of services that provide incentives for the correspondents to sell agency-eligible mortgage loans to the Company. The Company's strategy with respect to its correspondents is to provide a high level of service rather than the best price. Services provided include timely underwriting and approval or rejection of a loan (within approximately 48 hours after receipt of a completed loan application), timely purchase of loans (within 96 hours after being approved for acquisition), seminars on how to process and prepare a loan application and updates on current underwriting practices. In addition, the Company provides correspondents with a variety of products and delivery capabilities and multiple means of funding loans. During 2000, the Company introduced e-RBMG, its business-to-business Internet offering. e-RBMG makes it easier for correspondents to interact with the Company by automating the flow of information between the correspondent and the Company. e-RBMG allows correspondent lenders to upload/key files, register and lock a loan, submit a loan to Fannie Mae Desktop Underwriting, print out a fax cover with a bar code to be faxed and routed electronically, submit an electronic file to one of the Company's regional operating centers for validation and request closing funds on-line. As the mortgage lending market increases in sophistication and loan-price differentials narrow among mortgage bankers, the Company believes that the level of service and commitment it provides to its correspondents will be paramount to its success. Management believes that through correspondent lending it can manage risks and maintain good quality control. Correspondents have to meet established standards to be approved by the Veteran's Administration (VA), the U. S. Department of Housing and Urban Development (HUD) or private mortgage insurance companies. A correspondent qualifies to participate in the Company's correspondent program only after a thorough review of its reputation and mortgage lending expertise, including a review of references and financial statements and a personal visit by one or more representatives of the Company. After a correspondent qualifies for the Company's program, the Company closely monitors the correspondent's performance in terms of delinquency ratios, document exceptions and other pertinent data. Furthermore, all mortgage loans purchased by the Company through correspondents are subject to various aspects of the Company's underwriting criteria, and correspondents are required to repurchase loans or otherwise indemnify the Company for its losses in the event of fraud or misrepresentation in the origination process and for certain other reasons, including noncompliance with underwriting standards. All loan applications are subject to the Company's underwriting criteria and the guidelines set forth by the Federal Housing Authority (FHA), the VA, Ginnie Mae, Fannie Mae, Freddie Mac or private investors, as applicable. The Company or the correspondent, in the case of a correspondent with delegated underwriting authority, verifies each applicant's income and bank deposits, as well as the accuracy of the other information submitted by the applicant, and obtains and reviews a credit report from a credit reporting agency, a preliminary title report and a real estate appraisal. Generally, delegated underwriting authority is granted by the Company to its larger correspondents that meet certain financial strength, delinquency ratio, underwriting and quality control standards. 3 6 With respect to FHA and VA loans, HUD and the VA, respectively, have established approval guidelines for the underwriting of loans to be covered by FHA insurance or a VA guaranty. The Company is approved by both HUD and the VA to underwrite FHA and VA loans submitted by specified correspondents and wholesale brokers. The Company purchases FHA and VA loans only from those correspondents who are approved to underwrite FHA and VA loans and from those correspondents for whom the Company has been approved to underwrite FHA and VA loans. The Company has implemented a quality control program to monitor compliance with the Company's established lending and servicing policies and procedures, as well as with applicable laws and regulatory guidelines. The Company believes that the implementation and enforcement of its comprehensive underwriting criteria and its quality control program are significant elements in the Company's efforts to purchase high-quality mortgage loans and servicing rights. The Company's quality control department examines loans in order to evaluate the loan purchasing function for compliance with underwriting criteria. The quality control department also reviews loan applications for compliance with federal and state lending standards, which may involve re-verifying employment and bank information and obtaining separate credit reports and property appraisals. Wholesale The wholesale division receives loan applications through brokers, underwrites the loans, funds the loans at closing and prepares all closing documentation. The regional operating centers handle all shipping and follow-up procedures on loans. Typically, mortgage brokers are responsible for taking applications and accumulating the information precedent to the Company's processing of the loans. All loan applications processed by the wholesale division are subject to underwriting and quality control comparable to the standards used in the Company's correspondent lending program. In 1999 and 2000, the Company closed its branch offices and established regional operations centers to better facilitate service to a larger geographic area. At December 31, 2000, the Company had four regional operations centers serving approximately 4,227 brokers. The offices are located in San Jose, California; Boston, Massachusetts; Minneapolis, Minnesota; and St. Louis, Missouri. Although maintaining regional operations 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 regional operating center can serve a relatively sizable geographic area by establishing relationships with large numbers of independent mortgage loan brokers who bear much of the cost of identifying and interacting directly with loan applicants. The Company also offers the use of e-RBMG to its brokers. e-RBMG has the same features and benefits for brokers as enumerated above for the correspondent lending program. Subprime Subprime loan production decreased by 8% to $669.6 million for 2000 as compared to $728.4 million during 1999. Between 1999 and 2000 the Company increased the number of its subprime brokers by 453. During 2000, the Company phased out its branch facilities in favor of three regional operating centers where a critical mass of volume could be achieved for better operating efficiency. Residential production volume The following table shows residential production volume by source for each of the three years in the period ended December 31, 2000. 4 7
RESIDENTIAL LOAN PRODUCTION VOLUME Year Ended December 31, ------------------------------------------------------- ($ in Thousands) 2000 1999 1998 ----------------- ----------------- ----------------- Correspondent $4,532,335 $6,363,936 $11,666,560 Wholesale 1,098,699 1,748,415 3,023,961 Retail -- -- 264,059 ----------------- ----------------- ----------------- Total agency-eligible loan production $5,631,034 $8,112,351 $14,954,580 Subprime production 669,622 728,410 607,664 ----------------- ----------------- ----------------- Total residential production $6,300,656 $8,840,761 $15,562,244 ================= ================= =================
The Company purchases and originates conventional and subprime mortgage loans and mortgage loans insured by the FHA or partially guaranteed by the VA. All mortgage loans purchased or originated by the Company are purchased or originated for resale. The majority of the Company's loans are conforming loans, i.e., mortgage loans that qualify for inclusion in purchase and guarantee programs sponsored by Fannie Mae, Freddie Mac and Ginnie Mae. The Company purchases and originates a variety of mortgage loan products that are designed, in conjunction with the requirements of prospective purchasers of such loans, to respond to consumer needs and competitive factors. In addition to 15-year and 30-year conventional mortgage loans and 15-year and 30-year FHA loans and VA loans, the Company purchases and originates products designed to provide lower interest rates to borrowers or lower principal and interest payments by borrowers, including balloon mortgage loans that have relatively short terms (e.g., five or seven years) and longer amortization schedules (e.g., 25 or 30 years) and adjustable rate mortgage loans. The Company also purchases and originates mortgage loans featuring a variety of combinations of interest rates and discount points so that borrowers may elect to pay higher points at closing and less interest over the life of the loan, or pay a higher interest rate and reduce or eliminate points payable at closing. The portion of total loans held for sale at any time that consists of a particular product type depends upon the interest rate and competitive environments at the time such loans are made. Volume The following table shows residential mortgage loan production volume by type of loan for each of the three years in the period ended December 31, 2000.
Year Ended December 31, ------------------------------------------------------- ($ in Millions except as indicated) 2000 1999 1998 --------------- --------------- --------------- CONVENTIONAL LOANS: Volume $ 3,519.5 $ 4,892.9 $ 10,674.1 Percentage of total volume 56% 55% 68% FHA / VA LOANS: Volume $ 2,111.6 $ 3,219.5 $ 4,280.4 Percentage of total volume 34% 37% 28% SUBPRIME LOANS: Volume $ 669.6 $ 728.4 $ 607.7 Percentage of total volume 10% 8% 4% TOTAL LOANS: Volume $ 6,300.7 $ 8,840.8 $ 15,562.2 Number of loans 53,897 79,322 131,630 Average loan size ($ in Thousands) $ 116.9 $ 111.5 $ 118.2
5 8 The following table shows residential loan production volume by state for the year ended December 31, 2000, for each state that represented 5% or more of the Company's total residential loan production volume for 2000.
Year Ended December 31, 2000 ------------------------------------- ($ in Thousands) Percent of State Amount Total --------------------------------- ---------------- --------------- California $ 806,497 12.80% Massachusetts 611,078 9.69% Minnesota 558,233 8.86% Colorado 405,495 6.44% Ohio 388,124 6.16% Illinois 341,993 5.43% All other 3,189,236 50.62% --------------- ---------------- TOTAL $ 6,300,656 100.00% ================ ================
Sale of Residential Loans The Company customarily sells all agency-eligible mortgage loans that it originates or purchases, retaining the mortgage servicing rights, which currently are sold separately. Under ongoing programs established with Fannie Mae and Freddie Mac, the Company aggregates its conforming conventional loans into pools that are assigned to Fannie Mae or Freddie Mac in exchange for mortgage-backed securities. The Company's FHA mortgage loans and VA mortgage loans are generally pooled and sold in the form of Ginnie Mae mortgage-backed securities. The Company pays certain fees to Freddie Mac, Fannie Mae or Ginnie Mae, as applicable, in connection with these programs. The Company then sells Freddie Mac, Fannie Mae and Ginnie Mae securities to securities dealers. Substantially all of the Company's agency-eligible mortgage loans qualify under the various Fannie Mae, Freddie Mac and Ginnie Mae program guidelines, which include specific property and credit standards, including a loan size limit. Subprime and non-conforming conventional residential mortgage loans are sold to private investors through whole loan sales. Prior to 2000, the Company securitized a portion of its subprime production. During 2000, the Company sold its subprime production on a whole loan basis for cash. In the case of conventional loans, subject to the obligations of any primary mortgage insurer, the Company is generally at risk for any mortgage loan default until the loan is sold (typically less than 45 days). Once the Company sells the loan, the risk of loss from mortgage loan default and foreclosure generally passes to the purchaser or insurer of the loan. In the case of FHA and VA loans, the Company has, from the time such a loan is originated or purchased until the first borrower payment is due, a minimum of 31 days, to request insurance or a guarantee certificate. Once the insurance or the guarantee certificate is issued, the Company has no risk of default, except with respect to certain losses related to foreclosures of FHA mortgage loans and losses that exceed the VA's guarantee limitations. In connection with the Company's loan exchanges and sales, the Company makes representations and warranties customary in the industry relating to, among other things, compliance with laws, regulations and program standards and as to accuracy of information. In the event of a breach of these representations and warranties, the Company may become liable for certain damages or may be required to repurchase such loans and bear any potential related loss on the disposition of those loans. Typically, with respect to loans that the Company repurchases, the Company corrects the flaws that had resulted in the repurchase, and the loans are resold in the market or are repurchased by the original correspondent pursuant to prior agreement. 6 9 The Company uses hedging techniques to reduce its exposure to interest rate risk in connection with loans not yet sold or securitized. The Company projects the portion of the pipeline loans that the Company anticipates to close. The Company assesses the interest-rate risk associated with the commitments that it has extended to originate or purchase loans and evaluates the interest-rate risk of these commitments based upon a number of factors, including the remaining term of the commitment, the interest rate at which the commitment was provided, current interest rates and interest-rate volatility. The Company constantly monitors these factors and adjusts its hedging when appropriate throughout each business day. The Company's hedging currently consists of utilizing a combination of mandatory forward sales commitments on mortgage-backed securities and mortgage loans and options on treasuries. The sale of mortgage loans may generate a gain or loss to the Company. Gains or losses result primarily from two factors. First, the Company may originate or purchase a loan at a price (i.e., interest rate and discount) that may be higher or lower than the Company would receive if it immediately sold the loan in the secondary market. These pricing differences occur principally as a result of competitive pricing conditions in the primary loan origination market. Second, gains or losses upon the sale of loans may result from changes in interest rates, which cause changes in the market value of the loans, or commitments to originate or purchase loans, from the time the price commitment is given to the customer until the time that the loan is sold by the Company to the investor. To reduce the effect of interest-rate changes on the gain and loss on loan sales, the Company generally commits to sell all its agency-eligible warehouse loans and a portion of its pipeline loans to investors for delivery at a future time for a stated price. In connection with its agency-eligible loan sale program, which involves the sale of mortgage loans and mortgage-backed securities on a forward or other deferred delivery and payment basis, the Company has credit risk exposure to the extent purchasers are unable to meet the terms of their forward purchase contracts. As is customary in the marketplace, none of the forward payment obligations of any of the Company's counterparties is secured or subject to margin requirements; however, the Company attempts to limit its credit exposure on forward sales arrangements by entering into forward sales contracts solely with institutions that the Company believes are sound credit risks, and by limiting exposure to any single counterparty by selling to a number of investors. For example, it is the Company's current policy that not more than the lesser of (i) $500 million or (ii) 30% of the total forward purchase contracts outstanding at any time be with any single counterparty. All counterparties are obligated to settle such sales in accordance with the terms of the related forward sale agreement. Mortgage Servicing Agency-eligible mortgage servicing includes collecting and remitting mortgage loan payments, accounting for principal and interest, holding escrow funds for payment of mortgage-related expenses such as taxes and insurance, making advances to cover delinquent payments, making inspections of the mortgaged premises as required, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, and generally administering agency-eligible mortgage loans. Failure to service mortgage loans in accordance with contract requirements may lead to the termination of the servicing rights and the loss of future servicing fees. The Company's current strategy is to pool and sell substantially all of its produced agency-eligible mortgage servicing rights to other approved servicers. The Company retains a relatively small portion of its produced agency-eligible servicing rights and sells available-for-sale servicing rights in bulk transactions. The Company's credit facilities require it to maintain at all times a mortgage servicing rights portfolio with an underlying unpaid principal balance of at least $5.0 billion. The Company's policy with respect to the sale, purchase or retention of mortgage servicing rights may change in the future. 7 10 In addition to servicing its agency-eligible mortgage servicing rights portfolios, the Company also subservices agency-eligible mortgage servicing rights portfolios during the period of approximately 90 days between the date the Company has sold the related servicing rights and the date such servicing rights are actually transferred to the purchaser. The Company receives fees for servicing residential mortgage loans, ranging generally from 0.25% to 0.44% per annum on the unpaid principal balances of the loans. Servicing fees are collected by the Company from monthly mortgage loan payments. Other sources of loan servicing revenues include fees incidental to the services provided. As a servicer of mortgage loans underlying mortgage-backed securities, the Company is obligated to make timely payments of principal and interest to security holders, whether or not such payments have been made by mortgagors on the underlying mortgage loans. Similarly, in the event of foreclosure, the Company is responsible for covering with its own funds principal and foreclosure costs to the extent not covered by FHA insurance or a VA guarantee. The following table shows the delinquency percentages (excluding bankruptcies and foreclosures) of the Company's residential mortgage servicing rights portfolio (excluding loans serviced under subservicing agreements) at December 31, 2000.
December 31, December 31, Days Delinquent 2000 1999 --------------- ------------- ------------- 30 1.83% 1.65% 60 .26% .30% 90+ days .14% .17% ------------- ------------- Total delinquencies 2.23% 2.12% ============= =============
At December 31, 2000, the Company's owned mortgage servicing rights portfolio had an underlying unpaid principal balance of $8.0 billion. The portfolio generally reflected characteristics representative of the then-current market conditions and had a weighted average note rate of 7.67%. In 2000, the Company produced or purchased servicing rights associated with agency-eligible residential loans having an aggregate underlying unpaid principal balance of $5.6 billion and had an average aggregate underlying unpaid principal balance of loans being serviced of $9.0 billion. Typically, the Company sells the majority of its produced agency-eligible mortgage servicing rights between 90 days and 180 days of purchase. Nevertheless, certain market and operating characteristics, including origination costs, adjusted basis, market values, coupon rates, delinquency rates and current prepayment rates are considered to determine whether mortgage servicing rights should be held for longer periods of time. The following table provides certain information regarding the Company's agency-eligible mortgage servicing rights portfolio at December 31, 2000.* 8 11
($ in Thousands) Percentage of Aggregate Total Unpaid Year of Number of Loans Percentage of Unpaid Principal Principal Origination Total Loans Balance Balance ------------------------ ----------------- ------------------ --------------------- ----------------- 1992 or earlier 4,312 5.7% $ 219,638 2.7% 1993 5,670 7.5% 383,913 4.8% 1994 3,966 5.2% 315,699 3.9% 1995 1,327 1.8% 101,376 1.3% 1996 2,526 3.3% 256,951 3.2% 1997 9,363 12.4% 1,001,975 12.5% 1998 18,087 23.9% 2,195,268 27.3% 1999 8,707 11.5% 891,870 11.1% 2000 21,690 28.7% 2,680,489 33.2% ----------------- ------------------ --------------------- ----------------- Total 75,648 100.00% $8,047,179 100.00% ================= ================== ===================== =================
* Includes $236,267 (2,499 loans) of subprime loans as of December 31, 2000 being temporarily serviced until these loans are sold. The following table sets forth the Company's agency-eligible mortgage servicing rights portfolio by loan type*:
($ in Thousands) At December 31, 2000 ------------------------------------------------------------------------------- Aggregate Unpaid Weighted Weighted Number Principal Average Average Loan Type of Loans Balance Coupon Service Fee - ------------------------------- ------------- --------------- ----------------- ---------------- FHA 4,187 $ 444,578 8.34% .5672% VA 772 89,127 8.19% .5408% Fannie Mae 44,683 4,770,714 7.61% .4479% Freddie Mac 19,504 2,015,409 7.37% .3620% Private 425 24,949 8.83% .4033% Other 6,077 702,402 8.03% .2968% ------------- --------------- ----------------- ---------------- TOTAL 75,648 $8,047,179 7.67% .4223% ============= =============== ================= ================
* Includes $236,267 (2,499 loans) of subprime loans as of December 31, 2000 being temporarily serviced until these loans are sold. The Company's agency-eligible mortgage servicing rights portfolio is generally divided into two segments. The portion of the portfolio that is generated by current loan production is classified as "held-for-sale", and the portion of the portfolio that was acquired through bulk acquisitions or retained for production of servicing income is classified as "available-for-sale." The Company's held-for-sale portfolio had an aggregate underlying unpaid principal balance of $2,566.2 million at December 31, 2000. The Company's available-for-sale portfolio had an aggregate underlying unpaid principal balance of $5,480.9 million at December 31, 2000. As the servicing rights of the available-for-sale portfolio are generally held as a longer-term investment, there are certain prepayment risks inherent to it that do not attach to the portion of the portfolio held-for-sale (the portfolio held-for-sale is generally sold within 90 to 180 days). During periods of declining interest rates, prepayments of mortgage loans increase as homeowners seek to refinance at lower rates, resulting in a decrease in the value of the Company's available-for-sale portfolio. Mortgage loans with higher interest rates are more likely to result in prepayments. The following table sets forth certain information regarding the aggregate underlying unpaid principal balance of mortgage 9 12 loans in the available-for-sale portfolio serviced by the Company. The table includes both fixed and adjustable rate loans. Available-For-Sale Portfolio
($ in Thousands) At December 31, 2000 ---------------------------------------------------- Aggregate Percentage of Total Unpaid Principal Unpaid Principal Mortgage Interest Rate Balance Balance - -------------------------------- ----------------------- ----------------------- Less than 7.00% $1,494,538 27.27% 7.00% - 7.49% 1,864,327 34.01% 7.50% - 7.99% 1,074,547 19.61% 8.00% - 8.49% 571,886 10.43% 8.50% - 8.99% 342,360 6.25% 9.00% - 9.49% 88,084 1.61% Greater than 9.49% 45,187 0.82% ----------------------- ----------------------- TOTAL $5,480,929 100.00% ======================= =======================
The following table sets forth the geographic distribution of the Company's available-for-sale servicing portfolio for those states representing more than 3% of the portfolio:
($ in Thousands) At December 31, 2000 ------------------------------------------------------- Aggregate Percentage of Unpaid Principal Total Unpaid State Balance Principal Balance - ------------------------------- ------------------- ---------------------------------- Massachusetts $ 587,860 10.73% Minnesota 461,152 8.41% California 412,258 7.52% Illinois 366,134 6.68% New York 319,356 5.83% Ohio 273,393 4.99% Connecticut 250,290 4.57% Texas 247,737 4.52% Colorado 214,922 3.92% Michigan 203,062 3.70% Georgia 169,047 3.08% Florida 167,848 3.06% All others 1,807,870 32.99% ------------------- ---------------------------------- TOTAL $ 5,480,929 100.00% =================== ==================================
The following table sets forth certain information regarding the aggregate underlying unpaid principal balance of the mortgage loans in the held-for-sale portfolio serviced by the Company. The table includes both fixed and adjustable rate loans. 10 13 Held-For-Sale Portfolio
($ in Thousands) At December 31, 2000 ----------------------------------------------- Aggregate Percentage of Total Unpaid Principal Unpaid Principal Mortgage Interest Rate Balance Balance - --------------------------------------- --------------------- ----------------------- Less than 7.00% $ 4,181 0.16% 7.00% - 7.49% 375,989 14.65% 7.50% - 7.99% 482,729 18.81% 8.00% - 8.49% 976,681 38.06% 8.50% - 8.99% 424,908 16.57% 9.00% - 9.49% 75,479 2.94% Greater than 9.50% 226,282 8.81% --------------------- ----------------------- TOTAL $ 2,566,249 100.00% ===================== =======================
To help the Company manage its risk related to prepayments of its servicing portfolio, the Company has purchased interest-rate floor contracts and callable pass-through certificates, which provide an interest rate differential on a fixed portion of the portfolio in the event interest rates fall below a certain level. For a more detailed discussion of interest rate floor contracts and callable pass-through certificates, see Note 17 of the Company's Consolidated Financial Statements, found in the Company's accompanying 2000 Annual Report to Shareholders, included herein and incorporated by reference. Leasing Operations The Company's wholly-owned subsidiary, Republic Leasing Company, Inc. (Republic Leasing), originates and services small-ticket commercial equipment leases. Substantially all of Republic Leasing's lease receivables are acquired from independent brokers who operate throughout the continental United States. At December 31, 2000 the leasing division had 181 brokers. Lease production was $103.3 million, or 1.6% of the Company's total production volume, during 2000. At December 31, 2000, Republic Leasing managed a lease servicing portfolio of $192.6 million. Of this managed lease portfolio, $188.9 million was owned and $3.7 million was serviced for investors. The weighted average net yield for the managed lease servicing portfolio at December 31, 2000 was 10.8%. Delinquencies for the managed lease servicing portfolio at December 31, 2000 were 2.4%. Seasonality The residential mortgage banking industry is generally subject to seasonal trends. These trends reflect the general pattern of resale of homes, which typically peaks during the spring and summer seasons and declines to lower levels from mid-November through January. Refinancings tend to be less seasonal and more closely related to changes in interest rates. The small-ticket equipment leasing industry is generally not considered to be seasonal. 11 14 Changes in Economic Conditions The Company's business is subject to various business risks, including competition from other mortgage banking companies and other financial institutions. Economic conditions affect the consumer's decision to buy or sell residences as well as the number of residential mortgage loan delinquencies and foreclosures, the value of collateral supporting loan portfolios, administrative costs in evaluating and processing mortgage loan applications, and the cost and availability of funds that mortgage banking companies rely upon to make or purchase loans. Changes in the level of consumer confidence, tax laws, real estate values, prevailing interest rates and investment returns expected by the financial community could make mortgage loans of the types originated or purchased by the Company less attractive to borrowers or investors. Competition also may be affected by fluctuations in interest rates and general and local economic conditions. The Company continues to face the same challenges as other companies within the mortgage banking industry and, therefore, is not immune to significant volume declines precipitated by changes in interest rates or other factors beyond its control. Competition The mortgage banking industry is highly competitive. The Company competes with financial institutions, mainly mortgage banking companies, commercial banks and savings and loan associations and, to a lesser extent, credit unions and insurance companies. The Company competes principally by purchasing or originating a variety of mortgage loans, emphasizing the quality of its service and pricing the loans at competitive rates. Many of the Company's competitors may have greater financial resources, better operating efficiencies and longer operating histories than the Company. Many of the nation's largest mortgage banking companies and commercial banks have a significant number of branch offices in areas in which the Company's correspondents and wholesale regional operations centers operate. Increased competition for mortgage loans from larger lenders may result in a decrease in the volume of loans purchased or originated by the Company, thereby likely reducing the Company's revenues. At the same time, Fannie Mae and Freddie Mac are developing technologies and business practices that could reduce their reliance on large mortgage banking companies for loan production and enable them to access smaller producers for volume. Due to the current highly competitive market pricing environment, the Company may be unable to achieve its planned level of originations or consummate acquisitions of servicing rights at a satisfactory cost. The Company does not have a significant market share of mortgage banking activities in the areas in which it conducts operations. The small-ticket commercial equipment leasing industry is highly competitive. The Company is subject to competition from other equipment leasing companies, some of which may be better capitalized. The Company does not have a significant market share of equipment leasing in the areas in which it conducts operations. Due to the foregoing considerations, there can be no assurance that the Company will be able to continue to compete successfully in the markets it serves. Inability to compete successfully would have a material adverse effect on the results of operations and financial condition of the Company. Concentration The Company typically sells the mortgage servicing rights associated with its mortgage production into forward sales contracts. Additionally, from time to time, the Company will sell residential mortgage servicing rights from its available-for-sale portfolio. In 2000 approximately 94% of its sales under these forward sales contracts were to two major customers. In 1999, approximately 79% of its sales under these forward sales contracts were to four major customers. The loss of these purchasers would have a material adverse effect on the Company's business if no suitable replacement purchasers could be found. 12 15 The growth and profitability of the Company's equipment leasing business are dependent to a large extent on the ability to finance an increasing balance of leases held in its portfolio or to sell leases to and service leases for third parties. At December 31, 2000, approximately 16% and 7% of the Company's net lease receivables were located in the states of California and Florida, respectively. At December 31, 2000, approximately 16% and 5% of the Company's net lease receivables were collateralized by computer equipment and titled equipment, respectively. Interest Rate Risks The Company's loans held for sale are generally funded by borrowings under its revolving warehouse credit line. The Company's net warehouse interest income is the difference between the interest income it earns on loans held for sale (generally based on long-term interest rates) and the interest it pays on its borrowings (generally based on short-term interest rates). The factors that can affect this spread include interest rates charged by lenders, the relationship between long-term and short-term interest rates and the use of compensating balances (escrow funds held on deposit with lending banks) to decrease interest rates charged on borrowed funds. There can be no assurance that this spread will not decrease from its current level. A decrease in the spread would have a negative effect on the Company's net interest income. The Company's net income reflects a reduction in interest expense on its borrowings with depository institutions for escrow funds placed with such institutions. Net income could be adversely affected to the extent that any revisions of applicable bank regulations cause these escrow accounts to be recharacterized as demand deposit accounts, thereby requiring reserves to be established with Federal Reserve Banks, which would reduce the amount of the reduction in the Company's interest expense on its borrowings. Other regulatory changes or interpretations that change the ability of the Company to receive credit for escrow balances would adversely affect the Company. Certain states require that interest be paid to mortgagors on escrow funds deposited by them to cover mortgage-related payments such as property taxes and insurance premiums. Federal legislation has in the past been introduced that would, if enacted, revise current escrow regulations and establish a uniform interest payment requirement in all states. If such federal legislation were enacted or if additional states enact legislation relating to payment of, or increases in the rate of, interest on escrow balances, or if such legislation were retroactively applied to loans in the Company's servicing portfolio, the Company's earnings would be adversely affected. Regulation The operations of the Company are subject to extensive regulation by federal and state governmental authorities and are subject to various laws and judicial and administrative decisions that, among other things, regulate credit-granting activities, require disclosures to customers, govern secured transactions and establish collection, repossession and claims handling procedures and other trade practices. The Company is subject to the rules and regulations of the FHA, Freddie Mac, Fannie Mae, Ginnie Mae, HUD, the VA and state regulatory authorities with respect to originating, processing, underwriting, selling, securitizing and servicing mortgage loans. In addition, there are other federal and state statutes and regulations, as well as judicial decisions, affecting such activities. Those rules and regulations, among other things, impose licensing obligations on the Company, establish eligibility criteria for mortgage loans, prohibit discrimination and establish underwriting guidelines that include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts, and with respect to VA loans, fix maximum interest rates. Moreover, lenders such as the Company are required to submit annually to the FHA, Freddie Mac, Fannie Mae, Ginnie Mae and the VA audited financial statements, and each regulatory 13 16 entity has its own financial requirements. The Company's affairs also are subject to examination by the FHA, Freddie Mac, Fannie Mae, Ginnie Mae and the VA at all times to assure compliance with applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act and its related regulations, which prohibit discrimination, and the Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the regulations promulgated thereunder, which require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs, respectively. Many of the aforementioned regulatory requirements are designed to protect the interests of consumers, while others protect the owners or insurers of mortgage loans. Failure to comply with these requirements can lead to loss of approved status, termination of servicing contracts without compensation to the servicer, demands for indemnification or loan repurchases, class-action lawsuits and administrative enforcement actions. Such regulatory requirements are subject to change from time to time and may in the future become more restrictive, thereby making compliance more difficult or expensive or otherwise restricting the ability of the Company to conduct its business as such business is now conducted. There are various state and local laws and regulations affecting the Company's operations. The Company is in possession of licenses in all states in which it does business that require such licenses. Mortgage loans also may be subject to state usury statutes. Litigation In recent years, the mortgage banking industry has been subject to class action lawsuits that allege violations of federal and state laws and regulations, including the propriety of collecting and paying various fees and charges and the calculation of escrow amounts. Most recently, at least 170 purported class action lawsuits have been commenced against various mortgage banking companies, including the Company, alleging that the payment of certain fees to mortgage brokers violates the anti-kickback provisions of RESPA. If these cases are resolved against the lenders, it may cause an industry-wide change in the way independent mortgage brokers are compensated. Such a change could have a material adverse effect on the Company and the entire mortgage lending industry. The Company's broker compensation and table-funded correspondent purchase programs permit such payments. Although the Company believes these programs comply with all applicable laws and are consistent with long-standing industry practice and regulatory interpretations, in the future new regulatory interpretations or judicial decisions may require the Company to change its broker compensation and table-funded correspondent purchase practices. Class action lawsuits may continue to be filed against the mortgage banking industry generally. No prediction can be made as to whether the ultimate decisions in any of these class actions will be adverse to the defendant mortgage banking companies. Delinquency and Default The Company's profitability may be negatively impacted by economic downturns because, during such periods, the frequency of loan defaults tends to increase, thereby increasing the cost to service the loans in the Company's portfolio. Also, the Company is generally at risk for delinquency or default of newly originated or purchased loans. In the case of conventional loans, the Company is generally at risk for any mortgage loan default from origination or purchase by the Company, as the case may be, until the loan is sold (typically less than 45 days). Once the Company sells the loan, the risk of loss from mortgage loan default and foreclosure generally passes to the purchaser or insurer of the loan. The Company has from the time an FHA or VA mortgage loan is originated or purchased until the first payment is due, a minimum of 31 days, to request insurance or a guarantee certificate from the FHA and the VA, respectively. Once the insurance or the guarantee certificate is issued, the Company has no risk of default or foreclosure except with respect to certain losses related to foreclosures of FHA mortgage loans and losses that exceed the VA's guarantee limitation. 14 17 Moreover, under certain types of servicing contracts, particularly contracts to service loans that have been pooled or securitized, the servicer must advance all or part of the scheduled payments to the owner of the loan, even when loan payments are delinquent. Also, to protect their liens on mortgaged properties, owners of mortgage loans usually require the servicer to advance mortgage and hazard insurance and tax payments on schedule even if sufficient escrow funds are unavailable. Prior to the liquidation of a loan, the servicer must absorb the cost of funds advanced during the time the advance is outstanding. Further, the servicer must bear the increased costs of attempting to collect on delinquent and defaulted mortgage loans. The servicer generally is reimbursed for such advances ultimately by the mortgage loan owner or from liquidation proceeds. In addition, if a default is not cured, the mortgage loan will be extinguished as a result of foreclosure proceedings, and any servicing income will cease. As a consequence, the Company will forego servicing income from the time such loan becomes delinquent until it is foreclosed upon or is brought current. The Company maintains a reserve for losses at a level considered adequate to provide for known and inherent risks related to foreclosure and disposition losses. The Company's evaluation of an adequate level of foreclosure reserves considers past loss experience, industry loss experience, geographic and product concentrations, delinquency trends, economic conditions and other relevant factors. The Company uses currently available information to make such evaluation, therefore future adjustments to the foreclosure reserve will be required as conditions and assumptions are revised in response to changes in trends and the other factors and assumptions relevant to the Company's evaluation. With respect to VA loans, the VA guarantees the initial losses on a loan. The guaranteed amount generally ranges from 20% to 35% of the original principal balance. Before each foreclosure sale, the VA determines whether to bid to purchase the foreclosed loan by comparing the estimated net sale proceeds to the outstanding principal balance and the servicer's accumulated reimbursable costs and fees. If this amount is a loss and exceeds the guaranteed amount, the VA typically issues a no-bid and pays the servicer the guaranteed amount. Whenever a no-bid is issued, the servicer absorbs the loss, if any, in excess of the sum of the guaranteed principal and amounts recovered at the foreclosure sale. The Company's historical delinquency and foreclosure rate experience on VA loans has generally been consistent with that of the industry. In the case of loans insured by the FHA, the Company will not be reimbursed for certain amounts if foreclosure becomes necessary. Such amounts include interest on the mortgage loan for the first two months subsequent to the loan becoming delinquent and a portion of the costs of foreclosure (generally the unreimbursed amount of such costs is limited to one-third of such costs). Financing of Operations The Company's primary cash-flow requirement involves the funding of loan production, which is met primarily through external borrowings. In 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 $150 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, (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 15 18 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 December 31, 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. Meritage, RBMG and a bank are parties to a master repurchase agreement, pursuant to which Meritage and RBMG are 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 July 2001. RBMG, Inc. and RBMG PFC, Inc. entered into a $50 million commercial paper conduit facility in November 2000. The facility expires in November 2001. 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 facility. The terms of the related agreement require the Company to make 120 equal monthly principal and interest payments based upon a fixed interest rate of 8.07%. The note contains covenants similar to those previously described. The Company has entered into a $10.0 million unsecured line of credit agreement that expires in July 2001. 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 Republic Leasing to maintain a ratio of total liabilities to net worth of no more than 10.0 to 1.0. There can be no assurance that the Company will be able to comply with the covenants in its various credit facilities, and failure to comply could result in the loss of the related financing. In addition, there can be no assurance that the Company will be able to renew these arrangements at the end of their terms or obtain replacement financing on terms acceptable to the Company. To the extent that the Company loses its financing sources, or if the Company experiences difficulty in selling its mortgage loans or mortgage-backed securities, it may have to curtail its mortgage loan origination and purchase activities, which would have a material adverse effect on the Company's operations and financial condition. Changes in the Market for Servicing Rights, Mortgage Loans and Lease Receivables - -------------------------------------------------------------------------------- 16 19 Volume of Mortgage Loans Produced During periods of declining interest rates, the Company typically experiences an increase in loan originations because of increased home purchases and, particularly, increased refinancing activity. Increases in interest rates typically adversely affect refinancing activity, which has an adverse effect on the Company's origination revenues. Sales of Mortgage Loans Gains or losses on sales of mortgage loans may result from changes in interest rates from the time the interest rate on a customer's mortgage loan application is established to the time the company sells the loan. At any given time, the Company has committed to sell substantially all of its agency-eligible mortgage loans that are closed and a percentage of the agency-eligible mortgage loans that are not yet closed but for which the interest rate has been established ("pipeline loans"). To manage the interest rate risk of the Company's pipeline loans, the Company continuously projects the percentage of the pipeline loans it expects to close and, on the basis of such projections, enters into forward sales commitments to sell such loans. To reduce the effect of such interest rate changes, the Company employs a variety of techniques, currently consisting of a combination of mandatory forward sales commitments for mortgage-backed securities and put and call option contracts on treasuries. If interest rates make an unanticipated change, the actual percentage of pipeline loans that close may differ from the projected percentage. A sudden increase in interest rates can cause a higher percentage of pipeline loans to close than projected. To the degree that this may not have been anticipated, the Company may not have made forward sales commitments to sell these additional loans and consequently may incur significant losses upon their sale at current market prices, adversely affecting results of operations. Likewise, if a lower percentage of pipeline loans closes than was projected, due to a sudden decrease in interest rates or otherwise, the Company may have committed to sell more loans than actually close and as a result may incur significant losses in fulfilling these commitments, adversely affecting results of operations. This risk is greater during times of volatility of interest rates. Value of Mortgage Servicing Rights The value of the Company's servicing portfolio may be adversely affected if mortgage interest rates decline and loan prepayments increase. In periods of declining interest rates, the economic advantages to borrowers of refinancing their mortgage loans become greater. Increases in the rate of mortgage loan prepayments reduce the period during which the Company receives servicing income from such loans. The Company capitalizes the cost of the acquisition of servicing rights from third parties and capitalizes estimated servicing rights on loans that it originates. The value of servicing rights is based upon the net present value of estimated future cash flows. If the rate of prepayment of the related loans exceeds the rate assumed by the Company, due to a significant reduction in interest rates or otherwise, the value of the Company's servicing portfolio will decrease and accelerated amortization of servicing rights or recognition of an impairment provision may become necessary, thereby decreasing earnings. The Company attempts to mitigate these risks with respect to the value of its servicing rights by maintaining a portfolio of interest rate option contracts whose value tends to increase in periods of declining interest rates thus mitigating the decline in value typical during the same period with respect to servicing rights. However, there can be no assurance that the Company's efforts to mitigate these risks will prevent value loss or impairment provisions. Sales of Mortgage Servicing Rights The prices obtained by the Company upon the sale of its mortgage servicing rights depend upon a number of factors, including the general supply of and demand for mortgage servicing rights, as well as 17 20 prepayment and delinquency rates on the portfolio of mortgage servicing rights being sold. Interest rate changes can affect the ability to sell, or the profitability of a sale of, mortgage servicing rights. Purchasers of mortgage servicing rights analyze a variety of factors, including prepayment sensitivity of loans underlying servicing rights, to determine the purchase price they are willing to pay. Thus, in periods of declining interest rates, sales of mortgage servicing rights related to higher interest rate loans may be less profitable than sales of mortgage servicing rights related to lower interest rate loans because it is possible that the loans bearing higher interest rates will be refinanced. Because these factors are largely beyond the control of the Company, there can be no assurance that the current level of profitability from the sale of mortgage servicing rights will be maintained. Liabilities Under Representations and Warranties In the ordinary course of business, the Company makes representations and warranties to the purchasers and insurers of its mortgage loans and the purchasers of mortgage servicing rights regarding compliance with laws, regulations and program standards and as to accuracy of information. Under certain circumstances, the Company may become liable for certain damages or may be required to repurchase a loan if there has been a breach of representations or warranties. The Company generally receives similar representations and warranties from the correspondents from whom it purchases loans. However, in the event of breaches of such representations and warranties, the Company is subject to the risk that a correspondent may not have the financial capacity to repurchase loans when called upon to do so by the Company or otherwise may not respond to demands made by the Company. Environmental Matters In the course of its business, through the foreclosure process, the Company has acquired, and may acquire in the future, properties securing loans that are in default. Although the Company lends to owners of residential properties, there is a risk that the Company could be required to investigate and cleanup hazardous or toxic substances or chemical releases at such properties after its acquisition and might be held liable to a governmental entity or to third-parties for property damage, personal injury and investigation or cleanup costs incurred by such parties in connection with the contamination. To date, the Company has not been required to perform any investigation or cleanup activities of any material nature, nor has the Company been subject to any environmental claims. No assurance can be given, however, that this will remain the case in the future. Changes in the Demand for Mortgage Loans and Leases The Company's operating results can fluctuate substantially from period to period as a result of a number of factors, including the volume of loan and lease production, the level of interest rates, the level of amortization of mortgage servicing rights required by prepayment rates and the performance of the Company's servicing portfolio hedge, which currently consists primarily of interest rate option contracts for ten year Constant Maturity Treasury and Constant Maturity Swap floors and Callable Pass-through Certificates. In particular, the Company's results are strongly influenced by the level of loan and lease production, which is influenced by the interest rate environment and other economic factors. Accordingly, it is likely that the net income of the Company will fluctuate substantially from period to period. Prepayment Risks Amounts capitalized as mortgage servicing rights are amortized over the period of, and in proportion to, estimated future net servicing income. The Company assesses its capitalized mortgage servicing rights for impairment (on a stratified basis) based on the estimated market values of those 18 21 rights. Impairments are recognized as a valuation allowance for each impaired stratum. Market value is estimated by an internal valuation which is substantiated for reasonableness by reference to a third-party analysis. Both analyses value such rights in consideration of current forward committed delivery prices, prevailing interest, prepayment and default rates, mortgage to treasury spreads and other relevant factors as appropriate or allocable to each valuation stratum. Dependence Upon Independent Mortgage Brokers and Mortgage Bankers The Company depends largely upon independent mortgage bankers, including smaller mortgage companies and commercial banks, and, to a lesser extent, upon independent mortgage brokers, for its originations and purchases of mortgage loans. Substantially all of the independent mortgage brokers and mortgage bankers, with whom the Company does business, deal with multiple loan originators for each prospective borrower. Wholesale lenders, such as the Company, compete for business based upon pricing, service, loan fees and costs and other factors. The Company's competitors also seek to establish relationships with the same independent mortgage bankers and mortgage brokers with whom the Company seeks to do business, none of whom is obligated by contract or otherwise to continue to do business with the Company. Future operating and financial results of the Company will be susceptible to fluctuations in the volume and cost of its broker and mortgage banker-sourced loans resulting from, among other things, competition from other purchasers of such loans. Possible Changes in Accounting Estimates In preparing the financial statements, management is required to make estimates based on available information that can affect the reported amounts of assets, liabilities and disclosures as of the balance sheet date and revenues and expenses for the related periods. Such estimates relate principally to the Company's allowance for foreclosure losses and repurchased loans, and its allowance for lease losses. Additionally, estimates concerning the fair values of mortgage loans held-for-sale, lease receivables, servicing rights, servicing hedges and the Company's other hedging instruments are all relevant to ensuring that leases and mortgage loans are carried at the lower of cost or market, and that potential impairments of servicing rights are recognized as and if required. Because of the inherent uncertainties associated with any estimation process and due to possible future changes in market and economic conditions that will affect fair values, it is possible that actual future results in realization of the underlying assets and liabilities could differ significantly from the amounts reflected as of the balance sheet date. Federal Programs; Availability of Active Secondary Market The Company's ability to generate funds by sales of mortgage-backed securities is largely dependent upon the continuation of programs administered by Fannie Mae, Freddie Mac and Ginnie Mae, which facilitate the issuance of such securities, as well as the Company's continued eligibility to participate in such programs. Although the Company is not aware of any proposed discontinuation of, or significant reduction in, the operation of such programs, any such changes could have a material adverse effect on the Company's operations. The Company anticipates that it will continue to remain eligible to participate in such programs, but any significant impairment of such eligibility would materially adversely affect its operations. In addition, the mortgage loan products eligible for such programs may be changed from time to time by the sponsor. The profitability of specific types of mortgage loan products may vary depending on a number of factors, including the administrative costs to the Company of originating or purchasing such types of mortgage loans. There can be no assurance that the Company will be successful in effecting the sale of mortgage loans at the historic price or volume levels in any particular future periods. Any significant change in the 19 22 secondary market level of activity or underwriting criteria of Fannie Mae, Freddie Mac or private investors could have a material adverse effect on the gain or loss on sales of mortgage loans recorded by the Company and therefore on the Company's results of operations. Effect of Certain Charter and Bylaw Provisions; Possible Issuance of Preferred Stock Certain provisions of the Company's Certificate of Incorporation and the Company's Bylaws could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving the Company, even if such events could be beneficial to the interests of the Company's stockholders. For example, the Company's Certificate of Incorporation and the Company's Bylaws provide certain limitations on the calling of a special meeting of stockholders, and the Company's Bylaws require advance notice before certain proposals can be considered at stockholder meetings. Pursuant to the Company's Certificate of Incorporation, shares of preferred stock may be issued in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The ability to issue preferred stock provides desirable flexibility in connection with acquisitions and other corporate transactions. However, the rights of the holders of the Company's common stock will be subject to, and may be adversely affected by, any preferred stock that may be issued in the future, and the issuance of preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of preferred stock; however, the Company has adopted a Rights Agreement which provides that if a person or group acquires 15% or more of the Company's Common Stock, shareholders would have the right to acquire shares of preferred stock. The existence of the Rights Agreement has anti-takeover effects because it may deter certain potential acquirors from making takeover proposals or tender offers. Employees As of December 31, 2000, the Company had 932 employees, substantially all of whom were full-time employees. None of the Company's employees are represented by a union. The Company considers its relations with its employees to be good. Executive Officers of the Registrant DOUGLAS K. FREEMAN, age 50, has been Chairman and Chief Executive Officer of the Company since January 2000. Mr. Freeman was President of Bank of America's Consumer Finance Group, a major division of Bank of America. Mr. Freeman was employed as Consumer Corporate Bank Executive with Barnett Bank, Inc. from 1991 through March 1996. He was then promoted to Chief Consumer Bank Executive in March 1996 and held that position with Barnett Bank, Inc. until March 1998. NationsBank, N.A. acquired Barnett Bank, Inc. in March 1998 and Mr. Freeman became President of the Consumer Finance Division of NationsBank, N.A. until April 1999. Bank of America merged with NationsBank, N.A. in April 1999 and Mr. Freeman became the President of the Consumer Finance Group from April 1999 through January 2000. HAROLD LEWIS, JR., age 40, serves as the Chief Portfolio Management Executive since November 2000. Previously he had been the Executive Vice President of Portfolio Management since March 2000. From January 1996 through March 2000, Mr. Lewis was employed by Bank of America (formerly 20 23 NationsBank and Barnett Bank), most recently as the President of Home Equity Services and NationsCredit Consumer Corporation. WILLIAM M. ROSS, age 52, has been Chief Sales and Fulfillment Executive since November of 2000. Mr. Ross was President of EquiCredit a wholly owned subprime mortgage company of Bank of America from 1998 through 2000. Mr. Ross retired from Bank of America after 23 years of service. Prior to EquiCredit he held the following positions at Bank of America and companies attained through acquisitions, Southeast Production Manager for NationsBanc Mortgage Company 1997 through 1998 and Executive Vice President of Barnett Mortgage Company (acquired by NationsBank) 1986 through 1997. STEVEN F. HERBERT, age 44, has been Chief Financial Executive of the Company since July 1995. ITEM 2. PROPERTIES The Company's corporate and administrative headquarters facility, which is owned by the Company, is located in Columbia, South Carolina and is subject to a mortgage in the amount of $6.3 million as of December 31, 2000. This facility comprises a building having approximately 120,000 square feet which houses the Company's loan production and administrative operating groups and 16.5 acres of land. The Company purchased an additional 17.9 acres of land adjacent to this property in January 1996. In addition, the Company leases a 56,000 square foot facility in Columbia, South Carolina which houses its loan servicing operations. The Company leases smaller amounts of office space in Columbia, South Carolina and in 10 other states, consisting primarily of its leasing, wholesale and subprime regional offices and regional operations centers. The Company's primary computer data system is provided through ALLTEL Information Services, Mortgage Division (ALLTEL) (formerly Computer Power, Inc. of Jacksonville, Florida). Company personnel enter data on computer hardware located in-house. The data are transmitted directly to ALLTEL where it is processed. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of its business, the Company and its subsidiaries are from time to time subject to litigation. The Company and its subsidiaries are not parties to any material pending legal proceedings other than ordinary routine litigation incidental to their respective businesses. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 21 24 The Company's Common Stock is traded on the NASDAQ. Additional information required by this item is set forth under the caption "Stock Data" in the Company's accompanying 2000 Annual Report to Shareholders and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Financial Highlights" in the Company's accompanying 2000 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" (including all tables presented under that caption) in the Company's accompanying 2000 Annual Report to Shareholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information set forth under the caption "Quantitative and Qualitative Disclosure About Market Risk" in the Company's accompanying 2000 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following information set forth in the Company's accompanying 2000 Annual Report to Shareholders is incorporated herein by reference: The Consolidated Financial Statements of Resource Bancshares Mortgage Group, Inc., together with the report thereon of Ernst & Young, LLP dated January 31, 2001, including all Notes to such Consolidated Financial Statements except Note 19 - Quarterly Financial Data. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements with accountants on accounting and financial disclosure matters that require disclosure pursuant to Item 304 of Regulation S-K. During 2000, the Company changed accountants. This was previously reported on a Form 8-K filed March 29, 2000. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information set forth (i) under the caption "Proposal No. 1: Election of Directors" in the Proxy Statement of the Company furnished to shareholders in connection with its 2001 Annual Meeting (the "2001 Proxy Statement"), with respect to the name of each nominee or director, his age, his positions and offices with the registrant, his business experience, his directorships in other public companies and his 22 25 service on the registrant's Board of Directors, and (ii) under the caption "Beneficial Ownership--Section 16 (a) Beneficial Ownership Reporting Compliance" in the 2001 Proxy Statement with respect to Section 16 matters is incorporated herein by reference. Information with respect to executive officers is set forth in Item 1 of this Report on Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information with respect to the remuneration of executive officers and directors and certain other matters set forth in the 2001 Proxy Statement (i) under the caption "Compensation of Officers and Directors" and (ii) under the caption "Compensation Committee Interlocks and Insider Participation" to the extent such information is required by Item 402 of Regulation S-K to be set forth herein is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to the security ownership of (i) persons who beneficially own 5% or more of the outstanding shares of the Company's common stock, par value $.01 per share, (ii) directors, nominees and named executive officers individually and (iii) directors and executive officers as a group set forth in the 2001 Proxy Statement under the caption "Beneficial Ownership--Beneficial Owners of 5% or more of the Common Stock and " -- Stock Ownership of the Company's Directors, Nominees and Executive Officers" is, to the extent such information is required by Item 403 of Regulation S-K to be set forth herein, incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to relationships and related transactions between the Company and any director, nominee for director, executive officer, security holder owning 5% or more of the Company's voting securities or any associate or member of the immediate family of any of the above, as set forth in the 2001 Proxy Statement under the caption "Compensation Committee Interlocks and Insider Participation" is, to the extent such information is required by Item 404 of Regulation S-K to be set forth herein, incorporated herein by reference. 23 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a. The following documents are filed as part of this report: Page In Annual Report* (1) Consolidated Financial Statements as of December 31, 2000: Consolidated Balance Sheet at December 31, 2000 and 1999 ................ 32 Consolidated Statement of Income for each of the three years in the period ended December 31, 2000 ...................................... 33 Consolidated Statement of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2000 ............ 34 Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2000 .................................. 35 Notes to Consolidated Financial Statements .............................. 36-55 * Incorporated by reference from the indicated pages of the Company's 2000 Annual Report to Shareholders. (2) Report of Independent Accountants on Consolidated Financial Statements at December 31, 1999 and for each of the two years in the period ended December 31, 1999 are filed as part of this report at exhibit 99.1 All other schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. (3) The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index to Exhibits to this Annual Report on Form 10-K (pages A to H). b. Not applicable c. The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index to Exhibits to this Annual Report on Form 10-K (pages A to H). d. Not applicable With the exception of the information herein expressly incorporated by reference, the Company's 2000 Annual Report to Shareholders and 2001 Proxy Statement shall not be deemed filed as part of this Annual Report on Form 10-K. 24 27 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RESOURCE BANCSHARES MORTGAGE GROUP, INC. Date: March 29, 2001 By: /s/ Douglas K. Freeman -------------------------------------- Douglas K. Freeman Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ Douglas K. Freeman Chairman and Chief Executive March 29, 2001 ---------------------- Officer (principal executive Douglas K. Freeman officer) and Director /s/ Steven F. Herbert ---------------------- Chief Financial Executive March 29, 2001 Steven F. Herbert and Chief Financial Officer (principal financial and accounting officer) /s/ Boyd M. Guttery Director March 29,2001 ---------------------- Boyd M. Guttery /s/ Stuart M. Cable Director March 29, 2001 ---------------------- Stuart M. Cable /s/ Robin C. Kelton Director March 29, 2001 ---------------------- Robin C. Kelton /s/ Joel A. Smith Director March 29, 2001 ---------------------- Joel A. Smith /s/ Roger O. Goldman Director March 29, 2001 ---------------------- Roger O. Goldman /s/ David W. Johnson Director March 29, 2001 ---------------------- David W. Johnson
25 28 INDEX TO EXHIBITS
EXHIBITS 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 as amended through * November 8, 2000 incorporated by reference to Exhibit 4.2 of the Registrant's Registration No. 333-55054. 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 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 Director Deferred Compensation Plan dated June 2000 incorporated by reference to Exhibit 10.57 of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000 10.4 Outside Director Life Insurance Plan dated June 2000 incorporated by * reference to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000 10.5 Change of Control Agreement by and between Resource Bancshares Mortgage * Group, Inc. and Steven F. Herbert, dated as of July 27, 2000. 10.6 (A) Employment Agreement dated April 3, 2000, between Resource * Bancshares Mortgage Group, Inc. and Harold Lewis, Jr. incorporated by reference to Exhibit 10.6 (A) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000
A 29
EXHIBITS DESCRIPTION PAGE - -------- ----------- ---- (B) Change of Control Agreement dated May 3, 2000, by and * between Resource Bancshares Mortgage Group, Inc. and Harold Lewis, Jr. incorporated by reference to Exhibit 10.6 (B) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000 10.7 (A) Change of Control Agreement dated November 8, 2000 by and -- between Resource Bancshares Mortgage Group, Inc. and William M. Ross (B) Employment Agreement dated November 1, 2000 between -- Resource Bancshares Mortgage Group and William M. Ross 10.8 Section 125 Plan incorporated by reference to Exhibit 10.17 of * the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.9 (A) 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 (B) 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 (C) 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 . (D) 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 (E) Amendment IV to Pension Plan effective May 31, 2000 * incorporated by reference to Exhibit 10.16 (B) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000 10.10 (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.
B 30
EXHIBITS DESCRIPTION PAGE - -------- ----------- ---- 10.11 (A) 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. (B) 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 (C) Second Amendment to Resource Bancshares Mortgage Group, * Inc. Supplemental Executive Retirement Plan dated May 31, 2000 incorporated by reference to Exhibit 10.19 (B) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000 10.12 (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 * accruals under the Pension Restoration Plan effective May 31, 2000 incorporated by reference to Exhibit 10.20 (B) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000 10.13 (A) Stock Investment Plan incorporated by reference to Exhibit * 4.1 of the Registrant's Registration No. 33-87536 (B) 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 (C) 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 (D) 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 10.14 (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) 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
C 31
EXHIBITS DESCRIPTION PAGE - -------- ----------- ---- 10.15 (A) 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 (B) 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 (C) 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 (D) 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 10.16 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 10.17 (A) ESOP Notes dated January 20, 1998, April 1, 1998, July 1, * 1998 and October 1, 1998 between the Registrant and The Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust incorporated by reference to Exhibit 10.30 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (B) ESOP Notes dated March 8, 1999, April 26, 1999, July 1, * 1999 and October 1, 1999 between the Registrant and The Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust 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 10.18 (A) 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 (B) 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 (C) 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
D 32
EXHIBITS DESCRIPTION PAGE - -------- ----------- ---- (D) 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 (E) Third Amendment to Resource Bancshares Mortgage Group, * Inc. Formula Stock Option Plan by reference to Exhibit 3.4 of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2000 10.19 Form of Indemnity Agreement by and between Resource Bancshares * Mortgage Group, Inc. and Directors and/or Officers of the Corporation. 10.20 (A) 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 (B) 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 (C) 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 (D) Third Amendment to Omnibus Stock Award Plan. -- 10.21 (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) incorporated by reference to Exhibit 10.38 (B) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000 (C) Form of Incentive Stock Option Agreement (Omnibus Stock * Award Plan) effective June 2000 ($16 vesting provisions) incorporated by reference to Exhibit 10.38 (C) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000 10.22 (A) 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
E 33
EXHIBITS DESCRIPTION PAGE - -------- ----------- ---- (B) 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 (C) 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 (D) 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 (E) 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 (F) 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 10.23 (A) 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 (B) 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 (C) 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 (D) Third Amendment to Amended and Restated Retirement Savings Plan * dated May 31, 2000 incorporated by reference to Exhibit 10.47 (B) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000 10.24 (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
F 34
EXHIBITS DESCRIPTION PAGE - -------- ----------- ---- (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 10.25 (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 10.26 Preferred Provider Organization Plan for Retired Executives * incorporated by reference to Exhibit 10.43 of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1998 10.27 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 10.28 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 10.29 (A) 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 (B) 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 10.30 MSC Stock Option Agreement between Resource Bancshares Mortgage Group, * Inc. and Boyd M. Guttery dated February 2, 2000 incorporated by reference to Exhibit 10.55 of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000
G 35
EXHIBITS DESCRIPTION PAGE - -------- ----------- ---- 10.31 MSC Stock Option Agreement between Resource Bancshares Mortgage Group, * Inc. and Stuart M. Cable dated February 2, 2000 incorporated by reference to Exhibit 10.56 of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000 10.32 Outside Directors' Stock Option Plan (as amended through March 19, 2001) -- 11.1 Statement re: Computation of Net Income per Common Share -- 13.1 2000 Annual Report to Shareholders -- 21.1 Subsidiaries of the Registrant -- 23.1 Consent of Ernst & Young LLP -- 23.2 Consent of PricewaterhouseCoopers LLP to the incorporation by reference -- of the Registration Statements on Form S-3 of Resource Bancshares Mortgage Group, Inc. 23.3 Consent of PricewaterhouseCoopers LLP to the incorporation by reference -- of the Registration Statements on Form S-8 of Resource Bancshares Mortgage Group, Inc. 99.1 Report of Independent Accountants on Consolidated Financial Statements -- at December 31, 1999 and for each of the two years in the period ended December 31, 1999
*Incorporated by reference H EX-10.7.A 2 g67742ex10-7_a.txt CHANGE OF CONTROL AGREEMENT DATED 11-8-2000 1 EXHIBIT 10.7(A) EMPLOYMENT AGREEMENT AGREEMENT made as of November 1, 2000 between RESOURCE BANCSHARES MORTGAGE GROUP, INC. ("RMBG") and William M. Ross ("Employee"). WITNESSETH: WHEREAS, the parties hereto desire to provide for the Employee's employment by RBMG. NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows: 1. Employment. RBMG agrees to employ the Employee and the Employee agrees to enter into the employ of RMBG on the terms and conditions hereafter set forth. 2. Capacity and Duties. The Employee shall be employed as Chief Sales and Fulfillment Executive of RMBG. In addition, the Employee shall upon request serve as an officer and on the Board of Directors of such subsidiaries as the Board of Directors or management of RBMG may from time to time designate. The Employee shall perform his responsibilities in accordance with the direction and supervision of the Board of Directors and Chief Executive Officer of RBMG and he shall devote his full business time, skill, energies, business judgment, knowledge and best efforts to the advancement of the best interests of RBMG and the performance of such executive, administrative and operational duties on behalf of RBMG and its subsidiaries, appropriate to the offices he holds or shall hold hereunder, as the Board of Directors or Chief Executive Officer of RBMG may assign. The requirement that the Employee devote his full business time shall not be construed to prevent the Employee from making investments in stocks, bonds and other types of personal property, both tangible and intangible, and real estate or engaging in church, charitable or other community activities which do not, singly or in the aggregate, materially impair his ability to fulfill his responsibilities under this Agreement. 3. Term. The term of the Employee's employment hereunder shall be for the period commencing as of November 1, 2000 (the "Commencement Date") and ending on October 31, 2002 unless such term is terminated earlier by or pursuant to Section 5. 4. Compensation and Benefits. (a) Salary. RBMG shall pay or cause to be paid to the Employee, as compensation for all of the services to be rendered by him hereunder during 2 the term hereof, a salary of $225,000 per year ("Base Salary"), payable in accordance with the regular payroll practices of RBMG for executives, less such deductions or amounts as are required to be deducted or withheld by applicable laws or regulations and less such other deductions or amounts, if any, as are authorized by the Employee. The Board of Directors of RBMG shall have the right to increase the Employee's Base Salary from time to time. (b) Annual Bonus. The Employee shall be eligible to be considered for an annual bonus. The Employee's bonus opportunity will be $300,000 for the year ending December 31, 2000, $150,000 of which is guaranteed and $150,000 of which will be determined by RBMG based on achievement of goals which it specifies (c) Bonus for Signing. In consideration of the Employee entering into this Agreement, RBMG shall pay to the Employee on or about November 15, 2000 a bonus in the gross amount of $156,250. (d) Expenses. To the extent not otherwise paid for by RBMG or one of its subsidiaries, RBMG will reimburse the Employee or cause the Employee to be reimbursed for reasonable expenses incurred in promoting RBMG's and its subsidiaries' businesses, including expenses for travel and entertainment, such reimbursement to be made promptly upon presentation of appropriate receipts or other substantiation. (e) Plans. The Employee shall be entitled to participate in any and all employee benefit plans as may be in effect for executives of RBMG to the extent that he is eligible for participation therein and coverage thereunder. Such right of participation in any such plan and the degree or amount thereof shall be subject, however, to generally applicable RBMG policies and to action by RBMG's Board of Directors or any administrative or other committee or to any other administrative or managerial determination provided in or contemplated by such plan, it being agreed that this Agreement is not intended to impair the right of any committee or other group or person concerned with the administration of such plan to exercise in good faith the full discretion reposed in him or them by such plan. (f) Vacation. The Employee shall be entitled to paid vacation during each year of this Agreement in accordance with the policies of RBMG with respect thereto applicable to officers with comparable duties and responsibilities. Unused vacation time in any year shall not be carried over to subsequent years and the Employee shall not be entitled to pay in lieu of unused vacation time. (g) Withholding. The Employee acknowledges that certain payments provided for herein are subject to withholding and other taxes. 5. Termination. 2 3 Notwithstanding Section 3, the term of the Employee's employment hereunder shall terminate on the first to occur of the (i) termination date provided for under Section 3 or (ii) any of the events described in the paragraphs of this Section 5. (a) Death. In the event of the Employee's death, the Employee's employment shall terminate automatically, effective as of the date of death, and RBMG shall pay to his estate the Base Salary that otherwise would have been paid to the Employee pursuant to Section 4(a) up to the end of the fiscal quarter in which he died. (b) Disability. If the Employee, due to physical or mental illness, shall be disabled to perform substantially all of his duties for a continuous period of three months (a "disability"), then either the Employee or RBMG may by notice terminate the Employee's employment under this Agreement effective as of a date 30 days after the date such notice is given. The Employee's Base Salary during such three-month period and thereafter, prior to such termination, shall be reduced by the amount of any disability or similar benefits to which he is entitled, notwithstanding anything contained elsewhere in this Agreement to the contrary. (c) Termination for Cause. The Employee's employment may be terminated effective immediately by RBMG for "cause" by notice of termination to the Employee. "Cause" for such termination shall be limited to the following: (i) Breach by the Employee in any material respect of any of the material covenants contained in this Agreement, which breach continues for 30 days following receipt of written notice given by RBMG's Board of Directors or its Chief Executive Officer specifying the breach and requesting that the Employee correct the same; (ii) Chronic and disabling use of alcohol or controlled substances that materially inhibits the performance of the Employee's duties under this Agreement for a period of not less than three consecutive months; (iii) Employee's conviction of either a felony involving moral turpitude or any crime in connection with his employment by RBMG which causes RBMG a substantial detriment; (iv) Gross or willful neglect of the Employee's duties; or (v) Such conduct as results or as is likely to result in substantial damage to the reputation of RBMG or any of the affiliates of RBMG. (d) Compensation Upon Termination. Except as provided in Sections 5(a) and 5(b), all compensation to the Employee shall cease immediately on termination of the Employee's employment hereunder. 3 4 6. No Raid. The Employee acknowledges that he has had and will have extensive contacts with employees and customers of, and others having business dealings with, RBMG. For the purposes of this Section and Sections 7, 8 and 9, the term "RBMG" shall be deemed to include subsidiaries, parents and affiliates of RBMG. Accordingly, the Employee covenants and agrees that during the term of his employment and during the two-year period immediately thereafter he will not (i) solicit any of the employees of RBMG who were employed by RBMG during the time when the Employee was employed by RBMG to leave RBMG, (ii) interfere with the relationship of RBMG with any such employees or (iii) personally target or solicit to the detriment of RBMG any customers or others having business dealings with RBMG in the business activities and endeavors in which the Employee was involved. The Employee further covenants and agrees that during the term of his employment and during the two-year period immediately thereafter he will not make public statements in derogation of RBMG. 7. Blue Pencil. The Employee acknowledges that the period and geographic area of restriction imposed by Section 6 is fair and reasonable and is reasonably required for the protection of RBMG. If any part or parts of Section 6 shall be held to be unenforceable or invalid, then the remaining parts thereof shall nevertheless continue to be valid and enforceable as though the invalid portion or portions were not a part hereof. If any of the provisions of Section 6 relating to the period or geographic area of restriction shall be deemed to exceed the maximum period of time or area which a court of competent jurisdiction would deem enforceable, then the time and area shall, for the purposes of Section 6, be deemed to be the maximum time period and area which a court of competent jurisdiction would deem valid and enforceable in any state in which such court of competent jurisdiction shall be convened. 8. Confidentiality. The Employee acknowledges that he has had and will have access to certain information related to the business, operations, future plans and customers of RBMG, the disclosure or use of which could cause RBMG substantial losses and damages. Accordingly, the Employee covenants that during the term of his employment with RBMG and thereafter he will keep confidential all information and documents furnished to him by or on behalf of RBMG and not use the same to his advantage, except to the extent such information or documents are or thereafter become lawfully obtainable from other sources or are in the public domain through no fault on his part or as is consented to in writing by RBMG. Upon termination of his employment, the Employee shall return to RBMG all records, lists, files and documents which are in his possession and which relate to RBMG. 9. Right to Injunctive Relief. The Employee agrees and acknowledges that a violation of the covenants contained in Sections 6 and 8 of this Agreement will cause irreparable damage to RBMG, and 4 5 that it is and will be impossible to estimate or determine the damage that will be suffered by RBMG in the event of a breach by the Employee of any such covenant. Therefore, the Employee further agrees that in the event of any violation or threatened violation of such covenants, RBMG shall be entitled as a matter of course to an injunction issued by any court of competent jurisdiction restraining such violation or threatened violation by the Employee, such right to an injunction to be cumulative and in addition to whatever other remedies RBMG may have. 10. Representation by the Employee. The Employee hereby represents and warrants to RBMG that the execution of this Agreement and the performance of his duties and obligations hereunder will not breach or be in conflict with any other agreement to which he is a party or by which he is bound and that he is not now subject to any covenant against competition or similar covenant that would affect the performance of his duties hereunder. 11. No Assignment. This Agreement is personal and shall in no way be subject to assignment, except by RBMG incident to the sale of all or substantially all of its business (whether by asset sale, stock sale or merger). Any attempt by one party to assign this Agreement in any other circumstances without the prior written consent of the other party shall be null and void. 12. Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a duly authorized court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 13. Notices. All notices and other communications required or permitted to be given hereunder shall be given by delivering the same in hand or by mailing the same by certified or registered mail, return receipt requested, postage prepaid, as follows: if to RBMG, to: Resource Bancshares Mortgage Group, Inc. 7909 Parklane Road Columbia, South Carolina 29202-7486 Attention: Chief Executive Officer 5 6 if to the Employee, to: William M. Ross ----------------------------------- ----------------------------------- ----------------------------------- (or to such other address as either party shall have furnished to the other by like notice) A notice shall be effective as of the date of such delivery or mailing, as the case may be. 14. Entire Agreement. This Agreement constitutes the only agreement and understanding (other than the Change of Control Agreement to be dated as of November 8, 2000 between the Company and the Employee, employee benefit plans, policies and practices applicable to RBMG's executive officers generally) between RBMG, on the one hand, and the Employee, on the other hand, in relation to the subject of the Employee's employment by RBMG; and there are no promises, representations, conditions, provisions or terms related thereto other than those set forth herein. This Agreement supersedes all previous understandings, agreements and representations, written or oral, between RBMG and the Employee regarding the Employee's employment by RBMG. 15. Governing Law. This contract shall be construed under and be governed in all respects by the internal laws, and not the laws pertaining to choice or conflicts of laws, of the State of South Carolina. 16. Waiver; Amendment. No waiver in any instance by either party of any provision of this Agreement shall be deemed a waiver by such party of such provision in any other instance or a waiver of any other provision hereunder in any instance. This Agreement cannot be amended, supplemented or otherwise modified except in a writing signed by RBMG and the Employee. 6 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day first above written. RESOURCE BANCSHARES MORTGAGE GROUP, INC. By: ----------------------------------- Name: Douglas K. Freeman Title: Chief Executive Officer (L.S.) -------------------------------------- William M. Ross 7 EX-10.7.B 3 g67742ex10-7_b.txt EMPLOYMENT AGREEMENT DATED 11-1-2000 / ROSS 1 EXHIBIT 10.7(B) CHANGE OF CONTROL AGREEMENT AGREEMENT by and between Resource Bancshares Mortgage Group, Inc., a Delaware corporation ("RBMG"), and William M. Ross (the "Executive"), dated as of the 8th day of November, 2000. The Board of Directors of RBMG (the "Board") has determined that it is in the best interests of RBMG and its shareholders to assure that the Company (as defined below) will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of RBMG. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control. Therefore, in order to accomplish these objectives, the Board has caused RBMG to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth below: (a) "AFR" shall have the meaning set forth in Section 6. (b) "Affiliated Company" shall mean any corporation, partnership or other entity which controls, is controlled by or is under common control with RBMG. (c) "Annual Base Salary" shall have the meaning set forth in Section 1(q)(i). (d) "Board" shall have the meaning set forth in the recitals to this Agreement. (e) "Business Combination" shall have the meaning set forth in Section 1(g)(iii). (f) "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of RBMG which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties; or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. 2 For purposes of this provision, no act, or failure to act, on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of RBMG or based upon the advice of counsel for RBMG shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in Section 1(f)(i) or 1(f)(ii) above, and specifying the particulars thereof in detail. (g) "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of RBMG (the "Outstanding RBMG Common Stock") or (B) the combined voting power of the then outstanding voting securities of RBMG entitled to vote generally in the election of directors (the "Outstanding RBMG Voting Securities"); provided, however, that for purposes of this Section 1(g)(i), the following acquisitions shall not constitute a Change of Control: (W) any acquisition directly from RBMG or any corporation controlled by RBMG, (X) any acquisition by RBMG or any corporation controlled by RBMG, (Y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by RBMG or any corporation controlled by RBMG or (Z) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of Section 1(g)(iii); or (ii) That individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by RBMG's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of RBMG or the acquisition of assets of another corporation (a "Business Combination"), in each case, unless, following such Business 2 3 Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding RBMG Common Stock and Outstanding RBMG Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns RBMG or all or substantially all of RBMG's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding RBMG Common Stock and Outstanding RBMG Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of RBMG or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns RBMG or all or substantially all of RBMG's assets either directly or through one or more subsidiaries) except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the shareholders of RBMG of a complete liquidation or dissolution of RBMG. (h) "Change of Control Period" shall mean the period commencing on the Effective Date and ending on the second anniversary of the Effective Date. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended. (j) "Company" shall include RBMG and its Affiliated Companies. (k) "Date of Termination" means (i) if the Executive's employment is terminated by RBMG for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by RBMG other than for Cause or Disability, the Date of Termination shall be the date on which RBMG notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. (l) "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 120 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician 3 4 selected by RBMG or its insurers and acceptable to the Executive or the Executive's legal representatives. (m) "Disability Effective Date" shall have the meaning set forth in Section 3. (n) "Effective Date" shall mean the first date on which a Change of Control occurs. If a Change of Control occurs and the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment arose in connection with or anticipation of a Change of Control, then "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (o) "Exchange Act" shall have the meaning set forth in Section 1(g)(i). (p) "Executive" shall have the meaning set forth in the recitals to this Agreement. (q) "Good Reason" shall mean: (i) a reduction by the Company in the Executive's annual base salary as in effect immediately prior to the Effective Date (the "Annual Base Salary"); (ii) the Company requiring the Executive to be based at a location more than 100 miles from the location at which he is based immediately prior to the Effective Date (except for required travel which is substantially consistent with travel obligations as of the date of this Agreement); (iii) the failure by the Company to pay the Executive any portion of the Executive's current compensation within seven days of the date such compensation is due, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iv) the failure by the Company to continue any material benefit plan in which the Executive participates immediately prior to the Effective Date (unless the failure did not occur in bad faith and is remedied by the Company, promptly after receipt of notice thereof given by the Executive, by the Company providing an equitable arrangement with respect to such plan); (v) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (vi) any failure by RBMG to comply with and satisfy Section 8(c) of this Agreement. For purposes of this Section 1(q), any good faith determination of "Good Reason" made by the Executive shall be conclusive. 4 5 (r) "Incumbent Board" shall have the meaning set forth in Section 1(g)(ii). (s) "Most Recent Annual Bonus" shall have the meaning set forth in Section 4(a)(i)(A)(2)(x). (t) "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice). The failure by the Executive or RBMG to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or RBMG, respectively, hereunder or preclude the Executive or RBMG, respectively, from asserting such fact or circumstance in enforcing the Executive's or RBMG's rights hereunder. (u) "Outstanding RBMG Common Stock" shall have the meaning set forth in Section 1(g)(i). (v) "Outstanding RBMG Voting Securities" shall have the meaning set forth in Section 1(g)(i). (w) "Payment" shall have the meaning set forth in Section 4(c). (x) "Person" shall have the meaning set forth in Section 1(g)(i). (y) "RBMG" shall have the meaning set forth in the recitals to this Agreement. 2. Termination for Cause or Good Reason; Notice of Termination. RBMG may terminate the Executive's employment with the Company during the Change of Control Period for Cause and the Executive may terminate employment during the Change of Control Period for Good Reason. Any termination by RBMG for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto in accordance with Section 9(b) of this Agreement. 3. Termination by Reason of Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death. If RBMG determines in good faith during the Change of Control Period that the Disability of the Executive has occurred, it may give to the Executive written notice in accordance with Section 9(b) of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. 5 6 4. Obligations of RBMG upon Termination. (a) Good Reason; Without Cause; Death or Disability. If, during the Change of Control Period, RBMG shall terminate the Executive's employment without Cause, the Executive shall terminate employment for Good Reason or the Executive's employment terminates for death or Disability, and subject to the limitation set forth in Section 4(c): (i) RBMG shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid and (2) the product of (x) the Executive's annual bonus paid or payable, including any bonus or portion thereof which has been earned but deferred, (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months) for the most recently completed fiscal year, if any (the "Most Recent Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365; provided, that, such amount shall not be paid if duplicative of any amounts payable under the Company's annual incentive plans, and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any unused annual vacation pay, in each case to the extent not theretofore paid; and B. an amount equal to the sum of (1) the Executive's Annual Base Salary and (2) the lesser of (I) the Executive's Most Recent Annual Bonus or (II) $100,000; and (ii) RBMG shall provide medical, dental and vision insurance coverage for the Executive and his current spouse and eligible dependents until the first to occur of (A) the first anniversary of the Date of Termination or (B) the death of the Executive and his spouse, that is comparable to the most favorable medical, dental and vision insurance coverage provided by the Company for the Executive (and such spouse and dependents) during the 120-day period immediately prior to the Change of Control, with the Executive (or such spouse) continuing to pay the employee portion of the premiums for such coverage (in the same pro rata amount as during the 120-day period prior to the Change of Control). (b) Cause; Without Good Reason. If the Executive's employment shall be terminated for Cause during the Change of Control Period or if the Executive voluntarily terminates employment during the Change of Control Period without Good Reason, this Agreement shall terminate without further obligation to the Executive other than the obligation to pay to the Executive (i) his Annual Base Salary through the Date of Termination, and (ii) the amount of any compensation previously deferred by the Executive. (c) Notwithstanding anything in this Agreement to the contrary, if it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would constitute an "excess parachute payment" within the meaning of Section 280G of the Code, then the Payments, in the aggregate, shall be reduced 6 7 (in a manner elected by the Executive, or by RBMG if the Executive fails to make such an election) to the greatest amount that could be paid to the Executive such that the receipt of Payments would not constitute an "excess parachute payment." 5. Non-exclusivity of Rights. Subject to the limitation set forth in Section 4(c), nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any pension, profit sharing, 401(k), supplemental executive retirement or stock option plan provided by the Company and for which the Executive may qualify, nor, subject to Section 9(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any pension, profit sharing, 401(k), supplemental executive retirement or stock option plan or any contract or agreement with the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan or contract or agreement except as explicitly modified by this Agreement. 6. Full Settlement. RBMG's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. RBMG agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by RBMG, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code ( the "AFR"). The Executive shall repay (with interest at the AFR) any such advanced legal fees and expenses in the event a court determines that the Executive's claim or action was in bad faith. 7. Confidential Information. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company which shall have been obtained by the Executive during the Executive's employment by the Company and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of RBMG or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by RBMG. In no event shall an asserted violation of the provisions of this Section 7 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. (b) The Executive agrees and acknowledges that a violation of the covenants contained in this Section 7 will cause irreparable damage to the Company, and that it is and will 7 8 be impossible to estimate or determine the damage that will be suffered by the Company in the event of a breach by the Executive of any such covenant. Therefore, the Executive further agrees that in the event of any violation or threatened violation of such covenants, the Company shall be entitled as a matter of course to an injunction issued by any court of competent jurisdiction restraining such violation or threatened violation by the Executive, such right to an injunction to be cumulative and in addition to whatever other remedies the Company may have. 8. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of RBMG shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon RBMG and its successors and assigns. (c) RBMG will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of RBMG to assume expressly and agree to perform this Agreement in the same manner and to the same extent that RBMG would be required to perform it if no such succession had taken place. As used in this Agreement, "RBMG" shall mean RBMG as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 9. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of South Carolina, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: William M. Ross ---------------------------- ---------------------------- If to RBMG: Resource Bancshares Mortgage Group, Inc. 7909 Parklane Road 8 9 Columbia, SC 29223 Attention: Chief Executive Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) RBMG may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or RBMG's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or RBMG may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 2, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and RBMG acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(n), the Executive's employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. This Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. (g) This Agreement shall terminate and be of no further force or effect if a Change of Control does not occur on or before October 31, 2002. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, RBMG has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. --------------------------------- William M. Ross RESOURCE BANCSHARES MORTGAGE GROUP, INC. 9 10 By_______________________________ Douglas K. Freeman Chief Executive Officer 10 EX-10.20.D 4 g67742ex10-20_d.txt THIRD AMENDMENT TO OMNIBUS STOCK AWARD PLAN 1 EXHIBIT 10.20 (D) RESOURCE BANCSHARES MORTGAGE GROUP, INC. AMENDMENT TO OMNIBUS STOCK AWARD PLAN RESOLVED, that subject to shareholder approval, the Amended and Restated Resource Bancshares Mortgage Group, Inc. Omnibus Stock Award Plan, as previously amended (the "Omnibus Plan"), be and it hereby is, amended by increasing the number of shares of the Corporation's common stock, par value $.01 per share (the "Common Stock"), that may be issued under the Omnibus plan by 500,000 (the "amendment"). EX-10.32 5 g67742ex10-32.txt OUTSIDE DIRECTOR'S STOCK OPTION PLAN 1 EXHIBIT 10.32 RESOURCE BANCSHARES MORTGAGE GROUP, INC. OUTSIDE DIRECTORS' STOCK OPTION PLAN (AS AMENDED THROUGH MARCH 19, 2001) ARTICLE I PURPOSE; EFFECTIVE DATE; DEFINITIONS 1.1 Purpose. This Resource Bancshares Mortgage Group, Inc. Outside Directors' Stock Option Plan is intended to secure for Resource Bancshares Mortgage Group, Inc. and its stockholders the benefits of the incentive inherent in common stock ownership by the Outside Directors of the Company, who are responsible in part for the Company's growth and financial success, and to afford such persons the opportunity to obtain and thereafter increase a proprietary interest in the Company on a favorable basis and thereby share in its success. 1.2 Effective Date. Subject to the approval of the Board and to ratification by the Company's stockholders as provided in Section 5.8, this Plan shall become effective as of July 27, 2000. 1.3 Definitions. Capitalized terms used in this Plan but not defined herein are used herein as defined in the Option Agreement. In addition, throughout this Plan, the following terms shall have the meanings indicated: (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. (c) "Committee" shall mean the a committee of the Board that is composed solely of two or more "nonemployee directors" within the meaning of Rule 16b-3 promulgated under the Exchange Act. (d) "Common Stock" shall mean the Common Stock, par value $.01 per share, of the Company. (e) "Company" shall mean Resource Bancshares Mortgage Group, Inc., a Delaware corporation. (f) "Director" shall mean any member of the Board. 1 2 (g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (h) "Fair Market Value" shall mean, with respect to the Common Stock on any day, the closing sales price of a share of Common Stock for the immediately preceding or, if the principal market for trading the Common Stock is not open or if no closing sales price of a share of Common Stock is available that day, the closing sales price of a share of Common Stock for the day most immediately preceding that day for which a closing sales price is available. The market value of an Option granted under the Plan on any day shall be the market value of the underlying Common Stock, determined as aforesaid, less the exercise price of the Option. (i) "Option" shall mean an option to purchase shares of Common Stock awarded to an Outside Director pursuant to this Plan. (j) "Option Agreement" shall mean an agreement between the Company and an Outside Director, in substantially the form of Annex A to this Plan, evidencing the award of an Option; provided, however, that if an Outside Director elects pursuant to Section 4.1(c) of the Plan to receive an Option which is exercisable in whole immediately upon the date of award, then Section 3(a) of the Option Agreement shall be replaced in its entirety with the following: (a) The Option shall be exercisable, in whole or in part, at any time and from time to time during the Option Period, but not thereafter. The Option shall terminate on the expiration of the Option Period, if not earlier terminated. (k) "Option Shares" shall mean the shares of Common Stock purchased upon exercise of an Option. (l) "Outside Director" shall mean any Director other than a Director who, at the time of an Option award to such Director hereunder, is a full-time employee or executive officer of the Company or any subsidiary of the Company. (m) "Plan" shall mean this Resource Bancshares Mortgage Group, Inc. Outside Directors' Stock Option Plan, as the same may be amended from time to time. (n) "Change of Control" shall mean: (1) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of Common Stock (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of 2 3 directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this paragraph (1), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with subparagraphs (i), (ii) and (iii) of paragraph (3) of this subsection 1.3(n); or (2) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a Director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the Directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or 3 4 (4) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. ARTICLE II COMMITTEE 2.1 Committee Work. The Company's Senior Vice President for Human Resources (or other person with the responsibilities of such an officer) shall advise the Committee, upon request, as to the proper interpretation, construction and administration of this Plan and the Options. Nevertheless, this Plan and the Options shall be interpreted, construed and administered by the Committee alone. An Outside Director may appeal to the Committee, in writing, any decision or action of the Committee with respect to the Plan that adversely affects the Outside Director. Upon review of such appeal, and in any other case where the Committee has acted with respect to the Plan or Options, the decision on appeal or the interpretation or construction by the Committee of any provision of this Plan or of any Option shall be conclusive and binding on all parties. A majority of the entire Committee shall constitute a quorum, and the action of a majority of the members present at any meeting at which a quorum is present shall be deemed the action of the Committee. In addition, any decision or determination reduced to writing and signed by all members of the Committee shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held. Subject to the provisions of the Plan and the Company's bylaws, the Committee may make such additional rules and regulations for the conduct of its business as it shall deem advisable and shall hold meetings at such times and places as it may determine. 2.2 Good Faith Determinations.No member of the Committee or other member of the Board shall be liable for any action or determination made in good faith with respect to this Plan or any Option granted hereunder. ARTICLE III ELIGIBILITY; SHARES SUBJECT TO THE PLAN 3.1 Eligibility. Only Outside Directors shall be eligible to receive Option awards under this Plan. 3.2 Shares Subject to the Plan. Subject to the provisions of Section 4.3(d) (relating to adjustment for changes in the Common Stock), the maximum number of shares that may be issued under this Plan shall not exceed in the aggregate 400,000 shares of Common Stock, as such number of shares may be adjusted after July 27, 2000 pursuant to Section 4.3(d). Such shares may be authorized and unissued shares or, in the alternative, authorized and issued shares that have been reacquired by the Company as treasury stock. If any Option awarded under this Plan shall for any reason terminate or expire or be surrendered without having been exercised in full, then the underlying shares not acquired by Option exercise shall be available again for grant hereunder. 4 5 ARTICLE IV OPTION AWARDS 4.1 Grant of Options. (a) As of July 27, 2000, each person who is then an Outside Director shall be awarded an Option to purchase 10,000 shares of Common Stock, in each case at an exercise price per share equal to the Fair Market Value per share of Common Stock on July 27, 2000. (b) On September 1 of each year during the term of the Plan (including September 1, 2000), the Committee, upon recommendation of the Company's Chief Executive Officer, shall award Options to Outside Directors to purchase shares of Common Stock, in each case at an exercise price equal to the Fair Market Value per share of Common Stock on the September 1 that is the award date. The number of shares of Common Stock that are subject to an Option to an Outside Director may not exceed the number of shares recommended to the Committee for such Outside Director by the Company's Chief Executive Officer. In making any such recommendation to the Committee and the Committee's award of an Option, the Company's Chief Executive Officer and the Committee may take into account the nature of the services rendered by the Outside Director, other compensation payable to the Outside Director by the Company, the capacity of the Outside Director to contribute to the success of the Company and such other factors that the Company's Chief Executive Officer and the Committee may consider relevant. (c) Any Outside Director may notify the Company's Chief Executive Officer if the Outside Director wishes to receive an Option in lieu of cash for the annual retainer to which the Outside Director is entitled for service as an Outside Director or as chairman of or as a member of a Board committee (but not in lieu of any other compensation, including fees for attending meetings). Such notification (i) must be in writing, (ii) must indicate whether the Outside Director wishes to receive an Option which is exercisable (A) in whole immediately upon the date of award or (B) as provided in Section 4.2 of the Plan and (iii) must be received by the Company's Chief Executive Officer during the month of March. The notification shall relate to all retainers payable during the 12 month period beginning on the April 1 next following receipt of the notification and ending the following March 31 and is irrevocable during such period. The Company's Chief Executive Officer shall provide copies of all notifications to the Committee, which shall determine whether to award Options in lieu of retainers to those who have requested same. The number of shares of Common Stock that are subject to an Option to be awarded to an Outside Director in lieu of his or her retainer shall be determined by the Committee such that the value of the Option will be substantially equal to the amount of the retainer which would otherwise be payable. In making such determination, the Committee shall use a generally accepted independent option valuation method. The exercise price of the Option shall be equal to the Fair Market Value per share of Common Stock on the date that the retainer would otherwise be payable in cash. The Options so awarded shall be subject to any policy adopted by the Board relating to attendance at Board meetings, as it may be 5 6 amended from time to time. (d) Notwithstanding Section 4.1(c) and Section 4.2 of the Plan, grants of Options made prior to stockholder approval, as provided in Section 5.8 of the Plan, shall be subject to such stockholder approval and shall not be exercisable prior to such approval. 4.2 Vesting. Except as provided in Section 4.1(c) of the Plan, each Option shall be exercisable, in whole or in part, at any time and from time to time during the Option Period, but not thereafter, to the extent set forth in the schedule below: 6 7
if the period from then the maximum percentage of the Option the date of the award Shares that may be purchased through such until the Exercise Date is: Exercise Date is: ----------------------------------------- ------------------------------------------- Less than 1 year, 20% At least 1 year, 40% But less than 2 years, At least 2 years, 60% but less than 3 years, at least 3 years, 80% but less than 4 years, at least 4 years, 100%
Provided, however, that (i) in the event of a Change of Control of the type set forth in paragraph (1), (2) or (4) of the definition of Change of Control and (ii) immediately prior to the occurrence of a Change of Control of the type set forth in paragraph (3) of the definition of Change of Control, each Option outstanding under the Plan shall become exercisable in whole or in part without regard to the foregoing schedule. In addition, each Option Agreement shall provide for acceleration of exercisability in the event of death or permanent and total disability (within the meaning of Section 22(e)(3) of the Code). Each Option shall terminate on the expiration of its Option Period, if not earlier terminated. 4.3 Other Terms and Conditions. Each Option award under this Plan shall be evidenced by an Option Agreement. The Option Agreements need not be identical with one another, but each one shall include the substance of all of the following terms and conditions: (a) Numbers of Shares, Option Exercise Price and Vesting Schedule. Each Option Agreement shall state the number of shares of Common Stock to which it pertains, the Option exercise price and the schedule by which the Options subject thereto shall become exercisable, all in accordance with this Plan. (b) Medium and Time of Payment. Upon exercise of an Option, the Option exercise price shall be payable in United States dollars, in cash (including check) or (unless the Board otherwise prescribes) in shares of Common Stock owned by the optionee for a period of six months, or in a combination of cash and such Common Stock. If all or any portion of the Option exercise price is paid in Common Stock owned by the optionee, then that stock shall be valued at its Fair Market Value as of the date the Option is exercised. An Option shall be deemed to be exercised on the date that the Company receives full payment of the exercise price for the number of shares for which the Option is being exercised. For the purpose of assisting an optionee to 7 8 exercise an Option, the Company may, in the discretion of the Board, make recourse loans to the optionee or guarantee recourse loans made by third parties to the optionee, in either case on such terms and conditions as the Board may authorize. (c) Minimum Exercise; No Transfers. Not less than 100 shares of Common Stock may be purchased by Option exercise at any one time unless the number purchased is the total number of shares in respect of which the Option is then exercisable. No Option shall be assignable or transferable by an optionee, and no other person shall acquire any rights therein, except that the Option may be transferred by will or the laws of descent or distribution or pursuant to a formal court order in connection with the divorce of the optionee. (d) Recapitalization; Reorganization. Subject to any action required by the stockholders of the Company, the maximum number of shares of Common Stock that may be issued under this Plan pursuant to Section 3.2, the number of shares of Common Stock covered by each outstanding Option and the per-share exercise price applicable to each outstanding Option shall, in each case, be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of such shares effected without receipt of consideration by the Company. Subject to any action required by the stockholders, in the event of a Business Combination that does not result in a Change of Control, each Option outstanding under the Plan shall pertain to and apply to the securities or other consideration that a holder of the number of shares of Common Stock underlying the Option would have been entitled to receive in the Business Combination. In the event of a Business Combination that results in a Change of Control of the type set forth in paragraph (3) of the definition of Change of Control or in the event of the complete liquidation or dissolution of the Company, then each outstanding Option shall terminate; provided however, that each optionee shall, in such event, have the right immediately prior to such Change of Control or complete liquidation or dissolution, to exercise his or her Option in whole or in part without regard to any installment provision that might be contained in the applicable Option Agreement. In the event of a change in the Common Stock as presently constituted, which change is limited to a change of all of the authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be Common Stock within the contemplation of this Plan. The foregoing adjustments shall be made by the Committee, whose determination shall be conclusive. Except as expressly provided in this subsection, the optionee shall have no rights by reason of (i) any subdivision or consolidation of shares of any class, (ii) any stock dividend, (iii) any other increase or decrease in the number of shares of stock of any class, (iv) any dissolution, liquidation, merger or consolidation or spin-off, split-off or split-up of assets of the 8 9 Company or stock of another corporation or (v) any issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class. Moreover, except as expressly provided in this subsection, the occurrence of one or more of the above-listed events shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of, or the exercise price relative to, the shares of Common Stock underlying the Option. The grant of an Option pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes to, of or in its capital or business structure or to merge, consolidate, dissolve or liquidate or sell or transfer all or any part of its business or assets. (e) Rights as a Stockholder. An optionee or a transferee of an Option shall have no rights as a stockholder with respect to any shares underlying his or her Option until the date of the issuance of a stock certificate for those shares upon payment of the exercise price. No adjustments shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in subsection 4.3(d). (f) Option Termination. (1) Each Option Agreement shall provide that, if the optionee ceases to be a Director incidental to conduct that, in the judgment of the Committee, involves a breach of fiduciary duty by such optionee or other conduct detrimental to the Company, then his or her Option shall terminate immediately and thereafter be of no force or effect. (2) Each Option Agreement shall also provide that, if the optionee ceases to be a Director for a reason other than conduct that, in the judgment of the Committee, involves a breach of fiduciary duty by such optionee or other conduct detrimental to the Company, then the optionee may at any time within three months after he or she ceases to be a Director exercise his or her Option but only to the extent the Option was exercisable by him or her on the date he or she ceased to be a Director (the unexercisable portion of the Option shall terminate and thereafter be of no force or effect); provided, however, that if an optionee so requests, his or her Option Agreements shall provide that if the approval of the stockholders has not been obtained as required by Section 5.8 at the time the optionee so ceases to be a Director, the three months shall not begin to run until the first to occur of (i) such approval of stockholders or (ii) June 1, 2001. (3) Each Option Agreement also shall provide that, if the optionee becomes permanently and totally disabled (within the meaning of Section 22(e)(3) of the Code) while serving as a Director, then such Option may be fully exercised not later than the expiration of twelve months following such permanent and total disability by the optionee or person, if any, appointed by a court to administer the affairs of the optionee. 9 10 (4) Each Option Agreement also shall provide that, if the optionee dies while serving as a Director, then such Option may be fully exercised not later than the expiration of twelve months following such death by the person or persons to whom his or her rights under the Option shall pass by will or by the laws of descent or distribution. In addition, each Option Agreement also shall provide that, if the optionee dies within the three month period described in clause (2) above or the one year period described in clause (3) above, then his or her Option may be exercised at any time within one year following his or her death by the person or persons to whom his or her rights under the Option shall pass by will or by the laws of descent and distribution, but only to the extent that such Option was exercisable by him or her on his or her date of death. (5) Each Option Agreement also shall provide for acceleration of exercisability in the event of a Change of Control. (6) Notwithstanding anything to the contrary in this subsection, an Option may not be exercised by anyone after the expiration of its term. ARTICLE V MISCELLANEOUS 5.1 Designation. This Plan may be referred to in other documents and instruments as the "Resource Bancshares Mortgage Group, Inc. Outside Directors' Stock Option Plan." 5.2 Amendment, Suspension, Discontinuance and Termination of Plan. The Committee may from time to time amend, suspend or discontinue this Plan or revise it in any respect whatsoever for the purpose of maintaining or improving its effectiveness as an incentive device, for the purpose of conforming it to applicable governmental regulations or to any change in applicable law or regulations, or for any other purpose permitted by law; provided, however, that no such action by the Committee shall adversely affect any Option theretofore awarded hereunder without the consent of the holder so affected; provided further that any amendment to this Plan that would materially increase the benefits accruing to participants hereunder, materially increase the number of shares of Common Stock that may be issued upon exercise of Options granted hereunder or materially modify this Plan's requirements as to eligibility for participation herein must be approved by the stockholders of the Company. This Plan will terminate on the date when all shares of the Common Stock received for issuance under the Plan have been acquired upon exercise of Options granted hereunder or on such earlier date as the Board may determine. 5.3 Governing Law. This Plan and all rights and obligations hereunder shall be construed in accordance with and governed by the laws of the State of South Carolina. 5.4 Indemnification of Committee. In addition to such other rights of indemnification as they may have as Directors or as members of the Committee, the members of the Committee shall be indemnified by the Company against the reasonable expenses, including 10 11 legal fees actually and necessarily incurred in connection with the defense of any investigation, action, suit or proceeding, or in connection with any appeal therefrom, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with this Plan or any Option granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in or dismissal or other discontinuance of any such investigation, action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such investigation, action, suit or proceeding that such Committee member is liable for negligence or misconduct in the performance of his or her duties, provided that, within 60 days after institution of any such investigation, action, suit or proceeding, a Committee member shall in writing offer the Company the opportunity, at its own expense, to handle and defend the same. 5.5 Reservation of Shares. The Company shall, at all times during the term of this Plan and so long as any Option shall be outstanding, reserve and keep available such number of shares of Common Stock as shall be sufficient to satisfy the requirements hereof. Notwithstanding the foregoing, the inability of the Company to obtain, from any regulatory body of appropriate jurisdiction, authority considered by the Company to be necessary or desirable to the lawful issuance of any shares of its Common Stock hereunder shall relieve the Company of any liability in respect of the non-issuance or sale of such Common Stock as to which such requisite authority shall not have been obtained. 5.6 Application of Funds. The proceeds received by the Company from the sale of Common Stock upon the exercise of Options will be used for general corporate purposes. 5.7 No Obligation to Exercise.The award of an Option under this plan shall impose no obligation upon the optionee to exercise that Option. 5.8 Approval of Stockholders. No Options awarded pursuant to this Plan shall be enforceable against the Company unless and until the Plan shall have been ratified by the stockholders of the Company. * * * * * 11 EX-11.1 6 g67742ex11-1.txt STMT RE COMPUTATION OF NET INCOME PER COMMON SHARE 1 EXHIBIT 11.1 RESOURCE BANCSHARES MORTGAGE GROUP, INC. STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE, BASIC AND DILUTED EARNINGS PER SHARE ($ in thousands, except per share amounts)
For the Year Ended December 31,2000 --------------------- Net loss $40,190 Net loss per common share from continuing operations-Basic (1) $2.27 Net loss per common share from discontinued operations-Basic (1) $0.12 Net loss per common share from continuing operations-Diluted (1) $2.27 Net loss per common share from discontinued operations- Diluted (1) $0.12
(1) The number of common shares used to compute the net income per share above was 17,727,445 for the year ended December 31, 2000. EX-13.1 7 g67742ex13-1.txt 2000 ANNUAL REPORT TO SHAREHOLDERS 1 2000 ANNUAL REPORT [PHOTO] NAVIGATING THE COURSE FOR THE FUTURE [RESOURCE BANCSHARES MORTGAGE GROUP, INC. LOGO] 2 CORPORATE INFORMATION [RESOURCE BANCSHARES MORTGAGE GROUP, INC. LOGO] DIRECTORS BOYD M. GUTTERY* Business Consultant Atlanta, Georgia STUART M. CABLE Attorney Goodwin, Proctor, & Hoar LLP law firm Boston, Massachusetts DOUGLAS K. FREEMAN Chairman and Chief Executive Officer Resource Bancshares Mortgage Group, Inc. Columbia, South Carolina DAVID W. JOHNSON, JR. President (Retired) Resource Bancshares Mortgage Group, Inc. Columbia, South Carolina ROBIN C. KELTON Chairman Kelton International Ltd. investment bank London, England JOEL A. SMITH, III* Dean Darla Moore School of Business University of South Carolina Columbia, South Carolina ROGER O. GOLDMAN* President Ignite, Inc. management consulting firm New York, New York *Audit Committee KEY OFFICERS DOUGLAS K. FREEMAN Chairman and Chief Executive Officer STEVEN F. HERBERT Chief Financial Executive HAROLD LEWIS, JR. Chief Portfolio Management Executive WILLIAM M. ROSS Chief Sales and Fulfillment Executive THOMAS J. LITTLE, JR. Chief Human Resources Executive CORPORATE INFORMATION Exchange: Nasdaq Symbol: RBMG Internet Address: http://www.rbmg.com Investor Relations Contact Steven F. Herbert Chief Financial Executive 7909 Parklane Road Columbia, South Carolina 29223 Tel: (803)741-3539 Fax: (803)741-3903 E-mail: investors@rbmg.com 1-800-933-2890 FORM 10K AND OTHER INFORMATION Copies of the Resource Bancshares Mortgage Group, Inc. Annual Report on Form 10K, as filed with the Securities and Exchange Commission, will be furnished without charge to shareholders upon written request to Steven F. Herbert at the address set forth above. TRANSFER AGENT AND REGISTRAR EquiServe Telephone Inside the US: 1-800-446-2617 Outside the US: 1-201-324-0498 TDD/TTY for hearing impaired: 1-201-222-4955 Operators are available Monday-Friday, 8:30 a.m. to 7:00 p.m. Eastern time. An interactive automated system is available around the clock everyday. INTERNET Internet: http://www.equiserve.com GENERAL CORRESPONDENCE EquiServe P.O. Box 2500 Jersey City, NJ 07303-2500 For questions regarding stock transfers, change of address or lost certificates. CERTIFICATE TRANSFERS BY MAIL EquiServe P.O. Box 2589 Jersey City, NJ 07303-2589 ACCESS ACCOUNT INFORMATION VIA INTERNET http://gateway.EquiServe.com Internet Helpline: 1-877-843-9327 Operators are available Monday-Friday 8:30 a.m. to 7:00 p.m. Eastern time. RETURN ON ASSETS* (consolidated) [GRAPH] RETURN ON EQUITY* (consolidated) [GRAPH] NET OPERATING INCOME* ($ in millions) [GRAPH] DILUTED OPERATING EARNINGS PER SHARE* [GRAPH] * Amounts reflect operating amounts only. Excluded are the impact of non-recurring charges reported in 1996 and 1997 and non-recurring income reported in 1998, and workforce reduction charges reported in 1999. Also, excluded in 2000 are all unusual items as reported in the Annual Report. 3 TO OUR STOCKHOLDERS, CUSTOMERS AND COLLEAGUES: [PHOTO] It has been a little more than a year since I assumed responsibility as Chief Executive Officer. Throughout the first quarter of 2000, the Board, management and I met extensively to review your Company's position in the eyes of its customers, colleagues and investors and to reconsider our chosen markets, mission, goals, business principles, and core values. I articulated the results of that study and the resulting course that we charted for your Company in last year's annual report. When we charted our course a year ago, we decided to focus on becoming a customer centric financial intermediary that delivers value to its customers by combining the best of product depth, relationship management and service quality. We are now almost a full year into implementation of that business plan and have made significant progress in navigating the course back to profitability. The mortgage banking industry is highly cyclical. When interest rates are low, production volumes grow and profit margins widen. Throughout this past year, we operated in a high interest rate environment in which available volumes were lower than in the prior two years and competition for the "decreasing pie" drove margins in the agency-eligible side of our business down. I am happy to report that, as a result of recent reductions in interest rates by the Federal Reserve Board, the wind is once again at our backs. Our agency-eligible locked pipeline has grown to $1.2 billion at February 28, 2001 (145% greater than a year ago), and agency-eligible closing volumes for the month of February were $816.5 million (150% greater than February 2000 volumes). Likewise, margins have improved on the agency-eligible side of our business from 53 basis points average for 2000 to 61 basis points average for the fourth quarter of 2000. The year 2000 was a watershed year during which we focused our efforts on creating the infrastructure to enable your Company to operate profitably in favorable as well as unfavorable economic environments. In other words, though we can't control the speed and direction of the wind, we can adjust our sails and our tack to take advantage of the wind that is available. Accordingly, our focus in 2000 was to reduce the level of fixed costs in our loan production operation; to put in place the infrastructure to process loans better, cheaper and faster; to expand our product offerings focusing especially on higher margin, non-traditional products; and to put in place world class sales and portfolio management tools. "I am happy to report that...the wind is once again at our backs." Resource Bancshares Mortgage Group, Inc. 1 4 [PHOTO] During the last half of the year we completed a company-wide reorganization designed around business processes rather than traditional product groupings to help us become customer centric. The resulting business units are: sales, customer fulfillment, servicing, and portfolio management. During the year, we deployed new internal reporting models to measure "net value added" across products, customers, salespeople, and the newly defined business units. That system is now a cornerstone of our management information and accountability system. We have implemented a "balanced score card" management accountability and compensation system that encompasses financial performance, operational performance, customer satisfaction, employee satisfaction and development measurements. We also have developed a series of "dashboard" reports that track various sales, risk and financial measures, by customer. During the year we also provided training to our salespeople on various aspects of customer relationship management including consultative selling techniques. We put into their hands world class technology including: SALESFORCE.COM, a leading edge, web-based sales force automation tool that gives our salespeople access to our databases to know the status of each customer's pipeline of loans. MAPP, a database that allows each salesperson to identify market area potential for purposes of targeting new customers or increasing the "wallet share" of existing customers. RAP, a relationship action plan tool that provides discipline in managing customer relationships. These tools help our salespeople to be more efficient and effective. Coupled with careful pruning of lower volume producers, these tools have enabled our loans closed-per-agency-wholesale-salesperson to increase from $1.94 million in July 2000 to $5.41 million in January 2001. PRODUCTION BY CHANNEL ($ in millions) - Subprime - Wholesale - Correspondent [GRAPH] "...we have developed and are now selling the entire value chain of our mortgage banking competencies to our partners including sub-servicing, portfolio management and customer fulfillment services." 2 5 [PHOTO] "e-RBMG is...the first of many stepping stones allowing RBMG to ultimately process loans in a virtual, paperless process." We view our brokers and correspondents as more than customers. We view them as partners in a venture to bring mortgage financing to the public. Our success depends on our helping these partners to succeed in a fiercely competitive environment. Accordingly, as part of offering world class products and services, we have developed and are now selling the entire value chain of our mortgage banking competencies to our partners including sub-servicing, portfolio management and customer fulfillment services. These services are being offered under the brand name "Resource Mortgage Solutions." In our customer fulfillment unit we have completed the centralization of the loan processing operations from 34 separate subprime and agency-eligible branches into 7 regional operating centers. This is enabling us to build to a "critical mass" of volume in the remaining centers where we have significant quantity and quality of experience and effective management leadership. Working with outside consultants we re-engineered work processes to enable those regional customer fulfillment centers to serve our customers better, cheaper and faster. We believe that the consolidation of regional offices and re-engineering of work processes have enabled us to cut $4.0 million out of annual expense from our customer fulfillment processes. We re-engineered our centralized post-closing operation in Columbia, SC over a two-year period of time, resulting in an increase in monthly-units-processed-per-loan-operations-personnel from 40 units in the spring of 1998 to 70 units in December 2000. Paperwork is the Achilles heel of the mortgage banking industry. Our first step in proactively managing mortgage paperwork is e-RBMG. Launched early in 2000, this sophisticated on-line tool dramatically improves the efficiency and effectiveness of our interactions with customers. This web site allows RBMG's correspondent lenders and brokers to upload and key files, register and lock a loan, submit a loan to Fannie Mae Desktop Underwriting, print out a fax cover sheet with a bar code [GRAPH] [GRAPH] [GRAPH] Resource Bancshares Mortgage Group, Inc. 3 6 [PHOTO] to be faxed and routed electronically, submit an electronic file to one of RBMG's Regional Operations Centers for validation, and request closing funds on-line. During 2000, we trained 2,575 people (representing 950 of our correspondents and brokers) and closed $801 million of loans that had been processed on e-RBMG. During the fourth quarter alone, we closed $388 million of loans through e-RBMG. e-RBMG is the cornerstone of our future customer fulfillment strategy and the first of many stepping stones allowing RBMG to ultimately process loans in a virtual, paperless process. Much of our effort and resources in 2001 and 2002 will be in furtherance of these endeavors. During the year Mickey Ross joined our team as Chief Sales and Fulfillment Executive. Mickey was previously President of Home Equity Sale, a division of the Consumer Finance Group of Bank of America, responsible for NationsCredit, EquiCredit, telephone and correspondent lending sales efforts. Mickey's vast experience has enabled us to jump start many of the initiatives we have undertaken to become a customer centric organization. "Competitive advantage in portfolio management comes from having better information than our competitors and exploiting that information to squeeze out incremental profit through risk-based pricing and best execution modeling." On the portfolio side, we focused during the year on two key initiatives: shedding non-core assets from our balance sheet; and putting in place the technology and people to provide RBMG with world class portfolio management information. During the year we completed the sale of substantially all of the assets of Laureate Capital Corp. and the sale of all our residual interests in subprime securitizations, and we engaged a consultant to assist us in evaluating strategic alternatives for our leasing business. The sale of our residual interests was part of our overall strategy to deliver our subprime loan production into the cash markets. This transaction took a major source of volatility out of our earnings stream while providing liquidity to facilitate execution of our long-term strategic vision and to support continuation of our stock repurchase program. The mortgage market has become extremely sophisticated and competitive in recent years. As a result, competitive advantage in portfolio management comes from having better information than our competitors and exploiting that information to squeeze out incremental profit through risk-based pricing and best execution modeling. During 2000, we recruited Harold Lewis as Chief Portfolio Management Executive. Prior to joining RBMG, Harold served as President of Home Equity Services and NationsCredit Consumer Corporation. Harold brings to our team extensive consumer credit and portfolio management experience. Harold has assembled a team of colleagues with expertise in prime and subprime secondary marketing, servicing asset management, risk management and quantitative analysis. During the year we put in place best execution models for agency-eligible and subprime products and have made significant progress in implementing switch-in-front and risk-based pricing technologies. Likewise, we have implemented new pipeline and servicing asset management software that is state of the art. We now have one of the top portfolio management teams in the mortgage banking industry. From a strategy standpoint we continue to sell into the cash markets the vast majority of the loans and servicing that we produce. However, we will continue to own a sufficient quantity of servicing to enable us to maintain a quality, state of the art servicing factory. In order to do this, we will retain a small portion of the servicing that we generate and offer competitively priced sub-servicing to our correspondents and others as part of our total product offerings to customers. 4 7 [PHOTO] RBMG is uniquely qualified as a sub-servicer. RBMG is not a mega-servicer intent on "owning" the underlying mortgage customer in order to cross-sell additional products. We are, therefore, uniquely able to offer our customers the opportunity to place their servicing with us, thereby gaining cost savings, while retaining ownership of their customer. During 2000, RBMG developed the ability to "private label" sub-service in the name of the owner of the servicing. Resource Servicing Advantage has the ability to carry out collections and customer service processes as specified by the owner of the servicing. Further, as a result of its strategy to sell on a quarterly basis much of the servicing it produces, RBMG is efficient at servicing transfers and effective in dealing with dramatic changes in the number of loans serviced. In spite of the effect of loan transfers and in the absence of the "critical mass" typical of the servicing industry, RBMG serviced in excess of 1,000 loans per-full-time-equivalent-employee throughout 2000. Our servicing factory continues to maintain high standards of performance. RBMG consistently maintains Tier 1 rankings from Freddie Mac for both Investor Reporting and Default Reporting. Our delinquencies, including loans in bankruptcy or foreclosure, have consistently remained below 3% during 2000, and averaged 2.5% for the year. This compares favorably with the performance of our peers. "RBMG is...uniquely able to offer our customers the opportunity to place their servicing with us, thereby gaining cost savings, while retaining ownership of their customer." [GRAPH] Resource Bancshares Mortgage Group, Inc. 5 8 [PHOTO] FROM LEFT TO RIGHT STANDING WILLIAM M. ROSS Chief Sales and Fulfillment Executive HAROLD LEWIS, JR. Chief Portfolio Management Executive STEVEN F. HERBERT Chief Financial Executive THOMAS J. LITTLE, JR. Chief Human Resources Executive SITTING DOUGLAS K. FREEMAN Chairman and Chief Executive Officer In a nutshell, our performance for the year 2000 was all about execution of our plan and navigating the new course that we charted for the Company a year ago. That course required charges associated with shedding non-core assets from our balance sheet and restructuring charges associated with re-engineering work processes, organizational changes and consolidation of regional operating centers. What has emerged from all of this hard work is a Company with an improved and more liquid balance sheet, that is customer-centric and that competes on the basis of value added. I mentioned at the start of this letter that the interest rate environment has improved in recent months so that the wind is once again at our backs. What's different this time is that RBMG is entering the favorable end of the interest rate cycle with reduced fixed costs, better automation, streamlined work processes, better management information, stronger portfolio skills and tools, and an improved and more liquid balance sheet. I look forward as you do to a more prosperous 2001. I would be remiss if I did not thank the people who have worked so hard to navigate the new course that we charted a year ago. First and foremost, I want to thank my colleagues at RBMG for all of the hard work during 2000 in executing our business strategy. I am proud of your commitment to changing how our Company operates. You have embraced our new corporate culture of change and continuous process improvement. This cultural shift will allow us to increasingly become a more customer-centric organization. There is still much to do in the furtherance of our ultimate objectives of virtual loan processing in a near paperless environment and developing strategic partnerships with our brokers and correspondents. I look forward to working with you in 2001 in these and other endeavors. I would like to thank a member of our Board of Directors, Boyd Guttery, who served as Chairman of the Board during the critical transition months. While I assumed responsibility for day-to-day leadership inside the Company, his hard work as Chairman ensured an orderly transition. Finally, I want to thank David Johnson. David recently retired as President of your Company. David was one of the founders who helped to build the Company from the ground up. During the past year of organization changes and re-engineering, David was my "compass" to ensure that we kept the best from the past and adopted the best of the "new ideas." Without David's support and leadership, we would not have made the progress that we did. David will continue as a valued member of our Board of Directors, and I look forward to his continued assistance and guidance. /s/ DOUGLAS K FREEMAN - ------------------------------------ Douglas K. Freeman Chairman and Chief Executive Officer 6 9 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 2000 Annual Report on Form 10-K. Statements included in this discussion and analysis (or elsewhere in this annual report) which are not statements of historical fact are intended to be, and are hereby identified as, "forward-looking statements" for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and that actual results could differ materially from those indicated by such forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, the following which are described herein or in the Company's Annual Report on Form 10-K for the year ended December 31, 2000: (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) prepayment risks, (xi) possible changes in accounting estimates and (xii) availability of funding sources and other risks and uncertainties. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. THE COMPANY The Company is a 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, one of the Company's wholly-owned subsidiaries originates, sells and services small-ticket commercial equipment leases. LOAN AND LEASE PRODUCTION A summary of production by source for the periods indicated is set forth below:
For the Year Ended December 31, --------------------------------------------------------- ($ in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Agency-Eligible Loan Production: Correspondent ............................................... $ 4,532,335 $ 6,363,936 $ 11,666,560 Wholesale ................................................... 1,098,699 1,748,415 3,023,961 Retail ...................................................... -- -- 264,059 - ---------------------------------------------------------------------------------------------------------------------------------- Total Agency-Eligible Loan Production ......................... 5,631,034 8,112,351 14,954,580 Subprime Loan Production .................................... 669,622 728,410 607,664 Lease Production ............................................ 103,324 100,230 78,098 - ---------------------------------------------------------------------------------------------------------------------------------- Total Mortgage Loan and Lease Production ...................... $ 6,403,980 $ 8,940,991 $ 15,640,342 ==================================================================================================================================
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. Correspondent operations accounted for 71% of the Company's total production for both the twelve months ended December 31, 2000 and 1999. Wholesale and subprime production accounted for 17% and 10%, respectively, of the Company's production for the year ended December 31, 2000 and 20% and 8%, respectively, of the Company's production for the twelve months ended December 31, 1999. Lease production accounted for 2% and 1% of the Company's total production for 2000 and 1999, respectively. A summary of key information relevant to industry loan production activity is set forth below:
At or for the Year Ended December 31, ----------------------------------------------------------- ($ in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- U.S. 1-4 Family Mortgage Originations Statistics(1): U.S. 1-4 Family Mortgage Originations ....................... $1,024,000,000 $1,287,000,000 $1,470,000,000 Adjustable Rate Mortgage Market Share ....................... 24% 21% 14% Estimated Fixed Rate Mortgage Originations .................. 778,000,000 1,017,000,000 1,264,000,000 Company Information: Residential Loan Production ................................. $ 6,300,656 $ 8,840,761 $ 15,562,244 Estimated Company Market Share .............................. 0.62% 0.69% 1.06% ==================================================================================================================================
(1) Source: Mortgage Bankers Association of America, Economics Department. The Company's total residential mortgage production decreased by 29% to $6.3 billion for 2000 from $8.8 billion for 1999. During 2000, interest rates were higher than during 1999, resulting in a decrease in industry wide residential loan originations of 20%. Likewise, the higher rate environment resulted in an increase in ARM market share in 2000 compared to 1999. The Company has historically focused Resource Bancshares Mortgage Group, Inc. 7 10 on fixed rate products, and only recently has commenced offering a broader spectrum of mortgage products, including adjustable rate products. Further, a rise in interest rates and resulting decrease in volumes prompted increasing price competition in the marketplace during 2000 compared to 1999. The Company's total residential mortgage production decreased 43% to $8.8 billion for 1999 from $15.6 billion for 1998. During 1999, interest rates were higher than during 1998, resulting in a decrease in industry wide residential mortgage originations of 12%. Likewise, the higher rate environment resulted in an increase in ARM market share in 1999 compared to 1998. During 1999 and 1998, the Company offered primarily fixed rate products. Further, a rise in interest rates and resulting decrease in volumes prompted increasing price competition in the marketplace during 1999 compared to 1998. CORRESPONDENT LOAN PRODUCTION The Company purchases closed mortgage loans processed through its network of approved correspondent lenders. For certain correspondents, the Company underwrites and table funds loan applications taken and processed by the correspondent. Correspondents are primarily mortgage lenders, larger mortgage brokers and smaller savings and loan associations and commercial banks that have met the Company's approval requirements. The Company continues to emphasize correspondent loan production as its basic business focus because of the lower fixed expenses and capital investment required of the Company. A summary of key information relevant to the Company's correspondent loan production activities is set forth below:
At or for the Year Ended December 31, --------------------------------------------------------- ($ in thousands) 2000 1999 1998 ------------ ------------ ------------- Correspondent Loan Production ................................. $ 4,532,335 $ 6,363,936 $ 11,666,560 Estimated Correspondent Market Share(1) ....................... 0.44% 0.49% 0.79% Approved Correspondents ....................................... 924 909 852 Correspondent Division Expenses ............................... $ 40,732 $ 55,438 $ 68,975 ============ ============ =============
(1) Source: Mortgage Bankers Association of America, Economics Department. The Company's correspondent loan production decreased by 29% to $4.5 billion for 2000 from $6.4 billion for 1999. During 2000, interest rates were higher than during 1999, resulting in a decrease in industry wide residential loan originations of 20%. Likewise, the higher rate environment resulted in an increase in ARM market share in 2000 compared to 1999. 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, a rise in interest rates and resulting decrease in volumes prompted increasing price competition in the marketplace during 2000. The decline in production is the primary reason for the increase in correspondent division expenses as a percentage of production which increased from 87 basis points for 1999 to 90 basis points for 2000, in spite of the reduction in correspondent division expenses. The number of approved correspondent lenders increased 2% from 1999 to 2000. The Company's total correspondent residential mortgage production decreased 45% to $6.4 billion for 1999 from $11.7 billion for 1998. During 1999, interest rates were higher than during 1998, resulting in a decrease in industry wide residential mortgage originations of 12%. Likewise, the higher rate environment resulted in an increase in ARM market share in 1999 compared to 1998. During 1999 and 1998, the Company offered primarily fixed rate products. Further, a rise in interest rates and resulting decrease in volumes prompted increasing price competition in the marketplace during 1999 compared to 1998. The decline in production is the primary reason for the increase in correspondent division expenses as a percentage of production which increased from 59 basis points for 1998 to 87 basis points for 1999, in spite of the reduction in correspondent division expenses. The number of approved correspondent lenders increased 7% from 1998 to 1999. During 2000, the Company introduced e-RBMG, the Company's business-to-business Internet offering. e-RBMG makes it easier for correspondents to interact with the Company by automating the flow of information between the correspondent and the Company. e-RBMG allows correspondent lenders to upload and key files, register and lock a loan, submit a loan to Fannie Mae Desktop Underwriting, print out a fax cover with a bar code to be faxed and routed electronically, submit an electronic file to one of the Company's Regional Operation Centers for validation, and request closing funds on-line. WHOLESALE LOAN PRODUCTION The wholesale division receives loan applications through brokers, underwrites the loans, funds the loans at closing and prepares all closing documentation. Typically, mortgage brokers are responsible for taking applications and accumulating the information precedent to the Company's processing and underwriting of the loans. The Company handles all shipping and follow-up procedures on the loans. Although processing, underwriting and funding loans for mortgage brokers involves more work and expense than that involved in correspondent loan production, wholesale operations also generally provide for higher profit margins than correspondent loan production. Prior to the fourth quarter of 1999, the Company had wholesale processing branches in most major markets throughout the United States. During 2000 the Company completed the process started in 1999 of consolidating from an 18 branch environment into regional operating centers to improve operating cost efficiency levels. The Company's nationwide wholesale salesforce is now supported by four such regional operating centers at December 31, 2000. A summary of key information relevant to the Company's wholesale production activities is set forth below:
At or for the Year Ended December 31, --------------------------------------------------------- ($ in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Wholesale Loan Production ..................................... $ 1,098,699 $ 1,748,415 $ 3,023,961 Estimated Wholesale Market Share(1) ........................... 0.11% 0.14% 0.21% Wholesale Division Direct Operating Expenses .................. $ 11,522 $ 16,362 $ 16,037 Approved Brokers .............................................. 4,227 4,284 3,401 Regional Operation Centers .................................... 4 5 -- Number of Branches ............................................ -- 2 15 Number of Employees ........................................... 116 107 161 ==================================================================================================================================
(1) Source: Mortgage Bankers Association of America, Economics Department. 8 11 Wholesale loan production decreased 37% ($0.7 billion) from $1.8 billion for 1999 to $1.1 billion for 2000. During 2000, interest rates were higher than during 1999, resulting in a decrease in industry wide residential loan originations of 20%. Likewise, the higher rate environment resulted in an increase in ARM market share in 2000 compared to 1999. 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, a rise in interest rates and resulting decrease in volumes prompted increasing price competition in the marketplace during 2000. Wholesale division operating expenses as a percentage of production increased from 94 basis points in 1999 to 105 basis points in 2000, primarily as a result of the decline in production volumes. Wholesale loan production decreased 42% ($1.3 billion) from $3.0 billion for 1998 to $1.7 billion for 1999. During 1999, interest rates were higher than during 1998, resulting in a decrease in industry wide residential mortgage originations of 12%. Likewise, the higher rate environment resulted in an increase in ARM market share in 1999 compared to 1998. During 1999 and 1998, the Company offered primarily fixed rate products. Further, a rise in interest rates and resulting decrease in volumes prompted increasing price competition in the marketplace during 1999 compared to 1998. Wholesale division operating expenses as a percentage of production increased from 53 basis points in 1998 to 94 basis points in 1999 primarily as a result of the decline in production volumes. The Company also offers the same advantages available through e-RBMG to wholesale brokers. E-RBMG OPERATIONS Following is a summary of key e-RBMG operating statistics for the year ended December 31, 2000: Customers Added ....................................................................... 950 Headcount Trained ..................................................................... 2,575 Closed Loans ($ in thousands) ......................................................... $ 801,625 Pipeline ($ in thousands) ............................................................. $ 42,260
RETAIL LOAN PRODUCTION Effective May 1, 1998, the Company sold its retail production franchise. Retail loan production and retail divisional direct operating expenses for the year ended December 31, 1998 were $264.1 million and $6.0 million, respectively. SUBPRIME LOAN PRODUCTION In 1997, the Company began its initial expansion into subprime lending activities. The Company conducts subprime business through its wholly-owned subsidiary, Meritage Mortgage Corporation (Meritage). A summary of key information relevant to the Company's subprime production activities is set forth below:
At or for the Year Ended December 31, ------------------------------------------------------- ($ in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Subprime Loan Production ...................................... $ 669,622 $ 728,410 $ 607,664 Subprime Division Direct Operating Expenses ................... $ 23,062 $ 28,760 $ 19,896 Number of Brokers ............................................. 3,548 3,095 1,830 Number of Employees ........................................... 230 293 271 Number of Branches ............................................ -- 10 19 Regional Operation Centers .................................... 3 -- -- ==================================================================================================================================
Subprime loan production decreased by 8% to $669.6 million for 2000 as compared to $728.4 million during 1999. The decrease in production volumes relates to the higher rate environment in 2000 compared to 1999. Subprime division direct operating expenses decreased 20% from $28.8 million in 1999 to $23.1 million in 2000. This reduction in expenses is due to a decrease in production and to phasing out of branch facilities. During 2000, the Company's salespeople commenced working out of their homes or executive suites. The Company centralized processing, underwriting and closing functions into three regional operating centers where a critical mass of volume could be achieved for better operating efficiency. As a result, the Company reduced direct operating expenses by 51 bps from 1999 to 2000. Between 1999 and 2000 the Company increased the number of its subprime brokers by 453. Subprime loan production increased by 20% to $728.4 million for 1999 as compared to $607.7 million during 1998 as the Company expanded its operations. Between 1998 and 1999 the Company increased the number of its subprime brokers by 1,265. The number of branches declined from 19 in 1998 to 10 at the end of 1999 as the Company reassessed the geographic regions that each branch covered. COMMERCIAL MORTGAGE PRODUCTION On September 29, 2000, the Company closed on an agreement to sell substantially all of the assets of Laureate to BB&T Corporation of Winston-Salem, N.C. Accordingly, the Company recorded a $1.4 million after-tax charge during the period primarily related to the write-off of intangible assets of Laureate. LEASE PRODUCTION The Company's wholly-owned subsidiary, Republic Leasing Company, Inc. (Republic Leasing), originates and services small-ticket commercial equipment leases. Substantially all of Republic Leasing's lease receivables are acquired from independent brokers who operate throughout the continental United States. A summary of key information relevant to the Company's lease production activities is set forth below:
At or for the Year Ended December 31, ------------------------------------------------------- ($ in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Lease Production .............................................. $ 103,324 $ 100,230 $ 78,098 Lease Division Operating Expenses ............................. $ 7,901 $ 6,275 $ 5,307 Number of Brokers ............................................. 181 184 218 Number of Employees ........................................... 70 61 66 ==================================================================================================================================
Resource Bancshares Mortgage Group, Inc. 9 12 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. The Company is somewhat unique in that its strategy is to sell substantially all of its produced residential mortgage servicing rights to other approved servicers. Typically, the Company sells its residential 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 residential loan servicing activities is set forth below:
At or for the Year Ended December 31, --------------------------------------------------- ($ in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- Underlying Unpaid Principal Balances: Beginning Balance* .................................................. $ 7,822,394 $ 9,865,100 $ 7,125,222 Residential Loan Production (net of servicing-released production) .. 5,462,435 8,097,749 14,917,193 Net Change in Work-in-Process ....................................... 15,277 228,712 604,131 Bulk Acquisitions ................................................... -- -- 122,467 Sales of Servicing .................................................. (4,473,456) (9,104,706) (10,922,288) Paid-In-Full Loans .................................................. (580,393) (973,780) (1,639,776) Amortization, Curtailments and Other, net ........................... (199,078) (290,681) (341,849) - -------------------------------------------------------------------------------------------------------------------------------- Ending Balance* ..................................................... 8,047,179 7,822,394 9,865,100 Subservicing Ending Balance ......................................... 625,117 1,255,832 3,730,636 - -------------------------------------------------------------------------------------------------------------------------------- Total Underlying Unpaid Principal Balances ............................ $ 8,672,296 $ 9,078,226 $ 13,595,736 ================================================================================================================================
* These numbers and statistics apply to the Company's owned residential servicing portfolio and, therefore, exclude the subservicing portfolio. The 2000, 1999 and 1998 ending balance includes $236,267, $139,376 and $138,619 of subprime loans being temporarily serviced until these loans are sold. Of the $8.0 billion, $7.8 billion and $9.9 billion unpaid principal balance at December 31, 2000, 1999 and 1998, approximately $5.5 billion, $6.3 billion and $5.5 billion, respectively, of the related mortgage servicing right asset is classified as available-for-sale, while $2.5 billion, $1.5 billion and $4.4 billion, respectively, of the related mortgage servicing right asset is classified as held-for-sale. A summary of residential servicing statistics follows:
At or for the Year Ended December 31, --------------------------------------------------------- ($ in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Average Underlying Unpaid Principal Balances (including subservicing) $ 9,049,296 $ 11,820,861 $ 11,864,513 Weighted Average Note Rate* ................................... 7.67% 7.50% 7.20% Weighted Average Servicing Fee* ............................... 0.42% 0.43% 0.42% Delinquency (30+ days) Including Bankruptcies and Foreclosures* 2.78% 2.78% 2.01% Number of Servicing Division Employees ........................ 73 86 151 ==================================================================================================================================
* These numbers and statistics apply to the Company's owned residential servicing portfolio and, therefore, exclude the subservicing portfolio. The year end average underlying unpaid principal balance of residential mortgage loans being serviced and subserviced decreased $2.8 billion, or 23%, from 1999 to 2000. This relates primarily to a decrease in the average balance of servicing held-for-sale, which resulted from a decrease in residential loan production in 2000 compared with 1999. Since the Company generally sells servicing rights related to the residential 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. Likewise, the $0.04 billion, or 0.4%, decrease in the average underlying unpaid principal balance of residential mortgage loans being serviced and subserviced for 1999 as compared to 1998 is primarily related to the Company's decreased loan production volumes during 1999. LEASE SERVICING Republic Leasing services leases that are owned by it and also services leases for investors. A summary of key information relevant to the Company's lease servicing activity is set forth below:
At or for the Year Ended December 31, ------------------------------------------------------- ($ in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Owned Lease Servicing Portfolio ....................................... $ 188,912 $ 152,300 $ 98,956 Serviced For Investors Servicing Portfolio ............................ 3,729 14,272 37,565 - ---------------------------------------------------------------------------------------------------------------------------------- Total Managed Lease Servicing Portfolio ............................... $ 192,641 $ 166,572 $ 136,521 ================================================================================================================================== Weighted Average Net Yield For Managed Lease Servicing Portfolio 10.77% 10.61% 10.81% Delinquencies (30+ Days) Managed Lease Servicing Portfolio ............ 2.40% 2.76% 2.00% ==================================================================================================================================
10 13 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:
At or for the Year Ended December 31, ------------------------------------------------------- ($ in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Total Company Servicing Fees .................................. $ 34,981 $ 42,223 $ 39,379 Net Interest Income from Owned Leases ......................... 9,176 7,270 4,637 - ---------------------------------------------------------------------------------------------------------------------------------- Total Servicing Fees and Interest from Owned Leases ........... $ 44,157 $ 49,493 $ 44,016 Total Company Operating Expenses .............................. $ 121,524 $ 151,684 $ 155,892 Total Company Amortization and Depreciation ................... (33,065) (36,653) (32,572) - ---------------------------------------------------------------------------------------------------------------------------------- Total Company Operating Expenses, Net of Amortization and Depreciation $ 88,459 $ 115,031 $ 123,320 - ---------------------------------------------------------------------------------------------------------------------------------- Coverage Ratio ................................................ 50% 43% 36% ==================================================================================================================================
The Company's coverage ratios for 2000, 1999 and 1998 at 50%, 43% and 36%, respectively, result from gradually moving toward the Company's target level of between 50% and 80%. In the opinion of the Company's management, market prices for servicing rights have been attractive throughout this period. Accordingly, management consciously determined on a risk-versus-return basis to allow this ratio to move slowly toward its stated goal. As market conditions permit, management would expect to remain in line with the stated objective of maintaining a coverage ratio of between 50% and 80%. RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 2000, COMPARED TO YEAR ENDED DECEMBER 31, 1999 SUMMARY BY OPERATING DIVISION Net income (loss) per common share on a diluted basis for 2000 was ($2.39) as compared to $0.28 for 1999. Following is a summary of the revenues and expenses for each of the Company's operating divisions for the years ended December 31, 2000 and 1999, respectively:
For the Year Ended December 31, 2000(1)(2) ------------------------------------------------------------------- Agency-Eligible ---------------------------------------- Commercial (Unaudited)($ in thousands) Production Servicing Reinsurance Subprime Mortgage - ------------------------------------------------------------------------------------------------------------------------------ Net interest income ................................... $ 1,867 $ (5,326) (92) $ 11,439 $ -- Net gain on sale of mortgage loans .................... 24,194 -- -- 13,149 -- Gain on sale of mortgage servicing rights .............................................. -- 2,222 -- -- -- Servicing fees ........................................ -- 34,738 -- -- -- Mark-to-market on residual interests in subprime securitizations ......................... -- -- -- (39,338) -- Other income .......................................... 563 517 3,142 579 -- - ---------------------------------------------------------------------------------------------------------------------------- Total revenues ...................................... 26,624 32,151 3,050 (14,171) -- - ---------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits .......................... 28,333 2,904 -- 11,682 -- Occupancy expense ..................................... 11,332 191 -- 2,670 -- Amortization and provision for impairment of mortgage servicing rights ........................ -- 24,560 -- -- -- Provision expense ..................................... 2,102 -- -- 2,453 -- General and administrative expenses ................... 10,487 4,408 316 6,257 -- - ---------------------------------------------------------------------------------------------------------------------------- Total expenses ...................................... 52,254 32,063 316 23,062 -- - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes ................................. (25,630) 88 2,734 (37,233) -- Income tax benefit (expense) .......................... 9,875 (34) (960) 13,616 -- - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations .......................................... (15,755) 54 1,774 (23,617) -- Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $261) ............................... -- -- -- -- (1,448) Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $354) ........................................... -- -- -- -- (660) - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) ..................................... $(15,755) $ 54 $ 1,774 $ (23,617) $(2,108) ============================================================================================================================ For the Year Ended December 31, 2000(1)(2) ------------------------------------------------------ Total Other/ Leasing Segments Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------ Net interest income ................................... $ 9,176 $ 17,064 $ (1,188) $ 15,876 Net gain on sale of mortgage loans .................... -- 37,343 -- 37,343 Gain on sale of mortgage servicing rights .............................................. -- 2,222 -- 2,222 Servicing fees ........................................ 501 35,239 (258) 34,981 Mark-to-market on residual interests in subprime securitizations ......................... -- (39,338) -- (39,338) Other income .......................................... 1,229 6,030 120 6,150 - ---------------------------------------------------------------------------------------------------------------- Total revenues ...................................... 10,906 58,560 (1,326) 57,234 - ---------------------------------------------------------------------------------------------------------------- Salary and employee benefits .......................... 2,901 45,820 4,460 50,280 Occupancy expense ..................................... 497 14,690 (683) 14,007 Amortization and provision for impairment of mortgage servicing rights ........................ -- 24,560 -- 24,560 Provision expense ..................................... 3,133 7,688 -- 7,688 General and administrative expenses ................... 1,370 22,838 2,151 24,989 - ---------------------------------------------------------------------------------------------------------------- Total expenses ...................................... 7,901 115,596 5,928 121,524 - ---------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes ................................. 3,005 (57,036) (7,254) (64,290) Income tax benefit (expense) .......................... (1,192) 21,305 2,795 24,100 - ---------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations .......................................... 1,813 (35,731) (4,459) (40,190) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $261) ............................... -- (1,448) -- (1,448) Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $354) ............................................ -- (660) -- (660) - ----------------------------------------------------------------------------------------------------------------- Net income (loss) ..................................... 1,813 $ (37,839) $ (4,459) $ (42,298) =================================================================================================================
(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. Resource Bancshares Mortgage Group, Inc. 11 14
For the Year Ended December 31, 1999(1)(2) --------------------------------------------------------------------------- Agency-Eligible --------------------------------------------- Commercial (Unaudited)($ in thousands) Production Servicing Reinsurance Subprime Mortgage - --------------------------------------------------------------------------------------------------------------------------- Net interest income.......................... $ 8,240 $ (4,555) $ (12) $ 15,366 $ -- Net gain on sale of mortgage loans........... 64,033 -- -- 20,357 -- Gain on sale of mortgage servicing rights.... -- 7,262 -- -- -- Servicing fees............................... -- 41,791 -- -- -- Mark to market on residual interests in subprime securitizations................... -- -- -- (7,843) -- Other income................................. 340 582 1,661 3,471 -- - --------------------------------------------------------------------------------------------------------------------------- Total revenues............................. 72,613 45,080 1,649 31,351 -- - --------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits................. 38,751 3,399 -- 15,840 -- Occupancy expense............................ 10,079 419 -- 2,567 -- Amortization and provision for impairment of mortgage servicing rights............... -- 29,580 -- -- -- Provision expense............................ 5,722 -- 85 2,893 -- General and administrative expenses.......... 17,248 5,984 136 7,460 -- - --------------------------------------------------------------------------------------------------------------------------- Total expenses............................. 71,800 39,382 221 28,760 -- - --------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes........................ 813 5,698 1,428 2,591 -- Income tax benefit (expense)................. (207) (1,448) (356) (1,237) -- - --------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations..... 606 4,250 1,072 1,354 -- Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $-0-).................... -- -- -- -- -- Operating net income of Laureate Capital Corp. (less applicable income tax expense of $405)........................... -- -- -- -- 418 - --------------------------------------------------------------------------------------------------------------------------- Net income (loss)............................ $ 606 $ 4,250 $ 1,072 $ 1,354 $418 =========================================================================================================================== For the Year Ended December 31, 1999(1)(2) -------------------------------------------------------------- Total Other/ (Unaudited)($ in thousands) Leasing Segments Eliminations Consolidated - --------------------------------------------------------------------------------------------------------------- Net interest income.......................... $7,270 $ 26,309 $ (470) $ 25,839 Net gain on sale of mortgage loans........... -- 84,390 -- 84,390 Gain on sale of mortgage servicing rights.... -- 7,262 -- 7,262 Servicing fees............................... 620 42,411 (188) 42,223 Mark to market on residual interests in subprime securitizations................... -- (7,843) -- (7,843) Other income................................. 1,395 7,449 175 7,624 - --------------------------------------------------------------------------------------------------------------- Total revenues............................. 9,285 159,978 (483) 159,495 - --------------------------------------------------------------------------------------------------------------- Salary and employee benefits................. 2,654 60,644 3,903 64,547 Occupancy expense............................ 453 13,518 214 13,732 Amortization and provision for impairment of mortgage servicing rights............... -- 29,580 -- 29,580 Provision expense............................ 1,908 10,608 -- 10,608 General and administrative expenses.......... 1,260 32,088 1,129 33,217 - --------------------------------------------------------------------------------------------------------------- Total expenses............................. 6,275 146,438 5,246 151,684 - --------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes........................ 3,010 13,540 (5,729) 7,811 Income tax benefit (expense)................. (1,196) (4,444) 2,137 (2,307) - --------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations..... 1,814 9,096 (3,592) 5,504 Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $-0-).................... -- -- -- -- Operating net income of Laureate Capital Corp. (less applicable income tax expense of $405)......................... -- 418 -- 418 - --------------------------------------------------------------------------------------------------------------- Net income (loss)............................ $1,814 $ 9,514 $(3,592) $ 5,922 ===============================================================================================================
(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 MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage production operations.
For the Year Ended December 31, ----------------------------------- ($ in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Net interest income ....................................................... $ 1,867 $ 8,240 Net gain on sale of mortgage loans ........................................ 24,194 64,033 Other income .............................................................. 563 340 - ------------------------------------------------------------------------------------------------------------------------ Total production revenue ................................................ 26,624 72,613 - ------------------------------------------------------------------------------------------------------------------------ Salary and employee benefits .............................................. 28,333 38,751 Occupancy expense ......................................................... 11,332 10,079 Provision expense ......................................................... 2,102 5,722 General and administrative expenses ....................................... 10,487 17,248 - ------------------------------------------------------------------------------------------------------------------------ Total production expenses ............................................... 52,254 71,800 - ------------------------------------------------------------------------------------------------------------------------ Net pre-tax production margin ........................................... $ (25,630) $ 813 - ------------------------------------------------------------------------------------------------------------------------ Production ................................................................ $ 5,631,034 $ 8,112,351 Pooled production and whole loan sales .................................... 5,564,703 8,642,639 Total production revenue to pooled and whole loan sales ................... 48 bps 84 bps Total production expenses to production ................................... 93 bps 89 bps - ------------------------------------------------------------------------------------------------------------------------ Net pre-tax production margin ........................................... (45) bps (5) bps ========================================================================================================================
SUMMARY The production revenue to pooled production and whole loan sales ratio decreased 36 basis points for 2000 as compared to 1999. Generally, net gain on sale of mortgage loans (43 basis points for 2000 versus 74 basis points for 1999) declined primarily due to compressed margins attributable to an aggressively competitive pricing environment and lower overall agency-eligible production volume. Net interest income decreased from 10 basis points for 1999 to 3 basis points for 2000 primarily as a result of the flattened yield curve and, in part, due to higher financing costs associated with the renewal of the Company's bank lines during the third quarter of 2000. The 12 15 production expenses to production ratio increased 4 basis points for 2000 as compared to 1999. This is primarily due to the 31% decline in production for 2000 as compared to 1999 which was partially offset by a $19.5 million (27%) decline in total production expenses for 2000 as compared to 1999. As a consequence of the foregoing, the Company's net agency-eligible pre-tax production margin declined 40 basis points. Absent workforce reduction charges (discussed in greater detail elsewhere within Management's Discussion and Analysis), total production expenses would have declined by $20.2 million. NET INTEREST INCOME The following table analyzes net interest income allocated to the Company's agency-eligible mortgage production activities in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and mortgage-backed securities and interest rates paid on interest-bearing sources of funds) for the years ended December 31, 2000 and 1999, respectively:
($ 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 $364,231 $656,291 8.14% 6.85% Securities ............................... $29,632 $44,982 $(15,350) $ 4,668 $(20,018) - ------------------------------- ----------------------------------------------- INTEREST EXPENSE $280,613 $345,807 5.61% 4.14% Warehouse Line*............................. $15,746 $14,313 $ 1,433 $ 4,131 $ (2,698) 71,843 303,092 6.90% 5.21% Gestation Line.............................. 4,956 15,779 (10,823) 1,216 (12,039) 117,801 110,380 7.08% 6.21% Servicing Secured Line...................... 8,343 6,851 1,492 1,031 461 4,116 20,596 5.81% 5.27% Servicing Receivables Line.................. 239 1,085 (846) 22 (868) 8,491 7,142 8.57% 8.57% Other Borrowings............................ 728 612 116 -- 116 Facility Fees and Other Charges............. 3,222 2,968 254 -- 254 - ------------------------------- ----------------------------------------------- $482,864 $787,017 6.88% 5.29% Total Interest Expense...................... $33,234 $41,608 $ (8,374) $ 6,400 $(14,774) - ------------------------------- ----------------------------------------------- Net Interest Income Before Interdivisional 1.26% 1.56% Allocations............................... $(3,602) $ 3,374 $ (6,976) $(1,732) $(5,244) =========== ============================= Allocation to Other......................... 614 470 Allocation to Agency-Eligible Servicing Division.................................. 5,326 4,396 Intercompany Net Interest Income Included in Segmented Income Statement.................. (471) N/A ------- ------- Net Interest Income......................... $ 1,867 $ 8,240 ======= =======
* The interest-rate on the warehouse line is net of the benefit of escrow deposits. The 30 basis point decrease in the interest-rate spread was primarily the result of a flattened yield curve environment during 2000 compared to 1999. 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:
For the Year Ended December 31, ----------------------------------- ($ in thousands) 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------------- Gross proceeds on sales of mortgage loans ........................................... $ 5,554,746 $ 8,853,967 Initial unadjusted acquisition cost of mortgage loans sold, net of hedge results .... 5,568,456 8,861,915 - ---------------------------------------------------------------------------------------------------------------------------------- Unadjusted gain (loss) on sale of mortgage loans .................................... (13,710) (7,948) Loan origination and correspondent program administrative fees ...................... 10,599 21,402 - ---------------------------------------------------------------------------------------------------------------------------------- Unadjusted aggregate margin ......................................................... (3,111) 13,454 Acquisition basis allocated to mortgage servicing rights (SFAS No. 125) ............. 30,279 52,702 Net deferred costs and administrative fees recognized ............................... (2,974) (2,123) - ---------------------------------------------------------------------------------------------------------------------------------- Net gain on sale of agency-eligible mortgage loans .................................. $ 24,194 $ 64,033 ==================================================================================================================================
Net gain on sale of agency-eligible mortgage loans decreased $39.8 million from $64.0 million for 1999 to $24.2 million for 2000. The decrease is primarily due to compressed margins attributable to an aggressively competitive pricing environment in the correspondent channel and lower overall agency-eligible production volume. AGENCY-ELIGIBLE REINSURANCE OPERATIONS In November 1998, the Company formed a captive insurance company, MG Reinsurance Company (MG Reinsurance). MG Reinsurance is licensed as a property and casualty insurer and operates as a monoline captive insurance company assuming reinsurance for PMI policies on agency-eligible mortgage loans initially purchased or produced by the Company. During 2000 and 1999, the Company recognized premium and investment income of $3.1 million and $1.7 million, respectively, that has been included as other income in the agency-eligible reinsurance segment. Resource Bancshares Mortgage Group, Inc. 13 16 SUBPRIME MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's subprime mortgage production operations:
For the Year Ended December 31, ----------------------------------- ($ in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Net interest income ....................................................... $ 11,439 $ 15,366 Net gain on sale of mortgage loans ........................................ 13,149 20,357 Mark-to-market on residual interests in subprime securitizations .......... (39,338) (7,843) Other income .............................................................. 579 3,471 - ------------------------------------------------------------------------------------------------------------------------ Total production revenue ................................................. (14,171) 31,351 - ------------------------------------------------------------------------------------------------------------------------ Salary and employee benefits .............................................. 11,682 15,840 Occupancy expense ......................................................... 2,670 2,567 Provision expense ......................................................... 2,453 2,893 General and administrative expenses ....................................... 6,257 7,460 - ------------------------------------------------------------------------------------------------------------------------ Total production expenses ................................................ 23,062 28,760 - ------------------------------------------------------------------------------------------------------------------------ Net pre-tax production margin ............................................. $ (37,233) $ 2,591 - ------------------------------------------------------------------------------------------------------------------------ Production ................................................................ $ 669,622 $ 728,410 Whole loan sales and securitizations ...................................... $ 662,694 $ 699,317 Total production revenue to whole loan sales and securitizations .......... (214) bps 448 bps Total production expenses to production ................................... 344 bps 395 bps - ------------------------------------------------------------------------------------------------------------------------ Net pre-tax production margin ............................................. (558) bps 53 bps ========================================================================================================================
SUMMARY Overall, the Company operated during 2000 at a (5.58)% pre-tax subprime production margin. The $39.8 million decline in the pre-tax subprime production margin is primarily due to the ($39.3) million adjustment during 2000 in the mark-to-market on residual interests in subprime securitizations and a ($1.1) million adjustment to the residual hedges. During 2000 the Company marked down its residual interests in prior subprime securitizations as a result of changes in valuation assumptions due to changing market conditions and also wrote down such residuals and the associated residual hedges (including hedge amortization expense) as a result of signing a definitive agreement to sell all of the Company's residuals. Absent mark-to-market adjustment to residual interests and to residual hedges, the production revenue to whole loan sales and securitizations ratio would have been 380 bps and 560 bps for the years ended December 31, 2000 and 1999, respectively. Also contributing to the decline in production revenue to whole loan sales and securitizations ratio is the $7.2 million decline in net gain on sale of subprime mortgage loans. This decline is primarily attributable to lower sales volume and tighter margins associated with selling exclusively into the cash markets for 2000 versus securitizing a portion of the production in 1999. The production expenses to production ratio decreased 51 bps during 2000 as compared to 1999. This reduction was achieved in spite of the inclusion of restructuring and other unusual charges aggregating $2.3 million in operating expense and in spite of reduced production volumes during year 2000. Absent the $2.3 million in restructuring and unusual charges during 2000, the Company's production expenses to production ratio would have decreased to 311 basis points. See further discussion of unusual items elsewhere in this Management's Discussion and Analysis. Adjusting for the above mentioned impact of changes in the valuation of residuals and residual hedges and restructuring and other unusual charges, the net pre-tax production margin was 85 bps and 167 bps for the years ended December 31, 2000 and 1999, respectively. NET INTEREST INCOME The following table analyzes net interest income allocated to the Company's subprime mortgage production activities in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and residual certificates and interest rates paid on interest-bearing sources of funds) for the years ended December 31, 2000 and 1999, respectively.
($ in thousands) Variance Average Volume Average Rate Interest Attributable to - -------------------------------- ---------------- ---------------- 2000 1999 2000 1999 2000 1999 Variance Rate Volume - -------------------------------- ------------------------------------------- $182,217 $235,552 11.25% 10.62% Mortgages Held-for-Sale and Residual Certificates $20,499 $25,026 $(4,527) $ 1,140 $(5,667) - -------------------------------- ------------------------------------------- $135,478 $171,358 7.35% 5.73% Total Interest Expense $ 9,963 $ 9,819 $ 144 $ 2,200 $(2,056) - -------------------------------- ------------------------------------------- 3.90% 4.89% Net Interest Income $10,536 $15,207 $(4,671) $(1,060) $(3,611) =========== ========================= Allocation to Agency-Eligible Servicing Division -- 159 Intercompany Net Interest 903 N/A ---------------- Net Interest Income $11,439 $15,366 ================
Net interest income from subprime products decreased to $11.4 million for 2000 as compared to $15.4 million for 1999. This was primarily a result of a flattened yield curve, the decline in production volume, and the sale during the fourth quarter of the Company's residual certificates. 14 17 NET GAIN ON SALE AND SECURITIZATION OF SUBPRIME MORTGAGE LOANS The Company sold subprime mortgage loans for cash on a whole loan basis during 2000 and 1999. Whole loans are generally sold without recourse to third parties with the gain or loss being calculated based on the difference between the carrying value of the loans sold and the gross proceeds received from the purchaser less expenses. Generally, the Company retains no interest in these loans after sale. A reconciliation of the gain on subprime mortgage whole loan sales for the periods indicated follows:
For the Year Ended December 31, --------------------------------- ($ in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Gross proceeds on whole loan sales of subprime mortgage loans ............. $ 682,287 $ 463,443 Initial acquisition cost of subprime mortgage loans sold, net of fees ..... 662,694 447,155 - ------------------------------------------------------------------------------------------------------------------------ Unadjusted gain on whole loan sales of subprime mortgage loans ............ 19,593 16,288 Net deferred costs and administrative fees recognized ..................... (6,444) (5,721) - ------------------------------------------------------------------------------------------------------------------------ Net gain on whole loan sales of subprime mortgage loans ................... $ 13,149 $ 10,567 ========================================================================================================================
The gain on whole loan sales of subprime mortgage loans was $19.6 million and $16.3 million for the years ended December 31, 2000 and 1999, respectively. The $3.3 million increase is a result of an increase in whole loan sales in 2000, offset, in part, by a reduction in the margin on sale in 2000 compared with 1999. 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 gain on whole loan sales of subprime mortgage loans to $13.1 million in 2000 as compared to $10.6 million in 1999. There were no securitization transactions during 2000 compared to transactions netting a $9.8 million gain on securitization of subprime mortgage loans in 1999. A reconciliation of the gain on securitization of subprime mortgage loans for the periods indicated follows:
For the Year Ended December 31, ------------------------------- ($ in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Gross proceeds on securitization of subprime mortgage loans ............... N/A $ 248,456 Initial acquisition cost of subprime mortgage loans securitized, net of fees N/A 252,162 - ------------------------------------------------------------------------------------------------------------------------ Unadjusted loss on securitization of subprime mortgage loans .............. N/A (3,706) Initial capitalization of residual certificates ........................... N/A 16,394 Net deferred costs and administrative fees recognized ..................... N/A (2,898) - ------------------------------------------------------------------------------------------------------------------------ Net gain on securitization of subprime mortgage loans ..................... N/A $ 9,790 ========================================================================================================================
MARK-TO-MARKET ON RESIDUAL INTERESTS IN SUBPRIME SECURITIZATIONS The Company historically has retained residual certificates in connection with the securitization of subprime loans. However, during 2000 the Company executed no securitization transactions of subprime loans and marked down its residual interests in prior subprime securitizations as a result of signing a definitive agreement to sell all of the residual interests remaining on its balance sheet at September 30, 2000. The Company closed on that sale during the fourth quarter of 2000. AGENCY-ELIGIBLE MORTGAGE SERVICING Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage servicing operations for the years ended December 31, 2000 and 1999:
For the Year Ended December 31, ----------------------------------- ($ in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Net interest income ....................................................... $ (5,326) $ (4,555) Loan servicing fees ....................................................... 34,738 41,791 Other income .............................................................. 517 582 - ------------------------------------------------------------------------------------------------------------------------ Servicing revenues ........................................................ 29,929 37,818 Salary and employee benefits .............................................. 2,904 3,399 Occupancy expense ......................................................... 191 419 Amortization and provision for impairment of mortgage servicing rights .... 24,560 29,580 General and administrative expenses ....................................... 4,408 5,984 - ------------------------------------------------------------------------------------------------------------------------ Total loan servicing expenses ............................................. 32,063 39,382 - ------------------------------------------------------------------------------------------------------------------------ Net pre-tax servicing margin .............................................. (2,134) (1,564) Gain on sale of mortgage servicing rights ................................. 2,222 7,262 - ------------------------------------------------------------------------------------------------------------------------ Net pre-tax servicing contribution ........................................ $ 88 $ 5,698 ======================================================================================================================== Average servicing portfolio ............................................... $ 7,968,380 $ 9,279,848 Servicing sold ............................................................ $ 4,473,456 $ 9,104,706 Net pre-tax servicing margin to average servicing portfolio ............... (3) bps (2) bps Gain on sale of servicing to servicing sold ............................... 5 bps 8 bps ========================================================================================================================
Resource Bancshares Mortgage Group, Inc. 15 18 SUMMARY The ratio of net pre-tax servicing margin to the average servicing portfolio decreased 1 basis point in 2000 compared with 1999. This decrease resulted from a reduction in servicing revenues of $7.9 million, offset in part by a reduction in total loan servicing expenses of $7.3 million in 2000 compared with 1999. Servicing revenues and expenses were down as a result of a decrease of $1.3 billion in average loans serviced during 2000. Average loans serviced were down in 2000 as a result of reduced loan production in 2000 compared with 1999, which reduced the average volume of servicing held for sale during 2000. The $5.1 million decline in gain on sale of mortgage servicing rights is primarily due to the lower production volumes that resulted in a lower balance of agency-eligible servicing rights sold. 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. NET INTEREST EXPENSE The net interest expense for 2000 and 1999 is composed of benefits from escrow accounts of $5.8 million and $8.0 million, respectively, that is offset by $11.1 million and $12.6 million, respectively, in interest expense. GAIN ON SALE OF MORTGAGE SERVICING RIGHTS A reconciliation of the components of gain on sale of mortgage servicing rights for the periods indicated follows:
For the Year Ended December 31, ----------------------------------- ($ in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Underlying unpaid principal balances of agency-eligible mortgage loans on which servicing rights were sold during the period ..................... $ 4,473,456 $ 9,104,706 ======================================================================================================================== Gross proceeds from sales of mortgage servicing rights .................... $ 126,945 $ 245,302 Initial acquisition basis, net of amortization and hedge results .......... 106,438 179,721 - ------------------------------------------------------------------------------------------------------------------------ Unadjusted gain on sale of mortgage servicing rights ...................... 20,507 65,581 Acquisition basis allocated from mortgage loans, net of amortization (SFAS No. 125) (18,285) (58,319) - ------------------------------------------------------------------------------------------------------------------------ Gain on sale of mortgage servicing rights ................................. $ 2,222 $ 7,262 ========================================================================================================================
Gain on sale of mortgage servicing rights decreased $5.1 million from $7.3 million for 1999 to $2.2 million for 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 On September 29, 2000, the Company closed on an agreement to sell substantially all of the assets of Laureate to BB&T Corporation of Winston-Salem, N.C. Accordingly, the Company recorded a $1.4 million after-tax charge during the period primarily related to the write-off of intangible assets of Laureate. The results of Laureate's operations are carried in the caption "Discontinued Operations" in the Company's income statement for all periods presented. LEASING OPERATIONS Following is a summary of the revenues and expenses of the Company's small-ticket equipment leasing operations for the periods indicated:
For the Year Ended December 31, ----------------------------------- ($ in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Net interest income ....................................................... $ 9,176 $ 7,270 Other income .............................................................. 1,229 1,395 - ------------------------------------------------------------------------------------------------------------------------ Leasing production revenue .............................................. 10,405 8,665 - ------------------------------------------------------------------------------------------------------------------------ Salary and employee benefits .............................................. 2,901 2,654 Occupancy expense ......................................................... 497 453 Provision expense ......................................................... 3,133 1,908 General and administrative expenses ....................................... 1,370 1,260 - ------------------------------------------------------------------------------------------------------------------------ Total lease operating expenses .......................................... 7,901 6,275 - ------------------------------------------------------------------------------------------------------------------------ Net pre-tax leasing production margin ..................................... 2,504 2,390 Servicing fees ............................................................ 501 620 - ------------------------------------------------------------------------------------------------------------------------ Net pre-tax leasing margin ................................................ $ 3,005 $ 3,010 - ------------------------------------------------------------------------------------------------------------------------ Average owned leasing portfolio ........................................... $ 171,806 $ 125,258 Average serviced leasing portfolio ........................................ 8,170 24,831 - ------------------------------------------------------------------------------------------------------------------------ Average managed leasing portfolio ......................................... $ 179,976 $ 150,089 ======================================================================================================================== Leasing production revenue to average owned portfolio ..................... 606 bps 692 bps Leasing operating expenses to average owned portfolio ..................... 460 bps 501 bps - ------------------------------------------------------------------------------------------------------------------------ Net pre-tax leasing production margin ..................................... 146 bps 191 bps ======================================================================================================================== Servicing fees to average serviced leasing portfolio ...................... 613 bps 250 bps ========================================================================================================================
16 19 The 20% increase in leasing production revenue for 2000 as compared to 1999 is primarily due to the 37% 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 45 bps in 2000 as compared to 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. Net Interest Income Net interest income for 2000 was $9.2 million as compared to $7.3 million for 1999. This is equivalent to a net interest margin of 5.3% and 5.8% for 2000 and 1999, respectively, based upon average lease receivables owned of $171.8 million and $125.3 million, respectively, and average debt outstanding of $146.3 and $92.4 million, respectively. OTHER During the third quarter of 1999, the Company reorganized its reporting cost centers and is now reporting holding company costs as a reconciling item between the segmented income statement and the consolidated income statement. The primary components of holding company costs are (1) interest expense on the debt on the Company's corporate headquarters; (2) salary and employee benefits of corporate personnel; (3) depreciation on the corporate headquarters and (4) income taxes. The 1999 segmented income statement has been restated to conform with the 2000 segmented income statement presentation. UNUSUAL ITEMS During the fourth quarter of 1999, the Company incurred a $3.8 million ($2.4 million after-tax) charge related to a workforce reduction. The workforce reduction became necessary as the Company continued to adapt to a smaller overall residential mortgage market and intensely competitive pricing conditions. During 2000, the Company continued its efforts 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 million during 2000. In connection with the planned reorganization, the Company has made certain changes in its senior management team and has closed certain regional processing offices. Also, during 2000, the Company (1) marked down its residual interests in prior subprime securitizations as a result of changes in valuation assumptions due to changing market conditions; (2) marked down its residual interests in prior securitizations, and the associated residual hedges (including hedge amortization expense) as a result of signing a definitive agreement to sell all of the Company's residuals; (3) disposed of its commercial mortgage operation, Laureate Capital Corp.; (4) restructured and closed certain regional processing offices; (5) amended its defined benefit pension plan to freeze benefits under the plan; (6) changed the benefits available to employees under its 401(k) plan; (7) realized a gain on sale of a branch facility; (8) contributed to a fund that will benefit qualified charitable organizations; (9) incurred expenses for consultants who are assisting management in re-engineering work processes and (10) redesignated a lease of a former operations center as a nonoperating lease. The net impact of these unusual items in 2000 is summarized below by financial statement component and operating division:
Agency-Eligible ---------------------- Commercial Production Servicing Subprime Mortgage Leasing Other Total - --------------------------------------------------------------------------------------------------------------------------------- Mark-to-market on residual interest in subprime securitizations ........................ $ -- $ -- $ 39,338 $ -- $ -- $ -- $ 39,338 Residual hedge mark-to-market and amortization ................................ -- -- 1,077 -- -- -- 1,077 Salary and employee benefits ...................... 678 (45) 1,459 -- (22) 234 2,304 Occupancy expense ................................. 171 -- -- -- -- -- 171 General and administrative expenses ............... 1,027 -- 796 -- -- 1,040 2,863 Other income ...................................... -- -- -- -- -- (392) (392) - --------------------------------------------------------------------------------------------------------------------------------- Net pre-tax effect on continuing operations ....... 1,876 (45) 42,670 -- (22) 882 45,361 Estimated allocable income tax .................... (700) 17 (15,773) -- 8 (330) (16,778) - --------------------------------------------------------------------------------------------------------------------------------- Net after-tax impact on continuing operations ..... 1,176 (28) 26,897 -- (14) 552 28,583 Loss on sale of operating assets of Laureate Capital Corp. .......................... -- -- -- 1,448 -- -- 1,448 Operating loss of Laureate Capital Corp. .......... -- -- -- 660 -- -- 660 - --------------------------------------------------------------------------------------------------------------------------------- Net after-tax impact .............................. $1,176 $(28) $ 26,897 $2,108 $(14) $ 552 $ 30,691 =================================================================================================================================
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998 SUMMARY BY OPERATING DIVISION Net income per common share on a diluted basis for 1999 was $0.28 as compared to $2.07 for 1998. This 86% decrease in net income per common share was less than the 88% decrease in net income due primarily to the impact of the Company's stock repurchase program, which reduced the number of weighted average shares outstanding across comparative periods. Following is a summary of the revenues and expenses for each of the Company's operating divisions for the years ended December 31, 1999 and 1998, respectively: Resource Bancshares Mortgage Group, Inc. 17 20
For the Year Ended December 31, 1999(1)(2) ------------------------------------------------------------------ Agency-Eligible ---------------------------------------- Commercial (Unaudited)($ in thousands) Production Servicing Reinsurance Subprime Mortgage - ------------------------------------------------------------------------------------------------------------------- Net interest income ......................... $ 8,240 $ (4,555) $ (12) $ 15,366 $ -- Net gain on sale of mortgage loans .......... 64,033 -- -- 20,357 -- Gain on sale of mortgage servicing rights ... -- 7,262 -- -- -- Servicing fees .............................. -- 41,791 -- -- -- Mark-to-market on residual interests in subprime securitizations .................. -- -- -- (7,843) -- Other income ................................ 340 582 1,661 3,471 -- - ------------------------------------------------------------------------------------------------------------------- Total revenues ............................ 72,613 45,080 1,649 31,351 -- - ------------------------------------------------------------------------------------------------------------------- Salary and employee benefits ................ 38,751 3,399 -- 15,840 -- Occupancy expense ........................... 10,079 419 -- 2,567 -- Amortization and provision for impairment of mortgage servicing rights .............. -- 29,580 -- -- -- Provision expense ........................... 5,722 -- 85 2,893 -- General and administrative expenses ......... 17,248 5,984 136 7,460 -- - ------------------------------------------------------------------------------------------------------------------- Total expenses ............................ 71,800 39,382 221 28,760 -- - ------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes ....................... 813 5,698 1,428 2,591 -- Income tax benefit (expense) ................ (207) (1,448) (356) (1,237) -- - ------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations .... 606 4,250 1,072 1,354 -- Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $-0-) ................... -- -- -- -- -- Operating net income of Laureate Capital Corp. (less applicable income tax expense of $405) ................................ -- -- -- -- 418 - ------------------------------------------------------------------------------------------------------------------- Net Income (loss) ........................... $ 606 $ 4,250 $ 1,072 $ 1,354 $418 =================================================================================================================== For the Year Ended December 31, 1999(1)(2) -------------------------------------------------------- Total Other/ (Unaudited)($ in thousands) Leasing Segments Eliminations Consolidated - --------------------------------------------------------------------------------------------------------- Net interest income ......................... $ 7,270 $ 26,309 $ (470) $ 25,839 Net gain on sale of mortgage loans .......... -- 84,390 -- 84,390 Gain on sale of mortgage servicing rights ... -- 7,262 -- 7,262 Servicing fees .............................. 620 42,411 (188) 42,223 Mark-to-market on residual interests in subprime securitizations .................. -- (7,843) -- (7,843) Other income ................................ 1,395 7,449 175 7,624 - --------------------------------------------------------------------------------------------------------- Total revenues ............................ 9,285 159,978 (483) 159,495 - --------------------------------------------------------------------------------------------------------- Salary and employee benefits ................ 2,654 60,644 3,903 64,547 Occupancy expense ........................... 453 13,518 214 13,732 Amortization and provision for impairment of mortgage servicing rights .............. -- 29,580 -- 29,580 Provision expense ........................... 1,908 10,608 -- 10,608 General and administrative expenses ......... 1,260 32,088 1,129 33,217 - --------------------------------------------------------------------------------------------------------- Total expenses ............................ 6,275 146,438 5,246 151,684 - --------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes ....................... 3,010 13,540 (5,729) 7,811 Income tax benefit (expense) ................ (1,196) (4,444) 2,137 (2,307) - --------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations .... 1,814 9,096 (3,592) 5,504 Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $-0-) ................... -- -- -- -- Operating net income of Laureate Capital Corp. (less applicable income tax expense of $405) ................................ -- 418 -- 418 - --------------------------------------------------------------------------------------------------------- Net Income (loss) ........................... $ 1,814 $ 9,514 $(3,592) $ 5,922 =========================================================================================================
(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.
For the Year Ended December 31, 1998(1)(2) ------------------------------------------------------------------ Agency-Eligible ---------------------------------------- Commercial (Unaudited)($ in thousands) Production Servicing Reinsurance Subprime Mortgage - ------------------------------------------------------------------------------------------------------------------- Net interest income......................... $ 7,422 $ -- $ -- $ 9,565 $ -- Net gain on sale of mortgage loans.......... 134,472 -- -- 27,980 -- Gain on sale of mortgage servicing rights... -- 1,753 -- -- -- Servicing fees.............................. -- 37,856 -- -- -- Mark-to-market on residual interests in subprime securitizations.................. -- -- -- 435 -- Other income................................ 1,756 455 1,189 297 -- - ------------------------------------------------------------------------------------------------------------------- Total revenues............................ 143,650 40,064 1,189 38,277 -- - ------------------------------------------------------------------------------------------------------------------- Salary and employee benefits................ 53,158 3,449 -- 13,485 -- Occupancy expense........................... 7,005 443 -- 1,921 -- Amortization and provision for impairment of mortgage servicing rights.............. -- 27,897 -- -- -- Provision expense........................... 7,453 -- 119 2,330 -- General and administrative expenses......... 20,593 6,446 77 2,160 -- - ------------------------------------------------------------------------------------------------------------------- Total expenses............................ 88,209 38,235 196 19,896 -- - ------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes....................... 55,441 1,829 993 18,381 -- Income tax benefit (expense)................ (20,059) (662) (351) (6,656) -- - ------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations.... 35,382 1,167 642 11,725 -- Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $-0-)................... -- -- -- -- -- Operating net income of Laureate Capital Corp. (less applicable income tax expense of $952)........................ -- -- -- -- 1,152 - ------------------------------------------------------------------------------------------------------------------- Net Income (loss)........................... $ 35,382 $ 1,167 $ 642 $11,725 $1,152 =================================================================================================================== For the Year Ended December 31, 1998(1)(2) -------------------------------------------------------- Total Other/ (Unaudited)($ in thousands) Leasing Segments Eliminations Consolidated - --------------------------------------------------------------------------------------------------------- Net interest income......................... $4,637 $ 21,624 $ (382) $ 21,242 Net gain on sale of mortgage loans.......... -- 162,452 -- 162,452 Gain on sale of mortgage servicing rights... -- 1,753 -- 1,753 Servicing fees.............................. 1,014 38,870 509 39,379 Mark-to-market on residual interests in subprime securitizations.................. -- 435 -- 435 Other income................................ 753 4,450 680 5,130 - --------------------------------------------------------------------------------------------------------- Total revenues............................ 6,404 229,584 807 230,391 - --------------------------------------------------------------------------------------------------------- Salary and employee benefits................ 2,347 72,439 2,645 75,084 Occupancy expense........................... 376 9,745 634 10,379 Amortization and provision for impairment of mortgage servicing rights.............. -- 27,897 -- 27,897 Provision expense........................... 1,121 11,023 -- 11,023 General and administrative expenses......... 1,463 30,739 770 31,509 - --------------------------------------------------------------------------------------------------------- Total expenses............................ 5,307 151,843 4,049 155,892 - --------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes....................... 1,097 77,741 (3,242) 74,499 Income tax benefit (expense)................ (435) (28,163) 1,183 (26,980) - --------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations.... 662 49,578 (2,059) 47,519 Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $-0-)................... -- -- -- -- Operating net income of Laureate Capital Corp. (less applicable income tax expense of $952)........................ -- 1,152 -- 1,152 - --------------------------------------------------------------------------------------------------------- Net Income (loss)........................... $ 662 $ 50,730 $ (2,059) $ 48,671 =========================================================================================================
(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. 18 21 AGENCY-ELIGIBLE MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage production operations.
For the Year Ended December 31, ----------------------------------------- ($ in thousands) 1999 1998 - --------------------------------------------------------------------------------------------------------------- Net interest income .............................. $ 8,240 $ 7,422 Net gain on sale of mortgage loans ............... 64,033 134,472 Other income ..................................... 340 1,756 - --------------------------------------------------------------------------------------------------------------- Total production revenue ....................... 72,613 143,650 - --------------------------------------------------------------------------------------------------------------- Salary and employee benefits ..................... 38,751 53,158 Occupancy expense ................................ 10,079 7,005 Provision expense ................................ 5,722 7,453 General and administrative expenses .............. 17,248 20,593 - --------------------------------------------------------------------------------------------------------------- Total production expenses ...................... 71,800 88,209 - --------------------------------------------------------------------------------------------------------------- Net pre-tax production margin .................. $ 813 $ 55,441 - --------------------------------------------------------------------------------------------------------------- Production ....................................... $8,112,351 $14,954,580 Pool delivery .................................... 8,642,639 14,713,137 - --------------------------------------------------------------------------------------------------------------- Total production revenue to pool delivery ........ 84 bps 98 bps Total production expenses to production .......... 89 bps 59 bps - --------------------------------------------------------------------------------------------------------------- Net pre-tax production margin .................. (5) bps 39 bps ===============================================================================================================
SUMMARY The production revenue to pool delivery ratio decreased 14 basis points for 1999 as compared to 1998. Generally, net gain on sale of mortgage loans (74 basis points for 1999 versus 91 basis points for 1998) declined primarily due to compressed margins attributable to an aggressively competitive pricing environment and lower overall agency-eligible production volume. Net interest income increased from 5 basis points in 1998 to 10 basis points in 1999 primarily as a result of the generally steeper yield curve environment. The production expenses to production ratio increased 30 basis points for 1999 as compared to 1998. This is primarily due to the 46% decline in production for 1999 as compared to 1998, which was partially offset by a $16.4 million decline in total production expenses for 1999 as compared to 1998. As a consequence of the foregoing, the Company's net agency-eligible pre-tax production margin declined 44 basis points. Absent workforce reduction charges (discussed in greater detail elsewhere within Management's Discussion and Analysis), total production expenses would have declined by $19.5 million. NET INTEREST INCOME The following table analyzes net interest income allocated to the Company's agency-eligible mortgage production activities in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and mortgage-backed securities and interest rates paid on interest-bearing sources of funds) for the years ended December 31, 1999 and 1998, respectively:
($ in thousands) Variance Average Volume Average Rate Interest Attributable to - ------------------------------------ ----------------- ------------------- 1999 1998 1999 1998 1999 1998 Variance Rate Volume - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Mortgages Held-for-Sale and $656,291 $1,172,994 6.85% 6.74% Mortgage-Backed Securities........... $44,982 $79,078 $(34,096) $ 739 $(34,835) - ----------------------------------- --------------------------------------------------- INTEREST EXPENSE $345,807 $ 457,967 4.14% 4.50% Warehouse Line*........................ $14,313 $20,630 $ (6,317) $(1,265) $ (5,052) 303,092 689,711 5.21% 5.79% Gestation Line......................... 15,779 39,958 (24,179) (1,780) (22,399) 110,380 97,422 6.21% 6.58% Servicing Secured Line................. 6,851 6,413 438 (415) 853 20,596 33,331 5.27% 5.75% Servicing Receivables Line............. 1,085 1,918 (833) (100) (733) 7,142 8,726 8.57% 8.50% Other Borrowings....................... 612 742 (130) 5 (135) Facility Fees and Other Charges........ 2,968 2,377 591 -- 591 - ----------------------------------- --------------------------------------------------- $787,017 $1,287,157 5.29% 5.60% Total Interest Expense................. $41,608 $72,038 $(30,430) $(3,555) $(26,875) - ----------------------------------- --------------------------------------------------- Net Interest Income 1.56% 1.14% Before Interdivisional Allocations... $ 3,374 $ 7,040 $ (3,666) $ 4,294 $ (7,960) ============ =============================== Allocation to Other.................... 470 382 Allocation to Agency-Eligible Servicing Division................... 4,396 -- ----------------- Net Interest Income.................... $ 8,240 $ 7,422 =================
*The interest-rate yield on the warehouse line is net of the benefit of escrow deposits. The 42 basis point increase in the interest-rate spread was primarily the result of the steeper yield curve environment during 1999 compared to 1998. The Company's mortgages and mortgage-backed securities are generally sold and replaced within 30 to 35 days. Accordingly, the Company generally borrows at rates based upon short-term indices, while its asset yields are primarily based upon long-term mortgage rates. Resource Bancshares Mortgage Group, Inc. 19 22 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:
For the Year Ended December 31, ---------------------------------- ($ in thousands) 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Gross proceeds on sales of mortgage loans ............................................ $8,853,967 $14,921,242 Initial unadjusted acquisition cost of mortgage loans sold, net of hedge results ..... 8,861,915 14,917,751 - --------------------------------------------------------------------------------------------------------------------------------- Unadjusted gain (loss) on sale of mortgage loans ..................................... (7,948) 3,491 Loan origination and correspondent program administrative fees ....................... 21,402 36,729 - --------------------------------------------------------------------------------------------------------------------------------- Unadjusted aggregate margin .......................................................... 13,454 40,220 Acquisition basis allocated to mortgage servicing rights (SFAS No. 125) .............. 52,702 93,570 Net change in deferred administrative fees ........................................... (2,123) 682 - --------------------------------------------------------------------------------------------------------------------------------- Net gain on sale of agency-eligible mortgage loans ................................... $ 64,033 $ 134,472 =================================================================================================================================
Net gain on sale of agency-eligible mortgage loans decreased $70.4 million from $134.5 million for 1998 to $64.0 million for 1999. The decrease is primarily due to compressed margins attributable to an aggressively competitive pricing environment in the correspondent channel and lower overall agency-eligible production volume. OTHER INCOME The $1.4 million decline in other income for 1999 as compared to 1998 is primarily attributable to the sale of the Company's retail production franchise in 1998, which resulted in a nonrecurring gain of approximately $1.4 million. AGENCY-ELIGIBLE REINSURANCE OPERATIONS In November 1998, the Company formed a captive insurance company, MG Reinsurance Company (MG Reinsurance). MG Reinsurance is licensed as a property and casualty insurer and operates as a monoline captive insurance company assuming reinsurance for PMI policies on agency-eligible mortgage loans initially purchased or produced by the Company. During 1999 and 1998, the Company recognized premium and investment income of approximately $1.7 million and $1.2 million, respectively, that has been included as other income in the agency-eligible reinsurance segment. SUBPRIME MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's subprime mortgage production operations:
For the Year Ended December 31, ------------------------------- ($ in thousands) 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income .................................................................. $ 15,366 $ 9,565 Net gain on sale of mortgage loans ................................................... 20,357 27,980 Mark to market on residual interests in subprime securitizations ..................... (7,843) 435 Other income ......................................................................... 3,471 297 - --------------------------------------------------------------------------------------------------------------------------------- Total production revenue ........................................................... 31,351 38,277 - --------------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits ......................................................... 15,840 13,485 Occupancy expense .................................................................... 2,567 1,921 Provision expense .................................................................... 2,893 2,330 General and administrative expenses .................................................. 7,460 2,160 - --------------------------------------------------------------------------------------------------------------------------------- Total production expenses .......................................................... 28,760 19,896 - --------------------------------------------------------------------------------------------------------------------------------- Net pre-tax production margin ...................................................... $ 2,591 $ 18,381 - --------------------------------------------------------------------------------------------------------------------------------- Production ........................................................................... $728,410 $607,664 Whole loan sales and securitizations ................................................. 699,317 551,110 Total production revenue to whole loan sales and securitizations ..................... 448 bps 695 bps Total production expenses to production .............................................. 395 bps 327 bps - --------------------------------------------------------------------------------------------------------------------------------- Net pre-tax production margin ...................................................... 53 bps 368 bps =================================================================================================================================
SUMMARY During 1999, subprime production volume of $728.4 million exceeded whole loan sales and securitizations of $699.3 million by $29.1 million. At December 31, 1999, the Company had unsold subprime mortgage loans of $128.8 million as compared to $97.9 million at December 31, 1998. Overall, the Company operated during 1999 at a 0.53% pre-tax subprime production margin. The 315 basis point decline in the pre-tax subprime production margin is primarily due to the 217 basis point decline in net gain on the sale of subprime mortgage loans. This decline is primarily attributable to compressed margins in the subprime market during 1999 and the higher relative volumes of whole loan sales as compared to securitizations from year to year. Salary and employee benefit costs increased by 17%, or $2.4 million from 1998 to 1999. This was primarily due to an increase in production volume of 20%. Occupancy expense increased by $0.6 million primarily due to branch expansion cost and the workforce reduction charge of $0.2 million. Workforce reduction charges are discussed elsewhere in this Management's Discussion and Analysis. General and administrative expenses increased approximately $5.3 million primarily due to a 20% increase in production volume for 1999 as compared to 1998. 20 23 NET INTEREST INCOME The following table analyzes net interest income allocated to the Company's subprime mortgage production activities in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and residual certificates and interest rates paid on interest-bearing sources of funds) for the years ended December 31, 1999 and 1998, respectively.
($ in thousands) Variance Average Volume Average Rate Interest Attributable to - --------------------------------- --------------- --------------- 1999 1998 1999 1998 1999 1998 Variance Rate Volume - --------------------------------- ---------------------------------------- $235,552 $142,685 10.62% 10.29% Mortgages Held-for-Sale and Residual Certificates.... $25,026 $14,684 $10,342 $785 $9,557 - --------------------------------- ---------------------------------------- $171,358 $ 97,534 5.73% 5.25% Total Interest Expense................................ $ 9,819 $ 5,119 $ 4,700 $825 $3,875 - --------------------------------- ---------------------------------------- 4.89% 5.04% Net Interest Income................................... $15,207 $ 9,565 $ 5,642 $(40) $5,682 ============= ====================== Allocation to Agency-Eligible Servicing Division...... 159 -- ---------------- Net Interest Income................................... $15,366 $ 9,565 ================
Net interest income from subprime products increased to $15.4 million for 1999 as compared to $9.6 million for 1998. This was primarily the result of the increase in subprime loan production volume and an increase in accretion income earned on residual interests to $6.6 million for 1999 as compared to $3.4 million for 1998. NET GAIN ON SALE AND SECURITIZATION OF SUBPRIME MORTGAGE LOANS A reconciliation of the gain on securitization of subprime mortgage loans for the periods indicated follows:
For the Year Ended December 31, ------------------------------- ($ in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Gross proceeds on securitization of subprime mortgage loans .......................... $248,456 $318,040 Initial acquisition cost of subprime mortgage loans securitized, net of fees ......... 252,162 324,549 - ------------------------------------------------------------------------------------------------------------------------------- Unadjusted loss on securitization of subprime mortgage loans ......................... (3,706) (6,509) Initial capitalization of residual certificates ...................................... 16,394 22,240 Net deferred costs and administrative fees recognized ................................ (2,898) 357 - ------------------------------------------------------------------------------------------------------------------------------- Net gain on securitization of subprime mortgage loans ................................ $ 9,790 $ 16,088 ===============================================================================================================================
The net gain on securitization of subprime mortgage loans declined by $6.3 million or 39% in 1999 as compared to 1998. This decline is primarily attributable to a 22% decrease in the volume of subprime loans securitized as well as compressed margins in the subprime market during 1999. The Company assesses the fair value of residual certificates quarterly, with assistance from an independent third party. This valuation is based on the discounted cash flows expected to be available to the holder of the residual certificates. Significant assumptions used at December 31, 1999 for residual certificates then held by the Company generally include a discount rate of 13%, a constant default rate of 3% and a loss severity rate of 25%, and ramping periods are based on prepayment penalty periods and adjustable rate mortgage first reset dates. Terminal prepayment rate assumptions specific to the individual certificates for purposes of the December 31, 1999 valuations are set forth below:
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 - ---------------------------------------------------------------------------------------------------------------------------- Prepayment Speeds Fixed rate mortgages ........... 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr Adjustable rate mortgages ...... 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr ============================================================================================================================
Terminal prepayment rate assumptions specific to the individual certificates for purposes of the December 31, 1998 valuations are set forth below:
1997-1 1997-2 1998-1 1998-2 Other - ----------------------------------------------------------------------------------------------------- Prepayment speeds Fixed rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 32% cpr Adjustable rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 24% cpr ======================================================================================================
The assumptions used in the independent third party valuation referred to above are estimated based on current conditions for similar instruments that are subject to prepayment and credit risks. Other factors considered in the determination of fair value include credit and collateral quality of the underlying loans, current economic conditions and various fees and costs associated with ownership of the residual certificate including actual credit history of the individual residual certificates. Although the Company believes that the fair values of its residual certificates are reasonable given current market conditions, the assumptions used are estimates and actual experience may vary from these estimates. Differences in the actual prepayment speed and loss experience from the assumptions used, could have a significant effect on the fair value of the residual certificates. Resource Bancshares Mortgage Group, Inc. 21 24 As summarized in the following analysis, the recorded residual values imply that the Company's securitizations are valued at 1.55 times the implied excess yield at December 31, 1999, as compared to the 1.63 multiple implied at December 31, 1998. The table below represents balances as of December 31, 1999, unless otherwise noted.
Securitizations ------------------------------------------------------------ ($ in thousands) 1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 Subtotal Other Total - ------------------------------------------------------------------------------------------------------------------------------ Residual Certificates ......... $ 5,971 $ 7,153 $10,334 $ 12,460 $ 9,566 $ 8,898 $ 54,382 $ -- $ 54,382 Bonds ......................... $22,763* $34,349* $74,099* $139,882* $121,887* $125,000* $517,980 $28,763* $546,743 - ------------------------------------------------------------------------------------------------------------------------------ Subtotal ...................... $28,734 $41,502 $84,433 $152,342 $131,453 $133,898 $572,362 $28,763 $601,125 Unpaid Principal Balance ...... $27,583* $39,203* $79,724* $144,894* $122,689* $125,329* $539,422 $31,253* $570,675 - ------------------------------------------------------------------------------------------------------------------------------ Implied Price ................. 104.17 105.86 105.91 105.14 107.14 106.84 106.11 92.03 105.34 - ------------------------------------------------------------------------------------------------------------------------------ Collateral Yield .............. 12.03 11.19 9.80 9.73 9.84 9.82 10.01 10.37 10.03 Collateral Equivalent Securitization Costs ........ (0.71) (0.64) (0.59) (0.60) (0.62) (0.68) (0.63) (0.50) (0.62) Collateral Equivalent Bond Rate (5.10) (5.18) (5.55) (6.21) (5.98) (6.18) (5.92) (6.68) (5.96) - ------------------------------------------------------------------------------------------------------------------------------ Implied Collateral Equivalent Excess Yield ................ 6.22 5.37 3.66 2.92 3.24 2.96 3.46 3.19 3.45 - ------------------------------------------------------------------------------------------------------------------------------ Implied Premium Above Par ..... 4.17 5.86 5.91 5.14 7.14 6.84 6.11 -- 5.34 Implied Collateral Equivalent Excess Yield ................ 6.22 5.37 3.66 2.92 3.24 2.96 3.46 3.19 3.45 - ------------------------------------------------------------------------------------------------------------------------------ Multiple ...................... 0.67x 1.09x 1.61x 1.76x 2.20x 2.31x 1.76x --x 1.55x ==============================================================================================================================
*Amounts were based upon trustee statements dated January 25, 2000 that covered the period ended December 31, 1999. A summary of key information relevant to the subprime residual assets at December 31, 1999 is set forth below:
Securitizations ------------------------------------------------------------------ 1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 Other* Total - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 ..... $ 7,997 $ 9,702 $ 10,815 $ 12,569 $ -- $ -- $ 4,700 $ 45,783 Initial Capitalization of Residual Certificates ................... -- -- -- -- 7,826 6,330 -- 14,156 Accretion ........................ 1,140 1,245 1,325 1,521 593 -- 752 6,576 Mark-to-Market ................... (1,641) (1,130) (1,705) (1,630) 1,147 2,568 (5,452) (7,843) Cash Flow ........................ (1,525) (2,664) (101) -- -- -- -- (4,290) - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 ..... $ 5,971 $ 7,153 $ 10,334 $ 12,460 $9,566 $8,898 $ -- $ 54,382 ================================================================================================================================
*Represents a portion of a residual certificate the Company received in 1997 in settlement of an account receivable. In 1999 the Company decided to conservatively write off this receivable. A summary of key information relevant to the subprime residual assets at December 31, 1998 is set forth below:
Securitizations ----------------------------------------------- 1997-1 1997-2 1998-1 1998-2 Other Total - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 ....................... $ 7,910 $ 6,507 $ -- $ -- $ 5,267 $ 19,684 Initial Capitalization of Residual Certificates .... -- 2,164 9,040 11,017 -- 22,221 Accretion .......................................... 1,073 1,153 559 -- 661 3,446 Mark-to-Market ..................................... (986) (122) 1,216 1,552 (1,225) 435 Cash Flow .......................................... -- -- -- -- (3) (3) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 ....................... $ 7,997 $ 9,702 $10,815 $12,569 $ 4,700 $ 45,783 =================================================================================================================================
The Company sold subprime mortgage loans on a whole loan basis during 1999 and 1998. Whole loans are generally sold without recourse to third parties with the gain or loss being calculated based on the difference between the carrying value of the loans sold and the gross proceeds received from the purchaser less expenses. Generally, no interest in these loans is retained by the Company. A reconciliation of the gain on subprime mortgage whole loan sales for the periods indicated follows:
For the Year Ended December 31, -------------------------------- ($ in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Gross proceeds on whole loan sales of subprime mortgage loans ............ $463,443 $238,186 Initial acquisition cost of subprime mortgage loans sold, net of fees .... 447,155 226,561 - ------------------------------------------------------------------------------------------------------------------------- Unadjusted gain on whole loan sales of subprime mortgage loans ........... 16,288 11,625 Net deferred costs and administrative fees recognized .................... (5,721) 267 - ------------------------------------------------------------------------------------------------------------------------- Net gain on whole loan sales of subprime mortgage loans .................. $ 10,567 $ 11,892 =========================================================================================================================
22 25 The $1.3 million decrease in the net gain on whole loan sales of subprime mortgage loans from the 1998 gain of $11.9 million to $10.6 million reported for 1999 is primarily due to compressed margins in the subprime market during 1999. Also, in response to the growth in the subprime division, management reassessed its application of estimates related to Statement of Financial Accounting Standard No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" in the fourth quarter of 1998. This resulted in a $5.7 million reduction in the net gain on whole loan sales of subprime mortgage loans in 1999 as compared to a $0.3 million increase for 1998. MARK TO MARKET OF RESIDUAL INTERESTS IN SUBPRIME SECURITIZATIONS The Company generally retains residual certificates in connection with the securitization of subprime loans. These residual certificates are adjusted to approximate market value each quarter. For the years ended December 31, 1999 and 1998, respectively, mark-to-market gain (loss) on residuals was approximately $(7.8) million and $0.4 million, respectively. OTHER INCOME Other subprime income consists primarily of prepayment penalties received upon early payoff of loans. AGENCY-ELIGIBLE MORTGAGE SERVICING Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage servicing operations for the years ended December 31, 1999 and 1998:
For the Year Ended December 31, ---------------------------------- ($ in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest expense ................................................................. $ (4,555) $ -- Loan servicing fees .................................................................. 41,791 37,856 Other income ......................................................................... 582 455 - ------------------------------------------------------------------------------------------------------------------------------------ Servicing revenues ................................................................. 37,818 38,311 Salary and employee benefits ......................................................... 3,399 3,449 Occupancy expense .................................................................... 419 443 Amortization and provision for impairment of mortgage servicing rights ............... 29,580 27,897 General and administrative expenses .................................................. 5,984 6,446 - ------------------------------------------------------------------------------------------------------------------------------------ Total loan servicing expenses ...................................................... 39,382 38,235 - ------------------------------------------------------------------------------------------------------------------------------------ Net pre-tax servicing margin ....................................................... (1,564) 76 Gain on sale of mortgage servicing rights ............................................ 7,262 1,753 - ------------------------------------------------------------------------------------------------------------------------------------ Net pre-tax servicing contribution ................................................. $ 5,698 $ 1,829 ==================================================================================================================================== Average servicing portfolio .......................................................... $9,279,848 $ 9,386,653 Servicing sold ....................................................................... 9,104,706 10,922,288 - ------------------------------------------------------------------------------------------------------------------------------------ Net pre-tax servicing margin to average servicing portfolio .......................... (2) bps 0 bps Gain on sale of servicing to servicing sold .......................................... 8 bps 2 bps ====================================================================================================================================
SUMMARY The ratio of net pre-tax servicing margin to the average servicing portfolio declined 2 basis points primarily due to the Company beginning during the first quarter of 1999 to allocate net interest expense to the agency-eligible servicing division. Had the $4.6 million in interest expense not been allocated to the agency-eligible servicing division in 1999, the net pre-tax servicing margin to average servicing portfolio would have been 3 basis points, a slight improvement over the 1998 margin. The 6 basis point increase in the gain on sale of servicing sold is primarily attributable to rising rates which benefited the execution of servicing sales in the marketplace. Loan servicing fees were $41.8 million for 1999, compared to $37.9 million for 1998, an increase of 10%, primarily due to an increase in the weighted average service fee on serviced portfolios. Amortization and provision for impairment of mortgage servicing rights increased to $29.6 million during 1999 from $27.9 million during 1998, an increase of 6%. The increase in amortization is primarily attributable to higher amortization charges associated with increased book carrying values of mortgage servicing rights resulting from the rising rate environment. Given current market conditions, management continually assesses market prepay trends and adjusts amortization accordingly. Management believes that the value of the Company's mortgage servicing rights are reasonable in light of current market conditions. However, there can be no guarantee that market conditions will not change such that mortgage servicing rights valuations will require additional amortization or impairment charges. NET INTEREST EXPENSE During the first quarter of 1999, the Company began to allocate interest expense to the agency-eligible servicing division. The net interest expense for 1999 is composed of benefits from escrow accounts of $8.0 million that is offset by $12.6 million in interest expense. Had the Company allocated interest expense to the agency-eligible servicing division during 1998, net interest expense would have been $4.6 million. The net interest expense would have been composed of benefit from escrows of $7.7 million that would have been offset by $12.3 in interest expense. Resource Bancshares Mortgage Group, Inc. 23 26 GAIN ON SALE OF MORTGAGE SERVICING RIGHTS A reconciliation of the components of gain on sale of mortgage servicing rights for the periods indicated follows:
For the Year Ended December 31, --------------------------- ($ in thousands) 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Underlying unpaid principal balances of agency-eligible mortgage loans on which servicing rights were sold during the period .................................................................... $9,104,706 $10,922,288 ================================================================================================================================= Gross proceeds from sales of mortgage servicing rights ........................................... $ 245,302 $ 256,292 Initial acquisition basis, net of amortization and hedge results ................................. 179,721 189,918 - --------------------------------------------------------------------------------------------------------------------------------- Unadjusted gain on sale of mortgage servicing rights ............................................. 65,581 66,374 Acquisition basis allocated from mortgage loans, net of amortization (SFAS No. 125) .............. (58,319) (64,621) - --------------------------------------------------------------------------------------------------------------------------------- Gain on sale of mortgage servicing rights ........................................................ $ 7,262 $ 1,753 =================================================================================================================================
Gain on sale of mortgage servicing rights increased $5.5 million from $1.8 million for 1998 to $7.3 million for 1999. The increase in the gain on sale of mortgage servicing rights is primarily attributable to rising rates which benefited the execution of servicing sales into the secondary markets. COMMERCIAL MORTGAGE OPERATIONS On September 29, 2000, the Company closed on an agreement to sell substantially all of the assets of Laureate to BB&T Corporation of Winston-Salem, N.C. The results of Laureate's operations are carried in the caption "Discontinued Operations" in the Company's income statement for all periods presented. LEASING OPERATIONS Following is a summary of the revenues and expenses of the Company's small-ticket equipment leasing operations for the periods indicated:
For the Year Ended December 31, ------------------------------ ($ in thousands) 1999 1998 - --------------------------------------------------------------------------------------------------------- Net interest income ............................................ $ 7,270 $ 4,637 Other income ................................................... 1,395 753 - --------------------------------------------------------------------------------------------------------- Leasing production revenue ................................... 8,665 5,390 - --------------------------------------------------------------------------------------------------------- Salary and employee benefits ................................... 2,654 2,347 Occupancy expense .............................................. 453 376 Provision expense .............................................. 1,908 1,121 General and administrative expenses ............................ 1,260 1,463 - --------------------------------------------------------------------------------------------------------- Total lease operating expenses ............................... 6,275 5,307 - --------------------------------------------------------------------------------------------------------- Net pre-tax leasing production margin ........................ 2,390 83 Servicing fees ................................................. 620 1,014 - --------------------------------------------------------------------------------------------------------- Net pre-tax leasing margin ................................... $ 3,010 $ 1,097 - --------------------------------------------------------------------------------------------------------- Average owned leasing portfolio ................................ $125,258 $ 73,508 Average serviced leasing portfolio ............................. 24,831 53,480 - --------------------------------------------------------------------------------------------------------- Average managed leasing portfolio .............................. $150,089 $126,988 ========================================================================================================= Leasing production revenue to average owned portfolio .......... 692 bps 733 bps Leasing operating expenses to average owned portfolio .......... 501 bps 721 bps - --------------------------------------------------------------------------------------------------------- Net pre-tax leasing production margin .......................... 191 bps 12 bps ========================================================================================================= Servicing fees to average serviced leasing portfolio ........... 250 bps 190 bps =========================================================================================================
The 61% increase in leasing production revenue for 1999 as compared to 1998 is primarily due to the 70% increase in the average owned leasing portfolio which is due to the policy of retaining originated leases on the balance sheet. The net pre-tax leasing margin improved in 1999 as compared to 1998 due to the increase in production revenue which was only partially offset by an 18% increase in lease operating expenses. The Company was able to achieve efficiencies in managing costs in 1999 because the volume of leases owned substantially increased. Substantially all of the Company's lease receivables are acquired from independent brokers who operate throughout the continental United States and referrals from independent banks. The Company has made an effort to increase the owned portfolio. As it has increased its owned portfolio more cost efficiencies have been achieved thereby increasing the net pre-tax leasing production margin. NET INTEREST INCOME Net interest income for 1999 was $7.3 million as compared to $4.6 million for 1998. This is equivalent to a net interest margin of 3.25% and 4.35% for 1999 and 1998, respectively, based upon average lease receivables owned of $125.3 million and $73.5 million, respectively, and average debt outstanding of $92.4 and $53.5 million, respectively. 24 27 OTHER During the third quarter of 1999, the Company reorganized its reporting cost centers and is now reporting holding company costs as a reconciling item between the segmented income statement and the consolidated income statement. The primary components of holding company costs are (1) interest expense on the debt on the Company's corporate headquarters; (2) salary and employee benefits of corporate personnel; (3) depreciation on the corporate headquarters and (4) income taxes. The 1998 segmented income statement has been restated to conform with the 1999 segmented income statement presentation. WORKFORCE REDUCTION During the fourth quarter of 1999, the Company incurred a $3.8 million ($2.4 million after-tax) charge related to a workforce reduction. The workforce reduction became necessary as the Company continued to adapt to a smaller overall residential mortgage market and intensely competitive pricing conditions. The impact of the expense related to the workforce reduction is summarized below by financial statement component and operating division:
Agency-Eligible -------------------------- Other/ ($ in thousands) Production Servicing Subprime Eliminations Consolidated - -------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits ......... $ 820 $ 31 $ 166 $ 2 $ 1,019 Occupancy expense .................... 1,780 -- 186 190 2,156 General and administrative expenses .. 448 -- 164 2 614 - -------------------------------------------------------------------------------------------------------------------------- Net pre-tax impact ................... 3,048 31 516 194 3,789 Estimated allocable income tax expense (1,136) (12) (192) (72) (1,412) - -------------------------------------------------------------------------------------------------------------------------- Net after-tax impact ................. $ 1,912 $ 19 $ 324 $ 122 $ 2,377 ==========================================================================================================================
FINANCIAL CONDITION During 2000, the Company experienced a 28% decrease in the volume of production originated and acquired compared with 1999. Production decreased to $6.4 billion during 2000 from $8.9 billion during 1999. The December 31, 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 $0.4 billion. This compares to a locked mortgage application pipeline of $0.4 billion and a $0.3 billion application pipeline at December 31, 1999. Mortgage loans held-for-sale and mortgage-backed securities totaled $0.5 billion at December 31, 2000 and December 31, 1999. The Company's servicing portfolio (exclusive of loans serviced under subservicing agreements) increased to $8.0 billion at December 31, 2000, from $7.8 billion at December 31, 1999, an increase of 3%. Short-term borrowings, which are the Company's primary source of funds, totaled $0.8 billion at December 31, 2000, compared to $0.7 billion at December 31, 1999, an increase of 14%. At December 31, 2000, there were $6.1 million in long-term borrowings, compared to $6.3 million at December 31, 1999. Other liabilities totaled $91.0 million as of December 31, 2000, compared to the December 31, 1999 balance of $84.8 million, an increase of $6.2 million, or 7.3%. 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 2000 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 $150 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, (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 December 31, 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. Meritage, RBMG and a bank are parties to a master repurchase agreement, pursuant to which Meritage and RBMG are 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 July 2001. Resource Bancshares Mortgage Group, Inc. 25 28 RBMG and Prime Funding Company entered into a $50 million commercial paper conduit facility in November 2000. The facility expires in November 2001. The Company has entered into an uncommitted gestation financing arrangement. The interest rate on funds borrowed pursuant to the gestation line is based on a spread over the Federal Funds rate. The gestation line has a funding limit of $1.2 billion. The Company executed a $6.6 million note in May 1997. This debt is secured by the Company's corporate headquarters. The terms of the related agreement require the Company to make 120 equal monthly principal and interest payments based upon a fixed interest rate of 8.07%. The note contains covenants similar to those previously described. The Company has entered into a $10.0 million unsecured line of credit agreement that expires in July 2001. 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 Republic Leasing to maintain a ratio of total liabilities to net worth of no more than 10.0 to 1.0. The Company has been repurchasing its stock pursuant to Board authority since March 1998, and, as of December 31, 2000, the Company had remaining authority to repurchase up to $3.5 million of the Company's common stock in either open market transactions or in private or block trades. Decisions regarding the amount and timing of repurchases will be made by management based upon market conditions and other factors. Shares repurchased are maintained in the Company's treasury account and are not retired. At December 31, 2000, there were 6,949,711 shares held in the Company's treasury account at an average cost of $7.20 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 (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (2) a hedge of the exposure to variable cash flows of a forecasted transaction or (3) 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). The Company implemented SFAS No. 133 on January 1, 2001 and recorded certain transition adjustments in the manner prescribed in SFAS No. 133. See discussion regarding adjustments and table below. Under SFAS No. 133, rate lock commitments given to borrowers, correspondents or brokers are considered to be derivatives. The Derivative Implementation Group (DIG) of the FASB has not yet made a final resolution as to how mortgage companies should value rate locks. Pending ultimate resolution of this issue by the FASB, the Company has tentatively implemented SFAS No. 133 assuming that the value of such derivatives is zero at rate lock date. Commencing January 1, 2001, the Company will record on its balance sheet any changes in value from the date of rate lock to the balance sheet date. The Company hedges the interest rate risk inherent in rate lock commitments with mandatory delivery commitments to sell loans and, to a lesser extent, with options and futures transactions. Mandatory delivery commitments, options and futures are considered to be derivatives under SFAS No. 133. Accordingly, commencing January 1, 2001, these instruments will be marked-to-market at the balance sheet date, with the result being reported as an asset or liability in the balance sheet. Certain of the Company's derivatives no longer needed for hedging rate locks are "paired off" with an opposite position in the same derivative security. Under SFAS No. 133, both positions are derivatives that must be marked-to-market and the result carried as assets or liabilities in the balance sheet until settlement date of the respective trades. The Company hedges the future cash flows from sale of its inventory of closed loans held-for-sale with mandatory delivery commitments to sell loans. Mandatory delivery commitments are considered to be derivatives under SFAS No. 133 and are to be carried as an asset or liability on the balance sheet. Closed loans are not derivatives and are carried at the lower of cost or market (LOCOM) on the Company's balance sheet. Under SFAS No. 133, to the extent that the Company establishes statistical correlation between changes in the value of the hedge with changes in the value of the closed loans held-for-sale, it can mark those derivatives to market and record the after tax impact of that in the "Other Comprehensive Income" (OCI) caption in the equity section of the balance sheet. If the LOCOM valuation of closed loans is a net loss, the Company must record a charge to earnings. Simultaneously, the Company may take out of OCI a like amount and record it in the income statement as an offset to the LOCOM adjustment. The Company hedges the interest rate risk (prepayment risk) inherent in its servicing rights assets with various instruments including interest rate floors, interest rate corridors, interest rate swaps, interest rate swaptions, CPC call options, PO swaps, treasury futures and agency futures contracts. Each of these instruments is considered to be a derivative under SFAS No. 133 and must be marked-to-market, with the value being reported as an asset or a liability in the balance sheet. Under SFAS No. 133 and the guidance provided by the DIG, the Company may elect, at its option, hedge accounting treatment for its servicing rights. If changes in the value of the servicing rights and the hedges meet certain correlation criteria, changes in the fair value of the servicing rights may be offset in the income statement by changes in the fair value of the hedging instrument. The Company may elect not to qualify for hedge accounting treatment. Under SFAS No. 133, the hedges must be marked-to-market through the income statement. In contrast, servicing rights are LOCOM assets under GAAP. When values go down, the impact is recorded through the income statement. When values go up, the increase may be recorded in earnings only to the extent of impairment reserves established by previous writedowns of servicing under SFAS No. 125. The election for hedge treatment must be made at the beginning of the accounting period. The Company did not elect hedge accounting treatment as of January 1, 2001. Since the Company already carried the value of its servicing hedges on its balance sheet at December 31, 2000, there was no transition adjustment made at January 1, 2001. 26 29 The Company enters into interest rate swaps to pay fixed rate and receive floating rate as a cash flow hedge of its variable rate debt used to finance its fixed rate lease receivables. Interest rate swaps are considered to be derivatives under SFAS No. 133 and are to be carried at market value as assets or liabilities in the balance sheet with an offsetting entry to OCI. Under the transition rules of SFAS No. 133, as of January 1, 2001, the Company will recognize the value of derivatives on its balance sheet. It will recognize in a separate line in its income statement in 2001, the cumulative effect of changing to SFAS No. 133. That cumulative effect will be the difference between retained earnings at December 31, 2000 and the amount of retained earnings that would have been reported at that date if SFAS No. 133 had been retroactively applied to all prior periods. The table below highlights the impact of this transition adjustment.
Balance Sheet ---------------------------------------------------------------- Cumulative Derivative Tax Derivative Tax Effect of ($ in thousands) Assets Asset Liabilities Liability OCI Change - ---------------------------------------------------------------------------------------------------------------------------------- Rate lock commitments ......................... $ 1,366 $ -- $ -- $ 509 $ -- $ 857 Derivatives hedging rate lock commitments ..... 308 663 1,780 115 -- (924) Pairoffs of derivatives ....................... 55 70 187 21 -- (83) Derivatives hedging loans held-for-sale ....... -- 1,703 4,568 -- (2,865) -- Derivatives swapping variable rate debt to fixed rate debt ............................. -- 659 1,745 -- (1,086) -- - ---------------------------------------------------------------------------------------------------------------------------------- Total impact .................................. $ 1,729 $ 3,095 $ 8,280 $ 645 $ (3,951) $ (150) ==================================================================================================================================
DIVISIONAL ANALYSIS OF PRE-TAX FUNDS GENERATED FROM OPERATIONS The analyses which follow are included solely to assist investors in obtaining a better understanding of the material elements of the Company's funds generated by operations at a divisional level. It is intended as a supplement, and not an alternative to, and should be read in conjunction with, the Consolidated Statement of Cash Flows, which provides information concerning elements of the Company's cash flows. SUMMARY On a combined divisional basis, during the years ended December 31, 2000 and 1999, the Company generated approximately $13.6 million and $64.7 million, respectively, of positive funds from continuing operations.
For the Twelve Months Ended December 31, --------------------------- ($ in thousands) 2000 1999 - ---------------------------------------------------------------------- Agency-eligible production ........ $ (24,460) $ 26,348 Agency-eligible servicing ......... 22,558 28,623 Subprime production ............... 9,019 4,517 Leasing ........................... 6,455 5,224 - ---------------------------------------------------------------------- $ 13,572 $ 64,712 ======================================================================
Each of the Company's divisions produced positive operating funds during both periods except for agency-eligible production which produced negative operating funds in 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.
For the Twelve Months Ended December 31, --------------------------- ($ in thousands) 2000 1999 - ----------------------------------------------------------------------------------------- Income (loss) before income taxes ..................... $ (25,630) $ 813 Deduct: Net gain on sale of mortgage loans, as reported ..... (24,194) (64,033) Add back: Cash gains on sale of mortgage loans ................ (3,111) 13,454 Cash gains on sale of mortgage servicing rights ..... 20,507 65,581 Depreciation ........................................ 5,866 4,811 Provision expense ................................... 2,102 5,722 - ----------------------------------------------------------------------------------------- $ (24,460) $ 26,348 =========================================================================================
Resource Bancshares Mortgage Group, Inc. 27 30 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.
For the Twelve Months Ended December 31, ---------------------------- ($ in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes ..................................................... $ 88 $ 5,698 Deduct: Net gain on sale of mortgage servicing rights, as reported ................... (2,222) (7,262) Add back: Amortization and provision for impairment of mortgage servicing rights ....... 24,560 29,580 Depreciation ................................................................. 132 607 - ------------------------------------------------------------------------------------------------------------------- $ 22,558 $ 28,623 ===================================================================================================================
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 2000, the Company sold all of its loans to the cash markets. In this context, the table below reconciles the major elements of pre-tax operating funds flow of the Company's subprime mortgage production activities.
For the Twelve Months Ended December 31, --------------------------- ($ in thousands) 2000 1999 - ---------------------------------------------------------------------------------------------------- Income (loss) before income taxes ............................... $ (37,233) $ 2,591 Deduct: Net gain on sale of subprime loans, as reported ............... (13,149) (20,357) Cash losses on securitization of subprime loans ............... -- (3,706) Accretion income on residuals ................................. (5,634) (6,576) Add back: Cash gains on sale of whole subprime loans .................... 19,593 16,288 Cash received from investments in residual certificates ....... 1,922 4,290 Depreciation and amortization of goodwill and intangibles ..... 1,729 1,251 Provision expense ............................................. 2,453 2,893 Mark-to-market on residuals ................................... 39,338 7,843 - ---------------------------------------------------------------------------------------------------- $ 9,019 $ 4,517 ====================================================================================================
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.
For the Twelve Months Ended December 31, --------------------------- ($ in thousands) 2000 1999 - ---------------------------------------------------------------------------------------------------- Income before income taxes ...................................... $ 3,005 $ 3,010 Add back: Depreciation and amortization of goodwill and intangibles ..... 317 306 Provision expense ............................................... 3,133 1,908 - ---------------------------------------------------------------------------------------------------- $ 6,455 $ 5,224 ====================================================================================================
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK A primary market risk facing the Company is interest rate risk. The Company attempts to manage this risk by striving to balance its loan origination and loan servicing business segments, which are countercyclical in nature. In addition, the Company uses various financial instruments, including derivatives contracts, to manage the interest rate risk related specifically to its committed pipeline, mortgage loan inventory, mortgage-backed securities held-for-sale, servicing rights and leases. The overall objective of the Company's interest rate risk 28 31 management policies is to mitigate potentially significant adverse effects that changes in the values of these items, resulting from changes in interest rates, might have on the Company's consolidated balance sheet. The Company does not speculate on the direction of interest rates in its management of interest rate risk. For purposes of this disclosure, the Company has performed various sensitivity analyses that quantify the net financial impact of changes in interest rates on its interest rate-sensitive assets, liabilities and commitments. These analyses presume an instantaneous parallel shift of the yield curve. Various techniques are employed to value the underlying financial instruments and rely upon a number of critical assumptions. The scenarios presented are illustrative. Actual experience may differ materially from the estimated amounts presented for each scenario. To the extent that yield curve shifts are non-parallel and to the extent that actual variations in significant assumptions differ from those applied for purposes of the valuations, the resultant valuations can also be expected to vary. Such variances may prove material.
If Interest Rates Were to ------------------------ ------------------------ 2000 Increase Decrease Increase Decrease ------------------------- ---------------------------------------------------- CARRYING ESTIMATED 50 Basis Points 100 Basis Points AMOUNT FAIR VALUE Estimated Fair Value Estimated Fair Value - ------------------------------------------------------------------------------------------------------------------------- Mortgage loans held-for-sale and mortgage-backed securities ........ $ 541,785A $ 543,528A $ 542,829a $ 543,698a $ 542,418a $ 544,204a Servicing rights, net ............... 176,395B 185,383B 187,113b 184,226b 187,969b 182,569b Lease receivables ................... 191,777 193,290C 192,909c 193,571c 192,731c 193,586c Other assets ........................ 159,796 159,796 159,796 159,796 159,796 159,796 - ------------------------------------------------------------------------------------------------------------------------- Total assets ...................... $1,069,753 $1,081,997 $1,082,647 $1,081,291 $1,082,914 $1,080,155 - ------------------------------------------------------------------------------------------------------------------------- Long-term borrowings ................ $ 6,145 $ 6,361 $ 6,210 $ 6,517 $ 6,064 $ 6,677 Other liabilities ................... 911,839 911,839 911,839 911,839 911,839 911,839 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities ................. $ 917,984 $ 918,200 $ 918,049 $ 918,356 $ 917,903 $ 918,516 - ------------------------------------------------------------------------------------------------------------------------- Net equity value .................... $ 151,769 $ 163,797 $ 164,598 $ 162,935 $ 165,011 $ 161,639 =========================================================================================================================
a Estimated fair value has been adjusted to include $1,366, $(6,347), and $434 for estimated fair value of mortgage purchase commitments, mandatory delivery commitments and purchase option contracts, respectively, which have been allocated as hedges against mortgage loans held-for-sale and mortgage-backed securities. In addition, $211 of carrying value relating to purchase option contracts has been classified as mortgage loans held-for-sale and mortgage-backed securities. b Estimated fair value and carrying value have been adjusted to include $15,629 of interest rate floor contracts for 2000 which has been allocated as hedges against servicing rights, net. For the 50 bps increase, the 50 bps decrease, 100 bps increase and 100 bps decrease, respectively, the estimated fair value has been adjusted to include $10,591, $23,399, $7,219 and $34,492, respectively, of interest rate floor contracts which have been allocated as hedges against servicing rights, net. c Estimated fair value has been adjusted to include $(1,745), $(674), $(2,932), $582 and $(4,134), respectively, of interest rate swap contracts for 2000, 50 bps increase, 50 bps decrease, 100 bps increase and 100 bps decrease, respectively, which have been allocated as hedges against lease receivables.
If Interest Rates Were to ------------------------------------------------- 1999 Increase Decrease Increase Decrease ------------------------- ------------------------------------------------- Carrying Estimated 50 Basis Points 100 Basis Points Amount Fair Value Estimated Fair Value Estimated Fair Value - --------------------------------------------------------------------------------------------------------------------------------- Mortgage loans held-for-sale and mortgage-backed securities .................... $ 482,307a $ 483,606a $ 483,183a $ 484,113a $ 482,940a $ 484,583a Servicing rights, net ........................... 183,832b 201,068b 206,215b 196,345b 209,773b 192,980b Lease receivables ............................... 155,559 160,125c 157,849c 162,429c 162,256c 164,764c Residual interests in subprime securitizations .. 54,382 54,382 53,547 54,982 52,602 55,492 Other assets .................................... 151,102 152,562 152,562 152,562 152,562 152,562 - --------------------------------------------------------------------------------------------------------------------------------- Total assets .................................. $1,027,182 $1,051,743 $1,053,356 $1,050,431 $1,060,133 $1,050,381 - --------------------------------------------------------------------------------------------------------------------------------- Long-term borrowings ............................ $ 6,259 $ 6,190 $ 6,190 $ 6,190 $ 6,190 $ 6,190 Other liabilities ............................... 808,451 808,451 808,451 808,451 808,451 808,451 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities ............................. $ 814,710 $ 814,641 $ 814,641 $ 814,641 $ 814,641 $ 814,641 - --------------------------------------------------------------------------------------------------------------------------------- Net equity value ................................ $ 212,472 $ 237,102 $ 238,715 $ 235,790 $ 245,492 $ 235,740 =================================================================================================================================
a Estimated fair value has been adjusted to include $(840), $2,209, and $343 for estimated fair value of mortgage purchase commitments, mandatory delivery commitments and purchase option contracts, respectively, which have been allocated as hedges against mortgage loans held-for-sale and mortgage-backed securities. In addition, $1,803 of carrying value relating to purchase option contracts has been classified as mortgage loans held-for-sale and mortgage-backed securities. b Estimated fair value and carrying value have been adjusted to include $6,269 of interest rate floor contracts for 1999 which has been allocated as hedges against servicing rights, net. For the 50 bps increase, the 50 bps decrease, 100 bps increase and 100 bps decrease, respectively, the estimated fair value has been adjusted to include $3,754, $10,240, $2,506 and $16,517, respectively, of interest rate floor contracts which have been allocated as hedges against servicing rights, net. c Estimated fair value has been adjusted to include $(1,358), $(2,349), $(355), $3,327 and $663, respectively, of interest rate swap contracts for 1999, 50 bps increase, 50 bps decrease, 100 bps increase and 100 bps decrease, respectively, which have been allocated as hedges against lease receivables. These analyses are limited by the fact that they are performed at a particular point in time and do not incorporate other factors that would impact the Company's financial performance in each such scenario. Consequently, the preceding estimates should not be viewed as a forecast. The Company is a party to various derivative financial instruments and financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to risks related to fluctuating Resource Bancshares Mortgage Group, Inc. 29 32 interest rates. These financial instruments include mortgage purchase commitments, mandatory delivery commitments, put and call option contracts, swaps, futures contracts and interest rate floor contracts. The Company uses these financial instruments exclusively for purposes of managing its resale pricing and interest rate risks. The Company's mortgage loans held-for-sale are acquired or originated through a network of correspondents and wholesale brokers. In connection therewith, the Company routinely enters into optional mortgage purchase commitments to acquire or originate specific in-process mortgage loans when and if closed by the counterparty, at the option of the mortgagor. Mortgage purchase commitments obligate the Company to acquire mortgage loans on a delayed delivery basis, which may extend for a period of 60 days, at a price which is fixed as of the date of the contract. Accordingly, the Company is subject to the risk that the market value of its on-balance sheet mortgage loans held-for-sale and the mortgage loans it is obligated to purchase under its mortgage purchase commitments may change significantly prior to resale. In order to limit its resale price exposure for agency-eligible mortgage loans, the Company enters into mandatory delivery commitments which are contracts for delayed delivery of mortgage loans to third parties. Mandatory delivery commitments obligate the Company to sell agency-eligible mortgage loans on a delayed delivery basis at a price which is fixed as of the date of the contract. Since mandatory delivery commitments enable the Company to fix its resale prices for both on-balance sheet mortgage loans held-for-sale (for which a fixed price has already been paid) and for anticipated loan closures subject to mortgage purchase commitments (which fix the delayed purchase price for the resultant mortgage loans), these instruments can effectively limit the Company's resale price exposures. The percentages of anticipated agency-eligible loan closures under mortgage purchase commitments that are covered by mandatory delivery commitments not allocated to on-balance sheet mortgages held-for-sale are monitored continuously. The Company's resultant expected exposure to resale pricing risk is continuously adjusted to consider changing expectations regarding anticipated loan closure percentages and other market conditions. Generally, the Company buys put and call option contracts on U.S. Government Securities to effect modest adjustments of its overall exposure to resale pricing changes. Purchased call option contracts enable the Company, at its option, to acquire an underlying financial security from a third party at a specified price for a fixed period of time. Purchased put option contracts enable the Company, at its option, to sell an underlying financial security to a third-party at a specified price and for a fixed period of time. Since these financial instruments essentially enable the Company to fix the purchase or sale price on financial instruments whose changes in value have historically correlated closely with changes in value of mortgage loans, these instruments can be used effectively to adjust the Company's overall exposure to resale pricing risks. In addition, these instruments have the advantages of being available in smaller denominations than are typical of the Company's mandatory delivery commitments and of being traded in a highly liquid and efficient secondary market. Periodically, the Company, in addition to mandatory delivery commitments, also buys or sells futures contracts as part of its hedging activities for rate locked and closed subprime mortgage loans. Generally, futures positions are outstanding for short periods of time and are used to hedge against price movements of another financial instrument while execution of that instrument is bid among brokers. Futures contracts also may be similarly used to hedge against price movements when another financial instrument is illiquid due to temporary market conditions. Because the changes in value of futures contracts and the hedged items can be based on different indices, there is a risk that the changes in value may not correlate. There were no open futures positions as of December 31, 2000 or 1999. As discussed in Note 13, the Company typically sells its produced residential mortgage servicing rights between 90 and 180 days of origination or purchase of the related loan pursuant to committed prices under forward sales contracts. These forward sales contracts commit the Company to deliver mortgage servicing rights backed by contractual levels of unpaid principal balances. Outstanding commitments to deliver totaled $797,000 and $5,480,000 at December 31, 2000 and 1999, respectively. The Company also maintains a portfolio of residential mortgage servicing rights which, though available-for-sale, are not currently scheduled for sale pursuant to the Company's forward sales contracts. In connection therewith, the Company is subject to the risk that the economic value of such mortgage servicing rights may decline in the event of a significant decline in long-term interest rates. A significant decline in interest rates generally causes an increase in actual and expected mortgage loan prepayments (for example increased refinancing) which in turn tends to reduce the future expected cash flows (and economic value) of associated mortgage servicing rights. Interest rate floor contracts provide for the Company to receive an interest rate differential on a notional amount of outstanding principal to the extent that interest rates decline below a specified rate which is fixed as of the date of the contract. Accordingly, the value of an interest rate floor contract increases while the value of a mortgage servicing right decreases in a declining interest rate environment. As such, interest rate floor contracts can potentially effectively mitigate the Company's exposure to declines in the economic value of its servicing rights in a declining interest rate environment. Additionally, the Company utilizes Callable Pass Through Certificates (CPC) to diversify basis risk and improve hedge efficacy. The Company purchases a long-term call option on a large pool of mortgage-backed securities. When the price of the mortgage-backed securities rises, the value of the CPC will rise. This hedge offers performance based upon the price and prepayment behavior of mortgage-backed securities, instead of either CMT or CMS basis. The Company uses an amortizing interest rate swap agreement to fix the interest rate on its floating rate credit facility, which finances its fixed rate leasing portfolio. Under this agreement, the Company makes or receives payments based on the difference between a fixed rate paid by the Company and a floating rate paid by the counterparty, applied to a notional amount of outstanding principal. The interest rate swap agreement is valued based on the difference between the fixed rate and the floating rate at year end. The above described financial instruments involve, to varying degrees, elements of credit and interest rate risk which are in excess of the amounts recognized in the balance sheet. The Company believes that these instruments do not represent a significant exposure to credit loss since the amounts subject to credit risks are controlled through collateral requirements, credit approvals, limits and monitoring 30 33 procedures. The Company does not have a significant exposure to any individual customer, correspondent or counterparty in connection with these financial instruments. Except for mortgage purchase commitments, the Company does not require collateral or other security to support the financial instruments with credit risk whose contract or notional amounts are summarized as follows:
Contract Amount at December 31, ------------------------------- 2000 1999 - --------------------------------------------------------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Mortgage loan purchase commitments ..................................................... $ 742,469 $ 363,402 Financial instruments whose contract amounts exceed the amount of credit risk: Mandatory delivery commitments (allocated against mortgages held-for-sale) ............. 395,011 484,752 Mandatory delivery commitments (allocated against mortgage purchase commitments) ....... 502,089 273,748 Purchased option contracts ............................................................. 30,000 160,000 Forward servicing sales contracts ...................................................... 797,000 5,480,000 Interest rate floor contracts .......................................................... 1,185,000 1,700,000 Interest rate swaps .................................................................... 158,501 125,733 Callable Pass-Through Certificates ..................................................... 343,022 380,000 ================================================================================================================================
Mortgage loan purchase commitments expose the Company to credit loss in the event the purchase commitments are funded as mortgage loans and the Company's counterparties default prior to resale. The maximum credit loss to which the Company is exposed is the notional amount of the commitments. However, the Company does not believe the commitments represent a significant exposure to credit loss because the related loans are secured by 1-4 family homes, most loans are insured or guaranteed through private mortgage insurance or government approval programs and subjected to underwriting standards specified by government agencies or private mortgage insurance companies. The estimated credit exposure on financial instruments whose contract amounts exceed the amount of credit risk is the increase in market value of the instrument. The Company generally does not charge a premium to its correspondents in connection with issuance of its mortgage purchase commitments nor is a premium charged to the Company in connection with its acquisition of mandatory delivery or forward servicing sales contracts. Premiums paid for purchased put and call option and futures contracts are initially deferred and included in other assets in the balance sheet. Other assets included $210 and $1,803 at December 31, 2000 and 1999, respectively, of such deferred premiums. Ultimately, such deferred premiums and related realized gains or losses from these activities are recorded as a component of gains and losses on sales of mortgage loans at the earlier of the expiration of the underlying contract or when exercise of the contract is deemed remote. The Company uses CMT floors and CMS floors and Callable Pass-Through Certificates to protect itself against interest rate and prepayment risk on its available-for-sale portfolio. The Company monitors the changes in the fair value of these instruments and the hedged mortgage servicing rights on an ongoing basis. Premiums paid for these instruments are initially deferred and included in other assets in the balance sheet and are amortized over the term of the underlying contract. Amounts received as interest rate differentials under floor contracts as well as changes in the fair value of all of these instruments are recorded as a reduction or increase of basis in mortgage servicing rights to the extent that such changes generally correlate with changes in fair value of mortgage servicing rights. Included in the mortgage servicing right basis are deferred gains (losses) of $5,659 and $(5,050) at December 31, 2000 and 1999, respectively. Other assets included $9,970 and $11,318 at December 31, 2000 and 1999, respectively, of unamortized premiums. For the years ended December 31, 2000 and 1999, respectively, $3,336 and $3,608 of deferred premiums paid for interest rate floor contracts were amortized to expense. The current variable rate index for 10 year CMT and 10 year CMS were 5.11% and 6.168%, respectively, at December 31, 2000. Other terms of the interest rate floor contracts and Callable Pass-Through Certificates outstanding at December 31, 2000, are summarized as follows:
Contract Type(a) Contract Date Expiration Date Notional Amount Strike - ------------------------------------------------------------------------------------------------------------------- CMT ..................... August 20, 1996 August 20, 2001 $ 60,000 5.570% CMT ..................... July 9, 1998 July 9, 2005 55,000 4.910% CMT ..................... July 9, 1998 July 9, 2001 125,000 5.160% CMT ..................... September 15, 1998 September 15, 2003 75,000 4.500% CMT ..................... October 13, 1998 October 13, 2003 150,000 4.500% CMS ..................... November 10, 1998 November 10, 2003 120,000 5.410% CMT ..................... January 19, 1999 January 19, 2002 200,000 4.200% CMT ..................... March 15, 1999 March 15, 2002 200,000 4.950% CPC ..................... May 15, 1999 May 15, 2006 164,443 N/A CPC ..................... September 1, 1999 September 30, 2006 178,579 N/A CMS ..................... March 15, 2000 March 15, 2005 200,000 6.690% ----------- $ 1,528,022 ===========
(a) Contract types: CMT--Constant Maturity Treasury floor, CMS--Constant Maturity Swap floor, and CPC--Callable Pass-Through Certificate. During 2000, the Company purchased one CMS interest-rate floor contract for $1,988 with the contract and expiration dates as listed above. The notional amount of this interest rate floor totaled $200,000. Five interest rate floors with notional amounts totaling $715,000 expired during 2000. Resource Bancshares Mortgage Group, Inc. 31 34 CONSOLIDATED BALANCE SHEET
December 31, -------------------------- ($ in thousands, except share information) 2000 1999 - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash ............................................................................................... $ 15,205 $ 30,478 Receivables ........................................................................................ 63,098 40,219 Trading securities: Residual interests in subprime securitizations ................................................... -- 54,382 Mortgage loans held for sale ....................................................................... 541,574 480,504 Lease receivables .................................................................................. 191,777 155,559 Servicing rights, net .............................................................................. 160,766 177,563 Premises and equipment, net ........................................................................ 30,771 36,294 Accrued interest receivable ........................................................................ 2,645 1,691 Goodwill and other intangibles ..................................................................... 11,865 15,478 Other assets ....................................................................................... 52,052 35,014 - --------------------------------------------------------------------------------------------------------------------------------- Total assets ................................................................................. $ 1,069,753 $ 1,027,182 - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Short-term borrowings ............................................................................ $ 811,750 $ 709,803 Long-term borrowings ............................................................................. 6,145 6,259 Accrued expenses ................................................................................. 9,045 13,826 Other liabilities ................................................................................ 91,044 84,822 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities ............................................................................ 917,984 814,710 - --------------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity 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 December 31, 2000 and December 31, 1999 ........................................................ 316 316 Additional paid-in capital ....................................................................... 297,996 300,909 Retained earnings ................................................................................ 6,291 56,506 Common stock held by subsidiary at cost--7,767,099 shares at December 31, 2000 and December 31, 1999 .............................................................................. (98,953) (98,953) Treasury stock--6,949,711 and 4,686,391 shares at December 31, 2000 and December 31, 1999, respectively ................................................................ (50,050) (41,148) Unearned shares of employee stock ownership plan--310,320 and 536,644 shares at December 31, 2000 and December 31, 1999, respectively .......................................... (3,800) (5,158) Unearned Variable Option Expense at December 31, 2000 and December 31, 1999, respectively ........ (31) -- - --------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity ................................................................... 151,769 212,472 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity ................................................... $ 1,069,753 $ 1,027,182 =================================================================================================================================
The accompanying notes are an integral part of these financial statements. 32 35 CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, ------------------------------------------ ($ in thousands, except share information) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- REVENUES Interest income .................................................................... $ 69,469 $ 83,149 $ 101,647 Interest expense ................................................................... (53,593) (57,310) (80,405) - -------------------------------------------------------------------------------------------------------------------------------- Net interest income ................................................................ 15,876 25,839 21,242 Net gain on sale of mortgage loans ................................................. 37,343 84,390 162,452 Gain on sale of mortgage servicing rights .......................................... 2,222 7,262 1,753 Servicing fees ..................................................................... 34,981 42,223 39,379 Mark-to-market on residual interests in subprime securitizations ................... (39,338) (7,843) 435 Other income ....................................................................... 6,150 7,624 5,130 - -------------------------------------------------------------------------------------------------------------------------------- Total revenues ............................................................... 57,234 159,495 230,391 - -------------------------------------------------------------------------------------------------------------------------------- EXPENSES Salary and employee benefits ....................................................... 50,280 64,547 75,084 Occupancy expense .................................................................. 14,007 13,732 10,379 Amortization and provision for impairment of mortgage servicing rights ............. 24,560 29,580 27,897 Provision expense .................................................................. 7,688 10,608 11,023 General and administrative expenses ................................................ 24,989 33,217 31,509 - -------------------------------------------------------------------------------------------------------------------------------- Total expenses ............................................................... 121,524 151,684 155,892 - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes ....................... (64,290) 7,811 74,499 Income tax benefit (expense) ....................................................... 24,100 (2,307) (26,980) - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations ........................................... $ (40,190) $ 5,504 $ 47,519 - -------------------------------------------------------------------------------------------------------------------------------- Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income tax expense of $261 for the twelve months ended December 31, 2000) ............. (1,448) -- -- Operating profits (losses) of Laureate Capital Corp. for the twelve months ended December 31, 2000, 1999 and 1998, respectively (less applicable income tax expense (benefit) of $(354), $405, and $952, respectively) ..................... (660) 418 1,152 - -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) .................................................................. $ (42,298) $ 5,922 $ 48,671 - -------------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding--Basic................................... 17,727,445 20,643,166 23,122,835 Net income (loss) per common share from continuing operations--Basic ............... $ (2.27) $ 0.27 $ 2.06 Net income (loss) per common share from discontinued operations--Basic ............. $ (0.12) $ 0.02 $ 0.04 Weighted average common shares outstanding--Diluted ................................ 17,727,445 20,799,502 23,501,108 Net income (loss) per common share from continuing operations--Diluted ............. $ (2.27) $ 0.26 $ 2.02 Net income (loss) per common share from discontinued operations--Diluted ........... $ (0.12) $ 0.02 $ 0.05 - --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Resource Bancshares Mortgage Group, Inc. 33 36 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Additional Unearned --------------------- Paid-in Retained ESOP ($ in thousands, except share information) Shares Amount Capital Earnings Shares - ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 ....................... 31,120,470 $311 $299,516 $ 17,763 $ (3,498) - ------------------------------------------------------------------------------------------------------------------------- Issuance of restricted stock ..................... 20,056 * 328 -- -- Cash dividends ................................... -- -- -- (6,714) -- Treasury stock purchases (1,201,500 shares net of issuances 332,122 shares) ............... -- -- -- -- -- Exercise of stock options ........................ 155,965 2 1,537 -- -- Shares committed to be released under Employee Stock Ownership Plan .................. -- -- 544 -- 1,079 Purchase of shares by Employee Stock Ownership Plan ................................. -- -- -- -- (2,000) Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan ...................... 198,722 2 3,425 (121) -- Acquisition of Meritage Mortgage Corporation ..... 142,118 1 1,764 -- -- Net income ....................................... -- -- -- 48,671 -- Total comprehensive income ....................... -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 ....................... 31,637,331 316 307,114 59,599 (4,419) - ------------------------------------------------------------------------------------------------------------------------- Issuance of restricted stock ..................... -- -- 116 -- -- Cash dividends ................................... -- -- -- (8,902) -- Treasury stock purchases (5,051,896 shares net of issuances 1,234,883 shares) ............. -- -- -- -- -- Exercise of stock options ........................ -- -- (3) -- -- Shares committed to be released under Employee Stock Ownership Plan .................. -- -- (1,017) -- 2,261 Purchase of shares by Employee Stock Ownership Plan ................................. -- -- -- -- (3,000) Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan ...................... -- -- (5,301) (113) -- Net income ....................................... -- -- -- 5,922 -- Total comprehensive income ....................... -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 ....................... 31,637,331 316 300,909 56,506 (5,158) - ------------------------------------------------------------------------------------------------------------------------- Issuance of restricted stock ..................... -- -- (1,046) -- -- Cash dividends ................................... -- -- -- (7,856) -- Treasury stock purchases (2,872,725 shares net of issuances 609,405 shares) ............... -- -- -- -- -- Exercise of stock options ........................ -- -- -- -- -- Shares committed to be released under Employee Stock Ownership Plan .................. -- -- (304) (15) 1,358 Purchase of shares by Employee Stock Ownership Plan ................................. -- -- -- -- -- Variable option expense .......................... -- -- -- -- -- Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan ...................... -- -- (1,563) (46) -- Net income ....................................... -- -- -- (42,298) -- Total comprehensive income ....................... -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 ....................... 31,637,331 $316 $297,996 $ 6,291 $ (3,800) ========================================================================================================================= Common Unearned Total Treasury Stock Held by Variable Stockholders' ($ in thousands, except share information) Stock Subsidiary Option Equity - ---------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 ....................... $ -- $(98,953) $-- $215,139 - ---------------------------------------------------------------------------------------------------------------- Issuance of restricted stock ..................... -- -- -- 328 Cash dividends ................................... -- -- -- (6,714) Treasury stock purchases (1,201,500 shares net of issuances 332,122 shares) ............... (16,280) -- -- (16,280) Exercise of stock options ........................ 3,034 -- -- 4,573 Shares committed to be released under Employee Stock Ownership Plan .................. -- -- -- 1,623 Purchase of shares by Employee Stock Ownership Plan ................................. -- -- -- (2,000) Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan ...................... 1,747 -- -- 5,053 Acquisition of Meritage Mortgage Corporation ..... -- -- -- 1,765 Net income ....................................... -- -- -- -- Total comprehensive income ....................... -- -- -- 48,671 - ---------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 ....................... (11,499) (98,953) -- 252,158 - ---------------------------------------------------------------------------------------------------------------- Issuance of restricted stock ..................... 1,285 -- -- 1,401 Cash dividends ................................... -- -- -- (8,902) Treasury stock purchases (5,051,896 shares net of issuances 1,234,883 shares) ............. (43,216) -- -- (43,216) Exercise of stock options ........................ 7 -- -- 4 Shares committed to be released under Employee Stock Ownership Plan .................. -- -- -- 1,244 Purchase of shares by Employee Stock Ownership Plan ................................. -- -- -- (3,000) Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan ...................... 12,275 -- -- 6,861 Net income ....................................... -- -- -- -- Total comprehensive income ....................... -- -- -- 5,922 - ---------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 ....................... (41,148) (98,953) -- 212,472 - ---------------------------------------------------------------------------------------------------------------- Issuance of restricted stock ..................... 2,060 -- -- 1,014 Cash dividends ................................... -- -- -- (7,856) Treasury stock purchases (2,872,725 shares net of issuances 609,405 shares) ............... (13,988) -- -- (13,988) Exercise of stock options ........................ -- -- -- -- Shares committed to be released under Employee Stock Ownership Plan .................. -- -- -- 1,039 Purchase of shares by Employee Stock Ownership Plan ................................. -- -- -- -- Variable option expense .......................... -- -- (31) (31) Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan ...................... 3,026 -- -- 1,417 Net income ....................................... -- -- -- -- Total comprehensive income ....................... -- -- -- (42,298) - ---------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 ....................... $(50,050) $(98,953) $ (31) $151,769 ================================================================================================================
*Amounts less than $1. The accompanying notes are an integral part of these consolidated financial statements. 34 37 CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended December 31, ---------------------------------------- ($ in thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) from continuing operations ............................................. $ (40,190) $ 5,504 $ 47,519 Adjustments to reconcile net income to cash (used in) provided by operating activities: Depreciation and amortization .......................................................... 33,065 36,653 32,560 Deferred income tax (benefit) expense .................................................. (13,497) 1,585 31,169 Employee Stock Ownership Plan compensation ............................................. 658 1,244 1,623 Provision for estimated foreclosure losses and repurchased loans ....................... 7,688 10,608 11,023 (Increase) decrease in receivables ..................................................... (11,929) 57,540 (16,394) Acquisition of mortgage loans .......................................................... (6,300,656) (8,455,706) (15,562,244) Proceeds from sales of mortgage loans and mortgage-backed securities ................... 6,272,374 9,468,635 15,473,838 Acquisition of mortgage servicing rights ............................................... (141,729) (249,004) (339,715) Sales of mortgage servicing rights ..................................................... 126,945 245,302 256,292 Net gain on sales of mortgage loans and servicing rights ............................... (39,565) (91,652) (182,443) (Increase) decrease in accrued interest on loans ....................................... (954) 1,944 737 (Increase) in lease receivables ........................................................ (39,351) (55,438) (50,535) (Increase) in other assets ............................................................. (17,321) (2,521) (7,155) Decrease (increase) in residual certificates ........................................... 54,382 (8,600) (26,098) Increase (decrease) in accrued expenses and other liabilities .......................... 21,030 (46,341) (636) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities of continuing operations.............. (89,050) 919,753 (312,005) - ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of premises and equipment ...................................................... (3,896) (7,999) (12,989) Disposition of premises and equipment .................................................... 1,090 448 1,314 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities of continuing operations............................ (2,806) (7,551) (11,675) - ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from borrowings ................................................................. 9,687,390 26,248,644 42,978,503 Repayment of borrowings .................................................................. (9,585,557) (27,105,233) (42,636,093) Debt issuance costs ...................................................................... -- -- (283) Issuance of restricted stock ............................................................. 1,014 1,401 328 Shares issued under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan .............................................................. 1,417 6,861 5,053 Acquisition of treasury stock ............................................................ (13,988) (43,216) (16,280) Cash dividends ........................................................................... (7,856) (8,902) (6,714) Exercise of stock options ................................................................ -- 4 4,573 Variable options expense ................................................................. 350 -- -- Loans to Employee Stock Ownership Plan ................................................... -- (3,000) (2,000) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities of continuing operations.............. 83,770 (903,441) 327,087 - ----------------------------------------------------------------------------------------------------------------------------------- Discontinued operations .................................................................. (6,187) 3,593 1,171 - ----------------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash .......................................................... (15,273) 12,354 4,578 Cash, beginning of year .................................................................. 30,478 18,124 13,546 - ----------------------------------------------------------------------------------------------------------------------------------- Cash, end of year ........................................................................ $ 15,205 $ 30,478 $ 18,124 =================================================================================================================================== SUPPLEMENTAL INFORMATION Interest paid ............................................................................ $ 53,158 $ 57,349 $ 80,597 Taxes paid net of refunds received ....................................................... (6,396) 4,055 (3,727) Non-cash activity acquisition of Meritage Mortgage Corporation ........................... -- -- 1,765 ===================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Resource Bancshares Mortgage Group, Inc. 35 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share information) NOTE 1--THE COMPANY: Resource Bancshares Mortgage Group, Inc. (the Company) was organized to acquire and operate the residential mortgage banking business of Resource Bancshares Corporation (RBC), which commenced operations in May 1989. The assets and liabilities of the residential mortgage banking business of RBC were transferred to the Company on June 3, 1993, when the Company sold 58% of its common stock in an initial public offering. Following the offering, RBC retained a significant ownership interest in the Company. On December 31, 1997, the Company acquired RBC in a transaction in which it exchanged 9,894,889 shares of the Company's common stock for all of the outstanding stock of RBC. Resource Bancshares Mortgage Group, Inc. is a financial services company primarily engaged in the business of mortgage banking. Through its wholly owned subsidiaries, RBMG works with correspondent lenders and brokers to purchase, sell and service agency-eligible and subprime residential, single-family first mortgage loans and to purchase and sell servicing rights associated with agency-eligible and subprime loans. In addition, one of the Company's wholly-owned subsidiaries originates, sells and services small-ticket commercial leases. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting and reporting policies of the Company reflect industry practices and conform in all material respects with accounting principles generally accepted in the United States. Certain amounts from prior years have been reclassified to conform to current period presentation. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. SIGNIFICANT ESTIMATES In preparing the financial statements, management is required to make estimates based on available information that can affect the reported amounts of assets, liabilities and disclosures as of the balance sheet date and revenues and expenses for the related periods. Such estimates relate principally to the Company's allowance for foreclosure losses and repurchased loans, its allowance for lease losses and fair values of residual certificates. Additionally, estimates concerning the fair values of mortgage loans held-for-sale, lease receivables, servicing rights, servicing hedges and the Company's other hedging instruments are all relevant to ensuring that leases and mortgage loans are carried at the lower of cost or market, and that potential impairments of servicing rights are recognized as and if required. Because of the inherent uncertainties associated with any estimation process and due to possible future changes in market and economic conditions that will affect fair values, it is possible that actual future results in realization of the underlying assets and liabilities could differ significantly from the amounts reflected as of the balance sheet date. MORTGAGE LOANS HELD-FOR-SALE Mortgage loans held-for-sale are stated at the lower of aggregate cost or market. 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). The Company implemented SFAS No. 133 on January 1, 2001. See Note 3 for further discussion of the impact of SFAS No. 133 on accounting for mortgage loans held-for-sale. As a servicer of mortgage loans and small-ticket equipment leases, the Company will incur certain losses in the event it becomes necessary to carry out foreclosure actions on loans and leases serviced. Substantially all serviced agency-eligible loans are fully guaranteed against such losses by the securitizing government sponsored enterprise. The allowance for estimated losses on foreclosure, which is part of the mortgage servicing rights basis, is determined based on delinquency trends and management's evaluation of the probability that foreclosure actions will be necessary. The allowance for estimated losses on foreclosure was $213 and $401 at December 31, 2000 and 1999, respectively. On occasions the Company has to repurchase certain non-performing loans. Upon repurchase of a loan, the Company initially capitalizes the current unpaid principal balance and related advances and any other related costs are charged against the allowance. The Company subsequently estimates the net realizable value of the repurchased loan portfolio and records an estimate of the allowance for losses on repurchases. The allowance for estimated losses on repurchases was $836 and $1,798 at December 31, 2000 and 1999, respectively. The inventory of actual and pending repurchases to which these reserves relate aggregated $13,006 and $20,700 at December 31, 2000 and 1999, respectively. 36 39 MORTGAGE SERVICING RIGHTS The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which superseded SFAS No. 122 effective January 1, 1997. The provisions of SFAS No. 125 did not materially alter the Company's accounting for mortgage servicing rights. As required by SFAS No. 125, and as required by SFAS No. 122, the Company allocates the total cost of a whole mortgage loan to the mortgage servicing rights and the loan (without servicing rights) based on relative fair values. The market value of servicing rights acquired in bulk transactions, rather than as a by-product of the Company's loan production activities, is initially capitalized at the lower of cost or the estimated present value of future expected net servicing income. Amounts capitalized as mortgage servicing rights are amortized over the period of, and in proportion to, estimated future net servicing income. The Company assesses its capitalized mortgage servicing rights for impairment (on a stratified basis) based on the estimated market values of those rights. Impairments are recognized as a valuation allowance for each impaired stratum. The analysis values such rights in consideration of current forward committed delivery prices, prevailing interest, prepayment and default rates, and other relevant factors as appropriate or allocable to each valuation stratum. Fees for servicing loans and leases are recognized monthly on an accrual basis based upon the terms of the underlying agreement. Generally, such agreements provide for fees based upon a percentage of the outstanding balance. 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). The Company implemented SFAS No. 133 on January 1, 2001. See Note 3 for further discussion of the impact of SFAS No. 133 on accounting for mortgage servicing rights. LOAN ORIGINATION AND WHOLESALE PROGRAM ADMINISTRATION FEES Fees charged in connection with loan origination and net fees charged in conjunction with certain administrative functions performed by the Company in connection with the acquisition of mortgage loans are deferred and reduce the carrying value of the underlying mortgage loans. Allocable portions of such fees are included in the determination of the gain or loss when the related mortgage loans or servicing rights are sold. SALES OF MORTGAGE LOANS AND MORTGAGE SERVICING RIGHTS Gains or losses on sales of agency-eligible loans and on whole loan sales of subprime mortgage loans are determined at settlement date and are measured by the difference between the net proceeds and the carrying amount of the underlying mortgage loans. Gains and losses on sales of mortgage servicing rights are recognized at the sale date, which is the date the sales contract is closed and substantially all risks and rewards of ownership pass to the buyer. LEASE RECEIVABLES Lease receivables consist of direct finance equipment leases which are carried at the lower of aggregate cost or market value. Interest income is recognized monthly based on the net lease outstanding balance. Residuals are recognized monthly based on the estimated end-of-lease value and are included as an adjustment to interest income. Lease receivables are charged-off at the earlier of the date they are deemed uncollectible or they become 120 days past due. Certain direct costs to originate lease receivables are deferred and recognized as an adjustment to interest income over the estimated life of the lease. The allowance for lease losses is established through a provision charged to operations. The allowance is reviewed and adjusted as needed based upon management's evaluation of factors affecting the lease receivables portfolio such as economic conditions, growth and composition of the portfolio, historical loss experience and analysis of the collectibility of specific lease receivables. The allowance is established at an amount that management believes will be adequate to absorb probable losses on outstanding leases that may become uncollectible. At December 31, 2000 and 1999, the allowance for lease losses was $3,782 and $3,046, respectively. The inventory of lease receivables to which these reserves relate aggregated $195,559 and $158,605 at December 31, 2000 and 1999, respectively. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill arising from the acquisitions of RBC and Meritage Mortgage Corporation (Meritage) is being amortized over 20 years using the straight-line method. Amortization expense for both acquisitions totaled $747 and $830 for the years ended December 31, 2000 and 1999, respectively. INCOME TAXES The Company records taxes under an asset and liability approach, recognizing deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. Current taxes payable (receivable) of $(10,696) and $1,127 for the years ended December 31, 2000 and 1999, are included in other assets and liabilities. STATEMENT OF CASH FLOWS The Company has adopted the indirect method of reporting cash flows. The Consolidated Statement of Cash Flows has been restated for 1999 and 1998 for effects of discontinued operations resulting from the sale of Laureate Capital Corp. in 2000. Resource Bancshares Mortgage Group, Inc. 37 40 NOTE 3--SFAS No. 133: 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, as amended by SFAS No. 137 and 138, 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 (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (2) a hedge of the exposure to variable cash flows of a forecasted transaction or (3) 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). The Company implemented SFAS No. 133 on January 1, 2001 and recorded certain transition adjustments in the manner prescribed in SFAS No. 133. Under SFAS No. 133, rate lock commitments given to borrowers, correspondents or brokers are considered to be derivatives. The Derivative Implementation Group (DIG) of the FASB has not yet made a final determination as to how mortgage companies should value rate locks. Pending ultimate resolution of this issue by the FASB, the Company has tentatively implemented SFAS No. 133 assuming that the value of such derivatives is zero at rate lock date. Commencing January 1, 2001, the Company will record on its balance sheet any changes in value from the date of rate lock to the balance sheet date. The Company hedges the interest rate risk inherent in rate lock commitments with mandatory delivery commitments to sell loans and, to a lesser extent, with options and futures transactions. Mandatory delivery commitments, options and futures are considered to be derivatives under SFAS No. 133. Accordingly, commencing January 1, 2001, these instruments will be marked-to-market at the balance sheet date, with the result being reported as an asset or liability in the balance sheet. Certain of the Company's derivatives no longer needed for hedging rate locks are "paired-off" with an opposite position in the same derivative security. Under SFAS No. 133, both positions are derivatives that must be marked-to-market and the result carried as assets or liabilities in the balance sheet until settlement date of the respective trades. The Company hedges the future cash flows from sale of its inventory of closed loans held-for-sale with mandatory delivery commitments to sell loans. Mandatory delivery commitments are considered to be derivatives under SFAS No. 133 and are to be carried as an asset or liability on the balance sheet. Closed loans are not derivatives and are carried at the lower of cost or market ("LOCOM") on the Company's balance sheet. Under SFAS No. 133, to the extent that the Company establishes statistical correlation between changes in the value of the hedge with changes in the value of the closed loans held-for-sale, it can mark those derivatives to market and then record after tax impact of that in the "Other Comprehensive Income" (OCI) caption in the equity section of the balance sheet. If the LOCOM valuation of closed loans is a net loss, the Company must record a charge to earnings. Simultaneously, the Company may take out of OCI a like amount and record it in the income statement as an offset to the LOCOM adjustment. The Company hedges the interest rate risk (prepayment risk) inherent in its servicing rights assets with various instruments including interest rate floors, interest rate corridors, interest rate swaps, interest rate swaptions, CPC call options, PO swaps, treasury futures and agency futures contracts. Each of these instruments is considered to be a derivative under SFAS No. 133 and must be marked-to-market, with the value being reported as an asset or a liability in the balance sheet. Under SFAS No. 133 and the guidance provided by the DIG, the Company may elect, at its option, hedge accounting treatment for its servicing rights. If changes in the value of the servicing rights and the hedges meet certain correlation criteria, changes in the fair value of the servicing rights may be offset in the income statement by changes in the fair value of the hedging instrument. The Company may elect not to qualify for hedge accounting treatment. Under SFAS No. 133, the hedges must be marked-to-market through the income statement. In contrast, servicing rights are LOCOM assets under GAAP. When values go down, the impact is recorded through the income statement. When values go up, the increase may be recorded in earnings only to the extent of impairment reserves established by previous writedowns of servicing under SFAS No. 125. The election for hedge treatment must be made at the beginning of the accounting period. The Company did not elect hedge accounting treatment related to servicing rights as of January 1, 2001. Since the Company already carried the value of its servicing hedges on its balance sheet at December 31, 2000, there was no transition adjustment made at January 1, 2001. The Company enters into interest rate swaps to pay fixed rate and receive floating rate as a cash flow hedge of its variable rate debt used to finance its fixed rate lease receivables. Interest rate swaps are considered to be derivatives under SFAS No. 133 and are to be carried at market value as assets or liabilities in the balance sheet. Since this is a cash flow hedge under SFAS No. 133, the after tax impact is charged to or credited to OCI. Under the transition rules of SFAS No. 133, as of January 1, 2001, the Company will recognize the value of derivatives on its balance sheet. It will recognize in a separate line in its income statement in 2001 the cumulative effect of changing to SFAS No. 133. That cumulative effect will be the difference between retained earnings at December 31, 2000 and the amount of retained earnings that would have been reported at that date if SFAS No. 133 had been retroactively applied to all prior periods. The table below highlights the estimated impact of this transition adjustment.
Balance Sheet --------------------------------------------------------------- Cumulative Derivative Tax Derivative Tax Effect of ($ in thousands) Assets Asset Liabilities Liability OCI Change - ------------------------------------------------------------------------------------------------------------------------------------ Rate lock commitments ........................ $1,366 $ -- $ -- $509 $ -- $ 857 Derivatives hedging rate lock commitments .... 308 663 1,780 115 -- (924) Pairoffs of derivatives ...................... 55 70 187 21 -- (83) Derivatives hedging loans held for sale ...... -- 1,703 4,568 -- (2,865) -- Derivatives swapping variable rate debt to fixed rate debt ............................ -- 659 1,745 -- (1,086) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total impact ................................. $1,729 $3,095 $8,280 $645 $(3,951) $(150) ====================================================================================================================================
38 41 NOTE 4--RECEIVABLES: Receivables consist primarily of amounts due to the Company related to sales of mortgage servicing rights and mortgage-backed-securities and advances of delinquent principal, interest, tax and insurance payments related to loans serviced. Management does not anticipate losses on realization of the receivables. Receivables consist of the following:
December 31, ------------------------ 2000 1999 - --------------------------------------------------------------------------------------- Mortgage servicing rights sales, net of reserves ...... $ 19,083 $ 26,998 Servicing advances .................................... 6,601 7,613 Receivable from sale of mortgage-backed securities .... 25,866 -- Other ................................................. 11,548 5,608 - --------------------------------------------------------------------------------------- $ 63,098 $ 40,219 =======================================================================================
NOTE 5--LEASE RECEIVABLES: Lease receivables are summarized as follows:
December 31, ------------------------- 2000 1999 - ---------------------------------------------------------------------------------------- Lease receivables ..................................... $238,520 $194,422 Less--Unearned discount ............................... (42,961) (35,817) Less--Allowance for lease losses ...................... (3,782) (3,046) - ---------------------------------------------------------------------------------------- $191,777 $155,559 ========================================================================================
The components of the Company's investment in lease receivables are summarized as follows:
December 31, ------------------------- 2000 1999 - ---------------------------------------------------------------------------------------- Minimum lease payments due from lessees ............... $222,079 $180,164 Estimated residuals ................................... 7,191 6,102 Initial direct costs, net ............................. 9,250 8,156 - ---------------------------------------------------------------------------------------- $238,520 $194,422 ========================================================================================
At December 31, 2000, the maturities of minimum lease receivables, including lease residuals, are as follows: 2001........................................................ $ 83,130 2002........................................................ 67,644 2003........................................................ 45,310 2004........................................................ 24,741 2005........................................................ 8,378 2006 and thereafter......................................... 67 - ---------------------------------------------------------------------------------------- $229,270 ========================================================================================
Leases represent unconditional obligations of the lessees to pay all scheduled payments and require the lessees to assume all responsibility with respect to the equipment, including the obligation to pay all costs relating to its operation, maintenance, repair, sales and property taxes and insurance. At December 31, 2000 and 1999, the average lease size was approximately $24 and $26, respectively, and there were 28 leases and 31 leases, respectively, with a current lease receivable in excess of $250. At December 31, 2000 and 1999, respectively, the equipment covered by approximately 16% and 16% of the Company's net lease receivables were located in the state of California, approximately 7% and 9% were located in the state of Florida and approximately 7% and 8% were located in the state of Texas. At December 31, 2000 and 1999, respectively, approximately 16% and 20% of the Company's net lease receivables were collateralized by computer equipment and 5% and 7% were collateralized by titled equipment. The Company's leases are collateralized by the equipment subject to the leases. In most instances, the Company requires a security deposit equal to one monthly payment and personal guarantees. In addition, where considered necessary, other credit enhancements are obtained. At December 31, 2000, the Company held security deposits and sales and property taxes for the benefit of lessees of $6,980. NOTE 6--FAIR VALUE AND IMPAIRMENTS OF MORTGAGE SERVICING RIGHTS: For purposes of evaluating its mortgage servicing portfolio for impairment, the Company disaggregates its portfolio into two primary segments: available-for-sale and held-for-sale. The segment of the portfolio designated as available-for-sale is composed of servicing rights that were purchased in bulk transactions or that were retained out of production pursuant to individual portfolio retention decisions. The available-for-sale portfolio is disaggregated for purposes of measuring potential impairments according to defined risk tranches. The Company has defined its risk tranches based upon interest rate band and product type. With respect to each such risk tranche, the fair value thereof, which is based upon an internal analysis that considers current market conditions, prevailing interest, prepayment speed and default rates and other relevant factors, together with the fair value of hedges allocated thereto (which is based upon an independent third party estimate of value) is compared to amortized carrying values of the mortgage servicing rights for purposes of measuring potential impairment. The Company uses Constant Resource Bancshares Mortgage Group, Inc. 39 42 Maturity Treasury rate (CMT) and Constant Maturity Swap rate (CMS) floors and Callable Pass Through Certificates (CPC's) to protect itself against interest and prepayment risk on its available-for-sale portfolio. At December 31, 2000 and 1999 the following amounts related to the available-for-sale portfolio:
At December 31, ----------------------------------- Residential Mortgage Servicing 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Underlying unpaid principal balance ....................................... $ 5,480,930 $ 6,322,591 Fair value of related mortgage servicing rights ........................... $ 117,626 $ 146,476 Fair value/underlying unpaid principal balance ............................ 2.15% 2.31% Net carrying value of related mortgage servicing rights ................... $ 108,543 $ 137,419 Net carrying value/underlying unpaid principal balance .................... 1.98% 2.17% Weighted average note rate ................................................ 7.40% 7.35% Weighted average service fee .............................................. 0.42% 0.43% Net basis expressed as a multiple of weighted average service fee ......... 4.72x 5.05x ===========================================================================================================================
The segment of the portfolio designated as held-for-sale is composed of recently produced servicing rights that are scheduled for sale and have been allocated to specific forward servicing sales contracts. The held-for-sale portfolio is disaggregated for purposes of measuring possible impairments according to the specific forward sales contracts to which allocated, which the Company has determined to be the appropriate approach to disaggregation by predominant risk characteristic for this portfolio segment. For each such risk tranche, the fair value is based upon the allocated forward committed delivery price, which is compared to amortized carrying value for purposes of measuring potential impairment. At December 31, 2000 and 1999, the following amounts related to the held-for-sale portfolio:
At December 31, ----------------------------------- Residential Mortgage Servicing 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Underlying unpaid principal balance ....................................... $ 1,996,463 $ 1,499,803 Fair value of related mortgage servicing rights ........................... $ 52,128 $ 31,087 Fair value/underlying unpaid principal balance ............................ 2.61% 2.07% Net carrying value of related mortgage servicing rights ................... $ 52,223 $ 30,901 Net carrying value/underlying unpaid principal balance .................... 2.62% 2.06% Weighted average note rate ................................................ 8.17% 7.90% Weighted average service fee .............................................. 0.45% 0.49% Net basis expressed as a multiple of weighted average service fee ......... 5.82x 4.20x ===========================================================================================================================
NOTE 7--PREMISES AND EQUIPMENT: Premises and equipment are summarized as follows:
Estimated December 31, Useful ----------------------------- Lives 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Building .......................................................... 25 years $ 7,407 $ 7,657 Building improvements ............................................. 10-15 years 1,336 1,682 Furniture, fixtures and equipment ................................. 5-10 years 40,985 41,418 - --------------------------------------------------------------------------------------------------------------------------- 49,728 50,757 Less--Accumulated depreciation .................................... (22,054) (17,560) - --------------------------------------------------------------------------------------------------------------------------- 27,674 33,197 Land .............................................................. 3,097 3,097 - --------------------------------------------------------------------------------------------------------------------------- $ 30,771 $ 36,294 ===========================================================================================================================
Depreciation expense was $7,339 in 2000, $6,633 in 1999, $4,294 in 1998. NOTE 8--LEASE COMMITMENTS: The Company has entered into various non-cancelable operating lease agreements, primarily for office space. Certain of these leases contain renewal options and escalation clauses. At December 31, 2000, the annual minimum rental commitments for non-cancelable leases with remaining terms in excess of one year are as follows: 2001 ........................................................................................................... $ 5,838 2002 ........................................................................................................... 4,179 2003 ........................................................................................................... 3,486 2004 ........................................................................................................... 2,580 2005 ........................................................................................................... 1,224 2006 and thereafter ............................................................................................ 909 - --------------------------------------------------------------------------------------------------------------------------------- $ 18,216 =================================================================================================================================
40 43 Minimum rental commitments have not been reduced by minimum sublease rentals of $1,314 due in the future under non-cancelable subleases. Rent expense for operating leases, net of sublease rental income of $169 for 2000, $387 for 1999 and $387 for 1998, was $3,249 in 2000, $4,304 in 1999 and $3,106 in 1998. NOTE 9--SHORT-TERM AND LONG-TERM BORROWINGS: The Company's primary cash-flow requirement involves the funding of loan production, which is met primarily through external borrowings. In 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 $150 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, (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. At December 31, 2000 and 1999, the total amounts outstanding under this facility and its predecessor were $256,420 and $329,600, respectively. 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. At December 31, 2000 and 1999, the total amounts outstanding under these facilities and their predecessors were $265,679 and $108,200, respectively. The Restricted Group was in compliance with the debt covenants in place at December 31, 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. Meritage, RBMG and a bank are parties to a master repurchase agreement, pursuant to which Meritage and RBMG are 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 July 2001. RBMG and Prime Funding Company entered into a $50 million commercial paper conduit facility in November 2000. The facility expires in November 2001. At December 31, 2000 there was no debt outstanding under this facility. 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 total amounts outstanding under this facility and its predecessor at December 31, 2000 and 1999 were $128,287 and $0, respectively. 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 total amounts outstanding under this facility at December 31, 2000 and 1999 were $6,259 and $6,364, respectively. The Company has entered into a $10 million unsecured line of credit agreement that expires in July 2001. 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 Republic Leasing to maintain a ratio of total liabilities to net worth of no more than 10.0 to 1.0. At December 31, 2000 and 1999, the total amounts outstanding under this facility were $161,250 and $125,652, respectively. NOTE 10--CAPITAL TRANSACTIONS: The Company began paying regular quarterly cash dividends of $0.03 per share in the third quarter of 1996. This quarterly cash dividend was increased to $0.04 per share in the fourth quarter of 1997, to $0.05 per share in the first quarter of 1998, to $0.07 per share in the second quarter of 1998, to $0.10 per share in the fourth quarter of 1998 and finally to $0.11 per share in the second quarter of 1999. The Company has continued to pay a quarterly cash dividend of $0.11 per share through the fourth quarter of 2000. During 1995, the Company established a dividend reinvestment plan (DRIP). The DRIP offers stockholders a method of reinvesting cash dividends in the Company common stock at a five percent discount from market prices. The Company reserves the right to modify the pricing terms and any other provisions of the DRIP at any time. The DRIP agent purchases either original issue or treasury shares from the Company or the DRIP agent purchases shares on the open market. The Board of Directors has authorized the issuance of 4,099,985 shares under the DRIP. Through December 31, 2000, there were 1,947,073 shares issued under the DRIP. Resource Bancshares Mortgage Group, Inc. 41 44 The Company's Board of Directors has authorized the repurchase of up to $77,000 of the Company's common stock in either open market transactions or in private or block trades as of December 31, 2000. Through December 31, 2000, $73,472 of the Company's common stock has been purchased. At December 31, 2000, there were 6,949,711 shares held in the Company's treasury account at an average cost of $7.20 per share. NOTE 11--INCOME TAXES: Income tax expense (benefit) consists of the following:
For the Year Ended December 31, ------------------------------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Current: Federal ......................................................... $ (10,045) $ 1,871 $ (3,482) State ........................................................... (651) (744) 245 - ------------------------------------------------------------------------------------------------------------------------------ Total current ..................................................... (10,696) 1,127 (3,237) - ------------------------------------------------------------------------------------------------------------------------------ Deferred: Federal ......................................................... (11,259) 821 30,202 State ........................................................... (2,238) 764 967 - ------------------------------------------------------------------------------------------------------------------------------ Total deferred .................................................... (13,497) 1,585 31,169 - ------------------------------------------------------------------------------------------------------------------------------ Total tax (benefit) expense ....................................... $ (24,193) $ 2,712 $ 27,932 ==============================================================================================================================
Income tax (benefit) expense is included in the financial statements as follows:
For the Year Ended December 31, ------------------------------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Continuing operations ............................................. $ (24,100) $ 2,307 $ 26,980 Discontinued operations ........................................... (93) 405 952 - ------------------------------------------------------------------------------------------------------------------------------ Total tax (benefit) expense ....................................... $ (24,193) $ 2,712 $ 27,932 ==============================================================================================================================
Current income tax expense (benefit) represents the approximate amount payable (receivable) for each of the respective years. The above current and deferred balances reflect certain reclassifications made as a result of prior year returns. During 2000, 1999 and 1998, the Company qualified for state tax credits of $0, $275 and $300, respectively, reducing current state tax expense that otherwise would have been payable for each year. The effective tax rate varied from the statutory federal tax rate of 35% for 2000, 1999 and 1998 due to the following:
For the Year Ended December 31, -------------------------------------------------------------------------- 2000 1999 1998 --------------------------------------------------------------------------- % OF % of % of PRETAX Pretax Pretax AMOUNT INCOME Amount Income Amount Income - ----------------------------------------------------------------------------------------------------------------------------- Tax expense at statutory rate ............... $ (23,272) 35.0% $ 3,022 35.0% $ 26,811 35.0% State tax, net of federal benefit ........... (1,874) 2.8% 64 0.8% 1,571 2.1% Other, net .................................. 953 (1.4%) (374) (4.3%) (450) (0.6%) - ---------------------------------------------------------------------------------------------------------------------------- $ (24,193) 36.4% $ 2,712 31.5% $ 27,932 36.5% ============================================================================================================================
Deferred tax (assets) liabilities are summarized as follows:
December 31, -------------------------------- 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Mark-to-market ............................................................ $ (260) $ (1,755) Deferred compensation ..................................................... (2,764) (3,422) Branch closing expenses ................................................... (1,213) -- Foreclosure and repurchase reserves ....................................... (2,432) (3,522) NOL carryforwards ......................................................... (17,050) (668) Other, net ................................................................ (279) (19) - ------------------------------------------------------------------------------------------------------------------------ (23,998) (9,386) - ------------------------------------------------------------------------------------------------------------------------ Mortgage servicing rights ................................................. 52,757 42,632 Depreciation .............................................................. 7,146 6,756 Securitizations ........................................................... -- 8,970 Deferred tax income ....................................................... -- 7,094 Other, net ................................................................ 55 485 - ------------------------------------------------------------------------------------------------------------------------ 59,958 65,937 - ------------------------------------------------------------------------------------------------------------------------ Net deferred tax liability ................................................ $ 35,960 $ 56,551 ========================================================================================================================
42 45 There are no valuation allowances provided for any of the Company's deferred tax assets based on management's belief that it is more likely than not that deferred tax assets will be realized. During 2000 and 1999, non-qualified stock options were exercised generating a tax benefit of $10 and $0, respectively. This benefit is reflected in additional paid-in capital. A tax net operating loss of approximately $35,000 is available for carryforward to future years. This carryforward expires in 2020. NOTE 12--STOCK OPTIONS AND RESTRICTED STOCK PLAN: Contemporaneous with the Company's initial public offering, certain executives of the Company were granted options to purchase 901,310 shares of common stock of the Company at the initial offering price of $5.83 per share. The options have a term of ten years and expire in June 2003. At December 31, 2000 550,210 of the outstanding executive options were exercisable. No additional options have been granted since inception. During 2000 and 1999, no options were exercised. In addition, certain executive officers, in connection with their recruitment, became entitled to receive restricted stock as part of their compensation. Costs associated with these grants are included as compensation expense of the Company in the accompanying consolidated financial statements. In connection therewith, the Company issued restricted shares at the issuance prices summarized as follows:
Restricted Issuance Price Issuance Date Shares Issued Per Share - ----------------------------------------------------------------------------------------------------------------------------- January 21, 1994 .......................................................... 13,336 $ 6.93 January 26, 1995 .......................................................... 59,136 6.87 January 27, 1996 .......................................................... 18,438 13.87 February 1, 1997 .......................................................... 24,704 13.27 January 30, 1998 .......................................................... 20,048 16.35 February 1, 1999 .......................................................... 93,520 15.01 ===========================================================================================================================
On October 21, 1993, the Company adopted a phantom stock plan that provided for the awarding of up to 450,655 deferred compensation units to officers and certain key employees. The plan specified a five-year vesting schedule. In addition, from time to time the Board of Directors approved participation in a special phantom stock plan for certain officers of the Company. During 1996, the Company terminated all of its phantom stock plans and canceled all outstanding grants thereunder. In connection therewith, each former participant in the phantom stock plan was awarded an option under a new non-qualified stock option plan for each unit canceled under the phantom stock plans. Other terms of the awarded options were substantially similar to the underlying canceled units. The number of initially authorized units under the non-qualified stock option plan was 223,817. Since forfeited units under the plan do not become available for reissuance, no units are available for future grants under this plan. Activity in the non-qualified stock option plan is summarized below:
Units Units Units Units Non-qualified Stock Option Plan: Granted Exercised Forfeited Outstanding - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 .................................... 223,817 -- -- 223,817 - --1998 activity ................................................. -- (60,815) (38,801) (99,616) - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 .................................... 223,817 (60,815) (38,801) 124,201 - --1999 activity ................................................. -- (545) (135) (680) - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 .................................... 223,817 (61,360) (38,936) 123,521 - --2000 activity ................................................. -- -- (35,036) (35,036) - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 .................................... 223,817 (61,360) (73,972) 88,485 ===============================================================================================================================
Of the 88,485 units outstanding at December 31, 2000 under the non-qualified stock option plan, the following are exercise prices and percents vested:
Units Exercise Percent Expiration Date Outstanding Price Vested - ------------------------------------------------------------------------------------------------------------------------------- January 21, 2004 .................................................. 27,189 $ 6.93 100% January 26, 2005 .................................................. 20,438 6.85 100% January 26, 2005 .................................................. 23,162 6.87 100% July 1, 2005 ...................................................... 17,696 10.64 100% ==============================================================================================================================
During 1995, the Company established an Omnibus Employee Stock Award Plan (the Omnibus Plan). The Omnibus Plan was amended and restated in its entirety effective October 31, 1997 primarily to increase the number of authorized shares under the plan. The purpose of this plan is to provide key employees who are largely responsible for the Company's growth and continued success with the opportunity to have or increase their proprietary interest in the Company through the granting of any one, or any combination, of options, stock appreciation rights, restricted stock and unrestricted stock. This plan is authorized to issue up to 1,510,635 units. All options vest 20% on the date of grant and 20% each year thereafter on the anniversary date of the grant and expire 10 years after the grant date. Resource Bancshares Mortgage Group, Inc. 43 46 Activity in the Omnibus Plan is summarized below:
Units Units Units Units Omnibus Plan: Granted Exercised Forfeited Outstanding - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 .................................... 593,293 -- -- 593,293 - --1998 activity ................................................. 430,500 (32,700) (10,150) 387,650 - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 .................................... 1,023,793 (32,700) (10,150) 980,943 - --1999 activity ................................................. 25,000 (55,875) -- (30,875) - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 .................................... 1,048,793 (88,575) (10,150) 950,068 - --2000 activity ................................................. 828,549 (22,316) (829,894) (23,661) - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 .................................... 1,877,342 (110,891) (840,044) 926,407 ================================================================================================================================
Of the 926,407 units outstanding at December 31, 2000 under the Omnibus Employee Stock Award Plan, the following are exercise prices and percents vested:
Units Exercise Percent Expiration Date Outstanding Price Vested - -------------------------------------------------------------------------------------------------------------------------------- January 26, 2006 .................................................. 16,853 $ 13.87 100% December 30, 2006 ................................................. 5,250 13.85 100% August 26, 2007 ................................................... 6,300 16.27 80% September 16, 2007 ................................................ 6,300 15.94 80% January 29, 2007 .................................................. 94,500 13.20 80% April 18, 2007 .................................................... 15,750 14.53 80% April 14, 2008 .................................................... 49,400 16.44 60% February 19, 2009 ................................................. 5,000 14.13 40% January 3, 2010 ................................................... 5,000 4.56 20% January 10, 2010 .................................................. 100,000 4.50 20% Various ........................................................... 155,024 4.63 Various May 15, 2010 ...................................................... 3,000 4.81 20% June 1, 2010 ...................................................... 321,030 4.75 20% July 10, 2010 ..................................................... 20,000 4.13 20% July 27, 2010 ..................................................... 40,000 4.00 20% September 1, 2010 ................................................. 8,000 5.19 20% September 19, 2010 ................................................ 61,000 5.69 20% October 25, 2010 .................................................. 12,500 5.88 20% November 15, 2010 ................................................. 1,500 6.06 20% ==============================================================================================================================
During 1995, the Company established a Formula Stock Option Plan. The purpose of this plan is to provide annually (on each September 1) to the non-employee directors of the Company options to purchase 10,000 shares of the common stock of the Company. All options vest 20% on the date of grant and 20% each year thereafter on the anniversary date of the grant and expire ten years after the grant date. The plan is authorized to issue up to 420,000 shares of common stock. Options granted include:
Grant Date Units Granted Exercise Price - ------------------------------------------------------------------------------------------------------------------------------- September 1, 1995 ......................................................... 56,175 $ 14.16 September 1, 1996 ......................................................... 56,175 11.79 September 1, 1997 ......................................................... 52,500 15.91 September 1, 1998 ......................................................... 60,000 15.75 September 1, 1999 ......................................................... 60,000 6.00 ===========================================================================================================================
Through 1999 the Company's option plans were considered fixed stock award plans for accounting purposes. Accordingly, total compensation expense for these fixed plans is measured as the difference between the market value on the date of the grant over the exercise price which fixed total expense is then recognized over the vesting period. Compensation expense related to fixed stock awards (exclusive of the restricted stock plan which is expensed as incurred) was $(14), $351 and $(102) for 2000, 1999 and 1998, respectively. As a result of the decrease in market price for the Company's stock during 1999 and 2000, many outstanding options were priced far "out of the money", providing little incentive to recipients. Accordingly, during the second quarter of 2000, the Company repriced to current market price and simultaneously reduced the number of options of certain officers. Accounting principles require that once an option has been repriced, it must be accounted for as a variable option until it is exercised, forfeited or expires unexercised. For vesting purposes the original grant date will be used for these options. For variable options, compensation is adjusted for subsequent increases in intrinsic value (i.e., measured by changes in the quoted market price of the stock) in each reporting period after the repricing date. This additional compensation is recognized over the remaining vesting period (from repricing date to vesting date). If the market price subsequently declines, previously recognized compensation would be reversed. After awards vest, adjustments to additional compensation for changes in intrinsic value are recognized as compensation expense immediately. The compensation expense recognized during 2000 related to variable options was $286. At December 31, 2000, 130,024 of the Company's outstanding options were accounted for as variable options. On February 22, 2000, the Company made special awards of 30,768 options at an exercise price of $4.0625 to two members of the Board of Directors under the MSC Stock Option Agreement. Such options are exercisable, in whole or in part, at any time and from time 44 47 to time during the option period, but not thereafter. The option period begins on February 22, 2000 and expires ten years from such date. At December 31, 2000 none of these options had been exercised. The Company accounts for options using APB No. 25, "Accounting for Stock Issued to Employees." For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair value of stock options granted in 2000, 1999 and 1998 was estimated at the date of grant using a Black-Scholes option-pricing model. The Black-Scholes option-pricing model was originally developed for use in estimating the fair value of traded options which have different characteristics than the Company's employee stock options. The model is also sensitive to changes in the subjective assumptions which can materially affect fair value estimates. As a result, management believes that the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options. For purposes of SFAS No. 123, each award was separately valued using the 10 year CMT rate on the date of grant as the risk-free interest rate. The expected life of each grant was assumed to be equal to the term to expiration as of the grant date. The expected dividend yield was established based upon the dividend policies of the Company as of the date of award. Finally, for purposes of assigning a volatility factor, the historical 100 day volatility factor was reviewed for selected points in time over the past and a range of 36% to 65% was assigned to the 2000, 1999 and 1998 awards for purposes of the SFAS No. 123 valuation. The following is a summary of the significant assumptions used in the SFAS No. 123 valuation and the average fair value of the options granted:
2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Average risk-free interest rate ................................... 6.23% 5.75% 5.57% Average expected life of grants ................................... 10 years 10 years 10 years Average expected dividend yield ................................... $ 0.44 $ 0.43 $ 0.21 Average volatility factor ......................................... 76.20% 68.42% 49.30% Average fair value of options granted ............................. $ 1.95 $ 4.39 $ 9.93 ==============================================================================================================================
For purposes of the required pro forma disclosures, SFAS No. 123 permits straight-line amortization of the estimated fair value of the options over the vesting period. Had compensation cost for the Company's 2000, 1999 and 1998 stock-based option awards been determined consistent with the requirements of SFAS No. 123, net income and earnings per share would have been reported as follows for 2000, 1999 and 1998.
For the Year Ended December 31, ------------------------------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Net income as reported ............................................ $ (42,298) $ 5,922 $ 48,671 After-tax adjustment for SFAS No. 123 ............................. (1,631) (1,485) (1,968) - ------------------------------------------------------------------------------------------------------------------------------ Pro forma net income as adjusted .................................. $ (43,929) $ 4,437 $ 46,703 ============================================================================================================================== Pro forma net income per common share--basic ...................... $ (2.48) $ 0.22 $ 2.02 Pro forma net income per common share--diluted .................... $ (2.48) $ 0.21 $ 1.99 ==============================================================================================================================
Due to the inclusion of only 2000, 1999 and 1998 option grants, the effects of applying SFAS No. 123 in 2000, 1999 and 1998 may not be representative of the pro forma impact in future years. NOTE 13--COMMITMENTS AND CONTINGENCIES: The Company was servicing and subservicing 81,253, 87,810 and 125,686, residential loans owned by others, with unpaid balances aggregating approximately $8,690,000, $9,090,000 and $13,600,000, at December 31, 2000, 1999 and 1998, respectively. Related escrow funds totaled approximately $42,486, $44,714 and $80,300 as of December 31, 2000, 1999 and 1998, respectively. Loans serviced for others and the related escrow funds are not included in the accompanying consolidated balance sheet. The Company has issued mortgage-backed securities under programs sponsored by Ginnie Mae, Freddie Mac and Fannie Mae. In connection with servicing mortgage-backed securities guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae, the Company advances certain principal and interest payments to security holders prior to their collection from specific mortgagors. Additionally, the Company must remit certain payments of property taxes and insurance premiums in advance of collecting them from specific mortgagors and make certain payments of attorney's fees and other costs related to loans in foreclosure. These amounts are included in servicing advances under the caption receivables in the accompanying consolidated financial statements. The Company typically sells the residential mortgage servicing rights associated with its mortgage production into forward sales contracts. Additionally, from time to time, the Company will sell residential mortgage servicing rights from its available-for-sale portfolio. In 2000, approximately 94% of its total sales under these forward sales contracts were to two major customers. In 1999, approximately 79% of its total sales under these forward sales contracts were to four major customers. In the ordinary course of business, the Company is exposed to liability under representations and warranties made to purchasers and insurers of mortgage loans and the purchasers of servicing rights. Under certain circumstances, the Company may be required to repurchase mortgage loans or indemnify the purchasers of loans or servicing rights for losses if there has been a breach of representations or warranties. Repurchased loans are carried at the lower of cost or estimated recoverable value. At December 31, 2000, $6,474 of these repurchased loans are included in mortgage loans held-for-sale net of a loss allowance of $836. At December 31, 1999, $17,255 of these repurchased loans are included in mortgage loans held-for-sale net of a loss allowance of $1,798. At December 31, 1998, $33,285 of these repurchased loans are included in mortgage loans held-for-sale net of a loss allowance of $2,330. Provision for losses related to the repurchases of loans for the years ended December 31, 2000, 1999 and 1998 totaled $2,102, $5,795 and $9,783, respectively. The total number of loans repurchased for the year ended December 31, 2000, 1999 and 1998 was 161, 356 and 479, respectively. During 2000, 1999 and 1998 the Company repurchased approximately $15,687, $34,865 and $46,586 of unpaid principal balances, respectively. In the ordinary course of its business, the Company is from time to time subject to litigation. The Company is not a party to any material legal proceedings. Resource Bancshares Mortgage Group, Inc. 45 48 NOTE 14--UNUSUAL ITEMS: The Company continued 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 million during 2000. In connection with the planned reorganization, the Company has made certain changes in its senior management team and has closed certain regional processing offices. Also, during 2000, the Company (1) marked down its residual interests in prior subprime securitizations as a result of changes in valuation assumptions due to changing market conditions; (2) marked down its residual interests in prior securitizations, and the associated residual hedges (including hedge amortization expense) as a result of signing a definitive agreement to sell all of the Company's residuals; (3) disposed of its commercial mortgage operation, Laureate Capital Corp.; (4) restructured and closed certain regional processing offices; (5) amended its defined benefit pension plan to freeze benefits under the plan; (6) changed the benefits available to employees under its 401(k) plan; (7) realized a gain on sale of a branch facility; (8) contributed to a fund that will benefit qualified charitable organizations; (9) incurred expenses for consultants who are assisting management in re-engineering work processes; and (10) redesignated a lease of a former operations center as a nonoperating lease. The net impact of these unusual items in 2000 is summarized below by financial statement component and operating division:
Agency-Eligible --------------------- Commercial Production Servicing Subprime Mortgage Leasing Other Total - --------------------------------------------------------------------------------------------------------------------------------- Mark-to-market on residual interest in subprime securitizations .................... $ -- $ -- $ 39,338 $ -- $ -- $ -- $ 39,338 Residual hedge mark-to-market and amortization ............................ -- -- 1,077 -- -- -- 1,077 Salary and employee benefits .................. 678 (45) 1,459 -- (22) 234 2,304 Occupancy expense ............................. 171 -- -- -- -- -- 171 General and administrative expenses ........... 1,027 -- 796 -- -- 1,040 2,863 Other income .................................. -- -- -- -- -- (392) (392) - --------------------------------------------------------------------------------------------------------------------------------- Net pre-tax effect on continuing operations.... 1,876 (45) 42,670 -- (22) 882 45,361 Estimated allocable income tax ................ (700) 17 (15,773) -- 8 (330) (16,778) - --------------------------------------------------------------------------------------------------------------------------------- Net after-tax impact on continuing operations.. 1,176 (28) 26,897 -- (14) 552 28,583 Loss on sale of operating assets of Laureate Capital Corp. ...................... -- -- -- 1,448 -- -- 1,448 Operating loss of Laureate Capital Corp. ...... -- -- -- 660 -- -- 660 - --------------------------------------------------------------------------------------------------------------------------------- Net after-tax impact .......................... $ 1,176 $ (28) $ 26,897 $ 2,108 $ (14) $ 552 $ 30,691 =================================================================================================================================
During the fourth quarter of 1999, the Company incurred a $3.8 million ($2.4 million after-tax) charge related to a workforce reduction. At December 31, 1999 approximately $2.0 million remained in the accrual related to these workforce reduction charges. For the period ending December 31, 1999, the workforce reduction is summarized below by financial statement component and operating division:
Agency-Eligible ----------------------- ($ in thousands) Production Servicing Subprime Other Consolidate - ----------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits ............................. $ 820 $ 31 $ 166 $ 2 $ 1,019 Occupancy expense ........................................ 1,780 -- 186 190 2,156 General and administrative expenses ...................... 448 -- 164 2 614 - ---------------------------------------------------------------------------------------------------------------------------- Net pre-tax impact ....................................... 3,048 31 516 194 3,789 Estimated allocable income tax expense ................... (1,136) (12) (192) (72) (1,412) - ---------------------------------------------------------------------------------------------------------------------------- Net after-tax impact ..................................... $ 1,912 $ 19 $ 324 $ 122 $ 2,377 ============================================================================================================================
During the second quarter of 1998, the Company sold its retail production franchise and recognized a $1,490 pre-tax ($917 after-tax) gain on the sale. This gain is included in other income. NOTE 15--EMPLOYEE BENEFITS: On July 1, 1993, the Company established a 401(k) Retirement Savings Plan which is available to all regular, full-time active employees with six months continuous service. The plan allows employees to contribute up to 15% of their gross earnings on a before-tax basis annually, subject to the maximum established by law. Employees become eligible to participate in the plan as of January 1 or July 1, following the completion of six months continuous service. The Company contributes to the plan on a matching basis in an amount determined annually by the Board of Directors. In 1999 and through May 14, 2000, the Company's match percentage was 100% of the employee's contribution up to the first 3% of the employee's gross earnings and a 50% match on the second 3% of the employee's gross earnings and the employee vested in the Company's matching contribution at a rate of 25% per year. Effective May 15, 2000, the Plan was amended to (1) establish an additional employer contribution equal to 2% of the participant's compensation earned after January 1, 2000, (2) delete the employment on the last day of the Plan year and 1,000 hours of service requirements for employer contributions, (3) permit the Company to make quarterly employer contributions, and (4) change the vesting requirements for employer profit sharing contributions from five year cliff vesting to five year graded vesting. The Company recorded $1,843, $1,136 and $980 of matching contributions as compensation expense during 2000, 1999 and 1998, respectively. 46 49 On January 1, 1994, the Company established a defined benefit pension plan covering substantially all employees. As of May 31, 2000, the Company amended its defined benefit pension plan to freeze benefits under the plan. The impact of the curtailment of pension plan benefits and the change of 401(k) benefits was to reduce pension expense for 2000 by $950. Effective January 1, 1995, the Company established a non-qualified unfunded Pension Restoration Plan (Restoration Plan). The purpose of the Restoration Plan is to provide certain retirement benefits for eligible employees. Under the Restoration Plan, retirement benefits are based upon years of service and the employee's level of compensation during the last five years prior to retirement. Effective January 1, 1998, the Company established a non-qualified unfunded Supplemental Executive Retirement Plan (SERP). The purpose of the SERP is to provide certain retirement benefits for eligible employees. Under the SERP, retirement benefits are based upon the employee's level of compensation during the high five years of the last 10 years prior to retirement. The combined pension expense for all three defined benefit plans included the following:
For the Year Ended December 31, --------------------------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Service cost ...................................................... $ 881 $ 1,900 $ 1,417 Interest cost ..................................................... 784 786 563 Expected return on assets ......................................... (313) (204) (97) Amortization of prior service cost ................................ 249 316 316 Amortization of actuarial loss .................................... (18) 79 17 Curtailment credit ................................................ (950) (220) -- - ------------------------------------------------------------------------------------------------------------------------------ $ 633 $ 2,657 $ 2,216 ==============================================================================================================================
Change in the combined projected benefit obligation under the plans at December 31, 2000 and 1999 is as follows:
December 31, -------------------------------- 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Net benefit obligation at beginning of year ............................... $ 10,220 $ 8,826 Service cost .............................................................. 881 1,900 Interest cost ............................................................. 784 786 Actuarial (gain) loss ..................................................... (32) (994) Curtailments .............................................................. (2,043) (258) Benefits paid ............................................................. (156) (40) - ------------------------------------------------------------------------------------------------------------------------ Net benefit obligation at end of year ..................................... $ 9,654 $ 10,220 ========================================================================================================================
The combined change in the plans' assets for the years ended December 31, 2000 and 1999 were:
December 31, -------------------------------- 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Fair value of plan assets at beginning of year ............................ $ 3,443 $ 1,862 Actual return on plan assets .............................................. (324) 272 Employer contributions .................................................... 703 1,349 Benefits paid ............................................................. (156) (40) - ------------------------------------------------------------------------------------------------------------------------ Fair value of plan assets at end of year .................................. $ 3,666 $ 3,443 - ------------------------------------------------------------------------------------------------------------------------ Funded status at end of year .............................................. $ (5,997) $ (6,777) Unrecognized net actuarial (gain) loss .................................... 441 (190) Unrecognized prior service cost ........................................... 2,110 3,451 - ------------------------------------------------------------------------------------------------------------------------ Net amount recognized at end of year ...................................... $ (3,446) $ (3,516) ========================================================================================================================
Amounts recognized in the statement of financial position for the combined plans consist of:
December 31, -------------------------------- 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Prepaid benefit cost ...................................................... $ 188 $ -- Accrued benefit cost ...................................................... (3,634) (5,630) Additional minimum liability .............................................. (1,791) -- Intangible asset .......................................................... 1,791 2,114 - ------------------------------------------------------------------------------------------------------------------------ Net amount recognized at end of year ...................................... $ (3,446) $ (3,516) ========================================================================================================================
Weighted average assumptions used in accounting for the plans as of fiscal year-end were:
2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Discount rate ..................................................... 7.75% 8.00% 6.75% Expected return on plan assets .................................... 8.00% 8.00% 8.00% Rates of compensation increase--SERP .............................. 3.30% 3.30% 3.30% Rates of compensation increase all other plans .................... 4.00% 4.00% 4.00% ==============================================================================================================================
Resource Bancshares Mortgage Group, Inc. 47 50 On January 1, 1995, the Company established the Stock Investment Plan (the Stock Plan) covering substantially all employees. Under the Stock Plan, eligible employees may make contributions, through payroll deductions, to acquire common stock of the Company. The purchase price of such stock will be equal to 85% of the fair market value on the purchase date with the Company subsidizing the remaining 15% of the cost. The Company is responsible for custodian charges (including brokerage expenses incurred in connection with the purchase of shares) and all costs of maintaining and executing transfers. This plan will continue until 725,529 shares of stock have been purchased by employees. The Company has subsidized approximately $46, $113 and $121 relating to the noncompensatory Stock Plan discount for 2000, 1999 and 1998, respectively. Through December 31, 2000, there were 370,979 shares issued under the Stock Plan. On January 1, 1995, the Company established the Employee Stock Ownership Plan (ESOP) covering substantially all employees. Contributions to the ESOP, which are at the discretion of and determined annually by the Board of Directors, are not to exceed the maximum amount deductible under the applicable sections of the Internal Revenue Code and are funded annually. However, such contributions must be adequate to meet the required principal and interest payments on the underlying loans discussed below. During 2000 and 1999, the ESOP borrowed $-0- and $3,000, respectively, from the Company to purchase shares of the Company's common stock and pledged those shares to secure loans outstanding. The principal amount of the 1999 loan is repayable in annual installments of $500 commencing in March 2000. In accordance with other loan agreements, the ESOP repaid $1,603 and $1,400 to the Company in 2000 and 1999, respectively. An additional $236 and $221 was paid on these loans in 2000 and 1999, respectively, from the cash dividends paid on the unallocated ESOP shares. For the years ended December 31, 2000, 1999 and 1998, 180,432, 135,355 and 94,593 shares, respectively, were released. Compensation expense related to the ESOP was $1,083, $1,244 and $1,623 for the years ended December 31, 2000, 1999 and 1998, respectively. At December 31, 2000, the fair market value of the unallocated shares of stock held under the ESOP Plan was $2,516. NOTE 16 -- NET INCOME (LOSS) PER COMMON SHARE: The following is a reconciliation of basic earnings per share to diluted earnings per share as calculated under SFAS No. 128 for the years ended December 31, 2000, 1999 and 1998, respectively: CONTINUING OPERATIONS:
For the Year Ended December 31, ----------------------------------------------- ($ in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Net income (loss) from continuing operations ......................... $ (40,190) $ 5,504 $ 47,519 - -------------------------------------------------------------------------------------------------------------------------- Average common shares outstanding .................................... 17,727,445 20,643,166 23,122,835 - -------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share--basic ..................................... $ (2.27) $ 0.27 $ 2.06 - -------------------------------------------------------------------------------------------------------------------------- Dilutive stock options ............................................... -- 156,336 378,273 Average common and common equivalent shares outstanding .............. 17,727,445 20,799,502 23,501,108 - -------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share--diluted ................................... $ (2.27) $ 0.26 $ 2.02 ==========================================================================================================================
DISCONTINUED OPERATIONS:
For the Year Ended December 31, ----------------------------------------------- ($ in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Net income (loss) from discontinued operations ....................... $ (2,108) $ 418 $ 1,152 - -------------------------------------------------------------------------------------------------------------------------- Average common shares outstanding .................................... 17,727,445 20,643,166 23,122,835 - -------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share--basic ..................................... $ (0.12) $ 0.02 $ 0.04 - -------------------------------------------------------------------------------------------------------------------------- Dilutive stock options ............................................... -- 156,336 378,273 Average common and common equivalent shares outstanding .............. 17,727,445 20,799,502 23,501,108 - -------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share--diluted ................................... $ (0.12) $ 0.02 $ 0.05 ==========================================================================================================================
On September 29, 2000, the Company closed on an agreement to sell substantially all of the assets of Laureate to BB&T Corporation of Winston-Salem, N.C. Accordingly, the Company recorded a $1.4 million after-tax charge during the period primarily related to the write-off of intangible assets of Laureate. COMBINED:
For the Year Ended December 31, ----------------------------------------------- ($ in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Net income (loss) from operations .................................... $ (42,298) $ 5,922 $ 48,671 - -------------------------------------------------------------------------------------------------------------------------- Average common shares outstanding .................................... 17,727,445 20,643,166 23,122,835 - -------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share--basic ..................................... $ (2.39) $ 0.29 $ 2.10 - -------------------------------------------------------------------------------------------------------------------------- Dilutive stock options ............................................... -- 156,336 378,273 Average common and common equivalent shares outstanding .............. 17,727,445 20,799,502 23,501,108 - -------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share--diluted ................................... $ (2.39) $ 0.28 $ 2.07 ==========================================================================================================================
48 51 NOTE 17--FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: The Company is a party to various derivative financial instruments and financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to risks related to fluctuating interest rates. These financial instruments include mortgage purchase commitments, mandatory delivery commitments, put and call option contracts, swaps, futures contracts and interest rate floor contracts. The Company uses these financial instruments exclusively for purposes of managing its resale pricing and interest rate risks. The Company's mortgage loans held-for-sale are acquired or originated through a network of correspondents and wholesale brokers. In connection therewith, the Company routinely enters into optional mortgage purchase commitments to acquire or originate specific in-process mortgage loans when and if closed by the counterparty, at the option of the mortgagor. Mortgage purchase commitments obligate the Company to acquire mortgage loans on a delayed delivery basis, which may extend for a period of 60 days, at a price which is fixed as of the date of the contract. Accordingly, the Company is subject to the risk that the market value of its on-balance sheet mortgage loans held-for-sale and the mortgage loans it is obligated to purchase under its mortgage purchase commitments may change significantly prior to resale. In order to limit its resale price exposure for agency-eligible mortgage loans, the Company enters into mandatory delivery commitments which are contracts for delayed delivery of mortgage loans to third parties. Mandatory delivery commitments obligate the Company to sell agency-eligible mortgage loans on a delayed delivery basis at a price which is fixed as of the date of the contract. Since mandatory delivery commitments enable the Company to fix its resale prices for both on-balance sheet mortgage loans held-for-sale (for which a fixed price has already been paid) and for anticipated loan closures subject to mortgage purchase commitments (which fix the delayed purchase price for the resultant mortgage loans), these instruments can effectively limit the Company's resale price exposures. The percentages of anticipated agency-eligible loan closures under mortgage purchase commitments that are covered by mandatory delivery commitments not allocated to on-balance sheet mortgages held-for-sale are monitored continuously. The Company's resultant expected exposure to resale pricing risk is continuously adjusted to consider changing expectations regarding anticipated loan closure percentages and other market conditions. Generally, the Company buys put and call option contracts on U.S. Government Securities to effect modest adjustments of its overall exposure to resale pricing changes. Purchased call option contracts enable the Company, at its option, to acquire an underlying financial security from a third party at a specified price for a fixed period of time. Purchased put option contracts enable the Company, at its option, to sell an underlying financial security to a third-party at a specified price and for a fixed period of time. Since these financial instruments essentially enable the Company to fix the purchase or sale price on financial instruments whose changes in value have historically correlated closely with changes in value of mortgage loans, these instruments can be used effectively to adjust the Company's overall exposure to resale pricing risks. In addition, these instruments have the advantages of being available in smaller denominations than are typical of the Company's mandatory delivery commitments and of being traded in a highly liquid and efficient secondary market. Periodically, the Company, in addition to mandatory delivery commitments, also buys or sells futures contracts as part of its hedging activities for rate locked and closed subprime mortgage loans. Generally, futures positions are outstanding for short periods of time and are used to hedge against price movements of another financial instrument while execution of that instrument is bid among brokers. Futures contracts also may be similarly used to hedge against price movements when another financial instrument is illiquid due to temporary market conditions. Because the changes in value of futures contracts and the hedged items can be based on different indices, there is a risk that the changes in value may not correlate. There were no open futures positions as of December 31, 2000 or 1999. As discussed in Note 13, the Company typically sells its produced residential mortgage servicing rights between 90 and 180 days of origination or purchase of the related loan pursuant to committed prices under forward sales contracts. These forward sales contracts commit the Company to deliver mortgage servicing rights backed by contractual levels of unpaid principal balances. Outstanding commitments to deliver totaled $797,000 and $5,480,000 at December 31, 2000 and 1999, respectively. The Company also maintains a portfolio of residential mortgage servicing rights which, though available-for-sale, are not currently scheduled for sale pursuant to the Company's forward sales contracts. In connection therewith, the Company is subject to the risk that the economic value of such mortgage servicing rights may decline in the event of a significant decline in long-term interest rates. A significant decline in interest rates generally causes an increase in actual and expected mortgage loan prepayments (for example increased refinancing) which in turn tends to reduce the future expected cash flows (and economic value) of associated mortgage servicing rights. Interest rate floor contracts provide for the Company to receive an interest rate differential on a notional amount of outstanding principal to the extent that interest rates decline below a specified rate which is fixed as of the date of the contract. Accordingly, the value of an interest rate floor contract increases while the value of a mortgage servicing right decreases in a declining interest rate environment. As such, interest rate floor contracts can potentially effectively mitigate the Company's exposure to declines in the economic value of its servicing rights in a declining interest rate environment. Additionally, the Company utilizes Callable Pass Through Certificates (CPC) to diversify basis risk and improve hedge efficacy. The Company purchases a long-term call option on a large pool of mortgage-backed securities. When the price of the mortgage-backed securities rises, the value of the CPC will rise. This hedge offers performance based upon the price and prepayment behavior of mortgage-backed securities, instead of either CMT or CMS basis. The Company uses an amortizing interest rate swap agreement to fix the interest rate on its floating rate credit facility, which finances its fixed rate leasing portfolio. Under this agreement, the Company makes or receives payments based on the difference between a fixed rate paid by the Company and a floating rate paid by the counterparty, applied to a notional amount of outstanding principal. The interest rate swap agreement is valued based on the difference between the fixed rate and the floating rate at year end. Resources Bancshares Mortgage Group, Inc. 49 52 The above described financial instruments involve, to varying degrees, elements of credit and interest rate risk which are in excess of the amounts recognized in the balance sheet. The Company believes that these instruments do not represent a significant exposure to credit loss since the amounts subject to credit risks are controlled through collateral requirements, credit approvals, limits and monitoring procedures. The Company does not have a significant exposure to any individual customer, correspondent or counterparty in connection with these financial instruments. Except for mortgage purchase commitments, the Company does not require collateral or other security to support the financial instruments with credit risk whose contract or notional amounts are summarized as follows:
Contract Amount at December 31, ------------------------------- 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Mortgage loan purchase commitments ..................................................... $ 742,469 $ 363,402 Financial instruments whose contract amounts exceed the amount of credit risk: Mandatory delivery commitments (allocated against mortgages held-for-sale) ............. 395,011 484,752 Mandatory delivery commitments (allocated against mortgage purchase commitments) ....... 502,089 273,748 Purchased option contracts ............................................................. 30,000 160,000 Forward servicing sales contracts ...................................................... 797,000 5,480,000 Interest rate floor contracts .......................................................... 1,185,000 1,700,000 Interest rate swaps .................................................................... 158,501 125,733 Callable Pass-Through Certificates ..................................................... 343,022 380,000 =============================================================================================================================
Mortgage loan purchase commitments expose the Company to credit loss in the event the purchase commitments are funded as mortgage loans and the Company's counterparties default prior to resale. The maximum credit loss to which the Company is exposed is the notional amount of the commitments. However, the Company does not believe the commitments represent a significant exposure to credit loss because the related loans are secured by 1-4 family homes, most loans are insured or guaranteed through private mortgage insurance or government approval programs and subjected to underwriting standards specified by government agencies or private mortgage insurance companies. The estimated credit exposure on financial instruments whose contract amounts exceed the amount of credit risk is the increase in market value of the instrument. The Company generally does not charge a premium to its correspondents in connection with issuance of its mortgage purchase commitments nor is a premium charged to the Company in connection with its acquisition of mandatory delivery or forward servicing sales contracts. Premiums paid for purchased put and call option and futures contracts are initially deferred and included in other assets in the balance sheet. Other assets included $210 and $1,803 at December 31, 2000 and 1999, respectively, of such deferred premiums. Ultimately, such deferred premiums and related realized gains or losses from these activities are recorded as a component of gains and losses on sales of mortgage loans at the earlier of the expiration of the underlying contract or when exercise of the contract is deemed remote. The Company uses CMT floors and CMS floors and Callable Pass-Through Certificates to protect itself against interest rate and prepayment risk on its available-for-sale portfolio. The Company monitors the changes in the fair value of these instruments and the hedged mortgage servicing rights on an ongoing basis. Premiums paid for these instruments are initially deferred and included in other assets in the balance sheet and are amortized over the term of the underlying contract. Amounts received as interest rate differentials under floor contracts as well as changes in the fair value of all of these instruments are recorded as a reduction or increase of basis in mortgage servicing rights to the extent that such changes generally correlate with changes in fair value of mortgage servicing rights. Included in the mortgage servicing right basis are deferred gains (losses) of $5,659 and $(5,050) at December 31, 2000 and 1999, respectively. Other assets included $9,970 and $11,318 at December 31, 2000 and 1999, respectively, of unamortized premiums. For the years ended December 31, 2000 and 1999, respectively, $3,336 and $3,608 of deferred premiums paid for interest rate floor contracts were amortized to expense. The current variable rate index for 10 year CMT and 10 year CMS were 5.11% and 6.168%, respectively, at December 31, 2000. Other terms of the interest rate floor contracts and Callable Pass-Through Certificates outstanding at December 31, 2000, are summarized as follows:
Contract Type(a) Contract Date Expiration Date Notional Amount Strike - ------------------------------------------------------------------------------------------------------------------- CMT .......................... August 20, 1996 August 20, 2001 $ 60,000 5.570% CMT .......................... July 9, 1998 July 9, 2005 55,000 4.910% CMT .......................... July 9, 1998 July 9, 2001 125,000 5.160% CMT .......................... September 15, 1998 September 15, 2003 75,000 4.500% CMT .......................... October 13, 1998 October 13, 2003 150,000 4.500% CMS .......................... November 10, 1998 November 10, 2003 120,000 5.410% CMT .......................... January 19, 1999 January 19, 2002 200,000 4.200% CMT .......................... March 15, 1999 March 15, 2002 200,000 4.950% CPC .......................... May 15, 1999 May 15, 2006 164,443 N/A CPC .......................... September 1, 1999 September 30, 2006 178,579 N/A CMS .......................... March 15, 2000 March 15, 2005 200,000 6.690% ---------- $1,528,022 ==========
(a) Contract types: CMT--Constant Maturity Treasury floor, CMS--Constant Maturity Swap floor, and CPC--Callable Pass-Through Certificate. 50 53 During 2000, the Company purchased one CMS interest-rate floor contract for $1,988 with the contract and expiration dates as listed above. The notional amount of this interest rate floor totaled $200,000. Five interest rate floors with notional amounts totaling $715,000 expired during 2000. NOTE 18--SEGMENT INCOME STATEMENTS: In accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", the Company adopted segment reporting in 1998. The following tables present a summary of the revenues and expenses for each of the Company's operating divisions for the years ended December 31, 2000, 1999 and 1998, respectively. Total assets of the operating divisions at December 31, 2000 are also presented. Revenues and expenses for each of the Company's operating divisions for the years ended December 31, 1999 and 1998 have been restated to conform to the 2000 presentation. For purposes of segment reporting the Company operates through five operating divisions. The agency-eligible production division purchases and sells agency-eligible residential mortgage loans. The agency-eligible servicing division services agency-eligible residential mortgage loans and also purchases and sells servicing rights associated with these agency-eligible loans. Mortgage servicing includes collecting and remitting mortgage loan payments, accounting for principal and interest, holding escrow funds for payment of mortgage-related expenses such as taxes and insurance, making advances to cover delinquent payments, making inspections as required of the mortgaged premises, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults and generally administering mortgage loans. The subprime division purchases and sells subprime residential mortgage loans. The leasing division originates and services small-ticket commercial equipment leases. The agency-eligible reinsurance division operates as a licensed, property and casualty monoline captive insurance company assuming reinsurance for PMI policies on agency-eligible mortgage loans initially purchased or produced by the Company.
FOR THE YEAR ENDED DECEMBER 31, 2000(1)(2) - -------------------------------------------------------------------------------------------------------------------------------- Agency-Eligible ------------------------------------------------ (Unaudited)($ in thousands) Production Servicing Reinsurance Subprime - --------------------------------------------------------------------------------------------------------------------------------- Net interest income ................................... $ 1,867 $ (5,326) $ (92) $ 11,439 Net gain on sale of mortgage loans .................... 24,194 -- -- 13,149 Gain on sale of mortgage servicing rights ............. -- 2,222 -- -- Servicing fees ........................................ -- 34,738 -- -- Mark-to-market on residual interests in subprime securitizations ............................ -- -- -- (39,338) Other income .......................................... 563 517 3,142 579 - --------------------------------------------------------------------------------------------------------------------------------- Total revenues ...................................... 26,624 32,151 3,050 (14,171) - --------------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits .......................... 28,333 2,904 -- 11,682 Occupancy expense ..................................... 11,332 191 -- 2,670 Amortization and provision for impairment of mortgage servicing rights ........................ -- 24,560 -- -- Provision expense ..................................... 2,102 -- -- 2,453 General and administrative expenses ................... 10,487 4,408 316 6,257 - --------------------------------------------------------------------------------------------------------------------------------- Total expenses ...................................... 52,254 32,063 316 23,062 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes ................................. (25,630) 88 2,734 (37,233) Income tax benefit (expense) .......................... 9,875 (34) (960) 13,616 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations .............. (15,755) 54 1,774 (23,617) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $261) ........................... -- -- -- -- Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $354) .......................................... -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) ..................................... $ (15,755) $ 54 $ 1,774 (23,617) ================================================================================================================================= Total Assets .......................................... $ 495,701 $ 194,344 $ 8,046 $ 167,604 ================================================================================================================================= FOR THE YEAR ENDED DECEMBER 31, 2000(1)(2) - --------------------------------------------------------------------------------------------------------------------------------- Commercial Total Other/ (Unaudited) ($in thousands) Mortgage Leasing Segments Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income ................................... $ -- $ 9,176 $ 17,064 $(1,188) $ 15,876 Net gain on sale of mortgage loans .................... -- -- 37,343 -- 37,343 Gain on sale of mortgage servicing rights ............. -- -- 2,222 -- 2,222 Servicing fees ........................................ -- 501 35,239 (258) 34,981 Mark-to-market on residual interests in subprime securitizations ............................ -- -- (39,338) -- (39,338) Other income .......................................... -- 1,229 6,030 120 6,150 - ---------------------------------------------------------------------------------------------------------------------------------- Total revenues ...................................... -- 10,906 58,560 (1,326) 57,234 - ---------------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits .......................... -- 2,901 45,820 4,460 50,280 Occupancy expense ..................................... -- 497 14,690 (683) 14,007 Amortization and provision for impairment of mortgage servicing rights ........................ -- -- 24,560 -- 24,560 Provision expense ..................................... -- 3,133 7,688 -- 7,688 General and administrative expenses ................... -- 1,370 22,838 2,151 24,989 - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses ...................................... -- 7,901 115,596 5,928 121,524 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes ................................. -- 3,005 (57,036) (7,254) (64,290) Income tax benefit (expense) .......................... -- (1,192) 21,305 2,795 24,100 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations .............. -- 1,813 (35,731) (4,459) (40,190) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $261) ........................... (1,448) -- (1,448) -- (1,448) Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $354) .......................................... (660) -- (660) -- (660) - ---------------------------------------------------------------------------------------------------------------------------------- Net income (loss) ..................................... $(2,108) $ 1,813 $ 37,839) $(4,459) $ (42,298) ================================================================================================================================== Total Assets .......................................... $ -- $ 202,583 $ 1,068,278 $ 1,475 $ 1,069,753 ==================================================================================================================================
(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. Resource Bancshares Mortgage Group, Inc. 51 54
FOR THE YEAR ENDED DECEMBER 31, 1999(1)(2) - -------------------------------------------------------------------------------------------------------------------------------- Agency-Eligible ------------------------------------------------ (Unaudited)($ in thousands) Production Servicing Reinsurance Subprime - --------------------------------------------------------------------------------------------------------------------------------- Net interest income ................................... $ 8,240 $ (4,555) $ (12) $ 15,366 Net gain on sale of mortgage loans .................... 64,033 -- -- 20,357 Gain on sale of mortgage servicing rights ............. -- 7,262 -- -- Servicing fees ........................................ -- 41,791 -- -- Mark-to-market on residual interests in subprime securitizations ............................ -- -- -- (7,843) Other income .......................................... 340 582 1,661 3,471 - ---------------------------------------------------------------------------------------------------------------------------------- Total revenues ...................................... 72,613 45,080 1,649 31,351 - ---------------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits .......................... 38,751 3,399 -- 15,840 Occupancy expense ..................................... 10,079 419 -- 2,567 Amortization and provision for impairment of mortgage servicing rights ........................ -- 29,580 -- -- Provision expense ..................................... 5,722 -- 85 2,893 General and administrative expenses ................... 17,248 5,984 136 7,460 - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses ...................................... 71,800 39,382 221 28,760 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes ................................. 813 5,698 1,428 2,591 Income tax benefit (expense) .......................... (207) (1,448) (356) (1,237) - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations .............. 606 4,250 1,072 1,354 Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $-0-) ............................ -- -- -- -- Operating net income of Laureate Capital Corp. (less applicable income tax expense of $405) ......................................... -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net Income (loss) ..................................... $ 606 $ 4,250 $ 1,072 $ 1,354 ================================================================================================================================== FOR THE YEAR ENDED DECEMBER 31, 1999(1)(2) - ---------------------------------------------------------------------------------------------------------------------------------- Commercial Total Other/ (Unaudited) ($in thousands) Mortgage Leasing Segments Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income ................................... $ -- $ 7,270 $ 26,309 $ (470) $ 25,839 Net gain on sale of mortgage loans .................... -- -- 84,390 -- 84,390 Gain on sale of mortgage servicing rights ............. -- -- 7,262 -- 7,262 Servicing fees ........................................ -- 620 42,411 (188) 42,223 Mark-to-market on residual interests in subprime securitizations ............................ -- -- (7,843) -- (7,843) Other income .......................................... -- 1,395 7,449 175 7,624 - ---------------------------------------------------------------------------------------------------------------------------------- Total revenues ...................................... -- 9,285 159,978 (483) 159,495 - ---------------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits .......................... -- 2,654 60,644 3,903 64,547 Occupancy expense ..................................... -- 453 13,518 214 13,732 Amortization and provision for impairment of mortgage servicing rights ........................ -- -- 29,580 -- 29,580 Provision expense ..................................... -- 1,908 10,608 -- 10,608 General and administrative expenses ................... -- 1,260 32,088 1,129 33,217 - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses ...................................... -- 6,275 146,438 5,246 151,684 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes ................................. -- 3,010 13,540 (5,729) 7,811 Income tax benefit (expense) .......................... -- (1,196) (4,444) 2,137 (2,307) - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations .............. -- 1,814 9,096 (3,592) 5,504 Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $-0-) ............................ -- -- -- -- -- Operating net income of Laureate Capital Corp. (less applicable income tax expense of $405) ......................................... 418 -- 418 -- 418 - ---------------------------------------------------------------------------------------------------------------------------------- Net Income (loss) ..................................... $ 418 $ 1,814 $ 9,514 $(3,592) $ 5,922 ==================================================================================================================================
(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.
FOR THE YEAR ENDED DECEMBER 31, 1998(1)(2) - --------------------------------------------------------------------------------------------------------------------------------- Agency-Eligible ------------------------------------------------ (Unaudited)($ in thousands) Production Servicing Reinsurance Subprime - --------------------------------------------------------------------------------------------------------------------------------- Net interest income ................................... $ 7,422 $ -- $ -- $ 9,565 Net gain on sale of mortgage loans .................... 134,472 -- -- 27,980 Gain on sale of mortgage servicing rights ............. -- 1,753 -- -- Servicing fees ........................................ -- 37,856 -- -- Mark-to-market on residual interests in subprime securitizations ............................ -- -- -- 435 Other income .......................................... 1,756 455 1,189 297 - --------------------------------------------------------------------------------------------------------------------------------- Total revenues ...................................... 143,650 40,064 1,189 38,277 - --------------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits .......................... 53,158 3,449 -- 13,485 Occupancy expense ..................................... 7,005 443 -- 1,921 Amortization and provision for impairment of mortgage servicing rights ........................ -- 27,897 -- -- Provision expense ..................................... 7,453 -- 119 2,330 General and administrative expenses ................... 20,593 6,446 77 2,160 - --------------------------------------------------------------------------------------------------------------------------------- Total expenses ...................................... 88,209 38,235 196 19,896 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes ................................. 55,441 1,829 993 18,381 Income tax benefit (expense) .......................... (20,059) (662) (351) (6,656) - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations .............. 35,382 1,167 642 11,725 Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $-0-) ............................. -- -- -- -- Operating net income of Laureate Capital Corp. (less applicable income tax expense of $952) .................................. -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Net Income (loss) ..................................... $ 35,382 $ 1,167 $ 642 $ 11,725 ================================================================================================================================= FOR THE YEAR ENDED DECEMBER 31, 1998(1)(2) - ---------------------------------------------------------------------------------------------------------------------------------- Commercial Total Other/ (Unaudited) ($in thousands) Mortgage Leasing Segments Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income ................................... $ -- $ 4,637 $ 21,624 $ (382) $ 21,242 Net gain on sale of mortgage loans .................... -- -- 162,452 -- 162,452 Gain on sale of mortgage servicing rights ............. -- -- 1,753 -- 1,753 Servicing fees ........................................ -- 1,014 38,870 509 39,379 Mark-to-market on residual interests in subprime securitizations ............................ -- -- 435 -- 435 Other income .......................................... -- 753 4,450 680 5,130 - ---------------------------------------------------------------------------------------------------------------------------------- Total revenues ...................................... -- 6,404 229,584 807 230,391 - ---------------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits .......................... -- 2,347 72,439 2,645 75,084 Occupancy expense ..................................... -- 376 9,745 634 10,379 Amortization and provision for impairment of mortgage servicing rights ........................ -- -- 27,897 -- 27,897 Provision expense ..................................... -- 1,121 11,023 -- 11,023 General and administrative expenses ................... -- 1,463 30,739 770 31,509 - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses ...................................... -- 5,307 151,843 4,049 155,892 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes ................................. -- 1,097 77,741 (3,242) 74,499 Income tax benefit (expense) .......................... -- (435) (28,163) 1,183 (26,980) - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations .............. -- 662 49,578 (2,059) 47,519 Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $-0-) ............................. -- -- -- -- -- Operating net income of Laureate Capital Corp. (less applicable income tax expense of $952) .................................. 1,152 -- 1,152 -- 1,152 - ---------------------------------------------------------------------------------------------------------------------------------- Net Income (loss) ..................................... $ 1,152 $ 662 $ 50,730 $(2,059) $ 48,671 ==================================================================================================================================
(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. 52 55 NOTE 19 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
First Second Third Fourth 2000 Quarter Quarter Quarter Quarter Year - ----------------------------------------------------------------------------------------------------------------------------------- REVENUES Interest income ............................................. $ 15,294 $ 18,995 $ 18,607 $ 16,573 $ 69,469 Interest expense ............................................ (11,178) (13,834) (14,457) (14,124) (53,593) - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income ......................................... 4,116 5,161 4,150 2,449 15,876 Net gain on sale of mortgage loans .......................... 8,647 9,349 8,460 10,887 37,343 Gain on sale of mortgage servicing rights ................... 808 731 673 10 2,222 Servicing fees .............................................. 9,315 8,565 8,471 8,630 34,981 Mark-to-market on residual interests in subprime securitizations ........................................... (7,675) (1,771) (29,892) -- (39,338) Other income ................................................ 2,056 2,318 454 1,322 6,150 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues ............................................ 17,267 24,353 (7,684) 23,298 57,234 - ----------------------------------------------------------------------------------------------------------------------------------- EXPENSES Salary and employee benefits ................................ 14,753 10,117 13,432 11,978 50,280 Occupancy expense ........................................... 3,320 3,516 3,633 3,538 14,007 Amortization and provision for impairment of mortgage servicing rights .......................................... 6,277 5,932 6,069 6,282 24,560 Provision expense ........................................... 2,001 1,682 1,978 2,027 7,688 General and administrative expenses ......................... 5,449 6,645 7,358 5,537 24,989 - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses ............................................ 31,800 27,892 32,470 29,362 121,524 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes .............................................. (14,533) (3,539) (40,154) (6,064) (64,290) Income tax benefit .......................................... 5,331 1,199 14,859 2,711 24,100 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations .................... (9,202) (2,340) (25,295) (3,353) (40,190) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income tax expense (benefit) of $-0-, $200, $235, ($174) and $261 for the first, second, third, fourth quarters and the twelve months, respectively) ............................ -- (2,000) 393 159 (1,448) Operating profits (losses) of Laureate Capital Corp. ...... (less applicable income tax expense (benefit) of ($465), $111, $-0-, $-0- and ($354) for the first, second, third, fourth quarters and the twelve months, respectively) ........................................... (765) 105 -- -- (660) - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) ........................................... $ (9,967) $ (4,235) $ (24,902) $ (3,194) $ (42,298) =================================================================================================================================== Weighted average common shares outstanding--Basic ........... 18,657,683 18,017,764 17,435,701 16,811,898 17,727,445 =================================================================================================================================== Net income (loss) per common share from continuing operations--Basic ......................................... $ (0.49) $ (0.13) $ (1.45) $ (0.20) $ (2.27) =================================================================================================================================== Net income (loss) per common share from discontinued operations--Basic ......................................... $ (0.04) $ (0.11) $ 0.02 $ 0.01 $ (0.12) =================================================================================================================================== Weighted average common shares outstanding--Diluted ......... 18,657,683 18,017,764 17,435,701 16,811,898 17,727,445 =================================================================================================================================== Net income (loss) per common share from continuing operations--Diluted ....................................... $ (0.49) $ (0.13) $ (1.45) $ (0.20) $ (2.27) =================================================================================================================================== Net income (loss) per common share from discontinued operations--Diluted ....................................... $ (0.04) $ (0.11) $ 0.02 $ 0.01 $ (0.12) ===================================================================================================================================
* See discussion of unusual items in Management's Discussion & Analysis of Financial Condition and Results of Operations. Resource Bancshares Mortgage Group, Inc. 53 56
First Second Third Fourth 1999 Quarter Quarter Quarter Quarter Year - ----------------------------------------------------------------------------------------------------------------------------------- REVENUES Interest income ............................................. $ 25,574 $ 21,959 $ 19,314 $ 16,302 $ 83,149 Interest expense ............................................ (18,194) (14,656) (12,924) (11,536) (57,310) - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income ......................................... 7,380 7,303 6,390 4,766 25,839 Net gain on sale of mortgage loans .......................... 36,050 24,402 13,490 10,448 84,390 Gain on sale of mortgage servicing rights ................... 2,998 1,825 1,494 945 7,262 Servicing fees .............................................. 12,023 10,839 9,631 9,730 42,223 Mark-to-market on residual interests in subprime securitizations ........................................... (1,349) (2,618) (929) (2,947) (7,843) Other income ................................................ 1,467 2,286 1,399 2,472 7,624 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues ............................................ 58,569 44,037 31,475 25,414 159,495 - ----------------------------------------------------------------------------------------------------------------------------------- EXPENSES Salary and employee benefits ................................ 18,759 15,204 17,077 13,507 64,547 Occupancy expense ........................................... 2,910 3,187 3,773 3,862 13,732 Amortization and provision for impairment of mortgage servicing rights .......................................... 8,433 8,887 5,665 6,595 29,580 Provision expense ........................................... 3,055 2,341 2,535 2,677 10,608 General and administrative expenses ......................... 7,478 9,376 6,507 9,856 33,217 - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses ............................................ 40,635 38,995 35,557 36,497 151,684 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes ............................................. 17,934 5,042 (4,082) (11,083) 7,811 Income tax benefit (expense) ................................ (6,416) (1,853) 1,873 4,089 (2,307) - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations .................... 11,518 3,189 (2,209) (6,994) 5,504 Discontinued operations: Operating profits (losses) of Laureate Capital Corp. (less applicable income tax expense (benefit) of ($219), $128, $389, $107 and $405 for the first, second, third, fourth quarters and the twelve months, respectively) ............................ (357) 147 534 94 418 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) ........................................... $ 11,161 $ 3,336 $ (1,675) $ (6,900) $ 5,922 =================================================================================================================================== Weighted average common shares outstanding--Basic ........... 22,224,610 20,958,060 20,310,289 19,113,328 20,643,166 =================================================================================================================================== Net income (loss) per common share from continuing operations--Basic ......................................... $ 0.52 $ 0.15 $ (0.11) $ (0.37) $ 0.27 =================================================================================================================================== Net income (loss) per common share from discontinued operations--Basic ......................................... $ (0.02) $ 0.01 $ 0.03 $ 0.01 $ 0.02 =================================================================================================================================== Weighted average common shares outstanding--Diluted ...................................... 22,477,224 21,138,487 20,310,289 19,113,328 20,799,502 =================================================================================================================================== Net income (loss) per common share from continuing operations--Diluted ....................................... $ 0.51 $ 0.15 $ (0.11) $ (0.37) $ 0.26 =================================================================================================================================== Net income (loss) per common share from discontinued operations--Diluted ....................................... $ (0.02) $ 0.01 $ 0.03 $ 0.00 $ 0.02 ===================================================================================================================================
* See discussion of unusual items in Management's Discussion & Analysis of Financial Condition and Results of Operations. NOTE 20 -- FAIR VALUE OF FINANCIAL INSTRUMENTS: The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2000 and 1999.
2000 1999 --------------------------------------------------- CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value - --------------------------------------------------------------------------------------------------------------------------- Assets Cash ........................................................... $ 15,205 $ 15,205 $ 30,478 $ 30,478 Receivables .................................................... 63,098 63,098 40,219 40,219 Lease receivables .............................................. 191,777 195,035 155,559 161,483 Residual interests in subprime securitizations ................. -- -- 54,382 54,382 Mortgage loans held-for-sale and mortgage-backed securities .... 541,574 548,075 480,504 481,894 Liabilities Short-term borrowings .......................................... 811,750 811,750 699,803 699,803 Long-term borrowings ........................................... 6,145 6,361 6,259 6,190 ===========================================================================================================================
54 57
2000 1999 -------------------------------------------------------------------------------- NOTIONAL CARRYING ESTIMATED Notional Carrying Estimated AMOUNT VALUE FAIR VALUE Amount Value Fair Value - ------------------------------------------------------------------------------------------------------------------------------ Off-balance sheet instruments Mortgage purchase commitments ........ $ 742,469 $ -- $ 1,366 $ 363,402 $ -- $ (840) Mandatory delivery commitments (allocated to mortgage purchase commitments) ........................... 502,089 -- (6,347) 273,748 -- 2,209 Purchased option contracts ............. 30,000 211 434 160,000 1,803 343 Interest rate floor contracts .......... 1,185,000 5,122 6,377 2,100,000 6,269 6,269 Interest rate swaps .................... 158,501 -- 1,745 125,733 -- 1,358 Callable Pass-Through Certificates ..... 343,022 5,027 9,252 376,100 4,621 4,621 ==============================================================================================================================
The following notes summarize the significant methods and assumptions used in estimating the fair values of financial instruments. CASH and RECEIVABLES are short-term in nature. Accordingly, they are valued at their carrying amounts which are a reasonable estimation of fair value. LEASE RECEIVABLES are valued by management for each homogenous category of leases by discounting future expected cash flows. Lease receivables available-for-sale are valued by management based upon recent sales with consideration given to differences between those leases and leases sold. The implicit discount rate applied for purposes of determining the aggregate discounted lease balance was obtained from an investment banker based on recent market rates. MORTGAGE LOANS HELD-FOR-SALE and MORTGAGE-BACKED securities covered by mandatory delivery commitments allocated thereto are valued based upon commitment delivery prices. Uncommitted mortgage loans held-for-sale are valued by reference to quoted market prices for mortgage-backed securities, after appropriate adjustments thereto. For purposes of developing the estimated fair value, the portfolio has been segregated by product type, term and interest rate. SHORT-TERM BORROWINGS are all tied to short-term variable rate indices. Accordingly, they are valued at their carrying amounts, which are a reasonable estimation of fair values. LONG-TERM BORROWINGS are at a fixed rate of 8.07% and were valued based upon the net present value of the borrowings using an estimated current rate of 7.35% and a rate of 8.50% for the prior year. MORTGAGE PURCHASE COMMITMENTS are valued based upon the difference between quoted mandatory delivery commitment prices (which are used by the Company to price its mortgage purchase commitments) and the committed prices. MANDATORY DELIVERY COMMITMENTS are valued based upon the difference between quoted prices for such commitments and the prices applicable to the underlying commitment. PURCHASED OPTION CONTRACTS are valued based upon quoted prices for such option contracts. INTEREST RATE FLOOR CONTRACTS are valued based upon an independent third party valuation. INTEREST RATE SWAPS are valued based upon the present value of future cash flows based on the interest rate spread between the fixed rate and floating rate. NOTE 21 -- DISCONTINUED OPERATIONS: During 2000, the Company sold substantially all of the assets of Laureate Capital Corp. (Laureate), its commercial mortgage banking firm, to BB&T Corporation. The Company recorded a loss on the sale of $1.4 million net of taxes of $0.3 million. The loss on sale related primarily to the writeoff of intangible assets of Laureate. The accompanying financial statements present the results of operations of Laureate, previously reported as the commercial mortgage segment, as discontinued operations. Laureate's revenues through the sale date in 2000 were $9.1 million. Revenues for 1999 and 1998 were $14.3 million and $13.3 million, respectively. Operating (losses) profits of Laureate were ($0.7) million, $0.4 million, and $1.2 million for the partial year 2000 and the years 1999 and 1998, respectively. Net cash (used in) provided by operating activities of discontinued operations was ($6,979), $3,885 and $2,306 for the years ended December 31, 2000, 1999 and 1998, respectively. Net cash (used in) provided by investing activities of discontinued operations was $792, ($292) and ($426) for the years ended December 31, 2000, 1999 and 1998, respectively. Net cash (used in) provided by financing activities of discontinued operations was $0, $0 and ($709) for the years ended December 31, 2000, 1999 and 1998, respectively. Resource Bancshares Mortgage Group, Inc. 55 58 REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors of Resource Bancshares Mortgage Group, Inc. We have audited the accompanying consolidated balance sheet of Resource Bancshares Mortgage Group, Inc. and subsidiaries as of December 31, 2000 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Resource Bancshares Mortgage Group, Inc. and its subsidiaries for the year ended December 31, 1999, were audited by other auditors whose report dated February 7, 2000, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2000 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Resource Bancshares Mortgage Group, Inc. and subsidiaries at December 31, 2000, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP January 31, 2001 Atlanta, Georgia STOCK DATA Information pertaining to high and low stock prices for each quarter during 2000 and 1999 is given in the following chart.
2000 1999 ------------------------------------------ Quarter HIGH LOW High Low - ---------------------------------------------------------------------------------------- First .................................. $ 4.81 $ 3.50 $17.00 $11.81 Second ................................. 5.06 3.00 13.63 9.00 Third .................................. 6.06 3.88 11.00 4.50 Fourth ................................. 7.06 5.56 6.50 4.44
Source: Nasdaq The Company began paying cash dividends in 1996. The following chart summarizes cash dividends declared and paid during 1999 and 2000. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for restrictions on the Company's ability to pay cash dividends.)
Record Date Payment Date Cash Dividend - ------------------------------------------------------------------------------- February 10, 1999 March 10, 1999 $ 0.10 May 20, 1999 June 21, 1999 0.11 August 17, 1999 September 17, 1999 0.11 November 16, 1999 December 14, 1999 0.11 February 16, 2000 March 15, 2000 0.11 May 17, 2000 June 15, 2000 0.11 August 16, 2000 September 15, 2000 0.11 November 22, 2000 December 20, 2000 0.11
As of March 15, 2001, there were approximately 541 record holders of the Company's common stock. 56 59 SELECTED FINANCIAL HIGHLIGHTS
At or for the Year Ended December 31, -------------------------------------------------------------------------- ($ in thousands, except share information) 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT - ---------------------------------------------------------------------------------------------------------------------------- Net interest income $ 15,876 $ 25,839 $ 21,242 $ 17,644 $ 16,902 Net gain on sale of mortgage loans 37,343 84,390 162,452 103,370 79,178 Gain on sale of mortgage servicing rights 2,222 7,262 1,753 7,955 1,105 Servicing fees 34,981 42,223 39,379 30,869 28,763 Total revenues 57,234 159,495 230,391 161,018 126,617 Salary and employee benefits 50,280 64,547 75,084 62,235 55,578 Total expenses (including taxes) 121,524 151,684 182,872 139,220 106,994 Net income (loss) from continuing operations (40,190) 5,504 47,519 21,798 19,623 Net income (loss) from discontinued operations (2,108) 418 1,152 -- -- Net income (loss) (42,298) 5,922 48,671 -- -- PER COMMON SHARE DATA - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) per common share from continuing operations--Basic $ (2.27) $ 0.27 $ 2.06 $ 1.07 $ 1.02 Net income (loss) per common share from discontinued operations--Basic (0.12) 0.02 0.04 Net income (loss) per common share from continuing operations--Diluted (2.27) 0.26 2.02 1.05 1.00 Net income (loss) per common share from discontinued operations--Diluted (0.12) 0.02 0.05 Market price per common share at year-end(2) 7.06 4.53 16.56 16.31 13.57 Book value per common share at year-end 8.97 11.08 10.96 9.21 7.77 Cash dividends paid per common share 0.44 0.43 0.29 0.13 0.06 BALANCE SHEET - ---------------------------------------------------------------------------------------------------------------------------- Mortgage loans held for sale and mortgage-backed securities $ 541,574 $ 480,504 $ 1,441,458 $ 1,179,188 $ 802,335 Lease receivables 191,777 155,559 102,029 51,494 -- Mortgage servicing rights, net 160,766 177,563 191,022 127,326 109,815 Residual interests in subprime securitizations -- 54,382 45,782 19,684 -- Total assets 1,069,753 1,027,182 1,969,635 1,556,929 1,028,394 Total long-term borrowings 6,145 6,259 6,364 6,461 -- Total liabilities 917,984 814,710 1,717,477 1,341,790 871,093 Stockholders' equity 151,769 212,472 252,158 215,139 157,301 STATISTICS - ---------------------------------------------------------------------------------------------------------------------------- Total mortgage loan and lease production $ 6,403,980 $8,940,991 $15,640,342 $10,777,294 $9,995,725 Total agency-eligible servicing portfolio (including subservicing) 8,672,296 9,078,226 13,595,736 10,195,354 8,658,742 Managed lease servicing portfolio(3) 192,641 166,572 136,521 123,509 -- Return on average assets (4.01)% 0.47% 2.73% 1.78% 1.91% Return on average equity (22.86)% 2.52% 21.01% 12.82% 14.43% ============================================================================================================================
(1) See discussion of unusual items in Management's Discussion and Analysis. (2) Source of market price is Nasdaq. (3) Managed lease servicing portfolio consists of $188,912, $152,300, $98,956 and $49,104 of leases owned by the Company and $3,729, $14,272, $37,565 and $74,405 of leases serviced for investors as of December 31, 2000, 1999, 1998 and 1997, respectively. CONTENTS Selected Financial Highlights IFC To Our Stockholders, Customers and Colleagues 1 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Consolidated Balance Sheet 30 Consolidated Statement of Income 31 Consolidated Statement of Changes in Stockholders' Equity 32 Consolidated Statement of Cash Flows 33 Notes to Consolidated Financial Statements 34 Report of Independent Accountants 54 Stock Data 54 Corporate Information IBC 60 RESOURCE BANCSHARES MORTGAGE GROUP, INC. [MAP] 7909 Parklane Road (Zip 29223) - Post Office Box 7486 Columbia, South Carolina 29202-7486 EX-21.1 8 g67742ex21-1.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 RESOURCE BANCSHARES MORTGAGE GROUP, INC. SUBSIDIARIES OF THE REGISTRANT o RBMG, Inc., a wholly owned subsidiary of the Registrant, was formed by the Registrant in February 1999 and is incorporated in the state of Delaware. o Meritage Mortgage Corporation, a wholly-owned subsidiary of the Registrant, was acquired by the Registrant in April 1997 and is incorporated in the state of Oregon. o Resource Bancshares Corporation, a wholly-owned subsidiary of the Registrant was acquired by the Registrant in December 1997 and is incorporated in the state of South Carolina. o RBMG Asset Management Company, Inc., a wholly-owned subsidiary of Meritage Mortgage Corporation, was formed by the Registrant in November 1997 and is incorporated in the state of Nevada. o RBMG Funding Co., Inc., a wholly-owned subsidiary of RBMG Asset Management Company, Inc., was formed by RBMG Asset Management, Inc. in September 1997 and is incorporated in the state of Nevada. o TFP Funding III, Inc., a wholly-owned subsidiary of Republic Leasing Company, Inc. was formed by Resource Bancshares Corporation in June 1998 and is incorporated in the state of Delaware. o MG Reinsurance Company, a wholly-owned subsidiary of the Registrant, was formed by the Registrant in November 1998 and is incorporated in the state of Vermont. o Republic Leasing Company, Inc., a wholly-owned subsidiary of the Registrant, was acquired by the Registrant in December 1997 and is incorporated in the state of South Carolina. EX-23.1 9 g67742ex23-1.txt CONSENT OF ERNST & YOUNG 1 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Resource Bancshares Mortgage Group, Inc. of our report dated January 31, 2001, included in the 2000 Annual Report to Shareholders of Resource Bancshares Mortgage Group, Inc., and to the incorporation by reference in the Registration Statements (Form S-3 Nos. 333-82105, 333-94863), and in the related prospectuses, and in the Registration Statements (Form S-8 Nos. 333-25613, 333-25611, 333-25885, 333-44289, 333-68909, 333-42782, 333-55054) of Resource Bancshares Mortgage Group, Inc. of our report dated January 31, 2001 with respect to the consolidated financial statements of Resource Bancshares Mortgage Group, Inc. and subsidiaries incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 2000. Atlanta, Georgia March 28, 2001 EX-23.2 10 g67742ex23-2.txt CONSENT OF PRICEWATERHOUSECOOPERS (S-3) 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-82105, 333-94863) of Resource Bancshares Mortgage Group, Inc. of our report dated February 7, 2000, except as to the second paragraph of Note 21, for which the date is June 30, 2000, which appears as Exhibit 99.1 in this Annual Report on Form 10-K for the year ended December 31, 2000. PRICEWATERHOUSECOOPERS LLP Columbia, South Carolina March 29, 2001 EX-23.3 11 g67742ex23-3.txt CONSENT OF PRICEWATERHOUSECOOPERS (S-8) 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-25613, 333-25885, 333-44289, 333-68909) of Resource Bancshares Mortgage Group, Inc. of our report dated February 7, 2000, except as to the second paragraph of Note 21, for which the date is June 30, 2000, which is included as Exhibit 99.1 in this Annual Report on Form 10-K for the year ended December 31, 2000. PRICEWATERHOUSECOOPERS LLP Columbia, South Carolina March 29, 2001 EX-99.1 12 g67742ex99-1.txt REPORT OF INDEP ACCOUNTANTS ON CONSOL FINAN STMTS 1 EXHIBIT 99.1 To the Board of Directors and Stockholders of Resource Bancshares Mortgage Group, Inc. In our opinion, the consolidated balance sheet as of December 31, 1999 and the related consolidated statements of income, of changes in stockholders' equity and of cash flows for each of the two years in the period ended December 31, 1999 (appearing on pages 32 through 55 of the Resource Bancshares Mortgage Group, Inc. 2000 Annual Report to Shareholders which has been incorporated by reference in this Form 10-K) present fairly, in all material respects, the financial position, results of operations and cash flows of Resource Bancshares Mortgage Group, Inc. and its subsidiaries at December 31, 1999 and for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. We have not audited the consolidated financial statements of Resource Bancshares Mortgage Group, Inc. for any period subsequent to December 31, 1999. PricewaterhouseCoopers LLP Columbia, South Carolina February 7, 2000, except as to the second paragraph of Note 21, for which the date is June 30, 2000 -----END PRIVACY-ENHANCED MESSAGE-----