-----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, PA4Hr1+gxOUYPRWvJOO3DE/Kxg1CzGo3FI99HY/kaZ9UvuttFVe2eVvdFmYAnKz5 iXrfe820ArH0BhCmN2pczw== 0000950144-97-009277.txt : 19970815 0000950144-97-009277.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950144-97-009277 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21786 FILM NUMBER: 97663709 BUSINESS ADDRESS: STREET 1: 7909 PARKLANE ROAD SUITE 150 CITY: COLUMBIA STATE: SC ZIP: 29223 BUSINESS PHONE: 8037413000 MAIL ADDRESS: STREET 1: 7909 PARKLANE RD SUITE 150 STREET 2: 7909 PARKLANE RD SUITE 150 CITY: COLUMBI STATE: SC ZIP: 29223 10-Q 1 RESOURCE BANCSHARES MORTGAGE 10-Q 6-30-1997 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended June 30, 1997 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------- Commission File Number 000-21786 ---------- RESOURCE BANCSHARES MORTGAGE GROUP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) STATE OF DELAWARE 57-0962375 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7909 Parklane Road, Columbia, SC 29223 - -------------------------------------------------------------------------------- (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code (803)741-3000 ---------------- Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the registrant was required to file reports) and has been subject to such filing requirements for the past 90 days. YES X NO --- --- The number of shares of common stock of the Registrant outstanding as of July 31, 1997, was 19,850,103. Page 1 Exhibit Index on Pages A to D 2 RESOURCE BANCSHARES MORTGAGE GROUP, INC. Form 10-Q for the quarter ended June 30, 1997 TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements - (Unaudited) Consolidated Balance Sheet 3 Consolidated Statement of Income 4 Consolidated Statement of Changes in Stockholders' Equity 5 Consolidated Statement of Cash Flows 6 Notes to Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of 10 Financial Condition and Results of Operations PART II. OTHER INFORMATION 24 ITEM 2. Changes in Securities 24 ITEM 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 25 EXHIBIT INDEX A-D 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED BALANCE SHEET ($ in thousands)
June 30, December 31, 1997 1996 ----------- ----------- (Unaudited) ASSETS Cash $ 2,319 $ 2,492 Receivables 78,904 60,668 Mortgage-backed securities 76,392 123,447 Mortgage loans held for sale 866,310 678,888 Mortgage servicing rights, net 131,227 109,815 Premises and equipment, net 21,854 21,135 Goodwill and other intangibles 5,883 Accrued interest on loans held for sale 5,498 4,491 Other assets 39,233 27,458 ----------- ----------- Total assets $ 1,227,620 $ 1,028,394 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Short-term borrowings $ 943,752 $ 805,730 Long-term borrowings 6,507 Accrued expenses 13,538 11,386 Other liabilities 90,519 53,977 ----------- ----------- Total liabilities 1,054,316 871,093 ----------- ----------- Stockholders' equity Common stock 198 193 Additional paid-in capital 154,825 149,653 Retained earnings 22,611 12,007 Unearned shares of employee stock ownership plan (4,330) (4,552) ----------- ----------- Total stockholders' equity 173,304 157,301 ----------- ----------- Total liabilities and stockholders' equity $ 1,227,620 $ 1,028,394 =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 4 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED STATEMENT OF INCOME ($ in thousands, except share information) (Unaudited)
For the Six Months Ended For the Three Months Ended June 30, June 30, ------------------------------- ------------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ REVENUES Interest income $ 31,688 $ 35,301 $ 18,233 $ 16,856 Interest expense (22,037) (27,021) (12,317) (11,819) ------------ ------------ ------------ ------------ Net interest income 9,651 8,280 5,916 5,037 Net gain on sale of mortgage loans 42,250 40,036 25,223 21,503 Gain on sale of mortgage servicing rights 2,711 189 1,220 123 Loan servicing fees 15,338 13,859 7,803 6,729 Other income 426 298 157 220 ------------ ------------ ------------ ------------ Total revenues 70,376 62,662 40,319 33,612 ------------ ------------ ------------ ------------ EXPENSES Salary and employee benefits 27,144 25,515 14,880 12,849 Occupancy expense 3,442 2,640 1,850 1,364 Amortization of mortgage servicing rights 8,833 7,316 4,725 3,646 General and administrative expenses 11,743 9,750 6,868 5,563 ------------ ------------ ------------ ------------ Total expenses 51,162 45,221 28,323 23,422 ------------ ------------ ------------ ------------ Income before income taxes 19,214 17,441 11,996 10,190 Income tax expense (7,373) (6,714) (4,625) (3,923) ------------ ------------ ------------ ------------ Net income $ 11,841 $ 10,727 $ 7,371 $ 6,267 ============ ============ ============ ============ Weighted average shares* 19,831,581 17,534,817 20,108,839 19,058,888 ============ ============ ============ ============ Net income per common share $ 0.60 $ 0.61 $ 0.37 $ 0.33 ============ ============ ============ ============
* The provisions of Accounting Principles Board Opinion No. 15, "Earnings per Share" required that the Company, effective for the first quarter of 1997, prospectively commence to report net income per common share on a primary earnings per share basis. Accordingly, the weighted average shares outstanding for the second quarter of 1997 and the six months ended June 30, 1997 includes common stock equivalents while such equivalents are excluded for the comparable periods of the prior year. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 5 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ($ in thousands, except share information) (Unaudited)
Unearned Common Stock Additional Shares of Employee Six Months Ended ------------------- Paid-in Retained Stock Ownership June 30, 1996 Shares Amount Capital Earnings Plan Total - ------------------------------- ---------- ------ ------- -------- ------------------ ----- 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 Loans to ESOP (1,000) (1,000) Shares committed to be released under ESOP 97 200 297 Shares issued under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan 24,691 * 272 272 Net income 10,727 10,727 ---------- ---- -------- ------- ------- --------- Balance, June 30, 1996 18,018,115 $180 $132,575 $21,452 ($2,800) $151,407 ========== ==== ======== ======= ======= ========= Unearned Common Stock Additional Shares of Employee Six Months Ended ------------------- Paid-in Retained Stock Ownership June 30, 1997 Shares Amount Capital Earnings Plan Total - ------------------------------- ---------- ------ ------- -------- ------------------ ----- Balance, December 31, 1996 19,285,020 $193 $149,653 $12,007 ($4,552) $157,301 Issuance of restricted stock 23,528 * 328 328 Cash dividends (1,186) (1,186) Acquisition of Meritage Mortgage Corporation 537,846 5 4,742 4,747 Shares committed to be released under ESOP 59 222 281 Shares issued under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan 3,709 * 43 (51) (8) Net income 11,841 11,841 ---------- ---- -------- ------- ------- --------- Balance, June 30, 1997 19,850,103 $198 $154,825 $22,611 ($4,330) $173,304 ========== ==== ======== ======= ======= =========
* Amount less than $1 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5 6 RESOURCE BANCSHARES MORTGAGE GROUP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS ($ in thousands) (Unaudited)
Six Months Ended June 30, ---------------------------------- 1997 1996 ------------ ------------ OPERATING ACTIVITIES: Net income $ 11,841 $ 10,727 Adjustments to reconcile net income to cash (used in) provided by operating activities: Depreciation and amortization 10,453 8,554 Employee Stock Ownership Plan compensation 281 297 Provision for estimated foreclosure losses 1,093 200 (Increase) decrease in receivables (18,236) 1,503 Acquisition of mortgage loans (4,853,760) (5,674,298) Proceeds from sales of mortgage loans and mortgage-backed securities 4,754,990 6,056,032 Acquisition of mortgage servicing rights (112,051) (114,634) Sales of mortgage servicing rights 84,077 102,555 Net gain on sales of mortgage loans and servicing rights (44,961) (40,225) (Increase) decrease in accrued interest on loans (1,007) 1,938 Increase in other assets (10,976) (481) Increase (decrease) in accrued expenses and other liabilities 38,694 (6,620) ------------ ------------ Net cash (used in) provided by operating activities (139,562) 345,548 ------------ ------------ INVESTING ACTIVITIES: Purchases of premises and equipment, net (2,267) (5,308) ------------ ------------ Net cash used in investing activities (2,267) (5,308) ------------ ------------ FINANCING ACTIVITIES: Proceeds from borrowings 12,814,396 19,805,491 Repayment of borrowings (12,669,867) (20,192,534) Issuance of restricted stock 328 256 Shares issued under Dividend Reinvestment and Stock Purchase Plan and Stock Investment Plan (8) 272 Acquisition of Meritage Mortgage Corporation (1,750) Debt issuance costs (257) Cash dividends (1,186) Net proceeds of public offering 47,451 Loans to Employee Stock Ownership Plan (1,000) ------------ ------------ Net cash provided by (used in) financing activities 141,656 (340,064) ------------ ------------ Net increase in cash (173) 176 Cash, beginning of period 2,492 2,161 ------------ ------------ Cash, end of period $ 2,319 $ 2,337 ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6 7 RESOURCE BANCSHARES MORTGAGE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 Note 1 - Basis of Presentation: The financial information included herein should be read in conjunction with the consolidated financial statements and related notes of Resource Bancshares Mortgage Group, Inc. (the Company), included in the Company's December 31, 1996, Annual Report on Form 10-K. Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, is not required for interim financial statements and has been omitted. The accompanying interim consolidated financial statements are unaudited. However, in the opinion of management of the Company, all adjustments, consisting of normal recurring items, necessary for a fair presentation of operating results and financial position for the periods shown have been made. Certain prior period amounts have been reclassified to conform to current period presentation. In June 1996 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (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 Company adopted SFAS No. 125 effective January 1, 1997, as required. The requirements of SFAS No. 125 are substantially the same as those which were previously applicable to the Company pursuant to the provisions of SFAS No. 122, "Accounting for Mortgage Servicing Rights-An Amendment of FASB Statement No. 65." Accordingly, adoption of SFAS No. 125 had no material impact on the Company. As required by Accounting Principles Board Opinion No. 15, "Earnings per Share," the Company has prospectively implemented a policy of reporting primary earnings per share effective for the first quarter of 1997. In February 1997 the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share", which is effective for financial statements issued for periods ending after December 15, 1997. Early adoption of SFAS No. 128 is not permitted. Basic and diluted earnings per share for the second quarter reported pursuant to the provisions of SFAS No. 128 would be $0.38 and $0.36, respectively. Basic and diluted earnings per share for the first six months of 1997 reported pursuant to the provisions of SFAS No. 128 would be $0.62 and $0.59, respectively. Effective April 1, 1997, the Company completed a merger with Meritage Mortgage Corporation (Meritage), in which it exchanged approximately $1.75 million of cash and 537,846 noncontingent shares of RBMG common stock for all the outstanding stock of Meritage. This transaction was accounted for under the purchase method of accounting. In addition, 406,053 shares of RBMG common stock were issued contingent upon Meritage achieving specified increasingly higher levels of subprime mortgage production during the 31 months following closing. The fair market value of those contingent shares have been excluded from the purchase price for purposes of estimating goodwill and from outstanding shares for purposes of earnings per share computations. As each specified increasingly higher subprime mortgage production level is achieved, the corresponding fair market value of the associated contingent shares will be recorded as additional goodwill and such shares will prospectively be treated as outstanding for purposes of earnings per share computations. 7 8 The estimated total purchase price for the Meritage merger has been allocated to tangible and identifiable assets and liabilities based upon management's estimate of their respective fair values with the excess of estimated cost over the fair value of the net assets acquired allocated to goodwill. The estimated allocations of the purchase price are expected to be revised as additional information concerning asset and liability valuation is obtained and as specified increasingly higher production levels are achieved resulting in recognition of additional goodwill related to contingent shares of stock issued in the transaction. Management believes the estimated asset and liability valuations utilized for the acquisition, insofar as they are related to the noncontingent shares issued, will not be materially different from the information presented herein. Goodwill and other intangible assets are being amortized over a 20 year period using the straight line method. Amortization expense for the second quarter of 1997 was approximately $78. In connection with the acquisition, the following is a schedule of the allocation of the purchase price: Cash paid $ 1,750 Estimated fair market value of noncontingent shares of RBMG common stock 4,748 Deferred merger cost 463 ------- Total purchase price 6,961 Fair value of net assets acquired 1,000 ------- Goodwill and intangibles $ 5,961 ======= On April 21, the Company announced the signing of separate definitive merger agreements Resource Bancshares Corporation (RBC) and Walsh Holding Co., Inc. (Walsh). RBC, a financial services company, originates and purchases, sells and services small-ticket equipment leases through its Republic Leasing Company division and originates and services commercial mortgage loans through its Laureate subsidiaries. RBC, as of June 30, 1997, owned approximately 37% of the Company's common stock. Pursuant to the terms of a definitive merger agreement between RBC and the Company and subject to shareholder and regulatory approvals, RBC will merge with RBMG in a transaction that will be accounted for under the purchase method of accounting. The agreement provides for the Company to issue approximately 2 million additional shares of common stock (in addition to the 7.4 million shares of Company stock currently owned by RBC) to the shareholders of RBC. As of June 30, 1997, the Company has deferred approximately $0.9 million of merger costs related to this transaction. Walsh is a specialty finance mortgage company that, through its primary operating subsidiary, Walsh Securities, Inc., specializes in the purchase and origination of subprime mortgage loans. Walsh has eleven regional sales offices located in nine states from California to Massachusetts. According to the February 17, 1997 issue of Inside B&C Lending, Walsh was the twenty-third largest nationwide B&C originator for 1996. Walsh also sells and securitizes all originated and purchased loans and servicing rights associated with such loans, substantially all of which are secured by first mortgage liens on one-to-four family residences. Pursuant to the terms of a definitive merger agreement between the Company and Walsh and subject to shareholder and regulatory approvals, Walsh will merge with the Company in a transaction that will be accounted for as a pooling-of-interests. The agreement provides for the Company to issue approximately 21.4 million shares of common stock to the shareholders of Walsh assuming the RBC merger is completed first. Were the RBC merger not consummated, the agreement provides that the shareholders of Walsh would be issued approximately 19.6 million shares of the Company's common stock. As of June 30, 1997, the Company has deferred approximately $1.3 million of merger costs related to this transaction. These costs would be expensed upon completion of the pooling transaction. During the second quarter of 1997, the Company sold approximately $107 million of subprime loans to Walsh and recognized a gain of approximately $3.7 million on these sales. In conjunction therewith at June 30, 1997 the outstanding receivable due from Walsh which arose was approximately $8.3 million. Such receivable is secured by an interest in a residual certificate recently valued at approximately $28 million. As of the date of the filing of this 10-Q, these acquisitions have been delayed. Published news articles have reported that a subsidiary of Walsh originated or purchased mortgage loans on residential properties in transactions in which the purchase price may have been inflated. RBMG is conducting an independent review of this matter to determine the nature and scope of any irregularities. RBMG will take no action with respect to the proposed merger with Walsh until RBMG's review has provided it with a more complete understanding of this matter. 8 9 RESOURCE BANCSHARES MORTGAGE GROUP, INC. ITEM 2. 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, the Consolidated Financial Statements of the Company (and the notes thereto) and the other information included or incorporated by reference into the Company's 1996 Annual Report on Form 10-K and the interim Consolidated Financial Statements contained herein. Any statements made below (or elsewhere in this document) that are not statements of historical fact and could be considered forward-looking in nature within the meaning of the Private Securities Litigation Reform Act of 1995 are subject to risks and uncertainties that could cause actual results to differ materially. Such risks and uncertainties include, but are not limited to, those related to overall business conditions in the mortgage markets in which RBMG operates, fiscal and monetary policy, competitive products and pricing, credit risk management, changes in regulations affecting financial institutions and other risks and uncertainties discussed from time to time in the Company's SEC filings, including its 1996 Form 10-K. The Company disclaims any obligation to publicly announce future events or developments that affect the forward-looking statements herein. THE COMPANY 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 June 30, 1997, RBC owns approximately 37% of the outstanding common stock of the Company. The Company is principally engaged in the purchase and origination of mortgage loans, which it aggregates into mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. 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 A summary of loan production by source for the periods indicated is set forth below: ($ in thousands) (Unaudited)
Six Months Ended June 30, Quarter Ended June 30, ----------------------------- ----------------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Loan Production: Correspondent Division $3,554,180 $4,584,869 $1,948,454 $2,028,118 Wholesale Division 848,169 736,696 459,264 368,056 Retail Division 313,873 310,419 185,973 192,250 Subprime 133,758 87,001 ---------- ---------- ---------- ---------- Total Loan Production $4,849,980 $5,631,984 $2,680,692 $2,588,424 ========== ========== ========== ==========
9 10 A summary of key information relevant to industry loan production activity is set forth below: ($ in thousands) (Unaudited)
At or For the Quarter Ended June 30, ------------------------------------ 1997 1996 ------------ ------------ U. S. 1-4 Family Mortgage Originations Statistics (1) U. S. 1-4 Family Mortgage Originations $225,000,000 $195,000,000 Adjustable Rate Mortgage Market Share 26.00% 27.00% Estimated Fixed Rate Mortgage Originations $167,000,000 $142,000,000 Company Information Loan Production $ 2,680,692 $ 2,588,424 Estimated Company Market Share 1.19% 1.33%
(1) Source: Mortgage Bankers Association of America, Economics Department. Mortgage loan production increased 4% to $2.7 billion for the second quarter of 1997 from $2.6 billion for the second quarter of 1996. The net increase in loan production is primarily due to an estimated 17% increase in fixed rate mortgage origination volume between the comparable periods. Historically, the Company has been focused on purchasing loans through its correspondents. In order to diversify its sources of loan volume, the Company started a wholesale operation that purchased its first loan in May 1994, a retail operation which originated its first loan in May 1995 and a subprime division which was started in mid-1996, but did not commence significant business operations until the first quarter of 1997. Correspondent Loan Production Through its correspondents, the Company purchases loans that have been originated by such correspondents. Correspondents are primarily mortgage lenders, larger mortgage brokers and smaller savings and loan associations and commercial banks. The Company continues to emphasize correspondent loan production as its primary business focus because of the lower fixed expenses and capital investment required of the Company. That is, the Company can develop a cost structure that is more directly variable with loan production because the correspondent incurs most of the fixed costs of operating and maintaining branch office networks and of identifying and interacting directly with loan applicants. A summary of key information relevant to the Company's correspondent loan production activities is set forth below: ($ in thousands) (Unaudited)
At or For the Six Months At or For the Quarter Ended June 30, Ended June 30, ------------------------------ ------------------------------ 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Correspondent Loan Production $3,554,180 $4,584,869 $1,948,454 $2,028,118 Estimated Correspondent Market Share 0.88% 1.11% 0.87% 1.04% Approved Correspondents 920 803 920 803
The 4% decrease in correspondent loan production to $1.9 billion for the second quarter of 1997 from $2.0 billion for the second quarter of 1996 was primarily due to the Company's increased concentration on diversification of its sources of loan production, including the establishment of the new subprime division. However, the Company is still concentrating efforts on expanding its correspondent base, as can be 10 11 evidenced by the 15% increase in the number of approved correspondents from 803 at June 30, 1996 to 920 at June 30, 1997. Wholesale Loan Production The Company receives loan applications at its wholesale branches through brokers, underwrites the loans, funds the loans at closing and prepares all closing documentation. The wholesale branches also handle shipping and follow-up procedures on loans. Although the establishment of wholesale branch offices involves the incurrence of the fixed expenses associated with maintaining those offices, wholesale operations also provide for higher profit margins than correspondent loan production. Additionally, each branch office can serve a relatively sizable geographic area by establishing relationships with large numbers of independent mortgage loan brokers who bear much of the cost of identifying and interacting directly with loan applicants. A summary of key information relevant to the Company's wholesale production activities is set forth below: ($ in thousands) (Unaudited)
At or For the Six Months At or For the Quarter Ended June 30, Ended June 30, -------------------------- -------------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Wholesale Loan Production $848,169 $736,696 $459,264 $368,056 Estimated Wholesale Market Share 0.21% 0.17% 0.20% 0.19% Wholesale Division Direct Operating Expenses $ 4,964 $ 4,255 $ 2,730 $ 2,382 Approved Brokers 2,758 1,694 2,758 1,694 Number of Branches 13 11 13 11 Number of Employees 136 118 136 118
The $91 million increase in wholesale loan production to $459 million for the second quarter of 1997 from $368 million for the second quarter of 1996 relates to the Company's addition of two new branches and over 1,000 new brokers between June 30, 1996 and June 30, 1997. Similarly, the wholesale division's operating expenses increased and the division's estimated market share rose. Retail Loan Production A summary of key information relevant to the Company's retail production activities is set forth below: ($ in thousands) (Unaudited)
At or For the Six Months At or For the Quarter Ended June 30, Ended June 30, -------------------------- -------------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Retail Loan Production $313,873 $310,419 $185,973 $192,250 Estimated Retail Market Share 0.08% 0.07% 0.08% 0.10% Retail Division Operating Expenses $ 8,263 $ 7,831 $ 4,170 $ 3,753 Number of Branches 6 6 6 6 Number of Employees 206 190 206 190
The Company's retail loan production and direct operating expenses remained generally consistent for the quarter and six months ended June 30, 1996 and June 30, 1997. 11 12 Subprime Loan Production A summary of key information relevant to the Company's subprime production activities that were started in mid-1996, but did not commence significant business operations until the first quarter of 1997 is set forth below: ($ in thousands) (Unaudited)
At or For the Six Months At or For the Quarter Ended June 30, Ended June 30, -------------------------- ----------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- U. S. B&C Mortgage Originations Statistics (2) U. S. B&C Mortgage Originations $60,000,000 N/A $ 35,250,000 N/A Company Information Subprime Loan Production $ 133,758 N/A $ 87,001 N/A Estimated Subprime Market Share 0.22% N/A 0.25% N/A Subprime Division Operating Expenses $ 3,607 N/A $ 3,165 N/A Number of Brokers 522 N/A 522 N/A Number of Employees 116 N/A 116 N/A
(2) Source: August 4, 1997 issue of Inside B&C Lending During the second quarter of 1997, the Company originated/purchased $87.0 million in subprime mortgage loans through retail and wholesale channels. The subprime division served 522 brokers as of June 30, 1997. LOAN SERVICING A summary of key information relevant to the Company's loan servicing activities is set forth below: ($ in thousands) (Unaudited)
At or For the Six Months At or For the Quarter Ended June 30, Ended June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Underlying Unpaid Principal Balances: Beginning Balance $ 6,670,267 $ 5,562,930 $ 7,420,783 $ 5,827,271 Loan Production (net of servicing released production) 4,809,790 5,605,013 2,482,601 2,569,458 Net Change in Work-in-Process (236,395) 66,433 24,765 320,391 Bulk Acquisitions 774,097 60,887 168,336 60,887 Sales of Servicing (4,301,094) (4,965,473) (2,589,818) (2,608,374) Paid-In-Full Loans (285,580) (246,339) (152,684) (108,007) Amortization, Curtailments and Others, net (192,020) (157,252) (114,918) (135,427) ----------- ----------- ----------- ----------- Ending Balance $ 7,239,065 $ 5,926,199 $ 7,239,065 $ 5,926,199 =========== =========== =========== =========== Subservicing Ending Balance 2,368,709 2,890,396 2,368,709 2,890,709 ----------- ----------- ----------- ----------- Total Underlying Unpaid Principal Balances $ 9,607,774 $ 8,816,595 $ 9,607,774 $ 8,816,595 =========== =========== =========== =========== Loan Servicing Fees $ 15,338 $ 13,859 $ 7,803 $ 6,729 Cash Operating Expenses 42,329 37,905 23,598 19,776 Coverage Ratio 36% 37% 33% 34% Average Underlying Unpaid Principal Balances (including subservicing) $ 9,067,404 $ 8,754,039 $ 9,248,663 $ 8,833,350 Weighted Average Note Rate* 7.84% 7.80% 7.84% 7.80% Weighted Average Servicing Fee* 0.40% 0.41% 0.40% 0.41% Delinquency (30+ days)* 3.39% 2.84% 3.39% 2.84% Number of Servicing Division Employees 122 129 122 129
* These statistics apply to the Company's owned servicing portfolio. 12 13 The $415.3 million or 5% increase in the average underlying unpaid principal balance of mortgage loans being serviced for the second quarter of 1997 as compared to the second quarter of 1996 is primarily related to the Company's bulk acquisitions of approximately $1.3 billion during the latter half of 1996 and approximately $774 million during the first half of 1997. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 SUMMARY Total revenues of the Company increased 12% to $70.4 million for the first six months of 1997 as compared to $62.7 million for the first six months of 1996. The $7.7 million increase in revenues was primarily due to a $1.5 million increase in loan servicing fees and a $4.7 million increase in gains on sales of loans and servicing rights, which were partially offset by a $4.4 million increase in operating expenses (exclusive of amortization and taxes). The increase in loan servicing fees is primarily due to the overall increase in the Company's servicing portfolio. The increases in gains on sales of loans and servicing rights are primarily due to improved production margins and gains derived from the Company's growing subprime division. The increase in operating expenses is primarily attributable to increased costs associated with increased loan servicing volumes and the Company's expansion into subprime operations. Direct operating costs related to the Company's expansion into subprime operations account for approximately $3.6 million, or 82%, of the total increase in operating expenses (exclusive of amortization and taxes) for the first six months of 1997 compared to the same period of the prior year. 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 for the six months ended June 30, 1997 and June 30, 1996 (the difference between interest rates earned on loans and mortgage-backed securities and interest rates paid on interest-bearing sources of funds). All dollars are in thousands; the information presented is unaudited.
Variance Average Volume Average Rate Interest Attributable to - ----------------------------------------- -------------------- ------------------- 1997 1996 1997 1996 1997 1996 Variance Rate Volume - ----------------------------------------- ---------------------------------------------------- INTEREST INCOME Mortgages Held for Sale and Mortgage-Backed $ 810,759 $ 933,326 7.82% 7.56% Securities $ 31,688 $ 35,301 ($3,613) $1,023 ($4,636) - ----------------------------------------- ---------------------------------------------------- INTEREST EXPENSE $ 401,637 $ 336,991 4.78% 4.70% Warehouse Line $ 9,524 $ 7,879 $1,645 $ 134 $1,511 380,918 566,220 5.37% 5.63% Gestation Line 10,142 15,865 (5,723) (531) (5,192) 30,841 8.19% Servicing Secured Line 1,256 (1,256) (1,256) 43,722 22,285 6.33% 5.82% Servicing Receivable Line 1,372 645 727 106 621 3,010 15,276 8.22% 8.49% Other Borrowings 124 645 (521) (3) (518) Facility Fees & Other 875 731 144 144 Charges - ----------------------------------------- ---------------------------------------------------- $ 829,287 $ 971,613 5.36% 5.59% Total Interest Expense $ 22,037 $ 27,021 ($4,984) ($ 294) ($4,690) - ----------------------------------------- ---------------------------------------------------- 2.46% 1.97% Net Interest Income $ 9,651 $ 8,280 $1,371 $1,317 $ 54 ================== ====================================================
Net interest income increased 17% to $9.7 million for the first six months of 1997 compared to $8.3 million for the first six months of 1996. The $1.4 million increase in net interest income is primarily attributable to an increase in the interest-rate spread of 49 basis points to 246 basis points for 1997 as compared to 197 basis points for 1996. The increased spread is primarily attributed to inclusion of higher yielding subprime production in the current year's inventory of mortgages held for sale. 13 14 NET GAINS ON SALES OF MORTGAGE LOANS AND MORTGAGE SERVICING RIGHTS Net gains on sales of mortgage loans and mortgage servicing rights increased $4.7 million to $45.0 million for the first six months of 1997 as compared to $40.2 million for the first six months of 1996. As further discussed below, this increase is primarily due to increased profit margins on sales of mortgage loans and mortgage servicing rights. Net Gain on Sale of Mortgage Loans A reconciliation of the gain on sale of agency-eligible mortgage loans for the periods indicated follows: ($ in thousands) (Unaudited)
For the Six Months Ended June 30, --------------------------------- 1997 1996 ---------- ----------- Gross proceeds on sales of mortgage loans $4,589,379 $ 6,056,032 Initial unadjusted acquisition cost of mortgage loans sold, net of hedge results 4,585,229 6,049,973 ---------- ----------- Unadjusted gain on sale of mortgage loans 4,150 6,059 Loan origination and correspondent program administrative fees 14,136 18,710 ---------- ----------- Unadjusted aggregate margin 18,286 24,769 Acquisition basis allocated to mortgage servicing rights (SFAS No. 122 and SFAS No. 125) 18,120 15,581 Net change in deferred administrative fees 1,062 (314) ---------- ----------- Net gain on sale of agency-eligible mortgage loans $ 37,468 $ 40,036 ========== ===========
The Company sold agency-eligible loans during the first six months of 1997 with an aggregate unpaid principal balance of $4.6 billion compared to sales of $6.0 billion for the first six months of 1996. The amount of proceeds received on sales of mortgage loans exceeded the initial unadjusted acquisition cost of the loans sold by $4.2 million (9 basis points) for the first six months of 1997 as compared to $6.1 million (10 basis points) for the first six months of 1996. The Company received administrative fees of $14.1 million (31 basis points) on these loans during the first six months of 1997 and $18.7 million (31 basis points) during the first six months of 1996. The Company allocated $18.1 million (39 basis points) in the first six months of 1997 to basis in mortgage servicing rights, versus $15.6 million (26 basis points) during the first six months of 1996, was allocated to basis in mortgage servicing rights, in accordance with SFAS No. 125 and SFAS No. 122. Net gain on sale of mortgage loans decreased to $37.5 million for the first six months of 1997 versus $40.0 million for 1996. This decrease was primarily due to the 24% decrease in the dollar volume of mortgage loans sold during the first six months of 1997 compared to the first six months of 1996. A reconciliation of the gain on sale of subprime mortgage loans for the periods indicated follows: ($ in thousands) (Unaudited)
For the Six Months Ended June 30, --------------------------------- 1997 1996 -------- ---- Gross proceeds on sales of mortgage loans $119,209 N/A Initial acquisition cost of mortgage loans sold, net of fees 114,427 N/A -------- ---- Gain on sale of subprime mortgage loans $ 4,782 N/A ======== ====
The Company sold subprime loans during the first six months of 1997 with an aggregate unpaid principal balance of $114 million. The amount of proceeds received on sales of mortgage loans exceeded the initial acquisition cost of the loans sold, net of fees by $4.8 million (418 basis points) for the first six months of 1997. 14 15 Gain on Sale of Mortgage Servicing Rights A reconciliation of the components of gain on sale of mortgage servicing rights for the periods indicated follows: ($ in thousands) (Unaudited)
For the Six Months Ended June 30, --------------------------------- 1997 1996 ----------- ----------- Underlying unpaid principal balances of mortgage loans on which servicing rights were sold during the period $ 3,784,210 $ 4,972,126 =========== =========== Gross proceeds from sales of mortgage servicing rights $ 84,077 $ 102,555 Initial acquisition basis, net of amortization and hedge results 65,945 90,036 ----------- ----------- Unadjusted gain on sale of mortgage servicing rights 18,132 12,519 Acquisition basis allocated from mortgage loans, net of amortization (SFAS No. 122 and SFAS No. 125) (15,421) (12,330) ----------- ----------- Gain on sale of mortgage servicing rights $ 2,711 $ 189 =========== ===========
During the first six months of 1997, the Company completed 18 sales of mortgage servicing rights representing $3.8 billion of underlying unpaid principal mortgage loan balances. This compares to 16 sales of mortgage servicing rights representing $5.0 billion of underlying unpaid principal mortgage loan balances in the first six months of 1996. Unadjusted gain on sale of mortgage servicing rights was $18.1 million for the first six months of 1997, up from $12.5 million for the first six months of 1996. The Company reduced this unadjusted gain by $15.4 million in the first six months of 1997 versus a $12.3 million reduction in the first six months of 1996, in accordance with SFAS No. 125 and SFAS No. 122. The $2.5 million increase in gain on sale of mortgage servicing rights is primarily related to the increased margin in gain on sales of mortgage servicing rights. NET SERVICING MARGIN Loan servicing fees were $15.3 million for the first six months of 1997, compared to $13.9 million for the first six months of 1996, an increase of 11%. This increase is primarily related to an increase in the average aggregate underlying unpaid principal balance of mortgage loans serviced to $9.1 billion during the first six months of 1997 from $8.8 billion during the first six months of 1996, an increase of 4%. Similarly, amortization of mortgage servicing rights also increased to $8.8 million during the first six months of 1997 from $7.3 million during the first six months of 1996, an increase of 21%. The increase in amortization is primarily attributable to the growth in the average balance of the mortgage loans serviced. The corresponding increases in loan servicing fees and amortization of mortgage servicing rights resulted in the net servicing margin remaining constant at $6.5 million for the first six months of 1997 and 1996. Included in loan servicing fees for the first six months of 1997 and the first six months of 1996 are subservicing fees received by the Company of $227,000 and $678,000, respectively. The subservicing fees are associated with temporary subservicing agreements between the Company and purchasers of mortgage servicing rights. The following table summarizes the net servicing margin for the first six months of both 1997 and 1996: ($ in thousands) (Unaudited)
For the Six Months Ended June 30, --------------------------------- 1997 1996 ---------- ---------- Loan servicing fees $ 15,338 $ 13,859 Amortization of mortgage servicing rights 8,833 7,316 ---------- ---------- Net servicing margin $ 6,505 $ 6,543 ========== ========== Average underlying unpaid principal balance of mortgage loans serviced $9,067,404 $8,754,039 ---------- ----------
15 16 EXPENSES The $4.4 million increase in operating expenses (excluding amortization of mortgage servicing rights) was centered in salary and employee benefits; which increased $1.6 million, or 6%. The Company increased its employee headcount by 104 from 1,037 at June 30, 1996, to 1,141 at June 30, 1997. The increased employee headcount and associated increase in salary and employee benefit costs were necessitated by the Company's expansion into subprime operations. Establishment of the subprime division accounted for 116 new positions and for $3.6 million of the total $4.4 million increase in operating expenses. INCOME TAX EXPENSE Income tax expense includes both federal and state income taxes. The effective tax rates for the six months ended June 30, 1997 and 1996 were 38.4% and 38.5%, respectively. Income tax expense increased by 10% to $7.4 million for the first half of 1997 from $6.7 million for the first half of 1996 due to the above-described factors that resulted in a 10% or $1.8 million increase in income before taxes. RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 1997, COMPARED TO QUARTER ENDED JUNE 30, 1996 SUMMARY Total revenues of the Company increased 20% to $40.3 million for the second quarter of 1997 as compared to $33.6 million for the second quarter of 1996. The $6.7 million increase in revenues was primarily due to a $1.1 million increase in loan servicing fees and a $4.8 million increase in gains on sales of loans and servicing rights, which were partially offset by a $3.8 million increase in operating expenses (exclusive of amortization and taxes). The increase in loan servicing fees is primarily due to the increased volume of loans held in the Company's servicing portfolio. Similarly, the increase in gains on sales of loans and servicing rights is primarily attributable to the Company's increased loan production volumes during the second quarter of 1997. The increase in operating expenses is primarily attributable to increased costs associated with increased loan servicing volumes and increased costs associated with the Company's expansion into subprime operations. Direct operating costs related to the Company's expansion into subprime operations account for approximately $3.2 million, or 83%, of the total increase in operating expenses (exclusive of amortization and taxes) for the second quarter of 1997. 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 for the second quarter of 1997 and 1996 (the difference between interest rates earned on loans and mortgage-backed securities and interest rates paid on interest-bearing sources of funds). All dollars are in thousands; the information presented is unaudited. 16 17
Variance Average Volume Average Rate Interest Attributable to - ----------------------------------------- ------------------ -------------------- 1997 1996 1997 1996 1997 1996 Variance Rate Volume - ----------------------------------------- ---------------------------------------------------- INTEREST INCOME Mortgages Held for Sale and Mortgage-Backed $ 898,274 $ 870,075 8.12% 7.75% Securities $ 18,233 $ 16,856 $1,377 $ 830 $ 547 - ----------------------------------------- ---------------------------------------------------- INTEREST EXPENSE $ 427,889 $ 318,288 4.94% 4.57% Warehouse Line $ 5,267 $ 3,619 $1,648 $ 402 $1,246 431,384 520,654 5.41% 5.61% Gestation Line 5,817 7,259 (1,442) (198) (1,244) 4,033 7.38% Servicing Secured Line 74 (74) (74) 48,579 16,990 6.47% 5.75% Servicing Receivable Line 784 243 541 89 452 5,987 9,357 8.28% 9.07% Other Borrowings 124 211 (87) (11) (76) Facility Fees & Other Charges 325 413 (88) (88) - ----------------------------------------- ---------------------------------------------------- $ 913,839 $ 869,322 5.41% 5.47% Total Interest Expense $ 12,317 $ 11,819 $ 498 $ 282 $ 216 - ----------------------------------------- ---------------------------------------------------- 2.71% 2.28% Net Interest Income $ 5,916 $ 5,037 $ 879 $ 548 $ 331 ================== ====================================================
Net interest income increased 17% to $5.9 million for the second quarter of 1997 compared to $5.0 million for the second quarter of 1996. The $0.9 million increase in net interest income is partially attributable to the 3% increase in the average volume of mortgages held for sale and mortgage-backed securities for the second quarter of 1997 from that of the second quarter of 1996. Another component of the net interest income increase is the increase in the interest-rate spread of 43 basis points to 271 basis points for 1997 as compared to 228 basis points for 1996. The increased spread is primarily attributed to inclusion of higher yielding subprime production in the current year's inventory of mortgages held for sale. NET GAINS ON SALES OF MORTGAGE LOANS AND MORTGAGE SERVICING RIGHTS Net gains on sales of mortgage loans and mortgage servicing rights increased $4.8 million to $26.4 million for the second quarter of 1997 as compared to $21.6 million for the second quarter of 1996. As further discussed below, this increase is primarily due to improved profit margins on sales. Net Gain on Sale of Mortgage Loans A reconciliation of the gain on sale of agency-eligible mortgage loans for the periods indicated follows: ($ in thousands) (Unaudited)
For the Quarter Ended June 30, ------------------------------ 1997 1996 ---------- ----------- Gross proceeds on sales of mortgage loans $2,584,544 $ 2,961,189 Initial unadjusted acquisition cost of mortgage loans sold, net of hedge results $2,582,193 $ 2,956,794 ---------- ----------- Unadjusted gain on sale of mortgage loans 2,351 4,395 Loan origination and correspondent administrative fees 7,635 9,935 ---------- ----------- Unadjusted aggregate margin 9,986 14,330 Acquisition basis allocated to mortgage servicing rights (SFAS No. 122 and SFAS No. 125) 9,614 7,402 Net change in deferred administrative fees 841 (229) ---------- ----------- Net gain on sale of agency-eligible mortgage loans $ 20,441 $ 21,503 ========== ===========
The Company sold loans during the second quarter of 1997 with an aggregate unpaid principal balance of $2.6 billion compared to sales of $3.0 billion for the second quarter of 1996. The amount of proceeds received on sales of mortgage loans exceeded the initial unadjusted acquisition cost of the loans sold by $2.4 million (9 basis points) for the second quarter of 1997 as compared to $4.4 million (15 basis points) for the second quarter of 1996. The Company received loan origination and correspondent administrative fees of $7.6 million (30 basis points) on these loans during the second quarter of 1997 and $9.9 million (34 basis points) during the second quarter of 1996. The Company allocated $9.6 million (37 basis points) in the second quarter of 1997 to basis in mortgage servicing rights versus $7.4 million (25 basis points) during the second quarter of 1996 in accordance with SFAS No. 125 and SFAS No. 122. 17 18 As a result, net gain on sale of mortgage loans decreased to $20.4 million for the second quarter of 1997 versus $21.5 million for the second quarter of 1996. A reconciliation of the gain on sale of subprime mortgage loans for the periods indicated follows: ($ in thousands) (Unaudited)
For the Quarter Ended June 30, ------------------------------ 1997 1996 ----------- ---- Gross proceeds on sales of mortgage loans $ 119,209 N/A Initial acquisition cost of mortgage loans, net of fees 114,427 N/A =========== ==== Gain on sale of subprime mortgage loans $ 4,782 N/A =========== ====
The Company sold subprime loans during the second quarter of 1997 with an aggregate unpaid principal balance of $114 million. The amount of proceeds received on sales of mortgage loans exceeded the initial acquisition cost of the loans sold, net of fees by $4.8 million (418 basis points) for the second quarter of 1997. Gain on Sale of Mortgage Servicing Rights A reconciliation of the components of gain on sale of mortgage servicing rights for the periods indicated follows: ($ in thousands) (Unaudited)
For the Quarter Ended June 30, -------------------------------- 1997 1996 ----------- ----------- Underlying unpaid principal balances of mortgage loans on which servicing rights were sold during the period $ 2,071,902 $ 2,615,027 =========== =========== Gross proceeds from sales of mortgage servicing rights $ 44,918 $ 52,523 Initial acquisition cost, net of amortization and hedge results 37,200 45,756 ----------- ----------- Unadjusted gain on sale of mortgage servicing rights 7,718 6,767 Acquisition basis allocated from mortgage loans, net of amortization (SFAS No. 122 and SFAS No. 125) (6,498) (6,644) =========== =========== Gain on sale of mortgage servicing rights $ 1,220 $ 123 =========== ===========
During the second quarter of 1997, the Company completed ten sales of mortgage servicing rights representing $2.1 billion of underlying unpaid principal mortgage loan balances. This compares to seven sales of mortgage servicing rights representing $2.6 billion of underlying unpaid principal mortgage loan balances in the second quarter of 1996. Unadjusted gain on sale of mortgage servicing rights was $7.7 million for the second quarter of 1997, up from $6.8 million for the second quarter of 1996. The Company reduced this unadjusted gain by $6.5 million in the second quarter of 1997 versus a $6.6 million reduction in the second quarter of 1996 in accordance with SFAS No. 125 and SFAS No. 122. The $1.1 million increase in gain on sale of mortgage servicing rights is primarily related to the increased margin in gain on sales of mortgage servicing rights. 18 19 NET SERVICING MARGIN Loan servicing fees were $7.8 million for the second quarter of 1997, compared to $6.7 million for the second quarter of 1996, an increase of 16%. This increase is primarily related to an increase in the average aggregate underlying unpaid principal balance of mortgage loans serviced to $9.2 billion during the second quarter of 1997 from $8.8 billion during the second quarter of 1996, an increase of 5%. Similarly, amortization of mortgage servicing rights also increased to $4.7 million during the second quarter of 1997 from $3.6 million during the second quarter of 1996, an increase of 30%. The increase in amortization is primarily attributable to the growth in the average balance of the mortgage loans serviced. As a result, net servicing margin remained constant at $3.1 million during the second quarter of 1997 and the second quarter of 1996. Included in loan servicing fees for the second quarter of 1997 and the second quarter of 1996 are subservicing fees received by the Company of $79,000 and $360,000, respectively. The subservicing fees are associated with temporary subservicing agreements between the Company and purchasers of mortgage servicing rights. The following table summarizes the net servicing margin for the second quarters of both 1997 and 1996: ($ in thousands) (Unaudited)
For the Quarter Ended June 30, ------------------------------ 1997 1996 ---------- ---------- Loan servicing fees $ 7,803 $ 6,729 Amortization of mortgage servicing rights 4,725 3,646 ========== ========== Net servicing margin $ 3,078 $ 3,083 ========== ========== Average underlying unpaid principal balance of mortgage loans serviced $9,248,663 $8,833,350 ---------- ----------
EXPENSES The $3.8 million increase in operating expenses (excluding amortization of mortgage servicing rights) was centered in salary and employee benefits; which increased $2.0 million, or 16%. Through the end of the second quarter of 1997, the Company increased its employee headcount by 104 from 1,037 at June 30, 1996, to 1,141 at June 30, 1997. The increased employee headcount and associated increase in salary and employee benefit costs was necessitated by the Company's expansion into subprime operations. Establishment of the subprime division accounted for 116 new positions and for $3.2 million of the total $3.8 million increase in operating expenses. INCOME TAX EXPENSE Income tax expense includes both federal and state income taxes. The effective tax rates for the second quarter of 1997 and 1996 were 38.6% and 38.5%, respectively. Income tax expense increased by 18% to $4.6 million for the second quarter of 1997 from $3.9 million for the second quarter of 1996 due to the above-described factors that resulted in an 18% or $1.8 million increase in income before taxes. 19 20 FINANCIAL CONDITION During the second quarter of 1997, the Company experienced a 24% increase in the volume of mortgage loans originated and acquired compared to the first quarter of 1997. Mortgage loan production increased to $2.7 billion during the second quarter of 1997 from $2.2 billion during the previous quarter. The June 30, 1997, mortgage application pipeline (mortgage loans not yet closed but for which the interest rate has been locked) was approximately $967.4 million. The Company continued to establish new correspondent relationships during the second quarter of 1997. The number of correspondents approved to do business in the Company's correspondent lending program increased to 920 at June 30, 1997, from 897 at March 31, 1997. The Company continued expansion of the wholesale network between March 31, 1997, and June 30, 1997, with the addition of 335 brokers to the Company's approved list, increasing the number of approved brokers from 2,423 at March 31, 1997, to 2,758 at June 30, 1997. 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 $942.7 million at June 30, 1997, versus $983.6 million at March 31, 1997, a decrease of 4%. The Company's servicing portfolio (exclusive of loans under subservicing agreements) decreased to $7.2 billion at June 30, 1997, from $7.4 billion at March 31, 1997, a decrease of 2%. Short-term borrowings, which are the Company's primary source of funds, totaled $943.8 million at June 30, 1997, compared with $1.0 billion at March 31, 1997, a decrease of 6%. The slight decrease in the balance outstanding at June 30, 1997, resulted from the decreased funding requirements related to the decrease in the balance of mortgage loans held for sale and mortgage-backed securities at June 30, 1997, as compared to the balance at March 31, 1997. Long-term borrowings totaled $6.5 million at June 30, 1997. There were no long-term borrowings at March 31, 1997. 20 21 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, which expires in July 1998. 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 to (i) pay dividends in any fiscal quarter which exceed 50% of the Company's net income for the quarter or (ii) 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 31,1998, 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, 1998, 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, 1998, 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 June 30, 1997. 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 $1.2 billion. The Company entered into a $6.6 million note agreement in May 1997. This debt is secured by the Company's corporate headquarters. The terms of the agreement require the Company to make 120 equal monthly principal and interest payments based upon a fixed interest rate of 8.07%. The Company has also entered into a $200 million, 364-day term subprime revolving credit facility, which expires in July 1998. The facility includes covenants substantially the same as those described above with respect to the warehouse line of credit. 21 22 PART II. OTHER INFORMATION ITEM 2. - Changes in Securities Effective April 1, 1997, the Company issued 943,899 shares of its common stock, par value $.01 per share, to those shareholders of Meritage Mortgage Corporation, an Oregon corporation ("Meritage"), that qualified as accredited investors within the meaning of Regulation D under the Securities Act of 1933, as amended (the "Securities Act"). The stock was issued as part of the consideration paid by the Company in exchange for all of the common stock of Meritage in connection with the Company's acquisition of Meritage by means of a reverse subsidiary merger. The stock was valued at $14.0375 per share for purposes of determining the number of shares to be issued in connection with the merger. Of the 943,899 shares issued in connection with the merger, 406,053 were issued contingent on Meritage's achieving certain levels of subprime mortgage production in the 31 months following the merger. Because the stock was issued only to accredited investors in connection with the merger, the Company claimed an exemption from registration under the Securities Act pursuant to Rule 506 of Regulation D. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K -(A) A LIST OF THE EXHIBITS REQUIRED BY THIS FORM 10-Q, ALONG WITH THE EXHIBIT INDEX CAN BE FOUND ON PAGES A TO D FOLLOWING THE SIGNATURE PAGE. -(B) ON APRIL 21, 1997, THE COMPANY FILED A REPORT ON FORM 8-K ANNOUNCING PROPOSED MERGERS WITH WALSH HOLDING CO., INC. AND RESOURCE BANCSHARES CORPORATION. 22 23 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RESOURCE BANCSHARES MORTGAGE GROUP, INC. (Registrant) /s/ Steven F. Herbert ------------------------------------------ Steven F. Herbert Senior Executive Vice President and Chief Financial Officer (signing in the capacity of (i) duly authorized officer of the registrant and (ii) principal financial officer of the registrant) DATED: August 14, 1997 23 24 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 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 * 10.3 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 * 10.4 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 * 10.5 Assignment and Assumption of Office Lease incorporated by reference to Exhibit 10.6 of the Registrant's Registration No. 33-53980 * 10.6 (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 * 10.7 Termination Agreement dated June 3, 1993, between the Registrant and David W. Johnson, Jr. incorporated by reference to Exhibit 10.9 (A) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 * A 25 EXHIBIT NO. DESCRIPTION PAGE - ----------- ----------- ---- 10.8 (A) Deferred Compensation Agreement dated June 3, 1993, between the Registrant and David W. Johnson, Jr. incorporated by reference to Exhibit 10.10 (A) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 * (B) Deferred Compensation Rabbi Trust, for David W. Johnson, dated January 19, 1994, between 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 * 10.9 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 * 10.10 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 * 10.11 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 * 10.12 Pension Plan incorporated by reference to Exhibit 10.18 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 * 10.13 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 * 10.14 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 * 10.15 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 * 10.16 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 * 10.17 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 * 10.18 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 * 10.19 Stock Investment Plan incorporated by reference to Exhibit 4.1 of the Registrant's Registration No. 33-87536 * 10.20 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 * 10.21 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 * 10.22 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 * B 26 EXHIBIT NO. DESCRIPTION PAGE - ----------- ----------- ---- 10.23 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 * 10.24 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 * 10.25 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 * 10.26 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 * 10.27 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 * 10.28 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 * 10.29 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 * 10.30 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 * 10.31 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 * 10.32 Amendment to Omnibus Stock Award Plan dated March 22, 1996 incorporated by reference to Exhibit 10.44 of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1996 * 10.33 Second Amendment to Employee Stock Ownership Plan dated August 12, 1996 incorporated by reference to Exhibit 10.45 of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1996 * 10.34 Resource Bancshares Mortgage Group, Inc. Non-Qualified Stock Option Plan dated September 1, 1996 incorporated by reference to Exhibit 10.33 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 * 10.35 Amended and Restated Retirement Savings Plan dated April 1, 1996 incorporated by reference to Exhibit 10.34 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 * 10.36 First Amendment to Amended and Restated Retirement Savings Plan dated as of November 8, 1996 incorporated by reference to Exhibit 10.35 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 * C 27 EXHIBIT NO. DESCRIPTION PAGE - ----------- ----------- ---- 10.37 ESOP Loan and Security Agreement dated May 3, 1996, between the Registrant and The Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust incorporated by reference to Exhibit 10.36 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 * 10.38 Second Amendment to Amended and Restated Retirement Savings Plan dated January 1997, incorporated by reference to Exhibit 10.38 of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997 * 10.39 Form of Incentive Stock Option Agreement (Omnibus Stock Award Plan) incorporated by reference to Exhibit 10.40 of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997 * 10.40 Form of Non-Qualified Stock Option Agreement (Non-Qualified Stock Option Plan), incorporated by reference to Exhibit 10.41 of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997 * 10.41 Amendment to Resource Bancshares Mortgage Group, Inc. Omnibus Stock Award Plan, Formula Stock Option Plan and Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 10.42 of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997 * 10.42 Agreement of Merger dated April 18, 1997 between Resource Bancshares Mortgage Group, Inc., RBC Merger Sub, Inc. and Resource Bancshares Corporation incorporated by reference to Annex A of the Registrant's Registration No. 333-29245 * 10.43 Agreement of Merger dated April 18, 1997 between Resource Bancshares Mortgage Group, Inc., Carolina Merger Sub, Inc. and Walsh Holding Co., Inc. incorporated by reference to Annex B of the Registrant's Registration No. 333-29245 * 10.44 Mutual Release and Settlement Agreement between the Registrant, Lee E. Shelton and Constance P. Shelton dated January 31, 1997 _____ 10.45 Note Agreement between the Registrant and UNUM Life Insurance Company of America dated May 16, 1997 _____ 11.1 Statement re Computation of Net Income per Share _____ 27.1 Financial Data Schedule _____ - --------------------------------- * Incorporated by reference D EX-10.44 2 MUTUAL RELEASE AND SETTLEMENT AGREEMENT 1 EXHIBIT 10.44 MUTUAL RELEASE AND SETTLEMENT AGREEMENT THIS AGREEMENT (this "Agreement"), made and entered into as of January 31, 1997, by and among RESOURCE BANCSHARES MORTGAGE GROUP, INC., a Delaware corporation ("RBMG"); LEE E. SHELTON, an individual resident of the State of South Carolina ("Shelton"); and CONSTANCE P. SHELTON, an individual resident of the State of South Carolina and the wife of Shelton ("Connie Shelton"): W I T N E S S E T H: WHEREAS, pursuant to the Term Sheet for RBMG/Shelton Settlement (the "Term Sheet"), agreed on and as of January 24, 1997, between RBMG and Shelton, RBMG and Shelton agreed that the parties hereto would take certain actions in connection with Shelton's resignation of employment from RBMG; and WHEREAS, in consideration for the direct and indirect benefits to Connie Shelton to be derived from the payments and other benefits to be provided to Shelton and his family hereunder, Connie Shelton has agreed to take certain actions hereunder; NOW, THEREFORE, in consideration of the premises, the mutual promises and releases set forth hereinafter, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by all parties hereto, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Payment. RBMG represents and warrants that, on or about January 31, 1997, RBMG paid to Shelton by wire transfer the following amounts: (a) The lump sum of $1,206,098, less withholdings for federal income tax in the amount of $475,858.19, for state income tax in the amount of $84,116.35, for social security in the amount of $1,972.52, for Medicare in the amount of $17,488.42 and for 401(k) Plan contributions in the amount of $4,435.10, for a net payment of $622,227.42. Such lump sum constitutes payment of the bonus for 1996 pursuant to the Employment Agreement (the "Employment Agreement"), dated as of June 3, 1993, as amended by letter agreement dated October 22, 1993, between RBMG and Shelton. 1 2 (b) The lump sum of $3,793,902, less withholdings for federal income tax in the amount of $1,502,385.10 and for state income tax in the amount of $265,573.14, for a net payment of $2,025,943.76. Such lump sum constitutes consideration for all other provisions of this Agreement and will be reported to the Internal Revenue Service on Form 1099-MISC as other consideration not subject to social security or self-employment taxes. Section 2. Benefits. 2.1 Stock Option Agreement. (a) Amendments. RBMG and Shelton agree that the Stock Option Agreement between them (the "Option Agreement") (a copy of which is attached as Exhibit 1 hereto) is hereby amended as follows: (1) Paragraph 3(a) of the Option Agreement is hereby deleted. (2) The first sentence of Paragraph 4 of the Option Agreement is hereby deleted and replaced with the following: "The Grantee may transfer this Option in whole or in part to his wife and children for estate planning purposes to the extent permitted by General Instruction A(1)(a) to Form S-8." (3) Paragraph 6 of the Option Agreement is amended to add the following three sentences at and as the conclusion thereof: "The Company will cooperate with a stock broker of Grantee's choice, at Grantee's expense, with respect to the exercise of this Option pursuant to a broker-directed cashless exercise/resale procedure. In particular, and notwithstanding any other provision of this Option (including the remainder of this Paragraph 6, which would otherwise required ten business days' written notice to the Company, specification of the number of shares to be purchased and payment of the total exercise price and withholding by check), the Company will cooperate with Montgomery Securities ('Montgomery'), at Grantee's expense, to exercise this Option in whole or from time to time in part pursuant to Montgomery's 'cashless exercise' program. In furtherance of its agreement to cooperate with Montgomery for Grantee's benefit, the Company will accurately complete, duly execute and deliver to Montgomery (and will deliver a copy of each document to Grantee): (1) forthwith, its 'Certificate of Appointment of Stock Option Coordinator and Authorized Signatory,' in Montgomery's standard form; (2) within two trading days of its receipt, from time to time 2 3 from Grantee, via facsimile or otherwise, by the office of the Chief Financial Officer of the Company or other person performing the duties thereof (with a copy delivered, via facsimile or otherwise, to the General Counsel of the Company or other person performing the duties thereof), a 'Notice of Option Exercise and Payment Authorization,' also in Montgomery's standard form, provided that such Notice has been completed accurately by Grantee as to historical facts and payment to the Company; and (3) promptly upon request by either Montgomery or Grantee (and bearing in mind that time is of the essence in such matters), any other document reasonably required by Montgomery in execution of its cashless exercise program." (4) The address of Lee Shelton set forth at page 4 of the Option Agreement is replaced with the following: 109 Shallowbrook Drive Columbia, South Carolina 29223 As amended herein, the Option Agreement will remain in full force and effect. (b) Options. RBMG and Shelton agree that as of January 24, 1997, the date of execution of the Term Sheet, Shelton was the owner of record of 257,517 vested options and 171,678 unvested options (such vested and unvested options are hereinafter referred to collectively as the "Options") to purchase RBMG common stock at the adjusted exercise price of $6.12 per share. Shelton will become vested in the unvested Options pursuant to the time schedule set forth in Section 2 of the Option Agreement. The Options will remain exercisable for the remainder of their original ten-year term and will be subject to adjustment for future stock dividends and stock splits notwithstanding Shelton's earlier termination from employment. RBMG will, at its own expense, register the exercise of such Options and the resale of the underlying common stock on Form S-8. RBMG will file such registration statement with the Securities and Exchange Commission ("SEC") not later than March 31, 1997, and such registration will remain in effect until registration is no longer required to permit an unrestricted resale. At Shelton's request, RBMG and Shelton will agree to customary indemnification and cross-indemnification terms and conditions in connection with such registration. 3 4 2.2 Restricted Stock. RBMG and Shelton agree that, notwithstanding anything to the contrary in the Employment Agreement, the 43,286 shares of Restricted Stock paid to Shelton pursuant to the Employment Agreement will become 100% vested on the date of execution and delivery of this Agreement. The Restricted Stock will be subject to adjustment for future stock dividends and stock splits. RBMG will, at its own expense, register the Restricted Stock for resale on Form S-8. RBMG will file such registration statement with the SEC not later than March 31, 1997, and such registration will remain in effect until registration is no longer required to permit an unrestricted resale. At Shelton's request, RBMG and Shelton will agree to customary indemnification and cross-indemnification terms and conditions in connection with such registration. 2.3 Rabbi Trust. RBMG promptly processed (and did not deny) Shelton's claim for benefits under his Deferred Compensation Rabbi Trust, dated January 19, 1994. Specifically, RBMG paid Shelton on or about January 31, 1997, by wire transfer, $805,133.63. This amount was determined by deducting from the gross value of the Rabbi Trust of $1,309,236.98 certain bank fees totaling $1,140.11; federal income tax (at a 30% rate) of $392,429.06; state income tax (at a 7% rate) of $91,566.78; and Medicare tax (at a 1.45% rate) of $18,967.40. 2.4 401(k) Plan/Phantom 401(k) Plan. RBMG agrees Shelton will be eligible to make his own individual contribution in 1997 to RBMG's 401(k) Plan (the "401(k) Plan"). Shelton has elected to participate in the 401(k) Plan in 1997. Shelton's contribution for 1997 will be paid by Shelton and will be made through withholding by RBMG of $4,435.10 from the lump sum payment to be made to Shelton pursuant to Section 1. All 401(k) Plan and Phantom 401(k) Plan benefits will be paid to Shelton in accordance with the governing plan documents. 2.5 Benefit Plans. RBMG will permit Shelton and his family to participate in any and all employee benefit plans (including, without limitation, health insurance plans) through January 31, 1997. Shelton will have rights under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") after January 31, 1997. RBMG will send Shelton the notices required under COBRA. 2.6 Life and Disability Insurance. RBMG will continue to pay all premiums due through January 31, 1997 on the life and disability insurance policies in effect as of January 24, 1997 for Shelton. RBMG will not be required to make any payments otherwise due thereon after January 31, 1997. 2.7 Pension Plan/Pension Restoration Plan. RBMG will consider Shelton an employee for pension plan and pension restoration plan purposes through January 31, 1997. RBMG will provide Shelton with a written pro forma analysis of the benefits payable to him under his pension and pension restoration plans (assuming retirement at either age 55 or 65), as well as a written description of the alternatives available to him under such plans. 4 5 2.8 Employment Agreement. RBMG and Shelton hereby mutually rescind the Employment Agreement. Shelton will not be eligible for, or accrue any interest in, any bonus from RBMG in 1997 or thereafter. RBMG has paid Shelton $16,883.00 (which, after deductions, was $6,303.03) as his final salary payment for the time period ending January 31, 1997, and $7,791.85 (which, after deductions, was $4,046.48) as payment for his accrued but unused vacation. 2.9 Documents; Personal Property. Promptly after January 31, 1997, Shelton will return to RBMG all documents (including all copies) relating to his employment (as employee, officer and director) which he created, received, or obtained in connection with his employment with RBMG and any companies controlling, controlled by or under common control with, RBMG ("Affiliates"), as well as all property belonging to RBMG and Affiliates, other than (1) documents relating to this settlement and the underlying dispute, and (2) documents that are Shelton's personal property. The Affiliates include, without limitation, those entities listed in Exhibit 2 hereto. Promptly after January 31, 1997, RBMG will deliver to Shelton all of his personal property which remains on the premises of RBMG or Affiliates. Section 3. References and Announcements. RBMG and, by their execution of the Intervention to this Agreement, the directors of RBMG covenant not to expressly or implicitly disparage, slander, defame, libel, or malign Shelton or Connie Shelton or their attorneys with respect to the services that they performed in connection with this settlement and the underlying dispute. For purposes hereof, the "attorneys" of Shelton and Connie Shelton include Stephen G. Morrison, James C. Gray, Claude S. Scarborough, David E. Dukes, Kenneth E. Young, Patrick Daugherty and Nelson Mullins Riley & Scarborough, L.L.P.; Gaston H. Gage, James Y. Preston, William P. Farthing, Jr., Jonathan M. Crotty and Parker, Poe, Adams & Bernstein, L.L.P.; Michael F. Pezzulli and Pezzulli & Associates; Professor Dennis R. Nolan; John F. Olson and John H. Sturc and Gibson, Dunn & Crutcher LLP; Allen W. Groves and Glass, McCullough, Sherrill & Harrold; and George Hunter McMaster and Tompkins and McMaster; together with each past or present partner, shareholder or employee of every such law firm who at any time provided legal services, or assisted in the provision of legal services, to Shelton or Connie Shelton. Edward J. Sebastian, as Chairman and Chief Executive Officer of RBMG, will provide Shelton with a signed letter of reference in the form of Exhibit 3 hereto. Notwithstanding any other provision of this Agreement, RBMG will not state or imply that Shelton had any undischarged responsibility (legal or otherwise) at or in connection with Intercounty Mortgage, Inc. Shelton agrees that the press release attached as Exhibit 4 and the announcement to employees and others attached as Exhibit 5 are satisfactory and acceptable. All other similar announcements or statements made to RBMG employees, financiers, regulators and others will be consistent with Exhibits 4 and 5. Neither Shelton nor Connie Shelton will expressly or implicitly disparage, slander, defame, libel, or malign RBMG or the Affiliates or any of their respective officers, directors, employees, attorneys, or other representatives or the spouses of such individuals (collectively the "Associates"). The Associates include, without limitation, those individuals listed in Exhibit 6 hereto. Notwithstanding 5 6 anything herein to the contrary, it is understood that RBMG and Shelton may each provide truthful testimony in response to a valid subpoena or governmental inquiry, but in no event will RBMG state or imply that Shelton had any undischarged responsibility (legal or otherwise) at or in connection with Intercounty Mortgage, Inc. Section 4. Release and Covenant Not To Assert Claims. 4.1 RBMG. RBMG agrees that this Agreement constitutes a complete, final, and binding settlement, release, and covenant not to sue by RBMG with respect to all liabilities, claims, allegations, and causes of action whatsoever, known or unknown, suspected or unsuspected, that RBMG has against Shelton or Connie Shelton as of the date of execution of this Agreement, including, but not limited to, all claims arising out of any contracts, agreements (including, without limitation, the Employment Agreement, any deferred compensation plans, and all other benefit and insurance agreements, plans and trusts), or employment relationships or termination thereof, currently in force or contemplated, between Shelton and RBMG and between Shelton and any one or all of the Affiliates or Associates. RBMG further releases and covenants not to sue the attorneys of Shelton and Connie Shelton listed in Section 3, provided, however, that RBMG does not release any claims of malpractice it may have against Parker, Poe, Adams & Bernstein; Glass, McCullough, Sherrill & Harrold; and any past or present partners of those firms who performed or were expected to perform legal services for RBMG; provided further, however, that RBMG does release and does covenant not to sue any and all of the foregoing insofar as any and all such claims of malpractice are based upon fees and expenses previously paid by RBMG or asserted conflicts of interest. This release does not apply to any claim for breach of the obligations set forth in this Agreement. 4.2 Shelton and Connie Shelton. Shelton and Connie Shelton, jointly and severally, agree that this Agreement constitutes a complete, final, and binding settlement, release, and covenant not to sue with respect to all liabilities, claims, allegations, and causes of action whatsoever, known or unknown, suspected or unsuspected, either of them has against RBMG, Affiliates and Associates as of the date of execution of this Agreement, including, but not limited to, (a) all claims arising out of, or amounts payable pursuant to, any contracts, agreements (including, without limitation, the Employment Agreement, any deferred compensation plans, and all other benefit and insurance agreements, plans and trusts), or employment relationships or termination thereof, currently in force or contemplated, between Shelton and RBMG, and between Shelton and any one or all of the Affiliates or Associates (including, without limitation, any claim arising under the Age Discrimination in Employment Act of 1967 ("ADEA"), 29 U.S.C. ss. 621. et seq.; the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. ss. 201, et seq.; the Employee Retirement Income Security Act of 1974, 29 U.S.C. ss. 301, et seq.; any claims which have been or might be filed by either of them with the Equal Employment Opportunity Commission or with any other federal, state or local court, agency or commission); (b) all claims with respect to attorneys' fees, costs, and expenses for or by any and all attorneys who have represented either of them or with whom either of them has consulted or who have done anything in connection with the subject matter of this Agreement or any claims herein released or 6 7 otherwise; (c) all claims for any and all legal and equitable remedies, relief, and results, including but not limited to salary, bonus, options, benefits, allowances, back pay, front pay, liquidated damages, punitive damages, compensatory damages, tort damages, contract damages, loss of consortium, interest, restitution, expenses, costs, declaratory judgment, injunctive relief, and hiring, employment, reemployment, recall or reinstatement; excluding, however, any claim either of them may have against Price Waterhouse relative to the engagement of Price Waterhouse by either of them to perform tax, accounting or other personal services. Shelton and Connie Shelton understand and agree, jointly and severally, that their releases of RBMG, Affiliates and Associates in this Agreement will be deemed to be a release as to each and all of RBMG, Affiliates and Associates collectively, separately, and severally. This release does not apply to any claim for breach of obligations set forth in this Agreement. Section 5. Waiver Valid Notwithstanding Discovery of New Facts. RBMG, Shelton and Connie Shelton each acknowledge that they may hereafter discover facts different from or in addition to those which they now know or believe to be true with respect to the potential claims released and agree that, in such event, this Agreement will nevertheless be and remain effective in all respects, notwithstanding such different or additional facts or the discovery thereof. Section 6. Resignation. On January 24, 1997, Shelton resigned as an officer and member of the Board of Directors of RBMG. Shelton will remain on paid administrative leave until January 31, 1997. Shelton hereby voluntarily resigns as of January 31, 1997 as an employee of RBMG, and, to the extent applicable, as an employee, officer and director of all Affiliates. Shelton agrees to execute all documents required by RBMG or Affiliates, government agencies and other entities which are necessary to effectuate his resignation as an employee, officer and director of RBMG, and, to the extent applicable, as an employee, officer, and director of all Affiliates. Shelton hereby covenants and agrees that he will not now or in the future, at any time or in any place whatsoever, ask RBMG or Affiliates about, seek, or apply for employment with RBMG or Affiliates, or their respective successors and assigns. Section 7. Covenant Not To Assist Others Pursuing Claims. Shelton covenants and agrees that, except under compulsion of law, he will not counsel or assist others in pursuing claims, administrative charges or causes of action against RBMG, Affiliates or Associates, whether those claims are on behalf of himself or others, except that (a) Shelton may respond to questions posed to him and otherwise provide information requested of him in any investigation, whether formal or informal, conducted by a federal or state criminal law enforcement agency, it being represented and warranted by Shelton that he has not taken and will not take any action to cause or encourage the initiation or 7 8 continuation of any such investigation, it being understood that responding truthfully to questions posed to him or otherwise providing truthful information requested of him shall not be deemed to constitute encouragement, and (b) Shelton may counsel and assist his own personal attorney in pursuing his own individual civil claims and causes of action arising in the future against RBMG, Affiliates and Associates to the extent that such claims are not released or discharged by this Agreement. Shelton may provide truthful testimony in response to a valid subpoena. Section 8. Mutual Consent, No Liability, and Confidentiality. RBMG, Shelton and Connie Shelton mutually acknowledge and recognize that the terms set forth in this Agreement are based on a mutual decision by all parties to resolve any and all claims, contentions, and causes of action without the time and expense of contested litigation and that the terms of this Agreement are in no way an admission or implication of any wrongdoing by RBMG, Affiliates, Associates, Shelton or Connie Shelton. Accordingly, Shelton and Connie Shelton agree, jointly and severally, that neither of them nor anyone on their behalf will publicize, discuss or reveal the existence of this Agreement or its terms with or to anyone (including, but not limited to, any news media) other than their immediate family and legal and tax advisors, unless compelled to do so by law. If either Shelton or Connie Shelton shall determine (upon advice of counsel) that disclosure of any such information is at any time compelled by law, then, prior to making such disclosure, Shelton or Connie Shelton, as the case may be, shall provide written notice to Edward J. Sebastian, Chief Executive Officer of RBMG, or his successor, in order that RBMG might seek a protective order safeguarding the confidentiality of such information to the extent possible. Section 9. Confidential Business Information. Shelton acknowledges that he had access to certain information related to the business, operations, future plans and customers of RBMG and Affiliates, the disclosure or use of which could cause RBMG and Affiliates substantial losses and damages. Accordingly, Shelton further represents, covenants and agrees that he has kept, and that he will keep, confidential all information and documents furnished to him by or on behalf of RBMG or Affiliates and not use the same to his advantage, except to the extent such information or documents are or thereafter become lawfully obtainable from public sources or are in the public domain through no fault on his part. Shelton further covenants and agrees that he will not discuss any information, whether confidential or public, concerning RBMG, Affiliates or Associates with FHLMC, FNMA, GNMA, FHA or VA, except under compulsion of law. 8 9 Section 10. Nonsolicitation. Shelton acknowledges that he had extensive contacts with employees of RBMG and Affiliates. Accordingly, Shelton covenants and agrees that, for two years following the date of execution of this Agreement, he will not, directly or indirectly, either for himself or for any other party, (a) recruit or attempt to recruit any of the employees of RBMG or Affiliates who at that time are employed by RBMG or Affiliates, or (b) otherwise interfere with the relationship of RBMG or Affiliates with any such employees. Shelton acknowledges that the restrictions imposed by this Section are fair and reasonable and are reasonably required for the protection of RBMG and Affiliates. If any part of this Section will be held to be unenforceable or invalid, then the remaining parts thereof will nevertheless continue to be valid and enforceable as though the invalid portion or portions were not a part hereof. If any of the provisions of this Section will be deemed to exceed the maximum period of time or coverage which a court of competent jurisdiction would deem enforceable, then the time or coverage will, for the purposes of this Section, be deemed to be the maximum time period and coverage enforceable in the state in which such court of competent jurisdiction will be convened. Section 11. Indemnification. Shelton and Connie Shelton, jointly and severally, agree and covenant that, in the event of a breach of this Agreement through the filing of any lawsuit, charge or request for arbitration or mediation in any jurisdiction by Shelton or Connie Shelton with respect to any claim released by this Agreement, Shelton and Connie Shelton, jointly and severally, will hold RBMG, Affiliates and Associates harmless and reimburse all of them for the full amount of any and all expenses, including costs and attorneys' fees, associated with defending such action. RBMG agrees that, in the event of a breach of this Agreement through the filing of any lawsuit, charge, or request for arbitration or mediation in any jurisdiction by RBMG with respect to any claim released by this Agreement, RBMG will hold Shelton and Connie Shelton harmless and reimburse them for the full amount of any and all expenses, including costs and attorneys' fees, associated with defending such action. Section 12. No Prior Assignment. (a) RBMG. RBMG hereby represents and warrants that RBMG has not heretofore assigned or transferred or purported to assign or transfer to any person or entity any claim or matter herein released, disclaimed, discharged or terminated by RBMG. In the event of such assignment or transfer of any claims or other matters herein released, disclaimed, discharged or terminated, RBMG agrees to indemnify and hold harmless Shelton and Connie Shelton from and against any liability or loss, and for any cost or expense, including attorneys' fees, or judgment or settlement arising out of or occasioned by any such assignment or transfer. 9 10 (b) Shelton and Connie Shelton. Shelton and Connie Shelton, jointly and severally, hereby represent and warrant that neither of them has heretofore assigned or transferred or purported to assign or transfer to any person or entity any claim or matter herein released, disclaimed, discharged or terminated by Shelton or Connie Shelton. In the event of such assignment or transfer of any claims or other matters herein released, disclaimed, discharged or terminated, Shelton and Connie Shelton, jointly and severally, agree to indemnify and hold harmless RBMG, Affiliates and Associates from and against any liability or loss, and for any cost or expense, including attorneys' fees, or judgment or settlement arising out of or occasioned by any such assignment or transfer. Section 13. ADEA Waiver. Shelton hereby acknowledges and represents that he has had the opportunity to take a period of at least 21 days to consider the terms of this Agreement. RBMG has advised Shelton in writing to consult with an attorney prior to executing this Agreement. Shelton has had the benefit of the advice of an attorney of his choosing prior to executing this Agreement. Shelton has received good and valuable consideration to which he is otherwise not entitled in exchange for his execution of this Agreement. Section 14. No Coercion; Understanding; Consultation with Attorney. Shelton and Connie Shelton acknowledge they have consulted with their own attorney, and acknowledge and agree, jointly and severally, that executing this Agreement was done knowingly and voluntarily and was not the result of duress, coercion, or mistake of law or fact. Shelton and Connie Shelton further covenant and agree, jointly and severally, that they have read and fully understand the contents and the effect of this Agreement. Shelton and Connie Shelton accept each and all of the terms, provisions, and conditions of this Agreement, and do so voluntarily and with full knowledge and understanding of the contents, nature, and effect of this Agreement. Section 15. Miscellaneous. 15.1 Entire Agreement. This Agreement (including the Exhibits referred hereto herein) constitutes the sole understanding of the parties hereto with respect to the subject matter hereof. Except as otherwise expressly provided herein, this Agreement supersedes all prior agreements and understandings related to the subject matter hereof (including, without limitation, the Term Sheet and the Employment Agreement). There are no agreements, written or oral, express or implied, between the parties hereto, concerning the subject matter hereof, except the agreements referred to in this Agreement. Each of Shelton and Connie Shelton agrees, jointly and severally, that such party has not relied on any representations, promises or agreements of any kind made to such party in connection with this Agreement except those expressly set forth in this Agreement. 10 11 No amendment of this Agreement shall be binding unless made in writing and duly executed by the party to be bound thereby. 15.2 Parties Bound by Agreement. The terms, conditions and obligations of this Agreement shall inure to the benefit of and be binding upon RBMG and its successors and assigns and Shelton and Connie Shelton and their respective heirs and assigns. Without the prior written consent of the other parties, no party hereto may assign such party's rights, duties or obligations hereunder or any part thereof to any other person or entity; provided, however, that this Agreement will automatically inure to the benefit of any successor to RBMG and to the respective heirs of Shelton and Connie Shelton. The parties agree that the Affiliates and Associates and the attorneys listed in Section 3 are intended to be third party beneficiaries of this Agreement. 15.3 As of January 24, 1997, the date the Term Sheet for the RBMG/Shelton Settlement was executed, RBMG represents and warrants to Shelton that (i) there existed no material nonpublic information concerning RBMG or the market for its stock (other than (a) the information included in the Term Sheet and (b) RBMG's financial results for 1996), and (ii), without limiting the generality of the foregoing, RBMG knew of no material nonpublic information concerning Intercounty Mortgage. 15.4 Counterparts: This Agreement may be executed in one or more counterparts, each of which will for all purposes be deemed to be an original and all of which shall constitute the same instrument. 15.5 Headings. The headings of the Sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 15.6 Modification and Waiver. Any of the terms or conditions of this Agreement may be waived in writing at any time by the party which is entitled to the benefits thereof. No waiver of any of the provisions of this Agreement shall be deemed to or will constitute a waiver of any other provisions hereof. 15.7 Notices. Any notice or other document to be given hereunder by any party hereto to any other party hereto shall be in writing and delivered by courier or by telecopy transmission or sent by any express mail service, postage or fees prepaid, 11 12 If to RBMG, any Affiliate or any Associate: Resource Bancshares Mortgage Group, Inc. 7909 Parklane Road Columbia, South Carolina 29223 Attention: Mr. Edward J. Sebastian Chairman and Chief Executive Officer Telecopy No.: 803-741-3586 If to Shelton or Connie Shelton: Lee E. Shelton 109 Shallowbrook Drive Columbia, South Carolina 29223 With a copy (which shall not constitute notice) to: Patrick Daugherty, Esq. Nelson Mullins Riley & Scarborough, L.L.P. NationsBank Corporate Center Charlotte, North Carolina 28202 or at such other address or number for a party as shall be specified by like notice. Any notice which is delivered in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party or its agent. 15.8 Construction. This Agreement shall be construed in accordance with and governed by the laws of the State of South Carolina. No provision of this Agreement shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority or by any board of arbitrators by reason of such party or its counsel having or being deemed to have structured or drafted such provision. Unless otherwise expressly provided herein, all references in this Agreement to Section(s) or Exhibit(s) will refer to the Section(s) or Exhibit(s) of this Agreement. 12 13 15.9 Attachments. The following Exhibits are attached to this Agreement and are incorporated in this Agreement by this reference: Exhibit 1 - Option Agreement Exhibit 2 - List of Affiliates Exhibit 3 - Reference Letter Exhibit 4 - Press Release Exhibit 5 - Announcement To Employees Exhibit 6 - List of Associates 15.10 Additional Actions and Documents. Each of the parties hereto hereby agrees to take or cause to be taken, for no additional consideration, such further actions, to execute, deliver and file or cause to be executed, delivered and filed such further documents and instruments, as may be necessary or as may be reasonably requested in order to effectuate fully the purposes, terms and conditions of this Agreement. 15.11 Expenses. Except as otherwise provided in this Agreement, the parties hereto shall each pay their own respective costs and expenses in connection with this Agreement and the matters contemplated by this Agreement. It is specifically understood and agreed that RBMG shall not pay (and shall not be obligated to pay) to the attorneys of Shelton or Connie Shelton (including, without limitation, the attorneys named in Section 3) any of the respective fees or expenses of such attorneys, whether or not such attorneys have previously submitted invoices therefor. 13 14 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date above first written. RESOURCE BANCSHARES MORTGAGE GROUP, INC. Executed before me this By: ____________________________________ ____ day of ________, 1997: Edward J. Sebastian, Chairman and Chief Executive Officer - ---------------------------- Notary Public My Commission Expires: - ---------------------------- Executed before me this __________________________ ____ day of ________, 1997: Lee E. Shelton - ---------------------------- Notary Public My Commission Expires: - ---------------------------- Executed before me this __________________________ ____ day of ________, 1997: Constance P. Shelton - ---------------------------- Notary Public My Commission Expires: - ---------------------------- 14 15 INTERVENTION The undersigned persons, each in his capacity as a director of Resource Bancshares Mortgage Group, Inc. ("RBMG"), hereby consent to the Mutual Release and Settlement Agreement (the "Agreement"), dated as of January 31, 1997, among RBMG, Lee E. Shelton and Constance P. Shelton. DIRECTORS OF RESOURCE BANCSHARES MORTGAGE GROUP, INC. Executed before me this __________________________ ____ day of ________, 1997: John C. Baker - ---------------------------- Notary Public My Commission Expires: - ---------------------------- Executed before me this __________________________ ____ day of ________, 1997: Stuart M. Cable - ---------------------------- Notary Public My Commission Expires: - ---------------------------- Executed before me this __________________________ ____ day of ________, 1997: John W. Currie - ---------------------------- Notary Public My Commission Expires: - ---------------------------- 15 16 Executed before me this __________________________ ____ day of ________, 1997: Boyd M. Guttery - ---------------------------- Notary Public My Commission Expires: - ---------------------------- Executed before me this __________________________ ____ day of ________, 1997: David W. Johnson, Jr.(1) - ---------------------------- Notary Public My Commission Expires: - ---------------------------- (1) This consent by David W. Johnson, Jr. shall also serve as his consent to the Agreement as contemplated by Section 17 of the Employment Agreement, dated June 3, 1993, as amended by letter agreement dated October 22, 1993, between RBMG and David W. Johnson, Jr. 16 17 Executed before me this __________________________ ____ day of ________, 1997: Edward J. Sebastian - ---------------------------- Notary Public My Commission Expires: - ---------------------------- Executed before me this __________________________ ____ day of ________, 1997: John O. Wolcott - ---------------------------- Notary Public My Commission Expires: - ---------------------------- 17 18 EXHIBIT 1 OPTION AGREEMENT 18 19 EXHIBIT 2 AFFILIATES Any company controlling, controlled by or under common control with Resource Bancshares Mortgage Group, Inc. including, without limitation, the following: Intercounty Mortgage, Inc. Resource Bancshares Corporation Laureate Capital Corp. Laureate Realty Services, Inc. TPF Funding, Inc. TPF Funding, Inc. II Resource Processing Group, Inc. 19 20 EXHIBIT 3 REFERENCE LETTER 20 21 EXHIBIT 4 Resource Bancshares Mortgage Group, Inc. Steven F. Herbert (803) 741-3539 Distribution Instructions: Southeast and IRW and Local Circuit: Southeast Time of Release: 5:00 PM COLUMBIA, SC, January 31, 1997/PRNewswire/--(NASDAQ: REMMI) RESOURCE BANCSHARES MORTGAGE GROUP ANNOUNCES THE RESIGNATION OF LEE E. SHELTON Resource Bancshares Mortgage Group, Inc. (the "Company") (NASDAQ:REMI), today announced the resignation of Lee E. Shelton, Vice Chairman and Managing Director, to pursue opportunities outside the Company. Edward J. Sebastian, Chairman of the Board and Chief Executive Officer, said, "I would like to compliment Lee for his vital participation in growing the Company from its infancy through an initial public offering and secondary offering -- both highly successful -- to its present position as one of the top mortgage companies in the country. The Board of Directors and I are deeply appreciative of Lee's significant contributions and we wish him the very best in his future endeavors." * * * * Resource Bancshares Mortgage Group, Inc., is engaged in the business of mortgage banking, which primarily consists of the origination, purchase, sale and servicing of residential, single-family, first mortgage loans and the purchase and sale of servicing rights associated with such loans. According to the January 27, 1997, issue of Inside Mortgage Finance, the Company was the eleventh largest mortgage originator in the country in 1996. As of December 31, 1996, the Company employed 1,027 people. CONTACT: Steven F. Herbert, Chief Financial Officer, Resource Bancshares Mortgage Group, Inc. (803) 741-3539. 21 22 EXHIBIT 5 ANNOUNCEMENT [SAME AS PRESS RELEASE] 22 23 EXHIBIT 6 ASSOCIATES 23 24 Charles E. Williams Peter Roth Dwight Galloway Charles W. Randall, III Gary Bruce Thomas H.J. Upchurch, Jr. Joseph A. Shaffer Thomas S. Dennard Angelo R. Palombi R. Dean Dougherty L. Dale Savage Frank Piccolo John A. Brasher Price Waterhouse Barbara G. McQuillan, Cynthia S. Turnipseed, Celeste T. Jones, Elizabeth B. Anders, Edwin W. Johnson, III, James C. Siokos, Jonathan H. Nason, Richard J. Morgan, Reginald W. Belcher, Stephen D. Searcy and McNair Law Firm, P.A., together with each past or present partner, shareholder, counsel or employee of such law firm who at any time provided legal services, or assisted in the provision of legal services, to Resource Bancshares Mortgage Group, Inc. ("RBMG") or the Affiliates (as defined in the Mutual Release and Settlement Agreement to which this Exhibit is attached); Russell B. Richards, William A. Clineburg, Jr., Scott G. Blews, and King & Spalding, together with each past or present partner, counsel, associate, or employee of such law firm who at any time provided or assisted in providing legal services to RBMG or the Affiliates; and any other past or present officer, director, employee, attorney or other representative of RBMG or the Affiliates and the spouses of the individuals listed on this Exhibit. 24 EX-10.45 3 NOTE AGREEMENT BETWEEN REGISTRANT 1 EXHIBIT 10.45 NOTE US $6,600,000 Columbia, South Carolina April 17, 1997 1. FOR VALUE RECEIVED, the undersigned, Resource Bancshares Mortgage Group, Inc., a Delaware corporation, (hereinafter called "Maker"), promises to pay to the order of UNUM Life Insurance Company of America, a Maine corporation, (hereinafter called "Holder"), at such place and in such manner as Holder may designate in writing, the principal sum of Six Million Six Hundred Thousand Dollars (US $6,600,000), together with interest on the unpaid principal balance from the date hereof as hereinafter specified. 2. From and after April 17, 1997 (the "Closing Date"), interest, computed on the basis of a three hundred sixty (360) day year composed of twelve (12) thirty (30) day months, shall accrue at the rate of eight and seven hundredths percent (8.07%) per annum. Interest only from the Closing Date through the last day of the month in which the Closing Date occurs shall be payable on the first day of the next month following the Closing Date; provided that if the Closing Date occurs after the fifteenth (15th) day of a month, the interest which would accrue, based on the actual number of days, through the end of such month shall be payable in advance on the Closing Date. Thereafter, the unpaid principal and interest shall be due and payable, computed on the basis of an amortization period of three hundred (300) months (hereinafter called the "Amortization Period"), in one hundred and nineteen (119) consecutive monthly payments of Fifty One Thousand Two Hundred Forty Six and 30/100ths Dollars (US $51,246.30) each, on the first day of each month beginning on June 1, 1997, (the first day of the second month following the Closing Date). Such monthly payments shall continue until all obligations of Maker hereunder have been paid in full; except that, in any event, all obligations of Maker hereunder shall be fully paid, and all remaining principal and interest shall be due and payable, on the first day of May, 2007 (hereinafter called the "Maturity Date"). 3. As more fully provided in the Mortgage and Security Agreement hereinafter referred to, Holder may condition its consent to any sale, assignment, encumbrance or other disposition of title to the mortgaged property, upon payment of a transfer fee or upon an increase in the interest rate of this Note to the "Index Rate", (as hereinafter defined). Upon and after any such change in interest rate, the amount of each monthly payment hereunder shall be increased to an amount sufficient to amortize the then unpaid principal balance of this Note in equal monthly payments over the remainder of the Amortization Period. Index Rate shall mean one hundred and twenty five percent (125%) of the average of Moody's corporate bond yield average for an Aa Industrial Bond as published monthly in "Moody's Bond Record" for the three (3) months prior to the month of Holder's written consent. The provisions of this paragraph shall be self-executing without the need for any modification or amendment to this Note; provided, however, Holder may, at its sole option, require that Maker execute or provide documents confirming any adjustment in the interest rate, including without limiting the generality of the foregoing, at the expense of Maker, endorsements to the title insurance policy and/or opinions of counsel satisfactory to Holder. Page 1 of 6 2 4. Payments due under this Note shall be paid by wire transfer or other immediately available funds to the bank account and pursuant to instructions to be designated by Holder. At the option of Holder, payments may be made at the offices of UNUM Life Insurance Company of America, 2211 Congress Street, Portland, ME 04122-0590, Attn.: Mortgage Accounting & Administration. 5. Maker acknowledges that late payment to Holder will cause Holder to incur costs not contemplated by the loan evidenced by this Note (the "Loan"), the exact amount of such costs being difficult and impracticable to assess. Such costs include, without limitation, processing and accounting charges and the potential costs to be incurred as a result of Holder's frustration and inability to meet its other commitments. Therefore, if any payment under this Note is not paid on or before the fifth (5th) day of the month during which the payment is due, then Maker shall pay to Holder a late charge of five percent (5%) of such payment which shall be immediately due to Holder as liquidated damages for failure to make prompt payment and to compensate Holder for such costs. If any payment under this Note is not paid on or before the fifteenth (15th) day of the month during which the payment is due, or upon the occurrence of any "Event of Default", as defined in the "Loan Documents" (as hereinafter defined) in the performance or observance of any of the terms or agreements contained in any of the Loan Documents, then the entire principal balance of this Note shall bear interest from the due date of such late payment until such late payment is paid, or from the date of such Event of Default until such Event of Default, is fully cured, at a rate of five percent (5%) per annum in excess of the interest rate then applicable hereunder (the "Default Rate"). The late charge and excess interest shall be due and payable immediately without demand. The parties agree that the late charges represent a reasonable sum considering all of the circumstances existing as of the date of this Note and represents a fair and reasonable estimate of the costs that Holder will incur by reason of late payment. The parties further agree that proof of actual damages would be costly and inconvenient. Acceptance of any late charges and/or excess interest shall not constitute a waiver of the default with respect to the overdue amount, and shall not prevent Holder from exercising any of the other rights and remedies available to Holder. The late charges shall be due and payable immediately without demand and shall be secured by the "Loan Documents", as defined in Section 7, below. 6. From and after the date hereof, Maker shall not have any right, except as otherwise specifically provided, to prepay all or a portion of the principal balance of this Note until May 1, 1999. From May 1, 1999 to April 30, 2007, Maker shall have the right to prepay all, but not merely a portion of the principal balance of this Note, on any payment date thereafter and with sixty (60) days' prior written notice to Holder, and upon payment of the "Prepayment Premium" (as hereinafter defined). This Note, together with the "Prepayment Premium", shall be due and payable at the time provided in said notice. Page 2 of 6 3 The "Prepayment Premium" is that amount which, if invested with the outstanding principal balance in U.S. Treasury Securities maturing at or nearest the Maturity Date, would return to Holder the discounted present value [utilizing a discount factor equal to the "Reinvestment Rate" (as defined below)] of the stream of payments under this Note. The "Reinvestment Rate" shall be the yield on the current coupon U.S. Treasury Security having a maturity date closest to (before, on or after) the Maturity Date, as reported in The Wall Street Journal or similar publication on the 5th business day preceding the date of payoff; provided, however, that if the period between the maturity date of such U.S. Treasury Security and the Maturity Date exceeds four (4) months, the average of the yields on the two (2) current coupon U.S. Treasury Securities having maturity dates next preceding and following the Maturity Date shall be used to compute the Reinvestment Rate. If there are two (2) or more such U.S. Treasury Securities with the same maturity dates, the one whose yield is closest to the interest rate on this Note shall be used. Maker acknowledges and agrees that Holder is making the Loan evidenced by this Note in consideration of the receipt by Holder of all interest and other benefits intended to be conferred by this Note and the other "Loan Documents" (as hereinafter defined) and if payments of principal are made to Holder prior to the regularly scheduled due date of such payments, for whatever reason (whether voluntarily or involuntarily as a result of (a) Holder's acceleration of the Loan on account of an Event of Default under this Note or the Loan Documents, (b) the exercise of Holder's rights under "due-on-sale," "due-on-encumbrance" or similar provisions in the Loan Documents, (c) in connection with any bankruptcy proceeding involving the "Property" (as hereinafter defined) or (d) in connection with any foreclosure of the Property, whether judicial or non-judicial), Holder will not receive all such interest and other benefits and may incur additional costs. For these reasons, and to induce Holder to make the Loan, Maker expressly waives any right to prepay this Note except pursuant to this Section 6 and agrees that except in cases where this Note is prepaid from casualty insurance proceeds or condemnation awards, all other voluntary and involuntary prepayments will be accompanied by the premium specified above. Such premium shall be required whether payment is made by Maker, anyone on behalf of Maker, or by the purchaser at any judicial or non-judicial foreclosure sale, and may be included in any bid by Holder at such sale. By its initials appearing below, Maker acknowledges that: (i) it is a knowledgeable and sophisticated real estate investor; (ii) it fully understands the effect of the provisions of this Section 6; (iii) the making of the Loan by Holder at the interest rate and other terms set forth in this Note is sufficient consideration for the inclusion of the provisions in this Section 6; and (iv) Holder would not make the Loan on the terms set forth herein without the inclusion of such provisions. Maker also acknowledges that the provisions of this Section 6 limiting the right of prepayment and providing for payment of the premium specified above were independently negotiated and bargained for, and constitute a specific, material part of the consideration given by Maker to Holder for the making of the Loan. --------------------- MAKER'S INITIALS Page 3 of 6 4 7. This Note is secured by a Mortgage and Security Agreement of even date herewith, ("Mortgage") encumbering certain real and personal property (specifically excluding, however, any personal property owned by Maker and located at or upon the Property and used by Maker in its day-to-day business operations and affairs) (the "Property") located in Richland County, State of South Carolina (the terms and provisions of which are incorporated herein by this reference), and by any other instruments, now or hereafter executed by Maker in favor of Holder, which in any manner constitute additional security for this Note, and Maker has also given to Holder in connection herewith an Assignment of Rents, Leases, and Other Benefits of even date herewith (all of which are herein collectively called the "Loan Documents"). 8. It is agreed that time is of the essence in the performance of all obligations hereunder and under the Loan Documents. If Maker shall fail to make any payment hereunder when due, or upon the occurrence of an Event of Default in the performance or observance of any of the terms, agreements, covenants or conditions contained in the Loan Documents, then, or at any time thereafter, the entire principal balance of this Note, irrespective of the Maturity Date specified herein, together with the then accrued interest thereon, and to the extent permitted by law, the Prepayment Premium, shall, at the election of the Holder hereof, and without notice of such election, become immediately due and payable and the entire principal balance with accrued interest thereon shall thereafter until paid bear interest at the Default Rate. 9. All makers, endorsers, guarantors and sureties hereof jointly and severally waive presentment, notice of protest, protest, demand for payment, notice of dishonor, notice of intent to accelerate, and notice of acceleration; and they also jointly and severally hereby consent to any and all renewals, extensions or modifications of the terms hereof, including the terms or time for payment; and further agree that any such renewal, extension or modification of the terms hereof or time for payment or of the terms of any of the Loan Documents or the release or substitution of any security for the indebtedness evidenced hereby or any other indulgences shall not otherwise affect the liability of any of said parties for the indebtedness evidenced by this Note; and further agree that the Holder hereof shall not be required first to institute suit or exhaust its remedies hereon against Maker or others liable or to become liable hereon or to perfect or enforce its rights against them or any security therefor. Any such renewals, extensions or modifications may be made without notice to any of said parties. 10. This Note shall be the joint and several obligation of all makers, endorsers, guarantors, and sureties, and shall be binding upon them and their successors and assigns and shall inure to the benefit of the successors and assigns of Holder. All makers, endorsers, guarantors, and sureties hereof agree jointly and severally to pay all costs of collection incurred by Holder, including reasonable attorneys' fees and costs: (a) in the exercise of remedies provided under this Note and the Loan Documents and (b) in any state insolvency, receivership or federal bankruptcy proceeding to which the Maker is a party, whether prior to or after confirmation of a plan of reorganization. In addition to the foregoing entitlement to attorney's fees and costs, Holder shall be entitled to its attorneys' fees and costs incurred in any post-judgment proceedings to collect or enforce any judgment or order relating to this Note or the other Loan Documents. This provision is separate and several and shall survive the merger of this provision into any judgment. Page 4 of 6 5 11. Any forbearance of Holder in exercising any right or remedy hereunder or under the Loan Documents, or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any right or remedy. The acceptance by Holder of payment of any sum payable hereunder after the due date of such payment shall not be a waiver of Holder's right to either require prompt payment when due of all other sums payable hereunder or to declare a default for failure to make prompt payment. 12. This Note shall be governed by the laws of the State of South Carolina, except to the extent that federal law may apply. 13. All agreements between Maker, and Holder are expressly limited so that in no event whatsoever shall the amount paid or agreed to be paid to Holder for the use, forbearance or detention of the money to be advanced hereunder in accordance with the Loan Documents exceed the highest lawful rate permissible under applicable law governing the charging of interest which is applicable to the subject obligation, it being the intent of Holder and Maker in the execution hereof and of the Loan Documents to contract in strict accordance with applicable usury laws. If any obligation under this Note or under any Loan Document shall involve transcending the usury limit prescribed by applicable law, then ipso facto the obligation to be fulfilled shall be reduced to such limit, and if from any circumstance Holder shall receive as interest an amount which would exceed the highest lawful rate allowable under applicable law, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance due hereunder and not to the payment of interest, or if such excessive interest exceeds the unpaid principal balance, the excess shall be refunded to Maker and Maker hereby agrees to accept such refund. This provision shall control every other provision of all agreements between Maker and Holder. 14. Maker agrees that the "due-on-sale" provisions of Article 1.11 of the Mortgage and Security Agreement are incorporated herein by reference as if fully set forth herein. 15. AFTER CONSULTATION WITH COUNSEL, MAKER HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHT MAKER MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION BASED UPON THIS NOTE, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER VERBAL OR WRITTEN) OR ACTION OF HOLDER AND ACKNOWLEDGES THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR HOLDER MAKING THE LOAN. Page 5 of 6 6 IN WITNESS WHEREOF, Maker has executed this Note as of the date first above written. MAKER RESOURCE BANCSHARES MORTGAGE GROUP, INC., WITNESS: A DELAWARE CORPORATION BY: - -------------------------------- ----------------------------------- NAME: - -------------------------------- ----------------------------------- ITS: - -------------------------------- ----------------------------------- Page 6 of 6 EX-11.1 4 STATEMENT RE COMPUTATION OF NET INCOME 1 EXHIBIT 11.1 RESOURCE BANCSHARES MORTGAGE GROUP, INC. STATEMENT RE: COMPUTATION OF PRIMARY and FULLY DILUTED EARNINGS PER SHARE ($ in thousands, except per share amounts)
Quarter Ended Six Months Ended June 30, 1997 June 30, 1997 ------------------- -------------------- Net income $ 7,371 $ 11,841 Primary earnings per share (1) $ 0.37 $ 0.60 Fully diluted earnings per share (1) $ 0.36 $ 0.59
1) The number of common shares outstanding used to compute net income per share was 19,492,050 and 19,214,546 for the quarter and six months ended June 30, 1997, respectively. The provisions of Accounting Principles Board Opinion No. 15, Earnings per Share required that the Company, effective for the first quarter of 1997, prospectively commence to report net income per common share on a primary earnings per share basis. Accordingly, the weighted average shares outstanding for the second quarter of 1997 and the six months ended June 30, 1997, includes common stock equivalents. Primary and fully diluted earnings per share for the quarter ended June 30, 1997, were calculated based on weighted average shares outstanding of 20,108,839 and 20,304,831. Primary and fully diluted earnings per share for the six months ended June 30, 1997, were calculated based on weighted average shares outstanding of 19,831,581 and 20,027,327, respectively, which assumes the exercise of options covering 1,394,587 shares, excludes 406,053 contingent shares and computes incremental shares using the treasury stock method. EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 2,319 0 78,904 0 1,073,929 1,199,883 29,766 7,912 1,227,620 1,047,809 6,507 0 0 198 173,106 1,227,620 31,688 70,376 39,419 51,162 11,743 1,093 22,037 19,214 7,373 19,214 0 0 0 11,841 .60 .59
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