<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997 Commission File Number 000-21786
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
(Exact name of registrant as specified in its charter)
---------------------
Delaware 57-0962375
- ------------------------ ------------------------------------
(State of Incorporation) (IRS Employer Identification Number)
7909 Parklane Road
Columbia, South Carolina 29223
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(803) 741-3000
-------------------------------------------------
(Registrant's telephone no., including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of class
--------------
Common Stock, par value $.01 per share
(including rights attached thereto)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or in any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting and non-voting equity held by
non-affiliates of the registrant was $345,780,197.10 as of February 28, 1998,
based on the closing price of $15.56 per share of the registrant's Common
Stock, par value $.01 per share, on the NASDAQ National Market System on such
date.
As of February 28, 1998, 22,222,378 shares of the registrant's Common Stock,
par value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document of the Registrant Form 10-K Reference Locations
1997 Annual Report to Shareholders Parts II and IV
1998 Proxy Statement Part III
<PAGE> 2
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Form 10-K for the year ended December 31, 1997
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
----
PART I.
Item 1. Business 1
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II.
Item 5. Market for Registrant's Common Equity and Related 17
Stockholders Matters
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and 18
Results of Operation
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements With Accountants on Accounting and 18
Financial Disclosure
PART III.
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and Management 18
Item 13. Certain Relationships and Related Transactions 19
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports of Form 8-K 19
SIGNATURES 21
INDEX TO EXHIBITS A
<PAGE> 3
PART I
ITEM 1. BUSINESS
General
Resource Bancshares Mortgage Group, Inc. (the Company), was organized
to acquire and operate the residential mortgage banking business of Resource
Bancshares Corporation (RBC), which commenced operations in May 1989. The assets
and liabilities of the residential mortgage banking business of RBC were
transferred to the Company on June 3, 1993, when the Company sold 58% of its
common stock in an initial public offering. As a result, RBC retained a
significant ownership interest in the Company. On December 31, 1997, the Company
acquired RBC in a transaction in which it exchanged 9,894,889 shares of the
Company's common stock for all of the outstanding stock of RBC. Therefore, on a
consolidated basis, RBC no longer has an ownership interest in the Company.
RBC, through it's Republic Leasing Company division (Republic Leasing)
and its subsidiary, Laureate Realty Services, Inc. (Laureate Realty), have
engaged primarily in commercial small-ticket equipment lease financing and
servicing and commercial mortgage banking.
On April 1, 1997, the Company acquired Meritage Mortgage Corporation
(Meritage) in a transaction in which approximately $1.75 million of cash and
537,846 (564,738 shares as adjusted for stock dividends) shares of the Company's
common stock were exchanged for all the outstanding stock of Meritage. In
addition, 406,053 (426,355 shares as adjusted for stock dividends) shares of the
Company's common stock were issued and placed in escrow to be released
contingent upon Meritage achieving specified increasingly higher levels of
subprime mortgage production during the 31 months following the completion of
the merger. During the last six months of 1997, 270,702 (284,237 shares as
adjusted for stock dividends) shares of the contingent shares were released.
Meritage is a wholesale originator of subprime mortgages headquartered in
Portland, Oregon with offices in California, Washington and Colorado.
After consideration of the RBC and Meritage acquisitions, the Company
is now a diversified financial services company engaged primarily in the
business of mortgage banking, through the origination and purchase (through a
nationwide network of correspondents, brokers and retail offices), 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.
As part of its primary business focus, residential mortgage banking,
the Company purchases agency-eligible mortgage loans through its correspondents
and its wholesale division. The Company originates agency-eligible mortgage
loans through its retail division. The Company also purchases and originates
mortgage loans through its subprime division, which commenced operations in the
second quarter of 1997. Substantially all of the mortgage loans purchased and
originated by the Company are sold to institutional purchasers, including
national and regional broker/dealers, as mortgage-backed securities issued or
guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Substantially all the
agency-eligible mortgage loans are sold with the rights to service the loans
being retained by the Company. The servicing is either held in the Company's
portfolio or sold separately.
The Company receives loan servicing fees and subservicing fees on
agency-eligible loans it purchases through wholesale and correspondent
channels and loans originated through
1
<PAGE> 4
its retail channels. The Company also receives loan servicing fees on mortgage
servicing rights acquired through bulk acquisitions of servicing rights related
to loans originated by other lenders.
To further position itself as a nationwide producer and supplier of
mortgage loans and mortgage servicing, the Company intends to increase its
market penetration and the breadth of its mortgage origination sources,
particularly in the western and northeastern United States, by: (i) maintaining
corporate flexibility to operate in fluctuating mortgage markets; (ii) remaining
among the mortgage industry's lowest-cost producers; (iii) continuing its
commitment to high quality in underwriting and customer service; (iv) utilizing
advanced technology and (v) further developing its presence in the subprime
lending market. The Company also intends to expand its small-ticket equipment
lease portfolio and to increase its commercial mortgage loan production.
The Company does not hold any material trademarks, licenses, franchises
or concessions.
Residential Loan Production
Correspondent Division
The Company purchases closed mortgage loans through its network of
approved correspondent lenders. Correspondents are primarily mortgage lenders,
mortgage brokers, savings and loan associations and small commercial banks. At
December 31, 1997, the Company had 919 correspondents originating mortgage loans
in 49 states and the District of Columbia.
Loan production for the Company by correspondents is widely dispersed,
with the top 20 correspondents supplying the Company with just 29% of its dollar
volume of correspondent loans during 1997 compared to 35% in 1996. With the
increase in volume of production and the further development of correspondent
relationships during 1996 and 1997 over prior years, the Company further spread
the concentration of mortgage loan production volume over more correspondents,
thus reducing its dependence on selected individual correspondents. During 1997,
the top five correspondents accounted for approximately 13% of the year's
mortgage loan correspondent purchase volume. This compares to the top five
correspondents accounting for approximately 15% and 13.4%, of the mortgage loan
purchase volume during 1996 and 1995, respectively. No single correspondent
accounted for more than 3.3% of the Company's mortgage loan purchase volume in
1997. In 1996 and 1995, 3.4% and 4.5%, respectively, of the Company's total
mortgage loan purchase volume was acquired from the Company's highest-volume
correspondent.
Management believes that lending through correspondents is an efficient
and cost-effective method of producing loans because of the low fixed expenses
and capital investment required of the Company. Historically, retail mortgage
loan origination has involved higher fixed overhead costs such as offices,
furniture, computer equipment and telephones, as well as additional personnel
costs such as sales representatives. Because the correspondents incur the cost
of operating branch office networks and generating loans, the Company lowers its
cost structure and provides the correspondents with cost-efficient access to the
secondary loan markets. By emphasizing correspondent lending, the Company can
match its costs more directly with the volume of loans purchased, so that a
substantial portion of the Company's cost is variable rather than fixed.
Management also believes that, by emphasizing the correspondent origination
approach, the Company has greater flexibility to adjust to varying market
conditions. As conditions change, the Company can expand into new geographic
markets without incurring significant additional costs by utilizing existing and
new correspondents that operate in each new market. The use of correspondents
also enables the Company to exit markets easily if circumstances dictate.
2
<PAGE> 5
The Company attracts and maintains relationships with correspondents by
offering a variety of services that provide incentives for the correspondents to
sell mortgage loans to the Company. The Company's strategy with respect to its
correspondents is to provide a high level of service rather than the lowest
price. Services provided include timely underwriting and approval or rejection
of a loan (within 48 hours after receipt of a completed loan application),
timely purchase of loans (within 96 hours after being approved for acquisition),
seminars on how to process and prepare a loan application and updates on current
underwriting practices. In addition, the Company provides correspondents with a
variety of products and delivery capabilities and multiple means of funding
loans. As the mortgage lending market increases in sophistication and loan-price
differentials narrow among mortgage bankers, the Company believes that the level
of service and commitment it provides to its correspondents will be paramount to
its continued success. Management also believes that a correspondent generally
prefers to sell loans to a mortgage banker that is not competing with the
correspondent for retail originations.
Management believes that through correspondent lending it can manage
risks and maintain good quality control. Correspondents have to meet established
standards to be approved by the Veteran's Administration (VA), the U. S.
Department of Housing and Urban Development (HUD) or private mortgage insurance
companies. A correspondent qualifies to participate in the Company's
correspondent program only after a thorough review of its reputation and
mortgage lending expertise, including a review of references and financial
statements and a personal visit by one or more representatives of the Company.
After a correspondent qualifies for the Company's program, the Company closely
monitors the correspondent's performance in terms of delinquency ratios,
document exceptions and other pertinent data. Furthermore, all mortgage loans
purchased by the Company through correspondents are subject to various aspects
of the Company's underwriting criteria, and correspondents are required to
repurchase loans or otherwise indemnify the Company for its losses in the event
of fraud or misrepresentation in the origination process and for certain other
reasons, including noncompliance with underwriting standards.
All loan applications are subject to the Company's underwriting
criteria and the guidelines set forth by the Federal Housing Authority (FHA),
the VA, Ginnie Mae, Fannie Mae, Freddie Mac or private investors, as applicable.
The Company or the correspondent, in the case of a correspondent with delegated
underwriting authority, verifies each applicant's income and bank deposits, as
well as the accuracy of the other information submitted by the applicant, and
obtains and reviews a credit report from a credit reporting agency, a
preliminary title report and a real estate appraisal. Generally, delegated
underwriting authority is granted by the Company to its larger correspondents
and is granted only to correspondents who meet certain financial strength,
delinquency ratio, underwriting and quality control standards that the Company
has established for granting delegated underwriting authority to correspondents.
With respect to FHA and VA loans, HUD and the VA, respectively, have
established approval guidelines for the underwriting of loans to be covered by
FHA insurance or VA guaranty. The Company is approved by both HUD and the VA to
underwrite FHA and VA loans originated through its retail division as well as
loans submitted by specified correspondents and wholesale brokers. The Company
purchases FHA and VA loans only from those correspondents who are approved to
underwrite FHA and VA loans and from those correspondents for whom the Company
has been approved to underwrite FHA and VA loans. For those FHA and VA loans
purchased from correspondents and brokers, the appropriate FHA mortgage
insurance premium or VA funding fee must be remitted by the correspondent prior
to purchase by the Company.
The Company has implemented a quality control program to monitor
compliance with the Company's established lending and servicing policies and
procedures, as well as with applicable laws
3
<PAGE> 6
and regulatory guidelines. The Company believes that the implementation and
enforcement of its comprehensive underwriting criteria and its quality control
program are significant elements in the Company's efforts to purchase
high-quality mortgage loans and servicing rights. The Company's quality control
department examines loans in order to evaluate the loan purchasing function for
compliance with underwriting criteria. The quality control department also
reviews loan applications for compliance with federal and state lending
standards, which may involve reverifying employment and bank information and
obtaining separate credit reports and property appraisals.
Wholesale Division
As other financial institutions were exiting the wholesale mortgage
lending business, the Company made a decision in late 1994 to incorporate
expansion into the wholesale mortgage market into its primary business strategy.
Expansion into the wholesale mortgage banking business involves the
establishment of wholesale branch offices and the incurrence of the fixed
expenses associated with maintaining those offices. However, wholesale mortgage
purchases typically provide for higher profit margins than correspondent
production, and each branch office can serve a relatively sizable geographic
area compared to the retail market by establishing relationships with large
numbers of independent mortgage loan brokers who bear most of the cost of
identifying and interacting directly with loan applicants. Accordingly,
management believes that the wholesale division affords the Company an
opportunity to identify markets where higher profit margins and diversification
of the Company's sources of loan volumes can be appropriately balanced against
the increased earnings risks associated with a somewhat higher fixed-cost
structure.
At December 31, 1997, the Company had 15 wholesale branches, serving
approximately 3,046 brokers. The offices are located in Arizona (1), Colorado
(1), Florida (1), Georgia (1), Illinois (1), Maryland (1), Massachusetts (1),
Missouri (1), Nevada (1), North Carolina (1), Ohio (1), Texas (2), Utah (1) and
Washington (1). The Company receives loan applications through these brokers,
underwrites each loan, funds each loan at closing and prepares all closing
documentation. The wholesale branches also handle all shipping and follow-up
procedures on these loans. All loan applications processed by the wholesale
division are subject to underwriting and quality control comparable to the
standards used in the Company's correspondent lending program.
Retail Division
In mid-1995, the Company expanded into the retail mortgage banking
business in the Northeast. With the establishment of its retail subsidiary,
Intercounty Mortgage, Inc., operating through six branches located in New York
(4), New Jersey (1) and Pennsylvania (1), the Company began to originate
mortgage loans through its employees. From its organization in 1995 through
December 31, 1997, the retail division originated $1.6 billion in mortgage loans
using underwriting and quality control standards similar to the standards used
in the Company's correspondent lending and wholesale lending programs.
During late 1997, the Company began reviewing the compatibility of the
retail operation with its primary business focus. And on March 11, 1998, the
Company signed a definitive agreement with CFS Bank under which the Company will
sell the retail production franchise of Intercounty Mortgage, Inc. to CFS Bank.
Consummation of the transaction is subject to approval by the Office of Thrift
Supervision and certain other conditions. 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.
4
<PAGE> 7
Subprime Division
During the past several years the Company has diversified its sources
of production through de novo expansions into wholesale and retail operations.
In 1997, this basic business strategy was supplemented by further
diversification across markets through the Company's initial expansion into
subprime lending activities. In connection therewith, the Company acquired
Meritage in April 1997. The Company's subprime division produced $340 million or
3% of the Company's total production volume during 1997.
Management anticipates significant expansion of its subprime division
in 1998, as existing subprime wholesale branches reach full year production
levels, as additional wholesale subprime branches are opened and as subprime
operations are introduced and made available through the Company's existing 15
branch agency-eligible wholesale network, and in the future, as products are
introduced through the Company's existing nationwide correspondent production
channels.
The following table shows mortgage loan production volume by division
for each of the three years in the period ended December 31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
($ in Thousands) ----------- ---------- ----------
<S> <C> <C> <C>
Correspondent Division $ 7,893,583 $7,915,323 $6,252,008
Wholesale Division 1,868,726 1,411,643 673,201
Retail Division 675,411 668,759 210,565
----------- ---------- ----------
Total Agency-Eligible Loan Production $10,437,720 $9,995,725 $7,135,774
Subprime Division 339,574
----------- ---------- ----------
Total Loan Production $10,777,294 $9,995,725 $7,135,774
=========== ========== ==========
</TABLE>
The Company purchases and originates conventional mortgage loans and
mortgage loans insured by the FHA or partially guaranteed by the VA. All
mortgage loans purchased or originated by the Company are purchased or
originated for resale. Currently the majority of the Company's loans are
conforming loans, i.e., mortgage loans that qualify for inclusion in purchase
and guarantee programs sponsored by Fannie Mae, Freddie Mac and Ginnie Mae;
however, during 1997 the Company entered the subprime market, which provided the
Company with 3% of its total dollar volume of production for the year.
The Company purchases and originates a variety of mortgage loan
products that are designed, in conjunction with the requirements of prospective
purchasers of such loans, to respond to consumer needs and competitive factors.
In addition to 15-year and 30-year conventional mortgage loans and 15-year and
30-year FHA loans and VA loans, the Company purchases and originates products
designed to provide lower rates or lower principal and interest payments to
borrowers, including balloon mortgage loans that have relatively short maturity
dates (e.g., five or seven years) and longer amortization schedules (e.g., 25 or
30 years) and adjustable rate mortgage loans. The Company also purchases and
originates mortgage loans featuring a variety of combinations of interest rates
and discount points so that borrowers may elect to pay higher points at closing
and less interest over the life of the loan, or pay a higher interest rate and
reduce or eliminate points payable at closing. The portion of total loans held
for sale at any time that consists of a particular product type depends upon the
interest rate environment at the time such loans are made. The Company does not
believe that any of its products pose unusual risks.
5
<PAGE> 8
The following table shows mortgage loan production volume by type of
loan for each of the three years in the period ended December 31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
($ in Millions) 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CONVENTIONAL LOANS:
Volume $ 6,126.8 $ 6,197.3 $ 4,495.6
Percentage of total volume 57% 62% 63%
FHA/VA LOANS:
Volume $ 4,310.9 $ 3,798.4 $ 2,640.2
Percentage of total volume 40% 38% 37%
SUBPRIME LOANS
Volume $ 339.6
Percentage of total volume 3%
TOTAL LOANS:
Volume $ 10,777.3 $ 9,995.7 $ 7,135.8
Number of loans 99,349 98,237 72,792
Average loan size ($ in Thousands) $ 108.5 $ 101.8 $ 98.0
</TABLE>
The following table shows loan production volume by state for the year
ended December 31, 1997, for each state that represented 5% or more of the
Company's total loan production volume for 1997.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------
($ in Thousands) Percent of
State Amount Total
------------------------------- ---------------- ---------------
<S> <C> <C>
Illinois $ 948,669 8.80%
Minnesota 751,126 6.97%
Colorado 731,941 6.79%
Texas 725,837 6.73%
Massachusetts 614,362 5.70%
Georgia 605,336 5.62%
Florida 547,017 5.08%
All Other 5,853,006 54.31%
================ ---------------
TOTAL $ 10,777,294 100.00%
================ ===============
</TABLE>
Sale of Residential Loans
The Company customarily sells all residential mortgage loans that it
originates or purchases, retaining the mortgage servicing rights, which
currently are sold separately. Under ongoing programs established with Fannie
Mae and Freddie Mac, the Company aggregates its conforming conventional loans
into pools that are assigned to Fannie Mae or Freddie Mac in exchange for
mortgage-backed securities. The Company's FHA mortgage loans and VA mortgage
loans are generally pooled and sold in the form of Ginnie Mae mortgage-backed
securities. The Company pays certain fees to Freddie Mac, Fannie Mae or Ginnie
Mae, as applicable, in connection with these programs. The Company then sells
Freddie Mac, Fannie Mae and Ginnie Mae securities to securities dealers.
Substantially all of the Company's agency-eligible mortgage loans qualify under
the various Fannie Mae, Freddie Mac and Ginnie Mae program guidelines, which
include specific property and credit standards, including a loan size limit.
Subprime and non-conforming mortgage loans are sold to private investors through
whole loan sales or securitizations.
6
<PAGE> 9
In the case of conventional loans, subject to the obligations of any
primary mortgage insurer, the Company is generally at risk for any mortgage loan
default until the loan is sold (typically less than 45 days). Once the Company
sells the loan, the risk of loss from mortgage loan default and foreclosure
generally passes to the purchaser or insurer of the loan. In the case of FHA and
VA loans, the Company has, from the time such a loan is originated or purchased
until the first borrower payment is due, a minimum of 31 days to request
insurance or a guarantee certificate. Once the insurance or the guarantee
certificate is issued, the Company has no risk of default, except with respect
to certain losses related to foreclosures of FHA mortgage loans and losses that
exceed the VA's guarantee limitations. In connection with the Company's loan
exchanges and sales, the Company makes representations and warranties customary
in the industry relating to, among other things, compliance with laws,
regulations and program standards and as to accuracy of information. In the
event of a breach of these representations and warranties, the Company may
become liable for certain damages or may be required to repurchase such loans.
Typically, any flaws with respect to repurchased loans are corrected and the
loans are resold or are repurchased by the original correspondent pursuant to
prior agreement. Although the Company has not incurred losses in any material
respect as a result of mortgage loan repurchases due to breaches in
representations and warranties, there can be no assurance that the Company will
not experience such losses in the future.
Prior to the sale of originated or purchased mortgage loans, the
Company uses hedging techniques to reduce its exposure to interest rate risk.
The Company projects the portion of the pipeline loans that the Company
anticipates will close. The Company assesses the interest-rate risk associated
with the commitments that it has extended to originate or purchase loans and
evaluates the interest-rate risk of these commitments based upon a number of
factors, including the remaining term of the commitment, the interest rate at
which the commitment was provided, current interest rates and interest-rate
volatility. The Company constantly monitors these factors and adjusts its
hedging when appropriate throughout each business day. The Company's hedging
currently consists of utilizing a combination of mandatory forward sales
commitments on mortgage-backed securities and mortgage loans and options on
mortgage-backed securities.
The sale of mortgage loans may generate a gain or loss to the Company.
Gains or losses result primarily from two factors. First, the Company may
originate or purchase a loan at a price (i.e., interest rate and discount) that
may be higher or lower than the Company would receive if it immediately sold the
loan in the secondary market. These pricing differences occur principally as a
result of competitive pricing conditions in the primary loan origination market.
Second, gains or losses upon the sale of loans may result from changes in
interest rates that cause changes in the market value of the loans, or
commitments to originate or purchase loans, from the time the price commitment
is given to the customer until the time that the loan is sold by the Company to
the investor. To reduce the effect of interest-rate changes on the gain and loss
on loan sales, the Company generally commits to sell all its warehouse loans and
a portion of its pipeline loans to investors for delivery at a future time for a
stated price.
In connection with its loan sale program, which involves the sale of
mortgage loans and mortgage-backed securities on a forward or other deferred
delivery and payment basis, the Company has credit risk exposure to the extent
purchasers are unable to meet the terms of their forward purchase contracts. As
is customary in the marketplace, none of the forward payment obligations of any
of the Company's counterparties is currently secured or subject to margin
requirements, although the Company attempts to limit its credit exposure on
forward sales arrangements by entering into forward sales contracts solely with
institutions that the Company believes are sound credit risks, and by limiting
exposure to any single counterparty by selling to a number of investors. For
example, it is the
7
<PAGE> 10
Company's current policy, based on the Company's current size, that not more
than the lesser of (i) $350 million or (ii) 40% of the total forward purchase
contracts outstanding at any time be with any single counterparty. All
counterparties are obligated to settle such sales in accordance with the terms
of the related forward sale agreement.
Residential Loan Servicing
Residential loan servicing includes collecting and remitting mortgage
loan payments, accounting for principal and interest, holding escrow funds for
payment of mortgage-related expenses such as taxes and insurance, making
advances to cover delinquent payments, making inspections of the mortgaged
premises as required, contacting delinquent mortgagors, supervising foreclosures
and property dispositions in the event of unremedied defaults and generally
administering mortgage loans. A servicer's obligation to provide mortgage loan
servicing and its right to collect fees are set forth in a servicing contract.
Failure to service the mortgage loans in accordance with contract requirements
may lead to the termination of the servicing rights and the loss of future
servicing fees.
The Company's current strategy is to pool and sell a significant
percentage of its produced mortgage servicing rights to other approved
servicers. The Company currently follows a strategy of retaining a relatively
small portion of its produced mortgage servicing rights and exploring
opportunities to sell available-for-sale servicing rights in bulk transactions.
The Company's credit facilities require it to maintain at all times a mortgage
servicing rights portfolio with an underlying unpaid principal balance of at
least $4.0 billion. The Company's policy with respect to the sale, purchase or
retention of mortgage servicing rights may change in the future.
In addition to servicing its mortgage servicing rights portfolios, the
Company also subservices mortgage servicing rights portfolios during the period
of approximately 90 days between the date the Company has sold the related
servicing rights and the transfer date. In the future, the Company also may seek
other subservicing business.
The Company receives fees for servicing residential mortgage loans,
ranging generally from 0.25% to 0.44% per annum on the declining unpaid
principal balances of the loans. Servicing fees are collected by the Company
from monthly mortgage loan payments. Other sources of loan servicing revenues
include fees incidental to the services provided.
As a servicer of mortgage loans underlying mortgage-backed securities,
the Company is obligated to make timely payments of principal and interest to
security holders, whether or not such payments have been made by mortgagors on
the underlying mortgage loans. Similarly, in the event of foreclosure, the
Company is responsible for covering with its own funds principal and foreclosure
costs to the extent not covered by FHA insurance or a VA guarantee.
The following table shows the delinquency percentages (excluding
bankruptcies and foreclosures) of the Company's residential mortgage servicing
rights portfolio (excluding loans serviced under subservicing agreements) at
December 31, 1997.
Days Delinquent
30 2.13%
60 0.43%
90+ days 0.22%
-------------
Total Delinquencies 2.78%
=============
8
<PAGE> 11
At December 31, 1997, the Company's owned mortgage servicing rights
portfolio had an underlying unpaid principal balance of $7.1 billion. The
portfolio generally reflected characteristics representative of the then-current
market conditions and had a weighted average note rate of 7.69%, which is
somewhat higher than for current production.
In 1997, the Company produced or purchased servicing rights associated
with loans having an aggregate underlying principal balance of $10.8 billion and
had an average balance of aggregate underlying unpaid principal balance of loans
being serviced of $9.5 billion. Typically, the Company sells the majority of its
produced agency-eligible mortgage servicing rights between 90 days and 180 days
of purchase. Nevertheless, certain market and operating characteristics,
including original costs, adjusted basis, market values, coupon rates,
delinquency rates and current prepayment rates are considered to determine
whether mortgage servicing rights should be held for longer periods of time.
The following table provides certain information regarding the
Company's residential mortgage servicing rights portfolio at December 31, 1997.
<TABLE>
<CAPTION>
Percentage of
Unpaid Principal Total Unpaid
Year of Number of Percentage of Amount Principal
Origination Loans Total Loans ($ in Thousands Amount
--------------- --------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
1991 or earlier 3,355 4.3% $ 156,609 2.2%
1992 9,302 12.1% 640,625 9.0%
1993 11,743 15.2% 932,324 13.1%
1994 7,140 9.3% 644,322 9.1%
1995 2,794 3.6% 242,495 3.4%
1996 5,614 7.3% 579,925 8.1%
1997 37,181 48.2% 3,928,922 55.1%
--------- ------------ ---------------- --------------
Total 77,129 100.00% $ 7,125,222 100.00%
========= ============ ================ ==============
</TABLE>
The following table sets forth the Company's residential mortgage
servicing rights portfolio by loan type:
<TABLE>
<CAPTION>
($ in Thousands) At December 31, 1997
-------------------------------------------------------------------------------
Aggregate Weighted Weighted
Number Principal Average Average
Loan Type of Loans Balance Coupon Service Fee
- ------------------------------ ------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
FHA 14,504 $ 1,059,260 7.54% 0.5035%
VA 4,704 407,821 7.89% 0.4837%
FNMA 29,927 2,789,364 7.72% 0.4035%
FHLMC 20,022 2,042,698 7.85% 0.3402%
FmHA 5 282 9.07% 0.4400%
Private 1,099 86,543 8.31% 0.2855%
Warehouse 6,868 739,254 7.17% 0.3365%
------------- --------------- ----------------- ----------------
TOTAL 77,129 $ 7,125,222 7.69% 0.3993%
============= =============== ================= ================
</TABLE>
The Company's mortgage servicing rights portfolio is generally divided
into two segments. The portion of the portfolio that is generated by current
loan production is classified as "held-for-sale," and the portion of the
portfolio that was acquired through bulk acquisitions or retained for production
of servicing income is classified as "available-for-sale." The Company's
held-for-sale portfolio had an
9
<PAGE> 12
aggregate underlying unpaid principal balance of $2,928.4 million at December
31, 1997. The Company's available-for-sale portfolio had an aggregate underlying
unpaid principal balance of $4,196.8 million at December 31, 1997.
As the servicing rights of the available-for-sale portfolio are
generally held as a longer-term investment, there are certain prepayment risks
inherent to it that do not attach to the portion of the portfolio held-for-sale
(the portfolio held-for-sale is generally sold within 90 to 180 days). During
periods of declining interest rates, prepayments of mortgage loans increase as
homeowners seek to refinance at lower rates, resulting in a decrease in the
value of the Company's available-for-sale portfolio. Mortgage loans with higher
interest rates are more likely to result in prepayments. The following table
sets forth certain information regarding the aggregate underlying unpaid
principal balance of mortgage loans in the available-for-sale portfolio serviced
by the Company. The table includes both fixed and adjustable rate loans.
AVAILABLE-FOR-SALE PORTFOLIO
<TABLE>
<CAPTION>
($ in Thousands) At December 31, 1997
----------------------------------------------------
Aggregate Percentage of Total
Principal Unpaid Principal
Mortgage Interest Rate Balance Amount
- ------------------------- ----------------------- -----------------------
<S> <C> <C>
Less than 7.00% $ 398,071 9.48%
7.00% - 7.49% 578,209 13.78%
7.50% - 7.99% 1,165,881 27.78%
8.00% - 8.49% 1,124,313 26.79%
8.50% - 8.99% 694,563 16.55%
9.00% - 9.49% 156,054 3.72%
Greater than 9.49% 79,734 1.90%
----------------------- -----------------------
TOTAL $ 4,196,825 100.00%
======================= =======================
</TABLE>
10
<PAGE> 13
The following table sets forth the geographic distribution of the
Company's available-for-sale portfolio for those states representing more than
3% of the portfolio:
<TABLE>
<CAPTION>
($ in Thousands) At December 31, 1997
------------------------------------------------------
Aggregate Percent of
Principal Total Aggregate
State Balance Principal Balance Amount
- --------------------- ------------------- --------------------------------
<S> <C> <C>
Massachusetts $ 537,922 12.82%
Connecticut 396,194 9.44%
New York 385,572 9.19%
California 295,735 7.05%
Texas 289,305 6.89%
Florida 236,683 5.64%
New Jersey 180,250 4.29%
Ohio 174,387 4.16%
Illinois 141,518 3.37%
Georgia 130,001 3.09%
All others 1,429,258 34.06%
------------------- --------------------------------
TOTAL $ 4,196,825 100.00%
=================== ================================
</TABLE>
The following table sets forth certain information regarding the
aggregate underlying unpaid principal balance of the mortgage loans in the
held-for-sale portfolio serviced by the Company. The table includes both fixed
and adjustable rate loans.
HELD-FOR-SALE PORTFOLIO
<TABLE>
<CAPTION>
($ in Thousands) At December 31, 1997
--------------------------------------------------
Aggregate Percentage of Total
Principal Unpaid Principal
Mortgage Interest Rate Balance Amount
- ------------------------- ------------------------ -----------------------
<S> <C> <C>
Less than 6.00% $ 88,592 3.06%
6.00% - 6.49% 144,950 5.00%
6.50% - 6.99% 221,685 7.65%
7.00% - 7.49% 725,863 25.05%
7.50% - 7.99% 1,330,636 45.92%
8.00% - 8.49% 292,665 10.10%
8.50% - 8.99% 87,677 3.03%
Greater than 9.00% 5,387 0.19%
------------------------ -----------------------
TOTAL $ 2,897,455 100.00%
======================== =======================
</TABLE>
To help the Company manage its risk related to prepayments of its
servicing portfolio, the Company has purchased interest-rate floor contracts,
which provide an interest rate differential on a fixed portion of the portfolio
should interest rates fall below a certain level. For a more detailed discussion
of interest rate floor contracts, see Note 18 of the Company's Consolidated
Financial Statements, found in the Company's accompanying 1997 Annual Report to
Shareholders included herein and hereby incorporated by reference.
11
<PAGE> 14
Leasing Operations
The Company's leasing division, Republic Leasing, acquired on December
31, 1997, 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. At December 31,
1997 Republic Leasing managed a lease servicing portfolio of $123.5 million. Of
this managed lease portfolio, $49.1 million was owned and $74.4 million was
serviced for investors.
Commercial Mortgage Operations
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 insurance companies and other investors,
primarily in Alabama, Florida, Indiana, North Carolina, South Carolina,
Tennessee and Virginia. 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. At December 31, 1997,
Laureate Realty was servicing a commercial mortgage loan servicing portfolio of
$2,760.2 million.
Financing of Operations
The Company's primary cash-flow requirement involves the funding of
loan production, which is met primarily through external borrowings. The Company
has entered into a 364-day, $670 million warehouse line of credit provided by a
syndicate of unaffiliated banks that expires in July 1998. The credit agreement
includes covenants requiring the Company to maintain (i) a minimum net worth of
$130 million, plus net income subsequent to July 31, 1996, and capital
contributions and minus permitted dividends, (ii) a ratio of total liabilities
to net worth of not more than 8.0 to 1.0, excluding debt incurred pursuant to
gestation and repurchase financing agreements, (iii) its eligibility as a
servicer of 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 Company's ability to pay dividends in any fiscal quarter which exceed 50% of
the Company's net income for the quarter or to engage significantly in any type
of business unrelated to the mortgage banking business and the servicing of
mortgage loans.
Additionally, the Company entered into a $200 million, 364-day term
revolving credit facility with a syndicate of unaffiliated banks. An $80 million
portion of the revolver facility converts on July 29, 1998, into a four-year
term loan. The facility is secured by the Company's servicing portfolio
designated as "available-for-sale". A $70 million portion of the revolver
facility matures on July 29, 1998, and is secured by the Company's servicing
portfolio designated as "held-for-sale". A $50 million portion of the revolver
facility matures on July 29, 1998, and is secured by a first-priority security
interest in receivables on servicing rights sold. The facility includes
covenants identical to those described above with respect to the warehouse line
of credit.
The Company has also entered into a $200 million, 364-day term subprime
revolving credit facility, which expires in July 1998. The facility includes
covenants identical to those as described above with respect to the warehouse
line of credit.
The Company was in compliance with the above-mentioned debt covenants
at December 31, 1997. Although management anticipates continued compliance,
there can be no assurance that the
12
<PAGE> 15
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 $50 million revolving credit facility to provide
interim financing for its leasing portfolio. The warehouse credit agreement
matures in June 1998 and contains various covenants regarding characteristics of
the collateral and the performance of the leases originated and serviced by RBC
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 certificate of incorporation.
There can be no assurance that the Company will be able to comply with
the covenants in its various credit facilities, and failure to comply could
result in the loss of the related financing. In addition, there can be no
assurance that the Company will be able to renew these arrangements at the end
of their terms or obtain replacement financing on terms acceptable to the
Company. To the extent that the Company loses its financing sources, or if the
Company experiences difficulty in selling its mortgage loans or mortgage-backed
securities, it may have to curtail its mortgage loan origination and purchase
activities, which could have a material adverse effect on the Company's
operations and financial condition. However, management believes it will be able
to renew or, alternatively, obtain similar financing in the future on terms that
are satisfactory to the Company.
Seasonality
The residential mortgage banking industry is generally subject to
seasonal trends. These trends reflect the general pattern of resale of homes,
which typically peak during the spring and summer seasons and decline to lower
levels from mid-November through January. Refinancings tend to be less seasonal
and more closely related to changes in interest rates. The residential mortgage
servicing business is generally not subject to seasonal trends, except to the
extent that growth of the portfolio is generally higher in periods of greater
mortgage loan originations. The commercial mortgage and small-ticket equipment
leasing industries are generally not considered seasonal industries.
Competition
The mortgage banking industry is highly competitive. The Company
competes with financial institutions, mainly mortgage companies, commercial
banks and savings and loan associations and, to a certain extent, credit unions
and insurance companies. The Company competes principally by purchasing or
originating a variety of mortgage loans, emphasizing the quality of its service
and pricing the loans at competitive rates. Many of the Company's competitors
have financial resources that are substantially greater than those of the
Company. Many of the nation's largest mortgage companies and commercial banks
have a significant number of branch offices in areas in which the Company's
correspondents and wholesale and retail branches operate. Increased competition
for mortgage loans from larger lenders may result in a decrease in the volume of
loans purchased by the Company, thereby
13
<PAGE> 16
possibly reducing the Company's revenues. The Company does not have a
significant market share of mortgage banking activities in the areas in which it
conducts operations.
Both the small-ticket equipment leasing industry and the commercial
mortgage banking industry are highly competitive. The Company is subject to
competition from other equipment leasing and commercial mortgage banking
companies some of which may be better capitalized. The Company does not have a
significant market share of equipment leasing or commercial mortgage banking in
the areas in which it conducts operations.
Concentration
The Company typically sells the mortgage servicing rights associated
with its mortgage production into forward sales contracts. Additionally, from
time to time, the Company will sell residential mortgage servicing rights from
its available for sale portfolio. In 1997, approximately 37%, 36% and 11% of its
sales under these forward sales contracts were to three major customers. In 1996
approximately 46%, 23% and 16% of its sales under these forward sales contracts
were to three major customers.
The growth and profitability of the equipment lease business are
dependent to a large extent on its ability to finance an increasing balance of
leases held in portfolio or to sell leases to and service leases for third
parties. Currently, the Company has in place a $50 million lease financing
facility and an agreement to offer to sell equipment leases to only one client;
however, neither party is obligated to buy or sell. The client has acquired
leases on a regular basis from RBC since December 1996, but there is no
assurance of future sales. At December 31, 1997, approximately 19% and 10% of
the Company's net lease receivables were located in the states of California and
Florida, respectively. At December 31, 1997, approximately 18% and 11% of the
Company's net lease receivables were collateralized by computer equipment and
titled equipment, respectively. Otherwise, there are no geographic, equipment
type or lessee industry concentrations greater than 10%.
At December 31, 1997, 40% of commercial mortgage loans serviced were
for a single customer. In addition, at December 31, 1997, the Company was
servicing $74,405 of leases for third parties, 94% of which was serviced for a
single customer. The loss of these clients could have a material adverse effect
on the equipment leasing and commercial mortgage businesses.
Fluctuations in Performance
The Company's operating results can fluctuate substantially from period
to period as a result of a number of factors, including the volume of loan
production, interest rates, the level of amortization of mortgage servicing
rights required by prepayment rates and the performance of the Company's
servicing portfolio hedge. In particular, the Company's results are strongly
influenced by the level of loan production, which is influenced by the
interest-rate environment and other economic factors. Accordingly, the net
income of the Company may fluctuate substantially from period to period.
Regulation
The operations of the Company are subject to extensive regulation by
federal and state governmental authorities and are subject to various laws and
judicial and administrative decisions that, among other things, regulate
credit-granting activities, require disclosures to customers, govern secured
transactions and establish collection, repossession and claims handling
procedures and other trade practices. The Company is subject to the rules and
regulations of the FHA, Freddie Mac, Fannie Mae,
14
<PAGE> 17
Ginnie Mae, HUD, the VA and state regulatory authorities with respect to
originating, processing, underwriting, selling, securitizing and servicing
mortgage loans.
In addition, there are other federal and state statutes and
regulations, as well as judicial decisions, affecting such activities. Those
rules and regulations, among other things, impose licensing obligations on the
Company, establish eligibility criteria for mortgage loans, prohibit
discrimination and establish underwriting guidelines that include provisions for
inspections and appraisals, require credit reports on prospective borrowers and
fix maximum loan amounts, and with respect to VA loans, fix maximum interest
rates. Moreover, lenders such as the Company are required to submit annually to
the FHA, Freddie Mac, Fannie Mae, Ginnie Mae and the VA audited financial
statements, and each regulatory entity has its own financial requirements. The
Company's affairs also are subject to examination by the FHA, Freddie Mac,
Fannie Mae, Ginnie Mae and the VA at all times to assure compliance with
applicable regulations, policies and procedures. Mortgage origination activities
are subject to, among others, the Equal Credit Opportunity Act and its related
regulations, which prohibits discrimination, and the Federal Truth-in-Lending
Act and the Real Estate Settlement Procedures Act and the regulations
promulgated thereunder, which require the disclosure of certain basic
information to mortgagors concerning credit terms and settlement costs,
respectively. Many of the aforementioned regulatory requirements are designed to
protect the interests of consumers, while others protect the owners or insurers
of mortgage loans. Failure to comply with these requirements can lead to loss of
approved status, termination of servicing contracts without compensation to the
servicer, demands for indemnification or loan repurchases, class-action lawsuits
and administrative enforcement actions.
Certain states require that interest be paid to mortgagors on funds
deposited by them in escrow to cover mortgage-related payments such as property
taxes and insurance premiums. Currently there are 11 states in which the Company
does business where it is required to pay interest on escrow accounts. Loans
from these 11 states amounted to approximately 39.4% of the Company's mortgage
servicing rights portfolio at December 31, 1997. The amount of interest paid on
escrow accounts for 1997 was approximately $471,000.
From time to time, state and federal legislation has been proposed to
regulate certain practices with respect to mortgage servicers holding escrow
accounts of borrowers. Such proposed legislation has included provisions that
would (i) require that interest be paid on escrow accounts, (ii) permit
mortgagors to terminate escrow accounts at such time as their loan balances
decline below a specified level and (iii) require calculation of escrow balances
by mortgage banks on a basis that would be less advantageous to such companies
than presently permitted. The Company would be adversely affected by enactment
of such legislation. It is impossible to predict whether such legislation or any
similar legislation regulating escrow practices will be enacted, or if enacted,
what form it will take. If any additional legislative restrictions are imposed
on the Company by state or federal laws or regulations, the effect on the
Company's results of operations would depend on the requirements of such laws or
regulations, and such effect could be materially adverse. In addition to
legislative changes, a change of prevailing judicial interpretations regarding a
servicer's duty to pay interest on the escrow deposits could be materially
adverse to the Company's results of operations.
There are various state and local laws and regulations affecting the
Company's operations. The Company is in possession of licenses in all states in
which it does business that require such licenses. Conventional mortgage loans
also may be subject to state usury statutes.
15
<PAGE> 18
Employees
As of December 31, 1997, the Company had approximately 1,341 employees,
substantially all of whom were full-time employees. None of the Company's
employees are represented by a union. The Company considers its relations with
its employees to be good.
16
<PAGE> 19
Executive Officers of the Registrant
EDWARD J. SEBASTIAN, age 51, has been Chairman and Chief Executive
Officer of the Company since September 1992. He is also Chairman of the Board
and Chief Executive Officer of RBC, a position he has held since RBC was founded
by him in September 1986.
DAVID W. JOHNSON, JR., age 49, has been Vice Chairman of the Company
since October 1992 and Managing Director since July 1993. He joined the Company
in May 1989 when it was a division of Republic National Bank (Republic). From
that time and until June 3, 1993, he was an Executive Vice President of
Republic.
RICHARD M. DUNCAN, age 49, has been Senior Executive Vice President of
Production since January 1997. Previously he had been Executive Vice President
of Production since January 1995. He has been with the Company since May 1994,
joining it as Senior Vice President of Business Development. From May 1984
through April 1994, Mr. Duncan was an Executive Vice President of Fleet Mortgage
Group, Inc.
STEVEN F. HERBERT, age 42, has been Senior Executive Vice President and
Chief Financial Officer of the Company since January 1997. Previously, he had
been Executive Vice President and Chief Financial Officer since July 1995. From
September 1985 through June 1995, Mr. Herbert was employed by Price Waterhouse
LLP, most recently as the Client Services Director of the Columbia, South
Carolina office.
ITEM 2. PROPERTIES
The Company's corporate and administrative headquarters, which is owned
by the Company, is located in Columbia, South Carolina. This facility comprises
a building having approximately 120,000 square feet which houses its loan
production and administrative operating groups and 16.5 acres of land. The
Company purchased an additional 17.9 acres of land adjacent to the above
property in January 1996. In addition, the Company leases a 56,000 square foot
facility in Columbia, South Carolina which houses its loan servicing
operations. The Company has leased smaller amounts of office space in Columbia,
South Carolina and in 25 other states, consisting primarily of its leasing,
commercial mortgage, wholesale and retail branch offices and regional
underwriting centers.
The Company's primary computer data system is provided through ALLTEL
Information Services, Mortgage Division (ALLTEL) (formerly Computer Power, Inc.
of Jacksonville, Florida). Company personnel enter data on computer hardware
located in-house. The data is transmitted directly to ALLTEL where it is
processed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings. In the
ordinary course of its business, the Company is from time to time subject to
litigation.
17
<PAGE> 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The only matters submitted to a vote of shareholders during the quarter
ended December 31, 1997 were the following matters, all of which were submitted
to the shareholder at the 1997 Annual Meeting held on December 31, 1997:
1. The shareholders approved and adopted the Merger Agreement dated as
of April 18,1997, as amended by the First Amendment to Agreement of Merger dated
September 18, 1997, and the Second Amendment to Agreement of Merger dated
November 12, 1997 among the Company, RBC Merger Sub, Inc. and Resource
Bancshares Corporation, the merger contemplated thereby and the issuance of
shares of Common Stock of the Company in connection therewith. There were
17,568,565 votes for, with 7,941 abstentions, and 15,426 votes against.
2. The shareholders approved and adopted an amendment to the Restated
Certificate of Incorporation of the Company to increase the number of authorized
shares of RBMG Common Stock from 25,000,000 to 50,000,000 shares. There were
17,457,960 votes for, with 7,227 abstentions, and 181,206 votes against.
3. The shareholders elected John C. Baker and Robin C. Kelton to serve
as directors of the Company for three year terms expiring at the 2001 annual
meeting of shareholders. Mr. Baker received 18,779,904 votes for and 11,915
votes were withheld. Mr. Kelton received 18,779,204 votes for and 12,615 votes
were withheld.
4. The shareholders approved the Company's Amended and Restated Omnibus
Stock Award Plan. There were 15,649,156 votes for, with 16,777 abstentions, and
2,029,267 votes against.
5. The shareholders approved Amendment No. 1 to the Company's Formula
Stock Option Plan. There were 17,210,115 votes for, with 16,693 abstentions,
and 468,392 votes against.
6. The shareholders also voted to approve and adopt a Non-Qualified
Stock Option Plan. There were 15,821,600 votes for, with 17,971 abstentions,
and 1,855,629 votes against.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market on
the NASDAQ National Market System. Additional information required by this item
is set forth under the captions "Stock Data" and "Corporate Information" in the
Company's accompanying 1997 Annual Report to Shareholders and is hereby
incorporated herein by reference.
18
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial
Highlights" in the Company's accompanying 1997 Annual Report to Shareholders is
hereby incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" (including all
tables presented under that caption) in the Company's accompanying 1997 Annual
Report to Shareholders is hereby incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information set forth in the Company's accompanying 1997
Annual Report to shareholders is hereby incorporated herein by reference:
The Consolidated Financial Statements of Resource Bancshares Mortgage
Group, Inc., together with the report thereon of Price Waterhouse LLP dated
January 26, 1998, including all Notes to such Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in accountants or disagreements with
accountants on accounting and financial disclosure matters that require
disclosure pursuant to Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information set forth (i) under the caption "Proposal No. 1: Election
of Directors" in the definitive 1998 Proxy Statement of the Company furnished to
shareholders in connection with its 1998 Annual Meeting (the "1998 Proxy
Statement"), with respect to the name of each nominee or director, his age, his
positions and offices with the registrant, his business experience, his
directorships in other public companies and his service on the registrant's
Board of Directors, and (ii) under the caption "Section 16 (a) Beneficial
Ownership Reporting Compliance" in the 1998 Proxy Statement with respect to
Section 16 matters is hereby incorporated herein by reference. Information with
respect to executive officers is set forth in Item 1 of this Report on Form 10-K
under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the remuneration of executive officers and
directors and certain other matters set forth in the 1998 Proxy Statement (i)
under the caption "Compensation of Officers and Directors" and (ii) under the
caption "Compensation Committee Interlocks and Insider Participation" to the
extent such information is required by Item 402 of Regulation S-K to be set
forth herein is hereby incorporated herein by reference.
19
<PAGE> 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the security ownership of (i) persons who
beneficially own 5% or more of the outstanding shares of the Company's common
stock, par value $.01 per share, (ii) directors, nominees and named executive
officers individually and (iii) directors and executive officers as a group set
forth in the 1998 Proxy Statement under the caption "Beneficial Ownership" is,
to the extent such information is required by Item 403 of Regulation S-K to be
set forth herein, hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to relationships and related transactions
between the Company and any director, nominee for director, executive officer,
security holder owning 5% or more of the Company's voting securities or any
associate or member of the immediate family of any of the above, as set forth in
the 1998 Proxy Statement under the caption "Compensation Committee Interlocks
and Insider Participation" is, to the extent such information is required by
Item 404 of Regulation S-K to be set forth herein, hereby incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. The following documents are filed as part of this report:
Page In Annual Report*
(1) Consolidated Financial Statements as of December 31, 1997:
Consolidated Balance Sheet at December 31, 1997 and 1996 ......................
Consolidated Statement of Income for each of the years in the period ended
December 31, 1997 ....................................................
Consolidated Statement of Changes in Stockholders' Equity
for each of the years in the period ended December 31, 1997 ..........
Consolidated Statement of Cash Flows for each of the years in the period ended
December 31, 1997 ....................................................
Notes to Consolidated Financial Statements ....................................
* Incorporated by reference from the indicated pages of the 1997 Annual
Report to Shareholders.
(2) All other schedules are omitted because they are not applicable, or the
required information is shown in the consolidated financial statements
or notes thereto.
(3) The exhibits filed as part of this report and exhibits incorporated
herein by reference to other documents are listed in the Index to
Exhibits to this Annual Report on Form 10-K (pages A to E).
20
<PAGE> 23
b. Not applicable
c. The exhibits filed as part of this report and exhibits incorporated herein
by reference to other documents are listed in the Index to Exhibits to this
Annual Report on Form 10-K (pages A to E).
d. Not applicable
With the exception of the information herein expressly incorporated by
reference, the Company's 1997 Annual Report to Shareholders and 1998 Proxy
Statement are not deemed filed as part of this Annual Report on Form 10-K.
21
<PAGE> 24
SIGNATURE
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Date: March 26, 1998 By: s/Edward J. Sebastian
--------------------------------------
Edward J. Sebastian
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date
- --------------------------------------------------------------------------------
s/ Edward J. Sebastian Chairman of the Board and Chief March 26, 1998
- ------------------------- Executive Officer and Director
Edward J. Sebastian (principal executive officer)
s/ Steven F. Herbert Senior Executive Vice President March 26, 1998
- ------------------------- and Chief Financial Officer
Steven F. Herbert (principal financial and
accounting officer)
s/ David W. Johnson, Jr. Vice Chairman of the Board March 26, 1998
- ------------------------- and Managing Director
David W. Johnson, Jr.
s/ John W. Currie Secretary and Director March 26, 1998
- -------------------------
John W. Currie
s/ John C. Baker Director March 26, 1998
- -------------------------
John C. Baker
Director
- -------------------------
Stuart M. Cable
s/ Boyd M. Guttery Director March 26, 1998
- -------------------------
Boyd M. Guttery
Director
- -------------------------
Robin C. Kelton
s/ John O. Wolcott Director March 26, 1998
- -------------------------
John O. Wolcott
22
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
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 ___
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 Right Agreement Plan dated as of February 6, 1998 between the *
Registrant and First Chicago Trust Company of New York incorporated by
reference to Exhibit 4.1 of the Registrant's Form 8-A filed on February 8, 1998
4.3 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 Tax Agreement dated May 26, 1993, between Resource Bancshares Corporation (RBC) *
and the Registrant incorporated by reference to Exhibit 10.3 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993
10.3 Formation Agreement dated May 26, 1993, among Republic National Bank, the *
Registrant, RBC and 1st Performance National Bank incorporated by reference to
Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993
10.4 Office Building Lease dated March 8, 1991, as amended by Modification of Office *
Lease dated October 1, 1991, incorporated by reference to Exhibit 10.5 of the Registrant's
Registration No. 33-53980
10.5 Assignment and Assumption of Office Lease incorporated by reference to Exhibit 10.6 *
of the Registrant's Registration No. 33-53980
</TABLE>
A
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
10.6 (A) Stock Option Agreement between the Registrant and David W. Johnson, Jr. *
incorporated by reference to Exhibit 10.8 (A) of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993
(B) Stock Option Agreement between the Registrant and Lee E. Shelton incorporated by
reference to Exhibit 10.8 (B) of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993
10.7 Termination Agreement dated June 3, 1993, between the Registrant and *
David W. Johnson, Jr. incorporated by reference to Exhibit 10.9 (A) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993
10.8 (A) Deferred Compensation Agreement dated June 3, 1993, between the Registrant and *
David W. Johnson, Jr. incorporated by reference to Exhibit 10.10 (A) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993
(B) Deferred Compensation Rabbi Trust, for David W. Johnson, dated January 19, 1994,
between RBC and First Union National Bank of North Carolina incorporated by reference
to Exhibit 10.10 (C) of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993
10.9 Registration Rights Agreement dated May 26, 1993, between RBC and the Registrant *
incorporated by reference to Exhibit 10.11 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993
10.10 Flexible Benefits Plan incorporated by reference to Exhibit 10.16 of the Registrant's *
Annual Report on Form 10-K for the year ended December 31, 1993
10.11 Section 125 Plan incorporated by reference to Exhibit 10.17 of the Registrant's Annual *
Report on Form 10-K for the year ended December 31, 1993
10.12 Pension Plan incorporated by reference to Exhibit 10.18 of the Registrant's Annual *
Report on Form 10-K for the year ended December 31, 1993
10.13 Governmental Real Estate Sub-Lease-Office, between Resource Bancshares Mortgage *
Group, Inc. and the South Carolina Department of Labor, Licensing and Regulation
incorporated by reference to Exhibit 10.19 of the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1994
10.14 First Sub-Lease Amendment to Governmental Real Estate Sub-Lease-Office, *
between Resource Bancshares Mortgage Group, Inc. and the South Carolina Department
of Labor, Licensing and Regulation incorporated by reference to Exhibit 10.20 of the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1994
10.15 Amendment I to Pension Plan incorporated by reference to Exhibit 10.21 of the Registrant's *
Annual Report on Form 10-K for the year ended December 31, 1994
10.16 Amendment II to Pension Plan incorporated by reference to Exhibit 10.22 of the Registrant's *
Annual Report on Form 10-K for the year ended December 31, 1994
</TABLE>
B
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
10.17 Phantom 401(k) Plan incorporated by reference to Exhibit 10.24 of the Registrant's *
Annual Report on Form 10-K for the year ended December 31, 1994
10.18 Pension Restoration Plan incorporated by reference to Exhibit 10.25 of the Registrant's *
Annual Report on Form 10-K for the year ended December 31, 1994
10.19 Stock Investment Plan incorporated by reference to Exhibit 4.1 of the Registrant's *
Registration No. 33-87536
10.20 Amendment I to Stock Investment Plan incorporated by reference to *
Exhibit 10.27 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994
10.21 Employee Stock Ownership Plan incorporated by reference to Exhibit 10.29 *
of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994
10.22 Amended Resource Bancshares Mortgage Group, Inc. Successor Employee *
Stock Ownership Trust Agreement dated December 1, 1994, between the
Registrant and Marine Midland Bank incorporated by reference to Exhibit
10.30 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994
10.23 ESOP Loan and Security Agreement dated January 12, 1995, between the Registrant *
and The Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust
incorporated by reference to Exhibit 10.31 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994
10.24 Employment Agreement dated June 30, 1995, between the Registrant and *
Steven F. Herbert incorporated by reference to Exhibit 10.34 of the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1995
10.25 Formula Stock Option Plan incorporated by reference to Exhibit 10.36 of *
the Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1995
10.26 Amended and Restated Omnibus Stock Award Plan incorporated by reference to Exhibit 99.10 *
of the Registant's Registration No. 333-29245 filed on December 1, 1997
10.27 Employment Agreement dated September 25, 1995, between the Registrant and *
Richard M. Duncan incorporated by reference to Exhibit 10.38 of the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 1995
10.28 Request for Extension of Governmental Real Estate Sub-Lease-Office, between the Registrant *
and the South Carolina Department of Labor, Licensing and Regulation dated
December 12, 1995 incorporated by reference to Exhibit 10.39 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
10.29 First Amendment to Registration Rights Agreement dated March 11, 1996, *
between the Registrant and RBC incorporated by reference to Exhibit
10.40 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995
</TABLE>
C
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
10.30 First Amendment to Employee Stock Ownership Plan dated October 31, 1995 *
incorporated by reference to Exhibit 10.41 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
10.31 Amendment to Pension Plan effective January 1, 1995 incorporated by *
reference to Exhibit 10.42 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995
10.32 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
10.33 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
10.34 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
10.35 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
10.36 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
10.37 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
10.38 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
10.39 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
10.40 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
10.41 (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
</TABLE>
D
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
(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
Exhibit 2.2 of the Registrant's Registration No. 333-29245
10.42 (A) Mutual Release and Settlement Agreement between the Registrant, Lee E. Shelton *
and Constance P. Shelton dated January 31, 1997 incorporated by reference to Exhibit
10.44 of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997
(B) Amendment to Mutual Release and Settlement Agreement between *
Registrant, Lee E. Shelton and Constance P. Shelton dated January 31,
1997 incorporated by reference to Exhibit 10.44 of the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1997
10.43 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 *
11.1 Statement re Computation of Net Income per Share _____
13.1 1997 Annual Report to Shareholders _____
21.1 Subsidiaries of the Registrant _____
23.1 Consents of Price Waterhouse LLP _____
27.1 Financial Data Schedule _____
</TABLE>
- ----------------------------------
* Incorporated by reference
E
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
RESOURCE BANCSHARES MORTGAGE GROUP, INC., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation") hereby certifies:
FIRST: That the Board of Directors of the Corporation duly adopted the
following resolution proposing and declaring advisable an amendment to the
Certificate of Incorporation of the Corporation increasing the number of
authorized shares of Common Stock, par value $.01 per share, of the Company from
Twenty-Five Million (25,000,000) to Fifty Million (50,000,000):
"RESOLVED, that the Company amend its Certificate of
Incorporation by deleting in its entirety the first paragraph of the
Fourth Article of the Certificate of Incorporation and substituting in
lieu thereof the following:
FOURTH: (a) The total number of shares of all classes
of stock which the Corporation shall have authority
to issue is 55,000,000 shares, consisting of
50,000,000 shares of Common Stock, par value $.01 per
share, and 5,000,000 shares of Preferred Stock, par
value $.01 per share."
SECOND: That the amendments have been adopted by an affirmative vote of
a majority of the stockholders of the Corporation in accordance with the
provisions of Section 242(b)(2) of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused its duly authorized
officers to execute this Certificate as of this _____ day of _________, 1997.
RESOURCE BANCSHARES MORTGAGE
GROUP, INC.
By: __________________________
Attest: ______________________
<PAGE> 1
EXHIBIT 11.1
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE,
BASIC and DILUTED EARNINGS PER SHARE
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1997
--------------------------------------------------------------
<S> <C>
Net income $ 21,798
Net income per common share - basic (1) $ 1.07
Net income per common share - diluted (2) $ 1.05
</TABLE>
1) The number of common shares outstanding used to compute net income per share
was 20,396,428, which includes the retroactive adjustment for the five percent
stock dividend that was issued on December 31, 1997.
2) Diluted earnings per share for the year ended December 31, 1997, was
calculated based on weighted average shares outstanding of 20,800,828, which
assumes the exercise of options covering 1,332,587 shares and computes
incremental shares using the treasury stock method.
<PAGE> 1
OUR MISSION
To maximize shareholders' value by engaging primarily in the business of
correspondent, wholesale and retail mortgage banking, while maintaining
flexibility in our review of other opportunities.
To service our clients and our clients' customers in an efficient, economically
responsible and fair manner.
To support our people and the communities in which they reside.
HISTORY
Founded in 1989, RBMG went public in June 1993. Originally conceived as a
correspondent mortgage bank, the Company is now a diversified financial services
company engaged primarily in the business of mortgage banking, through the
origination and purchase (through a nationwide network of correspondents,
brokers and retail offices), 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.
WORTH QUOTING
"Resource Bancshares Mortgage is trading at 7.2-5.5x compared to Countrywide
Credit (CCR, $43 5/8) at 14.4x and recent takeover prices of HomeSide Lending
(HSL) and North American Mortgage (NAC), which were acquired by banks for
roughly 15-16x operating earnings."
NationsBanc Montgomery Securities, Equity Research, (REMI), January 28, 1998
"The stock is selling at 7 times next year's earnings and represents unusually
good value."
Raymond James & Associates, Equity Research, (REMI), January 27, 1998
"An `origination-sensitive' company that operates as a producer and supplier of
servicing to the mega-servicers, we believe REMI has tremendous upside potential
in the current economic environment."
UBS Securities, Equity Research, (REMI), February 20, 1998
<PAGE> 2
INDEX
1 Financial Overview
2 Letter to Our Shareholders
4 Production and Servicing Overview
9 Selected Financial Highlights
10 Management's Discussion and Analysis of Financial Condition and Results
of Operations
25 Consolidated Financial Statements and Notes
47 Report of Independent Accountants
48 Stock Data
49 Directors and Executive Officers
49 Corporation Information
FINANCIAL OVERVIEW
($ in thousands except per share data)
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues $161,018 $126,617 $76,697
Income before taxes 35,087 30,548 22,292
Net income 21,798 19,623 14,219
Weighted average common shares outstanding - Diluted 20,800,828 19,525,867 16,479,797
Net income per common share - Diluted $1.05 $1.00 $0.86
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total assets $1,556,929 $1,028,394 $1,231,097
Total liabilities 1,341,790 871,093 1,137,693
Total stockholder's equity 215,139 157,301 93,404
- ---------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA:
Market value per common share at year-end (1) $16.31 $13.57 $13.32
Book value per common share at year-end $ 9.21 $ 7.77 $ 5.71
Price/earnings ratio 15.53 13.57 14.74
</TABLE>
(1) Source: Nasdaq
NET INCOME
($ in millions)
1993 1994 1995 1996 1997
- ------------------------------------------------------
$17.6 $18.0 $14.2 $19.6 $21.8
<PAGE> 3
ESTIMATED MARKET SHARE (PERCENT)
1993 1994 1995 1996 1997
- ---------------------------------------------------------------
0.42% 0.37% 1.11% 1.27% 1.26%
PROFITABILITY REVIEW
<TABLE>
<CAPTION>
(Numbers in parentheses for '96 and '97 reflect performance before non-recurring
and special charges - dollars in billions)
-----------------------------------------------------------------------------------
1993 1994 1995 1996 1997
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings Per Share $0.76 $1.10 $0.86 ($1.17) ($1.35)
$1.00 $1.05
ROA 4.81% 5.25% 1.95% (2.22%) (2.29%)
1.91% 1.78%
ROE 38.50% 25.98% 17.00% (16.78%) (16.34%)
14.43% 12.82%
</TABLE>
<PAGE> 4
LETTER TO OUR SHAREHOLDERS
In 1996 we refined our strategic direction by concentrating on GROWTH THROUGH
DIVERSIFICATION. The objective of GROWTH THROUGH DIVERSIFICATION was designed to
overcome the fact that Resource Bancshares Mortgage Group, Inc. (the Company)
was a non-diversified, single-industry lender. We believe that GROWTH THROUGH
DIVERSIFICATION can significantly assist us in achieving our goal of enhancing
shareholder value by improving price-to-earnings and price-to-book multiples.
Our 1997 activities were driven by GROWTH THROUGH DIVERSIFICATION.
During 1997, we successfully completed mergers with Meritage Mortgage
Corporation (Meritage) and Resource Bancshares Corporation (RBC). The April 1
merger with Meritage gave us a meaningful presence in subprime lending. Our
year-end merger with RBC brought with it a platform for expansion into the
commercial mortgage and small-ticket equipment leasing industries. As a measure
of our progress towards GROWTH THROUGH DIVERSIFICATION, we are pleased to report
that 14% of our 1997 pre-tax net income (and 9% of our revenues) were derived
from sources other than our agency-eligible lending activities. For 1998, we
believe we can further increase our ratio.
Given that we have achieved diversification, our focus for 1998 and the theme of
our 1997 annual report must be MAPPING OUR GROWTH. Our plans for MAPPING OUR
GROWTH in 1998 include:
* Improving our agency-eligible market share, approximately
1.26% in 1997, primarily through aggressive expansion within
the wholesale production channel.
<PAGE> 5
* Increasing our subprime production volume, approximately $340
million in 1997, primarily through the addition of new
full-service subprime branches and by leveraging our existing
agency-eligible wholesale and correspondent relationships.
* Expanding our acquired commercial mortgage business.
* Building our small-ticket equipment lease portfolio.
Your management team possesses the experience and the commitment required for
continued success. Specifically, both the Meritage and RBC mergers brought to
your Company seasoned senior management teams that have worked in their
respective industries for more than a decade.
As we focus on the future, it is also appropriate to take note of our
accomplishments of the recent past. As more completely discussed in the
accompanying report, 1997 saw your Company report record operating earnings,
prior to non-recurring and special charges, of $1.35 per share and record loan
production of $10.8 billion. The year also saw net operating income, prior to
non-recurring and special charges, expand 23% on an increase in production
volume of only 8%. We are also gratified to see that you, our fellow
shareholders, were once again rewarded by our performance in the form of a
December 31, 1997, closing stock price of $16.31 per share. As you will recall,
on June 3, 1993, the Company went public at a stock dividend-adjusted offering
price of $5.83 per share. Thus, in just a little over four and one-half years,
the stock price has risen 180%. As always, our commitment is to continue to
apply the very best of our talents, abilities and energies to the objective of
replicating the superior stockholder returns of the past in the coming years.
In closing, let me observe that your Company has now become a diversified
financial services company. Today we are MAPPING OUR GROWTH with increasing
confidence and optimism. We are confident that the market will realize we are no
longer a non-diversified, single-industry lender and optimistic that the market
will reward you for your patience and continued support in the form of improved
price-to-earnings and price-to-book ratios.
We look forward to continued success and good fortune in the years ahead.
Edward J. Sebastian
Chairman and Chief Executive Officer
March 12, 1998
<PAGE> 6
"Resource Bancshares Mortgage Group is one of the fastest-growing mortgage
bankers in the country....Management has extensive experience building large
companies in this volatile industry, as well as maximizing shareholders' value."
NationsBanc Montgomery Securities, Equity Research, (REMI), January 28, 1998.
STOCK PERFORMANCE
($ in millions)*
<TABLE>
<CAPTION>
5/26/93 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
<S> <C> <C> <C> <C> <C> <C>
RBMG 100 121.4 132.3 217.7 233.0 280.0
NASDAQ 100 110.5 108.0 152.8 187.9 230.6
MBA Peer Group 100 97.4 87.2 126.4 158.2 231.4
</TABLE>
* Assumes reinvestment of dividends
Mortgage Finance Forecasts
<TABLE>
<CAPTION>
MORTGAGE ORIGINATIONS 1997 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL 1-4 FAMILY ($ in Billions) $ 857 $ 1,066
- ------------------------------------------------------------------------------
REFINANCE SHARE 31% 40%
- ------------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE SHARE
(LOAN COUNT) 22% 19%
- ------------------------------------------------------------------------------
INTEREST RATES
- ------------------------------------------------------------------------------
30-YEAR FIXED RATE MORTGAGE RATE 7.60% 7.14%
- ------------------------------------------------------------------------------
1-YEAR ADJUSTABLE RATE MORTGAGE RATE 5.60% 5.57%
- ------------------------------------------------------------------------------
</TABLE>
Source: Mortgage Bankers Association of America, Economics Department,
January 22, 1998
PRICE TO EARNINGS RATIO
<TABLE>
<CAPTION>
2/12/98 '98 EARNINGS P/E RATIO
STOCK PRICE ESTIMATES*
(FIRST CALL)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RBMG $15.25 $ 2.00 7.6
- ----------------------------------------------------------------------------------------------
Countrywide Home Loans $46.13 $ 2.77 16.7
- ----------------------------------------------------------------------------------------------
</TABLE>
*Analysts' estimates of 1998 performance have been included herein for
convenience of the reader only. RBMG has not adopted and does not endorse such
estimates, and their inclusion herein should not be construed as being a
representation by RBMG that it will achieve the level of performance of any such
estimate for 1998 or any other period.
SOURCES OF PRE-TAX NET INCOME 1997
AGENCY 86%
OTHER 14%
SOURCES OF PRE-TAX NET INCOME 1998
AGENCY 70%
OTHER 30%
<PAGE> 7
PRODUCTION AND SERVICING OVERVIEW
Residential Mortgage Loan Production
The Company's total residential mortgage loan production has continued to grow,
while the Company has diversified its sources of production. Initially, the
Company was exclusively focused on correspondent loan production; however, when
the timing was right, wholesale and retail channels were added. The addition of
the Company's new divisions, combined with the strong correspondent division,
helped the Company to become the twelfth largest residential mortgage loan
originator in the country for 1997 and the eighth largest securitizer of GSE
securities in 1997.
Top GSE Securitization Leaders ($ in billions)
<TABLE>
<CAPTION>
RANK LENDER 1997 % OF TOTAL
<S> <C> <C> <C>
1 NORWEST MORTGAGE $ 38.40 10.6%
2 COUNTRYWIDE HOME LOANS $ 29.72 8.2%
3 CHASE & AFFILIATES $ 19.74 5.4%
4 FLEET MORTGAGE GROUP $ 13.99 3.8%
5 HOMESIDE LENDING, INC. $ 13.76 3.8%
8 RBMG, INC. $ 7.73 2.1%
</TABLE>
Source: Mortgage Marketplace, January 26, 1998
MORTGAGE LOANS PURCHASED/ORIGINATED
($ in billions)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.2 $2.9 $7.1 $10.0 $10.8
</TABLE>
PRODUCTION MIX
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Correspondent 88% 79% 73%
Wholesale 9% 14% 17%
Retail 3% 7% 7%
Subprime 3%
</TABLE>
<PAGE> 8
Top Correspondent Originators in 1997
($ in billions)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
CORRESPONDENT TOTAL CORRESPONDENT
RANK LENDER BUSINESS ORIGINATIONS AS % OF TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 NORWEST MORTGAGE $20.75 $55.27 37.5%
2 CHASE & AFFILIATES $20.59 $40.07 51.4%
3 HOMESIDE LENDING, INC. $20.07 $21.78 92.1%
4 COUNTRYWIDE HOME LOANS $18.36 $43.10 42.6%
5 FLEET MORTGAGE GROUP $11.65 $15.55 74.9%
6 RBMG, INC. $7.89 $10.78 73.2%
</TABLE>
Source: Inside Mortgage Finance, February 13, 1998
Correspondent Lending
The correspondent division remains the Company's primary business focus because
of the lower fixed expenses and capital investment required of the Company. As
such, the Company can develop a cost structure that is more directly variable
with loan production, thus allowing the Company to easily enter or exit
geographic markets in response to changes in market conditions. For these
reasons, the Company anticipates that correspondent production will provide the
platform from which to leverage its operating infrastructure into
higher-margined lines of business.
Growth of the Correspondent Network
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
12/31/95 12/31/96 12/31/97
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Approved Correspondents 726 871 919
Regional Account Executives 10 11 10
Production ($ in billions) $ 6.3 $ 7.9 $7.9
</TABLE>
CORRESPONDENT LOAN PRODUCTION
($ in billions)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------------ ----------- ------------ ------------ ------------
<C> <C> <C> <C> <C>
$ 4.2 $ 2.9 $ 6.3 $ 7.9 $ 7.9
</TABLE>
<PAGE> 9
Wholesale Lending
Since its inception in May 1994, the Company's wholesale division has accounted
for a steadily increasing percentage of the Company's mortgage loan production.
In 1997 the Company's wholesale branches provided 17% of the Company's total
loan production of $10.8 billion (as compared to 14% for 1996). The success and
growth of the Company's wholesale division is due in no small part to a group of
extremely knowledgeable professionals who attract and retain quality broker
relationships with excellent customer service. During 1997, two new branch
offices were opened and more than 1,000 new brokers were accepted as approved
production partners.
WHOLESALE LOAN PRODUCTION
($ in billions)
<TABLE>
<CAPTION>
1994 1995 1996 1997
- ------------- ------------ -------------- --------------
<C> <C> <C> <C>
$ 0.02 $ 0.67 $ 1.41 $ 1.87
</TABLE>
Wholesale Division
($ in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LOAN PRODUCTION $ 673,201 $ 1,411,643 $ 1,868,726
- ------------------------------------------------------------------------------------------
DIRECT OPERATING EXPENSES 55 bps 60 bps 62 bps
(AS BASIS POINTS OF PRODUCTION)
- ------------------------------------------------------------------------------------------
APPROVED BROKERS 1,144 2,322 3,046
- ------------------------------------------------------------------------------------------
NUMBER OF BRANCHES 10 13 15
- ------------------------------------------------------------------------------------------
NUMBER OF EMPLOYEES 98 126 146
- ------------------------------------------------------------------------------------------
</TABLE>
Retail Lending
The retail division continued in 1997 to provide the Company a positive presence
in the Northeast. In 1997, through its wholly-owned subsidiary, Intercounty
Mortgage, Inc. (IMI), the Company maintained six full-scale retail branches
along with a number of smaller satellite offices. In March 1998 the Company
signed a definitive agreement to sell the retail production franchise of IMI to
CFS Bank.
Retail Division
($ in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LOAN PRODUCTION $ 210,565 $ 668,759 $ 675,411
- ------------------------------------------------------------------------------------------
DIRECT OPERATING EXPENSES 359 bps 239 bps 246 bps
(AS BASIS POINTS OF PRODUCTION)
- ------------------------------------------------------------------------------------------
NUMBER OF BRANCHES 6 6 6
- ------------------------------------------------------------------------------------------
NUMBER OF EMPLOYEES 158 209 198
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 10
Mortgage Loan Servicing
Unlike many traditional mortgage banks and today's mega-servicers, RBMG is first
and foremost a producer of residential mortgage loans. By systematically selling
a high percentage of the servicing it produces, RBMG can effectively manage
prepayment risk and immediately realize the cash value of the servicing it
creates.
Servicing Portfolio Summary
<TABLE>
<CAPTION>
12/31/96 12/31/97
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
PORTFOLIO BALANCE ($ IN THOUSANDS) $ 6,670,267 $ 7,125,222
- ----------------------------------------------------------------------------------------------------------
LOANS SERVICED 75,572 77,129
- ----------------------------------------------------------------------------------------------------------
AVERAGE LOAN SIZE $ 88,758 $ 92,306
- ----------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NOTE RATE 7.92% 7.69%
- ----------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE MATURITY (MONTHS) 288 304
- ----------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SERVICE FEE 39 bps 40 bps
- ----------------------------------------------------------------------------------------------------------
TOTAL DELINQUENCIES (LOAN COUNT) 3.75% 3.66%
- ----------------------------------------------------------------------------------------------------------
BASIS - MULTIPLE OF SERVICE FEE 4.22x 4.48x
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Servicing Strategy and Management
RBMG seeks to:
- - Generate servicing fee revenue to cover 50% to 80% of cash operating overhead
- - Manage prepayment risk through employment of "natural" and "synthetic" hedges
- - Maximize leverage of capacity requirements
- Systems
- Physical Plant
- Human Resources
Servicing Contributions
<TABLE>
<CAPTION>
($ in thousands) 1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PORTFOLIO BALANCE $ 5,562,930 $ 6,670,267 $ 7,125,222
- ---------------------------------------------------------------------------------------------------------------------------
LOAN SERVICING FEES $ 24,205 $ 28,763 $ 30,869
- ---------------------------------------------------------------------------------------------------------------------------
CASH OPERATING EXPENSES $ 45,053 $ 81,135 $ 107,616
- ---------------------------------------------------------------------------------------------------------------------------
COVERAGE RATIO 54% 35% 29%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 11
SERVICING SUMMARY (%) 1997
CONVENTIONAL 70%
GOVERNMENT 29%
PRIVATE 1%
FIXED RATE 92%
ARMS 8%
SERVICING PORTFOLIO BALANCES
($ in billions)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------------ ------------ ------------ ----------- -----------
<C> <C> <C> <C> <C>
$ 1.9 $ 4.0 $ 5.6 $ 6.7 $ 7.1
</TABLE>
Mapping Our Growth
During 1997, the Company completed two major steps in the execution of its plan
of Growth Through Diversification. Mergers with Meritage Mortgage Corporation
and Resource Bancshares Corporation propelled the Company into the subprime
market and commercial leasing and commercial mortgage lending arenas. These new
initiatives, coupled with RBMG's patterned growth in its core production
channels, should position the Company for solid earnings performance in the
years ahead. During 1998 we will be Mapping Our Growth as we:
- - Maintain our core competency in agency-eligible business.
- - Leverage our existing relationships in wholesale and correspondent
divisions to assist subprime growth.
- - Further diversify our revenue sources through expansion of subprime,
commercial mortgage and leasing activities.
- - Hedge our operating cost structure by maintaining right-sized loan
servicing operations.
- - Continue pursuit of other opportunities to enhance shareholder value.
<PAGE> 12
SELECTED FINANCIAL HIGHLIGHTS
($IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income $ 17,644 $ 16,902 $ 8,635 $ 7,686 $ 9,616
Net gain on sale of mortgage loans 103,370 79,178 33,822 1,160 2,167
Gain on sale of mortgage servicing rights 7,955 1,105 7,346 33,375 29,202
Loan servicing fees 30,869 28,763 24,205 14,196 6,128
Total revenues 161,018 126,617 76,697 56,622 47,756
Salary and employee benefits 62,235 55,578 (2) 31,199 15,986 12,203
Total expenses (including taxes) 139,220 106,994 (2) 62,478 38,579 30,176
Net income 21,798 19,623 (2) 14,219 18,043 17,580
PER COMMON SHARE DATA (3)
Net income per common share - basic $ 1.07 (1) $ 1.02 (2) $ 0.88 $ 1.11 $ 0.77 (4)
Net income per common share - diluted 1.05 (1) 1.00 (2) 0.86 1.10 0.76 (4)
Market value per common share at year-end 16.31 13.57 12.68 7.71 7.07
Book value per common share at year-end 9.20 7.77 5.71 4.95 3.84
Cash dividends per common share 0.13 0.06
BALANCE SHEET
Mortgage loans held for sale
and mortgage-backed securities $ 1,179,188 $ 802,335 $1,035,229 $ 119,044 $ 587,208
Lease receivables 51,494
Mortgage servicing rights, net 127,326 109,815 99,912 65,840 15,123
Residual interests in subprime securitizations 19,684
Total assets 1,556,929 1,028,394 1,231,097 237,631 639,425
Total liabilities 1,341,790 871,093 1,137,693 157,017 576,942
Stockholders' equity 215,139 157,301 93,404 80,614 62,483
STATISTICS
Total loan production $10,777,294 $9,995,725 $7,135,774 $2,875,265 $4,239,100
Total agency-eligible servicing
portfolio (including subservicing) 10,195,354 8,658,742 7,821,736 5,876,508 3,049,270
Commercial mortgage loan servicing
portfolio 2,760,238
Managed lease servicing portfolio 123,509 (6)
Return on average assets 1.78%(1) 1.91%(2) 1.95% 5.25% N/A (5)
Return on average equity 12.82%(1) 14.43%(2) 17.00% 25.98% N/A (5)
</TABLE>
(1) Includes non-recurring and special charges totalling $10,147 pre-tax or
$6,421 after-tax. Exclusive thereof, total expenses, net income, net income per
common share - basic, net income per common share - diluted, return on average
assets and return on average equity would have been $132,799, $28,219, $1.37,
$1.35, 2.29% and 16.34%, respectively. (2) Includes a non-recurring charge
totalling $5,190 pre-tax or $3,192 after-tax. Exclusive thereof, salary and
employee benefits, total expenses, net income, net income per common share -
basic, net income per common share - diluted, return on average assets and
return on average equity would have been $50,388, $103,802, $22,815, $1.19,
$1.17, 2.22% and 16.78%, respectively. (3) Amounts have been restated to conform
with the reporting requirements of SFAS No. 128 and to give retroactive effect
to stock dividends. Source of market price is Nasdaq. (4) Resource Bancshares
Mortgage Group, Inc.'s initial public offering was consummated on June 3, 1993.
Net income per common share for 1993 was calculated based on net income
subsequent to the date of the initial public offering through December 31, 1993,
of $12,465. (5) Because of the significantly different capital structure of the
Company prior to its initial public offering, these statistics are not
comparatively meaningful for periods prior to, and including the date on which,
the initial public offering was consummated. (6) Managed lease servicing
portfolio consists of $49,104 of leases owned by the Company and $74,405 of
leases serviced for investors.
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements included in this discussion and analysis (or elsewhere in this
annual report) which are not statements of historical fact are intended to be,
and are hereby identified as,"forward looking statements" for purposes of the
safe harbor provided by Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Readers are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties, and that actual
results could differ materially from those indicated by such forward-looking
statements. Important factors that could cause actual results to differ
materially from those indicated by such forward-looking statements include, but
are not limited to, the following which are described in the Resource
Bancshares Mortgage Group, Inc.'s (the Company) Joint Proxy Statement/
Prospectus dated December 2, 1997 (i) interest rate risks, (ii) changes in
economic conditions (iii) competition, (iv), possible changes in regulations
and related matters,(v) litigation affecting the mortgage banking business,
(vi) delinquency and default risks, (vii) changes in the market for servicing
rights, mortgage loans and lease receivables, (viii) environmental matters,(ix)
changes in the demand for mortgage loans and (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 was organized to acquire and operate the residential mortgage
banking business of Resource Bancshares Corporation (RBC), which commenced
operations in May 1989. The assets and liabilities of the residential mortgage
banking business of RBC were transferred to the Company on June 3, 1993, when
the Company sold 58% of its common stock in an initial public offering. As a
result, RBC retained a significant ownership interest in the Company. On
December 31, 1997, the Company acquired RBC in a transaction in which it
exchanged 9,894,889 shares of the Company's common stock for all of the
outstanding stock of RBC. Therefore, on a consolidated basis, RBC no longer
has an ownership interest in the Company.
The Company is a diversified financial services company engaged primarily
in the business of mortgage banking, through the origination and purchase
(through a nationwide network of correspondents, brokers and retail offices),
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.
RESIDENTIAL LOAN PRODUCTION
The Company purchases residential mortgage loans from its correspondents
and through its wholesale division and originates mortgage loans through its
retail division. The Company also purchases and originates subprime mortgages
through a separate division.
<PAGE> 14
A summary of residential loan production by source for the periods
indicated is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Loan Production:
Correspondent Division $ 7,893,583 $ 7,915,323 $ 6,252,008
Wholesale Division 1,868,726 1,411,643 673,201
Retail Division 675,411 668,759 210,565
--------------- --------------- ---------------
Total Agency-Eligible Loan Production 10,437,720 9,995,725 7,135,774
Subprime Division 339,574
--------------- --------------- ---------------
Total Loan Production $ 10,777,294 $ 9,995,725 $ 7,135,774
=============== =============== ===============
</TABLE>
Initially, the Company was exclusively focused on purchasing loans through
its correspondents. In order to diversify its sources of loan volume, the
Company started a wholesale operation, which purchased its first loan in May
1994, a retail operation, which originated its first loan in May 1995 and a
subprime division, which commenced significant business operations in the second
quarter of 1997. Accordingly, correspondent operations have accounted for a
diminishing percentage of the Company's loan production (73% for 1997, as
compared to 79% for 1996 and 88% for 1995). Management anticipates that its
higher margin wholesale and subprime production will continue to account for an
increasing percentage of total loan production as those divisions are expanded
more rapidly than the correspondent operations. In general, management has
targeted as a near-term goal a production mix of approximately 70%
correspondent, 25% wholesale and 5% subprime.
A summary of key information relevant to industry loan production activity
is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
--------------- -------------- -------------
<S> <C> <C> <C>
U. S. 1-4 Family Mortgage Originations Statistics (1):
U. S. 1-4 Family Mortgage Originations $ 857,000,000 $ 785,000,000 $ 644,000,000
Adjustable Rate Mortgage Market Share 22% 26% 30%
Estimated Fixed Rate Mortgage Originations 668,000,000 581,000,000 451,000,000
Company Information:
Loan Production $ 10,777,294 $ 9,995,725 $ 7,135,774
Estimated Company Market Share 1.26% 1.27% 1.11%
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's total mortgage production increased by 8% between 1996 and
1997. The Company's estimated share of the U.S. 1-4 family mortgage originations
remained essentially constant for 1997 and the Company remained among the
nation's top 15 mortgage originators for the third consecutive year. The
Company's 8% production increase corresponds with the 9% increase in nationwide
production from 1996 to 1997.
<PAGE> 15
Although nationwide production increased by 22% from 1995 to 1996, the
Company was able to increase its production by 40% during the same time period,
thereby increasing its 1996 market share by 14% over that for 1995. The 40%
increase in loan production was primarily due to the combined positive impact
of: 1) the overall increase in the market volume of originations nationwide,
which is related to the mortgage interest-rate environment among other factors;
2) expansion of the Company's production network, including realization of a
full year's production from the wholesale and retail divisions; and 3) the
decline in the adjustable-rate mortgage (ARM) share of the U.S. market, from 30%
in 1995 to 26% for 1996. The Company is primarily focused on the purchase and
origination of fixed-rate, 1-4 family residential mortgage loans. As such, the
Company is competitively disadvantaged in economic environments that tend to
favor ARMs over fixed-rate mortgages (generally, lower long-term fixed-rate and
flatter yield-curve environments tend to favor fixed-rate originations).
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 loan
production activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
---------------- --------------- ----------------
<S> <C> <C> <C>
Correspondent Loan Production $ 7,893,583 $ 7,915,323 $ 6,252,008
Estimated Correspondent Market Share (1) 0.92% 1.01% 0.97%
Approved Correspondents 919 871 726
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's correspondent market share decreased to 0.92% for 1997 as
compared to 1.01% for 1996, while the Company's total correspondent loan
production remained relatively constant. The decrease in correspondent market
share is primarily due to the Company's efforts to maintain its core competency
as a correspondent loan originator while devoting its resources to expanding or
diversifying into higher margin wholesale and subprime production channels. The
number of approved correspondent lenders increased 6%, as the Company focused on
maintenance of those correspondent relationships most compatible with the
Company's overall business strategies while continuing a disciplined and
measured expansion through establishment of new correspondent relationships.
The Company's correspondent market share increased slightly, to 1.01% for
1996 as compared to 0.97% for 1995. This rise is primarily due to the Company's
correspondent
<PAGE> 16
production increasing by 27% for 1996, while nationwide production increased by
only 22%. The Company's correspondent production outpaced nationwide trends
primarily due to the Company's 20% growth in the network of approved
correspondents, to 871 at December 31, 1996, from 726 at December 31, 1995.
Wholesale Loan Production
In May 1994, the Company began its expansion into the wholesale mortgage
banking business. In connection therewith, the Company receives loan
applications through brokers, underwrites the 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.
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 YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995
---------------- --------------- ---------------
<S> <C> <C> <C>
Wholesale Loan Production $ 1,868,726 $ 1,411,643 $ 673,201
Estimated Wholesale Market Share (1) 0.22% 0.18% 0.10%
Wholesale Division Direct Operating Expenses $ 11,540 $ 8,540 $ 3,697
Approved Brokers 3,046 2,322 1,144
Number of Branches 15 13 10
Number of Employees 146 126 98
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The 32% ($457 million) increase in wholesale loan production, from $1.4
billion in 1996 to $1.9 billion in 1997, resulted primarily from a 9% nationwide
increase in loan production, the addition of two new branches during the year
and realization of full year's production from three branches added during 1996.
As a result, the Company's wholesale market share increased 22% for 1997. The
increase in direct operating expenses for the wholesale division was primarily a
result of the increased production. Wholesale division direct operating expenses
as a percentage of production increased slightly from 60 basis points in 1996 to
62 basis points in 1997.
The 110% ($738 million) increase in wholesale loan production, from $673
million for 1995 to $1.4 billion for 1996, was driven primarily by the full year
impact for 1996 of production out of the seven branches added during 1995. As a
result, the Company's wholesale market share increased 80% year to year.
<PAGE> 17
Strategically, management anticipates focusing in the near-term on
significantly expanding its wholesale presence nationwide due to the relatively
higher margins attributable to this channel. Management anticipates that the
wholesale division will continue to account for an increasing percentage of the
Company's total loan production.
Retail Loan Production
During late 1997, the Company began reviewing the compatibility of the
retail operation with its primary business focus. And on March 11, 1998, the
Company signed a definitive agreement with CFS Bank under which the Company will
sell the retail production franchise of Intercounty Mortgage, Inc. to CFS Bank.
Consummation of the transaction is subject to approval by the Office of Thrift
Supervision and certain other conditions. Historically, the Company has focused
on accumulation of loan production through third-party correspondent and
wholesale broker channels because of the relatively lower fixed expenses and
capital investments required, among other reasons. Management believes the sale
of the retail operation will allow the Company to refocus on its core competency
as a correspondent and wholesale mortgage lender.
A summary of key information relevant to the Company's retail production
activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
---------- --------- --------
<S> <C> <C> <C>
Retail Loan Production $ 675,411 $ 668,759 $ 210,565
Estimated Retail Market Share (1) 0.08% 0.09% 0.03%
Retail Division Direct Operating Expenses $ 16,626 $ 15,963 $ 7,584
Number of Branches 6 6 6
Number of Employees 198 209 158
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
Retail loan production remained essentially constant between 1996 and 1997.
Retail division direct operating expenses as a percentage of production also
remained relatively constant at 246 basis points for 1997 as compared to 239
basis points for 1996.
The $458 million increase in retail loan production to $669 million for
1996 from $211 million for 1995, and the increase in market share to 0.09% for
1996 from 0.03% for 1995 resulted primarily from realization of a full year's
production from the retail channel in 1996, which commenced operations in May
1995.
Subprime Loan Production
During the past several years the Company has diversified its sources of
production through de novo expansions into wholesale and retail operations. In
1997, this basic business strategy was supplemented by further diversification
across markets through the Company's initial expansion into subprime lending
activities. In connection therewith, the Company acquired Meritage Mortgage
Corporation, a wholesale producer of subprime mortgage loans in April 1997. The
Company's subprime division produced $340 million during 1997 or 3% of the
Company's total 1997 production volume in the division's first full year of
operation.
<PAGE> 18
Management anticipates significant expansion of its subprime division in
1998 as wholesale branches opened or acquired in 1997 reach full year production
levels, as additional wholesale subprime branches are opened and as subprime
operations are introduced and made available through the Company's existing 15
branch agency-eligible wholesale network, and in the future, as products are
introduced through the Company's existing nationwide correspondent production
channel.
A summary of key information relevant to the Company's subprime production
activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
-------------- --------------- -------------
<S> <C> <C> <C>
U.S. Subprime Mortgage Originations (1) $ 125,000,000
Subprime Loan Production $ 339,574 N/A N/A
Estimated Subprime Market Share (1) 0.27% N/A N/A
Subprime Division Direct Operating Expenses $ 10,486 N/A N/A
Number of Brokers 661 N/A N/A
Number of Employees 139 N/A N/A
</TABLE>
(1) Source: Inside B&C Lending, issue dated February 16, 1998.
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 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 minimize the cash operating costs of its loan
production platform and thus the strategically required size of its loan
servicing operation.
<PAGE> 19
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 YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Underlying Unpaid Principal Balances:
Beginning Balance * $ 6,670,267 $ 5,562,930 $ 4,039,847
Loan Production (net of servicing-
released production) 10,557,994 9,912,365 6,615,441
Net Change in Work-in-Process 26,007 535,847
Bulk Acquisitions 774,097 1,354,592 390,632
Sales of Servicing (9,699,058) (9,521,451) (4,622,018)
Paid-In-Full Loans (709,052) (504,312) (400,897)
Amortization, Curtailments and Other, net (495,033) (669,704) (460,075)
------------ ----------- -----------
Ending Balance* 7,125,222 6,670,267 5,562,930
Subservicing Ending Balance 3,070,132 1,988,475 2,258,806
------------ ----------- -----------
Total Underlying Unpaid Principal Balances $ 10,195,354 $ 8,658,742 $ 7,821,736
============ =========== ===========
Loan Servicing Fees $ 30,869 $ 28,763 $ 24,205
Cash Operating Expenses $ 107,616 $ 81,135 $ 45,053
Coverage Ratio 29% 35% 54%
Average Underlying Unpaid Principal Balances
(including subservicing) $ 9,468,730 $ 8,814,560 $ 6,397,186
Weighted Average Note Rate* 7.69% 7.92% 7.84%
Weighted Average Servicing Fee* 0.40% 0.39% 0.42%
Delinquency (30+ days) Including
Bankruptcies and Foreclosures* 3.66% 3.75% 3.42%
Number of Servicing Division Employees 143 128 115
</TABLE>
* These numbers and statistics apply to the Company's owned servicing portfolio
and therefore exclude the subservicing portfolio.
The $654 million, or 7%, increase in the average underlying unpaid
principal balance of mortgage loans being serviced for 1997 as compared to 1996
is primarily related to the Company's increased loan production volumes during
1997 and the Company's $774 million in bulk acquisitions of servicing primarily
during the first half of 1997. Since the Company generally sells servicing
rights related to the loans it produces within 90 to 180 days of purchase or
origination, increased production volumes generally result in a higher volume of
mortgage servicing rights held in inventory pending sale.
The $2.4 billion, or 38%, increase in the average underlying unpaid
principal balance of mortgage loans being serviced for 1996 as compared to 1995
is primarily related to the Company's increased loan production volumes during
1996 and the Company's $1.4 billion in bulk acquisitions of servicing primarily
during the third quarter of 1996.
<PAGE> 20
The Company's coverage ratios for 1997 at 29% and for 1996 at 35% were
lower than the Company's target level of between 50% and 80%. The Company's
expansion into the relatively high cost retail and subprime production channels,
together with normal inflationary pressures on costs, have combined to increase
cash operating costs at a 28% and 69% pace for 1997 and 1996, respectively.
Although the servicing portfolio and servicing fees have increased during the
same period, such increases have not kept pace with the pace of growth in cash
operating expenses. Strategically, and in the opinion of the Company's
management, market prices for servicing rights have been attractive throughout
this period. Accordingly, management has consciously determined on a risk versus
return basis to allow this ratio to move below its stated goals.
Opportunistically and as market conditions permit, management would expect to
bring this ratio back in-line with the stated objective.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED
DECEMBER 31, 1996
SUMMARY BY OPERATING DIVISION
Following is a summary of the allocated revenues and expenses for each of
the Company's operating divisions (with non-recurring and special charges
separately categorized) for the years ended December 31, 1997 and 1996,
respectively:
<TABLE>
<CAPTION>
($ IN THOUSANDS) MORTGAGE PRODUCTION
------------------- AGENCY - NON-RECURRING
AGENCY - ELIGIBLE AND SPECIAL
FOR THE YEAR ENDED DECEMBER 31, 1997* ELIGIBLE SUBPRIME SERVICING CHARGES CONSOLIDATED
- ----------------------------------------- -------- -------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 16,376 $ 1,268 $ 17,644
Net gain on sale of mortgage loans 89,358 14,012 103,370
Gain on sale of mortgage servicing rights $ 7,955 7,955
Loan servicing fees 30,869 30,869
Other income 1,180 1,180
- ----------------------------------------- -------- ------- -------- -------- --------
Total revenues 106,914 15,280 38,824 161,018
- ----------------------------------------- -------- ------- -------- -------- --------
Salary and employee benefits 51,456 7,754 3,025 62,235
Occupancy expense 6,429 711 318 7,458
Amortization of mortgage servicing rights 18,315 18,315
General and administrative expenses 17,899 2,021 7,856 $ 10,147 37,923
- ----------------------------------------- -------- ------- -------- -------- --------
Total expenses 75,784 10,486 29,514 10,147 125,931
- ----------------------------------------- -------- ------- -------- -------- --------
Income before income taxes $ 31,130 $ 4,794 $ 9,310 ($10,147) $ 35,087
======== ======= ======== ======== ========
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
($ IN THOUSANDS) MORTGAGE PRODUCTION
------------------ AGENCY - NON-RECURRING
AGENCY - ELIGIBLE AND SPECIAL
FOR THE YEAR ENDED DECEMBER 31, 1996* ELIGIBLE SUBPRIME SERVICING CHARGES CONSOLIDATED
----------------------------------------- ------- -------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net interest income $16,902 $ 16,902
Net gain on sale of mortgage loans 79,178 79,178
Gain on sale of mortgage servicing rights $ 1,105 1,105
Loan servicing fees 28,763 28,763
Other income 669 669
----------------------------------------- ------- -------- ------- -------- --------
Total revenues 96,749 29,868 126,617
----------------------------------------- ------- -------- ------- -------- --------
Salary and employee benefits $47,567 2,821 $ 5,190 55,578
Occupancy expense 5,462 178 5,640
Amortization of mortgage servicing rights 14,934 14,934
General and administrative expenses 15,904 4,013 19,917
----------------------------------------- ------- -------- ------- -------- --------
Total expenses 68,933 21,946 5,190 96,069
----------------------------------------- ------- -------- ------- -------- --------
Income before income taxes $27,816 $ 7,922 $ (5,190) $ 30,548
======= ======== ======= ======== ========
</TABLE>
*Revenues and expenses have been recorded on a direct basis to the extent
possible. Other than direct allocation, 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 direct revenues and expenses allocated
to the Company's agency-eligible mortgage production operations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1997 1996
----------- -----------
<S> <C> <C>
Net interest income $ 16,376 $ 16,902
Net gain on sale of mortgage loans 89,358 79,178
Other income 1,180 669
----------- -----------
Total production revenue 106,914 96,749
----------- -----------
Salary and employee benefits 51,456 47,567
Occupancy expense 6,429 5,462
General and administrative expenses 17,899 15,904
----------- -----------
Total production expenses 75,784 68,933
----------- -----------
Net pre-tax production margin $ 31,130 $ 27,816
----------- -----------
Production $10,437,720 $ 9,995,725
Pool delivery 10,212,966 10,217,622
Total production revenue to pool delivery 105 bps 95 bps
Total production expenses to production 73 bps 69 bps
=========== ===========
Net pre-tax production margin 32 bps 26 bps
=========== ===========
</TABLE>
Summary
The production revenue to pool delivery ratio improved 10 basis points, or
11%, for 1997 which was centered in higher net gain on sale of mortgage loans.
This improvement is primarily
<PAGE> 22
attributable to higher initial allocations of basis to servicing rights (in
accordance with the provisions of SFAS No. 125) which are related to better
overall execution in the secondary markets. The full year impact of a pool
insurance program implemented in late - 1996 and slightly higher 1997 pricing
under the Company's forward servicing sales contracts contributed to the
improved execution into the secondary market. Overall, as further discussed
below, the Company allocated 47 basis points to mortgage servicing rights for
1997 as compared to 33 basis points for 1996. Although allocation of a
relatively higher basis to mortgage servicing rights results in an initially
higher gain on sale of mortgage loans such increase is subsequently offset by
increased amortization costs and reduced gains upon resale of the underlying
mortgage servicing rights. Since the Company's policy is to sell substantially
all of the mortgage servicing rights it produces, this variance has no
significant net effect on the Company's net income or cash flow from operations.
The production expenses to production ratio increased 4 basis points, or
6%, for 1997 and partially offset the above described 10 basis point
improvement. Generally, this increase is distributed across financial statement
captions and is associated with staffing upgrades to support the Company's
increasingly large, diverse and complex business operations as well as typical
inflationary pressures on the Company's cost structure.
As a consequence of the foregoing, the Company's net agency-eligible
pre-tax production margin improved 6 basis points, or 23%, to 32 basis points
while in absolute dollars it increased $3.3 million or 12%.
Net Interest Income
The following table analyzes net interest income allocated to the Company's
agency-eligible mortgage production activities in terms of rate and volume
variances of the interest spread (the difference between interest rates earned
on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds).
<TABLE>
<CAPTION>
($ IN THOUSANDS)
Variance
Average Volume Average Rate Interest Attributable to
- ---------------------------------------- -------------------- --------------------
1997 1996 1997 1996 1997 1996 Variance Rate Volume
- ---------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
---------------
Mortgages Held for Sale and
$ 917,341 $ 816,597 7.62% 7.70% Mortgage-Backed Securities $ 69,889 $ 62,858 $ 7,031 $ (724) $7,755
------------------------------------- -------------------------------------------------
INTEREST EXPENSE
----------------
$ 430,727 $ 331,356 4.77% 4.52% Warehouse Line $ 20,559 $ 14,993 $ 5,566 $ 1,069 $4,497
461,467 462,058 5.69% 5.66% Gestation Line 26,245 26,135 110 143 (33)
48,199 15,336 6.56% 8.19% Servicing Secured Line 3,160 1,256 1,904 (787) 2,691
22,953 18,639 6.10% 5.89% Servicing Receivable Line 1,401 1,098 303 49 254
4,804 7,842 8.11% 8.50% Other Borrowings 389 667 (278) (20) (258)
Facility Fees & Other Charges 1,759 1,807 (48) (48)
------------------------------------- -------------------------------------------------
$ 968,150 $ 835,231 5.53% 5.50% Total Interest Expense $ 53,513 $ 45,956 $ 7,557 $ 454 $7,103
------------------------------------- -------------------------------------------------
2.09% 2.20% Net Interest Income $ 16,376 $ 16,902 $ (526) $(1,178) $ 652
================ =================================================
</TABLE>
Net interest income from agency-eligible product decreased 3% to $16.4
million for 1997 compared to $16.9 million for 1996. The 11 basis point decrease
in the interest-rate spread was primarily the result of the narrower spreads
between long and short-term rates in 1997 compared to 1996. The Company's
mortgages and mortgage-backed securities are generally sold and replaced within
30 to 35 days. The Company generally borrows at rates based upon short-term
indices, while its asset yields are primarily based upon long-term mortgage
rates.
<PAGE> 23
Net Gain on Sale of Agency-eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996
----------------- ---------------
<S> <C> <C>
Gross proceeds on sales of mortgage loans $ 10,427,031 $ 10,307,177
Initial unadjusted acquisition cost of mortgage loans sold, net
of hedge results 10,422,340 10,296,282
----------------- ---------------
Unadjusted gain on sale of mortgage loans 4,691 10,895
Loan origination and correspondent program administrative
fees 34,448 34,405
----------------- ---------------
Unadjusted aggregate margin 39,139 45,300
Acquisition basis allocated to mortgage servicing rights
(SFAS No. 122 and SFAS No. 125) 49,170 34,181
Net change in deferred administrative fees 1,049 (303)
----------------- ---------------
Net gain on sale of agency-eligible mortgage loans $ 89,358 $ 79,178
================= ===============
</TABLE>
The Company sold agency-eligible loans during 1997 with an aggregate unpaid
principal balance of $10.4 billion compared to sales of $10.3 billion for 1996.
The amount of proceeds received on sales of mortgage loans exceeded the initial
unadjusted acquisition cost of the loans sold by $4.7 million (4 basis points)
for 1997 as compared to $10.9 million (11 basis points) for 1996. The Company
received loan origination and correspondent program administrative fees of $34.4
million (33 basis points) on these loans during 1997 and $34.4 million (33 basis
points) during 1996. The Company allocated $49.2 million (47 basis points) to
basis in mortgage servicing rights for loans sold in 1997 as compared to $34.2
million (33 basis points) during 1996 in accordance with Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" and SFAS No. 122. Net gain
on sale of agency-eligible mortgage loans increased to $89.4 million for 1997
versus $79.2 million for 1996. This increase was primarily due to the 14
basis-point increase in acquisition basis allocated to mortgage servicing
rights.
The $10.2 million increase in net gain on sale of agency-eligible mortgage
loans resulted in the Company's improved production revenue to pool delivery
ratio, which was partially offset by the increase in production expenses to
production ratio.
SUBPRIME MORTGAGE OPERATIONS
Following is an analysis of the direct revenues and expenses allocated to
the Company's subprime mortgage production operations.
<PAGE> 24
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
($ IN THOUSANDS) 1997 1996
-------------------- ----------------
<S> <C> <C>
Net interest income $ 1,268
Net gain on sale of mortgage loans 14,012
-------------------- ----------------
Total production revenue 15,280
-------------------- ----------------
Salary and employee benefits 7,754
Occupancy expense 711
General and administrative expenses 2,021
-------------------- ----------------
Total production expenses 10,486
-------------------- ----------------
Net pre-tax production margin $ 4,794
-------------------- ----------------
Production $ 292,817 *
Whole loan sales and securitizations 284,841
Total production revenue to whole loan sales and securitizations 536 bps
Total production cost to production 358 bps
------------------- ----------------
Net pre-tax production margin 178 bps
==================== ================
</TABLE>
* Excludes $46.8 million of loans purchased from Meritage in the first quarter
of 1997.
Summary
During 1997, the Company produced $292.8 million of subprime loans (and
acquired $46.8 million which was produced by Meritage during the first quarter
of 1997 prior to its acquisition). The Company sold approximately $117.0
million (41%) of its 1997 production in whole loan transactions and delivered
$167.8 million into the secondary markets through securitization transations.
Overall, the Company operated during 1997 at a 1.78% pre-tax production margin.
At December 31, 1997 the Company had unsold subprime mortgage loans of $52.8
million.
Net Interest Income
<TABLE>
<CAPTION>
($ IN THOUSANDS) Variance
Average Volume Average Rate Interest Attributable to
- ----------------------------------------- --------------------- ---------------------
1997 1996 1997 1996 1997 1996 Variance Rate Volume
- ----------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
---------------
Mortgages Held for Sale and
$ 19,512 12.37% Mortgage-Backed
Securities $ 2,413 $ 2,413 $ 2,413
- ----------------------------------------- ----------------------------------------------------
INTEREST EXPENSE
----------------
$ 16,693 6.86% Total Interest Expense $ 1,145 $ 1,145 $ 1,145
- ----------------------------------------- ----------------------------------------------------
5.51% Net Interest Income $ 1,268 $ 1,268 $ 1,268
================== ====================================================
</TABLE>
Net interest income on subprime product was $1.3 million and the interest
rate spread was 551 basis points for 1997. This was primarily the result of the
larger interest rate spreads possible for subprime product.
Net Gain on Sale and Securitization of Subprime Mortgage Loans
<PAGE> 25
A reconciliation of the gain on securitization of subprime mortgage loans
for the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Gross proceeds on securitization of subprime mortgage loans $ 164,787
Initial acquisition cost of subprime mortgage loans
securitized, net of fees 171,802
----------------- -----------------
Unadjusted loss on securitization of subprime mortgage loans (7,015)
Initial capitalization of residual certificates 13,946
----------------- -----------------
Net gain on securitization of subprime mortgage loans $ 6,931
================= =================
</TABLE>
During 1997, the Company completed its first two securitizations of
subprime mortgage loans through its newly formed subsidiary, RBMG Funding Co.
This subsidiary was incorporated as a qualified special purpose entity to issue
securities and hold residual certificates. The asset-backed transactions were
collateralized by a combined $167.8 million of subprime mortgage loans.
These securitizations were in the form of a sale of loans to a trust. The
trust took the form of a multi-class security structure collateralized by
residential mortgage loans which receives its monthly principal and interest
paydowns from the underlying mortgage loans. As discussed previously, effective
January 1, 1997, the Company adopted SFAS No. 125. Under this pronouncement,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes liabilities
when extinguished. As a result, the Company capitalizes the subordinated classes
of securities formed upon sale of the loans to the trust. The subordinated
classes held by the Company are in the form of residual certificates. The gain
on the securitization is determined based on the difference between the carrying
value of the mortgage loans and the proceeds received from the securitization
combined with the fair value of the residual certificates less the costs of the
sale.
The residual certificates 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 December 31, 1997 valuation 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 32% 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%
<PAGE> 26
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. Difference 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 in
1997. 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 and the gross proceeds received from the purchaser. No interest in
these loans are 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 YEAR ENDED DECEMBER
31,
-----------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Gross proceeds on whole loan sales of subprime mortgage loans $ 118,817
Initial acquisition cost of subprime mortgage loans sold, net of
fees 117,003
----------------- -----------------
Unadjusted gain on whole loan sales of subprime mortgage loans 1,814
Residual certificate received from sale 5,267
----------------- -----------------
Net gain on wholesale sales of subprime mortgage loans $ 7,081
================= =================
</TABLE>
As part of one whole loan sale the Company accepted legal title to a percentage
interest in a residual certificate. This residual certificate was valued by an
independent third party and is marked to market on a quarterly basis.
Significant assumptions used for purposes of the December 31, 1997 valuation are
set forth below:
Discount Rate 13.00%
Prepayment Speeds
Fixed rate mortgages 4.8% to 28% constant prepayment rate
Adjustable rate mortgages 10% 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%
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a summary of the direct revenues and expenses allocated to the
Company's agency-eligible mortgage servicing operations for the years ended
December 31, 1997 and 1996:
<PAGE> 27
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
($ IN THOUSANDS) 1997 1996
---------- ----------
<S> <C> <C>
Loan servicing fees $ 30,869 $ 28,763
---------- ----------
Salary and employee benefits 3,025 2,821
Occupancy expense 318 178
Amortization of mortgage servicing rights 18,315 14,934
General and administrative expenses 7,856 4,013
---------- ----------
Total loan servicing expenses 29,514 21,946
---------- ----------
Net pre-tax servicing margin 1,355 6,817
Gain on sale of mortgage servicing rights 7,955 1,105
---------- ----------
Net pre-tax servicing contribution $ 9,310 $ 7,922
========== ==========
Average servicing portfolio $7,470,892 $6,509,044
Servicing sold 9,699,058 9,521,451
Net pre-tax servicing margin to average servicing portfolio 2 bps 10 bps
Gain on sale of servicing to servicing sold 8 bps 1 bp
</TABLE>
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio declined 8 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. The increase in general and administrative
expense is primarily due to the provision for foreclosure and repurchased loan
losses which increased from $0.8 million for 1996 to $4.6 million for 1997.
During 1997, the number of loans which the Company was required to repurchase in
connection with it's servicing activities increased, and accordingly, provision
charges were also increased.
Offsetting the above decline was a 7 basis point increase in the ratio of
net gain on sale of servicing to servicing sold. During 1997, the Company sold
approximately $1.3 billion of its older available-for-sale mortgage servicing
rights (as compared to none for 1996) with relatively lower accounting basis. In
connection therewith, the Company recognized approximately $3.1 million of
gains.
Overall, the servicing division contributed $9.3 million to 1997 pre-tax
net income, a $1.4 million, or 18%, increase over the $7.9 million contribution
for 1996.
Loan servicing fees were $30.9 million for 1997, compared to $28.8 million
for 1996, an increase of 7%. This increase is primarily related to an increase
in the average aggregate underlying unpaid principal balance of mortgage loans
serviced to $7.5 billion during 1997 from $6.5 billion during 1996, an increase
of 15%. Similarly, amortization of mortgage servicing rights also increased to
$18.3 million during 1997 from $14.9 million during 1996, an increase of 23%.
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 9% to $12.6
million during 1997, from $13.8 million during 1996.
<PAGE> 28
Included in loan servicing fees for 1997 and 1996 are subservicing fees
received by the Company of $567 thousand and $960 thousand, respectively. The
subservicing fees are associated with temporary subservicing agreements between
the Company and purchasers of mortgage servicing rights.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996
------------- ------------
<S> <C> <C>
Underlying unpaid principal balances of mortgage loans
on which servicing rights were sold during the period $ 9,181,405 $ 9,528,240
============= ============
Gross proceeds from sales of mortgage servicing rights $ 206,868 $ 196,406
Initial acquisition basis, net of amortization and hedge
results 160,314 164,611
------------- ------------
Unadjusted gain on sale of mortgage servicing rights 46,554 31,795
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 122 and SFAS No. 125) (38,599) (30,690)
------------- ------------
Gain on sale of mortgage servicing rights $ 7,955 $ 1,105
============= ============
</TABLE>
During 1997, the Company completed 31 sales of mortgage servicing rights
representing $9.2 billion of underlying unpaid principal mortgage loan balances.
This compares to 34 sales of mortgage servicing rights representing $9.5 billion
of underlying unpaid principal mortgage loan balances in 1996. The unadjusted
gain on the sale of mortgage servicing rights was $46.6 million (51 basis
points) for 1997, up from $31.8 million (33 basis points) for 1996. The Company
reduced this unadjusted gain by $38.6 million in 1997, versus a $30.7 million
reduction in 1996, in accordance with SFAS No. 125 and SFAS No. 122. The $6.9
million increase in gain on sale of mortgage servicing rights can be attributed
to the increased profit margins on sales of mortgage servicing rights, which is
primarily related to higher market prices in 1997 and the sale of a portion of
the available-for-sale portfolio.
NON-RECURRING AND SPECIAL CHARGES
During the third quarter of 1997, the Company recorded a $2.3 million
pre-tax charge ($1.4 million after-tax) related to a merger agreement that was
terminated and a special pre-tax charge of $7.9 million ($4.8 million after-tax)
relating to certain nonrecoverable operating receivables. Since recording the
special charge, management has further reviewed and analyzed the components of
the special charge with the objective of assessing the affected accounts and
determining the time periods in which the variances arose. Approximately $6.1
million of the charge relates to previously accrued interest income and
primarily arose during a period beginning in mid-1994 and ending in the second
quarter of 1997. Approximately $0.9 million of the charge represents unrecovered
servicing advances for interim interest and escrow funds which arose during a
period beginning in late 1995 and ending in early 1996. Approximately $0.9
million of the charge relates to loan discount and branch income accruals on
retail loan production and arose during a period beginning in mid-1995 and
ending in mid-1996.
<PAGE> 29
During 1995 and 1996, the Company's scale of operations grew dramatically.
The rapid growth outpaced increases in the Company's back-office capabilities to
timely process activities and research, review, resolve and collect on the types
of resultant items which ultimately resulted in the above summarized variances.
Given the nature of these items, management is unable to precisely determine the
portion of the charge which relates to errors in reported income versus valid
receivables which have proven uncollectible. However, management believes that
such items, to the extent they would represent errors in reported income of
prior periods, are not material to the prior periods to which they relate.
Management believes its back-office processing capabilities are currently
appropriate and adequate in relation to its current scale of operations.
During the fourth quarter of 1996, the Company recorded a $5.2 million
pre-tax non-recurring charge ($3.2 million after-tax) related to certain
contractual employment obligations.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED
DECEMBER 31, 1995
SUMMARY
Total revenues of the Company increased 65%, to $126.6 million for 1996 as
compared to $76.7 million for 1995. The $49.9 million increase in revenues was
primarily due to an $8.3 million increase in net interest income and a $39.1
million increase in gains on sales of mortgage loans and mortgage servicing
rights. These increases in revenues were partially offset by a $36.1 million
increase in operating expenses (exclusive of amortization and taxes). The
increase in net interest income is due to the increase in annual production
volumes as well as the steeper 1996 yield-curve environment. Similarly, the
increase in gains on sales of loans and servicing rights is related to the
Company's increased loan production volumes for 1996. The increase in operating
expenses is primarily attributable to increased costs associated with increased
loan production and loan servicing volumes, increased costs associated with
further development of the wholesale and retail operations, and a non-recurring
charge. Direct costs related to the Company's development of its retail and
wholesale operations account for approximately $8.4 million and $4.8 million, or
23% and 13%, respectively, of the total increase in operating expenses
(exclusive of amortization and taxes) for 1996. Approximately $5.2 million of
the increase in operating expenses, which is partially offset by a $2.0 million
decrease in income taxes, is attributable to a non-recurring charge related to
certain contractual employment obligations.
As a consequence of the foregoing, pre-tax net income increased 37%, or
$8.3 million, for 1996 as compared to 1995 and after-tax net income increased
38%, or $5.4 million.
The following sections discuss the components of the Company's results of
operations in greater detail.
NET INTEREST INCOME
The following table analyzes net interest income in terms of rate and
volume variances of the interest spread (the difference between interest rates
earned on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds).
<PAGE> 30
<TABLE>
<CAPTION>
Variance
Average Volume Average Rate Interest Attributable to
- --------------------- ----------------- ----------------- ---------------------
1996 1995 1996 1995 1996 1995 Variance Rate Volume
- -------- -------- ------- ------ ------- ------- -------- -------- ---------
($ in thousands) INTEREST INCOME ($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans Held for Sale and
$816,597 $603,735 7.70% 7.86% Mortgage-Backed Securities $62,858 $47,477 $ 15,381 $(1,358) $ 16,739
- -------- -------- -------- ---- ------- ------- -------- ------- --------
INTEREST EXPENSE
331,356 250,767 4.52% 5.46% Warehouse Line 14,993 13,695 1,298 (3,103) 4,401
462,058 304,680 5.66% 6.11% Gestation Line 26,135 18,621 7,514 (2,104) 9,618
15,336 49,358 8.19% 7.77% Servicing Secured Line 1,256 3,835 (2,579) 64 (2,643)
18,639 4,776 5.89% 6.18% Servicing Receivable Line 1,098 295 803 (53) 856
7,842 8,479 8.50% 8.46% Other Borrowings 667 717 (50) 4 (54)
Facility Fees and Other Charges 1,807 1,679 128 128
- -------- -------- -------- ---- ------- ------- -------- ------- --------
835,231 618,060 5.50% 6.28% Total Interest Expense 45,956 38,842 7,114 (5,192) 12,306
- -------- -------- -------- ---- ------- ------- -------- ------- --------
2.20% 1.58% NET INTEREST INCOME $16,902 $ 8,635 $ 8,267 $ 3,834 $ 4,433
======== ======== ======== ==== ======= ======= ======== ======= ========
</TABLE>
Net interest income increased 96% to $16.9 million for 1996 compared to
$8.6 million for 1995. The $8.3 million increase in net interest income is
primarily attributable to the 35% increase in the average volume of mortgages
held for sale and mortgage-backed securities for 1996 from that of 1995. Net
interest income also increased due to a 62 basis-point increase in the
interest-rate spread, to 220 basis points for 1996 as compared to 158 basis
points for 1995. The increase in interest-rate spread was associated primarily
with the steeper 1996 yield curve environment. The Company's mortgages and
mortgage-backed securities are generally sold and replaced within 30 to 35 days.
The Company generally borrows at rates based upon short-term indices, while its
asset yields are primarily based upon long-term mortgage rates.
NET GAINS ON SALES OF MORTGAGE LOANS AND MORTGAGE SERVICING RIGHTS
Net gains on sales of mortgage loans and mortgage servicing rights
increased $39.1 million to $80.3 million for 1996 as compared to $41.2 million
for 1995. As further discussed below, this increase is primarily due to higher
volumes of mortgage loans and mortgage servicing rights sold during 1996
compared to 1995, as well as the effects of increased profit margins on sales.
Net Gain on Sale of Mortgage Loans
A reconciliation of gain on sale of mortgage loans for the periods indicated
follows:
<PAGE> 31
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
------------- -----------
<S> <C> <C>
Gross proceeds on sale of mortgage loans $ 10,307,177 $ 6,275,802
Initial allocated acquisition basis of mortgage loans sold 10,296,282 6,275,415
------------- -----------
Unadjusted gain on sale of mortgage loans 10,895 387
Loan origination and correspondent program administrative fees 34,405 15,497
------------- -----------
Unadjusted aggregate margin 45,300 15,884
Acquisition basis allocated to mortgage servicing rights 34,181 18,913
Gains deferred to reduce mortgage servicing rights (922)
Net change in deferred administrative fees (303) (53)
------------- -----------
Net gain on sale of mortgage loans $ 79,178 $ 33,822
============= ===========
</TABLE>
The Company sold loans during 1996 with an aggregate unpaid principal
balance of $10.3 billion compared to sales of $6.3 billion for 1995. The amount
of proceeds received on sales of mortgage loans exceeded the initial unadjusted
acquisition cost of the loans sold by $10.9 million (11 basis points) for 1996
as compared to $0.4 million (1 basis point) for 1995. The Company received loan
origination and correspondent program administrative fees of $34.4 million (33
basis points) on these loans during 1996 and $15.5 million (25 basis points)
during 1995. The Company had allocated $34.2 million (33 basis points) to basis
in mortgage servicing rights for loans sold in 1996 as compared to $18.9 million
(30 basis points) allocated to loans sold in 1995. This is a result of the
adoption of SFAS No. 122 for loans acquired after April 1, 1995. Also, there is
no gain deferred against mortgage servicing rights during 1996 due to the
adoption of SFAS No. 122, while $0.9 million was deferred for 1995 prior to
implementation of SFAS No. 122 on April 1, 1995. As a result, net gain on sale
of mortgage loans increased to $79.2 million for 1996 versus $33.8 million for
1995. This increase was primarily due to the 65% increase in the volume of
mortgage loans sold, as well as an 18 basis-point increase in the unadjusted
aggregate margin on the sale of mortgage loans, from 25 basis points for 1995 to
43 basis points for 1996.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
<PAGE> 32
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995
------------- -----------
<S> <C> <C>
Underlying unpaid principal balances of mortgage loans
on which servicing rights were sold during the period $ 9,528,240 $ 4,622,018
============= ===========
Gross proceeds from sales of mortgage servicing rights 196,406 94,027
Initial allocated acquisition basis, net of amortization 164,611 77,484
------------- -----------
Unadjusted gain on sale of mortgage servicing rights 31,795 16,543
Acquisition basis allocated from mortgage loans, net of
amortization (30,690) (12,803)
Previously deferred administrative fees and gain on sale of
mortgage loans recognized 3,606
------------- -----------
Gain on sale of mortgage servicing rights $ 1,105 $ 7,346
============= ===========
</TABLE>
During 1996, the Company completed 34 sales of mortgage servicing rights
representing $9.5 billion of underlying unpaid principal mortgage loan balances.
This compares to 24 sales of mortgage servicing rights representing $4.6 billion
of underlying unpaid principal mortgage loan balances in 1995. The unadjusted
gain on the sale of mortgage servicing rights was $31.8 million (33 basis
points) for 1996, up from $16.5 million (36 basis points) for 1995. The Company
reduced this unadjusted gain by $30.7 million in 1996, compared with a $12.8
million reduction in 1995, due to the adoption of SFAS No. 122 effective April
1, 1995. Also, prior to adoption of SFAS No. 122, the Company recognized $3.6
million in previously deferred administrative fees and gains on sales of
mortgage loans. The acquisition basis allocated from mortgage loans, net of
amortization, as a percentage of unadjusted gain on sale of mortgage servicing
rights, is 97% for 1996 as compared to 77% for 1995. The lower percentage for
1995 is because SFAS No. 122 was not adopted until the second quarter of 1995.
As such, a basis allocation adjustment was not recorded for the first quarter of
1995.
NET SERVICING MARGIN
Loan servicing fees were $28.8 million for 1996, compared to $24.2 million
for 1995, an increase of 19%. This increase is primarily related to an increase
in the average aggregate underlying unpaid principal balance of mortgage loans
serviced, to $8.8 billion during 1996 from $6.4 billion during 1995, an increase
of 38%. Similarly, amortization of mortgage servicing rights also increased, to
$14.9 million during 1996 from $9.4 million during 1995, an increase of 60%. The
increase in amortization is primarily attributable to the growth in the average
balance of the mortgage loans serviced and the higher basis in the servicing
rights resulting from SFAS No. 122. As a result, net servicing margin decreased
7% to $13.8 million during 1996, from $14.9 million during 1995.
Included in loan servicing fees for 1996 and 1995 are subservicing fees
received by the Company of $960 thousand and $695 thousand, respectively. The
subservicing fees are associated with temporary subservicing agreements between
the Company and purchasers of mortgage servicing rights.
The following table summarizes the net servicing margin for both 1996 and
1995:
<PAGE> 33
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Loan servicing fees $ 28,763 $ 24,205
Amortization of mortgage servicing rights 14,934 9,352
----------- ----------
Net servicing margin $ 13,829 $ 14,853
=========== ==========
Average underlying unpaid principal
balance of mortgage loans serviced $ 8,814,560 $6,397,186
</TABLE>
OTHER INCOME
Other income decreased during 1996 compared to 1995, primarily due to the
prospective recharacterization of certain loan-related gain and loss amounts in
connection with the implementation of SFAS No. 122.
EXPENSES
The $36.1 million increase in operating expenses (excluding amortization of
mortgage servicing rights and taxes) was centered in salary and employee
benefits, which increased $24.4 million, or 78%. Approximately $5.2 million of
the increase in operating expenses, partially offset by a $2.0 million decrease
in income taxes, is attributable to recognition of a non-recurring charge
related to certain contractual employment obligations. The Company increased its
employee headcount by 147, from 880 at December 31, 1995, to 1,027 at December
31, 1996. The increased employee headcount and associated increase in salary and
employee benefit costs were necessitated by the Company's increased loan
production and increased servicing volume for 1996 as compared to 1995, which
were up 40% and 38%, respectively. Employee headcount attributable to expansion
of the wholesale and retail divisions accounted for 79 of the total 147 increase
and for $13.2 million of the total $36.1 million increase in operating expenses
(excluding amortization of mortgage servicing rights and taxes).
INCOME TAX EXPENSE
Income tax expense includes both federal and state income taxes. The
effective tax rates for 1996 and 1995 were 35.8% and 36.2%, respectively. Income
tax expense increased by 35%, to $10.9 million for 1996 from $8.1 million for
1995, due to the above-described factors that resulted in a 37%, or $8.3,
million increase in income before taxes, which was partially offset by the
Company utilizing certain primarily non-recurring state tax credits of $1.7
million.
<PAGE> 34
FINANCIAL CONDITION
During 1997, the Company experienced an 8% increase in the volume of
mortgage loans originated and acquired compared to 1996. Mortgage loan
production increased to $10.8 billion during 1997 from $10.0 billion during
1996. The December 31, 1997, locked mortgage application pipeline (mortgage
loans not yet closed but for which the interest rate has been locked) was
approximately $1.0 billion and the application pipeline (mortgage loans for
which the interest rate has not yet been locked) was approximately $0.5 billion.
The Company continued expansion of the wholesale network during 1997, with the
addition of branches in Nevada and Utah. This increased the number of wholesale
branches in operation at December 31, 1997, to 15. In addition to the 15
wholesale branches, each of the Company's six retail branches is eligible to do
business in the wholesale market. At December 31, 1997, there were approximately
3,291 wholesale brokers approved to do business with the wholesale division as
compared to approximately 2,322 at December 31, 1996. Of the 3,291 approved
brokers, 245 are approved to do business with the retail branches. In addition
at December 31, 1997, the subprime division served 661 brokers.
Residential mortgage loans held for sale and mortgage-backed securities
totaled $1.2 billion at December 31, 1997, versus $802.3 million at December 31,
1996, an increase of 47%. The Company's servicing portfolio (exclusive of loans
under subservicing agreements) increased to $7.1 billion at December 31, 1997,
from $6.7 billion at December 31, 1996, an increase of 7%.
Short-term borrowings, which are the Company's primary source of funds,
totaled $1.2 billion at December 31, 1997, compared to $805.7 million at
December 31, 1996, an increase of 52%. The increase in the balance outstanding
at December 31, 1997, resulted from increased funding requirements related to
the increase in the balance of mortgage loans held for sale and mortgage-backed
securities. At December 31, 1997, there were $6.5 million in long-term
borrowings, compared to none at December 31, 1996.
Other liabilities totaled $86.6 million as of December 31, 1997,
compared to the December 31, 1996, balance of $54.0 million, an increase of
$32.6 million, or 60%. 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 other factors beyond
the Company's control. Management of the Company recognizes these challenges and
continues 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 1998. The credit agreement
includes covenants requiring the Company to maintain (i) a minimum net worth of
$130 million, plus net income subsequent to July 31, 1996, and capital
<PAGE> 35
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 Company's ability (i) to pay dividends in any fiscal quarter which exceed
50% of the Company's net income for the quarter or (ii) to engage significantly
in any type of business unrelated to the mortgage banking business and the
servicing of mortgage loans.
Additionally, the Company entered into a $200 million, 364-day term
revolving credit facility with a syndicate of unaffiliated banks. An $80 million
portion of the revolver facility converts on July 29, 1998, into a four-year
term loan. The facility is secured by the Company's servicing portfolio
designated as "available-for-sale". A $70 million portion of the revolver
facility matures on July 29, 1998, and is secured by the Company's servicing
portfolio designated as "held-for-sale". A $50 million portion of the revolver
facility matures on July 29, 1998, and is secured by a first-priority security
interest in receivables on servicing rights sold. The facility includes
covenants identical to those described above with respect to the warehouse line
of credit.
The Company has also entered into a $200 million, 364-day term subprime
revolving credit facility, which expires in July 1998. The facility includes
covenants identical to those as described above with respect to the warehouse
line of credit.
The Company was in compliance with the above-mentioned debt covenants
at December 31, 1997. Although management anticipates continued compliance,
there can be no assurance that the Company will be able to comply with the debt
covenants specified for each of these financing agreements. Failure to comply
could result in the loss of the related financing.
The Company has also entered into an uncommitted gestation financing
arrangement. The interest rate on funds borrowed pursuant to the gestation line
is based on a spread over the Federal Funds rate. The gestation line has a
funding limit of $1.2 billion.
The Company entered into a $6.6 million note agreement in May 1997.
This debt is secured by the Company's corporate headquarters. The terms of the
agreement require the Company to make 120 equal monthly principal and interest
payments based upon a fixed interest rate of 8.07%. The note contains covenants
similar to those described above.
RBC has a 364-day $50 million revolving credit facility to provide
interim financing for its leasing portfolio. The warehouse credit agreement
matures on June 30, 1998 and contains various covenants regarding
characteristics of the collateral and the performance of the leases originated
and serviced by RBC 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 certificate of
incorporation.
<PAGE> 36
On December 31, 1997, the Company acquired RBC in a transaction in
which it exchanged 9,894,889 shares of the Company's common stock for all of the
outstanding stock of RBC. Therefore, on a consolidated basis, RBC no longer has
an ownership interest in the Company. As a result of the Company's acquisition
of RBC, the Company acquired approximately $6.5 million in cash, $2.7 million in
receivables, $51.5 million in lease receivables, $1.2 million in premises and
equipment, $7.3 million in mortgage servicing rights and $4.1 million in other
assets and recorded $5.9 million in goodwill and other identifiable intangible
assets.
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 our enterprise wide mortgage
systems. The new systems are Year 2000 compliant. This effort encompasses the
major systems that perform our mission critical functions. Several components
have been installed and we are currently 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 corespondent 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 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.
New Accounting Standards
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 plans
to adopt SFAS No. 130 in 1998 and the effect of the adoption of this SFAS is not
expected to be material to the Company.
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 and thus will be adopted by the Company
in 1998. The effect of the adoption of this SFAS is not expected to be material
to the Company.
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
<PAGE> 37
beginning after December 15, 1997 and will be adopted by the Company in 1998.
The effects of adoption are not expected to be material to the Company.
<PAGE> 38
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED BALANCE SHEET
($ in thousands, except share information)
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 13,546 $ 2,492
Receivables 87,702 60,668
Trading securities:
Mortgage-backed securities 334,598 123,447
Residual interests in subprime securitizations 19,684
Mortgage loans held for sale 844,590 678,888
Lease receivables 51,494
Mortgage servicing rights, net 127,326 109,815
Premises and equipment, net 27,723 21,135
Accrued interest receivable 4,372 4,491
Goodwill and other intangibles 15,519
Other assets 30,375 27,458
----------- -----------
Total assets $ 1,556,929 $ 1,028,394
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 1,224,489 $ 805,730
Long-term borrowings 6,461
Accrued expenses 24,262 11,386
Other liabilities 86,578 53,977
----------- -----------
Total liabilities 1,341,790 871,093
----------- -----------
Stockholders' equity
Preferred stock - par value $.01 - 5,000,000 shares authorized; no
shares issued or outstanding
Common stock - par value $.01 - 50,000,000 shares authorized;
31,120,383 and 19,285,020 shares issued and outstanding at
December 31, 1997 and 1996, respectively 311 193
Additional paid-in capital 299,516 149,653
Retained earnings 17,763 12,007
Common stock held by subsidiary at cost- 7,767,099 shares at December 31, 1997 (98,953)
Unearned shares of employee stock ownership plan (3,498) (4,552)
----------- -----------
Total stockholders' equity 215,139 157,301
----------- -----------
Commitments and contingencies (Notes 9 and 14)
----------- -----------
Total liabilities and stockholders' equity $ 1,556,929 $ 1,028,394
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 39
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
($ in thousands, except share information)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Interest income $ 72,302 $ 62,858 $ 47,477
Interest expense (54,658) (45,956) (38,842)
- ------------------------------------------------------------------------------------------------------------
Net interest income 17,644 16,902 8,635
Net gain on sale of mortgage loans 103,370 79,178 33,822
Gain on sale of mortgage servicing rights 7,955 1,105 7,346
Loan servicing fees 30,869 28,763 24,205
Other income 1,180 669 2,689
- ------------------------------------------------------------------------------------------------------------
Total revenues 161,018 126,617 76,697
- ------------------------------------------------------------------------------------------------------------
EXPENSES
Salary and employee benefits 62,235 55,578 31,199
Occupancy expense 7,458 5,640 3,066
Amortization of mortgage servicing rights 18,315 14,934 9,352
General and administrative expenses 37,923 19,917 10,788
- ------------------------------------------------------------------------------------------------------------
Total expenses 125,931 96,069 54,405
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 35,087 30,548 22,292
Income tax expense (13,289) (10,925) (8,073)
- ------------------------------------------------------------------------------------------------------------
Net income $ 21,798 $ 19,623 $ 14,219
- ------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - Basic 20,396,428 19,158,658 16,181,588
Net income per common share - Basic $ 1.07 $ 1.02 $ 0.88
Weighted average common shares outstanding - Diluted 20,800,828 19,525,867 16,479,797
Net income per common share - Diluted $ 1.05 $ 1.00 $ 0.86
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 40
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands, except share information)
<TABLE>
<CAPTION>
ADDITIONAL UNEARNED COMMON TOTAL
COMMON STOCK PAID-IN RETAINED ESOP STOCK HELD BY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES SUBSIDIARY EQUITY
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 11,944,304 $ 119 $ 60,157 $ 20,338 $ 80,614
Issuance of restricted stock 43,402 * 406 406
Retroactive adjustments for
5% stock dividends declared
on March 25, 1995 and
August 3, 1995 and for 7%
stock dividend declared on
June 5, 1995 2,550,258 27 23,805 (23,832)
Loans to Employee Stock Ownership Plan $(2,000) (2,000)
Shares issued under Dividend
Reinvestment and Stock Purchase Plan 12,498 * 165 165
Net income 14,219 14,219
-------------------------------------------------------------------------------------
Balance, December 31, 1995 14,550,462 146 84,533 10,725 (2,000) 93,404
Issuance of restricted stock 16,410 * 256 256
Net proceeds of public offering 3,426,552 34 47,417 47,451
Retroactive adjustment for 7% stock
dividend declared on August 12, 1996 1,261,332 13 17,115 (17,128)
Cash dividends (1,119) (1,119)
Shares issued or purchased under
Dividend Reinvestment and Stock
Purchase Plan and Stock Investment Plan 30,264 * 180 (94) 86
Loans to Employee Stock Ownership Plan (3,000) (3,000)
Shares committed to be released under
Employee Stock Ownership Plan 152 448 600
Net income 19,623 19,623
-------------------------------------------------------------------------------------
Balance, December 31, 1996 19,285,020 193 149,653 12,007 (4,552) 157,301
Issuance of restricted stock 23,528 * 328 328
Cash dividends (2,536) (2,536)
Acquistion of Meritage Mortgage
Corporation 808,548 8 8,692 8,700
Acquisition of Resource Bancshares
Corporation 9,894,889 99 125,962 $(98,953) 27,108
Exercise of stock options 62,000 1 629 630
Shares committed to be released under
Employee Stock Ownership Plan 426 1,054 1,480
Shares issued or purchased under
Dividend Reinvestment and Stock
Purchase Plan and Stock Investment Plan 37,163 * 428 (98) 330
Retroactive adjustment for the 5% stock
dividend declared on October 31, 1997 1,009,235 10 13,398 (13,408)
Net income 21,798 21,798
-------------------------------------------------------------------------------------
Balance, December 31, 1997 31,120,383 $ 311 $ 299,516 $ 17,763 $(3,498) $(98,953) $215,139
==================== ========== ========== ======= ======== ========
</TABLE>
*Amount less than $1
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 41
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 21,798 $ 19,623 $ 14,219
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 21,859 17,566 10,991
Deferred income tax expense (benefit) 3,862 (2,463) 11,046
Employee Stock Ownership Plan compensation 1,480 600
Provision for estimated foreclosure losses and repurchased loans 4,615 817 168
Increase in receivables (24,303) (2,775) (26,999)
Acquisition of mortgage loans (10,777,294) (9,995,725) (7,135,774)
Proceeds from sales of mortgage loans
and mortgage-backed securities 10,503,811 10,307,177 6,275,802
Acquisition of mortgage servicing rights (230,503) (220,335) (129,641)
Sales of mortgage servicing rights 206,868 196,406 94,027
Net gain on sales of mortgage loans and servicing rights (111,325) (80,283) (41,168)
Decrease (increase) in accrued interest on loans 341 4,973 (8,787)
Increase in other assets (764) (16,897) (23,281)
Increase in residual certificates (19,684)
Increase in accrued expenses and other liabilities 17,179 1,220 23,647
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (382,060) 229,904 (935,750)
- --------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash assets acquired from Resource Bancshares Corporation 6,535
Acquisition of Meritage Mortgage Corporation (1,750)
Purchases of furniture, fixtures and equipment (8,613) (7,453) (5,510)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,828) (7,453) (5,510)
- --------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings 28,328,222 31,468,370 23,478,835
Repayment of borrowings (27,929,479) (31,733,727) (22,533,020)
Debt issuance costs (553) (437) (1,197)
Issuance of restricted stock 328 256 406
Activity under Employee Stock Ownership Plan (3,000) (2,000)
Shares issued under Dividend Reinvestment and Stock Purchase Plan 330 86 165
Cash dividends (2,536) (1,119)
Exercise of stock options 630
Net proceeds from public offering 47,451
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 396,942 (222,120) 943,189
- --------------------------------------------------------------------------------------------------------------------------
Net increase in cash 11,054 331 1,929
Cash, beginning of year 2,492 2,161 232
- --------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 13,546 $ 2,492 $ 2,161
==========================================================================================================================
SUPPLEMENTAL ACTIVITIES
Interest paid $ 55,762 $ 46,860 $ 36,264
Taxes paid 10,253 11,245 3,710
Non-cash activity acquisition of Resource Bancshares Corporation 20,573
Non-cash activity acquisition of Meritage Mortgage Corporation 8,700
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($IN THOUSANDS, EXCEPT SHARE INFORMATION)
Note 1 - The Company:
Resource Bancshares Mortgage Group, Inc. (the Company), was organized
to acquire and operate the residential mortgage banking business of Resource
Bancshares Corporation (RBC), which commenced operations in May 1989. The assets
and liabilities of the residential mortgage banking business of RBC were
transferred to the Company on June 3, 1993, when the Company sold 58% of its
common stock in an initial public offering. As a result, RBC retained a
significant ownership interest in the Company. On December 31, 1997, the Company
acquired RBC in a transaction in which it exchanged 9,894,889 shares of the
Company's common stock for all of the outstanding stock of RBC. Therefore, on a
consolidated basis, RBC no longer has an ownership interest in the Company.
The Company is a diversified financial services company engaged
primarily in the business of mortgage banking, through the origination and
purchase (through a nationwide network of correspondents, brokers and retail
offices), 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.
Note 2 - Summary of Significant Accounting Policies:
The accounting and reporting policies of the Company reflect industry
practices and conform in all material respects with generally accepted
accounting principles. Certain amounts from prior years have been reclassified
to conform to current period presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated. The pro-forma impact of the RBC
acquisition is discussed elsewhere in the notes to these consolidated financial
statements.
Significant Estimates
In preparing the financial statements, management is required to make
estimates based on available information that can affect the reported amounts of
assets, liabilities and disclosures as of the balance sheet date and revenues
and expenses for the related periods. Such estimates relate principally to the
Company's allowance for foreclosure losses and repurchased loans, its allowance
for lease losses and fair value of residual certificates. Additionally,
estimates concerning the fair values of mortgage loans held for sale, lease
receivables, servicing rights, servicing hedges and the Company's other hedging
instruments are all relevant to ensuring that leases and mortgage loans are
carried at the lower of cost or market, and that potential impairments of
servicing rights are recognized as and if required. Because of the inherent
<PAGE> 43
uncertainties associated with any estimation process and due to possible future
changes in market and economic conditions that will affect fair values, it is
possible that actual future results in realization of the underlying assets and
liabilities could differ significantly from the amounts reflected as of the
balance sheet date.
Investment Securities
Investments in debt securities are classified in three categories:
held-to-maturity securities (reported at amortized cost); trading securities
(reported at fair value, with unrealized gains or losses included in earnings);
and available-for-sale securities (reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity). Substantially all of the Company's investments are in the
form of mortgage-backed securities that are held for sale in conjunction with
the Company's mortgage banking activities. Such securities are classified as
trading securities as defined by Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for certain investments in Debt and Equity
Securities". The cost of securities sold is based on the specific identification
method.
Mortgage Loans Held for Sale
Mortgage loans held for sale are stated at the lower of aggregate cost
or market.
Mortgage Servicing Rights
Prior to April 1, 1995, and in conjunction with the acquisition of
mortgage loans, the Company capitalized as mortgage servicing rights the portion
of the purchase price that represented the premium paid for the right to service
the mortgage loans. The amount capitalized was subsequently reduced if the
mortgage loans were sold at a gain. Effective April 1, 1995 the Company adopted
SFAS No. 122, "Accounting for Mortgage Servicing Rights - An Amendment of FASB
Statement No. 65." The Company subsequently adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" which supersedes SFAS No. 122 effective January 1, 1997. The
provisions of SFAS No. 125 did not materially alter the Company's accounting for
mortgage servicing rights. Accordingly, effective April 1, 1995, and as required
by SFAS No. 122, the Company now allocates the total cost of a whole mortgage
loan to the mortgage servicing rights and the loan (without servicing rights)
based on relative fair values. The amount capitalized is no longer required to
be reduced if the mortgage loan is sold at a gain. The market value of servicing
rights acquired in bulk transactions, rather than as a by-product of the
Company's loan production activities, is initially capitalized at the lower of
cost or the estimated present value of future expected net servicing income.
Amounts capitalized as mortgage servicing rights are amortized over the period
of, and in proportion to, estimated future net servicing income. The Company
periodically assesses its capitalized mortgage servicing rights for impairment
(on a stratified basis) based on the estimated market values of those rights.
Impairments are recognized as a valuation allowance for each impaired stratum.
Market value is estimated by reference to a third-party analysis that values
such rights in consideration of current forward committed delivery prices,
prevailing interest, prepayment and default rates, and other relevant factors as
appropriate or allocable to each valuation stratum.
<PAGE> 44
Residual Certificates in Subprime Securitizations
The Company obtained three residual certificates during the third and
fourth quarters of 1997 as a result of subprime loan sales. The residual
certificates are classified as trading securities (as defined in SFAS No. 115),
and changes in it's fair value 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 in this
valuation include the discount rate, prepayment speed, and credit loss
estimates. Each of these factors can be significantly affected by changes in the
interest rate environment and expose the Company to prepayment, basis and rate
risks. Other factors evaluated in the determination of fair value include, but
are not necessarily limited to, the 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 an adverse effect on the fair value of the residual certificates.
Loan Origination and Correspondent Program Administration Fees
Fees charged in connection with loan origination and fees charged to
loan correspondents in conjunction with certain administrative functions
performed by the Company in connection with the acquisition of mortgage loans
are deferred and reduce the carrying value of the underlying mortgage loans.
Allocable portions of such fees are included in the determination of the gain or
loss when the related mortgage loans or servicing rights are sold.
Sales of Mortgage Loans and Mortgage Servicing Rights
Gains or losses on sales of agency-eligible and whole loan sales of
subprime mortgage loans are determined at settlement date and are measured by
the difference between the net proceeds and the carrying amount of the
underlying mortgage loans. Prior to implementation of SFAS No. 122, gains not in
excess of the amortized basis of mortgage servicing rights capitalized in
conjunction with the acquisition of the loans were applied as a reduction of
mortgage servicing rights and gains in excess of the amortized basis in mortgage
servicing rights and losses on the sales of mortgage loans were recognized at
settlement date. Effective with the implementation of SFAS No. 122, gains on
sales of mortgage loans are no longer required to be deferred as a reduction of
basis in mortgage servicing rights, and gains and losses on sales of mortgage
servicing rights are recognized at the sale date, which is the date the sales
contract is closed and substantially all risks and rewards of ownership pass to
the buyer.
During 1997, the Company completed its first two securitizations of
subprime mortgage loans. These securitizations were in the form of a sale of
loans to a trust. The trust took the form of a multi-class security structure
collateralized by residential mortgage loans which receives its
<PAGE> 45
monthly principal and interest paydowns from the underlying mortgage loans. As
discussed above, effective January 1, 1997, the Company adopted SFAS No. 125.
Under this pronouncement, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. As a result, the Company
capitalizes the subordinated classes of securities formed upon sale of the loans
to the trust. The subordinated classes held by the Company are in the form of
residual certificates. The gain on the securitization is determined based on the
difference between the (i) carrying value of the mortgage loans and (ii) the
proceeds received from the securitization and the fair value of the residual
certificates less the costs of the sale.
Lease Receivables
Receivables consist of direct financing leases which are carried at the
aggregate of lease payments and estimated residuals less unearned discount and
unamortized origination costs, except for leases held for sale which are carried
at the lower of aggregate cost or market value. Interest income is recognized
monthly based on the net lease outstanding balance. Residuals are recognized
monthly based on the estimated end-of-lease residuals and are included as an
adjustment to interest income. Lease receivables are charged-off at the earlier
of the date they are deemed uncollectible or when they become 120 days past due.
Certain direct costs to originate lease receivables are deferred and recognized
as an adjustment to interest income over the estimated life of the lease. The
allowance for lease losses is established through a provision charged to
operations. The allowance is reviewed and adjusted as needed based upon
management's evaluation of factors affecting the lease receivable portfolios
such as economic conditions, growth and composition of the portfolio, historical
loss experience and analysis of the collectibility of specific lease
receivables. The allowance is established at an amount that management believes
will be adequate to absorb probable losses on outstanding leases that may become
uncollectible. At December 31, 1997, the allowance for lease losses was $1,866.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Maintenance and repairs are expensed as
incurred.
Goodwill and Other Intangible Assets
Goodwill arising from the acquisitions of RBC and Meritage is being
amortized over 20 years using the straight-line method.
Estimated Foreclosure Losses
As a servicer of mortgage loans, the Company will incur certain losses
in the event it becomes necessary to carry out foreclosure actions on loans
serviced. Generally, such losses relate to FHA or VA loans, which are insured or
guaranteed on a limited basis. Substantially all other serviced loans are fully
guaranteed against such losses by the securitizing government agency. The
allowance for estimated losses on foreclosure, which is part of the mortgage
servicing rights basis, is determined based on delinquency trends and
management's evaluation of the probability that foreclosure actions will be
necessary. The allowance for estimated losses on foreclosure was $1,380 and
$1,550 at December 31, 1997 and 1996, respectively.
<PAGE> 46
Income Taxes
The Company records taxes under an asset and liability approach,
recognizing deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities. Current taxes payable of $9,427 and $13,388 for the
years ended December 31, 1997 and 1996, are included in other liabilities.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which is effective for
transactions entered into in fiscal years beginning after December 15, 1995.
SFAS No. 123 defines a fair-value-based method of accounting for stock-based
compensation. The statement allows measurement of compensation cost generally in
conformity with past practice under Accounting Principles Board Opinion No. 25
(APB No. 25), "Accounting for Stock Issued to Employees," provided pro forma
disclosure is made concerning net income as if the fair value approach had been
applied. The Company adopted the disclosure approach permitted by SFAS No. 123
effective January 1, 1996, and, as also permitted, continues to apply the
compensatory measurement principles of APB No. 25.
Statement of Cash Flows
The Company has adopted the indirect method of reporting cash flows.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, "Earnings Per Share", which establishes standards for
computing and presenting earnings per share (EPS) by replacing the presentation
of primary EPS with a presentation of basic and diluted EPS on the face of the
income statement and requires a reconciliation of the numerator and the
denominator of the basic and diluted EPS calculation. The Company has
prospectively adopted SFAS No. 128 as of December 31, 1997 and has restated EPS
for all periods presented.
Note 3 - Acquisition of Resource Bancshares Corporation:
Effective December 31, 1997, the Company acquired Resource bancshares
Corporation (RBC) in a transaction in which it exchanged approximately 9,894,889
shares of Company common stock for all the outstanding stock of RBC. RBC,
through it's Republic Leasing Company, division (Republic Leasing) and its
subsidiary, Laureate Realty Services, Inc. (Laureate Realty), have engaged
primarily in commercial small ticket equipment lease financing and servicing and
commercial mortgage banking. Substantially all of Republic Leasing's lease
receivables are acquired from independent brokers who operate throughout the
continental United States. 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.
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. Because RBC was acquired as of the close of
business on December 31,
<PAGE> 47
1997 and is being accounted for under the purchase method of accounting, there
is no income statement activity for RBC included in the Company's consolidated
financial statements. The estimated total purchase price for the RBC merger has
been allocated to tangible and identifiable intangible 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 and other intangible assets. The estimated allocations of the purchase
price are expected to be revised as additional information concerning asset and
liability valuation is obtained; however, the Company does not believe that the
final purchase price allocation will differ significantly from the information
presented herein. Goodwill and other intangible assets are being amortized over
a 20-year period using the straight line method. In connection with the
acquisition, the following is a schedule of the allocation of the purchase
price:
<TABLE>
<S> <C>
Estimated fair value of shares of
Company common stock $ 126,061
Acquisition costs 1,317
Less: common stock held by RBC (98,953)
---------
28,425
Fair value of net assets acquired:
Cash acquired 6,535
Noncash assets acquired:
Receivables 2,731
Lease receivables 51,494
Mortgage servicing rights 7,337
Premises and equipment 1,250
Other assets 4,129
Liabilities assumed (50,913)
---------
Fair value of net assets acquired 22,563
---------
Goodwill and other intangibles $ 5,862
=========
</TABLE>
The following unaudited pro forma combined results of operations have
been prepared as if RBC had been acquired as of the beginning of 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenues $179,733 $145,193
Net income 18,913 17,489
Net income per common share - basic 0.93 0.91
Net income per common share - diluted 0.91 0.90
</TABLE>
In management's opinion, the unaudited pro forma combined results are
not necessarily indicative of the actual results that would have occurred if the
acquisition had been completed as of the beginning of each year presented, nor
are they necessarily indicative of future consolidated results under the
ownership and management of the Company.
<PAGE> 48
Note 4 - Acquisition of Meritage Mortgage Corporation:
On April 1, 1997, the Company acquired Meritage Mortgage Corporation
(Meritage) in a transaction in which approximately $1.75 million of cash and
537,846 (564,738 after consideration of the Stock Dividends as defined in Note
11) shares of the Company's common stock were exchanged for all the outstanding
stock of Meritage. In addition, 406,053 (426,355 after consideration of the
Stock Dividends) shares of the Company's common stock were issued and placed in
escrow to be released contingent upon Meritage achieving specified increasingly
higher levels of subprime mortgage production during the 31 months following the
completion of the merger. During the last six months of 1997, 270,702 (284,237
shares after consideration of the Stock Dividends) shares of contingent stock
were released. Shares released under the terms of this contingent arrangement
will be accounted for as an addition to goodwill. Meritage is a wholesale
originator of subprime mortgages headquartered in Portland, Oregon with offices
in California, Washington and Colorado. The transaction including contingent
payments was accounted for under the purchase method of accounting. As such the
results of operations for Meritage are included in the Company's financial
results beginning April 1, 1997. Pro forma net income for periods prior to April
1, 1997 are not material for disclosure purposes. The estimated total purchase
price for the Meritage acquisition has been allocated to tangible and
identifiable intangible 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 and other intangible
assets. The estimated allocations of the purchase price are expected to be
revised as additional contingent shares are released and goodwill is increased
by the fair market value of these released shares. Goodwill and other intangible
assets are being amortized over a 20 year period using the straight line method.
Amortization expense for the year ended December 31, 1997 was $287. In
connection with the acquisition, the following is a schedule of the allocation
of the purchase price:
<TABLE>
<CAPTION>
AT
ACQUISITION RELEASE OF THROUGH
ON APRIL 1, CONTINGENT DECEMBER 31,
1997 SHARES 1997
----------- ---------- ------------
<S> <C> <C> <C>
Cash paid $ 1,750 $ 1,750
Estimated fair value of shares of
Company common stock 4,748 $ 3,983 8,731
Deferred acquisition costs 463 463
------- ------- -------
Total purchase price 6,961 3,983 10,944
Fair value of net assets acquired 1,000 1,000
------- ------- -------
Goodwill and other intangibles $ 5,961 $ 3,983 $ 9,944
======= ======= =======
</TABLE>
Note 5 - Receivables:
Receivables consist primarily of amounts due to the Company related to
sales of mortgage servicing rights and advances of delinquent principal,
interest, tax and insurance payments
<PAGE> 49
related to loans serviced. Management does not anticipate losses on realization
of the receivables. Receivables consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
------- -------
<S> <C> <C>
Mortgage servicing rights sales, net of reserves $59,111 $33,609
Servicing advances 13,007 14,752
Other 15,584 12,307
------- -------
$87,702 $60,668
======= =======
</TABLE>
Note 6 - Lease Receivables:
Lease receivables at December 31, 1997 are summarized as follows:
<TABLE>
<S> <C>
Lease receivables held for sale $ 66,244
Less-Unearned discount (12,884)
Less-Allowance for lease losses (1,866)
--------
$ 51,494
========
</TABLE>
The components of the Company's investment in lease receivables at
December 31, 1997 are summarized as follows:
<TABLE>
<S> <C>
Minimum lease payments due from lessees
and estimated residuals $ 63,382
Initial direct costs, net 2,862
--------
$ 66,244
========
</TABLE>
At December 31, 1997, the maturities of minimum lease receivables are
as follows:
<TABLE>
<S> <C>
1998 $ 22,733
1999 16,513
2000 11,861
2001 7,880
2002 4,353
2003 and thereafter 42
--------
$ 63,382
========
</TABLE>
Leases represent unconditional obligations of the lessees to pay all
scheduled payments and require the lessees to assume all responsibility with
respect to the equipment, including the obligation to pay all costs relating to
its operation, maintenance, repair, sales and property taxes and insurance. At
December 31, 1997, the average lease size was approximately $19 and there were
only four leases with a current lease receivable in excess of $250.
At December 31, 1997, approximately 19% and 10% of the Company's net
lease receivables were located in the states of California and Florida,
respectively. At December 31, 1997,
<PAGE> 50
approximately 18% and 11% of the Company's net lease receivables were
collateralized by computer equipment and titled equipment, respectively.
Otherwise, there are no geographic, equipment type or lessee industry
concentrations greater than 10%.
The Company's leases are collateralized by the equipment subject to the
leases. In most instances, the Company requires a security deposit equal to one
monthly payment and personal guarantees. In addition, where considered necessary
other credit enhancements are obtained. At December 31, 1997, the Company held
security deposits and sales and property taxes for the benefit of lessees of
$2,773.
Note 7 - Fair Value and Impairments of Mortgage Servicing Rights:
For purposes of evaluating its residential mortgage servicing portfolio
for impairment, the Company disaggregates its portfolio into two primary
segments: available-for-sale and held-for-sale.
The segment of the portfolio designated as available-for-sale is
comprised of servicing rights that were purchased in bulk transactions or that
were retained out of production pursuant to individual portfolio retention
decisions. The available-for-sale portfolio is disaggregated for purposes of
measuring potential impairments according to each individual bulk purchase or
portfolio retention decision, which the Company has determined to be the
appropriate approach to disaggregation by predominant risk characteristic for
this portfolio segment. With respect to each such risk tranche, the fair value
thereof, which is based upon a third-party analysis that considers current
forward committed delivery prices, prevailing interest, prepayment and default
rates and other relevant factors, together with the fair value of hedges
allocated thereto (which is based upon broker quotes) is compared to amortized
carrying values of the mortgage servicing rights for purposes of measuring
potential impairment. The Company uses CMT floors to protect itself against
interest and prepayment risk on its available-for-sale portfolio. At December
31, 1997, the underlying unpaid principal balance of the available-for-sale
portfolio totaled $4,196,825, its fair value was estimated as $73,238, the fair
value of hedges allocated thereto was estimated as $11,801, and the carrying
value of the portfolio was $72,130, which is net of accumulated amortization of
$23,097. At December 31, 1996, the underlying unpaid principal balance of the
available-for-sale portfolio totaled $4,842,253, its fair value was estimated as
$91,508, the fair value of hedges allocated thereto was estimated as $5,056, and
the carrying value of the portfolio was $76,136, which is net of accumulated
amortization of $18,198. No impairment provisions were required for 1997 or for
1996 with respect to this segment of the portfolio.
The segment of the portfolio designated as held-for-sale is comprised
of recently produced servicing rights that are scheduled for sale and have been
allocated to specific forward servicing sales contracts. The held-for-sale
portfolio is disaggregated for purposes of measuring possible impairments
according to the specific forward sales contracts to which allocated, which the
Company has determined to be the appropriate approach to disaggregation by
predominant risk characteristic for this portfolio segment. For each such risk
tranche, the fair value thereof, which is based upon the allocated forward
committed delivery price, is compared to amortized carrying value for purposes
of measuring potential impairment. At December 31, 1997, the underlying
<PAGE> 51
unpaid principal balance of the held-for-sale portfolio totaled $2,928,397. Its
fair value, approximated its carrying value, which was $55,196, net of
accumulated amortization of $885. At December 31, 1996, the underlying unpaid
principal balance of the held-for-sale portfolio totaled $1,828,014, its fair
value was estimated as $37,109, and its carrying value was $36,057, which is net
of accumulated amortization of $683. No impairment provisions were required for
1997 or for 1996 with respect to this segment of the portfolio.
Note 8 - Premises and Equipment:
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
Estimated
Useful DECEMBER 31,
Lives 1997 1996
----------- -------- --------
<S> <C> <C> <C>
Building 25 years $ 6,715 $ 6,714
Building improvements 10-15 years 1,482 939
Furniture, fixtures and equipment 5-10 years 28,688 16,772
-------- --------
36,885 24,425
Less-Accumulated depreciation (12,259) (6,337)
-------- --------
24,626 18,088
Land 3,097 3,047
-------- --------
$ 27,723 $ 21,135
======== ========
</TABLE>
Depreciation expense was $3,275 in 1997, $2,632 in 1996, and $1,639 in 1995.
Note 9 - Lease Commitments:
The Company has entered into various non-cancelable operating lease
agreements, primarily for office space. Certain of these leases contain renewal
options and escalation clauses. At December 31, 1997, the annual minimum rental
commitments for non-cancelable leases with remaining terms in excess of one year
are as follows:
<TABLE>
<S> <C>
1998 $2,889
1999 3,055
2000 2,179
2001 1,058
2002 and thereafter 529
------
$9,710
======
</TABLE>
Minimum rental commitments have not been reduced by minimum sublease
rentals of $1,276 that are due in the future under non-cancelable subleases.
Rent expense for operating leases, exclusive of sublease rental income of $445
for 1997, $385 for 1996 and $354 for 1995, was $2,181 in 1997, $1,905 in 1996
and $1,147 in 1995.
<PAGE> 52
Note 10 - Short-Term and Long-Term Borrowings:
The Company has entered into a 364-day, $670,000 warehouse line of
credit provided by a syndicate of unaffiliated banks that expires in July 1998.
The credit agreement includes covenants requiring the Company to maintain (i) a
minimum net worth of $130,000, plus net income subsequent to July 31, 1996, and
capital contributions and minus permitted dividends, (ii) a ratio of total
liabilities, excluding debt incurred pursuant to gestation and repurchase
financing agreements, to adjusted net worth of not more than 8.0 to 1.0, (iii)
its eligibility as a servicer of 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 $4,000,000. The provisions of
the agreement also restrict the Company's ability to pay dividends in any fiscal
quarter that exceed 50% of the Company's net income for the quarter; or to
engage significantly in any type of business unrelated to the mortgage banking
business and the servicing of mortgage loans. At December 31, 1997 and 1996, the
total amounts outstanding under this and its predecessor facilities were
$511,700 and $540,900, respectively.
Additionally, the Company has entered into a $200,000, 364-day
revolving credit facility with a syndicate of unaffiliated banks. An $80,000
portion of the revolver facility converts in July 1998, into a four-year term
loan and is secured by the portion of the Company's servicing portfolio
designated as "available-for-sale". A $70,000 portion of the revolver facility
matures in July 1998, and is secured by the portion of the Company's servicing
portfolio designated as "held-for-sale". A $50,000 portion of the revolver
facility matures in July 1998, and is secured by a first-priority security
interest in receivables on servicing rights sold. The facility includes
covenants identical to those described above with respect to the warehouse line
of credit. At December 31, 1997 and 1996, the total amounts outstanding under
this and its predecessor facilities were $119,200 and $35,000, respectively.
The Company has also entered into a $200,000, 364-day term subprime
revolving credit facility, which expires in July 1998. The facility includes
covenants identical to those described above with respect to the warehouse line
of credit. At December 31, 1997, the total amount outstanding under this
facility was $19,200.
The Company was in compliance with the above-mentioned debt covenants
at December 31, 1997. Although management anticipates continued compliance,
there can be no assurance that the Company will be able to comply with the debt
covenants specified for each of its financing agreements. Failure to comply
could result in the loss of the related financing.
The Company has also entered into an uncommitted gestation financing
arrangement. The interest rate on funds borrowed pursuant to the gestation line
is based on a spread over the Federal Funds rate. The gestation line has a
funding limit of $1,200,000. The total amounts outstanding under this and its
predecessor facility at December 31, 1997 and 1996 were $547,822 and $229,831,
respectively.
The Company entered into a $6,600 note agreement in May 1997. This debt
is secured by the Company's corporate headquarters. The terms of the agreement
require the Company to
<PAGE> 53
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.
The monthly average outstanding amount under these credit agreements
during 1997 was $984,843, at a weighted average rate of 5.55%. The Company
incurred interest expense of $54,658 on these borrowings in 1997. The Company
also incurred facility fees related to these credit agreements totaling $1,633,
which is included in interest expense. The Company incurred initial arrangement
fees of $725 in 1997, which have been capitalized and are included in other
assets in the accompanying consolidated balance sheet. These initial fees are
being amortized to interest expense over the term of the related credit
agreements. Amortization expense for 1997 was $592. Additional advances
available to the Company under these credit agreements at December 31, 1997,
amounted to $1,072,078.
The monthly average outstanding amount under these credit agreements
during 1996 was $835,231, at a weighted average rate of 5.50%. The Company
incurred interest expense of $45,956 on these borrowings in 1996. The Company
also incurred facility fees related to these credit agreements totaling $1,266,
which is included in interest expense. The Company incurred initial arrangement
fees of $437 in 1996, which have been capitalized and are included in other
assets in the accompanying consolidated balance sheet. These initial fees are
being amortized to interest expense over the term of the related credit
agreements. Amortization expense for 1996 was $490. Additional advances
available to the Company under these credit agreements at December 31, 1996,
amounted to $969,270.
RBC has a 364-day $50,000 revolving credit facility to provide
interim financing for its leasing portfolio. The warehouse credit agreement
matures on June 30, 1998 and contains various covenants regarding
characteristics of the collateral and the performance of the leases originated
and serviced by RBC 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 certificate of
incorporation.
Note 11 - Capital Transactions:
The Company issued five percent stock dividends on March 8, 1994,
September 12, 1994, May 8, 1995, August 31, 1995 and December 31, 1997. A ten
percent stock dividend was issued on June 30, 1995, and a seven percent stock
dividend was issued on September 24, 1996. All of the above are collectively
referred to as the Stock Dividends. Earnings per share and all other share
numbers have been restated for the effects of the Stock Dividends.
On March 15, 1996, the Company completed a second public offering of
3,512,961 shares of common stock (3,946,812 shares after consideration of the
Stock Dividends) priced at $14.50 per share ($12.91 after consideration of the
Stock Dividends). The Company sold 2,200,000 shares (2,471,700 shares after
consideration of the Stock Dividends) in the offering while certain selling
stockholders sold the remaining 1,312,961 shares (1,475,112 shares after
consideration of the Stock Dividends). In a concurrent private placement the
Company sold an additional 896,552 shares of common stock at the offering price
of $14.50 per share (1,007,276 shares at $12.91 after consideration of the Stock
Dividends) to RBC, which owned approximately 41% of the Company's outstanding
common stock prior to the public offering and private placement and
approximately 39% immediately thereafter. Net proceeds to the Company after
underwriting
<PAGE> 54
discounts and estimated offering expenses totaled approximately $43 million.
Proceeds of the offering were used to repay indebtedness to RBC and for other
general corporate purposes, including the continued growth and general expansion
of the Company's business activities.
During the fourth quarter of 1995, the Company established the Dividend
Reinvestment and Stock Purchase Plan (DRIP). The DRIP offers stockholders a
method of purchasing Company common stock at a 5% discount from market prices
through the reinvestment of cash dividends and through optional cash payments.
Optional cash payments may be made quarterly up to $15 per quarter. The price
per common share is 95% of the average closing sale price per common share for
the 20 trading days prior to the date on which dividends are paid, in the case
of a dividend reinvestment transaction, or on the date on which the Company's
fiscal quarter ends, in the case of an optional cash payment transaction. The
Company reserves the right to modify the pricing terms or any other provisions
of the DRIP at any time. To meet demands of the optional quarterly cash
contributions received through the DRIP and for the reinvestment of dividends
through the DRIP, the Company either issues new shares or the DRIP agent
purchases shares on the open market. The Board of Directors has authorized the
issuance of 1,000,000 shares under the DRIP (1,123,500 after consideration of
the Stock Dividends). At December 31, 1997 there were 331,743 shares issued
under the DRIP.
In February 1998 the Company's Board of Directors authorized the
repurchase of up to $10,000 of the Company's common stock in either open market
transactions or in private or block trades. Decisions regarding the amount and
timing of repurchases will be made by management based upon market conditions
and other factors. Any shares that may be repurchased would be maintained in the
Company's treasury account, and would not be retired.
Note 12 - Income Taxes:
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 8,885 $ 13,060 $ (2,519)
State 542 328 (454)
-------- -------- --------
9,427 13,388 (2,973)
-------- -------- --------
Deferred:
Federal 3,327 (2,254) 10,108
State 535 (209) 938
-------- -------- --------
3,862 (2,463) 11,046
-------- -------- --------
$ 13,289 $ 10,925 $ 8,073
======== ======== ========
</TABLE>
Current income tax expense (benefit) represents the amount payable for
each of the respective years. During 1997, 1996 and 1995, the Company qualified
for state tax headquarters credits of $202, $1,687 and $1,663, respectively,
reducing current state tax expense that otherwise would have been payable for
each year.
<PAGE> 55
The effective tax rate varied from the statutory federal tax rate of
35% for 1997, 1996 and 1995 due to the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate $12,280 35.0% $10,692 35.0% $ 7,802 35.0%
State tax, net of federal benefit 887 2.5% 107 0.4% 178 0.8%
Other, net 122 0.4% 126 0.4% 93 0.4%
------- ---- ------- ---- ------- ----
$13,289 37.9% $10,925 35.8% $ 8,073 36.2%
======= ==== ======= ==== ======= ====
</TABLE>
Deferred tax (assets) liabilities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Mark to market $ (896) $
Deferred compensation (2,514) (2,671)
Deferred book income (1,580)
Foreclosure and repurchase reserves (3,117) (1,537)
State headquarters tax credit carryforwards (370)
State NOL carryforwards (538)
Other, net (172) (615)
-------- --------
(8,817) (5,193)
-------- --------
Mortgage servicing rights 20,099 13,975
Depreciation 3,478 912
Securitizations 1,557
Deferred tax income- stock 7,186
Other, net 294
-------- --------
32,614 14,887
-------- --------
Net deferred tax liability $ 23,797 $ 9,694
======== ========
</TABLE>
There are no valuation allowances provided for any of the Company's
deferred tax assets based on management's belief that it is more likely than not
that deferred tax assets will be realized. The deferred tax balances as of
December 31, 1997 includes $10,241 of deferred tax liabilities related to the
acquisition of RBC as discussed in footnote 3. During 1997, non-qualified stock
options were exercised generating a tax benefit of $250. This benefit is
reflected in additional paid-in capital.
Note 13 - Stock Options and Restricted Stock Plan:
Contemporaneous with the Company's initial public offering, certain
executives of the Company were granted options to purchase 600,000 shares of
common stock of the Company at the initial offering price of the stock of $8.75
per share (901,310 shares at $5.83 per share after consideration of the Stock
Dividends). The options have a term of ten years and become
<PAGE> 56
exercisable at a rate of 20% per year during the period from May 26, 1994
through May 26, 1998. At December 31, 1997, 721,048 options were exercisable. No
additional options have been granted and none have been forfeited. During 1997,
62,000 options (65,100 shares after consideration of the Stock Dividends) were
exercised.
In addition, in connection with the employment of certain officers,
such officers are entitled to receive restricted stock as part of their
compensation. In connection therewith, the Company issued 20,048 restricted
shares at a price of $16.35 per share on January 30, 1998, 23,528 restricted
shares at a price of $13.93 per share on February 1, 1997 (24,704 shares at
$13.27 per share after consideration of the Stock Dividends), 16,410 restricted
shares at a price of $15.58 per share on January 27, 1996 (18,438 shares at
$13.87 per share after consideration of the Stock Dividends), 43,402 restricted
shares at a price of $9.36 per share on January 26, 1995 (59,136 shares at $6.87
per share after consideration of the Stock Dividends), and 8,878 restricted
shares at a price of $10.41 per share on January 21, 1994 (13,336 shares at
$6.93 per share after consideration of the Stock Dividends). Costs associated
with these grants are included as compensation expense of the Company in the
accompanying consolidated financial statements.
On October 21, 1993, the Company adopted a phantom stock plan that
provided for the awarding of up to 300,000 (450,655 after consideration of the
Stock Dividends) deferred compensation units to officers and certain key
employees. The plan specified a five-year vesting schedule. In addition, from
time to time the Board of Directors approved participation in a special phantom
stock plan for certain officers of the Company.
During 1996, the Company terminated all of its phantom stock plans and
canceled all outstanding grants thereunder. In connection therewith, each former
participant in the phantom stock plans was awarded an option under a new
non-qualified stock option plan for each unit canceled under the phantom stock
plans. Other terms of the awarded options were substantially similar to the
underlying canceled units. The number of authorized units under the new
non-qualified stock option plan is 223,818.
Activity in the phantom stock plans and the new non-qualified stock
option plan is summarized below:
<TABLE>
<CAPTION>
UNITS FORFEITED
UNITS CANCELED OR UNITS
PHANTOM STOCK PLANS: GRANTED REDEEMED OUTSTANDING
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 282,991 48,696 234,295
- 1996 activity 35,084 (35,084)
- Effect of Stock Dividends 2,419 42 2,377
- Plan cancellation (285,410) (83,822) (201,588)
-------- ------- --------
Balance at December 31, 1996
======== ======= ========
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
UNITS UNITS FORFEITED UNITS
NON-QUALIFIED STOCK OPTION PLAN: GRANTED OR EXERCISED OUTSTANDING
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995
- 1996 activity 201,588 201,588
- Effect of Stock Dividends 11,569 11,569
-------- ------- --------
Balance at December 31, 1996 213,157 213,157
-------- ------- --------
- 1997 activity
- Effect of Stock Dividends 10,661 10,661
-------- ------- --------
Balance at December 31, 1997 223,818 223,818
======== ======= ========
</TABLE>
Of the 223,818 units outstanding at December 31, 1997 under the
non-qualified stock option plan, the following are strike prices and percents
vested:
<TABLE>
<CAPTION>
EXPIRATION UNITS STRIKE PERCENT
DATE OUTSTANDING PRICE VESTED
-------------------------------------------------------
<S> <C> <C> <C>
January 21, 2004 106,660 $ 6.93 60%
January 26, 2005 20,438 6.85 40%
January 26, 2005 79,024 6.87 40%
July 1, 2005 17,696 10.64 40%
</TABLE>
During 1995, the Company established an Omnibus Employee Stock Award
Plan (the Omnibus Plan). The Omnibus Plan was amended and restated in its
entirety effective October 31, 1997 primarily to increase the number of
authorized shares under the plan. The purpose of this plan is to provide key
employees who are largely responsible for the Company's growth and continued
success with the opportunity to have or increase their proprietary interest in
the Company through the granting of any one or any combination of options, stock
appreciation rights, restricted stock and unrestricted stock. This plan is
authorized to issue up to 1,438,700 shares of common stock (1,510,635 shares
after consideration of the Stock Dividends). All options vest 20% on the date of
grant and 20% each year thereafter on the anniversary date of the grant and
expire 10 years after the grant date.
Activity in the Omnibus Plan is summarized below:
<TABLE>
UNITS UNITS FORFEITED UNITS
OMNIBUS PLAN: GRANTED OR EXERCISED OUTSTANDING
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
- 1995 activity 100,000 100,000
-------- ------- --------
Balance at December 31, 1995 100,000 100,000
- 1996 activity 104,000 104,000
- Effect of Stock Dividends 12,040 12,040
-------- ------- --------
Balance at December 31, 1996 216,040 216,040
- 1997 activity 366,450 366,450
- Effect of Stock Dividends 10,803 10,803
-------- ------- --------
Balance at December 31, 1997 593,293 593,293
======== ======= ========
</TABLE>
<PAGE> 58
Of the 593,293 units outstanding at December 31, 1997 under the Omnibus
Employee Stock Award Plan, the following are strike prices and percents vested:
<TABLE>
<CAPTION>
EXPIRATION UNITS STRIKE PERCENT
DATE OUTSTANDING PRICE VESTED
-----------------------------------------------------------
<S> <C> <C> <C>
October 30, 2005 112,350 $14.25 60%
January 26, 2006 24,718 13.87 40%
March 21, 2006 56,175 13.36 40%
November 8, 2006 17,850 14.31 40%
November 12, 2006 7,875 14.27 40%
December 3, 2006 7,875 13.87 40%
December 30, 2006 5,250 13.85 40%
September 3, 2007 5,250 15.91 20%
August 26, 2007 6,300 16.27 20%
September 16, 2007 6,300 15.94 20%
January 29, 2007 295,050 13.20 20%
April 11, 2007 10,500 14.73 20%
April 18, 2007 31,500 14.53 20%
May 1, 2007 6,300 13.57 20%
</TABLE>
During 1995, the Company established a Formula Stock Option Plan. This
plan was amended effective October 31, 1997 primarily to increase the number of
shares authorized. The purpose of this plan is to provide annually (on each
September 1) to the non-employee directors of the Company options to purchase
10,000 shares of the common stock of the Company. All options vest 20% on the
date of grant and 20% each year thereafter on the anniversary date of the grant
and expire 10 years after the grant date. The plan is authorized to issue up to
400,000 shares of common stock (420,000 shares after consideration of the Stock
Dividends). On September 1, 1997, 50,000 options were issued at a market strike
price of $16.71 per share (52,500 at a strike price of $15.91 after
consideration of the Stock Dividends). On September 1, 1996, 50,000 options were
issued at a market strike price of $13.25 per share (56,175 at a strike price of
$11.79 after consideration of the Stock Dividends). On September 1, 1995, 50,000
options were issued at a market strike price of $15.91 per share (56,175 options
at a strike price of $14.16 per share after consideration of the Stock
Dividends).
The phantom stock plan was a variable stock award plan for accounting
purposes. Accordingly, compensation expense was accrued by reference to the
difference between current market value over the value base adjusted for the
cumulative vested status of the underlying units. The Company's other
aforedescribed option plans are considered fixed stock award plans for
accounting purposes. Accordingly, total compensation expense for these fixed
plans is measured as the difference between the market value on the date of the
grant over the strike price which fixed total expense is then recognized over
the vesting period. The Company recognized compensation expense related to the
aforedescribed plans (exclusive of the restricted stock plan which is expensed
as incurred) of $408, $283 and $748 for 1997, 1996 and 1995, respectively.
<PAGE> 59
For purposes of providing the pro forma disclosures required under SFAS
No. 123, the fair value of stock options granted in 1997, 1996 and 1995 was
estimated at the date of grant using a Black-Scholes option pricing model. The
Black-Scholes option pricing model was originally developed for use in
estimating the fair value of traded options which have different characteristics
than the Company's employee stock options. The model is also sensitive to
changes in the subjective assumptions which can materially affect fair value
estimates. As a result, management believes that the Black-Scholes model may not
necessarily provide a reliable single measure of the fair value of employee
stock options.
For purposes of SFAS No. 123, each award was separately valued using
the 10 year constant maturity treasury rate on the date of grant (rates ranged
from 5.634% to 6.941%) as the risk-free interest rate. The expected life of each
grant was assumed to be equal to the term to expiration as of the grant date
(expected lives ranged from 7.2 to 10 years). The expected dividend yield was
established based upon the dividend policies of the Company as of the date of
award. Finally, for purposes of assigning a volatility factor, the historical
100 day volatility factor was reviewed for selected points in time over the past
and an average there of 75% was assigned to the 1997, 1996 and 1995 awards for
purposes of the SFAS No. 123 valuation.
SFAS No. 123, for purposes of the required pro forma disclosures,
permits straight-line amortization of the estimated fair value of the options
over the vesting period. Had compensation cost for the Company's 1997, 1996 and
1995 stock-based option awards been determined consistent with the requirements
of SFAS No. 123, net income and earnings per share would have been reported as
follows for 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net income as reported $ 21,798 $ 19,623 $ 14,219
After-tax adjustment for SFAS No. 123 (737) (409) (134)
-------- -------- --------
Pro forma net income as adjusted $ 21,061 $ 19,214 $ 14,085
======== ======== ========
Pro forma net income per common share - basic $ 1.03 $ 1.00 $ .87
Pro forma net income per common share - diluted $ 1.01 $ .98 $ .85
</TABLE>
Due to the inclusion of only 1997, 1996 and 1995 option grants, the
effects of applying SFAS No. 123 in 1997, 1996 and 1995 may not be
representative of the pro forma impact in future years.
Note 14 - Commitments and Contingencies:
The Company was servicing and subservicing 110,641, 96,087, and 90,063
loans owned by others, with unpaid balances aggregating approximately
$10,200,000, $8,700,000 and
<PAGE> 60
$7,800,000, at December 31, 1997, 1996 and 1995, respectively. Related escrow
funds totaled approximately $72,100, $56,900 and $56,800 as of December 31,
1997, 1996 and 1995, respectively. Loans serviced for others and the related
escrow funds are not included in the accompanying consolidated balance sheet.
The Company has issued mortgage-backed securities under programs
sponsored by Ginnie Mae, Freddie Mac and Fannie Mae. In connection with
servicing mortgage-backed securities guaranteed by Ginnie Mae, Freddie Mac or
Fannie Mae, the Company advances certain principal and interest payments to
security holders prior to their collection from specific mortgagors.
Additionally, the Company must remit certain payments of property taxes and
insurance premiums in advance of collecting them from specific mortgagors and
make certain payments of attorney's fees and other costs related to loans in
foreclosure. These amounts are included in servicing advances under the caption
receivables in the accompanying consolidated financial statements.
The Company was servicing commercial mortgage loans of $2,760,238 at
December 31, 1997. At December 31, 1997, 40% of commercial mortgage loans
outstanding were being serviced for a single customer. Commercial mortgage loans
and leases serviced for others are not included in the accompanying balance
sheet. Escrow balances related to serviced commercial mortgage loans are not
included in the accompanying balance sheet. In addition, at December 31, 1997,
the Company was servicing $74,405 of leases for third parties, 94% of this
portfolio was serviced for a single customer.
The Company typically sells the mortgage servicing rights associated
with its mortgage production into forward sales contracts. Additionally, from
time to time, the Company will sell residential mortgage servicing rights from
its available for sale portfolio. In 1997, approximately 37%, 36% and 11% of its
sales under these forward sales contracts were to three major customers. In 1996
approximately 46%, 23% and 16% of its sales under these forward sales contracts
were to three major customers.
In the ordinary course of business, the Company is exposed to liability
under representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights. Under certain circumstances, the
Company may be required to repurchase mortgage loans or indemnify the purchasers
of loans or servicing rights for losses if there has been a breach of
representations or warranties. Initially, liabilities are estimated at the sale
date of the mortgage servicing right and are included in the determination of
the gain or loss on sale. Such estimated liabilities are included in the
allowance for foreclosure losses, a reduction of mortgage servicing rights. Upon
repurchase of a loan, the Company initially records a purchase at its estimated
fair value and recognizes provision expense based upon the difference between
the purchase price of the loan and its fair value. Repurchased loans are
subsequently carried at the lower of cost or market. At December 31, 1997,
$9,213 of these repurchased loans are included in mortgage loans held for sale
net of a loss provision of $2,370. Losses related to the repurchases of loans
and foreclosure losses for the years ended December 31, 1997 and 1996 totaled
$4,615 and $817, respectively.
<PAGE> 61
In the ordinary course of its business, the Company is from time to
time subject to litigation. The Company is not a party to any material legal
proceedings.
Note 15 - Non-recurring and Special Charges:
During the third quarter of 1997 the Company expensed certain
non-recurring and special charges. The Company incurred a $2,279 pre-tax charge
($1,401 after-tax) related to a terminated merger agreement. In addition the
Company recorded a special charge of $7,869 pre-tax ($4,839 after-tax) relating
to certain nonrecoverable operating receivables. This special charge was
recorded during the third quarter of 1997, to fully reserve against certain
unrecoverable receivables.
During the fourth quarter of 1996, the Company wrote-off approximately
$5,190 in non-recurring charges, which was partially offset by a $1,998
decrease in income taxes. This charge was attributable to a non-recurring charge
related to certain contractual employment obligations.
Note 16 - Employee Benefits:
On July 1, 1993, the Company established a 401(k) Retirement Savings
Plan which is available to all regular, full-time active employees with six
months continuous service. The plan allows employees to contribute up to 15% of
their gross earnings on a before-tax basis annually, subject to the maximum
established by law. Employees become eligible to participate in the plan as of
the January 1, or July 1, following the completion of six months continuous
service. The Company contributes to the plan on a matching basis in an amount
determined annually by the Board of Directors. The Company match percentage for
1995 and 1996 was 50% of the employee's contribution up to a maximum of 3.0% of
the employee's gross earnings. In 1997 the Company's match percentage was
increased to 100% of the employee's contribution up to the first 3% of the
employees gross earnings and a 50% match on the second 3% of the employee's
gross earnings. An employee vests in the Company's matching contribution at a
rate of 25% per year. The Company recorded $958, $375 and $147 of matching
contributions as compensation expense during 1997, 1996 and 1995, respectively.
On January 1, 1994, the Company established a defined benefit pension
plan covering substantially all employees. Under the plan, retirement benefits
are based upon years of service and the employee's level of compensation during
the last five years prior to retirement. It is the Company's funding policy to
make, at a minimum, the annual contribution required by the Employee Retirement
Income Security Act of 1974, as amended.
<PAGE> 62
Pension expense included the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
----- -----
<S> <C> <C>
Service cost $ 515 $ 263
Interest cost on projected benefit obligation 161 90
</TABLE>
<TABLE>
<S> <C> <C>
Actual return on assets (49) (4)
Amortization of unrecognized prior service costs 30 30
Amortization of unrecognized losses 27 10
Asset gain (loss) deferred 4 (23)
----- -----
$ 688 $ 366
===== =====
</TABLE>
Projected benefit obligation under the plan at December 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 811 $ 369
Nonvested benefit obligation 861 293
------- -------
Accumulated benefit obligation 1,672 662
Benefits attributable to future salaries 945 454
------- -------
Projected benefit obligation 2,617 1,116
Fair value of plan assets (788) (420)
------- -------
1,829 696
Items not recognized:
Unrecognized prior service cost (291) (321)
Unrecognized net loss (843) (6)
Asset gain (loss) deferred 4 (23)
------- -------
Total unrecognized items (1,130) (350)
------- -------
Accrued pension expense 699 346
Adjustment for minimum liability 185
------- -------
Net pension liability $ 884 $ 346
------- -------
Intangible asset offsetting additional
minimum liability (185)
------- -------
$ 699 $ 346
======= =======
</TABLE>
Assumptions used in accounting for the plan were:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Weighted average discount rate 7.00% 7.50%
Average rate of increase in compensation levels 4.00% 4.00%
Expected long-term rate of return on plan assets 8.00% 8.00%
</TABLE>
On January 1, 1995, the Company established the Stock Investment Plan
(the Stock Plan) covering substantially all employees. Under the Stock Plan,
eligible employees may contribute, through payroll deductions, a minimum of
$10.00 per month to a maximum of $1,500.00 per month, to acquire common stock of
the Company. The purchase price of such stock will be equal to 85% of the fair
market value on the purchase date with the Company subsidizing the remaining 15%
of the cost. The Company is responsible for custodian charges (including
brokerage expenses incurred in connection with the purchase of shares) and all
costs of maintaining and executing transfers. This plan will continue until
100,000 shares of stock (136,252 shares after giving effect to the Stock
Dividends) have been purchased by employees. The Company has subsidized
approximately $108, $94 and $46 relating to the noncompensatory Stock Plan
discount for 1997, 1996 and 1995, respectively.
<PAGE> 63
On January 1, 1995, the Company established the Employee Stock
Ownership Plan (the ESOP) covering substantially all employees. Contributions to
the ESOP, which are at the discretion of and determined annually by the Board of
Directors, are not to exceed the maximum amount deductible under the applicable
sections of the Internal Revenue Code and are funded annually. However, such
contributions must be adequate to meet the required principal and interest
payments on the underlying loans discussed below.
During 1996 and 1995, the ESOP borrowed $3,000 and $2,000,
respectively, from the Company to purchase 224,169 and 200,944 (a total of
472,579 shares after consideration of the Stock Dividends) shares of the
Company's common stock and pledged those shares to secure loans outstanding. The
principal amount of the 1995 loan is repayable in equal quarterly installments
of $100, which commenced in January 1996. The principal amount of the 1996 loan
is repayable in annual installments of $600 which commenced in May 1997. In
accordance with these loan agreements, the ESOP repaid $1,000 to the Company in
1997 and $400 to the Company in 1996. An additional $53 and $48 was paid on
these loans in 1997 and 1996, respectively, from the cash dividends paid on the
unallocated ESOP shares. In accordance with the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans", the
Company records compensation expense equal to the fair value of shares on the
date such shares are committed to be released to employees. Shares are
considered committed to be released under the applicable plan formula as the
principal amount of the underlying loans are repaid. There was no compensation
expense related to the ESOP for 1995 since debt repayments did not begin until
January 1996. For the years ended December 31, 1997 and 1996, 94,805 and 40,323
shares, respectively were released (99,545 shares and 42,339 shares,
respectively, after consideration of the Stock Dividends). Compensation expense
related to the ESOP was $1,480 and $600 for the years ended December 31, 1997
and 1996, respectively. The fair market value of the 330,694 unallocated shares
held at December 31, 1997 was $5,394. Fair market value of the 141,884 allocated
shares was $2,314 at December 31, 1997. Administrative expenses of the ESOP for
1997, 1996 and 1995 paid by the Company totaled $8, $19 and $27, respectively,
and have been included as a component of salaries and employee benefits.
RBC, at the time of its acquisition, had in existence a defined
contribution 401(k) plan and an ESOP plan. The shares in the ESOP plan were
fully allocated. Both of these plans will be merged into the Company's ESOP and
401(k) Retirement Savings Plan effective January 1, 1998.
Note 17 - Net Income Per Common Share:
The following is a reconciliation of basic earnings per share to
diluted earnings per share as calculated under SFAS No.128 for the years ended
December 31, 1997, 1996 and 1995, respectively:
<PAGE> 64
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1997 (NUMERATOR) (DENOMINATOR) AMOUNT
- -------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Net Income Per Common Share - Basic
Income available to common
stockholders $21,798 $20,396,428 $1.07
=====
Effect of Dilutive Securities
Stock options 404,400
------- -----------
Net Income Per Common Share - Diluted
Income available to common
stockholders plus assumed
conversions $21,798 20,800,828 $1.05
======= =========== =====
</TABLE>
Options to purchase 6,300 shares of common stock at $16.27 per share
were outstanding during 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
August 26, 2007, were still outstanding at December 31, 1997.
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1996 (NUMERATOR) (DENOMINATOR) AMOUNT
- -------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Net Income Per Common Share - Basic
Income available to common
stockholders $19,623 $19,158,658 $1.02
=====
Effect of Dilutive Securities
Stock options 367,209
------- -----------
Net Income Per Common Share - Diluted
Income available to common
stockholders plus assumed
conversions $19,623 19,525,867 $1.00
======= =========== =====
</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, 7,875 shares of common stock
at $14.27 per share, 5,250 shares of common stock at $15.91 per share, 6,300
shares of common stock at $16.27 per share, 6,300 shares of common stock at
$15.94 per share, and 56,175 shares of common stock at $14.16 per share were
outstanding during 1996 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, November 12, 2006, September 3, 2007, August
26, 2007, September 16, 2007 and September 1, 2005, respectively, were still
outstanding at December 31, 1996.
<PAGE> 65
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1995 (NUMERATOR) (DENOMINATOR) AMOUNT
- -------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Net Income Per Common Share - Basic
Income available to common
stockholders $14,219 $16,181,588 $0.88
=====
Effect of Dilutive Securities
Stock options 298,209
------- -----------
Net Income Per Common Share - Diluted
Income available to common
stockholders plus assumed
conversions $14,219 16,479,797 $0.86
======= =========== =====
</TABLE>
Options to purchase 112,350 shares of common stock at $14.25 per share
and 56,175 shares of common stock at $14.16 per share were outstanding during
1995 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 and
September 1, 2005, respectively, were still outstanding at December 31, 1995.
Note 18 - Financial Instruments and Risk Management:
The Company is a party to various derivative financial instruments and
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers and to reduce its own
exposure to risks related to fluctuating interest rates. These financial
instruments include mortgage purchase commitments, mandatory delivery
commitments, put and call option contracts, futures contracts and interest rate
floor contracts. The Company uses these financial instruments exclusively for
purposes of managing its resale pricing and interest rate risks.
The Company's mortgage loans held for sale are acquired or originated
through a network of correspondents, wholesale brokers and retail branches. In
connection therewith, the Company routinely enters into optional mortgage
purchase commitments to acquire or originate specific in-process mortgage loans
when and if closed by the counterparty, at the option of the mortgagor. Mortgage
purchase commitments obligate the Company to acquire mortgage loans on a delayed
delivery basis, which may extend for a period of 60 days, at a price which is
fixed as of the date of the contract.
Accordingly, the Company is subject to the risk that the market value
of its on-balance sheet mortgage loans held for sale and the mortgage loans it
is obligated to purchase under its mortgage purchase commitments may change
significantly prior to resale. In order to limit its resale price exposure for
agency-eligible mortgage loans, the Company enters into mandatory delivery
commitments which are contracts for delayed delivery of mortgage loans to third
parties. Mandatory delivery commitments obligate the Company to sell
agency-eligible mortgage loans on a delayed delivery basis at a price which is
fixed as of the date of the contract. Since mandatory delivery commitments
enable the Company to fix its resale prices for both on-balance sheet mortgage
loans held for sale (for which a fixed price has already been paid) and for
anticipated loan closures subject to mortgage purchase commitments (which fix
the delayed purchase price for the resultant mortgage loans), these instruments
can effectively limit the Company's resale price exposures.
<PAGE> 66
The percentages of anticipated agency-eligible loan closures under
mortgage purchase commitments that are covered by mandatory delivery commitments
not allocated to on-balance sheet mortgages held for sale are monitored
continuously. The Company's resultant expected exposure to resale pricing risk
is continuously adjusted to consider changing expectations regarding anticipated
loan closure percentages and other market conditions. Generally, the Company
buys put and call option contracts on U.S. Government Securities to effect
modest adjustments of its overall exposure to resale pricing exposures.
Purchased call option contracts enable the Company, at its option, to
acquire an underlying financial security from a third party at a specified price
for a fixed period of time. Purchased put option contracts enable the Company,
at its option, to sell an underlying financial security to a third party at a
specified price and for a fixed period of time. Since these financial
instruments essentially enable the Company to fix the purchase or sale price on
financial instruments whose changes in value have historically correlated
closely with changes in value of mortgage loans, these instruments can be used
effectively to adjust the Company's overall exposure to resale pricing risks. In
addition, these instruments have the advantages of being available in smaller
denominations than are typical of the Company's mandatory delivery commitments
and of being traded in a highly liquid and efficient secondary market.
Periodically, the Company also buys or sells futures contracts as part
of its hedging activities for rate locked and closed subprime mortgage loans.
Generally, futures positions are outstanding for short periods of time and are
used to hedge against price movements of another financial instrument while
execution of that instrument is bid among brokers. Futures also may be similarly
used to hedge against price movements when another financial instrument is
illiquid due to temporary market conditions. There were no open futures
positions as of December 31, 1997 or 1996. Because the changes in value of
futures contract and the hedged items can be based on different indices, there
is a risk that the changes in value may not correlate.
As discussed in Note 14, the Company typically sells its produced
mortgage servicing rights between 90 and 180 days of origination or purchase of
the related loan pursuant to committed prices under forward sales contracts.
These forward sales contracts commit the Company to deliver mortgage servicing
rights backed by contractual levels of unpaid principle balances. Outstanding
commitments to deliver totaled $4,800,000 and $11,469,076 at December 31, 1997
and 1996, respectively. The Company also maintains a portfolio of mortgage
servicing rights which though available-for-sale, are not currently scheduled
for sale pursuant to the Company's forward sales contracts. In connection
therewith, the Company is subject to the risk that the economic value of those
mortgage servicing rights may decline in the event of a significant decline in
long-term interest rates. A significant decline in interest rates generally
causes an increase in actual and expected mortgage loan prepayments (for example
increased refinancing) which in turn tends to reduce the future expected cash
flows (and economic value) of associated mortgage servicing rights. Interest
rate floor contracts provide for the Company to receive an interest rate
differential on a notional amount of outstanding principal to the extent that
interest rates decline below a specified rate which is fixed as of the date of
the contract. Accordingly, the value of an interest rate floor contract
increases while the value of a mortgage servicing right decreases in a declining
interest rate environment. As such, interest rate floor contracts can
<PAGE> 67
effectively mitigate the Company's exposure to declines in the economic value of
its servicing rights in a declining interest rate environment.
The above described financial instruments involve, to varying degrees,
elements of credit and interest rate risk which are in excess of the amounts
recognized in the balance sheet. The Company believes that these instruments do
not represent a significant exposure to credit loss since the amounts subject to
credit risks are controlled through collateral requirements, credit approvals,
limits and monitoring procedures. The Company is exposed to credit losses in the
event of non-performance by counter parties to certain of its financial
instruments, but it does not expect any counter parties to fail since such risks
are managed through limits and monitoring procedures. The Company does not have
a significant exposure to any individual customer, correspondent or counterparty
in connection with these financial instruments. Except for mortgage purchase
commitments, the Company does not require collateral or other security to
support the financial instruments with credit risk whose contract or notional
amounts are summarized as follows:
<TABLE>
<CAPTION>
CONTRACT AMOUNT AT DECEMBER 31,
-------------------------------
1997 1996
---------- -----------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Mortgage purchase commitments $ 980,498 $ 528,672
Financial instruments whose contract amounts exceed the amount of
credit risk:
Mandatory delivery commitments (allocated against mortgages
held for sale) 800,725 644,200
Mandatory delivery commitments (allocated against mortgage
purchase commitments) 581,025 400,708
Purchased option contracts 215,000 100,000
Forward servicing sales contracts 4,800,000 11,469,076
Interest rate floor contracts 978,200 528,200
</TABLE>
Mortgage loan purchase commitments expose the Company to credit loss in
the event the purchase commitments are funded as mortgage loans and if counter
parties default prior to resale. The maximum credit loss to which the Company is
exposed is the notional amount of the commitments. However, the Company does not
believe the commitments represent a significant exposure to credit loss because
the related loans are secured by 1-4 family homes, most loans are insured or
guaranteed through private mortgage insurance or government approval programs
and subjected to underwriting standards specified by government agencies or
private mortgage insurance. The estimated credit exposure on financial
instruments whose contract amounts exceed the amount of credit risk is the
increase in market value of the instrument.
The Company generally does not charge a premium to its correspondents
in connection with issuance of its mortgage purchase commitments nor is a
premium charged to the Company in connection with its acquisition of mandatory
delivery or forward servicing sales contracts.
Premiums paid for purchased put and call option and futures contracts
are initially deferred and included in other assets in the balance sheet. Other
assets included $1,819 and $934 at December 31, 1997 and 1996, respectively, of
such deferred premiums. Ultimately, such deferred premiums and related realized
gains or losses from these activities are recorded as a
<PAGE> 68
component of gains and losses on sales of mortgage loans at the earlier of the
expiration of the underlying contract or when exercise of the contract is deemed
remote.
The Company uses CMT floors to protect itself against interest and
prepayment risk on its available-for-sale portfolio. The Company monitors the
changes in the fair value of the CMT floors and the hedged mortgage servicing
rights on an ongoing basis. Premiums paid for interest rate floor contracts are
initially deferred and included in other assets in the balance sheet and are
amortized over the term of the underlying contract. Amounts received as interest
rate differentials under floor contracts as well as changes in the fair value of
the contracts are recorded as a reduction or increase of basis in mortgage
servicing rights. Included in the mortgage servicing right basis are deferred
gains of $6,776 and $0 and deferred cash flows of $2,787 and $2,282 for 1997 and
1996, respectively. Other assets included $3,521 and $2,611 at December 31, 1997
and 1996, respectively, of unamortized premiums. For the years ended December
31, 1997 and 1996, respectively, $1,514 and $620 of deferred premiums paid for
interest rate floor contracts were amortized to expense. Open contracts and the
cost thereof are considered in determining the market value and cost of mortgage
servicing rights held for investment.
The current variable rate index (CMT Treasury rate) was 5.78% and 6.42%
at December 31, 1997 and 1996, respectively. Other terms of the interest rate
floor contracts outstanding at December 31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
Notional
Contract Date Expiration Date Amount Floor Rate
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
September 19, 1994 September 19, 1999 $ 81,000 6.345%
September 19, 1994 September 19, 1999 51,000 6.845%
February 13, 1995 February 13, 1998 21,200 7.067%
February 13, 1995 February 13, 2000 20,000 7.067%
February 13, 1995 February 13, 2000 45,000 6.567%
June 7, 1996 June 7, 1999 50,000 6.600%
August 20, 1996 August 20, 2001 60,000 5.570%
March 22, 1997 March 22, 2001 125,000 6.750%
March 22, 1997 March 22, 2001 150,000 6.500%
March 22, 1997 March 22, 2001 375,000 6.250%
--------
$978,200
========
</TABLE>
During November 1997, the Company sold two interest-rate floors. The
notional amounts of these interest- rate floors totaled $125,000 with contract
dates of August 20, 1996 and expiration dates of August 20, 2001. Proceeds from
the sale approximated $1,000.
<PAGE> 69
Note 19 - Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 3,735 $ 5,916 $ 4,535 $ 3,458 $ 17,644
Net gain on sale of mortgage loans 17,027 25,223 29,328 31,792 103,370
Gain on sale of mortgage servicing rights 1,491 1,220 3,237 2,007 7,955
Loan servicing fees 7,535 7,803 7,711 7,820 30,869
Other income 269 157 146 608 1,180
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues 30,057 40,319 44,957 45,685 161,018
- ------------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits 12,264 14,880 16,487 18,604 62,235
Occupancy expense 1,592 1,850 1,886 2,130 7,458
Amortization of mortgage servicing rights 4,108 4,725 4,840 4,642 18,315
Provision for foreclosure losses 266 827 1,512 2,010 4,615
General and administrative expenses 4,609 6,041 16,325 (1) 6,333 33,308 (1)
- ------------------------------------------------------------------------------------------------------------------------------
Total expenses 22,839 28,323 41,050 (1) 33,719 125,931 (1)
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,218 11,996 3,907 (1) 11,966 35,087 (1)
Income tax expense (2,748) (4,625) (1,340)(1) (4,576) (13,289)(1)
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,470 $ 7,371 $ 2,567 (1) $ 7,390 $ 21,798 (1)
- ------------------------------------------------------------------------------------------------------------------------------
Net income per common share-basic $ 0.23 $ 0.36 $ 0.12 (1) $ 0.36 $ 1.07 (1)
Net income per common share-diluted $ 0.22 $ 0.36 $ 0.12 (1) $ 0.35 $ 1.05 (1)
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 3,243 $ 5,037 $ 4,500 $ 4,122 $ 16,902
Net gain on sale of mortgage loans 18,533 21,503 19,312 19,830 79,178
Gain on sale of mortgage servicing rights 66 123 775 141 1,105
Loan servicing fees 7,130 6,729 7,520 7,384 28,763
Other income 78 220 106 265 669
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues 29,050 33,612 32,213 31,742 126,617
- ------------------------------------------------------------------------------------------------------------------------------
Salary and employee benefits 12,666 12,849 12,315 17,748 (2) 55,578 (2)
Occupancy expense 1,276 1,364 1,485 1,515 5,640
Amortization of mortgage servicing rights 3,670 3,646 3,748 3,870 14,934
Provision for foreclosure losses 100 100 91 526 817
General and administrative expenses 4,087 5,463 4,767 4,783 19,100
- ------------------------------------------------------------------------------------------------------------------------------
Total expenses 21,799 23,422 22,406 28,442 (2) 96,069 (2)
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,251 10,190 9,807 3,300 (2) 30,548 (2)
Income tax expense (2,791) (3,923) (3,626) (585)(2) (10,925)(2)
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,460 $ 6,267 $ 6,181 $ 2,715 (2) $ 19,623 (2)
- ------------------------------------------------------------------------------------------------------------------------------
Net income per common share-basic $ 0.27 $ 0.31 $ 0.31 $ 0.13 (2) $ 1.02 (2)
Net income per common share-diluted $ 0.26 $ 0.31 $ 0.30 $ 0.13 (2) $ 1.00 (2)
</TABLE>
(1) Includes non-recurring and special charges totalling $10,147 pre-tax, or
$6,241 after-tax. Exclusive thereof, third quarter 1997 and full year 1997
general and administrative expenses, total expenses, income before income taxes,
income tax expense, net income, net income per common share - basic and net
income per common share - diluted would have been $6,178, $30,903, $14,054,
$5,246, $8,808, $0.43 and $0.42; and $23,161, $115,784, $45,234, $17,195,
$28,039, $1.37 and $1.35, for the third quarter and the year, respectively.
(2) Includes a non-recurring charge totalling $5,190 pre-tax, or $3,192
after-tax. Exclusive thereof, fourth quarter 1996 and full year 1996 salary and
employee benefits, total expenses, income before income taxes, income tax
expense, net income, net income per common share - basic and net income per
common share - diluted, would have been $12,558, $23,252, $8,490, $2,583,
$5,907, $0.30 and $0.30; and $50,388, $90,879, $35,738, $12,923, $22,815, $1.19
and $1.17, for the fourth quarter and the year, respectively.
<PAGE> 70
Note 20 - Fair Value of Financial Instruments:
The following table presents the carrying amounts and fair values of
the Company's financial instruments at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets
Cash $ 13,546 $ 13,546 $ 2,492 $ 2,492
Receivables 87,702 87,702 60,668 60,668
Lease receivables 51,494 51,494
Mortgage loans held for sale and
mortgage-backed securities 1,179,188 1,181,533 802,335 803,137
Liabilities
Short-term borrowings 1,224,489 1,224,489 805,730 805,730
Long-term borrowings 6,461 6,380
</TABLE>
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
Notional Carrying Estimated Notional Carrying Estimated
Amount Value Fair Value Amount Value Fair Value
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Off-balance sheet instruments
Mortgage purchase commitments $980,498 $ $ 3,010 $528,672 $ $(1,450)
Mandatory delivery commitments
(allocated to mortgage purchase
commitments) 581,025 (2,446) 400,708 1,598
Purchased option contracts 215,000 1,819 2,757 100,000 934 502
Interest rate floor contracts 978,200 11,801 11,801 528,200 2,611 5,056
</TABLE>
The following notes summarize the significant methods and assumptions
used in estimating the fair values of financial instruments.
Cash, receivables and short-term borrowings are short-term in nature.
Accordingly, they are valued at their carrying amounts which are a reasonable
estimation of fair value.
Lease receivables are valued by management for each homogenous category
of leases by discounting future expected cash flows. Lease receivables held for
sale are valued by management based upon recent sales with consideration given
to differences between those leases and leases sold. The implicit discount rate
applied for purposes of determining the aggregate discounted lease balance was
obtained from an investment banker based on a recent lease securitization.
Mortgage loans held for sale and mortgage-backed securities covered by
mandatory delivery commitments allocated thereto are valued based upon
commitment delivery prices. Uncommitted mortgage loans held for sale are valued
by reference to quoted market prices for mortgage-backed securities, after
appropriate adjustments thereto. For purposes of developing
<PAGE> 71
the estimated fair value, the portfolio has been segregated by product type,
term and coupon interest rate.
Short-term borrowings are all tied to near term variable rate indices.
Accordingly they are valued at their carrying amounts, which are a reasonable
estimation of fair values.
Long-term borrowings are at a fixed rate of 8.07% and were valued based
upon the net present value of the borrowings using an estimated current rate of
7.33%.
Mortgage purchase commitments are valued based upon the difference
between quoted mandatory delivery commitment prices (which are used by the
Company to price its mortgage purchase commitments) and the committed prices.
Mandatory delivery commitments are valued based upon the difference
between quoted prices for such commitments and the prices applicable to the
underlying commitment.
Purchased option contracts are valued based upon quoted prices for such
option contracts.
Interest rate floor contracts are valued based upon broker quotations.
<PAGE> 72
STOCK DATA
Information pertaining to high and low stock prices for each quarter
during 1997, 1996, 1995 and 1994 is given in the following chart. All per share
data have been adjusted to reflect the Stock Dividends issued by the Company.
The Company began paying cash dividends in 1996. Cash dividends of
$0.03 per share, were paid to shareholders of record as of September 3, 1996,
November 29, 1996, February 19, 1997, June 2, 1997 and August 20, 1997. These
cash dividends were paid on September 24, 1996, December 13, 1996, March 5,
1997, June 16, 1997 and September 10, 1997. A cash dividend of $0.04 per share
was paid on December 31, 1997 to shareholders of record as of December 18, 1997.
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for restrictions on the Company's ability to pay cash dividends.)
As of February 28, 1998, there were approximately 432 record holders of
the Company's common stock.
<TABLE>
<CAPTION>
QUARTER
12-31-95 3-31-96 6-30-96 9-30-96 12-31-96 3-31-97 6-30-97 9-30-97 12-31-97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High $14.91 $16.24 $14.13 $13.57 $15.00 $16.79 $19.05 $19.05 $16.88
Low $12.01 $12.29 $9.68 $10.12 $12.26 $12.50 $12.02 $11.90 $10.95
</TABLE>
Source: Nasdaq
<PAGE> 73
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Resource Bancshares
Mortgage Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity, and of
cash flows present fairly, in all material respects, the financial position of
Resource Bancshares Mortgage Group, Inc. and its subsidiaries at December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for mortgage servicing rights in 1995.
Price Waterhouse LLP
Columbia, South Carolina
January 26, 1998
<PAGE> 74
DIRECTORS
Edward J. Sebastian
Chairman of the Board
Chief Executive Officer
Resource Bancshares Mortgage Group, Inc.
Columbia, South Carolina
David W. Johnson, Jr.
Vice Chairman
Managing Director
Resource Bancshares Mortgage Group, Inc.
Columbia, South Carolina
John C. Baker
Baker Capital Corp.
New York, New York
venture capital firm
Stuart M. Cable
Attorney
Goodwin, Proctor, & Hoar LLP
Boston, Massachusetts
law firm
John W. Currie
Attorney
McNair Law Firm P.A.
Columbia, South Carolina
law firm
Boyd M. Guttery*
Business Consultant
Private Investor
Atlanta, Georgia
Robin C. Kelton
Chairman
Kelton International Ltd.
London, England
investment bank
John O. Wolcott*
Executive Vice President
Olayan America Corporation
New York, New York
investment company
* Audit Committee
EXECUTIVE OFFICERS
Edward J. Sebastian
Chairman of the Board
Chief Executive Officer
David W. Johnson, Jr.
Vice Chairman
Managing Director
Steven F. Herbert
Senior Executive Vice President
Chief Financial Officer
Richard M. Duncan
Senior Executive Vice President
Production
<PAGE> 75
CORPORATE INFORMATION
Exchange: NASDAQ
Symbol: REMI*
*During the second quarter of 1998, the Company intends to change its ticker
symbol from REMI to RBMG.
Internet Address: http//www.rbmg.com
INVESTOR RELATIONS CONTACT
Steven F. Herbert
Senior Executive Vice President and Chief Financial Officer
7909 Parklane Road
Columbia, South Carolina 29223
Tel: (803) 741-3539
Fax: (803) 741-3586
DIVIDEND REINVESTMENT PLAN
Resource Bancshares Mortgage Group, Inc. has an optional Dividend Reinvestment
and Stock Purchase Plan. Shareholders interested in participating can contact
the Investor Relations contact listed above.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1441 Main Street, Suite 1200
Columbia, South Carolina 29201
FORM 10K AND OTHER INFORMATION
Copies of the Resource Bancshares Mortgage Group, Inc. Annual Report on Form
10K, as filed with the Securities and Exchange Commission, will be furnished
without charge to shareholders upon written request to Steven F.
Herbert, at the address set forth above.
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York
TELEPHONE: (Operators are available Monday - Friday, 8:30 a.m. to 7:00 p.m.
Eastern time. An interactive automated system is available around the clock
everyday.)
INSIDE THE US: 1-800-446-2617
OUTSIDE THE US: 1-201-324-0498
TDD/TTY FOR HEARING IMPAIRED: 1-201-222-4955
INTERNET:
INTERNET: HTTP://WWW.FCTC.COM
E-MAIL: [email protected]
GENERAL CORRESPONDENCE: (For questions regarding stock transfers, change of
address or lost certificates.)
FIRST CHICAGO TRUST COMPANY OF NEW YORK
P.O. BOX 2500
JERSEY CITY, NJ 07303-2500
CERTIFICATE TRANSFERS: (For stock certificates sent via mail.)
FIRST CHICAGO TRUST COMPANY OF NEW YORK
P.O. BOX 2506
JERSEY CITY, NJ 07303-2506
CERTIFICATE TRANSFERS BY COURIER:
FIRST CHICAGO TRUST COMPANY OF NEW YORK
14 WALL STREET, SUITE 4680-8TH FLOOR
NEW YORK, NY 10005
DIVIDEND REINVESTMENT PLANS: (For requests for a Dividend Reinvestment Plan
prospectus and enrollment form.)
FIRST CHICAGO TRUST COMPANY OF NEW YORK
P.O. BOX 2598
JERSEY CITY, NJ 07303-2598
<PAGE> 1
EXHIBIT 21.1
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
1. Intercounty Mortgage Inc., a wholly-owned subsidiary of the Company,
was formed by the Company in January 1995 and is incorporated in the
state of Delaware.
2. Meritage Mortgage Corporation, a wholly-owned subsidiary of the
Company, was acquired by the Company in April 1997 and is incorporated
in the state of Oregon.
3. Resource Bancshares Corporation, a wholly-owned subsidiary of the
Company, was acquired by the Company in December 1997 and is
incorporated in the state of South Carolina.
4. Laureate Realty Services, Inc., a wholly-owned subsidiary of Resource
Bancshares Corporation, was acquired by the Company in December 1997
and is incorporated in the state of South Carolina.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 333-25613, 333-25611, 333-25885, 333-44289) of
Resource Banschares Mortgage Group, Inc. of our report dated January 26, 1998
appearing on page 47 of this Annual Report on Form 10-K.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Columbia, South Carolina
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,546
<SECURITIES> 19,684
<RECEIVABLES> 139,196
<ALLOWANCES> 0
<INVENTORY> 1,306,514
<CURRENT-ASSETS> 1,513,687
<PP&E> 37,309
<DEPRECIATION> 9,586
<TOTAL-ASSETS> 1,556,929
<CURRENT-LIABILITIES> 1,335,329
<BONDS> 6,461
0
0
<COMMON> 311
<OTHER-SE> 214,828
<TOTAL-LIABILITY-AND-EQUITY> 1,556,929
<SALES> 72,302
<TOTAL-REVENUES> 161,018
<CGS> 88,008
<TOTAL-COSTS> 125,931
<OTHER-EXPENSES> 37,923
<LOSS-PROVISION> 4,615
<INTEREST-EXPENSE> 54,658
<INCOME-PRETAX> 35,087
<INCOME-TAX> 13,289
<INCOME-CONTINUING> 35,087
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,798
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.05
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,307
<SECURITIES> 0
<RECEIVABLES> 67,927
<ALLOWANCES> 15
<INVENTORY> 1,197,489
<CURRENT-ASSETS> 1,287,501
<PP&E> 23,148
<DEPRECIATION> 4,308
<TOTAL-ASSETS> 1,306,341
<CURRENT-LIABILITIES> 1,136,288
<BONDS> 0
0
0
<COMMON> 180
<OTHER-SE> 145,873
<TOTAL-LIABILITY-AND-EQUITY> 1,306,341
<SALES> 18,445
<TOTAL-REVENUES> 29,050
<CGS> 17,612
<TOTAL-COSTS> 21,799
<OTHER-EXPENSES> 4,187
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 15,202
<INCOME-PRETAX> 7,251
<INCOME-TAX> 2,791
<INCOME-CONTINUING> 7,251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,460
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,337
<SECURITIES> 0
<RECEIVABLES> 56,405
<ALLOWANCES> 15
<INVENTORY> 798,195
<CURRENT-ASSETS> 875,053
<PP&E> 25,328
<DEPRECIATION> 4,944
<TOTAL-ASSETS> 895,437
<CURRENT-LIABILITIES> 744,030
<BONDS> 0
0
0
<COMMON> 180
<OTHER-SE> 151,227
<TOTAL-LIABILITY-AND-EQUITY> 895,437
<SALES> 35,301
<TOTAL-REVENUES> 62,662
<CGS> 35,471
<TOTAL-COSTS> 45,221
<OTHER-EXPENSES> 9,750
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 27,021
<INCOME-PRETAX> 17,441
<INCOME-TAX> 6,714
<INCOME-CONTINUING> 17,441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,727
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.57
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,415
<SECURITIES> 0
<RECEIVABLES> 59,359
<ALLOWANCES> 15
<INVENTORY> 850,165
<CURRENT-ASSETS> 936,703
<PP&E> 26,607
<DEPRECIATION> 5,622
<TOTAL-ASSETS> 957,688
<CURRENT-LIABILITIES> 802,008
<BONDS> 0
0
0
<COMMON> 193
<OTHER-SE> 155,680
<TOTAL-LIABILITY-AND-EQUITY> 957,688
<SALES> 49,809
<TOTAL-REVENUES> 94,875
<CGS> 53,019
<TOTAL-COSTS> 67,627
<OTHER-EXPENSES> 14,608
<LOSS-PROVISION> 339
<INTEREST-EXPENSE> 37,029
<INCOME-PRETAX> 27,248
<INCOME-TAX> 10,340
<INCOME-CONTINUING> 27,248
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,908
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.87
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,492
<SECURITIES> 0
<RECEIVABLES> 60,668
<ALLOWANCES> 0
<INVENTORY> 912,150
<CURRENT-ASSETS> 1,007,259
<PP&E> 27,472
<DEPRECIATION> 6,337
<TOTAL-ASSETS> 1,028,394
<CURRENT-LIABILITIES> 871,093
<BONDS> 0
0
0
<COMMON> 193
<OTHER-SE> 157,108
<TOTAL-LIABILITY-AND-EQUITY> 1,028,394
<SALES> 62,858
<TOTAL-REVENUES> 126,617
<CGS> 76,152
<TOTAL-COSTS> 96,069
<OTHER-EXPENSES> 19,917
<LOSS-PROVISION> 817
<INTEREST-EXPENSE> 45,956
<INCOME-PRETAX> 30,548
<INCOME-TAX> 10,925
<INCOME-CONTINUING> 30,548
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,623
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,677
<SECURITIES> 0
<RECEIVABLES> 63,838
<ALLOWANCES> 0
<INVENTORY> 1,113,628
<CURRENT-ASSETS> 1,213,636
<PP&E> 28,172
<DEPRECIATION> 7,117
<TOTAL-ASSETS> 1,234,691
<CURRENT-LIABILITIES> 1,073,015
<BONDS> 0
0
0
<COMMON> 193
<OTHER-SE> 161,676
<TOTAL-LIABILITY-AND-EQUITY> 1,234,691
<SALES> 13,455
<TOTAL-REVENUES> 30,057
<CGS> 17,964
<TOTAL-COSTS> 22,839
<OTHER-EXPENSES> 4,875
<LOSS-PROVISION> 265
<INTEREST-EXPENSE> 9,720
<INCOME-PRETAX> 7,218
<INCOME-TAX> 2,748
<INCOME-CONTINUING> 7,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,470
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,319
<SECURITIES> 0
<RECEIVABLES> 78,904
<ALLOWANCES> 0
<INVENTORY> 1,073,929
<CURRENT-ASSETS> 1,199,883
<PP&E> 29,766
<DEPRECIATION> 7,912
<TOTAL-ASSETS> 1,227,620
<CURRENT-LIABILITIES> 1,047,809
<BONDS> 6,507
0
0
<COMMON> 198
<OTHER-SE> 173,106
<TOTAL-LIABILITY-AND-EQUITY> 1,227,620
<SALES> 31,688
<TOTAL-REVENUES> 70,376
<CGS> 39,419
<TOTAL-COSTS> 51,162
<OTHER-EXPENSES> 11,743
<LOSS-PROVISION> 1,093
<INTEREST-EXPENSE> 22,037
<INCOME-PRETAX> 19,214
<INCOME-TAX> 7,373
<INCOME-CONTINUING> 19,214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,841
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.58
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,939
<SECURITIES> 0
<RECEIVABLES> 96,882
<ALLOWANCES> 0
<INVENTORY> 1,219,044
<CURRENT-ASSETS> 1,371,636
<PP&E> 32,999
<DEPRECIATION> 8,712
<TOTAL-ASSETS> 1,404,144
<CURRENT-LIABILITIES> 1,219,076
<BONDS> 6,485
0
0
<COMMON> 210
<OTHER-SE> 178,373
<TOTAL-LIABILITY-AND-EQUITY> 1,404,144
<SALES> 53,301
<TOTAL-REVENUES> 115,333
<CGS> 62,632
<TOTAL-COSTS> 92,212
<OTHER-EXPENSES> 29,580
<LOSS-PROVISION> 2,605
<INTEREST-EXPENSE> (39,115)
<INCOME-PRETAX> 23,121
<INCOME-TAX> (8,713)
<INCOME-CONTINUING> 23,121
<DISCONTINUED> 0
<EXTRAORDINARY> 10,147
<CHANGES> 0
<NET-INCOME> 14,408
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.70
</TABLE>
