<PAGE> 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, 1998
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, 1998, was 23,765,999.
Page 1
Exhibit Index on Pages A to E
<PAGE> 2
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Form 10-Q for the quarter ended June 30, 1998
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 43
ITEM 2. Changes in Securities and Use of Proceeds 43
ITEM 4. Submission of Matters to a Vote of Security Holders 43
ITEM 6. Exhibits and Reports on Form 8-K 43
SIGNATURES 44
EXHIBIT INDEX A-E
2
<PAGE> 3
Part I. Financial Information
Item 1. Financial Statements
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED BALANCE SHEET
($ in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 15,494 $ 13,546
Receivables 83,218 87,702
Trading securities:
Mortgage-backed securities 201,925 334,598
Residual interest in subprime securitizations 30,442 19,684
Mortgage loans held-for-sale 1,048,596 844,590
Lease receivables 72,617 51,494
Mortgage servicing rights, net 163,918 127,326
Premises and equipment, net 30,735 27,723
Accrued interest receivable 4,550 4,372
Goodwill and other intangibles 16,805 15,519
Other assets 35,632 30,375
----------- -----------
Total assets $ 1,703,932 $ 1,556,929
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 1,292,768 $ 1,224,489
Long-term borrowings 6,414 6,461
Accrued expenses 23,783 24,262
Other liabilities 143,585 86,578
----------- -----------
Total liabilities 1,466,550 1,341,790
----------- -----------
Stockholders' equity
Common stock (31,451,448 and 31,120,383 shares outstanding
at June 30, 1998 and December 31, 1997, respectively) 315 311
Additional paid-in capital 302,474 299,516
Retained earnings 37,606 17,763
Common stock held by subsidiary at cost (7,767,099 shares
outstanding at June 30, 1998 and December 31, 1997) (98,953) (98,953)
Unearned shares of employee stock ownership plan (4,060) (3,498)
----------- -----------
Total stockholders' equity 237,382 215,139
----------- -----------
Total liabilities and stockholders' equity $ 1,703,932 $ 1,556,929
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
($ in thousands, except share information)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended For the Quarter Ended
June 30, June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Interest income $ 49,640 $ 31,688 $ 26,659 $ 18,233
Interest expense (39,889) (22,037) (21,200) (12,317)
------------ ------------ ------------ ------------
Net interest income 9,751 9,651 5,459 5,916
Net gain on sale of mortgage loans 83,629 42,250 44,455 25,223
Gain on sale of mortgage servicing rights 1,080 2,711 452 1,220
Servicing fees 19,715 15,338 10,412 7,803
Gain on sale of retail production franchise 1,490 1,490
Other income 1,407 426 433 157
------------ ------------ ------------ ------------
Total revenues 117,072 70,376 62,701 40,319
------------ ------------ ------------ ------------
EXPENSES
Salary and employee benefits 41,562 27,144 20,848 14,880
Occupancy expense 5,431 3,442 2,651 1,850
Amortization of mortgage servicing rights 12,303 8,833 6,674 4,725
General and administrative expenses 20,660 11,743 10,868 6,868
------------ ------------ ------------ ------------
Total expenses 79,956 51,162 41,041 28,323
------------ ------------ ------------ ------------
Income before income taxes 37,116 19,214 21,660 11,996
Income tax expense (14,423) (7,373) (8,548) (4,625)
------------ ------------ ------------ ------------
Net income $ 22,693 $ 11,841 $ 13,112 $ 7,371
============ ============ ============ ============
Weighted average common shares
outstanding -- Basic 23,084,986 20,133,317 23,102,831 20,424,696
============ ============ ============ ============
Net income per common share -- Basic $ 0.98 $ 0.59 $ 0.57 $ 0.36
============ ============ ============ ============
Weighted average common shares
outstanding -- Diluted 23,464,004 20,526,628 23,511,620 20,817,835
============ ============ ============ ============
Net income per common share -- Diluted $ 0.97 $ 0.58 $ 0.56 $ 0.35
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands, except share information)
(Unaudited)
<TABLE>
<CAPTION>
Unearned Common
Common Stock Additional Shares of Employee Stock Total
Six Months Ended ------------------ Paid-in Retained Stock Ownership Held by Treasury Stockholders'
June 30, 1997 Shares Amount Capital Earnings Plan Subsidiary Stock Equity
- ----------------------------- ----------- -------- ---------- ---------- ----------------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 19,285,020 $ 193 $ 149,653 $ 12,007 $ (4,552) $ 157,301
Issuance of restricted stock 23,528 * 328 328
Shares issued under Dividend
Reinvestment and Stock
Purchase Plan and Stock
Investment Plan 3,709 * 43 (51) (8)
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
Net income 11,841
Total comprehensive income 11,841
---------- -------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1997 19,850,103 $ 198 $ 154,825 $ 22,611 $ (4,330) $ 173,304
========== ======== ========= ========= ========= ========= ========= =========
<CAPTION>
Unearned Common
Common Stock Additional Shares of Employee Stock Total
Six Months Ended ------------------ Paid-in Retained Stock Ownership Held by Treasury Stockholders'
June 30, 1998 Shares Amount Capital Earnings Plan Subsidiary Stock Equity
- ----------------------------- ----------- -------- ---------- ---------- ----------------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 31,120,383 $ 311 $ 299,516 $ 17,763 $ (3,498) $ (98,953) $ 215,139
Issuance of restricted stock 20,056 * 328 328
Cash dividends (2,783) (2,783)
Exercise of stock options 274,215 1 (880) $ 3,034 2,155
Shares committed to be
released under ESOP 214 438 652
Loans to Employee Stock
Ownership Plan (1,000) (1,000)
Shares issued under Dividend
Reinvestment and Stock
Purchase Plan and Stock
Investment Plan 94,676 1 1,532 (67) 1,466
Acquisition of Meritage
Mortgage Corporation 142,118 2 1,764 1,766
Treasury stock purchased (200,000) (3,034) (3,034)
Net income 22,693
Total comprehensive income 22,693
---------- -------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1998 31,451,448 $ 315 $ 302,474 $ 37,606 $ (4,060) $ (98,953) $ 237,382
========== ======== ========= ========= ========= ========= ========= =========
</TABLE>
* Amount less than $1
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 22,693 $ 11,841
Adjustments to reconcile net
income to cash used in operating activities:
Depreciation and amortization 14,886 10,453
Employee Stock Ownership Plan compensation 652 281
Provision for estimated foreclosure losses 4,016 1,093
Decrease (increase) in receivables 4,484 (18,236)
Acquisition of mortgage loans (8,021,762) (4,853,760)
Proceeds from sales of mortgage loans and mortgage-backed securities 7,862,252 4,754,990
Acquisition of mortgage servicing rights (159,251) (112,051)
Sales of mortgage servicing rights 110,661 84,077
Net gain on sales of mortgage loans and servicing rights 84,709 (44,961)
Increase in accrued interest on loans (178) (1,007)
Increase in lease receivables (21,123)
Increase in other assets (6,043) (10,976)
Increase in residual certificates (10,758)
Increase in accrued expenses and other liabilities 56,528 38,694
------------ ------------
Net cash used in operating activities (58,234) (139,562)
------------ ------------
INVESTING ACTIVITIES:
Purchases of premises and equipment, net (5,182) (2,267)
------------ ------------
Net cash used in investing activities (5,182) (2,267)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings 17,043,955 12,814,396
Repayment of borrowings (16,975,723) (12,669,867)
Issuance of restricted stock 328 328
Shares issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan 1,466 (8)
Acquisition of Meritage Mortgage Corporation (1,750)
Debt issuance costs (257)
Cash dividends (2,783) (1,186)
Acquisition of treasury stock (3,034)
Issuance of treasury stock 1,674
Exercise of stock options 481
Loans to Employee Stock Ownership Plan (1,000)
------------ ------------
Net cash provided by financing activities 65,364 141,656
------------ ------------
Net increase in cash 1,948 (173)
Cash, beginning of period 13,546 2,492
------------ ------------
Cash, end of period $ 15,494 $ 2,319
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
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, 1997, Annual Report on Form 10-K. Certain financial information,
which is normally included in financial statements prepared in accordance with
generally accepted accounting principles, is not required for interim financial
statements and has been omitted. The accompanying interim consolidated financial
statements are unaudited. However, in the opinion of management of the Company,
all adjustments, consisting of normal recurring items, necessary for a fair
presentation of operating results for the periods shown have been made. Certain
prior period amounts have been reclassified to conform to current period
presentation.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
No. 128), which is effective for financial statements issued for periods ending
after December 15, 1997. The Company adopted SFAS No. 128 in December 1997 and
has retroactively restated to report its earnings per share on a comparable
basis for all periods presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which requires that changes in the amounts of comprehensive income
items, currently reported as separate components of equity, be shown in a
financial statement, displayed as prominently as other financial statements. The
most common components of other comprehensive income include foreign currency
translation adjustments, minimum pension liability adjustments and/or unrealized
gains and losses on available-for-sale securities. SFAS No. 130 does not require
a specific format for the new statement, but does require that an amount
representing total comprehensive income be reported. SFAS No. 130 is required to
be adopted for fiscal years beginning after December 15, 1997. The Company
has adopted SFAS No. 130 in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes new standards for
business segment reporting. Requirements of SFAS No. 131 include reporting of
(a) financial and descriptive information about reportable operating segments,
(b) a measure of segment profit or loss, certain specific revenue and expense
items and segment assets with reconciliations of such amounts to the Company's
financial statements and (c) information regarding revenues derived from the
Company's products and services, information about major customers and
information related to geographic areas. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The Company plans to adopt SFAS No. 131
for the full-year 1998.
In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits" which revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. The statement is effective for fiscal years beginning after
December 15, 1997. The Company plans to adopt SFAS No. 132 for the full-year
1998.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and , if it is, the type of hedge
transaction. For fair value hedge transactions in which the Company is hedging
changes in an asset's, liability's or firm commitment's fair value, changes in
the fair value of the derivative instrument will generally be offset in the
income statement by changes in the hedged item's fair value. For cash-flow hedge
transactions, in which the Company is hedging the variability of cash flows
related to a variable-rate asset, liability or a forecasted transaction, changes
in the fair value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative instrument that are
reported in other comprehensive income will be reclassified as earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. The ineffective portion of all hedges will be recognized in
current period earnings. SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999 (January 1, 2000 for the
Company). However, early adoption is permitted. The Company has not yet
determined either the impact that the adoption of FAS 133 will have on its
earnings or statement of financial position or the period in which the statement
will be implemented.
7
<PAGE> 8
Certain amounts in prior period statements have been reclassified in
order to conform to current period presentation. Specifically, first quarter of
1998 salary and employee benefits was decreased by $1.4 million, net gain on
sale of mortgage loans was decreased by $1.1 million and servicing fees were
increased by $223 thousand. These reclassifications of previously reported
first quarter of 1998 amounts had no net effect on pre-tax or after-tax net
income of the previously reported interim period.
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 (564,738 after retroactive adjustment for the 5%
stock dividend declared on October 31, 1997) 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 (426,355 after
retroactive adjustment for the 5% stock dividend declared on October 31, 1997)
shares of RBMG common stock were issued contingent upon Meritage achieving
specified increasingly higher levels of subprime mortgage production during
certain periods following closing. During the second quarter of 1998, 135,351
(142,118 after retroactive adjustment for the 5% stock dividend declared on
October 31, 1997) contingent shares of RBMG common stock were released. All the
contingent shares have now been released. The fair market value of contingent
shares had been excluded from the purchase price for purposes of recording
goodwill and from outstanding shares for purposes of earnings per share
computations. As each specified increasingly higher subprime mortgage production
level was achieved, the corresponding fair market value of the associated
contingent shares released was recorded as additional goodwill and such shares
were prospectively treated as outstanding for purposes of earnings per share
computations. The 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. Goodwill and
other intangible assets are being amortized over a 20 year period using the
straight line method. Amortization expense for the second quarter and six month
periods ended June 30, 1998 was approximately $141 and $265, respectively. The
following is a schedule of the allocation of the purchase price:
<TABLE>
<CAPTION>
At Release
Acquisition of
on April 1, Contingent June 30,
1997 Shares 1998
---- ------ ----
<S> <C> <C> <C>
Cash paid $1,750 $ 1,750
Estimated fair market value of shares of
RBMG common stock issued or released 4,748 $5,748 10,496
Deferred merger cost 463 463
------ ------ -------
Total purchase price 6,961 5,748 12,709
Fair value of net assets acquired 1,000 1,000
------ ------ -------
Goodwill and intangibles $5,961 $5,748 $11,709
====== ====== =======
</TABLE>
Effective May 1, 1998 the Company sold the retail production franchise
of Intercounty Mortgage, Inc. to CFS Bank. Historically, the Company has
focused on accumulation of loan production through third-party correspondent
and wholesale broker channels because of the relatively lower fixed expenses
and capital investments required, among other reasons. Management believes the
sale of the retail operation will allow the Company to refocus on its core
competency as a correspondent and wholesale mortgage lender. The following is a
schedule of the gain recognized on the sale of the retail production franchise:
<TABLE>
<S> <C>
Cash proceeds $ 5,503
Investment banking, legal and other advisory fees (533)
Severance and other transaction costs (1,980)
-------
Net proceeds 2,990
Basis in assets sold (1,500)
-------
Net pre-tax gain on sale of retail production franchise $ 1,490
=======
</TABLE>
8
<PAGE> 9
Earnings Per Share
The following is a reconciliation of basic earnings per share to diluted
earnings per share as calculated under SFAS No. 128 for the six months ended
June 30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Income
(Numerator) Shares Per Share
For the Six Months Ended June 30, 1998 ($ in thousands) (Denominator) Amount
- -------------------------------------------------- ----------------- -------------------- ----------------
<S> <C> <C> <C>
Net Income Per Common Share - Basic
Income available to common stockholders $ 22,693 23,084,986 $ 0.98
================
Effect of Dilutive Securities
Stock options 379,018
----------------- --------------------
Net Income Per Common Share - Diluted
Income available to common stockholders
plus assumed conversions $ 22,693 23,464,004 $ 0.97
================= ==================== ================
</TABLE>
The prices of all options outstanding at June 30, 1998 were less than the
average market price of the common shares for the first six months of 1998,
therefore all options were included in the computation of diluted earnings per
share.
<TABLE>
<CAPTION>
Income
(Numerator) Shares Per Share
For the Six Months Ended June 30, 1997 ($ in thousands) (Denominator) Amount
- -------------------------------------------------- ------------------ -------------------- ----------------
<S> <C> <C> <C>
Net Income Per Common Share - Basic
Income available to common stockholders $ 11,841 20,133,317 $ 0.59
================
Effect of Dilutive Securities
Stock options 393,311
------------------ --------------------
Net Income Per Common Share - Diluted
Income available to common stockholders
plus assumed conversions $ 11,841 20,526,628 $ 0.58
================== ==================== ================
</TABLE>
Options to purchase 112,350 shares of common stock at $14.25 per share,
17,850 shares of common stock at $14.31 per share and 7,875 shares of common
stock at $14.27 per share were outstanding during the first six months of 1997
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common shares.
The following is a reconciliation of basic earnings per share to diluted
earnings per share as calculated under SFAS No. 128 for the quarters ended June
30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Income
(Numerator) Shares Per Share
For the Quarter Ended June 30, 1998 ($ in thousands) (Denominator) Amount
- ------------------------------------------------- ----------------- -------------------- ------------------
<S> <C> <C> <C>
Net Income Per Common Share - Basic
Income available to common stockholders $ 13,112 23,102,831 $ 0.57
==================
Effect of Dilutive Securities
Stock options 408,789
----------------- --------------------
Net Income Per Common Share - Diluted
Income available to common stockholders
plus assumed conversions $ 13,112 23,511,620 $ 0.56
================= ==================== ==================
</TABLE>
The prices of all options outstanding at June 30, 1998 were less than the
average market price of the common shares for the second quarter of 1998,
therefore all options were included in the computation of diluted earnings per
share.
<TABLE>
<CAPTION>
Income
(Numerator) Shares Per Share
For the Quarter Ended June 30, 1997 ($ in thousands) (Denominator) Amount
- ------------------------------------------------- ----------------- ------------------- -----------------
<S> <C> <C> <C>
Net Income Per Common Share - Basic
Income available to common stockholders $ 7,371 20,424,696 $ 0.36
=================
Effect of Dilutive Securities
Stock options 393,139
----------------- -------------------
Net Income Per Common Share - Diluted
Income available to common stockholders
plus assumed conversions $ 7,371 20,817,835 $ 0.35
================= =================== =================
</TABLE>
Options to purchase 112,350 shares of common stock at $14.25 per share,
17,850 shares of common stock at $14.31 per share and 7,875 shares of common
stock at $14.27 per share were outstanding during the second quarter of 1997 but
were not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares. The options, which will expire on October 30, 2005, November 8, 2006
and, November 12, 2006, respectively, were still outstanding at June 30, 1997.
9
<PAGE> 10
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
Resource Bancshares Mortgage Group, Inc. (the Company) (and the notes thereto)
and the other information included or incorporated by reference into the
Company's 1997 Annual Report on Form 10-K and the interim Consolidated Financial
Statements contained herein. Statements included in this discussion and analysis
(or elsewhere in this document) which are not statements of historical fact are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve a number of risks and
uncertainties, and that actual results could differ materially from those
indicated by such forward-looking statements. Important factors that could cause
actual results to differ materially from those indicated by such forward-looking
statements include, but are not limited to, the following which are described in
the Company's Joint Proxy Statement/Prospectus dated December 2, 1997: (i)
interest rate risks; (ii) changes in economic conditions; (iii) competition;
(iv) changes in regulations and related matters; (v) litigation
affecting the mortgage banking business; (vi) delinquency and default risks;
(vii) changes in the market for servicing rights, mortgage loans and lease
receivables; (viii) environmental matters; (ix) changes in the demand for
mortgage loans and (x) availability of funding sources and other risks and
uncertainties, discussed elsewhere herein, in the Company's Joint Proxy
Statement/Prospectus dated December 2, 1997 or from time to time in the
Company's periodic reports filed with the Securities and Exchange Commission.
The Company disclaims any obligation to update any forward-looking statements.
THE COMPANY
The Company is a diversified financial services company engaged
primarily in the business of mortgage banking, through the purchase (through a
nationwide network of correspondents and brokers), sale and servicing of
agency-eligible and subprime residential, single-family first-mortgage loans and
the purchase and sale of servicing rights associated with such loans. In
addition, the Company originates, sells and services small ticket commercial
equipment leases and originates, sells, underwrites for investors and services
commercial mortgage loans.
PRODUCTION
The Company purchases residential mortgage loans from its
correspondents and through its wholesale division and, until the sale of its
retail production platform in May 1998, originated mortgage loans through its
retail division. The Company also purchases and originates subprime mortgage
loans through a separate division. In addition, the Company originates
commercial mortgage loans and leases small ticket equipment items.
10
<PAGE> 11
A summary of production by source for the periods indicated is set
forth below:
<TABLE>
<CAPTION>
($ in thousands) At or For the Six Months At or For the Quarter Ended
Ended June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Loan Production:
Correspondent Division $5,659,460 $3,554,180 $2,764,060 $1,948,454
Wholesale Division 1,483,489 848,169 748,629 459,264
Retail Division 264,059 313,873 76,178 185,973
---------- ---------- ---------- ----------
Total Agency-Eligible Loan Production 7,407,008 4,716,222 3,588,867 2,593,691
Subprime Division 252,132 133,758 146,146 87,001
Commercial Mortgage (for Investors
and Conduits) 362,622 170,107
Leases 33,543 20,703
---------- ---------- ---------- ----------
Total Production $8,055,305 $4,849,980 $3,925,823 $2,680,692
========== ========== ========== ==========
</TABLE>
Initially, the Company was exclusively focused on purchasing
agency-eligible mortgage loans through its correspondents. In order to diversify
its sources of loan volume, the Company started a wholesale operation in 1994, a
retail operation in 1995 and a subprime division in 1997. Management anticipates
that its higher margin wholesale and subprime production will continue to
account for an increasing percentage of total mortgage loan production as those
divisions are expanded more rapidly than correspondent operations. In general,
management has targeted as a near-term goal a residential mortgage production
mix of approximately 70% correspondent, 25% wholesale and 5% subprime. In order
to further diversify its sources of production and revenue, the Company acquired
Resource Bancshares Corporation (RBC) in December 1997. Through RBC, the Company
originates small ticket commercial equipment leases and commercial mortgage
loans. These two new sources of production accounted for 4.9% of the Company's
total second quarter 1998 production.
A summary of key information relevant to industry residential mortgage
loan production activity is set forth below:
<TABLE>
<CAPTION>
($ in thousands) At or For the Quarter Ended June 30,
------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
U. S. 1-4 Family Mortgage Originations Statistics (1):
U. S. 1-4 Family Mortgage Originations $352,000,000 $225,000,000
Adjustable Rate Mortgage Market Share 14.00% 26.00%
Estimated Fixed Rate Mortgage Originations $303,000,000 $167,000,000
Company Information:
Agency-Eligible Loan Production $ 3,588,867 $ 2,593,691
Estimated Company Market Share 1.02% 1.15%
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's total agency-eligible residential mortgage production
increased by 38% to $3.6 billion for the second quarter of 1998 from $2.6
billion for the second quarter of 1997. The Company's 38% agency-eligible loan
production increase is a direct result of the nationwide 56% increase in 1-4
family mortgage originations for the second quarter of 1998 as compared to the
second quarter of 1997. The decrease in the Company's estimated market share of
U.S. mortgage originations from 1.15% for the second quarter of 1997 to 1.02%
for the second quarter of 1998 is primarily due to the Company's focus on
improved agency-eligible profitability and expansion of its higher margined
subprime, commercial mortgage and leasing production.
11
<PAGE> 12
Correspondent Loan Production
The Company purchases closed mortgage loans through its network of approved
correspondent lenders. Correspondents are primarily mortgage lenders, larger
mortgage brokers and smaller savings and loan associations and commercial banks,
which have met the Company's approval requirements.
The Company continues to emphasize correspondent loan production as its
basic business focus because of the lower fixed expenses and capital investment
required of the Company. That is, the Company has developed a cost structure
that is more directly variable with loan production because the correspondent
incurs most of the fixed costs of operating and maintaining branch offices and
of identifying and interacting directly with loan applicants.
A summary of key information relevant to the Company's correspondent
residential loan production activities is set forth below:
<TABLE>
<CAPTION>
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Correspondent Loan Production $5,659,460 $3,554,180 $2,764,060 $1,948,454
Estimated Correspondent Market Share (1) 0.85% 0.88% 0.79% 0.87%
Approved Correspondents 901 920 901 920
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The 42% increase in the Company's correspondent loan production from $1.9
billion for the second quarter of 1997 to $2.8 billion for the second quarter of
1998 resulted primarily from the 56% increase in nationwide 1-4 family mortgage
loan production. The number of approved correspondent lenders at the end of the
second quarter of 1998 decreased slightly from that of the second quarter of
1997 as the Company focused on maintenance of those correspondent relationships
most compatible with the Company's overall business strategies and profitability
goals while continuing a disciplined and measured expansion through
establishment of new correspondent relationships.
Wholesale Loan Production
The wholesale division receives loan applications through brokers,
underwrites the loans, funds the loans at closing and prepares all closing
documentation. The wholesale branches also handle all shipping and follow-up
procedures on loans. Typically mortgage brokers are responsible for taking
applications and accumulating the information precedent to the Company's
processing of the loans. Although the establishment of wholesale branch offices
involves the incurrence of fixed expenses associated with maintaining those
offices, wholesale operations also provide for higher profit margins than
correspondent loan production. Additionally, each branch office can serve a
relatively sizable geographic area by establishing relationships with large
numbers of independent mortgage loan brokers who bear much of the cost of
identifying and interacting directly with loan applicants.
12
<PAGE> 13
A summary of key information relevant to the Company's wholesale production
activities is set forth below:
<TABLE>
<CAPTION>
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
----------------------------- --------------------------
1998 1997 1998 1997
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Wholesale Loan Production $1,483,489 $848,169 $748,629 $459,264
Estimated Wholesale Market Share (1) 0.22% 0.21% 0.21% 0.20%
Wholesale Division Operating Expenses $ 7,740 $ 4,964 $ 3,943 $ 2,730
Approved Brokers 3,085 2,758 3,085 2,758
Number of Branches 15 13 15 13
Number of Employees 153 136 153 136
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The 63% ($289 million) increase in wholesale loan production, from $459.3
million for the second quarter of 1997 to $748.6 million during the second
quarter of 1998, resulted from the 56% nationwide increase in loan production
and the Company's addition of two new wholesale branches between the second
quarter of 1997 and the second quarter of 1998. The increase in operating
expenses for the wholesale division was primarily a result of the increased
production. Wholesale division operating expenses as a percentage of production
decreased 10% from 59 basis points in the second quarter of 1997 to 53 basis
points in the second quarter of 1998.
Strategically, management anticipates focusing in the near-term on
significantly expanding its wholesale presence nationwide due to the relatively
higher margins attributable to this channel. Management anticipates that the
wholesale division will continue to account for an increasing percentage of the
Company's total loan production.
Retail Loan Production
During late 1997, the Company began reviewing the compatibility of the
retail operation with its primary business focus. On March 11, 1998, the Company
signed a definitive agreement with CFS Bank under which the Company sold the
retail production franchise of Intercounty Mortgage, Inc. to CFS Bank effective
May 1, 1998. Historically, the Company has focused on accumulation of loan
production through third-party correspondent and wholesale broker channels
because of the relatively lower fixed expenses and capital investments required,
among other reasons. Management believes the sale of the retail operation will
allow the Company to refocus on its core competency as a correspondent and
wholesale mortgage lender.
13
<PAGE> 14
A summary of key information relevant to the Company's retail production
activities is set forth below:
<TABLE>
<CAPTION>
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
---------------------------- -------------------------
1998 1997 1998 1997
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Retail Loan Production $264,059 $313,873 $76,178 $185,973
Estimated Retail Market Share (1) 0.04% 0.08% 0.02% 0.08%
Retail Division Operating Expenses $ 5,595 $ 8,263 $ 1,676 $ 4,170
Number of Branches 6 6
Number of Employees 206 206
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The primary cause of the variations observed above relate to the sale of
the retail production platform effective May 1, 1998.
Subprime Loan Production
In 1997, the Company began its initial expansion into subprime lending
activities. In connection therewith, the Company acquired Meritage Mortgage
Corporation (Meritage), a wholesale producer of subprime mortgage loans, in
April 1997. The Company's subprime division produced $252.1 million during the
first six months of 1998, 89% more than for the comparable prior year period.
Management anticipates continuing significant expansion of its subprime
division during the remainder of 1998 as subprime branches recently opened or
acquired in 1997 reach full year production levels, as additional wholesale
subprime branches are opened and as subprime operations are introduced and made
available through the Company's existing 15 branch agency-eligible wholesale
network. In the future, the Company plans to offer select subprime loan products
through the existing nationwide correspondent production channel.
A summary of key information relevant to the Company's subprime production
activities is set forth below:
<TABLE>
<CAPTION>
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
------------------------- ------------------------
1998 1997 1998 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Subprime Loan Production $252,132 $133,758 $146,146 $87,001
Subprime Division Operating Expenses $ 10,575 $ 3,607 $ 5,952 $ 3,165
Number of Brokers 1,659 522 1,659 522
Number of Employees 220 116 220 116
</TABLE>
Subprime loan production increased by 68% to $146.1 million for the
second quarter of 1998 as compared to $87.0 million during the second quarter of
1997.
Commercial Mortgage Production
In connection with its acquisition of RBC on December 31, 1997, the Company
acquired RBC's subsidiary, Laureate Realty. Laureate Realty originates
commercial mortgage loans for various
14
<PAGE> 15
insurance companies and other investors. Commercial mortgage loans are generally
originated in the name of the investor and, in most instances, Laureate Realty
retains the right to service the loans under a servicing agreement.
A summary of key information relevant to the Company's commercial mortgage
production activities is set forth below:
<TABLE>
<CAPTION>
($ in thousands) At or For the Six Months At or for the Quarter
Ended June 30, Ended June 30,
-------------------- ----------------------
1998 1997 1998 1997
-------- ---- -------- -----
<S> <C> <C> <C> <C>
Commercial Mortgage Production $362,622 N/A $170,107 N/A
Commercial Mortgage Division Operating N/A N/A
Expenses $ 4,806 $ 2,356
Number of Branches 11 N/A 11 N/A
Number of Employees 75 N/A 75 N/A
</TABLE>
Lease Production
Through RBC's leasing division, Republic Leasing, acquired on December 31,
1997, the Company originates and services small-ticket equipment leases.
Substantially all of Republic Leasing's lease receivables are acquired from
independent brokers who operate throughout the continental United States.
A summary of key information relevant to the Company's lease production
activities is set forth below:
<TABLE>
<CAPTION>
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
-------------------- ---------------------
1998 1997 1998 1997
------ ---- ------ ----
<S> <C> <C> <C> <C>
Lease Production $33,543 N/A $20,703 N/A
Lease Division Operating Expenses $ 2,460 N/A $ 1,240 N/A
Number of Brokers 210 N/A 210 N/A
Number of Employees 61 N/A 61 N/A
</TABLE>
AGENCY-ELIGIBLE MORTGAGE SERVICING
Agency-eligible mortgage servicing includes collecting and remitting
mortgage loan payments, accounting for principal and interest, holding escrow
funds for payment of mortgage-related expenses such as taxes and insurance,
making advances to cover delinquent payments, making inspections as required of
the mortgaged premises, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults and
generally administering mortgage loans.
The Company is somewhat unique in that its strategy is to sell
substantially all of its produced agency-eligible mortgage servicing rights to
other approved servicers. In that regard, the Company believes it is the largest
national supplier of agency-eligible servicing rights to the still-consolidating
mega-servicers. Typically, the Company sells its agency-eligible mortgage
servicing rights within 90 to 180 days of purchase or origination. However, for
strategic reasons, the Company also strives to maintain a servicing portfolio
whose size is determined by reference to the Company's cash operating costs
which, in turn, are largely determined by the size of its loan production
platform. By continuing to focus on the low-cost correspondent and wholesale
production channels, the Company is able to
15
<PAGE> 16
minimize the cash operating costs of its loan production platform and thus the
strategically required size of its agency-eligible loan servicing operation.
A summary of key information relevant to the Company's loan servicing
activities is set forth below:
<TABLE>
<CAPTION>
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
--------------------------------- --------------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Underlying Unpaid Principal Balances:
Beginning Balance* $ 7,125,222 $ 6,670,267 $ 7,980,181 $ 7,420,783
Loan Production (net of servicing-
released production) 7,831,922 4,809,790 3,589,235 2,482,601
Net Change in Work-in-Process (67,610) (236,395) 337,045 24,765
Bulk Acquisitions 122,467 774,097 122,467 168,336
Sales of Servicing (4,804,235) (4,301,094) (2,269,219) (2,589,818)
Paid-In-Full Loans (650,891) (285,580) (284,255) (152,684)
Amortization, Curtailments and Other, net (187,549) (192,020) (106,128) (114,918)
------------ ----------- ------------ -----------
Ending Balance* $ 9,369,326 $ 7,239,065 $ 9,369,326 $ 7,239,065
Subservicing Ending Balance 2,624,893 2,368,709 2,624,893 2,368,709
------------ ----------- ------------ -----------
Total Underlying Unpaid Principal Balances $ 11,994,219 $ 9,607,774 $ 11,994,219 $ 9,607,774
============ =========== ============ ===========
Total Company Servicing Fees $ 19,715 $ 15,338 $ 10,412 $ 7,803
Net Interest Income from Owned Leases 1,982 1,036
------------ ----------- ------------ -----------
21,697 15,338 11,448 7,803
------------ ----------- ------------ -----------
Total Company Operating Expenses 79,956 51,162 41,041 28,323
Total Company Amortization and
Depreciation (14,886) (10,453) (7,902) (5,597)
------------ ----------- ------------ -----------
Total Company Cash Operating Expenses $ 65,070 $ 40,709 $ 33,139 $ 22,726
------------ ----------- ------------ -----------
Coverage Ratio 33% 38% 35% 34%
============ =========== ============ ===========
</TABLE>
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and therefore exclude the subservicing portfolio.
The Company's coverage ratio for the first half of 1998 at 33% was lower
than the Company's target level of between 50% and 80%. The Company's expansion
into the relatively high cost subprime production channel and diversification
into the commercial mortgage and small ticket equipment leasing businesses,
together with normal inflationary pressures on costs, have combined to increase
cash operating costs at a 60% pace for the first six months of 1998 over that
for the first six months of 1997. Although the servicing portfolio and servicing
fees have increased during the same period, such increases have not kept pace
with the rate of growth in cash operating expenses. Strategically, and in the
opinion of the Company's management, market prices for servicing rights have
been attractive throughout this period. Accordingly, management has consciously
determined on a risk versus return basis to allow this ratio to move below its
stated goals. Opportunistically and as market conditions permit, management
would expect to bring this ratio back in line with the stated objective.
Effective May 1, 1998, the Company sold its retail production franchise, which
accounted for $5.6 million of the Company's cash operating expenses for the
first half of 1998. Without retail division operating expenses for the first six
months of 1998, the Company's coverage ratio would have been 36%.
16
<PAGE> 17
A summary of agency-eligible servicing statistics follows:
<TABLE>
<CAPTION>
($ in thousands) At or For the Six Months At or For the Quarter
Ended June 30, Ended June 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Average Underlying Unpaid Principal Balances
(including subservicing) $ 10,888,995 $ 9,067,404 $ 11,451,709 $ 9,248,663
Weighted Average Note Rate* 7.44% 7.84% 7.44% 7.84%
Weighted Average Servicing Fee* 0.39% 0.40% 0.39% 0.40%
Delinquency (30+ days) Including
Bankruptcies and Foreclosures* 2.29% 3.39% 2.29% 3.39%
Number of Servicing Division Employees 160 122 160 122
</TABLE>
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and therefore exclude the subservicing portfolio.
The $2.2 billion, or 24%, increase in the average underlying unpaid
principal balance of agency-eligible mortgage loans being serviced for the
second quarter of 1998 as compared to the second quarter of 1997 is primarily
related to the Company's decision to retain a larger percentage of its
production during the first half of 1998. Additionally, the Company's increased
loan production volumes during the latter half of 1997 and the first half of
1998 compared to the same periods of the prior years contributed to the
increase. Since the Company generally sells servicing rights related to the
agency-eligible loans it produces within 90 to 180 days of purchase or
origination, increased production volumes generally result in a higher volume of
mortgage servicing rights held in inventory pending sale.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998,
COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Summary by Operating Division
Following is a summary of the allocated revenues and expenses for each of
the Company's operating divisions for the six months ended June 30, 1998 and
1997, respectively:
<TABLE>
<CAPTION>
Residential
---------------------------------
($ in thousands) Mortgage Production
--------------------- Agency -
Agency- Eligible Commercial
For the Six Months Ended June 30, 1998* Eligible Subprime Servicing Mortgage Leasing Other Consolidated
- ----------------------------------------- -------- -------- --------- ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 3,869 $ 3,413 $ 260 $ 1,982 $ 227 $ 9,751
Net gain on sale of mortgage loans 66,765 13,382 3,482 83,629
Gain on sale of mortgage servicing rights $ 1,080 1,080
Servicing fees 17,230 1,812 509 164 19,715
Other income 1,695 137 141 (2) 425 501 2,897
-------- -------- -------- ------- ------- ------- ---------
Total revenues 72,329 16,932 18,451 5,552 2,916 892 117,072
-------- -------- -------- ------- ------- ------- ---------
Salary and employee benefits 28,031 7,589 1,648 2,920 1,030 344 41,562
Occupancy expense 3,692 871 218 389 166 95 5,431
Amortization of mortgage servicing rights 11,649 654 12,303
General and administrative expenses 12,945 2,115 3,117 843 1,264 376 20,660
-------- -------- -------- ------- ------- ------- ---------
Total expenses 44,668 10,575 16,632 4,806 2,460 815 79,956
-------- -------- -------- ------- ------- ------- ---------
Income before income taxes 27,661 6,357 1,819 746 456 77 37,116
Income tax expense (10,940) (2,249) (710) (282) (188) (54) (14,423)
-------- -------- -------- ------- ------- ------- ---------
Net income $ 16,721 $ 4,108 $ 1,109 $ 464 $ 268 $ 23 $ 22,693
======== ======== ======== ======= ======= ======= =========
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
Residential
---------------------------------
($ in thousands) Mortgage Production
--------------------- Agency -
Agency- Eligible Commercial
For the Six Months Ended June 30, 1997* Eligible Subprime Servicing Mortgage Leasing Other Consolidated
- ----------------------------------------- -------- -------- --------- ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 9,651 $ 9,651
Net gain on sale of mortgage loans 37,468 $ 4,782 42,250
Gain on sale of mortgage servicing rights $ 2,711 2,711
Servicing fees 15,338 15,338
Other income 426 426
-------- ------- -------- --- --- --- ------- --------
Total revenues 47,545 4,782 18,049 70,376
-------- ------- -------- --- --- --- ------- --------
Salary and employee benefits 23,174 2,587 1,383 27,144
Occupancy expense 3,050 236 156 3,442
Amortization of mortgage servicing rights 8,833 8,833
General and administrative expenses 8,274 706 2,763 11,743
-------- ------- -------- --- --- --- ------- --------
Total expenses 34,498 3,529 13,135 51,162
-------- ------- -------- --- --- --- ------- --------
Income before income taxes 13,047 1,253 4,914 19,214
Income tax expense (5,008) (485) (1,880) (7,373)
-------- ------- -------- --- --- --- ------- --------
Net income $ 8,039 $ 768 $ 3,034 $ 11,841
======== ======= ======== === === === ======= ========
</TABLE>
* Revenues and expenses have been recorded on a direct basis to the extent
possible. Other than direct charges, management believes that revenues and
expenses have been allocated to the respective divisions on a reasonable
basis.
Agency-Eligible Mortgage Operations
Following is a comparison of the revenues and expenses allocated to the
Company's agency-eligible mortgage production operations.
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
($ in thousands) 1998 1997
---------- ----------
<S> <C> <C>
Net interest income $ 3,869 $ 9,651
Net gain on sale of mortgage loans 66,765 37,468
Other income 1,695 426
---------- ----------
Total production revenue 72,329 47,545
---------- ----------
Salary and employee benefits 28,031 23,174
Occupancy expense 3,692 3,050
General and administrative expenses 12,945 8,274
---------- ----------
Total production expenses 44,668 34,498
---------- ----------
Net pre-tax production margin $ 27,661 $ 13,047
---------- ----------
Production $7,407,008 $4,716,222
Pool delivery 7,171,373 4,499,563
Total production revenue to pool delivery 101 bps 106 bps
Total production expenses to production 60 bps 73 bps
---------- ----------
Net pre-tax production margin 41 bps 33 bps
========== ==========
</TABLE>
18
<PAGE> 19
Summary
The production revenue to pool delivery ratio declined five basis points,
or 5%, for the first six months of 1998 as compared to the first six months of
1997. Generally, net gain on sale of mortgage loans (93 basis points for 1998
versus 83 basis points for 1997) improved due to better overall execution into
the secondary markets. However, net interest income declined and offset this
improvement due to the relatively flatter yield curve environment. The
production expenses to production ratio decreased 13 basis points, or 18%, for
the first six months of 1998 as compared to the first six months of 1997.
Generally, this relates to better leverage of fixed operating expenses in the
higher volume production environment for the first six months of 1998 versus the
comparable period of 1997. As a consequence of the foregoing, the Company's net
agency-eligible pre-tax production margin improved 8 basis points, or 24%, to 41
basis points while in absolute dollars it increased $14.6 million, or 112%.
Net Interest Income
The following table analyzes net interest income allocated to the Company's
agency-eligible mortgage production activities in terms of rate and volume
variances of the interest spread (the difference between interest rates earned
on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds).
<TABLE>
<CAPTION>
($ in thousands) Variance
Average Volume Average Rate Interest Attributable to
- ----------------------------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997 Variance Rate Volume
- ----------------------------------------- ----------------------------------------------------
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
Interest Income
Mortgages Held for Sale and
$1,178,375 $ 810,759 6.89% 7.82% Mortgage-Backed Securities $ 40,592 $ 31,688 $ 8,904 ($ 5,464) $ 14,368
- ----------------------------------------- ----------------------------------------------------
Interest Expense
$ 464,620 $ 401,637 4.62% 4.78% Warehouse Line $ 10,643 $ 9,524 1,119 (375) 1,494
681,723 380,918 5.88% 5.37% Gestation Line 19,869 10,142 9,727 1,719 8,008
94,282 6.79% Servicing Secured Line 3,174 3,174 3,174
33,067 43,722 5.89% 6.33% Servicing Receivable Line 966 1,372 (406) (72) (334)
6,731 3,010 7.88% 8.22% Other Borrowings 263 124 139 (14) 153
Facility Fees & Other Charges 1,808 875 933 933
- ----------------------------------------- ----------------------------------------------------
$1,280,423 $ 829,287 5.78% 5.36% Total Interest Expense $ 36,723 $ 22,037 $ 14,686 $ 4,432 $ 10,254
- ----------------------------------------- ----------------------------------------------------
1.11% 2.46% Net Interest Income $ 3,869 $ 9,651 ($ 5,782) ($ 9,896) $ 4,114
================== ====================================================
</TABLE>
Net interest income from agency-eligible product decreased 60% to $3.9
million for the first six months of 1998 compared to $9.7 million for the first
six months of 1997. The 135 basis point decrease in the interest-rate spread was
primarily the result of the narrower spreads between long and short-term rates
in the first six months of 1998 compared to the first six months of 1997. The
Company's mortgages and mortgage-backed securities are generally sold and
replaced within 30 to 35 days. Accordingly, the Company generally borrows at
rates based upon short-term indices, while its asset yields are primarily based
upon long-term mortgage rates.
Net Gain on Sale of Agency-eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for the
periods indicated follows:
19
<PAGE> 20
<TABLE>
<CAPTION>
($ in thousands) For the Six Months Ended June 30,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Gross proceeds on sales of mortgage loans $7,239,752 $4,589,379
Initial unadjusted acquisition cost of mortgage loans sold, net of
hedge results 7,237,275 4,585,229
---------- ----------
Unadjusted gain on sale of mortgage loans 2,477 4,150
Loan origination and correspondent program administrative fees 19,836 14,136
---------- ----------
Unadjusted aggregate margin 22,313 18,286
Acquisition basis allocated to mortgage servicing rights (SFAS No 125) 43,856 18,120
Net change in deferred administrative fees 596 1,062
---------- ----------
Net gain on sale of agency-eligible mortgage loans $ 66,765 $ 37,468
========== ==========
</TABLE>
The Company sold agency-eligible loans during the first six months of 1998
with an aggregate unpaid principal balance of $7.2 billion compared to sales of
$4.6 billion for the first six months of 1997. The amount of proceeds received
on sales of mortgage loans exceeded the initial unadjusted acquisition cost of
the loans sold by $2.5 million (3 basis points) for the first half of 1998 as
compared to $4.2 million (9 basis points) for the comparable period of the prior
year. The Company received loan origination and correspondent program
administrative fees of $19.8 million (27 basis points) on these loans during the
first six months of 1998 and $14.1 million (31 basis points) during the first
six months of 1997. The Company allocated $43.9 million (61 basis points) to
basis in mortgage servicing rights for loans sold in the first six months of
1998 as compared to $18.1 million (39 basis points) during the first six months
of 1997 in accordance with Statement of Financial Accounting Standards (SFAS)
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". Consequently, net gain on sale of
agency-eligible mortgage loans increased to $66.8 million for the first six
months of 1998 versus $37.5 million for the first six months of 1997. Overall,
the increase is attributed to better execution into the secondary markets.
Subprime Mortgage Operations
Following is an analysis of the revenues and expenses allocated to the
Company's subprime mortgage production operations.
20
<PAGE> 21
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
($ in thousands) 1998 1997
-------- --------
<S> <C> <C>
Net interest income $ 3,413
Net gain on sale of mortgage loans 13,382 $ 4,782
Other income 137
-------- --------
Total production revenue 16,932 4,782
-------- --------
Salary and employee benefits 7,589 2,587
Occupancy expense 871 236
General and administrative expenses 2,115 706
-------- --------
Total production expenses 10,575 3,529
-------- --------
Net pre-tax production margin $ 6,357 $ 1,253
======== ========
Production $252,132 $133,758
Whole loan sales and securitizations 214,971 114,427
Total production revenue to whole loan sales and securitizations 788 bps 418 bps
Total production expenses to production 419 bps 264 bps
-------- --------
Net pre-tax production margin 369 bps 154 bps
======== ========
</TABLE>
Summary
During the first six months of 1998, the Company produced $252.1 million of
subprime loans. The Company sold approximately $89.7 million (36%) of its first
six months 1998 production in whole loan transactions and delivered $125.2
million into the secondary markets through securitization transactions. Overall,
the Company operated during the first six months of 1998 at a 3.69% pre-tax
subprime production margin. At June 30, 1998, the Company had unsold subprime
mortgage loans of $80.2 million. During the first six months of 1997, the
Company's subprime division was in its initial startup phase and $46.8 million
of the subprime mortgage loan production for that period was purchased in bulk
from Meritage prior to the Company's acquisition of Meritage.
Net Interest Income
<TABLE>
<CAPTION>
($ in thousands) Variance
Average Volume Average Rate Interest Attributable to
- ----------------------------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997 Variance Rate Volume
- ----------------------------------------- ----------------------------------------------------
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
Interest Income
Mortgages Held for Sale and
$ 111,877 9.72% Residual Certificates $ 5,439 $ 5,439 $ 5,439
- ----------------------------------------- ----------------------------------------------------
Interest Expense
$ 69,590 5.87% Total Interest Expense $ 2,026 $ 2,026 $ 2,026
- ----------------------------------------- ----------------------------------------------------
3.85% Net Interest Income $ 3,413 $ 3,413 $ 3,413
================== ====================================================
</TABLE>
Net interest income on subprime loans and accretion income on residuals was
$3.4 million and the interest rate spread was 385 basis points, for the first
six months of 1998. This was primarily the result of the larger interest rate
spreads possible for subprime product.
21
<PAGE> 22
Net Gain on Securitization and Sale of Subprime Mortgage Loans
A reconciliation of the gain on securitization of subprime mortgage loans
for the periods indicated follows:
<TABLE>
<CAPTION>
($ in thousands) For the Six Months Ended June 30,
---------------------------------
1998 1997
--------- -------
<S> <C> <C>
Gross proceeds on securitization of subprime mortgage loans $ 124,237
Initial acquisition cost of subprime mortgage loans securitized, net
of fees 126,975
--------- -------
Unadjusted loss on securitization of subprime mortgage loans (2,738)
Initial capitalization of residual certificates 9,262
--------- -------
Net gain on securitization of subprime mortgage loans $ 6,524
========= =======
</TABLE>
Residual certificates arising from subprime securitizations are classified
as trading securities (as defined in SFAS No. 115), and changes in the fair
value of such certificates are recorded as adjustments to income in the period
of change. The Company assesses the fair value of the residual certificates
quarterly, based on an independent third party valuation. This valuation is
based on the discounted cash flows expected to be available to the holder of the
residual certificate. Significant assumptions used for purposes of the June 30,
1998 valuations are set forth below:
Discount Rate 13.00%
Prepayment Speeds
Fixed rate mortgages 4.8% to 28% constant prepayment rate
Adjustable rate mortgages 4.8% to 28% constant prepayment rate
Ramp to Full Prepayment Speeds Ramping period based on prepayment penalty
period and adjustable rate mortgage first
reset dates.
Constant Default Rate 3%
Loss Severity 25%
The assumptions above are estimated based on current conditions for similar
instruments that are subject to prepayment and credit risks. Other factors
evaluated in the determination of fair value include credit and collateral
quality of the underlying loans, current economic conditions and various fees
and costs (such as prepayment penalties) associated with ownership of the
residual certificate. Although the Company believes that the fair values of its
residual certificates are reasonable given current market conditions, the
assumptions used are estimates and actual experience may vary from these
estimates. Differences in the actual prepayment speed and loss experience from
the assumptions used, could have a significant effect on the fair value of the
residual certificates.
The Company also sold subprime mortgage loans on a whole loan basis during
the first six months of 1998. Whole loans are generally sold without recourse to
third parties with the gain or loss being calculated based on the difference
between the carrying value of the loans sold and the gross proceeds received
from the purchaser. No interest in these loans is retained by the Company.
A reconciliation of the gain on subprime mortgage whole loan sales for the
periods indicated follows:
22
<PAGE> 23
<TABLE>
<CAPTION>
($ in thousands) For the Six Months Ended June 30,
---------------------------------
1998 1997
------- --------
<S> <C> <C>
Gross proceeds on whole loan sales of subprime mortgage loans $96,577 $119,209
Initial acquisition cost of subprime mortgage loans sold, net of fees 89,719 114,427
------- --------
Net gain on whole loan sales of subprime mortgage loans $ 6,858 $ 4,782
======= ========
</TABLE>
As summarized in the following analysis, the recorded residual values imply
that the Company's securitizations are valued at 1.75 times the implied excess
yield at June 30, 1998, as compared to the 1.73 multiple implied at March 31,
1998. The table below represents balances as of June 30, 1998 unless otherwise
noted.
<TABLE>
<CAPTION>
($ in thousands) Securitizations
---------------------------------------
1997-1 1997-2 1998-1 Subtotal Other Total
---------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Residual Certificates $ 9,034 $ 9,383 $ 7,075 $ 25,492 $ 4,950 $ 30,442
Bonds $ 75,901 * $ 93,721 * $ 99,795 * $ 269,417 $ 56,009 ** $ 325,426
---------- ----------- ------------ ------------ ----------- ------------
Subtotal $ 84,935 $ 103,104 $ 106,870 $ 294,909 $ 60,959 $ 355,868
Unpaid Principal Balance $ 79,504 * $ 97,188 * $ 99,944 * $ 276,636 $ 58,253 ** $ 334,889
---------- ----------- ------------ ------------ ----------- ------------
Implied Price 106.83 106.09 106.93 106.61 104.65 106.26
---------- ----------- ------------ ------------ ----------- ------------
</TABLE>
* Amounts were based upon trustee statements dated July 27,1998 that covered
the period ended June 30,1998.
** Amounts were based upon trustee statements dated June 30, 1998 that covered
the period ended May 31, 1998.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Collateral Yield 10.38 9.98 9.71 10.00 11.08 10.36
Collateral Equivalent
Securitization Costs (0.73) (0.66) (0.64) (0.67) (0.50) (0.64)
Collateral Equivalent
Bond Rate (5.63) (5.74) (5.83) (5.74) (7.16) (6.15)
---------- ----------- ------------ ------------ ----------- ------------
4.02 3.58 3.24 3.59 3.42 3.57
---------- ----------- ------------ ------------ ----------- ------------
Implied Premium Above Par 6.83 6.09 6.93 6.61 4.65 6.26
Implied Collateral
Equivalent Excess Yield 4.02 3.58 3.24 3.59 3.42 3.57
---------- ----------- ------------ ------------ ----------- ------------
Multiple 1.70 x 1.70 x 2.14 x 1.84 x 1.36 x 1.75 x
---------- ----------- ------------ ------------ ----------- ------------
</TABLE>
23
<PAGE> 24
Agency-Eligible Mortgage Servicing
Following is a summary of the revenues and expenses allocated to the
Company's agency-eligible mortgage servicing operations for the six months ended
June 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
($ in thousands) 1998 1997
---------- ----------
<S> <C> <C>
Servicing fees $ 17,230 $ 15,338
Other income 141
---------- ----------
Servicing revenues 17,371 15,338
---------- ----------
Salary and employee benefits 1,648 1,383
Occupancy expense 218 156
Amortization of mortgage servicing rights 11,649 8,833
General and administrative expenses 3,117 2,763
---------- ----------
Total loan servicing expenses 16,632 13,135
---------- ----------
Net pre-tax servicing margin 739 2,203
Gain on sale of mortgage servicing rights 1,080 2,711
---------- ----------
Net pre-tax servicing contribution $ 1,819 $ 4,914
========== ==========
Average owned servicing portfolio $8,519,521 $7,307,094
Servicing sold 4,804,235 3,784,210
Net pre-tax servicing margin to average servicing portfolio 2 bps 6 bps
Gain on sale of servicing to servicing sold 2 bps 7 bps
</TABLE>
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio declined four basis points primarily due to relatively larger
increases in amortization and general and administrative expenses. The increased
amortization expense is attributable to generally higher levels of mortgage
servicing rights held for sale and the generally higher amortization expenses
required in the current higher prepay speed environment.
Overall, the servicing division contributed $1.8 million to the first six
months of 1998 pre-tax net income, a $3.1 million, or 63%, decrease from the
$4.9 million contribution for the first six months of 1997.
Loan servicing fees were $17.2 million for the first six months of 1998,
compared to $15.3 million for the first six months of 1997, an increase of 12%.
This increase is primarily related to an increase in the average aggregate
underlying unpaid principal balance of mortgage loans serviced to $8.5 billion
during the first six months of 1998 from $7.3 billion during the first six
months of 1997, an increase of 17%. Similarly, amortization of mortgage
servicing rights also increased to $11.6 million during the first six months of
1998 from $8.8 million during the first six months of 1997, an increase of 32%.
The increase in amortization is primarily attributable to the growth in the
average balance of the mortgage loans serviced and the current generally higher
prepay speed environment.
Included in loan servicing fees for the first six months of 1998 and 1997
are subservicing fees received by the Company of $422 thousand and $227
thousand, respectively. The subservicing fees are associated with temporary
subservicing agreements between the Company and purchasers of mortgage servicing
rights.
24
<PAGE> 25
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
<TABLE>
<CAPTION>
($ in thousands) For the Six Months Ended June 30,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Underlying unpaid principal balances of mortgage loans on
which servicing rights were sold during the period $ 4,804,235 $ 3,784,210
=========== ===========
Gross proceeds from sales of mortgage servicing rights $ 110,661 $ 84,077
Initial acquisition basis, net of amortization and hedge results 85,940 65,945
----------- -----------
Unadjusted gain on sale of mortgage servicing rights 24,721 18,132
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 125) (23,641) (15,421)
----------- -----------
Gain on sale of mortgage servicing rights $ 1,080 $ 2,711
=========== ===========
</TABLE>
During the first six months of 1998, the Company completed 13 sales of
mortgage servicing rights representing $4.8 billion of underlying unpaid
principal mortgage loan balances. This compares to 18 sales of mortgage
servicing rights representing $3.8 billion of underlying unpaid principal
mortgage loan balances in the first six months of 1997. The unadjusted gain on
the sale of mortgage servicing rights was $24.7 million (51 basis points) for
the first six months of 1998, up from $18.1 million (48 basis points) for the
first six months of 1997. The Company reduced this unadjusted gain by $23.6
million in the first half of 1998, versus a $15.4 million reduction during the
first six months of 1997, in accordance with SFAS No. 125.
Commercial Mortgage Operations
Following is a summary of the revenues and expenses allocated to the
Company's commercial mortgage production operations.
25
<PAGE> 26
<TABLE>
<CAPTION>
For the Six Months ended June 30,
-----------------------------------------
($ in thousands) 1998 1997
---------------- ---------------
<S> <C> <C>
Net interest income $ 260
Net gain on sale of mortgage loans 3,482
Other income (2)
---------------- ---------------
Total production revenue 3,740
---------------- ---------------
Salary and employee benefits 2,920
Occupancy expense 389
General and administrative expenses 843
---------------- ---------------
Total production expenses 4,152
---------------- ---------------
Net pre-tax production margin (412)
---------------- ---------------
Servicing fees 1,812
Amortization of mortgage servicing rights 654
---------------- ---------------
Net pre-tax servicing margin 1,158
---------------- ---------------
Pre-tax income $ 746
---------------- ---------------
Production $ 362,622
Whole loan sales 362,622
Average commercial mortgage servicing portfolio $ 2,862,729
Total production revenue to whole loan sales 103 bps
Total production expenses to production 114 bps
---------------- ---------------
Net pre-tax production margin (11 bps)
---------------- ---------------
Servicing fees to average commercial mortgage servicing portfolio 13 bps
Amortization of mortgage servicing rights to average commercial
mortgage servicing portfolio 5 bps
---------------- ---------------
Net pre-tax servicing margin to average servicing portfolio 8 bps
---------------- ---------------
</TABLE>
Laureate Realty originates commercial mortgage loans for various insurance
companies and other investors, primarily in Alabama, Florida, Indiana, North
Carolina, South Carolina, Tennessee and Virginia. Substantially all loans
originated by Laureate Realty have been originated in the name of the investor,
and in most cases, Laureate Realty has retained the right to service the loans
under a servicing agreement with the investor. Most commercial mortgage loan
servicing agreements are short-term, and retention of the servicing contract is
dependent on maintaining the investor relationship.
Net Gain on Sale of Commercial Mortgage Loans
A reconciliation of gain on sale of commercial mortgage loans for the
periods indicated follows:
26
<PAGE> 27
<TABLE>
<CAPTION>
($ in thousands) For the Six Months Ended June 30,
-------------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Gross proceeds on sales of commercial mortgage loans $ 362,622
Initial unadjusted acquisition cost of commercial mortgage loans
sold 362,622
---------------- ----------------
Unadjusted gain on sale of commercial mortgage loans
Commercial mortgage and origination fees 2,981
---------------- ----------------
Unadjusted aggregate margin 2,981
Initial acquisition cost allocated to basis in commercial
mortgage servicing rights (SFAS No. 125) 501
---------------- ----------------
Net gain on sale of commercial mortgage loans $ 3,482
================ ================
</TABLE>
During the first six months of 1998, the commercial mortgage division
originated and sold approximately $363 million in commercial mortgage loans.
Commercial mortgage fees on these loans were $3.0 million or 82 basis points.
Origination fees are generally between 50 and 100 basis points on the loan
amount. In addition the commercial mortgage division allocated $500 thousand,
or 14 basis points, to basis in servicing rights retained on commercial
mortgage loans produced during the period.
Leasing Operations
Following is a summary of the revenues and expenses allocated to the
Company's small ticket equipment leasing operations for the periods indicated:
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-------------------------------------------------
($ in thousands) 1998 1997
-------------------- --------------------
<S> <C> <C>
Net interest income $ 1,982
Other income 425
-------------------- --------------------
Leasing production revenue 2,407
-------------------- --------------------
Salary and employee benefits 1,030
Occupancy expense 166
General and administrative expenses 1,264
-------------------- --------------------
Total lease operating expenses 2,460
-------------------- --------------------
Net pre-tax leasing production margin (53)
-------------------- --------------------
Servicing fees 509
-------------------- --------------------
Net pre-tax leasing margin $ 456
-------------------- --------------------
Average owned leasing portfolio $ 59,129
Average serviced leasing portfolio 62,595
==================== ====================
Average leasing portfolio $ 121,724
==================== ====================
Leasing production revenue to average owned portfolio 814 bps
Leasing operating expenses to average owned portfolio 832 bps
==================== ====================
Net pre-tax leasing production margin (18 bps)
==================== ====================
Servicing fees to average serviced leasing portfolio 163 bps
</TABLE>
27
<PAGE> 28
Substantially all of the Company's lease receivables are acquired from
independent brokers who operate throughout the continental United States and
referrals from independent banks. At June 30, 1998 the Company's managed lease
servicing portfolio was $125.0 million. Of this managed lease portfolio, $70.6
million was owned and $54.4 million was serviced for investors. The negative net
pre-tax leasing margin is primarily attributable to the size of the Company's
owned leasing portfolio. As this owned leasing portfolio is expanded,
management expects the net pre-tax leasing margin to improve.
Net Interest Income
Net interest income for the first six months of 1998 was $2.0 million. This
is an annualized net interest margin of 3.74% based upon average lease
receivables owned of $60.0 million and average debt outstanding of $34.4
million.
28
<PAGE> 29
The options, which will expire on October 30, 2005, November 8, 2006 and
November 12, 2006, respectively, were still outstanding at June 30, 1997.
RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 1998, COMPARED TO QUARTER ENDED
JUNE 30, 1997
Summary by Operating Division
Following is a summary of the allocated revenues and expenses for each of
the Company's operating divisions for the quarters ended June 30, 1998 and 1997,
respectively:
<TABLE>
<CAPTION>
Residential
--------------------------------
($ in thousands) Mortgage Production
--------------------- Agency-
Agency- Eligible Commercial
For the Quarter Ended June 30, 1998* Eligible Subprime Servicing Mortgage Leasing Other Consolidated
- ----------------------------------------- -------- -------- --------- ---------- ------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 2,133 $ 2,066 $ 131 $ 1,036 $ 93 $ 5,459
Net gain on sale of mortgage loans 35,724 7,211 1,520 44,455
Gain on sale of mortgage servicing rights $ 452 452
Servicing fees 9,110 897 241 164 10,.412
Other income 1,608 (258) 48 (4) 206 323 1,923
-------- ------- ------- ------- ------- ----- --------
Total revenues 39,465 9,019 9,610 2,544 1,483 580 62,701
-------- ------- ------- ------- ------- ----- --------
Salary and employee benefits 13,690 4,290 820 1,399 477 172 20,848
Occupancy expense 1,720 499 98 203 86 45 2,651
Amortization of mortgage servicing rights 6,347 327 6,674
General and administrative expenses 6,803 1,163 1,597 427 677 201 10,868
-------- ------- ------- ------- ------- ----- --------
Total expenses 22,213 5,952 8,862 2,356 1,240 418 41,041
-------- ------- ------- ------- ------- ----- --------
Income before income taxes 17,252 3,067 748 188 243 162 21,660
Income tax expense (6,983) (998) (303) (70) (107) (87) (8,548)
-------- ------- ------- ------- ------- ----- --------
Net income $ 10,269 $ 2,069 $ 445 $ 118 $ 136 $ 75 $ 13,112
======== ======= ======= ======= ======= ===== ========
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
Residential
--------------------------------
($ in thousands) Mortgage Production
--------------------- Agency-
Agency- Eligible Commercial
For the Quarter Ended June 30, 1997* Eligible Subprime Servicing Mortgage Leasing Other Consolidated
- ------------------------------------ -------- -------- --------- ---------- ------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 5,916 $ 5,916
Net gain on sale of mortgage loans 20,441 $ 4,782 25,223
Gain on sale of mortgage servicing rights $ 1,220 1,220
Servicing fees 7,803 7,803
Other income 157 157
-------- ------- ------- --- --------- ---- --------
Total revenues 26,514 4,782 9,023 40,319
-------- ------- ------- --- --------- ---- --------
Salary and employee benefits 11,935 2,263 682 14,880
Occupancy expense 1,576 196 78 1,850
Amortization of mortgage servicing rights 4,725 4,725
General and administrative expenses 4,619 629 1,620 6,868
-------- ------- ------- --- --------- ---- --------
Total expenses 18,130 3,088 7,105 28,323
-------- ------- ------- --- --------- ---- --------
Income before income taxes 8,384 1,694 1,918 11,996
Income tax expense (3,233) (653) (739) (4,625)
-------- ------- ------- --- --------- ---- --------
Net income $ 5,151 $ 1,041 $ 1,179 7,371
======== ======= ======= === ========= ==== ========
</TABLE>
* Revenues and expenses have been recorded on a direct basis to the extent
possible. Other than direct charges, management believes that revenues and
expenses have been allocated to the respective divisions on a reasonable
basis.
Agency-Eligible Mortgage Operations
Following is a comparison of the revenues and expenses allocated to the
Company's agency-eligible mortgage production operations.
<TABLE>
<CAPTION>
For the Quarter Ended June 30,
------------------------------
($ in thousands) 1998 1997
---------- ----------
<S> <C> <C>
Net interest income $ 2,133 $ 5,916
Net gain on sale of mortgage loans 35,724 20,441
Other income 1,608 157
---------- ----------
Total production revenue 39,465 26,514
---------- ----------
Salary and employee benefits 13,690 11,935
Occupancy expense 1,720 1,576
General and administrative expenses 6,803 4,619
---------- ----------
Total production expenses 22,213 18,130
---------- ----------
Net pre-tax production margin $ 17,252 $ 8,384
---------- ----------
Production $3,588,867 $2,593,691
Pool delivery 3,851,991 2,468,038
Total production revenue to pool delivery 102 bps 107 bps
Total production expenses to production 62 bps 70 bps
---------- ----------
Net pre-tax production margin 40 bps 37 bps
========== ==========
</TABLE>
30
<PAGE> 31
Summary
The production revenue to pool delivery ratio declined five basis
points, or 5%, for the second quarter of 1998 as compared to the second quarter
of 1997. Generally, net gain on sale of mortgage loans (93 basis points for 1998
versus 83 basis points for 1997) improved due to better overall execution into
the secondary markets. However, net interest income declined and offset this
improvement due to the relatively flatter yield curve environment. The
production expenses to production ratio decreased 8 basis points, or 11%, for
the second quarter of 1998 as compared to the second quarter of 1997. Generally,
this relates to better leverage of fixed operating expenses in the higher volume
production environment for the second quarter of 1998 versus the comparable
period of 1997. As a consequence of the foregoing, the Company's net
agency-eligible pre-tax production margin improved 3 basis points, or 8%, to 40
basis points while in absolute dollars it increased $8.9 million, or 106%.
Net Interest Income
The following table analyzes net interest income allocated to the Company's
agency-eligible mortgage production activities in terms of rate and volume
variances of the interest spread (the difference between interest rates earned
on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds).
<TABLE>
<CAPTION>
($ in thousands) Variance
Average Volume Average Rate Interest Attributable to
- ----------------------------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997 Variance Rate Volume
- ----------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Mortgages Held for Sale and
$1,217,037 $ 898,274 7.05% 8.12% Mortgage-Backed Securities $ 21,461 $ 18,233 $ 3,228 ($ 3,242) $ 6,470
--------------------------------------- ----------------------------------------------------
Interest Expense
$ 446,797 $ 427,889 4.67% 4.94% Warehouse Line $ 5,200 $ 5,267 (67) (300) 233
738,672 431,384 5.91% 5.41% Gestation Line 10,884 5,817 5,067 923 4,144
98,038 6.89% Servicing Secured Line 1,684 1,684 1,684
30,066 48,579 5.86% 6.47% Servicing Receivable Line 439 784 (345) (46) (299)
6,927 5,987 7.59% 8.28% Other Borrowings 131 124 7 (12) 19
Facility Fees & Other Charges 990 325 665 665
--------------------------------------- ----------------------------------------------------
$1,320,500 $ 913,839 5.87% 5.41% Total Interest Expense $ 19,328 $ 12,317 $ 7,011 $ 2,249 $ 4,762
--------------------------------------- ----------------------------------------------------
1.18% 2.71% Net Interest Income $ 2,133 $ 5,916 ($ 3,783) ($ 5,491) $ 1,708
================== ====================================================
</TABLE>
Net interest income from agency-eligible product decreased 64% to $2.1
million for the second quarter of 1998 compared to $5.9 million for the second
quarter of 1997. The 153 basis point decrease in the interest-rate spread was
primarily the result of the narrower spreads between long and short-term rates
in the second quarter of 1998 compared to the second quarter of 1997. The
Company's mortgages and mortgage-backed securities are generally sold and
replaced within 30 to 35 days. Accordingly, the Company generally borrows at
rates based upon short-term indices, while its asset yields are primarily based
upon long-term mortgage rates.
31
<PAGE> 32
Net Gain on Sale of Agency-eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for the
periods indicated follows:
<TABLE>
<CAPTION>
($ in thousands) For the Quarter Ended June 30,
------------------------------
1998 1997
----------- ----------
<S> <C> <C>
Gross proceeds on sales of mortgage loans $ 3,877,635 $2,584,544
Initial unadjusted acquisition cost of mortgage loans sold, net of
hedge results 3,875,380 $2,582,193
----------- ----------
Unadjusted gain on sale of mortgage loans 2,255 2,351
Loan origination and correspondent program administrative fees 10,866 7,635
----------- ----------
Unadjusted aggregate margin 13,121 9,986
Acquisition basis allocated to mortgage servicing rights (SFAS No. 125) 23,216 9,614
Net change in deferred administrative fees (613) 841
----------- ----------
Net gain on sale of agency-eligible mortgage loans $ 35,724 $ 20,441
=========== ==========
</TABLE>
The Company sold agency-eligible loans during the second quarter of 1998
with an aggregate unpaid principal balance of $3.9 billion compared to sales of
$2.6 billion for the second quarter of 1997. The amount of proceeds received on
sales of mortgage loans exceeded the initial unadjusted acquisition cost of the
loans sold by $2.3 million (6 basis points) for the second quarter of 1998 as
compared to $2.4 million (9 basis points) for the comparable period of the prior
year. The Company received loan origination and correspondent program
administrative fees of $10.9 million (28 basis points) on these loans during the
second quarter of 1998 and $7.6 million (30 basis points) during the second
quarter of 1997. The Company allocated $23.2 million (60 basis points) to basis
in mortgage servicing rights for loans sold in the second quarter of 1998 as
compared to $9.6 million (37 basis points) during the second quarter of 1997 in
accordance with Statement of Financial Accounting Standards (SFAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". Consequently, net gain on sale of agency-eligible mortgage
loans increased to $35.7 million for the second quarter of 1998 versus $20.4
million for the second quarter of 1997. The increase is primarily attributed to
better execution into the secondary markets.
32
<PAGE> 33
Subprime Mortgage Operations
Following is an analysis of the revenues and expenses allocated to the
Company's subprime mortgage production operations.
<TABLE>
<CAPTION>
For the Quarter Ended June 30,
------------------------------
($ in thousands) 1998 1997
--------- --------
<S> <C> <C>
Net interest income $ 2,066 $ 4,782
Net gain on sale of mortgage loans 7,211
Other income (258)
--------- --------
Total production revenue 9,019 4,782
--------- --------
Salary and employee benefits 4,290 2,263
Occupancy expense 499 196
General and administrative expenses 1,163 629
--------- --------
Total production expenses 5,952 3,088
--------- --------
Net pre-tax production margin $ 3,067 $ 1,694
--------- --------
Production $ 146,146 $ 87,001
Whole loan sales and securitizations 128,268 114,427
Total production revenue to whole loan sales and securitizations 703 bps 418 bps
Total production expenses to production 407 bps 355 bps
--------- --------
Net pre-tax production margin 296 bps 63 bps
========= ========
</TABLE>
Summary
During the second quarter of 1998, the Company produced $146.1 million of
subprime loans. The Company sold approximately $28.3 million (19%) of its second
quarter 1998 subprime production in whole loan transactions and delivered $100.0
million into the secondary markets through securitization transactions. Overall,
the Company operated during the second quarter of 1998 at a 2.96% pre-tax
subprime production margin. This compares to a 0.63% pre-tax subprime
production margin for the second quarter of 1997. The second quarter of 1997
was the first full quarter of operations for the subprime division.
Net Interest Income
<TABLE>
<CAPTION>
($ in thousands) Variance
Average Volume Average Rate Interest Attributable to
- ----------------------------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997 Variance Rate Volume
- ----------------------------------------- ----------------------------------------------------
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
Interest Income
Mortgages Held for Sale and
$ 140,149 9.83% Residual Certificates $ 3,445 $ 3,445 $ 3,445
- ----------------------------------------- ----------------------------------------------------
Interest Expense
$ 94,883 5.83% Total Interest Expense $ 1,379 $ 1,379 $ 1,379
- ----------------------------------------- ----------------------------------------------------
4.00% Net Interest Income $ 2,066 $ 2,066 $ 2,066
================== ====================================================
</TABLE>
Net interest income on subprime loans and accretion income on residuals was
$2.1 million, and the interest rate spread was 400 basis points, for the second
quarter of 1998. This was primarily the result of the larger interest rate
spreads possible for subprime product.
33
<PAGE> 34
Net Gain on Securitization and Sale of Subprime Mortgage Loans
A reconciliation of the gain on securitization of subprime mortgage loans
for the periods indicated follows:
<TABLE>
<CAPTION>
($ in thousands) For the Quarter Ended June 30,
------------------------------
1998 1997
--------- -------
<S> <C> <C>
Gross proceeds on securitization of subprime mortgage loans $ 99,370
Initial acquisition cost of subprime mortgage loans securitized, net
of fees 101,599
--------- -------
Unadjusted loss on securitization of subprime mortgage loans (2,229)
Initial capitalization of residual certificates 7,075
--------- -------
Net gain on securitization of subprime mortgage loans $ 4,846
========= =======
</TABLE>
The Company also sold subprime mortgage loans on a whole loan basis during
the first quarter of 1998. Whole loans are generally sold without recourse to
third parties with the gain or loss being calculated based on the difference
between the carrying value of the loans sold and the gross proceeds received
from the purchaser. No interest in these loans is retained by the Company.
A reconciliation of the gain on subprime mortgage whole loan sales for the
periods indicated follows:
<TABLE>
<CAPTION>
($ in thousands) For the Quarter Ended June 30,
------------------------------
1998 1997
-------- --------
<S> <C> <C>
Gross proceeds on whole loan sales of subprime mortgage loans $ 30,620 $119,209
Initial acquisition cost of subprime mortgage loans sold, net of fees 28,255 114,427
-------- --------
Net gain on whole loan sales of subprime mortgage loans $ 2,365 $ 4,782
======== ========
</TABLE>
34
<PAGE> 35
Agency-Eligible Mortgage Servicing
Following is a summary of the revenues and expenses allocated to the
Company's agency-eligible mortgage servicing operations for the quarters ended
June 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the Quarter Ended June 30,
------------------------------
($ in thousands) 1998 1997
---------- ----------
<S> <C> <C>
Servicing fees $ 9,110 $ 7,803
Other income 48
---------- ----------
Servicing revenues 9,158 7,803
---------- ----------
Salary and employee benefits 820 682
Occupancy expense 98 78
Amortization of mortgage servicing rights 6,347 4,725
General and administrative expenses 1,597 1,620
---------- ----------
Total loan servicing expenses 8,862 7,105
---------- ----------
Net pre-tax servicing margin 296 698
Gain on sale of mortgage servicing rights 452 1,220
---------- ----------
Net pre-tax servicing contribution $ 748 $ 1,918
========== ==========
Average owned servicing portfolio $9,107,296 $7,523,779
Servicing sold 2,269,219 2,071,902
Net pre-tax servicing margin to average servicing portfolio 1 bps 4 bps
Gain on sale of servicing to servicing sold 2 bps 6 bps
</TABLE>
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio declined three basis points primarily due to relatively larger
increases in amortization and general and administrative expenses. The increased
amortization expense is attributable to generally higher levels of mortgage
servicing rights held for sale which are carried at a higher basis than older
available-for-sale mortgage servicing rights and thus require a relatively
higher periodic amortization charge.
Overall, the servicing division contributed $0.7 million to second quarter
1998 pre-tax net income, a $1.2 million, or 61%, decrease from the $1.9 million
contribution for the second quarter of 1997.
Loan servicing fees were $9.1 million for the second quarter of 1998,
compared to $7.8 million for the second quarter of 1997, an increase of 17%.
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 second quarter of 1998 from $7.5 billion during the second quarter of
1997, an increase of 21%. Similarly, amortization of mortgage servicing rights
also increased to $6.3 million during the second quarter of 1998 from $4.7
million during the second quarter of 1997, an increase of 34%. The increase in
amortization is primarily attributable to the growth in the average balance of
the mortgage loans serviced and the higher basis in the servicing rights. As a
result, net servicing margin decreased 10% to $2.8 million during the second
quarter of 1998, from $3.1 million during the second quarter of 1997.
Included in loan servicing fees for the first quarters of 1998 and 1997 are
subservicing fees received by the Company of $154 thousand and $79 thousand,
respectively. The subservicing fees are associated with temporary subservicing
agreements between the Company and purchasers of mortgage servicing rights.
35
<PAGE> 36
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
<TABLE>
<CAPTION>
($ in thousands) For the Quarter Ended June 30,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Underlying unpaid principal balances of mortgage loans on
which servicing rights were sold during the period $ 2,269,219 $ 2,071,902
=========== ===========
Gross proceeds from sales of mortgage servicing rights $ 54,294 $ 44,918
Initial acquisition basis, net of amortization and hedge results 42,909 37,200
----------- -----------
Unadjusted gain on sale of mortgage servicing rights 11,385 7,718
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 125) (10,933) (6,498)
----------- -----------
Gain on sale of mortgage servicing rights $ 452 $ 1,220
=========== ===========
</TABLE>
During the second quarter of 1998, the Company completed seven sales of
mortgage servicing rights representing $2.3 billion of underlying unpaid
principal mortgage loan balances. This compares to ten sales of mortgage
servicing rights representing $2.1 billion of underlying unpaid principal
mortgage loan balances in the second quarter of 1997. The unadjusted gain on the
sale of mortgage servicing rights was $11.4 million (50 basis points) for the
second quarter of 1998, compared to $7.7 million (37 basis points) for the
second quarter of 1997. The Company reduced this unadjusted gain by $10.9
million in the second quarter of 1998, versus a $6.5 million reduction during
the second quarter of 1997, in accordance with SFAS No. 125.
Commercial Mortgage Operations
Following is a summary of the revenues and expenses allocated to the
Company's commercial mortgage production operations.
36
<PAGE> 37
<TABLE>
<CAPTION>
For the Quarter Ended June 30,
---------------------------------------
($ in thousands) 1998 1997
---------------- ---------------
<S> <C> <C>
Net interest income $ 131
Net gain on sale of mortgage loans 1,520
Other income (4)
---------------- ---------------
Total production revenue 1,647
---------------- ---------------
Salary and employee benefits 1,399
Occupancy expense 203
General and administrative expenses 427
---------------- ---------------
Total production expenses 2,029
---------------- ---------------
Net pre-tax production margin ($ 382)
================ ===============
Servicing fees $ 897
Amortization of mortgage servicing rights 327
---------------- ---------------
Net pre-tax servicing margin 570
---------------- ---------------
Pre-tax income $ 188
================ ===============
Production $ 170,107
Whole loan sales 170,107
Average commercial mortgage servicing portfolio 2,907,213
Total production revenue to whole loan sales 97 bps
Total production expenses to production 119 bps
---------------- ---------------
Net pre-tax production margin (22 bps)
================ ===============
Servicing fees to average commercial mortgage servicing portfolio 12 bps
Amortization of mortgage servicing rights to average commercial
mortgage servicing portfolio 4 bps
---------------- ---------------
Net pre-tax servicing margin to average servicing portfolio 8 bps
================ ===============
</TABLE>
Laureate Realty originates commercial mortgage loans for various insurance
companies and other investors, primarily in Alabama, Florida, Indiana, North
Carolina, South Carolina, Tennessee and Virginia. Substantially all loans
originated by Laureate Realty have been originated in the name of the investor,
and in most cases, Laureate Realty has retained the right to service the loans
under a servicing agreement with the investor. Most commercial mortgage loan
servicing agreements are short-term, and retention of the servicing contract is
dependent on maintaining the investor relationship.
Net Gain on Sale of Commercial Mortgage Loans
A reconciliation of gain on sale of commercial mortgage loans for the
periods indicated follows:
37
<PAGE> 38
<TABLE>
<CAPTION>
($ in thousands) For the Quarter Ended June 30,
-------------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Gross proceeds on sales of commercial mortgage loans $ 170,107
Initial unadjusted acquisition cost of commercial mortgage loans
sold 170,107
---------------- ----------------
Unadjusted gain on sale of commercial mortgage loans
Commercial mortgage and transaction processing fees 1,316
---------------- ----------------
Unadjusted aggregate margin 1,316
Initial acquisition cost allocated to basis in commercial
mortgage servicing rights (SFAS No. 125) 204
---------------- ----------------
Net gain on sale of commercial mortgage loans $ 1,520
================ ================
</TABLE>
During the second quarter of 1998, the commercial mortgage division
originated and sold approximately $170 million in commercial loans. Commercial
mortgage fees on these loans were $1.3 million, or 77 basis points. Origination
fees on commercial mortgages are generally between 50 and 100 basis points on
the loan amount. In addition the commercial mortgage division allocated $204
thousand, or 12 basis points, to basis in servicing rights retained on
commercial mortgage loans.
Leasing Operations
Following is a summary of the revenues and expenses allocated to the
Company's small ticket equipment leasing operations for the periods indicated:
<TABLE>
<CAPTION>
For the Quarter Ended June 30,
-------------------------------------------------
($ in thousands) 1998 1997
-------------------- --------------------
<S> <C> <C>
Net interest income $ 1,036
Other income 206
-------------------- --------------------
Leasing production revenue 1,242
-------------------- --------------------
Salary and employee benefits 477
Occupancy expense 86
General and administrative expenses 677
-------------------- --------------------
Total lease operating expenses 1,240
-------------------- --------------------
Net pre-tax leasing production margin $ 2
-------------------- --------------------
Servicing fees 241
-------------------- --------------------
Net pre-tax leasing margin $ 243
-------------------- --------------------
Average owned leasing portfolio $ 62,702
Average serviced leasing portfolio 59,249
-------------------- --------------------
Average leasing portfolio 121,951
==================== ====================
Leasing production revenue to average owned portfolio 792 bps
Lease operating expenses to average owned portfolio 791 bps
-------------------- --------------------
Net pre-tax leasing production margin 1 bps
==================== ====================
Servicing fees to average serviced portfolio 163 bps
</TABLE>
38
<PAGE> 39
Substantially all of the Company's lease receivables are acquired from
independent brokers who operate throughout the continental United States and
referrals from independent banks. At June 30, 1998 the Company's managed lease
servicing portfolio was $125.0 million. Of this managed lease portfolio, $70.6
million was owned and $54.4 million was serviced for investors. The one basis
point net pre-tax leasing margin is primarily attributable to the size of the
Company's owned leasing portfolio. As this owned leasing portfolio is expanded,
management expects the net pre-tax leasing margin to improve.
Net Interest Income
Net interest income for the second quarter of 1998 was $1.0 million. This
is an annualized net interest margin of 3.69% based upon average lease
receivables owned of $64.6 million and average debt outstanding of $38.6
million.
39
<PAGE> 40
FINANCIAL CONDITION
During the second quarter of 1998, the Company experienced a 5% decrease in
total production originated and acquired compared to the first quarter of 1998,
from $4.1 billion during the first quarter of 1998 to $3.9 billion during the
second quarter of 1998. The June 30, 1998, locked mortgage application pipeline
(mortgage loans not yet closed but for which the interest rate has been locked)
was approximately $1.3 billion and the application pipeline (mortgage loans for
which the interest rate has not yet been locked) was approximately $0.5 billion.
Mortgage loans held for sale and mortgage-backed securities totaled $1.3
billion at June 30, 1998, versus $1.2 billion at December 31, 1997, an increase
of 8%. The Company's servicing portfolio (exclusive of loans under subservicing
agreements) increased to $9.4 billion at June 30, 1998, from $7.1 billion at
December 31, 1997, an increase of 32%.
Short-term borrowings, which are the Company's primary source of funds,
totaled $1.3 billion at June 30, 1998, compared to $1.2 billion at December 31,
1997, an increase of 8%. The increase in the balance outstanding at June 30,
1998, resulted from increased funding requirements related to the increase in
the balance of mortgage loans held for sale and mortgage-backed securities.
There were $6.4 million in long-term borrowings at June 30, 1998, compared to
6.5 million at December 31, 1997, a decrease of 2%.
Other liabilities totaled $144 million as of June 30, 1998, compared to the
December 31, 1997, balance of $87 million, an increase of $57 million, or 66%.
The increase in other liabilities resulted primarily from an increase in the
volume of loans acquired through certain correspondent funding programs of the
Company.
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 mortgage servicing rights
and residual certificate valuation declines resulting from changes in interest
rates that can lead to changing prepayment speeds or other factors beyond the
Company's control. Management of the Company recognizes these challenges and
intends to continue to manage the Company accordingly.
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, $670 million warehouse line of credit provided by a
syndicate of unaffiliated banks that expires in July 1999. The credit agreement
includes covenants requiring the Company to maintain (i) a minimum net worth of
$185 million, plus net income subsequent to July 31, 1998, 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 Ginnie Mae, FHA, VA, Fannie Mae and Freddie Mac 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
40
<PAGE> 41
Company's ability (i) to pay dividends in any fiscal quarter which exceed 50% of
the Company's net income for the quarter or (ii) to engage significantly in any
type of business unrelated to the mortgage banking business, the servicing of
mortgage loans or equipment leasing.
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 in July 1999, 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 in
July 1999, and is secured by the Company's servicing portfolio designated as
"held-for-sale". A $50 million portion of the revolver facility matures in July
1999, 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 has also entered into a $200 million, 364-day term subprime
revolving credit facility, which expires in July 1999. 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, 1998. 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 note contains covenants
similar to those described above.
RBC has a 364-day $75 million revolving credit facility to provide financing
for its leasing portfolio. The warehouse credit agreement matures in July 1999,
and contains various covenants regarding characteristics of the collateral and
the performance of the leases originated and serviced by RBC and which restrict
RBC's ability to incur debt, encumber assets, other than as collateral for the
facility, sell assets, merge, declare or pay any dividends or change its
corporate by-laws or articles of incorporation.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems. For
reasons independent from the Year 2000 issue, the Company had already undertaken
an initiative to replace significant portions of its enterprise wide mortgage
systems. The new systems are Year 2000 compliant. This effort encompasses the
major systems that perform our mission
41
<PAGE> 42
critical functions. Several components have been installed and management has
targeted to complete these installations by December 31, 1998. The Company does
not believe that Year 2000 issues will have a material impact on its
correspondent and broker relationships. The Company is also communicating with
suppliers, dealers, financial institutions and others with which it does
business to coordinate Year 2000 conversion. The Company does not foresee a
material impact to the Company surrounding the Year 2000 compliance with such
correspondents, brokers, suppliers, dealers, financial institutions and others.
Direct costs associated exclusively with achieving Year 2000 compliance is not
expected to be material to the Company and will be incurred through 1999.
42
<PAGE> 43
Part II. OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds
Effective April 1, 1997, the Company issued 943,899 shares of its common
stock, par value $0.01 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 certain periods following the merger. All of the
contingent shares have been released as of June 30, 1998.
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 4. - Submission of Matters to a Vote of Security Holders
During the period of April 1, 1998, through June 30, 1998, the following
matters were submitted to a vote of security holders:
At the annual meeting of the shareholders of the Company on May 20,
1998, the shareholders elected Boyd M. Guttery, David W. Johnson, Jr.,
and Edward J. Sebastian to serve as directors of the Company for three
year terms expiring at the 2001 annual meeting of shareholders.
Mr. Guttery received 18,714,907 votes, 608,034 votes were withheld
with no votes against. Mr. Johnson received 18,715,433 votes, 607,508
votes were withheld with no votes against. Mr. Sebastian received
18,715,588 votes, 607,353 votes were withheld with no votes against.
Item 6. - Exhibits and Reports on Form 8-K
- (a) A list of exhibits filed with this Form 10-Q, along with the
exhibit index can be found on pages A to E following the
signature page.
- (b) none
43
<PAGE> 44
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, 1998
44
<PAGE> 45
INDEX TO EXHIBITS
Exhibit No. Description Page
- ----------- ----------- ----
3.1 Restated Certificate of Incorporation of the Registrant *
incorporated by reference to Exhibit 3.3 of the Registrant's
Registration No. 33-53980
3.2 Certificate of Amendment of Certificate of Incorporation of *
the Registrant incorporated by reference to Exhibit 3.2 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997
3.3 Certificate of Designation of the Preferred Stock of the *
Registrant incorporated by reference to Exhibit 4.1 of the
Registrant's Form 8-A filed on February 8, 1998
3.4 Amended and Restated Bylaws of the Registrant incorporated by *
reference to Exhibit 3.4 of the Registrant's Registration No.
33-53980
4.1 Specimen Certificate of Registrant's Common Stock incorporated *
by reference to Exhibit 4.1 of the Registrant's Registration
No. 33-53980
4.2 Rights Agreement dated as of February 6, 1998 between the *
Registrant and First Chicago Trust Company of New York
incorporated by reference to Exhibit 4.1 of the Registrant's
Form 8-A filed on February 8, 1998
4.3 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
4.4 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
4.5 Amendment No. 1 dated as of July 30, 1997 to and under the *
Second Amended and Restated Secured Revolving/Term Credit
Agreement dated as of July 31, 1996, among the Registrant, the
Banks and Co-Agents named therein and The Bank of New York as
Collateral Agent
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 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
10.3 Assignment and Assumption of Office Lease incorporated by *
reference to Exhibit 10.6 of the Registrant's Registration No.
33-53980
A
<PAGE> 46
Exhibit No. Description Page
- ----------- ----------- ----
10.4 (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
10.5 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
10.6 (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
10.7 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
10.8 Section 125 Plan incorporated by reference to Exhibit 10.17 of *
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993
10.9 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
10.10 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
10.11 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
10.12 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
10.13 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
10.14 Resource Bancshares Mortgage Group, Inc. Supplemental Executive ___
Retirement Plan
B
<PAGE> 47
Exhibit No. Description Page
- ----------- ----------- ----
10.15 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
10.16 Stock Investment Plan incorporated by reference to Exhibit 4.1 *
of the Registrant's Registration No. 33-87536
10.17 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
10.18 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
10.19 Amended Resource Bancshares Mortgage Group, Inc. Successor *
Employee Stock Ownership Trust Agreement dated December 1,
1994, between the Registrant and Marine Midland Bank
incorporated by reference to Exhibit 10.30 of the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1994
10.20 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
10.21 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
10.22 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
10.23 Amended and Restated Omnibus Stock Award Plan incorporated by *
reference to Exhibit 99.10 of the Registrant's Registration No.
333-29245 filed on December 1, 1997
10.24 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
10.25 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
10.26 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
10.27 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
C
<PAGE> 48
Exhibit No. Description Page
- ----------- ----------- ----
10.28 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
10.29 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
10.30 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
10.31 First Amendment to Amended and Restated Retirement Savings *
Plan dated as of November 8, 1996 incorporated by reference to
Exhibit 10.35 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996
10.32 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
10.33 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
10.34 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
10.35 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
10.36 First Amendment to the Formula Stock Option Plan incorporated *
by reference to Exhibit 99.8 of the Registrant's
Registration No. 333-29245 as filed on December 1, 1997
10.37 (A) Agreement of Merger dated April 18, 1997 between Resource *
Bancshares Mortgage Group, Inc., RBC Merger Sub, Inc. and
Resource Bancshares Corporation incorporated by reference to
Annex A of the Registrant's Registration No.333-29245
(B) First Amendment to Agreement of Merger dated April 18, *
1997 between Resource Bancshares Mortgage Group, Inc., RBC
Merger Sub, Inc. and Resource Bancshares Corporation
incorporated by reference to Exhibit 10.42 of the Registrant's
Quarterly Report on Form 10-Q for the period ended September
30, 1997
(C) Second Amendment to Agreement of Merger dated April 18, *
1997 between Resource Bancshares Mortgage Group, Inc., RBC
Merger Sub, Inc. and Resource Bancshares Corporation
incorporated by reference to Annex A of the Registrant's
Registration No. 333-29245
D
<PAGE> 49
Exhibit No. Description Page
- ----------- ----------- ----
10.38 (A) Mutual Release and Settlement Agreement between the *
Registrant, Lee E. Shelton and Constance P. Shelton dated
January 31, 1997 incorporated by reference to Exhibit 10.44 of
the Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 1997
(B) Amendment to Mutual Release and Settlement Agreement *
between the Registrant, Lee E. Shelton and Constance P.
Shelton dated January 31, 1997 incorporated by reference to
Exhibit 10.44 of the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1997
10.39 Note Agreement between the Registrant and UNUM Life Insurance *
Company of America dated May 16, 1997 incorporated by
reference to Exhibit 10.45 of the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1997
10.40 Second Amendment to the Non-Qualified Stock Option Agreement *
dated February 6, 1998 incorporated by reference to Exhibit
10.40 of the Registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 1998
10.41 Agreement and Release Form of Non-Qualified Stock Option *
Agreement incorporated by reference to Exhibit 10.41 of the
Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 1998
11.1 Statement re: Computation of Net Income per Share ___
27.1 Financial Data Schedule ___
- ----------------------------------
* Incorporated by reference
E
<PAGE> 1
EXHIBIT 10.14
ANY DISPUTE OR CONTROVERSY ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT
SHALL BE SUBJECT TO ARBITRATION PURSUANT TO THE RULES OF THE AMERICAN
ARBITRATION ASSOCIATION AND THE SOUTH CAROLINA UNIFORM ARBITRATION ACT.
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS, Resource Bancshares Mortgage Group, Inc. (the "Corporation")
desires to adopt and establish, effective as of January 1, 1998, a
non-qualified unfunded supplemental executive retirement plan to be known as
the Resource Bancshares Mortgage Group, Inc. Supplemental Executive Retirement
Plan" for the purpose of providing certain benefits for eligible employees, all
as more specifically provided for herein below;
NOW THEREFORE, the Corporation does hereby adopt and establish
effective as of January 1, 1998, the "Resource Bancshares Mortgage Group, Inc.
Supplemental Executive Retirement Plan" consisting of the terms and provisions
set forth in Articles I through VIII, inclusive, as follows:
ARTICLE I
NAME AND PURPOSE
Section 1.1 Name. The plan, as defined below, shall be known as
the Resource Bancshares Mortgage Group, Inc. Supplemental Executive Retirement
Plan."
Section 1.2 Purpose. The purpose of the plan is to provide
Eligible Employees, as defined below, of the Participating Employers, as
defined below, who become Participants, as defined below, in this Plan with
certain retirement benefits in accordance with the provisions of the Plan.
<PAGE> 2
ARTICLE II
CONSTRUCTION, DEFINITIONS AND APPLICABLE LAW
Section 2.1 Construction and Definitions.
(a) Construction. Article, section and paragraph headings have been
inserted for convenience of reference only in the Plan and are to be ignored in
any construction of the provisions hereof. If any provision of the Plan shall
for any reason be invalid or unenforceable, the remaining provisions shall
nevertheless be valid, enforceable and fully effective.
(b) Definitions. Whenever used in the Plan, unless the context
clearly indicates otherwise, the following terms shall have the following
meanings:
(1) Affiliated Corporation means
(A) any corporation more than fifty percent (50%) of whose
outstanding voting capital stock is owned by Resource Bancshares
Mortgage Group, Inc.;
(B) any corporation at least eighty percent (80%) of whose
outstanding voting capital stock and at least eighty percent (80%) of
each class of whose outstanding non-voting capital stock is owned by a
corporation more than fifty percent (50%) of whose outstanding voting
capital stock is owned by Resource Bancshares Mortgage Group, Inc.; or
(C) any corporation at least eighty percent (80%) of whose
outstanding voting capital stock and at least eighty percent (80%) of
each class of whose outstanding non-voting capital stock is owned by a
corporation described in subparagraph (B) above.
(2) Beneficiary means the Participant's spouse as of the
date benefits become payable under this Plan.
(3) Benefit Commencement Date means, with respect to a
Participant who becomes eligible for Normal Retirement, Early Retirement or
retirement pursuant to Section 4.4 the first day of the calendar quarter
(January 1, April 1, July 1, and October 1) following the
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<PAGE> 3
day in which such Participant becomes eligible for Normal Retirement, Early
Retirement or retirement pursuant to Section 4.4.
(4) Claim means a claim for benefits under the Plan.
(5) Claimant means a person making a Claim.
(6) Code means the Internal Revenue Code of 1986, as
amended from time to time, and references thereto shall include the valid
Treasury regulations thereunder.
(7) Corporation means Resource Bancshares Mortgage Group,
Inc., a Delaware corporation.
(8) Creditable Service means, with respect to a
Participant as of any date, such Participant's "Benefit Accrual Service" as of
such date determined in accordance with the provisions of the Retirement Plan.
(9) Early Commencement Adjustment Factor means, with
respect to a Participant eligible to receive Early Retirement Benefits, one
less one-third of one percent (0.33%) for each month that the Participant's
Benefit Commencement Date precedes the first day of the month coincident or
immediately preceding the date upon which the Participant reaches Normal
Retirement Age.
(10) Early Retirement means, with respect to a Participant,
such Participant's (1) having attained age fifty-five (55); (2) having
completed at least ten years of Creditable Service; (3) having separated from
Service; and (4) having elected to receive the Early Retirement Benefit.
(11) Early Retirement Benefit means, with respect to a
Participant eligible for Early Retirement, the difference between (1) the
product of 60% of Final Average Pay
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<PAGE> 4
multiplied by the Early Commencement Adjustment Factor, minus (2) the sum of
(a) Other Retirement Benefits, and (b) the Primary Insurance Benefit.
(12) Earnings means, with respect to a Participant, as of
any date, such Participants annual base salary of the Employee as shown by the
personnel records of the Participating Employers plus cash bonuses (with the
includible cash bonuses limited to $100,000) received by the Participant during
the applicable calendar year.
(13) Effective Date means, with respect to the Plan,
January 1, 1998.
(14) Eligible Employee means an Employee who is on the
executive committee of the Corporation or who has been designated as eligible
to become a Participant in the Plan pursuant to Section 3.1.
(15) Employee means a person employed by any of the
Participating Employers.
(16) Final Average Pay means, with respect to a Participant
as of any date, the highest amount obtainable by averaging the Earnings of a
Participant in any five calendar years out of the last ten calendar years
preceding the date of Retirement or termination of employment. In the case of a
Participant without five complete calendar years of Earnings, Final Average Pay
means, with respect to a Participant as of any date, the amount equal to twelve
times the Average Monthly Earnings. For purposes of this section, Average
Monthly Earnings means the quotient obtained by dividing (1) the sum of (a)
Earnings for each consecutive full calendar year for which the Participant has
been employed with a Participating Employer; (b) the product of Earnings for
the calendar year preceding the calendar years described in (a) above
multiplied by a fraction of which the numerator is the number of complete
consecutive months (ending on December 31st) for which the Participant has been
employed with a Participating Employer
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<PAGE> 5
during such calendar year and the denominator is twelve (12); and (c) the
product of Earnings for the calendar year succeeding the calendar years
described in (a) above multiplied by a fraction of which the numerator is the
number of complete consecutive months (beginning on January 1st and ending on
the date of Retirement of termination of employment) for which the Participant
has been employed with a Participant Employer during such calendar year and the
denominator is twelve (12); by (2) the number of complete consecutive months of
employment to which such Earnings are attributable (i.e., twelve for each year
described in (a) above plus the numerator of the fractions described in (b) and
(c) above).
(17) Management Compensation Committee means the
Compensation Committee of the Board of Directors of the Company if no such
Committee exists or is otherwise established then the Board of Directors of the
Company shall be deemed to be the Management Compensation Committee.
(18) Normal Retirement means, with respect to a
Participant, such Participant's (1) having attained Normal Retirement Age; (2)
having completed at least ten years of Creditable Service; (3) having separated
from Service; and (4) having elected to receive the Normal Retirement Benefit.
(19) Normal Retirement Age means, with respect to a
Participant, the attainment of age sixty-two (62).
(20) Normal Retirement Benefit means, with respect to a
Participant eligible for Normal Retirement, 60% of Final Average Pay less the
sum of (1) Other Retirement Benefits, and (2) the Primary Insurance Benefit.
(21) Other Retirement Benefits means, with respect to a
Participant, the benefit
5
<PAGE> 6
payable by the Retirement Plan to such Participant expressed as an annual
benefit payable as of the Benefit Commencement Date as a Qualified Joint and
Survivor Annuity plus, with respect to a Participant, the benefit payable by
the Pension Restoration Plan to such Participant expressed as an annual benefit
payable as of the Benefit Commencement Date as a Qualified Joint and Survivor
Annuity (whether or not the Participant elects to receive such benefits at
Normal Retirement, Early Retirement or retirement pursuant to Section 4.4). The
determination of the value of the joint and survivor annuities shall be based
on the actuarial equivalence factors as defined in the Retirement Plan.
(22) Participant means an Eligible Employee who has been
designated a participant in the Plan as provided in Section 3.2 of the Plan.
(23) Participating Employers means Resource Bancshares
Mortgage Group, Inc. and those Affiliated Corporations of Resource Bancshares
Mortgage Group, Inc. which in the future adopt the Plan pursuant to the
provisions of Section 7.1 hereof.
(24) Pension Restoration Plan means the RBMG, Inc. Pension
Restoration Plan, as amended and restated effective as of January 1, 1995, as
amended from time to time.
(25) Plan means the Resource Bancshares Mortgage Group,
Inc. Supplemental Executive Retirement Plan, as amended from time to time.
(26) Plan Committee means the committee described in
Article V hereof.
(27) Plan Year means the twelve (12) month period beginning
January 1 and ending December 31.
(28) Primary Insurance Benefit means the monthly amount of
benefits which a Participant is or would be entitled to receive at age 65, or
later if his unreduced primary
6
<PAGE> 7
insurance benefit commences at a later age, as a primary insurance amount under
the federal Social Security Act, as amended, as determined in accordance with
this subsection, whether or not he applies for such benefit, and even though he
may lose part or all of such benefit through delay in applying for it, by
making application for a reduced benefit, by entering into covered employment
or for any other reason. The amount of such Primary Insurance Benefit to which
the Participant is or would be entitled shall be estimated by the Plan
Committee for the purposes of the Plan as of the January 1 of the year in which
retirement or termination occurs on the following basis:
(1) For a Participant entitled to a Normal Retirement
Benefit, on the basis of the federal Social Security Act as
in effect on the January 1 coincident with or next preceding
his Normal Retirement Age (regardless of any retroactive
changes made by legislation enacted after said January 1); or
(2) For a Participant entitled to an Early Retirement
Benefit, on the basis of (i) the federal Social Security Act
as in effect on the January 1 coincident with or next
preceding the time his employment with the Company terminates
because of his early retirement (regardless of any
retroactive changes made by legislation enacted after said
January 1), and (ii) the benefit formula under the Social
Security Act that would be applicable to him at the date his
monthly benefits under the Social Security Act would equal
the primary insurance amount under the Social Security Act,
assuming no future compensation; or
(3) For a Participant who has terminated with a vested
benefit on the basis of (i) the federal Social Security Act
as in effect on the January 1 coincident with or next
preceding the time his employment with the Company terminates
(regardless of any retroactive changes made by legislation
enacted after said January 1), and (ii) the benefit formula
under the Social Security Act that would be applicable to him
at the date his monthly benefits under the Social Security
Act would equal the primary insurance amount under the Social
Security Act, assuming his employment, and Earnings in effect
at his termination of employment, continued to the date his
monthly benefits under the Social Security Act would equal
the primary insurance amount under the Social Security Act.
(29) Qualified Joint and Survivor Annuity means, for a
married participant, a retirement benefit which equal quarterly installments
are payable during the joint lifetime of the
7
<PAGE> 8
retired Participant and the Participant's spouse, and under which, upon the
earlier death of the retired Participant, 50% continues to be paid to the
Participant's spouse for the Participant's spouse's lifetime. For a single
Participant it shall mean a benefit payable in the form of an annuity for the
life of the Participant.
(30) Retirement Plan means the RBMG, Inc. Pension Plan
(effective as of January 1, 1994), as amended from time to time.
(31) Service means "Service" as defined in the Retirement
Plan.
Section 2.2. Applicable Law. The Plan shall be construed,
administered, regulated and governed in all respects under and by the laws of
the United States to the extent applicable, and to the extent such laws are not
applicable, by the laws of the State of South Carolina.
ARTICLE III
PARTICIPATION
Section 3.1. Eligibility. No person shall become a Participant
unless or until such person is or becomes an Eligible Employee. The names of
the initial Eligible Employees are contained on the attached Exhibit 3.2. In
addition, the Plan Committee, in its discretion, shall determine which
additional Employees of the Participating Employers shall become Eligible
Employees. Designation of Eligible Employees shall be made in such manner as
the Plan Committee shall determine from time to time.
Section 3.2. Designation of Participants. The names of the initial
Participants of the Plan are contained on the attached Exhibit 3.2. In
addition, the Plan Committee, as applicable, may designate an Eligible Employee
as a Participant for the purpose of permitting such individual to become a
Participant in the Plan.
8
<PAGE> 9
ARTICLE IV
BENEFITS
Section 4.1. General. The benefits to be provided by the Plan shall
be determined in accordance with the provisions of the Plan subject to selected
provisions of the Retirement Plan. Such benefits shall depend upon (i) the age
of such Participant upon termination of employment or retirement, as the case
may be, (ii) the amount of compensation of such Participant and (iii) such
Participant's Creditable Service at the time such Participant separates from
Service. A Participant with ten or more years of Creditable Service shall in
all events be entitled to benefits under the Plan. A Participant shall elect to
receive Early Retirement Benefits, Normal Retirement Benefits, or retirement
benefits pursuant to Section 4.4 by giving written notice, in such form and
manner as established by the Committee, to the Committee prior to the Benefit
Commencement Date.
Section 4.2. Normal Retirement. Subject to the provisions of
Article VI, upon the Normal Retirement of a Participant such Participant shall
become entitled to such Participant's Normal Retirement Benefit. Such
Participant's Normal Retirement Benefit shall be expressed as an annual benefit
payable as a Qualified Joint and Survivor Annuity payable for the lifetime of
the Participant and the Participant's Beneficiary beginning on such
Participant's Benefit Commencement Date. The total Normal Retirement Benefit
payable for such period shall be payable in equal quarterly installments. Such
quarterly installments shall commence on such Participant's Benefit
Commencement Date and continue on the first day of each calendar quarter
(January 1, April 1, July 1 and October 1) thereafter until the later of the
death of the Participant or the death of the Participant's Beneficiary.
9
<PAGE> 10
Section 4.3. Early Retirement. Subject to the provisions of Article
VI, upon the Early Retirement of a Participant such Participant shall become
entitled to such Participant's Early Retirement Benefit. Such Participant's
Early Retirement Benefit shall be expressed as an annual benefit payable as a
Qualified Joint and Survivor Annuity payable for the lifetime of the
Participant and the Participant's Beneficiary beginning on such Participant's
Benefit Commencement Date. The total Early Retirement Benefit payable for such
period shall be payable in equal quarterly installments. Such quarterly
installments shall commence on such Participant's Benefit Commencement Date and
continue on the first day of each calendar quarter (January 1, April 1, July 1,
and October 1) thereafter until the later of the death of the Participant or
the death of the Participant's Beneficiary.
Section 4.4. Certain Separations From Service after a Change in
Control. In the event of a Change in Control (as described in Section 6.3) and
the Participant is involuntarily terminated without Cause, the acquiring
company terminates the Plan, or the Participant separates from service for Good
Reason, such Participant shall be vested for benefits under this Plan according
to the following schedule:
<TABLE>
<CAPTION>
Creditable Service Vesting Percentage
- ------------------ ------------------
<S> <C>
1 30%
2 40%
3 50%
4 60%
5 70%
6 80%
7 90%
8 100%
</TABLE>
Upon the Participant's attaining age 62 and in the absence of the Participant's
electing to receive the Optional Early Retirement Benefit (described below),
the Participant shall be entitled to
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<PAGE> 11
receive a retirement benefit equal to the Normal Retirement Benefit multiplied
by the applicable Vesting Percentage. This retirement benefit shall be paid in
accordance with the provisions of Section 4.2. Upon the Participant's attaining
age 55, the Participant shall be entitled to elect to receive an Optional Early
Retirement Benefit equal to the Early Retirement Benefit multiplied by the
applicable Vesting Percentage. This retirement benefit shall be paid in
accordance with the provisions of Section 4.3.
For purposes of this section, "Cause" shall mean (i) a material breach
by the Participant of the Participant's obligation to the Corporation (other
than as a result of incapacity due to physical or mental illness) which is
demonstrably willful and deliberate on the Participant's part, which is
committed in bad faith or without reasonable belief that such breach is in the
best interest of the Corporation and which is not remedied in a reasonable
period of time after receipt of written notice from the Corporation specifying
such breach or (ii) the conviction of the Participant of a felony involving
moral turpitude.
For purposes of this section, "Good Reason" shall mean the (i)
Participant's determination that as a result of a change in circumstances
occurring following a Change in Control significantly effecting his position,
he can no longer adequately exercise his authority, power, functions or duties
of his position; (ii) Participant's determination that he can no longer perform
his duties by reason of a substantial diminution of his responsibilities,
status, or position; or (iii) the Corporation requiring the Participant to
relocate to an area 100 miles outside of the Participant's place of business as
of the date of the Change in Control.
Section 4.5. Death Benefits.
(a) Death After Separation from Service. In the event a Participant
separates from
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<PAGE> 12
Service after becoming eligible for Normal Retirement or Early Retirement, but
such Participant dies prior to such Participant's Benefit Commencement Date,
the benefits payable under the Qualified Joint and Survivor Annuity shall be
paid to such Participant's Beneficiary, if any, commencing on the Benefit
Commencement Date. In the event a Participant entitled to benefits pursuant to
Section 4.4 dies prior to receipt of benefits under Section 4.4, the benefits
shall be paid to such Participant's Beneficiary, if any, in accordance with the
provisions of Section 4.5(b).
(b) Death While in Service. In the event a Participant (having
completed at least ten years of Creditable Service) dies while in Service, the
Participant's Beneficiary shall be paid a death benefit equal to 50% of the
Participant's Early Retirement Benefit or, if applicable, the Normal Retirement
Benefit. In the event that the Participant had not yet attained age 55, the
death benefit shall be equal to 50% of the Participant's Early Retirement
Benefit. The death benefit provided herein shall be expressed as an annual
benefit payable for life of the Beneficiary with the initial quarterly payment
beginning on the first day of the calendar quarter (January 1, April 1, July 1,
October 1) following the calendar quarter in which such Participant dies except
that in the event the Participant had not yet attained age 55 such benefit
shall not be payable until such time as the Participant would have attained age
55 but for his death. The total death benefit payable shall be payable in equal
quarterly installments. Such quarterly installments shall commence on the first
day of the calendar quarter following the quarter in which such Participant
dies (or, in the event of a Participant dying before age 55, the date the
Participant would have attained age 55) and continue on the first day of each
calendar quarter thereafter until the death of the Beneficiary.
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<PAGE> 13
(c) Article VI Controlling. The provisions of this Section 4.5 shall
be subject to the provisions of Article VI.
Section 4.6. Additional Payments by Corporation. In the event it is
determined that any payment or distribution under this Plan would be or is
subject to the excise tax imposed by Section 4999 of the Code or any interest
or penalties are incurred by a Participant with respect to such excise tax
(such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the Excise Tax), the Corporation shall
make an additional payment ("Gross-Up Payment") in an amount such that after
payment by the Participant of all taxes (including any interest or penalties
imposed with respect to such taxes), including without limitation, any income
taxes (any interest and penalties imposed with respect thereto) and Excise Tax
imposed on the Gross-Up Payment, the Participant retains an amount equal to the
Excise Tax imposed on the benefit provided under the Plan.
All determinations required to be made under this section, including,
whether and when a Gross-Up Payment is required and the amount of the Gross-Up
Payment and the assumptions to be utilized in arriving at such determinations,
shall be made by an accounting firm (the "Accounting Firm") selected by the
members of the Plan Committee (as of the date of the Change in Control). Prior
to or upon a Change in Control, the Plan Committee shall select an Accounting
Firm and the Accounting Firm shall make appropriate computations of Gross-Up
Payments for benefits paid and payable under the Plan after the Change in
Control. All fees and expenses of the Accounting Firm shall be borne solely by
the Corporation. Any Gross-Up Payment shall be paid by the Corporation within
ten days of the Participant's and the Corporation's receipt of the computation
of the amount of the Gross-Up Payment (including
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<PAGE> 14
detailed supporting calculations). If the Accounting Firm determines that no
Excise Tax is payable by a Participant, the Accounting Firm shall furnish to
the Participant a written confirmation that failure to report the Excise Tax on
the Participant's applicable federal income tax return would not result in the
imposition of a negligence or similar penalty. The Participant shall notify the
Corporation in writing of any claim by the Internal Revenue Service that, if
successful, would require the payment by the Corporation of the Gross-Up
Payment.
ARTICLE V
PLAN COMMITTEE
Section 5.1. Appointment, Term of Office and Vacancy. The Plan
Committee shall consist of the Chairman of the Compensation Committee of the
Board of Directors, the Chief Executive Officer of the Corporation, the Vice
Chairman of the Corporation, and any additional individuals appointed by the
Board of Directors of the Corporation. The Board of Directors of the
Corporation shall have the absolute right to remove any member of the Plan
Committee at any time, with or without cause, and any member of the Plan
Committee shall have the right to resign at any time. If a vacancy in the Plan
Committee should occur, from death, resignation, removal or otherwise, a
successor shall be appointed by the Board of Directors of the Corporation.
Section 5.2. Organization of Plan Committee. The Plan Committee
shall designate one of the members of the Plan Committee to serve as its
Chairman, one member as its Vice-Chairman and one member as its Secretary. One
person may hold more than one office. The Plan Committee, as it may deem
necessary for the effective performance of its duties, may
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<PAGE> 15
designate one person as agent to act for the Plan Committee and may delegate to
such agent such powers and duties, whether ministerial or discretionary, as the
Plan Committee may delegate. The Plan Committee shall act by majority vote and
may adopt such bylaws, rules and regulations as it deems desirable for the
conduct of its affairs. The members of the Plan Committee shall serve as such
without compensation.
Section 5.3. Powers of the Plan Committee. The Plan Committee shall
administer the Plan. The Plan Committee shall have all the powers to enable it
to carry out its duties under the Plan properly. Not in limitation of the
foregoing, the Plan Committee shall have the power to construe and interpret
the Plan and determine all questions that shall arise thereunder. It shall
decide all questions arising with respect to the interpretation of the Plan and
shall have such other and further specified duties, powers, authority and
discretion as are elsewhere in the Plan either expressly or by necessary
implication conferred upon it. The decision of the Plan Committee upon all
matters within the scope of its authority shall be final and conclusive on all
persons, except to the extent otherwise provided by law.
Section 5.4. Expenses of Plan Committee. The reasonable expenses of
the Plan Committee incurred by the Plan Committee in the performance of its
duties under the Plan, including without limitation, reasonable counsel fees
and expenses of other agents, shall be paid by the Participating Employers.
ARTICLE VI
AMENDMENT AND TERMINATION
Section 6.1. Amendment and Termination of the Plan. Except as
provided in Section 6.3, the Participating Employers expressly reserve the
right, at any time and from time to time,
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<PAGE> 16
to amend in whole or in part any of the terms and provisions of the Plan and to
terminate the Plan for whatever reasons the Participating Employers may deem
appropriate. The Management Compensation Committee shall have authority to so
amend or terminate the Plan on behalf of the Participating Employers in all
respects. Any such amendment or termination of the Plan shall be effected by an
instrument in writing duly executed and acknowledged on behalf of the
Participating Employers which amendment shall become a part of the Plan. Upon
termination of the Plan the benefits accrued by each Participant as of the date
of termination shall become vested in accordance with the schedule in Section
4.4 and the actuarial equivalent of such accrued benefits (utilizing the
actuarial assumptions contained in Section 2.1(b)(21)) shall be paid to such
Participants in a lump sum as if such Participant has separated from service
immediately following the date of termination. Furthermore the Plan may not be
amended to retroactively reduce or modify any Participant's accrued benefit as
provided by the Plan.
Section 6.2 Income Tax Aspects of the Plan. The Participating
Employers have established the Plan and shall maintain the Plan based on
certain "assumptions" regarding the income tax aspects of the Plan. Such
"assumptions" include (i) the applicability of Section 451(a) of the Code to a
participant's recognition of gross income as a result of participation in the
Plan and (ii) the applicability of Section 404(a)(5) of the Code to the
benefits paid by the Participating Employers to Participants under the Plan.
Section 6.3. Change in Control. For purposes of this Agreement, the
term "control" means the power to directly or indirectly direct or cause the
direction of the management or indirectly direct or cause the direction of the
management or policies of the Participating Employers. A change in control
shall be deemed to have occurred for purposes of this
16
<PAGE> 17
agreement: (i) upon the merger of the Participating Employers with or into or
the consolidation of the Participating Employers with another corporation
where, as a result of such merger or consolidation, the shareholders of the
Participating Employers immediately prior to such merger or consolidation do
not own at least a majority of the voting power of the resulting or surviving
corporation or the corporation whose securities were issued in connection
therewith, as the case may be; or (ii) upon the sale of all or substantially
all the assets of the Participating Employers; or (iii) if any person is or
becomes the beneficial owner, directly or indirectly, of securities of the
Participating Employers representing 25% or more of the votes that could then
be cast in an election for the Participating Employers' Board of Directors; or
(iv) if less than a majority of the members of the Participating Employers'
Board of Directors during any period of 24 consecutive months continues to be
composed of persons who were serving as directors at the beginning of any such
24-month period or who were persons elected as directors by the vote of at
least two-thirds of the directors then still in office who were directors at
the beginning of such 24-month period. When two or more persons act as a
partnership, limited partnership, syndicate, or other group for the purpose of
acquiring, holding or disposing of securities of an issuer, such partnership,
syndicate or group shall be deemed a "person" for the purposes of this
definition of "change in control." For the purposes of the definition of
"change in control" of the Participating Employer, a beneficial owner of a
security includes any person, who directly or indirectly, pursuant to a
contract, arrangement, understanding, relationship or otherwise has: (A) voting
power which includes the power to vote, or to direct the voting of, such
security; and/or (B) investment power which includes the power to dispose, or
to direct the disposition of, such security. For purposes of this definition of
change in control, the "Participating
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<PAGE> 18
Employers" shall mean only Resource Bancshares Mortgage Group, Inc.
ARTICLE VII
MISCELLANEOUS
Section 7.1. Adoption by an Affiliated Corporation. An Affiliated
Corporation may, with the approval of the Management Compensation Committee and
the Board of Directors of such Affiliated Corporation, elect to adopt the Plan
as of the date mutually agreeable to the Management Compensation Committee and
the Board of Directors of such Subsidiary Corporation. Any such adoption of the
Plan by a Subsidiary Corporation shall be evidenced by an appropriate
instrument of adoption executed by such Subsidiary Corporation.
Section 7.2. Authorization and Delegation to the Management
Compensation Committee. Each Affiliated Corporation which is or hereafter
becomes a Participating Employer authorizes and empowers the Management
Compensation Committee or, if applicable, the Plan Committee (i) to amend or
terminate the Plan without further action by said Affiliated Corporation as
provided in Article VI and (ii) to perform such other acts and do such other
things as the Management Compensation Committee or Plan Committee is expressly
directed, authorized or permitted to perform or do as provided herein.
Section 7.3. Spendthrift Clause. To the extent permitted by law, no
benefits payable under the Plan shall be subject to the claim of any creditor
of any Participant or to any legal process by any creditor of any Participant
and no Participant entitled to benefits hereunder shall have any right
whatsoever to alienate, commute, anticipate or assign any benefits under the
Plan.
Section 7.4. Benefits Payable From General Assets of the
Participating Employers. All benefits payable hereunder shall be paid from the
general assets of the Participating Employers.
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No assets of the Participating Employers shall be segregated or placed in trust
pursuant to the Plan in a manner which would put such assets beyond the reach
of the general creditors of any Participating Employer. The right of any
Participant (or Beneficiary) to receive any benefit hereunder shall be no
greater than the right of any general, unsecured creditor of the Participating
Employers. Nothing contained in the Plan shall create or be construed as
creating a trust of any kind or any other fiduciary relationship between the
Participating Employers and a Participant (or Beneficiary). In the event the
Participating Employers purchase any insurance policies insuring the life of
any Eligible Employee hereunder, no Eligible Employee shall have any rights
whatsoever therein and the Participating Employers shall be the sole owner and
beneficiary thereof and shall possess and exercise all incidents of ownership
therein.
Section 7.5. Successors and Assigns. This agreement shall inure to
the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees, and legatees. If the Participating Employers shall find that any
person to whom a payment is payable under this Agreement, has been adjudicated
incompetent or, by reason of illness or mental or physical disability, is
unable properly to handle his or her own affairs, then (unless a claim for such
payment has been made by a duly appointed guardian, committee or other legal
representative) such payment may be made to a relative or friend for such
persons' care or support, may be paid directly to a hospital, nursing home or
other creditor for such persons' benefit, or may be paid in such other manner
as the Participating Employers may determine, including payment to such person
himself. Any such payment shall be a complete discharge of the Participating
Employers' liability hereunder for such payment.
Section 7.6. Other Compensation. No payments under this Agreement
shall be deemed
19
<PAGE> 20
salary or other compensation to the Employee for the purpose of computing
benefits to which the Employee may be entitled under any pension plan or other
arrangement which the Participating Employers may have for the benefit of its
employees.
Section 7.7. Successors in Interest. The Participating Employers
will require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Participating Employers or of any division or subsidiary thereof
employing the Employee, to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Participating Employers
would be required to perform it if no such succession had taken place. Failure
of the Participating Employers to obtain such assumption and agreement prior to
the effectiveness of any such succession shall be a breach of the Agreement and
shall entitle the Employee to compensation from the Participating Employers in
the same amount and on the same terms as the Employee would be entitled
hereunder if the Employee terminated employment, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the date of termination.
Section 7.8 Arbitration. After the claimant has exhausted his
administrative remedies provided by the Plan, any dispute or controversy
arising under, or in connection with, this Agreement shall be settled
exclusively by arbitration in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction.
Section 7.9. Allocation of Costs of Benefits Among the
Participating Employers. The cost of benefits to be provided a Participant (or
Beneficiary) pursuant to this Plan shall be paid
20
<PAGE> 21
by the Participating Employer of such Participant. In the case of a transfer of
a Participant between Participating Employers, the Participating Employer to
whom such Participant is transferred shall assume the responsibility of the
Participating Employer from which such Participant is transferred without
further action, and the cost of benefits provided pursuant to the Plan shall be
allocated among the Participating Employers in proportion to the benefits
payable by each such Participating Employer pursuant to the Plan.
Section 7.10. Benefits Limited to the Plan. Participation in the
Plan shall not give a Participant any right to be retained in the employ of any
one or more of the Participating Employers nor, upon dismissal, any right or
interest in the Plan except as expressly provided herein.
ARTICLE VIII
CLAIMS PROCEDURE
Section 8.1 Claims Procedure.
(a) General. In the event that a Claimant has a Claim under the
Plan, such Claim shall be made by the Claimant's filing notice thereof with the
Plan Committee within ninety (90) days after such Claimant first has knowledge
of such Claim. Each Claimant who has submitted a Claim to the Plan Committee
shall be afforded a reasonable opportunity to state such Claimant's position
and to present evidence and other material relevant to the Claim to the Plan
Committee for its consideration in rendering its decision with respect thereto.
The Plan Committee shall render it decision in writing within sixty (60) days
after the Claim is referred to it, and a copy of such written decision shall be
furnished to the Claimant.
(b) Notice of Decision of Committee. Each Claimant whose Claim has
been denied
21
<PAGE> 22
by the Plan Committee shall be provided written notice thereof, which notice
shall set forth:
(i) the specific reason(s) for the denial;
(ii) specific reference to pertinent provision(s) of the
Plan upon which such denial is based;
(iii) a description of any additional material or
information necessary for the Claimant to perfect such Claim and an
explanation of why such material or information is necessary; and
(iv) an explanation of the procedure hereunder for review
of such claim; all in a manner calculated to be understood by such
Claimant.
(c) Review of Decision of Plan Committee. Each such Claimant shall
be afforded a reasonable opportunity for a full and fair review of the decision
of the Plan Committee denying the Claim. Such review shall be by the Management
Compensation Committee. Such appeal shall be made within ninety (90) days after
the Claimant received the written decision of the Plan Committee and shall be
made by the written request of the Claimant or such Claimant's duly authorized
representative of the Management Compensation Committee. In the event of
appeal, the Claimant or such Claimant's duly authorized representative may
review pertinent documents and submit issues and comments in writing to the
Management Compensation Committee. The Management Compensation Committee shall
review the following:
(i) the initial proceedings of the Plan Committee with
respect to such Claim;
(ii) such issues and comments as were submitted in writing
by the Claimant or the Claimant's duly authorized representative; and
(iii) such other material and information as the Management
Compensation Committee, in its sole discretion, deems advisable for a
full and fair review of the decision of the Plan Committee.
The Management Compensation Committee may approve, disapprove or modify the
decision of
22
<PAGE> 23
the Plan Committee, in whole or in part, or may take such other action with
respect to such appeal as it deems appropriate. The decision of the Management
Compensation Committee with respect to such appeal shall be made promptly, and
in no event later than sixty (60) days after receipt of such appeal, unless
special circumstances require an extension of such time within which to render
such decision, in which event such decision shall be rendered as soon as
possible and in no event later than one hundred twenty (120) days following
receipt of such appeal. The decision of the Management Compensation Committee
shall be in writing and in an manner calculated to be understood by the
Claimant and shall include specific reasons for such decision and set forth
specific references to the pertinent provisions of the Plan upon which such
decision is based. The Claimant shall be furnished a copy of the written
decision of the Management Compensation Committee. Such decision shall be final
and conclusive upon all persons interested therein, except to the extent
otherwise provided by applicable law.
IN WITNESS WHEREOF, the Corporation has caused this instrument to be
executed by their duly authorized officers all as of the 20 day of May,
1998.
RESOURCE BANCSHARES MORTGAGE
GROUP, INC.
[CORPORATE SEAL]
ATTEST: By: /s/ Edward J. Sebastian
-----------------------------
CHAIRMAN & C.E.O.
-----------------------------
/s/ John W. Currie
- ---------------------------
John W. Currie, Secretary
/s/ David W. Johnson, Jr.
-----------------------------
Vice Chairman
-----------------------------
23
<PAGE> 1
EXHIBIT 11.1
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE,
BASIC and DILUTED EARNINGS PER SHARE
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Six Months Ended For the Quarter Ended
June 30, 1998 June 30, 1998
--------------------------- -------------------------
<S> <C> <C>
Net Income $ 22,693 $ 13,112
Net Income per common share - basic (1) 0.98 0.57
Net income per common share - diluted (2) 0.97 0.56
</TABLE>
1) The number of common shares outstanding used to compute net income per
share - basic was 23,084,986 for the six months ended June 30, 1998,
and 23,102,831 for the quarter ended June 30, 1998.
2) Diluted earnings per share for the six months and the quarter ended
June 30, 1998, was calculated based on weighted average shares
outstanding of 23,464,004 and 23,511,620, respectively, which assumes
the exercise of options covering 1,844,555 shares and computes
incremental shares using the treasury stock method.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 15,494
<SECURITIES> 30,442
<RECEIVABLES> 155,835
<ALLOWANCES> 0
<INVENTORY> 1,212,514
<CURRENT-ASSETS> 1,656,392
<PP&E> 44,243
<DEPRECIATION> 13,508
<TOTAL-ASSETS> 1,703,932
<CURRENT-LIABILITIES> 1,460,136
<BONDS> 6,414
0
0
<COMMON> 315
<OTHER-SE> 237,067
<TOTAL-LIABILITY-AND-EQUITY> 1,703,932
<SALES> 49,640
<TOTAL-REVENUES> 117,072
<CGS> 59,296
<TOTAL-COSTS> 79,956
<OTHER-EXPENSES> 20,660
<LOSS-PROVISION> 4,016
<INTEREST-EXPENSE> 39,889
<INCOME-PRETAX> 37,116
<INCOME-TAX> 14,423
<INCOME-CONTINUING> 37,116
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,693
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.97
</TABLE>
