<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, 1998 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
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, 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. [ ]
<PAGE> 2
The aggregate market value of the voting and non-voting equity held by
non-affiliates of the registrant was $269,338,339 as of March 19, 1999, based on
the closing price of $12.38 per share of the registrant's Common Stock, par
value $.01 per share, on the NASDAQ National Market System on such date.
As of March 19, 1999, 22,503,599 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
1998 Annual Report to Shareholders Parts II and IV
1999 Proxy Statement Part III
<PAGE> 3
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Form 10-K for the year ended December 31, 1998
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
<TABLE>
<CAPTION>
PAGE
PART I. ----
<S> <C>
Item 1. Business 1
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results 24
of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 24
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements With Accountants on Accounting and 24
Financial Disclosure
PART III.
Item 10. Directors and Executive Officers 24
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and Management 25
Item 13. Certain Relationships and Related Transactions 25
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25
SIGNATURES 27
INDEX TO EXHIBITS A
</TABLE>
<PAGE> 4
PART I
Item 1. BUSINESS
General
Resource Bancshares Mortgage Group, Inc. (the Company) is a diversified
financial services company engaged primarily in the business of mortgage
banking, through the purchase (via a nationwide network of correspondent and
brokers), sale and servicing of agency-eligible and subprime residential,
single-family, first-mortgage loans and the purchase and sale of servicing
rights associated with agency-eligible 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 also purchases and originates mortgage
loans through its subprime division. 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 or securitized.
Substantially all the agency-eligible mortgage loans are sold with the rights to
service the loans being retained by the Company. The retained 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.
The Company also receives loan servicing fees on agency-eligible mortgage
servicing rights acquired through bulk acquisitions of servicing rights related
to agency-eligible 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 continue expansion of its
small-ticket commercial equipment lease portfolio and to increase its commercial
mortgage loan production.
The Company does not hold any material trademarks, licenses, franchises
or concessions.
Loan Production
Correspondent
The Company purchases closed agency-eligible 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, 1998, the Company had 852 correspondents originating
mortgage loans in 48 states and the District of Columbia.
Agency-eligible residential loan production for the Company by
correspondents is widely dispersed, with the top 20 correspondents supplying the
Company with just 27% of its dollar volume of correspondent loans during 1998
compared to 29% in 1997. During 1998, the top five correspondents accounted for
approximately 12% of the year's mortgage loan correspondent purchase volume.
This compares to the top five
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correspondents accounting for approximately 13% and 15%, of the agency-eligible
mortgage loan purchase volume during 1997 and 1996, respectively. No single
correspondent accounted for more than 3.9% of the Company's agency-eligible
mortgage loan purchase volume in 1998. In 1997 and 1996, 3.3% and 3.4%,
respectively, of the Company's total agency-eligible 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 agency-eligible loans because of the low
fixed expenses and capital investment required of the Company. 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 agency-eligible loans purchased, so that a substantial portion of the
Company's cost is variable rather than fixed. Management also believes that, by
emphasizing the correspondent origination approach, the Company has greater
flexibility to adjust to varying market conditions. As conditions change, the
Company can expand into new geographic markets without incurring significant
additional costs by utilizing existing and new correspondents that operate in
each new market. The use of correspondents also enables the Company to exit
markets easily if circumstances dictate.
The Company attracts and maintains relationships with correspondents by
offering a variety of services that provide incentives for the correspondents to
sell agency-eligible 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 approximately 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 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
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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 a VA guaranty. The Company is approved by both HUD and the VA
to underwrite FHA and VA 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 to
the Company by the correspondent within fifteen days of closing.
The Company has implemented a quality control program to monitor
compliance with the Company's established lending and servicing policies and
procedures, as well as with applicable laws and regulatory guidelines. The
Company believes that the implementation and enforcement of its comprehensive
underwriting criteria and its quality control program are significant elements
in the Company's efforts to purchase high-quality mortgage loans and servicing
rights. The Company's quality control department examines loans in order to
evaluate the loan purchasing function for compliance with underwriting criteria.
The quality control department also reviews loan applications for compliance
with federal and state lending standards, which may involve reverifying
employment and bank information and obtaining separate credit reports and
property appraisals.
Wholesale
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 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, 1998, the Company had 15 wholesale branches, serving
approximately 3,400 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
In mid-1995, the Company expanded into the retail mortgage banking
business in the Northeast. With the establishment of a retail subsidiary
operating through six
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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 May 1, 1998, the retail division originated
$1.9 billion in mortgage loans.
During late 1997, the Company began reviewing the compatibility of the
retail operation with its primary business focus. Effective May 1, 1998, the
Company sold its retail production franchise to CFS Bank. Historically, the
Company has focused on accumulation of loan production through third-party
correspondent and wholesale broker channels because of the relatively lower
fixed expenses and capital investments required, among other reasons. Management
believes the sale of the retail operation has allowed the Company to refocus on
its core competency as a correspondent and wholesale mortgage lender.
Subprime
In 1997, the Company began its initial expansion into subprime lending
activities. In connection therewith, the Company acquired Meritage Mortgage
Corporation (Meritage) in April 1997. The Company's subprime division produced
$607.7 million or 4% of the Company's total production volume during 1998.
Management anticipates continuing near-term increases in subprime
production volumes as subprime operations introduced and made available through
the Company's existing 15 branch agency-eligible wholesale network reach full
year production levels. In the future, the Company also plans to offer select
subprime loan products through its existing nationwide correspondent production
channel.
The following table shows residential production volume by source for
each of the three years in the period ended December 31, 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
($ in Thousands) 1998 1997 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Correspondent $11,666,560 $ 7,893,583 $ 7,915,323
Wholesale 3,023,961 1,868,726 1,411,643
Retail 264,059 675,411 668,759
----------------- ----------------- ----------------
Total Agency-Eligible Loan Production $14,954,580 $ 10,437,720 $ 9,995,725
Subprime Production 607,664 339,574 -
----------------- ----------------- ----------------
Total Residential Production $15,562,244 $ 10,777,294 $ 9,995,725
================= ================= ================
</TABLE>
The Company purchases and originates conventional and subprime 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. 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.
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
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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.
The following table shows residential mortgage loan production volume
by type of loan for each of the three years in the period ended December 31,
1998.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
($ in Millions Except as Indicated) 1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Conventional Loans:
Volume $ 10,674.1 $ 6,126.8 $ 6,197.3
Percentage of total volume 68% 57% 62%
FHA / VA Loans:
Volume $ 4,280.4 $ 4,310.9 $ 3,798.4
Percentage of total volume 28% 40% 38%
Subprime Loans
Volume $ 607.7 $ 339.6
Percentage of total volume 4% 3%
Total Loans:
Volume $ 15,562.2 $10,777.3 $ 9,995.7
Number of loans 131,630 99,349 98,237
Average loan size ($ in Thousands) $ 118.2 $ 108.5 $ 101.8
</TABLE>
The following table shows residential loan production volume by state
for the year ended December 31, 1998, for each state that represented 5% or more
of the Company's total residential loan production volume for 1998.
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-------------------------------------
($ in Thousands) Percent of
State Amount Total
--------------------------------- ---------------- ---------------
<S> <C> <C>
Illinois $ 1,543,482 9.92%
Minnesota 1,520,796 9.77%
Massachusetts 1,437,262 9.23%
Colorado 1,344,030 8.64%
California 1,228,862 7.90%
Ohio 854,829 5.49%
All Other 7,632,983 49.05%
---------------- ---------------
Total $ 15,562,244 100.00%
================ ===============
</TABLE>
Sale of Residential Loans
The Company customarily sells all agency-eligible 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
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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 conventional residential mortgage loans are sold to
private investors through whole loan sales or securitizations.
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
and bear any potential related loss on the disposition of those 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.
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 agency-eligible
warehouse loans and a portion of its pipeline loans to investors for delivery at
a future time for a stated price. The Company does not currently hedge the
interest rate risk associated with subprime loans.
In connection with its agency-eligible 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
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Company's counterparties is secured or subject to margin requirements; however,
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
Company's current policy 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.
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 of the
mortgaged premises as required, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults and
generally administering agency-eligible 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 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 substantially all of
its produced agency-eligible mortgage servicing rights to other approved
servicers. The Company currently follows a strategy of retaining a relatively
small portion of its produced agency eligible 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 agency-eligible mortgage servicing rights
portfolios, the Company also subservices agency-eligible 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 agency-eligible 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, 1998.
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Days Delinquent
30 1.20%
60 0.20%
90+ days 0.11%
-------------
Total Delinquencies 1.51%
=============
At December 31, 1998, the Company's owned mortgage servicing rights
portfolio had an underlying unpaid principal balance of $9.9 billion. The
portfolio generally reflected characteristics representative of the then-current
market conditions and had a weighted average note rate of 7.20%, which is
somewhat higher than for current production.
In 1998, the Company produced or purchased servicing rights associated
with agency-eligible residential loans having an aggregate underlying unpaid
principal balance of $15.0 billion and had an average balance of aggregate
underlying unpaid principal balance of loans being serviced of $11.9 billion.
Typically, the Company sells the majority of its produced agency-eligible
mortgage servicing rights between 90 days and 180 days of purchase.
Nevertheless, certain market and operating characteristics, including
origination costs, adjusted basis, market values, coupon rates, delinquency
rates and current prepayment rates are considered to determine whether mortgage
servicing rights should be held for longer periods of time.
The following table provides certain information regarding the
Company's agency-eligible mortgage servicing rights portfolio at December 31,
1998.
<TABLE>
<CAPTION>
($ in Thousands) Percentage of
Year of Percentage of Aggregate Total Unpaid
Origination Number of Loans Total Loans Unpaid Principal Amount Principal Amount
- ---------------------- ----------------- ----------------- ----------------------- -----------------
<S> <C> <C> <C> <C>
1991 or earlier 2,530 2.8% $ 106,996 1.1%
1992 3,519 3.8% 247,152 2.5%
1993 7,458 8.1% 564,832 5.7%
1994 5,351 5.8% 459,895 4.7%
1995 1,884 2.0% 153,708 1.6%
1996 3,975 4.3% 409,115 4.2%
1997 13,859 15.0% 1,475,955 14.9%
1998 53,615 58.2% 6,447,447 65.3%
----------------- ----------------- ----------------------- -----------------
Total 92,191 100.00% $ 9,865,100 100.00%
================= ================= ======================= =================
</TABLE>
The following table sets forth the Company's agency-eligible mortgage
servicing rights portfolio by loan type:
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<PAGE> 12
<TABLE>
<CAPTION>
($ in Thousands) At December 31, 1998
-------------------------------------------------------------------------------
Aggregate
Unpaid Weighted Weighted
Number Principal Average Average
Loan Type of Loans Balance Coupon Service Fee
- ------------------------------- ------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
FHA 8,002 $ 656,417 7.10% 0.5625%
VA 3,526 362,287 6.87% 0.4834%
Fannie Mae 43,099 4,716,719 7.18% 0.4497%
Freddie Mac 28,134 3,121,008 7.30% 0.3490%
Private 620 38,787 8.36% 0.3971%
Other 8,810 969,882 7.09% 0.3162%
============= =============== ================= ================
TOTAL 92,191 $ 9,865,100 7.20% 0.4168%
============= =============== ================= ================
</TABLE>
The Company's agency-eligible 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 aggregate underlying unpaid principal
balance of $4,406.8 million at December 31, 1998. The Company's
available-for-sale portfolio had an aggregate underlying unpaid principal
balance of $5,458.3 million at December 31, 1998.
As the servicing rights of the available-for-sale portfolio are
generally held as a longer-term investment, there are certain prepayment risks
inherent to it that do not attach to the portion of the portfolio held-for-sale
(the portfolio held-for-sale is generally sold within 90 to 180 days). During
periods of declining interest rates, prepayments of mortgage loans increase as
homeowners seek to refinance at lower rates, resulting in a decrease in the
value of the Company's available-for-sale portfolio. Mortgage loans with higher
interest rates are more likely to result in prepayments. The following table
sets forth certain information regarding the aggregate underlying unpaid
principal balance of mortgage loans in the available-for-sale portfolio serviced
by the Company. The table includes both fixed and adjustable rate loans.
Available-for-Sale Portfolio
<TABLE>
<CAPTION>
($ in Thousands) At December 31, 1998
----------------------------------------------------
Aggregate Percentage of Total
Unpaid Principal Unpaid Principal
Mortgage Interest Rate Balance Amount
- -------------------------------- ----------------------- -----------------------
<S> <C> <C>
Less than 7.00% $ 917,684 16.81%
7.00% - 7.49% 2,015,044 36.92%
7.50% - 7.99% 1,435,904 26.31%
8.00% - 8.49% 668,721 12.25%
8.50% - 8.99% 306,815 5.62%
9.00% - 9.49% 70,249 1.29%
Greater than 9.49% 43,917 0.80%
----------------------- -----------------------
TOTAL $ 5,458,334 100.00%
======================= =======================
</TABLE>
The following table sets forth the geographic distribution of the
Company's available-for-sale portfolio for those states representing more than
3% of the portfolio:
9
<PAGE> 13
<TABLE>
<CAPTION>
($ in Thousands) At December 31, 1998
--------------------------------------------------------
Aggregate Percent of
Unpaid Principal Total Aggregate Unpaid
State Balance Principal Balance
- ------------------------ ------------------- ----------------------------------
<S> <C> <C>
Massachusetts $ 607,975 11.14%
New York 383,703 7.03%
California 355,045 6.51%
Minnesota 345,087 6.32%
Connecticut 333,325 6.11%
Texas 291,999 5.35%
Illinois 275,746 5.05%
Ohio 240,353 4.40%
Colorado 228,643 4.19%
Florida 220,653 4.04%
Georgia 170,561 3.12%
New Jersey 168,712 3.09%
All others 1,836,532 33.65%
=================== ==================================
TOTAL $5,458,334 100.00%
=================== ==================================
</TABLE>
The following table sets forth certain information regarding the
aggregate underlying unpaid principal balance of the mortgage loans in the
held-for-sale portfolio serviced by the Company. The table includes both fixed
and adjustable rate loans.
Held-for-Sale Portfolio
<TABLE>
<CAPTION>
($ in Thousands) At December 31, 1998
--------------------------------------------------
Aggregate Percentage of Total
Unpaid Principal Aggregate Unpaid
Mortgage Interest Rate Balance Principal Balance
- -------------------------------- ------------------------ -----------------------
<S> <C> <C>
Less than 6.00% $ 31,613 0.72%
6.00% - 6.49% 467,619 10.61%
6.50% - 6.99% 2,680,487 60.83%
7.00% - 7.49% 1,011,905 22.96%
7.50% - 7.99% 154,215 3.50%
8.00% - 8.49% 10,256 0.23%
8.50% - 8.99% 5,994 0.14%
Greater than 8.99% 44,677 1.01%
======================== =======================
TOTAL $4,406,766 100.00%
======================== =======================
</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 1998 Annual Report to
shareholders included herein and hereby incorporated by reference.
10
<PAGE> 14
Leasing Operations
The Company's leasing division, Republic Leasing, acquired on December
31, 1997, originates and services small-ticket commercial equipment leases.
Substantially all of Republic Leasing's lease receivables are acquired from
independent brokers who operate throughout the continental United States. At
December 31, 1998 the leasing division had 218 brokers. Lease production was
$78.1 million or 0.5% of the Company's total production volume during 1998. At
December 31, 1998 Republic Leasing managed a lease servicing portfolio of $136.5
million. Of this managed lease portfolio, $98.9 million was owned and $37.6
million was serviced for investors. The weighted average net yield for the
managed lease servicing portfolio at December 31, 1998 was 10.81%. Delinquencies
for the managed lease servicing portfolio at December 31, 1998 were 2.00%.
Commercial Mortgage Operations
In connection with its acquisition of RBC on December 31, 1997, the
Company acquired RBC's subsidiary Laureate. Laureate 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 retains the right to service the loans
under a servicing agreement. Laureate produced $899.7 million or 5% of the
Company's total production volume during 1998 through 12 commercial mortgage
branches. At December 31, 1998, Laureate was servicing a commercial mortgage
loan servicing portfolio of approximately $3.3 billion. The weighted average
note rate for the commercial mortgage loan servicing portfolio was 8.11% at
December 31, 1998. Delinquencies for the commercial mortgage loan servicing
portfolio were 0.42% at December 31, 1998.
Seasonality
The residential mortgage banking industry is generally subject to
seasonal trends. These trends reflect the general pattern of resale of homes,
which typically peaks during the spring and summer seasons and declines 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.
Changes in Economic Conditions
The Company's business is subject to various business risks, including
competition from other mortgage companies and other financial institutions.
Economic conditions affect the consumer's decision to buy or sell residences as
well as the number of residential mortgage loan delinquencies and foreclosures,
the value of collateral supporting loan portfolios, administrative costs in
evaluating and processing mortgage loan applications and the cost and
availability of funds that mortgage banking companies rely upon to make or
purchase loans. Changes in the level of consumer confidence, tax laws, real
estate values, prevailing interest rates and investment returns expected by the
financial community could make mortgage loans of the types originated or
purchased by the Company less attractive to
11
<PAGE> 15
borrowers or investors. Competition also may be affected by fluctuations in
interest rates, general economic conditions and localized economic conditions.
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 changes in interest rates or other factors
beyond its control.
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
may have greater financial resources, better operating efficiencies and longer
operating histories than 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 branches operate.
Increased competition for mortgage loans from larger lenders may result in a
decrease in the volume of loans purchased by the Company, thereby possibly
reducing the Company's revenues. At the same time, Fannie Mae and Freddie Mac
are developing technologies and business practices that could reduce their
reliance on large mortgage companies for loan production and enable them to
access smaller producers for volume. To the extent that market pricing becomes
more competitive, the Company may be unable to achieve its planned level of
originations and may be unable to consummate acquisitions of servicing rights at
a satisfactory cost. 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 commercial 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.
Due to the foregoing considerations, there can be no assurance that the
Company will be able to continue to compete successfully in the markets it
serves. Inability to compete successfully would have a material adverse effect
on the results of operations and financial condition of Company.
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 1998, approximately 97% of its sales under
these forward sales contracts were to four major customers. In 1997
approximately 84% of its sales under these forward sales contracts were to three
major customers. The loss of these clients could have a material adverse effect
on the Company's residential mortgage servicing business if no suitable
replacement can be found.
The growth and profitability of the Company's equipment leasing
business are dependent to a large extent on the ability to finance an increasing
balance of leases held in its portfolio or to sell leases to and service leases
for third parties. Currently, Resource Bancshares Corporation (RBC) has in place
a $100 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
12
<PAGE> 16
assurance of future sales. At December 31, 1998, approximately 17% and 9% of the
Company's net lease receivables were located in the states of California and
Florida, respectively. At December 31, 1998, approximately 19% and 9% of the
Company's net lease receivables were collateralized by computer equipment and
titled equipment, respectively. Otherwise, there are no lessee geographic,
equipment type or lessee industry concentrations greater than 9%.
At December 31, 1998, 35% of commercial mortgage loans serviced were
for a single customer. In addition, at December 31, 1998, the Company was
servicing approximately $37.6 million of leases for third parties, 98% 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.
Interest Rate Risks
The Company's loans held for sale are generally funded by borrowings
under its revolving warehouse credit line. The Company's net warehouse interest
income is the difference between the interest income it earns on loans held for
sale (generally based on long-term interest rates) and the interest it pays on
its borrowings (generally based on short-term interest rates). The factors that
can affect this spread include interest rates charged by lenders, the
relationship between long-term and short-term interest rates and the use of
compensating balances (escrow funds held on deposit with lending banks) to
decrease interest rates charged on borrowed funds. There can be no assurance
that this spread will not decrease from its current level. A decrease in the
spread would have a negative effect on the Company's net interest income.
The Company's net income reflects a reduction in interest expense on
its borrowings with depository institutions for escrow funds placed with such
institutions. Net income could be adversely affected to the extent that proposed
revisions of applicable bank regulations cause these escrow accounts to be
recharacterized as demand deposit accounts, thereby requiring reserves to be
established with Federal Reserve Banks, which would reduce the amount of the
reduction in the Company's interest expense on its borrowings. Other regulatory
changes or interpretations that change the ability of the Company to receive
credit for escrow balances would adversely affect the Company.
In addition, certain states require that interest be paid to mortgagors
on escrow funds deposited by them to cover mortgage-related payments such as
property taxes and insurance premiums. Federal legislation has in the past been
introduced that would, if enacted, revise current escrow regulations and
establish a uniform interest payment requirement in all states. If such federal
legislation were enacted or if additional states enact legislation relating to
payment of, or increases in the rate of, interest on escrow balances, or if such
legislation were retroactively applied to loans in the Company's servicing
portfolio, the Company's earnings would be adversely affected.
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, Ginnie Mae, HUD, the VA and
state regulatory authorities with respect to originating, processing,
underwriting, selling, securitizing and servicing mortgage loans.
13
<PAGE> 17
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 prohibit 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. Such regulatory requirements are subject
to change from time to time and may in the future become more restrictive,
thereby making compliance more difficult or expensive or otherwise restricting
the ability of the Company to conduct its business as such business is now
conducted.
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 nine states in which the
Company does business where it is required to pay interest on escrow accounts.
Loans from these nine states amounted to approximately 30.3% of the Company's
mortgage servicing rights portfolio at December 31, 1998. The amount of interest
paid on escrow accounts for 1998 was approximately $500 thousand.
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. Mortgage loans also may be
subject to state usury statutes.
14
<PAGE> 18
Litigation
In recent years, the mortgage banking industry has been subject to
class action lawsuits that allege violations of federal and state laws and
regulations, including the propriety of collecting and paying various fees and
charges and the calculation of escrow amounts. Most recently, at least 150
purported class action lawsuits have been commenced against various mortgage
companies, including the Company, alleging, inter alia, that the payment of
certain fees to mortgage brokers violates the anti-kickback provisions of RESPA.
If these cases are resolved against the lenders, it may cause an industry-wide
change in the way independent mortgage brokers are compensated. Such a change
could have a material adverse effect on the Company and the entire mortgage
lending industry. The Company's broker compensation and table-funded
correspondent purchase programs permit such payments. Although the Company
believes these programs comply with all applicable laws and are consistent with
long-standing industry practice and regulatory interpretations, in the future
new regulatory interpretations or judicial decisions may require the Company to
change its broker compensation and table-funded correspondent purchase
practices. Class action lawsuits may continue to be filed in the future against
the mortgage banking industry generally. No prediction can be made as to whether
the ultimate decisions in any of these class actions will be adverse to the
defendant mortgage companies.
Delinquency and Default
The Company's profitability may be negatively impacted by economic
downturns as during such periods the frequency of loan defaults tends to
increase. The Company originates and purchases conventional loans as well as
loans insured by the FHA or partially guaranteed by the VA. In the case of
conventional loans, the Company is generally at risk for any mortgage loan
default from origination or purchase by the Company, as the case may be, 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. The Company has from the time an FHA or VA
mortgage loan is originated or purchased until the first payment is due, a
minimum of 31 days, to request insurance or a guarantee certificate from the FHA
and the VA, respectively. Once the insurance or the guarantee certificate is
issued, The Company has no risk of default or foreclosure except with respect to
certain losses related to foreclosures of FHA mortgage loans and losses that
exceed the VA's guarantee limitation.
The Company is also affected by mortgage loan delinquencies and
defaults on the mortgage loans that it services. Under certain types of
servicing contracts, particularly contracts to service loans that have been
pooled or securitized, the servicer must advance all or part of the scheduled
payments to the owner of the loan, even when loan payments are delinquent. Also,
to protect their liens on mortgaged properties, owners of mortgage loans usually
require the servicer to advance mortgage and hazard insurance and tax payments
on schedule even if sufficient escrow funds are unavailable.
With respect to VA loans, the VA guarantees the initial losses on a
loan. The guaranteed amount generally ranges from 20% to 35% of the original
principal balance. Before each foreclosure sale, the VA determines whether to
bid to purchase the foreclosed loan by comparing the estimated net sale proceeds
to the outstanding principal balance and the servicer's accumulated reimbursable
costs and fees. If this amount is a loss and exceeds the guaranteed amount, the
VA typically issues a no-bid and pays the servicer the guaranteed amount.
Whenever a no-bid is issued, the servicer absorbs the loss, if any, in excess of
the sum of the guaranteed principal and amounts recovered at the foreclosure
sale. The Company's historical delinquency and foreclosure rate experience on VA
loans has generally been consistent with that of the industry.
15
<PAGE> 19
In the case of loans insured by the FHA, the Company will not be
reimbursed for certain amounts if foreclosure becomes necessary. Such amounts
include interest on the mortgage loan for the first two months subsequent to the
loan becoming delinquent and a portion of the costs of foreclosure (generally
the unreimbursed amount of such costs is limited to one-third of such costs).
With respect to VA loans, FHA loans and conventional loans, the
servicer generally is reimbursed ultimately by the mortgage loan owner or from
liquidation proceeds. However, in the interim, the servicer must absorb the cost
of funds advanced during the time the advance is outstanding. Further, the
servicer must bear the increased costs of attempting to collect on delinquent
and defaulted mortgage loans. In addition, if a default is not cured, the
mortgage loan will be extinguished as a result of foreclosure proceedings and
any servicing income will cease. As a consequence, the Company will forego
servicing income from the time such loan becomes delinquent until it is
foreclosed upon or is brought current. The Company maintains a reserve for
possible losses at a level considered adequate to provide for known and inherent
risks related to foreclosure and disposition losses. The Company's evaluation of
an adequate level of foreclosure reserves considers past loss experience,
industry loss experience, geographic and product concentrations, delinquency
trends, economic conditions and other relevant factors. While the Company uses
the best currently available information to make such evaluation, future
adjustments to the foreclosure reserve will be required as conditions and
assumptions are revised in response to changes in trends and the other factors
and assumptions relevant to the Company's evaluation.
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 1999. The credit agreement
includes covenants requiring the Company to maintain (i) a minimum net worth of
$185 million, plus net income subsequent to June 30, 1998, and capital
contributions and minus permitted dividends, (ii) a ratio of total liabilities
to net worth of not more than 8.0 to 1.0, excluding debt incurred pursuant to
gestation and repurchase financing agreements, (iii) its eligibility as a
servicer of Ginnie Mae, FHA, VA, Fannie Mae and Freddie Mac mortgage loans and
(iv) a mortgage servicing rights portfolio with an underlying unpaid principal
balance of at least $4 billion. The provisions of the agreement also restrict
the Company's ability (i) to pay dividends which exceed 70% of the Company's net
income or (ii) to engage significantly in any type of business unrelated to the
mortgage banking business, the servicing of mortgage loans or equipment leasing.
Additionally, the Company has entered into a $230 million, 364-day term
revolving credit facility with a syndicate of unaffiliated banks. An $80 million
portion of the revolver facility converts in July 1999, into a four-year term
loan. The facility is secured by the Company's servicing portfolio designated as
"available-for-sale." A $100 million portion of the revolver facility matures in
July 1999, and is secured by the Company's servicing portfolio designated as
"held-for-sale." A $50 million portion of the revolver facility matures in July
1999, and is secured by a first-priority security interest in receivables on
servicing rights sold. The facility includes covenants identical to those
described above with respect to the warehouse line of credit.
The Company has also entered into a $200 million, 364-day term subprime
revolving credit facility, which expires in July 1999. The facility includes
covenants identical to those described above with respect to the warehouse line
of credit.
16
<PAGE> 20
The Company was in compliance with the above-mentioned debt covenants
at December 31, 1998. Although management anticipates continued compliance,
there can be no assurance that the Company will be able to comply with the debt
covenants specified for each of these financing agreements. Failure to comply
could result in the loss of the related financing.
RBMG Asset Management Company, Inc. (Asset Management Co.), a
wholly-owned subsidiary of the Company, and a bank entered into a master
repurchase agreement dated as of December 11, 1997, pursuant to the terms of
which Asset Management Co. is entitled from time to time to deliver eligible
subprime mortgage loans in an aggregate principal amount of up to $150 million
to the bank. The term of this repurchase agreement is 364 days. As of December
31, 1998, no loans had been sold under this agreement. The master repurchase
agreement has been extended through April 1999 and is in the process of being
renewed.
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 $100 million credit facility to provide financing for
its leasing portfolio. The warehouse credit agreement matures in July 1999, and
contains various covenants regarding characteristics of the collateral and the
performance of the leases originated and serviced by RBC and which require RBC
to maintain a minimal net worth of $40 million and a ratio of total liabilities
to net worth of no more than 10.0 to 1.0.
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.
Changes in the Market for Servicing Rights, Mortgage Loans and Lease Receivables
Volume of Mortgage Loans Produced
During periods of declining interest rates, the Company typically
experiences an increase in loan originations because of increased home purchases
and, particularly, increased refinancing activity. Increases in interest rates
in the future may adversely affect refinancing activity, which could have an
adverse effect on the Company's origination revenues.
17
<PAGE> 21
Sales of Mortgage Loans
Gains or losses on sales of mortgage loans may result from changes in
interest rates from the time the interest rate on a customer's mortgage loan
application is established to the time the company sells the loan. At any given
time, the Company has committed to sell substantially all of its mortgage loans
that are closed and a percentage of the mortgage loans that are not yet closed
but for which the interest rate has been established ("pipeline loans"). To
manage the interest rate risk of the Company's pipeline loans, the Company
continuously projects the percentage of the pipeline loans it expects to close
and, on the basis of such projections, enters into forward sales commitments to
sell such loans. To reduce the effect of such interest rate changes, the Company
employs a variety of techniques, currently consisting of a combination of
mandatory forward sales commitments for mortgage-backed securities and put and
call option contracts on treasuries.
If interest rates make an unanticipated change, the actual percentage
of pipeline loans that close may differ from the projected percentage. A sudden
increase in interest rates can cause a higher percentage of pipeline loans to
close than projected. To the degree that this may not have been anticipated, the
Company may not have made forward sales commitments to sell these additional
loans and consequently may incur significant losses upon their sale at current
market prices, adversely affecting results of operations. Likewise, if a lower
percentage of pipeline loans closes than was projected, due to a sudden decrease
in interest rates or otherwise, the Company may have committed to sell more
loans than actually close and as a result may incur significant losses in
fulfilling these commitments, adversely affecting results of operations. This
risk is greater during times of volatility of interest rates.
Value of Mortgage Servicing Rights
The value of the Company's servicing portfolio may be adversely
affected if mortgage interest rates decline and loan prepayments increase. In
periods of declining interest rates, the economic advantages to borrowers of
refinancing their mortgage loans become greater. Increases in the rate of
mortgage loan prepayments reduce the period during which the Company receives
servicing income from such loans. The Company capitalizes the cost of the
acquisition of servicing rights from third parties and capitalizes estimated
servicing rights on loans that it originates. The value of servicing rights is
based upon the net present value of estimated future cash flows. If the rate of
prepayment of the related loans exceeds the rate assumed by the Company, due to
a significant reduction in interest rates or otherwise, the value of the
Company's servicing portfolio will decrease and accelerated amortization of
servicing rights or recognition of an impairment provision may become necessary,
thereby decreasing earnings. The Company attempts to mitigate these risks with
respect to the value of its servicing rights by maintaining a portfolio of
interest rate option contracts whose value tends to increase in periods of
declining interest rates thus mitigating the decline in value typical during the
same period with respect to servicing rights. However, there can be no assurance
that the Company's efforts to mitigate these risks will prevent value loss or
impairment provisions.
Sales of Mortgage Servicing Rights
The prices obtained by the Company upon the sale of its mortgage
servicing rights depend upon a number of factors, including the general supply
of and demand for mortgage servicing rights, as well as prepayment and
delinquency rates on the portfolio of mortgage servicing rights being sold.
Interest rate changes can affect the ability to sell, or the profitability of a
sale of, mortgage servicing rights to a third party. Purchasers of mortgage
servicing rights analyze a variety of factors, including prepayment sensitivity
of loans underlying servicing rights, to determine the purchase price they are
willing to pay.
18
<PAGE> 22
Thus, in periods of declining interest rates, sales of mortgage servicing rights
related to higher interest rate loans may be less profitable than sales of
mortgage servicing rights related to lower interest rate loans as it is possible
that such higher interest rate loans will be refinanced. Because these factors
are largely beyond the control of the Company, there can be no assurance that
the current level of profitability from the sale of mortgage servicing rights
will be maintained.
Liabilities Under Representations and Warranties
In the ordinary course of business, the Company makes representations
and warranties to the purchasers and insurers of its mortgage loans and the
purchasers of mortgage servicing rights regarding compliance with laws,
regulations and program standards and as to accuracy of information. Under
certain circumstances, the Company may become liable for certain damages or may
be required to repurchase a loan if there has been a breach of representations
or warranties. The Company generally receives similar representations and
warranties from the correspondents from whom it purchases loans. However, in the
event of breaches of such representations and warranties, the Company is subject
to the risk that a correspondent may not have the financial capacity to
repurchase loans when called upon to do so by the Company or otherwise may not
respond to demands made by the Company.
Environmental Matters
In the course of its business, through the foreclosure process, the
Company has acquired, and may acquire in the future, properties securing loans
that are in default. Although the Company lends to owners of residential
properties, there is a risk that the Company could be required to investigate
and cleanup hazardous or toxic substances or chemical releases at such
properties after its acquisition and may be held liable to a governmental entity
or to third-parties for property damage, personal injury and investigation
cleanup costs incurred by such parties in connection with the contamination.
To date, the Company has not been required to perform any investigation
or cleanup activities of any material nature, nor has the Company been subject
to any environmental claims. No assurance can be given, however, that this will
remain the case in the future.
Changes in the Demand for Mortgage Loans and Leases
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, which currently consists primarily of interest rate
option contracts for ten year Constant Maturity Treasury and Constant Maturity
Swap floors. 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.
Changes in the Value of Residual Interests in Subprime Securitizations
Residual certificates are classified as trading securities and changes
in their 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
19
<PAGE> 23
discounted cash flows 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, among other things, changes in the interest rate
environment and general economic conditions 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 and
other assumptions from those applied for valuation purposes, could have a
significant effect on the estimated fair value of the residual certificates.
Prepayment Risks
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 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 an internal valuation which
is substantiated for reasonableness by reference to a third-party analysis. Both
analyses value such rights in consideration of current forward committed
delivery prices, prevailing interest, prepayment and default rates, mortgage to
treasury spreads and other relevant factors as appropriate or allocable to each
valuation stratum.
Dependence Upon Independent Mortgage Brokers and Mortgage Bankers
The Company depends largely upon independent mortgage bankers,
including smaller mortgage companies and commercial banks, and, to a lesser
extent, upon independent mortgage brokers, for its originations and purchases of
mortgage loans. Substantially all of the independent mortgage brokers and
mortgage bankers with whom the Company does business deal with multiple loan
originators for each prospective borrower. Wholesale originators, such as the
Company, compete for business based upon pricing, service, loan fees and costs
and other factors. The Company's competitors also seek to establish
relationships with such independent mortgage bankers and mortgage brokers, none
of whom is obligated by contract or otherwise to continue to do business with
the Company. In addition, the Company expects the volume of broker and mortgage
banker-sourced loans purchased by it to increase. Future operating and financial
results of the Company may be more susceptible to fluctuations in the volume and
cost of its broker and mortgage banker-sourced loans resulting from, among other
things, competition from other purchasers of such loans.
Possible Changes in Accounting 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 values of its 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
20
<PAGE> 24
cost or market, and that potential impairments of servicing rights are
recognized as and if required. Because of the inherent 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.
Federal Programs; Availability of Active Secondary Market
The Company's ability to generate funds by sales of mortgage-backed
securities is largely dependent upon the continuation of programs administered
by Fannie Mae, Freddie Mac and Ginnie Mae, which facilitate the issuance of such
securities, as well as the Company's continued eligibility to participate in
such programs. Although the Company is not aware of any proposed discontinuation
of, or significant reduction in, the operation of such programs, any such
changes could have a material adverse effect on the Company's operations. The
Company anticipates that it will continue to remain eligible to participate in
such programs, but any significant impairment of such eligibility would
materially adversely affect its operations. In addition, the mortgage loan
products eligible for such programs may be changed from time to time by the
sponsor. The profitability of specific types of mortgage loan products may vary
depending on a number of factors, including the administrative costs to the
Company of originating or purchasing such types of mortgage loans.
There can be no assurance that the Company will be successful in
effecting the sale of mortgage loans at the historic price or volume levels in
any particular future periods. Any significant change in the secondary market
level of activity or underwriting criteria of Fannie Mae, Freddie Mac or private
investors could have a material adverse effect on the gain or loss on sales of
mortgage loans recorded by the Company and therefore on the Company's results of
operations.
Effect of Certain Charter and Bylaw Provisions;
Possible Issuance of Preferred Stock
Certain provisions of the Company's Certificate of Incorporation and
the Company's Bylaws could delay or frustrate the removal of incumbent directors
and could make more difficult a merger, tender offer or proxy contest involving
the Company, even if such events could be beneficial to the interests of the
Company's stockholders. For example, the Company's Certificate of Incorporation
and the Company's Bylaws provide certain limitations on the calling of a special
meeting of stockholders, and the Company's Bylaws require advance notice before
certain proposals can be considered at stockholder meetings. Pursuant to the
Company's Certificate of Incorporation, shares of preferred stock may be issued
in the future without further stockholder approval and upon such terms and
conditions, and having such rights, privileges and preferences, as the Board of
Directors may determine. The ability to issue preferred stock provides desirable
flexibility in connection with acquisitions and other corporate transactions.
However, the rights of the holders of the Company's common stock will be subject
to, and may be adversely affected by, any preferred stock that may be issued in
the future, and the issuance of preferred stock could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue any shares of preferred stock; however,
the Company has adopted a Rights Agreement which provides that if a person or
group acquires 15% or more of the Company's Common Stock, shareholders would
have the right to acquire shares of preferred stock. The existence of the
Rights Agreement has anti-takeover effects because it may deter certain
potential acquirors from making takeover proposals or tender offers.
Dependence on Key Individuals
The success of the Company is in large part dependent upon the efforts
of Edward J. Sebastian, Chairman and Chief Executive Officer, and David W.
Johnson, Jr., Vice Chairman and Managing Director. The loss of the services of
either of these two officers could have a material adverse effect upon
21
<PAGE> 25
the Company if a suitable replacement could not be quickly retained. The Company
has obtained key man life insurance policies on Mr. Sebastian in the amount of
$2,000,000 and Mr. Johnson in the amount of $5,000,000. The Company also has
entered into certain employment and employment related agreements with Mr.
Johnson.
Year 2000 Risks
The Company recognizes the need to address the potentially adverse
impact that Year 2000 issues might have on its business operations. The
Company's compliance efforts are ongoing under the guidance of the Director of
Operations and involve employees throughout the Company as well as outside
consultants and contractors. The Company's Year 2000 Project leadership team
meets with the Company's executive management weekly and the Board of Directors
is routinely updated on the status of their efforts.
Further discussion on this Year 2000 project is incorporated herein by
reference to the discussion thereof in the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the Company's accompanying
1998 Annual Report to Shareholders in Item 7 herein.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer code and unforeseen circumstances causing the
Company to allocate its resources elsewhere.
Failure by either the Company or third parties to achieve Year 2000
compliance could cause short-term operational inconveniences and inefficiencies
for the Company. To the extent reasonably achievable, the Company will seek to
prevent or mitigate the effects of such possible failures through its
contingency planning efforts. This may temporarily divert management's time and
attention from ordinary business activities.
Employees
As of December 31, 1998, the Company had 1,396 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.
Executive Officers of the Registrant
Edward J. Sebastian, age 52, has been Chairman and Chief Executive
Officer of the Company since September 1992.
David W. Johnson, Jr., age 50, has been Vice Chairman of the Company
since October 1992 and Managing Director since July 1993.
Richard M. Duncan, age 50, 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.
22
<PAGE> 26
Steven F. Herbert, age 43, 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 and is subject to a
mortgage in the amount of $6.4 million as of December 31, 1998. 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 23 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
In the ordinary course of its business, the Company and its
subsidiaries are from time to time subject to litigation. The Company and its
subsidiaries are not parties to any material pending legal proceedings other
than ordinary routine litigation incidental to their respective businesses.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ. Additional
information required by this item is set forth under the captions "Stock Data"
and "Corporate Information" in the Company's accompanying 1998 Annual Report to
Shareholders and is hereby incorporated herein by reference.
23
<PAGE> 27
Item 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial
Highlights" in the Company's accompanying 1998 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 1998 Annual
Report to Shareholders is hereby incorporated herein by reference.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information set forth under the caption "Quantitative and
Qualitative Disclosure About Market Risk" in the Company's accompanying 1998
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 1998
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 PricewaterhouseCoopers LLP
dated January 29, 1999, 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 1999 Proxy Statement of the Company furnished to
shareholders in connection with its 1999 Annual Meeting (the "1999 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 1999 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."
24
<PAGE> 28
Item 11. EXECUTIVE COMPENSATION
Information with respect to the remuneration of executive officers and
directors and certain other matters set forth in the 1999 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.
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 1999 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 1999 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, 1998:
Consolidated Balance Sheet at December 31, 1998 and 1997 .......................
Consolidated Statement of Income for each of the three years in the period ended
December 31, 1998 .....................................................
Consolidated Statement of Changes in Stockholders' Equity
for each of the three years in the period ended December 31, 1998 .....
Consolidated Statement of Cash Flows for each of the three years in the period
25
<PAGE> 29
ended December 31, 1998 ...............................................
Notes to Consolidated Financial Statements .....................................
* Incorporated by reference from the indicated pages of the 1998 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 F).
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 F).
d. Not applicable
With the exception of the information herein expressly incorporated by
reference, the Company's 1998 Annual Report to Shareholders and 1999 Proxy
Statement shall not be deemed filed as part of this Annual Report on Form 10-K.
26
<PAGE> 30
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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 30, 1999 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.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
s/ Edward J. Sebastian Chairman of the Board and Chief March 30, 1999
- -------------------------------- Executive Officer and Director
Edward J. Sebastian (principal executive officer)
s/ Steven F. Herbert Senior Executive Vice President March 30, 1999
- -------------------------------- and Chief Financial Officer (principal
Steven F. Herbert financial and accounting officer)
s/ David W. Johnson, Jr. Vice Chairman of the Board, March 30, 1999
- -------------------------------- Managing Director and Director
David W. Johnson, Jr.
s/ John W. Currie Secretary and Director March 30, 1999
- --------------------------------
John W. Currie
s/ John C. Baker Director March 30, 1999
- --------------------------------
John C. Baker
Director
- --------------------------------
Stuart M. Cable
s/ Boyd M. Guttery Director March 30, 1999
- --------------------------------
Boyd M. Guttery
Director
- --------------------------------
Robin C. Kelton
s/ John G. Wolcott Director March 30, 1999
- --------------------------------
John O. Wolcott
</TABLE>
27
<PAGE> 31
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 incorporated *
by reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997
3.3 Certificate of Designation of the Preferred Stock of the Registrant incorporated by *
reference to Exhibit 4.1 of the Registrant's Form 8-A filed on February 8, 1998
3.4 Amended and Restated Bylaws of the Registrant incorporated by reference to *
Exhibit 3.4 of the Registrant's Registration No. 33-53980
3.5 Amendment to Bylaws of Resource Bancshares Mortgage Group, Inc. dated January 28, 1999 _____
4.1 Specimen Certificate of Registrant's Common Stock incorporated by reference *
to Exhibit 4.1 of the Registrant's Registration No. 33-53980
4.2 Rights Plan dated as of February 6, 1998 between the Registrant and First Chicago *
Trust Company of New York incorporated by reference to Exhibit 4.1 of the Registrant's
Form 8-A filed on February 8, 1998
4.3 Third Amended and Restated Secured Revolving /Term Credit Agreement dated as of July *
28, 1998, 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
4.3 of the Registrant's Quarterly Report on Form 10-Q for the period ended September
30, 1998.
4.4 Second Amended and Restated Revolving/Term Security and 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 28, 1998 to Second Amended and Restated *
Revolving/Term Security and Collateral Agency 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 incorporated by reference to Exhibit 4.5 of the
Registrant's 10-Q for the period ended September 30, 1998.
4.6 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 10Q for the period ended June 30, 1997
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
</TABLE>
A
<PAGE> 32
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
10.2 (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
10.3 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
10.4 (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 Registrant 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
10.5 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
10.6 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
10.7 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
10.8 Assignment and Assumption of Office Lease incorporated by reference to Exhibit 10.6 *
of the Registrant's Registration No. 33-53980
10.9 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
10.10 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
10.11 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
10.12 Section 125 Plan incorporated by reference to Exhibit 10.17 of the Registrant's Annual *
Report on Form 10-K for the year ended December 31, 1993
10.13 Pension Plan incorporated by reference to Exhibit 10.18 of the Registrant's Annual *
Report on Form 10-K for the year ended December 31, 1993
10.14 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
</TABLE>
B
<PAGE> 33
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
10.15 Amendment II to Pension Plan incorporated by reference to Exhibit 10.22 of the Registrant's *
Annual Report on Form 10-K for the year ended December 31, 1994
10.16 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
10.17 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 Resource Bancshares Mortgage Group, Inc. Supplemental Executive Retirement Plan *
incorporated by reference to Exhibit 10.14 of the Registrant's Quarterly Report
on Form 10-Q for the period ended June 30, 1998.
10.19 First Amendment to Resource Bancshares Mortgage Group, Inc. Supplemental Executive
Retirement Plan dated October 28, 1998 ____
10.20 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
10.21 Stock Investment Plan incorporated by reference to Exhibit 4.1 of the Registrant's *
Registration No. 33-87536
10.22 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
10.23 Amendment II to Stock Investment Plan dated November 30, 1998 incorporated by *
reference to Exhibit 4.1(c) of the Registrant's Registration Statement No. 333-68909
10.24 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
10.25 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
10.26 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
10.27 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
10.28 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
</TABLE>
C
<PAGE> 34
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
10.29 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
10.30 ESOP Loan Agreements dated January 20, 1998, April 1, 1998, July 1, 1998, October 1,
1998 between the Registrant and The Resource Bancshares Mortgage Group, Inc.
Employee Stock Ownership Trust _____
10.31 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
10.32 Amendment to Resource Bancshares Mortgage Group, Inc. Omnibus Stock Award Plan, *
Formula Stock Option Plan and Non-Qualified Stock Option Plan as incorporated by
reference to Exhibit 10.42 of the Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 1997
10.33 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
10.34 Second Amendment to Resource Bancshares Mortgage Group, Inc. Formula Stock Option Plan _____
dated October 28, 1998
10.35 Amended and Restated Omnibus Stock Award Plan incorporated by reference to Exhibit 99.10 *
of the Registrant's Registration No. 333-29245 filed on December 1, 1997
10.36 First Amendment to Omnibus Stock Award Plan and form of Incentive Stock Option *
Agreement and Release to the Omnibus Stock Award Plan incorporated by reference to
Exhibit 10.44 of the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1998.
10.37 Second Amendment to Resource Bancshares Mortgage Group, Inc. Omnibus Stock Award Plan _____
dated October 28, 1998
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 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
10.40 Form of Non-Qualified Stock Option Agreement (Non-Qualified Stock Option Plan), *
incorporated by reference to Exhibit 10.41 of the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 1997
10.41 First Amendment to Resource Bancshares Mortgage Group, Inc. Non-Qualified Stock _____
Option Plan dated January 29, 1997
10.42 Second Amendment to the Non-Qualified Stock Option Plan dated February 6, 1998 *
incorporated by reference to Exhibit 10.40 of the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 1998
</TABLE>
D
<PAGE> 35
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
10.43 Third Amendment to Resource Bancshares Mortgage Group, Inc. Non-Qualified _____
Stock Option Plan dated October 28, 1998
10.44 Agreement and Release Form of Non-Qualified Stock Option Agreement incorporated by *
reference to Exhibit 10.41 of the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1998
10.45 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
10.46 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
10.47 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
10.48 (A) Agreement of Merger dated April 18, 1997 between Resource Bancshares *
Mortgage Group, Inc., RBC Merger Sub, Inc. and Resource Bancshares Corporation
incorporated by reference to Annex A of the Registrant's Registration No.333-29245
(B) First Amendment to Agreement of Merger dated April 18, 1997 between Resource *
Bancshares Mortgage Group, Inc., RBC Merger Sub, Inc. and
Resource Bancshares Corporation incorporated by reference to Exhibit
10.42 of the Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 1997
(C) Second Amendment to Agreement of Merger dated April 18, 1997 between Resource *
Bancshares Mortgage Group, Inc., RBC Merger Sub, Inc. and Resource
Bancshares Corporation incorporated by reference to Annex A of the Registrant's
Registration No. 333-29245
10.49 (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
10.50 Preferred Provider Organization Plan for Retired Executives incorporated by reference to *
Exhibit 10.43 of the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1998
10.51 Resource Bancshares Mortgage Group, Inc. Flexible Benefits Plan Amended _____
and Restated as of January 1, 1998
</TABLE>
E
<PAGE> 36
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
11.1 Statement re: Computation of Net Income per Common Share _____
13.1 1998 Annual Report to Shareholders _____
21.1 Subsidiaries of the Registrant _____
23.1 Consents of PricewaterhouseCoopers LLP _____
27.1 Financial Data Schedule (for SEC use only) _____
</TABLE>
- ----------------------------------
* Incorporated by reference
F
<PAGE> 1
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
AMENDMENT TO BYLAWS
January 28, 1999
RESOLVED, that the Bylaws of Resource Bancshares Mortgage Group, Inc. shall be
amended by adding to Article V a new Section 8 as follows:
Section 8. Indemnification. Each person (and the heirs, executors or
administrators of such person) who was or is a party or is threatened to be made
a party to, or is involved in any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a director
or officer of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified and held harmless by the Corporation to the
fullest extent permitted by Delaware Law. The right to indemnification conferred
by this Section shall also include the right to be paid by the Corporation the
expenses incurred in connection with such proceeding in advance of its final
disposition to the fullest extent permitted by Delaware Law. The right to
indemnification conferred by this Section shall be a contract right and shall
not be exclusive of any other right which any person may otherwise have or
hereafter acquire.
<PAGE> 1
EXHIBIT 10.19
STATE OF SOUTH CAROLINA )
) FIRST AMENDMENT
COUNTY OF RICHLAND )
THIS FIRST AMENDMENT, made as of this ____ day of October, 1998, by
RESOURCE BANCSHARES MORTGAGE GROUP, INC. (the "Corporation")
W I T N E S S E T H:
WHEREAS, the Corporation maintains the Resource Bancshares Mortgage
Group, Inc. Supplemental Executive Retirement Plan, effective as of January 1,
1998 (the "SERP") for the benefit of the eligible employees; and
WHEREAS, the Corporation desires to amend the SERP so as to clarify the
vesting of SERP participants upon a change in control of the Corporation; and
WHEREAS, in Section 6.1 of the SERP, the Corporation reserved the right
by action of the Management Compensation Committee (or, in the absence of a
Management Compensation Committee, the Board of Directors of the Corporation) to
amend the SERP.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Corporation covenants and agrees that the SERP
as set forth is amended as follows:
1. Effective as of the date first above written, Section 4.4 of the
SERP shall be amended by deleting the section in its entirety and inserting the
following in its place:
"Section 4.4. Certain Separations from Service after a Change
in Control. Upon a Change in Control (as defined in Section 6.3), the
Participants shall be vested and continue to vest for benefits under
this Plan according to the following schedule:
Creditable Service Vesting Percentage
------------------ ------------------
1 30%
2 40%
3 50%
4 60%
5 70%
6 80%
7 90%
<PAGE> 2
A Participant with eight or more years of Creditable Service (upon or
after a Change in Control) shall be one hundred percent (100%) vested.
Upon the Participant's attaining age 62 and in the absence of
the Participant's electing to receive the Optional Early Retirement
Benefit (described below), the Participant shall be entitled to receive
a retirement benefit equal to the Normal Retirement Benefit multiplied
by the applicable Vesting Percentage. This retirement benefit shall be
paid in accordance with the provisions of Section 4.2. Upon the
Participant's attaining age 55, the Participant shall be entitled to
elect to receive an Optional Early Retirement Benefit equal to the
Early Retirement Benefit multiplied by the applicable Vesting
Percentage. This retirement benefit shall be paid in accordance with
the provisions of Section 4.3."
2. Effective as of the date first above written, Section 6.3 of the
SERP shall be amended by deleting the section in its entirety and inserting the
following in its place:
Section 6.3. Change in Control. For purposes of this Plan, a "Change in
Control" shall mean:
"(a) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of either (i) the then
outstanding shares of common stock of the Corporation (the "Outstanding
Corporation Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Corporation entitled to vote
generally in the election of directors (the "Outstanding Corporation
Voting Securities"); provided, however, that for purposes of this
subsection (a), the following acquisitions shall not constitute a
Change in Control: (i) any acquisition directly from the Corporation,
(ii) any acquisition by the Corporation, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Corporation or any corporation controlled by the Corporation or (iv)
any acquisition by any corporation pursuant to a transaction which
complies with clauses (i), (ii) and (iii) of subsection (c) of this
Section 6.3; or
(b) Individuals who, as of the date hereof, constitute the
Board of Directors of the Corporation (the "Incumbent Board") cease for
any reason to constitute at least a majority of the Board of Directors;
provided, however, that any individual becoming a director subsequent
to the date hereof whose election, or nomination for election by the
Corporation's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose
initial assumption of office
<PAGE> 3
occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board of Directors of the Corporation; or
(c) Consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets
of the Corporation or the acquisition of assets of another corporation
(a "Business Combination"), in each case, unless, following such
Business Combination, (i) all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Corporation Common Stock and Outstanding Corporation Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Corporation
or all or substantially all of the Corporation's assets either directly
or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Corporation Common Stock and Outstanding
Corporation Voting Securities, as the case may be, (ii) no Person
(excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Corporation or such
corporation resulting from such Business Combination) beneficially
owns, directly or indirectly, 20% or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from
such Business Combination or the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of directors of such corporation except to the extent that
such ownership existed prior to the Business Combination and (iii) at
least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of
the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board of Directors of the
Corporation, providing for such Business Combination; or
(d) Approval by the stockholders of the Corporation of a
complete liquidation or dissolution of the Corporation."
3. The Corporation reserves the right by action authorized under the
SERP to amend at any time any of the terms and provisions of this First
Amendment. Except as expressly or by necessary implication amended hereby, the
SERP shall continue in full force and effect.
<PAGE> 4
IN WITNESS WHEREOF, the Corporation has caused this First Amendment to
be executed by its duly authorized officers as of the day and year first above
written.
RESOURCE BANCSHARES
MORTGAGE GROUP, INC.
By:
----------------------------------
----------------------------------
[CORPORATE SEAL]
ATTEST:
- --------------------------------
John W. Currie, Secretary
<PAGE> 1
EXHIBIT 10.30
THIS ESOP NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM.
ESOP NOTE
$500,000 January 20, 1998
FOR VALUE RECEIVED, the undersigned, RESOURCE BANCSHARES MORTGAGE
GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST ("Borrower"), promises to pay to the
order of RESOURCE BANCSHARES MORTGAGE GROUP, INC. ("Lender") the principal sum
of Five Hundred Thousand and no/100 Dollars ($500,000.00) together with interest
thereon described herein, in accordance with the terms and conditions of that
certain ESOP Loan and Security Agreement by and between Borrower and Lender,
dated May 3, 1996 ("Loan Agreement"). Borrower also promises to pay interest on
the unpaid principal balance hereof, commencing as of the date of disbursement
of funds hereunder, at the rate of 7.00% per annum.
The principal amount of this Note shall be due and payable in five
equal annual installments of $100,000, on the anniversary date of this Note
occurring in each of the succeeding five years following the date of this Note.
Accrued interest shall be payable in arrears at the same time that payments of
principal are made.
Borrower waives presentment for payment, demand, notice of nonpayment,
notice of protest and protest of this Note, and all other notices in connection
with the delivery, acceptance, performance, default, dishonor or enforcement of
the payment of this Note or by the Loan Agreement, and shall not be in any
manner affected by any extension of time, renewal, waiver or modification
granted or consented by Lender. Borrower consents to any and all extensions of
time, renewals, waivers or modifications that may be granted by Lender with
respect to payment or other provisions of this Note and the Loan Agreement, and
to the release of any property now or hereafter securing this Note with or
without substitution.
<PAGE> 2
This Note is the ESOP Note referred to in the Loan Agreement and is
entitled to all of the benefits and obligations specified in the Loan Agreement,
including but not limited to any Pledged Shares held as collateral. This Note is
without recourse to Borrower and is payable solely from the sources specified in
the Loan Agreement. Terms defined in the Loan Agreement are used herein with the
same meanings.
RESOURCE BANCSHARES MORTGAGE
GROUP, INC. EMPLOYEE STOCK
OWNERSHIP TRUST
By: MARINE MIDLAND BANK, TRUSTEE
By: s/ Stephen J. Hartman, Jr.
--------------------------------------------
Stephen J. Hartman, Jr., solely in his
capacity as authorized signer for the
Trustee of the Resource Bancshares Mortgage
Group, Inc. Employee Stock Ownership Trust,
and not in his individual capacity
<PAGE> 3
THIS ESOP NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM.
ESOP NOTE
$499,975 April 1, 1998
FOR VALUE RECEIVED, the undersigned, RESOURCE BANCSHARES MORTGAGE
GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST ("Borrower"), promises to pay to the
order of RESOURCE BANCSHARES MORTGAGE GROUP, INC. ("Lender") the principal sum
of Four Hundred Ninety Nine Thousand Nine Hundred Seventy Five and no/100
Dollars ($499,975.00) together with interest thereon described herein, in
accordance with the terms and conditions of that certain ESOP Loan and Security
Agreement by and between Borrower and Lender, dated May 3, 1996 ("Loan
Agreement"). Borrower also promises to pay interest on the unpaid principal
balance hereof, commencing as of the date of disbursement of funds hereunder, at
the rate of 7.00% per annum.
The principal amount of this Note shall be due and payable in five
annual installments on the anniversary date of this Note occurring in each of
the succeeding five years following the date of this Note. The first four annual
principal installments shall be in the amount of $100,000, with the fifth annual
principal installment of $99,975. Accrued interest shall be payable in arrears
at the same time that payments of principal are made.
Borrower waives presentment for payment, demand, notice of nonpayment,
notice of protest and protest of this Note, and all other notices in connection
with the delivery, acceptance, performance, default, dishonor or enforcement of
the payment of this Note or by the Loan Agreement, and shall not be in any
manner affected by any extension of time, renewal, waiver or modification
granted or consented by Lender. Borrower consents to any and all extensions of
time, renewals, waivers or modifications that may be granted by Lender with
respect to payment or other provisions of this Note and the
<PAGE> 4
Loan Agreement, and to the release of any property now or hereafter securing
this Note with or without substitution.
This Note is the ESOP Note referred to in the Loan Agreement and is
entitled to all of the benefits and obligations specified in the Loan Agreement,
including but not limited to any Pledged Shares held as collateral. This Note is
without recourse to Borrower and is payable solely from the sources specified in
the Loan Agreement. Terms defined in the Loan Agreement are used herein with the
same meanings.
RESOURCE BANCSHARES MORTGAGE
GROUP, INC. EMPLOYEE STOCK
OWNERSHIP TRUST
By: MARINE MIDLAND BANK, TRUSTEE
By: s/ Stephen J. Hartman, Jr.
--------------------------------------------
Stephen J. Hartman, Jr., solely in his
capacity as authorized signer for the
Trustee of the Resource Bancshares Mortgage
Group, Inc. Employee Stock Ownership Trust,
and not in his individual capacity
<PAGE> 5
THIS ESOP NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM.
ESOP NOTE
$499,984.88 July 1, 1998
FOR VALUE RECEIVED, the undersigned, RESOURCE BANCSHARES MORTGAGE
GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST ("Borrower"), promises to pay to the
order of RESOURCE BANCSHARES MORTGAGE GROUP, INC. ("Lender") the principal sum
of Four Hundred Ninety Nine Thousand Nine Hundred Eighty Four and 88/100 Dollars
($499,984.88) together with interest thereon described herein, in accordance
with the terms and conditions of that certain ESOP Loan and Security Agreement
by and between Borrower and Lender, dated May 3, 1996 ("Loan Agreement").
Borrower also promises to pay interest on the unpaid principal balance hereof,
commencing as of the date of disbursement of funds hereunder, at the rate of
7.00% per annum.
The principal amount of this Note shall be due and payable in five
annual installments on the anniversary date of this Note occurring in each of
the succeeding five years following the date of this Note. The first four annual
principal installments shall be in the amount of $100,000, with the fifth annual
principal installment of $99,984.88. Accrued interest shall be payable in
arrears at the same time that payments of principal are made.
Borrower waives presentment for payment, demand, notice of nonpayment,
notice of protest and protest of this Note, and all other notices in connection
with the delivery, acceptance, performance, default, dishonor or enforcement of
the payment of this Note or by the Loan Agreement, and shall not be in any
manner affected by any extension of time, renewal, waiver or modification
granted or consented by Lender. Borrower consents to any and all extensions of
time, renewals, waivers or modifications that may be granted by Lender with
respect to payment or other provisions of this Note and the
<PAGE> 6
Loan Agreement, and to the release of any property now or hereafter securing
this Note with or without substitution.
This Note is the ESOP Note referred to in the Loan Agreement and is
entitled to all of the benefits and obligations specified in the Loan Agreement,
including but not limited to any Pledged Shares held as collateral. This Note is
without recourse to Borrower and is payable solely from the sources specified in
the Loan Agreement. Terms defined in the Loan Agreement are used herein with the
same meanings.
RESOURCE BANCSHARES MORTGAGE
GROUP, INC. EMPLOYEE STOCK
OWNERSHIP TRUST
By: MARINE MIDLAND BANK, TRUSTEE
By: s/ Stephen J. Hartman, Jr.
--------------------------------------------
Stephen J. Hartman, Jr., solely in his
capacity as authorized signer for the
Trustee of the Resource Bancshares Mortgage
Group, Inc. Employee Stock Ownership Trust,
and not in his individual capacity
<PAGE> 7
THIS ESOP NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM.
ESOP NOTE
$499,830.06 October 1, 1998
FOR VALUE RECEIVED, the undersigned, RESOURCE BANCSHARES MORTGAGE
GROUP, INC. EMPLOYEE STOCK OWNERSHIP TRUST ("Borrower"), promises to pay to the
order of RESOURCE BANCSHARES MORTGAGE GROUP, INC. ("Lender") the principal sum
of Four Hundred Ninety Nine Thousand Eight Hundred Thirty and 06/100 Dollars
($499,830.06) together with interest thereon described herein, in accordance
with the terms and conditions of that certain ESOP Loan and Security Agreement
by and between Borrower and Lender, dated May 3, 1996 ("Loan Agreement").
Borrower also promises to pay interest on the unpaid principal balance hereof,
commencing as of the date of disbursement of funds hereunder, at the rate of
6.75% per annum.
The principal amount of this Note shall be due and payable in five
annual installments on the anniversary date of this Note occurring in each of
the succeeding five years following the date of this Note. The first four annual
principal installments shall be in the amount of $100,000, with the fifth annual
principal installment of $99,830.06. Accrued interest shall be payable in
arrears at the same time that payments of principal are made.
Borrower waives presentment for payment, demand, notice of nonpayment,
notice of protest and protest of this Note, and all other notices in connection
with the delivery, acceptance, performance, default, dishonor or enforcement of
the payment of this Note or by the Loan Agreement, and shall not be in any
manner affected by any extension of time, renewal, waiver or modification
granted or consented by Lender. Borrower consents to any and all extensions of
time, renewals, waivers or modifications that may be granted by Lender with
respect to payment or other provisions of this Note and the
<PAGE> 8
Loan Agreement, and to the release of any property now or hereafter securing
this Note with or without substitution.
This Note is the ESOP Note referred to in the Loan Agreement and is
entitled to all of the benefits and obligations specified in the Loan Agreement,
including but not limited to any Pledged Shares held as collateral. This Note is
without recourse to Borrower and is payable solely from the sources specified in
the Loan Agreement. Terms defined in the Loan Agreement are used herein with the
same meanings.
RESOURCE BANCSHARES MORTGAGE
GROUP, INC. EMPLOYEE STOCK
OWNERSHIP TRUST
By: MARINE MIDLAND BANK, TRUSTEE
By: s/ Stephen J. Hartman, Jr.
--------------------------------------------
Stephen J. Hartman, Jr., solely in his
capacity as authorized signer for the
Trustee of the Resource Bancshares Mortgage
Group, Inc. Employee Stock Ownership Trust,
and not in his individual capacity
<PAGE> 1
EXHIBIT 10.34
SECOND AMENDMENT
TO
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
FORMULA STOCK OPTION PLAN
THIS SECOND AMENDMENT TO RESOURCE BANCSHARES MORTGAGE GROUP, INC.
FORMULA STOCK OPTION PLAN is made as of the ____ day of October, 1998 by
RESOURCE BANCSHARES MORTGAGE GROUP, INC. (the "Company").
W I T N E S S E T H:
WHEREAS, the Company maintains the Resource Bancshares Mortgage Group,
Inc. Formula Stock Option Plan (the "Plan") for the benefit of its directors who
are not full-time employees or executive officers of the Company ("Independent
Directors"); and
WHEREAS, in Section 5.2 of the Plan, the Company reserved the right by
action of a committee (the "Committee") composed of all members of its Board of
Directors except Independent Directors to amend the Plan; and
WHEREAS, the Committee now desires to amend certain provisions of the Plan;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Company covenants and agrees that the Plan is amended as
follows, effective as of the date first above written:
1. Section 1.3 of the Plan is amended by adding the following
definition thereto:
"(o) "Change of Control" shall mean:
(a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either (i) the
then outstanding shares of Common Stock (the "Outstanding Company
Common Stock") or (ii) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally
in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection
(a), the following acquisitions shall not constitute a Change of
Control: (i) any acquisition directly from the Company, (ii) any
acquisition by the Company, (iii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company or (iv) any acquisition by
any corporation pursuant to a transaction which complies with clauses
(i), (ii) and (iii) of subsection (c) of this Section 1.3(o); or
9
<PAGE> 2
(b) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by
a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
(c) Consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets
of the Company or the acquisition of assets of another corporation (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or
all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination of
the Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding any
corporation resulting from such Business Combination or any employee
benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly
or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors of
such corporation except to the extent that such ownership existed prior
to the Business Combination and (iii) at least a majority of the
members of the board of directors of the corporation resulting from
such Business Combination were members of the Incumbent Board at the
time of the execution of the initial agreement, or of the action of the
Board, providing for such Business Combination; or
(d) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company."
2. Section 4.1 of the Plan is amended by deleting therefrom the clause
beginning with "provided that" and ending with "foregoing schedule" which
immediately precedes the last sentence of such section and substituting in lieu
thereof the following:
10
<PAGE> 3
"provided, however, that (i) in the event of a Change of Control of the
type set forth in paragraph (a), (b) or (d) of the definition of Change
of Control and (ii) immediately prior to the occurrence of a Change of
Control of the type set forth in paragraph (c) of the definition of
Change of Control, each Option outstanding under the Plan shall become
exercisable in whole or in part without regard to the foregoing
schedule."
3. Subsection 4.2(d) of the Plan is amended by deleting therefrom in
its entirety the second paragraph thereof and inserting in lieu thereof the
following:
"Subject to any action required by the stockholders, in the
event of a Business Combination that does not result in a Change of
Control, each Option outstanding under the Plan shall pertain to and
apply to the securities or other consideration that a holder of the
number of shares of Common Stock underlying the Option would have been
entitled to receive in the Business Combination. In the event of a
Business Combination that results in a Change of Control of the type
set forth in paragraph (c) of the definition of Change of Control or in
the event of the complete liquidation or dissolution of the Company,
then each outstanding Option shall terminate; provided, however, that
each Optionee shall, in such event, have the right immediately prior to
such Change of Control or complete liquidation or dissolution, to
exercise his or her Option in whole or in part without regard to any
installment provision that might be contained in the applicable Option
Agreement."
4. Section 4.2(f) of the Plan is amended by deleting therefrom in its
entirety the penultimate sentence thereof and substituting in lieu thereof the
following:
"(f) Each Option Agreement also shall provide for acceleration
of exercisability in the event of a Change of Control."
5. The Company reserves the right by action of the Committee to amend
further at any time any of the terms and provisions of the Plan as amended
hereby. Except as expressly or by necessary implication amended hereby, the Plan
shall continue in full force and effect.
11
<PAGE> 1
EXHIBIT 10.37
SECOND AMENDMENT
TO
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
OMNIBUS STOCK AWARD PLAN
THIS SECOND AMENDMENT TO RESOURCE BANCSHARES MORTGAGE GROUP, INC.
OMNIBUS STOCK AWARD PLAN is made as of the ____ day of October, 1998 by RESOURCE
BANCSHARES MORTGAGE GROUP, INC. (the "Company").
W I T N E S S E T H:
WHEREAS, the Company maintains the Resource Bancshares Mortgage Group,
Inc. Omnibus Stock Award Plan (the "Plan") for the benefit of certain of its
employees; and
WHEREAS, in Section 7.2 of the Plan, the Company reserved the right to
amend the Plan by action of a committee (the "Committee") designated by the
Board to administer the Plan (the "Committee"); and
WHEREAS, the Committee now desires to amend certain provisions of the
Plan;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Company covenants and agrees that the Plan is amended as
follows, effective as of the date first above written.
1. Section 1.3 of the Plan is amended by adding the following
definition thereto:
"(y) "Change of Control" shall mean:
(a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either (i) the
then outstanding shares of Common Stock (the "Outstanding Company
Common Stock") or (ii) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally
in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection
(a), the following acquisitions shall not constitute a Change of
Control: (i) any acquisition directly from the Company, (ii) any
acquisition by the Company, (iii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company or (iv) any acquisition by
any corporation pursuant to a transaction which complies with clauses
(i), (ii) and (iii) of subsection (c) of this Section 1.3(y); or
5
<PAGE> 2
(b) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by
a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
(c) Consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets
of the Company or the acquisition of assets of another corporation (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or
all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination of
the Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding any
corporation resulting from such Business Combination or any employee
benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly
or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors of
such corporation except to the extent that such ownership existed prior
to the Business Combination and (iii) at least a majority of the
members of the board of directors of the corporation resulting from
such Business Combination were members of the Incumbent Board at the
time of the execution of the initial agreement, or of the action of the
Board, providing for such Business Combination; or
(d) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company."
2. Section 4.1(d) of the Plan is amended by adding the following
sentence to the first paragraph thereof:
6
<PAGE> 3
"Notwithstanding the foregoing, (i) in the event of a Change of Control of the
type set forth in paragraph (a), (b) or (d) of the definition of Change
of Control and (ii) immediately prior to the occurrence of a Change of
Control of the type set forth in paragraph (c) of the definition of
Change of Control, each Option outstanding under the Plan shall become
exercisable in whole or in part without regard to any vesting
provisions set forth in the related Option Agreement."
3. Subsection 4.1(e) of the Plan is amended by deleting therefrom in
its entirety the second paragraph thereof and inserting in lieu thereof the
following:
"Subject to any action required by the shareholders, in the event of a
Business Combination that does not result in a Change of Control, each
outstanding Option and Stock Appreciation Right shall pertain to and
apply to the securities or other consideration that a holder of the
number of shares of Common Stock subject to the Option or to which the
Stock Appreciation Right relates would have been entitled to receive in
the Business Combination. In the event of a Business Combination that
results in a Change of Control of the type set forth in paragraph (c)
of the definition of Change of Control or in the event of the complete
liquidation or dissolution of the Company, then each outstanding Option
and Stock Appreciation Right shall terminate; provided, however, that
each holder thereof shall, in such event, have the right immediately
prior to such Change of Control or complete liquidation or dissolution,
to exercise his or her Option or Stock Appreciation Right in whole or
in part without regard to any installment provision that might be
contained in the applicable Agreement. The last sentence shall apply to
any outstanding Options which are ISOs to the extent permitted by Code
Section 422(d), and such outstanding ISO's in excess thereof shall,
immediately upon the occurrence of such Business Combination, be
treated for all purposes of the Plan as NQSOs and shall be immediately
exercisable as such as provided in such sentence. Notwithstanding the
foregoing, in no event shall any Option be exercisable after the date
of termination of the exercise period of such Option."
4. Section 5.3(a) of the Plan is amended by deleting therefrom in its
entirety the first sentence thereof and inserting in lieu thereof the following:
"Stock Appreciation Rights shall not be exercisable during the
first six months after their date of grant; provided, however, that
notwithstanding the foregoing, Stock Appreciation Rights shall become
exercisable (i) in the event of a Change of Control of the type set
forth in paragraph (a), (b) or (d) of the definition of Change of
Control and (ii) immediately prior to a Change of Control of the type
set forth in paragraph (c) of the definition of Change of Control."
5. Section 6.1 of the Plan is amended by inserting the following
sentence in the second paragraph thereof immediately following the first
sentence of such paragraph:
7
<PAGE> 4
"Notwithstanding the foregoing, the Restriction Period shall
end (i) upon a Change of Control of the type set forth in paragraph
(a), (b) or (d) of the definition of Change of Control and (ii)
immediately prior to a Change of Control of the type set forth in
paragraph (c) of the definition of Change of Control."
6. Section 6.1 of the Plan is further amended by deleting therefrom in
its entirety the last paragraph thereof and inserting in lieu thereof the
following:
"If any change is made in the Common Stock by reason of any Business
Combination that does not result in a Change of Control or any
recapitalization, stock dividend, split up or combination of shares,
then any shares received by an Employee with respect to Restricted
Stock shall be subject to the same restrictions applicable to such
Restricted Stock and the certificates representing such shares shall be
deposited with the Company."
7. The Company reserves the right by action of the Committee to amend
further at any time any of the terms and provisions of the Plan as amended
hereby. Except as expressly or by necessary implication amended hereby, the Plan
shall continue in full force and effect.
<PAGE> 1
EXHIBIT 10.41
FIRST AMENDMENT
TO
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NON-QUALIFIED STOCK OPTION PLAN
THIS FIRST AMENDMENT TO RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NON-QUALIFIED STOCK OPTION PLAN (the "First Amendment") is made as of this 29th
day of January, 1997 by RESOURCE BANCSHARES MORTGAGE GROUP, INC. (the
"Company").
W I T N E S S E T H:
WHEREAS, the Company maintains the Resource Bancshares Mortgage Group,
Inc. Non-Qualified Stock Option Plan (the "Plan") for the benefit of the
employees of the Company; and
WHEREAS, in Section 5.2 of the Plan, the Company reserved the right by
action of Board of Directors (the "Board") to amend the Plan; and
WHEREAS, the Board now desires to amend the Plan to decrease the number
of shares of common stock of the Company subject to the Plan;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Company covenants and agrees that, subject to shareholder
approval, the Plan is amended as follows, effective as of January 29, 1997.
1. Section 3.2 of the Plan is amended by deleting the number "400,000"
and substituting in lieu thereof the number "213,159."
2. The Company reserves the right by action of the Board to amend
further at any time any of the terms and provisions of the Plan as amended
hereby. Except as expressly or by necessary implication amended hereby, the Plan
shall continue in full force and effect.
<PAGE> 1
EXHIBIT 10.43
THIRD AMENDMENT
TO
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NON-QUALIFIED STOCK OPTION PLAN
THIS THIRD AMENDMENT TO RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NON-QUALIFIED STOCK OPTION PLAN is made as of the 28th day of October, 1998 by
RESOURCE BANCSHARES MORTGAGE GROUP, INC. (the "Company").
W I T N E S S E T H:
WHEREAS, the Company maintains the Resource Bancshares Mortgage Group,
Inc. Non-Qualified Stock Option Plan (the "Plan") for the benefit of certain of
its employees; and
WHEREAS, in Section 5.2 of the Plan, the Company reserved the right by
action of its Board of Directors to amend the Plan; and
WHEREAS, the Board of Directors now desires to amend certain provisions
of the Plan;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Company covenants and agrees that the Plan is amended as
follows, effective as of the date first above written:
1. Section 1.3 of the Plan is amended by adding the following
definition thereto:
"(k) "Change of Control" shall mean:
(a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of either (i) the then
outstanding shares of Common Stock (the "Outstanding Company Common
Stock") or (ii) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the
following acquisitions shall not constitute a Change of Control: (i)
any acquisition directly from the Company, (ii) any acquisition by the
Company, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company or (iv) any acquisition by any corporation
pursuant to a transaction which complies with clauses (i), (ii) and
(iii) of subsection (c) of this Section 1.3(k); or
2
<PAGE> 2
(b) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by
a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
(c) Consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets
of the Company or the acquisition of assets of another corporation (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or
all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination of
the Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding any
corporation resulting from such Business Combination or any employee
benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly
or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors of
such corporation except to the extent that such ownership existed prior
to the Business Combination and (iii) at least a majority of the
members of the board of directors of the corporation resulting from
such Business Combination were members of the Incumbent Board at the
time of the execution of the initial agreement, or of the action of the
Board, providing for such Business Combination; or
(d) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company."
2. Section 4.1 (d) of the Plan is amended by adding the following at
the end of the second sentence thereof:
3
<PAGE> 3
"provided, however, that (i) in the event of a Change of Control of the
type set forth in paragraph (a), (b) or (d) of the definition of Change
of Control and (ii) immediately prior to the occurrence of a Change of
Control of the type set forth in paragraph (c) of the definition of
Change of Control, each Option outstanding under the Plan shall become
exercisable in whole or in part without regard to any vesting
provisions set forth in the related Option Agreement."
3. Subsection 4.2 of the Plan is amended by deleting therefrom in its
entirety the second paragraph thereof and inserting in lieu thereof the
following:
"Subject to any action required by the shareholders of the
Company, in the event of a Business Combination that does not result in
a Change of Control, each Option outstanding under the Plan shall
pertain to and apply to the securities or other consideration that a
holder of the number of shares of Common Stock underlying the Option
would have been entitled to receive in the Business Combination. In the
event of a Business Combination that results in a Change of Control of
the type set forth in paragraph (c) of the definition of Change of
Control or in the event of the complete liquidation or dissolution of
the Company, then each outstanding Option shall terminate; provided,
however, that each Optionee shall, in such event, have the right
immediately prior to such Change of Control or complete liquidation or
dissolution, to exercise his or her Option in whole or in part without
regard to any installment provision that might be contained in the
applicable Option Agreement."
4. The Company reserves the right by action of the Board to amend
further at any time any of the terms and provisions of the Plan as amended
hereby. Except as expressly or by necessary implication amended hereby, the Plan
shall continue in full force and effect.
4
<PAGE> 1
EXHIBIT 10.51
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
FLEXIBLE BENEFITS PLAN
Amended and Restated as of January 1, 1998
<PAGE> 2
FLEXIBLE BENEFITS PLAN
ARTICLE I
PURPOSE AND ESTABLISHMENT
1.01 Section 125 Plan. This Flexible Benefits Plan consisting of the Medical
Expense Flexible Benefits Accounts Plan and the Dependent Care Flexible
Benefits Accounts Plan, has been established by Resource Bancshares
Mortgage Group, Inc. for the benefit of its Employees and their
dependents and beneficiaries. It is maintained according to the terms
of this instrument.
1.02 Purpose. The purpose of the Plan is to provide reimbursement for
covered charges incurred by Participants and their dependents that are
excludable from the Participant's gross income under the Internal
Revenue Code of 1986, as amended. Resource Bancshares Mortgage Group,
Inc.'s Flexible Benefits Accounts ("FBA") Plans are intended to comply
with the provisions applicable to Flexible Spending Accounts (FSAs) for
health FSAs and dependent care assistance FSAs.
Reimbursements under the FBA Plans will be paid specifically to
reimburse the covered individual for medical expenses or dependent care
assistance incurred previously during the period of coverage.
1.03 Relation to Cafeteria Plan. This Plan shall be subject to the
provisions of the Section 125 Plan of Resource Bancshares Mortgage
Group, Inc., except to the extent that such provisions are inconsistent
with this Plan.
1.04 Establishment of Plan. Resource Bancshares Mortgage Group, Inc.
previously adopted the Resource Bancshares Mortgage Group, Inc.
Flexible Benefits Plan, effective as of July 1, 1993 which is currently
in effect. Resource Bancshares Mortgage Group, Inc. hereby amends and
restates this plan which shall be known as the Resource Bancshares
Mortgage Group, Inc. Flexible Benefits Plan, amended and restated as of
January 1, 1998.
1-1
<PAGE> 3
ARTICLE II
DEFINITIONS
2.01 Definitions. Whenever used in this Plan, the following terms shall have
the respective meanings set forth below unless otherwise expressly
provided and where the defined meaning is intended the term is
capitalized.
(a) "Board of Directors" means the Board of Directors of RBMG.
(b) "Claims Administrator" shall be such person who may be
designated by the Company, to serve the following functions:
the receipt and deposit of contributions, maintenance of
records of Plan Participants and the determination of
eligibility of individual claimants for receipt of benefits.
The Plan Administrator may be the Claims Administrator.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Company" means RBMG, its successor or successors, and any
other organization, corporation or partnership which is
related to or affiliated with RBMG pursuant to Section 267,
414, 707 or 1563 of the Code.
(e) "Compensation" means the basic wages and salary which are paid
by the Company to a Participant. It does not include overtime
pay, bonuses, and other non-base pay.
(f) "Dependent" means any individual who is a dependent of a
Participant within the meaning of Section 152(a) of the
Internal Revenue Code.
(g) "Doctor" means a person licensed to treat illness by the state
in which the treatment is rendered.
(h) "Earned Income" means all income derived from wages, salaries,
tips, self-employment and other employee compensation (such as
disability benefits) but such term does not include any
amounts, (a) received under this Plan or any other dependent
care assistance program; (b) received as a pension or annuity;
(c) received as social security payments, worker's
compensation, or unemployment compensation; or (d) received as
a distribution of earnings or profits rather than a reasonable
compensation for the personal services actually rendered.
(i) "Employee" means any person who is receiving Compensation from
the
2-1
<PAGE> 4
Company on a regular basis. The term "Employee" shall not
include any temporary employees or any employees who perform
services on a part-time basis, that is, less than 30 hours per
week.
(j) "Employment Related Expenses" means expenses incurred for
Qualifying Services or for the cost of sending a child of a
Participant to a Qualifying Day Care Center.
Employment-related expenses do not include expenses paid by
the Participant to:
1. A Dependent of the Participant;
2. The Participant's Spouse; or
3. A child of the Participant under the age of 19.
(k) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and regulations promulgated thereunder.
(l) "Health Plan" means the Resource Bancshares Mortgage Group,
Inc. Health Plan.
(m) "Participant" means an Employee participating in one of the
Plans. Such Employee must satisfy the eligibility requirements
of Section 3.01 hereof.
(n) "Plan" means the Medical Expense FBA Plan of RBMG or the
Dependent Care FBA Plan of RBMG.
(o) "Plan Administrator" means the person or persons designated to
administer the Plan pursuant to Section 6.01 hereof.
(p) "Plan Year" means the period commencing on January 1 and
ending on December 31.
(q) "Qualifying Day Care Center" means: (a) a day care center
which substantially complies with all applicable state and
local laws and regulations; and (b) provides care for more
than six persons (other than persons who live there); and (c)
receives a fee, payment, or grant for providing services for
any of those persons, regardless of whether or not the center
is run for profit.
(r) "Qualifying Dependent Care Expenses" means Employment Related
Expenses for the care of a Qualifying Individual.
(s) "Qualifying Individual" means (1) a Participant's Dependent
under the age of 13 and with respect to whom the taxpayer is
entitled to a deduction under
2-2
<PAGE> 5
Section 151(a) of the Code; or (2) a Participant's Dependent
or Spouse who is physically or mentally not able to care for
himself.
(t) "Qualifying Services" means services performed to enable a
Participant or his Spouse to remain gainfully employed and
which are related to the care of Qualifying Individuals.
Qualifying Services are limited to services provided:
1. In the home of the Participant; or
2. Outside the home of the Participant for: (a) The care
of a Participant's Dependent under the age of 13; or
(b) The care of any other Qualifying Individual who
spends at least eight hours a day in the
Participant's home.
(u) "RBMG" means Resource Bancshares Mortgage Group, Inc. and any
successor thereto.
(v) "Reasonable and Customary Charges" means charges which do not
exceed the amount usually charged by most providers in the
same geographic area for services, treatment or materials,
taking into account the nature of the illness involved.
(w) "Reimbursement Account" means an account established for
designated contributions made by the Company on behalf of the
Participant for reimbursement of either qualifying health
expenses or Qualifying Dependent Care Expenses. All amounts
held in such accounts are general assets of the Company.
(x) "Spouse" means the spouse of a Participant, but does not
include an individual legally separated from the Participant
under a decree of legal separation.
(y) "Termination" means the termination of a Participant's
employment as an Employee, whether by reason of change in job
classification, discharge, layoff, voluntary termination,
disability, retirement, death or otherwise.
2.02 Construction. The masculine gender, where appearing in the Plan, shall
be deemed to include the feminine gender, unless the context clearly
indicates to the contrary.
2-3
<PAGE> 6
ARTICLE III
ELIGIBILITY
3.01 Eligibility. The Employees will be eligible to participate on the first
day of the month after he or she has been an Employee for 60 days and
has been regularly scheduled to work 30 or more hours per week. If the
Employee does not participate in the Plan on that date, he or she will
not be able to participate in the Plan until the enrollment date for
the next Plan Year.
3.02 Enrollment. In order to participate in the Plan, an Employee must,
during the annual enrollment period of each preceding Plan Year or at
such other time as determined by the Plan Administrator, designate the
coverage amount he desires under the Plan on a form supplied by the
Plan Administrator. The Employee may designate from $100 to $8,000 of
coverage, subject to the limitation of the maximum benefits contained
in Section 4.02, and his Compensation for that Plan Year shall be
reduced (in accordance with Article V of this Plan), by the amount of
his elected coverage in equal amounts each payroll period which shall
be credited each payroll period to the Participant's applicable
Reimbursement Account.
3.03 Acceptance of Elections. An election form filed by a Participant is
subject to acceptance, modification or rejection by the Plan
Administrator. The Plan Administrator may modify or reject an
application in order to satisfy legal requirements, to comply with the
minimum benefits requirements of this Plan or for other good cause. An
election form not modified or rejected by the Plan Administrator within
30 days after the end of the relevant enrollment period shall be deemed
to be accepted, although it may subsequently be modified by the Plan
Administrator as provided in this Plan. Rejection of an election for a
Plan Year shall be deemed to result in an election of no benefits for
that Plan Year, unless prior to the beginning of the Plan Year, the
Plan Administrator, in its discretion, permits the Participant to file
a new election.
3.04 Revocation and Modification. Once an election has been accepted by the
Plan Administrator, a Participant may not modify or revoke his election
for the remainder of the Plan Year except where both the revocation (or
modification) and new election are on account of and consistent with a
change in his family status (e.g., marriage, divorce, death of Spouse
or Dependent, birth or adoption of child of the Participant,
termination or commencement of employment of the Participant's Spouse,
switching from part-time to full-time employment status or from
full-time to part-time status
3-1
<PAGE> 7
by the Participant or the Participant's Spouse, or taking an unpaid
leave of absence by the Participant or the Participant's Spouse, or
significant change in health coverage of the Employee or spouse
attributable to the Spouse's employment). Any such modification or
revocation of an election shall be effective on the first day of the
payroll period beginning coincident with or next following the date the
election is filed.
3.05 Limitations on Elections of Highly Compensated Employees.
(a) The Plan Administrator may reject the medical expense benefit
election of a "highly compensated individual" as that term is defined
in Section 105(h)(5) of the Code to prevent discrimination in favor of
such individuals with respect to eligibility to participate or as to
contributions and benefits in accordance with Section 105(h) of the
Code.
(b) The Plan Administrator may reject dependent care benefit elections
of:
1. "highly compensated employees" as that term is defined in
Section 414(q) of the Code to prevent either:
A. discrimination in favor of such employees with
respect to eligibility to participate or as to
contributions and benefits in accordance with Section
129(d)(2) and (3) of the Code; or
B. the average benefits of such employees from
exceeding 45% of the average benefits provided to
employees who are not highly compensated employees
under all plans of the Company in accordance with
Section 129(d)(8) of the Code; and
2. shareholders or owners (or their spouses or dependents) who
own more than 5% of the stock or of the capital or profits
interest in the Company to prevent benefits provided to such
shareholders or owners under this Plan from exceeding 25% of
the aggregate of such benefits provided for all Employees
under the Plan.
3-2
<PAGE> 8
3.06 Termination.
(a) A Participant's contributions to the Plan cease upon Termination
provided, however, with respect to medical expenses, a Participant who
terminates during a Plan Year, may elect to continue to receive medical
coverage under the Plan for the remainder of the Plan Year provided
that he continues to make contributions to the Plan after the date of
Termination, equal to 102% of the amount of the premium that the
Participant would have allocated to the Plan had he remained an
Employee throughout the Plan Year. For Plan Years beginning after the
Plan Year in which the Termination occurs, the terminating Participant
(and his Dependents) shall be eligible to continue to receive coverage
under the Plan, to the extent required under the health plan
continuation rules contained in section 4980B of the Code.
(b) A Participant who terminates from the Plan and does not continue to
make contributions for the remainder of the Plan Year (as described in
paragraph (a), above) shall not receive coverage under the Plan for the
remainder of such Plan Year. However, such Participant may submit
eligible expenses incurred prior to or after the Termination until
March 31st of the Plan Year following the Plan Year in which the
Termination occurs.
3-3
<PAGE> 9
ARTICLE IV
BENEFITS
4.01 Covered Expenses. Each Participant will be entitled to receive for each
Plan Year reimbursement of covered expenses (described below) which are
incurred during the Plan Year, which are not reimbursed by other plans,
and which are not taken as a deduction on the Participant's income tax
return, up to the dollar amount of coverage elected by the Participant
for that Plan Year and subject to the limitations contained in Section
4.02.
(a) Medical Expense FBA. Generally, if an expense qualifies as a
Medical Expense under Section 213 of the Internal Revenue Code,
excluding medical insurance premiums, it is eligible for reimbursement
under this Plan. The following medical expenses are covered under this
Plan:
(1) Expenses which apply to the deductible amount under your
group medical plan.
(2) Expenses which apply to the co-insurance amount you are
required to pay under your group medical plan.
(3) Excess expenses over the limitations of your group medical
plan. This includes, but is not limited to:
(A) Doctor's charges in excess of Reasonable and
Customary Charges. Private room charges.
(B) Charges in excess of limits for alcoholism, drug
abuse, and mental illness.
(4) Expenses, no part of which are covered under your group
medical plan. This includes, but is not limited to:
(A) Dental and orthodontic expenses.
(B) Vision care, including all types of frames.
(C) Otologic examinations and hearing aids.
(D) Speech therapy.
4-1
<PAGE> 10
(E) Physical examinations.
(b) Dependent Care FBA. Each Participant will be entitled to
receive for each Plan Year reimbursement of Qualifying
Dependent Care Expenses, up to the dollar amount of coverage
elected by the Participant for that Plan Year.
(c) The FBA Plans cannot make advance reimbursements of future
or projected expenses.
4.02 Maximum Benefit. The maximum amount of reimbursement under the Medical
Expense FBA Plan will be available at all times during the period of
coverage (properly reduced as of any particular time for prior
reimbursements for the same period of coverage).
The Dependent Care FBA Plan reimbursements will be limited to the
amount in the individual's account at the time of the claim for
reimbursement. The maximum benefit applies to a Participant and his
eligible Dependents in the aggregate. The maximum benefit does not
apply to each person individually.
(a) Medical Expense FBA. A maximum of $3,000 of covered
charges for medical expenses may be reimbursed for each
Participant during any one Plan Year.
(b) Dependent Care FBA. The maximum amount of dependent care
expenses which will be reimbursed under this Plan will be the
lowest of:
1. A maximum of $5,000 ($2,500 for married individuals
filing separate tax returns) may be reimbursed for
each Participant during any one Plan year;
2. If the Employee is single or is married and earns
less than his or her Spouse in a calendar year, the
Compensation paid to the Employee by the Company as
reflected on his Form W-2 for the year; or
3. If the Employee is married and the earned income of
his Spouse is less than the Compensation paid to the
Employee by the Company in a calendar year, the
earned income of the Spouse. If the Spouse is a
student or is physically or mentally incapable of
caring for himself/herself, the Spouse
4-2
<PAGE> 11
will be deemed to have earned income (for each month
that the Spouse is a student or incapacitated) of
$200 per month if the Employee has one Dependent for
whom care is provided and of $400 per month if the
Employee has two or more Dependents for whom care is
provided.
The Company may require that the Employee and/or his Spouse
verify to the Company the amount of such Spouse's expected
earned income for the calendar year in question and may
require that the Employee provide documentary evidence of the
amount certified in the form of an employment contract,
paycheck stub, medical records (if the Spouse is
incapacitated) or a school enrollment form (if the Spouse is a
student). The Company may require further evidence as to your
eligibility for these benefits.
4.03 Excluded Expenses. The following expenses are not covered and no
reimbursement will be made under the FBA Plans:
(a) Any expense which does not qualify as a medical expense under
Section 213 of the Code.
(b) Any expense which does not qualify as an employment-related
expense under Section 21(b)(2) of the Code.
(c) Any portion of an expense which is reimbursed under the Health
Plan or any other plan under which the Participant and his or
her eligible Dependents are covered.
This list is not all-inclusive, and other expenses may be denied in the
discretion of the Plan Administrator.
4.04 Procedure. In order to be reimbursed for expenses under the Plan, you
must complete the appropriate reimbursement request form. See ss.6.04.
4.05 Forfeiture. If a Participant incurs, during the Plan Year aggregate
expenses qualifying for reimbursement less than the dollar amount of
coverage he elects for a Plan Year under this Plan, any amount
remaining in the Participant's Reimbursement Account as of the end of
the Plan Year shall be forfeited. Subject to applicable law and
regulations, forfeitures will be applied toward payment of Plan
expenses but the Plan Administrator shall have the discretion to
allocate the forfeitures on a pro rata basis to Plan Participants. In
no case may the forfeitures be allocated among Plan Participants based
on their individual claims experience.
4-3
<PAGE> 12
4.06 Benefits Limited to Expenses Incurred During Plan Year. The coverage
elected for a Plan is only available to reimburse expenses which are
incurred during the Plan Year. However, the Participants shall have
until March 31st following the end of the Plan Year to submit claims
for expenses incurred during the Plan Year. An expense is incurred
during the Plan Year if the services giving rise to the expense are
performed during the Plan Year. An expense shall not be deemed to be
incurred during the Plan Year merely because a Participant receives a
bill for the expense during the Plan Year or pays for the expense
during the Plan Year.
4-4
<PAGE> 13
ARTICLE V
CONTRIBUTIONS
5.01 Contributions. Covered Employees and the Company pay the entire cost of
the benefits under this Plan. Employee contributions are made through
salary reduction.
(a) Medical Expense Flexible Benefit Accounts. Covered Employees
are required to contribute the entire cost of the Medical
Expense Flexible Benefit Account component of the Plan.
Employee contributions are based on the coverages elected by
such Employee.
(b) Dependent Care Flexible Benefit Accounts. The covered
Employees and the Company pay the entire cost of the Dependent
Care Flexible Benefit Account (the "Dependent Care FBA")
Component of the Plan. The Company contribution to the
Dependent Care FBA shall equal 50% of the Participant's
Qualifying Dependent Care Expenses, up to a maximum of $40 per
week (the "Company Contribution"). Notwithstanding the
preceding sentence, Employees whose Compensation plus
Commissions paid by the Company during the Plan Year will
exceed $70,000 shall not be eligible to receive a Company
Contribution. The covered Employee's contributions to the
Dependent Care FBA shall equal the coverage elected by such
Employee minus the Company Contribution.
5.02 Medical Expense FBA. A Participant shall be entitled to elect to have a
minimum of $100 and a maximum of $3,000 used by the Company to purchase
or provide a nontaxable benefit(s) through salary reduction.
5.03 Dependent Care FBA. A Participant shall be entitled to elect to have a
minimum of $100 and a maximum of $5,000 ($2,500 for married individuals
filing separate tax returns) used by the Company to purchase or to
purchase or provide a nontaxable benefit(s) through salary reduction.
5.04 Premiums. Premiums will be paid in 24 equal payments over the Plan
Year.
5-1
<PAGE> 14
ARTICLE VI
ADMINISTRATION
6.01 Plan Administrator. The Vice President of Human Resources of RBMG is
hereby designated as the Plan Administrator to serve until resignation
or removal by the Board of Directors and appointment of a successor by
duly adopted resolution of the Board of Directors. The Plan
Administrator may designate as his agent a Claims Administrator or a
Company administrator.
6.02 Reimbursement Account. The Company will establish a Reimbursement
Account for each Participant for each Plan Year. This account will be
credited with the amount of contributions and will be debited with any
reimbursements of covered expenses. The amount in the Reimbursement
Account is the property of the Company until used to pay covered
expenses under this Plan.
6.03 Plan Administrator's Authority. The Plan Administrator shall exercise
such authority and responsibility as he deems appropriate in order to
comply which ERISA, including, but not limited to, authority and
responsibility over any documents and notifications required to be
given to Participants and annual reports required to be filed with the
Internal Revenue Service and the Department of Labor. The Plan
Administrator has discretionary authority to determine eligibility for
benefits or to construe the terms of the Plan.
6.04 Claims Procedures. Reimbursements will be made when a covered
individual incurs eligible expenses over $25.00 and submits the
appropriate claim forms and documentation. At no time will individuals
covered under either FBA Plan be entitled to any amount under the
Plans, in the form of cash or any other taxable or nontaxable benefit,
without submitting specific proof of a properly reimbursable expense.
In order to obtain reimbursement for covered charges, the Participant
must follow the steps listed below in the order they appear.
1. A Plan claim form must be fully completed for each claim
submission. This form can be obtained from the Plan
Administrator.
2. The form must be signed by the Participant.
3. The completed claim form and the necessary information must be
sent to the address designated by the Plan Administrator.
6-1
<PAGE> 15
6.05 Notice of Denied Claim. If a claim is wholly or partially denied,
notice of the decision, in accordance with Section 6.06, shall be
furnished to the claimant within a reasonable period of time, not to
exceed 90 days after receipt of the claim by the Claims Administrator,
unless special circumstances require an extension of time for
processing the claim. If such an extension of time is required, written
notice of the extension shall be furnished to the claimant prior to the
termination of the initial 90 day period. In no event shall such
extension exceed a period of 90 days from the end of such initial
period. The extension notice shall indicate the special circumstances
requiring an extension of time and the date on which the Claims
Administrator expects to render a decision. If notice of the denial of
a claim is not furnished in accordance with this section, the claim
shall be deemed denied and the claimant shall be permitted to proceed
to the review procedure described in Sections 6.07 and 6.08.
6.06 Form of Denied Claim. The Claims Administrator shall provide every
claimant who is denied a claim for benefits written notice setting
forth, in a manner calculated to be understood by the claimant, the
following:
1. A specific reason or reasons for the denial;
2. Specific reference to pertinent Plan provisions upon which the
denial is based;
3. A description of any additional material or information
necessary for the claimant to perfect the claim and an
explanation of why such material or information is necessary;
4. An explanation of the Plan's claims review procedure, as set
forth below in Sections 6.07 and 6.08 hereof.
6.07 Review Procedure. The purpose of the review procedure set forth in this
section and Section 6.08 is to provide a procedure by which a claimant,
under the Plan, may have reasonable opportunity to appeal a denial of a
claim to an appropriate named fiduciary for a full and fair review. To
accomplish that purpose, the claimant, or his duly authorized
representative may:
1. Request review upon written application to the Plan
Administrator;
2. Review pertinent Plan documents; and
6-2
<PAGE> 16
3. Submit issues and comments in writing.
A claimant (or his duly authorized representative) shall request a
review by filing a written application for review with the Plan
Administrator at any time within 60 days after receipt by the claimant
of written notice of the denial of his claim.
6.08 Decision on Review. Decision on review of a denied claim shall be made
in the following manner:
(a) The decision on review shall be made by the Plan
Administrator, who may, in his discretion, hold a hearing on
the denied claim; the Plan Administrator shall make his
decision promptly, and not later than 60 days after the Plan
Administrator receives the request for review, unless special
circumstances require extension of time for processing, in
which case a decision shall be rendered as soon as possible,
but not later than 120 days after receipt of the request for
review. If such an extension of time for review is required,
written notice of the extension shall be furnished to the
claimant prior to the commencement of the extension.
(b) The decision on review shall be in writing and shall include
specific reasons for the decision, written in a manner
calculated to be understood by the claimant, and specific
references to the pertinent Plan provisions on which the
decision is based. Any construction of the Plan's provisions
adopted by the Plan Administrator, in good faith, shall be
binding upon the Participants.
(c) In the event that the decision on review is not furnished
within the time period set forth in Section 6.08(a), the claim
shall be deemed denied on review.
6.09 Disputed Claims. If a dispute arises with respect to any matter under
this Plan, the Claims Administrator may refrain from taking any other
or further action in connection with the matter involved in the
controversy until the dispute has been resolved.
6.10 Legal Action. Legal action to recover any lost benefits under this Plan
may not be brought: (1) until the Plan's appeal procedure, including
utilization of a professional/peer review committee, has been exhausted
under the terms of ERISA; or (2) later than three years after the
expense/disability was incurred.
6-3
<PAGE> 17
ARTICLE VII
AMENDMENT AND TERMINATION
7.01 Amendment and Termination. The Board of Directors may amend or
terminate this Plan at any time by duly adopted resolution.
7.02 Effect of Termination. All benefits shall cease upon the day that the
Plan is terminated unless otherwise provided by the Board of Directors
or other provisions of this Plan.
7-1
<PAGE> 18
ARTICLE VIII
MISCELLANEOUS
8.01 Nonguarantee of Employment. This Plan shall not be deemed to constitute
a contract between the Company and any Participant or to be a
consideration or inducement for the employment of any Participant or
Employee. Nothing contained in this Plan shall be deemed to give any
Participant or Employee the right to be retained in the service of the
Company or to interfere with the right of the Company to discharge any
Participant or Employee at any time regardless of the effect which such
discharge will have upon him as a Participant of this Plan.
8.02 Nonguarantee of Tax Treatment. The Company does not guarantee that any
reimbursements made pursuant to this Plan will be excludable from the
Participant's gross income for federal or state income tax purposes. It
is the obligation of each Participant to determine whether each
reimbursement is so excludable. If any reimbursements are made pursuant
to this Plan that are not excludable from the Participant's gross
income for federal or state income tax purposes, such Participant shall
indemnify and reimburse the Company for any liability it may incur for
failure to withhold such taxes from such reimbursement.
Amounts paid to reimburse an individual under a dependent care
assistance program are excludable from gross income only to the extent
that these amounts do not exceed the lesser of the individual's Earned
Income or the individual's spouses's Earned Income.
8.03 Governing Laws. This Plan shall be construed and enforced in accordance
with the laws of the State of South Carolina to the extent not
preempted by federal law.
8.04 Reduction of Premium. If either FBA Plan has an experience gain with
respect to a year of coverage, the excess of the premiums paid and
income (if any) of the FBA Plan over the FBA's total claims
reimbursements and reasonable administrative costs for the year may, in
the Plan Administrator's discretion, be used to reduce required
premiums for the following year.
8.05 No Assignment. No benefit payable at any time under this Plan shall be
subject in any manner to alienation, sale, transfer, assignment,
pledge, attachment, or encumbrance of any kind.
8-1
<PAGE> 19
8.06 Headings. The headings of this Plan are inserted for convenience of
reference only and shall have no effect upon the meaning of the
provisions hereof.
8.07 Information to be Furnished. Participants shall provide the Company and
Plan Administrator with such information and evidence and shall sign
such documents as may reasonably be requested from time to time for the
purpose of administration of the Plan.
8.08 Severability. If any provision of this Plan shall be held by a court of
competent jurisdiction to be invalid or unenforceable, the remaining
provisions hereof shall continue to be fully effective.
ARTICLE IX
EXECUTION
IN WITNESS WHEREOF, and as evidence of adoption of this Plan by the
Company, it has caused the same to be executed by its duly authorized
representative.
ATTEST: RESOURCE BANCSHARES MORTGAGE
GROUP, INC.
By:___________________________ By:_________________________________
___________________________ _______________________________
(Title) (Title)
8-2
<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, 1998
-----------------------------------------------------------------
<S> <C>
Net income $ 48,671
Net income per common share - basic (1) $ 2.10
Net income per common share - diluted (2) $ 2.07
</TABLE>
1) The number of common shares outstanding used to compute net income per
share-basic was 23,122,835 for the year ended December 31, 1998.
2) Diluted earnings per common share for the year ended December 31, 1998, was
calculated based on weighted average common shares outstanding of 23,501,108,
which assumes the exercise of options covering 1,742,705 shares and computes
incremental shares using the treasury stock method.
<PAGE> 1
EXHIBIT 13.1
Front Cover:
1998 ANNUAL REPORT
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
RBMG
- ----
RESOURCE
BANCSHARES
MORTGAGE
GROUP, INC.
- -----------
<PAGE> 2
Inside Front Cover:
DESCRIPTION OF RBMG
- -- 17th largest originator of agency-eligible residential mortgage loans.
- -- A national supplier of agency-eligible servicing rights to the still
consolidating mortgage industry.
- -- An efficiently sized servicer of agency-eligible loans.
- -- A growth-oriented originator and seller of subprime loans.
- -- A growth-oriented originator, seller and servicer of commercial mortgage
loans.
- -- A growth-oriented originator, seller and servicer of small-ticket equipment
leases.
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
purchase (through a nationwide network of correspondents and brokers), sale and
servicing of agency-eligible and subprime residential single-family
first-mortgage loans and the purchase and sale of servicing rights associated
with agency-eligible 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.
<PAGE> 3
"Greenpoint's acquisition of Headlands leaves Resource Bancshares as one of the
last well-managed, independent, mid-sized prime mortgage bankers in the country.
The purchase price of roughly $23 per share (a premium of roughly 35%) is 12.7x
our 1998 EPS estimate for Headlands. By comparison, valuing Resource Bancshares
Mortgage Group, Inc. at 12.7x our 1998 operating EPS estimate of $2.00 yields an
acquisition price of more than $25 per share, or nearly 75% above current
levels. We note, however, that the vast majority of Resource Bancshares'
originations consist of more commoditized agency-eligible loans, whereas
Headlands only relies on this product for roughly 20% of originations with the
remaining 80% coming primarily from higher-margin specialty mortgage products."
Jospeh A. Jolson
NationsBanc Montgomery Securities
December 8, 1998
CONTENTS
Stock Performance/Outlook one
Letter to Our Shareholders two
Divisional Analysis of Pre-Tax Funds
Generated From Operations five
Selected Financial Highlights nine
Management's Discussion and
Analysis of Financial Condition
and Results of Operations ten
Quantitative and Qualitative Disclosure
About Market Risk thirty
Consolidated Financial Statements and Notes thirty-one
Report to Independent Accountants fifty-two
Stock Data fifty-two
Directors and Executive Officers fifty-three
Corporate Information fifty-three
<PAGE> 4
Page One:
STOCK PERFORMANCE
<TABLE>
<CAPTION>
PRICE
----------------------------------------------
MBA PEER
DATE RBMG NASDAQ GROUP
- -------------------------------------------------------------------
<S> <C> <C> <C>
5/26/93 100.0 100.0 100.0
12/31/93 121.4 110.5 97.4
12/31/94 132.3 108.0 87.2
12/31/95 217.7 152.8 126.4
12/31/96 233.0 187.9 158.2
12/31/97 280.0 230.6 231.4
12/31/98 284.3 323.5 305.1
</TABLE>
STOCK PERFORMANCE/OUTLOOK
On June 3, 1993, the Company went public at a stock dividend-adjusted offering
price of $5.83 per share. In just a little over five and a half years, the
Company's stock price has risen 184% (an annualized rate of return of 33%) to
close at $16.56 as of December 31, 1998.
PRICE TO EARNINGS RATIOS
2/1/99 STOCK PRICE P/E RATIO
-------------------------------------
RBMG* $14.88 7.19
CCR* $44.44 13.98
* Source is Nasdaq
ANALYST ESTIMATES
1999
<TABLE>
<CAPTION>
ANALYST RECOMMENDATION ESTIMATE DATE OF REPORT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sandler O'Neill Buy $2.25 December 22, 1998
Equity Research Services Buy $2.35 October 29, 1998
NationsBanc Montgomery Securities Buy $2.15 March 12, 1999
Raymond James & Associates Buy $2.25 February 12, 1999
Warburg Dillion Read Hold $2.35 November 17, 1998
</TABLE>
The Company is followed by the analysts listed above. Please note that any
opinions, estimates or forecasts regarding the Company's performance made by
these analysts are theirs alone and do not represent opinions, estimates,
forecasts or predictions of the
<PAGE> 5
Company or its management. The Company does not by providing the information
above imply its endorsement of or concurrence therewith.
"Resource is selling at a 49% P/E multiple discount to industry giant
Countrywide Credit (NYSE: CCR -$48 15/16) and a 71% discount to the market
multiple of 24.1 times based on 1999 estimated earnings. Historically, Resource
has sold at an average 20% discount to CCR and a 45% discount to the market
multiple. We believe the current discount is excessive, given the unusually
favorable projections of low and declining interest rates, low unemployment,
robust housing activity, and a strong mortgage market."
MICHAEL MCMAHON
Sandler O'Neill & Partners, L.P.
December 22, 1998
"Although the flatness of the yield curve has had a modestly negative impact on
current earnings, we believe mortgage rates are likely to remain low and could
decline further, particularly given their relatively high spreads to
treasuries.... We believe production activity is likely to increase in 1999.
Even if we are wrong, however, and production remains essentially flat, the
Company should benefit from an increasing percentage of subprime production,
which is significantly more profitable to the Company."
JOHN A. HOWARD
Equity Research Services
October 29, 1998
<PAGE> 6
Page two
LETTER TO OUR SHAREHOLDERS
Resource Bancshares Mortgage Group, Inc.
GROWTH THROUGH DIVERSIFICATION
RBMG's outstanding results in 1998 convince us that strategic moves
taken in 1996 and 1997 by concentrating on "GROWTH THROUGH DIVERSIFICATION" and
our plans for "MAPPING OUR GROWTH" in 1998 have positioned RBMG for continued
excellent financial performance in the future. Let me recap where we have been,
where we are and where we are going.
WHERE WE HAVE BEEN
Our initial founding strategy in 1989 was to originate agency-eligible
mortgage loans and position ourselves as a national supplier of mortgage
servicing rights to the consolidating mortgage servicing industry. We designed
our operations to meet the under-served needs of correspondents and wholesale
brokers with the objective of providing them more cost-efficient access to the
secondary markets. It was our expectation that they would then be able to more
effectively compete against the costly retail branch infrastructures of the
large financial services concerns that were common at the time. We believed
these strategies would help insulate the Company's earnings from some of the
cyclicality and seasonality of the mortgage banking business by eliminating much
of the fixed cost of maintaining retail loan origination offices.
Notwithstanding that many said our unique business strategy would not work, we
grew to become the sixth-largest correspondent originator in the United States
by the end of 1996.
Having become an agency-eligible market leader, we recognized an
opportunity to diversify beyond our singular focus on the agency-eligible
mortgage business. In April of 1997, we acquired a subprime mortgage origination
platform, and in December of 1997, we acquired commercial mortgage and
small-ticket commercial equipment leasing operations. As a consequence of these
investments, 30% of our 1998 pre-tax profits were derived from other than our
agency-eligible mortgage production and servicing businesses.
<PAGE> 7
Page three:
TOP 50 COMMERCIAL SERVICERS RANKED BY NUMBER OF LOANS SERVICED AT DECEMBER 31,
1997
<TABLE>
<CAPTION>
NUMBER
ORGANIZATION OF LOANS RANK
- ----------------------------------------------- -------- ----
<S> <C> <C>
GMAC Commercial Mortgage 30,457 1
Midland Commercial Funding 13,000 2
Washington Mutual Savings Bank 9,000 3
Southern Pacific Bank 5,600 4
First Union Capital Markets Group 3,056 5
Laureate Realty Services, Inc. 884 14
Source: Mortgage Servicing News, February 1999
</TABLE>
B&C LENDERS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(dollars in millions)
<TABLE>
<CAPTION>
MARKET
LENDER VOLUME SHARE RANK
- --------------------------------------------------- ------- ------ ----
<S> <C> <C> <C>
Associates First Capital $ 7,858 6.5% 1
Household Financial Services 6,989 5.8% 2
ContiMortgage Corp. 6,069 5.1% 3
IMC Mortgage Company 5,500 4.6% 4
The Money Store 5,291 4.4% 5
RBMG, INC. 418 0.4%
Source: Inside B&C Lending, November 23, 1998
</TABLE>
WHERE WE ARE
We have grown to be ranked among the nation's leaders in the mortgage industry.
For the year ended December 31, 1998, RBMG was ranked as the 7th largest
correspondent originator, the 12th largest GSE securitization issuer and the
17th largest residential mortgage originator. For the year ended December 31,
1997, Laureate Realty Services was ranked as the 14th largest commercial
mortgage servicer in the United States. RBMG is also an unranked originator and
seller of subprime loans and an unranked originator, seller and servicer of
small-ticket commercial equipment leases with plenty of room to grow.
<PAGE> 8
TOP CORRESPONDENT ORIGINATORS FOR THE YEAR ENDED DECEMBER 31, 1998
(dollars in billions)
<TABLE>
<CAPTION>
CORRESPONDENT TOTAL
RANK LENDER BUSINESS ORIGINATIONS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Chase Manhattan & Affiliates $45.17 $85.14
2 Norwest Mortgage 39.58 109.45
3 Countrywide Credit Industries 29.33 87.08
4 HomeSide Lending, Inc. 22.66 26.88
5 Fleet Mortgage Corp. 19.84 30.27
7 Resource Bancshares
Mortgage Group, Inc. $11.67 $15.56
Source: Inside Mortgage Finance, February 12,1999
</TABLE>
TOP GSE SECURITIZATION ISSUERS
FOR THE YEAR ENDED DECEMBER 31, 1998
(dollars in millions)
<TABLE>
<CAPTION>
LENDER VOLUME RANK
- ---------------------------------------------- ------- ----
<S> <C> <C>
Norwest Mortgage, Inc. $72,344 1
Countrywide Home Loans, Inc. 55,383 2
Chase Manhattan Mortgage 32,742 3
Fleet Mortgage Corp. 24,892 4
Homeside Lending, Inc. 16,668 5
RBMG, INC. 11,544 12
Source: Mortgage Marketplace, February 1, 1999
</TABLE>
TOP MORTGAGE ORIGINATORS
FOR THE YEAR ENDED DECEMBER 31, 1998
(dollars in billions)
<TABLE>
<CAPTION>
MARKET
LENDER VOLUME SHARE RANK
- ------------------------------------------------------ ------- ------ ----
<S> <C> <C> <C>
Norwest Mortgage, Inc. $109.50 7.7% 1
Countrywide Credit Industries 87.08 6.1% 2
Chase Manhattan & Affiliates 85.14 6.0% 3
Bank of America Mortgage & Affiliates 79.10 5.5% 4
Washington Mutual 42.89 3.0% 5
RBMG, INC. 15.56 1.1% 17
Source: Inside Mortgage Finance, January 22, 1999
</TABLE>
<PAGE> 9
Page four:
RETURN ON ASSETS/RETURN ON EQUITY*
<TABLE>
<CAPTION>
ROA - ROE -
(RETURN ON (RETURN ON
YEAR ASSETS) EQUITY)
- ------------------------------------------
<S> <C> <C>
1993 4.81% 38.50%
1994 5.25% 25.98%
1995 1.95% 17.00%
1996 2.22% 16.78%
1997 2.29% 16.34%
1998 2.68% 20.61%
</TABLE>
*Amounts reflect operating amounts only. Excluded are the impact of
non-recurring charges reported in 1996 and 1997 and non-recurring income
reported in 1998.
NET OPERATING INCOME*
<TABLE>
<CAPTION>
AGENCY-
ELIGIBLE
RESIDENTIAL SUBPRIME
PRODUCTION RESIDENTIAL COMMERCIAL
YEAR & SERVICING PRODUCTION MORTGAGE LEASING CONSOLIDATED
- ------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
1993 $17,580 N/A N/A N/A $17,580
1994 18,043 N/A N/A N/A 18,043
1995 14,219 N/A N/A N/A 14,219
1996 22,815 N/A N/A N/A 22,815
1997 25,070 $ 2,969 N/A N/A 28,039
1998 34,111 11,725 $ 1,152 $ 662 47,650
</TABLE>
DILUTED OPERATING EARNINGS PER SHARE *
<TABLE>
<CAPTION>
AGENCY-
ELIGIBLE
RESIDENTIAL SUBPRIME
PRODUCTION RESIDENTIAL COMMERCIAL
YEAR & SERVICING PRODUCTION MORTGAGE LEASING CONSOLIDATED
- ------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
1993 $ 0.76 N/A N/A N/A $ 0.76
1994 1.10 N/A N/A N/A 1.10
1995 0.86 N/A N/A N/A 0.86
1996 1.17 N/A N/A N/A 1.17
1997 1.21 $0.14 N/A N/A 1.35
1998 1.45 0.50 $0.05 $0.03 2.03
</TABLE>
<PAGE> 10
WHERE WE ARE GOING
We believe secondary markets for subprime mortgage loans will continue
to mature, and we plan to be a part of making efficient access available. If we
are correct, subprime operations should provide us with strong growth and high
returns for the foreseeable future.
Beyond just residential mortgage loans, our business strategy can be
applied to other financial products. Any product traditionally originated
through costly retail branch infrastructures that can be sold into a relatively
well-developed secondary market has potential. As opportunities arise, we will
pursue further diversification of our basic strategies across new products and
markets.
Your management team and Board of Directors are confident in the future
of RBMG as evidenced by our cash dividend increase of 233% from our first
dividend paid in 1996 to our latest cash dividend paid in 1998.
Our performance aspirations for the next five years are to:
-- Increase annual diluted earnings per share by 12%-15%;
-- Achieve return on average equity above 18%; and
-- Achieve a return on average assets above 2%.
We are confident that if we continue to meet our performance
aspirations our shareholders will be rewarded as our market capitalization
increases.
I look forward to reporting on our progress and growth in the years
ahead. We appreciate your confidence, interest and support.
Edward J. Sebastian
Chairman and Chief Executive Officer
March 10, 1999
<PAGE> 11
Page five:
MARKET PRICE
<TABLE>
<CAPTION>
MARKET
DATE PRICE*
- -------- -------
<S> <C>
12/31/98 $ 16.56
12/31/97 16.31
12/31/96 13.57
12/31/95 12.68
12/31/94 7.71
* Closing price of stock based upon NASDAQ.
</TABLE>
MARKET CAPITALIZATION
<TABLE>
<CAPTION>
MARKET
DATE CAP
- -------- ---------
<C> <C>
12/31/98 $ 380,893
12/31/97 380,892
12/31/96 274,783
12/31/95 207,286
12/31/94 122,054
</TABLE>
"Overall, Resource Bancshares continues to produce record results. Production
levels remain high and the servicing portfolio continues to grow despite the
current prepay environment and continued servicing sales."
RICHARD X. BOVE
Raymond James & Associates
December 22, 1998
Resource Bancshares Mortgage Group, Inc.
DIVISIONAL ANALYSIS OF PRE-TAX FUNDS GENERATED FROM OPERATIONS
The analyses which follow are included solely to assist investors in
obtaining a better understanding of the material elements of the Company's funds
generated by operations at a divisional level. It is intended as a supplement,
and not an alternative to, and should be read in conjunction with the
Consolidated Statement of Cash Flows which provides information concerning
elements of the Company's cash flows.
<PAGE> 12
Summary
On a combined divisional basis, for 1998 and 1997, the Company
generated approximately $51.5 million and $36.0 million, respectively, of
operating funds. These funds are summarized by division in the table below and
explained in more detail in the sections which follow.
<TABLE>
<CAPTION>
(dollars in thousands) For the Year Ended December 31,
-------------------------------
1998 1997
------- --------
<S> <C> <C>
Agency-eligible production $27,256 $30,425
Agency-eligible servicing 28,282 19,928
Subprime production (7,052) (14,374)
Commercial mortgage 1,582 N/A
Leasing 1,407 N/A
======= =======
$51,475 $35,979
======= =======
</TABLE>
Except for the subprime division, each of the Company's divisions produced
positive operating funds. The combined positive operating funds were invested to
reduce indebtedness, to pay dividends, to repurchase stock and to purchase fixed
assets.
Agency-eligible production
Generally, the Company purchases agency-eligible mortgage loans which are
resold with the rights to service the loans being retained by the Company. The
Company then separately sells a large percentage of the servicing rights
<PAGE> 13
Page six:
so produced. At the time loans are sold, current accounting principles require
capitalization of the estimated fair value of the retained mortgage servicing
rights. Accordingly, amounts reported as gains on sale of agency-eligible
mortgage loans may not represent positive funds flow to the extent that the
associated servicing rights are not sold for cash but are instead retained and
capitalized. In this context, the table below reconciles the major elements of
pre-tax operating funds flow allocable to agency-eligible production activities.
<TABLE>
<CAPTION>
(dollars in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
--------- --------
<S> <C> <C>
Income before income taxes $ 51,593 $ 31,130
Deduct:
Net gain on sale of mortgage loans, as reported (134,472) (89,358)
Add back:
Cash gains on sale of mortgage loans 40,220 39,139
Cash gains on sale of mortgage servicing rights 66,374 46,554
Depreciation 3,541 2,960
========= ========
$ 27,256 $ 30,425
========= ========
</TABLE>
During 1998 and 1997, reported gains on sale of mortgage loans exceeded
actual cash gains from sales of mortgage loans and servicing rights by
approximately $27.9 million and $3.7 million, respectively. This excess is
primarily attributable to the decision to increase the size of the mortgage
servicing portfolio through strategic retention of certain of the servicing
rights produced during the periods. Specifically, during 1998 the Company
retained servicing rights related to approximately $4.1 billion or 28% of the
mortgage loans produced and sold during the period ($15.0 billion of loans were
produced and sold while servicing rights were sold on only $10.9 billion of such
loans). As a consequence of these strategic investment decisions, the underlying
unpaid principle balance of loans being serviced increased approximately $2.8
billion (from $7.1 billion to $9.9 billion) during the period. After
consideration of these investments and adjustment for non-cash depreciation,
agency eligible mortgage production activities generated approximately $27.3
million and $30.4 million of pre-tax operating funds flow during 1998 and 1997,
respectively.
Agency-eligible servicing
The Company's current strategy is to position itself as a national supplier
of agency-eligible servicing rights to the still consolidating mortgage
servicing industry. Accordingly, the Company generally sells a significant
percentage of its produced mortgage servicing rights to other approved servicers
under forward committed bulk purchase agreements. Even so, the Company maintains
a relatively small mortgage servicing portfolio. As discussed above, mortgage
servicing rights produced or
<PAGE> 14
purchased are initially capitalized and subsequently must be amortized to
expense. Much like depreciation, such amortization charges are "non-cash." In
this context, the table below reconciles the major elements of pre-tax operating
funds flow allocable to agency-eligible mortgage servicing activities.
<TABLE>
<CAPTION>
(dollars in thousands) FOR THE YEAR ENDED DECEMBER 31
------------------------------
1998 1997
------- -------
<S> <C> <C>
Income before income taxes $ 1,829 $ 9,310
Deduct:
Net gain on sale of mortgage servicing rights, as reported (1,753) (7,955)
Add back:
Amortization and provision for impairment of mortgage
servicing rights 27,897 18,315
Depreciation 309 258
======= =======
$28,282 $19,928
======= =======
</TABLE>
During 1998 and 1997, the Company reported gains on servicing rights of
approximately $1.8 million and $8.0 million, respectively. This reported amount
is deducted above because the cash consequences of servicing sales are
considered as a component of agency-eligible mortgage production activities.
After consideration of adjustments for non-cash amortization and depreciation
<PAGE> 15
Page seven:
charges, agency-eligible mortgage servicing activities generated approximately
$28.3 million and $19.9 million of pre-tax operating funds flow during 1998 and
1997, respectively.
Subprime production
Generally, the Company purchases subprime loans through a wholesale broker
network. The Company then separately sells or securitizes the loans so produced.
At the time loans are securitized, existing accounting principles require
capitalization of the estimated fair value of future cash flows to be received
in connection with retention by the Company of a residual interest in the
securitized loans. Accordingly, amounts reported as gains on sale of subprime
mortgage loans may not represent cash gains to the extent that associated
residual interests are retained and capitalized. In this context, the table
below reconciles the major elements of pre-tax operating funds flow allocable to
subprime mortgage production activities.
<TABLE>
<CAPTION>
(dollars in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
--------- --------
<S> <C> <C>
Income before income taxes $ 18,381 $ 4,794
Deduct:
Net gain on sale of subprime loans, as reported (27,980) (14,012)
Add back:
Accretion income on residuals (3,425) (299)
Cash gains on sale of whole subprime loans 11,625 1,814
Cash loss on securitization of subprime loans (6,509) (7,015)
Depreciation and amortization of goodwill and
intangibles 856 344
--------- --------
$ (7,052) $(14,374)
========= ========
</TABLE>
During 1998 and 1997, reported gains on sale exceeded actual cash gains
from loan sales by approximately $ 16.4 million and $12.2 million, respectively.
This excess is attributable to the decision to securitize approximately $325
million and $172 million of loans during 1998 and 1997, respectively, which
resulted in non-cash capitalization of approximately a $22.2 million and $19.2
million residual interest, respectively. Overall, the subprime division operated
on a negative operating funds flow basis in 1998 and 1997.
Commercial mortgage
Generally, the Company originates commercial mortgage loans for conduits,
insurance companies and other investors. The Company either table funds the
loans or originates the loans pursuant to pre-existing investor commitments to
purchase the loans so originated. Similar to the agency-eligible operation, the
Company generally retains the right to service the loans under various servicing
agreements. At the time loans are sold,
<PAGE> 16
current accounting principles require capitalization of the estimated fair value
of mortgage servicing rights produced. Accordingly, amounts reported as gains on
sale of commercial mortgage loans may not represent cash gains to the extent
that the associated servicing rights are not sold for cash but are instead
retained and capitalized. Mortgage servicing rights initially capitalized must
be amortized subsequently to expense. Much like depreciation, such amortization
charges are "non-cash". In this context, the table below reconciles the major
elements of pre-tax operating funds flow allocable to commercial mortgage
production and servicing activities.
<TABLE>
<CAPTION>
(dollars in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
-------- ------
<S> <C> <C>
Income before income taxes $ 2,104 N/A
Deduct:
Net gain on sale of commercial loans, as reported (9,011) N/A
Add back:
Cash gains on sale of whole commercial loans 6,831 N/A
Amortization and provision for impairment of commercial
mortgage servicing rights 1,335 N/A
Depreciation and amortization of goodwill and intangibles 323
------- ------
$ 1,582 N/A
======= ======
</TABLE>
<PAGE> 17
Page eight:
During 1998, reported gains on sale of approximately $9.0 million exceeded
actual cash gains from loan sales ($6.8 million) by $2.2 million. This excess is
attributable to the retention of commercial mortgage servicing rights as a long
term investment. After consideration of this and adjustment for non-cash
depreciation and amortization charges, commercial mortgage production activities
generated positive funds flow of approximately $1.6 million during 1998.
Leasing
Generally, the Company originates small-ticket equipment leases for
commercial customers which are retained as investments by the Company.
Investments in leases originated and retained are financed through a borrowing
facility at draw rates that approximate the net cash investment in the lease.
Accordingly, financing activities related to growth in the balance of leases
held for investment does not significantly impact operating cash flow. In this
context, the table below reconciles the major elements of pre-tax operating
funds flow allocable to leasing activities.
<TABLE>
<CAPTION>
(dollars in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
------- -------
<S> <C> <C>
Income before income taxes $ 1,097 N/A
Add back:
Depreciation and amortization of goodwill and intangibles 310 N/A
------- -------
$ 1,407 N/A
======= =======
</TABLE>
After adjustment for non-cash depreciation and amortization charges,
leasing activities generated approximately $1.4 million of positive operating
funds flow during 1998.
Forbes Magazine List of The 200 Best Small Companies
In the November 2, 1998 edition of Forbes magazine, Resource Bancshares Mortgage
Group, Inc. was listed as the 135th best small company. This classification was
based upon financial statistics such as return on equity, debt to equity, sales
growth, earnings per share growth, sales, net income, market value, earnings
per share and price to earnings ratios.
1998 1000 Nasdaq Honor Roll
The Company was named to the Nasdaq 1000 Honor Roll in 1998 in the September
1998 edition of Equities Magazine. The Company made this list based upon
improved ranking in four measures: assets, sales, net income and market value.
<PAGE> 18
SELECTED FINANCIAL HIGHLIGHTS
($ IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement
Net interest income $ 21,778 $ 17,644 $ 16,902 $ 8,635 $ 7,686
Net gain on sale of mortgage loans 171,463 103,370 79,178 33,822 1,160
Gain on sale of mortgage servicing rights 1,753 7,955 1,105 7,346 33,375
Servicing fees 43,156 30,869 28,763 24,205 14,196
Total revenues 243,726(1) 161,018 126,617 76,697 56,622
Salary and employee benefits 82,406 62,235 55,578(3) 31,199 15,986
Total expenses (including taxes) 195,055(1) 139,220(2) 106,994(3) 62,478 38,579
Net income 48,671(1) 21,798(2) 19,623(3) 14,219 18,043
Per Common Share Data (4)
Net income per common share - basic $ 2.10(1) $ 1.07(2) $ 1.02(3) $ 0.88 $ 1.11
Net income per common share - diluted 2.07(1) 1.05(2) 1.00(3) 0.86 1.10
Market price per common share at year-end 16.56 16.31 13.57 12.68 7.71
Book value per common share at year-end 10.96 9.21 7.77 5.71 4.95
Cash dividends paid per common share 0.29 0.13 0.06 - -
Balance Sheet
Mortgage loans held for sale
and mortgage-backed securities $ 1,441,458 $ 1,179,188 $ 802,335 $1,035,229 $ 119,044
Lease receivables 102,029 51,494 - - -
Mortgage servicing rights, net 191,022 127,326 109,815 99,912 65,840
Residual interests in subprime securitizations 45,782 19,684 - - -
Total assets 1,969,635 1,556,929 1,028,394 1,231,097 237,631
Total long-term borrowings 6,364 6,461 - 65,530 22,000
Total liabilities 1,717,477 1,341,790 871,093 1,137,693 157,017
Stockholders' equity 252,158 215,139 157,301 93,404 80,614
Statistics
Total mortgage loan and lease production $16,540,016 $10,777,294 $9,995,725 $7,135,774 $2,875,265
Total agency-eligible servicing
portfolio (including subservicing) 13,595,736 10,195,354 8,658,742 7,821,736 5,876,508
Commercial mortgage loan servicing
portfolio 3,255,458 2,760,238 - - -
Managed lease servicing portfolio 136,521(5) 123,509(5) - - -
Return on average assets 2.73%(1) 1.78%(2) 1.91%(3) 1.95% 5.25%
Return on average equity 21.01%(1) 12.82%(2) 14.43%(3) 17.00% 25.98%
</TABLE>
(1) Includes a non-recurring gain totaling $1,490 pre-tax or $917 after-tax.
Exclusive thereof, total revenues, 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 $242,236, $194,482, $47,754,
$2.07, $2.03, 2.68% and 20.61%, respectively.
(2) Includes non-recurring and special charges totaling $10,147 pre-tax or
$6,241 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 $132,979, $28,039, $1.37,
$1.35, 2.29% and 16.34%, respectively.
(3) Includes a non-recurring charge totaling $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.
(4) Source of market price is Nasdaq.
(5) Managed lease servicing portfolio consists of $98,956 and $49,104 of leases
owned by the Company and $37,565 and $74,405 of leases serviced for investors as
of December 31, 1998 and December 31, 1997, respectively.
<PAGE> 19
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
herein or in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998: (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 leases, (x) changes in the value of residual interests in
subprime securitizations, (xi) prepayment risks, (xii) Year 2000 risks, (xiii)
possible changes in accounting estimates and (xiv) availability of funding
sources and other risks and uncertainties, discussed elsewhere herein, in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998; 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. Following the offering, 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.
The Company is now a diversified financial services company engaged
primarily in the business of mortgage banking, through the purchase (via a
nationwide network of correspondents and brokers), sale and servicing of
agency-eligible and subprime residential, single-family, first-mortgage loans
and the purchase and sale of servicing rights associated with agency-eligible
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.
<PAGE> 20
LOAN AND LEASE PRODUCTION
The Company purchases agency-eligible residential mortgage loans from
its correspondents and through its wholesale division and, until the sale of its
retail production platform in May 1998, originated mortgage loans through its
retail division. The Company also purchases and originates subprime mortgage
loans and commercial mortgage loans and leases small-ticket equipment items.
A summary of production by source for the periods indicated is set forth
below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Agency-Eligible Loan Production:
Correspondent $11,666,560 $ 7,893,583 $7,915,323
Wholesale 3,023,961 1,868,726 1,411,643
Retail 264,059 675,411 668,759
----------- ----------- ----------
Total Agency-Eligible Loan Production 14,954,580 10,437,720 9,995,725
Subprime Loan Production 607,664 339,574
Commercial Mortgage (for Investors
and Conduits) Loan Production 899,674
Lease Production 78,098
----------- ----------- ----------
Total Mortgage Loan and Lease Production $16,540,016 $10,777,294 $9,995,725
=========== =========== ==========
</TABLE>
Initially, the Company was focused exclusively on purchasing
agency-eligible mortgage loans through its correspondents. In order to diversify
its sources of loan volume, the Company started a wholesale operation in 1994, a
retail operation in 1995 and a subprime division in 1997. Management anticipates
that its higher margin wholesale and subprime production will continue to
account for an increasing percentage of total mortgage loan production as those
divisions are expanded more rapidly than correspondent operations. Historically,
correspondent operations have accounted for a diminishing percentage of the
Company's total production (71% for 1998, 73% for 1997 and 79% for 1996).
Wholesale and subprime production accounted for 18% and 4%, respectively, of the
Company's 1998 total production. In order to further diversify its sources of
production and revenue, the Company acquired RBC in December 1997. Through RBC,
the Company originates small-ticket commercial equipment leases and commercial
mortgage loans. These two new sources of production accounted for 6% of the
Company's total 1998 production.
A summary of key information relevant to industry loan production
activity is set forth below:
<PAGE> 21
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
-------------- ------------ ------------
<S> <C> <C> <C>
U. S. 1-4 Family Mortgage Originations Statistics (1):
U. S. 1-4 Family Mortgage Originations $1,470,000,000 $857,000,000 $785,000,000
Adjustable Rate Mortgage Market Share 14% 22% 26%
Estimated Fixed Rate Mortgage Originations 1,264,000,000 668,000,000 581,000,000
Company Information:
Residential Loan Production $ 15,562,244 $ 10,777,294 $ 9,995,725
Estimated Company Market Share 1.06% 1.26% 1.27%
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's total residential mortgage production increased by 44%
between 1997 and 1998. The increase is a direct result of the nationwide 72%
increase in 1-4 family mortgage originations from 1997 to 1998. The decrease in
the Company's estimated market share of U.S. mortgage originations from 1.26%
for 1997 to 1.06% for 1998 is primarily due to the Company's focus on improved
agency-eligible profitability margins and concentration on expansion of its
subprime, wholesale, commercial mortgage and leasing production. In spite of the
loss of market share, the Company remained among the nation's top 20 mortgage
originators for the fourth consecutive year.
The Company's 8% production increase from 1996 to 1997 corresponds with
a 9% nationwide production increase for the same period. The Company's estimated
market share of the U.S. 1-4 family mortgage originations remained essentially
constant for 1997.
Correspondent Loan Production
The Company purchases closed mortgage loans through its network of
approved correspondent lenders. Correspondents are primarily mortgage lenders,
larger mortgage brokers and smaller savings and loan associations and commercial
banks that have met the Company's approval requirements.
The Company continues to emphasize correspondent loan production as its
basic business focus because of the lower fixed expenses and capital investment
required of the Company. 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:
<PAGE> 22
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Correspondent Loan Production $11,666,560 $7,893,583 $7,915,323
Estimated Correspondent Market Share (1) 0.79% 0.92% 1.01%
Approved Correspondents 852 919 871
Correspondent Division Expenses $ 68,975 $ 47,618 $ 44,430
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's correspondent loan production increased by 48% to $11.7
billion for 1998 from $7.9 billion for 1997. This increase is primarily a result
of the 72% increase in nationwide mortgage originations for 1998. The Company's
production remained relatively constant in 1997 as compared to 1996. The
Company's correspondent market share decreased to 0.79% for 1998 as compared to
0.92% for 1997 and 1.01% for 1996. The decrease in correspondent market share
since 1996 is primarily due to the Company's efforts to maintain its core
competency as a correspondent loan originator while devoting its resources to
expanding or diversifying into the higher margin wholesale, subprime, commercial
mortgage and leasing production channels. The number of approved correspondent
lenders decreased 7% in 1998 and increased 6% in 1997 as the Company focused on
maintenance of those correspondent relationships most compatible with the
Company's overall business strategies.
Wholesale Loan Production
The wholesale division receives loan applications through brokers,
underwrites the loans, funds the loans at closing and prepares all closing
documentation. The wholesale branches handle all shipping and follow-up
procedures on loans. Typically mortgage brokers are responsible for taking
applications and accumulating the information precedent to the Company's
processing of the loans. Although the establishment of wholesale branch offices
involves the incurrence of fixed expenses associated with maintaining those
offices, wholesale operations also provide for higher profit margins than
correspondent loan production. Additionally, each branch office can serve a
relatively sizable geographic area by establishing relationships with large
numbers of independent mortgage loan brokers who bear much of the cost of
identifying and interacting directly with loan applicants.
A summary of key information relevant to the Company's wholesale
production activities is set forth below:
<PAGE> 23
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Wholesale Loan Production $3,023,961 $1,868,726 $1,411,643
Estimated Wholesale Market Share (1) 0.21% 0.22% 0.18%
Wholesale Division Direct Operating Expenses $ 16,037 $ 11,540 $ 8,540
Approved Brokers 3,401 3,046 2,322
Number of Branches 15 15 13
Number of Employees 161 146 126
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The 62% ($1.1 billion) increase in wholesale loan production, from $1.9
billion in 1997 to $3.0 billion in 1998, resulted primarily from the Company's
expansion of its wholesale production channel and the 72% nationwide increase in
loan production. The Company's wholesale market share remained relatively
constant for 1998. 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 decreased from 62 basis
points in 1997 to 53 basis points in 1998 as higher volumes better leveraged the
direct operating expenses.
The 32% ($0.5 billion) 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 a 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.
Strategically, management anticipates focusing in the near term on
expanding its wholesale presence nationwide due to the relatively higher margins
attributable to this channel. Accordingly, management anticipates that the
wholesale division will continue to account for an increasing percentage of the
Company's total loan production.
Retail Loan Production
Effective May 1, 1998, the Company sold its retail production franchise
to CFS Bank. Historically, the Company has focused on accumulation of loan
production through third-party correspondent and wholesale broker channels
because of the relatively lower fixed expenses and capital investments required,
among other reasons. Management believes the sale of the retail operation has
allowed the Company to refocus on its core competency as a correspondent and
wholesale mortgage lender. The following is a schedule of the gain recognized in
1998 on the sale of the retail production franchise:
<PAGE> 24
<TABLE>
-----------------------------------------------------------------------
<S> <C>
Cash proceeds $ 5,503
Investment banking, legal and other advisory fees (533)
Severance and other transaction costs (1,980)
---------
Net proceeds 2,990
Basis in assets sold (1,500)
---------
Net pre-tax gain on sale of retail production franchise $ 1,490
--------------------------------------------------------------=========
</TABLE>
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,
----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Retail Loan Production $ 264,059 $ 675,411 $ 668,759
Retail Division Direct Operating Expenses $ 6,002 $ 16,626 $ 15,963
</TABLE>
The primary cause of the variations between 1998 and 1997 observed above
relates to the sale of the retail production platform effective May 1, 1998.
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.
Subprime Loan Production
In 1997, the Company began its initial expansion into subprime lending
activities. In connection therewith, the Company acquired Meritage Mortgage
Corporation (Meritage), a wholesale producer of subprime mortgage loans, in
April 1997.
Management anticipates continuing near term increases in subprime
production volumes as subprime operations introduced and made available through
the Company's existing 15-branch agency-eligible wholesale network reach
full-year production levels. In the future, the Company also plans to offer
select subprime loan products through its 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,
----------------------------------------------
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
U.S. Subprime Mortgage Originations (1) $160,000,000 $125,000,000 N/A
Subprime Loan Production $ 607,664 $ 339,574 N/A
Estimated Subprime Market Share (1) 0.38% 0.27% N/A
Subprime Division Direct Operating Expenses $ 19,896 $ 10,486 N/A
Number of Brokers 1,830 661 N/A
Number of Employees 271 139 N/A
</TABLE>
(1) Source: Amounts projected based upon Inside B&C Lending, issue dated
November 23, 1998.
<PAGE> 25
Subprime loan production increased by 79% to $607.7 million for 1998 as
compared to $339.6 million during 1997. This increase is partially attributable
to a 28% increase in nationwide subprime originations in 1998, but is primarily
due to expansion of the Company's subprime operations during 1998.
Commercial Mortgage Production
In connection with its acquisition of RBC on December 31, 1997, the
Company acquired RBC's subsidiary, Laureate Capital, formerly known as Laureate
Realty Services, Inc. (Laureate). Laureate originates commercial mortgage loans
for various insurance companies and other investors. Commercial mortgage loans
are generally originated in the name of the investor and, in most instances,
Laureate retains the right to service the loans under a servicing agreement.
A summary of key information relevant to the Company's commercial
mortgage production activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Commercial Mortgage Production $899,674 N/A N/A
Commercial Mortgage Division
Operating Expenses $ 11,231 N/A N/A
Number of Branches 12 N/A N/A
Number of Employees 81 N/A N/A
</TABLE>
Lease Production
Through RBC's leasing division, Republic Leasing, acquired on December
31, 1997, the Company originates and services small-ticket equipment leases.
Substantially all of Republic Leasing's lease receivables are acquired from
independent brokers throughout the continental United States and referrals from
independent banks.
A summary of key information relevant to the Company's lease production
activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Lease Production $78,098 N/A N/A
Lease Division Operating Expenses $ 5,307 N/A N/A
Number of Brokers 218 N/A N/A
Number of Employees 66 N/A N/A
</TABLE>
<PAGE> 26
SERVICING
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 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.
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 reduce the cash operating costs of its loan
production platform and thus the size of its loan servicing operation.
A summary of key information relevant to the Company's loan servicing
activities is set forth below:
<PAGE> 27
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Underlying Unpaid Principal Balances:
Beginning Balance * $ 7,125,222 $ 6,670,267 $ 5,562,930
Agency-Eligible Loan Production (net of
servicing-released production) 14,917,193 10,557,994 9,912,365
Net Change in Work-in-Process 604,131 26,007 535,847
Bulk Acquisitions 122,467 774,097 1,354,592
Sales of Servicing (10,922,288) (9,699,058) (9,521,451)
Paid-In-Full Loans (1,639,776) (709,052) (504,312)
Amortization, Curtailments and Other, net (341,849) (495,033) (669,704)
------------ ------------ -----------
Ending Balance* 9,865,100 7,125,222 6,670,267
Subservicing Ending Balance 3,730,636 3,070,132 1,988,475
------------ ------------ -----------
Total Underlying Unpaid Principal Balances $ 13,595,736 $ 10,195,354 $ 8,658,742
============ ============ ===========
</TABLE>
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and therefore exclude the subservicing portfolio.
Of the $9.9 billion, $7.1 billion and $6.7 billion unpaid principal
balance at December 31, 1998, 1997 and 1996, approximately $5.5 billion, $4.2
billion and $4.9 billion, respectively, are
<PAGE> 28
classified as available-for-sale, while $4.4 billion, $2.9 billion and $1.8
billion, respectively, are classified as held-for-sale.
A summary of agency-eligible servicing statistics follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Average Underlying Unpaid Principal Balances
(including subservicing) $11,864,513 $9,468,730 $8,814,560
Weighted Average Note Rate* 7.20% 7.69% 7.92%
Weighted Average Servicing Fee* 0.42% 0.40% 0.39%
Delinquency (30+ days) Including
Bankruptcies and Foreclosures* 2.01% 3.66% 3.75%
Number of Servicing Division Employees 151 143 128
</TABLE>
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and therefore exclude the subservicing portfolio.
The $2.4 billion, or 25%, increase in the average underlying unpaid
principal balance of agency-eligible mortgage loans being serviced for 1998 as
compared to 1997 is primarily related to the Company's increased loan production
volumes during the latter part of 1997 and during 1998 compared to the same
periods of the prior years. Since the Company generally sells servicing rights
related to the agency-eligible loans it produces within 90 to 180 days of
purchase or origination, increased production volumes generally result in a
higher volume of mortgage servicing rights held in inventory pending sale. In
addition during 1998, the Company decided to retain a slightly larger percentage
of the servicing rights associated with its production.
Commercial Mortgage Servicing
Laureate originates commercial mortgage loans for investors and in most
cases, Laureate retains the right to service the loans. A summary of key
information relevant to the Company's commercial mortgage servicing activities
is set forth below:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
($ IN THOUSANDS) 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Commercial Mortgage Loan Servicing Portfolio $3,255,458 $2,760,238 N/A
Weighted Average Note Rate 8.11% 8.41% N/A
Delinquencies (30+ Days) 0.42% 0.60% N/A
</TABLE>
Lease Servicing
The Company's leasing division services leases that are owned by the
Company and also services leases for investors. A summary of key information
relevant to the Company's lease servicing activity is set forth below:
<PAGE> 29
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
($ IN THOUSANDS) 1998 1997 1996
-------- -------- ----
<S> <C> <C> <C>
Owned Lease Servicing Portfolio $ 98,956 $ 49,104 N/A
Serviced For Investors Servicing Portfolio 37,565 74,405 N/A
-------- -------- ---
Total Managed Lease Servicing Portfolio $136,521 $123,509 N/A
======== ======== ===
Weighted Average Net Yield For Managed
Lease Servicing Portfolio 10.81% 10.77% N/A
Delinquencies (30+ Days) Managed Lease
Servicing Portfolio 2.00% 3.35% N/A
</TABLE>
Consolidated Coverage Ratios
A summary of the Company's consolidated ratios of servicing fees and
interest income for owned leases to cash operating expenses, net of
amortization and depreciation, follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Total Company Servicing Fees $ 43,156 $ 30,869 $ 28,763
Net Interest Income from Owned Leases 4,637 N/A N/A
--------- --------- --------
Total Servicing Fees and Interest from Owned
Leases $ 47,793 $ 30,869 $ 28,763
Total Company Operating Expenses $ 167,123 $ 125,931 $ 96,069
Total Company Amortization and
Depreciation (34,570) (21,859) (17,566)
--------- --------- --------
Total Company Operating Expenses, Net of
Amortization and Depreciation $ 132,553 $ 104,072 $ 78,503
--------- --------- --------
Coverage Ratio 36% 30% 37%
========= ========= ========
</TABLE>
The Company's coverage ratios for 1998, 1997 and 1996 at 36%, 30% and 37%,
respectively, were lower than the Company's target level of between 50% and 80%.
Effective May 1, 1998, the Company sold its retail production franchise, which
accounted for $6.0 million of the Company's cash operating expenses for 1998.
Without retail division operating expenses for 1998, the Company's coverage
ratio would have been 38%. Although the servicing portfolio and servicing fees
have increased, such increases have not kept pace with the pace of growth in
cash operating expenses. Strategically, and in the opinion of the Company's
management, market prices for servicing rights have been attractive throughout
this period. Accordingly, management has consciously determined on a
risk-versus-return basis to allow this ratio to move below its stated goals.
Opportunistically and as market conditions permit, management would expect to
bring this ratio back in line with the stated objective.
<PAGE> 30
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED
DECEMBER 31, 1997
SUMMARY BY OPERATING DIVISION
Following is a summary of the allocated revenues and expenses for each
of the Company's operating divisions (with non-recurring and special charges
separately categorized) for the years ended December 31, 1998 and 1997,
respectively:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
NON-
MORTGAGE PRODUCTION RECURRING
------------------- AGENCY- AND
AGENCY- ELIGIBLE COMMERCIAL SPECIAL CONSOLI-
FOR THE YEAR ENDED DECEMBER 31, 1998* ELIGIBLE SUBPRIME SERVICING MORTGAGE LEASING OTHER CHARGES DATED
- ----------------------------------------- -------- -------- --------- --------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 6,680 $ 9,565 $ 536 $ 4,637 $ 360 $ 21,778
Net gain on sale of mortgage loans 134,472 27,980 9,011 171,463
Gain on sale of mortgage servicing rights $ 1,753 1,753
Servicing fees 37,856 3,777 1,014 509 43,156
Other income 1,455 732 455 11 753 680 $ 1,490 5,576
- ----------------------------------------- -------- -------- -------- --------- -------- -------- --------- --------
Total revenues 142,607 38,277 40,064 13,335 6,404 1,549 1,490 243,726
- ----------------------------------------- -------- -------- -------- --------- -------- -------- --------- --------
Salary and employee benefits 55,221 13,485 3,449 7,322 2,347 582 82,406
Occupancy expense 7,451 1,921 443 840 376 188 11,219
Amortization and provision for impairment
of mortgage servicing rights 27,897 1,335 29,232
General and administrative expenses 28,342 4,490 6,446 1,734 2,584 670 44,266
- ----------------------------------------- -------- -------- -------- --------- -------- -------- --------- --------
Total expenses 91,014 19,896 38,235 11,231 5,307 1,440 167,123
- ----------------------------------------- -------- -------- -------- --------- -------- -------- --------- --------
Income before income taxes 51,593 18,381 1,829 2,104 1,097 109 1,490 76,603
Income tax expense (18,649) (6,656) (662) (952) (435) (5) (573) (27,932)
- ----------------------------------------- -------- -------- -------- --------- -------- -------- --------- --------
Net income (loss) $ 32,944 $ 11,725 $ 1,167 $ 1,152 $ 662 $ 104 $ 917 $ 48,671
======== ======== ======== ========= ======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
($ IN THOUSANDS)
NON-
MORTGAGE PRODUCTION RECURRING
------------------- AGENCY- AND
AGENCY- ELIGIBLE COMMERCIAL SPECIAL CONSOLI-
FOR THE YEAR ENDED DECEMBER 31, 1997* ELIGIBLE SUBPRIME SERVICING MORTGAGE LEASING OTHER CHARGES DATED
- ----------------------------------------- -------- -------- --------- --------- -------- -------- ---------- --------
<S> <C> <C> <C> <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
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 and provision for impairment
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
Income tax expense (11,833) (1,825) (3,537) 3,906 (13,289)
- ----------------------------------------- -------- -------- -------- --------- -------- -------- --------- --------
Net income (loss) $ 19,297 $ 2,969 $ 5,773 $ (6,241) $ 21,798
======== ======== ======== ========= ======== ======== ========= ========
</TABLE>
*Revenues and expenses have been allocated on a direct basis to the extent
possible. Corporate overhead expenses have been allocated to agency-eligible
mortgage production. Management believes that these and all other revenues and
expenses have been allocated to the respective divisions on a reasonable basis.
<PAGE> 31
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses allocated to the
Company's agency-eligible mortgage production operations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1998 1997
----------- -----------
<S> <C> <C>
Net interest income $ 6,680 $ 16,376
Net gain on sale of mortgage loans 134,472 89,358
Other income 1,455 1,180
----------- -----------
Total production revenue 142,607 106,914
----------- -----------
Salary and employee benefits 55,221 51,456
Occupancy expense 7,451 6,429
General and administrative expenses 28,342 17,899
----------- -----------
Total production expenses 91,014 75,784
----------- -----------
Net pre-tax production margin $ 51,593 $ 31,130
----------- -----------
Production $14,954,580 $10,437,720
Pool delivery 14,713,137 10,212,966
Total production revenue to pool delivery 97 bps 105 bps
Total production expenses to production 61 bps 73 bps
=========== ===========
Net pre-tax production margin 36 bps 32 bps
=========== ===========
</TABLE>
Summary
Overall, the Company's net agency-eligible pre-tax production margin
improved 4 basis points, or 13%, to 36 basis points while in absolute dollars it
increased $20.5 million, or 66%. The production revenue to pool delivery ratio
declined eight basis points, or 8%, for 1998 as compared to 1997. Generally, net
gain on sale of mortgage loans (91 basis points for 1998 versus 88 basis points
for 1997) improved due to better overall execution into the secondary markets.
However, net interest income declined and offset this improvement due to the
relatively flatter yield curve environment. The production expenses to
production ratio decreased 12 basis points, or 16%, for 1998 as compared to
1997. Generally, this relates to better leverage of fixed operating expenses in
the higher volume production environment for 1998 versus 1997.
Net Interest Income
The following table analyzes net interest income for the years
ended December 31, 1998 and 1997, allocated to the Company's agency-eligible
mortgage production activities in terms of rate and volume variances of the
interest-rate spread (the difference between interest rates earned on loans and
mortgage-backed securities and interest rates paid on interest-bearing sources
of funds).
<PAGE> 32
<TABLE>
<CAPTION>
($ IN THOUSANDS)
Variance
Average Volume Average Rate Interest Attributable to
- ---------------------------------------- ---------------------- ----------------------
1998 1997 1998 1997 1998 1997 Variance Rate Volume
- ---------------------------------------- ------------------------------------------------------------
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
INTEREST INCOME
Mortgages Held-for-Sale and
$1,172,994 $ 917,341 6.71% 7.62% Mortgage-Backed Securities $ 78,718 $69,889 $ 8,829 $(10,648) $19,477
- ---------------------------------------- ------------------------------------------------------------
INTEREST EXPENSE
$ 457,967 $ 430,727 4.50% 4.77% Warehouse Line * $ 20,630 $20,559 $ 71 $ (1,229) $ 1,300
689,711 461,467 5.79% 5.69% Gestation Line 39,958 26,245 13,713 732 12,981
97,422 48,199 6.58% 6.56% Servicing Secured Line 6,413 3,160 3,253 26 3,227
33,331 22,953 5.75% 6.10% Servicing Receivables Line 1,918 1,401 517 (116) 633
8,726 4,804 8.50% 8.11% Other Borrowings 742 389 353 35 318
Facility Fees & Other Charges 2,377 1,759 618 618
- ---------------------------------------- ------------------------------------------------------------
$1,287,157 $ 968,150 5.60% 5.53% Total Interest Expense $72,038 $53,513 $18,525 $ (552) $19,077
- ---------------------------------------- ------------------------------------------------------------
1.11% 2.09% Net Interest Income $ 6,680 $16,376 $(9,696) $(10,096) $ 400
================= ============================================================
</TABLE>
* The interest-rate yield on the warehouse line is net of the benefit of escrow
deposits.
Net interest income from agency-eligible products decreased 59% to $6.7
million for 1998 compared to $16.4 million for 1997. The 98 basis point decrease
in the interest-rate spread was primarily the result of the narrower spreads
between long and short-term rates in 1998 compared to 1997. The Company's
mortgages and mortgage-backed securities are generally sold and replaced within
30 to 35 days. The Company generally borrows at rates based upon short-term
indices, while its asset yields are primarily based upon long-term mortgage
rates.
Net Gain on Sale of Agency-Eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Gross proceeds on sales of mortgage loans $14,921,242 $10,427,031
Initial unadjusted acquisition cost of mortgage loans sold, net
of hedge results 14,917,751 10,422,340
----------- -----------
Unadjusted gain on sale of mortgage loans 3,491 4,691
Loan origination and correspondent program administrative
fees 36,729 34,448
----------- -----------
Unadjusted aggregate margin 40,220 39,139
Acquisition basis allocated to mortgage servicing rights
(SFAS No. 125) 93,570 49,170
Net change in deferred administrative fees 682 1,049
----------- -----------
Net gain on sale of agency-eligible mortgage loans $ 134,472 $ 89,358
=========== ===========
</TABLE>
The Company sold agency-eligible loans during 1998 with an aggregate
unpaid principal balance of $14.9 billion compared to sales of $10.4 billion for
1997. The amount of proceeds received on sales of mortgage loans exceeded the
initial unadjusted acquisition cost of the loans sold by $3.5 million (2 basis
points) for 1998 as compared to $4.7 million (4 basis points) for 1997. The
Company received loan origination and correspondent program administrative fees
of $36.7 million (25 basis points) on these loans during 1998 and $34.4 million
(33 basis points) during 1997. The Company allocated $93.6 million (63 basis
points) to basis in mortgage
<PAGE> 33
servicing rights for loans sold in 1998 as compared to $49.2 million (47 basis
points) during 1997 in accordance with Statement of Financial Accounting
Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". Net gain on sale of agency-eligible
mortgage loans increased to $134.5 million for 1998 versus $89.4 million for
1997.
Other Income
During 1998, the Company formed a captive insurance company, MG
Reinsurance Company (MG Reinsurance). MG Reinsurance is licensed as a property
and casualty insurer and operates as a monoline captive insurance company
assuming reinsurance for agency-eligible mortgage loans initially purchased or
produced by the Company. During 1998, the Company recognized premium income of
approximately $1.2 million categorized as other income in the agency-eligible
production segment.
General and Administrative Expenses
General and administrative expenses allocated to the production of
agency-eligible mortgage loans increased $10.4 million to $28.3 million for 1998
as compared to $17.9 million for 1997. Provision for foreclosure and repurchase
expenses increased by $5.1 million to approximately $9.7 million for 1998
primarily due to the increase in repurchase loan volumes in 1998 as compared to
1997. The balance of the increase was primarily due to the overall growth of the
Company's production and servicing operations.
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses allocated
to the Company's subprime mortgage production operations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1998 1997
-------- --------
<S> <C> <C>
Net interest income $ 9,565 $ 1,268
Net gain on sale of mortgage loans 27,980 14,012
Other income 732 --
-------- --------
Total production revenue 38,277 15,280
-------- --------
Salary and employee benefits 13,485 7,754
Occupancy expense 1,921 711
General and administrative expenses 4,490 2,021
-------- --------
Total production expenses 19,896 10,486
-------- --------
Net pre-tax production margin 18,381 $ 4,794
-------- --------
Production $607,664 $292,817
Whole loan sales and securitizations 551,110 284,841
Total production revenue to whole loan sales and securitizations 695 bps 536 bps
Total production expenses to production 327 bps 358 bps
-------- --------
Net pre-tax production margin 368 bps 178 bps
======== ========
</TABLE>
<PAGE> 34
Summary
During 1998, the Company produced $607.7 million of subprime loans. The
Company sold approximately $226.6 million (37%) of its 1998 production in whole
loan transactions and delivered $324.5 million into the secondary markets
through securitization transactions. Overall, the subprime division operated
during 1998 at a 3.68% pre-tax production margin. At December 31, 1998 the
Company had unsold subprime mortgage loans of $97.9 million. During 1997, the
Company's subprime division was in its initial startup phase and $46.8 million
of the subprime mortgage loan production for that period was purchased in bulk
from Meritage prior to the Company's acquisition of Meritage.
Net Interest Income
The following table analyzes net interest income for the years ended
December 31, 1998 and 1997 allocated to the Company's subprime mortgage
production activities in terms of rate and volume variances of the interest rate
spread (the difference between interest rates earned on loans and
residual certificates and interest rates paid on interest-bearing sources
of funds).
<TABLE>
<CAPTION>
($ IN THOUSANDS)
Variance
Average Volume Average Rate Interest Attributable to
- -------------------------------------- ------------------ -------------------
1998 1997 1998 1997 1998 1997 Variance Rate Volume
- -------------------------------------- ----------------------------------------------------
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
INTEREST INCOME
Mortgages Held-for-Sale and
$ 142,685 $19,512 10.29% 12.37% Residual Certificates $ 14,684 $2,413 $ 12,271 $(2,961) $ 15,232
- -------------------------------------- ----------------------------------------------------
$ 97,534 $16,693 5.25% 6.86% Total Interest Expense $ 5,119 $1,145 $ 3,974 $(1,571) $ 5,545
- -------------------------------------- ----------------------------------------------------
5.04% 5.51% Net Interest Income $ 9,565 $1,268 $ 8,297 $(1,390) $ 9,687
================== ====================================================
</TABLE>
Net interest income from subprime products increased 654% to $9.6
million for 1998 as compared to $1.3 million for 1997. This was primarily the
result of increased subprime production volumes as subprime operations
introduced and made available through the Company's existing 15 branch
agency-eligible wholesale network reached full year production levels.
Net Gain on Sale and Securitization of Subprime Mortgage Loans
A reconciliation of the gain on securitization of subprime mortgage
loans for the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Gross proceeds on securitization of subprime mortgage loans $ 318,040 $ 164,787
Initial acquisition cost of subprime mortgage loans
securitized, net of fees
324,549 171,802
--------- ---------
Unadjusted loss on securitization of subprime mortgage loans (6,509) (7,015)
Initial capitalization of residual certificates 22,240 13,946
Net change in deferred administrative fees 357 N/A
--------- ---------
Net gain on securitization of subprime mortgage loans $ 16,088 $ 6,931
========= =========
</TABLE>
<PAGE> 35
The Company assesses the fair value of 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
certificates. Significant assumptions used at December 31, 1998 for all residual
certificates then held by the Company include a discount rate of 13%, a constant
default rate of 3% and a loss severity rate of 25%, and ramping periods are
based on prepayment penalty periods and adjustable rate mortgage first reset
dates. Constant prepayment rate assumptions specific to the individual
certificates for purposes of the December 31, 1998 valuations are set forth
below:
<TABLE>
<CAPTION>
1997-1 1997-2 1998-1 1998-2 OTHER
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Prepayment speeds
Fixed rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 32% cpr
Adjustable rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 24% cpr
</TABLE>
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 certificates. Although the Company believes that the fair values
of its residual certificates are reasonable given current market conditions, the
assumptions used are estimates and actual experience may vary from these
estimates. Differences in the actual prepayment speed and loss experience from
the assumptions used could have a significant effect on the fair value of the
residual certificates.
As summarized in the following analysis, the recorded residual values
imply that the Company's securitizations are valued at 1.63 times the implied
excess yield at December 31, 1998, as compared to the 1.57 multiple implied at
September 30, 1998. The table below represents balances as of December 31, 1998,
unless otherwise noted.
<TABLE>
<CAPTION>
($ IN THOUSANDS) SECURITIZATIONS
---------------------------------------------
1997-1 1997-2 1998-1 1998-2 SUBTOTAL OTHER TOTAL
-------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Residual Certificates $ 7,997 $ 9,702 $ 10,815 $ 12,569 $ 41,083 $ 4,700 $ 45,783
Bonds $ 51,778 * $ 75,504 * $117,977 * $ 169,514 * $414,773 $ 43,690 ** $458,463
-------- -------- -------- --------- -------- -------- --------
Subtotal $ 59,775 $ 85,206 $128,792 $ 182,083 $455,856 $ 48,390 $504,246
Unpaid Principal Balance $ 56,636 * $ 80,358 * $120,358 * $ 169,068 * $426,420 $ 46,686 ** $473,106
-------- -------- -------- --------- -------- -------- --------
Implied Price 105.54 106.03 107.01 107.70 106.90 103.65 106.58
-------- -------- -------- --------- -------- -------- --------
Collateral Yield 10.39 10.03 9.76 9.70 9.87 11.30 10.02
Collateral Equivalent
Securitization Costs (0.72) (0.65) (0.60) (0.60) (0.63) (0.50) (0.61)
Collateral Equivalent
Bond Rate (4.74) (4.90) (5.02) (5.60) (5.19) (6.96) (5.37)
-------- -------- -------- --------- -------- -------- --------
Implied Collateral
Equivalent Excess Yield 4.93 4.48 4.14 3.50 4.05 3.84 4.04
-------- -------- -------- --------- -------- -------- --------
Implied Premium Above Par 5.54 6.03 7.01 7.70 6.90 3.65 6.58
Implied Collateral
Equivalent Excess Yield 4.93 4.48 4.14 3.50 4.05 3.84 4.04
-------- -------- -------- --------- -------- -------- --------
Multiple 1.12 x 1.35 x 1.69 x 2.20 x 1.70 x 0.95 x 1.63x
-------- -------- -------- --------- -------- ------- --------
</TABLE>
* Amounts were based upon trustee statements dated January 23, 1999 that covered
the period ended December 31, 1998.
<PAGE> 36
** Amounts were based upon trustee statements dated December 23, 1998 that
covered the period ended November 30, 1998.
The Company also sold subprime mortgage loans on a whole loan basis in
1998 and 1997. Whole loans are generally sold without recourse to third parties
with the gain or loss being calculated based on the difference between the
carrying value of the loans and the gross proceeds received from the purchaser
less expenses. Generally, no interest in these loans is retained by the Company.
A reconciliation of the gain on subprime mortgage whole loan sales for
the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Gross proceeds on whole loan sales of subprime mortgage loans $238,186 $118,817
Initial acquisition cost of subprime mortgage loans sold, net of
fees
226,561 117,003
-------- --------
Unadjusted gain on whole loan sales of subprime mortgage loans 11,625 1,814
Residual certificate received from sale N/A 5,267
Net change in deferred administrative fees 267 N/A
-------- --------
Net gain on whole loan sales of subprime mortgage loans $ 11,892 $ 7,081
======== ========
</TABLE>
Other Income
During 1997 and 1998, the Company retained residual certificates in
connection with the securitization of subprime loans. These residual
certificates are adjusted to approximate market value each quarter. For the year
ended December 31, 1998, mark-to-market income on residuals was approximately
$0.5 million. This amount is reflected as other income within the subprime
division. Accretion income for 1998 and 1997 relating to residuals was
approximately $3.4 million and $0.3 million, respectively, and is recorded as a
component of net interest income.
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses allocated to
the Company's agency-eligible mortgage servicing operations for the years ended
December 31, 1998 and 1997:
<PAGE> 37
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1998 1997
----------- ----------
<S> <C> <C>
Loan servicing fees $ 37,856 $ 30,869
Other income 455 --
----------- ----------
Servicing revenues 38,311 30,869
Salary and employee benefits 3,449 3,025
Occupancy expense 443 318
Amortization and provision for impairment of mortgage
servicing rights 27,897 18,315
General and administrative expenses 6,446 7,856
----------- ----------
Total loan servicing expenses 38,235 29,514
----------- ----------
Net pre-tax servicing margin 76 1,355
Gain on sale of mortgage servicing rights 1,753 7,955
----------- ----------
Net pre-tax servicing contribution $ 1,829 $ 9,310
=========== ==========
Average servicing portfolio $ 9,386,653 $7,470,892
Servicing sold 10,922,288 9,699,058
Net pre-tax servicing margin to average servicing portfolio 0 bps 2 bps
Gain on sale of servicing to servicing sold 2 bps 8 bps
</TABLE>
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio declined 2 basis points from 1997 to 1998 primarily due to relatively
larger increases in amortization expense. The increased amortization expense is
largely attributable to the generally higher volumes of mortgage servicing
rights held-for-sale and increased prepayment speeds resulting from the
generally low interest rate environment which required relatively higher
periodic amortization charges. In the fourth quarter of 1998 the Company
recorded a reserve for potential impairment of mortgage servicing rights of
approximately $0.8 million.
Overall, the servicing division contributed $1.8 million to 1998
pre-tax net income, a $7.5 million, or 80%, decrease over the $9.3 million
contribution for 1997.
Loan servicing fees were $37.9 million for 1998, compared to $30.9
million for 1997, an increase of 23%. This increase is primarily related to an
increase in the average aggregate underlying unpaid principal balance of
mortgage loans serviced to $9.4 billion during 1998 from $7.5 billion during
1997, an increase of 26%. Similarly, amortization and provision for impairment
of mortgage servicing rights also increased to $27.9 million during 1998 from
$18.3 million during 1997, an increase of 52%. The increase in amortization is
primarily attributable to the growth in the average balance of the mortgage
loans serviced and the generally higher prepay speed environment.
Management continually assesses market prepayment trends and adjusts
amortization accordingly. Management believes that the carrying value of
mortgage servicing rights is reasonable in light of current market conditions.
However, there can be no guarantee that market conditions will not change such
that mortgage servicing rights valuations will require additional amortization
or impairment charges.
<PAGE> 38
Included in loan servicing fees for 1998 and 1997 are subservicing fees
received by the Company of $733 thousand and $567 thousand, respectively. The
subservicing fees are associated with temporary subservicing agreements between
the Company and purchasers of mortgage servicing rights.
Gain on Sale of Agency-Eligible Mortgage Servicing Rights
A reconciliation of the components of gain on sale of agency-eligible
mortgage servicing rights for the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997
------------ -----------
<S> <C> <C>
Underlying unpaid principal balances of agency-eligible
mortgage loans on which servicing rights were sold
during the period $ 10,922,288 $ 9,181,405
============ ===========
Gross proceeds from sales of agency-eligible mortgage
servicing rights $ 256,292 $ 206,868
Initial acquisition basis, net of amortization and hedge
results 189,918 160,314
------------ -----------
Unadjusted gain on sale of agency-eligible mortgage
servicing rights 66,374 46,554
Acquisition basis allocated from agency-eligible mortgage
loans, net of amortization (SFAS No. 125) (64,621) (38,599)
------------ -----------
Gain on sale of agency-eligible mortgage servicing rights $ 1,753 $ 7,955
============ ===========
</TABLE>
During 1998, the Company completed 25 sales of agency-eligible mortgage
servicing rights representing $10.9 billion of underlying unpaid principal
mortgage loan balances. This compares to 31 sales of agency-eligible mortgage
servicing rights representing $9.2 billion of underlying unpaid principal
mortgage loan balances in 1997. The unadjusted gain on the sale of
agency-eligible mortgage servicing rights was $66.4 million (61 basis points)
for 1998, up from $46.6 million (51 basis points) for 1997. The Company reduced
this unadjusted gain by $64.6 million in 1998, versus a $38.6 million reduction
in 1997, in accordance with SFAS No. 125. During 1997, certain seasoned
available-for-sale agency-eligible mortgage servicing rights were sold at a
relatively higher margin as compared to 1998, thus causing the decrease in gain
on sale of agency-eligible mortgage servicing rights in 1998.
COMMERCIAL MORTGAGE OPERATIONS
Following is a summary of the revenues and expenses allocated to the
Company's commercial mortgage production operations.
<PAGE> 39
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1998 1997
----------- ----------
<S> <C> <C>
Net interest income $ 536 N/A
Net gain on sale of mortgage loans 9,011 N/A
Other income 11 N/A
----------- ----------
Total production revenue 9,558 N/A
----------- ----------
Salary and employee benefits 7,322 N/A
Occupancy expense 840 N/A
General and administrative expenses 1,734 N/A
----------- ----------
Total production expenses 9,896 N/A
----------- ----------
Net pre-tax production margin (338) N/A
----------- ----------
Servicing fees 3,777 N/A
Amortization of mortgage servicing rights 1,335 N/A
----------- ----------
Net pre-tax servicing margin 2,442 N/A
----------- ----------
Pre-tax income $ 2,104 N/A
----------- ----------
Production $ 899,674 N/A
Whole loan sales 875,874 N/A
Average commercial mortgage servicing portfolio $ 3,006,859 N/A
Total production revenue to whole loan sales 109 BPS N/A
Total production expenses to production 110 BPS N/A
----------- ----------
Net pre-tax production margin (1) BPS N/A
----------- ----------
Servicing fees to average commercial mortgage servicing portfolio 13 BPS N/A
Amortization of mortgage servicing rights to average commercial
mortgage servicing portfolio 4 BPS N/A
----------- ----------
Net pre-tax servicing margin 9 BPS N/A
----------- ----------
</TABLE>
Laureate originates commercial mortgage loans for various insurance
companies and other investors, primarily in Alabama, Florida, Indiana, North
Carolina, South Carolina, Tennessee and Virginia. Substantially all loans
originated by Laureate have been originated in the name of the investor, and in
most cases Laureate has retained the right to service the loans under a
servicing agreement with the investor. Most commercial mortgage loan servicing
agreements are short-term, and retention of the servicing contract is dependent
on maintaining the investor relationship.
<PAGE> 40
Net Gain on Sale of Commercial Mortgage Loans
A reconciliation of gain on sale of commercial mortgage loans for the
periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Gross proceeds on sales of commercial mortgage loans $875,874 N/A
Initial unadjusted acquisition cost of commercial mortgage
loans sold 875,874 N/A
-------- --------
Unadjusted gain on sale of commercial mortgage loans -- N/A
Commercial mortgage and origination fees 6,831 N/A
-------- --------
Unadjusted aggregate margin 6,831 N/A
Initial acquisition cost allocated to basis in commercial
Mortgage servicing rights (SFAS No. 125) 2,180 N/A
-------- --------
Net gain on sale of commercial mortgage loans $ 9,011 N/A
======== ========
</TABLE>
During 1998, the commercial mortgage division originated $899.7 million
and sold approximately $875.9 million in commercial mortgage loans. Commercial
mortgage fees on the loans sold were $6.8 million or 78 basis points.
Origination fees are generally between 50 and 100 basis points on the loan
amount. In addition the commercial mortgage division allocated $2.2 million, or
25 basis points, to basis in servicing rights retained on commercial mortgage
loans produced during the period.
LEASING OPERATIONS
Following is a summary of the revenues and expenses allocated to the
Company's small-ticket equipment leasing operations for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1998 1997
-------- --------
<S> <C> <C>
Net interest income $ 4,637 N/A
Other income 753 N/A
-------- --------
Leasing production revenue 5,390 N/A
-------- --------
Salary and employee benefits 2,347 N/A
Occupancy expense 376 N/A
General and administrative expenses 2,584 N/A
-------- --------
Total lease operating expenses 5,307 N/A
-------- --------
Net pre-tax leasing production margin 83 N/A
-------- --------
Servicing fees 1,014 N/A
-------- --------
Net pre-tax leasing margin $ 1,097 N/A
-------- --------
Average owned leasing portfolio $ 73,508 N/A
Average serviced leasing portfolio 53,480 N/A
-------- --------
Average managed leasing portfolio $126,988 N/A
======== ========
Leasing production revenue to average owned portfolio 733 BPS N/A
Leasing operating expenses to average owned portfolio 721 BPS N/A
-------- --------
Net pre-tax leasing production margin 12 BPS N/A
======== ========
Servicing fees to average serviced leasing portfolio 190 BPS N/A
======== ========
</TABLE>
<PAGE> 41
Substantially all of the Company's lease receivables are acquired from
independent brokers who operate throughout the continental United States and
referrals from independent banks. At December 31, 1998, the Company's managed
lease servicing portfolio was $136.5 million. Of this managed lease portfolio,
$98.9 million was owned and $37.6 million was serviced for investors.
Net Interest Income
Net interest income for 1998 was $4.6 million. This is equivalent to a
net interest margin of 4.35% based upon average lease receivables owned of $73.5
million and average leasing debt outstanding of $53.5 million.
NON-RECURRING AND SPECIAL CHARGES
During 1998, the Company recognized a $1.5 million pre-tax gain ($0.9
million after-tax) on the sale of its retail production platform. 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 ($4.8 million after-tax) relating to
certain nonrecoverable operating receivables.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED
DECEMBER 31, 1996
SUMMARY BY OPERATING DIVISION
Following is a summary of the allocated revenues and expenses for each
of the Company's operating divisions (with non-recurring and special charges
separately categorized) for the years ended December 31, 1997 and 1996,
respectively:
<TABLE>
<CAPTION>
($ 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
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 and provision for impairment 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
Income tax expense (11,833) (1,825) (3,537) 3,906 (13,289)
- -------------------------------------------- --------- -------- --------- --------- ---------
Net income (loss) $ 19,297 $ 2,969 $ 5,773 $ (6,241) $ 21,798
========= ======== ========= ========= =========
</TABLE>
<PAGE> 42
<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
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 and provision for impairment 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
Income tax expense (10,058) (2,865) 1,998 (10,925)
- -------------------------------------------- --------- -------- --------- --------- ---------
Net income (loss) $ 17,758 $ 5,057 $ ( 3,192) $ 19,623
========= ======== ========= ========= =========
</TABLE>
*Revenues and expenses have been allocated on a direct basis to the extent
possible. Corporate overhead expenses have been allocated to agency-eligible
mortgage production. 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>
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>
<PAGE> 43
Summary
The production revenue to pool delivery ratio improved 10 basis points,
or 11%, for 1997 which was the primary cause of the higher net gain on sale of
mortgage loans. This improvement is primarily 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 sale
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
- ----------------------------------------- ----------------------------------------------------------
<C> <C> <C> <C> <S> <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 Receivables 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>
<PAGE> 44
Net interest income from agency-eligible product decreased 3% to $16.4
million for 1997 compared to $16.9 million for 1996. The 11 basis point decrease
in the interest-rate spread was primarily the result of the narrower spreads
between long- and short-term rates in 1997 compared to 1996. The Company's
mortgages and mortgage-backed securities are generally sold and replaced within
30 to 35 days. The Company generally borrows at rates based upon short-term
indices, while its asset yields are primarily based upon long-term mortgage
rates.
Net Gain on Sale of Agency-Eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
<TABLE>
<CAPTION>
($ 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 SFAS No. 125
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 $10.2 million increase in net gain on sale of agency-eligible
mortgage loans resulted in the Company's improved production revenue to pool
delivery ratio, which was partially offset by the increase in production
expenses to production ratio.
SUBPRIME MORTGAGE OPERATIONS
Following is an analysis of the direct revenues and expenses allocated
to the Company's subprime mortgage production operations.
<PAGE> 45
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1997 1996
-------- -----
<S> <C> <C>
Net interest income $ 1,268 N/A
Net gain on sale of mortgage loans 14,012 N/A
-------- ---
Total production revenue 15,280 N/A
-------- ---
Salary and employee benefits 7,754 N/A
Occupancy expense 711 N/A
General and administrative expenses 2,021 N/A
-------- ---
Total production expenses 10,486 N/A
-------- ---
Net pre-tax production margin $ 4,794 N/A
-------- ---
Production $292,817 * N/A
Whole loan sales and securitizations 284,841 N/A
Total production revenue to whole loan sales and securitizations 536 bps N/A
Total production cost to production 358 bps N/A
-------- ---
Net pre-tax production margin 178 bps N/A
======== ===
</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 transactions. 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> <S> <C> <C> <C> <C> <C>
INTEREST INCOME
Mortgages Held-for-Sale and
$ 19,512 N/A 12.37% N/A Residual Certificates $ 2,413 N/A $ 2,413 $ 2,413 N/A
- ----------------------------------------- --------------------------------------------------------
$ 16,693 N/A 6.86% N/A Total Interest Expense $ 1,145 N/A $ 1,145 $1,145 N/A
- ----------------------------------------- --------------------------------------------------------
5.51% N/A Net Interest Income $ 1,268 N/A $ 1,268 $ 1,268 N/A
================== ========================================================
</TABLE>
Net interest income on subprime product was $1.3 million and the
interest rate spread was 551 basis points for 1997. This was primarily the
result of the larger interest rate spreads possible for subprime product.
<PAGE> 46
Net Gain on Sale and Securitization of Subprime Mortgage Loans
A reconciliation of the gain on securitization of subprime mortgage
loans for the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
--------- ----
<S> <C> <C>
Gross proceeds on securitization of subprime mortgage loans $ 164,787 N/A
Initial acquisition cost of subprime mortgage loans
securitized, net of fees
171,802 N/A
--------- ---
Unadjusted loss on securitization of subprime mortgage loans (7,015) N/A
Initial capitalization of residual certificates 13,946 N/A
--------- ---
Net gain on securitization of subprime mortgage loans $ 6,931 N/A
========= ===
</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 $167.8 million of subprime mortgage loans.
These securitizations were in the form of a sale of loans to a trust.
The trust took the form of a multi-class security structure collateralized by
residential mortgage loans which receives its monthly principal and interest
paydowns from the underlying mortgage loans. As discussed previously, effective
January 1, 1997, the Company adopted SFAS No. 125. Under this pronouncement,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes liabilities
when extinguished. As a result, the Company capitalizes the subordinated classes
of securities formed upon sale of the loans to the trust. The subordinated
classes held by the Company are in the form of residual certificates. The gain
on the securitization is determined based on the difference between the carrying
value of the mortgage loans and the proceeds received from the securitization
combined with the fair value of the residual certificates less the costs of the
sale.
The Company also sold subprime mortgage loans on a whole loan basis in
1997. Whole loans are generally sold without recourse to third parties with the
gain or loss being calculated based on the difference between the carrying value
of the loans and the gross proceeds received from the purchaser less the cost of
the sale.
A reconciliation of the gain on subprime mortgage whole loan sales for
the periods indicated follows:
<PAGE> 47
<TABLE>
<CAPTION>
($ 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 N/A
Initial acquisition cost of subprime mortgage loans sold, net of
fees 117,003 N/A
-------- ---
Unadjusted gain on whole loan sales of subprime mortgage
loans 1,814 N/A
Residual certificate received from sale 5,267 N/A
-------- ---
Net gain on whole loan sales of subprime mortgage loans $ 7,081 N/A
======== ===
</TABLE>
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:
<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.
<PAGE> 48
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.
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
<PAGE> 49
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.
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.
<PAGE> 50
FINANCIAL CONDITION
During 1998, the Company experienced a 53% increase in the volume of
production originated and acquired compared to 1997. Production increased to
$16.5 billion during 1998 from $10.8 billion during 1997. The December 31, 1998,
locked residential mortgage application pipeline (mortgage loans not yet closed
but for which the interest rate has been locked) was approximately $1.0 billion
and the application pipeline (mortgage loans for which the interest rate has not
yet been locked) was approximately $0.6 billion.
Mortgage loans held-for-sale and mortgage-backed securities totaled $1.4
billion at December 31, 1998, versus $1.2 billion at December 31, 1997, an
increase of 22%. The Company's servicing portfolio (exclusive of loans under
subservicing agreements) increased to $9.9 billion at December 31, 1998, from
$7.1 billion at December 31, 1997, an increase of 39%.
Short-term borrowings, which are the Company's primary source of funds,
totaled $1.6 billion at December 31, 1998, compared to $1.2 billion at December
31, 1997, an increase of 28%. The increase in the balance outstanding at
December 31, 1998, 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, 1998, there were $6.4 million in long-term
borrowings, compared to $6.5 million at December 31, 1997.
Other liabilities totaled $114.7 million as of December 31, 1998, compared
to the December 31, 1997 balance of $86.6 million, an increase of $28.1 million,
or 33%. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash-flow requirement involves the funding of loan
production, which is met primarily through external borrowings. The Company has
entered into a 364-day, $670 million warehouse line of credit provided by a
syndicate of unaffiliated banks that expires in July 1999. The credit agreement
includes covenants requiring the Company to maintain (i) a minimum net worth of
$185 million, plus net income subsequent to June 30, 1998, and capital
contributions and minus permitted dividends, (ii) a ratio of total liabilities
to net worth of not more than 8.0 to 1.0, excluding debt incurred pursuant to
gestation and repurchase financing agreements, (iii) its eligibility as a
servicer of Ginnie Mae, FHA, VA, Fannie Mae and Freddie Mac mortgage loans and
(iv) a mortgage servicing rights portfolio with an underlying unpaid principal
balance of at least $4 billion. The provisions of the agreement also restrict
the Company's ability (i) to pay dividends which exceed 70% of the Company's net
income or (ii) to
<PAGE> 51
engage significantly in any type of business unrelated to the mortgage banking
business, the servicing of mortgage loans or equipment leasing.
Additionally, the Company entered into a $230 million, 364-day term
revolving credit facility with a syndicate of unaffiliated banks. An $80 million
portion of the revolver facility converts in July 1999, into a four-year term
loan. The facility is secured by the Company's servicing portfolio designated as
"available-for-sale." A $100 million portion of the revolver facility matures in
July 1999, and is secured by the Company's servicing portfolio designated as
"held-for-sale." A $50 million portion of the revolver facility matures in July
1999, and is secured by a first-priority security interest in receivables on
servicing rights sold. The facility includes covenants identical to those
described above with respect to the warehouse line of credit.
The Company has also entered into a $200 million, 364-day term subprime
revolving credit facility, which expires in July 1999. The facility includes
covenants identical to those described above with respect to the warehouse line
of credit.
The Company was in compliance with the above-mentioned debt covenants at
December 31,1998. Although management anticipates continued compliance, there
can be no assurance that the Company will be able to comply with the debt
covenants specified for each of these financing agreements. Failure to comply
could result in the loss of the related financing.
RBMG Asset Management Company, Inc. (Asset Management Co.), a wholly-owned
subsidiary of the Company, and a bank entered into a master repurchase agreement
dated as of December 11, 1997, pursuant to the terms of which Asset Management
Co. is entitled from time to time to deliver eligible subprime mortgage loans in
an aggregate principal amount of up to $150 million to the bank. The term of
this repurchase agreement is 364 days. As of December 31, 1998 no loans had been
sold under this agreement. The master repurchase agreement has been extended
through April 1999 and is in the process of being renewed.
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 previously described.
RBC has a 364-day $100 million credit facility to provide financing for its
leasing portfolio. The warehouse credit agreement matures in July 1999 and
contains various covenants regarding characteristics of the collateral and the
performance of the leases originated and serviced by RBC and that require RBC to
maintain a minimum net worth of $40 million and a ratio of total liabilities to
net worth of no more than 10.0 to 1.0.
<PAGE> 52
In 1998 the Company's Board of Directors authorized the repurchase of up to
$25 million of the Company's common stock in either open market transactions or
in private or block trades. Decisions regarding the amount and timing of
repurchases will be made by management based upon market conditions and other
factors. The repurchase authority will enable the Company to repurchase shares
to meet the Company's obligations pursuant to existing stock option, dividend
reinvestment and employee stock purchase and ESOP plans. The Company's primary
objective is to offset the potentially dilutive effect that option exercises and
stock issuances under these plans might otherwise have. Shares repurchased are
maintained in the Company's treasury account and are not retired. At December
31, 1998, there were 869,378 shares held in the Company's treasury account at an
average cost of $13.23 per share.
YEAR 2000
The Company recognizes the need to address the potentially adverse
impact that Year 2000 issues might have on its business operations. The
Company's compliance efforts are ongoing under the guidance of the Director of
Operations and involve employees throughout the Company as well as outside
consultants and contractors. The Company's Year 2000 Project leadership team
meets with the Company's executive management weekly and the Board of Directors
is routinely updated on the status of their efforts.
OVERVIEW OF THE COMPANY'S STATE OF READINESS
The Company has reviewed its critical information technology and
non-information technology systems and summarizes its state of readiness as
follows:
- -- The Company uses 20 applications that were developed internally - all of
these have been remediated and are now Year 2000 compliant. The remediated
versions are scheduled to be placed into use in the second quarter of
1999.
- -- The Company uses various applications that were purchased or are used in a
service bureau relationship with third parties. Compliant versions are
available for all of these applications. Some of these compliant versions
have been installed with the remainder scheduled for installation during
the first and second quarters of 1999.
- -- The Company uses desktop software at each PC. Implementation of a
standardized package that delivers Year 2000 compliant desktop software is
90% complete with the rollout of 1,200 new desktops with completion
scheduled for the second quarter of 1999.
- -- The Company uses computer hardware, including servers, desktop PCs and
network infrastructure components. Remediation and upgrade of these units
to Year 2000 compliant hardware is approximately 95% complete with
completion scheduled for the second quarter of 1999. Remaining work
consists primarily of installing available Microsoft and NetWare service
patches.
<PAGE> 53
The Company's growth motivated a generalized review of the adequacy of the
existing software environment and technological infrastructure to meet the
Company's long-term operating requirements. Accordingly, during the past 18
months the Company has been working to design and prepare for implementation of
Cybertek's LoanXchange Mortgage Processing System. Implementation of this Year
2000 compliant system is scheduled for the second quarter of 1999. If
implemented on time, this application will replace fourteen existing
applications and is expected to benefit the Company by providing enhanced
functionality, reliability, performance and efficiency. Accordingly, the
Company's Year 2000 compliance program continues to proceed on a dual track: (1)
reaching Year 2000 compliant status with respect to the existing environment as
outlined above and (2) preparing for Year 2000 compliant status with respect to
the environment that will exist after implementation of the LoanXchange system.
REVIEW OF MISSION CRITICAL BUSINESS SPECIFIC YEAR 2000 COMPLIANCE STATUS
AGENCY-ELIGIBLE MORTGAGE PRODUCTION Mission critical applications include the 20
internally developed applications that have been remediated and are Year 2000
compliant. Also, two of the applications provided by third parties are mission
critical. As discussed above, Year 2000 compliant versions of all mission
critical applications are scheduled to be installed by the end of the second
quarter of 1999. In addition, the LoanXchange system may be installed in which
case Year 2000 compliant versions of all mission critical applications also will
be in place.
MORTGAGE SERVICING The primary mission critical system is the Alltel servicing
system which is used by the Company through a third-party service bureau
relationship. Alltel has issued the Company a letter stating that it has
completed modification of all systems used by the Company bringing them to Year
2000 compliance. Alltel is the largest vendor of mortgage servicing systems in
the United States and is scheduled to participate in an industry sponsored
testing program. The Company is monitoring the progress of this testing
activity.
LAUREATE The Company operates its commercial mortgage origination and servicing
business through its subsidiary, Laureate. Upgrade of Laureate's mission
critical McCracken commercial mortgage servicing system to a Year 2000 compliant
version is scheduled for the second quarter of 1999.
REPUBLIC LEASING The Company operates its leasing business through its
subsidiary Resource Bancshares Corporation doing business as Republic Leasing.
Republic Leasing's mission critical systems are Year 2000 compliant.
MERITAGE MORTGAGE CORP. The Company operates substantially all of its sub-prime
loan origination business through its subsidiary, Meritage Mortgage Corp.
Upgrade of Meritage's mission critical Contour front-end loan processing system
to a Year 2000 compliant version is complete.
OTHER
All of the Company's subsidiaries use the same general ledger, accounts payable
and human resources systems all of which are Year 2000 compliant.
<PAGE> 54
THIRD PARTY SUPPLIERS
Mission critical third party suppliers are Fannie Mae, Freddie Mac and
Alltel. Software supplied to the Company by Fannie Mae and Freddie Mac has been
certified as compliant and the Company has scheduled installation of the
compliant versions during the first quarter of 1999. As discussed above, Alltel
has also stated that its software and systems are compliant. Fannie Mae, Freddie
Mac and Alltel will be participating in an industry sponsored testing program
which the Company will monitor and participate in.
TRADING PARTNERS
The Company is communicating with suppliers, dealers, financial
institutions and others with whom it does business to coordinate Year 2000
compliance. However, the Company's residential mortgage business is conducted
through relationships with over 6,000 correspondents and brokers. The primary
points of interaction with these customers relate to loan registration, loan
locking and loan closing activities. Approximately 85% of these activities are
initiated via phone and fax. The remaining 15% are provided via a compliant and
proprietary interface that is made available to those customers over the
Internet. The Company is not undertaking a readiness review of these
relationships based on its assessment that the Year 2000 issue is not likely to
have a material impact on the Company's ability to interact with these trading
partners.
FINANCIAL IMPACT
Direct costs associated exclusively with achieving Year 2000 compliance
are expected to be between $500 thousand and $1 million dollars and will be paid
out of cash flow. Additional system costs exceeding $8 million are not directly
related to Year 2000 but serve to solve Year 2000 issues. Direct costs
associated with work performed to date were approximately $350 thousand through
December 31, 1998. The Year 2000 effort is expected to use approximately 5% of
information technology's 1999 budget.
RISKS AND CONTINGENCY PLANNING
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer code and unforeseen circumstances causing the
Company to allocate its resources elsewhere.
The Company's contingency planning led to development of the dual track
compliance program previously discussed.
Failure by either the Company or third parties to achieve Year 2000
compliance could cause short-term operational inconveniences and inefficiencies
for the Company. To the extent
<PAGE> 55
reasonably achievable, the Company will seek to prevent or mitigate the effects
of such possible failures through its contingency planning efforts. This may
temporarily divert management's time and attention from ordinary business
activities. With the delivery and testing of LoanXchange scheduled for the first
quarter of 1999, the Company feels sufficient time exists to execute the
contingency plan.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board (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 or in a separate 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 unrealized
gains and losses on available-for-sale securities. SFAS No. 130 does not require
a specific format for the new statement, but does require that an amount
representing total comprehensive income be reported. SFAS No. 130 is required to
be adopted for fiscal years beginning after December 15, 1997. The Company has
adopted SFAS No. 130 in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes new standards for
business segment reporting. Requirements of SFAS No. 131 include reporting of
(a) financial and descriptive information about reportable operating segments,
(b) a measure of segment profit or loss, certain specific revenue and expense
items and segment assets with reconciliations of such amounts to the Company's
financial statements and (c) information regarding revenues derived from the
Company's products and services, information about major customers and
information related to geographic areas. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The Company has adopted SFAS No. 131 in
1998.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits" which revises employers' disclosures
about pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. The statement is effective for fiscal
years beginning after December 15, 1997. The Company adopted SFAS No. 132 in
1998.
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133). SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and to measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction or (c) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm
<PAGE> 56
commitment, an available-for-sale security or a foreign-currency denominated
forecasted transaction. SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company).
However, early adoption is permitted. The Company has not yet determined either
the impact that the adoption of SFAS 133 will have on its earnings or statement
of financial position or the period in which the statement will be implemented.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
(SFAS No. 134). SFAS No. 134 amends SFAS No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests as available-for-sale or trading securities based on its
ability and intent to sell or hold those investments in accordance with SFAS No.
115. Prior to this amendment, entities engaged in mortgage banking activities
were required to classify mortgage-backed securities as trading securities under
SFAS No. 115. This statement will be effective for the first fiscal quarter
beginning after December 15, 1998. Management has elected to continue to
classify its mortgage-related securities as trading securities as permitted
pursuant to SFAS No. 134.
Quantitative and Qualitative Disclosure About Market Risk
The primary market risk facing the Company is interest rate risk. The
Company manages this risk by striving to balance its loan origination and loan
servicing business segments, which are countercyclical in nature. In addition,
the Company utilizes various financial instruments, including derivatives
contracts, to manage the interest rate risk related specifically to its
committed pipeline, mortgage loan inventory, mortgage backed securities held for
sale, servicing rights, leases and residual interests retained in
securitizations. The overall objective of the Company's interest rate risk
management policies is to mitigate potentially significant adverse effects that
changes in the values of these items resulting from changes in interest rates
might have on the Company's consolidated balance sheet. The Company does not
speculate on the direction of interest rates in its management of interest
rate risk.
For purposes of this disclosure, the Company has performed various
sensitivity analyses that quantify the net financial impact of changes in
interest rates on its interest rate-sensitive assets, liabilities and
commitments. These analyses presume an instantaneous parallel shift of the yield
curve. Various techniques are employed to value the underlying financial
instruments which rely upon a number of critical assumptions. The scenarios
presented are illustrative. Actual experience may differ materially from the
estimated amounts presented for each scenario. To the extent that yield curve
shifts are non-parallel and to the extent that actual variations in significant
assumptions differ from those applied for purposes of the valuations, the
resultant valuations can also be expected to vary. Such variances may prove
material.
<PAGE> 57
These analyses are limited by the fact that they are performed at a
particular point in time and do not incorporate other factors that would impact
the Company's financial performance in each such scenario. Consequently, the
preceding estimates should not be viewed as a forecast.
Qualitative disclosures about market risk are further discussed in Note 18
of the accompanying financial statements.
<PAGE> 58
<TABLE>
<CAPTION>
1998 If interest rates were to
----------------------- -------------------------------------------------
Carrying Estimated Increase Decrease Increase Decrease
Amount Fair Value ----------------------- -----------------------
---------- ---------- 50 basis points 100 basis points
Estimated Fair Value Estimated Fair Value
----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans held-for-sale and
mortgage backed securities $1,444,281 a $1,445,864 a $1,439,874 a $1,443,160 a $1,439,183 a $1,444,857 a
Servicing rights, net 211,070 b 211,070 b 223,869 b 206,815 b 229,949 b 206,549 b
Lease receivables 102,029 106,531 c 106,359 c 106,734 c 106,172 c 106,923 c
Residual interests in subprime
securitizations 45,782 45,782 44,745 45,281 43,685 46,384
Other assets 166,473 168,113 168,113 168,113 168,113 168,113
---------- ---------- ---------- ---------- ---------- ----------
Total assets $1,969,635 $1,977,360 $1,982,960 $1,970,103 $1,987,102 $1,972,826
---------- ---------- ---------- ---------- ---------- ----------
Long-term borrowings $ 6,364 $ 6,371 $ 6,371 $ 6,371 $ 6,371 $ 6,371
Other liabilities 1,711,113 1,711,113 1,711,113 1,711,113 1,711,113 1,711,113
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities $1,717,477 $1,717,484 $1,717,484 $1,717,484 $1,717,484 $1,717,484
---------- ---------- ---------- ---------- ---------- ----------
Net equity value $ 252,158 $ 259,876 $ 265,476 $ 252,619 $ 269,618 $ 255,342
========== ========== ========== ========== ========== ==========
</TABLE>
a) Estimated fair value has been adjusted to include $2,600, $(451), and $1,183
for estimated fair value of mortgage purchase commitments, mandatory delivery
commitments and purchase option contracts, respectively, which have been
allocated as hedges against mortgage loans-held-for-sale and mortgage backed
securities. In addition, $2,823 of carrying value relating to purchase option
contracts has been classified as mortgage loans held-for-sale and mortgage
backed securities.
b) Estimated fair value and carrying value has been adjusted to include $20,048
of interest rate floor contracts for 1998 which has been allocated as hedges
against servicing rights, net. For the 50 bps increase, the 50 bps decrease, 100
bps increase and 100 bps decrease, respectively, the estimated fair value has
been adjusted to include $15,234, $26,995, $10,325 and $36,401, respectively, of
interest rate floor contracts which have been allocated as hedges against
servicing rights, net.
c) Estimated fair value has been adjusted to include $(759), $(63), $(1,436),
$609, $(2,138), respectively, of interest rate floor contracts for 1998, 50 bps
increase, 50 bps decrease, 100 bps increase and 100 bps decrease, respectively,
which have been allocated as hedges against lease receivables.
<PAGE> 59
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED BALANCE SHEET
($ in thousands, except share information)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
December 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 18,124 $ 13,546
Receivables 80,248 87,702
Trading securities:
Mortgage-backed securities 385,055 334,598
Residual interests in subprime securitizations 45,782 19,684
Mortgage loans held for sale 1,056,403 844,590
Lease receivables 102,029 51,494
Servicing rights, net 191,022 127,326
Premises and equipment, net 35,338 27,723
Accrued interest receivable 3,642 4,372
Goodwill and other intangibles 16,363 15,519
Other assets 35,629 30,375
----------- -----------
Total assets $ 1,969,635 $ 1,556,929
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 1,566,287 $ 1,224,489
Long-term borrowings 6,364 6,461
Accrued expenses 30,098 24,262
Other liabilities 114,728 86,578
----------- -----------
Total liabilities 1,717,477 1,341,790
----------- -----------
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;
31,637,244 and 31,120,383 shares issued and outstanding at
December 31, 1998 and 1997, respectively 316 311
Additional paid-in capital 307,114 299,516
Retained earnings 59,599 17,763
Treasury Stock - 869,378 shares at December 31, 1998 (11,499) --
Common stock held by subsidiary at cost- 7,767,099 shares at
December 31, 1998 and 1997 (98,953) (98,953)
Unearned shares of employee stock ownership plan - 353,641 and 330,694
unallocated shares at December 31, 1998 and 1997, respectively (4,419) (3,498)
----------- -----------
Total stockholders' equity 252,158 215,139
----------- -----------
Commitments and contingencies (Notes 9 and 14) -- --
----------- -----------
Total liabilities and stockholders' equity $ 1,969,635 $ 1,556,929
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE> 60
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
($ in thousands, except share information)
<TABLE>
<CAPTION>
For the Year Ended December 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Interest income $102,446 $72,302 $62,858
Interest expense (80,668) (54,658) (45,956)
- -----------------------------------------------------------------------------------------------------
Net interest income 21,778 17,644 16,902
Net gain on sale of mortgage loans 171,463 103,370 79,178
Gain on sale of mortgage servicing rights 1,753 7,955 1,105
Servicing fees 43,156 30,869 28,763
Other income 5,576 1,180 669
- -----------------------------------------------------------------------------------------------------
Total revenues 243,726 161,018 126,617
- -----------------------------------------------------------------------------------------------------
EXPENSES
Salary and employee benefits 82,406 62,235 55,578
Occupancy expense 11,219 7,458 5,640
Amortization and provision for impairment
of mortgage servicing rights 29,232 18,315 14,934
General and administrative expenses 44,266 37,923 19,917
- -----------------------------------------------------------------------------------------------------
Total expenses 167,123 125,931 96,069
- -----------------------------------------------------------------------------------------------------
Income before income taxes 76,603 35,087 30,548
Income tax expense (27,932) (13,289) (10,925)
- -----------------------------------------------------------------------------------------------------
Net income $48,671 $21,798 $19,623
- -----------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - Basic 23,122,835 20,396,428 19,158,658
Net income per common share - Basic $ 2.10 $ 1.07 $ 1.02
Weighted average common shares outstanding - Diluted 23,501,108 20,800,828 19,525,867
Net income per common share - Diluted $ 2.07 $ 1.05 $ 1.00
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE> 61
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands, except share information)
<TABLE>
<CAPTION>
Total
Additional Unearned Common Stock-
Common Stock Paid-in Retained ESOP Treasury Stock Held by holders'
Shares Amount Capital Earnings Shares Stock Subsidiary Equity
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 19,285,020 $193 $149,653 $12,007 ($4,552) $157,301
Issuance of restricted stock 23,528 * 328 328
Cash dividends (2,536) (2,536)
Acquisition 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
Adjustment for the 5% stock
dividend declared on
October 31, 1997 1,009,235 10 13,398 (13,408)
Net income 21,798
Total comprehensive income 21,798
-----------------------------------------------------------------------------------------------
Balance, December 31, 1997 31,120,383 311 299,516 17,763 (3,498) (98,953) 215,139
Issuance of restricted stock 20,056 * 328 328
Cash dividends (6,714) (6,714)
Treasury stock purchases
(1,201,500 shares net of
issuances 332,122 shares) (16,280) (16,280)
Exercise of stock options 155,965 2 1,537 3,034 4,573
Shares committed to be
released under Employee
Stock Ownership Plan 544 1,079 1,623
Purchase of shares by Employee Stock
Ownership Plan (2,000) (2,000)
Shares issued or purchased
under Dividend Reinvestment and
Stock Purchase Plan and Stock
Investment Plan 198,722 2 3,425 (121) 1,747 5,053
Acquisition of Meritage Mortgage
Corporation 142,118 1 1,764 1,765
Net income 48,671
Total comprehensive income 48,671
------------------------------------------------------------------------------------------
Balance, December 31, 1998 31,637,244 $316 $307,114 $59,599 ($4,419) ($11,499) ($98,953) $252,158
==========================================================================================
</TABLE>
*Amount less than $1
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE> 62
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 48,671 $ 21,798 $ 19,623
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 34,570 21,859 17,566
Deferred income tax expense (benefit) 31,169 3,862 (2,463)
Employee Stock Ownership Plan compensation 1,623 1,480 600
Provision for estimated foreclosure losses and repurchased loans 11,023 4,615 817
Decrease (increase) in receivables 7,454 (24,303) (2,775)
Acquisition of mortgage loans (16,461,918) (10,777,294) (9,995,725)
Proceeds from sales of mortgage loans
and mortgage-backed securities 16,358,939 10,503,811 10,307,177
Acquisition of mortgage servicing rights (344,341) (230,503) (220,335)
Sales of mortgage servicing rights 256,292 206,868 196,406
Net gain on sales of mortgage loans and servicing rights (173,216) (111,325) (80,283)
Decrease in accrued interest on loans 730 341 4,973
Increase in lease receivables (50,535)
Increase in other assets (6,879) (764) (16,897)
Increase in residual certificates (26,098) (19,684)
Increase in accrued expenses and other liabilities 2,817 17,179 1,220
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (309,699) (382,060) 229,904
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash assets acquired from Resource Bancshares Corporation 6,535
Acquisition of Meritage Mortgage Corporation (1,750)
Purchases of premises and equipment (13,608) (8,613) (7,453)
Disposition of premises and equipment 1,507
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,101) (3,828) (7,453)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings 42,977,794 28,328,222 31,468,370
Repayment of borrowings (42,636,093) (27,929,479) (31,733,727)
Debt issuance costs (283) (553) (437)
Issuance of restricted stock 328 328 256
Activity under Employee Stock Ownership Plan (2,000) (3,000)
Shares issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan 5,053 330 86
Acquisition of treasury stock (16,280)
Cash dividends (6,714) (2,536) (1,119)
Exercise of stock options 4,573 630
Net proceeds from public offering 47,451
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 326,378 396,942 (222,120)
- --------------------------------------------------------------------------------------------------------------------
Net increase in cash 4,578 11,054 331
Cash, beginning of year 13,546 2,492 2,161
- --------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 18,124 $ 13,546 $ 2,492
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL ACTIVITIES
Interest paid $ 80,219 $ 55,762 $ 46,860
Taxes paid net of refunds received (3,595) 10,253 11,245
Non-cash activity acquisition of Resource Bancshares Corporation 20,573
Non-cash activity acquisition of Meritage Mortgage Corporation 1,765 8,700
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS, EXCEPT PER 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. Following the offering 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.
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 and brokers), sale and servicing
of agency-eligible and subprime residential, single-family, first-mortgage loans
and the purchase and sale of servicing rights associated with such loans. In
addition, the Company originates, sells and services small-ticket commercial
equipment leases and originates, sells, underwrites for investors and services
commercial mortgage loans.
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 intercompany accounts and transactions
have been eliminated.
Significant Estimates
In preparing the financial statements, management is required to make
estimates based on available information that can affect the reported amounts of
assets, liabilities and disclosures as of the balance sheet date and revenues
and expenses for the related periods. Such estimates relate principally to the
Company's allowance for foreclosure losses and repurchased loans, its allowance
for lease losses and fair values 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
uncertainties associated with any estimation process and due to possible future
changes in market
<PAGE> 64
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
Substantially all of the Company's investments are in the form of
mortgage-backed securities and residuals that are held 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.
As a servicer of mortgage loans and small-ticket equipment leases, the
Company will incur certain losses in the event it becomes necessary to carry out
foreclosure actions on loans and leases serviced. Generally with respect to
agency-eligible production, such losses relate to FHA or VA loans, which are
insured or guaranteed on a limited basis. Substantially all other serviced
agency-eligible 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 $851 and $1,380 at December 31, 1998 and 1997, respectively.
On occasions the Company has to repurchase certain non-performing loans.
Generally, such agency-eligible mortgage loan losses relate to FHA or VA loans,
which are insured or guaranteed on a limited basis. Upon repurchase of a loan,
the Company initially capitalizes the current unpaid principal balance and
related advances and any other related costs are charged against the allowance.
The Company subsequently estimates the net realizable value of the repurchased
loan portfolio and records an estimate of the allowance for losses on
repurchases. The allowance for estimated losses on repurchases was $2,330 and
$3,399 at December 31, 1998 and 1997, respectively.
Mortgage Servicing Rights
The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" which superseded 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. As
required by SFAS No. 125, and as required by SFAS No. 122, the Company 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 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 assesses its capitalized mortgage servicing rights for impairment (on a
stratified basis)
<PAGE> 65
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
an internal valuation which is substantiated for reasonableness by reference to
a third-party analysis. Both analyses value 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.
Fees for servicing commercial mortgage loans and lease portfolios are
recognized monthly on an accrual basis based upon the terms of the underlying
agreement. Generally, such agreements provide for fees based upon a percentage
of the outstanding balance.
Residual Certificates in Subprime Securitizations
Residual certificates are classified as trading securities (as defined in
SFAS No. 115), and changes in their 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 available to the holder of the
residual certificate. Significant assumptions used in this valuation include
discount rate, prepayment speed and credit loss estimates. Each of these factors
can be significantly affected by, among other things, changes in the interest
rate environment and general economic conditions 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 and
other assumptions from those applied for valuation purposes, could have a
significant effect on the estimated fair value of the residual certificates.
Significant assumptions used at December 31, 1998 for all residual
certificates then held by the Company include a discount rate of 13%, a constant
default rate of 3% and a loss severity rate of 25% and ramping periods are based
on prepayment penalty periods and adjustable rate mortgage first reset dates.
Constant prepayment rate assumptions specific to the individual certificates for
purposes of the December 31, 1998 valuations are set forth below:
<TABLE>
<CAPTION>
1997-1 1997-2 1998-1 1998-2 OTHER
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Prepayment speeds
Fixed rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 32% cpr
Adjustable rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 24% cpr
</TABLE>
Loan Origination and Correspondent Program Administration Fees
Fees charged in connection with loan origination and net 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
<PAGE> 66
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. 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 and 1998, the Company completed four 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 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 estimated fair value of 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 (a) the
proceeds received from the securitization plus (b) the fair value of the
residual certificates minus (c) the carrying value of the mortgage loans and
minus (d) the costs of the sale.
Lease Receivables
Lease receivables consist of direct financing leases 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 receivables portfolio
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, 1998 and 1997, the allowance for lease losses was
$1,976 and $1,866, respectively.
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.
<PAGE> 67
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.
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 (receivable) of $(3,237) and
$9,427 for the years ended December 31, 1998 and 1997, are included in other
assets and liabilities.
Statement of Cash Flows
The Company has adopted the indirect method of reporting cash flows.
Note 3 - Acquisition of Resource Bancshares Corporation:
Effective December 31, 1997, the Company acquired RBC in a transaction in
which it exchanged 9,894,889 shares of Company common stock for all the
outstanding stock of RBC. RBC, through its Republic Leasing Company division
(Republic Leasing) and its subsidiary, Laureate Capital Corp. formerly known as
Laureate Realty Services, Inc. (Laureate), has engaged primarily in small-ticket
commercial equipment lease financing and servicing and commercial mortgage
banking. Because RBC was acquired as of the close of business on December 31,
1997, there is no income statement activity for RBC included in the Company's
1997 consolidated financial statements. The 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. Goodwill and other intangible
assets are being amortized over a 20-year period using the straight line method.
Amortization expense for 1998 was $289. In connection with the acquisition, the
following is a schedule of the allocation of the purchase price:
<PAGE> 68
<TABLE>
<S> <C>
Estimated fair value of shares of
Company common stock $ 126,061
Acquisition costs 1,248
Less: Common stock of RBMG held by
RBC (98,953)
-----------------
28,356
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 $ 5,793
=================
</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.
Note 4 - Acquisition of Meritage Mortgage Corporation:
On April 1, 1997, the Company acquired Meritage Mortgage Corporation
(Meritage) in a transaction in which $1,750 of cash and 564,738 shares of the
Company's common stock were exchanged for all the outstanding stock of Meritage.
In addition, 426,355 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,
284,237 shares of contingent stock were released. During 1998 the remaining
142,118 contingent shares of RBMG common stock were released. Therefore, as of
December 31, 1998,
<PAGE> 69
all contingent shares have been released. The estimated allocations of the
purchase price were revised as additional contingent shares were released and
goodwill and other intangibles increased by the fair market value of these
released shares. Accordingly, goodwill and other intangibles were increased by
$1,765 and $3,983 in 1998 and 1997, respectively. 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. 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.
Goodwill and other intangible assets are being amortized over a 20 year period
using the straight line method. Amortization expense for the years ended
December 31, 1998 and 1997 was $564 and $287, respectively. In connection with
the acquisition, the following is a schedule of the allocation of the purchase
price:
<TABLE>
<CAPTION>
AT
ACQUISITION RELEASE OF AT
ON APRIL 1, CONTINGENT DECEMBER 31,
1997 SHARES 1998
----------------- ----------------- -------------------
<S> <C> <C> <C>
Cash paid $1,750 - $ 1,750
Estimated fair value of shares of
Company common stock 4,748 $5,748 10,496
Acquisition costs 463 - 463
----------------- ----------------- -------------------
Total purchase price 6,961 5,748 12,709
Fair value of net assets acquired 1,000 - 1,000
----------------- ----------------- -------------------
Goodwill and other intangibles $5,961 $5,748 $ 11,709
================= ================= ===================
</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 related to loans serviced. Management does
not anticipate losses on realization of the receivables. Receivables consist of
the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Mortgage servicing rights sales, net of reserves $ 55,618 $ 59,111
Servicing advances 12,780 13,007
Other 11,850 15,584
================ ===============
$ 80,248 $ 87,702
================ ===============
</TABLE>
<PAGE> 70
Note 6 - Lease Receivables:
Lease receivables are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Lease receivables held-for-sale $129,585 $66,244
Less-Unearned discount (25,580) (12,884)
Less-Allowance for lease losses (1,976) (1,866)
================ ===============
$102,029 $51,494
================ ===============
</TABLE>
The components of the Company's investment in lease receivables are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Minimum lease payments due from lessees $119,756 $60,812
Estimated residuals 4,167 2,570
Initial direct costs, net 5,662 2,862
================ ===============
$129,585 $ 66,244
================ ===============
</TABLE>
At December 31, 1998, the maturities of minimum lease receivables,
including residuals, are as follows:
1999 $ 39,760
2000 34,483
2001 25,969
2002 16,548
2003 7,096
2004 and thereafter 67
===========
$ 123,923
===========
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, 1998 and 1997, the average lease size was approximately $27 and
$19, respectively, and there were 16 leases and four leases, respectively, with
a current lease receivable in excess of $250.
At December 31, 1998 and 1997, respectively, approximately 17% and 19% of
the Company's net lease receivables were located in the state of California and
approximately 9% and 10% were located in the state of Florida. At December 31,
1998 and 1997, respectively,
<PAGE> 71
approximately 19% and 18% of the Company's net lease receivables were
collateralized by computer equipment and 9% and 11% were collateralized by
titled equipment. 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, 1998, the
Company held security deposits and sales and property taxes for the benefit of
lessees of $4,229.
Note 7 - Fair Value and Impairments of Mortgage Servicing Rights:
For purposes of evaluating its 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 defined risk tranches. The Company has
defined its risk tranches based upon interest rate band and product type. With
respect to each such risk tranche, the fair value thereof, which is based upon
an internal analysis (whose reasonableness is evaluated by reference to a
similar analysis prepared by an independent third party) that considers current
market conditions, prevailing interest, prepayment and default rates and other
relevant factors, together with the fair value of hedges allocated thereto
(which is based upon an independent third party estimate of value) is compared
to amortized carrying values of the mortgage servicing rights for purposes of
measuring potential impairment. The Company uses Constant Maturity Treasury rate
(CMT) and Constant Maturity Swap rate (CMS) floors to protect itself against
interest and prepayment risk on its available-for-sale portfolio. At December
31, 1998, the underlying unpaid principal balance of the available-for-sale
portfolio totaled $5,458,334, its fair value approximated $102,454 and the
carrying value of the portfolio was $101,533, which is net of accumulated
amortization of $38,167. 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 and the carrying value of the portfolio was $72,130,
which is net of accumulated amortization of $23,097. Impairment provisions
recognized for 1998 and 1997 were $750 and none with respect to
available-for-sale mortgage servicing rights.
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
<PAGE> 72
is based upon the allocated forward committed delivery price, is compared to
amortized carrying value for purposes of measuring potential impairment. At
December 31, 1998, the underlying unpaid principal balance of the held-for-sale
portfolio totaled $4,406,766. The fair value of the mortgage servicing rights
approximated its carrying value which was $89,489, net of accumulated
amortization of $1,446. At December 31, 1997, the underlying 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. No impairment provisions were required for 1998 or for
1997 with respect to held-for-sale mortgage servicing rights.
Note 8 - Premises and Equipment:
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
Estimated DECEMBER 31,
Useful Lives 1998 1997
------------ --------------- ---------------
<S> <C> <C> <C>
Building 25 years $ 7,657 $ 6,715
Building improvements 10-15 years 1,489 1,482
Furniture, fixtures and equipment 5-10 years 39,038 28,688
--------------- ---------------
48,184 36,885
Less-Accumulated depreciation (15,943) (12,259)
--------------- ---------------
32,241 24,626
Land 3,097 3,097
--------------- ---------------
$ 35,338 $ 27,723
=============== ===============
</TABLE>
Depreciation expense was $4,486 in 1998, $3,275 in 1997, and $2,632 in 1996.
Included in furniture, fixtures and equipment at December 31, 1998 is
approximately $7,578 of assets in progress relating to the development and
pending implementation of new computer systems.
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, 1998, the annual minimum rental
commitments for non-cancelable leases with remaining terms in excess of one year
are as follows:
1999 $ 3,168
2000 2,488
2001 1,702
2002 739
2003 391
2004 and thereafter 132
============
$ 8,620
============
<PAGE> 73
Minimum rental commitments have not been reduced by minimum sublease
rentals of $939 due in the future under non-cancelable subleases. Rent expense
for operating leases, net of sublease rental income of $387 for 1998, $445 for
1997 and $385 for 1996, was $3,106 in 1998, $2,181 in 1997 and $1,905 in 1996.
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 1999. The
credit agreement includes covenants requiring the Company to maintain (i) a
minimum net worth of $185,000, plus net income subsequent to June 30, 1998, 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 that exceed 70% of the
Company's net income, or to engage significantly in any type of business
unrelated to the mortgage banking business and the servicing of mortgage loans
or equipment leasing. At December 31, 1998 and 1997, the total amounts
outstanding under this facility and its predecessor were $468,600 and $511,700,
respectively.
Additionally, the Company has entered into a $230,000, 364-day revolving
credit facility with a syndicate of unaffiliated banks. An $80,000 portion of
the revolver facility converts in July 1999, into a four-year term loan and is
secured by the portion of the Company's servicing portfolio designated as
"available-for-sale". A $100,000 portion of the revolver facility matures in
July 1999, 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 1999, and is secured by a first-priority security interest in
receivables on servicing rights sold. The facility includes covenants identical
to those described above with respect to the warehouse line of credit. At
December 31, 1998 and 1997, the total amounts outstanding under this facility
and its predecessor were $174,500 and $119,200, respectively.
The Company has also entered into a $200,000, 364-day term subprime
revolving credit facility, which expires in July 1999. The facility includes
covenants identical to those described above with respect to the warehouse line
of credit. At December 31, 1998 and 1997, the total amount outstanding under
this facility and its predecessor were $85,000 and $19,200, respectively.
The Company was in compliance with the above-mentioned debt covenants at
December 31, 1998. Although management anticipates continued compliance, there
can be no assurance that the Company will be able to comply with the debt
covenants specified for each of its financing agreements. Failure to comply
could result in the loss of the related financing.
<PAGE> 74
RBMG Asset Management Company, Inc. (Asset Management Co.), a wholly-owned
subsidiary of the Company, and a bank entered into a master repurchase agreement
dated as of December 11, 1997, pursuant to the terms of which Asset Management
Co. is entitled from time to time to deliver eligible subprime mortgage loans in
an aggregate principal amount of up to $150,000 to the bank. The term of this
repurchase agreement is 364 days. As of December 31, 1998 no loans had been sold
under this agreement. This master repurchase agreement has been extended through
April 1999 and is in the process of being renewed.
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 facility
and its predecessor at December 31, 1998 and 1997 were $753,684 and $547,822,
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 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 total amounts outstanding under this facility at
December 31, 1998 and 1997 were $6,461 and $6,551, respectively.
RBC has a 364-day $100,000 credit facility to provide financing for its
leasing portfolio. The warehouse credit agreement matures in July 1999 and
contains various covenants regarding characteristics of the collateral and the
performance of the leases originated and serviced by RBC which require RBC to
maintain a minimum net worth of $40,000 and a ratio of total liabilities to net
worth of no more than 10.0 to 1.0. At December 31, 1998 and 1997, the total
amounts outstanding under this facility were $80,405 and none, respectively.
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.
The Company began paying regular quarterly cash dividends of $0.03 per
share in the third quarter of 1996. This quarterly cash dividend was increased
to $0.04 per share in the fourth quarter of 1997, to $0.05 per share in the
first quarter of 1998, to $0.07 per share in the second quarter of 1998 and
finally to $0.10 per share in the fourth quarter of 1998.
On March 15, 1996, the Company completed a second public offering of
3,946,812 shares of common stock priced at $12.91 per share. The Company sold
2,471,700 shares in the offering while certain selling stockholders sold the
remaining 1,475,112 shares. In a concurrent private
<PAGE> 75
placement the Company sold an additional 1,007,276 shares of common stock at the
offering price of $12.91 per share to RBC, which owned approximately 41% of the
Company's outstanding common stock prior to the public offering and private
placement and approximately 39% immediately thereafter. Net proceeds to the
Company after underwriting discounts and estimated offering expenses totaled
approximately $43,000. 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 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. The Company
reserves the right to modify the pricing terms and any other provisions of the
DRIP at any time. To meet demands of the optional cash contributions received
through the DRIP and for the reinvestment of dividends through the DRIP, the
DRIP agent purchases either new or treasury shares from the Company or the DRIP
agent purchases shares on the open market. The Board of Directors has authorized
the issuance of 2,099,985 shares under the DRIP. At December 31, 1998 there were
634,738 shares issued under the DRIP.
In 1998 the Company's Board of Directors authorized the repurchase of up to
$25,000 of the Company's common stock in either open market transactions or in
private or block trades. At December 31, 1998, there were 869,378 shares held in
the Company's treasury account at an average cost of $13.23 per share.
Note 12 - Income Taxes:
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Current:
Federal $ (3,482) $ 8,885 $ 13,060
State 245 542 328
------------- ------------- --------------
Total current (3,237) 9,427 13,388
------------- ------------- --------------
Deferred:
Federal 30,202 3,327 (2,254)
State 967 535 (209)
------------- ------------- --------------
Total deferred 31,169 3,862 (2,463)
------------- ------------- --------------
Total tax expense $ 27,932 $ 13,289 $ 10,925
============= ============= ==============
</TABLE>
Current income tax expense (benefit) represents the approximate amount
payable for each of the respective years. The above current and deferred
balances reflect certain reclassifications
<PAGE> 76
made as a result of prior year returns. During 1998, 1997 and 1996, the Company
qualified for state tax credits of $300, $202 and $1,687, respectively, reducing
current state tax expense that otherwise would have been payable for each year.
The effective tax rate varied from the statutory federal tax rate of 35%
for 1998, 1997 and 1996 due to the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1998 1997 1996
------------------------ -------------------------- -----------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
----------- --------- ------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate $26,811 35.0% $12,280 35.0% $10,692 35.0%
State tax, net of federal benefit 1,571 2.1% 887 2.5% 107 0.4%
Other, net (450) (0.6%) 122 0.4% 126 0.4%
----------- --------- ------------ --------- --------- ---------
$27,932 36.5% $13,289 37.9% $10,925 35.8%
=========== ========= ============= ========= ========== =========
</TABLE>
Deferred tax (assets) liabilities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Mark to market $ (1,864) $ (896)
Deferred compensation (3,235) (2,514)
Deferred book income (4,833) (1,580)
Foreclosure and repurchase reserves (3,672) (3,117)
State NOL carryforwards (794) (538)
Other, net (45) (172)
-------- --------
(14,443) (8,817)
-------- --------
Mortgage servicing rights 49,608 20,099
Depreciation 4,864 3,478
Securitizations 7,231 1,557
Deferred tax income 7,094 7,186
Other, net 612 294
-------- --------
69,409 32,614
======== ========
Net deferred tax liability $ 54,966 $ 23,797
======== ========
</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. During 1998 and 1997, non-qualified
stock options were exercised generating a tax benefit of $1,562 and $250,
respectively. This benefit is reflected in additional paid-in capital.
<PAGE> 77
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 901,310 shares of
common stock of the Company at the initial offering price of $5.83 per share.
The options have a term of ten years and became exercisable at a rate of 20% per
year during the period from May 26, 1994 through May 26, 1998. At December 31,
1998, all the remaining outstanding executive options were exercisable. No
additional options have been granted and none have been forfeited. During 1998
and 1997, 299,250 options and 65,100 options, respectively, were exercised.
In addition, in connection with the employment of certain officers, such
officers became entitled to receive restricted stock as part of their
compensation. Costs associated with these grants are included as compensation
expense of the Company in the accompanying consolidated financial statements. In
connection therewith, the Company issued restricted shares at the issuance
prices summarized as follows:
<TABLE>
<CAPTION>
RESTRICTED SHARES ISSUANCE PRICE PER
ISSUANCE DATE ISSUED SHARE
-------------------------------------------------------------------
<S> <C> <C>
January 21, 1994 13,336 $ 6.93
January 26, 1995 59,136 6.87
January 27, 1996 18,438 13.87
February 1, 1997 24,705 13.27
January 30, 1998 20,048 16.35
February 1, 1999 93,520 15.01
</TABLE>
On October 21, 1993, the Company adopted a phantom stock plan that provided
for the awarding of up to 450,655 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 an officer 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 223,817.
Activity in the new non-qualified stock option plan is summarized below:
<PAGE> 78
<TABLE>
<CAPTION>
UNITS UNITS FORFEITED UNITS
NON-QUALIFIED STOCK OPTION PLAN: GRANTED OR EXERCISED OUTSTANDING
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 213,157 - 213,157
- 1997 activity
- Effect of Stock Dividends 10,660 - 10,660
------------- ----------------------- ------------------
Balance at December 31, 1997 223,817 - 223,817
- 1998 activity - 99,616 (99,616)
------------- ----------------------- ------------------
Balance at December 31, 1998 223,817 99,616 124,201
============= ======================= ==================
</TABLE>
Of the 124,201 units outstanding at December 31, 1998 under the
non-qualified stock option plan, the following are exercise prices and percents
vested:
<TABLE>
<CAPTION>
EXPIRATION UNITS EXERCISE PERCENT
DATE OUTSTANDING PRICE VESTED
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
January 21, 2004 46,419 $ 6.93 80%
January 26, 2005 20,438 6.85 60%
January 26, 2005 39,648 6.87 60%
July 1, 2005 17,696 10.64 60%
</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 1,510,635 units. 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>
<CAPTION>
UNITS UNITS FORFEITED UNITS
OMNIBUS PLAN: GRANTED OR EXERCISED OUTSTANDING
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- 1998 activity 358,000 42,850 315,150
------------- ----------------------- ---------------------
Balance at December 31, 1998 951,293 42,850 908,443
============= ======================= =====================
</TABLE>
Of the 908,443 units outstanding at December 31, 1998 under the Omnibus
Employee Stock Award Plan, the following are exercise prices and percents
vested:
<PAGE> 79
<TABLE>
<CAPTION>
EXPIRATION UNITS EXERCISE PERCENT
DATE OUTSTANDING PRICE VESTED
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
October 30, 2005 112,350 $14.25 80%
January 26, 2006 24,718 13.87 60%
March 21, 2006 56,175 13.36 60%
November 8, 2006 17,850 14.31 60%
November 12, 2006 7,875 14.27 60%
December 3, 2006 7,875 13.87 60%
December 30, 2006 5,250 13.85 60%
September 3, 2007 5,250 15.91 40%
August 26, 2007 6,300 16.27 40%
September 16, 2007 6,300 15.94 40%
January 29, 2007 268,800 13.20 40%
April 11, 2007 10,500 14.73 40%
April 18, 2007 31,500 14.53 40%
May 1, 2007 6,300 13.57 40%
April 14, 2008 335,400 16.44 20%
May 1, 2008 6,000 17.75 20%
</TABLE>
During 1995, the Company established a Formula Stock Option Plan. The
purpose of this plan is to provide annually (on each September 1) to the
non-employee directors of the Company options to purchase 10,000 shares of the
common stock of the Company. All options vest 20% on the date of grant and 20%
each year thereafter on the anniversary date of the grant and expire 10 years
after the grant date. The plan is authorized to issue up to 420,000 shares of
common stock. Options granted include:
<TABLE>
<CAPTION>
GRANT DATE UNITS GRANTED EXERCISE PRICE
--------------------------------------------------------------------
<S> <C> <C>
September 1, 1995 56,175 $14.16
September 1, 1996 56,175 11.79
September 1, 1997 52,500 15.91
September 1, 1998 60,000 15.75
</TABLE>
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 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 exercise
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
$(102), $408 and $283 for 1998, 1997 and 1996, respectively.
For purposes of providing the pro forma disclosures required under SFAS No.
123, the fair value of stock options granted in 1998, 1997 and 1996 was
estimated at the date of grant using a
<PAGE> 80
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 CMT rate on the date of grant (rates ranged from 5.06% to 6.94%) 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 6.2
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 a range of 36% to 64% was
assigned to the 1998, 1997 and 1996 awards for purposes of the SFAS No. 123
valuation. The average fair value of options granted during 1998, 1997 and 1996
was $9.93, $8.35 and $9.00, respectively.
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 1998, 1997 and 1996
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 1998, 1997 and 1996.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996
--------------- --------------- -----------------
<S> <C> <C> <C>
Net income as reported $ 48,671 $ 21,798 $ 19,623
After-tax adjustment for SFAS No. 123 (1,968) (737) (409)
--------------- --------------- -----------------
Pro forma net income as adjusted $ 46,703 $ 21,061 $ 19,214
=============== =============== =================
Pro forma net income per common
share - basic
$ 2.02 $ 1.03 $ 1.00
Pro forma net income per common
share - diluted
$ 1.99 $ 1.01 $ 0.98
</TABLE>
Due to the inclusion of only 1998, 1997 and 1996 option grants, the effects
of applying SFAS No. 123 in 1998, 1997 and 1996 may not be representative of the
pro forma impact in future years.
<PAGE> 81
Note 14 - Commitments and Contingencies:
The Company was servicing and subservicing 125,686, 110,641, and 96,087
residential loans owned by others, with unpaid balances aggregating
approximately $13,600,000, $10,200,000 and $8,700,000, at December 31, 1998,
1997 and 1996, respectively. Related escrow funds totaled approximately $80,300,
$72,100 and $56,900 as of December 31, 1998, 1997 and 1996, 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 $3,255,458 and
$2,760,238 at December 31, 1998 and 1997, respectively. At December 31, 1998 and
1997, respectively, 35% and 40% of commercial mortgage loans outstanding were
being serviced for a single customer. In addition, at December 31, 1998 and
1997, respectively, the Company was servicing $37,565 and $74,405 of leases for
third parties, 98% and 94% of this portfolio was serviced for a single customer.
Commercial mortgage loans and leases serviced for others are not included in the
accompanying balance sheet.
The Company typically sells the residential 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 1998, approximately
97% of its total sales under these forward sales contracts were to four major
customers. In 1997, approximately 84% of its total 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. Repurchased loans are carried at the lower of
cost or estimated recoverable value. At December 31, 1998, $33,285 of these
repurchased loans are included in mortgage loans held-for-sale net of a loss
allowance of $3,399. At December 31, 1997, $9,213 of these repurchased loans are
included in mortgage loans held-for-sale net of a loss allowance of $2,370.
Provision for losses related to the repurchases of loans for the years ended
December 31, 1998 and 1997 totaled $9,783 and $4,615, respectively. The total
number of loans
<PAGE> 82
repurchased for the year ended December 31, 1998 and 1997 were 479 and 268,
respectively. During 1998 and 1997 the Company repurchased approximately $46,586
and $26,800 of unpaid principal balances, respectively.
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 second quarter of 1998 the Company sold its retail production
franchise to CFS Bank and recognized a $1,490 pre-tax ($917 after-tax) gain on
the sale. During the third quarter of 1997 the Company recorded a $2,279 pre-tax
charge ($1,401 after-tax) related to a terminated merger agreement and a special
charge of $7,869 pre-tax ($4,839 after-tax) relating to certain nonrecoverable
operating receivables.
During the fourth quarter of 1996, the Company recognized approximately
$5,190 ($3,192 after-tax) for 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
1996 was 50% of the employee's contribution up to a maximum of 3.0% of the
employee's gross earnings. In 1997 and 1998 the Company's match percentage was
increased to 100% of the employee's contribution up to the first 3% of the
employee's 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 $980, $958 and $375 of matching
contributions as compensation expense during 1998, 1997 and 1996, 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.
Effective January 1, 1995, the Company established a non-qualified unfunded
Pension Restoration Plan (Restoration Plan). The purpose of the Restoration Plan
is to provide certain benefits for eligible employees. Under the Restoration
Plan, retirement benefits are based upon
<PAGE> 83
years of service and the employee's level of compensation during the last five
years prior to retirement.
Effective January 1, 1998, the Company established a non-qualified unfunded
Supplemental Executive Retirement Plan (SERP). The purpose of the SERP is to
provide certain benefits for eligible employees. Under the SERP, retirement
benefits are based upon the employee's level of compensation during the high
five years of the last 10 years prior to retirement.
The combined pension expense for all three defined benefit plans included
the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
===================================
1998 1997 1996
------- ----- -----
<S> <C> <C> <C>
Service cost $ 1,417 $ 555 $ 306
Interest cost 563 186 113
Expected return on assets (97) (46) (27)
Amortization of prior service cost 316 44 44
Amortization of actuarial loss 17 24 8
------- ----- -----
$ 2,216 $ 763 $ 444
======= ===== =====
</TABLE>
Change in the combined projected benefit obligation under the plans at
December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
------- -------
<S> <C> <C>
Net benefit obligation at beginning of year $ 3,010 $ 1,404
Service cost 1,417 555
Interest cost 563 186
Plan amendments 3,696 -
Actuarial loss 649 879
Curtailments (477) -
Benefits paid (32) (14)
------- -------
Net benefit obligation at end of year $ 8,826 $ 3,010
======= =======
</TABLE>
The combined change in the plans' assets for the years ended December 31, 1998
and 1997 were:
<PAGE> 84
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
------- -------
<S> <C> <C>
Fair value of plan assets at beginning of year $ 788 $ 420
Actual return on plan assets 100 47
Employer contributions 1,006 335
Benefits paid (32) (14)
------- -------
Fair value of plan assets at end of year $ 1,862 $ 788
======= =======
Funded status at end of year $(6,965) $(2,222)
Unrecognized net actuarial loss 951 797
Unrecognized prior service cost 3,805 425
------- -------
Net amount recognized at end of year $(2,209) $(1,000)
======= =======
</TABLE>
Amounts recognized in the statement of financial position for the combined plans
consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
------- -------
<S> <C> <C>
Accrued benefit cost $(4,315) $(1,186)
Intangible asset 2,106 186
------- -------
Net amount recognized at end of year $(2,209) $(1,000)
======= =======
</TABLE>
Weighted-average assumptions used in accounting for the plans as of fiscal
year-end were:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Discount rate 6.75% 7.00% 7.50%
Expected return on plan assets 8.00% 8.00% 8.00%
Rates of compensation increase-SERP 3.30% 3.30% 3.30%
Rates of compensation increase all other plans 4.00% 4.00% 4.00%
</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 make contributions, through payroll deductions 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 425,528 shares of stock have been purchased by employees. The
Company has subsidized approximately $121, $108 and $94 relating to the
noncompensatory Stock Plan discount for 1998, 1997 and 1996, respectively. At
December 31, 1998 there were 155,564 shares issued under the Stock Plan.
On January 1, 1995, the Company established the Employee Stock Ownership
Plan (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
<PAGE> 85
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 1998, 1996 and 1995, the ESOP borrowed $2,000, $3,000 and $2,000,
respectively, from the Company to purchase a total of 590,119 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. The
principal amount of the 1998 loan is repayable in annual installments of $500
which commence in January 1999. In accordance with these loan agreements, the
ESOP repaid $1,000 to the Company in 1998, $1,000 to the Company in 1997 and
$400 to the Company in 1996. An additional $108, $53 and $48 was paid on these
loans in 1998, 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. For the years ended
December 31, 1998, 1997 and 1996, 94,593, 99,545 and 42,339 shares, respectively
were released. Compensation expense related to the ESOP was $1,623, $1,480 and
$600 for the years ended December 31, 1998, 1997 and 1996, respectively. The
fair market value of the unallocated shares held at December 31, 1998 was
$5,857. Fair market value of the allocated shares was $2,322 at December 31,
1998.
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 were 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, 1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
PER
INCOME SHARES SHARE
FOR THE YEAR ENDED DECEMBER 31, 1998 (NUMERATOR) (DENOMINATOR) AMOUNT
- --------------------------------------- ----------- -------------- -------
<S> <C> <C> <C>
Net income per common share - basic $48,671 23,122,835 $2.10
=======
Effect of stock options 378,273
----------- --------------
Net income per common share - diluted $48,671 23,501,108 $2.07
=========== ============== =======
</TABLE>
<PAGE> 86
Options to purchase 6,000 shares of common stock at $17.75 per share were
outstanding during 1998 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 May
1, 2008, were still outstanding at December 31, 1998.
<TABLE>
<CAPTION>
PER
INCOME SHARES SHARE
FOR THE YEAR ENDED DECEMBER 31, 1997 (NUMERATOR) (DENOMINATOR) AMOUNT
- --------------------------------------- ----------- -------------- -------
<S> <C> <C> <C>
Net income per common share - basic $ 21,798 20,396,428 $ 1.07
========
Effect of stock options 404,400
----------- -------------
Net income per common share - diluted $ 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>
PER
INCOME SHARES SHARE
FOR THE YEAR ENDED DECEMBER 31, 1996 (NUMERATOR) (DENOMINATOR) AMOUNT
- --------------------------------------- ----------- -------------- -------
<S> <C> <C> <C>
Net income per common share - basic $ 19,623 19,158,658 $ 1.02
=======
Effect of stock options 367,209
------------ -------------
Net income per common share - diluted $ 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> 87
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 and wholesale brokers. 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.
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 changes.
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
<PAGE> 88
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, 1998 or 1997. Because the changes in value of
futures contracts 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
residential 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 principal balances.
Outstanding commitments to deliver totaled $3,300,000 and $4,800,000 at December
31, 1998 and 1997, respectively. The Company also maintains a portfolio of
residential 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 potentially effectively mitigate the Company's exposure to
declines in the economic value of its servicing rights in a declining interest
rate environment.
The Company uses an amortizing interest rate swap agreement to fix the
interest rate on its floating rate credit facility, which finances its fixed
rate leasing portfolio. Under this agreement, the Company makes or receives
payments based on the difference between a fixed rate paid by the Company and a
floating rate paid by the counterparty, applied to a notional amount of
outstanding principal. The interest rate swap agreement is valued based on the
difference between the fixed rate and the floating rate at year end.
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
<PAGE> 89
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
counterparties to certain of its financial instruments, but it does not expect
any counterparties 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,
---------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Mortgage purchase commitments $1,089,539 $ 980,498
Financial instruments whose contract amounts exceed the amount of
credit risk:
Mandatory delivery commitments (allocated against mortgages
held-for-sale) 1,263,861 800,725
Mandatory delivery commitments (allocated against mortgage
purchase commitments) 402,139 581,025
Purchased option contracts 310,000 215,000
Forward servicing sales contracts 3,300,000 4,800,000
Interest rate floor contracts 1,482,000 978,200
Interest rate swaps 81,147 --
</TABLE>
Mortgage loan purchase commitments expose the Company to credit loss in the
event the purchase commitments are funded as mortgage loans and if
counterparties 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 $2,823 and $1,819 at December 31, 1998 and 1997, respectively,
of such deferred premiums. Ultimately, such deferred premiums and related
realized gains or losses from these activities are recorded as a component of
gains and losses on sales of mortgage loans at the earlier of the expiration of
the underlying contract or when exercise of the contract is deemed remote.
<PAGE> 90
The Company uses CMT rate and CMS rate 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 and CMS 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 to the extent that such changes
correlate with changes in fair value of mortgage servicing rights. Included in
the mortgage servicing right basis are deferred gains of $13,509 and $6,776 and
unamortized floor premiums of $9,000 and $2,787 for 1998 and 1997, respectively.
Other assets included $6,539 and $3,521 at December 31, 1998 and 1997,
respectively, of unamortized premiums. For the years ended December 31, 1998 and
1997, respectively, $1,976 and $1,514 of deferred premiums paid for interest
rate floor contracts were amortized to expense.
The current variable rate index (CMT Treasury rate) was 4.65% and 5.78% at
December 31, 1998 and 1997, respectively. Other terms of the CMT interest rate
floor contracts outstanding at December 31, 1998, 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, 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%
April 22, 1997 April 22, 2000 125,000 6.750%
April 22, 1997 April 22, 2000 150,000 6.500%
April 22, 1997 April 22, 2000 375,000 6.250%
July 9, 1998 July 9, 2005 55,000 4.910%
July 9, 1998 July 9, 2001 125,000 5.160%
September 15, 1998 September 15, 2003 75,000 4.500%
October 13, 1998 October 13, 2003 150,000 4.500%
================
$ 1,362,000
================
</TABLE>
During 1998 the Company purchased four CMT interest-rate floors contracts
for $3,530 with contract dates as listed above. The notional amounts of these
interest rate floors totaled $405,000. One interest rate floor with a notional
amount of $21,200 and a contract date of February 13, 1995, expired on February
13, 1998.
During 1998 the Company purchased one CMS interest-rate floor contract for
$1,464 with a contract date of November 10, 1998. The notional amount of this
CMS interest rate floor is $120,000 with a floor rate of 5.410% that expires on
November 10, 2003. The CMS rate at December 31, 1998 was 4.65%.
<PAGE> 91
Note 19 - Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 4,292 $ 5,459 $ 4,601 $ 7,426 $ 21,778
Net gain on sale of mortgage loans 39,174 44,455 45,597 42,237 171,463
Gain on sale of mortgage servicing rights 628 452 533 140 1,753
Servicing fees 9,303 10,412 11,419 12,022 43,156
Other income 974 1,923 (1) 487 2,192 5,576 (1)
- ------------------------------------------------------------------------------------------------------
Total revenues 54,371 62,701 (1) 62,637 64,017 243,726 (1)
- ------------------------------------------------------------------------------------------------------
Salary and employee benefits 20,714 20,848 20,479 20,365 82,406
Occupancy expense 2,780 2,651 2,627 3,161 11,219
Amortization and provision for impairment
of mortgage servicing rights 5,629 6,674 7,750 9,179 29,232
Provision for foreclosure losses and
repurchased loans 1,962 2,054 2,436 4,571 11,023
General and administrative expenses 7,830 8,814 7,959 8,640 33,243
- ------------------------------------------------------------------------------------------------------
Total expenses 38,915 41,041 41,251 45,916 167,123
- ------------------------------------------------------------------------------------------------------
Income before income taxes 15,456 21,660 (1) 21,386 18,101 76,603 (1)
Income tax expense (5,875) (8,548)(1) (8,134) (5,375) (27,932)(1)
- ------------------------------------------------------------------------------------------------------
Net income 9,581 13,112 (1) 13,252 12,726 48,671 (1)
- ------------------------------------------------------------------------------------------------------
Net income per common share-basic $ 0.42 $ 0.57 (1) $ 0.57 $ 0.56 $ 2.10 (1)
Net income per common share-diluted $ 0.41 $ 0.56 (1) $ 0.56 $ 0.55 $ 2.07 (1)
</TABLE>
<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
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 and provision for impairment
of mortgage servicing rights 4,108 4,725 4,840 4,642 18,315
Provision for foreclosure losses and
repurchased loans 266 827 1,512 2,010 4,615
General and administrative expenses 4,609 6,041 16,325 (2) 6,333 33,308 (2)
- ------------------------------------------------------------------------------------------------------
Total expenses 22,839 28,323 41,050 (2) 33,719 125,931 (2)
- ------------------------------------------------------------------------------------------------------
Income before income taxes 7,218 11,996 3,907 (2) 11,966 35,087 (2)
Income tax expense (2,748) (4,625) (1,340)(2) (4,576) (13,289)(2)
- ------------------------------------------------------------------------------------------------------
Net income $ 4,470 $ 7,371 $ 2,567 (2) $ 7,390 $ 21,798 (2)
- ------------------------------------------------------------------------------------------------------
Net income per common share-basic $ 0.23 $ 0.36 $ 0.12 (2) $ 0.36 $ 1.07 (2)
Net income per common share-diluted $ 0.22 $ 0.36 $ 0.12 (2) $ 0.35 $ 1.05 (2)
</TABLE>
(1) Includes non-recurring and special charges totaling $1,490 pre-tax, or $917
after-tax. Exclusive thereof, second quarter 1998 and full year 1998 other
income, total revenue, 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 $433, $61,211, $20,170, $7,975, $12,195, $0.56 and
$0.52; and $4,086, $242,236, $75,113, $27,359, $47,754, $2.07 and $2.03,
respectively.
(2) Includes non-recurring and special charges totaling $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.
<PAGE> 92
Note 20 - Segment Income Statement:
In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" the Company adopted segment reporting in
1998. The following tables present 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, 1998,
1997 and 1996, respectively.
<TABLE>
<CAPTION>
NON-
MORTGAGE PRODUCTION RECURRING
-------------------- AGENCY- AND
AGENCY- ELIGIBLE COMMERCIAL SPECIAL
FOR THE YEAR ENDED DECEMBER 31, 1998* ELIGIBLE SUBPRIME SERVICING MORTGAGE LEASING OTHER CHARGES CONSOLIDATED
- ------------------------------------- -------- ---------- ---------- ------------ --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 6,680 $ 9,565 $ 536 $ 4,637 $ 360 $ 21,778
Net gain on sale of mortgage loans 134,472 27,980 9,011 171,463
Gain on sale of mortgage servicing $ 1,753 1,753
rights
Servicing fees 37,856 3,777 1,014 509 43,156
Other income 1,455 732 455 11 753 680 $ 1,490 5,576
- ------------------------------------- -------- ---------- ---------- ------------ --------- --------- ---------- -------------
Total revenues 142,607 38,277 40,064 13,335 6,404 1,549 1,490 243,726
- ------------------------------------- -------- ---------- ---------- ------------ --------- --------- ---------- -------------
Salary and employee benefits 55,221 13,485 3,449 7,322 2,347 582 82,406
Occupancy expense 7,451 1,921 443 840 376 188 11,219
Amortization and provision for
impairment of mortgage servicing
rights 27,897 1,335 29,232
General and administrative expenses 28,342 4,490 6,446 1,734 2,584 670 44,266
- ------------------------------------- -------- ---------- ---------- ------------ --------- --------- ---------- -------------
Total expenses 91,014 19,896 38,235 11,231 5,307 1,440 167,123
- ------------------------------------- -------- ---------- ---------- ------------ --------- --------- ---------- -------------
Income before income taxes 51,593 18,381 1,829 2,104 1,097 109 1,490 76,603
Income tax expense (18,649) (6,656) (662) (952) (435) (5) (573) (27,932)
- ------------------------------------- -------- ---------- ---------- ------------ --------- --------- ---------- -------------
Net income $32,944 $ 11,725 $ 1,167 $ 1,152 $ 662 $ 104 $ 917 $ 48,671
======== ========== ========== ============ ========= ========= ========== =============
</TABLE>
<PAGE> 93
<TABLE>
<CAPTION>
NON-
MORTGAGE PRODUCTION RECURRING
-------------------- AGENCY- AND
AGENCY- ELIGIBLE COMMERCIAL SPECIAL
FOR THE YEAR ENDED DECEMBER 31, 1997* ELIGIBLE SUBPRIME SERVICING MORTGAGE LEASING OTHER CHARGES CONSOLIDATED
- ------------------------------------- -------- ---------- ---------- ------------ --------- --------- ---------- -------------
<S> <C> <C> <C> <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 $ 7,955 7,955
rights
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 and provision for
impairment 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
Income tax expense (11,833) (1,825) (3,537) 3,906 (13,289)
- ------------------------------------- -------- ---------- ---------- ------------ --------- --------- ---------- -------------
Net income (loss) $19,297 $ 2,969 $ 5,773 $ (6,241) $ 21,798
======== ========== ========== ============ ========= ========= ========== =============
</TABLE>
<TABLE>
<CAPTION>
NON-
MORTGAGE PRODUCTION RECURRING
-------------------- AGENCY- AND
AGENCY- ELIGIBLE COMMERCIAL SPECIAL
FOR THE YEAR ENDED DECEMBER 31, 1996* ELIGIBLE SUBPRIME SERVICING MORTGAGE LEASING OTHER CHARGES CONSOLIDATED
- ------------------------------------- -------- ---------- ---------- ------------ --------- --------- ---------- -------------
<S> <C> <C> <C> <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
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 and provision for
impairment 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
Income tax expense (10,058) (2,865) 1,998 (10,925)
- ------------------------------------- -------- ---------- ---------- ------------ --------- --------- ---------- -------------
Net income (loss) $17,758 $ 5,057 $(3,192) $19,623
======== ========== ========== ============ ========= ========= ========== =============
</TABLE>
*Revenues and expenses have been allocated on a direct basis to the extent
possible. Corporate overhead expenses have been allocated to agency-eligible
mortgage production. Management believes that these and all other revenues and
expenses have been allocated to the respective divisions on a reasonable basis.
<PAGE> 94
Note 21 - Fair Value of Financial Instruments:
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
----------------------------- ------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Assets
Cash $ 18,124 $ 18,124 $ 13,546 $ 13,546
Receivables 80,248 80,248 87,702 87,702
Lease receivables 102,029 107,290 51,494 51,494
Residual interests in subprime
securitizations 45,782 45,782 19,684 19,684
Mortgage loans held-for-sale and
mortgage-backed securities 1,441,458 1,442,532 1,179,188 1,181,533
Liabilities
Short-term borrowings 1,566,287 1,566,287 1,224,489 1,224,489
Long-term borrowings 6,364 6,371 6,461 6,380
</TABLE>
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- ---------------------------------------
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 $1,089,539 - $ 2,600 $ 980,498 - $ 3,010
Mandatory delivery commitments
(allocated to mortgage purchase
commitments) 402,139 - (451) 581,025 - (2,446)
Purchased option contracts 310,000 $ 2,823 1,183 215,000 $ 1,819 2,757
Interest rate floor contracts 1,482,000 20,048 20,048 978,200 11,801 11,801
Interest rate swaps 81,147 - (759) - - -
</TABLE>
The following notes summarize the significant methods and assumptions used
in estimating the fair values of financial instruments.
Cash and receivables 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
<PAGE> 95
aggregate discounted lease balance was obtained from an investment banker based
on recent market rates.
Mortgage loans held-for-sale and mortgage-backed securities covered by
mandatory delivery commitments allocated thereto are valued based upon
commitment delivery prices. Uncommitted mortgage loans held-for-sale are valued
by reference to quoted market prices for mortgage-backed securities, after
appropriate adjustments thereto. For purposes of developing the estimated fair
value, the portfolio has been segregated by product type, term and 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
7.375%.
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 an independent third
party valuation.
Interest rate swaps are valued based upon the present value of future cash
flows based on the interest rate spread between the fixed rate and floating rate
at December 31, 1998.
<PAGE> 96
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,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, 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.
PricewaterhouseCoopers LLP
Columbia, South Carolina
January 29, 1999
<PAGE> 97
STOCK DATA
Information pertaining to high and low stock prices for each quarter during
1998 and 1997 is given in the following chart. All per share data have been
adjusted to reflect the stock dividends issued by the Company.
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------- ----------------------------------------------
QUARTER HIGH LOW HIGH LOW
---------------------- ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
First $18.00 $13.50 $16.79 $12.50
Second 19.63 15.06 19.05 12.02
Third 23.25 15.06 19.05 11.90
Fourth 17.13 9.50 16.88 10.95
Source: Nasdaq
</TABLE>
The Company began paying cash dividends in 1996. The following chart
summarizes cash dividends declared and paid during 1997 and 1998. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for restrictions on the Company's ability to pay cash dividends.)
<TABLE>
<CAPTION>
RECORD DATE PAYMENT DATE CASH DIVIDEND
------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
February 19, 1997 March 5, 1997 $0.03
June 2, 1997 June 16, 1997 0.03
August 20, 1997 September 10, 1997 0.03
December 18, 1997 December 31, 1997 0.04
February 16, 1998 March 18, 1998 0.05
June 1, 1998 June 30, 1998 0.07
July 31, 1998 August 31, 1998 0.07
November 6, 1998 December 4, 1998 0.10
</TABLE>
As of March 19, 1999, there were approximately 581 record holders of
the Company's common stock.
<PAGE> 98
DIRECTORS EXECUTIVE OFFICERS
- --------- ------------------
Edward J. Sebastian Edward J. Sebastian
Chairman of the Board Chairman of the Board
Chief Executive Officer Chief Executive Officer
Resource Bancshares Mortgage Group, Inc.
Columbia, South Carolina David W. Johnson, Jr.
Vice Chairman
David W. Johnson, Jr. Managing Director
Vice Chairman
Managing Director Steven F. Herbert
Resource Bancshares Mortgage Group, Inc. Senior Executive Vice President
Columbia, South Carolina Chief Financial Officer
John C. Baker Richard M. Duncan
Baker Capital Corp. Senior Executive Vice President
venture capital firm Production
New York, New York
Stuart M. Cable *
Attorney
Goodwin, Proctor, & Hoar LLP
law firm
Boston, Massachusetts
John W. Currie
Attorney
McNair Law Firm P.A.
law firm
Columbia, South Carolina
Boyd M. Guttery *
Business Consultant
Atlanta, Georgia
Robin C. Kelton
Chairman
Kelton International Ltd.
investment bank
London, England
John O. Wolcott *
Executive Vice President
Olayan America Corporation
investment company
New York, New York
* Audit Committee
<PAGE> 99
CORPORATE INFORMATION
Exchange: NASDAQ
Symbol: 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
E-mail : [email protected]
1-800-933-2890
DIVIDEND REINVESTMENT PLAN
Resource Bancshares Mortgage Group, Inc. has an optional Dividend Reinvestment
and Stock Purchase Plan. Shareholders interested in participating can contact
Steven F. Herbert at the address set forth previously in Investor Relations
Contact.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1441 Main Street, Suite 705
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 PREVIOUSLY IN INVESTOR RELATIONS CONTACT.
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company, a division of Equiserve
TELEPHONE
Inside the US: 1-800-446-2617
Outside the US: 1-201-324-0498
TDD/TTY for hearing impaired: 1-201-222-4955
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.
INTERNET
Internet: http://www.equiserve.com
E-mail: [email protected]
GENERAL CORRESPONDENCE
First Chicago Trust Company, a division of Equiserve
P.O. Box 2500
Jersey City, NJ 07303-2500
For questions regarding stock transfers, change of address or lost certificates.
CERTIFICATE TRANSFERS BY MAIL
First Chicago Trust Company, a division of Equiserve
P.O. Box 2506
Jersey City, NJ 07303-2506
CERTIFICATE TRANSFERS BY COURIER
First Chicago Trust Company, a division of Equiserve
14 Wall Street, Suite 4680-8th Floor
New York, NY 10005
<PAGE> 1
EXHIBIT 21.1
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
1. RBMG, Inc. (f/k/a Intercounty Mortgage, Inc.) a wholly-owned subsidiary of
the Registrant, was formed by the Registrant in January 1995 and is
incorporated in the state of Delaware.
2. Meritage Mortgage Corporation, a wholly-owned subsidiary of the Registrant,
was acquired by the Registrant in April 1997 and is incorporated in the state
of Oregon.
3. Resource Bancshares Corporation, a wholly-owned subsidiary of the
Registrant was acquired by the Registrant in December 1997 and is incorporated
in the state of South Carolina.
4. Laureate Capital Corp. (f/k/a Laureate Realty Services, Inc.) a
wholly-owned subsidiary of Laureate Holdings, Inc., was acquired by the
Registrant in December 1997 and is incorporated in the state of South Carolina.
5. Laureate Holdings, Inc. (f/k/a Laureate Capital Corp.), a wholly-owned
subsidiary of Resource Bancshares Corporation, was acquired by the Registrant
in December 1997 and is incorporated in the state of Delaware.
6. RBMG Asset Management Company, Inc., a wholly-owned subsidiary of the
Registrant, was formed by the Registrant in November 1997 and is incorporated
in the state of Nevada.
7. RBMG Funding Co., Inc., a wholly-owned subsidiary of RBMG Asset Management
Company, Inc., was formed by RBMG Asset Management, Inc. in September 1997 and
is incorporated in the state of Nevada.
8. TFP Funding, Inc., a wholly-owned subsidiary of Resource Bancshares
Corporation, was acquired by the Registrant in December 1997 and is
incorporated in the state of Delaware.
9. TFP Funding III, Inc., a wholly-owned subsidiary of Resource Bancshares
Corporation was formed by Resource Bancshares Corporation in June 1998 and is
incorporated in the state of Delaware.
10. MG Reinsurance Company, a wholly-owned subsidiary of the Registrant, was
formed by the Registrant in November 1998 and is incorporated in the state of
Vermont.
<PAGE> 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,
333-68909} of Resource Bancshares Mortgage Group, Inc. of our report dated
January 29, 1999 appearing on page 52 of this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Columbia, South Carolina
March 29, 1999
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-95914} of
Resource Bancshares Mortgage Group, Inc. of our report dated January 29, 1999
appearing on page 52 of this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Columbia, South Carolina
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,124
<SECURITIES> 45,782
<RECEIVABLES> 182,277
<ALLOWANCES> 0
<INVENTORY> 1,247,425
<CURRENT-ASSETS> 1,917,934
<PP&E> 51,281
<DEPRECIATION> 15,943
<TOTAL-ASSETS> 1,969,635
<CURRENT-LIABILITIES> 1,711,113
<BONDS> 6,364
0
0
<COMMON> 316
<OTHER-SE> 251,842
<TOTAL-LIABILITY-AND-EQUITY> 1,969,635
<SALES> 102,446
<TOTAL-REVENUES> 243,726
<CGS> 122,857
<TOTAL-COSTS> 167,123
<OTHER-EXPENSES> 44,266
<LOSS-PROVISION> 11,023
<INTEREST-EXPENSE> 80,668
<INCOME-PRETAX> 76,603
<INCOME-TAX> 27,932
<INCOME-CONTINUING> 76,603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,671
<EPS-PRIMARY> 2.10
<EPS-DILUTED> 2.07
</TABLE>
