-----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, NF7JIaLkqNIcjBK/3/+cXy5aTnZVA+yHI8xC1X7noHowl8zCHOpH0DQ5ne/xX2IM hBHTUrBU5wui3vv8EijDWw== 0000950144-97-003206.txt : 19970329 0000950144-97-003206.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950144-97-003206 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESOURCE BANCSHARES MORTGAGE GROUP INC CENTRAL INDEX KEY: 0000893817 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 570962375 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21786 FILM NUMBER: 97567697 BUSINESS ADDRESS: STREET 1: 7909 PARKLANE ROAD SUITE 150 CITY: COLUMBIA STATE: SC ZIP: 29223 BUSINESS PHONE: 8037413000 MAIL ADDRESS: STREET 2: 7909 PARKLANE RD SUITE 150 CITY: COLUMBI STATE: SC ZIP: 29223 10-K 1 RESOURCE BANCSHARES MORTGAGE GROUP, INC. 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1996 Commission File Number 000-21786 RESOURCE BANCSHARES MORTGAGE GROUP, INC. (Exact name of registrant as specified in its charter) --------------------- Delaware 57-0962375 ------------------------ ------------------------------------ (State of Incorporation) (IRS Employer Identification Number) 7909 Parklane Road Columbia, South Carolina 29223 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (803) 741-3000 ------------------------------------------------- (Registrant's telephone no., including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of class -------------- Common Stock, par value $.01 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. [ ] 2 The aggregate market value of the voting stock held by non-affiliates of the registrant was $171,923,103.75 as of February 28, 1997, based on the closing price of $15.00 per share of such stock on the NASDAQ National Market System on such date. As of February 28, 1997, 19,308,548 shares of the registrant's Common Stock, par value $.01 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Document of the Registrant Form 10-K Reference Locations 1996 Annual Report to Shareholders Parts II and IV 1997 Proxy Statement Part III 3 PART I ITEM 1. BUSINESS General Resource Bancshares Mortgage Group, Inc., (the Company), was organized under Delaware law in 1992 to acquire and operate the mortgage banking business of the banking subsidiaries of Resource Bancshares Corporation (RBC), which commenced operations in May 1989. The assets and liabilities of these banking subsidiaries were transferred to the Company on June 3, 1993, as part of the Company's initial public offering. The Company purchases mortgage loans through its correspondents and the wholesale division. The Company also originates mortgage loans through its retail division, Intercounty Mortgage, Inc. (IMI), which commenced operations as a wholly-owned subsidiary of the Company in May 1995. Substantially all of the mortgage loans purchased and originated by the Company are sold to institutional purchasers, including national and regional broker/dealers, as mortgage-backed securities issued or guaranteed by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) or the Government National Mortgage Association (GNMA). Substantially all the mortgage loans are sold with the rights to service the loans being retained by the Company. The servicing is either held in the Company's portfolio or sold separately. The Company receives loan servicing fees and subservicing fees on loans it purchases from correspondents and the wholesale division and loans originated by the retail division. The Company retains servicing rights on the majority of these loans until the loans are sold and transferred. The Company also receives loan servicing fees on mortgage servicing rights acquired through bulk acquisitions of servicing rights related to loans originated by other lenders. To further position itself as a nationwide producer and supplier of mortgage loans and mortgage servicing, the Company intends to increase its market penetration and the breadth of its mortgage origination sources, particularly in the western and northeastern United States, by: (i) maintaining corporate flexibility to operate in fluctuating mortgage markets; (ii) remaining among the mortgage industry's lowest-cost producers; (iii) continuing its commitment to high quality in underwriting and customer service; (iv) utilizing advanced technology; and (v) entering into the subprime lending market. The Company does not hold any material trademarks, licenses, franchises or concessions. Loan Production Correspondents Through its correspondents, the Company purchases mortgage loans that have been made by such correspondents to residential property owners. Correspondents are primarily mortgage lenders, mortgage brokers, savings and loan associations and small commercial banks. At December 31, 1996, the Company had 871 correspondents originating mortgage loans in 49 states and the District of Columbia. Loan production for the Company by correspondents is widely dispersed, with the top 20 correspondents supplying the Company with 35% of its dollar volume of correspondent loans during 1996. With the increase in volume of production and the further development of correspondent relationships during 1996 over prior years, the Company further spread the concentration of mortgage 1 4 loan production volume over more correspondents, thus reducing its dependence on selected individual correspondents. During 1996, the top five correspondents accounted for approximately 15% of the year's mortgage loan correspondent purchase volume. This compares to the top five correspondents accounting for approximately 13.4% and 43% of the mortgage loan purchase volume during 1995 and 1994, respectively. No single correspondent accounted for more than 3.4% of the Company's mortgage loan purchase volume in 1996. In 1995, 4.5% of the Company's total mortgage loan purchase volume was acquired from the Company's highest-volume correspondent. In 1994, each of the Company's two highest-volume correspondents accounted for more than 10% of the Company's total mortgage loan purchase volume. Management believes that lending through correspondents is an efficient and cost-effective method of producing loans because of the low fixed expenses and capital investment required of the Company. Historically, retail mortgage loan origination has involved higher fixed overhead costs such as offices, furniture, computer equipment and telephones, as well as additional personnel costs such as sales representatives. Because the correspondents incur the cost of operating branch office networks and generating loans, the Company lowers its cost structure and provides the correspondents with cost-efficient access to the secondary loan markets. By emphasizing correspondent lending, the Company can match its costs more directly with the volume of loans purchased, so that a substantial portion of the Company's cost is variable rather than fixed. Management also believes that, by emphasizing the correspondent origination approach, the Company has greater flexibility to adjust to varying market conditions. As conditions change, the Company can expand into new geographic markets without incurring significant additional costs by utilizing existing and new correspondents that operate in each new market. The use of correspondents also enables the Company to exit markets easily if circumstances dictate. The Company attracts and maintains relationships with correspondents by offering a variety of services that provide incentives for the correspondents to sell mortgage loans to the Company. The Company's strategy with respect to its correspondents is to provide a high level of service rather than the lowest price. Services provided include timely underwriting and approval or rejection of a loan (within 48 hours after receipt of a completed loan application), timely purchase of loans (within 96 hours after being approved for acquisition), seminars on how to process and prepare a loan application and updates on current underwriting practices. In addition, the Company provides correspondents with a variety of products and delivery capabilities and multiple means of funding loans. As the mortgage lending market increases in sophistication and loan-price differentials narrow among mortgage bankers, the Company believes that the level of service and commitment it provides to its correspondents will be paramount to its continued success. Management also believes that a correspondent generally prefers to sell loans to a mortgage banker that is not competing with the correspondent for retail originations. Management believes that through correspondent lending it can manage risks and maintain good quality control. Correspondents have to meet established standards to be approved by the Veteran's Administration (VA), the U. S. Department of Housing and Urban Development (HUD) or private mortgage insurance companies. A correspondent qualifies to participate in the Company's correspondent program only after a thorough review of its reputation and mortgage lending expertise, including a review of references and financial statements and a personal visit by one or more representatives of the Company. After a correspondent qualifies for the Company's program, the Company closely monitors the correspondent's performance in terms of delinquency ratios, document exceptions and other pertinent data. Furthermore, all mortgage loans purchased by the Company through correspondents are subject to various aspects of the Company's underwriting criteria, and correspondents are required to repurchase loans or otherwise indemnify the Company for its losses in the event of fraud or misrepresentation in the origination process and for certain other reasons, including noncompliance with underwriting standards. 2 5 All loan applications are subject to the Company's underwriting criteria and the guidelines set forth by the Federal Housing Authority (FHA), the VA, GNMA, FNMA, FHLMC or private investors, as applicable. The Company or the correspondent, in the case of a correspondent with delegated underwriting authority, verifies each applicant's income and bank deposits, as well as the accuracy of the other information submitted by the applicant, and obtains and reviews a credit report from a credit reporting agency, a preliminary title report and a real estate appraisal. Generally, delegated underwriting authority is granted by the Company to its larger correspondents and is granted only to correspondents who meet certain financial strength, delinquency ratio, underwriting and quality control standards that the Company has established for granting delegated underwriting authority to correspondents. With respect to FHA and VA loans, HUD and the VA, respectively, have established approval guidelines for the underwriting of loans to be covered by FHA insurance or VA guaranty. The Company is approved by both HUD and the VA to underwrite FHA and VA loans originated through its retail division subsidiary, IMI, as well as loans submitted by specified correspondents and wholesale brokers. The Company purchases FHA and VA loans only from those correspondents who are approved to underwrite FHA and VA loans and from those correspondents for whom the Company has been approved to underwrite FHA and VA loans. For those FHA and VA loans purchased from correspondents and brokers, the appropriate FHA mortgage insurance premium or VA Funding Fee must be remitted by the correspondent prior to purchase by the Company. The Company has implemented a quality control program to monitor compliance with the Company's established lending and servicing policies and procedures, as well as with applicable laws and regulatory guidelines. The Company believes that the implementation and enforcement of its comprehensive underwriting criteria and its quality control program are significant elements in the Company's efforts to purchase high-quality mortgage loans and servicing rights. The Company's quality control department examines loans in order to evaluate the loan purchasing function for compliance with underwriting criteria. The quality control department also reviews loan applications for compliance with federal and state lending standards, which may involve reverifying employment and bank information and obtaining separate credit reports and property appraisals. Wholesale Division As other financial institutions were exiting the wholesale mortgage lending business, the Company made a decision in late 1994 to incorporate expansion into the wholesale mortgage market into its primary business strategy. Expansion into the wholesale mortgage banking business involves the establishment of wholesale branch offices and the incurrence of the fixed expenses associated with maintaining those offices. However, wholesale mortgage purchases typically provide for higher profit margins than correspondent production, and each branch office can serve a relatively sizable geographic area compared to the retail market by establishing relationships with large numbers of independent mortgage loan brokers who bear most of the cost of identifying and interacting directly with loan applicants. Accordingly, management believes that the wholesale division affords the Company an opportunity to identify markets where higher profit margins and diversification of the Company's sources of loan volumes can be appropriately balanced against the increased earnings risks associated with a somewhat higher fixed-cost structure. At December 31, 1996, the Company had 13 wholesale branches, serving approximately 2,322 brokers. The offices are located in Arizona (1), Colorado (1), Florida (1), Georgia (1), Illinois (1), Maryland (1), Massachusetts (1), Missouri (1), North Carolina (1), Ohio (1), Texas (2) and Washington (1). The Company receives loan applications through these brokers, underwrites each loan, funds each 3 6 loan at closing and prepares all closing documentation. The wholesale branches also handle all shipping and follow-up procedures on these loans. All loan applications processed by the wholesale division are subject to underwriting and quality control comparable to the standards used in the Company's correspondent lending program. Retail Division The establishment of the retail division was made in the context of the demographics and market conditions affecting the northeast and is expected to be unique within the context of the Company's primary business strategies of continuing to increase the number of correspondents and expand the wholesale division. The establishment of the retail division further diversified the Company's sources of loan volume and permitted management to obtain as employees a group of seasoned originators who had previously worked together for 13 years in the mortgage banking industry. With the establishment of the retail division in 1995 through the opening of six branches located in New York (4), New Jersey (1) and Pennsylvania (1), the Company began to originate mortgage loans through its employees. At December 31, 1996, the retail division had 209 employees. From its organization in 1995 through December 31, 1996, the retail division originated $879 million in mortgage loans. The retail division operates through IMI. The Company requires the retail division to use underwriting and quality control standards similar to the standards used in the Company's correspondent lending and wholesale lending programs. The following table shows mortgage loan production volume by division for each of the three years in the period ended December 31, 1996.
Year Ended December 31, ------------------------------------------ ($ in Thousands) 1996 1995 1994 ---------- ---------- ---------- Correspondent Division $7,915,323 $6,252,008 $2,855,334 Wholesale Division 1,411,643 673,201 19,931 Retail Division 668,759 210,565 ---------- ---------- ---------- Total Loan Production $9,995,725 $7,135,774 $2,875,265 ========== ========== ==========
The Company purchases and originates conventional mortgage loans and mortgage loans insured by the FHA or partially guaranteed by the VA. All mortgage loans purchased or originated by the Company are purchased or originated for resale. Currently, substantially all of the Company's loans are conforming loans, i.e., mortgage loans that qualify for inclusion in purchase and guarantee programs sponsored by FNMA, FHLMC and GNMA. The Company purchases and originates a variety of mortgage loan products that are designed, in conjunction with the requirements of prospective purchasers of such loans, to respond to consumer needs and competitive factors. In addition to 15-year and 30-year conventional mortgage loans and 15-year and 30-year FHA loans and VA loans, the Company purchases and originates products designed to provide lower rates or lower principal and interest payments to borrowers, including balloon mortgage loans that have relatively short maturity dates (e.g., five or seven years) and longer amortization schedules (e.g., 25 or 30 years) and adjustable rate mortgage loans. The Company also purchases and originates mortgage loans featuring a variety of combinations of interest rates and discount points so that borrowers may elect to pay higher points at closing and less interest over the life of the loan, or pay a higher interest rate and reduce or eliminate points payable at closing. The portion of total loans held for sale at any time that 4 7 consists of a particular product type depends upon the interest rate environment at the time such loans are made. The Company does not believe that any of its products pose unusual risks. The following table shows mortgage loan production volume by type of loan for each of the three years in the period ended December 31, 1996.
Year Ended December 31, ----------------------------------------------------------------------- ($ in Millions) 1996 1995 1994 -------------------- -------------------- --------------------- CONVENTIONAL LOANS: Volume $ 6,197.3 $ 4,495.6 $ 987.7 Percentage of total volume 62% 63% 34% FHA / VA LOANS: Volume $ 3,798.4 $ 2,640.2 $ 1,887.6 Percentage of total volume 38% 37% 66% TOTAL LOANS: Volume $ 9,995.7 $ 7,135.8 $ 2,875.3 Number of loans 98,237 72,792 40,260 Average loan size ($ in Thousands) $101.8 $ 98.0 $ 71.4
The following table shows loan production volume by state for the year ended December 31, 1996, for each state that represented 5% or more of the Company's total loan production volume for 1996.
Year Ended December 31, 1996 -------------------------------------- ($ in Thousands) Percent of State Amount Total - ---------------------------------- ----------- ----------- Illinois $ 1,132,912 11.33% Colorado 825,972 8.26% Florida 720,501 7.21% Texas 686,108 6.86% Georgia 597,131 5.97% Massachusetts 584,561 5.85% Maryland 556,207 5.57% Minnesota 521,028 5.21% New York 505,531 5.06% All Other 3,865,774 38.68% ----------- ------- TOTAL $ 9,995,725 100.00% =========== =======
Sale of Loans The Company customarily sells all mortgage loans that it originates or purchases, retaining the mortgage servicing rights, which currently are sold separately. Under ongoing programs established with FNMA and FHLMC, the Company aggregates its conforming conventional loans into pools that are assigned to FNMA or FHLMC in exchange for mortgage-backed securities. The Company's FHA mortgage loans and VA mortgage loans are generally pooled and sold in the form of GNMA mortgage-backed securities. The Company pays certain fees to FHLMC, FNMA or GNMA, as applicable, in connection with these programs. The Company then sells FHLMC, FNMA and GNMA securities to securities dealers. 5 8 Substantially all of the Company's mortgage loans qualify under the various FNMA, FHLMC and GNMA program guidelines, which include specific property and credit standards, including a loan size limit. The small number that do not qualify are sold to private investors. In the case of conventional loans, subject to the obligations of any primary mortgage insurer, the Company is generally at risk for any mortgage loan default until the loan is sold (typically less than 45 days). Once the Company sells the loan, the risk of loss from mortgage loan default and foreclosure generally passes to the purchaser or insurer of the loan. In the case of FHA and VA loans, the Company has, from the time such a loan is originated or purchased until the first borrower payment is due, a minimum of 31 days to request insurance or a guarantee certificate. Once the insurance or the guarantee certificate is issued, the Company has no risk of default, except with respect to certain losses related to foreclosures of FHA mortgage loans and losses that exceed the VA's guarantee limitations. In connection with the Company's loan exchanges and sales, the Company makes representations and warranties customary in the industry relating to, among other things, compliance with laws, regulations and program standards and as to accuracy of information. In the event of a breach of these representations and warranties, the Company may become liable for certain damages or may be required to repurchase such loans. Typically, any flaws with respect to repurchased loans are corrected and the loans are resold or are repurchased by the original correspondent pursuant to prior agreement. Although the Company has not incurred losses in any material respect as a result of mortgage loan repurchases due to breaches in representations and warranties, there can be no assurance that the Company will not experience such losses in the future. Prior to the sale of originated or purchased mortgage loans, the Company uses hedging techniques to reduce its exposure to interest rate risk. The Company projects the portion of the pipeline loans that the Company anticipates will close. The Company assesses the interest-rate risk associated with the commitments that it has extended to originate or purchase loans and evaluates the interest-rate risk of these commitments based upon a number of factors, including the remaining term of the commitment, the interest rate at which the commitment was provided, current interest rates and interest-rate volatility. The Company constantly monitors these factors and adjusts its hedging when appropriate throughout each business day. The Company's hedging currently consists of utilizing a combination of mandatory forward sales commitments on mortgage-backed securities and mortgage loans and options on mortgage-backed securities. The sale of mortgage loans may generate a gain or loss to the Company. Gains or losses result primarily from two factors. First, the Company may originate or purchase a loan at a price (i.e., interest rate and discount) that may be higher or lower than the Company would receive if it immediately sold the loan in the secondary market. These pricing differences occur principally as a result of competitive pricing conditions in the primary loan origination market. Second, gains or losses upon the sale of loans may result from changes in interest rates that cause changes in the market value of the loans, or commitments to originate or purchase loans, from the time the price commitment is given to the customer until the time that the loan is sold by the Company to the investor. To reduce the effect of interest-rate changes on the gain and loss on loan sales, the Company generally commits to sell all its warehouse loans and a portion of its pipeline loans to investors for delivery at a future time for a stated price. In connection with its loan sale program, which involves the sale of mortgage loans and mortgage-backed securities on a forward or other deferred delivery and payment basis, the Company has credit risk exposure to the extent purchasers are unable to meet the terms of their forward purchase contracts. As is customary in the marketplace, none of the forward payment obligations of any of the Company's counterparties is currently secured or subject to margin requirements, although the Company 6 9 attempts to limit its credit exposure on forward sales arrangements by entering into forward sales contracts solely with institutions that the Company believes are sound credit risks, and by limiting exposure to any single counterparty by selling to a number of investors. For example, it is the Company's current policy, based on the Company's current size, that not more than the lesser of (i) $350 million or (ii) 40% of the total forward purchase contracts outstanding at any time be with any single counterparty. All counterparties are obligated to settle such sales in accordance with the terms of the related forward sale agreement. Loan Servicing Loan 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. A servicer's obligation to provide mortgage loan servicing and its right to collect fees are set forth in a servicing contract. Failure to service the mortgage loans in accordance with contract requirements may lead to the termination of the servicing rights and the loss of future servicing fees. The Company's current strategy is to pool and sell a significant percentage of its produced mortgage servicing rights to other approved servicers. The Company currently follows a strategy of retaining a relatively small portion of its produced mortgage servicing rights and exploring opportunities to sell available-for-sale servicing rights in bulk transactions. The Company's credit facilities require it to maintain at all times a mortgage servicing rights portfolio with an underlying unpaid principal balance of at least $4.0 billion. The Company's policy with respect to the sale, purchase or retention of mortgage servicing rights may change in the future. In addition to servicing its mortgage servicing rights portfolios, the Company also subservices mortgage servicing rights portfolios sold by it during approximately 90 days between the sales date and the transfer date. In the future, the Company also may seek other subservicing business. The Company receives fees for servicing mortgage loans, ranging generally from 0.25% to 0.44% per annum on the declining unpaid principal balances of the loans. Servicing fees are collected by the Company from monthly mortgage loan payments. Other sources of loan servicing revenues include fees incidental to the services provided. As a servicer of mortgage loans underlying mortgage-backed securities, the Company is obligated to make timely payments of principal and interest to security holders, whether or not such payments have been made by mortgagors on the underlying mortgage loans. Similarly, in the event of foreclosure, the Company is responsible for covering with its own funds principal and foreclosure costs to the extent not covered by FHA insurance or a VA guarantee. 7 10 The following table shows the delinquency percentages (excluding bankruptcies and foreclosures) of the Company's mortgage servicing rights portfolio (excluding loans serviced under subservicing agreements) at December 31, 1996. Days Delinquent --------------- 30 2.31% 60 0.40% 90+ days 0.20% --------------- Total Delinquencies 2.91% =============== At December 31, 1996, the Company's mortgage servicing rights portfolio had an underlying unpaid principal balance of $6.7 billion. The portfolio generally reflected characteristics representative of the then-current market conditions and had a weighted average note rate of 7.92%, which is somewhat higher than for current production. In 1996, the Company produced or purchased servicing rights associated with loans having an aggregate underlying principal balance of $10.0 billion and had an average balance of aggregate underlying unpaid principal balance of loans being serviced of $6.4 billion. Typically, the Company sells the majority of its produced mortgage servicing rights between 90 days and 180 days of purchase. Nevertheless, certain market and operating characteristics, including original costs, adjusted basis, market values, coupon rates, delinquency rates and current prepayment rates are considered to determine whether mortgage servicing rights should be held for longer periods of time. The following table provides certain information regarding the Company's mortgage servicing rights portfolio at December 31, 1996.
Percentage of Unpaid Principal Total Unpaid Year of Number of Percentage of Amount Principal Origination Loans Total Loans ($ in thousands) Amount ----------- ----- ----------- ---------------- ------------- 1991 or earlier 4,343 5.8% $ 221,287 3.3% 1992 14,924 19.7% 1,034,868 15.5% 1993 16,129 21.3% 1,312,131 19.7% 1994 10,105 13.4% 932,871 14.0% 1995 4,177 5.5% 402,602 6.0% 1996 25,894 34.3% 2,766,508 41.5% ------ ------ ----------- ------ Total 75,572 100.00% $ 6,670,267 100.00% ====== ====== =========== ======
8 11 The following table sets forth the Company's mortgage servicing rights portfolio by loan type:
($ in Thousands) At December 31, 1996 ----------------------------------------------------------------------------- Aggregate Weighted Weighted Number Principal Average Average Loan Type of Loans Balance Coupon Service Fee - ------------------------------------- ---------------- ----------------- ---------------- ----------------- FHA 16,347 $ 1,109,294 8.04% 0.4773% VA 5,668 454,699 8.19% 0.4618% FNMA 20,659 1,704,025 7.81% 0.4329% FHLMC 28,087 2,947,186 7.81% 0.3319% FmHA 13 739 8.93% 0.4400% Private 1,006 76,380 8.41% 0.3423% Warehouse 3,792 377,944 7.63% 0.3672% ---------------- ----------------- ---------------- ----------------- TOTAL 75,572 $ 6,670,267 7.92% 0.3900% ================ ================= ================ =================
The Company's mortgage servicing rights portfolio is generally divided into two segments. The portion of the portfolio that is generated by current loan production is classified as "held-for-sale", and the portion of the portfolio that was acquired through bulk acquisitions is classified as "available-for-sale". The Company's held-for-sale portfolio had an aggregate underlying unpaid principal balance of $1,827.8 million at December 31, 1996. The Company's available-for-sale portfolio had an aggregate underlying unpaid principal balance of $4,842.5 million at December 31, 1996. As the servicing rights of the available-for-sale portfolio are generally held as a longer-term investment, there are certain prepayment risks inherent to it that do not attach to the portion of the portfolio held-for-sale (the portfolio held-for-sale is generally sold within 90 to 180 days). During periods of declining interest rates, prepayments of mortgage loans increase as homeowners seek to refinance at lower rates, resulting in a decrease in the value of the Company's available-for-sale portfolio. Mortgage loans with higher interest rates are more likely to result in prepayments. The following table sets forth certain information regarding the aggregate underlying unpaid principal balance of mortgage loans in the available-for-sale portfolio serviced by the Company. The table includes both fixed and adjustable rate loans. AVAILABLE-FOR-SALE PORTFOLIO
($ in Thousands) At December 31, 1996 ------------------------------------------------------ Aggregate Percentage of Total Principal Unpaid Principal Mortgage Interest Rate Balance Amount - -------------------------------- ------------------------- ------------------------- Less than 7.00% $ 619,091 12.79% 7.00% - 7.99% 1,998,893 41.28% 8.00% - 8.49% 1,034,068 21.35% 8.50% - 8.99% 932,359 19.25% 9.00% - 9.49% 150,513 3.11% Greater than 9.49% 107,527 2.22% ------------------------- -------------------------- TOTAL $ 4,842,451 100.00% ========================= =========================
The following table sets forth the geographic distribution of the Company's available-for-sale portfolio for those states representing more than 3% of the portfolio: 9 12
($ in Thousands) At December 31, 1996 ---------------------------------------------------------- Aggregate Percent of Principal Total Aggregate State Balance Principal Balance Amount - ------------------------ -------------------- ----------------------------------- Massachusetts $ 644,733 13.31% Connecticut 441,664 9.12% California 381,788 7.88% Texas 356,226 7.36% Florida 256,952 5.31% New York 231,807 4.79% Illinois 227,232 4.69% Colorado 178,797 3.69% Georgia 161,659 3.34% New Jersey 159,169 3.29% All others 1,802,424 37.22% -------------------- ----------------------------------- TOTAL $ 4,842,451 100.00% ==================== ===================================
The following table sets forth certain information regarding the aggregate underlying unpaid principal balance of the mortgage loans in the held-for-sale portfolio serviced by the Company. The table includes both fixed and adjustable rate loans. HELD-FOR-SALE PORTFOLIO
($ in Thousands) At December 31, 1996 ---------------------------------------------------- Aggregate Percentage of Total Principal Unpaid Principal Mortgage Interest Rate Balance Amount - -------------------------------- -------------------------- ------------------------- Less than 7.00% $ 161,806 8.85% 7.00% - 7.99% 487,094 26.65% 8.00% - 8.49% 649,219 35.52% 8.50% - 8.99% 419,170 22.93% 9.00% - 9.49% 90,902 4.97% Greater than 9.49% 19,625 1.08% -------------------------- ------------------------- TOTAL $ 1,827,816 100.00% ========================== =========================
To help the Company manage its risk related to prepayments of its servicing portfolio, the Company has purchased interest-rate floor contracts, which provide an interest rate differential on a fixed portion of the portfolio should interest rates fall below a certain level. For a more detailed discussion of interest rate floor contracts, see Note 15 of the Company's Consolidated Financial Statements, found in the Company's accompanying 1996 Annual Report to Shareholders included herein and hereby incorporated by reference. 10 13 Financing of Mortgage Banking Operations The Company's primary cash-flow requirement involves the funding of loan production, which is met primarily through external borrowings. The Company has entered into a 364-day, $570 million warehouse line of credit provided by a syndicate of unaffiliated banks that expires in July 1997. The credit agreement includes covenants requiring the Company to maintain (i) a minimum net worth of $130 million, plus net income subsequent to July 31, 1996 and capital contributions and minus permitted dividends, (ii) a ratio of total liabilities to net worth of not more than 8.0 to 1.0, excluding debt incurred pursuant to gestation and repurchase financing agreements, (iii) its eligibility as a servicer of GNMA, FHA, VA, FNMA and FHLMC mortgage loans and (iv) a mortgage servicing rights portfolio with an underlying unpaid principal balance of at least $4.0 billion. The provisions of the agreement also restrict the Company's ability to pay dividends in any fiscal quarter that exceed 50% of the Company's net income for the quarter, or to engage significantly in any type of business unrelated to the mortgage banking business and the servicing of mortgage loans. Additionally, the Company has entered into a $200 million, 364-day term revolving credit facility with a syndicate of unaffiliated banks. An $80 million portion of the revolver facility converts on July 31, 1997, into a four-year term loan. The facility is secured by the Company's servicing portfolio designated as "available-for-sale." A $70 million portion of the revolver facility matures on July 31, 1997, and is secured by the Company's servicing portfolio designated as "held-for-sale." A $50 million portion of the revolver facility matures on July 31, 1997, and is secured by a first-priority security interest in receivables on servicing rights sold. The facility includes covenants identical to those described above with respect to the warehouse line of credit. The Company was in compliance with the above-mentioned debt covenants at December 31, 1996. Although management anticipates continued compliance, there can be no assurance that the Company will be able to comply with the debt covenants specified for each of its financing agreements. Failure to comply could result in the loss of the related financing. The Company has also entered into an uncommitted gestation financing arrangement. The interest rate on funds borrowed pursuant to this arrangement is based on a spread over the Federal Funds rate. The gestation line has a funding limit of $1.0 billion. The Company entered into a $5 million unsecured line of credit in September 1996. The line of credit expires in September 1997. The interest rate on funds borrowed through this line of credit is prime plus one half percent. The Company entered into a $6.6 million, 364-day revolving credit facility secured by certain real property of the Company. This facility was retired in August of 1996. There can be no assurance that the Company will be able to comply with the covenants in its various credit facilities, and failure to comply could result in the loss of the related financing. In addition, there can be no assurance that the Company will be able to renew these arrangements at the end of their terms or obtain replacement financing on terms acceptable to the Company. To the extent that the Company loses its financing sources, or if the Company experiences difficulty in selling its mortgage loans or mortgage-backed securities, it may have to curtail its mortgage loan origination and purchase activities, which could have a material adverse effect on the Company's operations and financial condition. However, management believes it will be able to renew or, alternatively, obtain similar financing in the future on terms that are satisfactory to the Company. 11 14 Beginning in June 1995, the Company had from time to time borrowed up to $19 million on a short-term unsecured basis from RBC. Interest on the loans was at the prime rate. There was no indebtedness to RBC at December 31, 1996. The Company has no plans in the foreseeable future to borrow from RBC. Seasonality The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general pattern of resale of homes, which typically peak during the spring and summer seasons and decline to lower levels from mid-November through January. Refinancings tend to be less seasonal and more closely related to changes in interest rates. The mortgage servicing business is generally not subject to seasonal trends, except to the extent that growth of the portfolio is generally higher in periods of greater mortgage loan originations. Competition The mortgage banking industry is highly competitive. The Company competes with financial institutions, mainly mortgage companies, commercial banks and savings and loan associations and, to a certain extent, credit unions and insurance companies. The Company competes principally by purchasing or originating a variety of mortgage loans, emphasizing the quality of its service and pricing the loans at competitive rates. Many of the Company's competitors have financial resources that are substantially greater than those of the Company. Many of the nation's largest mortgage companies and commercial banks have a significant number of branch offices in areas in which the Company's correspondents and wholesale and retail branches operate. Increased competition for mortgage loans from larger lenders may result in a decrease in the volume of loans purchased by the Company, thereby possibly reducing the Company's revenues. The Company does not have a significant market share of mortgage banking activities in the areas in which it conducts operations. Fluctuations in Performance The Company's operating results can fluctuate substantially from period to period as a result of a number of factors, including the volume of loan production, interest rates, the level of amortization of mortgage servicing rights required by prepayment rates and the performance of the Company's servicing portfolio hedge. In particular, the Company's results are strongly influenced by the level of loan production, which is influenced by the interest-rate environment and other economic factors. Accordingly, the net income of the Company may fluctuate substantially from period to period. Regulation The operations of the Company are subject to extensive regulation by federal and state governmental authorities and are subject to various laws and judicial and administrative decisions that, among other things, regulate credit-granting activities, require disclosures to customers, govern secured transactions and establish collection, repossession and claims handling procedures and other trade practices. The Company is subject to the rules and regulations of the FHA, FHLMC, FNMA, GNMA, the VA and state regulatory authorities with respect to originating, processing, underwriting, selling, securitizing and servicing mortgage loans. In addition, there are other federal and state statutes and regulations, as well as judicial decisions, affecting such activities. Those rules and regulations, among other things, impose licensing obligations on the Company, establish eligibility criteria for mortgage loans, prohibit discrimination and establish 12 15 underwriting guidelines that include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts, and with respect to VA loans, fix maximum interest rates. Moreover, lenders such as the Company are required to submit annually to the FHA, FHLMC, FNMA, GNMA and the VA audited financial statements, and each regulatory entity has its own financial requirements. The Company's affairs also are subject to examination by the FHA, FHLMC, FNMA, GNMA and the VA at all times to assure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, the Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the regulations promulgated thereunder, which prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Many of the aforementioned regulatory requirements are designed to protect the interests of consumers, while others protect the owners or insurers of mortgage loans. Failure to comply with these requirements can lead to loss of approved status, termination of servicing contracts without compensation to the servicer, demands for indemnification or loan repurchases, class-action lawsuits and administrative enforcement actions. Certain states require that interest be paid to mortgagors on funds deposited by them in escrow to cover mortgage-related payments such as property taxes and insurance premiums. Currently there are 10 states in which the Company does business where it is required to pay interest on escrow accounts. Loans from these 10 states amounted to approximately 35.4% of the Company's mortgage servicing rights portfolio at December 31, 1996. The amount of interest paid on escrow accounts for 1996 was approximately $467,000. From time to time, state and federal legislation has been proposed to regulate certain practices with respect to mortgage servicers holding escrow accounts of borrowers. Such proposed legislation has included provisions that would (i) require that interest be paid on escrow accounts, (ii) permit mortgagors to terminate escrow accounts at such time as their loan balances decline below a specified level and (iii) require calculation of escrow balances by mortgage banks on a basis that would be less advantageous to such companies than presently permitted. The Company seeks to benefit from interest-rate reductions on its borrowings by depositing escrow accounts at its lending banks, and the Company would be adversely affected by enactment of such legislation. It is impossible to predict whether such legislation or any similar legislation regulating escrow practices will be enacted, or if enacted, what form it will take. If any additional legislative restrictions are imposed on the Company by state or federal laws or regulations, the effect on the Company's results of operations would depend on the requirements of such laws or regulations, and such effect could be materially adverse. In addition to legislative changes, a change of prevailing judicial interpretations regarding a servicer's duty to pay interest on the escrow deposits could be materially adverse to the Company's results of operations. There are various state and local laws and regulations affecting the Company's operations. The Company is in possession of licenses in all states in which it does business that require such licenses. Conventional mortgage operations also may be subject to state usury statutes. FHA and VA mortgage loans are exempt from the effect of such statutes. Employees As of December 31, 1996, the Company had approximately 1,027 employees, substantially all of whom were full-time employees. None of the Company's employees are represented by a union. The Company considers its relations with its employees to be good. 13 16 Executive Officers of the Registrant EDWARD J. SEBASTIAN, age 50, has been Chairman and Chief Executive Officer of the Company since September 1992. He is also Chairman of the Board and Chief Executive Officer of RBC, a position he has held since RBC was founded by him in September 1986. DAVID W. JOHNSON, JR., age 48, has been Vice Chairman of the Company since October 1992 and Managing Director since July 1993. He joined the Company in May 1989 when it was a division of Republic National Bank (Republic). From that time and until June 3, 1993, he was an Executive Vice President of Republic. RICHARD M. DUNCAN, age 48, has been Senior Executive Vice President of Production since January 1997. Previously he had been Executive Vice President of Production since January 1995. He has been with the Company since May 1994, joining it as Senior Vice President of Business Development. From May 1984 through April 1994, Mr. Duncan was an Executive Vice President of Fleet Mortgage Group, Inc. STEVEN F. HERBERT, age 41, has been Senior Executive Vice President and Chief Financial Officer of the Company since January 1997. Previously, he had been Executive Vice President and Chief Financial Officer since July 1995. From September 1985 through June 1995, Mr. Herbert was employed by Price Waterhouse LLP, most recently as the Client Services Director of the Columbia, South Carolina office. ITEM 2. PROPERTIES The Company's corporate and administrative headquarters, which are owned by the Company, is located in Columbia, South Carolina. This facility comprises a building having approximately 120,000 square feet and 16.5 acres of land. The Company purchased an additional 17.9 acres of land adjacent to the above property in January 1996. In addition, the Company leases smaller amounts of office space in 19 states, consisting primarily of wholesale and retail branch offices and regional underwriting centers. The Company's primary computer data system is provided through ALLTEL Information Services, Mortgage Division (ALLTEL) (formerly Computer Power, Inc. of Jacksonville, Florida). Company personnel enter data on computer hardware located in-house. The data is transmitted directly to ALLTEL where it is processed. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. In the ordinary course of its business, the Company is from time to time subject to litigation. 14 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1996. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since June 3, 1993, the Company's Common Stock has been traded in the over-the-counter market on the NASDAQ National Market System under the symbol "REMI." Additional information required by this item is set forth under the captions "Stock Data" and "Corporate Information" in the Company's accompanying 1996 Annual Report to Shareholders and is hereby incorporated herein by reference. On January 27, 1996, the Company issued 8,205 shares (8,779 after consideration of the Stock Dividends as defined in the Annual Report) of its common stock, par value $0.01 per share, to each David W. Johnson, Jr. and Lee E. Shelton. These shares were issued pursuant to the terms of Messrs. Johnson and Shelton's employment agreements dated as of June 3, 1993 and represented a portion of their bonuses for 1995. The fair market value of the shares on the date of issuance to each Mr. Johnson and Mr. Shelton was $127,173 based on the Stock Dividend adjusted closing price of $14.49 per share on the NASDAQ Market System on such date. The Company believes that the issuance of the shares to Messrs. Johnson and Shelton was exempt from the registration requirements of the Securities and Exchange Act of 1993, as amended, under Section 4 (2) by virtue of their positions as Vice Chairmen and Managing Directors of the Company. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Financial Highlights" in the Company's accompanying 1996 Annual Report to Shareholders is hereby incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" (including all tables presented under that caption) in the Company's accompanying 1996 Annual Report to Shareholders is hereby incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following information set forth in the Company's accompanying 1996 Annual Report to Shareholders is hereby incorporated herein by reference: 15 18 The Consolidated Financial Statements of Resource Bancshares Mortgage Group, Inc., together with the report thereon of Price Waterhouse LLP dated February 3, 1997, including all Notes to such Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in accountants or disagreements with accountants on accounting and financial disclosure matters that require disclosure pursuant to Item 304 of Regulation S-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information set forth (i) under the caption "Proposal No. 1: Election of Directors" in the definitive 1997 Proxy Statement of the Company furnished to shareholders in connection with its 1997 Annual Meeting (the "1997 Proxy Statement"), with respect to the name of each nominee or director, his age, his positions and offices with the registrant, his business experience, his directorships in other public companies and his service on the registrant's Board of Directors, and (ii) under the caption "Section 16 (a) Beneficial Ownership Reporting Compliance" in the 1997 Proxy Statement with respect to Section 16 matters is hereby incorporated herein by reference. Information with respect to executive officers is set forth in Item 1 of this Report on Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information with respect to the remuneration of executive officers and certain other matters set forth in the 1997 Proxy Statement (i) under the caption "Compensation of Officers and Directors" and (ii) under the caption "Compensation Committee Interlocks and Insider Participation" to the extent such information is required by Item 402 of Regulation S-K to be set forth herein, hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to the security ownership of (i) persons who beneficially own 5% or more of the outstanding shares of the Company's common stock, par value $.01 per share, (ii) directors, nominees and named executive officers individually and (iii) directors and executive officers as a group set forth in the 1997 Proxy Statement under the caption "Beneficial Ownership" is, to the extent such information is required by Item 403 of Regulation S-K to be set forth herein, hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to relationships and related transactions between the Company and any director, nominee for director, executive officer, security holder owning 5% or more of the Company's voting securities or any associate or member of the immediate family of any of the above, as set forth in the 1997 Proxy Statement under the caption "Compensation Committee Interlocks and Insider Participation" is, to the extent such information is required by Item 404 of Regulation S-K to be set forth herein, hereby incorporated herein by reference. 16 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a. The following documents are filed as part of this report: Page In Annual Report* (1) Consolidated Financial Statements as of December 31, 1996: Consolidated Balance Sheet at December 31, 1996 and 1995 ........................................33 Consolidated Statement of Income for each of the years in the three-year period ended December 31, 1996 ......................................................................34 Consolidated Statement of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1996 .................35 Consolidated Statement of Cash Flows for each of the years in the three-year period ended December 31, 1996 ......................................................................36 Notes to Consolidated Financial Statements ......................................................37
* Incorporated by reference from the indicated pages of the 1996 Annual Report to Shareholders. (2) All other schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. (3) The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index to Exhibits to this Annual Report on Form 10-K (pages A to D). b. Not applicable c. The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index to Exhibits to this Annual Report on Form 10-K (pages A to D). d. Not applicable ------------------------ With the exception of the information herein expressly incorporated by reference, the Company's 1996 Annual Report to Shareholders and 1996 Proxy Statement are not deemed filed as part of this Annual Report on Form 10-K. 17 20 SIGNATURE Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RESOURCE BANCSHARES MORTGAGE GROUP, INC. Date: March 28, 1997 By: s/ Edward J. Sebastian ------------------------- Edward J. Sebastian Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - ------------------------------------------------------------------------------------------------ s/Edward J. Sebastian Chairman of the Board and Chief March 28, 1997 - --------------------------------- Executive Officer and Director Edward J. Sebastian (principal executive officer) s/ Steven F. Herbert Senior Executive Vice President March 28, 1997 - --------------------------------- and Chief Financial Officer (principal Steven F. Herbert financial and accounting officer) s/David W. Johnson, Jr. Vice Chairman of the Board March 28, 1997 - --------------------------------- and Managing Director David W. Johnson, Jr. s/John W. Currie Secretary and Director March 28, 1997 - --------------------------------- John W. Currie Director - --------------------------------- John C. Baker Director - --------------------------------- Stuart M. Cable Director - --------------------------------- Boyd M. Guttery s/John O. Wolcott Director March 28, 1997 - --------------------------------- John O. Wolcott
21 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- 3.1 Restated Certificate of Incorporation of the Registrant incorporated by reference to * Exhibit 3.3 of the Registrant's Registration No. 33-53980 3.2 Amended and Restated Bylaws of the Registrant incorporated by reference to * Exhibit 3.4 of the Registrant's Registration No. 33-53980 4.1 Specimen Certificate of Registrant's Common Stock incorporated by reference * to Exhibit 4.1 of the Registrant's Registration No. 33-53980 4.2 Second Amended and Restated Secured Revolving /Term Credit Agreement dated as of July * 31, 1996, between the Registrant and the Banks Listed on the Signature Pages Thereof, Bank One, Texas, National Association, First Bank National Association, NationsBank of Texas, N.A. and Texas Commerce Bank, National Association, as Co-agents and the Bank of New York as Agent and Collateral Agent incorporated by reference to Exhibit 4.2 of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1996 4.3 Second Amended and Restated Revolving/Term Security Collateral Agency Agreement * dated as of July 31, 1996, between the Registrant and The Bank of New York as Collateral Agent and Secured Party incorporated by reference to Exhibit 4.3 of the Registrant's Form 10-Q for the period ended September 30, 1996 10.1 Employment Agreement dated June 3, 1993, between the Registrant and * David W. Johnson, Jr. as amended by amendment dated October 22, 1993 incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.2 Employment Agreement dated June 3, 1993, between the Registrant and * Lee E. Shelton as amended by amendment dated October 22, 1993 incorporated by reference to Exhibit 10.2 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.3 Tax Agreement dated May 26, 1993, between Resource Bancshares Corporation (RBC) * and the Registrant incorporated by reference to Exhibit 10.3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.4 Formation Agreement dated May 26, 1993, among Republic National Bank, the * Registrant, RBC and 1st Performance National Bank incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.5 Office Building Lease dated March 8, 1991, as amended by Modification of Office * Lease dated October 1, 1991, incorporated by reference to Exhibit 10.5 of the Registrant's Registration No. 33-53980 10.6 Assignment and Assumption of Office Lease incorporated by reference to Exhibit 10.6 * of the Registrant's Registration No. 33-53980
A 22
EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- 10.7 (A) Stock Option Agreement between the Registrant and David W. Johnson, Jr. * incorporated by reference to Exhibit 10.8 (A) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (B) Stock Option Agreement between the Registrant and Lee E. Shelton incorporated by reference to Exhibit 10.8 (B) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.8 (A) Termination Agreement dated June 3, 1993, between the Registrant and * David W. Johnson, Jr. incorporated by reference to Exhibit 10.9 (A) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (B) Termination Agreement dated June 3, 1993, between the Registrant and Lee E. Shelton incorporated by reference to Exhibit 10.9 (B) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.9 (A) Deferred Compensation Agreement dated June 3, 1993, between the Registrant and * David W. Johnson, Jr. incorporated by reference to Exhibit 10.10 (A) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (B) Deferred Compensation Agreement dated June 3, 1993, between the Registrant and Lee E. Shelton incorporated by reference to Exhibit 10.10 (B) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (C) Deferred Compensation Rabbi Trust, for David W. Johnson, dated January 19, 1994, between RBC and First Union National Bank of North Carolina incorporated by reference to Exhibit 10.10 (C) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (D) Deferred Compensation Rabbi Trust, for Lee E. Shelton dated January 19, 1994, between RBC and First Union National Bank of North Carolina incorporated by reference to Exhibit 10.10 (D) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.10 Registration Rights Agreement dated May 26, 1993, between RBC and the Registrant * incorporated by reference to Exhibit 10.11 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.11 Flexible Benefits Plan incorporated by reference to Exhibit 10.16 of the Registrant's * Annual Report on Form 10-K for the year ended December 31, 1993 10.12 Section 125 Plan incorporated by reference to Exhibit 10.17 of the Registrant's Annual * Report on Form 10-K for the year ended December 31, 1993 10.13 Pension Plan incorporated by reference to Exhibit 10.18 of the Registrant's Annual * Report on Form 10-K for the year ended December 31, 1993
B 23
EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- 10.14 Governmental Real Estate Sub-Lease-Office, between Resource Bancshares Mortgage * Group, Inc. and the South Carolina Department of Labor, Licensing and Regulation incorporated by reference to Exhibit 10.19 of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1994 10.15 First Sub-Lease Amendment to Governmental Real Estate Sub-Lease-Office, * between Resource Bancshares Mortgage Group, Inc. and the South Carolina Department of Labor, Licensing and Regulation incorporated by reference to Exhibit 10.20 of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1994 10.16 Amendment I to Pension Plan incorporated by reference to Exhibit 10.21 of the Registrant's * Annual Report on Form 10-K for the year ended December 31, 1994 10.17 Amendment II to Pension Plan incorporated by reference to Exhibit 10.22 of the Registrant's * Annual Report on Form 10-K for the year ended December 31, 1994 10.18 Phantom 401(k) Plan incorporated by reference to Exhibit 10.24 of the Registrant's * Annual Report on Form 10-K for the year ended December 31, 1994 10.19 Pension Restoration Plan incorporated by reference to Exhibit 10.25 of the Registrant's * Annual Report on Form 10-K for the year ended December 31, 1994 10.20 Stock Investment Plan incorporated by reference to Exhibit 4.1 of the Registrant's * Registration No. 33-87536 10.21 Amendment I to Stock Investment Plan incorporated by reference to Exhibit 10.27 * of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 10.22 Employee Stock Ownership Plan incorporated by reference to Exhibit 10.29 * of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 10.23 Amended Resource Bancshares Mortgage Group, Inc. Successor Employee Stock * Ownership Trust Agreement dated December 1, 1994, between the Registrant and Marine Midland Bank incorporated by reference to Exhibit 10.30 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 10.24 ESOP Loan and Security Agreement dated January 12, 1995, between the Registrant * and The Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust incorporated by reference to Exhibit 10.31 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 10.25 Employment Agreement dated June 30, 1995, between the Registrant and Steven F. Herbert * incorporated by reference to Exhibit 10.34 of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1995 10.26 Formula Stock Option Plan incorporated by reference to Exhibit 10.36 of the Registrant's * Quarterly Report on Form 10-Q for the period ended September 30, 1995 10.27 Omnibus Stock Award Plan incorporated by reference to Exhibit 10.37 of the Registrant's * Quarterly Report on Form 10-Q for the period ended September 30, 1995
C 24
EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- 10.28 Employment Agreement dated September 25, 1995, between the Registrant and * Richard M. Duncan incorporated by reference to Exhibit 10.38 of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1995 10.29 Request for Extension of Governmental Real Estate Sub-Lease-Office, between the Registrant * and the South Carolina Department of Labor, Licensing and Regulation dated December 12, 1995 incorporated by reference to Exhibit 10.39 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 10.30 First Amendment to Registration Rights Agreement dated March 11, 1996, between * the Registrant and RBC incorporated by reference to Exhibit 10.40 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 10.31 First Amendment to Employee Stock Ownership Plan dated October 31, 1995 * incorporated by reference to Exhibit 10.41 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 10.32 Amendment to Pension Plan effective January 1, 1995 incorporated by reference * to Exhibit 10.42 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 10.33 Resource Bancshares Mortgage Group, Inc. Non-Qualified Stock Option Plan _____ dated September 1, 1996 10.34 Amended and Restated Retirement Savings Plan dated April 1, 1996 _____ 10.35 First Amendment to Amended and Restated Retirement Savings Plan dated as of _____ November 8, 1996 10.36 ESOP Loan and Security Agreement dated May 3, 1996, between the Registrant and _____ The Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust 11.1 Statement re Computation of Net Income per Share _____ 13.1 1996 Annual Report to Shareholders _____ 21.1 Subsidiaries of the Registrant _____ 23.1 Consents of Price Waterhouse LLP _____ 27.1 Financial Data Schedule _____
- ---------------------------------- * Incorporated by reference D EX-10.33 2 NON-QUALIFIED STOCK OPTION PLAN 1 EXHIBIT 10.33 PHANTOM FORM - NO DIVIDENDS NON-QUALIFIED STOCK OPTION AGREEMENT Pursuant to RESOURCE BANCSHARES MORTGAGE GROUP, INC. NON-QUALIFIED STOCK OPTION PLAN This Non-Qualified Stock Option Agreement is entered into as of the _____ day of _____________, 199___, between Resource Bancshares Mortgage Group, Inc., a Delaware corporation (the "Company"), and _______________________ (the "Optionee"). 1. Definitions. Capitalized terms used in this Option Agreement but not defined herein are used herein as defined in the Plan. In addition, throughout this Option Agreement, the following terms shall have the meanings indicated: (a) "Exercise Date" shall have the meaning indicated in paragraph 3 hereof. (b) "Option Period" shall mean the period commencing on the date of this Option Agreement and ending at the close of the Company's business on _____________. (c) "Plan" shall mean the Resource Bancshares Mortgage Group, Inc. Non-Qualified Stock Option Plan. (d) "Securities Act" shall mean the Securities Act of 1933, as amended. 2. Award of Option. Effective upon the date hereof, and subject to the terms and conditions set forth herein and in the Plan, the Company has awarded to the Optionee the option to purchase from the Company, at an exercise price of $_________ per share, up to but not exceeding in the aggregate ____________ shares of Common Stock. 3. Exercise of Option. 2 (a) Except as provided below, on or after _____________ the Option shall be exercisable, in whole or in part, at any time and from time to time during the Option Period, but not thereafter. If not earlier terminated, the Option shall terminate and may not be exercised if the Optionee ceases to be employed by the Company except (i) if the Optionee's employment terminates for any reason other than conduct that in the judgment of the Board involves dishonesty or action by the Optionee that is detrimental to the best interest of the Company, then the Optionee may at any time within three months after termination of the Optionee's employment exercise the Option but only to the extent the Option was vested (as provided below) on the date of termination of employment; (ii) if the Optionee's employment terminates on account of total and permanent disability, then the Optionee may at any time within one year after termination of the Optionee's employment exercise the Option with respect to all shares to which it pertains; and (iii) if the Optionee dies while in the employ of the Company, or within the three month or one year period following termination of the Optionee's employment as described in clause (i) or (ii) above, then the Option may be exercised with respect to all shares to which it pertains at any time within one year following the Optionee's death by the person or persons to whom the Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. Notwithstanding anything to the contrary in this subsection, the Option may not be exercised by anyone after the expiration of its term. The Option shall be deemed to be vested as follows: then the percentage of the Option that is if the date is: vested is: on or before the date first written above, % ---------- after the date first written above but on or before , % - -------------- ---------- after ___________ but on or before , % - -------------- ---------- after ___________ but on or before , % - -------------- ---------- after , 100% -------------- 2 3 (b) No less than 100 shares of Common Stock may be purchased upon any one exercise of the Option granted hereby unless the number of shares purchased at such time is the total number of shares in respect of which the Option is then exercisable. (c) Upon exercise of the Option, the Option exercise price shall be payable in United States dollars, in cash (including by check) or (unless the Board otherwise prescribes) in shares of Common Stock owned by the Optionee for a period exceeding six months, or in a combination of cash and such Common Stock. If all or any portion of the Option exercise price is paid in Common Stock owned by the Optionee, then that stock shall be valued at its Fair Market Value as of the date the Option is exercised. The Option shall be deemed to be exercised on the date (the "Exercise Date") that the Company receives full payment of the exercise price for the number of shares for which the Option is being exercised. (d) During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee and shall not be assignable or transferable by the Optionee and no person shall acquire any rights therein. The Option may be transferred by will or the laws of descent and distribution. 4. Compliance with the Securities Act; No Registration Rights. Anything in this Option Agreement to the contrary notwithstanding, if, at any time specified herein for the issuance of Option Shares, any law, regulation or requirement of any governmental authority having jurisdiction in the premises shall require the Company or the Optionee, in the judgment of the Company, to take any action in connection with the shares then to be issued, then the issue of such shares shall be deferred until such action shall have been taken. Nothing in this Option Agreement shall be construed to obligate the Company at any time to file or maintain the effectiveness of a registration statement under the Securities Act, or under the securities laws of any state or other jurisdiction, or to take or cause to be taken any action that may be necessary in order to provide an exemption from the registration requirements of the Securities Act under Rule 144 or any other exemption with respect to the Option Shares or otherwise for resale or other transfer by the Optionee (or by the executor or administrator of the Optionee's estate or a person who acquired the Option or any Option Shares or other rights by bequest or inheritance or by reason of the death of the Optionee) as a result of the exercise of the Option evidenced by this Option Agreement. 5. Resolution of Disputes. Any dispute or disagreement that arises under, or as a result of, or pursuant to, this Option Agreement shall be determined by the Board in its absolute and uncontrolled discretion, and any such determination or other determination by the Board under or pursuant to this Option 3 4 Agreement, and any interpretation by the Board of the terms of this Option Agreement, shall be conclusive as to all persons affected thereby. 6. Miscellaneous. (a) Binding on Successors and Representatives. The parties understand that this Option Agreement shall be binding not only upon themselves, but also upon their heirs, executors, administrators, personal representatives, successors and assigns (including any transferee of a party hereto); and the parties agree, for themselves and their successors, assigns and representatives, to execute any instrument that may be necessary or desirable legally to effect such understanding. (b) Entire Agreement; Relationship to Plan. The Optionee acknowledges that he or she has received a copy of the Plan. This Option Agreement, together with the Plan, constitutes the entire agreement of the parties with respect to the Option and supersedes any previous agreement, whether written or oral, with respect thereto. This Option Agreement has been entered into in compliance with the terms of the Plan; to the extent that any interpretive conflict may arise between the terms of this Option Agreement and the terms of the Plan, the terms of the Plan shall control. (c) Amendment. Neither this Option Agreement nor any of the terms and conditions herein set forth may be altered or amended orally, and any such alteration or amendment shall be effective only when reduced to writing and signed by each of the parties or their respective successors or assigns. (d) Construction of Terms. Any reference herein to the singular or plural shall be construed as plural or singular whenever the context requires. (e) Notices. All notices and requests under this Option Agreement shall be in writing and shall be deemed to have been given when personally delivered or sent prepaid certified mail: (i) if to the Company, to the following address: Resource Bancshares Mortgage Group, Inc. 7909 Parklane Road Columbia, South Carolina 29223 Attention: Chairman or to such other address as the Company shall designate by notice. 4 5 (ii) if to the Optionee, to the Optionee's address appearing in the Company's records, or to such other address as the Optionee shall designate by notice. (f) Governing Law; Submission to Jurisdiction. This Option Agreement shall be governed by and construed in accordance with the laws of the State of South Carolina. The parties hereby consent to the exclusive jurisdiction and venue of the Court of Common Pleas in Richland County, South Carolina for purposes of adjudicating any issue arising hereunder. (g) Severability. The invalidity or unenforceability of any particular provision of this Option Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted. IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement as of the day and year first above written. RESOURCE BANCSHARES MORTGAGE GROUP, INC. By: ------------------------------------ Edward J. Sebastian Chief Executive Officer OPTIONEE: (SEAL) ---------------------------------------- Name: 5 6 EXHIBIT 10.33 RESOURCE BANCSHARES MORTGAGE GROUP, INC. NON-QUALIFIED STOCK OPTION PLAN ARTICLE I PURPOSE; EFFECTIVE DATE; DEFINITIONS 1.1 Purpose. The Resource Bancshares Mortgage Group, Inc. Non-Qualified Stock Option Plan (the "Plan") is intended to secure for Resource Bancshares Mortgage Group, Inc. (the "Company") and its shareholders the benefits of the incentive inherent in common stock ownership by the employees of the Company who are largely responsible for the Company's future growth and continued financial success and to afford such persons the opportunity to obtain or increase their proprietary interest in the Company on a favorable basis and thereby have an opportunity to share in its success. 1.2 Effective Date. Subject to the approval of the Board, this Plan shall be effective on and after September 1, 1996. 1.3 Definitions. Throughout this Plan, the following terms shall have the meanings indicated: (a) "Agreement" shall mean a Non-Qualified Stock Option Agreement between the Company and an Employee evidencing an Option grant. (b) "Board" shall mean the Board of Directors of the Company. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended, any successor revenue laws of the United States, and the rules and regulations promulgated thereunder. (d) "Common Stock" shall mean the common stock, par value $.01 per share, of the Company. (e) "Company" shall mean Resource Bancshares Mortgage Group, Inc., a Delaware corporation. (f) "Employee" shall mean any person engaged or proposed to be engaged as an officer or employee of the Company. (g) "Fair Market Value" shall mean, with respect to the Common Stock on any day, the closing sales price of a share of Common Stock for that day or, if the principal market for trading the Common Stock is not open or if no closing sales price of a share of 7 Common Stock is available on that day, the closing sales price of a share of Common Stock for the day immediately preceding that day for which a closing sales price is available. The market value of an Option granted under the Plan on any day shall be the market value of the underlying Common Stock, determined as aforesaid, less the exercise price of the Option. (h) "Option" shall mean an option to purchase shares of Common Stock granted by the Board to an Employee pursuant to this Plan. Options pursuant to this Plan do not qualify as incentive stock options under Code Section 422. (i) "Option Shares" shall mean the shares of Common Stock purchased upon exercise of an Option. (j) "Plan" shall mean this Resource Bancshares Mortgage Group, Inc. Non-Qualified Stock Option Plan, as the same may be amended from time to time. ARTICLE II ADMINISTRATION 2.1 Board Administration. This Plan and the Options awarded hereunder shall be interpreted, construed and administered by the Board in its sole discretion. An Employee who has been granted an Option under the Plan may appeal to the Board in writing any decision or action of the Board with respect to the Plan that adversely affects the Employee. Upon review of such appeal and in any other case where the Board has acted with respect to the Plan, the interpretation and construction by the Board of any provisions of this Plan or of any Agreement shall be conclusive and binding on all parties. 2.2 Powers. The Board shall have authority to grant Options pursuant to an Agreement providing for such terms (not inconsistent with the provisions of this Plan) as the Board may consider appropriate. Such terms shall include, without limitation, as applicable, the number of shares, the exercise price, the medium and time of payment, the term of each award and any vesting requirements and may include conditions (in addition to those contained in this Plan) on the exercisability of all or any part of an Option. Notwithstanding any such conditions, the Board may, in its discretion, accelerate the time at which any Option may be exercised. In addition, the Board shall have complete discretionary authority to prescribe the form of Agreements; to adopt, amend and rescind rules and regulations pertaining to the administration of the Plan; and to make all other determinations necessary or advisable for the administration of this Plan. The express grant in the Plan of any specific power to the Board shall not be construed as limiting any power or authority of the Board. All expenses of administering this Plan shall be borne by the Company. 2 8 2.3 Good Faith Determinations. No member of the Board shall be liable for any action or determination made in good faith with respect to this Plan or any Option granted hereunder. ARTICLE III ELIGIBILITY; SHARES SUBJECT TO PLAN 3.1 Eligibility. The Board shall from time to time determine and designate the Employees of the Company to be awarded Options under this Plan and the number of Options to be awarded to each such Employee. In making any such award, the Board may take into account the nature of services rendered by an Employee, commissions or other compensation earned by the Employee, the capacity of the Employee to contribute to the success of the Company and other factors that the Board may consider relevant. 3.2 Shares Subject to this Plan. Subject to the provisions of Section 4.2 (relating to adjustment for changes in Common Stock), the maximum number of shares that may be issued under this Plan shall not exceed in the aggregate 400,000 shares of Common Stock. Such shares may be authorized and unissued shares or authorized and issued shares that have been reacquired by the Company. If any Options granted under this Plan shall for any reason terminate or expire or be surrendered without having been exercised in full, the shares not purchased under such Options shall be available again for grant hereunder. ARTICLE IV OPTIONS 4.1 Grant; Terms and Conditions. The Board, in its discretion, may from time to time grant Options to any Employee eligible to be awarded Options under this Plan. Each Employee who is granted an Option shall enter into an Agreement with the Company in a form specified by the Board and containing such provisions as the Board, in its sole discretion, shall from time to time approve consistent with this Plan. The Agreements need not be identical, but each Agreement by appropriate language shall include the substance of all of the following terms and conditions: (a) Number of Shares. Each Agreement shall state the number of shares to which it pertains. (b) Option Exercise Price. Each Agreement shall state the Option exercise price. The date of the grant of an Option shall be the date specified by the Board in its grant of the Option. The price at which each share of Common Stock covered by an Option granted 3 9 under the Plan may be purchased shall be the price determined by the Board, in its absolute discretion, to be suitable to attain the purposes of this Plan. (c) Medium and Time of Payment. Upon the exercise of an Option, the Option exercise price shall be payable in United States dollars, in cash (including by check) or (unless the Board otherwise prescribes) in shares of Common Stock owned by the optionee for a period exceeding six months, or in a combination of cash and such Common Stock. If all or any portion of the Option exercise price is paid in Common Stock owned by the optionee, then that stock shall be valued at its Fair Market Value as of the date immediately prior to the date the Option is exercised. An Option shall be deemed to be exercised on the date that the Company receives full payment of the exercise price for the number of shares for which the Option is being exercised. (d) Term and Exercise of Options. The term of each Option shall be determined by the Board; provided that the exercise of an Option shall in no event be more than ten years and one month from the date of grant. An Agreement may in the discretion of the Board contain provisions relating to vesting of Options. Not less than 100 shares may be purchased at any one time unless the number purchased is the total number at the time purchasable under the Option. During the lifetime of the optionee, the Option shall be exercisable only by him or her and shall not be assignable or transferable by him or her and no person shall acquire any rights therein. An Option may be transferred (unless the Board otherwise prescribes) by will or the laws of descent and distribution. Every Agreement shall provide that, unless earlier terminated, Options granted pursuant to this Plan shall be exercisable at any time on or after the date of exercise set forth in the Agreement. Notwithstanding the foregoing, an Option shall terminate and may not be exercised if the Employee to whom it is granted ceases to be employed by the Company, except that the Agreement may, in the discretion of the Board, provide: (1) that, if such Employee's employment terminates for any reason other than conduct that in the judgment of the Board involves dishonesty or action by the Employee that is detrimental to the best interest of the Company, then the Employee may at any time within three months after termination of his or her employment exercise his or her Option but only to the extent the Option was either exercisable by him or her or vested on the date of termination of employment; (2) that, if such Employee's employment terminates on account of total and permanent disability, then the Employee may at any time within one year after termination of his or her employment exercise his or her Option with respect to all shares to which it pertains; and (3) that, if such Employee dies while in the employ of the Company, or within the three month or one year period following termination of his or her employment as described in clause (1) or (2) above, then his or her Option may be exercised with respect to all shares to which it pertains at any time within one year following his or her death by the person or persons to whom his or her rights under the Option shall pass by will or by the laws of descent and distribution. Notwithstanding anything to the contrary in this subsection, an Option may not be exercised by anyone after the expiration of its term. 4 10 4.2 Recapitalization; Reorganization. Subject to any required action by the shareholders of the Company, the maximum number of shares of Common Stock that may be issued under this Plan pursuant to Section 3.2 above, the number of shares of Common Stock covered by each outstanding Option and the per share exercise price under each outstanding Option shall be adjusted, in each case, to the extent and in the manner the Board deems appropriate for any increase or decrease in the number of issued shares of Common Stock resulting from a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering, subdivision or consolidation of shares or the payment of a stock dividend (but only on the Common Stock) or any other change in the corporate structure or shares of the Company. Subject to any action that may be required on the part of the shareholders of the Company, if the Company is the surviving corporation in any merger, then each outstanding Option shall pertain to and apply to the securities or other consideration that a holder of the number of shares of Common Stock subject to the Option would have been entitled to receive in the merger. A dissolution, liquidation or consolidation of the Company or a merger in which the Company is not the surviving corporation, other than a merger effected for the purpose of changing the Company's domicile, shall cause each outstanding Option to terminate, provided that each holder shall, in such event, have the right immediately prior to such dissolution, liquidation, consolidation or merger to exercise his or her Option in whole or in part. Notwithstanding the foregoing, in no event shall any Option be exercisable after the date of termination of the exercise period of such Option. In the case of a merger effected for the purpose of changing the Company's domicile, each outstanding Option shall continue in effect in accordance with its terms and shall apply or relate to the same number of shares of common stock of such surviving corporation as the number of shares of Common Stock to which it applied or related immediately prior to such merger, adjusted for any increase or decrease in the number of outstanding shares of common stock of the surviving corporation effected without receipt of consideration. In the event of a change in the Common Stock as presently constituted, which change is limited to a change of all of the authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the Common Stock within the meaning of this Plan. The foregoing adjustments shall be made by the Board, whose determination shall be final, binding and conclusive. The Company may pay to each optionee amounts in respect of dividends (cash or property) that are paid from time to time on issued and outstanding Common Stock. The amount paid to each optionee with respect to each dividend shall be equivalent to the dividend the optionee would have received had the optionee been the owner of a number of shares of 5 11 Common Stock equal to the number of the optionee's unexercised Options on the dividend record date. Except as expressly provided in this Section, the holder of an Option shall have no rights by reason of (i) any subdivision or consolidation of shares of any class, (ii) any stock dividend, (iii) any other increase or decrease in the number of shares of stock of any class, (iv) any dissolution, liquidation, consolidation, merger or spin-off, split-off or split-up of assets of the Company or stock of another corporation or (v) any issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class. Moreover, except as expressly provided in this subsection, the occurrence of one or more of such events shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of or exercise price for shares of Common Stock subject to the Option. The grant of an Option pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell or otherwise transfer all or any part of its business or assets. 4.3 Rights as a Shareholder. Subject to Section 5.9 of this Plan regarding uncertificated shares, an optionee or a transferee of an Option shall have no rights as a shareholder with respect to any shares covered by his or her Option until the date of the issuance of a stock certificate to him or her for those shares upon payment of the exercise price. No adjustments or payments shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 4.2. 4.4 Modification, Extension and Renewal of Options. Subject to the terms and conditions and within the limitations of this Plan, the Board may modify, extend or renew outstanding Options granted under this Plan or accept the surrender of outstanding Options (to the extent not theretofore exercised) and authorize the granting of new Options in substitution therefor (to the extent not theretofore exercised). No modification of an Option shall, without the consent of the optionee, alter or impair any rights or obligations under any Option theretofore granted under this Plan. 4.5 Other Terms and Conditions. Through the Agreements authorized under this Plan, the Board may impose such other terms and conditions, not inconsistent with the terms hereof, on the grant or exercise of Options, as it deems advisable. ARTICLE V MISCELLANEOUS 6 12 5.1 Withholding Taxes. An Employee granted Options under this Plan shall be conclusively deemed to have authorized the Company to withhold from the salary, commissions or other compensation of such Employee funds in amounts or property (including Common Stock) in value equal to any federal, state and local income, employment or other withholding taxes applicable to the income recognized by such Employee and attributable to the Options or Option Shares, when and to the extent, if any, required by law; provided, however, that, in lieu of the withholding of federal, state and local taxes as herein provided, the Company may require that the Employee (or other person exercising such Option) pay the Company an amount equal to the federal, state and local withholding taxes on such income at the time such withholding is required or such other time as shall be satisfactory to the Company; and provided further, that as an alternative to complying with withholding requirements as provided above in this sentence, an optionee may elect by written notice to the Company at the time of exercise of an Option to have the number of shares of Common Stock issued in connection with such exercise reduced by such number of shares such that the market value of the Option relating to the shares not being issued as a result of such reduction shall be equal to the required withholding (but in no event in excess of withholding resulting from using the maximum marginal federal and state tax rates in effect). 5.2 Amendment, Suspension, Discontinuance or Termination of Plan. The Board may from time to time amend, suspend or discontinue this Plan or revise it in any respect whatsoever for the purpose of maintaining or improving the effectiveness of this Plan as an incentive device, for the purpose of conforming this Plan to applicable governmental regulations or to any change in applicable law or regulations or for any other purpose permitted by law; provided, however, that no such action by the Board shall adversely affect any Option theretofore granted under this Plan without the consent of the holder so affected. 5.3 Governing Law. This Plan and all rights and obligations hereunder shall be construed in accordance with and governed by the laws of the State of South Carolina. 5.4 Designation. This Plan may be referred to in other documents and instruments as the "Resource Bancshares Mortgage Group, Inc. Non-Qualified Stock Option Plan." 5.5 Indemnification of Directors. In addition to such other rights of indemnification as they may have as directors, the members of the Board shall be indemnified by the Company against the reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any investigation, action, suit or proceeding, or in connection with any appeal therefrom, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with this Plan or any Option and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in or dismissal or other discontinuance of any such investigation, action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such investigation, action, suit or proceeding that such Board member is liable for negligence or misconduct in the 7 13 performance of his or her duties; provided that, within 60 days after institution of any such investigation, action, suit or proceeding, a Board member shall in writing offer the Company the opportunity, at its own expense, to handle and defend the same. 5.6 Reservation of Shares. The Company shall at all times during the term of this Plan, and so long as any Option shall be outstanding, reserve and keep available (and will seek or obtain from any regulatory body having jurisdiction any requisite authority in order to issue) such number of shares of its Common Stock as shall be sufficient to satisfy the requirements of this Plan. Inability of the Company to obtain from any regulatory body of appropriate jurisdiction authority considered by the Company to be necessary or desirable to the lawful issuance of any shares of its Common Stock hereunder shall relieve the Company of any liability in respect of the nonissuance or sale of such Common Stock as to which such requisite authority shall not have been obtained. 5.7 Application of Funds. The proceeds received by the Company from the sale of Common Stock pursuant to Options will be used for general corporate purposes. 5.8 No Obligation to Exercise. The granting of an Option shall impose no obligation upon the holder to exercise or otherwise realize the value of that Option. 5.9 Uncertificated Shares. Each Employee who exercises an Option to acquire Common Stock may, but need not, be issued a stock certificate in respect of the Common Stock so acquired. A "book entry" (i.e., a computerized or manual entry) shall be made in the records of the Company to evidence the issuance of shares of Common Stock to an Employee where no certificate is issued in the name of the Employee. Such Company records, absent manifest error, shall be binding on Employees. In all instances where the date of issuance of shares may be deemed significant but no certificate is issued in accordance with this Section 5.9, the date of the book entry shall be the relevant date for such purposes. 5.10 Loans. For the purpose of assisting an optionee to exercise an Option, the Company may, in the discretion of the Board, make loans to the optionee or guarantee loans made by third parties to the optionee, in any case on such terms and conditions as the Board may authorize, provided such loans or guarantees are made on a full recourse basis. 5.11 Other Actions. Nothing contained in the Plan shall be construed to limit the authority of the Company to exercise its corporate rights and powers, including, but not by way of limitation, the right of the Company to grant or assume options for proper corporate purposes other than under the Plan with respect to any employee or other person, firm, corporation or association. 5.12 Approval of Stockholders. No Options awarded pursuant to this Plan shall be enforceable against the Company unless and until the Plan shall have been ratified by the 8 14 stockholders of the Company in the manner and to the extent required as a result of the Common Stock being included in the NASDAQ National Market and the General Corporation Law of Delaware. EX-10.34 3 AMENDED & RESTATED RETIREMENT SAVINGS PLAN 1 EXHIBIT 10.34 THE CORPORATEPLAN FOR RETIREMENT(SM) (PROFIT SHARING/401(K) PLAN) A FIDELITY PROTOTYPE PLAN NON-STANDARDIZED ADOPTION AGREEMENT 002 BASIC PLAN NO. 07 2 ADOPTION AGREEMENT ARTICLE 1 NON-STANDARDIZED PROFIT SHARING PLAN 1.01 PLAN INFORMATION (A) NAME OF PLAN: This is the Resource Bancshares Mortgage Group, Inc. Retirement Savings Plan (the "Plan"). ------------------------------------------------------------ (B) TYPE OF PLAN: (1) /X/ 401(k) and Profit Sharing (2) / / Profit Sharing Only (3) / / 401(k) Only (C) NAME OF PLAN ADMINISTRATOR, IF NOT THE EMPLOYER: Retirement Plan Committee/RBMG Address: 7909 Parklane Road, Columbia, SC 29223 Phone Number: (803) 741-3000 The Plan Administrator is the agent for service of legal process for the Plan. (D) LIMITATION YEAR (check one): (1) /X/ Calendar Year (2) / / Plan Year (3) / / Other:___________ (E) THREE DIGIT PLAN NUMBER: 001 (F) PLAN YEAR END (month/day): December 31 (G) PLAN STATUS (check one):
3 (1) / / Effective Date of new Plan: (2) /X/ Amendment Effective Date: 4/1/96 . This is (check one): ----------- (A) / / an amendment of The CORPORATEplan for RetirementSM Adoption Agreement previously executed by the Employer; or (B) / / a conversion from another plan document into The CORPORATEplan for RetirementSM. The original effective date of the Plan: 7/1/93 --------------- The substantive provisions of the Plan shall apply prior to the Effective Date to the extent required by the Tax Reform Act of 1986 or other applicable laws. 1.02 EMPLOYER (A) THE EMPLOYER IS Resource Bancshares Mortgage Group, Inc. Address: 7909 Parklane Road Columbia, South Carolina 29223 Contact's Name: Thomas J. Little, Jr. and Tom McCants Telephone Number: (803) 741-3231 (803) 741-3784 --------------------------------------------------------------------------- (1) Employer's Tax Identification Number: 57-0962375 (2) Business form of Employer (check one): (A) /x/ Corporation (D) / / Governmental (B) / / Sole proprietor or partnership (E) / / Tax-exempt organization (C) / / Subchapter S Corporatio (F) / / Rural Electric Cooperative (3) Employer's fiscal year end: December 31 ---------------------------- (4) Date business commenced: May, 1993 ----------------------------
2 4 (B) THE TERM "EMPLOYER" INCLUDES THE FOLLOWING RELATED EMPLOYER(S) (as defined in Section 2.01(a)(26)): Intercounty Mortgage, Inc. ---------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- 1.03 COVERAGE (A) ALL EMPLOYEES WHO MEET THE CONDITIONS SPECIFIED BELOW WILL BE ELIGIBLE TO PARTICIPATE IN THE PLAN: (1) SERVICE REQUIREMENT (check one): (A) [ ] no service requirement. (B) [ ] three consecutive months of service (no minimum number Hours of Service can be required). (C) [ ] six consecutive months of service (no minimum number Hours of Service can be required). (D) [X] one Year of Service (1,000 Hours of Service is required during the Eligibility Computation Period.) (2) AGE REQUIREMENT (check one): (A) [ ] no age requirement. (B) [X] must have attained age 21___ (not to exceed 21). 3 5 (3) THE CLASS OF EMPLOYEES ELIGIBLE TO PARTICIPATE IN THE PLAN (check one): (A) [ ] includes all Employees of the Employer. (B) [X] includes all Employees of the Employer except for (check the appropriate box(es)): (i) [ ] Employees covered by a collective bargaining agreement. (ii) [ ] Highly Compensated Employees as defined in Code Section 414(q). (iii) [ ] Leased Employees as defined in Section 2.01(a)(18). (iv) [ ] Nonresident aliens who do not receive any earned income from the Employer which constitutes United States source income. (V) [ ] Other ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- NOTE: No exclusion in this section may create a discriminatory class of employees. An Employer's Plan must still pass the Internal Revenue Code coverage and participation requirements if one or more of the above groups of Employees have been excluded from the Plan. (B) THE ENTRY DATE(S) SHALL BE (check one): (1) [ ] the first day of each Plan Year (do not select if Section 1.03 (a)(1)(D) is elected or if there is an age requirement of greater than 20 1/2 in Section 1.03(a)(2)(B)). (2) [X] the first day of each Plan Year and the date six months later. (3) [ ] the first day of each Plan Year and the first day of the fourth, seventh, and tenth months. (4) [ ] the first day of each month. 4 6 (C) DATE OF INITIAL PARTICIPATION - AN EMPLOYEE WILL BECOME A PARTICIPANT UNLESS EXCLUDED BY SECTION 1.03(A)(3) ABOVE ON THE ENTRY DATE IMMEDIATELY FOLLOWING THE DATE THE EMPLOYEE COMPLETES THE SERVICE AND AGE REQUIREMENT(S) IN SECTION 1.03(A), IF ANY, EXCEPT (check one): (1) [ ] No exceptions. (2) [ ] Employees employed on the Effective Date in Section 1.01(g) will become Participants on that date. (3) [ ] Employees who meet the age and service requirement(s) of Section 1.03(a) on the Effective Date in Section 1.01(g) will become Participants on that date. 1.04 COMPENSATION (A) FOR PURPOSES OF DETERMINING CONTRIBUTIONS UNDER THE PLAN, COMPENSATION SHALL BE AS DEFINED IN SECTION 2.01(A)(7), BUT EXCLUDING (check the appropriate box(es)): (1) [ ] Overtime Pay. (2) [ ] Bonuses. (3) [ ] Commissions. (4) [ ] The value of a qualified or a non-qualified stock option granted to an Employee by the Employer to the extent such value is includable in the Employee's taxable income. NOTE: These exclusions shall not apply for purposes of the "Top Heavy" requirements in Section 9.03 or for allocating Discretionary Employer Contributions if an Integrated Formula is elected in Section 1.05(a)(2). (5) [X] No exclusions. 5 7 (B) COMPENSATION FOR THE FIRST YEAR OF PARTICIPATION Contributions for the Plan Year in which an Employee first becomes a Participant shall be determined based on the Employee's Compensation (check one): (1) [ ] For the entire Plan Year. (2) [ ] For the portion of the Plan Year in which the Employee is eligible to participate in the Plan. 1.05 CONTRIBUTIONS (A) [X] EMPLOYER CONTRIBUTIONS : (1) [ ] FIXED FORMULA - NONINTEGRATED FORMULA (check (A) or (B)): (A) [ ] Fixed Percentage Employer Contribution: For each Plan Year, the Employer will contribute for each eligible Participant an amount equal to __________% (not to exceed 15%) of such Participant's Compensation. (B) [ ] Fixed Flat Dollar Employer Contribution: For each Plan Year, the Employer will contribute for each eligible Participant an amount equal to $_________. (2) [X] DISCRETIONARY FORMULA The Employer may decide each Plan Year whether to make a discretionary Employer contribution on behalf of eligible Participants in accordance with Section 4.06. Such contributions shall be allocated to eligible Participants based upon the following (check (A) or (B)): (A) [X] Nonintegrated Allocation Formula: In the ratio that each eligible Participant's Compensation bears to the total Compensation paid to all eligible Participants for the Plan Year. (B) [ ] Integrated Allocation Formula: In accordance with Section 4.06. NOTE: An Employer who maintains any other plan that provides for Social Security Integration (permitted disparity) may not elect (2)(B). 6 8 (3) ELIGIBILITY REQUIREMENT(S) A Participant shall be entitled to Employer Contributions for a Plan Year under this Subsection (a) if the Participant satisfies the following requirement(s) (Check the appropriate box(es) - Options (B) and (C) may not be elected together): (A) [X] is employed by the Employer on the last day of the Plan Year. (B) [ ] earns at least 500 Hours of Service during the Plan Year. (C) [X] earns at least 1,000 Hours of Service during the Plan Year. (D) [ ] no requirements. NOTE: If option (A), (B) or (C) above is selected then Employer contributions can only be FUNDED by the Employer AFTER Plan Year end. Employer contributions funded during the Plan Year shall not be subject to the eligibility requirements of this Section 1.05(a)(3). (B) [ ] DEFERRAL CONTRIBUTIONS (1) REGULAR CONTRIBUTIONS The Employer shall make a Deferral Contribution in accordance with Section 4.01 on behalf of each Participant who has an executed salary reduction agreement in effect with the Employer for the payroll period in question, not to exceed _ 15________% (NO MORE THAN 15%) of Compensation for that period. (A) A Participant may increase or decrease, on a prospective basis, his salary reduction agreement percentage (check one): (i) [ ] As of the beginning of each payroll period. (ii) [ ] As of the first day of each month. (iii) [ ] As of the next Entry Date. (iv) [ ] (Specify, but must be at least once per Plan Year) ---------------------------- ---------------------------- (B) A Participant may revoke, on a prospective basis, a salary reduction agreement at any time upon proper notice to the Administrator but in such case may not file a new salary reduction agreement until (check one): (i) [ ] The first day of the next Plan Year. (ii) [ ] Any subsequent Plan Entry Date (iii)[ ] (Specify, but must be at least once per Plan Year) ------------------------------ ------------------------------ 7 9 (2) [ ] CATCH-UP CONTRIBUTIONS The Employer may allow Participants upon proper notice and approval to enter into a special salary reduction agreement to make additional Deferral Contributions in an amount up to 100% of their Compensation for the payroll period(s) in the final month of the Plan Year. (3) [ ] BONUS CONTRIBUTIONS The Employer may allow Participants upon proper notice and approval to enter into a special salary reduction agreement to make Deferral Contributions in an amount up to 100% of any Employer paid cash bonuses made for such Participants during the Plan Year. The Compensation definition elected by the Employer in Section 1.04(a) must include bonuses if bonus contributions are permitted. NOTE: A Participant's contributions under (2) and/or (3) may not cause the Participant to exceed the percentage limit specified by the Employer in (1) after the Plan Year. The Employer has the right to restrict a Participant's right to make Deferral Contributions if they will adversely affect the Plan's ability to pass the actual deferral percentage and/or the actual contribution percentage test. (4) [X] QUALIFIED DISCRETIONARY CONTRIBUTIONS The Employer may contribute an amount which it designates as a Qualified Discretionary Contribution to be included in the actual deferral percentage or actual contribution percentage test. Qualified Discretionary Contributions shall be allocated to Non-highly Compensated Employees (check one): (A) [X] in the ratio which each such Participant's Compensation for the Plan Year bears to the total of all such Participants' Compensation for the Plan Year. (B) [ ] as a flat dollar amount for each such Participant for the Plan Year. 8 10 (C) [X] MATCHING CONTRIBUTIONS (only if Section 1.05(b) is checked) (1) THE EMPLOYER SHALL MAKE A MATCHING CONTRIBUTION ON BEHALF OF EACH PARTICIPANT IN AN AMOUNT EQUAL TO THE FOLLOWING PERCENTAGE OF A PARTICIPANT'S DEFERRAL CONTRIBUTIONS DURING THE PLAN YEAR (check one): (A) [ ] 50% (B) [ ] 100% (C) [ ] % ----- (D) [ ] (Tiered Match) _________ % of the first ______% of the Participant's Compensation contributed to the Plan, ________ % of the next ______% of the Participant's Compensation contributed to the Plan, ________ % of the next ______% of the Participant's Compensation contributed to the Plan. NOTE: THE PERCENTAGES SPECIFIED ABOVE FOR MATCHING CONTRIBUTIONS MAY NOT INCREASE AS THE PERCENTAGE OF COMPENSATION CONTRIBUTED INCREASES. (E) [X] The percentage declared for the year, if any, by a Board of Directors' Resolution (or by a Letter of Intent for a Sole Proprietor or Partnership). (2) [ ] THE EMPLOYER MAY AT PLAN YEAR END MAKE AN ADDITIONAL MATCHING CONTRIBUTION EQUAL TO A PERCENTAGE DECLARED BY THE EMPLOYER, THROUGH A BOARD OF DIRECTORS' RESOLUTION (OR BY A LETTER OF INTENT FOR A SOLE PROPRIETOR OR PARTNERSHIP), OF THE DEFERRAL CONTRIBUTIONS MADE BY EACH PARTICIPANT DURING THE PLAN YEAR (only if an option is checked under Section 1.05(c)(1)). (3) [ ] MATCHING CONTRIBUTION LIMITS (check the appropriate box): (A) [ ] Deferral Contributions in excess of ________% of the Participant's Compensation for the period in question shall not be considered for Matching Contributions. Note: If the Employer elects a percentage limit in (A) above and requests the Trustee to account separately for matched and unmatched Deferral Contributions, the Matching Contributions allocated to each Participant must be computed, and the percentage limit applied, based upon each payroll period. (B) [ ] Matching Contributions for each Participant for each Plan Year shall be limited to $___________. 9 11 (4) ELIGIBILITY REQUIREMENT(S) A Participant who makes Deferral Contributions during the Plan Year under Section 1.05(b) shall be entitled to Matching Contributions for that Plan Year if the Participant satisfies the following requirement(s) (Check the appropriate box(es). Options (B) and (C) may not be elected together): (A) [ ] Is employed by the Employer on the last day of the Plan Year. (B) [ ] Earns at least 500 Hours of Service during the Plan Year. (C) [ ] Earns at least 1,000 Hours of Service during the Plan Year. (D) [ ] Is not a Highly Compensated Employee for the Plan Year. (E) [ ] Is not a Partner of the Employer, if the Employer is a Partnership. (F) [X] No requirements. NOTE: If option (A), (B) or (C) above is selected then Matching Contributions can only be FUNDED by the Employer AFTER the Plan Year ends. Any Matching Contribution funded before Plan Year end shall not be subject to the eligibility requirements of this Section 1.05(c)(4)). If option (A), (B), or (C) is adopted during a Plan Year, such option shall not become effective until the first day of the next Plan Year. (D) [ ] EMPLOYEE AFTER-TAX CONTRIBUTIONS (check one): (1) [ ] FUTURE CONTRIBUTIONS Participants may make voluntary non-deductible Employee Contributions pursuant to Section 4.09 of the Plan. This option may only be elected if the Employer has elected to permit Deferral Contributions under Section 1.05(b). Matching Contributions by the Employer are not allowed on any voluntary non-deductible Employee Contributions. Withdrawals are limited to one per year unless Employee Contributions were allowed under a previous plan document which authorized more frequent withdrawals. (2) [ ] FROZEN CONTRIBUTIONS Participants may not make voluntary non-deductible Employee Contributions, but he Employer does maintain frozen Participant voluntary non-deductible Employee Contribution Accounts. 10 12 1.06 RETIREMENT AGE(S) (A) [X] THE NORMAL RETIREMENT AGE UNDER THE PLAN IS (check one): (1) [X] age 65. (2) [ ] age ____ (specify between 55 and 64). (3) [ ] later of the age ___ (can not exceed 65) or the fifth anniversary of the Participant's Employment Commencement Date. (B) [ ] THE EARLY RETIREMENT AGE IS THE FIRST DAY OF THE MONTH AFTER THE PARTICIPANT ATTAINS AGE ____________ (SPECIFY 55 OR GREATER) AND COMPLETES _______________ YEARS OF SERVICE FOR VESTING. (C) [X] A PARTICIPANT IS ELIGIBLE FOR DISABILITY RETIREMENT IF HE/SHE (check the appropriate box(es)): (1) [ ] satisfies the requirements for benefits under the Employer's Long-Term Disability Plan. (2) [X] satisfies the requirements for Social Security disability benefits. (3) [X] is determined to be disabled by a physician approved by the Employer. 11 13 1.07 VESTING SCHEDULE (A) THE PARTICIPANT'S VESTED PERCENTAGE IN EMPLOYER CONTRIBUTIONS (FIXED OR DISCRETIONARY) ELECTED IN SECTION 1.05(A) AND/OR MATCHING CONTRIBUTIONS ELECTED IN SECTION 1.05(C) SHALL BE BASED UPON THE SCHEDULE(S) SELECTED BELOW, EXCEPT WITH RESPECT TO ANY PLAN YEAR DURING WHICH THE PLAN IS TOP-HEAVY. THE SCHEDULE ELECTED IN SECTION 1.12(D) SHALL AUTOMATICALLY APPLY FOR A TOP-HEAVY PLAN YEAR AND ALL PLAN YEARS THEREAFTER UNLESS THE EMPLOYER HAS ALREADY ELECTED A MORE FAVORABLE VESTING SCHEDULE BELOW. (1) EMPLOYER CONTRIBUTIONS (2) MATCHING CONTRIBUTIONS (check one): (check one): (A) [ ] N/A - No Employer Contributions (A) [ ] N/A - No Matching Contributions (B) [ ] 100% Vesting immediately (B) [ ] 100% Vesting immediately (C) [ ] 3 year cliff (see C below) (C) [ ] 3 year cliff (see C below) (D) [X] 5 year cliff (see D below) (D) [ ] 5 year cliff (see D below) (E) [ ] 6 year graduated (see E below) (E) [ ] 6 year graduated (see E below) (F) [ ] 7 year graduated (see F below) (F) [ ] 7 year graduated (see F below) (G) [ ] Other vesting (complete G1 below) (G) [X] Other vesting (complete G2 below)
YEARS OF VESTING SCHEDULE SERVICE FOR ---------------- VESTING C D E F G1 G2 ------- - - - - -- -- 0 0% 0% 0% 0% ___ 0%__ 1 0% 0% 0% 0% ___ 25%_ 2 0% 0% 20% 0% ___ 50%_ 3 100% 0% 40% 20% ___ 75%_ 4 100% 0% 60% 40% ___ 100% 5 100% 100% 80% 60% ___ ___ 6 100% 100% 100% 80% ___ ___ 7 100% 100% 100% 100% 100% 100%
NOTE: A schedule elected under G1 or G2 above must be at least as favorable as one of the schedules in C, D, E or F above. (B) [ ] YEARS OF SERVICE FOR VESTING SHALL EXCLUDE: (1) [ ] for new plans, service prior to the Effective Date as defined in Section 1.01(g)(1). (2) [ ] for existing plans converting from another plan document, service prior to the original Effective Date as defined in Section 1.01(g)(2). 12 14 1.08 PREDECESSOR EMPLOYER SERVICE [ ] SERVICE FOR PURPOSES OF ELIGIBILITY IN SECTION 1.03(A)(1) AND VESTING IN SECTION 1.07(A) OF THIS PLAN SHALL INCLUDE SERVICE WITH THE FOLLOWING EMPLOYER(S): (A) ------------------------------------------------------------- (B) ------------------------------------------------------------- (C) ------------------------------------------------------------- (D) ------------------------------------------------------------- 1.09 PARTICIPANT LOANS PARTICIPANT LOANS (check (a) or (b)): (A) [X] WILL BE ALLOWED IN ACCORDANCE WITH SECTION 7.09, SUBJECT TO A $1,000 MINIMUM AMOUNT AND WILL BE GRANTED (check (1) or (2)): (1) [X] for any purpose. (2) [X] for hardship withdrawal (as defined in Section 7.10) purposes only. (B) [ ] WILL NOT BE ALLOWED. 1.10 HARDSHIP WITHDRAWALS PARTICIPANT WITHDRAWALS FOR HARDSHIP PRIOR TO TERMINATION OF EMPLOYMENT (check one): (A) [X] WILL BE ALLOWED IN ACCORDANCE WITH SECTION 7.10, SUBJECT TO A $1,000 MINIMUM AMOUNT. (B) [ ] WILL NOT BE ALLOWED. 13 15 1.11 DISTRIBUTIONS (A) SUBJECT TO ARTICLES 7 AND 8 AND (B) BELOW, DISTRIBUTIONS UNDER THE PLAN WILL BE PAID (check the appropriate box(es)): (1) [X] as a lump sum. (2) [ ] under a systematic withdrawal plan (installments). (B) [ ] CHECK IF A PARTICIPANT WILL BE ENTITLED TO RECEIVE A DISTRIBUTION OF ALL OR ANY PORTION OF THE FOLLOWING ACCOUNTS WITHOUT TERMINATING EMPLOYMENT UPON ATTAINMENT OF AGE 591/2 (CHECK ONE): (1) [ ] Deferral Contribution Account (2) [ ] All Accounts (C) [X] CHECK IF THE PLAN WAS CONVERTED (BY PLAN AMENDMENT) FROM ANOTHER DEFINED CONTRIBUTION PLAN, AND THE BENEFITS WERE PAYABLE AS (check the appropriate box(es)): (1) [ ] a form of single or joint and survivor life annuity. (2) [ ] an in-service withdrawal of vested employer contributions maintained in a participant's account (check (A) and/or (B)): (A) [ ] for at least _______________ (24 or more) months. (B) [ ] after the Participant has at least 60 months of participation. (3) [X] another distribution option that is a "protected benefit" under Section 411(d)(6) of the Internal Revenue Code. Please attach a separate page identifying the distribution option(s).
These additional forms of benefit may be provided for such plans under Articles 7 or 8. NOTE: Under Federal Law, distributions to Participants must generally begin no later than April 1 following the year in which the Participant attains age 70 1/2. 14 16 1.12 TOP HEAVY STATUS (A) THE PLAN SHALL BE SUBJECT TO THE TOP-HEAVY PLAN REQUIREMENTS OF ARTICLE 9 (check one): (1) [ ] for each Plan Year. (2) [X] for each Plan Year, if any, for which the Plan is Top-Heavy as defined in Section 9.02. (3) [ ] Not applicable. (This option is available for plans covering only employees subject to a collective bargaining agreement and there are no Employer or Matching Contributions elected in Section 1.05.) (B) IN DETERMINING TOP-HEAVY STATUS, IF NECESSARY, FOR AN EMPLOYER WITH AT LEAST ONE DEFINED BENEFIT PLAN, THE FOLLOWING ASSUMPTIONS SHALL APPLY: (1) [X] Interest rate: _5.0_% per annum (2) [X] Mortality table: _UP84________ (3) [ ] Not Applicable. (C) IN THE EVENT THAT THE PLAN IS TREATED AS TOP-HEAVY FOR A PLAN YEAR, EACH NON-KEY EMPLOYEE SHALL RECEIVE AN EMPLOYER CONTRIBUTION OF AT LEAST 3 (3, 4, 5, OR 7 1/2) % OF COMPENSATION FOR THE PLAN YEAR IN ACCORDANCE WITH SECTION 9.03 (check one): (1) [ ] under this Plan in any event. (2) [X] under this Plan only if the Participant is not entitled to such contribution under another qualified plan of the Employer. (3) [ ] Not applicable. (This option is available for plans covering only employees subject to a collective bargaining agreement and there are no Employer or Matching Contributions elected in Section 1.05.) NOTE: Such minimum Employer contribution may be less than the percentage indicated in (c) above to the extent provided in Section 9.03(a). 15 17 (D) IN THE EVENT THAT THE PLAN IS TREATED AS TOP-HEAVY FOR A PLAN YEAR, THE FOLLOWING VESTING SCHEDULE SHALL APPLY INSTEAD OF THE SCHEDULE(S) ELECTED IN SECTION 1.07(A) FOR SUCH PLAN YEAR AND EACH PLAN YEAR THEREAFTER (check one):
(1) [X] 100% vested after _3____________ (not in excess of 3) Years of Service for Vesting. (2) [ ] Years of Service for Vesting Vesting Percentage Must be at Least 0 ________ 0% 1 ________ 0% 2 ________ 20% 3 ________ 40% 4 ________ 60% 5 ________ 80% 6 ________ 100%
NOTE: If the schedule(s) elected in Section 1.07(a) is(are) more favorable in all cases than the schedule elected in (d) above, then the schedule(s) in Section 1.07(a) will continue to apply even in Plan Years in which the Plan is Top- Heavy. 1.13 TWO OR MORE PLANS - CODE SECTION 415 LIMITATION ON ANNUAL ADDITIONS If the Employer maintains or ever maintained another qualified plan in which any Participant in this Plan is (or was) a participant or could become a participant, the Employer must complete this section. The Employer must also complete this section if it maintains a welfare benefit fund, as defined in Section 419(e) of the Code, or an individual medical account, as defined in Section 415(l)(2) of the Code, under which amounts are treated as annual additions with respect to any Participant in this Plan. (A) IF THE EMPLOYER MAINTAINS, OR MAINTAINED, ANY OTHER DEFINED CONTRIBUTION PLAN WHICH IS NOT A MASTER OR PROTOTYPE PLAN, ANNUAL ADDITIONS FOR ANY LIMITATION YEAR TO THIS PLAN WILL BE LIMITED (check one): (1) [X] in accordance with Section 5.03 of this Plan. (2) [ ] in accordance with another method set forth on an attached separate sheet. (3) [ ] Not Applicable. 16 18 (B) IF THE EMPLOYER MAINTAINS, OR MAINTAINED, ANY DEFINED BENEFIT PLAN(S), THE SUM OF THE DEFINED CONTRIBUTION FRACTION AND DEFINED BENEFIT FRACTION FOR A LIMITATION YEAR MAY NOT EXCEED THE LIMITATION SPECIFIED IN CODE SECTION 415(E), MODIFIED BY SECTION 416(H)(1) OF THE CODE. THIS COMBINED PLAN LIMIT WILL BE MET AS FOLLOWS (check one): (1) [X] Annual Additions to this Plan are limited so that the sum of the Defined Contribution Fraction and the Defined Benefit Fraction does not exceed 1.0. (2) [ ] another method of limiting Annual Additions or reducing projected annual benefits is set forth on an attached schedule. (3) [ ] Not Applicable. 1.14 ESTABLISHMENT OF TRUST AND INVESTMENT DECISIONS (A) INVESTMENT DIRECTIONS Participant Accounts will be invested (check one): (1) [ ] in accordance with investment directions provided to the Trustee by the Employer for allocating all Participant Accounts among the options listed in (b) below. (2) [X] in accordance with investment directions provided to the Trustee by each Participant for allocating his entire Account among the options listed in (b) below. (3) [ ] in accordance with investment directions provided to the Trustee by each Participant for all contribution sources in a Participant's Account except the following sources shall be invested as directed by the Employer (check (A) and/or (B)): (A) [ ] Fixed or Discretionary Employer Contributions (B) [ ] Employer Matching Contributions The Employer must direct the applicable sources among the same investment options made available for Participant directed sources listed in (b) below. 17 19 (B) PLAN INVESTMENT OPTIONS The Employer hereby establishes a Trust under the Plan in accordance with the provisions of Article 14, and the Trustee signifies acceptance of its duties under Article 14 by its signature below. Participant Accounts under the Trust will be invested among the Fidelity Funds listed below pursuant to Participant and/or Employer directions.
Fund Name Fund Number --------- ----------- (1) Growth & Income Portfolio 027 ------------------------------------------ ---------------- (2) Puritan Fund 004 (3) Contrafund 022 (4) Disciplined Equity Fund 315 (5) Magellan Fund 021 (6) Overseas Fund 094 (7) Managed Income Portfolio 632 (8) Emerging Growth 324 (9) ------------------------------------------ ---------------- (10) ------------------------------------------ ----------------
NOTE: An additional annual recordkeeping fee will be charged for each fund in excess of five funds. To the extent that the Employer selects as an investment option the Managed Income Portfolio of the Fidelity Group Trust for Employee Benefit Plans (the "Group Trust"), the Employer hereby (A) agrees to the terms of the Group Trust and adopts said terms as a part of this Agreement and (B) acknowledges that it has received from the Trustee a copy of the Group Trust, the Declaration of Separate Fund for the Managed Income Portfolio of the Group Trust, and the Circular for the Managed Income Portfolio. NOTE: The method and frequency for change of investments will be determined under the rules applicable to the selected funds or, if applicable, the rules of the Employer adopted in accordance with Section 6.03. Information will be provided regarding expenses, if any, for changes in investment options. 18 20 1.15 RELIANCE ON OPINION LETTER An adopting Employer may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under Section 401 of the Code. If the Employer wishes to obtain reliance that his or her Plan(s) are qualified, application for a determination letter should be made to the appropriate Key District Director of the Internal Revenue Service. Failure to fill out the Adoption Agreement properly may result in disqualification of the Plan. This Adoption Agreement may be used only in conjunction with Fidelity Prototype Plan Basic Plan Document No. 07. The Prototype Sponsor shall inform the adopting Employer of any amendments made to the Plan or of the discontinuance or abandonment of the prototype plan document. 1.16 PROTOTYPE INFORMATION: Name of Prototype Sponsor: Fidelity Management & Research Co. Address of Prototype Sponsor: 82 Devonshire Street Boston, MA 02109 Questions regarding this prototype document may be directed to the following telephone number: 1-(800) 343-9184. 21 THE CORPORATEPLAN FOR RETIREMENT THE PROFIT SHARING/401(K) PLAN FIDELITY BASIC PLAN DOCUMENT NO. 07 22 THE CORPORATE PLAN FOR RETIREMENT PROFIT SHARING/401(K) PLAN ARTICLE 1 ADOPTION AGREEMENT ARTICLE 2 DEFINITIONS 2.01 - Definitions ARTICLE 3 PARTICIPATION 3.01 - Date of Participation 3.02 - Resumption of Participation Following Reemployment 3.03 - Cessation or Resumption of Participation Following a Change in Status 3.04 - Participation by Owner-Employee; Controlled Businesses 3.05 - Omission of Eligible Employee ARTICLE 4 CONTRIBUTIONS 4.01 - Deferral Contributions 4.02 - Additional Limit on Deferral Contributions 4.03 - Matching Contributions 4.04 - Limit on Matching Contributions and Employee Contributions 4.05 - Special Rules 4.06 - Fixed/Discretionary Employer Contributions 4.07 - Time of Making Employer Contributions 4.08 - Return of Employer Contributions 4.09 - Employee Contributions 4.10 - Rollover Contributions 4.11 - Deductible Voluntary Employee Contributions 4.12 - Additional Rules for Paired Plans ARTICLE 5 PARTICIPANTS' ACCOUNTS 5.01 - Individual Accounts 5.02 - Valuation of Accounts 5.03 - Code Section 415 Limitations ARTICLE 6 INVESTMENT OF CONTRIBUTIONS 6.01 - Manner of Investment 6.02 - Investment Decisions 6.03 - Participant Directions to Trustee 2 23 ARTICLE 7 RIGHT TO BENEFITS 7.01 - Normal or Early Retirement 7.02 - Late Retirement 7.03 - Disability Retirement 7.04 - Death 7.05 - Other Termination of Employment 7.06 - Separate Account 7.07 - Forfeitures 7.08 - Adjustment for Investment Experience 7.09 - Participant Loans 7.10 - In-Service Withdrawals 7.11 - Prior Plan In-Service Distribution Rules ARTICLE 8 DISTRIBUTION OF BENEFITS PAYABLE AFTER TERMINATION OF SERVICE 8.01 - Distribution of Benefits to Participants and Beneficiaries 8.02 - Annuity Distributions 8.03 - Joint and Survivor Annuities/Preretirement Survivor Annuities 8.04 - Installment Distributions 8.05 - Immediate Distributions 8.06 - Determination of Method of Distribution 8.07 - Notice to Trustee 8.08 - Time of Distribution 8.09 - Whereabouts of Participants and Beneficiaries ARTICLE 9 TOP-HEAVY PROVISIONS 9.01 - Application 9.02 - Definitions 9.03 - Minimum Contribution 9.04 - Adjustment to the Limitation on Contributions and Benefits 9.05 - Minimum Vesting ARTICLE 10 AMENDMENT AND TERMINATION 10.01 - Amendment by Employer 10.02 - Amendment by Prototype Sponsor 10.03 - Amendments Affecting Vested and/or Accrued Benefits 10.04 - Retroactive Amendments 10.05 - Termination 10.06 - Distribution Upon Termination of the Plan 10.07 - Merger or Consolidation of Plan; Transfer of Plan Assets ARTICLE 11 AMENDMENT AND CONTINUATION OF PREDECESSOR PLAN; TRANSFER OF FUNDS TO OR FROM OTHER QUALIFIED PLANS 11.01 - Amendment and Continuation of Predecessor Plan 11.02 - Transfer of Funds from an Existing Plan 11.03 - Acceptance of Assets by Trustee 3 24 11.04 - Transfer of Assets from Trust ARTICLE 12 MISCELLANEOUS 12.01 - Communication to Participants 12.02 - Limitation of Rights 12.03 - Nonalienability of Benefits and Qualified Domestic Relations Orders 12.04 - Facility of Payment 12.05 - Information Between Employer and Trustee 12.06 - Effect of Failure to Qualify Under Code 12.07 - Notices 12.08 - Governing Law ARTICLE 13 PLAN ADMINISTRATION 13.01 - Powers and Responsibilities of the Administrator 13.02 - Nondiscriminatory Exercise of Authority 13.03 - Claims and Review Procedures 13.04 - Named Fiduciary 13.05 - Costs of Administration ARTICLE 14 TRUST AGREEMENT 14.01 - Acceptance of Trust Responsibilities 14.02 - Establishment of Trust Fund 14.03 - Exclusive Benefit 14.04 - Powers of Trustee 14.05 - Accounts 14.06 - Approving of Accounts 14.07 - Distribution from Trust Fund 14.08 - Transfer of Amounts from Qualified Plan 14.09 - Transfer of Assets from Trust 14.10 - Separate Trust or Fund for Existing Plan Assets 14.11 - Voting; Delivery of Information 14.12 - Compensation and Expenses of Trustee 14.13 - Reliance by Trustee on other Persons 14.14 - Indemnification by Employer 14.15 - Consultation by Trustee with Counsel 14.16 - Persons Dealing with the Trustee 14.17 - Resignation or Removal of Trustee 14.18 - Fiscal Year of the Trust 14.19 - Discharge of Duties by Fiduciaries 14.20 - Amendment 14.21 - Plan Termination 14.22 - Permitted Reversion of Funds to Employer 14.23 - Governing Law 4 25 ARTICLE 1. ADOPTION AGREEMENT. ARTICLE 2. DEFINITIONS. 2.01. DEFINITIONS. (a) Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context: (1) "Account" means an account established on the books of the Trust for the purpose of recording contributions made on behalf of a Participant and any income, expenses, gains or losses incurred thereon. (2) "Administrator" means the Employer adopting this Plan, or other person designated by the Employer in Section 1.01(c). (3) "Adoption Agreement" means Article 1, under which the Employer establishes and adopts, or amends, the Plan and Trust and designates the optional provisions selected by the Employer, and the Trustee accepts its responsibilities under Article 14. The provisions of the Adoption Agreement shall be an integral part of the Plan. (4) "Annuity Starting Date" means the first day of the first period for which an amount is payable as an annuity or in any other form. (5) "Beneficiary" means the person or persons entitled under Section 7.04 to receive benefits under the Plan upon the death of a Participant, provided that for purposes of Section 7.04 such term shall be applied in accordance with Section 401(a)(9) of the Code and the regulations thereunder. (6) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (7) "Compensation" shall mean (A) for purposes of Article 4 (Contributions), compensation as defined in Section 5.03(e)(2) excluding any items elected by the Employer in Section 1.04(a), reimbursements or other expense allowances, fringe benefits (cash and non-cash), moving expenses, deferred compensation and welfare benefits, but including amounts that are not includable in the gross income of the Participant under a salary reduction agreement by reason of the application of Sections 125, 402(a)(8), 402(h), or 403(b) of the Code; and (B) for purposes of Section 2.01(a)(16) (Highly Compensated Employees), Section 5.03 (Code Section 415 Limitations), and Section 9.03 (Top-Heavy Plan Minimum Contribution), compensation as defined in Section 5.03(e)(2). 26 Compensation shall generally be based on the amount actually paid to the Participant during the Plan Year or, for purposes of Article 4 if so elected by the Employer in Section 1.04(b), during that portion of the Plan Year during which the Employee is eligible to participate. Notwithstanding the preceding sentence, compensation for purposes of Section 5.03 (Code Section 415 Limitations) shall be based on the amount actually paid or made available to the Participant during the Limitation Year. Compensation for the initial Plan Year for a new plan shall be based upon eligible Participant Compensation, subject to Section 1.04(b), from the Effective Date listed in Section 1.01(g)(1) through the end of the first Plan Year. In the case of any Self-Employed Individual, Compensation shall mean the Individual's Earned Income. For years beginning after December 31, 1988, the annual Compensation of each Participant taken into account for determining all benefits provided under the plan for any determination period shall not exceed $200,000. This limitation shall be adjusted by the Secretary at the same time and in the same manner as under Section 415(d) of the Code, except that the dollar increase in effect on January 1 of any calendar year is effective for years beginning in such calendar year and the first adjustment to the $200,000 limitation is effected on January 1, 1990. If a plan determines Compensation on a period of time that contains fewer than 12 calendar months, then the annual Compensation limit is the amount equal to the annual Compensation limit for the calendar year in which the Compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12. If Compensation for any prior determination period is taken into account in determining an Employee's allocations or benefits for the current determination period, the Compensation for such prior year is subject to the applicable annual compensation limit in effect for that prior year. For this purpose, for years beginning before January 1, 1990, the applicable annual compensation limit is $200,000. In determining the Compensation of a Participant for purposes of this limitation, the rules of Section 414(q)(6) of the Code shall apply, except that in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the year. If the $200,000 limitation is exceeded as a result of the application of these rules, then the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of this limitation. 2 27 (8) "Earned Income" means the net earnings of a Self-Employed Individual derived from the trade or business with respect to which the Plan is established and for which the personal services of such individual are a material income-providing factor, excluding any items not included in gross income and the deductions allocated to such items, except that for taxable years beginning after December 31, 1989 net earnings shall be determined with regard to the deduction allowed under Section 164(f) of the Code, to the extent applicable to the Employer. Net earnings shall be reduced by contributions of the Employer to any qualified plan, to the extent a deduction is allowed to the Employer for such contributions under Section 404 of the Code. (9) "Eligibility Computation Period" means each 12-consecutive month period beginning with the Employment Commencement Date and each anniversary thereof or, in the case of an Employee who, before completing the eligibility requirements set forth in Section 1.03(a)(1), incurs a break in service for participation purposes and thereafter returns to the employ of the Employer or Related Employer, each 12-consecutive month period beginning with the first day of reemployment and each anniversary thereof. A "break in service for participation purposes" shall mean an Eligibility Computation Period during which the participant does not complete more than 500 Hours of Service with the Employer. (10) "Employee" means any employee of the Employer, any Self-Employed Individual or Owner-Employee. The Employer must specify in Section 1.03(a)(3) any Employee or class of Employees not eligible to participate in the Plan. If the Employer elects to exclude collective bargaining employees, the exclusion applies to any employee of the Employer included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers unless the collective bargaining agreement requires the employee to be included within the Plan. The term "employee representatives" does not include any organization more than half the members of which are owners, officers, or executives of the Employer. For purposes of the Plan, an individual shall be considered to become an Employee on the date on which he first completes an Hour of Service and he shall be considered to have ceased to be an Employee on the date on which he last completes an Hour of Service. The term also includes a Leased Employee, such that contributions or benefits provided by the leasing organization which are attributable to services performed for the Employer shall be treated as provided by the Employer. Notwithstanding the above, a Leased Employee shall not be considered an Employee if Leased Employees do not constitute more than 20 percent of the Employer's non-highly compensated work-force (taking into account all Related Employers) and the Leased Employee is covered by a money purchase pension plan maintained by the 3 28 leasing organization and providing (A) a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined for purposes of Section 415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from gross income under Section 125, Section 402(a)(8), Section 402(h) or Section 403(b) of the Code, (B) full and immediate vesting, and (C) immediate participation by each employee of the leasing organization. (11) "Employer" means the employer named in Section 1.02(a) and any Related Employers required by this Section 2.01(a)(11). If Article 1 of the Employer's Plan is the Standardized Adoption Agreement, the term "Employer" includes all Related Employers. If Article 1 of the Employer's Plan is the Non-standardized Adoption Agreement, the term "Employer" includes those Related Employers designated in Section 1.02(b). (12) "Employment Commencement Date" means the date on which the Employee first performs an Hour of Service. (13) "ERISA" means the Employee Retirement Income Security Act of 1974, as from time to time amended. (14) "Fidelity Fund" means any Registered Investment Company or Managed Income Portfolio of the Fidelity Group Trust for Employee Benefit Plans which is made available to plans utilizing the CORPORATEplan for Retirement. (15) "Fund Share" means the share, unit, or other evidence of ownership in a Fidelity Fund. (16) "Highly Compensated Employee" means both highly compensated active Employees and highly compensated former Employees. A highly compensated active Employee includes any Employee who performs service for the Employer during the determination year and who, during the "look-back year," (A) received compensation from the Employer in excess of $75,000 (as adjusted pursuant to Section 415(d) of the Code), (B) received compensation from the Employer in excess of $50,000 (as adjusted pursuant to Section 415(d) of the Code) and was a member of the top-paid group for such year, or (C) was an officer of the Employer and received compensation during such year that is greater than 50 percent of the dollar limitation in effect under Section 415(b)(1)(A) of the Code. The term "Highly Compensated Employee" also includes (i) Employees who are both described in the preceding sentence if the term "determination year" is substituted for the term "look-back year" and the Employee is one of the 100 Employees who received the most compensation from the Employer during the determination year, and (ii) Employees who are 5-percent owners at any time during the look-back year or determination year. 4 29 If no officer has satisfied the compensation requirement of (C) above during either a determination year or look-back year, the highest paid officer for such year shall be treated as a highly compensated Employee. For this purpose, the determination year shall be the Plan Year. The look-back year shall be the twelve- month period immediately preceding the determination year. The Employer may elect to make the look-back year calculation for a determination on the basis of the calendar year ending with or within the applicable determination year, as prescribed by Section 414(q) of the Code and the regulations issued thereunder. A highly compensated former Employee includes any Employee who separated from service (or was deemed to have separated) prior to the determination year, performs no service for the Employer during the determination year, and was a highly compensated active Employee for either the separation year or any determination year ending on or after the Employee's 55th birthday. If an Employee is, during a determination year or look-back year, a family member of either a 5-percent owner who is an active or former Employee or a highly compensated Employee who is one of the 10 most highly compensated Employees ranked on the basis of compensation paid by the Employer during such year, then the family member and the 5-percent owner or top-ten highly compensated Employee shall be aggregated. In such case, the family member and 5-percent owner or top-ten highly compensated Employee shall be treated as a single Employee receiving compensation and plan contributions or benefits equal to the sum of such compensation and contributions or benefits of the family member and 5-percent owner or top-ten highly compensated Employee. For purposes of this Section, family member includes the spouse, lineal ascendants and descendants of the Employee or former Employee and the spouses of such lineal ascendants and descendants. The determination of who is a highly compensated Employee, including the determinations of the number and identity of Employees in the top-paid group, the top 100 Employees, the number of Employees treated as officers, and the compensation that is considered, will be made in accordance with Section 414(q) of the Code and the regulations thereunder. (17) "Hour of Service" means, with respect to any Employee, (A) Each hour for which the Employee is directly or indirectly paid, or entitled to payment, for the performance of duties for the Employer or a Related Employer, each such hour to be credited to the Employee for the Eligibility Computation Period in which the duties were performed; 5 30 (B) Each hour for which the Employee is directly or indirectly paid, or entitled to payment, by the Employer or Related Employer (including payments made or due from a trust fund or insurer to which the Employer contributes or pays premiums) on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity, disability, layoff, jury duty, military duty, or leave of absence, each such hour to be credited to the Employee for the Eligibility Computation Period in which such period of time occurs, subject to the following rules: (i) No more than 501 Hours of Service shall be credited under this paragraph (B) on account of any single contin-uous period during which the Employee performs no duties; (ii) Hours of Service shall not be credited under this paragraph (B) for a payment which solely reimburses the Employee for medically-related expenses, or which is made or due under a plan maintained solely for the purpose of complying with applicable workmen's compensation, unemployment compensation or disability insurance laws; and (iii) If the period during which the Employee performs no duties falls within two or more Eligibility Computation Periods and if the payment made on account of such period is not calculated on the basis of units of time, the Hours of Service credited with respect to such period shall be allocated between not more than the first two such Eligibility Computation Periods on any reasonable basis consistently applied with respect to similarly situated Employees; and (C) Each hour not counted under paragraph (A) or (B) for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to be paid by the Employer or a Related Employer, shall be credited to the Employee for the Eligibility Computation Period to which the award or agreement pertains rather than the Eligibility Computation Period in which the award agreement or payment is made. For purposes of determining Hours of Service, Employees of the Employer and of all Related Employers will be treated as employed by a single employer. For purposes of paragraphs (B) and (C) above, Hours of Service will be calculated in accordance with the provisions of Section 2530.200b-2(b) of the Department of Labor regulations, which are incorporated herein by reference. Solely for purposes of determining whether a break in service for participation purposes has occurred in a computation period, an individual who is absent from work for maternity or paternity reasons shall receive credit for 6 31 the hours of service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, 8 hours of service per day of such absence. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (i) by reason of the pregnancy of the individual, (ii) by reason of a birth of a child of the individual, (iii) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement. The hours of service credited under this paragraph shall be credited (a) in the computation period in which the absence begins if the crediting is necessary to prevent a break in service in that period, or (b) in all other cases, in the following computation period. (18) "Leased Employee" means any individual who provides services to the Employer or a Related Employer (the "recipient") but is not otherwise an employee of the recipient if (A) such services are provided pursuant to an agreement between the recipient and any other person (the "leasing organization"), (B) such individual has performed services for the recipient (or for the recipient and any related persons within the meaning of Section 414(n)(6) of the Code) on a substantially full-time basis for at least one year, and (C) such services are of a type historically performed by employees in the business field of the recipient. (19) "Normal Retirement Age" means the normal retirement age specified in Section 1.06(a) of the Adoption Agreement. If the Employer enforces a mandatory retirement age, the Normal Retirement Age is the lesser of that mandatory age or the age specified in Section 1.06(a). (20) "Owner-Employee" means, if the Employer is a sole proprietorship, the individual who is the sole proprietor, or if the Employer is a partnership, a partner who owns more than 10 percent of either the capital interest or the profits interest of the partnership. (21) "Participant" means any Employee who participates in the Plan in accordance with Article 3 hereof. (22) "Plan" means the plan established by the Employer in the form of the prototype plan, as set forth herein as a new plan or as an amendment to an existing plan, by executing the Adoption Agreement, together with any and all amendments hereto. (23) "Plan Year" means the 12-consecutive-month period ending on the date designated by the Employer in Section 1.01(f). (24) "Prototype Sponsor" means Fidelity Management and Research Company or its successor. 7 32 (25) "Registered Investment Company" means any one or more corporations, partnerships or trusts registered under the Investment Company Act of 1940 for which Fidelity Management and Research Company serves as investment advisor. (26) "Related Employer" means any employer other than the Employer named in Section 1.02(a) if the Employer and such other employer are members of a controlled group of corporations (as defined in Section 414(b) of the Code) or an affiliated service group (as defined in Section 414(m)), or are trades or businesses (whether or not incorporated) which are under common control (as defined in Section 414(c)), or such other employer is required to be aggregated with the Employer pursuant to regulations issued under Section 414(o). (27) "Self-Employed Individual" means an individual who has Earned Income for the taxable year from the Employer or who would have had Earned Income but for the fact that the trade or business had no net profits for the taxable year. (28) "Trust" means the trust created by the Employer in accordance with the provisions of Section 14.01. (29) "Trust Agreement" means the agreement between the Employer and the Trustee, as set forth in Article 14, under which the assets of the Plan are held, administered, and managed. (30) "Trust Fund" means the property held in Trust by the Trustee for the Accounts of the Participants and their Beneficiaries. (31) "Trustee" means the Fidelity Management Trust Company, or its successor. (32) "Year of Service for Participation" means, with respect to any Employee, an Eligibility Computation Period during which the Employee has been credited with at least 1,000 Hours of Service. If the Plan maintained by the Employer is the plan of a predecessor employer, an Employee's Years of Service for Participation shall include years of service with such predecessor employer. In any case in which the Plan maintained by the Employer is not the plan maintained by a predecessor employer, service for such predecessor shall be treated as service for the Employer, to the extent provided in Section 1.08. (33) "Years of Service for Vesting" means, with respect to any Employee, the number of whole years of his periods of service with the Employer or a Related Employer (the elapsed time method to compute vesting service), subject to any exclusions elected by the Employer in Section 1.07(b). An Employee will receive credit for the aggregate of all time period(s) commencing with the Employee's Employment Commencement Date and ending on the date a break in service begins, unless any such years are excluded by Section 1.07(b). An Employee will also receive credit for any period of 8 33 severance of less than 12 consecutive months. Fractional periods of a year will be expressed in terms of days. In the case of a Participant who has 5 consecutive 1-year breaks in service, all years of service after such breaks in service will be disregarded for the purpose of vesting the Employer-derived account balance that accrued before such breaks, but both pre-break and post-break service will count for the purposes of vesting the Employer- derived account balance that accrues after such breaks. Both accounts will share in the earnings and losses of the fund. In the case of a Participant who does not have 5 consecutive 1-year breaks in service, both the pre-break and post-break service will count in vesting both the pre-break and post-break employer-derived account balance. A break in service is a period of severance of at least 12 consecutive months. Period of severance is a continuous period of time during which the Employee is not employed by the Employer. Such period begins on the date the Employee retires, quits or is discharged, or if earlier, the 12-month anniversary of the date on which the Employee was otherwise first absent from service. In the case of an individual who is absent from work for maternity or paternity reasons, the 12-consecutive month period beginning on the first anniversary of the first date of such absence shall not constitute a break in service. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (A) by reason of the pregnancy of the individual, (B) by reason of the birth of a child of the individual, (C) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (D) for purposes of caring for such child for a period beginning immediately following such birth or placement. If the Plan maintained by the Employer is the plan of a predecessor employer, an Employee's Years of Service for Vesting shall include years of service with such predecessor employer. In any case in which the Plan maintained by the Employer is not the plan maintained by a predecessor employer, service for such predecessor shall be treated as service for the Employer to the extent provided in Section 1.08. (b) Pronouns used in the Plan are in the masculine gender but include the feminine gender unless the context clearly indicates otherwise. ARTICLE 3. PARTICIPATION. 3.01. DATE OF PARTICIPATION. All Employees in the eligible class (as defined in Section 1.03(a)(3)) who are in the service of the Employer on the Effective Date will become Participants on the date elected by the Employer in Section 1.03(c). Any other Employee will become a 9 34 Participant in the Plan as of the first Entry Date on which he first satisfies the eligibility requirements set forth in Section 1.03(a). In the event that an Employee who is not a member of an eligible class (as defined in Section 1.03(a)(3)) becomes a member of an eligible class, the individual shall participate immediately if such individual had already satisfied the eligibility requirements and would have otherwise previously become a Participant. If an eligibility requirement other than one Year of Service is elected in 1.03(a)(1), an Employee may not be required to complete a minimum number of Hours of Service before becoming a Participant. An otherwise eligible Employee subject to a minimum months of service requirement shall become a Participant on the first Entry Date following his completion of the required number of consecutive months of employment measured from his Employment Commencement Date to the coinciding date in the applicable following month. For purposes of determining consecutive months of service, the Related Employer and predecessor employer rules contained in Sections 2.01(a)(17) and 2.01(a)(32) shall apply. 3.02. RESUMPTION OF PARTICIPATION FOLLOWING REEMPLOYMENT. If a Participant ceases to be an Employee and thereafter returns to the employ of the Employer he will be treated as follows: (a) he will again become a Participant on the first date on which he completes an Hour of Service for the Employer following his reemployment and is in the eligible class of Employees as defined in Section 1.03(a)(3), and (b) any distribution which he is receiving under the Plan will cease except as otherwise required under Section 8.08. 3.03. CESSATION OR RESUMPTION OF PARTICIPATION FOLLOWING A CHANGE IN STATUS. If any Participant continues in the employ of the Employer or Related Employer but ceases to be a member of an eligible class as defined in Section 1.03(a)(3), the individual shall continue to be a Participant for most purposes until the entire amount of his benefit is distributed; however, the individual shall not be entitled to receive an allocation of contributions or forfeitures during the period that he is not a member of the eligible class. Such Participant shall continue to receive credit for service completed during the period for purposes of determining his vested interest in his Accounts. In the event that the individual subsequently again becomes a member of an eligible class of Employees, the individual shall resume full participation immediately upon the date of such change in status. 3.04. PARTICIPATION BY OWNER-EMPLOYEE; CONTROLLED BUSINESSES. If the Plan provides contributions or benefits for one or more Owner-Employees who control both the trade or business with respect to which the Plan is established and one or more other trades or businesses, the Plan and any plan established with respect to such other trades or businesses must, when looked at as a single plan, satisfy Sections 401(a) and 401(d) of the Code with respect to the employees of this and all such other trades or businesses. If the Plan provides contributions or benefits for one or more Owner-Employees who control one or more 10 35 other trades or businesses, the Employees of each such other trade or business must be included in a plan which satisfies Sections 401(a) and 401(d) of the Code and which provides contributions and benefits not less favorable than provided for Owner-Employees under the Plan. If an individual is covered as an Owner-Employee under the plans of two or more trades or businesses which are not controlled and the individual controls a trade or business, then the contributions or benefits of the Employees under the plan of the trades or businesses which are controlled must be as favorable as those provided for him under the most favorable plan of the trade or business which is not controlled. For purposes of this Section, an Owner-Employee, or two or more Owner-Employees, shall be considered to control a trade or business if such Owner-Employee, or such Owner-Employees together, (a) own the entire interest in an unincorporated trade or business or (b) in the case of a partnership, own more than 50 percent of either the capital interest or the profits interest in such partnership. For this purpose, an Owner-Employee, or two or more Owner- Employees, shall be treated as owning any interest in a partnership which is owned, directly or indirectly, by a partnership controlled by such Owner-Employee or such Owner-Employees. 3.05. OMISSION OF ELIGIBLE EMPLOYEE. If any Employee who should be included as a Participant in the Plan is erroneously omitted and discovery of such omission is not made until after a contribution by his Employer for the year has been made, the Employer shall make a subsequent contribution, if necessary, so that the omitted Employee receives the total amount which the said Employee would have received had he not been omitted. For purposes of this Section 3.05, the term "contribution" shall not include Deferral Contributions and Matching Contributions made pursuant to Sections 4.01 and 4.03, respectively. ARTICLE 4. CONTRIBUTIONS. 4.01. DEFERRAL CONTRIBUTIONS. (a) 4.01. If so provided by the Employer in Section 1.05(b), each Participant may elect to execute a salary reduction agreement with the Employer to reduce his Compensation by a specified percentage not exceeding 15% per payroll period, subject to any exceptions elected by the Employer in Section 1.05(b)(2) and 1.05(b)(3) and equal to a whole number multiple of one (1) percent. Such agreement shall become effective on the first day of the first payroll period for which the Employer can reasonably process the request. The Employer shall make a Deferral Contribution on behalf of the Participant corresponding to the amount of said reduction, subject to the restrictions set forth below. Under no circumstances may a salary reduction agreement be adopted retroactively. 11 36 (b) A Participant may elect to change or discontinue the percentage by which his Compensation is reduced by notice to the Employer as provided in Section 1.05(b)(1). (c) No Participant shall be permitted to have Deferral Contributions made under the Plan, or any other qualified plan maintained by the Employer, during the taxable year, in excess of the dollar limitation contained in Section 402(g) of the Code in effect at the beginning of such taxable year. A Participant may assign to the Plan any Excess Deferrals made during the taxable year of the Participant by notifying the Plan Administrator on or before March 15 following the taxable year of the amount of the Excess Deferrals to be assigned to the Plan. A Participant is deemed to notify the Administrator of any Excess Deferrals that arise by taking into account only those Deferral Contributions made to the Plan and any other plan of the Employer. Notwithstanding any other provision of the Plan, Excess Deferrals, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15 to any Participant to whose Account Excess Deferrals were so assigned for the preceding year and who claims Excess Deferrals for such taxable year. "Excess Deferrals" shall mean those Deferral Contributions that are includable in a Participant's gross income under Section 402(g) of the Code to the extent such Participant's Deferral Contributions for a taxable year exceed the dollar limitation under such Code section. For purposes of determining Excess Deferrals, the term "Deferral Contributions" shall include the sum of all Employer Contributions made on behalf of such Participant pursuant to an election to defer under any qualified CODA as described in Section 401(k) of the Code, any simplified employee pension cash or deferred arrangement as described in Section 402(h)(1)(B) of the Code, any eligible deferred compensation plan under Section 457 of the Code, any plan as described under Section 501(c)(18) of the Code, and any Employer Contributions made on the behalf of a Participant for the purchase of an annuity contract under Section 403(b) of the Code pursuant to a salary reduction agreement. Deferral Contributions shall not include any deferrals properly distributed as excess annual additions. Excess Deferrals shall be treated as annual additions under the Plan, unless such amounts are distributed no later than the first April 15 following the close of the Participant's taxable year. Excess Deferrals shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Deferrals is (1) income or loss allocable to the Participant's Deferral Contributions Account for the taxable year multiplied by a fraction, the numerator of which is such Participant's Excess Deferrals for the year and the denominator is the Participant's Account balance attributable to Deferral Contributions without regard to any income or loss occurring during such taxable year, or (2) such other amount determined under any reasonable method, provided that such method is used consistently for all Participants 12 37 in calculating the distributions required under this Section 4.01(c) and Sections 4.02(d) and 4.04(d) for the Plan Year, and is used by the Plan in allocating income or loss to Participants' Accounts. Income or loss allocable to the period between the end of the Plan Year and the date of distribution shall be disregarded in determining income or loss. (d) In order for the Plan to comply with the requirements of Sections 401(k), 402(g) and 415 of the Code and the regulations promulgated thereunder, at any time in a Plan Year the Administrator may reduce the rate of Deferral Contributions to be made on behalf of any Participant, or class of Participants, for the remainder of that Plan Year, or the Administrator may require that all Deferral Contributions to be made on behalf of a Participant be discontinued for the remainder of that Plan Year. Upon the close of the Plan Year or such earlier date as the Administrator may determine, any reduction or discontinuance in Deferral Contributions shall automatically cease until the Administrator again determines that such a reduction or discontinuance of Deferral Contributions is required. 4.02. ADDITIONAL LIMIT ON DEFERRAL CONTRIBUTIONS. (a) The Actual Deferral Percentage (hereinafter "ADP") for Participants who are Highly Compensated Employees for each Plan Year and the ADP for participants who are Non-highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (1) The ADP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for Participants who are Non-highly Compensated Employees for the same Plan Year multiplied by 1.25; or (2) The ADP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for Participants who are Non-highly Compensated Employees for the same Plan Year multiplied by 2.0, provided that the ADP for Participants who are Highly Compensated Employees does not exceed the ADP for Participants who are Non-highly Compensated Employees by more than two (2) percentage points. (b) The following special rules apply for the purposes of this Section: (1) The ADP for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Deferral Contributions (and Qualified Discretionary Contributions if treated as Deferral Contributions for purposes of the ADP test) allocated to his or her accounts under two or more arrangements described in Section 401(k) of the Code that are maintained by the Employer, shall be determined as if such Deferral Contributions (and, if applicable, such Qualified Discretionary Contributions) were made under a single arrangement. If a 13 38 Highly Compensated Employee participates in two or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Section 401(k) of the Code. (2) In the event that this Plan satisfies the requirements of Sections 401(k), 401(a)(4), or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with this plan, then this Section shall be applied by determining the ADP of Employees as if all such plans were a single plan. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy section 401(k) of the Code only if they have the same Plan Year. (3) For purposes of determining the ADP of a Participant who is a 5-percent owner or one of the ten most highly-paid Highly Compensated Employees, the Deferral Contributions (and Qualified Discretionary Contributions if treated as Deferral Contributions for purposes of the ADP test) and Compensation of such Participant shall include the Deferral Contributions (and, if applicable, Qualified Discretionary Contributions) and Compensation for the Plan Year of Family Members (as defined in Section 414(q)(6) of the Code). Family Members, with respect to between the end of the Plan Year and the date of distribution shall be disregarded in determining income or loss. Excess Contributions shall be distributed from the Participant's Qualified Discretionary Contribution account only to the extent that such Excess Contributions exceed the balance in the Participant's Deferral Contributions account. (4) For purposes of determining the ADP test, Deferral Contributions and Qualified Discretionary Contributions must be made before the last day of the twelve-month period immediately following the Plan Year to which contributions relate. (5) The Employer shall maintain records sufficient to demonstrate satisfaction of the ADP test and the amount of Qualified Discretionary Contributions used in such test. (6) The determination and treatment of the ADP amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (c) The following definitions shall apply for purposes of this Section: (1) "Actual Deferral Percentage" shall mean, for a specified group of Participants for a Plan Year, the average of the ratios 14 39 (calculated separately for each Participant in such group) of (A) the amount of Employer contributions actually paid over to the Trust on behalf of such Participant for the Plan Year to (B) the Participant's Compensation for such Plan Year. Employer contributions on behalf of any Participant shall include (i) any Deferral Contributions made pursuant to the Participant's deferral election, including Excess Deferrals of Highly Compensated Employees, but excluding (a) Excess Deferrals of Non-highly Compensated Employees that arise solely from Deferral Contributions made under the Plan or plans of the Employer and (b) Deferral Contributions that are taken into account in the Contribution Percentage test (provided the ADP test is satisfied both with and without exclusion of these Deferral Contributions) and (ii) at the election of the Employer, Qualified Discretionary Contributions. Matching Contributions, whether or not non-forfeitable when made, shall not be considered as Employer Contributions for purposes of this paragraph. For purposes of computing Actual Deferral Percentages, an Employee who would be a Participant but for the failure to make Deferral Contributions shall be treated as a Participant on whose behalf no Deferral Contributions are made. (2) "Excess Contributions" shall mean, with respect to any Plan Year, the excess of (a) The aggregate amount of Employer contributions actually taken into account in computing the ADP of Highly Compensated Employees for such Plan Year, over (b) The maximum amount of such contributions permitted by the ADP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of the ADPs, beginning with the highest of such percentages). (3) "Qualified Discretionary Contributions" shall mean contributions made by the Employer as elected in Section 1.05(b)(4) and allocated to Participant Accounts of Non-highly Compensated Employees that such Participants may not elect to receive in cash until distributed from the Plan, that are nonforfeitable when made, and that are distributable only in accordance with the distribution provisions that are applicable to Deferral Contributions. Participants shall not be required to satisfy any hours of service or employment requirement in order to receive an allocation of such contributions. (d) Notwithstanding any other provision of this Plan, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to Participants to whose Accounts such Excess Contributions were allocated for the preceding Plan Year. If such excess amounts are distributed more than 2 1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten-(10-) percent excise tax will be imposed on the Employer maintaining the Plan with respect to such amounts. Such 15 40 distributions shall be made to Highly Compensated Employees on the basis of the respective portions of the Excess Contributions attributable to each of such employees. Excess Contributions of Participants who are subject to the family member aggregation rules of Section 414(q)(6) of the Code shall be allocated among the family members in proportion to the Deferral Contributions (and amounts treated as Deferral Contributions) of each family member that is combined to determine the combined ADP. Excess Contributions shall be treated as annual additions under the Plan. Excess Contributions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Contributions is (1) income or loss allocable to the Participant's Deferral Contribution Account (and if applicable, the Qualified Discretionary Contribution Account) for the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Contributions for the year and the denominator is the Participant's Account balance attributable to Deferral Contributions without regard to any income or loss occurring during such Plan Year, or (2) an amount determined under any reasonable method, provided that such method is used consistently for all Participants in calculating any distributions required under Section 4.02(d) and Sections 4.01(c) and 4.04(d) for the Plan Year, and is used by the Plan in allocating income or loss to the Participants' Accounts. Income or loss allocable to the period between the end of the Plan Year and the date of distibution shall be disregarded in determining income or loss. Excess Contributions shall be distributed from the Participant's Qualified Discretionary Contribution Account only to the extent that such Excess Contributions exceed the balance in the Participant's Deferral Contributions Account. 4.03 MATCHING CONTRIBUTIONS: If so provided by the Employer in Section 1.05(c), the Employer shall make a Matching Contribution on behalf of each Participant who had Deferral Contributions made on his behalf during the year and who meets the requirement, if any, of Section 1.05(c)(4). The amount of the Matching Contribution shall be determined in accordance with Section 1.05(c), subject to the limitations set forth in Section 4.04 and Section 404 of the Code. Matching Contributions will not be allowed to be made by the Employer on any voluntary non-deductible Employee Contributions. 4.04 LIMIT ON MATCHING CONTRIBUTIONS AND EMPLOYEE CONTRIBUTIONS: (a) The Average Contribution Percentage (hereinafter "ACP") for Participants who are Highly Compensated Employees for each Plan Year and the ACP for Participants who are Non-highly Compensated Employees for the same Plan Year must satisfy one of the following tests: 16 41 (1) The ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for Participants who are Non-highly Compensated Employees for the same Plan Year multiplied by 1.25; or (2) The ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for Participants who are Non-highly Compensated Employees for the same Plan Year multiplied by two (2), provided that the ACP for Participants who are Highly Compensated Employees does not exceed the ACP for Participants who are Non-highly Compensated Employees by more than two (2) percentage points. (b) The following special rules apply for purposes of this section: (1) If one or more Highly Compensated Employees participate in both a qualified cash or deferred arrangement described in Section 401(k) of the Code (hereafter "CODA") and a plan subject to the ACP test maintained by the Employer and the sum of the ADP and ACP of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Limit, then the ACP of those Highly Compensated Employees who also participate in a CODA will be reduced (beginning with such Highly Compensated Employee whose ACP is the highest) so that the limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage Amounts is reduced shall be treated as an Excess Aggregate Contribution. The ADP and ACP of the Highly Compensated Employees are determined after any corrections required to meet the ADP and ACP tests. Multiple use does not occur if either the ADP or ACP of the Highly Compensated Employees does not exceed 1.25 multiplied by the ADP and ACP of the Non-highly Compensated Employees. (2) For purposes of this section, the Contribution Percentage for any Participant who is a Highly Compensated Employee and who is eligible to have Contribution Percentage Amounts allocated to his or her account under two or more plans described in section 401(a) of the Code, or arrangements described in section 401(k) of the Code that are maintained by the Employer, shall be determined as if the total of such Contribution Percentage Amounts was made under each plan. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Section 401(m) of the Code. (3) In the event that this Plan satisfies the requirements of Sections 401(m), 401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only 17 42 if aggregated with this Plan, then this section shall be applied by determining the Contribution Percentage of Employees as if all such plans were a single plan. For plan years beginning after December 31, 1989, plans may be aggregated in order to satisfy Section 401(m) of the Code only if they have the same Plan Year. (4) For purposes of determining the Contribution percentage of a Participant who is a five-percent owner or one of the ten most highly-paid Highly Compensated Employees, the Contribution Percentage Amounts and Compensation of such Participant shall include the Contribution Percentage Amounts and Compensation for the Plan Year of family members (as defined in Section 414(q)(6) of the Code). Family members, with respect to Highly Compensated Employees, shall be disregarded as separate Employees in determining the Contribution Percentage both for Participants who are Non-highly Compensated Employees and for Participants who are Highly Compensated Employees. (5) For purposes of determining the Contribution Percentage test, Employee Contributions made pursuant to Section 1.05(d)(1) are considered to have been made in the Plan Year in which contributed to the Trust. Matching Contributions and Qualified Discretionary Contributions will be considered made for a Plan Year if made no later than the end of the twelve-month period beginning on the day after the close of the Plan Year. (6) The Employer shall maintain records sufficient to demonstrate satisfaction of the ACP test and the amount of Qualified Discretionary Contributions used in such test. (7) The determination and treatment of the Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of Treasury. (c) The following definitions shall apply for purposes of this Section: (1) "Aggregate Limit" shall mean the greater of (A) or (B) where (A) is the sum of (i) 125 percent of the greater of the ADP of the Non-highly Compensated Employees for the Plan Year or the ACP of Non-highly Compensated Employees under the Plan subject to Section 401(m) of the Code for the Plan Year beginning with or within the Plan Year of the CODA and (ii) the lesser of 200% or two plus the lesser of such ADP or ACP and where (B) is the sum of (i) 125 percent of the lesser of the ADP of the Non-highly Compensated Employees for the Plan Year or the ACP of Non-highly Compensated Employees under the Plan subject to Section 401(m) of the Code for the Plan Year beginning with or within the Plan Year of the CODA and (ii) the lesser of 200% or two plus the greater of such ADP or ACP. 18 43 (2) "Average Contribution Percentage" or "ACP" shall mean the average of the Contribution Percentages of the Eligible Participants in a group. (3) "Contribution Percentage" shall mean the ratio (expressed as a percentage) of the Participant's Contribution Percentage Amounts to the Participant's Compensation for the Plan Year. (4) "Contribution Percentage Amounts" shall mean the sum of the Employee Contributions and Matching Contributions made under the plan on behalf of the Participant for the Plan Year. Such Contribution Percentage Amounts shall not include Matching Contributions that are forfeited either to correct Excess Aggregate Contributions or because the contributions to which they relate are Excess Deferrals, Excess Contributions or Excess Aggregate Contributions. If so elected by the Employer in Section 1.05(b)(4), the Employer may include Qualified Discretionary Contributions in the Contribution Percentage Amounts. The Employer also may elect to use Deferral Contributions in the Contribution Percentage Amounts so long as the ADP test is met before the Deferral Contributions are used in the ACP test and continues to be met following the exclusion of those Deferral Contributions that are used to meet the ACP test. (5) "Deferral Contribution" shall mean any contribution made at the election of the Participant pursuant to a salary reduction agreement in accordance with Section 4.01(a). (6) "Eligible Participant" shall mean any Employee who is eligible to make an Employee Contribution, or a Deferral Contribution (if the Employer takes such contributions into account in the calculation of the Contribution Percentage), or to receive a Matching Contribution. (7) "Employee Contribution" shall mean any voluntary non-deductible contribution made to the plan by or on behalf of a Participant that is included in the Participant's gross income in the year in which made and that is maintained in a separate Account to which earnings and losses are allocated. (8) "Matching Contribution" shall mean an Employer contribution made to this or any other defined contribution plan on behalf of a Participant on account of a Participant's Deferral Contribution. (9) "Excess Aggregate Contributions" shall mean, with respect to any Plan Year, the excess of (A) The aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly Compensated Employees for such Plan Year, over 19 44 (B) The maximum Contribution Percentage Amounts permitted by the ACP test (determined by reducing contributions made on behalf of Highly Compensated Employees in the order of their Contribution Percentages beginning with the highest of such percentages). Such determination shall be made after first determining Excess Deferrals pursuant to Section 4.01 and then determining Excess Contributions pursuant to Section 4.02. (d) Notwithstanding any other provision of the Plan, Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited, if forfeitable, or if not forfeitable, distributed no later than the last day of each Plan Year to Participants to whose Accounts such Excess Aggregate Contributions were allocated for the preceding Plan Year. Excess Aggregate Contributions of Participants who are subject to the family member aggregation rules of Section 414(q)(6) of the Code shall be allocated among the family members in proportion to the Employee and Matching Contributions of each family member that is combined to determine the combined ACP. If such Excess Aggregate Contributions are distributed more than 2 1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten (10) percent excise tax will be imposed on the employer maintaining the Plan with respect to those amounts. Excess Aggregate Contributions shall be treated as annual additions under the Plan. Excess Aggregate Contributions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Aggregate Contributions is (1) income or loss allocable to the Participant's Employee Contribution Account, Matching Contribution Account (if any, and if all amounts therein are not used in the ADP test) and if applicable, Qualified Non-elective Contribution Account for the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Aggregate Contributions for the year and the denominator is the Participant's Account balance(s) attributable to Contribution Percentage Amounts without regard to income or loss occurring during such Plan Year, or (2) such other amount determined under any reasonable method, provided that such method is used consistently for all Participants in calculating any distributions required under Section 4.04(d) and Sections 4.01(c) and 4.02(d) for the Plan Year, and is used by the Plan in allocating income or loss to the Participants' Accounts. Income or loss allocable to the period between the end of the Plan Year and the date of distribution shall be disregarded in determining income or loss. Forfeitures of Excess Aggregate Contributions shall be applied to reduce Employer contributions; the forfeitures shall be held in the money market fund, if any, listed in Section 1.14(b) pending such application. Excess Aggregate Contributions shall be forfeited, if forfeitable, or distributed on a prorata basis from the 20 45 Participant's Employee Contribution Account, Matching Contribution Account and if applicable, the Participant's Deferral Contributions Account or Qualified Discretionary Contribution Account or both. 4.05. SPECIAL RULES. Deferral Contributions and Qualified Discretionary Contributions and income allocable to each are not distributable to a Participant or his or her Beneficiary or Beneficiaries, in accordance with such Participant's or beneficiary's or beneficiaries' election, earlier than upon separation from service, death, or disability, except as otherwise provided in Section 7.10, 7.11 or 10.06. Such amounts may also be distributed, but after March 31, 1988, in the form of a lump sum only, upon (a) Termination of the Plan without establishment of another defined contribution plan, other than an employee stock ownership plan (as defined in Section 4975(e) or Section 409 of the Code) or a simplified employee pension plan as defined in Section 408(k) of the Code. (b) The disposition by a corporation to an unrelated corporation of substantially all of the assets (within the meaning of Section 409(d)(2) of the Code) used in a trade or business of such corporation if such corporation continues to maintain this Plan after the disposition, but only with respect to Employees who continue employment with the corporation acquiring such assets. (c) The disposition by a corporation to an unrelated entity of such corporation's interest in a subsidiary (within the meaning of Section 409(d)(2) of the Code) if such corporation continues to maintain this Plan, but only with respect to Employees who continue employment with such subsidiary. The Participant's accrued benefit derived from Deferral Contributions, Qualified Discretionary Contributions and Employee Contributions (as defined in Section 4.09) is nonforfeitable. Separate Accounts for Deferral Contributions, Qualified Discretionary Contributions, Employee Contributions and Matching Contributions will be maintained for each Participant. Each Account will be credited with the applicable contributions and earnings thereon. 4.06. FIXED/DISCRETIONARY EMPLOYER CONTRIBUTIONS. If so provided by the Employer in Sections 1.05(a)(1) or 1.05(a)(2), for the Plan Year in which the Plan is adopted and for each Plan Year thereafter, the Employer will make Fixed or Discretionary Employer contributions to the Trust in accordance with Section 1.05 to be allocated as follows: (a) Fixed Employer contributions shall be allocated among eligible Participants (as determined in accordance with Section 1.05(a)(3)) in the manner specified in Section 1.05(a). (b) Discretionary Employer contributions shall be allocated among eligible Participants, as determined in accordance with Section 1.05(a)(3), as follows: 21 46 (1) If the Non-Integrated Formula is elected in Section 1.05(a)(2)(A), such contributions shall be allocated to eligible Participants in the ratio that each Participant's Compensation bears to the total Compensation paid to all eligible Participants for the Plan Year; or (2) If the Integrated Formula is elected in Section 1.05(a)(2)(B), such contributions shall be allocated in the following steps: (A) First, to each eligible Participant in the same ratio that the sum of the Participant's Compensation and Excess Compensation for the Plan Year bears to the sum of the Compensation and Excess Compensation of all Participants for the Plan Year. This allocation as a percentage of the sum of each Participant's Compensation and Excess Compensation shall not exceed 5.7%. (B) Any remaining Discretionary Employer Contribution shall be allocated to each eligible Participant in the same ratio that each Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. For purposes of this Section, "Excess Compensation" means Compensation in excess of the taxable wage base, as determined under Section 230 of the Social Security Act, in effect on the first day of the Plan Year. Further, this Section 4.06(b)(2) shall be modified as provided in Section 9.03 for years in which the Plan is top heavy under Article 9. 4.07. TIME OF MAKING EMPLOYER CONTRIBUTIONS. The Employer will pay its contribution for each Plan Year not later than the time prescribed by law for filing the Employer's federal income tax return for the fiscal (or taxable) year with or within which such Plan Year ends (including extensions thereof). The Trustee will have no authority to inquire into the correctness of the amounts contributed and paid over to the Trustee, to determine whether any contribution is payable under this Article 4, or to enforce, by suit or otherwise, the Employer's obligation, if any, to make a contribution to the Trustee. 22 47 4.08. RETURN OF EMPLOYER CONTRIBUTIONS. The Trustee shall, upon request by the Employer, return to the Employer the amount (if any) determined under Section 14.22. Such amount shall be reduced by amounts attributable thereto which have been credited to the Accounts of Participants who have since received distributions from the Trust, except to the extent such amounts continue to be credited to such Participants' Accounts at the time the amount is returned to the Employer. Such amount shall also be reduced by the losses of the Trust attributable thereto, if and to the extent such losses exceed the gains and income attributable thereto, but will not be increased by the gains and income of the Trust attributable thereto, if and to the extent such gains and income exceed the losses attributable thereto. In no event will the return of a contribution hereunder cause the balance of the individual Account of any Participant to be reduced to less than the balance which would have been credited to the Account had the mistaken amount not been contributed. 4.09. EMPLOYEE CONTRIBUTIONS. If the Employer elected to permit Deferral Contributions in Section 1.05(b) and if so provided by the Employer in Section 1.05(d), each Participant may elect to make Employee Contributions to the Plan in accordance with the rules and procedures established by the Employer and in an amount not less than one percent (1%) and not greater than ten percent (10%) of such Participant's Compensation for the Plan Year. Such contributions and all Employee Contributions for Plan Years beginning after December 31, 1986, shall be subject to the nondiscrimination requirements of Section 401(m) of the Code as set forth in Section 4.04. For purposes of this Plan, "Employee Contributions" shall mean any voluntary non-deductible contribution made to a plan by or on behalf of a Participant that is or was included in the Participant's gross income in the year in which made and that is maintained under a separate account to which applicable earnings and losses are allocated. Excess Contributions may not be recharacterized as Employee Contributions. Employee Contributions shall be paid over to the Trustee not later than thirty (30) days following the end of the month in which the Participant makes the contribution. A Participant shall have a fully vested 100% nonforfeitable right to his Employee Contributions and the earnings or losses allocated thereon. Distributions of Employee Contributions shall be made in accordance with Section 7.10. 4.10. ROLLOVER CONTRIBUTIONS. (a) Rollover of Eligible Rollover Distributions (1) An Employee who is or was a distributee of an "eligible rollover distribution"(as defined in Section 402(c)(4) of the Code and the regulations issued thereunder) from a qualified plan may directly transfer all or any portion of such distribution to the Trust or transfer all or any portion of such distribution to the Trust within sixty (60) days of payment. The transfer shall be made in the form of cash or allowable Fund Shares only. (2) The Employer may refuse to accept rollover contributions or instruct the Trustee not to accept rollover contributions under the Plan. (b) Treatment of Rollover Amount. 23 48 (1) An account will be established for the transferring Employee under Article 5, the rollover amount will be credited to the account and such amount will be subject to the terms of the Plan, including Section 8.01, except as otherwise provided in this Section 4.10. (2) The rollover account will at all times be fully vested in and nonforfeitable by the Employee. (c) Entry into Plan by Transferring Employee. Although an amount may be transferred to the Trust Fund under this Section 4.10 by an Employee who has not yet become a Participant in accordance with Article 3, and such amount is subject to the terms of the Plan as described in paragraph (b) above, the Employee will not become a Participant entitled to share in Employer contributions until he has satisfied such requirements. (d) Monitoring of Rollovers. (1) The Administrator shall develop such procedures and require such information from transferring Employees as it deems necessary to insure that amounts transferred under this Section 4.10 meet the requirements for tax-free rollovers established by such Section and by Section 402(c) of the Code. No such amount may be transferred until approved by the Administrator. (2) If a transfer made under this Section 4.10 is later determined by the Administrator not to have met the requirements of this Section or of the Code or Treasury regulations, the Trustee shall, within a reasonable time after such determination is made, and on instructions from the Administrator, distribute to the Employee the amounts then held in the Trust attributable to the transferred amount. 4.11. DEDUCTIBLE VOLUNTARY EMPLOYEE CONTRIBUTIONS. The Administrator will not accept deductible Employee Contributions which are made for a taxable year beginning after December 31, 1986. Contributions made prior to that date will be maintained in a separate Account which will be nonforfeitable at all times and which will share in the gains and losses of the trust in the same manner as described in Section 5.02. No part of the deductible voluntary contribution Account will be used to purchase life insurance. Subject to Article 8, the Participant may withdraw any part of the deductible voluntary contribution Account upon request. 4.12. ADDITIONAL RULES FOR PAIRED PLANS. If the Employer has adopted a qualified plan under Fidelity Basic Plan Document No. 09 which is to be considered as a paired plan with this Plan, the elections in Section 1.03 must be identical to the Employer's corresponding elections for the other plan. When the paired plans are top-heavy or are deemed to be top-heavy as provided in Section 9.01, the plan paired with this Plan will provide a minimum contribution to each non-key Employee which is equal to 3 percent (or such other percent elected by the Employer in Section 1.12(c)) of such Employee's Compensation. Notwithstanding the 24 49 preceding sentence, the minimum contribution shall be provided by this Plan if contributions under the other plan paired with this Plan are frozen. ARTICLE 5. PARTICIPANTS' ACCOUNTS. 5.01. INDIVIDUAL ACCOUNTS. The Administrator will establish and maintain an Account for each Participant which will reflect Employer and Employee Contributions made on behalf of the Participant and earnings, expenses, gains and losses attributable thereto, and investments made with amounts in the Participant's Account. The Administrator will establish and maintain such other accounts and records as it decides in its discretion to be reasonably required or appropriate in order to discharge its duties under the Plan. 5.02. VALUATION OF ACCOUNTS. Participant Accounts will be valued at their fair market value at least annually as of a date specified by the Administrator in accordance with a method consistently followed and uniformly applied, and on such date earnings, expenses, gains and losses on investments made with amounts in each Participant's Account will be allocated to such Account. Participants will be furnished statements of their Account values at least once each Plan Year. 5.03. CODE SECTION 415 LIMITATIONS. Notwithstanding any other provisions of the Plan: Subsections (a)(1) through (a)(4)--(These subsections apply to Employers who do not maintain any qualified plan, including a Welfare Benefit Fund, an Individual Medical Account, or a simplified employee pension in addition to this Plan.) (a)(1) If the Participant does not participate in, and has never participated in any other qualified plan, Welfare Benefit Fund, Individual Medical Account, or a simplified employee pension, as defined in section 408(k) of the Code, maintained by the Employer, which provides an annual addition as defined in Section 5.03(e)(1), the amount of Annual Additions to a Participant's Account for a Limitation Year shall not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. If the Employer contribution that would otherwise be contributed or allocated to the Participant's Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. (a)(2) Prior to the determination of the Participant's actual Compensation for a Limitation Year, the Maximum Permissible Amount may be determined on the basis of a reasonable estimation of the Participant's compensation for such Limitation Year, uniformly determined for all Participants similarly situated. Any Employer contributions based on estimated annual compensation shall be reduced by any Excess Amounts carried over from prior years. 25 50 (a)(3) As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for such Limitation Year shall be determined on the basis of the Participant's actual Compensation for such Limitation Year. (a)(4) If, pursuant to subsection (a)(3) or as a result of the allocation of forfeitures or a reasonable error in determining the total Elective Deferrals there is an Excess Amount with respect to a Participant for a Limitation Year, such Excess Amount shall be disposed of as follows: (A) Any nondeductible voluntary employee contributions ("employee contributions") or Elective Deferrals, to the extent they would reduce the Excess Amount, will be returned to the Participant. Any gains attributable to returned employee contributions will also be returned or will be treated as additional employee contributions for the Limitation Year in which the employee contributions were made. (B) If after the application of paragraph (A) an Excess amount still exists and the Participant is in the service of the Employer which is covered by the Plan at the end of the Limitation Year, then such Excess Amount shall be reapplied to reduce future Employer contributions under this Plan for the next Limitation Year (and for each succeeding year, as necessary) for such Participant, so that in each such Year the sum of actual Employer contributions plus the reapplied amount shall equal the amount of Employer contributions which would otherwise be made to such Participant's Account. (C) If after the application of paragraph (A) an Excess Amount still exists and the Participant is not in the service of the Employer which is covered by the Plan at the end of a Limitation Year, then such Excess Amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer contributions for all remaining Participants in the next Limitation Year and each succeeding Limitation Year if necessary. (D) If a suspense account is in existence at any time during the Limitation Year pursuant to this subsection, it will not participate in the allocation of the Trust Fund's investment gains and losses. All amounts in the suspense account must be allocated to the Accounts of Participants before any Employer contribution may be made for the Limitation Year. Except as provided in paragraph (A), Excess Amounts may not be distributed to Participants or former Participants. Subsections (b)(1) through (b)(6)--(These subsections apply to Employers who, in addition to this Plan, maintain one or more plans, all of which are qualified Master or Prototype defined contribution Plans, any Welfare Benefit Fund, any Individual Medical Account, or any simplified employee pension.) 26 51 (b)(1) If, in addition to this Plan, the Participant is covered under any other qualified defined contribution plans (all of which are qualified Master or Prototype Plans), Welfare Benefit Funds, Individual Medical Accounts, or simplified employee pension Plans, maintained by the Employer, that provide an annual addition as defined in Section 5.03(e)(1), the amount of Annual Additions to a Participant's Account for a Limitation Year shall not exceed the lesser of (A) the Maximum Permissible Amount, reduced by the sum of any Annual Additions to the Participant's accounts for the same Limitation Year under such other qualified Master or Prototype defined contribution plans, and Welfare Benefit Funds, Individual Medical Accounts, and simplified employee pensions, or (B) any other limitation contained in this Plan. If the annual additions with respect to the Participant under other qualified Master or Prototype defined contribution Plans, Welfare Benefit Funds, Individual Medical Accounts, and simplified employee pensions maintained by the Employer are less than the maximum permissible amount and the Employer contribution that would otherwise be contributed or allocated to the Participant's account under this plan would cause the annual additions for the limitation year to exceed this limitation, the amount contributed or allocated will be reduced so that the annual additions under all such plans and funds for the limitation year will equal the maximum permissible amount. If the annual additions with respect to the Participant under such other qualified Master or Prototype defined contribution Plans, Welfare Benefit Funds, Individual Medical Accounts, and simplified employee pensions in the aggregate are equal to or greater than the maximum permissible amount, no amount will be contributed or allocated to the Participant's account under this plan for the limitation year. (b)(2) Prior to the determination of the Participant's actual Compensation for the Limitation Year, the amounts referred to in (b)(1)(A) above may be determined on the basis of a reasonable estimation of the Participant's compensation for such Limitation Year, uniformly determined for all Participants similarly situated. Any Employer contribution based on estimated annual compensation shall be reduced by any Excess Amounts carried over from prior years. (b)(3) As soon as is administratively feasible after the end of the Limitation Year, the amounts referred to in (b)(1)(A) shall be determined on the basis of the Participant's actual Compensation for such Limitation Year. (b)(4) If a Participant's Annual Additions under this Plan and all such other plans result in an Excess Amount, such Excess Amount shall be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a simplified employee 27 52 pension will be deemed to have been allocated first, followed by Annual Additions to a Welfare Benefit Fund or Individual Medical Account regardless of the actual allocation date. (b)(5) If an Excess Amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan will be the product of (A) the total Excess Amount allocated as of such date (including any amount which would have been allocated but for the limitations of Section 415 of the Code), and (B) the ratio of (i) the Annual Additions allocated to the Participant as of such date under this Plan, and (ii) the Annual Additions allocated as of such date under all qualified defined contribution plans (determined without regard to the limitations of Section 415 of the Code). (b)(6) Any Excess Amounts attributed to this Plan shall be disposed of as provided in subsection (a)(4). Subsection (c)--(This subsection applies only to Employers who, in addition to this Plan, maintain one or more qualified plans which are qualified defined contribution plans other than Master or Prototype Plans.) (c) If the Employer also maintains another plan which is a qualified defined contribution plan other than a Master or Prototype Plan, Annual Additions allocated under this Plan on behalf of any Participant shall be limited in accordance with the provisions of (b)(1) through (b)(6), as though the other plan were a Master or Prototype Plan, unless the Employer provides other limitations in the Adoption Agreement. Subsection (d)--(This subsection applies only to Employers who, in addition to this Plan, maintain or at any time maintained a qualified defined benefit plan.) (d) If the Employer maintains, or at any time maintained, a qualified defined benefit plan, the sum of any Participant's Defined Benefit Fraction and Defined Contribution Fraction shall not exceed the combined plan limitation of 1.0 in any Limitation Year. The combined plan limitation will be met as provided by the Employer in the Adoption Agreement. Subsections (e)(1) through (e)(11)--(Definitions.) (e)(1) "Annual Additions" means the sum of the following amounts credited to a Participant for a Limitation Year: (A) all Employer contributions, (B) all Employee Contributions, 28 53 (C) all forfeitures, (D) amounts allocated, after March 31, 1984, to an Individual Medical Account which is part of a pension or annuity plan maintained by the Employer are treated as Annual Additions to a defined contribution plan. Also, amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post- retirement medical benefits allocated to the separate account of a key employee, as defined in Section 419A(d)(3) of the Code, under a Welfare Benefit Fund maintained by the Employer are treated as Annual Additions to a defined contribution plan, and (E) allocations under a simplified employee pension. For purposes of this Section 5.03, amounts reapplied to reduce Employer contributions under subsection (a)(4) shall also be included as Annual Additions. (e)(2) "Compensation" means wages as defined in Section 3401(a) of the Code and all other payments of compensation to an employee by the employer (in the course of the employer's trade or business) for which the employer is required to furnish the employee a written statement under Sections 6041(d) and 6051(a)(3) of the Code. Compensation must be determined without regard to any rules under Section 3401(a) of the Code that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code.) For any Self-Employed Individual compensation will mean Earned Income. For limitation years beginning after December 31, 1991, for purposes of applying the limitations of this article, compensation for a limitation year is the compensation actually paid or made available during such limitation year. (e)(3) "Defined Benefit Fraction" means a fraction, the numerator of which is the sum of the Participant's annual benefits (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or qualified joint and survivor annuity) under all the defined benefit plans (whether or not terminated) maintained by the Employer, each such annual benefit computed on the assumptions that the Participant will remain in employment until the normal retirement age under each such plan (or the Participant's current age, if later) and that all other factors used to determine benefits under such plan will remain constant for all future Limitation Years, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the Limitation Year under Sections 29 54 415(b)(1)(A) and 415(d) of the Code or 140 percent of the Participant's highest average Compensation for 3 consecutive calendar years of service during which the Participant was active in each such plan, including any adjustments under Section 415(b) of the Code. However, if the Participant was a participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986 then the denominator of the Defined Benefit Fraction shall not be less than 125 percent of the Participant's total accrued benefit as of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986, under all such defined benefit plans that met, individually and in the aggregate, the requirements of Section 415 of the Code for all Limitation Years beginning before January 1, 1987. (e)(4) "Defined Contribution Fraction" means a fraction, the numerator of which is the sum for the current and all prior Limitation Years of (A) all Annual Additions (if any) to the Participant's accounts under each defined contribution plan (whether or not terminated) maintained by the Employer and (B) all Annual Additions attributable to the Participant's nondeductible Employee Contributions to all defined benefit plans (whether or not terminated) maintained by the Employer, and the Participant's Annual Additions attributable to all Welfare Benefit Funds, Individual Medical Accounts, and simplified employee pensions, maintained by the Employer, and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior Limitation Years during which the Participant was an Employee (regardless of whether the Employer maintained a defined contribution plan in any such year). The maximum aggregate amount in any Limitation Year is the lesser of 125 percent of the dollar limitation in effect under Section 415(c)(1)(A) of the Code for each such year or 35 percent of the Participant's Compensation for each such year. If the Participant was a participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 6, 1986, then the numerator of the Defined Contribution Fraction shall be adjusted if the sum of this fraction and the Defined Benefit Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment an amount equal to the product of (i) the excess of the sum of the fractions over 1.0 and (ii) the denominator of this fraction will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plan made after May 6, 1986, but using the Section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987. 30 55 The annual addition for any limitation year beginning before January 1, 1987 shall not be recomputed to treat all employee contributions as annual additions. (e)(5) "Employer" means the Employer and any Related Employer that adopts this Plan. In the case of a group of employers which constitutes a controlled group of corporations (as defined in Section 414(b) of the Code as modified by Section 415(h)) or which constitutes trades or businesses (whether or not incorporated) which are under common control (as defined in Section 414(c) of the Code as modified by Section 415(h) of the Code) or which constitutes an affiliated service group (as defined in Section 414(m)of the Code) and any other entity required to be aggregated with the Employer pursuant to regulations issued under Section 414(o) of the Code, all such employers shall be considered a single employer for purposes of applying the limitations of this Section 5.03. (e)(6) "Excess Amount" means the excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. (e)(7) "Individual Medical Account" means an individual medical account as defined in Section 415(l)(2) of the Code. (e)(8) "Limitation Year" means the Plan Year. All qualified plans of the Employer must use the same Limitation Year. If the Limitation Year is amended to a different 12-consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. (e)(9) "Master or Prototype Plan" means a plan the form of which is the subject of a favorable opinion letter from the Internal Revenue Service. (e)(10) "Maximum Permissible Amount" means for a Limitation Year with respect to any Participant the lesser of (A) $30,000 or, if greater, 25 percent of the dollar limitation set forth in Section 415(b)(1) of the Code, as in effect for the Limitation Year, or (B) 25 percent of the Participant's Compensation for the Limitation Year. If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12- consecutive-month period, the Maximum Permissible Amount will not exceed the limitation in (e)(10)(A) multiplied by a fraction whose numerator is the number of months in the short Limitation Year and whose denominator is 12. The compensation limitation referred to in subsection (e)(10)(B) shall not apply to any contribution for medical benefits within the meaning of Section 401(h) or Section 419A(f)(2) of the Code after separation from service which is otherwise treated as an Annual Addition under Section 419A(d)(2) or Section 415(l)(1) of the Code. 31 56 (e)(11) "Welfare Benefit Fund" means a welfare benefit fund as defined in Section 419(e) of the Code. ARTICLE 6. INVESTMENT OF CONTRIBUTIONS. 6.01. MANNER OF INVESTMENT. All contributions made to the Accounts of Participants shall be held for investment by the Trustee. The Accounts of Participants shall be invested and reinvested only in eligible investments selected by the Employer in Section 1.14(b), subject to Section 14.10. 6.02. INVESTMENT DECISIONS. Investments shall be directed by the Employer or by each Participant or both, in accordance with the Employer's election in Section 1.14(a). Pursuant to Section 14.04, the Trustee shall have no discretion or authority with respect to the investment of the Trust Fund. (a) With respect to those Participant Accounts for which Employer investment direction is elected, the Employer has the right to direct the Trustee in writing with respect to the investment and reinvestment of assets comprising the Trust Fund in the Fidelity Fund(s) designated in Section 1.14(b) and as allowed by the Trustee. (b) If Participant investment direction is elected, each Participant shall direct the investment of his Account among the Fidelity Funds listed in Section 1.14(b). The Participant shall file initial investment instructions with the Administrator, on such form as the Administrator may provide, selecting the Funds in which amounts credited to his Account will be invested. (1) Except as provided in this Section 6.02, only authorized Plan contacts and the Participant shall have access to a Participant's Account. While any balance remains in the Account of a Participant after his death, the Beneficiary of the Participant shall make decisions as to the investment of the Account as though the Beneficiary were the Participant. To the extent required by a qualified domestic relations order as defined in Section 414(p) of the Code, an alternate payee shall make investment decisions with respect to a Participant's Account as though such alternate payee were the Participant. (2) If the Trustee receives any contribution under the Plan as to which investment instructions have not been provided, the Trustee shall promptly notify the Administrator and the Administrator shall take steps to elicit instructions from the Participant. The Trustee shall credit any such contribution to the Participant's Account and such amount shall be invested in the Fidelity Fund selected by the Employer for such purposes or, absent Employer selection, in the most conservative Fidelity Fund listed in Section 1.14(b), until investment instructions have been received by the Trustee. 32 57 (c) All dividends, interest, gains and distributions of any nature received in respect of Fund Shares shall be reinvested in additional shares of that Fidelity Fund. (d) Expenses attributable to the acquisition of investments shall be charged to the Account of the Participant for which such investment is made. 6.03. PARTICIPANT DIRECTIONS TO TRUSTEE. All Participant initial investment instructions filed with the Administrator pursuant to the provisions of Section 6.02 shall be promptly transmitted by the Administrator to the Trustee. A Participant shall transmit subsequent investment instructions directly to the Trustee by means of the telephone exchange system maintained by the Trustee for such purposes. The method and frequency for change of investments will be determined under the (a) rules applicable to the investments selected by the Employer in Section 1.14(b) and (b) the additional rules of the Employer, if any, limiting the frequency of investment changes, which are included in a separate written administrative procedure adopted by the Employer and accepted by the Trustee. The Trustee shall have no duty to inquire into the investment decisions of a Participant or to advise him regarding the purchase, retention or sale of assets credited to his Account. ARTICLE 7. RIGHT TO BENEFITS. 7.01. NORMAL OR EARLY RETIREMENT. Each Participant who attains his Normal Retirement Age or, if so provided by the Employer in Section 1.06(b), Early Retirement Age, will have a 100-percent nonforfeitable interest in his Account regardless of any vesting schedule elected in Section 1.07. If a Participant retires upon the attainment of Normal or Early Retirement Age, such retirement is referred to as a normal retirement. Upon his normal retirement the balance of the Participant's Account, plus any amounts thereafter credited to his Account, subject to the provisions of Section 7.08, will be distributed to him in accordance with Article 8. If a Participant separates from service before satisfying the age requirements for early retirement, but has satisfied the service requirement, the Participant will be entitled to elect an early retirement distribution upon satisfaction of such age requirement. 7.02. LATE RETIREMENT. If a Participant continues in the service of the Employer after attainment of Normal Retirement Age, he will continue to have a 100-percent nonforfeitable interest in his Account and will continue to participate in the Plan until the date he establishes with the Employer for his late retirement. Until he retires, he has a continuing election to receive all or any portion of his Account. Upon the earlier of his late retirement or the distribution date required under Section 8.08, the balance of his Account, plus any amounts 33 58 thereafter credited to his Account, subject to the provisions of Section 7.08, will be distributed to him in accordance with Article 8 below. 7.03. DISABILITY RETIREMENT. If so provided by the Employer in Section 1.06(c), a Participant who becomes disabled will have a 100-percent nonforfeitable interest in his Account, the balance of which Account, plus any amounts thereafter credited to his Account, subject to the provisions of Section 7.08, will be distributed to him in accordance with Article 8 below. A Participant is considered disabled if he cannot engage in any substantial, gainful activity because of a medically determinable physical or mental impairment likely to result in death or to be of a continuous period of not less than 12 months, and terminates his employment with the Employer. Such termination of employment is referred to as a disability retirement. Determinations with respect to disability shall be made by the Administrator who may rely on the criteria set forth in Section 1.06(c) as evidence that the Participant is disabled. 7.04. DEATH. Subject, if applicable, to Section 8.04, if a Participant dies before the distribution of his Account has commenced, or before such distribution has been completed, his Account shall become 100 percent vested and his designated Beneficiary or Beneficiaries will be entitled to receive the balance or remaining balance of his Account, plus any amounts thereafter credited to his Account, subject to the provisions of Section 7.08. Distribution to the Beneficiary or Beneficiaries will be made in accordance with Article 8. A Participant may designate a Beneficiary or Beneficiaries, or change any prior designation of Beneficiary or Beneficiaries by giving notice to the Administrator on a form designated by the Administrator. If more than one person is designated as the Beneficiary, their respective interests shall be as indicated on the designation form. In the case of a married Participant, the Participant's spouse shall be deemed to be the designated Beneficiary unless the Participant's spouse has consented to another designation in the manner described in Section 8.03(d). A copy of the death notice or other sufficient documentation must be filed with and approved by the Administrator. If upon the death of the Participant there is, in the opinion of the Administrator, no designated Beneficiary for part or all of the Participant's Account, such amount will be paid to his surviving spouse or, if none, to his estate (such spouse or estate shall be deemed to be the Beneficiary for purposes of the Plan). If a Beneficiary dies after benefits to such Beneficiary have commenced, but before they have been completed, and, in the opinion of the Administrator, no person has been designated to receive such remaining benefits, then such benefits shall be paid in a lump sum to the deceased Beneficiary's estate. 7.05. OTHER TERMINATION OF EMPLOYMENT. If a Participant terminates his employment for any reason other than death or normal, late, or disability retirement, he will be entitled to a termination benefit equal to the sum of (a) the vested percentage(s) of the value of the Matching and/or Fixed/Discretionary Contributions to his Account, as 34 59 adjusted for income, expense, gain, or loss, such percentage(s) determined in accordance with the vesting schedule(s) selected by the Employer in Section 1.07, and (b) the value of the Deferral, Employee, Qualified Discretionary and Rollover Contributions to his Account as adjusted for income, expense, gain or loss. The amount payable under this Section 7.05 will be subject to the provisions of Section 7.08 and will be distributed in accordance with Article 8 below. 7.06. SEPARATE ACCOUNT. If a distribution from a Participant's Account has been made to him at a time when he has a nonforfeitable right to less than 100 percent of his Account, the vesting schedule in Section 1.07 will thereafter apply only to amounts in his Account attributable to Employer contributions allocated after such distribution. The balance of his Account immediately after such distribution will be transferred to a separate account which will be maintained for the purpose of determining his interest therein according to the following provisions. At any relevant time prior to a forfeiture of any portion thereof under Section 7.07, a Participant's nonforfeitable interest in his Account held in a separate account described in the preceding paragraph will be equal to P(AB + (RxD))-(RxD), where P is the nonforfeitable percentage at the relevant time determined under Section 7.05; AB is the account balance of the separate account at the relevant time; D is the amount of the distribution; and R is the ratio of the account balance at the relevant time to the account balance after distribution. Following a forfeiture of any portion of such separate account under Section 7.07 below, any balance in the Participant's separate account will remain fully vested and nonforfeitable. 7.07. FORFEITURES. If a Participant terminates his employment, any portion of his Account (including any amounts credited after his termination of employment) not payable to him under Section 7.05 will be forfeited by him upon the complete distribution to him of the vested portion of his Account, if any, subject to the possibility of reinstatement as described in the following paragraph. For purposes of this paragraph, if the value of an Employee's vested Account balance is zero, the Employee shall be deemed to have received a distribution of his vested interest immediately following termination of employment. Such forfeitures will be applied to reduce the contributions of the Employer next payable under the Plan (or administrative expenses of the Plan); the forfeitures shall be held in a money market fund pending such application. If a Participant forfeits any portion of his Account under the preceding paragraph but again becomes an Employee after such date, then the amount so forfeited, without any adjustment for the earnings, expenses, or losses or gains of the assets credited to his Account since the date forfeited, will be recredited to his Account (or to a separate account as described in Section 7.06, if applicable) but only if he repays to the Plan before the earlier of five years after the date of his reemployment or the date he incurs 5 consecutive 1-year breaks in service following the date of the distribution the amount previously distributed to him, without interest, under Section 7.05. If an 35 60 Employee is deemed to receive a distribution pursuant to this Section 7.07, and the Employee resumes employment before 5 consecutive 1-year breaks in service, the Employee shall be deemed to have repaid such distribution on the date of his reemployment. Upon such an actual or deemed repayment, the provisions of the Plan (including Section 7.06) will thereafter apply as if no forfeiture had occurred. The amount to be recredited pursuant to this paragraph will be derived first from the forfeitures, if any, which as of the date of recrediting have yet to be applied as provided in the preceding paragraph and, to the extent such forfeitures are insufficient, from a special Employer contribution to be made by the Employer. If a Participant elects not to receive the nonforfeitable portion of his Account following his termination of employment, the non-vested portion of his Account shall be forfeited after the Participant has incurred five consecutive 1-year breaks in service as defined in Section 2.01(a)(33). No forfeitures will occur solely as a result of a Participant's withdrawal of Employee contributions. 7.08. ADJUSTMENT FOR INVESTMENT EXPERIENCE. If any distribution under this Article 7 is not made in a single payment, the amount retained by the Trustee after the distribution will be subject to adjustment until distributed to reflect the income and gain or loss on the investments in which such amount is invested and any expenses properly charged under the Plan and Trust to such amounts. 7.09. PARTICIPANT LOANS. If permitted under Section 1.09, the Administrator shall allow Participants to apply for a loan from the Plan, subject to the following: (a) Loan Application. All Plan loans shall be administered by the Administrator. Applications for loans shall be made to the Administrator on forms available from the Administrator. Loans shall be made available to all Participants on a reasonably equivalent basis. For this purpose, the term "Participant" means any Participant or Beneficiary, including an alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, who is a party-in-interest (as determined under ERISA Section 3(14)) with respect to the Plan except no loans will be made to (1) an Employee who makes a rollover contribution in accordance with Section 4.10 who has not satisfied the requirements of Section 3.01 or (2) a shareholder- employee or Owner-Employee. For purposes of this requirement, a shareholder-employee means an employee or officer of an electing small business (Subchapter S) corporation who owns (or is considered as owning within the meaning of Section 318(a)(1) of the Code), on any day during the taxable year of such corporation, more than 5% of the outstanding stock of the corporation. A Participant with an existing loan may not apply for another loan until the existing loan is paid in full and may not refinance an existing loan or attain a second loan for the purpose of paying 36 61 off the existing loan. A Participant may not apply for more than one loan during each Plan Year. (b) Limitation of Loan Amount/Purpose of Loan. Loans shall not be made available to Highly Compensated Employees in an amount greater than the amount made available to other Employees. No loan to any Participant or Beneficiary can be made to the extent that such loan when added to the outstanding balance of all other loans to the Participant or Beneficiary would exceed the lesser of (1) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans during the one-year period ending on the day before the loan is made over the outstanding balance of loans from the plan on the date the loan is made, or (2) one-half the present value of the nonforfeitable Account of the Participant. For the purpose of the above limitation, all loans from all plans of the Employer and Related Employers are aggregated. A Participant may not request a loan for less than $1,000. The Employer may provide that loans only be made from certain contribution sources within Participant Account(s) by notifying the Trustee in writing of the restricted source. Loans may be made for any purpose or if elected by the Employer in Section 1.09(a), on account of hardship only. A loan will be considered to be made on account of hardship only if made on account of an immediate and heavy financial need described in Section 7.10(b)(1). (c) Terms of Loan. All loans shall bear a reasonable rate of interest as determined by the Administrator based on the prevailing interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances. The determination of a reasonable rate of interest must be based on appropriate regional factors unless the Plan is administered on a national basis in which case the Administrator may establish a uniform reasonable rate of interest applicable to all regions. All loans shall by their terms require that repayment (principal and interest) be amortized in level payments, not less than quarterly, over a period not extending beyond five years from the date of the loan unless such loan is for the purchase of a Participant's primary residence, in which case the repayment period may not extend beyond ten years from the date of the loan. A Participant may prepay the outstanding loan balance prior to maturity without penalty. (d) Security. Loans must be secured by the Participant's Accounts not to exceed 50 percent of the Participant's vested Account. A Participant must obtain the consent of his or her spouse, if any, to use a Participant Account as security for the loan, if the provisions of Section 8.03 apply to the Participant. Spousal consent shall be obtained no earlier than the beginning of the 90-day period that ends on the date on which the loan is to be so secured. The consent must be in writing, must acknowledge the effect of the loan, and must be witnessed by a Plan representative 37 62 or notary public. Such consent shall thereafter be binding with respect to the consenting spouse or any subsequent spouse with respect to that loan. (e) Default. The Administrator shall treat a loan in default if (1) any scheduled repayment remains unpaid more than 90 days or (2) there is an outstanding principal balance existing on a loan after the last scheduled repayment date. Upon default or termination of employment, the entire outstanding principal and accrued interest shall be immediately due and payable. If a distributable event (as defined by the Code) has occurred, the Administrator shall direct the Trustee to foreclose on the promissory note and offset the Participant's vested Account by the outstanding balance of the loan. If a distributable event has not occurred, the Administrator shall direct the Trustee to foreclose on the promissory note and offset the Participant's vested Account as soon as a distributable event occurs. (f) Pre-existing loans. The provision in paragraph (a) of this Section 7.09 limiting a Participant to one outstanding loan shall not apply to loans made before the Employer adopted this prototype plan document. A Participant may not apply for a new loan until all outstanding loans made before the Employer adopted this prototype plan have been paid in full. The Trustee may accept any loans made before the Employer adopted this prototype plan document except such loans which require the Trustee to hold as security for the loan property other than the Participant's vested Account. As of the effective date of amendment of this Plan in Section 1.01(g)(2), the Trustee shall have the right to reamortize the outstanding principal balance of any Participant loan that is delinquent. Such reamortization shall be based upon the remaining life of the loan and the original maturity date may not be extended. Notwithstanding any other provision of this Plan, the portion of the Participant's vested Account used as a security interest held by the plan by reason of a loan outstanding to the Participant shall be taken into account for purposes of determining the amount of the Account payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. If less than 100% of the Participant's vested Account (determined without regard to the preceding sentence) is payable to the surviving spouse, then the Account shall be adjusted by first reducing the vested Account by the amount of the security used as repayment of the loan, and then determining the benefit payable to the surviving spouse. No loan to any Participant or Beneficiary can be made to the extent that such loan when added to the outstanding balance of all 38 63 other loans to the Participant or Beneficiary would exceed the lesser of (1) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans during the one-year period ending on the day before the loan is made over the outstanding balance of loans from the plan on the date the loan is made or (2) one-half the present value of the nonforfeitable Account of the Participant. For the purpose of the above limitation, all loans from all plans of the Employer and Related Employers are aggregated. 7.10. IN-SERVICE/HARDSHIP WITHDRAWALS. Subject to the provisions of Article 8, a Participant shall not be permitted to withdraw any Employer or Employee Contributions (and earnings thereon) prior to retirement or termination of employment, except as follows: (a) AGE 59 1/2. If permitted under Section 1.11(b), a Participant who has attained the age of 59 1/2 is permitted to withdraw upon request all or any portion of the Accounts specified by the Employer in 1.11(b). (b) HARDSHIP. If permitted under Section 1.10, a Participant may apply to the Administrator to withdraw some or all of his Deferral Contributions (and earnings thereon accrued as of December 31, 1988) and, if applicable, Rollover Contributions and such other amounts allowed by a predecessor plan, if such withdrawal is made on account of a hardship. For purposes of this Section, a distribution is made on account of hardship if made on account of an immediate and heavy financial need of the Employee where such Employee lacks other available resources. Determinations with respect to hardship shall be made by the Administrator and shall be conclusive for purposes of the Plan, and shall be based on the following special rules: (1) The following are the only financial needs considered immediate and heavy: expenses incurred or necessary for medical care (within the meaning of Section 213(d) of the Code) of the Employee, the Employee's spouse, children, or dependents; the purchase (excluding mortgage payments) of a principal residence for the Employee; payment of tuition and related educational fees for the next twelve (12) months of post-secondary education for the Employee, the Employee's spouse, children or dependents; or the need to prevent the eviction of the Employee from, or a foreclosure on the mortgage of, the Employee's principal residence. (2) A distribution will be considered as necessary to satisfy an immediate and heavy financial need of the Employee only if: (i) The Employee has obtained all distributions, other than the hardship distributions, and all nontaxable (at the time of the loan) loans currently available under all plans maintained by the Employer; (ii) The Employee suspends Deferral Contributions and Employee Contributions to the Plan for the 12-month period 39 64 following the date of his hardship distribution. The suspension must also apply to all elective contributions and Employee Contributions to all other qualified plans and non-qualified plans maintained by the Employer, other than any mandatory employer contribution portion of a defined benefit plan, including stock option, stock purchase and other similar plans, but not including health and welfare benefit plans (other than the cash or deferred arrangement portion of a cafeteria plan); (iii) The distribution is not in excess of the amount of an immediate and heavy financial need (including amounts necessary to pay any Federal, state or local income taxes or penalties reasonably anticipated to result from the distribution); and (iv) The Employee agrees to limit Deferral Contributions (elective contributions)to the Plan and any other qualified plan maintained by the Employer for the Employee's taxable year immediately following the taxable year of the hardship distribution to the applicable limit under Section 402(g) of the Code for such taxable year less the amount of such Employee's Deferral Contributions for the taxable year of the hardship distribution. (3) A Participant must obtain the consent of his or her spouse, if any, to obtain a hardship withdrawal, if the provisions of Section 8.03 apply to the Participant. (c) EMPLOYEE CONTRIBUTIONS. A Participant may elect to withdraw, in cash, up to one hundred percent of the amount then credited to his Employee Contribution Account. Such withdrawals shall be limited to one (1) per Plan Year unless this prototype plan document is an amendment of a prior plan document, in which case the rules and restrictions governing Employee Contribution withdrawals, if any, are incorporated herein by reference. 7.11. PRIOR PLAN IN-SERVICE DISTRIBUTION RULES. If designated by the Employer in Section 1.11(b), a Participant shall be entitled to withdraw at anytime prior to his termination of employment, subject to the provisions of Article 8 and the prior plan, any vested Employer Contributions maintained in a Participant's Account for the specified period of time. ARTICLE 8. DISTRIBUTION OF BENEFITS PAYABLE AFTER TERMINATION OF SERVICE. 8.01. DISTRIBUTION OF BENEFITS TO PARTICIPANTS AND BENEFICIARIES. (a) Distributions from the Trust to a Participant or to the Beneficiary of the Participant shall be made in a lump sum in cash or, if elected by the Employer in Section 1.11, under a systematic withdrawal plan (installment(s)) upon retirement, death, 40 65 disability, or other termination of employment, unless another form of distribution is required or permitted in accordance with paragraph (d) of this Section 8.01 or Sections 1.11(c), 8.02, 8.03, 8.04 or 11.02. A distribution may be made in Fund Shares, at the election of the Participant, pursuant to the qualifying rollover of such distribution to a Fidelity Investments individual retirement account. (b) Distributions under a systematic withdrawal plan must be made in substantially equal annual, or more frequent, installments, in cash, over a period certain which does not extend beyond the life expectancy of the Participant or the joint life expectancies of the Participant and his Beneficiary, or, if the Participant dies prior to the commencement of his benefits the life expectancy of the Participant's Beneficiary, as further described in Section 8.04. (c) Notwithstanding the provisions of Section 8.01(b) above, if a Participant's Account is, and at the time of any prior distribution(s) was, $3,500 or less, the balance of such Account shall be distributed in a lump sum as soon as practicable following retirement, disability, death or other termination of employment. (d) This paragraph (d) applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Article 8, a distributee may elect, at the time and in the manner prescribed by the Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. The following definitions shall apply for purposes of this paragraph (d): (1) Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (2) Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover 41 66 distribution. However, in the case of an eligible rollover distribution to a surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (3) Distributee: A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (4) Direct rollover: A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee. 8.02. ANNUITY DISTRIBUTIONS. If so provided in Section 1.11(c), a Participant may elect distributions made in whole or in part in the form of an annuity contract subject to the provisions of Section 8.03. (a) An annuity contract distributed under the Plan must be purchased from an insurance company and must be nontransferable. The terms of an annuity contract shall comply with the requirements of the Plan and distributions under such contract shall be made in accordance with Section 401(a)(9) of the Code and the regulations thereunder. (b) The payment period of an annuity contract distributed to the Participant pursuant to this Section may be as long as the Participant lives. If the annuity is payable to the Participant and his spouse or designated Beneficiary, the payment period of an annuity contract may be for as long as either the Participant or his spouse or designated Beneficiary lives. Such an annuity may provide for an annuity certain feature for a period not exceeding the life expectancy of the Participant. If the annuity is payable to the Participant and his spouse such period may not exceed the joint life and last survivor expectancy of the Participant and his spouse, or, if the annuity is payable to the Participant and a designated Beneficiary, the joint life and last survivor expectancy of the Participant and such Beneficiary. If the Participant dies prior to the commencement of his benefits, the payment period of an annuity contract distributed to the Beneficiary of the Participant may be as long as the Participant's Beneficiary lives, and may provide for an annuity certain feature for a period not exceeding the life expectancy of the Beneficiary. Any annuity contract distributed under the Plan must provide for nonincreasing payments. 8.03. JOINT AND SURVIVOR ANNUITIES/PRERETIREMENT SURVIVOR ANNUITIES. (a) Application. The provisions of this Section supersede any conflicting provisions of the Plan; however, paragraph (b) of this Section shall not apply if the Participant's Account does not exceed or at the time of any prior distribution did not exceed 42 67 $3,500. A Participant is described in this Section only if (i) the Participant has elected distribution of his Account in the form of an Annuity Contract in accordance with Section 8.02, or (ii) the Trustee has directly or indirectly received a transfer of assets from another plan (including a predecessor plan) to which Section 401(a)(11) of the Code applies with respect to such Participant. (b) Retirement Annuity. Unless the Participant elects to waive the application of this subsection in a manner satisfying the requirements of subsection (d) below, to the extent applicable to the Participant, within the 90-day period preceding his Annuity Starting Date (which election may be revoked, and if revoked, remade, at any time in such period), the vested Account due any Participant to whom this subsection (b) applies will be paid to him by the purchase and delivery to him of an annuity contract described in Section 8.02 providing a life annuity only form of benefit or, if the Participant is married as of his Annuity Starting Date, providing an immediate annuity for the life of the Participant with a survivor annuity for the life of the Participant's spouse (determined as of the date of distribution of the contract) which is 50 percent of the amount of the annuity which is payable during the joint lives of the Participant and such spouse. The Participant may elect to receive distribution of his benefits in the form of such annuity as of the earliest date on which he could elect to receive retirement benefits under the Plan. Within the period beginning 90 days prior to the Participant's Annuity Starting Date and ending 30 days prior to such Date, the Administrator will provide such Participant with a written explanation of (1) the terms and conditions of the annuity contract described herein, (2) the Participant's to make, and the effect of, an election to waive application of this subsection, (3) the rights of the Participant's spouse under subsection (d), and (4) the right to revoke and the period of time necessary to revoke the election to waive application of this subsection. (c) Annuity Death Benefit. Unless the Participant elects to waive the application of this subsection in a manner satisfying the requirements of subsection (d) below at any time within the applicable election period (which election may be revoked, and if revoked, remade, at any time in such period), if a married Participant to whom this Section applies dies before his Annuity Starting Date, then notwithstanding any designation of a Beneficiary to the contrary, 50 percent of his vested Account will be applied to purchase an annuity contract described in Section 8.02 providing an annuity for the life of the Participant's surviving spouse, which contract will then be promptly distributed to such spouse. In lieu of the purchase of such an annuity contract, the spouse may elect in writing to receive distributions under the Plan as if he or she had been designated by the Participant as his Beneficiary with respect to 50 percent of his Account. For purposes of this subsection, the applicable election period will commence on the first day of the Plan Year in which the Participant attains age 35 and will end on the date of the 43 68 Participant's death, provided that in the case of a Participant who terminates his employment the applicable election period with respect to benefits accrued prior to the date of such termination will in no event commence later than the date of his termination of employment. A Participant may elect to waive the application of this subsection prior to the Plan Year in which he attains age 35, provided that any such waiver will cease to be effective as of the first day of the Plan Year in which the Participant attains age 35. The Administrator will provide a Participant to whom this subsection applies with a written explanation with respect to the annuity death benefit described in this subsection (c) comparable to that required under subsection (b) above. Such explanation shall be furnished within whichever of the following periods ends last: (1) the period beginning with the first day of the Plan Year in which the Participant reaches age 32 and ending with the end of the Plan Year preceding the Plan Year in which he reaches age 35, (2) a reasonable period ending after the Employee becomes a Participant, (3) a reasonable period ending after this Section 8.04 first becomes applicable to the Participant in accordance with Section 8.04(a), (4) in the case of a Participant who separates from service before age 35, a reasonable period of time ending after separation from service. For purposes of the preceding sentence, the two-year period beginning one year prior to the date of the event described in clause (2), (3) or (4), whichever is applicable, and ending one year after such date shall be considered reasonable, provided, that in the case of a Participant who separates from service under (4) above and subsequently recommences employment with the Employer, the applicable period for such Participant shall be redetermined in accordance with this subsection. (d) Requirements of Elections. This subsection will be satisfied with respect to a waiver or designation which is required to satisfy this subsection if such waiver or designation is in writing and either (1) the Participant's spouse consents thereto in writing, which consent must acknowledge the effect of such waiver or designation and be witnessed by a notary public or Plan representative, or (2) the Participant establishes to the satisfaction of the Administrator that the consent of the Participant's spouse cannot be obtained because there is no spouse, because the spouse cannot be located, or because of such other circumstances as the Secretary of Treasury may prescribe. Any consent by a spouse, or establishment that the consent of a spouse may not be obtained, will be effective only with respect to a specific Beneficiary (including any class of Beneficiaries or any contingent Beneficiaries) or form of benefits identified in the Participant's waiver or designation, unless the consent of the 44 69 by the Participant without any requirement of further consent by the spouse. A consent which permits such designations by the Participant shall acknowledge that the spouse has the right to limit consent to a specific Beneficiary and form of benefits and that the spouse voluntarily elects to relinquish both such rights. A consent by a spouse shall be irrevocable once made. Any such consent, or establishment that such consent may not be obtained, will be effective only with respect to such spouse. For purposes of subsections (b) and (c) above, no consent of a spouse shall be valid unless the notice required by whichever subsection is applicable has been provided to the Participant. (e) Former Spouse. For purposes of this Section 8.03, a former spouse of a Participant will be treated as the spouse or surviving spouse of the Participant, and a current spouse will not be so treated, to the extent required under a qualified domestic relations order, as defined in Section 414(p) of the Code. (f) Vested Account Balance. For purposes of this Section, vested Account shall include the aggregate value of the Participant's vested Account derived from Employer and Employee Contributions (including rollovers), whether vested before or upon death. The provisions of this Section shall apply to a Participant who is vested in amounts attributable to Employer contributions, Employee Contributions, or both, upon death or at the time of distribution. 8.04 INSTALLMENT DISTRIBUTIONS. This Section shall be interpreted and applied in accordance with the regulations under Section 401(a)(9) of the Code, including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)- 2 of the Proposed Treasury Regulations, or any successor regulations of similar import. (a) In General. If a Participant's benefit may be distributed in accordance with Section 8.01(b), the amount to be distributed for each calendar year for which a minimum distribution is required shall be at least an amount equal to the quotient obtained by dividing the Participant's interest in his Account by the life expectancy of the Participant or Beneficiary or the joint life and last survivor expectancy of the Participant and his Beneficiary, whichever is applicable. For calendar years beginning before January 1, 1989, if a Participant's Beneficiary is not his spouse, the method of distribution selected must insure that at least 50 percent of the present value of the amount available for distribution is paid within the life expectancy of the Participant. For calendar years beginning after December 31, 1988, the amount to be distributed for each calendar year shall not be less than an amount equal to the quotient obtained by dividing the Participant's interest in his Account by the lesser of (1) the applicable life expectancy under Section 8.01(b), or (2) if a Participant's Beneficiary is not his spouse, the applicable divisor determined under Section 1.401(a)(9)-2, Q&A 4 of the Proposed Treasury Regulations, or any successor regulations of similar import. Distributions after the death of the Participant shall be made 45 70 using the applicable life expectancy under (1) above, without regard to Section 1.401(a)(9)-2 of such regulations. The minimum distribution required under this subsection (a) for the calendar year immediately preceding the calendar year in which the Participant's required beginning date, as determined under Section 8.08(b), occurs shall be made on or before the Participant's required beginning date, as so determined. Minimum distributions for other calendar years shall be made on or before the close of such calendar year. (b) Additional Requirements for Distributions After Death of Participant. (1) Distribution beginning before Death. If the Participant dies before distribution of his benefits has begun, distributions shall be made in accordance with the provisions of this paragraph. Distributions under Section 8.01(a) shall be completed by the close of the calendar year in which the fifth anniversary of the death of the Participant occurs. Distributions under Section 8.01(b) shall commence, if the Beneficiary is not the Participant's spouse, not later than the close of the calendar year immediately following the calendar year in which the death of the Participant occurs. Distributions under Section 8.01(b) to a Beneficiary who is the Participant's surviving spouse shall commence not later than the close of the calendar year in which the Participant would have attained age 70 1/2 or, if later, the close of the calendar year immediately following the calendar year in which the death of the Participant occurs. In the event such spouse dies prior to the date distribution to him or her commences, he or she will be treated for purposes of this subsection (other than the preceding sentence) as if he or she were the Participant. If the Participant has not designated a Beneficiary, or the Participant or Beneficiary has not effectively selected a method of distribution, distribution of the Participant's benefit shall be completed by the close of the calendar year in which the fifth anniversary of the death of the Participant occurs. Any amount paid to a child of the Participant will be treated as if it had been paid to the surviving spouse if the amount becomes payable to the surviving spouse when the child reaches the age of majority. For purposes of this subsection (b)(1), the life expectancy of a Beneficiary who is the Participant's surviving spouse shall be recalculated annually unless the Participant's spouse irrevocably elects otherwise prior to the time distributions are required to begin. Life expectancy shall be computed in accordance with the provisions of subsection (a) above. (2) Distribution beginning after Death. If the Participant dies after distribution of his benefits has begun, distributions to the Participant's Beneficiary will be made at least as 46 71 rapidly as under the method of distribution being used as of the date of the Participant's death. For purposes of this Section 8.04(b), distribution of a Participant's interest in his Account will be considered to begin as of the Participant's required beginning date, as determined under Section 8.08(b). If distribution in the form of an annuity irrevocably commences prior to such date, distribution will be considered to begin as of the actual date distribution commences. (c) Life Expectancy. For purposes of this Section, life expectancy shall be recalculated annually in the case of the Participant or a Beneficiary who is the Participant's spouse unless the Participant or Beneficiary irrevocably elects otherwise prior to the time distributions are required to begin. If not recalculated in accordance with the foregoing, life expectancy shall be calculated using the attained age of the Participant or Beneficiary, whichever is applicable, as of such individual's birth date in the first year for which a minimum distribution is required reduced by one for each elapsed calendar year since the date life expectancy was first calculated. For purposes of this Section, life expectancy and joint life and last survivor expectancy shall be computed by use of the expected return multiples in Table V and VI of section 1.72-9 of the income tax Regulations. A Participant's interest in his Account for purposes of this Section 8.04 shall be determined as of the last valuation date in the calendar year immediately preceding the calendar year for which a minimum distribution is required, increased by the amount of any contributions allocated to, and decreased by any distributions from, such Account after the valuation date. Any distribution for the first year for which a minimum distribution is required made after the close of such year shall be treated as if made prior to the close of such year. 8.05. IMMEDIATE DISTRIBUTIONS. If the Account distributable to a Participant exceeds, or at the time of any prior distribution exceeded, $3,500, no distribution will be made to the Participant before he reaches his Normal Retirement Age (or age 62, if later), unless the written consent of the Participant has been obtained. Such consent shall be made in writing within the 90-day period ending on the Participant's Annuity Starting Date. Within the period beginning 90 days before the Participant's Annuity Starting Date and ending 30 days before such Date, the Administrator will provide such Participant with written notice comparable to the notice described in Section 8.03(b) containing a general description of the material features and an explanation of the relative values of the optional forms of benefit available under the Plan and informing the Participant of his right to defer receipt of the distribution until his Normal Retirement Age (or age 62, if later). The consent of the Participant's spouse must also be obtained if the Participant is subject to the provisions of Section 8.03(a), unless the distribution will be made in the form of the applicable retirement 47 72 annuity contract described in Section 8.03(b). A spouse's consent to early distribution, if required, must satisfy the requirements of Section 8.03(d). Neither the consent of the Participant nor the Participant's spouse shall be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code. In addition, upon termination of the Plan if it does not offer an annuity option (purchased from a commercial provider) and if the Employer or any Related Employer does not maintain another defined contribution plan (other than an employee stock ownership plan as defined in Code Section 4975(e)(7)) the Participant's Account will, without the Participant's consent, be distributed to the Participant. However, if any Related Employer maintains another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code) then the Participant's Account will be transferred, without the Participant's consent, to the other plan if the Participant does not consent to an immediate distribution. 8.06. DETERMINATION OF METHOD OF DISTRIBUTION. The Participant will determine the method of distribution of benefits to himself and may determine the method of distribution to his Beneficiary. Such determination will be made prior to the time benefits become payable under the Plan. If the Participant does not determine the method of distribution to his Beneficiary or if the Participant permits his Beneficiary to override his determination, the Beneficiary, in the event of the Participant's death, will determine the method of distribution of benefits to himself as if he were the Participant. A determination by the Beneficiary must be made no later than the close of the calendar year in which distribution would be required to begin under Section 8.04(b) or, if earlier, the close of the calendar year in which the fifth anniversary of the death of the Participant occurs. 8.07. NOTICE TO TRUSTEE. The Administrator will notify the Trustee in writing whenever any Participant or Beneficiary is entitled to receive benefits under the Plan. The Administrator's notice shall indicate the form of benefits that such Participant or Beneficiary shall receive and (in the case of distributions to a Participant) the name of any designated Beneficiary or Beneficiaries. 8.08. TIME OF DISTRIBUTION. In no event will distribution to a Participant be made latest than the earlier of the dates described in (a) and (b) below: (a) Absent the consent of the Participant (and his spouse, if appropriate), the 60th day after the close of the Plan Year in which occurs the later of the date on which the Participant attains age 65, the date on which the Participant ceases to be employed by the Employer, or the 10th anniversary of the year in which the Participant commenced participation in the Plan; and (b) April 1 of the calendar year first following the calendar year in which the Participant attains age 70 1/2 or, in the case of a Participant who had attained age 70 1/2 before January 1, 1988, 48 73 the required beginning date determined in accordance with (1) or (2) below: (1) The required beginning date of a Participant who is not a 5-percent owner is the first day of April of the calendar year following the calendar year in which the later of retirement or attainment of age 70 1/2 occurs. (2) The required beginning date of a Participant who is a 5-percent owner during any year beginning after December 31, 1979, is the first day of April following the later of (A) the calendar year in which the Participant attains age 70 1/2, or (B) the earlier of the calendar year with or within which ends the Plan Year in which the Participant becomes a 5-percent owner, or the calendar year in which the Participant retires. Notwithstanding the foregoing, in the case of a Participant who attained age 70 1/2 during 1988 and who had not retired prior to January 1, 1989, the required beginning date described in this paragraph shall be April 1, 1990. Notwithstanding (a) above, the failure of a Participant (and spouse) to consent to a distribution while a benefit is immediately distributable, within the meaning of Section 8.05, shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy (a) above. Once distributions have begun to a 5-percent owner under (b) above, they must continue to be distributed, even if the Participant ceases to be a 5-percent owner in a subsequent year. For purposes of (b) above, a Participant is treated as a 5-percent owner if such Participant is a 5-percent owner as defined in Section 416(i) of the Code (determined in accordance with Section 416 but without regard to whether the Plan is top-heavy) at any time during the Plan Year ending with or within the calendar year in which such owner attains age 66 1/2 or any subsequent Plan Year. The Administrator shall notify the Trustee in writing whenever a distribution is necessary in order to comply with the minimum distribution rules set forth in this Section. 8.09. WHEREABOUTS OF PARTICIPANTS AND BENEFICIARIES. The Administrator will at all times be responsible for determining the whereabouts of each Participant or Beneficiary who may be entitled to benefits under the Plan and will at all times be responsible for instructing the Trustee in writing as to the current address of each such Participant or Beneficiary. The Trustee will be entitled to rely on the latest written statement received from the Administrator as to such addresses. The Trustee will be under no duty to make any distributions under the Plan 49 74 unless and until it has received written instructions from the Administrator satisfactory to the Trustee containing the name and address of the distributee, the time when the distribution is to occur, and the form which the distribution will take. Notwithstanding the foregoing, if the Trustee attempts to make a distribution in accordance with the Administrator's instructions but is unable to make such distribution because the whereabouts of the distributee is unknown, the Trustee will notify the Administrator of such situation and thereafter the Trustee will be under no duty to make any further distributions to such distributee until it receives further written instructions from the Administrator. If a benefit is forfeited because the Administrator determines that the Participant or Beneficiary cannot be found, such benefit will be reinstated by the Sponsor if a claim is filed by the Participant or Beneficiary with the Administrator and the Administrator confirms the claim to the Sponsor. ARTICLE 9. TOP-HEAVY PROVISIONS. 9.01 APPLICATION. If the Plan is or becomes a Top-Heavy Plan in any Plan Year or is automatically deemed to be Top- Heavy in accordance with the Employer's election in Section 1.12(a)(1) of the Adoption Agreement, the provisions of this Article 9 shall supersede any conflicting provision in the Plan. 9.02 DEFINITIONS. For purposes of this Article 9, the following terms have the meanings set forth below: (a) Key Employee. Any Employee or former Employee (and the Beneficiary of any such Employee) who at any time during the determination period was (1) an officer of the Employer whose annual Compensation exceeds 50 percent of the dollar limitation under Section 415(b)(1)(A) of the Code, (2) an owner (or considered an owner under Section 318 of the Code) of one of the ten largest interests in the Employer if such individual's annual Compensation exceeds the dollar limitation under Section 415(c)(1)(A) of the Code, (3) a 5-percent owner of the Employer, or (4) a 1-percent owner of the Employer who has annual Compensation of more than $150,000. For purposes of this paragraph, the determination period is the Plan Year containing the Determination Date and the four preceding Plan Years. The determination of who is a Key Employee shall be made in accordance with Section 416(i)(1) of the Code and the regulations thereunder. Annual Compensation means compensation as defined in Section 5.03(e)(2), but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the employee's gross income under Section 125, Section 402(a)(8), and Section 403(b) of the Code. (b) Top-Heavy Plan. The Plan is a Top-Heavy Plan if any of the following conditions exists: (1) the Top-Heavy Ratio for the Plan exceeds 60 percent and the Plan is not part of any Required Aggregation Group or Permissive Aggregation Group, 50 75 (2) the Plan is a part of a Required Aggregation Group but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the Required Aggregation Group exceeds 60 percent, or (3) the Plan is a part of a Required Aggregation Group and a Permissive Aggregation Group and the Top- Heavy Ratio for both Groups exceeds 60 percent. (c) Top-Heavy Ratio. (1) With respect to this Plan, or with respect to any Required Aggregation Group or Permissive Aggregation Group that consists solely of defined contribution plans (including any simplified employee pension plans) and the Employer has not maintained any defined benefit plan which during the 5-year period ending on the determination date(s) has or has had accrued benefits, the Top-Heavy Ratio is a fraction, the numerator of which is the sum of the account balances of all Key Employees under the plans as of the Determination Date (including any part of any account balance distributed in the 5-year period ending on the Determination Date), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the 5-year period ending on the Determination Date) of all participants under the plans as of the Determination Date. Both the numerator and denominator of the Top-Heavy Ratio shall be increased, to the extent required by Section 416 of the Code, to reflect any contribution which is due but unpaid as of the Determination Date. (2) With respect to any Required Aggregation Group or Permissive Aggregation Group that includes one or more defined benefit plans which, during the 5-year period ending on the Determination Date, has covered or could cover a Participant in this Plan, the Top-Heavy Ratio is a fraction, the numerator of which is the sum of the account balances under the defined contribution plans for all Key Employees and the present value of accrued benefits under the defined benefit plans for all Key Employees, and the denominator of which is the sum of the account balances under the defined contribution plans for all participants and the present value of accrued benefits under the defined benefit plans for all participants. Both the numerator and denominator of the Top-Heavy Ratio shall be increased for any distribution of an account balance or an accrued benefit made in the 5-year period ending on the Determination Date and any contribution due but unpaid as of the Determination Date. (3) For purposes of (1) and (2) above, the value of Accounts and the present value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in Section 416 of the Code and the regulations thereunder for the first and second plan years of a defined benefit plan. The Account and accrued benefits of a Participant 51 76 (A) who is not a Key Employee but who was a Key Employee in a prior year, or (B) who has not been credited with at least one Hour of Service with the Employer at any time during the 5-year period ending on the Determination Date, will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account, shall be made in accordance with Section 416 of the Code and the regulations thereunder. Deductible employee contributions shall not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans, the value of Accounts and accrued benefits shall be calculated with reference to the Determination Dates that fall within the same calendar year. For purposes of determining if the Plan, or any other plan included in a Required Aggregation Group of which this Plan is a part, is a Top-Heavy Plan, the accrued benefit in a defined benefit plan of an Employee other than a Key Employee shall be determined under (i) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Employer, or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Section 411(b)(1)(C) of the Code. (d) Permissive Aggregation Group. The Required Aggregation Group plus any other qualified plans of the Employer or a Related Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Code. (e) Required Aggregation Group. (1) Each qualified plan of the Employer or Related Employer in which at least one Key Employee participates, or has participated at any time during the determination period (regardless of whether the plan has terminated), and (2) any other qualified plan of the Employer or Related Employer which enables a plan described in (1) above to meet the requirements of Sections 401(a)(4) or 410 of the Code. (f) Determination Date. For any Plan Year of the Plan subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, the last day of that Plan Year. (g) Valuation Date. The Determination Date. (h) Present Value. Present value shall be based only on the interest rate and mortality table specified in the Adoption Agreement. 9.03. MINIMUM CONTRIBUTION. 52 77 (a) Except as otherwise provided in (b) and (c) below, the Fixed/Discretionary Contributions made on behalf of any Participant who is not a Key Employee shall not be less than the lesser of 3 percent (or such other percent elected by the Employer in Section 1.12(c)) of such Participant's Compensation or, in the case where the Employer has no defined benefit plan which designates this Plan to satisfy Section 401 of the Code, the largest percentage of Employer contributions, as a percentage of the first $200,000 of the Key Employee's Compensation, made on behalf of any Key Employee for that year. If the Employer selected the Integrated Formula in Section 1.05(a)(2), the minimum contribution shall be determined under paragraph (e) of this Section 9.03. Further, the minimum contribution under this Section 9.03 shall be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive a contribution, or would have received a lesser contribution for the year, because (1) the Participant failed to complete 1,000 Hours of Service or any equivalent service requirement provided in the Adoption Agreement; or (2) the Participant's Compensation was less than a stated amount. (b) The provisions of (a) above shall not apply to any Participant who was not employed by the Employer on the last day of the Plan Year. (c) The Employer contributions for the Plan Year made on behalf of each Participant who is not a Key Employee and who is a participant in a defined benefit plan maintained by the Employer shall not be less than 5 percent of such Participant's Compensation, unless the Employer has provided in Section 1.12(c) that the minimum contribution requirement will be met in the other plan or plans of the Employer. (d) The minimum contribution required under (a) above (to the extent required to be nonforfeitable under Section 416(b) of the Code) may not be forfeited under Section 411(a)(3)(B) or 411(a)(3)(D) of the Code. (e) If the Employer elected an Integrated Formula in Section 1.05(a)(2), the allocation steps in Section 4.06(b)(2) shall be preceded by the following steps: (1) The Discretionary Employer Contributions will be allocated to each eligible Participant (as determined under this Section 9.03) in the ratio that the Participant's Compensation bears to all Participants' Compensation, but not in excess of 3%(or such other percent elected by the Employer in Section 1.12(c). (2) Any Discretionary Employer Contributions remaining after (e)(1) above will be allocated to each eligible Participant in the ratio that the Participant's Excess Compensation for the Plan Year bears to the Excess Compensation of all eligible Participants, but not in excess of 3%(or such other percent elected by the Employer in Section 1.12(c)). 53 78 9.04. ADJUSTMENT TO THE LIMITATION ON CONTRIBUTIONS AND BENEFITS. If this Plan is in Top-Heavy status, the number 100 shall be substituted for the number 125 in subsections (e)(3) and (e)(4) of Section 5.03. However, this substitution shall not take effect with respect to this Plan in any Plan Year in which the following requirements are satisfied: (a) The Employer contributions for such Plan Year made on behalf of each Participant who is not a Key Employee and who is a participant in a defined benefit plan maintained by the Employer is not less than 7 1/2 percent of such Participant's Compensation. (b) The sum of the present value as of the Determination Date of (1) the aggregate accounts of all Key Employees under all defined contribution plans of the Employer and (2) the cumulative accrued benefits of all Key Employees under all defined benefit plans of the Employer does not exceed 90 percent of the same amounts determined for all Participants under all plans of the Employer that are Top-Heavy Plans, excluding Accounts and accrued benefits for Employees who formerly were but are no longer Key Employees. The substitutions of the number 100 for 125 shall not take effect in any Limitation Year with respect to any Participant for whom no benefits are accrued or contributions made for such Year. 9.05. MINIMUM VESTING. For any Plan Year in which the Plan is a Top-Heavy Plan and all Plan Years thereafter, the Top- Heavy vesting schedule elected in Section 1.12(d) will automatically apply to the Plan. The Top-Heavy vesting schedule applies to all benefits within the meaning of Section 411(a)(7) of the Code except those attributable to Employee Contributions or those already subject to a vesting schedule which vests at least as rapidly in all cases as the schedule elected in Section 1.12(d), including benefits accrued before the Plan becomes a Top-Heavy Plan. Further, no decrease in a Participant's nonforfeitable percentage may occur in the event the Plan's status as a Top-Heavy Plan changes for any Plan Year. However, this Section 9.05 does not apply to the Account of any Employee who does not have an Hour of Service after the Plan has initially become a Top-Heavy Plan and such Employee's Account attributable to Employer Contributions will be determined without regard to this Section 9.05. ARTICLE 10. AMENDMENT AND TERMINATION. 10.01 AMENDMENT BY EMPLOYER. The Employer reserves the authority, subject to the provisions of Article 1 and Section 10.03, to amend the Plan: (a) Changes to Elections Contained in the Adoption Agreement. By filing with the Trustee an amended Adoption Agreement, executed by the Employer only, on which said Employer has indicated a change or changes in provisions previously elected by it. Such changes are to be effective on the effective date of such amended Adoption 54 79 Agreement except that retroactive changes to a previous election or elections pursuant to the regulations issued under Section 401(a)(4) of the Code shall be permitted. Any such change notwithstanding, no Participant's Account shall be reduced by such change below the amount to which the Participant would have been entitled if he had voluntarily left the employ of the Employer immediately prior to the date of the change. The Employer may from time to time make any amendment to the Plan that may be necessary to satisfy Sections 415 or 416 of the Code because of the required aggregation of multiple plans by completing overridingplan language in the Adoption Agreement. The Employer may also add certain model amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the Plan to be treated as an individually designed plan; or (b) Other Changes. By amending any provision of the Plan for any reason other than those specified in (a) above. However, upon making such amendment, including a waiver of the minimum funding requirement under Section 412(d) of the Code, the Employer may no longer participate in this prototype plan arrangement and will be deemed to have an individually designed plan. Following such amendment, the Trustee may transfer the assets of the Trust to the trust forming part of such newly adopted plan upon receipt of sufficient evidence (such as a determination letter or opinion letter from the Internal Revenue Service or an opinion of counsel satisfactory to the Trustee) that such trust will be a qualified trust under the Code. 10.02. AMENDMENT BY PROTOTYPE SPONSOR. The Prototype Sponsor may in its discretion amend the Plan or the Adoption Agreement at any time, subject to the provisions of Article 1 and Section 10.03, and provided that the Prototype Sponsor mails a copy of such amendment to the Employer at its last known address as shown on the books of the Prototype Sponsor. 10.03. AMENDMENTS AFFECTING VESTED AND/OR ACCRUED BENEFITS. (a) Except as permitted by Section 10.04, no amendment to the Plan shall be effective to the extent that it has the effect of decreasing a Participant's Account or eliminating an optional form of benefit with respect to benefits attributable to service before the amendment. Furthermore, if the vesting schedule of the Plan is amended, the nonforfeitable interest of a Participant in his Account, determined as of the later of the date the amendment is adopted or the date it becomes effective, will not be less than the Participant's nonforfeitable interest in his Account determined without regard to such amendment. (b) If the Plan's vesting schedule is amended, including any amendment resulting from a change to or from Top-Heavy Plan status, or the Plan is amended in any way that directly or indirectly affects the computation of a Participant's nonforfeitable interest in his Account, each Participant with at least three (3) Years of Service for Vesting with the Employer may elect, within a 55 80 reasonable period after the adoption of the amendment, to have the nonforfeitable percentage of his Account computed under the Plan without regard to such amendment. The Participant's election may be made within 60 days from the latest of (1) the date the amendment is adopted, (2) the date the amendment becomes effective, or (3) the date the Participant is issued written notice of the amendment by the Employer or the Administrator. 10.04. RETROACTIVE AMENDMENTS. An amendment made by the Prototype Sponsor in accordance with Section 10.02 may be made effective on a date prior to the first day of the Plan Year in which it is adopted if such amendment is necessary or appropriate to enable the Plan and Trust to satisfy the applicable requirements of the Code or to conform the Plan to any change in federal law, or to any regulations or ruling thereunder. Any retroactive amendment by the Employer shall be subject to the provisions of Section 10.01. 10.05. TERMINATION. The Employer has adopted the Plan with the intention and expectation that contributions will be continued indefinitely. However, said Employer has no obligation or liability whatsoever to maintain the Plan for any length of time and may discontinue contributions under the Plan or terminate the Plan at any time by written notice delivered to the Trustee without any liability hereunder for any such discontinuance or termination. 10.06. DISTRIBUTION UPON TERMINATION OF THE PLAN. Upon termination or partial termination of the Plan or complete discontinuance of contributions thereunder, each Participant (including a terminated Participant with respect to amounts not previously forfeited by him) who is affected by such termination or partial termination or discontinuance will have a fully vested interest in his Account, and, subject to Section 4.05 and Article 8, the Trustee will distribute to each Participant or other person entitled to distribution the balance of the Participant's Account in a single lump sum payment. In the absence of such instructions, the Trustee will notify the Administrator of such situation and the Trustee will be under no duty to make any distributions under the Plan until it receives written instructions from the Administrator. Upon the completion of such distributions, the Trust will terminate, the Trustee will be relieved from all liability under the Trust, and no Participant or other person will have any claims thereunder, except as required by applicable law. 10.07. MERGER OR CONSOLIDATION OF PLAN; TRANSFER OF PLAN ASSETS. In case of any merger or consolidation of the Plan with, or transfer of assets and liabilities of the Plan to, any other plan, provision must be made so that each Participant would, if the Plan then terminated, receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer if the Plan had then terminated. 56 81 ARTICLE 11. AMENDMENT AND CONTINUATION OF PREDECESSOR PLAN; TRANSFER OF FUNDS TO OR FROM OTHER QUALIFIED PLANS. 11.01. AMENDMENT AND CONTINUATION OF PREDECESSOR PLAN. In the event the Employer has previously established a plan (the "predecessor plan") which is a defined contribution plan under the Code and which on the date of adoption of the Plan meets the applicable requirements of section 401(a) of the Code, the Employer may, in accordance with the provisions of the predecessor plan, amend and continue the predecessor plan in the form of the Plan and become the Employer hereunder, subject to the following: (a) Subject to the provisions of the Plan, each individual who was a Participant or former Participant in the predecessor plan immediately prior to the effective date of such amendment and continuation will become a Participant or former Participant in the Plan; (b) No election may be made under the vesting provisions of the Adoption Agreement if such election would reduce the benefits of a Participant under the Plan to less than the benefits to which he would have been entitled if he voluntarily separated from the service of the Employer immediately prior to such amendment and continuation; (c) No amendment to the Plan shall decrease a Participant's accrued benefit or eliminate an optional form of benefit and if the amendment of the predecessor plan in the form of the Plan results in a change in the method of crediting service for vesting purposes between the general method set forth in Section 2530.200b-2 of the Department of Labor Regulations and the elapsed-time method in Section 2.01(a)(33) of the Plan, each Participant with respect to whom the method of crediting vesting service is changed shall be treated in the manner set forth by the provisions of Section 1.410(a)-7(f)(1) of the Treasury Regulations which are incorporated herein by reference; (d) The amounts standing to the credit of a Participant's Account immediately prior to such amendment and continuation which represent the amounts properly attributable to (1) contributions by the Participant and (2) contributions by the Employer and forfeitures will constitute the opening balance of his Account or Accounts under the Plan; (e) Amounts being paid to a former Participant or to a Beneficiary in accordance with the provisions of the predecessor plan will continue to be paid in accordance with such provisions; (f) Any election and waiver of the qualified pre-retirement annuity in effect after August 23, 1984, under the predecessor plan immediately before such amendment and continuation will be deemed a valid election and waiver of Beneficiary under Section 8.04 if such designation satisfies the requirements of Section 8.04(d), unless 57 82 and until the Participant revokes such election and waiver under the Plan; and (g) Unless the Employer and the Trustee agree otherwise, all assets of the predecessor trust will be deemed to be assets of the Trust as of the effective date of such amendment. Such assets will be invested by the Trustee as soon as reasonably practicable pursuant to Article 6. The Employer agrees to assist the Trustee in any way requested by the Trustee in order to facilitate the transfer of assets from the predecessor trust to the Trust Fund. 11.02. TRANSFER OF FUNDS FROM AN EXISTING PLAN. The Employer may from time to time direct the Trustee, in accordance with such rules as the Trustee may establish, to accept cash, allowable Fund Shares or participant loan promissory notes transferred for the benefit of Participants from a trust forming part of another qualified plan under the Code, provided such plan is a defined contribution plan. Such transferred assets will become assets of the Trust as of the date they are received by the Trustee. Such transferred assets will be credited to Participants' Accounts in accordance with their respective interests immediately upon receipt by the Trustee. A Participant's interest under the Plan in transferred assets which were fully vested and nonforfeitable under the transferring plan will be fully vested and nonforfeitable at all times. Such transferred assets will be invested by the Trustee in accordance with the provisions of paragraph (g) of Section 11.01 as if such assets were transferred from a predecessor plan. No transfer of assets in accordance with this Section may cause a loss of an accrued or optional form of benefit protected by Section 411(d)(6) of the Code. 11.03. ACCEPTANCE OF ASSETS BY TRUSTEE. The Trustee will not accept assets which are not either in a medium proper for investment under the Plan, as set forth in Section 1.14(b), or in cash. Such assets shall be accompanied by written instructions showing separately the respective contributions by the prior employer and by the Employee, and identifying the assets attributable to such contributions. The Trustee shall establish such accounts as may be necessary or appropriate to reflect such contributions under the Plan. The Trustee shall hold such assets for investment in accordance with the provisions of Article 6, and shall in accordance with the written instructions of the Employer make appropriate credits to the Accounts of the Participants for whose benefit assets have been transferred. 11.04. TRANSFER OF ASSETS FROM TRUST. The Employer may direct the Trustee to transfer all or a specified portion of the Trust assets to any other plan or plans maintained by the Employer or the employer or employers of a former Participant or Participants, provided that the Trustee has received evidence satisfactory to it that such other plan meets all applicable requirements of the Code. The assets so transferred shall be accompanied by written instructions from the Employer naming the persons for whose benefit such assets have been transferred, showing separately the respective contributions by the Employer and by each Participant, if any, and identifying the assets 58 83 attributable to the various contributions. The Trustee shall have no further liabilities with respect to assets so transferred. 59 84 ARTICLE 12. MISCELLANEOUS. 12.01. COMMUNICATION TO PARTICIPANTS. The Plan will be communicated to all Participants by the Employer promptly after the Plan is adopted. 12.02. LIMITATION OF RIGHTS. Neither the establishment of the Plan and the Trust, nor any amendment thereof, nor the creation of any fund or account, nor the payment of any benefits, will be construed as giving to any Participant or other person any legal or equitable right against the Employer, Administrator or Trustee, except as provided herein; and in no event will the terms of employment or service of any Participant be modified or in any way affected hereby. It is a condition of the Plan, and each Participant expressly agrees by his participation herein, that each Participant will look solely to the assets held in the Trust for the payment of any benefit to which he is entitled under the Plan. 12.03. NONALIENABILITY OF BENEFITS AND QUALIFIED DOMESTIC RELATIONS ORDERS. The benefits provided hereunder will not be subject to alienation, assignment, garnishment, attachment, execution or levy of any kind, either voluntarily or involuntarily, and any attempt to cause such benefits to be so subjected will not be recognized, except to such extent as may be required by law. The preceding sentence shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined by the Plan Administrator to be a qualified domestic relations order, as defined in Section 414(p) of the Code, or any domestic relations order entered before January 1, 1985. The Administrator must establish reasonable procedures to determine the qualified status of a domestic relations order. Upon receiving a domestic relations order, the Administrator will promptly notify the Participant and any alternate payee named in the order, in writing, of the receipt of the order and the Plan's procedures for determining the qualified status of the order. Within a reasonable period of time after receiving the domestic relations order, the Administrator must determine the qualified status of the order and must notify the Participant and each alternate payee, in writing, of its determination. The Administrator must provide notice under this paragraph by mailing to the individual's address specified in the domestic relations order, or in a manner consistent with the Department of Labor regulations. If any portion of the Participant's Account is payable during the period the Administrator is making its determination of the qualified status of the domestic relations order, the Administrator must make a separate accounting of the amounts payable. If the Administrator determines the order is a qualified domestic relations order within 18 months of the date amounts first are payable following receipt of the order, the Administrator will direct the Trustee to distribute the payable amounts in accordance with the order. If the Administrator does not make his determination of the qualified status of the order within the 18-month determination period, the Administrator will direct the Trustee to distribute the payable amounts in the manner the Plan would distribute if the order did not exist and will apply the order 60 85 prospectively if the Administrator later determines the order is a qualified domestic relations order. A domestic relations order will not fail to be deemed a qualified domestic relations order merely because it requires the distribution or segregation of all or part of a Participant's Account with respect to an alternate payee prior to the Participant's earliest retirement age (as defined in Section 414(p) of the Code) under the Plan. A distribution to an alternate payee prior to the Participant's attainment of the earliest retirement age is available only if (a) the order specifies distribution at that time and (b) if the present value of the alternate payee's benefits under the Plan exceeds $3,500, and the order requires, and the alternate payee consents to, a distribution occurring prior to the Participant's attainment of earliest retirement age. 12.04. FACILITY OF PAYMENT. In the event the Administrator determines, on the basis of medical reports or other evidence satisfactory to the Administrator, that the recipient of any benefit payments under the Plan is incapable of handling his affairs by reason of minority, illness, infirmity or other incapacity, the Administrator may direct the Trustee to disburse such payments to a person or institution designated by a court which has jurisdiction over such recipient or a person or institution otherwise having the legal authority under state law for the care and control of such recipient. The receipt by such person or institution of any such payments shall be complete acquittance therefore, and any such payment to the extent thereof, shall discharge the liability of the Trust for the payment of benefits hereunder to such recipient. 12.05. INFORMATION BETWEEN EMPLOYER AND TRUSTEE. The Employer agrees to furnish the Trustee, and the Trustee agrees to furnish the Employer, with such information relating to the Plan and Trust as may be required by the other in order to carry out their respective duties hereunder, including without limitation information required under the Code and any regulations issued or forms adopted by the Treasury Department thereunder or under the provisions of ERISA and any regulations issued or forms adopted by the Labor Department thereunder. 12.06. EFFECT OF FAILURE TO QUALIFY UNDER CODE. Notwithstanding any other provision contained herein, if the Employer fails to obtain or retain approval of the Plan by the Internal Revenue Service as a qualified Plan under the Code, the Employer may no longer participate in this prototype Plan arrangement and will be deemed to have an individually designed plan. 12.07. NOTICES. Any notice or other communication in connection with this Plan shall be deemed delivered in writing if addressed as provided below and if either actually delivered at said address or, in the case of a letter, three business days shall have elapsed after the same shall have been deposited in the United States mails, first-class postage prepaid and registered or certified: 61 86 (a) If to the Employer or Administrator, to it at the address set forth in the Adoption Agreement, to the attention of the person specified to receive notice in the Adoption Agreement; (b) If to the Trustee, to it at the address set forth in the Adoption Agreement; or, in each case at such other address as the addressee shall have specified by written notice delivered in accordance with the foregoing to the addressor's then effective notice address. 12.08. GOVERNING LAW. The Plan and the accompanying Adoption Agreement will be construed, administered and enforced according to ERISA, and to the extent not preempted thereby, the laws of the Commonwealth of Massachusetts. ARTICLE 13. PLAN ADMINISTRATION. 13.01. POWERS AND RESPONSIBILITIES OF THE ADMINISTRATOR. The Administrator has the full power and the full responsibility to administer the Plan in all of its details, subject, however, to the requirements of ERISA. The Administrator's powers and responsibilities include, but are not limited to, the following: (a) To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan; (b) To interpret the Plan, its interpretation thereof in good faith to be final and conclusive on all persons claiming benefits under the Plan; (c) To decide all questions concerning the Plan and the eligibility of any person to participate in the Plan; (d) To administer the claims and review procedures specified in Section 13.03; (e) To compute the amount of benefits which will be payable to any Participant, former Participant or Beneficiary in accordance with the provisions of the Plan; (f) To determine the person or persons to whom such benefits will be paid; (g) To authorize the payment of benefits and provide for the distribution of Code Section 402(f) notices; (h) To comply with the reporting and disclosure requirements of Part 1 of Subtitle B of Title I of ERISA; (i) To appoint such agents, counsel, accountants, and consultants as may be required to assist in administering the Plan; 62 87 (j) By written instrument, to allocate and delegate its fiduciary responsibilities in accordance with Section 405 of ERISA including the formation of an Administrative Committee to administer the Plan; (k) To provide bonding coverage as required under Section 412 of ERISA. 13.02. NONDISCRIMINATORY EXERCISE OF AUTHORITY. Whenever, in the administration of the Plan, any discretionary action by the Administrator is required, the Administrator shall exercise its authority in a nondiscriminatory manner so that all persons similarly situated will receive substantially the same treatment. 13.03. CLAIMS AND REVIEW PROCEDURES. (a) Claims Procedure. If any person believes he is being denied any rights or benefits under the Plan, such person may file a claim in writing with the Administrator. If any such claim is wholly or partially denied, the Administrator will notify such person of its decision in writing. Such notification will contain (1) specific reasons for the denial, (2) specific reference to pertinent Plan provisions, (3) a description of any additional material or information necessary for such person to perfect such claim and an explanation of why such material or information is necessary, and (4) information as to the steps to be taken if the person wishes to submit a request for review. Such notification will be given within 90 days after the claim is received by the Administrator (or within 180 days, if special circumstances require an extension of time for processing the claim, and if written notice of such extension and circumstances is given to such person within the initial 90-day period). If such notification is not given within such period, the claim will be considered denied as of the last day of such period and such person may request a review of his claim. (b) Review Procedure. Within 60 days after the date on which a person receives a written notice of a denied claim (or, if applicable, within 60 days after the date on which such denial is considered to have occurred), such person (or his duly authorized representative) may (1) file a written request with the Administrator for a review of his denied claim and of pertinent documents and (2) submit written issues and comments to the Administrator. The Administrator will notify such person of its decision in writing. Such notification will be written in a manner calculated to be understood by such person and will contain specific reasons for the decision as well as specific references to pertinent Plan provisions. The decision on review will be made within 60 days after the request for review is received by the Administrator (or within 120 days, if special circumstances require an extension of time for processing the request, such as an election by the Administrator to hold a hearing, and if written notice of such extension and circumstances is given to such person within the initial 60-day period). If the decision on review is not made within such period, the claim will be considered denied. 63 88 13.04. NAMED FIDUCIARY. The Administrator is a "named fiduciary" for purposes of Section 402(a)(1) of ERISA and has the powers and responsibilities with respect to the management and operation of the Plan described herein. 13.05. COSTS OF ADMINISTRATION. Unless some or all are paid by the Employer, all reasonable costs and expenses (including legal, accounting, and employee communication fees) incurred by the Administrator and the Trustee in administering the Plan and Trust will be paid first from the forfeitures (if any) resulting under Section 7.07, then from the remaining Trust Fund. All such costs and expenses paid from the Trust Fund will, unless allocable to the Accounts of particular Participants, be charged against the Accounts of all Participants on a prorata basis or in such other reasonable manner as may be directed by the Employer. ARTICLE 14. TRUST AGREEMENT. 14.01. ACCEPTANCE OF TRUST RESPONSIBILITIES. By executing the Adoption Agreement, the Employer establishes a trust to hold the assets of the Plan. By executing the Adoption Agreement, the Trustee agrees to accept the rights, duties and responsibilities set forth in this Article 14. 14.02. ESTABLISHMENT OF TRUST FUND. A trust is hereby established under the Plan and the Trustee will open and maintain a trust account for the Plan and, as part thereof, Participants' Accounts for such individuals as the Employer shall from time to time give written notice to the Trustee are Participants in the Plan. The Trustee will accept and hold in the Trust Fund such contributions on behalf of Participants as it may receive from time to time from the Employer. The Trust Fund shall be fully invested and reinvested in accordance with the applicable provisions of the Plan in Fund Shares or as otherwise provided in Section 14.10. 14.03. EXCLUSIVE BENEFIT. The Trustee shall hold the assets of the Trust Fund for the exclusive purpose of providing benefits to Participants and Beneficiaries and defraying the reasonable expenses of administering the Plan. No assets of the Plan shall revert to the Employer except as specifically permitted by the terms of the Plan. 14.04. POWERS OF TRUSTEE. The Trustee shall have no discretion or authority with respect to the investment of the Trust Fund but shall act solely as a directed trustee of the funds contributed to it. In addition to and not in limitation of such powers as the Trustee has by law or under any other provisions of the Plan, the Trustee will have the following powers, each of which the Trustee exercises solely as directed Trustee in accordance with the written direction of the Employer except to the extent a Plan asset is subject to Participant direction of investment and provided that no such power shall be exercised in any manner inconsistent with the provisions of ERlSA: 64 89 (a) to deal with all or any part of the Trust Fund and to invest all or a part of the Trust Fund in investments available under the Plan, without regard to the law of any state regarding proper investment; (b) to retain uninvested such cash as it may deem necessary or advisable, without liability for interest thereon, for the administration of the Trust; (c) to sell, convert, redeem, exchange, or otherwise dispose of all or any part of the assets constituting the Trust Fund; (d) to enforce by suit or otherwise, or to waive, its rights on behalf of the Trust, and to defend claims asserted against it or the Trust, provided that the Trustee is indemnified to its satisfaction against liability and expenses; (e) to employ such agents and counsel as may be reasonably necessary in collecting, managing, administering, investing, distributing and protecting the Trust Fund or the assets thereof and to pay them reasonable compensation; (f) to compromise, adjust and settle any and all claims against or in favor of it or the Trust; (g) to oppose, or participate in and consent to the reorganization, merger, consolidation, or readjustment of the finances of any enterprise, to pay assessments and expenses in connection therewith, and to deposit securities under deposit agreements; (h) to apply for or purchase annuity contracts in accordance with Section 8.02; (i) to hold securities unregistered, or to register them in its own name or in the name of nominees; (j) to appoint custodians to hold investments within the jurisdiction of the district courts of the United States and to deposit securities with stock clearing corporations or depositories or similar organizations; (k) to make, execute, acknowledge and deliver any and all instruments that it deems necessary or appropriate to carry out the powers herein granted; and (l) generally to exercise any of the powers of an owner with respect to all or any part of the Trust Fund. The Employer specifically acknowledges and authorizes that affiliates of the Trustee may act as its agent in the performance of ministerial, nonfiduciary duties under the Trust. The expenses and compensation of such agent shall be paid by the Trustee. The Trustee shall provide the Employer with reasonable notice of any claim filed against the Plan or Trust or with regard to any related 65 90 matter, or of any claim filed by the Trustee on behalf of the Plan or Trust or with regard to any related matter. 14.05. ACCOUNTS. The Trustee will keep full accounts of all receipts and disbursements and other transactions hereunder. Within 60 days after the close of each Plan Year, within 60 days after termination of the Trust, and at such other times as may be appropriate, the Trustee will determine the then net fair market value of the Trust Fund as of the close of the Plan Year, as of the termination of the Trust, or as of such other time, whichever is applicable, and will render to the Employer and Administrator an account of its administration of the Trust during the period since the last such accounting, including all allocations made by it during such period. 14.06. APPROVING OF ACCOUNTS. To the extent permitted by law, the written approval of any account by the Employer or Administrator will be final and binding, as to all matters and transactions stated or shown therein, upon the Employer, Administrator, Participants and all persons who then are or thereafter become interested in the Trust. The failure of the Employer or Administrator to notify the Trustee within six (6) months after the receipt of any account of its objection to the account will, to the extent permitted by law, be the equivalent of written approval. If the Employer or Administrator files any objections within such six (6) month period with respect to any matters or transactions stated or shown in the account, and the Employer or Administrator and the Trustee cannot amicably settle the question raised by such objections, the Trustee will have the right to have such questions settled by judicial proceedings. Nothing herein contained will be construed so as to deprive the Trustee of the right to have judicial settlement of its accounts. In any proceeding for a judicial settlement of any account or for instructions, the only necessary parties will be the Trustee, the Employer and the Administrator. 14.07. DISTRIBUTION FROM TRUST FUND. The Trustee shall make such distribution from the Trust Fund as the Employer or Administrator may in writing direct, as provided by the terms of the Plan, upon certification by the Employer or Administrator that the same is for the exclusive benefit of Participants or their Beneficiaries, or for the payment of expenses of administering the Plan. 14.08. TRANSFER OF AMOUNTS FROM QUALIFIED PLAN. If the Plan provides that amounts may be transferred to the Plan from another qualified plan or trust under Section 401(a) of the Code, such transfer shall be made in accordance with the provisions of the Plan and with such rules as may be established by the Trustee. The Trustee will only accept assets which are in a medium proper for investment under this agreement or in cash. Such amounts shall be accompanied by written instructions showing separately the respective contributions by the prior employer and the transferring Employee, and identifying the assets attributable to such contributions. The Trustee shall hold such assets for investment in accordance with the provisions of this agreement. 14.09. TRANSFER OF ASSETS FROM TRUST. Subject to the provisions of the Plan, the Employer may direct the Trustee to transfer all or a specified 66 91 portion of the Trust assets to any other plan or plans maintained by the Employer or the employer or employers of a former Participant or Participants, provided that the Trustee has received evidence satisfactory to it that such other plan meets all applicable requirements of the Code. The assets so transferred shall be accompanied by written instructions from the Employer naming the persons for whose benefit such assets have been transferred, showing separately the respective contributions by the Employer and by each Participant, if any, and identifying the assets attributable to the various contributions. The Trustee shall have no further liabilities with respect to assets so transferred. 14.10. SEPARATE TRUST OR FUND FOR EXISTING PLAN ASSETS. With the consent of the Trustee, the Employer may maintain a trust or fund (including a group annuity contract) under this prototype plan document separate from the Trust Fund for Plan assets purchased prior to the adoption of this prototype plan document which are not Fidelity Funds listed in Section 1.14(b). The Trustee shall have no authority and no responsibility for the Plan assets held in such separate trust or fund. The duties and responsibilities of the trustee of a separate trust shall be provided by a separate trust agreement, between the Employer and the trustee. Notwithstanding the preceding paragraph, the Trustee or an affiliate of the Trustee may agree in writing to provide ministerial recordkeeping services for guaranteed investment contracts held in the separate trust or fund. The guaranteed investment contract(s) shall be valued as directed by the Employer or the Trustee of the separate trust. The trustee of the separate trust (hereafter referred to as "trustee") will be the owner of any insurance contract purchased prior to the adoption of this prototype plan document. The insurance contract(s) must provide that proceeds will be payable to the trustee; however the trustee shall be required to pay over all proceeds of the contract(s) to the Participant's designated Beneficiary in accordance with the distribution provisions of this plan. A Participant's spouse will be the designated Beneficiary of the proceeds in all circumstances unless a qualified election has been made in accordance with Article 8. Under no circumstances shall the trust retain any part of the proceeds. In the event of any conflict between the terms of this plan and the terms of any insurance contract purchased hereunder, the plan provisions shall control. Any life insurance contracts held in the Trust Fund or in the separate trust are subject to the following limits: (a) Ordinary life - For purposes of these incidental insurance provisions, ordinary life insurance contracts are contracts with both nondecreasing death benefits and nonincreasing premiums. If such contracts are held, less than 1/2 of the aggregate employer contributions allocated to any Participant will be used to pay the premiums attributable to them. 67 92 (b) Term and universal life - No more than 1/4 of the aggregate employer contributions allocated to any participant will be used to pay the premiums on term life insurance contracts, universal life insurance contracts, and all other life insurance contracts which are not ordinary life. (c) Combination - The sum of 1/2 of the ordinary life insurance premiums and all other life insurance premiums will not exceed 1/4 of the aggregate employer contributions allocated to any Participant. 14.11. VOTING; DELIVERY OF INFORMATION. The Trustee shall deliver, or cause to be executed and delivered, to the Employer or Plan Administrator all notices, prospectuses, financial statements, proxies and proxy soliciting materials received by the Trustee relating to securities held by the Trust or, if applicable, deliver these materials to the appropriate Participant or the Beneficiary of a deceased Participant. The Trustee shall not vote any securities held by the Trust except in accordance with the written instructions of the Employer, Participant or the Beneficiary of the Participant, if the Participant is deceased; however, the Trustee may, in the absence of instructions, vote "present" for the sole purpose of allowing such shares to be counted for establishment of a quorum at a shareholders' meeting. The Trustee shall have no duty to solicit instructions from Participants, Beneficiaries, or the Employer. 14.12. COMPENSATION AND EXPENSES OF TRUSTEE. The Trustee's fee for performing its duties hereunder will be such reasonable amounts as the Trustee may from time to time specify by written agreement with the Employer. Such fee, any taxes of any kind which may be levied or assessed upon or with respect to the Trust Fund, and any and all expenses, including without limitation legal fees and expenses of administrative and judicial proceedings, reasonably incurred by the Trustee in connection with its duties and responsibilities hereunder will, unless some or all have been paid by said Employer, be paid first from forfeitures resulting under Section 7.07, then from the remaining Trust Fund and will, unless allocable to the Accounts of particular Participants, be charged against the respective Accounts of all Participants, in such reasonable manner as the Trustee may determine. 14.13. RELIANCE BY TRUSTEE ON OTHER PERSONS. The Trustee may rely upon and act upon any writing from any person authorized by the Employer or Administrator to give instructions concerning the Plan and may conclusively rely upon and be protected in acting upon any written order from the Employer or Administrator or upon any other notice, request, consent, certificate, or other instructions or paper reasonably believed by it to have been executed by a duly authorized person, so long as it acts in good faith in taking or omitting to take any such action. The Trustee need not inquire as to the basis in fact of any statement in writing received from the Employer or Administrator. The Trustee will be entitled to rely on the latest certificate it has received from the Employer or Administrator as to any person or persons authorized to act for the Employer or Administrator hereunder 68 93 and to sign on behalf of the Employer or Administrator any directions or instructions, until it receives from the Employer or Administrator written notice that such authority has been revoked. Notwithstanding any provision contained herein, the Trustee will be under no duty to take any action with respect to any Participant's Account (other than as specified herein) unless and until the Employer or Administrator furnishes the Trustee with written instructions on a form acceptable to the Trustee, and the Trustee agrees thereto in writing. The Trustee will not be liable for any action taken pursuant to the Employer's or Administrator's written instructions (nor for the collection of contributions under the Plan, nor the purpose or propriety of any distribution made thereunder). 14.14. INDEMNIFICATION BY EMPLOYER. The Employer shall indemnify and save harmless the Trustee from and against any and all liability to which the Trustee may be subjected by reason of any act or conduct (except willful misconduct or negligence) in its capacity as Trustee, including all expenses reasonably incurred in its defense. 14.15. CONSULTATION BY TRUSTEE WITH COUNSEL. The Trustee may consult with legal counsel (who may be but need not be counsel for the Employer or the Administrator) concerning any question which may arise with respect to its rights and duties under the Plan and Trust, and the opinion of such counsel will, to the extent permitted by law, be full and complete protection in respect of any action taken or omitted by the Trustee hereunder in good faith and in accordance with the opinion of such counsel. 14.16. PERSONS DEALING WITH THE TRUSTEE. No person dealing with the Trustee will be bound to see to the application of any money or property paid or delivered to the Trustee or to inquire into the validity or propriety of any transactions. 14.17. RESIGNATION OR REMOVAL OF TRUSTEE. The Trustee may resign at any time by written notice to the Employer, which resignation shall be effective 60 days after delivery to the Employer. The Trustee may be removed by the Employer by written notice to the Trustee, which removal shall be effective 60 days after delivery to the Trustee. Upon resignation or removal of the Trustee, the Employer may appoint a successor trustee. Any such successor trustee will, upon written acceptance of his appointment, become vested with the estate, rights, powers, discretion, duties and obligations of the Trustee hereunder as if he had been originally named as Trustee in this Agreement. Upon resignation or removal of the Trustee, the Employer will no longer participate in this prototype plan and will be deemed to have adopted an individually designed plan. In such event, the Employer shall appoint a successor trustee within said 60-day period and the Trustee will transfer the assets of the Trust to the successor trustee upon receipt of sufficient evidence (such as a determination letter or opinion letter from the Internal Revenue Service or an opinion of 69 94 counsel satisfactory to the Trustee) that such trust will be a qualified trust under the Code. The appointment of a successor trustee shall be accomplished by delivery to the Trustee of written notice that the Employer has appointed such successor trustee, and written acceptance of such appointment by the successor trustee. The Trustee may, upon transfer and delivery of the Trust Fund to a successor trustee, reserve such reasonable amount as it shall deem necessary to provide for its fees, compensation, costs and expenses, or for the payment of any other liabilities chargeable against the Trust Fund for which it may be liable. The Trustee shall not be liable for the acts or omissions of any successor trustee. 14.18. FISCAL YEAR OF THE TRUST. The fiscal year of the Trust will coincide with the Plan Year. 14.19. DISCHARGE OF DUTIES BY FIDUCIARIES. The Trustee and the Employer and any other fiduciary shall discharge their duties under the Plan and this Trust Agreement solely in the interests of Participants and their Beneficiaries in accordance with the requirements of ERISA. 14.20. AMENDMENT. In accordance with provisions of the Plan, and subject to the limitations set forth therein, this Trust Agreement may be amended by an instrument in writing signed by the Employer and the Trustee. No amendment to this Trust Agreement shall divert any part of the Trust Fund to any purpose other than as provided in Section 2 hereof. 14.21. PLAN TERMINATION. Upon termination or partial termination of the Plan or complete discontinuance of contributions thereunder, the Trustee will make distributions to the Participants or other persons entitled to distributions as the Employer or Administrator directs in accordance with the provisions of the Plan. In the absence of such instructions and unless the Plan otherwise provides, the Trustee will notify the Employer or Administrator of such situation and the Trustee will be under no duty to make any distributions under the Plan until it receives written instructions from the Employer or Administrator. Upon the completion of such distributions, the Trust will terminate, the Trustee will be relieved from all liability under the Trust, and no Participant or other person will have any claims thereunder, except as required by applicable law. 14.22. PERMITTED REVERSION OF FUNDS TO EMPLOYER. If it is determined by the Internal Revenue Service that the Plan does not initially qualify under Section 401 of the Code, all assets then held under the Plan will be returned by the Trustee, as directed by the Administrator, to the Employer, but only if the application for determination is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan was adopted or such later date as may be prescribed by regulations. Such distribution will be made within one year after the date the initial qualification is denied. Upon such distribution the Plan will be considered to be rescinded and to be of no force or effect. 70 95 Contributions under the Plan are conditioned upon their deductibility under Section 404 of the Code. In the event the deduction of a contribution made by the Employer is disallowed under Section 404 of the Code, such contribution (to the extent disallowed) must be returned to the Employer within one year of the disallowance of the deduction. Any contribution made by the Employer because of a mistake of fact must be returned to the Employer within one year of the contribution. 14.23. GOVERNING LAW. This Trust Agreement will be construed, administered and enforced according to ERISA and, to the extent not preempted thereby, the laws of the Commonwealth of Massachusetts. 71 96 CORPORATEPLAN FOR RETIREMENTSM PROFIT SHARING/401(K) PLAN FIDELITY BASIC PLAN DOCUMENT NO. 07 AMENDMENT ONE SECTION 2.01(A)(7) "COMPENSATION" is amended to include: In addition to other applicable limitations set forth in the plan, and notwithstanding any other provision of the plan to the contrary, for plan years beginning on or after January 1, 1994, the annual compensation of each Employee taken into account under the plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual compensation will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For plan years beginning on or after January 1, 1994, any reference in this plan to the limitation under section 401(a)(17) of the Code shall mean the OBRA '93 annual compensation limit set forth in this provision. Notwithstanding 2.01(a)(7)(A), for purpose of Section 4.02 (Additional Limit on Deferral Contributions) and Section 4.04 (Limit on Matching Contributions), the Employer may use Compensation as defined in Section 5.03(e)(2) excluding reimbursements or other expense allowances, fringe benefits (cash and non-cash), moving expenses, deferred compensation and welfare benefits, but including amounts that are not includable in the gross income of the Participant under a salary reduction agreement by reason of the application of Section 125, 402(a)(8), 402(h) or 403(b) of the Code. If compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current plan year, the compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first plan year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000. SECTION 8.01(D) "DISTRIBUTION OF BENEFITS TO PARTICIPANTS AND BENEFICIARIES" is amended to include: (5) If a distribution is one to which sections 401(a)(11) and 417 of the Internal Revenue Code do not apply, such distribution may commence less than 30 days after the notice required under section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (1) the administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. EX-10.35 4 FIRST AMENDMENT TO RETIREMENT SAVINGS PLAN 1 EXHBIT 10.35 STATE OF SOUTH CAROLINA ) FIRST AMENDMENT TO THE ) AMENDED AND RESTATED PLAN COUNTY OF RICHLAD ) THIS AGREEMENT, made as of this _____ day of November, 1996, by RESOURCE BANCSHARES MORTGAGE GROUP, INC. (the "Company") WITNESSETH: WHEREAS, the Company maintains the Resource Bancshares Mortgage Group, Inc. Retirement Savings Plan, effective as of July 1, 1993 (the "Plan") for the benefit of the eligible employees; and WHEREAS, effective April 1, 1996, the Company amended and restated the Plan into a prototype plan utilizing the Fidelity Prototype Plan Basic Plan Document No. 07 and the applicable adoption agreement (the "Restated Plan"); and WHEREAS, in the opinion of the Board of Directors of the Company, the provisions of the Restated Plan should be amended so as to clarify the Restated Plan's eligibility requirements and vesting provisions by authorizing the award of credit for service with Resource Bancshares Corporation; and WHEREAS, in Section 10.1 of the Restated Plan, the Company reserved the right by action of its Board of Directors to amend the Restated Plan. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company covenants and agrees that the Restated Plan as set forth is amended as follows: 1. Effective April 1, 1996, Section 1.08 of the Adoption Agreement shall be amended by inserting: (a) Resource Bancshares Corporation ("RBC"). The Company reserves the right by action of the Board of Directors to amend at any time any of the terms and provisions of this First Amendment. Except as expressly or by necessary implication amended hereby, the Restated Plan shall continue in full force and effect. 2 IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by its duly authorized officers as of the day and year first above written. RESOURCE BANCSHARES MORTGAGE GROUP, INC. By: ------------------------------------- ---------------------------------------- [CORPORATE SEAL] ATTEST: - ----------------------------------- John W. Currie, Secretary 2 EX-10.36 5 ESOP LOAN & SECURITY AGREEMENT 1 EXHIBIT 10.36 THE ESOP LOAN AND SECURITY AGREEMENT BETWEEN RESOURCE BANCSHARES MORTGAGE GROUP, INC. AND THE RESOURCE BANCSHARES MORTGAGE GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST 2 ESOP LOAN AND SECURITY AGREEMENT THIS AGREEMENT, is dated May 3, 1996 by and between RESOURCE BANCSHARES MORTGAGE GROUP, INC. (the "Company") and the RESOURCE BANCSHARES MORTGAGE GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST, a trust established under the laws of the State of New York (the "Borrower"). BACKGROUND. Using funds borrowed from the Company, the Borrower has previously purchased shares of capital stock of the Company. The Company has agreed to loan additional funds to the Borrower (the "ESOP Loan") to enable the Borrower to purchase additional shares of the capital stock of the Company (the "Shares") from shareholders of the Company. NOW, THEREFORE, in consideration of the promises herein contained, and each intending to be legally bound hereby, the parties agree as follows: ARTICLE I. DEFINITIONS. As used herein: "Code" means the Internal Revenue Code of 1986, as amended. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Event of Default" has the meaning set forth in ARTICLE V of this Agreement. "Laws" means all ordinances, statutes, regulations, orders, injunctions, writs or decrees of any government or political subdivision or agency thereof, or of any court or similar entity established by any thereof. "ESOP Note" shall mean a secured promissory note which is issued by the Borrower to evidence any indebtedness incurred by the Borrower to the Company to purchase additional shares of capital stock of the Company (the "Shares"). "Obligations" means the obligation of the Borrower to pay the principal of and interest on an ESOP Note in accordance with the terms thereof and to satisfy all of its 3 other liabilities hereunder to the Company, including any extensions, modifications, or renewals thereof and substitutions therefor. "Person" means any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, joint venture, court or government or political subdivision or agency thereof. "Plan" means the Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Plan, effective as of January 1, 1994. "Rate" means the interest rate set forth in each ESOP Note. ARTICLE II. THE LOAN. 2.01 General Terms. Subject to the terms and conditions of this Agreement, the Company agrees to make one or more term loans to the Borrower, each to be evidenced by and payable as provided in a separate ESOP Note. 2.02 Payment and Prepayment. The Borrower shall repay the principal balance of each ESOP Note (plus accrued interest thereon) at the times and in the amounts set forth in that ESOP Note. The Borrower may prepay without penalty the principal amount of each ESOP Note outstanding in whole or, from time to time, in part. All such partial prepayments shall be applied against the installments of principal in the inverse order of their maturity. 2.03 Interest Rate and Payments of Interest. Interest on the principal balance of each ESOP Note from time to time outstanding will be payable at the Rate, and calculated on the basis of a 360-day year, counting the actual number of days elapsed, and shall be payable in arrears at the same time that principal payments (including any prepayments) are made. If, at any time, the Rate shall be deemed by any competent court of law, governmental agency or tribunal to exceed the maximum rate of interest permitted by applicable Laws, then, for such time as the Rate is deemed excessive, its application shall be suspended and there shall be charged instead the maximum rate of interest permissible under such Laws. 2.04 Order of Payment. Payments under each ESOP Note shall be applied first against any interest accrued as of the date of such payment, and then against the outstanding principal balance. If more than one ESOP Note is outstanding, the Borrower shall designate which ESOP Note each payment shall be applied against. If the Borrower -2- 4 shall fail to make such a designation, then such payment shall be applied against the oldest ESOP Note with a principal balance outstanding at the time of such payment. 2.05 Payment to the Company. All sums payable to the Company hereunder and on each ESOP Note shall be paid directly to the Company in immediately available funds. The Company shall, at the Borrower's request, provide the Borrower from time to time with statements of all amounts due under each ESOP Note. 2.06 Limitation on Repayment. The indebtedness reflected by each ESOP Note is intended to be an "exempt loan" within the meaning of Section 4975(d)(3) of the Code and Section 408(b)(3) of the ERISA. Accordingly, subject to the provisions of Section 6.03, payments of principal and interest shall not exceed the sum of all contributions (excluding any contributions of capital stock of the Company) that are made to the Borrower by the Company to enable the Borrower to meet its obligations under this Agreement and on each ESOP Note, any earnings on such Company contributions and any cash dividends on the Shares purchased with the proceeds thereof (whether or not such Shares have been released from pledge under Section 6.02 at the time the dividend is paid, but subject to the requirements of Section 404(k) of the Code), less payments made in prior years. The Company shall have no recourse against the Borrower other than (a) cash contributions that are made to the Borrower by the Company to enable the Borrower to meet its obligations with respect to a particular ESOP Note, (b) any earnings attributable to the investment of such cash contributions, (c) any cash dividends on the Shares purchased with the proceeds thereof, and (d) the Shares remaining subject to pledge under this Article II but only to the extent permitted under Section 6.03. ARTICLE III. THE BORROWER'S AND THE COMPANY'S REPRESENTATIONS AND WARRANTIES. 3.01 Borrower. To induce the Company to enter into this Agreement, the Borrower represents and warrants to the Company as follows: (A) The Borrower has the power and authority to execute, deliver and perform its obligations under this Agreement and each ESOP Note, and to incur the Obligations herein and therein provided for, and has taken all action necessary to authorize the execution, delivery and performance of this Agreement. (B) Neither the execution nor the delivery of this Agreement by the Borrower will constitute a default under or conflict with any agreement, contract, document, or instrument to which the Borrower now is a party. -3- 5 (C) There is no litigation or proceeding pending against the Borrower, or to the knowledge of the Borrower, threatened that, if decided adversely to the Borrower, would have a material adverse effect upon its financial condition. 3.02 Company. To induce the Borrower to enter into this Agreement, the Company represents and warrants to the Borrower as follows: (A) Corporate Authority. The Company has all requisite power and authority to execute, deliver and perform its obligations under this Agreement. The Company has taken all corporate action to authorize the execution of this Agreement. This Agreement has been duly executed and delivered on behalf of the Company by the authorized corporate officers. (B) Compliance with Laws and Obligations. Neither the execution of this Agreement by the Company nor the fulfillment of any of the Company's obligations under this Agreement will conflict with, or result in a breach or violation of, or constitute a default under any law, rule, regulation, order, injunction or decree of any court, and binding on the Company, or any other obligation, loan, contract or agreement of the Company. 3.03 Survival. All of the representations and warranties set forth in Paragraphs 3.01 and 3.02 shall survive until all Obligations are satisfied in full. ARTICLE IV. THE BORROWER'S AND THE COMPANY'S COVENANTS. The Borrower and the Company do hereby covenant and agree that, so long as any of the Obligations remain unsatisfied, they will comply with the following covenants: 4.01 Borrower. (A) Use of Proceeds. All of the proceeds of a loan represented by each ESOP Note shall be used by the Borrower solely to acquire Shares. Such purchase shall be made in a lawful manner, consistent with the fiduciary requirements of ERISA and the prohibited transaction requirements of the Code. In the event that the Borrower shall for any reason fail to use all of such proceeds within a reasonable time after their draw (within the meaning of Treas. Reg. ss. 54.4975-7(b)(4)) for the purchase of Shares, the Borrower shall promptly return such unused proceeds to the Company, in accordance with the loan prepayment provisions of this Agreement. -4- 6 (B) Continued Qualification. The Borrower will at all times operate in a manner resulting in the Plan's continued qualification under Sections 401(a) and 4975(e)(7) of the Code. (C) Records. The Borrower at all times will keep accurate and complete records of its affairs and the Pledged Shares. The Company or its agents shall have the right to inspect, audit, check, and make extracts from the books, records, journals, orders, receipts, correspondence, and other data of the Borrower. 4.02 Company. (A) Payment of Costs Incurred by the Borrower. The Company will pay all reasonable costs, expenses and fees incurred by the Borrower and by the Trustee of the Borrower in connection with this Agreement. (B) Contributions. The Company will make cash contributions to the Borrower in such amounts and at such times which, when combined with any cash dividends which it pays on the Shares purchased therewith, will be sufficient to enable the Borrower to timely make all principal and interest payments on each ESOP Note. A contribution or dividend by the Company to enable the Borrower to make any given payment shall be made sufficiently prior to the date such payment is due to provide for timely payment on each ESOP Note and shall be made in immediately available funds. ARTICLE V. EVENT OF DEFAULT. If the Borrower shall fail to pay when due any installment of principal or interest payable under an ESOP Note, or if there shall be any breach by Borrower of any covenant, agreement, condition precedent, or undertaking of Borrower contained in this Agreement or an ESOP Note, there shall be an Event of Default hereunder with respect to that ESOP Note. ARTICLE VI. PLEDGE OF SHARES, REMEDIES. 6.01 Pledge. To secure the payment and performance of its Obligations hereunder and under each ESOP Note, Borrower hereby assigns, transfers and pledges the Shares (the "Pledged Shares") purchased with the proceeds of that ESOP Note to the Company. Collateral shall be released from this pledge automatically in accordance with the formula prescribed in Section 6.02. The Company, as pledgee, may at its discretion require the Borrower to deliver custody of some or all of the Pledged Shares to the Company prior to its release, and shall have full power to assign its rights or prospective rights as Pledgee. -5- 7 Prior to the occurrence of an Event of Default, the Borrower shall be entitled to collect and receive all dividends, income, installment sale proceeds, revenue, and profits accruing with respect to the Pledged Shares, and shall have full power with respect to the voting, sale, and other exercise of discretionary shareholder rights with respect to the Pledged Shares. 6.02 Release. As of each Valuation Date (as defined in the Plan) during the term of each ESOP Note, a number of the Pledged Shares attributable thereto shall be released from pledge hereunder and delivered by the Company to the Borrower. The number of Pledged Shares to be so released shall be calculated by multiplying the number of such Pledged Shares held by the Company under that ESOP Note (immediately before the release) by a fraction: the numerator of the fraction shall be the amount of principal and interest paid with respect to that ESOP Note for the fiscal year ending on that date; the denominator of the fraction shall be the sum of the numerator and the remaining payments of principal and interest thereon. 6.03 Remedies. In the case of an Event of Default, the sole remedy of the Company shall be as set forth in this Section 6.03. In the case of an Event of Default, the Company as pledgee shall be entitled to realize upon the Pledged Shares securing the ESOP Note which is subject to the Event of Default up to but not exceeding the amount of Borrower's failure to meet the required payment schedule under that ESOP Note (and not considering any acceleration thereof). The Company as pledgee is entitled to sell at public or private sale or otherwise dispose of any part of such Pledged Shares up to the amount of the Borrower's failure to meet the required payment schedule hereunder, and after deducting from the proceeds of such sale or other disposition all expenses (including reasonable expenses for legal services), the Company may apply any such proceeds toward the satisfaction of the Obligations, up to the amount of the Borrower's failure to meet the required payment schedule hereunder. Any remainder of the proceeds after satisfaction of the Event of Default shall be distributed as required by applicable laws. Notice of any sale or other disposition shall be given to the Borrower at least 30 business days before the time of any such sale or disposition, which the Borrower hereby agrees shall be reasonable notice of such sale or disposition. Subsequent to the occurrence of an Event of Default, Company shall be entitled to collect and receive all dividends, income, installment sale proceeds, revenue, and profits accruing with respect to the Pledged Shares securing that ESOP Note, to be applied against the Obligations as described herein, and shall have full power with respect to the voting, sale, and other exercise of discretionary shareholder rights with respect to that portion of the Pledged Shares the fair market value of which is not in excess of the Borrower's failure to meet the required payment schedule on that ESOP Note. 6.04 No Waivers. No delay or omission by the Company to exercise any right or remedy shall impair any other right or remedy or be construed to be a waiver of any -6- 8 default or an acquiescence therein. Every right and remedy herein conferred or now or hereafter existing at law, in equity, or by statute may be exercised separately or concurrently and in such order and as often as may be deemed reasonable by the Company. ARTICLE VII. MISCELLANEOUS. 7.01 Further Assurance. From time to time, the Borrower will execute and deliver to the Company such additional documents and will provide such additional information as the Company may reasonably require to carry out the terms of this Agreement and be informed of the Borrower's status and affairs. 7.02 Notices. Any notices, consents or information required or requested or permitted by this Agreement shall be in writing and shall be deemed delivered if delivered in person or if sent by certified mail, postage prepaid, return receipt requested, or telegraph, as follows, unless such address is changed by written notice hereunder: (A) If to the Borrower: Marine Midland Bank, Trustee Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust 250 Park Avenue, 4th Floor New York, NY 10177 Attention: Stephen J. Hartman, Jr. (B) If to Company: Resource Bancshares Mortgage Group, Inc. 7909 Parklane Road Columbia, SC 29223 Attention: R. Michael Watson, Jr. 7.03 Applicable Law, Venue. The substantive Laws of the State of New York shall govern the construction of this Agreement and the rights and remedies of the parties hereto, to the extent not pre-empted by ERISA. 7.04 Assignment and Amendment. This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and permitted assigns of the parties hereto. The Borrower has no right to assign any of its rights or obligations hereunder without the prior written consent of the Company. This Agreement, and the documents executed and delivered pursuant hereto and in connection herewith, constitute the entire -7- 9 agreement between the parties and may be amended only by a writing signed on behalf of each the Company (or its assigns) and the Borrower. 7.05 Severability. If any provision of this Agreement shall be held invalid under any applicable Laws, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable. 7.06 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one and the same instrument. 7.07 Non-Recourse. The Company and any subsequent holder of each ESOP Note shall have no recourse against the Borrower with respect to the Obligations, except to the extent of the Pledged Shares. 7.08 Entire Agreement. This Agreement, each ESOP Note, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties and may be amended only by a writing signed on behalf of each party. 7.09 ERISA Construction. Whenever possible, each provision of this Agreement and each ESOP Note shall be construed and interpreted in such manner as to be effective and valid under ERISA and the Code, and regulations issued thereunder, but if any provision of this Agreement or an ESOP Note shall be prohibited by, or invalid or unenforceable under such statutes or regulations, such provision shall be ineffective and unenforceable to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement or that ESOP Note. 7.10 Action Taken As Trustee. The Trustee has executed and delivered this Agreement and will execute and deliver each ESOP Note, not in its individual or corporate capacities, but solely as Trustee of the Borrower. The performance of this Agreement by the Trustee and any and all duties, obligations and liabilities of the Trustee hereunder will be effected by it only as Trustee. The Trustee does not undertake, nor shall have, any -8- 10 individual liability or obligation of any nature whatsoever by virtue of the execution and delivery of this Agreement or an ESOP Note, or the representations, covenants or warranties contained herein. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on May __, 1996. RESOURCE BANCSHARES MORTGAGE GROUP, INC. -------------------------------------- , Managing Director RESOURCE BANCSHARES MORTGAGE GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST MARINE MIDLAND BANK, TRUSTEE By: ---------------------------------- Stephen J. Hartman, Jr., solely in his capacity as authorized signer for the Trustee of the Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust, and not in his individual capacity. -9- EX-11.1 6 STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE 1 EXHIBIT 11.1 RESOURCE BANCSHARES MORTGAGE GROUP, INC. STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE, PRIMARY and FULLY DILUTED EARNINGS PER SHARE ($ in thousands, except per share amounts)
For the Year Ended December 31, 1996 ------------------------------------------------------------------------- Net income $19,623 Net income per share (1) $ 1.08 Primary and fully diluted earnings per share (2) $ 1.05
1) The number of common shares outstanding used to compute net income per share was 18,240,994, which includes the retroactive adjustment for the seven percent stock dividend that was issued on September 24, 1996. 2) Primary and fully diluted earnings per share for the year ended December 31, 1996, was calculated based on weighted average shares outstanding of 18,787,671 and 18,824,535, respectively, which assumes the exercise of options covering 1,287,587 shares and computes incremental shares using the treasury stock method. EX-13.1 7 1996 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13.1 RESOURCE BANCSHARES MORTGAGE GROUP, INC. TABLE OF CONTENTS Mission Statement Letter to Our Shareholders Production and Servicing Highlights Selected Financial Highlights Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Financial Statements and Notes Report of Independent Accountants Stock Data Directors and Officers Corporate Information MISSION STATEMENT To maximize shareholders' value by engaging primarily in the business of correspondent, wholesale and retail mortgage banking, while maintaining flexibility in our review of other opportunities. To service our clients and our clients' customers in an efficient, economically responsible and fair manner. To support our people and the communities in which they reside. 2 LETTER TO OUR SHAREHOLDERS: As we reflect back on 1996, a year of records, we remain focused on the future. After all, it is our vision for the future, rather than our achievements of the past, that will ensure your investment in the Company provides the returns you are seeking. 1996-A RECORD YEAR During 1996, your Company achieved record market share, loan production, total revenue and net income. But for the non-recurring, fourth-quarter charge of $3.2 million ($0.17 per share), earnings per share would also have set a new record of $1.25. During the year we also successfully completed a $63.9 million follow-on stock offering, instituted a quarterly cash dividend program, and acquired over $1.4 billion in servicing through bulk transactions. By the close of 1996, we had solidified our presence in the mortgage marketplace, becoming the 11th-largest loan originator in the country (up from 13th in 1995 and 37th in 1994). All this was achieved without neglecting our loan production platform, the heart and soul of the Company. During 1996, we hired two new account executives to facilitate our entry into the California market and expanded our number of approved correspondents from 726 to 871. Similarly, we opened three new wholesale branches in the major metropolitan markets of Baltimore, Denver and St. Louis. The total number of approved brokers who deliver product through RBMG increased from 1,144 to 2,322, a rise of 103%. These investments in the agency-eligible side of our business are expected to help expand both market share and profitability in the years ahead. Although these achievements continued our year-in, year-out track record of creating enhanced shareholder value, we candidly acknowledge we did not meet all of our financial goals for 1996. Returns on equity and assets of 16.8% and 2.2%, respectively (prior to consideration of the non-recurring 1996 charge), were below our long-term targets, but we look to improve on these percentages in the future.
ESTIMATED MARKET SHARE 1993 1994 1995 1996 - --------------------------------- 0.42% 0.37% 1.11% 1.26%
MORTGAGE LOANS PURCHASED/ORIGINATED (In Millions) 1992 1993 1994 1995 1996 - ------- ------- ------- ------- ------- $2,458 $4,239 $2,875 $7,136 $9,996
3 THE FUTURE It is with great excitement that we report to you our plans for the future -- a plan whose essence is captured in the theme of this year's Annual Report: GROWTH THROUGH DIVERSIFICATION. Recognizing that the Company serves two distinct customer groups -- small loan producers and large mortgage loan servicers -- we are now positioned as a nationwide loan wholesaler, providing efficient secondary market access to smaller producers of agency-eligible loan products. Simultaneously, we are also positioned among the largest national suppliers of servicing rights to the still-consolidating mortgage servicing industry. Although our financial achievements testify to the prudence of our strategic approach, we are nonetheless perceived by the marketplace as a non-diversified, single-industry lender operating in an increasingly commoditized market. We believe our plan of GROWTH THROUGH DIVERSIFICATION can overcome this perception -- leading to enhanced shareholder value in the form of improved price-to-earnings and price-to-book multiples. After considerable study, we selected the subprime mortgage marketplace, which is countercyclical to the agency-eligible market, as a nearly ideal opportunity for diversifying our revenue sources. Specifically, we can access this marketplace as a wholesaler with the same objective of providing efficient secondary market access to small producers of subprime loan products. Simultaneously, we can leverage our low-cost operational infrastructure and our existing loan production platform -- along with our reputation for exceptional customer service -- to rapidly establish a nationwide presence in this industry. We are pleased to report that our plan is already well underway. In January, 1997, we signed a letter of intent to merge with Meritage Mortgage Corporation, a wholesale originator of subprime mortgages on the West Coast. Meritage was formed just over a year ago, but its key personnel have over a decade of successful experience as subprime mortgage lenders. By merging with Meritage and its management expertise, we would expect to jump-start our plans to make an aggressive entry into this marketplace. Simultaneously, we've assembled a staff of experienced subprime lenders in Columbia, who have started building an East Coast operation to complement the efforts of Meritage on the West Coast. Upon consummation of the Meritage merger, which we expect to complete during the second quarter, we are increasingly confident that these initiatives will contribute significantly to our 1997 earnings performance.
TOTAL REVENUES NET INCOME ($000) ($000) 1993 1994 1995 1996 1992 1993 1994 1995 1996 - ------- ------- ------- -------- ------- ------- ------- ------- ------- $47,756 $56,622 $76,697 $126,617 $11,250 $17,580 $18,043 $14,219 $19,623
4 OUR GOAL On June 3, 1993 the Company went public at a stock dividend-adjusted offering price of $6.12 per share. In just a little over three and one-half years, our stock price has risen 133% to close at $14.25 as of December 31, 1996. In short, our goal over the next three and one-half years is to replicate our superior stockholder returns through implementation of our plan of GROWTH THROUGH DIVERSIFICATION. We appreciate your continued commitment and support. In return, we will continue to apply the very best of our talents, our abilities and our energies with the objective of creating ever greater value for you, our stockholder. Edward J. Sebastian Chairman & Chief Executive Officer March 18, 1997
PROFITABILITY REVIEW BEFORE NON-RECURRING CHARGE 1993 1994 1995 1996 ------------------------------------------------------------------ Earnings Per Share $ 0.80 $ 1.16 $ 0.92 $ 1.25 ROA 4.81% 5.25% 1.95% 2.22% ROE 38.50% 25.98% 17.00% 16.78%
Note: All earnings per share data has been adjusted for the Stock Dividends
PROFITABILITY REVIEW AFTER NON-RECURRING CHARGE 1993 1994 1995 1996 ------------------------------------------------------------------ Earnings Per Share $ 0.80 $ 1.16 $ 0.92 $ 1.08 ROA 4.81% 5.25% 1.95% 1.91% ROE 38.50% 25.98% 17.00% 14.43%
Note: All earnings per share data has been adjusted for the Stock Dividends
STOCK PERFORMANCE MAY 26, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1993 1994 1995 1996 - ------------------------------------------------------------------------------------- RBMG 100 121.4 132.3 217.7 233.0 NASDAQ 100 110.4 108.0 152.7 187.8 MBA Peer Group 100 97.4 87.2 126.4 158.2
5 PRODUCTION AND SERVICING HIGHLIGHTS INCREASED PRODUCTION
TOP MORTGAGE ORIGINATORS IN 1996 (VOLUME IN BILLIONS) - -------------------------------------------------------------------------------------------- RANK RANK LENDER VOLUME MARKET SHARE (1996) (1995) - -------------------------------------------------------------------------------------------- 1 1 Norwest Mortgage, Inc.* $51.48 6.4% 2 2 Countrywide Home Loans $38.82 4.8% 3 4 Chase Manhattan Mortgage* $33.56 4.2% 4 20 HomeSide Lending $19.64 2.4% (BancBoston)* 5 6 Fleet Mortgage $17.81 2.2% 11 13 RBMG, Inc. $ 9.96 1.2%
*Chase Manhattan Mortgage's numbers reflect merger with Chemical, Norwest Mortgage's numbers reflect acquisition of Prudential Home Mortgage, and HomeSide Lending's numbers reflect the acquisition of Barnett Mortgage. Source: Inside Mortgage Finance, January 24, 1997 Production volume rose over 40% in 1996, the Company's second straight year of exceptional growth and fourth in the past five. Our market share also rose, from 1.11% to 1.26% (a 13.5% increase), pushing the Company into 11th place nationally among mortgage loan originators, up from 13th place in 1995.
PRODUCTION MIX 1994 1995 1996 ---- ---- ---- Correspondent 99% 88% 79% Wholesale 1% 9% 14% Retail 3% 7% ---- ---- ---- Total 100% 100% 100%
As our wholesale and retail channels increased their percentage contribution to the Company's volume, core margins showed steady improvement over the last half of the year, growing from $0.61 per share on $5.6 billion in production in the first six months, to $0.64 (prior to the non-recurring item in the fourth quarter) on only $4.4 billion in production from July through December. These improved margins bode well for future profitability. 6 CORRESPONDENT LENDING
CORRESPONDENT LOAN PRODUCTION ($ millions) 1992 1993 1994 1995 1996 - ------- ------- ------- ------- ------- $2,458 $4,239 $2,855 $6,252 $7,915
Correspondent mortgage banking remains the Company's primary production channel, still providing nearly 80% of total Company origination volume in 1996. As evidence of our commitment to correspondent lending, the Company chose this line of business to lead the Company's first venture into California, placing two new account executives there late in the year. Growth in this division remained solid, as correspondent production for the year rose to $7.9 billion, a 27% increase over 1995. The number of approved correspondents rose by 145, representing a 20% increase.
GROWTH OF THE CORRESPONDENT NETWORK - ------------------------------------------------------------------------------- 12/31/94 12/31/95 12/31/96 - ------------------------------------------------------------------------------- Approved Correspondents 485 726 871 Regional Account Executives 9 10 11 Production (in billions) $2.9 $6.3 $7.9
TOP CORRESPONDENT/BROKER ORIGINATORS IN 1996 (VOLUME IN BILLIONS)
- -------------------------------------------------------------------------------------------- RANK LENDER WHOLESALE* TOTAL WHOLESALE AS (1996) ORIGINATIONS ORIGINATIONS % OF TOTAL - -------------------------------------------------------------------------------------------- 1 Countrywide Home Loans $30.54 $38.82 78.7% 2 Norwest Mortgage, Inc. $25.16 $51.48 48.9% 3 HomeSide Lending (BancBoston) $18.74 $19.64 95.4% 4 Chase Manhattan Mortgage $22.09 $33.56 65.8% 5 Fleet Mortgage $14.29 $17.81 80.2% 6 RBMG, Inc. $ 9.29 $ 9.96 93.3%
*Wholesale includes correspondent and broker originations. Source: Inside Mortgage Finance, February 14, 1997 EXCEPTIONAL CUSTOMER SERVICE KEEPS OUR CORRESPONDENTS/BROKERS HAPPY. THE RESULTS SPEAK FOR THEMSELVES. As a result of continued strong performance by the Company's correspondent division, plus continued investment in our wholesale division, the Company retained its position as 7 the country's sixth-largest correspondent/broker mortgage originator. The addition of the California market and continued emphasis on the Texas and Pacific Northwest markets should position RBMG as a top-five correspondent/broker originator. 93.3% of RBMG's 1996 loan production was originated through correspondent/broker channels, which is the Company's primary business focus because of its inherent lower cost structure. According to Inside Mortgage Finance, RBMG's percentage is among the highest of the top 15 lenders in this category. PLATFORM EXPANSION WHOLESALE LENDING
WHOLESALE LOAN PRODUCTION ($ thousands) 1994 1995 1996 - --------- --------- ----------- $19,931 $673,201 $1,411,643
Since the formation of this division in late 1994, it has grown dramatically, now contributing 14% of the Company's production volume. 1996 production outpaced that of 1995 by nearly $750 million, a 110% increase.
NUMBER OF BRANCHES APPROVED BROKERS 1994 1995 1996 1994 1995 1996 - ------ ------ ------ ------ ------ ------ 3 10 13 190 1,144 2,322
The number of approved brokers more than doubled in 1996. The recent addition of branches in Denver, St. Louis and the metropolitan Baltimore area, bringing the number of the Company's wholesale branches to 13, affords opportunity for future growth as well. The Company continues to evaluate other new markets as candidates for additional wholesale branches, including various California locations. The Company also intends to leverage its wholesale branch network as a base on which to build its subprime originations platform. Continued consolidation among the larger banks and mortgage companies will cause a steady stream of brokers entering the business as these companies downsize and merge operations. 8
DIRECT OPERATING EXPENSES (AS BASIS POINTS OF PRODUCTION) 1994 1995 1996 - --------- --------- --------- 214 bps 55bps 60bps
With further expansion of the wholesale division and resulting increased production from 1994 to 1996, the Company has been able to reduce the division's operating expenses as a percentage of production. RBMG'S EXPANSION INTO WHOLESALE AND RETAIL OPERATIONS HAS BEEN SUCCESSFUL. BOTH DIVISIONS ARE NOW OPERATING PROFITABLY. RETAIL LENDING
RETAIL LOAN PRODUCTION ($ thousands) 1995 1996 - ------------- ----------- $210,565 $668,759
In 1996, the Company began to fully realize the results of its entrance into the retail mortgage market in May 1995. Production from this channel grew from $211 million in 1995 to $669 million in 1996, an increase of $458 million, or 218%. Five new "satellite" branches were opened during the year to facilitate further market penetration. In addition, two joint ventures were initiated late in the year that are expected to further contribute to profits.
DIRECT OPERATING EXPENSES (AS BASIS POINTS OF PRODUCTION) 1995 1996 --------- --------- 359 bps 239 bps
As production has increased from 1995 to 1996, there has been a corresponding decrease in direct operating expenses as a percentage of production. The Company has been able to manage costs by leveraging the expertise of its seasoned retail management group, who have worked together for more than 13 years. Opportunities to fine tune and enhance the retail operations are still abundant. A closing operation is now operative in New York that will enable RBMG to retain a greater portion of fee income while incurring little additional expense. 9 EXPANDING SERVICING PORTFOLIO LOAN SERVICING HIGHLIGHTS
SERVICING PORTFOLIO BALANCES ($ in millions) 1992 1993 1994 1995 1996 - -------- -------- ------- ------- ------- $1,198 $1,921 $4,040 $5,563 $6,670
The Company continued to pursue its strategy of bargain hunting in the acquisition of bulk servicing packages in 1996. By utilizing a combination of in-house and analyst portfolio valuation techniques, we identified and acquired several reasonably priced packages, totaling $1.4 billion for 1996. Given the current fierce competition for servicing, resulting in agressive bidding for most packages offered for sale, the Company began to execute an alternative approach to build its longer-term portfolio in 1996 by routinely retaining a percentage of our own production each quarter. BY ROUTINELY SELLING A HIGH PERCENTAGE OF THE SERVICING IT PRODUCES, RBMG CAN EFFECTIVELY MANAGE PREPAYMENT RISK AND IMMEDIATELY REALIZE THE CASH VALUE OF THE SERVICING IT CREATES.
SERVICING PORTFOLIO SUMMARY - ----------------------------------------------------------------------------- 12/31/95 12/31/96 - ----------------------------------------------------------------------------- OWNED: Portfolio Balance ($000) $5,562,930 $6,670,267 Loans Serviced 64,579 75,572 Average Loan Size $ 86,141 $ 88,758 Weighted Average Note Rate 7.84% 7.92% Weighted Average Maturity (Months) 302 288 Weighted Average Service Fee 42bps 39bps Total Delinquencies (Loan Count) 3.42% 3.75% Basis - Multiple of Service Fee 4.26x 4.22x SUBSERVICED: Portfolio Balance ($000) $2,258,806 $1,988,475 Loans Serviced 25,484 20,515 Average Loan size $ 88,636 $ 96,928 Average Owned and Subserviced Portfolio Balance ($000) $6,397,186 $8,814,560
Although the subservicing portfolio balance at the end of 1996 was 12% less than the 1995 year-end balance, the average portfolio balance for 1996 that is owned and subserviced has increased by 38% over the 1995 average. As a combined result of acquisitions and retentions, the Company grew its servicing portfolio nearly 20% over the 10 past year. Our intent for 1997 is to accelerate this growth, using both approaches, with a goal of $10 billion by sometime during 1998. EXPANDING INTO SUBPRIME MARKET SUBPRIME LENDING Perhaps the most exciting prospect the Company faces currently is its venture into the subprime lending market. Assuming our pending merger with Meritage Mortgage, Corporation closes, the Company would gain an immediate foothold in this market. Even more promising, Meritage is still a young company - despite the substantial cumulative experience of its key personnel - with considerable potential for rapid growth. Add to this scenario the simultaneous formation of an East-Coast subprime unit, also laden with experience, and the Company is poised to become a significant player in the industry. To generate even greater returns from our new subprime operations, the Company is aggressively pursuing the capacity to perform its own securitizations. In fact, current plans foresee completing our first securitization perhaps as early as the second quarter of 1997. "REMI's entry into the subprime market should position it for strong future growth." UBS Securities, Equity Research, (REMI), February 27, 1997 11 STOCK PERFORMANCE
STOCK PERFORMANCE - -------------------------------------- 12/31/93 12/31/94 12/31/95 12/31/96 - -------------------------------------- $7.43 $8.09 $13.32 $14.25
"REMI is still in its initial growth stage." UBS Securities, Equity Research, (REMI), February 27, 1997 "Resource's stock remains a bargain at $14.25 a share ... selling at just 8.1 times projected 1997 earnings. Industry leader Countrywide Credit, by contrast, with more modest growth prospects, is trading at 10.7 times projected earnings." Smart Money Magazine March 1997 "The company has always been able to make money when others weren't...They know what they are doing." Rick Lawson, Weitz & Company as quoted in Smart Money Magazine March 1997 12 SELECTED FINANCIAL HIGHLIGHTS ($ in thousands, except share information)
- ------------------------------------------------------------------------------------------------------------------------------- At or for the Year Ended December 31, 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT Net interest income $ 16,902 $ 8,635 $ 7,686 $ 9,616 $ 9,200 Net gain on sale of mortgage loans 79,178 33,822 1,160 2,167 2,262 Gain on sale of mortgage servicing rights 1,105 7,346 33,375 29,202 17,491 Loan servicing fees 28,763 24,205 14,196 6,128 3,216 Total revenues 126,617 76,697 56,622 47,756 32,826 Salary and employee benefits 55,578 31,199 15,986 12,203 10,048 Total expenses (including taxes) 106,994 62,478 38,579 30,176 21,576 Net income 19,623 14,219 18,043 17,580 11,250 PER COMMON SHARE DATA (2) Net income per common share $ 1.08 $ 0.92 $ 1.16 $ 0.80 (1) N/A Market value per common share at year-end 14.25 13.32 8.09 7.43 N/A Book value per common share at year-end 8.16 6.00 5.21 4.04 N/A Cash dividends per common share 0.06 BALANCE SHEET Mortgage loans held for sale and mortgage-backed securities $ 802,335 $ 1,035,229 $ 119,044 $ 587,208 $ 330,305 Mortgage servicing rights, net 109,815 99,912 65,840 15,123 10,630 Total assets 1,028,394 1,231,097 237,631 639,425 364,328 Total liabilities 871,093 1,137,693 157,017 576,942 344,388 Stockholders' equity and parent equity in the division 157,301 93,404 80,614 62,483 19,940 STATISTICS Total loan production $ 9,995,725 $ 7,135,774 $ 2,875,265 $ 4,239,100 $ 2,458,302 Total servicing portfolio (including subservicing) 8,658,742 7,821,736 5,876,508 3,049,270 1,830,825 Return on average assets 1.91% 1.95% 5.25% N/A (3) N/A (3) Return on average equity 14.43% 17.00% 25.98% N/A (3) N/A (3)
(1) Resource Bancshares Mortgage Group, Inc.'s initial public offering was consummated on June 3, 1993. Net income per common share for 1993 was calculated based on net income subsequent to the date of the initial public offering through December 31, 1993, of $12,465. (2) Amounts have been adjusted for Stock Dividends as defined elsewhere in this Annual Report. (3) Because of the significantly different capital structure of the Company prior to its initial public offering, these statistics are not comparatively meaningful for periods prior to, and including the date on which, the initial public offering was consummated. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the financial information and the Consolidated Financial Statements of the Company (including the notes thereto) contained elsewhere in this document. To the extent that any statement below (or elsewhere in this document) is not a statement of historical fact and could be considered a forward-looking statement, the "Risk Factors" discussion set forth in the Company's final Prospectus dated March 11, 1996, identifies important factors that could cause actual results to differ materially from those in the forward-looking statement. THE COMPANY Resource Bancshares Mortgage Group, Inc. (the Company), was organized under Delaware law in 1992 to acquire and operate the mortgage banking business of Resource Bancshares Corporation (RBC), which commenced operations in May 1989. The assets and liabilities of the mortgage banking business of RBC were transferred to the Company on June 3, 1993, when the Company sold 58% of its common stock in an initial public offering. As a result, RBC retained a significant ownership interest in the Company. As of December 31, 1996, RBC owned approximately 38% of the outstanding common stock of the Company. The Company is principally engaged in the purchase and origination of residential mortgage loans, which it aggregates into mortgage-backed securities issued or guaranteed by the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA) and the Government National Mortgage Association (GNMA). The Company sells the mortgage-backed securities it creates to institutional purchasers with the rights to service the underlying loans being retained by the Company. The servicing rights retained are generally sold separately but may be held for extended periods by the Company. LOAN PRODUCTION The Company purchases mortgage loans from its correspondents and through its wholesale division. The Company originates mortgage loans through its retail division. A summary of loan production by source for the periods indicated is set forth below:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 1994 ---------- ---------- ---------- Loan Production: Correspondent Division $7,915,323 $6,252,008 $2,855,334 Wholesale Division 1,411,643 673,201 19,931 Retail Division 668,759 210,565 ---------- ---------- ---------- Total Loan Production $9,995,725 $7,135,774 $2,875,265 ========== ========== ==========
14 Historically, the Company was exclusively focused on purchasing loans through its correspondents. In order to diversify its sources of loan volume, the Company started a wholesale operation, which purchased its first loan in May 1994, and a retail operation, which originated its first loan in May 1995. Accordingly, correspondent operations have accounted for a diminishing percentage of the Company's loan production (79% for 1996, as compared to 88% for 1995 and 99% for 1994) as the wholesale and retail operations have grown. Management anticipates that wholesale and retail operations will continue to account for an increasing percentage of total loan production as those divisions are further expanded and approach capacity. In general, management has targeted as a near-term goal a production mix of approximately 70% correspondent , 20% wholesale and 10% retail. A summary of key information relevant to industry loan production activity is set forth below:
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ U.S. 1-4 Family Mortgage Originations Statistics (1): U.S. 1-4 Family Mortgage Originations $791,000,000 $644,000,000 $769,000,000 Adjustable Rate Mortgage Market Share 27.00% 30.00% 39.00% Company Information: Loan Production $ 9,995,725 $ 7,135,774 $ 2,875,265 Estimated Company Market Share 1.26% 1.11% 0.37%
(1) Source: Mortgage Bankers Association of America, Economics Department. Although nationwide production increased by 23% from 1995 to 1996, the Company was able to increase its production by 40% during the same time period, thereby increasing its 1996 market share by 14% over that for 1995. The 40% increase in Company loan production was primarily due to the combined positive impact of: 1) the overall increase in the market volume of originations nationwide, which is related to the mortgage interest-rate environment among other factors; 2) expansion of the Company's production network, including realization of a full year's production from the wholesale and retail divisions; and 3) the decline in the adjustable-rate mortgage (ARM) share of the U.S. market, from 30% in 1995 to 27% for 1996. The Company is primarily focused on purchase and origination of fixed-rate, 1-4 family residential mortgage loans. As such, the Company is competitively disadvantaged in economic environments that tend to favor ARMs over fixed-rate mortgages (Generally lower long-term fixed-rate and flatter yield-curve environments tend to favor fixed-rate originations.) Although nationwide production decreased by 16% from 1994 to 1995, the Company was able to increase its production by 148% during the same time period, thereby nearly tripling its market share from 0.37% for 1994 to 1.11% for 1995. The increase in the Company's loan production was primarily due to the expansion of the Company's production network and the decline in the ARM share of the U.S. market from 39% in 1994 to 30% for 1995. 15 Correspondent Loan Production Through its correspondents, the Company purchases loans that have been originated by such correspondents with property owners. Correspondents are primarily mortgage lenders, larger mortgage brokers and smaller savings and loan associations and commercial banks. The Company continues to emphasize correspondent loan production as its primary business focus because of the lower fixed expenses and capital investment required of the Company. That is, the Company can develop a cost structure that is more directly variable with loan production because the correspondent incurs most of the fixed costs of operating and maintaining branch office networks and of identifying and interacting directly with loan applicants. A summary of key information relevant to the Company's correspondent loan production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------- 1996 1995 1994 ---------- ---------- ---------- Correspondent Loan Production $7,915,323 $6,252,008 $2,855,334 Estimated Correspondent Market Share 1.00% 0.97% 0.37% Approved Correspondents 871 726 485
The Company's correspondent market share increased slightly, to 1.00% for 1996 as compared to 0.97% for 1995. This rise is primarily due to the Company's correspondent production increasing by 27% for 1996, while nationwide production increased by only 23%. The Company's correspondent production outpaced nationwide trends primarily due to the Company's 20% growth in the network of approved correspondents, to 871 at December 31, 1996, from 726 at December 31, 1995. The 119% increase in correspondent loan production, from $2.9 billion for 1994 to $6.3 billion for 1995, was primarily due to the combined positive impact of expansion of the Company's correspondent network and the decline in the ARM share of the U.S. market, from 39% in 1994 to 30% for 1995. The number of approved correspondents increased by 241 or 50% during 1995, from 485 at December 31, 1994, to 726 at December 31, 1995. These positive factors more than offset the negative effects of the 16% reduction in the overall U.S. market for 1-4 family residential mortgage loans. As a result, the Company's correspondent market share nearly tripled, to 0.97% for 1995 from 0.37% for 1994. Wholesale Loan Production In May 1994, the Company began its expansion into the wholesale mortgage banking business. In connection therewith, the Company receives loan applications through brokers, underwrites the loan, funds the loan at closing and prepares all closing documentation. The wholesale branches also handle all shipping and follow-up procedures on loans. Although the establishment of wholesale branch offices involves the incurrence of the fixed expenses associated with maintaining those offices, wholesale operations also provide for higher profit margins than correspondent loan production. Additionally, each branch office can serve a relatively sizable geographic area by establishing relationships with large numbers of 16 independent mortgage loan brokers who bear much of the cost of identifying and interacting directly with loan applicants. A summary of key information relevant to the Company's wholesale production activities is set forth below:
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31, -------------------------------------- 1996 1995 1994 ---------- ---------- ---------- Wholesale Loan Production $1,411,643 $ 673,201 $ 19,931 Estimated Wholesale Market Share 0.18% 0.10% 0.00% Wholesale Division Direct Operating Expenses $ 8,540 $ 3,697 $ 427 Approved Brokers 2,322 1,144 190 Number of Branches 13 10 3 Number of Employees 126 98 15
The 110% ($738 million) increase in wholesale loan production, from $673 million for 1995 to $1.4 billion for 1996, was driven primarily by the full year impact for 1996 of production out of the new branches added during 1995. As a result thereof, together with the associated significant increase in broker relationships, our wholesale market share increased 80% year to year. Similarly, the $653 million increase in wholesale production from 1994 to 1995 resulted from a combination of branch expansion during 1995, and the associated growth in established broker relationships. Management anticipates the wholesale division will continue to account for an increasing percentage of the Company's total loan production as existing operations approach capacity and as the branch network is further expanded. Retail Loan Production In mid-1995, the Company expanded into the retail mortgage banking business in the northeast. The establishment of the retail division was made in the context of the demographics and market conditions affecting the northeast and is expected to be unique within the context of the Company's primary business strategies of continuing to increase the number of correspondents and expand its wholesale division. The retail operation further diversifies the Company's sources of loan volume and permitted management to retain a group of seasoned and profitable originators who had previously worked together for 13 years. Management believes that in this particular case these positive considerations, together with the higher relative profit margins typical for retail originations, outweigh the increased earnings risk associated with the retail division's higher fixed-cost structure. A summary of key information relevant to the Company's retail production activities that commenced in May 1995 is set forth below: 17
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 -------- -------- -------- Retail Loan Production $668,759 $210,565 N/A Estimated Retail Market Share 0.08% 0.03% N/A Retail Division Direct Operating Expenses $ 15,963 $ 7,584 N/A Number of Branches 6 6 N/A Number of Employees 209 158 N/A
The $458 million increase in retail loan production, to $669 million for 1996 from $211 million for 1995, relates to the Company's initial May 1995 expansion into this production channel. The increase in market share to 0.08% for 1996 from 0.03% for 1995 resulted primarily from realization of a full year's production from the retail channel in 1996. Management anticipates that the retail division will account for an increasing percentage of the Company's total loan production as the existing operations approach capacity. However, there are no current plans to increase the number of retail branches. LOAN SERVICING Loan servicing includes collecting and remitting mortgage loan payments, accounting for principal and interest, holding escrow funds for payment of mortgage-related expenses such as taxes and insurance, making advances to cover delinquent payments, making inspections as required of the mortgaged premises, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults and generally administering mortgage loans. The Company's strategy is to sell a substantial portion of its produced mortgage servicing rights to other approved servicers. Typically, the Company sells mortgage servicing rights within 90 to 180 days of purchase or origination. However, for strategic reasons, the Company also strives to maintain a servicing portfolio whose size is determined by reference to the Company's cash operating costs which, in turn, is largely determined by reference to the size of its loan production platform. By continuing to focus on the low-cost correspondent production channel, the Company is able to minimize the cash operating cost of its loan production platform and thus the strategically required size of its loan servicing operation. A summary of key information relevant to the Company's loan servicing activities is set forth below: 18
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Underlying Unpaid Principal Balances: Beginning Balance $ 5,562,930 $ 4,039,847 $ 1,920,593 Loan Production (net of servicing- released production) 9,912,365 6,615,441 2,875,265 Net Change in Work-in-Process 535,847 Bulk Acquisitions 1,354,592 390,632 3,352,928 Sales of Servicing (9,521,451) (4,622,018) (3,802,498) Paid-In-Full Loans (504,312) (400,897) (133,289) Amortization, Curtailments, and Other, net (669,704) (460,075) (173,152) ----------- ----------- ----------- Ending Balance 6,670,267 5,562,930 4,039,847 Subservicing Ending Balance 1,988,475 2,258,806 1,836,661 ----------- ----------- ----------- Total Underlying Unpaid Principal Balances $ 8,658,742 $ 7,821,736 $ 5,876,508 =========== =========== =========== Loan Servicing Fees $ 28,763 $ 24,205 $ 14,196 Cash Operating Expenses $ 81,135 $ 45,053 $ 24,972 Coverage Ratio 35% 54% 57% Average Underlying Unpaid Principal Balances (including subservicing) $ 8,814,560 $ 6,397,186 $ 4,298,435 Weighted Average Note Rate 7.92% 7.84% 7.87% Weighted Average Servicing Fee 0.39% 0.42% 0.46% Delinquency (30+ days), Including Bankruptcies and Foreclosures 3.75% 3.42% 3.36% Number of Servicing Division Employees 128 115 85
The $2.4 billion or 38% increase in the average underlying unpaid principal balance of mortgage loans being serviced for 1996 as compared to 1995 is primarily related to the Company's increased loan production volumes during 1996 and the Company's $1.4 billion in bulk acquisitions of servicing primarily during the third quarter of 1996. Since the Company generally sells servicing rights related to the loans it produces within 90 to 180 days of purchase or origination, increased production volumes generally result in a higher volume of mortgage servicing rights held in inventory pending sale. The $2.1 billion or 49% increase in the average underlying unpaid principal balance of mortgage loans being serviced for 1995 as compared to 1994 is primarily related to the Company's increased loan production volumes during 1995. The 35% coverage ratio for 1996 is below the Company's strategic goal to generally maintain such ratio at between 50% and 80%. The Company is continuing to review bulk purchase opportunities with the objective of increasing this ratio. 19 RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995 SUMMARY Total revenues of the Company increased 65%, to $126.6 million for 1996 as compared to $76.7 million for 1995. The $49.9 million increase in revenues was primarily due to an $8.3 million increase in net interest income and a $39.1 million increase in gains on sales of mortgage loans and mortgage servicing rights. These increases in revenues were partially offset by a $36.1 million increase in operating expenses (exclusive of amortization and taxes). The increase in net interest income is due to the increase in annual production volumes as well as the steeper 1996 yield-curve environment. Similarly, the increase in gains on sales of loans and servicing rights is related to the Company's increased loan production volumes for 1996. The increase in operating expenses is primarily attributable to increased costs associated with increased loan production and loan servicing volumes, increased costs associated with further development of the wholesale and retail operations, and a non-recurring charge. Direct costs related to the Company's development of its retail and wholesale operations account for approximately $8.4 million and $4.8 million, or 23% and 13%, respectively, of the total increase in operating expenses (exclusive of amortization and taxes) for 1996. Approximately $5.2 million of the increase in operating expenses, which is partially offset by a $2.0 million decrease in income taxes, is attributable to a non-recurring charge related to certain contractual employment obligations. As a consequence of the foregoing, pre-tax net income increased 37% or $8.3 million. After-tax net income also increased 38%, or $5.4 million, for 1996 as compared to 1995. The following sections discuss the components of the Company's results of operations in greater detail. NET INTEREST INCOME The following table analyzes net interest income in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and mortgage-backed securities and interest rates paid on interest-bearing sources of funds). 20
Variance Average Volume Average Rate Interest Attributable to - -------------------- ------------- ----------------- ----------------- 1996 1995 1996 1995 1996 1995 Variance Rate Volume - -------- -------- ---- ---- ------- ------- -------- ------- ------- ($ in thousands) INTEREST INCOME ($ in thousands) Mortgage Loans Held for Sale and $816,597 $603,735 7.70% 7.86% Mortgage-Backed Securities $62,858 $47,477 $15,381 $(1,358) $16,739 - -------- -------- ---- ---- ------- ------- ------- ------- ------- INTEREST EXPENSE 331,356 250,767 4.52% 5.46% Warehouse Line 14,993 13,695 1,298 (3,103) 4,401 462,058 304,680 5.66% 6.11% Gestation Line 26,135 18,621 7,514 (2,104) 9,618 15,336 49,358 8.19% 7.77% Servicing Secured Line 1,256 3,835 (2,579) 64 (2,643) 18,639 4,776 5.89% 6.18% Servicing Sales Receivable Line 1,098 295 803 (53) 856 7,842 8,479 8.50% 8.46% Other Borrowings 667 717 (50) 4 (54) Facility Fees and Other Charges 1,807 1,679 128 128 - -------- -------- ---- ---- ------- ------- ------- ------- ------- 835,231 618,060 5.50% 6.28% Total Interest Expense 45,956 38,842 7,114 (5,192) 12,306 - -------- -------- ---- ---- ------- ------- ------- ------- ------- N/A N/A 2.20% 1.58% NET INTEREST INCOME $16,902 $ 8,635 $ 8,267 $ 3,834 $ 4,433 - -------- -------- ---- ---- ------- ------- ------- ------- -------
Net interest income increased 96% to $16.9 million for 1996 compared to $8.6 million for 1995. The $8.3 million increase in net interest income is primarily attributable to the 35% increase in the average volume of mortgages held for sale and mortgage-backed securities for 1996 from that of 1995. Net interest income also increased due to a 62 basis-point increase in the interest-rate spread, to 220 basis points for 1996 as compared to 158 basis points for 1995. The increase in interest-rate spread was associated primarily with the steeper 1996 yield curve environment. The Company's mortgages and mortgage-backed securities are generally sold and replaced within 30 to 35 days. The Company generally borrows at rates based upon short-term indices, while its asset yields are primarily based upon long-term mortgage rates. NET GAINS ON SALES OF MORTGAGE LOANS AND MORTGAGE SERVICING RIGHTS Net gains on sales of mortgage loans and mortgage servicing rights increased $39.1 million to $80.3 million for 1996 as compared to $41.2 million for 1995. As further discussed below, this increase is primarily due to higher volumes of mortgage loans and mortgage servicing rights sold during 1996 compared to 1995, as well as the effects of increased profit margins on sales. Net Gain on Sale of Mortgage Loans A reconciliation of gain on sale of mortgage loans for the periods indicated follows: 21
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 ------------ ----------- Gross proceeds on sale of mortgage loans $ 10,307,177 $ 6,275,802 Initial allocated acquisition basis of mortgage loans sold 10,296,282 6,275,415 ------------ ----------- Unadjusted gain on sale of mortgage loans 10,895 387 Loan origination and correspondent program administrative fees 34,405 15,497 ------------ ----------- Unadjusted aggregate margin 45,300 15,884 Acquisition basis allocated to mortgage servicing rights 34,181 18,913 Gains deferred to reduce mortgage servicing rights (922) Net change in deferred administrative fees (303) (53) ------------ ----------- Net gain on sale of mortgage loans $ 79,178 $ 33,822 ============ ===========
The Company sold loans during 1996 with an aggregate unpaid principal balance of $10.3 billion compared to sales of $6.3 billion for 1995. The amount of proceeds received on sales of mortgage loans exceeded the initial unadjusted acquisition cost of the loans sold by $10.9 million (11 basis points) for 1996 as compared to $0.4 million (1 basis point) for 1995. The Company received loan origination and correspondent program administrative fees of $34.4 million (33 basis points) on these loans during 1996 and $15.5 million (25 basis points) during 1995. The Company had allocated $34.2 million (33 basis points) to basis in mortgage servicing rights for loans sold in 1996 as compared to $18.9 million (30 basis points) allocated to loans sold in 1995. This is a result of the adoption of SFAS No. 122 for loans acquired after April 1, 1995. Also, there is no gain deferred against mortgage servicing rights during 1996 due to the adoption of SFAS No. 122, while $0.9 million was deferred for 1995 prior to implementation of SFAS No. 122 on April 1, 1995. As a result, net gain on sale of mortgage loans increased to $79.2 million for 1996 versus $33.8 million for 1995. This increase was primarily due to the 65% increase in the volume of mortgage loans sold, as well as an 18 basis-point increase in the unadjusted aggregate margin on the sale of mortgage loans, from 25 basis points for 1995 to 43 basis points for 1996. Gain on Sale of Mortgage Servicing Rights A reconciliation of the components of gain on sale of mortgage servicing rights for the periods indicated follows: 22
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 ----------- ----------- Underlying unpaid principal balances of mortgage loans on which servicing rights were sold during the period $ 9,528,240 $ 4,622,018 =========== =========== Gross proceeds from sales of mortgage servicing rights 196,406 94,027 Initial allocated acquisition basis, net of amortization 164,611 77,484 ----------- ----------- Unadjusted gain on sale of mortgage servicing rights 31,795 16,543 Acquisition basis allocated from mortgage loans, net of amortization (30,690) (12,803) Previously deferred administrative fees and gain on sale of mortgage loans recognized 3,606 ----------- ----------- Gain on sale of mortgage servicing rights $ 1,105 $ 7,346 =========== ===========
During 1996, the Company completed 34 sales of mortgage servicing rights representing $9.5 billion of underlying unpaid principal mortgage loan balances. This compares to 24 sales of mortgage servicing rights representing $4.6 billion of underlying unpaid principal mortgage loan balances in 1995. The unadjusted gain on the sale of mortgage servicing rights was $31.8 million (33 basis points) for 1996, up from $16.5 million (36 basis points) for 1995. The Company reduced this unadjusted gain by $30.7 million in 1996, compared with a $12.8 million reduction in 1995, due to the adoption of SFAS No. 122 effective April 1, 1995. Also, prior to adoption of SFAS No. 122, the Company recognized $3.6 million in previously deferred administrative fees and gains on sales of mortgage loans. The acquisition basis allocated from mortgage loans, net of amortization, as a percentage of unadjusted gain on sale of mortgage servicing rights, is 97% for 1996 as compared to 77% for 1995. The lower percentage for 1995 is because SFAS No. 122 was not adopted until the second quarter of 1995. As such, a basis allocation adjustment was not recorded for the first quarter of 1995. NET SERVICING MARGIN Loan servicing fees were $28.8 million for 1996, compared to $24.2 million for 1995, an increase of 19%. This increase is primarily related to an increase in the average aggregate underlying unpaid principal balance of mortgage loans serviced, to $8.8 billion during 1996 from $6.4 billion during 1995, an increase of 38%. Similarly, amortization of mortgage servicing rights also increased, to $14.9 million during 1996 from $9.4 million during 1995, an increase of 60%. The increase in amortization is primarily attributed to the growth in the average balance of the mortgage loans serviced and the higher basis in the servicing rights resulting from SFAS No. 122. As a result, net servicing margin decreased 7% to $13.8 million during 1996, from $14.9 million during 1995. Included in loan servicing fees for 1996 and 1995 are subservicing fees received by the Company of $960,000 and $695,000, respectively. The subservicing fees are associated with temporary subservicing agreements between the Company and purchasers of mortgage servicing rights. The following table summarizes the net servicing margin for both 1996 and 1995: 23
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 ---------- ---------- Loan servicing fees $ 28,763 $ 24,205 Amortization of mortgage servicing rights 14,934 9,352 ---------- ---------- Net servicing margin $ 13,829 $ 14,853 ========== ========== Average underlying unpaid principal balance of mortgage loans serviced $8,814,560 $6,397,186
OTHER INCOME Other income decreased during 1996 compared to 1995, primarily due to the prospective recharacterization of certain loan-related gain and loss amounts in connection with the implementation of SFAS No. 122. EXPENSES The $36.1 million increase in operating expenses (excluding amortization of mortgage servicing rights) was centered in salary and employee benefits, which increased $24.4 million or 78%. Approximately $5.2 million of the increase in operating expenses, partially offset by a $2.0 million decrease in income taxes, is attributable to recognition of a non-recurring charge related to certain contractual employment obligations. The Company increased its employee headcount by 147, from 880 at December 31, 1995, to 1,027 at December 31, 1996. The increased employee headcount and associated increase in salary and employee benefit costs were necessitated by the Company's increased loan production and increased servicing volume for 1996 as compared to 1995, which were up 40% and 38%, respectively. Employee headcount attributable to expansion of the wholesale and retail divisions accounted for 79 of the total 147 increase and for $13.2 million of the total $36.1 million increase in operating expenses (excluding amortization of mortgage servicing rights). INCOME TAX EXPENSE Income tax expense includes both federal and state income taxes. The effective tax rates for 1996 and 1995 were 35.8% and 36.2%, respectively. Income tax expense increased by 35%, to $10.9 million for 1996 from $8.1 million for 1995, due to the above-described factors that resulted in a 37% or $8.3 million increase in income before taxes, which was partially offset by the Company utilizing certain primarily non-recurring state tax credits of $1.7 million. 24 RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1995, COMPARED TO YEAR ENDED DECEMBER 31, 1994 SUMMARY Total revenues of the Company increased 35% to $76.7 million for 1995 as compared to $56.6 million for 1994. The $20.1 million increase in revenues was centered in loan servicing fees, which increased $10.0 million (due to the increase in the average underlying unpaid principal balance of mortgage loans being serviced by the Company), and in gains on sales of mortgage loans and mortgage servicing rights, which increased $6.7 million (due to increases in the Company's loan production). Similarly, expenses of the Company (exclusive of income tax expense) increased 84%, to $54.4 million for 1995 as compared to $29.5 million for 1994. The $24.9 million increase in expenses was centered in personnel expense, which increased $15.2 million (due to increased employee headcount associated with the higher volumes of loan production and loan servicing activities, as well as the Company's expansion into wholesale and retail operations) and in amortization of mortgage servicing rights, which increased $4.8 million (due to the increased size of the Company's mortgage servicing portfolio). As a consequence of the foregoing, pre-tax net income decreased 18% or $4.8 million, while after-tax net income decreased 21% or $3.8 million for 1995 as compared to 1994. NET INTEREST INCOME The following table analyzes net interest income in terms of rate and volume variances of the interest spread (the difference between interest rates earned on loans and mortgage-backed securities and interest rates paid on interest-bearing sources of funds).
Variance Average Volume Average Rate Interest Attributable to - ------------------- ------------ ----------------- ----------------- 1995 1994 1995 1994 1995 1994 Variance Rate Volume - -------- -------- ---- ---- ------- ------- -------- ------- ------- ($ in thousands) INTEREST INCOME ($ in thousands) Mortgage Loans Held for Sale and $603,735 $274,855 7.86% 7.63% Mortgage-Backed Securities $47,477 $20,974 $26,503 $ 1,406 $25,097 - -------- -------- ---- ---- ------- ------- ------- ------- ------- INTEREST EXPENSE 250,767 86,901 5.46% 4.76% Warehouse Line 13,695 4,137 9,558 1,757 7,801 304,680 159,329 6.11% 4.52% Gestation Line 18,621 7,194 11,427 4,864 6,563 49,358 382 7.77% 7.33% Servicing Secured Line 3,835 28 3,807 217 3,590 4,776 6.18% Servicing Sales Receivable Line 295 295 295 8,479 8.46% Other Borrowings 717 717 717 Facility Fees and Other Charges 1,679 1,929 (250) (250) - -------- -------- ---- ---- ------- ------- ------- ------- ------- 618,060 246,612 6.28% 5.39% Total Interest Expense 38,842 13,288 25,554 6,588 18,966 - -------- -------- ---- ---- ------- ------- ------- ------- ------- N/A N/A 1.58% 2.24% Net Interest Income $ 8,635 $ 7,686 $ 949 $(5,182) $ 6,131 ======== ======== ==== ==== ======= ======= ======= ======= =======
Net interest income increased 12% to $8.6 million for 1995 as compared to $7.7 million for 1994. The $0.9 million increase in net interest margin is primarily attributable to the 120% increase in the average volume of mortgages held for sale and mortgage-backed securities for 1995 as compared to 1994. This increase in volume more than offset the negative effects of the decrease in the interest-rate spread of 66 basis points. The decrease in interest-rate spread was 25 primarily the result of the narrower spreads between long-and short-term rates in 1995 as compared to 1994. That is, since the Company's mortgages and mortgage-backed securities are generally sold and replaced within 30-35 days, the Company generally borrows at rates based upon short-term indices, while its asset yields are primarily based upon long-term mortgage rates. NET GAINS ON SALES OF MORTGAGE LOANS AND MORTGAGE SERVICING RIGHTS Net gains on sales of mortgage loans and mortgage servicing rights increased $6.7 million or 19% to $41.2 million for 1995 as compared to $34.5 million for 1994. As further discussed below, this increase was primarily due to higher production volumes, which caused the volumes of mortgage loans and mortgage servicing rights sold for 1995 to increase as compared to 1994. The positive effects of increased sales volumes were partially offset by thinner profit margins on sales. NET GAIN ON SALE OF MORTGAGE LOANS A reconciliation of selected components of gain on sale of mortgage loans for the periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------ 1995 1994 ----------- ----------- Gross proceeds on sales of mortgage loans $ 6,275,802 $ 3,353,880 Initial allocated acquisition basis of mortgage loans sold 6,275,415 3,343,429 ----------- ----------- Unadjusted gain on sale of mortgage loans 387 10,451 Loan origination and correspondent program administrative fees 15,497 9,047 ----------- ----------- Adjusted gain on sale of mortgage loans 15,884 19,498 Acquisition basis allocated to mortgage servicing rights 18,913 Gains deferred to reduce mortgage servicing rights (922) (18,338) Net change in deferred administrative fees (53) =========== =========== Net gain on sale of mortgage loans $ 33,822 $ 1,160 =========== ===========
The Company sold loans during 1995 with an aggregate unpaid principal balance of $6.3 billion, compared to sales of $3.4 billion for 1994. Since the Company sells substantially all the loans it produces, the $2.9 billion or 87% increase in gross proceeds on sales of mortgage loans is due primarily to the previously discussed increase in loan production for 1995 as compared to 1994. The amount of proceeds received on sales of mortgage loans exceeded the initial acquisition basis in the loans sold by $0.4 million for 1995 and $10.5 million for 1994. The Company received loan origination and correspondent program administrative fees of $15.5 million on these loans during 1995 and $9.0 million during 1994. As a result, adjusted gain on sale of mortgage loans decreased 19%, to $15.9 million for 1995 versus $19.5 million for 1994, in spite of an 87% increase in the volume of mortgage loans sold, primarily due to the implementation of SFAS No. 122. The positive effects of increased sales volume were partially offset by a 33 basis-point decrease in the margin of unadjusted gain on sale of mortgage loans, from 58 basis points for 1994 to 25 basis points for 26 1995. The thinner profit margin is primarily attributable to competitive pricing conditions in the Company's primary markets for 1995 as compared to 1994. Prior to April 1, 1995, and in conjunction with the acquisition of mortgage loans, the Company capitalized as mortgage servicing rights the portion of the purchase price that represented the premium paid for the right to service the mortgage loans. The amount capitalized was subsequently reduced, if the mortgage loans were sold at a gain, by the amount of such gain. Effective April 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 122, ("Accounting for Mortgage Servicing Rights-An Amendment of FASB Statement No. 65"), and, as required thereby, the Company began allocating the total cost of a whole mortgage loan to the mortgage servicing right and the loan (without servicing rights) based on relative fair market values. The amount capitalized as mortgage servicing rights is no longer required to be reduced if the loan is sold at a gain. Accordingly, the reduction in the amount of gains deferred to reduce mortgage servicing rights, from $18.3 million for 1994 to $0.9 million for 1995, is due to implementation of SFAS No. 122 effective April 1, 1995. Although implementation of SFAS No. 122 accounts for a significant portion of the increase in the amount reported as net gain on sale of mortgage loans, the implementation also accounts for a significant portion of the decrease in the amount reported as gain on sale of mortgage servicing rights, as discussed below. Gain on Sale of Mortgage Servicing Rights A reconciliation of selected components of gain on sale of mortgage servicing rights for the periods indicated follows:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 ----------- ---------- Underlying unpaid principal balances of mortgage loans on which servicing rights were sold during the period $ 4,622,018 $3,802,498 =========== ========== Gross proceeds from sales of mortgage servicing rights 94,027 60,805 Initial allocated acquisition basis, net of amortization 77,484 54,005 ----------- ---------- Unadjusted gain on sale of mortgage servicing rights 16,543 6,800 Acquisition basis allocated from mortgage loans, net of amortization (12,803) Previously deferred administrative fees and gain on sale of mortgage loans recognized 3,606 26,575 =========== ========== Gain on sale of mortgage servicing rights $ 7,346 $ 33,375 =========== ==========
During 1995, the Company completed 24 sales of mortgage servicing rights representing $4.6 billion of underlying unpaid principal mortgage loan balances, compared to 11 sales of mortgage servicing rights representing $3.8 billion of underlying unpaid principal balances in 1994. Unadjusted gain on sale of mortgage servicing rights was $16.5 million for 1995, compared to $6.8 million for 1994. This increase was primarily due to implementation of SFAS No. 122, which provides for initial capitalization of mortgage servicing rights using a relative fair value allocation approach that has resulted in narrower unadjusted margins upon sales. 27 Similarly, the decline in previously deferred administrative fees and gain on sale of mortgage loans recognized is due to adoption of SFAS No. 122 effective April 1, 1995, which eliminated the requirement that gains on sale of mortgage loans and administrative fees be deferred as a reduction of basis in mortgage servicing rights. Thus, the $26.0 million decline in gain on sale of mortgage servicing rights is primarily related to adoption of SFAS No. 122. The prices obtained by the Company upon the sale of its mortgage servicing rights depend upon a number of factors, including the general supply of, and demand for, mortgage servicing rights, as well as prepayment and delinquency rates on the portfolio of mortgage servicing rights being sold. Interest-rate changes and product mix can affect the ability to sell or the profitability of a sale of mortgage servicing rights to a third party. Additionally, competitive pressures impact prices paid to acquire mortgage servicing rights, which impact profitability upon disposition. Purchasers of mortgage servicing rights analyze a variety of factors, including prepayment sensitivity of servicing rights, to determine the purchase price they are willing to pay. Thus, sales of mortgage servicing rights related to higher interest-rate loans may be less profitable than sales of mortgage servicing rights related to lower interest-rate loans. Because these factors are largely beyond the control of the Company, there can be no assurance as to the level of future profitability from the sale of mortgage servicing rights. NET SERVICING MARGIN The following table summarizes the net servicing margin for both 1995 and 1994:
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 ---------- ---------- Loan servicing fees $ 24,205 $ 14,196 Amortization of mortgage servicing rights 9,352 4,574 ---------- ---------- Net servicing margin $ 14,853 $ 9,622 ========== ========== Average underlying unpaid principal balance of mortgage loans serviced $6,397,186 $4,298,435
Loan servicing fees were $24.2 million for 1995, compared to $14.2 million for 1994. Similarly, amortization of mortgage servicing rights increased to $9.4 million during 1995 from $4.6 million during 1994. As a result, net servicing margin increased to $14.8 million during 1995, compared to $9.6 million during 1994, an increase of 54%. These increases primarily relate to a 49% increase in the average aggregate underlying unpaid principal balance of mortgage loans serviced, to $6.4 billion during 1995 from $4.3 billion during 1994. Included in loan servicing fees for 1995 and 1994 are subservicing fees received by the Company of $695,000 and $565,000, respectively. The subservicing fees are associated with temporary subservicing agreements between the Company and purchasers of mortgage servicing rights. 28 OTHER INCOME Other income increased during 1995 compared to 1994, primarily due to increased administrative fees received from sales of servicing-released loans during 1995 as compared to 1994. EXPENSES The $20.1 million increase in operating expenses (excluding amortization of mortgage servicing rights) was centered in salary and employee benefits, which increased $15.2 million, or 95%. During 1995, the Company increased its employee headcount by 529, from 351 at December 31, 1994, to 880 at December 31, 1995. The increased employee headcount and associated 95% increase in salary and employee benefit costs were necessitated by the Company's increased loan production and average loan servicing volumes, which were up 148% and 54%, respectively. Employee headcount attributable to expansion of the wholesale division and establishment of the retail division accounted for 241 of the total 529 increase and for $10.9 million of the total $20.1 million increase in operating expenses. The $4.9 million increase in operating expense categories other than salaries and wages is also attributable to the Company's increased level of core business activities, which caused most other such categories of expense to increase. INCOME TAX EXPENSE Income tax expense includes both federal and state income taxes. The effective tax rates for 1995 and 1994 were 36.2% and 33.4%, respectively. Income tax expense decreased by 11% to $8.1 million during 1995 from $9.0 million during 1994 due to the above-described factors, which resulted in an 18% or $4.8 million decrease in income before taxes. Additionally, the effective tax rate for 1994 was reduced by the qualification of the Company for a corporate headquarters tax credit from the state of South Carolina, $1.5 million of which was reflected as a reduction of tax expense for 1994. 29 FINANCIAL CONDITION During 1996, the Company experienced a 40% increase in the volume of mortgage loans originated and acquired compared to 1995. Mortgage loan production increased to $10.0 billion during 1996 from $7.1 billion during 1995. The December 31, 1996, mortgage application pipeline (mortgage loans not yet closed but for which the interest rate has been locked) was approximately $500 million. The Company continued to establish new correspondent relationships during 1996. The number of correspondents approved to do business in the Company's correspondent lending program increased to 871 at December 31, 1996, from 726 at December 31, 1995. The Company continued expansion of the wholesale network during 1996, with the addition of branches in Colorado, Missouri, and Maryland. This increased the number of wholesale branches in operation at December 31, 1996, to 13. In addition to the 13 wholesale branches, each of the Company's six retail branches operated through Intercounty Mortgage, Inc. (IMI) is eligible to do business in the wholesale market. At December 31, 1996, there were approximately 2,322 wholesale brokers approved to do business with the Company as compared to approximately 1,144 at December 31, 1995. Of the 2,322 approved brokers, 186 are approved to do business with IMI branches. The Company's retail division, IMI, employed 209 people at December 31, 1996, with offices in New York (4), New Jersey and Pennsylvania. The Company continues to face the same challenges as other companies within the mortgage banking industry and as such is not immune from significant volume declines precipitated by a rise in interest rates or other factors beyond the Company's control. Management of the Company recognizes these challenges and continues to manage the Company accordingly. Mortgage loans held for sale and mortgage-backed securities totaled $802.3 million at December 31, 1996, versus $1.0 billion at December 31, 1995, a decrease of 22%. The Company's servicing portfolio (exclusive of loans under subservicing agreements) increased to $6.7 billion at December 31, 1996, from $5.6 billion at December 31, 1995, an increase of 20%. Short-term borrowings, which are the Company's primary source of funds, totaled $805.7 million at December 31, 1996, compared to $1.0 billion at December 31, 1995, a decrease of 20%. The decrease in the balance outstanding at December 31, 1996, resulted from decreased funding requirements related to the decrease in the balance of mortgage loans held for sale and mortgage-backed securities at December 31, 1996, as compared to the balance at December 31, 1995. At December 31, 1996, there were no long-term borrowings, compared with $65.5 million at December 31, 1995. Other liabilities totaled $54.0 million as of December 31, 1996, compared to the December 31, 1995, balance of $56.6 million, a decrease of $2.6 million, or 5%. The decrease in other 30 liabilities resulted primarily from a decrease at month end in the volume of loans acquired through certain correspondent funding programs of the Company. In connection with the Company's primary business activities, which involve loan servicing activities and the purchase or origination of loans and the sale of the related loans and servicing rights, the Company is actively involved in certain risk management activities as more fully described in Note 13 to the Consolidated Financial Statements. 31 LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash-flow requirement involves the funding of loan production, which is met primarily through external borrowings. The Company has entered into a 364-day, $570 million warehouse line of credit provided by a syndicate of unaffiliated banks that expires in July 1997. The credit agreement includes covenants requiring the Company to maintain (i) a minimum net worth of $130 million, plus net income subsequent to July 31, 1996, and capital contributions and minus permitted dividends, (ii) a ratio of total liabilities to net worth of not more than 8.0 to 1.0, excluding debt incurred pursuant to gestation and repurchase financing agreements, (iii) its eligibility as a servicer of GNMA, FHA, VA, FNMA and FHLMC mortgage loans and (iv) a mortgage servicing rights portfolio with an underlying unpaid principal balance of at least $4 billion. The provisions of the agreement also restrict the Company's ability (i) to pay dividends in any fiscal quarter which exceed 50% of the Company's net income for the quarter or (ii) to engage significantly in any type of business unrelated to the mortgage banking business and the servicing of mortgage loans. Additionally, the Company entered into a $200 million, 364-day term revolving credit facility with a syndicate of unaffiliated banks. An $80 million portion of the revolver facility converts on July 31,1997, into a four-year term loan. The facility is secured by the Company's servicing portfolio designated as "available-for-sale". A $70 million portion of the revolver facility matures on July 31, 1997, and is secured by the Company's servicing portfolio designated as "held-for-sale". A $50 million portion of the revolver facility matures on July 31, 1997, and is secured by a first-priority security interest in receivables on servicing rights sold. The facility includes covenants identical to those described above with respect to the warehouse line of credit. The Company was in compliance with the above-mentioned debt covenants at December 31, 1996. Although management anticipates continued compliance, there can be no assurance that the Company will be able to comply with the debt covenants specified for each of these financing agreements. Failure to comply could result in the loss of the related financing. The Company has also entered into an uncommitted gestation financing arrangement. The interest rate on funds borrowed pursuant to the gestation line is based on a spread over the Federal Funds rate. The gestation line has a funding limit of $1 billion. The Company entered into a $5 million unsecured line of credit in September 1996. The line of credit expires in September 1997. The Company entered into a $6.6 million, 364-day revolving credit facility secured by certain real property of the Company. This revolving credit facility was retired in the third quarter of 1996. 32 Beginning in June 1995, the Company had from time to time borrowed up to $19 million on a short-term unsecured basis from RBC. Interest on those borrowings was at the prime rate. There was no indebtedness to RBC at December 31, 1996. The Company has no plans in the foreseeable future to borrow from RBC. The Company issued five percent stock dividends on March 8, 1994, September 12, 1994, May 8, 1995, and August 31, 1995. A ten percent stock dividend was issued on June 30, 1995, and a seven percent stock dividend was issued on September 24, 1996. All of the above are collectively referred to as the Stock Dividends. On March 15, 1996, the Company completed a public offering of 3,512,961 shares of common stock (3,758,868 shares after consideration of the Stock Dividends) priced at $14.50 per share ($13.55 after consideration of the Stock Dividends). The Company sold 2,200,000 shares (2,354,000 shares after consideration of the Stock Dividends) in the offering, while certain stockholders sold the remaining 1,312,961 shares (1,404,868 shares after consideration of the Stock Dividends). In a concurrent private placement, the Company sold an additional 896,552 shares of common stock at the offering price of $14.50 per share ($13.55 after consideration of the Stock Dividends) to RBC, which owned approximately 41% of the Company's outstanding common stock prior to the public offering and private placement and approximately 39% immediately thereafter. Net proceeds to the Company after underwriting discounts and offering expenses totaled approximately $43 million. Proceeds of the offering were used to repay indebtedness to RBC and were otherwise used for other general corporate purposes, including the continued growth and general expansion of the Company's business activities. 33 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED BALANCE SHEET ($ in thousands, except share information)
- -------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 1995 - -------------------------------------------------------------------------------------------------- ASSETS Cash $ 2,492 $ 2,161 Receivables 60,668 57,893 Mortgage-backed securities 123,447 22,391 Mortgage loans held for sale 678,888 1,012,838 Mortgage servicing rights, net 109,815 99,912 Premises and equipment, net 21,135 16,314 Accrued interest on loans held for sale 4,491 9,464 Other assets 27,458 10,124 ----------- ----------- Total assets $ 1,028,394 $ 1,231,097 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Short-term borrowings $ 805,730 $ 1,005,557 Long-term borrowings 65,530 Accrued expenses 11,386 10,036 Other liabilities 53,977 56,570 ----------- ----------- Total liabilities 871,093 1,137,693 ----------- ----------- Stockholders' equity Preferred stock - par value $.01 - 5,000,000 shares authorized; no shares issued or outstanding Common stock - par value $.01 - 25,000,000 shares authorized; 19,285,020 and 14,550,462 shares issued and outstanding at December 31, 1996 and 1995, respectively 193 146 Additional paid-in capital 149,653 84,533 Retained earnings 12,007 10,725 Unearned shares of employee stock ownership plan (4,552) (2,000) ----------- ----------- Total stockholders' equity 157,301 93,404 ----------- ----------- Commitments and contingencies (Notes 7 and 13) ----------- ----------- Total liabilities and stockholders' equity $ 1,028,394 $ 1,231,097 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 34 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED STATEMENT OF INCOME ($ in thousands, except share information)
FOR THE YEAR ENDED DECEMBER 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------ REVENUES Interest income $ 62,858 $ 47,477 $ 20,974 Interest expense (45,956) (38,842) (13,288) - ------------------------------------------------------------------------------------------ Net interest income 16,902 8,635 7,686 Net gain on sale of mortgage loans 79,178 33,822 1,160 Gain on sale of mortgage servicing rights 1,105 7,346 33,375 Loan servicing fees 28,763 24,205 14,196 Other income 669 2,689 205 - ------------------------------------------------------------------------------------------ Total revenues 126,617 76,697 56,622 - ------------------------------------------------------------------------------------------ EXPENSES Salary and employee benefits 55,578 31,199 15,986 Occupancy expense 5,640 3,066 1,595 Amortization of mortgage servicing rights 14,934 9,352 4,574 General and administrative expenses 19,917 10,788 7,391 - ------------------------------------------------------------------------------------------ Total expenses 96,069 54,405 29,546 - ------------------------------------------------------------------------------------------ Income before income taxes 30,548 22,292 27,076 Income tax expense (10,925) (8,073) (9,033) - ------------------------------------------------------------------------------------------ Net income $ 19,623 $ 14,219 $ 18,043 - ------------------------------------------------------------------------------------------ Weighted average common shares outstanding 18,240,994 15,411,036 15,498,607 Net income per common share $ 1.08 $ 0.92 $ 1.16
The accompanying notes are an integral part of these consolidated financial statements. 35 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ($ in thousands, except share information)
ADDITIONAL UNEARNED TOTAL COMMON STOCK PAID-IN RETAINED ESOP STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS SHARES EQUITY --------------------------------------------------------------------------- Balance, December 31, 1993 10,825,000 $ 108 $ 55,061 $ 7,314 $ $ 62,483 Issuance of restricted stock 8,878 * 89 89 Stock dividend adjustment 1,110,426 11 5,007 (5,019) (1) Net income 18,043 18,043 --------------------------------------------------------------------------- Balance, December 31, 1994 11,944,304 119 60,157 20,338 80,614 Issuance of restricted stock 43,402 * 406 406 Stock dividend adjustment 2,550,258 27 23,805 (23,832) Loans to Employee Stock Ownership Plan (2,000) (2,000) Shares issued under Dividend Reinvestment and Stock Purchase Plan 12,498 * 165 165 Net income 14,219 14,219 --------------------------------------------------------------------------- Balance, December 31, 1995 14,550,462 146 84,533 10,725 (2,000) 93,404 Issuance of restricted stock 16,410 * 256 256 Net proceeds of public offering 3,426,552 34 47,417 47,451 Stock dividend adjustment 1,261,332 13 17,115 (17,128) Cash dividends (1,119) (1,119) Shares issued or purchased under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan 30,264 * 180 (94) 86 Loans to Employee Stock Ownership Plan (3,000) (3,000) Shares committed to be released under Employee Stock Ownership Plan 152 448 600 Net income 19,623 19,623 --------------------------------------------------------------------------- Balance, December 31, 1996 19,285,020 $ 193 $149,653 $ 12,007 $ (4,552) $157,301 ===========================================================================
*Amount less than $1 The accompanying notes are an integral part of these consolidated financial statements. 36 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS ($ in thousands) - ----------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 19,623 $ 14,219 $ 18,043 Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization 17,566 10,991 5,671 Deferred income tax (benefit) expense (2,463) 11,046 4,467 Employee Stock Ownership Plan Compensation 600 Provision for estimated foreclosure losses 817 168 635 Increase in receivables (2,775) (26,999) (13,698) Acquisition of mortgage loans (9,995,725) (7,135,774) (2,875,265) Proceeds from sales of mortgage loans and mortgage-backed securities 10,307,177 6,275,802 3,353,880 Acquisition of mortgage servicing rights (220,335) (129,641) (92,012) Sales of mortgage servicing rights 196,406 94,027 60,805 Net gain on sales of mortgage loans and servicing rights (80,283) (41,168) (34,535) Decrease (increase) in accrued interest on loans 4,973 (8,787) 1,348 Increase in other assets (16,897) (23,281) (1,319) Increase (decrease) in accrued expenses and other liabilities 1,220 23,647 (18,079) - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 229,904 (935,750) 409,941 - ----------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of furniture, fixtures and equipment (7,453) (5,510) (3,565) - ----------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (7,453) (5,510) (3,565) - ----------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from borrowings 31,468,370 23,478,835 9,631,764 Repayment of borrowings (31,733,727) (22,533,020) (10,038,712) Debt issuance costs (437) (1,197) (1,700) Issuance of restricted stock 256 406 89 Stock dividend adjustments (1) Activity under Employee Stock Ownership Plan (3,000) (2,000) Shares issued under Dividend Reinvestment and Stock Purchase Plan 86 165 Net proceeds from public offering 47,451 Cash dividends (1,119) - ----------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (222,120) 943,189 (408,560) - ----------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 331 1,929 (2,184) Cash, beginning of year 2,161 232 2,416 - ----------------------------------------------------------------------------------------------------------------- Cash, end of year $ 2,492 $ 2,161 $ 232 ================================================================================================================= SUPPLEMENTAL ACTIVITIES Interest paid $ 46,860 $ 36,264 $ 14,636 Taxes paid 11,245 3,710 6,846 Non-cash activity under Employee Stock Ownership Plan 600
The accompanying notes are an integral part of these consolidated financial statements. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ IN THOUSANDS, EXCEPT SHARE INFORMATION) Note 1 - The Company: Resource Bancshares Mortgage Group, Inc. (the Company), was organized under Delaware law in 1992 to acquire and operate the mortgage banking business of Resource Bancshares Corporation (RBC), which commenced operations in May 1989. The assets and liabilities of the mortgage banking business of RBC were transferred to the Company on June 3, 1993, when the Company sold 58% of its common stock in an initial public offering. As a result, RBC retained a significant ownership interest in the Company. As of December 31, 1996, RBC owned approximately 38% of the outstanding common stock of the Company. Following consummation of the initial public offering, the Company continued to engage in the mortgage banking business that was formerly conducted by RBC. The Company is principally engaged in the purchase and origination of residential mortgage loans, which it aggregates into mortgage-backed securities issued or guaranteed by the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA) and the Government National Mortgage Association (GNMA). The Company sells the mortgage-backed securities it creates to institutional purchasers with the rights to service the underlying loans being retained by the Company. The servicing rights retained are generally sold separately but may be held for extended periods by the Company. Note 2 - Summary of Significant Accounting Policies: The accounting and reporting policies of the Company reflect industry practices and conform in all material respects with generally accepted accounting principles. Certain minor amounts from prior years have been reclassified to conform to current period presentation. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Intercounty Mortgage, Inc. (IMI). All significant intercompany accounts and transactions have been eliminated. Significant Estimates In preparing the financial statements, management is required to make estimates based on available information that can affect the reported amounts of assets, liabilities and disclosures as of the balance sheet date and revenues and expenses for the related periods. Such estimates relate principally to the Company's allowance for foreclosure losses. Additionally, estimates concerning the fair values of mortgage loans held for sale, servicing rights, servicing hedges and the Company's other hedging instruments are all relevant to ensuring that mortgage loans are carried at the lower of cost or market, and that potential impairments of servicing rights are recognized as and if required. Because of the inherent uncertainties associated with any 38 estimation process and due to possible future changes in market and economic conditions that will affect fair values, it is possible that actual future results in realization of the underlying assets and liabilities could differ significantly from the amounts reflected as of the balance sheet date. Investment Securities Investments in debt securities are classified in three categories: held-to-maturity securities (reported at amortized cost); trading securities (reported at fair value, with unrealized gains or losses included in earnings); and available-for-sale securities (reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity). Substantially all of the Company's investments are in the form of mortgage-backed securities that are held for sale in conjunction with the Company's mortgage banking activities. Such securities are classified as trading securities. The cost of securities sold is based on the specific identification method. Mortgage Loans Held for Sale Mortgage loans held for sale are stated at the lower of aggregate cost or market. Mortgage Servicing Rights Prior to April 1, 1995, and in conjunction with the acquisition of mortgage loans, the Company capitalized as mortgage servicing rights the portion of the purchase price that represented the premium paid for the right to service the mortgage loans. The amount capitalized was subsequently reduced if the mortgage loans were sold at a gain. Effective April 1, 1995 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights - An Amendment of FASB Statement No. 65." Accordingly, effective April 1, 1995, and as required by SFAS No. 122, the Company now allocates the total cost of a whole mortgage loan to the mortgage servicing rights and the loan (without servicing rights) based on relative fair values. The amount capitalized is no longer required to be reduced if the mortgage loan is sold at a gain. The market value of servicing rights acquired in bulk transactions, rather than as a by-product of the Company's loan production activities, is initially capitalized at the lower of cost or the estimated present value of future expected net servicing income. Amounts capitalized as mortgage servicing rights are amortized over the period of, and in proportion to, estimated future net servicing income. The Company periodically assesses its capitalized mortgage servicing rights for impairment (on a stratified basis) based on the estimated market values of those rights. Impairments are recognized as a valuation allowance for each impaired stratum. Market value is estimated by reference to a third-party analysis that values such rights in consideration of current forward committed delivery prices, prevailing interest, prepayment and default rates, and other relevant factors as appropriate or allocable to each valuation stratum. Loan Origination and Correspondent Program Administration Fees Fees charged in connection with loan origination and fees charged to loan correspondents in conjunction with certain administrative functions performed by the Company in connection with the acquisition of mortgage loans are deferred and reduce the carrying value of the underlying 39 mortgage loans. Allocable portions of such fees are included in the determination of the gain or loss when the related mortgage loans or servicing rights are sold. Sales of Mortgage Loans and Mortgage Servicing Rights Gains or losses on sales of mortgage loans are determined at settlement date and are measured by the difference between the net proceeds, adjusted for the value of excess servicing fees, and the carrying amount of the underlying mortgage loans. Prior to implementation of SFAS No. 122, gains not in excess of the amortized basis of mortgage servicing rights capitalized in conjunction with the acquisition of the loans were applied as a reduction of mortgage servicing rights and gains in excess of the amortized basis in mortgage servicing rights and losses on the sales of mortgage loans were recognized at settlement date. Effective with the implementation of SFAS No. 122, gains on sales of mortgage loans are no longer required to be deferred as a reduction of basis in mortgage servicing rights, and gains and losses on sales of mortgage servicing rights are recognized at the sale date, which is the date the sales contract is closed and substantially all risks and rewards of ownership pass to the buyer. Stock Based Compensation In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective for transactions entered into in fiscal years beginning after December 15, 1995. SFAS No. 123 defines a fair-value-based method of accounting for stock-based compensation. The statement allows measurement of compensation cost generally in conformity with past practice under Accounting Principles Board Opinion No. 25, (APB No. 25), "Accounting for Stock Issued to Employees," provided pro forma disclosure is made concerning net income as if the fair value approach had been applied. The Company adopted the disclosure approach permitted by SFAS No. 123 effective January 1, 1996, and, as also permitted, continues to apply the compensatory measurement principles of APB No. 25. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred. Estimated Foreclosure Losses As a servicer of mortgage loans, the Company will incur certain losses in the event it becomes necessary to carry out foreclosure actions on loans serviced. Generally, such losses relate to FHA or VA loans, which are insured or guaranteed on a limited basis. Substantially all other serviced loans are fully guaranteed against such losses by the securitizing government agency. The allowance for estimated losses on foreclosure, which is part of the mortgage servicing rights basis, is determined based on delinquency trends and management's evaluation of the probability that foreclosure actions will be necessary. The allowance for estimated losses on foreclosure was $1,550, $1,000, and $1,150 at December 31, 1996, 1995 and 1994, respectively. 40 Income Taxes The Company records taxes under an asset and liability approach, recognizing deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. Deferred income taxes arise primarily from timing differences between the accounting methods used for mortgage servicing rights and estimated foreclosure losses for income tax and financial reporting purposes. Current tax expense (benefit) of $13,388, ($2,973) and $4,566 for the years ended December 31, 1996, 1995 and 1994, are included in other liabilities. Statement of Cash Flows The Company has adopted the indirect method of reporting cash flows. New Accounting Standards In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. SFAS No. 125 is based upon consistent application of a financial-components approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The standard is not expected to materially impact the Company's financial condition or results of operations. The Company plans to adopt SFAS No. 125 effective January 1, 1997, as required. Note 3 - Joint Ventures: In August 1996, Intercounty Mortgage, Inc. (IMI), entered into a joint venture agreement with ERA Specht Realty, Inc. The joint venture, Corridor Mortgage Company, LLC (Corridor), is engaged primarily in the business of providing broker services on first-lien mortgage loans to mortgage bankers. IMI owns 51% of Corridor and made an initial contribution of $10 in January 1997. Corridor did not become operational until the first quarter of 1997. Accordingly, there are no transactions recorded in the Company's 1996 consolidated financial statements relating to Corridor. For financial reporting purposes, Corridor's assets, liabilities and earnings will be consolidated with those of IMI, and the minority member's interest in the joint venture will be included in the Company's consolidated financial statements as minority interest. In December 1996, IMI entered into a joint venture agreement with Lawyers Title Insurance Corporation. The joint venture, Excel Title Agency, LLC (ETA), is engaged primarily in the business of providing core title services in connection with the closing of real estate transactions and acts as a title insurance agent. IMI owns 49% of ETA and made an initial $25 contribution to form the joint venture in December 1996. The Company will account for this investment on the equity method. Accordingly, IMI's investment is reported as an investment in joint venture within other assets on the balance sheet. ETA did not become operational until the first quarter 41 of 1997. Accordingly, there is no share of operational income or loss recorded in the Company's 1996 consolidated financial statements. Note 4 - Receivables: Receivables consist primarily of amounts due to the Company related to sales of mortgage servicing rights and advances of delinquent principal, interest, tax and insurance payments related to loans serviced. Management does not anticipate any significant losses on realization of the receivables. Receivables consist of the following at:
DECEMBER 31, -------------------- 1996 1995 -------- -------- Mortgage servicing rights sales $ 33,609 $ 31,764 Servicing advances 14,752 8,791 Other 12,307 17,338 ======== ======== $ 60,668 $ 57,893 ======== ========
Note 5 - Fair Value and Impairments of Mortgage Servicing Rights: For purposes of evaluating its servicing portfolio for impairment, the Company disaggregates its portfolio into two primary segments: available-for-sale and held-for-sale. The segment of the portfolio designated as available-for-sale is comprised of servicing rights that were purchased in bulk transactions or that were retained out of production pursuant to individual portfolio retention decisions. The available-for-sale portfolio is disaggregated for purposes of measuring potential impairments according to each individual bulk purchase or portfolio retention decision, which the Company has determined to be the appropriate approach to disaggregation by predominant risk characteristic for this portfolio segment. However, as permitted by SFAS No. 122, the portion of this portfolio acquired prior to implementation is not further disaggregated for purposes of measuring potential impairments. With respect to each such risk tranche, the fair value thereof, which is based upon a third-party analysis that considers current forward committed delivery prices, prevailing interest, prepayment and default rates and other relevant factors, together with the fair value of hedges allocated thereto (which is based upon broker quotes) is compared to amortized carrying values of the mortgage servicing rights for purposes of measuring potential impairment. At December 31, 1996, the underlying unpaid principal balance of the available-for-sale portfolio totaled $4,842,253, its fair value was estimated as $91,508, the fair value of hedges allocated thereto was estimated as $5,056, and the carrying value of the portfolio was $76,136, which is net of accumulated amortization of $18,198. At December 31, 1995, the underlying unpaid principal balance of the available-for-sale portfolio totaled $3,047,554, its fair value was estimated as $49,340, the fair value of hedges allocated thereto was estimated as $8,916, and the carrying value of the portfolio was $49,979. 42 No impairment provisions were required for 1996 or for 1995 with respect to this segment of the portfolio. The segment of the portfolio designated as held-for-sale is comprised of recently produced servicing rights that are scheduled for sale and have been allocated to specific forward servicing sales contracts. The held-for-sale portfolio is disaggregated for purposes of measuring possible impairments according to the specific forward sales contracts to which allocated, which the Company has determined to be the appropriate approach to disaggregation by predominant risk characteristic for this portfolio segment. For each such risk tranche, the fair value thereof, which is based upon the allocated forward committed delivery price, is compared to amortized carrying value for purposes of measuring potential impairment. At December 31, 1996, the underlying unpaid principal balance of the held-for-sale portfolio totaled $1,828,014, its fair value was estimated as $37,109, and its carrying value was $36,057, which is net of accumulated amortization of $683. At December 31, 1995, the underlying unpaid principal balance of the held-for-sale portfolio totaled $2,515,376, its fair value was estimated as $50,811, and its carrying value was $49,933. No impairment provisions were required for 1996 or for 1995 with respect to this segment of the portfolio. Note 6 - Premises and Equipment: Premises and equipment are summarized as follows:
Estimated Useful DECEMBER 31, Lives 1996 1995 ----------- -------- -------- Building 25 years $ 6,714 $ 6,579 Building improvements 10-15 years 939 103 Furniture, fixtures and equipment 5-10 years 16,772 11,586 -------- -------- 24,425 18,268 Less-Accumulated depreciation (6,337) (3,714) -------- -------- 18,088 14,554 Land 3,047 1,760 -------- -------- $ 21,135 $ 16,314 ======== ========
Depreciation expense was $2,632 in 1996, $1,639 in 1995 and $1,097 in 1994. Note 7 - Lease Commitments: The Company has entered into various non-cancelable operating lease agreements, primarily for office space. Certain of these leases contain renewal options and escalation clauses. 43 At December 31, 1996, the annual minimum rental commitments for non-cancelable leases with remaining terms in excess of one year are as follows: 1997 $ 1,891 1998 1,566 1999 1,282 2000 850 2001 and thereafter 254 ======= $ 5,843 =======
Minimum rental commitments have not been reduced by minimum sublease rentals of $1,721 that are due in the future under non-cancelable subleases. Rent expense for operating leases, exclusive of sublease rental income of $385 for 1996, $354 for 1995, and $217 for 1994, was $1,905 in 1996, $1,147 in 1995, and $552 in 1994. Note 8 - Short-Term and Long-Term Borrowings: The Company has entered into a 364-day, $570,000 warehouse line of credit provided by a syndicate of unaffiliated banks that expires in July 1997. The credit agreement includes covenants requiring the Company to maintain (i) a minimum net worth of $130,000, plus net income subsequent to July 31, 1996, and capital contributions and minus permitted dividends, (ii) a ratio of total liabilities, excluding debt incurred pursuant to gestation and repurchase financing agreements, to adjusted net worth of not more than 8.0 to 1.0, (iii) its eligibility as a servicer of GNMA, FHA, VA, FNMA and FHLMC mortgage loans and (iv) a mortgage servicing rights portfolio with an underlying unpaid principal balance of at least $4,000,000. The provisions of the agreement also restrict the Company's ability to pay dividends in any fiscal quarter that exceed 50% of the Company's net income for the quarter; or to engage significantly in any type of business unrelated to the mortgage banking business and the servicing of mortgage loans. At December 31, 1996 and 1995, the total amounts outstanding under this and its predecessor facilities were $540,900 and $468,020, respectively. Additionally, the Company has entered into a $200,000, 364-day revolving credit facility with a syndicate of unaffiliated banks. An $80,000 portion of the revolver facility converts on July 31, 1997, into a four-year term loan and is secured by the portion of the Company's servicing portfolio designated as "available-for-sale". A $70,000 portion of the revolver facility matures on July 31, 1997, and is secured by the portion of the Company's servicing portfolio designated as "held-for-sale". A $50,000 portion of the revolver facility matures on July 31, 1997, and is secured by a first-priority security interest in receivables on servicing rights sold. The facility includes covenants identical to those described above with respect to the warehouse line of credit. At December 31, 1996 and 1995, the total amounts outstanding under this and its predecessor facilities were $35,000 and $90,150, respectively. The Company was in compliance with the above-mentioned debt covenants at December 31, 1996. Although management anticipates continued compliance, there can be no assurance that 44 the Company will be able to comply with the debt covenants specified for each of its financing agreements. Failure to comply could result in the loss of the related financing. The Company has also entered into an uncommitted gestation financing arrangement. The interest rate on funds borrowed pursuant to the gestation line is based on a spread over the Federal Funds rate. The gestation line has a funding limit of $1,000,000. The total amounts outstanding under this and its predecessor facility at December 31, 1996 and 1995 were $229,831 and $487,336, respectively. The Company entered into a $5,000 unsecured line of credit in September 1996. The line of credit expires in September 1997. The interest rate on funds borrowed through this line of credit is prime plus 0.5%. There were no amounts outstanding on this line of credit at December 31, 1996. The Company had entered into a $6,580, 364-day revolving credit facility secured by certain real property of the Company. This revolving credit facility was retired in the third quarter of 1996. The interest rate on funds borrowed through this facility approximated the average Federal Funds rate plus 2.125%. Beginning in June 1995, the Company had from time to time borrowed up to $19,000 on a short-term, unsecured basis from RBC. Interest on the loans was at the prime rate, and the Company incurred interest expense of $258 and $527 related to these borrowings during 1996 and 1995, respectively. There was no indebtedness to RBC at December 31, 1996. The Company has no plans in the foreseeable future to borrow from RBC. The monthly average outstanding amount under these credit agreements during 1996 was $835,231, at a weighted average rate of 5.50%. The Company incurred interest expense of $45,956 on these borrowings in 1996. The Company also incurred facility fees related to these credit agreements totaling $1,266, which is included in interest expense. The Company incurred initial arrangement fees of $437 in 1996, which have been capitalized and are included in other assets in the accompanying consolidated balance sheet. These initial fees are being amortized to interest expense over the term of the related credit agreements. Amortization expense for 1996 was $490. Additional advances available to the Company under these credit agreements at December 31, 1996, amounted to $969,270. The monthly average outstanding amount under these credit agreements during 1995 was $618,060, at a weighted average rate of 6.28%. The Company incurred interest expense of $38,842 on these borrowings in 1995. The Company also incurred facility fees related to these credit agreements totaling $1,092, which is included in interest expense. The Company incurred initial arrangement fees of $1,197, which have been capitalized and are included in other assets in the accompanying consolidated balance sheet. These initial fees are being amortized to interest expense over the term of the related credit agreements. Amortization during 1995 was $812. Additional advances available to the Company under these credit agreements at December 31, 1995, amounted to $765,493. 45 Note 9 - Capital Transactions: The Company issued five percent stock dividends on March 8, 1994, September 12, 1994, May 8, 1995, and August 31, 1995. A ten percent stock dividend was issued on June 30, 1995, and a seven percent stock dividend was issued on September 24, 1996. All of the above are collectively referred to as the Stock Dividends. Earnings per share have been restated for the effects of the Stock Dividends. On March 15, 1996, the Company completed a second public offering of 3,512,961 shares of common stock (3,758,868 shares after consideration of the Stock Dividends) priced at $14.50 per share ($13.55 after consideration of the Stock Dividends). The Company sold 2,200,000 shares (2,354,000 shares after consideration of the Stock Dividends) in the offering while certain selling stockholders sold the remaining 1,312,961 shares (1,404,868 shares after consideration of the Stock Dividends). In concurrent private placements the Company sold an additional 896,552 shares of common stock at the offering price of $14.50 per share (959,311 shares at $13.55 after consideration of the Stock Dividends) to RBC, which owned approximately 41% of the Company's outstanding common stock prior to the public offering and private placement and approximately 39% immediately thereafter. Net proceeds to the Company after underwriting discounts and estimated offering expenses totaled approximately $43 million. Proceeds of the offering were used to repay indebtedness to RBC and for other general corporate purposes, including the continued growth and general expansion of the Company's business activities. During the fourth quarter of 1995, the Company established the Dividend Reinvestment and Stock Purchase Plan (DRIP). The DRIP offers stockholders a convenient method of purchasing Company common stock at a 5% discount from market prices through the reinvestment of cash dividends and through optional cash payments. Optional cash payments may be made quarterly up to $15 per quarter. The price per common share will be 95% of the average closing sale price per common share for the 20 trading days prior to the date on which dividends are paid, in the case of a dividend reinvestment transaction, or on the date on which the Company's fiscal quarter ends, in the case of an optional cash payment transaction. The Company reserves the right to modify the pricing terms or any other provisions of the DRIP at any time. To meet demands of the optional quarterly cash contributions received through the DRIP and for the reinvestment of dividends through the DRIP, the Company either issues new shares or the DRIP agent purchases shares on the open market. The Board of Directors has authorized the issuance of 1,000,000 shares under the DRIP (1,070,000 after consideration of the Stock Dividends). At December 31, 1996 there were 223,642 shares outstanding under the DRIP. 46 Note 10 - Income Taxes: Income tax expense (benefit) consists of the following:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 -------- -------- ------ Current: Federal $ 13,060 $ (2,519) $4,566 State 328 (454) -------- -------- ------ 13,388 (2,973) 4,566 Deferred (2,463) 11,046 4,467 ======== ======== ====== $ 10,925 $ 8,073 $9,033 ======== ======== ======
During 1996 and 1995, the Company qualified for state tax headquarters credits of $1,687 and $1,663, respectively, reducing current state tax expense that otherwise would have been payable for 1996 and 1995. In addition, during 1994 the Company initially elected a new method of accounting for mortgage servicing rights for purposes of filing its tax returns for the period beginning June 3, 1993, and ending December 31, 1993. This new tax accounting method accelerated tax deductions related to mortgage servicing rights into earlier periods and accounts for the reallocation of approximately $5,744 from current to deferred tax expenses during 1994. The effective tax rate varied from the statutory federal tax rate of 35% for 1996, 1995 and 1994 due to the following:
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 1996 1995 1994 ------------------ ----------------- -------------------- % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income ------- ------ ------ ------ ------- ------- Tax expense at statutory rate $10,692 35.0% $7,802 35.0% $ 9,477 35.0 % State tax, net of federal benefit 107 .4% 178 .8% 30 .1 % Other, net 126 .4% 93 .4% (474) (1.7)% ------- ---- ------ ---- ------- ---- $10,925 35.8% $8,073 36.2% $ 9,033 33.4 % ======= ==== ====== ==== ======= ====
Deferred tax expense (benefit) results from timing differences in the recognition of revenue and expenses for income tax and financial reporting purposes. The sources and the tax effects of each are as follows: 47
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 -------- -------- ------- Mortgage servicing rights $ 92 $ 12,528 $ 4,752 Deferred compensation (2,204) (383) Mark to market loans held for sale 521 (521) Foreclosure reserve (1,053) (44) (243) State headquarters tax credit carryforwards generated (370) 135 (135) Depreciation 511 15 148 Other, net 40 (684) (55) -------- -------- ------- $ (2,463) $ 11,046 $ 4,467 ======== ======== =======
Deferred tax (assets) liabilities are summarized as follows:
DECEMBER 31, ---------------------- 1996 1995 -------- -------- Deferred compensation $ (2,671) $ (467) Mark to market loans held for sale (521) Foreclosure reserve (1,537) (484) State headquarters tax credit carryforwards (370) Other, net (615) (671) -------- -------- (5,193) (2,143) -------- -------- Mortgage servicing rights 13,975 13,883 Depreciation 912 401 Other, net 16 -------- -------- 14,887 14,300 ======== ======== Net deferred tax liability $ 9,694 $ 12,157 ======== ========
There are no valuation allowances provided for any of the Company's deferred tax assets based on management's belief that it is more likely than not that deferred tax assets will be realized. Note 11 - Related Party Transactions: In connection with the initial public offering, RBC entered into an agreement with two officers of the Company to pay each $200 per year through 2000, provided they remained in the employment of the Company. During 1996 and 1995, RBC paid $400 for each year, pursuant to the terms of these agreements. The Company recorded no expenses related to these agreements during 1996 or 1995. Beginning in June 1995, the Company had from time to time borrowed up to $19,000 on a short-term unsecured basis from RBC. Interest on the loans was at the prime rate, and the Company incurred interest expense of $258 related to these borrowings during 1996. Interest 48 expense incurred for 1995 was $527. The average outstanding balance under this financing arrangement was $3,000 for 1996 and $6,099 for 1995. At December 31, 1995, the principal amount of such indebtedness aggregated $19,000. There was no indebtedness to RBC at December 31, 1996. The Company has no plans in the foreseeable future to borrow from RBC. Note 12 - Stock Options and Restricted Stock Plan: Contemporaneous with the initial public offering, certain executives of the Company were granted options to purchase 600,000 shares of common stock of the Company at the initial offering price of the stock of $8.75 per share (858,390 shares at $6.12 per share after giving effect to the Stock Dividends). The options have a term of ten years and become exercisable at a rate of 20% per year during the period from May 26, 1994 through May 26, 1998. At December 31, 1996, 515,034 options were exercisable. No additional options have been granted, and none have been exercised or forfeited. In addition, in connection with the employment of certain officers, such officers are entitled to receive restricted stock as part of their compensation. In connection therewith, the Company issued 16,410 restricted shares at a price of $15.58 per share on January 27, 1996 (17,558 shares at $14.56 per share after giving effect to the Stock Dividends), 43,402 restricted shares at a price of $9.36 per share on January 26, 1995 (56,320 shares at $7.21 per share after giving effect to the Stock Dividends), and 8,878 restricted shares at a price of $10.41 per share on January 21, 1994 (12,700 shares at $7.28 per share after giving effect to the Stock Dividends). Costs associated with these grants are included as compensation expense of the Company in the accompanying consolidated financial statements. On October 21, 1993, the Company adopted a phantom stock plan that provided for the awarding of up to 300,000 (429,195 after giving effect to the Stock Dividends) deferred compensation units to officers and certain key employees. The plan specified a five-year vesting schedule. In addition, from time to time the Board of Directors has approved participation in a special phantom stock plan for certain officers of the Company. During 1996, the Company terminated all of its phantom stock plans and canceled all outstanding grants thereunder. In connection therewith, each former participant in the phantom stock plans was awarded an option under a new nonqualified stock option plan for each unit canceled under the phantom stock plans. Other terms of the awarded options were substantially similar to the underlying canceled units. 49 Activity in the phantom stock plans and the new nonqualified stock option plan is summarized below:
UNITS FORFEITED UNITS CANCELED OR UNITS PHANTOM STOCK PLANS: GRANTED REDEEMED OUTSTANDING - --------------------------------------------------------------------------------- Balance at December 31, 1994 114,109 3,307 110,802 -1995 activity 121,250 36,846 84,404 -Effect of Stock Dividends 47,632 8,543 39,089 -------- ------- -------- Balance at December 31, 1995 282,991 48,696 234,295 -1996 activity 35,084 (35,084) -Effect of Stock Dividends 2,419 42 2,377 -Plan cancellation (285,410) (83,822) (201,588) -------- ------- -------- Balance at December 31, 1996 ======== ======= ========
UNITS UNITS FORFEITED UNITS NONQUALIFIED STOCK OPTION PLAN: GRANTED OR EXERCISED OUTSTANDING - --------------------------------------------------------------------------------- Balance at December 31, 1995 - 1996 activity 201,588 201,588 - Effect of Stock Dividends 11,569 11,569 ------- ------ ------- Balance at December 31, 1996 213,157 213,157 ======= ====== =======
Of the 213,157 units outstanding at December 31, 1996 under the nonqualified stock option plan, the following are strike prices and percents vested:
EXPIRATION UNITS STRIKE PERCENT DATE OUTSTANDING PRICE VESTED ---------------------------------------------------------- January 21, 2004 101,578 $ 7.28 40% January 26, 2005 19,465 7.19 20% January 26, 2005 75,261 7.22 20% July 1, 2005 16,853 11.17 20%
During 1995, the Company established an Omnibus Employee Stock Award Plan (the Omnibus Plan). The purpose of this plan is to provide key employees who are largely responsible for the Company's growth and continued success with the opportunity to have or increase their proprietary interest in the Company through the granting of any one or any combination of options, stock appreciation rights, restricted stock and unrestricted stock. This plan is authorized to issue up to 200,000 shares of common stock (224,700 shares after giving effect to the Stock Dividends). Units issued under this plan vest 20% per year on each anniversary of the grant date and expire 10 years after the grant date. 50 Activity in the Omnibus Plan is summarized below:
UNITS UNITS FORFEITED UNITS OMNIBUS PLAN: GRANTED OR EXERCISED OUTSTANDING - ---------------------------------------------------------------------------------- - -1995 activity 100,000 100,000 ------- ------- ------- Balance at December 31, 1995 100,000 100,000 - -1996 activity 104,000 104,000 - -Effect of Stock Dividends 12,040 12,040 ------- ------- ------- Balance at December 31, 1996 216,040 216,040 ======= ======= =======
Of the 216,040 units outstanding at December 31, 1996 under the Omnibus Employee Stock Award Plan, the following are strike prices and percents vested:
EXPIRATION UNITS STRIKE PERCENT DATE OUTSTANDING PRICE VESTED --------------------------------------------------------- January 26, 2006 23,540 $14.56 0% October 30, 2005 107,000 14.96 20% March 21, 2006 53,500 14.03 0% November 8, 2006 17,000 15.03 0% November 12, 2006 7,500 14.98 0% December 3, 2006 7,500 14.56 0%
During 1995, the Company established a Formula Stock Option Plan. The purpose of this plan is to provide annually (on each September 1) to the non-employee directors of the Company options to purchase 10,000 shares of the common stock of the Company. All options vest 20% on the date of grant and 20% each year thereafter on the anniversary date of the grant and expire 10 years after the grant date. The plan is authorized to issue up to 150,000 shares of common stock (168,525 shares after giving effect to the Stock Dividends). On September 1, 1995, 50,000 options were issued at a market strike price of $15.91 per share (53,500 options at a strike price of $14.87 per share after giving effect to the Stock Dividends). On September 1, 1996, 50,000 options were issued at a market strike price of $13.25 per share (53,500 at a strike price of $12.38 after consideration of the Stock Dividends). The phantom stock plan was a variable stock award plan for accounting purposes. Accordingly, compensation expense was accrued by reference to the difference between current market value over the value base adjusted for the cumulative vested status of the underlying units. The Company's other aforedescribed option plans are considered fixed stock award plans for accounting purposes. Accordingly, total compensation expense for these fixed plans is measured as the difference between the market value on the date of the grant over the strike price which fixed total expense is then recognized over the vesting period. The Company recognized compensation expense related to the aforedescribed plans (exclusive of the restricted stock plan which is expensed as incurred) of $283, $748 and $60 for 1996, 1995 and 1994, respectively. 51 For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair value of stock options granted in 1996 and 1995 was estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option pricing model was originally developed for use in estimating the fair value of traded options which have different characteristics than the Company's employee stock options. The model is also sensitive to changes in the subjective assumptions which can materially affect fair value estimates. As a result, management believes that the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options. For purposes of SFAS No. 123, each award was separately valued using the 10 year constant maturity treasury rate on the date of grant (rates ranged from 5.634% to 6.941%) as the risk-free interest rate. The expected life of each grant was assumed to be equal to the term to expiration as of the grant date (expected lives ranged from 7.2 to 10.0 years). The expected dividend yield was established based upon the dividend policies of the Company as of the date of award. Finally, for purposes of assigning a volatility factor, the historical 100 day volatility factor was reviewed for selected points in time over the past two-years and the average of all such selected points of 44.89% was assigned to all 1995 and 1996 awards for purposes of the SFAS No. 123 valuation. SFAS No. 123, for purposes of the required pro forma disclosures, permits straight-line amortization of the estimated fair value of the options over the vesting period. Had compensation cost for the Company's 1996 and 1995 stock-based option awards been determined consistent with the requirements of SFAS No. 123, net income and earnings per share would have been reported as follows for 1996 and 1995.
For the Year Ended December 31, -------------------- 1996 1995 -------- -------- Net income as reported $ 19,623 $ 14,219 After-tax adjustment for SFAS No. 123 (409) (134) -------- -------- Pro forma net income as adjusted $ 19,214 $ 14,085 ======== ======== Pro forma net income per common share $ 1.05 $ 0.91
Due to the inclusion of only 1995 and 1996 option grants, the effects of applying SFAS No. 123 in 1995 and 1996 may not be representative of the pro forma impact in future years. Note 13 - Commitments and Contingencies: The Company was servicing and subservicing 96,087, 90,063 and 78,136 loans owned by others, with unpaid balances aggregating approximately $8,700,000, $7,800,000 and $5,900,000, at December 31, 1996, 1995 and 1994, respectively. Related escrow funds totaled approximately $56,900, $56,800 and $31,200 as of December 31, 1996, 1995 and 1994, respectively. Loans serviced for others and the related escrow funds are not included in the accompanying consolidated balance sheet. 52 The Company has issued mortgage-backed securities under programs sponsored by GNMA and FNMA. In connection with servicing mortgage-backed securities guaranteed by GNMA or FNMA, the Company advances certain principal and interest payments to security holders prior to their collection from specific mortgagors. Additionally, the Company must remit certain payments of property taxes and insurance premiums in advance of collecting them from specific mortgagors and make certain payments of attorney's fees and other costs related to loans in foreclosure. These amounts are included in servicing advances under the caption receivables in the accompanying consolidated financial statements. In the ordinary course of business, the Company is exposed to liability under representations and warranties made to purchasers and insurers of mortgage loans and the purchasers of servicing rights. Under certain circumstances, the Company may be required to repurchase mortgage loans or indemnify the purchasers of loans or servicing rights for losses if there has been a breach of representations or warranties. Liabilities are estimated at the date of sale and included in the determination of the gain or loss on sale. Such estimated liabilities are included in the allowance for foreclosure losses, a reduction of mortgage servicing rights basis. In the ordinary course of its business, the Company is from time to time subject to litigation. The Company is not a party to any material legal proceedings. Note 14 - Employee Benefits: On July 1, 1993, the Company established a 401(k) Retirement Savings Plan which is available to all regular, full-time active employees with 12 months continuous service. The plan allows employees to contribute up to 15% of their gross earnings on a before-tax basis annually, subject to the maximum established by law. Employees become eligible to participate in the plan as of January 1, or July 1, following the completion of 12 months continuous service. The Company contributes to the plan on a matching basis in an amount determined annually by the Board of Directors. The Company match percentage for 1996 and 1995 was 50% of the employee's contribution up to a maximum of 3% of the employee's gross earnings. An employee vests in the Company's matching contribution at a rate of 25% per year. The Company recorded $375, $147 and $116 of matching contributions as compensation expense during 1996, 1995 and 1994 respectively. On January 1, 1994, the Company established a defined benefit pension plan covering substantially all employees. Under the plan, retirement benefits are based upon years of service and the employee's level of compensation during the last five years prior to retirement. It is the Company's funding policy to make, at a minimum, the annual contribution required by the Employee Retirement Income Security Act of 1974, as amended. 53 Pension expense included the following:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 ----- ----- Service cost $ 263 $ 129 Interest cost on projected benefit obligation 90 48 Actual return on assets (4) (7) Amortization of unrecognized prior service costs 30 30 Amortization of unrecognized losses (gains) 10 (8) Asset loss deferred (23) (1) ----- ----- $ 366 $ 191 ===== =====
The projected benefit obligation under the plan at December 31, 1996 and 1995 is presented below:
DECEMBER 31, ----------------- 1996 1995 ------- ----- Actuarial present value of benefit obligations: Vested benefit obligation $ 369 $ 190 Nonvested benefit obligation 293 218 ------- ----- Accumulated benefit obligation 662 408 Benefits attributable to future salaries 454 362 ------- ----- Projected benefit obligation 1,116 770 Fair value of plan assets (420) (275) ------- ----- 696 495 Items not recognized: Unrecognized prior service cost (321) (351) Unrecognized net gain (6) (18) Asset loss deferred (23) (1) ------- ----- Total unrecognized items (350) (370) ------- ----- Accrued pension expense 346 125 Adjustment for minimum liability 8 ------- ----- Net pension liability $ 346 $ 133 ======= =====
Assumptions used in accounting for the plan were:
1996 1995 ----- ----- Weighted average discount rate 7.50% 7.25% Average rate of increase in compensation levels 4.00% 5.00% Expected long-term rate of return on plan assets 8.00% 8.00%
On January 1, 1995, the Company established the Stock Investment Plan (the Stock Plan) covering substantially all employees. Under the Stock Plan, eligible employees may contribute, 54 through payroll deductions, a minimum of $10.00 per month to a maximum of $1,500.00 per month, to acquire common stock of the Company. The purchase price of such stock will be equal to 85% of the fair market value on the purchase date with the Company subsidizing the remaining 15% of the cost. The Company is responsible for custodian charges (including brokerage expenses incurred in connection with the purchase of shares) and all costs of maintaining and executing transfers. This plan will continue until 100,000 shares of stock (129,764 shares after giving effect to the Stock Dividends) have been purchased by employees. As of December 31, 1996, 52,710 shares have been purchased under the Stock Plan. The Company has subsidized approximately $94 and $46 relating to the noncompensatory Stock Plan discount for 1996 and 1995, respectively. On January 1, 1995, the Company established the Employee Stock Ownership Plan (the ESOP) covering substantially all employees. Contributions to the ESOP, which are at the discretion of and determined annually by the Board of Directors, are not to exceed the maximum amount deductible under the applicable sections of the Internal Revenue Code and are funded annually. However, such contributions must be adequate to meet the required principal and interest payments on the underlying loans discussed below. During 1996 and 1995, the ESOP borrowed $3,000 and $2,000, respectively, from the Company to purchase 224,169 and 200,944 shares of the Company's common stock which are pledged to secure loans outstanding. The principal amount of the 1995 loan is repayable in equal quarterly installments of $100, which commenced in January 1996. The principal amount of the 1996 loan is repayable in annual installments of $600 which commence in May 1997. In accordance with these loan agreements, the ESOP repaid $400 to the Company in 1996. An additional $48 was paid on these loans in 1996 from the cash dividends paid on the unallocated ESOP shares. In accordance with the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans", the Company records compensation expense equal to the fair value of shares on the date such shares are committed to be released to employees. Shares are considered committed to be released under the applicable plan formula as the principal amount of the underlying loans are repaid. There was no compensation expense related to the ESOP for 1995 since debt repayments did not begin until January 1996. For the year ended December 31, 1996, 40,323 shares were released and compensation expense related to the ESOP was $600. The fair market value of the 409,752 unallocated shares held at December 31, 1996 was $5,839. Fair market value of the 40,323 allocated shares was $575 at December 31, 1996. Administrative expenses of the ESOP for 1996 and 1995 paid by the Company totaled $19 and $27, respectively, and have been included as a component of salaries and employee benefits. Note 15 - Financial Instruments and Risk Management: The Company is a party to various derivative financial instruments and financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to risks related to fluctuating interest rates. These 55 financial instruments include mortgage purchase commitments, mandatory delivery commitments, put and call option contracts, futures contracts and interest rate floor contracts. The Company uses these financial instruments exclusively for purposes of managing its resale pricing and interest rate risks. The Company's mortgage loans held for sale are acquired or originated through a network of correspondents, wholesale brokers and retail branches. In connection therewith, the Company routinely enters into optional mortgage purchase commitments to acquire or originate specific in-process mortgage loans when and if closed by the counterparty, at the option of the mortgagor. Mortgage purchase commitments obligate the Company to acquire mortgage loans on a delayed delivery basis, which may extend for a period of 60 days, at a price which is fixed as of the date of the contract. Accordingly, the Company is subject to the risk that the market value of its on-balance sheet mortgage loans held for sale and the mortgage loans it is obligated to purchase under its mortgage purchase commitments may change significantly prior to resale. In order to limit its resale price exposure, the Company enters into mandatory delivery commitments which are contracts for delayed delivery of mortgage loans to third parties. Mandatory delivery commitments obligate the Company to sell mortgage loans on a delayed delivery basis at a price which is fixed as of the date of the contract. Since mandatory delivery commitments enable the Company to fix its resale prices for both on-balance sheet mortgage loans held for sale (for which a fixed price has already been paid) and for anticipated loan closures subject to mortgage purchase commitments (which fix the delayed purchase price for the resultant mortgage loans), these instruments can effectively limit the Company's resale price exposures. The percentages of anticipated loan closures under mortgage purchase commitments that are covered by mandatory delivery commitments not allocated to on-balance sheet mortgages held for sale are monitored continuously. The Company's resultant expected exposure to resale pricing risk is continuously adjusted to consider changing expectations regarding anticipated loan closure percentages and other market conditions. Generally, the Company buys put and call option contracts on U.S. Government Securities to effect modest adjustments of its overall exposure to resale pricing exposures. Purchased call option contracts enable the Company, at its option, to acquire an underlying financial security from a third party at a specified price for a fixed period of time. Purchased put option contracts enable the Company, at its option, to sell an underlying financial security to a third party at a specified price and for a fixed period of time. Since these financial instruments essentially enable the Company to fix the purchase or sale price on financial instruments whose changes in value have historically correlated closely with changes in value of mortgage loans, these instruments can be used effectively to adjust the Company's overall exposure to resale pricing risks. In addition, these instruments have the advantages of being available in smaller denominations than are typical of the Company's mandatory delivery commitments and of being traded in a highly liquid and efficient secondary market. 56 Periodically, the Company also buys or sells futures contracts as part of its hedging activities. Generally, futures positions are outstanding for short periods of time and are used to hedge against price movements of another financial instrument while execution of that instrument is bid among brokers. Futures may be similarly used to hedge against price movements when another financial instrument is illiquid due to temporary market conditions. There were no open futures positions as of December 31, 1996 or 1995. The Company typically sells its produced mortgage servicing rights between 90 and 180 days of origination or purchase of the related loan pursuant to committed prices under forward sales contracts. The Company also maintains a portfolio of mortgage servicing rights which though available-for-sale, are not currently scheduled for sale pursuant to the Company's forward sales contracts. In connection therewith, the Company is subject to the risk that the economic value of those mortgage servicing rights may decline in the event of a significant decline in long-term interest rates. A significant decline in interest rates generally causes an increase in mortgage loan prepayments (for example increased refinancing) which in turn tends to reduce the future expected cash flows (and economic value) of associated mortgage servicing rights. Interest rate floor contracts provide for the Company to receive an interest rate differential on a notional amount of outstanding principal to the extent that interest rates decline below a specified rate which is fixed as of the date of the contract. Accordingly, the value of an interest rate floor contract tends to increase while the value of a mortgage servicing right tends to decrease in a declining interest rate environment. As such, interest rate floor contracts can effectively mitigate the Company's exposure to declines in the economic value of its servicing rights in a declining interest rate environment. The above described financial instruments involve, to varying degrees, elements of credit and interest rate risk which are in excess of the amounts recognized in the balance sheet. The Company believes that these instruments do not represent a significant exposure to credit loss since the amounts subject to credit risks are controlled through collateral requirements, credit approvals, limits and monitoring procedures. The Company is exposed to credit losses in the event of non-performance by counter parties to certain of its financial instruments, but it does not expect any counter parties to fail since such risks are managed through limits and monitoring procedures. The Company does not have a significant exposure to any individual customer, correspondent or counterparty in connection with these financial instruments. Except for mortgage purchase commitments, the Company does not require collateral or other security to support the financial instruments with credit risk whose contract or notional amounts are summarized as follows: 57
CONTRACT AMOUNT AT DECEMBER 31, 1996 1995 ----------- ----------- Financial instruments whose contract amounts represent credit risk: Mortgage purchase commitments $ 528,672 $ 786,800 Financial instruments whose contract amounts exceed the amount of credit risk: Mandatory delivery commitments (allocated against mortgages held for sale) 644,200 1,025,300 Mandatory delivery commitments (allocated against mortgage purchase commitments) 400,708 705,900 Purchased option contracts 100,000 175,000 Forward servicing sales contracts 11,469,076 12,290,700 Interest rate floor contracts 528,200 453,200
Mortgage loan purchase commitments expose the Company to credit loss in the event the purchase commitments are funded as mortgage loans and if counter parties default prior to resale. The maximum credit loss to which the Company is exposed is the notional amount of the commitments. However, the Company does not believe the commitments represent a significant exposure to credit loss because the related loans are secured by 1-4 family homes, most loans are insured or guaranteed through private mortgage insurance or government approval programs and subjected to underwriting standards specified by government agencies or private mortgage insurance. The estimated credit exposure on financial instruments whose contract amounts exceed the amount of credit risk is the increase in market value of the instrument. The Company generally does not charge a premium to its correspondents in connection with issuance of its mortgage purchase commitments nor is a premium charged to the Company in connection with its acquisition of mandatory delivery or forward servicing sales contracts. Premiums paid for purchased put and call option and futures contracts are initially deferred and included in other assets in the balance sheet. Other assets included $934 and $1,412 at December 31, 1996 and 1995, respectively, of such deferred premiums. Ultimately, such deferred premiums and related realized gains or losses from these activities are recorded as a component of gains and losses on sales of mortgage loans at the earlier of the expiration of the underlying contract or when exercise of the contract is deemed remote. Premiums paid for interest rate floor contracts are initially deferred and included in other assets in the balance sheet and subsequently amortized over the term of the underlying contract. Amounts received as interest rate differentials under floor contracts are recorded as a reduction of basis in mortgage servicing rights. Other assets included $2,611 and $1,695 at December 31, 1996 and 1995, respectively, of unamortized premiums. For the years ended December 31, 1996 and 1995, respectively, $620 and $464 of deferred premiums paid for interest rate floor contracts were amortized to expense. Open contracts and the cost thereof are considered in determining the market value and cost of mortgage servicing rights held for investment. 58 The current variable rate index (CMT Treasury rate) was 6.42% and 5.57% at December 31, 1996 and 1995, respectively. Other terms of the interest rate floor contracts outstanding at December 31, 1996, are summarized as follows:
Notional Contract Date Expiration Date Amount Floor Rate - ------------------------------------------------------------------------------- September 19, 1994 September 19, 1997 $ 75,000 6.845% September 19, 1994 September 19, 1999 81,000 6.345% September 19, 1994 September 19, 1999 51,000 6.845% February 13, 1995 February 13, 1998 21,200 7.067% February 13, 1995 February 13, 2000 20,000 7.067% February 13, 1995 February 13, 2000 45,000 6.567% June 7, 1996 June 7, 1999 50,000 6.600% August 20, 1996 August 20, 2001 60,000 5.570% August 20, 1996 August 20, 2001 65,000 5.570% August 20, 1996 August 20, 2001 60,000 5.570% -------- $528,200 ========
59 Note 17 - Fair Value of Financial Instruments: The following table presents the carrying amounts and fair values of the Company's financial instruments at December 31, 1996 and 1995.
1996 1995 -------------------- ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- ---------- ---------- Assets Cash $ 2,492 $ 2,492 $ 2,161 $ 2,161 Receivables 60,668 60,668 57,893 57,893 Mortgage loans held for sale and mortgage-backed securities 802,335 803,137 1,035,229 1,036,415 Liabilities Short-term borrowings 805,730 805,730 1,005,557 1,005,557 Long-term borrowings 65,530 65,530
1996 1995 ============================= =============================== Notional Carrying Estimated Notional Carrying Estimated Amount Value Fair Value Amount Value Fair Value -------- -------- ---------- -------- -------- ---------- Off-balance sheet instruments Mortgage purchase commitments $528,672 $ $(1,450) $786,800 $ $ 7,539 Mandatory delivery commitments (allocated to mortgage purchase commitments) 400,708 1,598 705,900 (5,400) Purchased option contracts 100,000 934 502 175,000 1,412 1,513 Interest rate floor contracts 528,200 2,611 5,056 453,200 1,695 11,058
The following notes summarize the significant methods and assumptions used in estimating the fair values of financial instruments. Cash, receivables and short-term borrowings are short-term in nature. Accordingly, they are valued at their carrying amounts which are a reasonable estimation of fair value. Mortgage loans held for sale and mortgage-backed securities covered by mandatory delivery commitments allocated thereto are valued based upon commitment delivery prices. Uncommitted mortgage loans held for sale are valued by reference to quoted market prices for mortgage-backed securities, after appropriate adjustments thereto. For purposes of developing the estimated fair value, the portfolio has been segregated by product type, term and coupon interest rate. Short-term and long-term borrowings are all tied to near term variable rate indices. Accordingly they are valued at their carrying amounts, which are a reasonable estimation of fair values. 60 Mortgage purchase commitments are valued based upon the difference between quoted mandatory delivery commitment prices (which are used by the Company to price its mortgage purchase commitments) and the committed prices. Mandatory delivery commitments are valued based upon the difference between quoted prices for such commitments and the prices applicable to the underlying commitment. Purchased option contracts are valued based upon quoted prices for such option contracts. Interest rate floor contracts are valued based upon broker quotations. Note 18 - Subsequent Events: The Company and Meritage Mortgage Corporation (Meritage) have signed a letter of intent for the Company to merge with Meritage. Meritage is a wholesale originator of subprime mortgages headquartered in Portland, Oregon that was organized in November 1995 and has origination offices in the Portland, San Jose, Tacoma/Seattle, Tulsa and Denver metropolitan areas. During the year ended December 31, 1996, Meritage produced approximately $107,000 of subprime mortgage loans. Subprime mortgage production was approximately $40,000 for the fourth quarter. As of December 31, 1996, Meritage employed 66 people. The Company will exchange approximately $2,000 of cash and 926,000 shares of the Company's common stock, for all of the outstanding common stock of Meritage. Approximately 427,000 of the 926,000 Company shares are being issued contingent upon Meritage achieving specified increasingly higher levels of subprime mortgage production during the 30 months following closing. In January 1997, the Company reached resolution concerning certain of its contractual employment obligations. In connection therewith, the Company recorded a non-recurring charge of $5,200 (partially offset by a $2,000 reduction of income tax expense) in the accompanying consolidated financial statements for 1996. 61 Note 16 - Quarterly Financial Data (Unaudited):
First Second Third Fourth 1996 Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 3,243 $ 5,037 $ 4,500 $ 4,122 $ 16,902 Net gain on sale of mortgage loans 18,533 21,503 19,312 19,830 79,178 Gain on sale of mortgage servicing rights 66 123 775 141 1,105 Loan servicing fees 7,130 6,729 7,520 7,384 28,763 Other income 78 220 106 265 669 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 29,050 33,612 32,213 31,742 126,617 - ----------------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits 12,666 12,849 12,315 17,748(1) 55,578 Occupancy expense 1,276 1,364 1,485 1,515 5,640 Amortization of mortgage servicing rights 3,670 3,646 3,748 3,870 14,934 Provision for foreclosure losses 100 100 91 526 817 General and administrative expenses 4,087 5,463 4,767 4,783 19,100 - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 21,799 23,422 22,406 28,442 96,069 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 7,251 10,190 9,807 3,300 30,548 Income tax expense (2,791) (3,923) (3,626) (585) (10,925) - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 4,460 $ 6,267 $ 6,181 $ 2,715 $ 19,623 - ----------------------------------------------------------------------------------------------------------------------------------- Net income per common share $ 0.28 $ 0.33 $ 0.33 $ 0.14 $ 1.08
First Second Third Fourth 1995 Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 794 $ 1,428 $ 3,172 $ 3,241 $ 8,635 Net gain on sale of mortgage loans 550 2,547 13,733 16,992 33,822 Gain on sale of mortgage servicing rights 1,816 4,024 188 1,318 7,346 Loan servicing fees 5,851 5,237 6,344 6,773 24,205 Other income 537 721 446 985 2,689 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 9,548 13,957 23,883 29,309 76,697 - ----------------------------------------------------------------------------------------------------------------------------------- Salary and employee benefits 3,800 4,876 9,842 12,681 31,199 Occupancy expense 393 676 886 1,111 3,066 Amortization of mortgage servicing rights 2,028 2,119 2,458 2,747 9,352 Provision for foreclosure losses 16 19 40 93 168 General and administrative expenses 1,636 2,278 3,220 3,486 10,620 - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 7,873 9,968 16,446 20,118 54,405 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,675 3,989 7,437 9,191 22,292 Income tax expense (642) (1,529) (2,841) (3,061) (8,073) - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 1,033 $ 2,460 $ 4,596 $ 6,130 $ 14,219 - ----------------------------------------------------------------------------------------------------------------------------------- Net income per common share $ 0.06 $ 0.16 $ 0.30 $ 0.40 $ 0.92
(1) Includes non-recurring charge of $5,200. 62 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Resource Bancshares Mortgage Group, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of changes in stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of Resource Bancshares Mortgage Group, Inc. and its subsidiary at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for mortgage servicing rights in 1995. Price Waterhouse LLP Columbia, South Carolina February 3, 1997 63 STOCK DATA Information pertaining to high and low stock prices for each quarter during 1996, 1995 and 1994 is given in the following chart. All per share data have been adjusted to reflect the Stock Dividends issued by the Company. The Company began paying cash dividends in 1996. Cash dividends, each of $0.03 per share, were paid to shareholders of record as of September 3, 1996 and November 29, 1996. These cash dividends were paid on September 24, 1996 and December 13, 1996. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for restrictions on the Company's ability to pay cash dividends.) As of February 28, 1997, there were approximately 812 record holders of the Company's common stock. [GRAPH] Quarter 12-31-93 3-31-94 6-30-94 9-30-94 12-31-94 3-31-95 6-30-95 9-30-95 12-31-95 3-31-96 6-30-96 9-30-96 12-31-96 High $9.41 $8.98 $8.44 $8.28 $8.86 $8.47 $11.34 $17.06 $15.66 $17.06 $14.84 $14.25 $15.75 Low $6.97 $6.61 $6.42 $6.23 $7.50 $6.17 $ 7.70 $10.02 $12.61 $12.91 $10.16 $10.63 $12.88
64
DIRECTORS OFFICERS Edward J. Sebastian Edward J. Sebastian Thomas S. Palmer Chairman of the Board Chairman of the Board Senior Vice President Chief Executive Officer Chief Executive Officer Correspondent Production Resource Bancshares Mortgage Group, Inc. Columbia, South Carolina David W. Johnson, Jr. Larry W. Reed Vice Chairman Senior Vice President David W. Johnson, Jr. Managing Director Subprime Lending Vice Chairman Managing Director Steven F. Herbert Gregory A. Samp Resource Bancshares Mortgage Group, Inc. Senior Executive Vice President Senior Vice President Columbia, South Carolina Chief Financial Officer Director of Operations John W. Currie Richard M. Duncan Judy B. Schneider Attorney Senior Executive Vice President Senior Vice President McNair Law Firm P.A. Production Loan Operations Columbia, South Carolina law firm D. Hugh Burgess Joseph P. Sheridan, Jr. Senior Vice President Senior Vice President Stuart M. Cable General Auditor Retail Production Attorney Goodwin, Proctor & Hoar, LLP Jordan D. Dorchuck Ronald C. Simpson, Jr. Boston, Massachusetts Senior Vice President Senior Vice President law firm General Counsel Secondary Marketing John C. Baker D. Keith Gettman Edward F. Wallace, Jr. Baker Capital Corp. Senior Vice President Senior Vice President New York, New York Secondary Marketing and Wholesale Production venture capital firm Subprime Lending Steven D. Walls *Boyd M. Guttery Robin H. Holmes Senior Vice President Business Consultant Senior Vice President Controller Private Investor Underwriting and Insuring and Guaranteeing Atlanta, Georgia Brian L. Kunar *John O. Wolcott Senior Vice President Executive Vice President Loan Administration Olayan America Corporation New York, New York Thomas J. Little, Jr. investment company Senior Vice President Human Resources *Audit Committee
65 CORPORATE INFORMATION Exchange: NASDAQ Symbol: REMI Internet Address: http://www.rbmg.com INVESTOR RELATIONS CONTACT Steven F. Herbert Senior Executive Vice President and Chief Financial Officer Resource Bancshares Mortgage Group, Inc. 7909 Parklane Road Columbia, South Carolina 29223 Tel: (803) 741-3539 Fax: (803) 741-3586 DIVIDEND REINVESTMENT PLAN Resource Bancshares Mortgage Group, Inc. has an optional Dividend Reinvestment and Stock Purchase Plan. Shareholders interested in participating can contact the Investor Relations Contact listed above. FORM 10K AND OTHER INFORMATION Copies of the Resource Bancshares Mortgage Group, Inc., Annual Report on Form 10K, as filed with the Securities and Exchange Commission, will be furnished without charge to shareholders upon written request to Steven F. Herbert at the address set forth above. EX-21.1 8 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 RESOURCE BANCSHARES MORTGAGE GROUP, INC. SUBSIDIARIES OF THE REGISTRANT 1. Intercounty Mortgage Inc., a wholly-owned subsidiary of the Company, was formed by the Company in January 1995 and is incorporated in the state of Delaware. EX-23.1 9 CONSENTS OF PRICE WATERHOUSE 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of Amendment No. 3 of the Registration Statement on Form S-3 (No. 333-00638) of Resource Bancshares Mortgage Group, Inc. of our report dated February 3, 1997 appearing on page 56 of the 1996 Annual Report to Shareholders of Resource Bancshares Mortgage Group, Inc. which is incorporated in this Annual Report on Form 10-K. We also consent to the reference to us under the heading "Experts" in such Prospectus. PRICE WATERHOUSE LLP Columbia, South Carolina March 25, 1997 2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-87536) of Resource Bancshares Mortgage Group, Inc. of our report dated February 3, 1997 appearing on page 56 of the 1996 Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. PRICE WATERHOUSE LLP Columbia, South Carolina March 25, 1997 EX-27.1 10 FINANCIAL DATA SCHEDULE ( FOR SEC USE ONLY )
5 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-1-1996 DEC-31-1996 1 2,492 0 60,668 0 912,150 1,007,259 27,472 6,337 1,028,394 871,093 0 0 0 193 157,108 1,028,394 62,858 126,617 76,152 96,069 19,917 817 45,956 30,548 10,925 30,548 0 0 0 19,623 1.05 1.05
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