-----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, JcIn3WSxeAjo/d0Ud1ydwr39o5luVIhhoRTX7TE2yNwwQSMwPOO4bu+PoecyYYNu mfh74mszJbQALGpfRgeJog== 0000950144-01-508865.txt : 20020410 0000950144-01-508865.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950144-01-508865 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESOURCE BANCSHARES MORTGAGE GROUP INC CENTRAL INDEX KEY: 0000893817 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 570962375 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21786 FILM NUMBER: 1783445 BUSINESS ADDRESS: STREET 1: 7909 PARKLANE ROAD SUITE 150 CITY: COLUMBIA STATE: SC ZIP: 29223 BUSINESS PHONE: 8037413000 MAIL ADDRESS: STREET 1: 7909 PARKLANE RD SUITE 150 STREET 2: 7909 PARKLANE RD SUITE 150 CITY: COLUMBI STATE: SC ZIP: 29223 10-Q 1 g72633e10-q.txt RESOURCE BANCSHARES MORTGAGE GROUP, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- -------------- Commission File Number 000-21786 --------- RESOURCE BANCSHARES MORTGAGE GROUP, INC. ----------------------------------------------------------- (Exact name of registrant as specified in its charter) STATE OF DELAWARE 57-0962375 - ------------------------------------ ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7909 Parklane Road, Columbia, SC 29223 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (803)741-3000 ----------------------------- Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (ii) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The number of shares of common stock of the registrant outstanding as of October 31, 2001 was 16,599,864. Page 1 Exhibit Index on Pages A to J RESOURCE BANCSHARES MORTGAGE GROUP, INC. Form 10-Q for the quarterly period ended September 30, 2001 TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE PART I. FINANCIAL INFORMATION ---- ITEM 1. Financial Statements - (Unaudited) Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Changes in Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of 19 Financial Condition and Results of Operations ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 79 PART II. OTHER INFORMATION 79 ITEM 6. Exhibits and Reports on Form 8-K 79 SIGNATURES 80 EXHIBIT INDEX A-J
RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED BALANCE SHEETS ($ IN THOUSANDS)
September 30, December 31, 2001 2000 -------------- ------------- (Unaudited) ASSETS Cash $ 32,006 $ 15,205 Receivables 79,653 63,098 Mortgage loans held-for-sale 617,958 541,574 Lease receivables 195,263 191,777 Servicing rights, net 144,979 160,766 Premises and equipment, net 27,096 30,771 Accrued interest receivable 2,381 2,645 Goodwill and other intangibles 13,781 11,865 Other assets 45,344 52,052 ----------- ----------- Total assets $ 1,158,461 $ 1,069,753 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Short-term borrowings $ 876,230 $ 811,750 Long-term borrowings 6,054 6,145 Accrued expenses 12,283 9,045 Other liabilities 112,939 91,044 ----------- ----------- Total liabilities 1,007,506 917,984 ----------- ----------- Common stock - par value $0.01 - 50,000,000 shares authorized; 31,637,331 shares issued at September 30, 2001 and December 31, 2000 316 316 Additional paid-in capital 298,155 297,996 Retained earnings 15,944 6,291 Common stock held by subsidiary at cost - 7,767,099 shares at September 30, 2001 and December 31, 2000 (98,953) (98,953) Treasury stock - 7,273,783 and 6,949,711 shares at September 30, 2001 and December 31, 2000, respectively (52,595) (50,050) Unearned shares of employee stock ownership plan - 356,212 and 310,320 unallocated shares at at September 30, 2001 and December 31, 2000, respectively (4,313) (3,800) Unearned variable option expense at September 30, 2001 and December 31, 2000, respectively (7) (31) Other comprehensive loss (7,592) -- ----------- ----------- Total stockholders' equity 150,955 151,769 ----------- ----------- Total liabilities and stockholders' equity $ 1,158,461 $ 1,069,753 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS ($ IN THOUSANDS EXCEPT SHARE AMOUNTS) (UNAUDITED)
For the Nine Months Ended For the Quarter Ended September 30 September 30 ----------------------------- ----------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ REVENUES Interest income $ 57,952 $ 52,896 $ 18,421 $ 18,607 Interest expense (39,751) (39,469) (11,427) (14,457) ------------ ------------ ------------ ------------ Net interest income 18,201 13,427 6,994 4,150 Net gain on sale of mortgage loans 87,511 26,456 36,947 8,460 (Loss) gain on sale of mortgage servicing rights (2,329) 2,212 396 673 Servicing fees 26,446 26,351 9,214 8,471 Mark-to-market on residual interests in subprime securitizations -- (39,338) -- (29,892) Other (expense) income (822) 4,828 (1,765) 454 ------------ ------------ ------------ ------------ Total revenues 129,007 33,936 51,786 (7,684) ------------ ------------ ------------ ------------ EXPENSES Salary and employee benefits 38,497 38,302 12,885 13,432 Occupancy expense 13,799 10,469 5,709 3,633 Amortization and provision for impairment of mortgage servicing rights 20,065 18,278 9,523 6,069 Provision expense 11,644 5,661 5,389 1,978 General and administrative expenses 20,581 19,452 7,792 7,358 ------------ ------------ ------------ ------------ Total expenses 104,586 92,162 41,298 32,470 ------------ ------------ ------------ ------------ Income (loss) from continuing operations before income taxes 24,421 (58,226) 10,488 (40,154) Income tax (expense) benefit (9,121) 21,389 (4,006) 14,859 ------------ ------------ ------------ ------------ Income (loss) from continuing operations before transition adjustment 15,300 (36,837) 6,482 (25,295) Cumulative effect of change in accounting principles- SFAS No. 133, net of tax (149) -- -- -- ------------ ------------ ------------ ------------ Income (loss) from continuing operations 15,151 (36,837) 6,482 (25,295) Discontinued operations: (Loss) gain on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $435 and $235 for the nine months and quarter ended September 30, 2000, respectively) -- (1,607) -- 393 Operating (losses) of Laureate Capital Corp. for the nine months ended September 30, 2000 (less applicable income tax benefit of $354) -- (660) -- -- ------------ ------------ ------------ ------------ Net income (loss) $ 15,151 $ (39,104) $ 6,482 $ (24,902) ------------ ------------ ------------ ------------ Weighted average common shares outstanding -- Basic 16,368,382 18,034,854 16,273,761 17,435,701 ------------ ------------ ------------ ------------ Net income (loss) per common share from continuing operations-- Basic $ 0.93 $ (2.04) $ 0.40 $ (1.45) ------------ ------------ ------------ ------------ Net (loss) income per common share from discontinued operations-- Basic -- $ (0.13) $ -- $ 0.02 ------------ ------------ ------------ ------------ Weighted average common shares outstanding -- Diluted 16,609,335 18,034,854 16,552,512 17,435,701 ------------ ------------ ------------ ------------ Net income (loss) per common share from continuing operations-- Diluted 0.91 $ (2.04) $ 0.39 $ (1.45) ------------ ------------ ------------ ------------ Net (loss) income per common share from discontinued operations-- Diluted -- $ (0.13) $ -- $ 0.02 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. 4 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ($ in thousands, except share information) (Unaudited)
Unearned Shares of Other Common Employee Unearned Compre- Total Common Stock Additional Stock Stock Variable hensive Stock- Nine Months Ended ----------------- Paid-in Retained Held by Treasury Ownership Option Income holders' September 30, 2000 Shares Amount Capital Earnings Subsidiary Stock Plan Expense (loss) Equity - ----------------------------- --------- ------- --------- --------- ---------- -------- -------- -------- ------- -------- Balance, January 1, 2000 31,637,331 $ 316 $300,909 $ 56,506 $(98,953) $(41,148) $(5,158) $ -- $ -- 212,472 Issuance of restricted stock (960) 1,750 790 Cash dividends (6,815) (6,815) Treasury stock purchases (10,527) (10,527) Exercise of stock options Shares committed to be released under Employee Stock Ownership Plan 157 306 463 Purchase of shares by Employee Stock Ownership Plan Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan (1,563) (46) 3,025 1,416 Net income (loss) (39,104) (39,104) Total comprehensive income ---------- ----- -------- -------- -------- -------- ------- ---- ---- -------- Balance, September 30, 2000 31,637,331 $ 316 $298,543 $ 10,541 $(98,953) $(46,900) $(4,852) $ -- $ -- $158,695 ========== ===== ======== ======== ======== ======== ======= ==== ==== ========
Unearned Shares of Other Common Employee Unearned Compre- Total Common Stock Additional Stock Stock Variable hensive Stock- Nine Months Ended ----------------- Paid-in Retained Held by Treasury Ownership Option Income holders' September 30, 2001 Shares Amount Capital Earnings Subsidiary Stock Plan Expense (loss) Equity - ------------------------- --------- ------ --------- --------- ---------- -------- --------- -------- ------- --------- Balance, January 1, 2001 31,637,331 $ 316 $297,996 $ 6,291 $(98,953) $(50,050) $ (3,800) $ (31) $ -- $151,769 Issuance of restricted stock Cash dividends (5,487) (5,487) Treasury stock purchases (329,572 shares net of issuances 542,728) (6,467) (6,467) Exercise of Stock Options 83 3,473 3,556 Shares committed to be released under Employee Stock Ownership Plan 569 (513) 56 Purchase of share by Employee Stock Ownership Plan Variable Option Exercises 109 50 24 183 Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan (602) (11) 399 (214) Net income (loss) 15,151 15,151 Cumulative effect of change in accounting principle on other comprehensive income (net of tax)* (3,951) (3,951) Change in other comprehensive income (net of tax) ** (3,641) (3,641) ---------- ----- -------- -------- -------- -------- -------- ---- ------- -------- Balance, September 30, 2001 31,637,331 $ 316 $298,155 $ 15,944 $ (98,953) $(52,595) $ (4,313) $ (7) $(7,592) $150,955 ========== ===== ======== ======== ======== ======== ======== ==== ======= ========
* Cumulative effect of change in accounting principle on other comprehensive income is net of $1,948 in income tax benefit. ** Net change in other comprehensive income is net of $2,051 in income tax benefit. The accompanying notes are an integral part of these consolidated financial statements. 5 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands) (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 ------------ ----------- OPERATING ACTIVITIES Net income (loss) $ 15,151 $ (36,837) Adjustments to reconcile net income to cash used in operating activities: Depreciation and amortization 28,263 24,588 Employee Stock Ownership Plan compensation 56 463 Provision for estimated foreclosure losses and repurchased loans 11,644 5,661 (Increase) decrease in receivables (16,555) 11,554 Acquisition of mortgage loans (8,903,179) (4,590,507) Proceeds from sales of mortgage loans and mortgage-backed securities 8,906,311 4,576,826 Acquisition of mortgage servicing rights (205,416) (108,942) Sales of mortgage servicing rights 198,809 110,321 Net gain on sales of mortgage loans and servicing rights (85,182) (28,668) Decrease (increase) in accrued interest on loans 264 (1,103) Increase in lease receivables (7,135) (32,112) Decrease in other assets 4,227 556 Decrease in residual certificates -- 33,998 Increase (decrease) in accrued expenses and other liabilities 25,292 (8,754) Cumulative effect of change in accounting principle on other comprehensive loss (net of tax) * (3,951) -- Net change in other comprehensive income (net of tax) ** (3,641) -- ------------ ----------- Net cash used in operating activities of continuing operations (35,042) (42,956) ------------ ----------- INVESTING ACTIVITIES Purchases of premises and equipment (4,391) (2,392) Disposition of premises and equipment 407 485 Loss on sale of fixed assets 26 -- ------------ ----------- Net cash used in investing activities of continuing operations (3,958) (1,907) ------------ ----------- FINANCING ACTIVITIES Proceeds from borrowings 13,609,589 5,651,248 Repayment of borrowings (13,545,200) (5,598,836) Issuance of restricted stock -- 790 Shares (purchased) issued under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan (214) 1,416 Acquisition of treasury stock (6,467) (10,527) Cash dividends (5,487) (6,815) Exercise of stock options 3,556 -- Variable options expense 24 -- ------------ ----------- Net cash provided by financing activities of continuing operations 55,801 37,276 ------------ ----------- Discontinued operations -- (6,187) ------------ ----------- Net increase (decrease) in cash 16,801 (13,774) Cash, beginning of period 15,205 30,478 ------------ ----------- Cash, end of period $ 32,006 $ 16,704 ------------ -----------
* Cumulative effect of change in accounting principle on other comprehensive income is net of $1,948 in income tax benefit. ** Net change in other comprehensive income is net of $2,051 in income tax benefit. The accompanying notes are an integral part of these consolidated financial statements. 6 RESOURCE BANCSHARES MORTGAGE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (Unaudited) Note 1 - Basis of Presentation: The financial information included herein should be read in conjunction with the consolidated financial statements and related notes of Resource Bancshares Mortgage Group, Inc. (the Company), included in the Company's December 31, 2000, Annual Report on Form 10-K. Certain financial information, which is normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, is not required for interim financial statements and has been omitted. The accompanying interim consolidated financial statements are unaudited. However, in the opinion of management of the Company, all adjustments, consisting of normal recurring items, necessary for a fair presentation of operating results for the periods shown have been made. Certain prior period amounts have been reclassified to conform to current period presentation and for comparability purposes. Note 2 - Earnings (Loss) and Dividends Per Share: The following is a reconciliation of basic earnings (loss) per share and diluted earnings (loss) per share for the quarter and nine months ended September 30, 2001 and 2000, respectively:
($ in thousands except share information) FOR THE NINE MONTHS ENDED FOR THE QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ----------- ------------ ----------- ----------- CONTINUING OPERATIONS Net Income (loss) $ 15,151 $ (36,837) $ 6,482 $ (25,295) Weighted average common shares outstanding - Basic 16,368,382 18,034,854 16,273,761 17,435,701 Net Income (loss) per common share from continuing operations - Basic $ 0.93 $ (2.04) $ 0.40 $ (1.45) Weighted average common shares outstanding - Diluted 16,609,335 18,034,854 16,552,512 17,435,701 Net Income (loss) per common share from continuing operations - Diluted $ 0.91 $ (2.04) $ 0.39 $ (1.45)
7
($ in thousands except share information) FOR THE NINE MONTHS ENDED FOR THE QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ----------- ------------ ----------- ----------- DISCONTINUED OPERATIONS Net (loss) income from discontinued operations* $ -- $ (2,267) $ -- $ 393 Weighted average common shares 16,368,382 18,034,854 16,273,761 17,435,701 Outstanding - Basic Net (loss) income per common share from discontinued operations - Basic $ -- $ (0.13) $ -- $ 0.02 Weighted average common shares 16,609,335 18,034,854 16,552,512 17,435,701 outstanding - Diluted Net (loss) income per common share from discontinued operations - Diluted $ -- $ (0.13) $ -- $ 0.02
* Net of applicable income tax expense of $0, $81, $0 and $235, respectively
($ in thousands except share information) FOR THE NINE MONTHS ENDED FOR THE QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ----------- ------------ ----------- ----------- SUPPLEMENTAL DISCLOSURE: Cumulative effect of change in accounting principles SFAS No. 133 on income per common share, $ (0.01) -- -- -- net of tax - Basic Cumulative effect of change in accounting principles SFAS No. 133 on income per common share, $ (0.01) -- -- -- net of tax - Diluted
The supplemental disclosure above represents the cumulative effect of adopting as of January 1, 2001 Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) on basic and diluted earnings (loss) per share. See Note 3 below for additional information. The Board of Directors approved a cash dividend of $0.11 per share on August 2, 2001. This dividend was paid on September 12, 2001 to holders of record as of August 15, 2001. Note 3 - Change in Accounting Principles In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133. SFAS No. 133, as amended by SFAS Nos. 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 8 forecasted transaction. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company adopted 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 Company has implemented SFAS No.133 assuming that the value of such derivatives is zero at rate lock date. Commencing January 1, 2001, the Company records 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 are 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 are 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 records a charge to earnings. Simultaneously, the Company takes out of OCI a like amount and records 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, 9 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 Company did not elect hedge accounting treatment related to servicing rights as of January 1, 2001. During May 2001, the Company chose to elect hedge accounting treatment for its servicing hedges. Since the time of election, the Company has marked-to-market the hedge instruments resulting in pre-tax charges of $5.3 million. Prior to the election of hedge accounting, the offsetting increase in value of the underlying servicing portfolio could not be recognized. The Company enters into interest rate swaps to pay fixed rate and receive floating rate as a cash flow hedge of its variable rate debt used to finance its fixed rate lease receivables. Interest rate swaps are considered to be derivatives under SFAS No. 133 and are to be carried at market value as assets or liabilities in the balance sheet. Since this is a cash flow hedge under SFAS No. 133, the after tax impact is charged to or credited to OCI. Under the transition rules of SFAS No. 133, as of January 1, 2001, the Company recognized the value of derivatives on its balance sheet. It recognized in a separate line in its income statement the cumulative effect of changing to SFAS No. 133. That cumulative effect is the difference between retained earnings at December 31, 2000 and the amount of retained earnings that would have been reported at that date if SFAS No. 133 had been retroactively applied to all prior periods. The table below highlights the impact of this transition adjustment.
($ IN THOUSANDS) BALANCE SHEET - -------------- CUMULATIVE DERIVATIVE TAX DERIVATIVE TAX EFFECT OF ASSETS ASSET LIABILITIES LIABILITY OCI CHANGE ---------- ------ ----------- --------- ------- ---------- Rate lock commitments $1,366 $ -- $ -- $509 $ -- $ 857 Derivatives hedging rate lock Commitments 308 663 1,779 115 -- (923) 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 $8,279 $645 $(3,951) $(149) ====== ====== ====== ==== ======= =====
In addition to the cumulative effect adjustment above, SFAS No. 133 resulted in a decrease in net income net of tax of $1.5 million ($0.09 per share) and $1.6 million ($0.09 per share), for the nine months and three months ended September 30, 2001, respectively. 10 Note 4 - Disposal of Commercial Mortgage Segment On September 29, 2000, the Company closed on an agreement to sell substantially all of the assets of its commercial mortgage division, Laureate Capital Corp., to BB&T Corporation of Winston-Salem, N.C. Note 5 - Recently Issued Accounting Standard In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.142, "Goodwill and Other Intangibles" (SFAS No. 142). SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". Under SFAS No. 142, amortization of past and future intangible assets that have indefinite useful lives will be eliminated, and, instead, such assets will be subjected to an impairment assessment at least annually. The FASB has concluded that goodwill has an indefinite useful life and will not be amortized under any circumstances. SFAS No. 142 is effective for all fiscal quarters of all fiscal years beginning after December 15, 2001. Consistent with the provisions of SFAS No. 142, as of January 1, 2002, the Company will report on its balance sheet the assessed value of its goodwill, will discontinue any further amortization of goodwill, and will at least annually assess goodwill for further impairment. Management does not at this time consider the forthcoming change in accounting principle to be material to its financial statements. Note 6 - Employee Benefit and Incentive Programs The Company performs an annual review of the costs and merits of each of its benefit programs. During 2001, the Company completed its review of the Employee Stock Ownership Plan (ESOP) and determined that there are alternative programs that are more easily understood by and more beneficial to the participants than a leveraged employee stock ownership plan. Pursuant to this, the Board of Directors has instructed management to suspend further contributions to the ESOP pending an anticipated termination of the plan. Upon suspension of contributions, participants will vest 100% in their respective account balances. The Company's expense under the plan will be substantially reduced for 2001. Expenses were $1,083, $1,244 and $1,623 for the years ended December 31, 2000, 1999 and 1998, respectively. During 2001, the Company implemented incentive compensation programs to more effectively encourage employees to "run it like they own it". These programs include cash incentives based upon achievement of 1) corporate level goals (EPS and efficiency ratio goals) and 2) individual goals related to cost control and other strategic objectives for the respective operating divisions and departments. The costs accrued under these programs for the nine months ended September 30, 2001 were $4,169, primarily resulting from the strength of the Company's year-to-date performance. Likewise, in 2001 each of the Company's full-time employees was granted incentive stock options to provide further incentive to employees to "run it like they own it". 11 Note 7 - Dividend Restrictions: The covenant of the Company's syndicated warehouse credit facility, renewed July 25, 2001, contains a limit on cash dividends to 35% of reported earnings for the prior quarter and prohibits repurchases of common stock. Note 8 - Purchase of Assets: On September 14, 2001, the Company filed a report on Form 8-K reporting under Item 5 the purchase of certain assets from Nations Credit Financial Services Corporation ("EquiCredit"), a wholly owned subsidiary of Bank of America Corporation, by Meritage Mortgage Corporation ("Meritage"), a wholly owned subsidiary of the Company. The assets purchased included fixed assets of 15 of EquiCredit's offices and a service center in Jacksonville, Florida. The purchase was structured as a cash transaction and funded from regular operating funds of the Company. The transaction did not have a material effect upon the Company's subprime financing arrangements. Note 9 - Allocated Revenues and Expenses: Through 2000, the Company reported segment data using agency-eligible production, servicing, reinsurance, subprime production and leasing as its segments. During the second half of 2000, the Company completed a company-wide reorganization designed around business processes rather than traditional product groupings to help the Company to become more customer-centric. The new segments are sales, customer fulfillment, portfolio, servicing, leasing and administration. The sales segment includes the sales forces of the agency-eligible and subprime units. The customer fulfillment segment includes all the personnel responsible for underwriting, processing and closing or purchasing loans. The portfolio segment is assumed to own the Company's balance sheet and is responsible for managing the pipeline and inventory of loans, the liquidity of the Company, and the servicing portfolio as well as performance of secondary marketing activities. Servicing subservices the loans on behalf of the portfolio segment and external subservicing customers, assists the portfolio segment in transferring loans and servicing to end investors and obtains trailing documentation necessary for final pool certification. Leasing includes all of the sales and operating functions of the Company's leasing operation. Administration includes corporate administration, information systems, finance, administrative services, legal, human resources and internal audit. Each item of revenue and expense is initially charged or credited to the segment that has the most control over the respective revenues and expenses. The new segment reporting recognizes the existence of internal customer relationships, and the resulting accounting includes transfer pricing based on net value added for billings between segments. Overhead from administration is allocated to the other segments based on headcount and budgeted overhead expenses. 12 During 2001, the Company will present both the old and the new segments to facilitate investor transition to the new view of the Company. Prior period comparative information for the new segments is not available. Following is a summary of the allocated revenues and expenses for each of the Company's operating divisions for the quarter and nine months ended September 30, 2001 and 2000, respectively, based upon traditional product groupings: 13
AGENCY-ELIGIBLE FOR THE QUARTER ENDED RE- TOTAL OTHER/ CON- SEPTEMBER 30, 2001 (A) PRODUCTION SERVICING INSURANCE SUBPRIME LEASING SEGMENTS ELIMINATIONS SOLIDATED ---------- --------- --------- -------- ------- -------- ------------ --------- (Unaudited) ($ in thousands) Net interest income (expense) $ 2,739 $(1,119) $ 1 $ 2,788 $ 2,842 $ 7,251 $ (257) $ 6,994 Net gain on sale of mortgage loans 26,606 -- -- 10,341 -- 36,947 -- 36,947 Gain on sale of mortgage servicing rights -- 396 -- -- -- 396 -- 396 Servicing fees -- 9,127 -- -- 87 9,214 -- 9,214 Other income (expense) 14 (2,811) 748 (3) 286 (1,766) 1 (1,765) ------- ------- ------- -------- -------- -------- -------- ------- Total revenues 29,359 5,593 749 13,126 3,215 52,042 (256) 51,786 ------- ------- ------- -------- -------- -------- -------- ------- Salary and employee benefits 6,711 1,035 -- 2,948 819 11,513 1,372 12,885 Occupancy expense 4,606 323 -- 792 127 5,848 (139) 5,709 Amortization and provision for impairment of mortgage servicing rights -- 9,523 -- -- -- 9,523 -- 9,523 Provision expense 1,223 -- 51 2,383 1,732 5,389 -- 5,389 General and administrative expenses 2,696 1,640 (52) 1,533 289 6,106 1,686 7,792 ------- ------- ------- -------- -------- -------- -------- ------- Total expenses 15,236 12,521 (1) 7,656 2,967 38,379 2,919 41,298 ------- ------- ------- -------- -------- -------- -------- ------- Income (loss) before income taxes 14,123 (6,928) 750 5,470 248 13,663 (3,175) 10,488 Income tax benefit (expense) (5,280) 2,590 (264) (2,102) (106) (5,162) 1,156 (4,006) ------- ------- ------- -------- -------- -------- -------- ------- Income (loss) from continuing operations $ 8,843 $(4,338) $ 486 $ 3,368 $ 142 $ 8,501 $ (2,019) $ 6,482 ======= ======= ======= ======== ======== ======== ======== =======
(a) 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.
AGENCY-ELIGIBLE FOR THE QUARTER ENDED RE- COMMERCIAL SEPTEMBER 30, 2001 (A) PRODUCTION SERVICING INSURANCE SUBPRIME MORTGAGE LEASING ---------- --------- --------- -------- ---------- -------- (Unaudited) ($ in thousands) Net interest income (expense) $ 339 $(1,345) $ (32) $ 3,233 $ -- $ 2,343 Net gain on sale of mortgage loans 4,438 -- -- 4,022 -- -- Gain on sale of mortgage servicing rights -- 673 -- -- -- -- Servicing fees -- 8,335 -- -- -- 136 Mark-to-market on residual interests in subprime securitizations -- -- -- (29,892) -- -- Other income (expense) 102 117 813 (776) -- 293 -------- ------- ----- -------- ---- -------- Total revenues 4,879 7,780 781 (23,413) -- 2,772 -------- ------- ----- -------- ---- -------- Salary and employee benefits 7,737 684 (90) 2,785 -- 669 Occupancy expense 2,961 35 -- 686 -- 127 Amortization and provision for impairment of mortgage servicing rights -- 6,069 -- -- -- -- Provision expense 450 -- -- 841 -- 687 General and administrative expenses 3,134 1,148 73 2,166 -- -- -------- ------- ----- -------- ---- -------- Total expenses 14,282 7,936 (17) 6,478 -- 1,809 -------- ------- ----- -------- ---- -------- Income (loss) before income taxes (9,403) (156) 798 (29,891) -- 963 Income tax benefit (expense) 3,472 56 (281) 11,079 -- (378) -------- ------- ----- -------- ---- -------- Income (loss) from continuing operations (5,931) (100) 517 (18,812) -- 585 Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $235) -- -- -- -- 393 -- -------- ------- ----- -------- ---- -------- Net income (loss) $ (5,931) $ (100) $ 517 $(18,812) $393 $ 585 TOTAL OTHER/ CON- SEGMENTS ELIMINATIONS SOLIDATED -------- ------------ --------- Net interest income (expense) $ 4,538 $ (388) $ 4,150 Net gain on sale of mortgage loans 8,460 -- 8,460 Gain on sale of mortgage servicing rights 673 -- 673 Servicing fees 8,471 -- 8,471 Mark-to-market on residual interests in subprime securitizations (29,892) -- (29,892) Other income (expense) 549 (95) 454 Total revenues (7,201) (483) (7,684) Salary and employee benefits 11,785 1,647 13,432 Occupancy expense 3,809 (176) 3,633 Amortization and provision for impairment of mortgage servicing rights 6,069 -- 6,069 Provision expense 1,978 -- 1,978 General and administrative expenses 6,847 511 7,358 -------- -------- -------- Total expenses 30,488 1,982 32,470 -------- -------- -------- Income (loss) before income taxes (37,689) (2,465) (40,154) Income tax benefit (expense) 13,948 911 14,859 -------- -------- -------- Income (loss) from continuing operations (23,741) (1,554) (25,295) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $235) 393 -- 393 -------- -------- -------- Net income (loss) $(23,348) $ (1,554) $(24,902) -------- -------- --------
(a) Revenues and expenses have been allocated on a direct basis to the extent possible. Management believes that these and all other revenues and expenses have been allocated to the respective divisions on a reasonable basis. 14
AGENCY-ELIGIBLE ---------------------------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) PRODUCTION SERVICING REINSURANCE - ------------------------------------------------------------------------------------------------ (Unaudited) ($ in thousands) Net interest income (expense) $ 6,799 $ (3,467) $ (6) Net gain on sale of mortgage loans 65,862 -- -- (Loss) on sale of mortgage servicing rights -- (2,329) -- Servicing fees -- 26,172 -- Other income (expense) 404 (4,750) 2,433 ------------------------------------------ Total revenues 73,065 15,626 2,427 ------------------------------------------ Salary and employee benefits 21,194 2,754 -- Occupancy expense 10,745 868 -- Amortization and provision for impairment of mortgage servicing rights -- 20,065 -- Provision expense 2,822 -- 165 General and administrative expenses 7,615 5,471 10 ------------------------------------------ Total expenses 42,376 29,158 175 ------------------------------------------ Income (loss) before income taxes 30,689 (13,532) 2,252 Income tax benefit (expense) (11,478) 5,061 (792) Income (loss) from continuing operations before transition adjustment 19,211 (8,471) 1,460 ------------------------------------------ Transition Adjustment - SFAS No. 133 -- -- -- ------------------------------------------ Income (loss) from continuing operations $ 19,211 $ (8,471) $ 1,460 ========================================== OTHER / FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) SUBPRIME LEASING TOTAL SEGMENTS ELIMINATIONS CONSOLIDATED - --------------------------------------------------------------------------------------------------------------------------- (Unaudited) ($ in thousands) Net interest income (expense) $ 7,672 $ 8,405 $ 19,403 $(1,202) $ 18,201 Net gain on sale of mortgage loans 21,649 -- 87,511 -- 87,511 (Loss) on sale of mortgage servicing rights -- -- (2,329) -- (2,329) Servicing fees -- 274 26,446 -- 26,446 Other income (expense) 7 932 (974) 152 (822) --------------------------------------------------------------------- Total revenues 29,328 9,611 130,057 (1,050) 129,007 --------------------------------------------------------------------- Salary and employee benefits 8,021 2,355 34,324 4,173 38,497 Occupancy expense 2,249 379 14,241 (442) 13,799 Amortization and provision for impairment of mortgage servicing rights -- -- 20,065 -- 20,065 Provision expense 5,008 3,649 11,644 -- 11,644 General and administrative expenses 3,618 1,107 17,821 2,760 20,581 --------------------------------------------------------------------- Total expenses 18,896 7,490 98,095 6,491 104,586 --------------------------------------------------------------------- Income (loss) before income taxes 10,432 2,121 31,962 (7,541) 24,421 Income tax benefit (expense) (4,078) (838) (12,125) 3,004 (9,121) Income (loss) from continuing operations before transition adjustment 6,354 1,283 19,837 (4,537) 15,300 --------------------------------------------------------------------- Transition Adjustment - SFAS No. 133 -- -- -- (149) (149) --------------------------------------------------------------------- Income (loss) from continuing operations $ 6,354 $ 1,283 $ 19,837 $(4,686) $ 15,151 =====================================================================
(a) 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.
AGENCY-ELIGIBLE COMMERCIAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (A) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE - ---------------------------------------------------------------------------------------------------------------------------------- (Unaudited) ($ in thousands) Net interest income (expense) $ 1,252 $ (3,661) $ (71) $ 9,890 $ -- Net gain on sale of mortgage loans 16,255 -- -- 10,201 -- Gain on sale of mortgage servicing rights -- 2,212 -- -- -- Servicing fees -- 26,241 -- -- -- Mark-to-market on residual interests in subprime securitizations -- -- -- (39,338) -- Other income 534 365 2,408 544 -- -------------------------------------------------------------- Total revenues 18,041 25,157 2,337 (18,703) -- -------------------------------------------------------------- Salary and employee benefits 20,860 2,057 -- 9,911 -- Occupancy expense 8,484 146 -- 1,991 -- Amortization and provision for impairment of mortgage servicing rights -- 18,278 -- -- -- Provision expense 1,702 -- -- 1,751 -- General and administrative expenses 8,271 3,168 245 5,311 -- -------------------------------------------------------------- Total expenses 39,317 23,649 245 18,964 -- -------------------------------------------------------------- Income (loss) before income taxes (21,276) 1,508 2,092 (37,667) -- Income tax benefit (expense) 7,841 (556) (735) 13,842 -------------------------------------------------------------- Income (loss) from continuing operations (13,435) 952 1,357 (23,825) -- Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $261) -- -- -- -- (1,607) Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $465) -- -- -- -- (660) -------------------------------------------------------------- Net income (loss) $(13,435) $ 952 $ 1,357 $(23,825) $(2,267) ============================================================== TOTAL OTHER / FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (A) LEASING SEGMENTS ELIMINATIONS CONSOLIDATED - --------------------------------------------------------------------------------------------------------------------------- (Unaudited) ($ in thousands) Net interest income (expense) $ 6,763 $ 14,173 $ (746) $ 13,427 Net gain on sale of mortgage loans -- 26,456 -- 26,456 Gain on sale of mortgage servicing rights -- 2,212 -- 2,212 Servicing fees 368 26,609 (258) 26,351 Mark-to-market on residual interests in subprime securitizations -- (39,338) -- (39,338) Other income 859 4,710 118 4,828 --------------------------------------------------- Total revenues 7,990 34,822 (886) 33,936 --------------------------------------------------- Salary and employee benefits 2,107 34,935 3,367 38,302 Occupancy expense 373 10,994 (525) 10,469 Amortization and provision for impairment of mortgage servicing rights -- 18,278 -- 18,278 Provision expense 2,208 5,661 -- 5,661 General and administrative expenses 948 17,943 1,509 19,452 --------------------------------------------------- Total expenses 5,636 87,811 4,351 92,162 --------------------------------------------------- Income (loss) before income taxes 2,354 (52,989) (5,237) (58,226) Income tax benefit (expense) (934) 19,458 1,931 21,389 --------------------------------------------------- Income (loss) from continuing operations 1,420 (33,531) (3,306) (36,837) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $261) -- (1,607) -- (1,607) Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $465) -- (660) -- (660) --------------------------------------------------- Net income (loss) $ 1,420 $(35,798) $ (3,306) $(39,104) ====================================================
(a) Revenues and expenses have been allocated on a direct basis to the extent possible. Management believes that these and all other revenues and expenses have been allocated to the respective divisions on a reasonable basis. 15 Following is a summary of the allocated revenues and expenses for each of the Company's operating divisions for the quarter and nine months ended September 30, 2001, based upon business processes. 16
CUSTOMER FOR THE QUARTER ENDED SEPTEMBER 30, 2001 (A) SALES FULFILLMENT PORTFOLIO SERVICING LEASING - ----------------------------------------------------------------------------------------------------------------------------------- (Unaudited) ($ in thousands) Net interest income $ -- $ -- $ 4,412 $ -- $2,842 Net gain (loss) on sale of mortgage loans 2,476 (385) 40,495 (139) -- Gain on sale of mortgage servicing rights -- -- 396 -- -- Servicing fees -- -- 8,291 836 87 Other income (4) 2 (2,144) 99 286 ------------------------------------------------------------------------ Total revenues (expense) 2,472 (383) 51,450 796 3,215 ------------------------------------------------------------------------ Salary and employee benefits 6,223 6,709 1,437 1,600 819 Occupancy expense 347 2,576 227 508 127 Amortization and provision for impairment of mortgage servicing rights -- -- 9,523 -- -- Provision expense -- -- 3,657 -- 1,732 General and administrative expenses 817 1,339 1,472 843 289 ------------------------------------------------------------------------ Total expenses 7,387 10,624 16,316 2,951 2,967 ------------------------------------------------------------------------ Income (loss) before income taxes (4,915) (11,007) 35,134 (2,155) 248 Income tax expense -- -- -- -- -- ------------------------------------------------------------------------ Income (loss) before allocations and transfer pricing (4,915) (11,007) 35,134 (2,155) 248 Overhead allocations 1,084 2,867 523 1,093 -- ------------------------------------------------------------------------ Income (loss) before transfer pricing (5,999) (13,874) 34,611 (3,248) 248 Transfer pricing 8,993 12,138 (24,365) 3,234 -- ------------------------------------------------------------------------ Net income (expense) $ 2,994 $ (1,736) $ 10,246 $ (14) $ 248 ======================================================================== (B) OTHER / FOR THE QUARTER ENDED SEPTEMBER 30, 2001 (A) ADMINISTRATION ELIMINATIONS CONSOLIDATED - ------------------------------------------------------------------------------------------------------------ (Unaudited) ($ in thousands) Net interest income $ (260) $ -- $ 6,994 Net gain (loss) on sale of mortgage loans 492 (5,993) 36,946 Gain on sale of mortgage servicing rights -- -- 396 Servicing fees -- -- 9,214 Other income (3) -- (1,764) ----------------------------------------------- Total revenues (expense) 229 (5,993) 51,786 ----------------------------------------------- Salary and employee benefits 3,344 (7,247) 12,885 Occupancy expense 1,924 -- 5,709 Amortization and provision for impairment of mortgage servicing rights -- -- 9,523 Provision expense -- -- 5,389 General and administrative expenses 2,884 148 7,792 ----------------------------------------------- Total expenses 8,152 (7,099) 41,298 ----------------------------------------------- Income (loss) before income taxes (7,923) 1,106 10,488 Income tax expense -- (4,006) (4,006) ----------------------------------------------- Income (loss) before allocations and transfer pricing (7,923) (2,900) 6,482 Overhead allocations (5,567) -- -- ----------------------------------------------- Income (loss) before transfer pricing (2,356) (2,900) 6,482 Transfer pricing -- -- -- ----------------------------------------------- Net income (expense) $(2,356) $(2,900) $ 6,482 ===============================================
(a) 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. (b) Includes consolidation eliminations, SFAS No. 91 and No. 133 17
CUSTOMER FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) SALES FULFILLMENT PORTFOLIO SERVICING LEASING - ---------------------------------------------------------------------------------------------------------------------------- (Unaudited) ($ in thousands) Net interest income $ -- $ -- $ 11,003 $ -- $8,405 Net gain (loss) on sale of mortgage loans 7,118 (1,054) 96,497 (317) -- (Loss) on sale of mortgage servicing rights -- -- (2,329) -- -- Servicing fees -- -- 24,482 1,690 274 Other income 374 9 (2,666) 400 932 ------------------------------------------------------------------- Total revenues 7,492 (1,045) 126,987 1,773 9,611 ------------------------------------------------------------------- Salary and employee benefits 15,961 17,441 4,351 4,448 2,355 Occupancy expense 874 5,646 634 1,520 379 Amortization and provision for impairment of mortgage servicing rights -- -- 20,065 -- -- Provision expense -- -- 7,995 -- 3,649 General and administrative expenses 2,247 3,493 3,726 3,664 1,107 ------------------------------------------------------------------- Total expenses 19,082 26,580 36,771 9,632 7,490 ------------------------------------------------------------------- Income (loss) before income taxes (11,590) (27,625) 90,216 (7,859) 2,121 Income tax expense -- -- -- -- -- ------------------------------------------------------------------- Income (loss) before transition adjustment, allocations and transfer pricing (11,590) (27,625) 90,216 (7,859) 2,121 Transition adjustment - SFAS No. 133 -- -- -- -- -- ------------------------------------------------------------------- Income (loss) before allocations and transfer pricing (11,590) (27,625) 90,216 (7,859) 2,121 ------------------------------------------------------------------- Overhead allocations 3,138 7,791 1,643 3,311 -- ------------------------------------------------------------------- Income (loss) before transfer pricing (14,728) (35,416) 88,573 (11,170) 2,121 Transfer pricing 23,780 35,774 (69,371) 9,817 -- ------------------------------------------------------------------- Net income (expense) $ 9,052 $ 358 $ 19,202 $ (1,353) $2,121 ------------------------------------------------------------------- (B) OTHER / FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) ADMINISTRATION ELIMINATIONS CONSOLIDATED - ------------------------------------------------------------------------------------------------------- (Unaudited) ($ in thousands) Net interest income $ (1,207) $ -- $ 18,201 Net gain (loss) on sale of mortgage loans 916 (15,649) 87,511 (Loss) on sale of mortgage servicing rights -- -- (2,329) Servicing fees -- -- 26,446 Other income 129 -- (822) ----------------------------------------- Total revenues (162) (15,649) 129,007 ----------------------------------------- Salary and employee benefits 11,394 (17,453) 38,497 Occupancy expense 4,746 -- 13,799 Amortization and provision for impairment of mortgage servicing rights -- -- 20,065 Provision expense -- -- 11,644 General and administrative expenses 5,898 446 20,581 ----------------------------------------- Total expenses 22,038 (17,007) 104,586 ----------------------------------------- Income (loss) before income taxes (22,200) 1,358 24,421 Income tax expense -- (9,121) (9,121) ----------------------------------------- Income (loss) before transition adjustment, allocations and transfer pricing (22,200) (7,763) 15,300 Transition adjustment - SFAS No. 133 -- (149) (149) ----------------------------------------- Income (loss) before allocations and transfer pricing (22,200) (7,912) 15,151 ----------------------------------------- Overhead allocations (15,883) -- -- ----------------------------------------- Income (loss) before transfer pricing (6,317) (7,912) 15,151 Transfer pricing -- -- -- ----------------------------------------- Net income (expense) $ (6,317) $ (7,912) $ 15,151 -----------------------------------------
(a) 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. (b) Includes consolidation eliminations, SFAS No. 91 and No. 133 18 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 in 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 quarterly report) which are not statements of historical fact are intended to be, and are hereby identified as, "forward looking statements" for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and that actual results could differ materially from those indicated by such forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, the following which are described herein or in the Company's Annual Report on Form 10-K for the year ended December 31, 2000: (i) changes in economic conditions, (ii) competition, (iii) concentration, (iv) changes in interest rate, (v) changes in regulations and related matters, (vi) litigation affecting the mortgage banking business, (vii) delinquency and default risks, (viii) financing of operations, (ix) changes in the market for servicing rights, mortgage loans and lease receivables, (x) environmental matters, (xi) changes in the demand for mortgage loans and leases, (xii) prepayment risks, (xiii) dependence upon independent mortgage brokers and mortgage bankers, (xiv) changes in accounting estimates, (xv) changes in federal programs, the availability of an active secondary market, (xvi) the effect of certain charter and bylaw provisions, the possible issuance of preferred stock and (xvii) employee matters. 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. 19 LOAN AND LEASE PRODUCTION A summary of production by source for the periods indicated is set forth below:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------ ------------------------ 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Agency-Eligible Loan Production: Correspondent $6,203,712 $3,277,105 $1,861,706 $1,249,462 Wholesale 1,824,573 831,451 558,896 288,230 ---------- ---------- ---------- ---------- Total Agency-Eligible Loan Production 8,028,285 4,108,556 2,420,602 1,537,692 Subprime 874,895 481,951 417,796 160,637 Lease Production 65,636 78,215 19,486 24,915 ---------- ---------- ---------- ---------- Total Mortgage Loan and Lease Production $8,968,816 $4,668,722 $2,857,884 $1,723,244 ========== ========== ========== ==========
The Company purchases agency-eligible mortgage loans through its correspondents and originates loans through its wholesale and subprime divisions. The Company also has a small-ticket commercial equipment lease operation. Correspondent operations accounted for 69% and 70% of the Company's total production for the nine months ended September 30, 2001 and 2000, respectively. Wholesale and subprime production accounted for 20% and 10%, respectively, of the Company's production for the nine months ended September 30, 2001 and 18% and 10%, respectively, of the Company's production for the nine months ended September 30, 2000. Lease production accounted for 1% and 2% of the Company's total production for the nine months ended September 30, 2001 and 2000, respectively. A summary of key information relevant to industry loan production activity is set forth below:
FOR THE NINE MONTHS ($ IN THOUSANDS) ENDED SEPTEMBER 30, ---------------------------------------- 2001 2000 -------------- --------------- U.S. 1-4 Family Mortgage Originations Statistics (1): U.S. 1-4 Family Mortgage Originations $1,295,000,000 $ 763,000,000 Adjustable Rate Mortgage Market Share 11.89% 30.00% Estimated Fixed Rate Mortgage Originations $1,141,000,000 $ 534,000,000 Company Information: Residential Loan Production $ 8,903,180 $ 4,590,507 Estimated Company Market Share 0.69% 0.60%
(1) Source: Mortgage Bankers Association of America, Economics Department, (as of October 10, 2001). The Company's total residential mortgage production increased by 94% to $8.9 billion for the first nine months of 2001 from $4.6 billion for the first nine months of 2000. Interest rates began falling in December of 2000 and remained low during the first nine months of 2001 as compared to the first nine months of 2000, resulting in an increase in overall production levels industry-wide. Due to expanded sales efforts and success in the secondary markets, the Company's estimated market share for the first nine months of 2001 increased 0.09% compared with the first nine months of 2000. 20
FOR THE QUARTER ($ IN THOUSANDS) ENDED SEPTEMBER 30, -------------------------------------- 2001 2000 ------------ --------------- U.S. 1-4 Family Mortgage Originations Statistics (1): U.S. 1-4 Family Mortgage Originations $467,000,000 $ 290,000,000 Adjustable Rate Mortgage Market Share 13.00% 28.00% Estimated Fixed Rate Mortgage Originations $406,000,000 $ 209,000,000 Company Information: Residential Loan Production $ 2,838,398 $ 1,698,329 Estimated Company Market Share 0.61% 0.59%
(1) Source: Mortgage Bankers Association of America, Economics Department, (as of October 10, 2001). The Company's total residential mortgage production increased by 67% to $2.8 billion for the third quarter of 2001 from $1.7 billion for the third quarter of 2000. Interest rates began falling in December of 2000 and remained low during the first nine months of 2001 as compared to the first nine months of 2000, resulting in an increase in overall production levels industry-wide. Due to expanded sales efforts and success in the secondary markets, the Company's estimated market share for third quarter 2001 increased 0.02% from third quarter 2000. Correspondent Loan Production The Company purchases closed mortgage loans through its network of approved correspondent lenders. Correspondents are primarily mortgage lenders, larger mortgage brokers and smaller savings and loan associations and commercial banks that have met the Company's approval requirements. The Company continues to emphasize correspondent loan production as its basic business focus because of the lower fixed expenses and capital investment required of the Company. A summary of key information relevant to the Company's correspondent loan production activities is set forth below:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, --------------------------- --------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Correspondent Loan Production $6,203,713 $3,277,105 $1,861,706 $1,249,462 Estimated Correspondent Market Share (1) 0.48% 0.43% 0.40% 0.43% Active Correspondents 721 918 721 918 Correspondent Division Expenses $ 31,106 $ 30,780 $ 11,430 $ 10,698
(1) Source: Mortgage Bankers Association of America, Economics Department, (as of October 10, 2001). The Company's correspondent loan production increased by 90% to $6.2 billion for the first nine months of 2001 from $3.3 billion for the first nine months of 2000. Correspondent division expenses increased to $31.1 million for the first nine months of 2001 from $30.8 million for the first nine months of 2000. However, these expenses as bps of production decreased by 44 bps to 50 bps for the nine months ended September 30, 2001 from 94 bps for the nine months ended 21 September 30, 2000. This gained efficiency is a result of the Company's continued efforts to reduce operating expenses through automation and re-engineering of work processes. The Company's correspondent loan production increased by 50% to $1.9 billion for the third quarter of 2001 from $1.2 billion for the third quarter of 2000. Mortgage interest rates were low during the third quarter of 2001 when compared to the third quarter of 2000, resulting in an increase in overall production levels industry-wide. Correspondent division expenses only increased $0.7 million (7%) to $11.4 million for the third quarter of 2001 compared to $10.7 million for the third quarter of 2000, despite a 50% increase ($621 million) in production. In bps these expenses decreased by 25 bps to 61 bps in the third quarter of 2001 from 86 bps in the third quarter of 2000, primarily due to gained efficiency as noted above in the nine months results analysis. Wholesale Loan Production The wholesale division receives loan applications through brokers, underwrites the loans, funds the loans at closing and prepares all closing documentation. The Company's operating centers handle all shipping and follow-up procedures on loans. Typically, a mortgage broker is responsible for taking applications and accumulating the information precedent to the Company's processing and underwriting of the loans. Although the establishment of regional operating centers involves the incurrence of fixed expenses associated with maintaining those offices, wholesale operations also generally provide for higher profit margins than correspondent loan production. Additionally, each regional operating center can serve a relatively sizeable geographic area by establishing relationships with large numbers of independent mortgage loan brokers who bear much of the cost of identifying and interacting directly with loan applicants. During 2000, the Company completed the process started in 1999 of consolidating from 18 branches into 4 regional operating centers to improve operating cost efficiency levels. A summary of key information relevant to the Company's wholesale production activities is set forth below:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Wholesale Loan Production $1,824,573 $831,451 $558,896 $288,230 Estimated Wholesale Market Share (1) 0.14% 0.11% 0.12% 0.10% Wholesale Division Expenses $ 11,278 $ 8,537 $ 3,814 $ 3,584 Approved Brokers 4,718 4,128 4,718 4,128 Number of Regional Operating Centers (2) 4 6 4 6 Number of Employees 131 123 131 123
(1) Source: Mortgage Bankers Association of America, Economics Department, (as of October 10, 2001). (2) Regional operating centers were formerly known as branches Wholesale loan production increased 118% ($1.0 billion) to $1.8 billion for the first nine months of 2001 from $0.8 billion for the first nine months of 2000. This resulted in an increase in market share of 0.03% to 0.14% for the first nine months of 2001 from 0.11% for the first nine months of 2000. Wholesale loan production increased $0.3 billion to $0.6 billion for the third quarter of 2001 from $0.3 billion for the third quarter of 2000. 22 Subprime Loan Production The Company conducts subprime business through its wholly owned subsidiary, Meritage Mortgage Corporation (Meritage). A summary of key information relevant to the Company's subprime production activities is set forth below:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ----------------------- ----------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Subprime Loan Production $874,895 $481,951 $417,796 $160,637 Estimated Subprime Market Share (1) 0.07% 0.06% 0.09% 0.06% Subprime Direct Operating Expenses $ 18,896 $ 18,964 $ 7,656 $ 6,478 Approved Brokers 4,612 2,925 4,612 2,925 Number of operating centers 4 3 4 3 Number of Employees 448 240 448 240
(1) Source: Mortgage Bankers Association of America, Economics Department, (as of October 10, 2001). Subprime loan production increased by 82% to $874.9 million for the nine months ended September 30, 2001, compared to the nine months ended September 30, 2000. Despite the 82% increase in production, subprime costs rose by only 7% (exclusive of a one-time charge of $1.3 million in 2000) to $18.9 million for the nine month period ended September 30, 2001. These cost savings were largely the result of gained efficiencies through the Company's efforts to centralize subprime processing, underwriting and closing functions into three regional operating centers where a critical mass of volume has been achieved for better operating efficiency. The addition of the fourth regional operating center, related to the acquisition of 15 EquiCredit branches, occurred late in the third quarter of 2001 and did not significantly impact direct operating expenses for the nine months. Subprime loan production increased by 160% to $417.8 million for the three months ended September 30, 2001, as compared to $160.6 million during the three months ended September 30, 2000. Due to this increase in production along with the Company's expansion on the East Coast, subprime direct operating expenses increased to $7.7 million for the third quarter of 2001 as compared to $6.5 million during the third quarter of 2000. These expenses, however, decreased in bps by 220 bps to 183 bps in the third quarter of 2001 from 403 bps in the third quarter of 2000. This drop in unit cost is largely the result of gained efficiencies through the Company's efforts to centralize subprime processing, underwriting and closing functions into three regional operating centers where a critical mass of volume has been achieved for better operating efficiency. The addition of the fourth regional operating center, related to the acquisition of 15 EquiCredit branches, occurred late in the third quarter of 2001 and did not significantly impact direct operating expenses for the quarter. 23 Commercial Mortgage Production On September 29, 2000, the Company closed on an agreement to sell substantially all of the assets of its commercial mortgage division, Laureate Capital Corp., to BB&T Corporation of Winston-Salem, N.C. Lease Production The Company's wholly owned subsidiary, Republic Leasing Company, Inc. (Republic Leasing), originates and services small-ticket commercial equipment leases. Substantially all of Republic Leasing's lease receivables are acquired from independent brokers who operate throughout the continental United States. A summary of key information relevant to the Company's lease production activities is set forth below:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------- -------------------- 2001 2000 2001 2000 ------- ------- ------- ------- Lease Production $65,636 $78,215 $19,486 $24,915 Lease Division Direct Operating Expenses $ 7,490 $ 5,636 $ 2,967 $ 1,809 Approved Brokers 235 193 235 193 Number of Employees 62 67 62 67
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 agency-eligible mortgage servicing rights to other approved servicers. Typically, the Company sells its agency-eligible mortgage servicing rights within 90 to 180 days of purchase or origination. However, for strategic reasons, the Company also strives to maintain a servicing portfolio whose size is determined by reference to the Company's cash operating costs which, in turn, are largely determined by the size of its loan production platform. 24 A summary of key information relevant to the Company's agency-eligible loan servicing activities is set forth below:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------------ ------------------------------ 2001 2000 2001 2000 ------------ ----------- ------------ ----------- Underlying Unpaid Principal Balances: Beginning Balance * $ 8,047,179 $ 7,822,394 $ 8,184,965 $ 8,529,100 Agency-Eligible Loan Production (net of servicing- released production)* 7,786,042 3,989,019 2,326,823 1,506,323 Net Change in Work-in-Progress* 773,087 40,493 802,183 (1,119,163) Sales of Servicing* (7,294,392) (3,928,087) (2,997,187) (1,348,268) Paid-In-Full Loans* (1,352,097) (396,066) (463,161) (141,310) Amortization, Curtailments and Other, net* (181,054) (149,484) (74,858) (48,413) ------------ ----------- ------------ ----------- Ending Balance* 7,778,765 7,378,269 7,778,765 7,378,269 Subservicing Ending Balance 4,582,563 1,354,124 4,582,563 1,354,124 ------------ ----------- ------------ ----------- Total Underlying Unpaid Principal Balances $ 12,361,327 $ 8,732,393 $ 12,361,327 $ 8,732,393 ============ =========== ============ ===========
* These numbers and statistics apply to the Company's owned agency-eligible servicing portfolio and, therefore, exclude the subservicing portfolio. The ending balance for the third quarter of 2001 and 2000 include $317,142 and $194,016, respectively, of subprime loans being temporarily serviced until these loans are sold. Of the $7.8 billion and $7.4 billion unpaid principal balance at September 30, 2001 and 2000, $4.8 billion and $5.6 billion, respectively, of the related mortgage servicing right asset is classified as available-for-sale, while $3.0 billion and $1.8 billion, respectively, of the related mortgage servicing right asset is classified as held-for-sale. A summary of servicing statistics follows:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ---------- ----------- ---------- Average Underlying Unpaid Principal Balances (including subservicing) $10,389,983 $9,082,315 $11,565,875 $8,826,384 Weighted Average Note Rate* 7.43% 7.64% 7.43% 7.64% Weighted Average Servicing Fee* 0.44% 0.42% 0.44% 0.42% Delinquency (30+ days) Including Bankruptcies and Foreclosures* 3.89% 2.40% 3.89% 2.40% Number of Servicing Division Employees 108 71 108 71
* These numbers and statistics apply to the Company's owned servicing portfolio The average underlying unpaid principal balance of agency-eligible mortgage loans being serviced and subserviced for the first nine months of 2001 as compared to the first nine months of 2000 increased $1.3 million, or 14.4%, generally due to the 95% overall increase in agency-eligible production. The increase in delinquencies and foreclosures is primarily due to delays in the mail system and other payment delivery systems that were disrupted by the September 11th terrorist attacks. The extent of the impact is not known. 25 The average underlying unpaid principal balance of agency-eligible mortgage loans being serviced and subserviced for the third quarter of 2001 as compared to the third quarter of 2000 increased $2.7 billion, or 31%, generally due to the 57% overall increase in agency-eligible production and the addition of $0.9 billion in third party subservicing. The weighted average note rate decreased by 21 bps, to 7.43% in the third quarter of 2001 from 7.64% in the third quarter of 2000. Lease Servicing Republic Leasing services leases that are owned by it and also services leases for investors. A summary of key information relevant to the Company's lease servicing activity is set forth below:
($ IN THOUSANDS) AS OF SEPTEMBER 30, ----------------------- 2001 2000 -------- -------- Owned Lease Servicing Portfolio $192,298 $182,444 Serviced For Investors Servicing Portfolio 846 5,392 -------- -------- Total Managed Lease Servicing Portfolio $193,144 $187,836 ======== ======== Weighted Average Net Yield For Managed Lease Servicing Portfolio 10.81% 10.73% Delinquencies (30+ Days) Managed Lease Servicing Portfolio 2.24% 2.27%
Consolidated Coverage Ratios A summary of the Company's consolidated ratios of mortgage and lease servicing fees and net interest income from owned leases to cash operating expenses net of amortization and depreciation follows:
($ IN THOUSANDS) FOR THE NINE MONTHS FOR THE QUARTER ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------ ---------------------- 2001 2000 2001 2000 -------- --------- -------- ------- Total Company Servicing Fees $ 26,446 $ 26,351 $ 9,214 $ 8,471 Net Interest Income from Owned Leases 8,405 6,763 2,842 2,343 -------- -------- -------- ------- Total Servicing Fees and Interest from Owned Leases $ 34,851 $ 33,114 $ 12,056 $10,814 -------- -------- -------- ------- Total Company Operating Expenses $104,586 $ 92,162 $ 41,298 $32,470 Total Company Amortization and Depreciation (28,263) (24,588) (13,021) (7,391) -------- -------- -------- ------- Total Company Operating Expenses, Net of Amortization and Depreciation $ 76,323 $ 67,574 $ 28,277 $25,079 -------- -------- -------- ------- Coverage Ratio 46% 49% 43% 43% ======== ======== ======== =======
The Company's coverage ratios for the first nine months of 2001 and 2000 were 46% and 49%, respectively. The Company has a target level of between 50% and 80%. Opportunistically and as market conditions permit, management would expect to move in line with the stated objective of maintaining a coverage ratio of between 50% and 80%. 26 RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 SUMMARY BY OPERATING DIVISION (USING TRADITIONAL PRODUCT GROUPINGS) Net income (loss) from continuing operations per common share on a diluted basis for the first nine months of 2001 was $0.91 per share as compared to ($2.04) per share for the first nine months of 2000. Following is a summary of the revenues and expenses for each of the Company's operating divisions for the nine months ended September 30, 2001 and 2000, respectively: 27
AGENCY-ELIGIBLE ---------------------------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) PRODUCTION SERVICING REINSURANCE - --------------------------------------------------------------------------------------------- (Unaudited) ($ in thousands) Net interest income (expense) $ 6,799 $ (3,467) $ (6) Net gain on sale of mortgage loans 65,862 -- -- (Loss) on sale of mortgage servicing rights -- (2,329) -- Servicing fees -- 26,172 -- Other income (expense) 404 (4,750) 2,433 ------------------------------------- Total revenues 73,065 15,626 2,427 ------------------------------------- Salary and employee benefits 21,194 2,754 -- Occupancy expense 10,745 868 -- Amortization and provision for impairment of mortgage servicing rights -- 20,065 -- Provision expense 2,822 -- 165 General and administrative expenses 7,615 5,471 10 ------------------------------------- Total expenses 42,376 29,158 175 ------------------------------------- Income (loss) before income taxes 30,689 (13,532) 2,252 Income tax benefit (expense) (11,478) 5,061 (792) Income (loss) from continuing operations before transition adjustment 19,211 (8,471) 1,460 ------------------------------------- Transition Adjustment - SFAS No. 133 -- -- -- ------------------------------------- Income (loss) from continuing operations $ 19,211 $ (8,471) $ 1,460 ===================================== OTHER / FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) SUBPRIME LEASING TOTAL SEGMENTS ELIMINATIONS CONSOLIDATED - --------------------------------------------------------------------------------------------------------------------------- (Unaudited) ($ in thousands) Net interest income (expense) $ 7,672 $ 8,405 $ 19,403 $(1,202) $ 18,201 Net gain on sale of mortgage loans 21,649 -- 87,511 -- 87,511 (Loss) on sale of mortgage servicing rights -- -- (2,329) -- (2,329) Servicing fees -- 274 26,446 -- 26,446 Other income (expense) 7 932 (974) 152 (822) -------------------------------------------------------------------- Total revenues 29,328 9,611 130,057 (1,050) 129,007 -------------------------------------------------------------------- Salary and employee benefits 8,021 2,355 34,324 4,173 38,497 Occupancy expense 2,249 379 14,241 (442) 13,799 Amortization and provision for impairment of mortgage servicing rights -- -- 20,065 -- 20,065 Provision expense 5,008 3,649 11,644 -- 11,644 General and administrative expenses 3,618 1,107 17,821 2,760 20,581 -------------------------------------------------------------------- Total expenses 18,896 7,490 98,095 6,491 104,586 -------------------------------------------------------------------- Income (loss) before income taxes 10,432 2,121 31,962 (7,541) 24,421 Income tax benefit (expense) (4,078) (838) (12,125) 3,004 (9,121) Income (loss) from continuing operations before transition adjustment 6,354 1,283 19,837 (4,537) 15,300 -------------------------------------------------------------------- Transition Adjustment - SFAS No. 133 -- -- -- (149) (149) -------------------------------------------------------------------- Income (loss) from continuing operations $ 6,354 $ 1,283 $ 19,837 $(4,686) $ 15,151 ====================================================================
(a) 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.
AGENCY-ELIGIBLE ------------------------------------- COMMERCIAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (A) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE - --------------------------------------------------------------------------------------------------------------------------------- (Unaudited) ($ in thousands) Net interest income (expense) $ 1,252 $ (3,661) $ (71) $ 9,890 $ -- Net gain on sale of mortgage loans 16,255 -- -- 10,201 -- Gain on sale of mortgage servicing rights -- 2,212 -- -- -- Servicing fees -- 26,241 -- -- -- Mark-to-market on residual interests in subprime securitizations -- -- -- (39,338) -- Other income 534 365 2,408 544 -- ---------------------------------------------------------- Total revenues 18,041 25,157 2,337 (18,703) -- ---------------------------------------------------------- Salary and employee benefits 20,860 2,057 -- 9,911 -- Occupancy expense 8,484 146 -- 1,991 -- Amortization and provision for impairment of mortgage servicing rights -- 18,278 -- -- -- Provision expense 1,702 -- -- 1,751 -- General and administrative expenses 8,271 3,168 245 5,311 -- ---------------------------------------------------------- Total expenses 39,317 23,649 245 18,964 -- ---------------------------------------------------------- Income (loss) before income taxes (21,276) 1,508 2,092 (37,667) -- Income tax benefit (expense) 7,841 (556) (735) 13,842 ---------------------------------------------------------- Income (loss) from continuing operations (13,435) 952 1,357 (23,825) -- Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $261) -- -- -- -- (1,607) Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $465) -- -- -- -- (660) ---------------------------------------------------------- Net income (loss) $(13,435) $ 952 $ 1,357 $(23,825) $(2,267) ========================================================== TOTAL OTHER / FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (A) LEASING SEGMENTS ELIMINATIONS CONSOLIDATED - --------------------------------------------------------------------------------------------------------------------------- (Unaudited) ($ in thousands) Net interest income (expense) $ 6,763 $ 14,173 $ (746) $ 13,427 Net gain on sale of mortgage loans -- 26,456 -- 26,456 Gain on sale of mortgage servicing rights -- 2,212 -- 2,212 Servicing fees 368 26,609 (258) 26,351 Mark-to-market on residual interests in subprime securitizations -- (39,338) -- (39,338) Other income 859 4,710 118 4,828 --------------------------------------------------- Total revenues 7,990 34,822 (886) 33,936 --------------------------------------------------- Salary and employee benefits 2,107 34,935 3,367 38,302 Occupancy expense 373 10,994 (525) 10,469 Amortization and provision for impairment of mortgage servicing rights -- 18,278 -- 18,278 Provision expense 2,208 5,661 -- 5,661 General and administrative expenses 948 17,943 1,509 19,452 --------------------------------------------------- Total expenses 5,636 87,811 4,351 92,162 --------------------------------------------------- Income (loss) before income taxes 2,354 (52,989) (5,237) (58,226) Income tax benefit (expense) (934) 19,458 1,931 21,389 --------------------------------------------------- Income (loss) from continuing operations 1,420 (33,531) (3,306) (36,837) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $261) -- (1,607) -- (1,607) Operating losses of Laureate Capital Corp. (plus applicable income tax benefit of $465) -- (660) -- (660) --------------------------------------------------- Net income (loss) $ 1,420 $(35,798) $ (3,306) $(39,104) ===================================================
(a) Revenues and expenses have been allocated on a direct basis to the extent possible. Management believes that these and all other revenues and expenses have been allocated to the respective divisions on a reasonable basis. 28 AGENCY-ELIGIBLE MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage production operations.
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 2001 2000 ---------- ---------- Net interest income $ 6,799 $ 1,252 Net gain on sale of mortgage loans 65,862 16,255 Other income 404 534 ---------- ---------- Total production revenue 73,065 18,041 ---------- ---------- Salary and employee benefits 21,194 20,860 Occupancy expense 10,745 8,484 Provision expense 2,822 1,702 General and administrative expenses 7,615 8,271 ---------- ---------- Total production expenses 42,376 39,317 ---------- ---------- Net pre-tax production margin $ 30,689 $ (21,276) ========== ========== Production $8,028,285 $4,108,556 Pooled production and whole loan sales $8,007,639 $3,946,280 Total production revenue to pool delivery 91 bps 46 bps Total production expenses to production 53 bps 96 bps ---------- ---------- Net pre-tax production margin 38 bps (50) bps ========== ==========
Summary The production revenue to pool delivery ratio increased 45 bps for the first nine months of 2001 as compared to the first nine months of 2000. Net gain on sale of mortgage loans (82 bps for the first nine months of 2001 versus 41 bps for the first nine months of 2000) increased primarily due to an improvement in the competitive environment as a result of reduced mortgage interest rates and the resulting increase in industry-wide loan production volumes. Net interest income increased to 8 bps in the first nine months of 2001 from 3 bps in the first nine months of 2000 primarily as a result of a steepening of the yield curve. The Company earns long-term interest rates on loans held-for-sale and borrows funds based on short-term interest indices. Absent non-recurring items ($1,206 for 2001 and $1,505 for 2000), the production expenses to production ratio declined to 51 bps, a drop of 41 bps compared to 92 bps for the first nine months of 2000. This decline was primarily due to the consolidation of regional loan processing centers during the second half of 2000 and the re-engineering of workflows within those processing centers. Likewise, with higher production volumes, the Company has been able to better leverage its fixed expenses. As a consequence of the foregoing, the Company's net agency-eligible pre-tax production margin increased 88 bps from the first nine months of 2000 to the first nine months of 2001. 29 Net Interest Income The following table analyzes net interest income allocated to the Company's agency-eligible mortgage production activities in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and mortgage-backed securities and interest rates paid on interest-bearing sources of funds) for the nine months ended September 30, 2001 and 2000, respectively:
($ IN THOUSANDS) Variance Average Volume Average Rate Interest Attributable to -------------------- -------------------- - --------------------------------------- 2001 2000 2001 2000 2001 2000 Variance Rate Volume - --------------------------------------- --------------------------------------------------- INTEREST INCOME Mortgages Held-for-Sale and $507,953 $352,717 7.47% 8.14% Mortgage-Backed $28,472 $21,541 $ 6,931 $(2,549) $9,481 - --------------------------------------- Securities -------------------------------------------------- INTEREST EXPENSE $281,209 $288,355 4.25% 5.38% Warehouse Lines * 8,966 11,633 (2,667) (2,379) (288) 198,157 54,631 4.80% 6.79% Gestation Line 7,134 2,781 4,353 (2,953) 7,306 131,686 126,053 5.33% 7.11% Servicing Secured Line 5,266 6,726 (1,460) (1,761) 301 Facility Fees & Other Charges 1,712 2,594 (882) -- (882) - --------------------------------------- -------------------------------------------------- $611,052 $469,039 5.04% 6.75% Total Interest Expense 23,078 23,734 (656) (7,092) 6,436 - --------------------------------------- -------------------------------------------------- Net Interest Income Before 2.44% 1.40% Interdivisional Allocations 5,394 (2,193) $ 7,587 $ 4,543 $3,044 ================= ================================================== Allocation to Agency-Eligible Servicing Division 3,467 3,661 ------------------- Net Interest Income 8,861 1,468 Intercompany Net Interest Expense included in Segmented Income statement (2,062) (216) ------------------- Net Interest Income $6,799 $1,252 ===================
* The interest-rate yield on the warehouse lines are net of the benefit of escrow deposits. The 104 bps increase in the interest-rate spread for the agency-eligible segment was primarily a result of a steepening of the yield curve following the short-term rate cuts made by the Federal Reserve at the end of 2000 and during the first nine months of 2001. The Company's mortgages held-for-sale and mortgage-backed securities are generally sold and replaced within 30 to 35 days. Accordingly, the Company generally borrows at rates based upon short-term indices, while its asset yields are primarily based upon long-term mortgage rates. 30 Net Gain on Sale of Agency-Eligible Mortgage Loans A reconciliation of gain on sale of agency-eligible mortgage loans for the periods indicated follows:
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2001 2000 ----------- ----------- Gross proceeds on sales of mortgage loans $ 8,069,645 $ 4,042,380 Initial unadjusted acquisition cost of mortgage loans sold, net of hedge results 8,046,433 4,048,534 ----------- ----------- Unadjusted Gain (loss) on sale of mortgage loans 23,212 (6,154) Loan origination and correspondent program administrative fees 3,715 3,500 ----------- ----------- Unadjusted aggregate margin 26,927 (2,654) Acquisition basis allocated to mortgage servicing rights (SFAS No. 140) 44,804 21,280 Net deferred costs and administrative fees recognized (5,869) (2,371) ----------- ----------- Net gain on sale of agency-eligible mortgage loans $ 65,862 $ 16,255 =========== ===========
Net gain on sale of agency-eligible mortgage loans increased $49.6 million to $65.9 million for the first nine months of 2001 from $16.3 million for the first nine months of 2000. The increase is primarily due to a 103% increase in sales volumes and a 45 bps improvement in margin on sale. Production and sales volumes improved as a result of lower interest rates during the first nine months of 2001 compared with the first nine months of 2000. The margin increased as a result of an improvement in the competitive environment due to the increase in overall industry production. AGENCY-ELIGIBLE REINSURANCE OPERATIONS The Company has a captive insurance company, MG Reinsurance Company (MG Reinsurance). MG Reinsurance is licensed as a property and casualty insurer and operates as a monoline captive insurance company assuming reinsurance for PMI policies on agency-eligible mortgage loans initially purchased or produced by the Company. During the first nine months of both 2001 and 2000, the Company recognized premium and investment income of approximately $2.4 million that has been included as other income in the agency-eligible reinsurance segment. 31 SUBPRIME MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's subprime mortgage production operations for the periods indicated:
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2001 2000 -------- --------- Net interest income $ 7,672 $ 9,890 Net gain on sale of mortgage loans 21,649 10,201 Mark-to-Market on residual interests in subprime securitizations -- (39,338) Other income 7 1,621 -------- --------- Total production revenue 29,328 (18,703) -------- --------- Salary and employee benefits 8,021 9,911 Occupancy expense 2,249 1,991 Provision expense 5,008 1,751 General and administrative expenses 3,618 5,311 -------- --------- Total production expenses 18,896 18,964 -------- --------- Net pre-tax production margin $ 10,432 $ (37,667) ======== ========= Production $874,895 $ 481,951 Whole loan sales $818,738 $ 489,184 Total production revenue to whole loan sales 358 bps (382) bps Total production expenses to production 216 bps 393 bps -------- --------- Net pre-tax production margin 142 bps (775) bps ======== =========
Summary The subprime unit had production of $875 million during the first nine months of 2001, an increase of $393 million over the same period in 2000. This increase is primarily due to positive market-share increases ($327 million) and the purchase of 15 East Coast Equicredit branches ($66 million). During the first nine months of 2000 the subprime unit's results included the following non-recurring items: 1) a ($39.3) million adjustment in mark-to-market on residual interests in subprime securitizations, 2) a ($1.1) million adjustment to the residual hedges included in other income, 3) a $1.5 million charge to salary and employee benefits and 4) $0.8 million charge to general and administrative expenses. Absent these non-recurring items, the net pre-tax production margin improved 45 bps to 142 bps for the first nine months of 2001 from 97 bps for the first nine months of 2000. Net gain on sale of mortgage loans increased by $11.4 million to $21.6 million for the first nine months of 2001 from $10.2 million compared to the same period of 2000. This is primarily due to positive variances in both volume of whole loan sales and margin. Net interest income declined by $2.2 million due primarily to the absence of $5.7 million of interest earned on subprime residuals that were sold in 2000. Adjusted for the residual interest, net interest income would have increased by $3.5 million for the first nine months of 2001 when compared to the same period in 2000 due to positive variances in both volume of mortgages held-for-sale and interest spread. 32 Absent these non-recurring items, total production expenses to production improved by 131 bps to 216 bps for the first nine months of 2001 compared to 347 bps for the same period of 2000. This improvement was due primarily to the consolidation of regional operating centers and the associated reengineering efforts completed in 2000. Provision expense increased by $3.3 million, which is primarily attributable to the 82% increase in subprime production. Net Interest Income The following table analyzes net interest income allocated to the Company's subprime mortgage production activities in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and residual certificates and interest rates paid on interest-bearing sources of funds) for the nine months ended September 30, 2001 and 2000, respectively.
($ IN THOUSANDS) Variance Average Volume Average Rate Interest Attributable to - -------------------------------------- ------------------ ---------------- 2001 2000 2001 2000 2001 2000 Variance Rate Volume - -------------------------------------- ----------------------------------------------- $157,595 $152,816 10.62% 9.98% Mortgages Held-for-Sale $12,550 $11,442 $ 1,108 $ 750 $ 358 -- 49,404 -- 15.49% Residual Certificates -- 5,739 (5,739) -- (5,739) - -------------------------------------- ----------------------------------------------- 157,595 202,220 10.62% 11.33% Total Interest Income 12,550 17,181 (4,631) 750 (5,381) - -------------------------------------- ----------------------------------------------- $159,667 $141,309 6.08% 7.19% Total Interest Expense 7,282 7,615 (333) (1,322) 989 - -------------------------------------- ----------------------------------------------- 4.54% 4.14% Net Interest Income $ 5,268 $ 9,566 $(4,298) $ 2,072 $(6,370) ================= ================ Intercompany Net Interest Income included in Segmented Income Statement 2,404 324 ----------------- Net Interest Income $ 7,672 $ 9,890 =================
Net interest income from subprime products decreased $2.2 million for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. This is primarily due to the absence of $5.7 million in interest income associated with the residual certificates sold by the Company in the fourth quarter of 2000. Net of this amount, net interest income increased by $3.5 million. Interest income on mortgages held-for-sale increased by $1.1 million during the first nine months of 2001 from the first nine months of 2000, due primarily to a 64 bps improvement in interest earned on mortgages held-for-sale ($0.8 million) and a $4.8 million increase in the average volume of mortgages held-for-sale ($0.4 million). Total interest expense declined primarily due to the 111 bps drop in cost of funds ($1.3 million), which was offset by an increase of warehouse borrowings outstanding ($0.9 million). Net Gain on Sale of Subprime Mortgage Loans The Company sold subprime mortgage loans for cash on a whole loan basis during the first nine months of 2001 and 2000. Whole loans are generally sold, without recourse, to third parties with the gain or loss being calculated based on the difference between the carrying value of the loans sold and the gross proceeds received from the purchaser less expenses. Generally, no interest in these loans is retained by the Company. 33 A reconciliation of the gain on subprime mortgage whole loan sales for the periods indicated follows:
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 2001 2000 --------- --------- Gross proceeds on whole loan sales of subprime mortgage loans $ 836,666 $ 506,278 Initial unadjusted acquisition cost of subprime mortgage loans sold, net of fees 802,381 489,184 --------- --------- Unadjusted gain on whole loan sales of subprime mortgage loans 34,285 17,094 Net deferred costs and administrative fees recognized (12,636) (6,893) --------- --------- Net gain on sale of subprime mortgage loans $ 21,649 $ 10,201 ========= =========
The net gain on whole loan sales of subprime mortgage loans increased $11.4 million to $21.6 million for the first nine months of 2001 from $10.2 million for the first nine months of 2000. Of this increase, $6.9 million is due to the increase in volume, $2.7 million is due to the increased margin and $1.8 million is due to the mix of increased volume and increased margin. Mark-to-Market on Residual Interests in Subprime Securitizations Through late 2000, the Company retained residual certificates in connection with the securitization of subprime loans. For both fiscal year 2000 and the first nine months of 2001, the Company executed no securitization transactions of subprime loans. For the nine months ended September 30, 2000, the mark-to-market loss on residuals was approximately $39.3 million. In the fourth quarter of 2000, the Company further marked down its residual interests in prior subprime securitizations as a result of signing a definitive agreement to sell all of the residual interests remaining on its balance sheet at September 30, 2000. The Company closed on that sale during the fourth quarter of 2000 and currently has no residuals on the balance sheet. 34 AGENCY-ELIGIBLE MORTGAGE SERVICING Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage servicing operations:
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2001 2000 ----------- ----------- Net interest expense $ (3,467) $ (3,661) Loan servicing fees 26,172 26,241 Other (expense) income (4,750) 365 ----------- ----------- Servicing revenues 17,955 22,945 Salary and employee benefits 2,754 2,057 Occupancy expense 868 146 Amortization and provision for impairment of mortgage servicing rights 20,065 18,278 General and administrative expenses 5,471 3,168 ----------- ----------- Total loan servicing expenses 29,158 23,649 Net pre-tax servicing margin (11,203) (704) (Loss) gain on sale of mortgage servicing rights (2,329) 2,212 ----------- ----------- Net pre-tax servicing contribution $ (13,532) $ 1,508 =========== =========== Average owned servicing portfolio $ 8,255,649 $ 7,964,645 Servicing sold $ 7,294,392 $ 3,928,087 Net pre-tax servicing margin to average servicing portfolio (18) bps (1) bps (Loss) gain on sale of servicing to servicing sold (3) bps 6 bps
Summary The $4.5 million decline in gain on sale of mortgage servicing rights as compared to the first nine months of 2000 is due to the rapid decline in interest rates during the first nine months of 2001, which triggered the Company's servicing production to prepay at an unprecedented speed even before it could be transferred to the takeout buyers. Net pre-tax servicing margin decreased $10.5 million for the first nine months of 2001, compared to the same period of 2000, primarily due to charges associated with reductions in value of its servicing rights portfolio. Pursuant to the provisions of SFAS No. 133, there were $5.3 million of charges arising from reductions in servicing value that were not offset by appreciation in value of derivatives used to hedge the selected risks during the first nine months of 2001. Furthermore, a $3.5 million charge for impairment under SFAS No. 125 was taken in the third quarter of 2001. 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. 35 Net Interest Expense The net interest expense for the first nine months of 2001 and the first nine months of 2000 is composed of benefits from escrow accounts of $4.9 million and $6.1 million, respectively, that are offset by $8.3 million and $9.8 million, respectively, in interest expense. Gain on Sale of Mortgage Servicing Rights A reconciliation of the components of gain on sale of mortgage servicing rights for the periods indicated follows:
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2001 2000 ----------- ----------- Underlying unpaid principal balances of agency-eligible mortgage loans on which servicing rights were sold during the period $ 7,294,392 $ 3,928,087 =========== =========== Gross proceeds from sales of mortgage servicing rights $ 198,808 $ 110,321 Initial acquisition basis, net of amortization and hedge results 164,853 92,364 ----------- ----------- Unadjusted gain on sale of mortgage servicing rights $ 33,955 $ 17,957 Acquisition basis allocated from mortgage loans, net of amortization (SFAS No. 140) (36,284) (15,745) ----------- ----------- (Loss) gain on sale of mortgage servicing rights $ (2,329) $ 2,212 =========== ===========
(Loss) Gain on sale of mortgage servicing rights decreased $4.5 million to $(2.3) million for the first nine months of 2001 from $2.2 million for the first nine months of 2000. The decrease in the gain on sale of mortgage servicing rights is primarily attributable to the rapid decline in interest rates as described previously in the agency-eligible mortgage servicing operations summary. COMMERCIAL MORTGAGE OPERATIONS On September 29, 2000, the Company closed on an agreement to sell substantially all of the assets of its commercial mortgage division, Laureate Capital Corp., to BB&T Corporation of Winston-Salem, N.C. 36 LEASING OPERATIONS Following is a summary of the revenues and expenses of the Company's small-ticket equipment leasing operations for the periods indicated:
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 2001 2000 -------- -------- Net interest income $ 8,405 $ 6,763 Other income 932 859 -------- -------- Leasing production revenue 9,337 7,622 Salary and employee benefits 2,355 2,107 Occupancy expense 379 373 Provision expense 3,649 2,208 General and administrative expenses 1,107 948 -------- -------- Total lease operating expenses 7,490 5,636 Net pre-tax leasing production margin 1,847 1,986 Servicing fees 274 368 -------- -------- Net pre-tax leasing margin $ 2,121 $ 2,354 ======== ======== Average owned leasing portfolio $192,947 $167,278 Average serviced leasing portfolio 2,062 9,348 -------- -------- Average managed leasing portfolio $195,009 $176,626 ======== ======== Leasing production revenue to average owned portfolio 645 bps 608 bps Leasing operating expenses to average owned portfolio 518 bps 449 bps -------- -------- Net pre-tax leasing production margin 127 bps 159 bps ======== ========
The 23% increase in leasing production revenue for the first nine months of 2001 as compared to the first nine months of 2000 is primarily attributable to the 15% 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 production margin decreased 32 bps in the first nine months of 2001 as compared to the first nine months of 2000 primarily as a result of the 65% increase in provision expense associated with the overall deterioration of the credit worthiness of small businesses in today's economic environment. 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. As previously announced, the Company is currently evaluating strategic alternatives for its leasing subsidiary including the possible sale of Republic Leasing Company. Net Interest Income Net interest income for the first nine months of 2001 was $8.4 million as compared to $6.8 million for the first nine months of 2000. This is equivalent to an annualized net interest margin of 4.20% and 3.86% for the first nine months of 2001 and 2000, respectively, based upon average lease receivables owned of $193.0 million and $167.2 million, respectively, and average debt outstanding of $164.6 and $142.3 million, respectively. 37 OTHER The primary components of the other segment are holding company items which mainly consist of 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. UNUSUAL ITEMS During the first nine months of 2001, the agency-eligible production segment benefited from the reversal of $1.3 million of accrued employee benefit expense. This consisted of $0.7 million relating to a one-time benefit due to the Company's self-insured health plan experiencing lower than expected claims and $0.5 million relating to other benefits, both following the reduction in workforce completed in 2000. During the first nine months of 2001, the Company accelerated amortization of its mortgage production software and accelerated the depreciation of furniture, fixtures and leasehold improvements for its existing sites in Columbia, SC in anticipation of the migration to a new loan operating system software in the second quarter of 2002 and the Company's forthcoming move to a new and more cost efficient headquarters building in Columbia, SC. The pre-tax impact of the accelerated amortization of software costs and accelerated depreciation of furniture, fixtures and leasehold improvements was $0.8 and $1.1 million, respectively, for the nine months. During the first nine months of 2001, the Company wrote-off its $1.5 million investment in Digital Lighthouse Corporation, formerly known as "Etinuum, Inc." and or "Intek, Inc.", an information services company, which filed for bankruptcy in the third quarter of 2001. The Company had held its investment since August of 1996. Additionally, during the first nine months of 2001, the Company took charges aggregating $8.7 million related to reductions in the value of its servicing rights portfolio. The Company hedges selected but not all of the risks inherent in its servicing portfolio. Pursuant to the provisions of SFAS No. 133, $5.3 million of the charge arose from reductions in servicing value that were not offset by appreciation in value of derivatives used to hedge the selected risks. The remaining $3.5 million relates to charges taken for impairment under SFAS No.125. 38 The impact of the servicing valuation charges and other unusual items for the nine months ended September 30, 2001, are summarized below by financial statement component and business unit:
($ in thousands) AGENCY-ELIGIBLE ------------------------- PRODUCTION SERVICING OTHER TOTAL --------------------------------------------------------- Other expense $ -- $(5,221) $ -- $ (5,221) Salary and employee benefits 1,271 -- -- 1,271 Occupancy expense (1,552) (337) -- (1,889) Amortization and provision for impairment of mortgage servicing rights -- (3,500) -- (3,500) General and administrative expenses -- -- (1,475) (1,475) --------------------------------------------------------- Net pre-tax effect on continuing operations (281) (9,058) (1,475) (10,814) Estimated allocable income tax benefit 108 3,487 568 4,164 --------------------------------------------------------- Net after-tax impact on continuing operations $ (173) $(5,571) $ (907) $ (6,651) =========================================================
During the fourth quarter of 1999, the Company initiated a workforce reduction. The workforce reduction became necessary as the Company adapted to a smaller overall residential mortgage market and intensely competitive pricing conditions. During the nine month period ended September 30, 2000, the Company began reconsidering its positioning in the market and its corporate, management and leadership structures. As a result, 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 $2.5 million during the nine month period ending September 30, 2000. In connection with the planned reorganization, the Company made certain changes in its senior management team and closed certain regional processing offices. Also, during the first nine months of 2000, the Company (1) redesignated a lease of a former operations center as a nonoperating lease, (2) marked down its residual interests in prior subprime securitizations as a result of changes in valuation assumptions due to changing market conditions, (3) marked down its residual interests in prior securitizations, and the associated residual hedges (including hedge amortization expense) as a result of signing a definitive agreement to sell all of the Company's residuals, (4) disposed of its commercial mortgage operation, Laureate Capital Corp., (5) amended its defined benefit pension plan to freeze benefits under the plan, (6) changed the benefits available to employees under its 401(k) plan, (7) realized a gain on the sale of a branch facility, (8) contributed to a fund that will benefit qualified charitable organizations, (9) incurred expenses for consultants assisting management in re-engineering work processes, (10) restructured and closed certain regional processing offices and (11) made changes in the Company's senior management team. 39 The net impact of these unusual items in the first nine months of 2000 is summarized below by financial statement component and operating division:
($ in thousands) 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 307 (45) 1,454 -- (22) 234 1,928 Occupancy expense 171 -- -- -- -- -- 171 General and administrative expenses 1,027 -- 796 -- -- 741 2,564 Other income -- -- -- -- -- (392) (392) ------- ----- -------- --------- ------ ----- -------- Net pre-tax effect on continuing operations 1,505 (45) 42,665 -- (22) 583 44,686 Estimated allocable income tax (563) 17 (15,771) -- 8 (219) (16,528) ------- ---- -------- --------- ------ ----- -------- Net after-tax impact on continuing operations 942 (28) 26,894 -- (14) 364 28,158 Loss on sale of operating assets of Laureate Capital Corp. -- -- -- 1,607 -- -- 1,607 Operating loss of Laureate Capital Corp. -- -- -- 660 -- -- 660 ------- ---- -------- --------- ------ ----- -------- Net after-tax impact $ 942 $(28) $ 26,894 $ 2,267 $ (14) $ 364 $ 30,425 ======= ==== ======== ========= ====== ===== ========
RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 2001, COMPARED TO QUARTER ENDED SEPTEMBER 30, 2000 SUMMARY BY OPERATING DIVISION (USING TRADITIONAL PRODUCT GROUPINGS) Net income (loss) from continuing operations per common share on a diluted basis for the third quarter of 2001 was $0.39 per share as compared to a loss of ($1.45 per share) for the third quarter of 2000. Following is a summary of the revenues and expenses for each of the Company's operating divisions for the quarters ended September 30, 2001 and 2000, respectively: 40
AGENCY-ELIGIBLE FOR THE QUARTER ENDED ----------------------------------- TOTAL OTHER / SEPTEMBER 30, 2001 (a) PRODUCTION SERVICING REINSURANCE SUBPRIME LEASING SEGMENTS ELIMINATIONS CONSOLIDATED - ---------------------------------------------------------------------------------------------------------------------------------- (Unaudited) ($ in thousands) Net interest income (expense) $ 2,739 $ (1,119) $ 1 $ 2,788 $ 2,842 $ 7,251 $ (257) $ 6,994 Net gain on sale of mortgage loans 26,606 -- -- 10,341 -- 36,947 -- 36,947 Gain on sale of mortgage servicing rights -- 396 -- -- -- 396 -- 396 Servicing fees -- 9,127 -- -- 87 9,214 -- 9,214 Other income (expense) 14 (2,811) 748 (3) 286 (1,766) 1 (1,765) ------------------------------------------------------------------------------------------ Total revenues 29,359 5,593 749 13,126 3,215 52,042 (256) 51,786 ------------------------------------------------------------------------------------------ Salary and employee benefits 6,711 1,035 -- 2,948 819 11,513 1,372 12,885 Occupancy expense 4,606 323 -- 792 127 5,848 (139) 5,709 Amortization and provision for impairment of mortgage servicing rights -- 9,523 -- -- -- 9,523 -- 9,523 Provision expense 1,223 -- 51 2,383 1,732 5,389 -- 5,389 General and administrative expenses 2,696 1,640 (52) 1,533 289 6,106 1,686 7,792 ------------------------------------------------------------------------------------------ Total expenses 15,236 12,521 (1) 7,656 2,967 38,379 2,919 41,298 ------------------------------------------------------------------------------------------ Income (loss) before income taxes 14,123 (6,928) 750 5,470 248 13,663 (3,175) 10,488 Income tax benefit (expense) (5,280) 2,590 (264) (2,102) (106) (5,162) 1,156 (4,006) ------------------------------------------------------------------------------------------ Income (loss) from continuing operations $ 8,843 $ (4,338) $ 486 $ 3,368 $ 142 $ 8,501 $(2,019) $ 6,482 ==========================================================================================
(a) 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.
AGENCY-ELIGIBLE FOR THE QUARTER ENDED ------------------------------------ COMMERCIAL TOTAL SEPTEMBER 30, 2000 (A) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE LEASING SEGMENTS - ----------------------------------------------------------------------------------------------------------------------------------- (Unaudited) ($ in thousands) Net interest income (expense) $ 339 $(1,345) $ (32) $ 3,233 $ -- $ 2,343 $ 4,538 Net gain on sale of mortgage loans 4,438 -- -- 4,022 -- 8,460 Gain on sale of mortgage servicing rights -- 673 -- -- -- 673 Servicing fees -- 8,335 -- -- 136 8,471 Mark-to-market on residual interests in subprime securitizations -- -- -- (29,892) -- (29,892) Other income (expense) 102 117 813 (776) 293 549 -------------------------------------------------------------------------------------- Total revenues 4,879 7,780 781 (23,413) -- 2,772 (7,201) -------------------------------------------------------------------------------------- Salary and employee benefits 7,737 684 (90) 2,785 669 11,785 Occupancy expense 2,961 35 -- 686 127 3,809 Amortization and provision for impairment of mortgage servicing rights -- 6,069 -- -- -- 6,069 Provision expense 450 -- -- 841 687 1,978 General and administrative expenses 3,134 1,148 73 2,166 326 6,847 -------------------------------------------------------------------------------------- Total expenses 14,282 7,936 (17) 6,478 -- 1,809 30,488 -------------------------------------------------------------------------------------- Income (loss) before income taxes (9,403) (156) 798 (29,891) -- 963 (37,689) Income tax benefit (expense) 3,472 56 (281) 11,079 -- (378) 13,948 -------------------------------------------------------------------------------------- Income (loss) from continuing operations (5,931) (100) 517 (18,812) -- 585 (23,741) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $235) 393 393 Net income (loss) $ (5,931) $ (100) $ 517 $(18,812) $ 393 $ 585 $(23,348) ====================================================================================== FOR THE QUARTER ENDED OTHER / SEPTEMBER 30, 2000 (A) ELIMINATIONS CONSOLIDATED - ---------------------------------------------------------------------- (Unaudited) ($ in thousands) Net interest income (expense) $ (388) $ 4,150 Net gain on sale of mortgage loans -- 8,460 Gain on sale of mortgage servicing rights -- 673 Servicing fees -- 8,471 Mark-to-market on residual interests in subprime securitizations -- (29,892) Other income (expense) (95) 454 --------------------- Total revenues (483) (7,684) --------------------- Salary and employee benefits 1,647 13,432 Occupancy expense (176) 3,633 Amortization and provision for impairment of mortgage servicing rights -- 6,069 Provision expense -- 1,978 General and administrative expenses 511 7,358 --------------------- Total expenses 1,982 32,470 --------------------- Income (loss) before income taxes (2,465) (40,154) Income tax benefit (expense) 911 14,859 --------------------- Income (loss) from continuing operations (1,554) (25,295) Discontinued operations: Loss on sale of operating assets of Laureate Capital Corp. (less applicable income taxes of $235) 393 Net income (loss) $(1,554) $(24,902) =====================
(a) Revenues and expenses have been allocated on a direct basis to the extent possible. Management believes that these and all other revenues and expenses have been allocated to the respective divisions on a reasonable basis. 41 AGENCY-ELIGIBLE MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage production operations.
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30, -------------------------- 2001 2000 ---------- ----------- Net interest income $ 2,739 $ 339 Net gain on sale of mortgage loans 26,606 4,438 Other income 14 102 ---------- ----------- Total production revenue 29,359 4,879 ---------- ----------- Salary and employee benefits 6,711 7,737 Occupancy expense 4,606 2,961 Provision expense 1,223 450 General and administrative expenses 2,696 3,134 ---------- ----------- Total production expenses 15,236 14,282 ---------- ----------- Net pre-tax production margin $ 14,123 $ (9,403) ========== =========== Production $2,420,602 $ 1,537,692 Pooled production and whole loan sales $2,515,404 $ 1,457,191 Total production revenue to pool delivery 117 bps 33 bps Total production expenses to production 63 bps 93 bps ---------- ----------- Net pre-tax production margin 54 bps (60) bps ========== ===========
Summary The production revenue to pool delivery ratio increased 84 bps for the third quarter of 2001 as compared to the third quarter of 2000. Net gain on sale of mortgage loans (106 bps for the third quarter of 2001 versus 30 bps for the third quarter of 2000) increased primarily due to an improvement in the competitive environment as a result of reduced mortgage interest rates and the resulting increase in industry-wide loan production volumes. Net interest income increased to 11 bps in the third quarter of 2001 from 2 bps in the third quarter of 2000 primarily as a result of a steepening of the yield curve. The Company earns long-term interest rates on loans held-for-sale and borrows funds based on short-term interest indices. Absent non-recurring items ($1.0 million for 2001 and $1.6 million for 2000), the total production expenses to production ratio for the current quarter declined to 59 bps, a drop of 24 bps compared to 83 bps for the same quarter in 2000. This decline was primarily due to the consolidation of regional loan processing centers during the second half of 2000 and the re-engineering of workflows within those processing centers. Likewise, with higher production volumes, the Company was able to more effectively leverage its fixed expenses. As a consequence of the foregoing, the Company's net agency-eligible pre-tax production margin increased 108 bps, absent non-recurring items, from the third quarter of 2000 to the third quarter of 2001. 42 Net Interest Income The following table analyzes net interest income allocated to the Company's agency-eligible mortgage production activities in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and mortgage-backed securities and interest rates paid on interest-bearing sources of funds) for the quarters ended September 30, 2001 and 2000, respectively:
($ IN THOUSANDS) Variance Average Volume Average Rate Interest Attributable to - -------------------------------------------- ------------------ ------------------- 2001 2000 2001 2000 2001 2000 Variance Rate Volume - -------------------------------------------- ------------------------------------------------- INTEREST INCOME Mortgages Held-for-Sale and $ 432,911 $ 397,390 7.67% 8.21% Mortgage-Backed Securities $8,301 $8,155 $ 146 $ (583) $ 729 - -------------------------------------------- ------------------------------------------------ INTEREST EXPENSE 233,907 268,608 3.13% 5.98% Warehouse Lines* $1,833 $4,018 $(2,185) $(1,666) $(519) 171,289 121,138 4.36% 6.75% Gestation Line 1,868 2,045 (177) (1,024) 847 139,548 127,252 5.03% 6.99% Servicing Secured Line 1,756 2,223 (467) (682) 215 Facility Fees & Other Charges 587 750 (163) -- (163) - -------------------------------------------- ------------------------------------------------ $ 544,744 $ 516,998 4.44% 6.99% Total Interest Expense $6,044 $9,036 $(2,992) $(3,371) $ 379 - -------------------------------------------- ------------------------------------------------ Net Interest Income Before 3.23% 1.22% Interdivisional Allocations $2,257 $ (881) $ 3,138 $ 2,788 $ 350 ==================== ================================================ Allocation to Agency-Eligible Servicing Division 1,119 1,345 --------------- Net Interest Income $3,376 $ 464 Intercompany Net Interest Income (Expense) included in Segmented Income Statement (637) (125) --------------- Net Interest Income $2,739 $ 339 ===============
* The interest-rate yield on the warehouse lines are net of the benefit of escrow deposits. The 201 basis point increase in the interest-rate spread for the agency-eligible segment was primarily a result of a steepening of the yield curve following the short-term rate cuts made by the Federal Reserve at the end of 2000 and during the first nine months of 2001. The Company's mortgages held-for-sale 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. 43 Net Gain on Sale of Agency-Eligible Mortgage Loans A reconciliation of gain on sale of agency-eligible mortgage loans for the periods indicated follows:
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30, ---------------------------- 2001 2000 ----------- ----------- Gross proceeds on sales of mortgage loans $ 2,542,661 $ 1,483,913 Initial unadjusted acquisition cost of mortgage loans sold, net of hedge results 2,529,523 1,487,318 ----------- ----------- Unadjusted gain (loss) on sale of mortgage loans 13,138 (3,405) Loan origination and correspondent program administrative fees 806 890 ----------- ----------- Unadjusted aggregate margin 13,944 (2,515) Acquisition basis allocated to mortgage servicing rights (SFAS No. 140) 13,899 7,802 Net deferred costs and administrative fees recognized (1,237) (849) ----------- ----------- Net gain on sale of agency-eligible mortgage loans $ 26,606 $ 4,438 =========== ===========
Net gain on sale of agency-eligible mortgage loans increased $22.2 million to $26.6 million for the third quarter of 2001 from $4.4 million for the third quarter of 2000. The increase is primarily due to increases in sales volumes and an improvement in margin on sale. Sales volumes improved as a result of lower interest rates during the third quarter of 2001 compared with the third quarter of 2000. The margin increased as a result of an improvement in the competitive environment. AGENCY-ELIGIBLE REINSURANCE OPERATIONS The Company has a captive insurance company, MG Reinsurance Company (MG Reinsurance). MG Reinsurance is licensed as a property and casualty insurer and operates as a monoline captive insurance company assuming reinsurance for PMI policies on agency-eligible mortgage loans initially purchased or produced by the Company. During the third quarter of both 2001 and 2000, the Company recognized premium and investment income of approximately $0.7 million and $0.8 million, respectively, which has been included as other income in the agency-eligible reinsurance segment. 44 SUBPRIME MORTGAGE OPERATIONS Following is a comparison of the revenues and expenses of the Company's subprime mortgage production operations for the periods indicated:
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30, --------------------------- 2001 2000 --------- --------- Net interest income $ 2,788 $ 3,233 Net gain on sale of mortgage loans 10,341 4,022 Mark-to-Market on residual interests in subprime securitizations (29,892) Other income (3) (776) --------- --------- Total production revenue 13,126 (23,413) --------- --------- Salary and employee benefits 2,948 2,785 Occupancy expense 792 686 Provision expense 2,383 841 General and administrative expenses 1,533 2,166 --------- --------- Total production expenses 7,656 6,478 --------- --------- Net pre-tax production margin $ 5,470 $ (29,891) ========= ========= Production $ 417,796 $ 160,637 Whole loan sales $ 361,546 $ 182,606 Total production revenue to whole loan sales 363 bps (1,282)bps Total production expenses to production 183 bps 403 bps --------- ---------- Net pre-tax production margin 180 bps (1,685)bps ========= ==========
Summary The subprime unit had production of $418 million during the current quarter, an increase of $257 million compared to the same period of 2000. This increase is due primarily to positive market-share increases in existing markets ($191 million) and the purchase of 15 Equicredit branches ($66 million) during the third quarter. The third quarter of 2000 results include non-recurring charges of 1) $29.9 million in mark-to-market on residual interests in subprime securitizations; 2) $1.1 million in other income; 3) $0.2 million in salary and employee benefits and 4) $0.8 million in general and administrative expenses. Absent these charges, the subprime unit increased its net pre-tax production margin for the current quarter by 107 bps to 180 bps from an adjusted 73 bps for the same period of 2000. Net gain on sale of mortgage loans for the current quarter increased by $6.3 million compared to the same period of 2000 due primarily to positive variances in both volume of whole-loan sales and margin. Net interest income declined by $0.4 million due primarily to the absence of $1.9 million of interest earned on subprime residuals that were sold in 2000. Adjusted for the residual interest, net interest income would have increased by $1.0 million for the current quarter compared to the same quarter of 2000 due to positive variances in both volume of mortgages held-for-sale and interest spread. 45 Absent non-recurring items, the total production expenses to production ratio for the current quarter improved by 158 bps to 183 bps compared to 341 bps for the same quarter of 2000. This improvement was due primarily to the consolidation of regional operating centers and the associated reengineering efforts completed in 2000. Provision expense increased by $1.5 million, which is primarily attributable to the 160% increase in production. Net Interest Income The following table analyzes net interest income allocated to the Company's subprime mortgage production activities in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and residual certificates and interest rates paid on interest-bearing sources of funds) for the three months ended September 30, 2001 and 2000, respectively.
($ IN THOUSANDS) Variance Average Volume Average Rate Interest Attributable to - --------------------------------------- ----------------------------------------------------- 2001 2000 2001 2000 2001 2000 Variance Rate Volume - --------------------------------------- ----------------------------------------------------- $ 176,290 $ 145,184 10.34% 9.81% Mortgages Held-for-Sale $ 4,555 $ 3,562 $ 993 $ 230 $ 763 -- 45,322 16.56% Residual Certificates -- 1,876 (1,876) -- (1,876) - --------------------------------------- ----------------------------------------------------- $ 176,290 $ 190,507 10.34% 11.42% Total Interest Income $ 4,555 $ 5,438 $ (883) $ 230 $ (1,113 $ 185,058 $ 133,789 5.15% 7.27% Total Interest Expense $ 2,382 $ 2,430 $ (48) $ (979) $ 931 - --------------------------------------- ----------------------------------------------------- 5.19% 4.15% Net Interest Income $ 2,173 $ 3,008 $ (835) $ 1,209 $ (2,044) =============== =============================== Intercompany Net Interest Income included in Segmented Income Statement 615 225 -------------------- Net Interest Income $ 2,788 $ 3,233 ====================
Net interest income from subprime products decreased $0.4 million for the quarter ended September 30, 2001 compared to the quarter ended September 30, 2000. This is primarily due to an absence of $1.9 million in interest income because the Company sold its residual certificates during the fourth quarter of 2000. Net of this amount, net interest income increased by $1.0 million. Interest income on mortgage loans held-for-sale increased by $1.0 million during the third quarter of 2001 from the third quarter of 2000, due primarily to the $31.1 million increase in the average volume of mortgages held-for-sale ($0.8 million) and an improvement of 53 bps in interest earned on mortgages held-for-sale ($0.2 million). Total interest expense declined primarily due to the 212 bps drop in cost of funds ($1.0 million), which was offset by an increase in mortgages held-for-sale ($0.9 million). Net Gain on Sale of Subprime Mortgage Loans The Company sold subprime mortgage loans for cash on a whole loan basis during the third quarters of 2001 and 2000. Whole loans are generally sold without recourse to third parties with the gain or loss being calculated based on the difference between the carrying value of the loans sold and the gross proceeds received from the purchaser less expenses. Generally, no interest in these loans is retained by the Company. 46 A reconciliation of the gain on subprime mortgage whole loan sales for the periods indicated follows:
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30, --------------------------- 2001 2000 ------------- ------------- Gross proceeds on whole loan sales of subprime mortgage loans $ 372,694 $ 189,366 Initial unadjusted acquisition cost of subprime mortgage loans sold, net of fees 357,142 182,606 --------- --------- Unadjusted gain on whole loan sales of subprime mortgage loans 15,552 6,760 Net deferred costs and administrative fees recognized (5,211) (2,738) --------- --------- Net gain on sale of subprime mortgage loans $ 10,341 $ 4,022 ========= =========
The net gain on whole loan sales of subprime mortgage loans increased $6.3 million to $10.3 million for the third quarter of 2001 from $4.0 million for the third quarter of 2000. Of this increase, $3.9 million is from a positive increase in volume, $1.2 million is from a positive variance in margin and $1.2 million is from the mix of volume and margin. Mark-to-Market on Residual Interests in Subprime Securitizations Through late 2000, the Company retained residual certificates in connection with the securitization of subprime loans. For both fiscal 2000 and the third quarter of 2001, the Company executed no securitization transactions of subprime loans. For the quarter ended September 30, 2000, the mark-to-market loss on residuals was approximately $29.9 million. In the fourth quarter of 2000, the Company further marked down its residual interests in prior subprime securitizations as a result of signing a definitive agreement to sell all of the residual interests remaining on its balance sheet at September 30, 2000. The Company closed on that sale during the fourth quarter of 2000 and currently has no residuals on the balance sheet. 47 AGENCY-ELIGIBLE MORTGAGE SERVICING Following is a comparison of the revenues and expenses of the Company's agency-eligible mortgage servicing operations:
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30, ---------------------------------- 2001 2000 ----------- ----------- Net interest expense $ (1,119) $ (1,345) Loan servicing fees 9,127 8,335 Other (expense) income (2,811) 117 ----------- ----------- Servicing revenues 5,197 7,107 Salary and employee benefits 1,035 684 Occupancy expense 323 35 Amortization and provision for impairment of mortgage servicing rights 9,523 6,069 General and administrative expenses 1,640 1,148 ----------- ----------- Total loan servicing expenses 12,521 7,936 Net pre-tax servicing margin (7,324) (829) Gain on sale of mortgage servicing rights 396 673 ----------- ----------- Net pre-tax servicing contribution $ (6,928) $ (156) =========== =========== Average servicing portfolio $ 8,188,416 $ 7,722,359 Servicing sold $ 2,997,187 $ 1,348,268 Net pre-tax servicing margin to average servicing portfolio (36) bps (4) bps Gain on sale of servicing to servicing sold 1 bps 5 bps
Summary Net pre-tax servicing margin decreased $6.5 million from the third quarter of 2000 to the same period of 2001 primarily due to $6.5 million in charges associated with reductions in value of the servicing rights portfolio. Pursuant to the provisions of SFAS No. 133, $3.0 million of the charges arose from reductions in servicing value that were not offset by appreciation in value of derivatives used to hedge the selected risks. The remaining $3.5 million relates to charges taken for impairment under SFAS No.125. These charges were due primarily to the continued rapid decline in interest rates causing the Company's servicing assets to prepay at unusually high rates. 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. 48 Net Interest Expense The net interest expense for the third quarter of 2001 and the third quarter of 2000 is composed of benefits from escrow accounts of $1.1 million and $2.0 million, respectively, that are offset by $2.2 million and $3.3 million, respectively, in interest expense. Gain on Sale of Mortgage Servicing Rights A reconciliation of the components of gain on sale of mortgage servicing rights for the periods indicated follows:
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30, -------------------------------------- 2001 2000 ----------- ----------- Underlying unpaid principal balances of agency-eligible mortgage loans on which servicing rights were sold during the period $ 2,997,187 $ 1,348,268 =========== =========== Gross proceeds from sales of mortgage servicing rights $ 83,720 $ 38,084 Initial acquisition basis, net of amortization and hedge results 67,618 31,860 ----------- ----------- Unadjusted gain on sale of mortgage servicing rights $ 16,102 $ 6,224 Acquisition basis allocated from mortgage loans, net of amortization (SFAS No. 140) (15,706) (5,551) ----------- ----------- Gain on sale of mortgage servicing rights $ 396 $ 673 =========== ===========
Gain on sale of mortgage servicing rights decreased $0.3 million to $0.4 million for the third quarter of 2001 from $0.7 million for the third quarter of 2000. The decrease in the gain on sale of mortgage servicing rights is primarily attributable to the prepayment of loans as a result of lower interest rates in 2001 compared to 2000. COMMERCIAL MORTGAGE OPERATIONS On September 29, 2000, the Company closed on an agreement to sell substantially all of the assets of its commercial mortgage division, Laureate Capital Corp., to BB&T Corporation of Winston-Salem, N.C. 49 LEASING OPERATIONS Following is a summary of the revenues and expenses of the Company's small-ticket equipment leasing operations for the periods indicated:
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30, ------------------------------ 2001 2000 -------- -------- Net interest income $ 2,842 $ 2,343 Other income 286 293 -------- -------- Leasing production revenue 3,128 2,636 Salary and employee benefits 819 669 Occupancy expense 127 127 Provision expense 1,732 687 General and administrative expenses 289 326 -------- -------- Total lease operating expenses 2,967 1,809 Net pre-tax leasing production margin 161 827 Servicing fees 87 136 -------- -------- Net pre-tax leasing margin $ 248 $ 963 -------- -------- Average owned leasing portfolio $193,187 $178,199 Average serviced leasing portfolio 1,140 6,445 -------- -------- Average managed leasing portfolio $194,327 $184,644 ======== ======== Leasing production revenue to average owned portfolio 648 bps 592 bps Leasing operating expenses to average owned portfolio 614 bps 406 bps -------- -------- Net pre-tax leasing production margin 34 bps 186 bps ======== ========
The 19% increase in leasing production revenue for the third quarter of 2001 as compared to the third quarter of 2000 is primarily due to the 8% 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 production margin decreased 152 bps in the third quarter of 2001 as compared to the third quarter of 2000 primarily as a result of the 152% increase in provision expense associated with the overall deterioration of the credit worthiness of small businesses in today's economic environment. 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. As previously announced, the Company is currently evaluating strategic alternatives for its leasing subsidiary, including the possible sale of Republic Leasing. Net Interest Income Net interest income for the third quarter of 2001 was $2.8 million as compared to $2.3 million for the third quarter of 2000. This is equivalent to an annualized net interest margin of 4.48% and 3.75% for the third quarters of 2001 and 2000, respectively, based upon average lease receivables owned of $198.6 million and $178.1 million, respectively, and average debt outstanding of $163.8 and $152.6 million, respectively. 50 OTHER The primary components of the other segment are holding company items which mainly consist of 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. UNUSUAL ITEMS During the third quarter of 2001, the Company accelerated amortization of its mortgage production software and accelerated the depreciation of furniture, fixtures and leasehold improvements for its existing sites in Columbia, SC in anticipation of the migration to a new loan operating system software in the second quarter of 2002 and the Company's forthcoming move to a new and more cost efficient headquarters building in Columbia, SC. The pre-tax impact of the accelerated amortization of software costs and accelerated depreciation of furniture, fixtures and leasehold improvements was $0.8 and $1.1 million, respectively for the third quarter. During the third quarter of 2001, the agency-eligible production segment benefited from the reversal of over accrued employee benefits ($0.6 million). During the third quarter of 2001, the Company wrote-off its $1.5 million investment in Digital Lighthouse Corporation, formerly known as "Etinuum, Inc." also "Intek, Inc.", an information services company, which filed for bankruptcy during the third quarter of 2001. The Company held this investment since August of 1996. Additionally, during the third quarter of 2001, the Company took charges aggregating $6.5 million related to reductions in the value of its servicing rights portfolio. The Company hedges selected but not all of the risks inherent in its servicing portfolio. Pursuant to the provisions of SFAS No. 133, $3.0 million of the charge arose from reductions in servicing value that were not offset by appreciation in value of derivatives used to hedge the selected risks. The remaining $3.5 million relates to charges taken for impairment under SFAS No.125. The impact of the servicing valuation charges and other unusual items for the quarter ended September 30, 2001 are summarized below by financial statement component and business unit:
($ in thousands) AGENCY-ELIGIBLE ------------------------------- PRODUCTION SERVICING OTHER TOTAL --------------------------------------------------------------------- Other expense $ -- $(3,002) $ -- $(3,002) Salary and employee benefits 571 -- -- 571 Occupancy expense (1,552) (337) -- (1,889) Amortization and provision for impairment of mortgage servicing rights -- (3,500) -- (3,500) General and administrative expenses -- -- (1,475) (1,475) ------- ------- ------- ------- Net pre-tax effect on continuing operations (981) (6,839) (1,475) (9,295) Estimated allocable income tax benefit 378 2,633 568 3,579 ------- ------- ------- ------- Net after-tax impact on continuing operations $ (603) $(4,206) $ (907) $(5,716) ======= ======= ======= =======
51 During the fourth quarter of 1999, the Company initiated a workforce reduction. The workforce reduction became necessary as the Company continued to adapt to a smaller overall residential mortgage market and intensely competitive pricing conditions. During the quarter ended September 30, 2000, the Company continued to reconsider its positioning in the market and its corporate, management and leadership structures. As a result, 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 $1.8 million during the period. In connection with the planned reorganization, the Company made certain changes in its senior management team and closed some regional processing offices. During the third quarter of 2000, the Company (1) disposed of its commercial mortgage operation, Laureate Capital Corp., (2) marked down its residual interests in prior securitizations, and the associated residual hedges (including hedge amortization expense) as a result of signing a definitive agreement to sell all of the Company's residuals, (3) incurred expenses for consultants who are assisting management in re-engineering work processes, (4) restructured and closed certain regional processing offices and (5) made changes in the Company's senior management team. The net impact of these unusual items in the third quarter of 2000 is summarized below by financial statement component and operating division:
($ in thousands) AGENCY-ELIGIBLE --------------------- COMMERCIAL PRODUCTION SERVICING SUBPRIME MORTGAGE LEASING OTHER TOTAL --------------------------------------------------------------------------------------- Mark-to-market on residual interest in subprime securitizations $ -- $ 29,892 $ -- $ -- $ -- $ 29,892 Residual hedge mark-to-market and amortization -- 1,077 -- -- -- 1,077 Salary and employee benefits 551 203 -- -- 213 967 General and administrative expenses 1,027 796 -- -- 289 2,112 -------- -------- ------ ------- ------ -------- Net pre-tax effect on continuing operations 1,578 31,968 -- -- 502 34,048 Estimated allocable income tax (592) (11,833) -- -- (188) (12,613) -------- -------- ------ ------- ------ -------- Net after-tax impact on continuing operations 986 20,135 -- -- 314 21,435 Loss on sale of operating assets of Laureate Capital Corp. -- -- (393) -- -- (393) Operating profits of Laureate Capital Corp. -- -- -- -- -- -- -------- -------- ------ ------- ------ -------- Net after-tax impact $ 986 $ 20,135 $ (393) -- $ 314 $ 21,042 ======== ======== ====== ======= ====== ========
52 SUPPLEMENTAL RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 SUMMARY BY BUSINESS PROCESS (USING SEGMENTS DEFINED BY BUSINESS PROCESS) Net income (loss) from continuing operations per common share on a diluted basis for the first nine months of 2001 was $0.91 per share as compared to ($2.04) per share for the first nine months of 2000. Following is a summary of the revenues and expenses for each of the Company's business process divisions for the nine months ended September 30, 2001: 53
CUSTOMER FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) SALES FULFILLMENT PORTFOLIO - ------------------------------------------------------------------------------------------------------------ (Unaudited) ($ in thousands) Net interest income $ -- $ -- $ 11,003 Net gain (loss) on sale of mortgage loans 7,118 (1,054) 96,497 (Loss) on sale of mortgage servicing rights -- -- (2,329) Servicing fees -- -- 24,482 Other income 374 9 (2,666) -------- -------- --------- Total revenues 7,492 (1,045) 126,987 -------- -------- --------- Salary and employee benefits 15,961 17,441 4,351 Occupancy expense 874 5,646 634 Amortization and provision for impairment of mortgage servicing rights -- -- 20,065 Provision expense -- -- 7,995 General and administrative expenses 2,247 3,493 3,726 -------- -------- --------- Total expenses 19,082 26,580 36,771 -------- -------- --------- Income (loss) before income taxes (11,590) (27,625) 90,216 Income tax expense -- -- -- Income (loss) before transition adjustment, allocations and transfer pricing (11,590) (27,625) 90,216 Transition adjustment - SFAS No. 133 -- -- -- -------- -------- --------- Income (loss) before allocations and transfer pricing (11,590) (27,625) 90,216 -------- -------- --------- Overhead allocations 3,138 7,791 1,643 -------- -------- --------- Income (loss) before transfer pricing (14,728) (35,416) 88,573 Transfer pricing 23,780 35,774 (69,371) -------- -------- --------- Net income (expense) $ 9,052 $ 358 $ 19,202 -------- -------- --------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (A) (B) OTHER/ (Unaudited) ($ in thousands) SERVICING LEASING ADMINISTRATION ELIMINATIONS CONSOLIDATED --------- ------- -------------- ------------ ------------ Net interest income $ -- $8,405 $ (1,207) $ -- $ 18,201 Net gain (loss) on sale of mortgage loans (317) -- 916 (15,649) 87,511 (Loss) on sale of mortgage servicing rights -- -- -- -- (2,329) Servicing fees 1,690 274 -- -- 26,446 Other income 400 932 129 -- (822) -------- ------ -------- -------- --------- Total revenues 1,773 9,611 (162) (15,649) 129,007 -------- ------ -------- -------- --------- Salary and employee benefits 4,448 2,355 11,394 (17,453) 38,497 Occupancy expense 1,520 379 4,746 -- 13,799 Amortization and provision for impairment of mortgage servicing rights -- -- -- -- 20,065 Provision expense -- 3,649 -- -- 11,644 General and administrative expenses 3,664 1,107 5,898 446 20,581 -------- ------ -------- -------- --------- Total expenses 9,632 7,490 22,038 (17,007) 104,586 -------- ------ -------- -------- --------- Income (loss) before income taxes (7,859) 2,121 (22,200) 1,358 24,421 Income tax expense -- -- -- (9,121) (9,121) -------- ------ -------- -------- --------- Income (loss) before transition adjustment, allocations and transfer pricing (7,859) 2,121 (22,200) (7,763) 15,300 Transition adjustment - SFAS No. 133 -- -- -- (149) (149) -------- ------ -------- -------- --------- Income (loss) before allocations and transfer pricing (7,859) 2,121 (22,200) (7,912) 15,151 Overhead allocations 3,311 -- (15,883) -- -- Income (loss) before transfer pricing (11,170) 2,121 (6,317) (7,912) 15,151 -------- ------ -------- -------- --------- Transfer pricing 9,817 -- -- -- -- -------- ------ -------- -------- --------- Net income (expense) $ (1,353) $2,121 $ (6,317) $ (7,912) $ 15,151 ======== ====== ======== ======== =========
(a) 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. (b) Includes consolidation eliminations, SFAS No. 91 and No. 133 54 REVENUE AND EXPENSE BY SEGMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 The following table presents the percentage of revenues and expenses contributed on a direct and NVA (transfer pricing basis) by each of the Company's operating segments.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 ($ in thousands) (unaudited) REVENUES DIRECT NVA Sales $ 7,492 6% $ 31,272 24% Customer Fulfillment (1,045) -1% 34,729 27% Portfolio 126,987 98% 57,616 45% Servicing 1,773 1% 11,590 9% Leasing 9,611 8% 9,611 7% Administration (162) 0% (162) 0% Other/Eliminations (15,649) -12% (15,649) -12% --------------------------- ------------------------- Total revenues 129,007 129,007 EXPENSES Sales 19,082 18% 22,220 21% Customer Fulfillment 26,580 26% 34,371 33% Portfolio 36,771 35% 38,414 37% Servicing 9,632 9% 12,943 12% Leasing 7,490 7% 7,490 7% Administration 22,038 21% 6,155 6% Other/Eliminations (17,007) -16% (17,007) -16% --------------------------- ------------------------- Total expenses 104,586 104,586 PRE-TAX INCOME (LOSS) Sales $ (11,590) -47% $ 9,052 37% Customer Fulfillment (27,625) -113% 358 1% Portfolio 90,216 369% 19,202 79% Servicing (7,859) -32% (1,353) -6% Leasing 2,121 9% 2,121 9% Administration (22,200) -91% (6,317) -26% Other/Eliminations 1,358 5% 1,358 6% --------------------------- ------------------------- Total pre-tax income (loss) $ 24,421 $ 24,421 ========= =========
SALES The Sales segment includes the sales forces of both the agency-eligible and subprime units. Under the Company's net value added (NVA) accounting, Sales is responsible for establishing and maintaining relationships with correspondents and brokers. The Customer Fulfillment segment processes loans on behalf of Sales, and Portfolio funds the closing or acquisition of the loans. Customer Fulfillment charges Sales fees for specific services based upon loan and channel type. The transfer pricing between Sales and Portfolio is based on Portfolio's budgeted margin on sale of loans and budgeted expenses per loan times the actual number of loans produced. The following is a summary of Sale's revenues and expenses and key operating statistics for the nine months ended September 30, 2001: 55
SALES - ------------------------------------------------- ($ in thousands except per unit) (unaudited) Direct revenues $ 7,492 Transfer pricing 23,780 ---------- Total revenues 31,272 Direct expenses 19,082 Overhead expense allocation 3,138 ---------- Total expenses 22,220 ---------- Income $ 9,052 ========== Production $8,903,180 Units 67,483 Revenue per unit $ 463 Expense per unit 329 ---------- Net pre-tax sales margin $ 134 ========== Bps of revenue per unit 35 Bps of expense per unit 25 ---------- Net pre-tax sales margin 10 ========== FTEs 233 Units per FTE 290
Summary As presented previously in the revenue and expense by segment report, the Sales segment contributed 6% of direct revenues and 24% of NVA revenues. Sales contributed 18% and 21% of direct expenses and NVA expenses, respectively. The direct revenue of Sales is comprised of net fees less sales incentives. The Sales segment is responsible for the pricing of fees and sales incentives, which are included in gain on sale of mortgage loans as presented in the Company's consolidated statement of operations. As of September 30, 2001, there were 59 and 174 employees related to agency-eligible and subprime sales, respectively. CUSTOMER FULFILLMENT The Customer Fulfillment segment processes, underwrites, closes and performs certain post-closing functions on behalf of Sales. Customer Fulfillment charges Sales fees for specific services based upon loan and channel type. The following is a summary of Customer Fulfillment's revenues and expenses and key operating statistics for the nine months ended September 30, 2001: 56
CUSTOMER FULFILLMENT - -------------------------------------------------------------- ($ in thousands except per unit) (unaudited) Direct revenues $ (1,045) Transfer pricing 35,774 ----------- Total revenues 34,729 Direct expenses 26,580 Overhead expense allocation 7,791 ----------- Total expenses 34,371 ----------- Income (loss) $ 358 =========== Production $ 8,903,180 Units 67,483 Revenue per unit $ 515 Expenses per unit 509 ----------- Net pre-tax customer fulfillment margin $ 6 =========== Bps of revenue per unit 39 Bps of expense per unit 38 ----------- Net pre-tax customer fulfillment margin 1 =========== FTEs 515 Units per FTE 131
Summary As presented in the revenue and expense by segment table, the Customer Fulfillment segment contributed (1%) of direct revenues and 27% of NVA revenues. Customer Fulfillment contributed 26% and 33% of direct expenses and NVA expenses, respectively. The Customer Fulfillment segment does not have any actual direct revenues. It is debited with certain acquisition expenses, which are included in gain on sale of mortgage loans in the revenue section of the consolidated statement of operations. As of September 30, 2001, there were 297 and 218 Customer Fulfillment employees related to agency-eligible and subprime, respectively. PORTFOLIO Under the Company's NVA accounting, the Portfolio segment is assumed to own the Company's balance sheet and is responsible for managing the pipeline and inventory of loans, the liquidity of the Company, and the servicing portfolio as well as performance of secondary marketing activities. Portfolio funds loans on behalf of Sales and sells or securitizes loans for delivery into the secondary market in the form of whole loans, mortgage-backed securities (MBS) and servicing rights. In addition to owning loans, MBSs and servicing rights held-for-sale, Portfolio owns servicing rights held-for-investment. The Servicing segment subservices on behalf of the Portfolio segment. The following is a summary of Portfolio's revenues and expenses and key operating statistics for the nine months ended September 30, 2001: 57
SECONDARY SERVICING TOTAL PORTFOLIO MARKETING ASSETS PORTFOLIO --------- ----------- ----------- --------- ($ in thousands except per unit) (unaudited) Direct revenues $ 113,451 $ 13,536 $ 126,987 Transfer pricing (63,021) (6,350) (69,371) ----------- ----------- --------- Total revenues 50,430 7,186 57,616 Direct expenses 14,168 22,603 36,771 Overhead expense allocation 1,627 16 1,643 ----------- ----------- --------- Total expenses 15,795 22,619 38,414 ----------- ----------- --------- Income (loss) $ 34,635 $ (15,433) $ 19,202 =========== =========== ========= Production and average owned servicing portfolio $ 8,903,180 $ 8,255,649 Production and average owned servicing portfolio units 67,483 75,808 Revenue per unit $ 747 $ 95 Expenses per unit 234 298 ----------- ----------- Net pre-tax portfolio margin $ 513 $ (203) =========== =========== Bps of revenue per unit 57 12 Bps of expense per unit 18 37 ----------- ----------- Net pre-tax portfolio margin 39 (25) =========== =========== FTEs 92 n/a Units per FTE 734 n/a
Summary As presented in the revenue and expense by segment table, the Portfolio segment contributed 98% of direct revenues and 45% of NVA revenues. The secondary marketing unit contributed 39% of total NVA revenues and 15% of total NVA expenses. The secondary marketing unit is responsible for managing the pipeline and inventory of loans, the liquidity of the Company and selling/securitizing loans for delivery into the secondary markets. Secondary marketing's major direct revenues are net interest income and gain on sale of mortgage loans. Transferred pricing for secondary marketing is calculated using the actual number of loans it "purchases" from Sales times the budgeted margin and budgeted expense per loan. Secondary marketing's direct expenses include the Company's provision expense. The segment's nine month pre-tax income of $34.6 million is primarily attributable to the actual margin exceeding the budgeted margin due to an improved competitive environment during the first nine months of 2001. As of September 30, 2001, there were 92 Portfolio employees. The servicing assets unit contributed 2% of total NVA revenues and 22% of total NVA expenses. The servicing assets unit is responsible for the management of the Company's owned servicing portfolio. Its direct revenues are from the gain (loss) on sale of mortgage servicing rights and servicing fees collected. Direct expenses of the servicing assets unit are mainly 58 amortization and impairment expense ($20.1 million of the $22.6 million). The nine month loss of $15.4 million is mainly attributable to the $2.3 million loss on the sale of mortgage servicing rights relating to high pre-payments on servicing held-for-sale that was sold during the first three quarters, the $5.3 million charge related to reductions in servicing values under SFAS No. 133 and a $3.5 million charge taken for impairment under SFAS No. 125. SERVICING The Servicing segment subservices loans on behalf of the Portfolio segment and external subservicing customers. The Servicing segment also assists the Portfolio segment in transferring loans and servicing to end investors and obtains trailing documentation necessary for final pool certification (these functions are referred to as "Portfolio Support"). Servicing charges Portfolio fees for services rendered based upon the number of loans set-up, serviced and transferred during the period. Fees for trailing documentation follow-up services are charged on a per loan basis and are recognized by Servicing using the "Rule of 78th" method over a 12 month period of time, approximating the timing of the services performed. The following is a summary of Servicing's revenues and expenses and key operating statistics for the nine months ended September 30, 2001:
($ in thousands except per unit) SERVICING PORTFOLIO SERVICING FACTORY SUPPORT TOTAL --------------------------------------------------------------------------------------------- (unaudited) Direct revenues $ 1,791 $ (18) $ 1,773 Transfer pricing 7,080 2,737 9,817 ----------- ----------- -------- Total revenues 8,871 2,719 11,590 Direct expenses 6,555 3,077 9,632 Overhead expense allocation 1,781 1,530 3,311 ----------- ----------- -------- Total expenses 8,336 4,607 12,943 ----------- ----------- -------- Income (loss) $ 535 $ (1,888) $ (1,353) Average UPB serviced/Production $10,389,983 $ 8,903,180 Average units serviced/units produced 92,525 67,483 Revenue per unit $ 96 $ 40 Expenses per unit 90 68 ----------- ----------- Net pre-tax servicing margin $ 6 $ (28) Bps of revenue per unit 11 3 Bps of expense per unit 11 5 ----------- ----------- Net pre-tax servicing margin 0 (2) FTEs 108 73 Units per FTE 857 924
Summary As presented in the revenue and expense by segment table, the Servicing segment contributed 1% of direct revenues and 9% of NVA revenues. Servicing contributed 9% and 12% of direct expenses and NVA expenses, respectively. 59 The Servicing Factory, which is responsible for subservicing loans on behalf of the Portfolio segment, contributed 7% of NVA revenues and 8% of NVA expenses. The Servicing Factory's direct revenues are comprised of miscellaneous servicing fees, third party subservicing fees and other ancillary income related to servicing. Servicing Factory had 108 employees as of September 30, 2001. Portfolio Support, which aids Secondary Marketing with the transfer of loans and servicing to end investors and obtaining trailing documents, contributed 2% of NVA revenues and 4% of NVA expenses. Portfolio Support had 73 employees as of September 30, 2001. LEASING OPERATIONS See page 37 in the Results of Operations for a discussion of Leasing's operating statistics for the nine months ended September 30, 2001. Leasing is not included in the new NVA accounting methodology, and only direct revenue and expenses are presented. ADMINISTRATION Administration includes all corporate functions and support areas including administrative services, information systems, finance, human resources, legal and internal audit services. Administration's expenses are allocated to Sales, Customer Fulfillment, Portfolio and Servicing based upon budgeted administration expenses divided by budgeted headcount times the actual headcount of those four segments. The following is a summary of Administration revenues and expenses and key operating statistics for the nine months ended September 30, 2001:
ADMINISTRATION ------------------------------------------------ ($ in thousands except per unit) (unaudited) Direct revenues $ (162) ----------- Total revenues (162) Direct expenses 22,038 Overhead expense allocation (15,883) ----------- Total expenses 6,155 ----------- (Loss) $ (6,317) Production $ 8,903,180 Units 67,483 Expenses per unit 91 Bps of expense per unit 7 FTEs 192
Summary As described above, the Administration segment is credited or debited with revenues and expenses directly related to corporate and support area functions. These costs are then allocated to the business segments based on headcount. The per headcount rates that are charged to the 60 business segments are set each quarter based on forecasted expenses and headcount. The $6.3 million dollar loss is attributable in part to: 1) the Administrative segment being debited with incentive compensation for the entire company tied to the increase in loan volume and profitability; 2) the Company wrote off its $1.5 million investment in Digital Lighthouse Corporation, an information services company, which filed for bankruptcy in the third quarter and 3) a $1.6 million charge in the third quarter relating to accelerated amortization of its mortgage production software and accelerated depreciation of furniture, fixtures, and leasehold improvements in anticipation of the Company's move to a new headquarters building and new loan operating system. To control their own costs, the business segments can attempt to negotiate lower per headcount rates or to control their respective employee headcount, which reduces their respective allocations. Both methods of cost control create pressure upon the administrative segment to further control its costs. Allocation of overhead expenses based on headcount serves to promote the automation of work processes throughout the organization. OTHER/ELIMINATION Other/Elimination includes the impact of SFAS No. 91 and No. 133, intercompany eliminations, amortization of goodwill, taxes and the transition adjustment due to the implementation of SFAS No. 133. 61 SUPPLEMENTAL RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 2001, COMPARED TO QUARTER ENDED SEPTEMBER 30, 2000 SUMMARY BY BUSINESS PROCESS (USING SEGMENTS DEFINED BY BUSINESS PROCESS) Net income (loss) from continuing operations per common share on a diluted basis for the third quarter of 2001 was $0.39 per share as compared to ($1.45) per share for the third quarter of 2000. Following is a summary of the revenues and expenses for each of the Company's business process divisions for the quarter ended September 30, 2001: 62
CUSTOMER ADMINIS- (B)OTHER/ELI- CONSO- FOR THE QUARTER ENDED SEPTEMBER 30, 2001 (A) SALES FULFILLMENT PORTFOLIO SERVICING LEASING TRATION MINATIONS LIDATED - -------------------------------------------- ------- ----------- --------- --------- ------- -------- ------------- ------- (Unaudited) ($ in thousands) Net interest income $ -- $ -- $ 4,412 $ -- $2,842 $ (260) $ -- $ 6,994 Net gain (loss) on sale of mortgage loans 2,476 (385) 40,495 (139) -- 492 (5,993) 36,946 Gain on sale of mortgage servicing rights -- -- 396 -- -- -- -- 396 Servicing fees -- -- 8,291 836 87 -- -- 9,214 Other income (4) 2 (2,144) 99 286 (3) -- (1,764) -------- -------- -------- ------- ------ ------- ------- -------- Total revenues (expense) 2,472 (383) 51,450 796 3,215 229 (5,993) 51,786 -------- -------- -------- ------- ------ ------- ------- -------- Salary and employee benefits 6,223 6,709 1,437 1,600 819 3,344 (7,247) 12,885 Occupancy expense 347 2,576 227 508 127 1,924 -- 5,709 Amortization and provision for impairment of mortgage servicing rights -- -- 9,523 -- -- -- -- 9,523 Provision expense -- -- 3,657 -- 1,732 -- -- 5,389 General and administrative expenses 817 1,339 1,472 843 289 2,884 148 7,792 -------- -------- -------- ------- ------ ------- ------- -------- Total expenses 7,387 10,624 16,316 2,951 2,967 8,152 (7,099) 41,298 -------- -------- -------- ------- ------ ------- ------- -------- Income (loss) before income taxes (4,915) (11,007) 35,134 (2,155) 248 (7,923) 1,106 10,488 Income tax expense -- -- -- -- -- -- (4,006) (4,006) Income (loss) before allocations and transfer pricing (4,915) (11,007) 35,134 (2,155) 248 (7,923) (2,900) 6,482 Overhead allocations 1,084 2,867 523 1,093 -- (5,567) -- -- -------- -------- -------- ------- ------ ------- ------- -------- Income (loss) before transfer pricing (5,999) (13,874) 34,611 (3,248) 248 (2,356) (2,900) 6,482 Transfer pricing 8,993 12,138 (24,365) 3,234 -- -- -- -- -------- -------- -------- ------- ------ ------- ------- -------- Net income (expense) $ 2,994 $ (1,736) $ 10,246 $ (14) $ 248 $(2,356) $(2,900) $ 6,482 ======= ======== ======== ======= ====== ======= ======= ========
(a) 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. (b) Includes consolidation eliminations, SFAS No. 91 and No. 133 63 REVENUE AND EXPENSE BY SEGMENT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 The following table presents the percentage of revenues and expenses contributed on a direct and NVA (transfer pricing basis) by each of the Company's operating segments.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 ($ in thousands) (unaudited) REVENUES DIRECT NVA Sales $ 2,472 5% $ 11,465 22% Customer Fulfillment (383) -1% 11,755 23% Portfolio 51,450 99% 27,085 52% Servicing 796 2% 4,030 8% Leasing 3,215 6% 3,215 6% Administration 229 1% 229 1% Other / Eliminations (5,993) -12% (5,993) -12% ------------------------ ------------------------ Total revenues 51,786 51,786 EXPENSES Sales 7,387 18% 8,471 20% Customer Fulfillment 10,624 26% 13,491 33% Portfolio 16,316 39% 16,839 41% Servicing 2,951 7% 4,044 10% Leasing 2,967 7% 2,967 7% Administration 8,152 20% 2,585 6% Other / Eliminations (7,099) -17% (7,099) -17% -------------------------- ----------------------- Total expenses 41,298 41,298 PRE-TAX INCOME (LOSS) Sales $ (4,915) -47% $ 2,994 29% Customer Fulfillment (11,007) -105% (1,736) -17% Portfolio 35,134 335% 10,246 98% Servicing (2,155) -20% (14) 0% Leasing 248 2% 248 2% Administration (7,923) -76% (2,356) -22% Other / Eliminations 1,106 11% 1,106 10% -------------------------- ----------------------- Total pre-tax income $ 10,488 $10,488 ======== =======
SALES The Sales segment includes the sales forces of both the agency-eligible and subprime units. Under the Company's net value added (NVA) accounting, Sales is responsible for establishing and maintaining relationships with correspondents and brokers. The Customer Fulfillment segment processes loans on behalf of Sales, and Portfolio funds the closing or acquisition of the loans. Customer Fulfillment charges Sales fees for specific services based upon loan and channel type. The transfer pricing between Sales and Portfolio is based on Portfolio's budgeted margin on sale of loans and budgeted expenses per loan times the actual number of loans produced. The following is a summary of Sale's revenues and expenses and key operating statistics for the quarter ended September 30, 2001: 64
SALES ----------------------------------------------- ($ in thousands except per unit) (unaudited) Direct revenues $ 2,472 Transfer pricing 8,993 ---------- Total revenues 11,465 Direct expenses 7,387 Overhead expense allocation 1,084 ---------- Total expenses 8,471 ---------- Income $ 2,994 ========== Production $2,838,398 Units 22,290 Revenue per unit $ 514 Expenses per unit 380 ---------- Net pre-tax sales margin $ 134 ========== Bps of revenue per unit 40 Bps of expense per unit 30 ---------- Net pre-tax sales margin 10 ========== FTEs 233 Units per FTE 96
Summary As presented previously in the revenue and expense by segment report, the Sales segment contributed 5% of direct revenues and 22% of NVA revenues. Sales contributed 18% and 20% of direct expenses and NVA expenses, respectively. The direct revenue of Sales is comprised of net fees less sales incentives. The Sales segment is responsible for the pricing of fees and sales incentives, which are included in gain on sale of mortgage loans as presented in the Company's consolidated statement of income. As of September 30, 2001, there were 59 and 174 employees related to agency-eligible and subprime sales, respectively. CUSTOMER FULFILLMENT The Customer Fulfillment segment processes, underwrites, closes and performs certain post-closing functions on behalf of Sales. Customer Fulfillment charges Sales fees for specific services based upon loan and channel type. The following is a summary of Customer Fulfillment's revenues and expenses and key operating statistics for the quarter ended September 30, 2001: 65
CUSTOMER FULFILLMENT ------------------------------------------------------------ ($ in thousands except per unit) (unaudited) Direct revenues $ (383) Transfer pricing 12,138 ----------- Total revenues 11,755 Direct expenses 10,624 Overhead expense allocation 2,867 ----------- Total expenses 13,491 ----------- Income (loss) $ (1,736) =========== Production $ 2,838,398 Units 22,290 Revenue per unit $ 527 Expenses per unit 605 ----------- Net pre-tax customer fulfillment margin $ (78) =========== Bps of revenue per unit 41 Bps of expense per unit 47 ----------- Net pre-tax customer fulfillment margin (6) =========== FTEs 515 Units per FTE 43
Summary As presented in the revenue and expense by segment table, the Customer Fulfillment segment contributed (1%) of direct revenues and 23% of NVA revenues. Customer Fulfillment contributed 26% and 33% of direct expenses and NVA expenses, respectively. The Customer Fulfillment segment does not have any actual direct revenues. It is debited with certain acquisition expenses that are classified in gain on sale of mortgage loans in the revenue section of the consolidated statement of operations. As of September 30, 2001, there were 297 and 218 Customer Fulfillment employees related to agency-eligible and subprime, respectively. PORTFOLIO Under the Company's NVA accounting, the Portfolio segment is assumed to own the Company's balance sheet and is responsible for managing the pipeline and inventory of loans, the liquidity of the Company, and the servicing portfolio as well as performance of secondary marketing activities. Portfolio funds loans on behalf of Sales and sells or securitizes loans for delivery into the secondary market in the form of whole loans, mortgage-backed securities (MBS) and servicing rights. In addition to owning loans, MBSs and servicing rights held-for-sale, Portfolio owns servicing rights held-for-investment. The Servicing segment subservices on behalf of the Portfolio segment. The following is a summary of Portfolio's revenues and expenses and key operating statistics for the quarter ended September 30, 2001: 66
SECONDARY SERVICING TOTAL PORTFOLIO MARKETING ASSETS PORTFOLIO - --------- ----------- ----------- --------- ($ in thousands except per unit) (unaudited) Direct revenues $ 46,791 $ 4,659 $ 51,450 Transfer pricing (22,159) (2,206) (24,365) ----------- ----------- -------- Total revenues 24,632 2,453 27,085 Direct expenses 5,662 10,654 16,316 Overhead expense allocation 511 12 523 ----------- ----------- -------- Total expenses 6,173 10,666 16,839 ----------- ----------- -------- Income (loss) $ 18,459 $ (8,213) $ 10,246 =========== =========== ======== Production and average owned servicing $ 2,838,398 $ 8,188,416 portfolio Production and average owned servicing portfolio units 22,290 74,728 Revenue per unit $ 1,105 $ 33 Expenses per unit 277 143 ----------- ----------- Net pre-tax portfolio margin $ 828 $ (110) =========== =========== Bps of revenue per unit 87 12 Bps of expense per unit 22 52 ----------- ----------- Net pre-tax portfolio margin 65 (40) =========== =========== FTEs 92 n/a Units per FTE 242 n/a
Summary As presented in the revenue and expense by segment table, the Portfolio segment contributed 99% of direct revenues and 52% of NVA revenues. The secondary marketing unit contributed 48% of total NVA revenues and 15% of total NVA expenses. The secondary marketing unit is responsible for managing the pipeline and inventory of loans, the liquidity of the Company and selling/securitizing loans for delivery into the secondary markets. Secondary marketing's major direct revenues are net interest income and gain on sale of mortgage loans. Transferred pricing for secondary marketing is calculated using the actual number of loans it "purchases" from Sales times the budgeted margin and budgeted expenses per loan. Secondary marketing's direct expenses include provision expense. The segment's third quarter pre-tax income of $18.5 million is primarily attributable to the actual margin exceeding the budgeted margin due to an improved competitive environment during the third quarter of 2001. As of September 30, 2001, there were 92 Portfolio employees. The servicing assets unit contributed 5% of total NVA revenues and 26% of total NVA expenses. The servicing assets unit is responsible for the management of the Company's owned servicing portfolio. Its direct revenues are from the gain (loss) on sale of mortgage servicing rights and servicing fees collected. The direct expenses of the Servicing assets segment are mainly amortization and impairment expense ($9.5 million of the $10.7 million). The third 67 quarter loss of $8.2 million is mainly attributable to the $6.5 million dollar charge related to reductions in the value of its servicing rights portfolio. Pursuant to the provisions of SFAS No. 133, $3.0 million of the charge arose from reductions in servicing value that were not offset by appreciation in value of derivatives used to hedge the selected risks. The remaining $3.5 million relates to charges taken for impairment under SFAS No. 125. SERVICING The Servicing segment subservices loans on behalf of the Portfolio segment and external subservicing customers. The Servicing segment also assists the Portfolio segment in transferring loans and servicing to end investors and obtains trailing documentation necessary for final pool certification (these functions are referred to as "Portfolio Support"). Servicing charges Portfolio fees for services rendered based upon the number of loans set-up, serviced and transferred during the month. Fees for trailing documentation follow-up services are charged on a per loan basis and are recognized by Servicing using the "Rule of 78th" method over a 12 month period of time, approximating the timing of the services performed. The following is a summary of Servicing's revenues and expenses and key operating statistics for the quarter ended September 30, 2001:
($ in thousands except per unit) SERVICING PORTFOLIO SERVICING FACTORY SUPPORT TOTAL - ------------------------------- ----------- ----------- ------- (unaudited) Direct revenues $ 797 $ (1) $ 796 Transfer pricing 2,502 732 3,234 ----------- ----------- ------- Total revenues 3,299 731 4,030 Direct expenses 1,867 1,084 2,951 Overhead expense allocation 648 445 1,093 ----------- ----------- ------- Total expenses 2,515 1,529 4,044 ----------- ----------- ------- Income (loss) $ 784 $ (798) $ (14) =========== =========== ======= Average UPB serviced/Production $11,565,875 $ 2,838,398 Average units serviced/units produced 100,809 22,290 Revenue per unit $ 33 $ 33 Expenses per unit 25 69 ----------- ----------- Net pre-tax servicing margin $ 8 $ (36) =========== =========== Bps of revenue per unit 11 2 Bps of expense per unit 9 5 ----------- ----------- Net pre-tax servicing margin 2 (3) =========== =========== FTEs 108 73 Units per FTE 933 305
Summary As presented in the revenue and expense by segment table, the Servicing segment contributed 2% of direct revenues and 8% of NVA revenues. Servicing contributed 7% and 10% of direct expenses and NVA expenses, respectively. 68 The Servicing Factory, which is responsible for subservicing loans on behalf of the Portfolio silo, contributed 6% of NVA revenues and 6% of NVA expenses. The Servicing Factory's direct revenues are comprised of miscellaneous servicing fees, third party subservicing fees and other ancillary income related to servicing. Servicing Factory had 108 employees as of September 30, 2001. Portfolio Support, which aids Secondary Marketing with the transfer of loans and servicing to end investors and obtaining trailing documents, contributed 1% of NVA revenues and 4% of NVA expenses. Portfolio Support had 73 employees as of September 30, 2001. LEASING OPERATIONS See page 50 in the Results of Operations for a discussion of Leasing's operating statistics for the three months ended September 30, 2001. Leasing is not included in the new NVA accounting methodology, and only direct revenue and expenses are presented. ADMINISTRATION Administration includes all corporate functions and support areas including administrative services, information systems, finance, human resources, legal and internal audit services. Administration's expenses are allocated to Sales, Customer Fulfillment, Portfolio and Servicing based upon budgeted administration expenses divided by budgeted headcount times the actual headcount of those four segments. The following is a summary of Administration revenues and expenses and key operating statistics for the quarter ended September 30, 2001:
ADMINISTRATION --------------------------------------------------- ($ in thousands except per unit) (unaudited) Direct revenues $ 229 ----------- Total revenues 229 Direct expenses 8,152 Overhead expense allocation (5,567) ----------- Total expenses 2,585 ----------- Income (loss) $ (2,356) Production $ 2,838,398 Units 22,290 Expenses per unit 116 Bps of expense per unit 9 FTEs 192
Summary As described above, the Administration segment is credited or debited with revenues and expenses directly related to corporate and support area functions. These costs are then allocated to the business segments based on headcount. The per headcount rates that are charged to the business 69 segments are set each quarter based on forecasted expenses and headcount. The $2.4 million loss is attributable in part to: 1) the Administrative segment being debited with incentive compensation for the entire company tied to the increase in loan volume and profitability; 2) the Company wrote off its $1.5 million investment in Digital Lighthouse Corporation, which filed for bankruptcy in the third quarter and 3) a $1.6 million charge for the third quarter relating to accelerated amortization of its mortgage production software and accelerated depreciation of furniture, fixtures, and leasehold improvements in anticipation of the Company's move to a new headquarters building and new loan operating system. To control their own costs, the business segments can attempt to negotiate lower per headcount rates or to control their respective employee headcount, which reduces their respective allocations. Both methods of cost control create pressure upon the administrative segment to further control its costs. Allocation of overhead expenses based on headcount serves to promote the automation of work processes throughout the organization. OTHER/ELIMINATION Other/Elimination includes the impact of SFAS No. 91 and No. 133, intercompany eliminations, amortization of goodwill, taxes and the transition adjustment due to the implementation of SFAS No. 133. 70 FINANCIAL CONDITION The Company experienced a 66% increase in the volume of loans and leases produced to $2.9 billion for the third quarter of 2001 from $1.7 billion in the third quarter of 2000. Loan production for the third quarter of 2001 declined by 15% compared to loan production of $3.4 billion for the second quarter of 2001. The September 30, 2001, locked residential mortgage application pipeline (mortgage loans not yet closed but for which the interest rate has been locked) was approximately $1.0 billion and the application pipeline (mortgage loans for which the interest rate has not yet been locked) was approximately $0.6 billion. This compares to a locked mortgage application pipeline of $0.8 billion and a $0.6 billion application pipeline at June 30, 2001. Mortgage loans held-for-sale and mortgage-backed securities totaled $0.6 billion at September 30, 2001 and $0.5 billion at December 31, 2000. The Company's servicing portfolio (exclusive of loans serviced under subservicing agreements) decreased to $7.8 billion at September 30, 2001 from $8.0 billion at December 31, 2000, a decrease of 3%. Short-term borrowings, which are the Company's primary source of funds, totaled $0.9 billion at September 30, 2001 and $0.8 billion at December 31, 2000. At September 30, 2001 and December 31, 2000, there were $6.1 million in long-term borrowings. Other liabilities totaled $112.9 million as of September 30, 2001, compared to the December 31, 2000 balance of $91.0 million, an increase of $21.9 million, or 24%. 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 Annual Report on 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 2001, the Company and its wholly owned subsidiaries RBMG, Inc., Meritage Mortgage Corporation, MG Reinsurance Company and RBMG Asset Management Company, Inc. (not including the Company, the Restricted Group), entered into a $321.5 million, as amended, revolving credit agreement provided by a syndicate of unaffiliated banks that expires in July 2002. The credit agreement includes covenants requiring the Restricted Group to maintain (i) a minimum net worth of $150 million, plus 65% of the Restricted Group's positive net income for each quarter commencing with the quarter ending June 30, 2001, plus 90% of capital contributions to the Restricted Group after July 25, 2001, minus restricted payments, (ii) a minimum tangible net worth of $140 million, plus 65% of the Restricted Group's positive net income for each quarter commencing with the quarter ending June 30, 2001, plus 90% of capital contributions to the Restricted Group after July 25, 2001, minus restricted payments, (iii) a ratio of total Restricted Group liabilities to tangible net 71 worth of not more than 8.0 to 1.0, excluding debt incurred pursuant to certain gestation and repurchase financing agreements, (iv) RBMG, Inc.'s eligibility as a servicer of Ginnie Mae, FHA, VA, Fannie Mae and Freddie Mac mortgage loans, (v) a mortgage servicing rights portfolio with an underlying unpaid principal balance of at least $4 billion and (vi) a ratio of consolidated cash flow to consolidated interest expense (these terms are defined in the loan agreement) of at least 1.25 to 1.00 for any period of two consecutive fiscal quarters (the interest rate coverage ratio). The Company also is required to maintain $10 million of liquidity pursuant to the agreement. The covenants also limit the Company's dividends to 35% of the prior quarter's consolidated net income. 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 2001, the Company's subsidiaries, RBMG, Inc. and Meritage Mortgage Corporation, entered into a $75 million warehouse line of credit that expires in July 2002. The credit agreement includes covenants similar to those described above. Meritage Mortgage Corporation, RBMG, Inc. and a bank are parties to a master repurchase agreement, pursuant to which Meritage and RBMG, Inc. may deliver eligible subprime mortgage loans in an aggregate principal amount of up to $300 million to the bank. The master repurchase agreement expires in July 2002. RBMG, Inc., Meritage Mortgage Corporation and RBMG PFC are party to a $100 million commercial paper conduit facility that expires in April 2002. The facility has covenants similar to those discussed previously. 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. RBMG, Inc. has entered into a $10.0 million unsecured line of credit agreement that expires in September 2002. The interest rate on funds borrowed is based upon the prime rate announced by a major money center bank. 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 and its subsidiaries were in compliance with the various debt covenants in place at September 30, 2001. Although management anticipates continued compliance with current debt covenants, there can be no assurance that the Company and its subsidiaries will be able to comply with the debt covenants of these financing agreements. Failure to comply could result in the loss of the related financing. 72 Republic Leasing has a $200 million credit facility to provide financing for its leasing portfolio. The credit agreement matures in December 2001 and contains various covenants regarding characteristics of the collateral and the performance of the leases originated and serviced by Republic Leasing. The 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 is currently evaluating strategic alternatives for its leasing subsidiary. Alternatives being considered include the possible sale of Republic Leasing. The Company has been repurchasing its stock pursuant to Board authority since March 1998, and, as of September 30, 2001, the Company had remaining authority to repurchase up to $2.1 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. Certain of the Company's financing arrangements contain covenants that prevent the Company from repurchasing its stock at this time. Shares repurchased are maintained in the Company's treasury account and are not retired. At September 30, 2001, there were 7,273,783 shares held in the Company's treasury account at an average cost of $7.23 per share. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133. SFAS No. 133, as amended by SFAS No.'s 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. 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 Company has implemented SFAS No.133 assuming that the value of such derivatives is zero at rate lock date. Commencing January 1, 2001, the Company records 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 73 derivatives under SFAS No. 133. Accordingly, commencing January 1, 2001, these instruments are 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 are 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 the 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 records a charge to earnings. Simultaneously, the Company takes out of OCI a like amount and records 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. During May 2001, however, the Company chose to elect hedge accounting treatment for its servicing hedges. Since the time of election, the Company has marked-to-market the hedge instruments resulting in pre-tax charges of $5.3 million. Prior to the election of hedge accounting, the offsetting increase in value of the underlying servicing portfolio could not be recognized. The Company enters into interest rate swaps to pay fixed rate and receive floating rate as a cash flow hedge of its variable rate debt used to finance its fixed rate lease receivables. Interest 74 rate swaps are considered to be derivatives under SFAS No. 133 and are to be carried at market value as assets or liabilities in the balance sheet. Since this is a cash flow hedge under SFAS No. 133, the after tax impact is charged to or credited to OCI. Under the transition rules of SFAS No. 133, as of January 1, 2001, the Company recognized the value of derivatives on its balance sheet. It recognized in a separate line in its income statement the cumulative effect of changing to SFAS No. 133. That cumulative effect is the difference between retained earnings at December 31, 2000 and the amount of retained earnings that would have been reported at that date if SFAS No. 133 had been retroactively applied to all prior periods. The table below highlights the impact of this transition adjustment.
($ IN THOUSANDS) BALANCE SHEET ------------- CUMULATIVE DERIVATIVE TAX DERIVATIVE TAX EFFECT OF ASSETS ASSET LIABILITIES LIABILITY OCI CHANGE ------ ----- ----------- --------- --- ------ Rate lock commitments $1,366 $ -- $ -- $ 509 $ -- $ 857 Derivatives hedging rate lock commitments 308 663 1,779 115 (923) 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 $ 8,279 $ 645 $(3,951) $ (149) ====== ====== ======= ====== ======= =======
In addition to the cumulative effect adjustment above, SFAS No. 133 resulted in a decrease in net income net of tax of $1.5 million and $1.6 million ($0.09 per share), for the nine months and third quarter, respectively. DIVISIONAL ANALYSIS OF PRE-TAX FUNDS GENERATED FROM OPERATIONS The analyses that 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 nine months ended September 30, 2001 and 2000, the Company generated approximately $79.1 million and $14.2 million, respectively, of positive funds from continuing operations. 75
($ in thousands) FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2001 2000 ------- -------- Agency-eligible production $34,450 $(16,151) Agency-eligible servicing 9,562 17,673 Subprime production 29,092 7,849 Leasing 5,986 4,810 ------- -------- $79,090 $ 14,181 ======= ========
Each of the Company's divisions produced positive operating funds during both periods except for agency-eligible production which produced negative operating funds in the first nine months of 2000. The combined positive operating funds were invested to reduce indebtedness, pay dividends, repurchase stock and purchase fixed assets. AGENCY-ELIGIBLE PRODUCTION Generally, the Company purchases agency-eligible mortgage loans which are resold with the rights to service the loans being retained by the Company. The Company then separately sells a large percentage of the servicing rights so produced. When the loans are sold, current accounting principles require that the Company capitalize the estimated fair value of the retained mortgage servicing rights and subsequently amortize the servicing rights retained to expense. Accordingly, amounts reported as gains on sale of agency-eligible mortgage loans may not represent positive funds flow to the extent that the associated servicing rights are not sold for cash but are instead retained and capitalized. In this context, the table below reconciles the major elements of pre-tax operating funds flow of the Company's agency-eligible production activities.
($ in thousands) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 2001 2000 -------- -------- Income (loss) before income taxes $ 30,689 $(21,276) Deduct: Net gain on sale of mortgage loans, as (65,862) (16,255) reported Add back: Cash gains (losses) on sale of mortgage loans 26,927 (2,654) Cash gains on sale of mortgage servicing rights 33,955 17,957 Depreciation and amortization 5,919 4,375 Provision expense 2,822 1,702 -------- -------- $ 34,450 $(16,151) ======== ========
76 AGENCY-ELIGIBLE SERVICING The Company's current strategy is to position itself as a national supplier of agency-eligible servicing rights to the still consolidating mortgage servicing industry. Accordingly, the Company generally sells a significant percentage of its produced mortgage servicing rights to other approved servicers under forward committed bulk purchase agreements. However, the Company maintains a relatively small mortgage servicing portfolio. As discussed above, mortgage servicing rights produced or purchased are initially capitalized and subsequently must be amortized to expense. Much like depreciation, such amortization charges are "non-cash". In this context, the table below reconciles the major elements of pre-tax operating funds flow of the Company's agency-eligible mortgage servicing activities.
($ in thousands) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 2001 2000 -------- -------- (Loss) income before income taxes $(13,532) $ 1,508 Deduct: Net loss (gain) on sale of mortgage servicing rights, as reported 2,329 (2,212) Add back: Amortization and provision for impairment of Mortgage servicing rights 20,065 18,278 Depreciation and amortization 700 99 -------- -------- $ 9,562 $ 17,673 ======== ========
SUBPRIME PRODUCTION Generally, the Company purchases subprime loans through a wholesale broker network. The Company then 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 the first nine months of 2001 and 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. 77
($ in thousands) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 2001 2000 -------- -------- Income (loss) before income taxes $ 10,432 $(37,667) Deduct: Net gain on sale of subprime loans, as reported (21,649) (10,201) Accretion income on residuals -- (5,634) Add back: Cash gains on sale of whole subprime loans 34,285 17,094 Cash received from investments in residual certificates -- 1,922 Depreciation and amortization of goodwill and intangibles 1,016 1,246 Provision expense 5,008 1,751 Mark-to-market on residuals -- 39,338 -------- -------- $ 29,092 $ 7,849 ======== ========
LEASING Generally, the Company originates small-ticket equipment leases for commercial customers that are retained as investments by the Company. Investments in leases originated and retained are financed through a borrowing facility at draw rates that approximate the net cash investment in the related lease. Accordingly, financing activities related to growth in the balance of leases held-for-investment do not significantly impact operating cash flow. In this context, the table below reconciles the major elements of operating funds flow allocable to leasing activities.
($ in thousands) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2001 2000 ------ ------ Income before income taxes $2,121 $2,354 Add back: Depreciation and amortization of goodwill and intangibles 216 248 Provision expense 3,649 2,208 ------ ------ $5,986 $4,810 ====== ======
78 ITEM 3. 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 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 disclosure in the 2000 Annual Report on Form 10-K, the Company performed various sensitivity analyses that quantify the net financial impact of hypothetical changes in interest rates on its interest rate-sensitive assets, liabilities and commitments. These analyses presume an instantaneous parallel shift of the yield curve. Various techniques are employed to value the underlying financial instruments which rely upon a number of critical assumptions. Actual experience may differ materially from the estimated. To the extent that yield curve shifts are non-parallel and to the extent that actual variations in significant assumptions differ from those applied for purposes of the valuations, the resultant valuations can also be expected to vary. Such variances may prove material. The Company has procedures in place that monitor whether material changes in market risk are likely to have occurred since December 31, 2000. The Company does not believe that there have been any material changes in market risk from those reported in the 2000 Annual Report on Form 10-K. PART II. OTHER INFORMATION ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K -(a) A list of exhibits filed with this Form 10-Q, along with the exhibit index can be found on pages A to I following the signature page. - (b) On September 14, 2001, the Company filed a report on Form 8-K reporting under Item 5 the purchase of certain assets from Nations Credit Financial Services Corporation ("EquiCredit"), a wholly owned subsidiary of Bank of America Corporation, by Meritage Mortgage Corporation ("Meritage"), a wholly owned subsidiary of the Company. The assets purchased included fixed assets of 15 of EquiCredit's offices and a service center in Jacksonville, Florida. 79 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RESOURCE BANCSHARES MORTGAGE GROUP, INC. ------------------------------------------- (Registrant) /s/ Steven F. Herbert ------------------------------------------- Steven F. Herbert Corporate Chief Financial Executive (Signing in the capacity of (i) duly authorized officer of the registrant and (ii) principal financial officer of the registrant) 80 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 (A) Outside Directors' Stock Option Plan (as amended through * March 19, 2001) incorporated by reference to Exhibit 10.32 of the Registrant's Annual Report on Form 10-K for the period ended December 31, 2000 (B) Amendment to the Outside Directors' Stock Option Plan adopted * May 2, 2001 incorporated by reference to Exhibit 10.1(B) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001 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
A
EXHIBITS DESCRIPTION PAGE 10.5 (A) Change of Control Agreement by and between Resource * Bancshares Mortgage Group, Inc. and Steven F. Herbert, dated as of July 27, 2000, incorporated by reference to Exhibit 10.5 of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2000 (B) Amendment to Change of Control Agreement between Steven F. * Herbert and the Company dated May 2, 2001 incorporated by reference to Exhibit 10.5(B) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001 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 (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 (C) Amendment to Change of Control Agreement between Harold * Lewis, Jr. and the Company dated May 2, 2001 incorporated by reference to Exhibit 10.6(C) of the Registrant's Quarterly Report of Form 10-Q for the period ended June 30, 2001 10.7 (A) Change of Control Agreement dated November 8, 2000 by and * between Resource Bancshares Mortgage Group, Inc. and William M. Ross incorporated by reference to Exhibit 10.7 (A) of the Registrant's Annual Report on Form 10-K for the period ended December 31, 2000 (B) Employment Agreement dated November 1, 2000 between Resource * Bancshares Mortgage Group and William M. Ross incorporated by reference to Exhibit 10.7 (B) of the Registrant's Annual Report on Form 10-K for the period ended December 31, 2000 (C) Amendment to Change of Control Agreement between William M. * Ross and the Company dated May 2, 2001 incorporated by reference to Exhibit 10.7(C) of the Registrant's Quarterly Report of Form 10-Q for the period ended June 30, 2001 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
B
EXHIBITS DESCRIPTION PAGE (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 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 10.11 (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
C
EXHIBITS DESCRIPTION PAGE (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 Registrant's 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 Registrant's 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 Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2000 (C) Incentive Stock Option Agreement pursuant to Resource Bancshares Mortgage Group, Inc. Omnibus Stock Award Plan between the Company and Douglas K. Freeman dated January 10, 2000 incorporated by reference to Exhibit 10.14 (c) of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2001 (D) Incentive Stock Option Agreement under the Resource * Bancshares Mortgage Group, Inc. Omnibus Stock Award Plan between the Company and Douglas K. Freeman dated February 1, 2001 incorporated by reference to Exhibit 10.14 (d) of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2001 (E) Incentive Stock Option Agreement under the Resource * Bancshares Mortgage Group, Inc. Omnibus Stock Award Plan between the Company and Douglas K. Freeman dated June 25, 2001 incorporated by reference to Exhibit 10.14(E) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001 (F) Incentive Stock Option Agreement under the Resource * Bancshares Mortgage Group, Inc. Omnibus Stock Award Plan between the Company and Douglas K. Freeman dated June 25, 2001 incorporated by reference to Exhibit 10.14(F) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001 (G) Incentive Stock Option Agreement under the Resource * Bancshares Mortgage Group, Inc. Omnibus Stock Award Plan between the Company and Douglas K. Freeman dated June 25, 2001 incorporated by reference to Exhibit 10.14(G) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001
D
EXHIBITS DESCRIPTION PAGE (H) Incentive Stock Option Agreement under the Resource * Bancshares Mortgage Group, Inc. Omnibus Stock Award Plan between the Company and Douglas K. Freeman dated June 25, 2001 incorporated by reference to Exhibit 10.14(H) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001 (I) Incentive Stock Option Agreement under the Resource * Bancshares Mortgage Group, Inc. Omnibus Stock Award Plan between the Company and Douglas K. Freeman dated June 25, 2001 incorporated by reference to Exhibit 10.14(I) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001 (J) Amendment to Change of Control Agreement between Douglas K. * Freeman and the Company dated May 2, 2001 incorporated by reference to Exhibit 10.14(J) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001 (K) Amendment to employment agreement between Douglas K. Freeman * and the Company dated June 25, 2001 incorporated by reference to Exhibit 10.14(K) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001 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 (E) Resolutions of the Board of Directors suspending * contributions to the Employee Stock Ownership Plan and directing officers to take steps to terminate the Employee Stock Ownership Plan incorporated by reference to Exhibit 10.15(E) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001 10.16 (A) ESOP Loan and Security Agreement dated January 12, 1995 * between the Registrant and The Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust incorporated by reference to Exhibit 10.31 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995
E
EXHIBITS DESCRIPTION PAGE (B) 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) 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 incorporated by reference to Exhibit 10.32(D) 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 incorporated by reference to Exhibit 10.33 of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2000
F
EXHIBITS DESCRIPTION PAGE 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 incorporated by * reference to Exhibit 10.20 (D) of the Registrant's Annual Report on Form 10-K for the period ended December 31, 2000 (E) Fourth Amendment to Omnibus Stock Award Plan adopted May 2, * 2001 incorporated by reference to Exhibit 10.20(E) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001 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 (D) Form of Incentive Stock Option Agreement (Omnibus Stock Award * Plan) effective June 2001 ($21 vesting provisions) incorporated by reference to Exhibit 10.21(D) of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001 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 (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
G
EXHIBITS DESCRIPTION PAGE (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 (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
H
EXHIBITS DESCRIPTION PAGE (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 10.48 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 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 11.1 Statement re: Computation of Net Income per Common Share ______
* Incorporated by reference I EX-11.1 3 g72633ex11-1.txt STATEMENT RE: COMPUTATION OF NET INCOME 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 Nine Months Ended For the Quarter Ended September 30, 2001 September 30, 2001 ------------------------- --------------------- Net income $15,151 $6,482 Net income per common share from continuing operations-Basic(1) $ 0.93 $ 0.40 Net loss per common share from continuing operations-Diluted(2) $ 0.91 $ 0.39
(1) The number of common shares used to compute the net income per share above was 16,368,382 for the nine months ended September 30, 2001 and 16,273,761 for the quarter ended September 30, 2001. (2) The number of common shares used to compute the net income per share above was 16,609,335 for the nine months ended September 30, 2001 and 16,552,512 for the quarter ended September 30, 2001. -----END PRIVACY-ENHANCED MESSAGE-----