<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999 Commission File Number 000-21786
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware 57-0962375
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(State of Incorporation) (IRS Employer Identification Number)
7909 Parklane Road
Columbia, South Carolina 29223
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(Address of principal executive offices) (Zip Code)
(803) 741-3000
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(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 common equity held by
non-affiliates of the registrant was $70,454,162 as of March 6, 2000, based on
the closing price of $3.81 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 6, 2000, 19,168,376 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
1999 Annual Report to Shareholders Parts II and IV
2000 Proxy Statement Part III
<PAGE> 3
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Form 10-K for the year ended December 31, 1999
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I.
Item 1. Business 1
Executive Officers of the Registrant 22
Item 2. Properties 22
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 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results 23
of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements With Accountants on Accounting and 24
Financial Disclosure
PART III.
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions 24
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25
SIGNATURES 26
INDEX TO EXHIBITS A
</TABLE>
<PAGE> 4
PART I
ITEM 1. BUSINESS
General
The Company is a diversified financial services company engaged through
wholly-owned subsidiaries 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 (i.e.,
one-four family), first lien and second lien mortgage loans and the purchase and
sale of servicing rights associated with agency-eligible loans. In addition, two
of the Company's wholly-owned subsidiaries originate, sell and service
small-ticket commercial equipment leases and originate, sell, underwrite for
investors and service commercial mortgage loans.
As part of its primary business focus, residential mortgage banking,
the Company purchases agency-eligible mortgage loans through its correspondents
and funds loans through its wholesale division. The Company also purchases and
originates residential mortgage loans through its subprime division.
Substantially all of the residential 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 are 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 then either held in the
Company's portfolio or sold separately.
The Company receives loan servicing fees and subservicing fees with
respect to the agency-eligible loans it funds through its wholesale channel and
purchases through its correspondent channel. The Company also receives loan
servicing fees with respect to agency-eligible loans the mortgage servicing
rights for which were acquired through bulk acquisitions of servicing rights
related to agency-eligible loans originated by other lenders.
During 1999, mortgage rates rose causing a significant decline in
nationwide mortgage refinance activity. Production volumes declined and the
resultant industry overcapacity led to an increasingly intense competitive
pricing environment. The Company was not immune from these cyclical trends as
its volumes and gross production margins were adversely affected. Accordingly,
the Company reported net operating losses for the latter half of 1999.
In response, on December 1, 1999 the Company announced a planned
reorganization and workforce reduction which involved (1) consolidation of 18
existing agency-eligible wholesale branch locations into six regional operating
centers, (2) closure of three subprime branches, and (3) reduction of overall
agency-eligible production support and administrative staffing levels. In
connection with execution of the plan, 208 agency-eligible employees (out of
907) and 34 subprime employees (out of 320) were terminated. Although
implementation of the above described reorganization and workforce reduction
achieved the expected cost savings levels, its scope may prove inadequate to
return the Company to profitability in the short-term due primarily to continued
erosion of gross production margins during the latter portion of 1999.
On January 10, 2000 the Company named Douglas K Freeman as its new
Chief Executive Officer. On February 12 through 14, 2000 the senior management
team met and restated its corporate strategy, mission, goals, business
principles and core values. The Company's strategy is to become a customer
centric financial intermediary that combines the best of product depth,
relationship management and service quality. In order to realize this vision,
the Company plans to: (1) diversify its product array, (2) utilize and deploy
advanced technology to support a more effective order fulfillment process and
(3) to integrate enhanced customer relationship management systems and
disciplines into its ongoing sales and marketing operations.
The Company also intends to continue expansion of its small-ticket
commercial equipment lease portfolio.
The Company does not hold any material trademarks, licenses, franchises
or concessions.
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During 1999, mortgage rates rose causing a significant decline in
nationwide mortgage refinance activity. Production volumes declined and the
resultant industry overcapacity led to an increasingly intense competitive
pricing environment. The Company was not immune from these cyclical trends as
its volumes and gross production margins were adversely affected. Accordingly,
the Company reported net operating losses for the latter half of 1999.
In response, on December 1, 1999 the Company announced a planned
reorganization and workforce reduction which involved (1) consolidation of 18
existing agency-eligible wholesale branch locations into six regional operating
centers, (2) closure of three subprime branches, and (3) reduction of overall
agency-eligible production support and administrative staffing levels. In
connection with execution of the plan, 208 agency-eligible employees (out of
907) and 34 subprime employees (out of 320) were terminated. Although
implementation of the above described reorganization and workforce reduction
achieved the expected cost savings levels, its scope may prove inadequate to
return the Company to profitability in the short-term due primarily to continued
erosion of gross production margins during the latter portion of 1999.
On January 10, 2000 the Company named Douglas K Freeman as its new
Chief Executive Officer. On February 12 through 14, 2000 the senior management
team met and restated its corporate strategy, mission, goals, business
principles and core values. The Company's strategy is to become a customer
centric financial intermediary that combines the best of product depth,
relationship management and service quality. In order to realize this vision,
the Company plans to: (1) diversify its product array, (2) utilize and deploy
advanced technology to support a more effective order fulfillment process and
(3) to integrate enhanced customer relationship management systems and
disciplines into its ongoing sales and marketing operations.
<PAGE> 6
Segmented Income Statements
The Company operates under wholly-owned subsidiaries that are engaged
in the following lines of business: (a) agency-eligible production; (b)
agency-eligible servicing; (c) agency-eligible reinsurance; (d) subprime
residential production; (e) commercial mortgage lending; and (f) small-ticket
equipment leasing. Tables set forth under Note 17 in the Consolidated Financial
Statements in the Company's accompanying 1999 Annual Report to Shareholders
present a summary of the revenues and expenses for each of the Company's
subsidiaries for the years ended December 31, 1999, 1998 and 1997, respectively
and are hereby incorporated herein by reference. The following represents the
percentage and amount of total Company revenues as contributed by the various
operating divisions for the years ended December 31, 1999, 1998 and 1997:
($ in thousands)
<TABLE>
<CAPTION>
1999 1999 1998 1998 1997 1997
$ Amount Percentage $ Amount Percentage $ Amount Percentage
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Agency-eligible
production $ 72,613 42% $ 143,650 59% $ 107,302 67%
Agency-eligible
servicing 45,080 26% 40,064 16% 38,824 24%
Agency-eligible
reinsurance 1,649 1% 1,189 1% -- --
Subprime 31,351 18% 38,277 16% 15,280 9%
Commercial mortgage 14,297 8% 13,335 5% -- --
Leasing 9,285 5% 6,404 3% -- --
Other
/eliminations (483) 0% 807 0% (388) 0%
--------- --------- --------- --------- --------- ---------
Total $ 173,792 100% $ 243,726 100% $ 161,018 100%
--------- --------- --------- --------- --------- ---------
</TABLE>
Residential 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, 1999, the Company had 909 correspondents originating
mortgage loans in 49 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 34% of its dollar volume of correspondent loans during 1999
compared to 27% in 1998. During 1999, the top five correspondents accounted for
approximately 16% of the year's mortgage loan correspondent purchase volume.
This compares to the top five correspondents accounting for approximately 12%
and 13% of the mortgage loan purchase volume during 1998 and 1997, respectively.
No single correspondent accounted for more than 5.8% of the Company's
agency-eligible mortgage loan purchase volume in 1999. In 1998 and 1997, 3.9%
and 3.3%, respectively, of the Company's total agency-eligible mortgage loan
purchase volume was acquired from the Company's highest-volume correspondent.
The Company continues to emphasize correspondent loan production as its
basic business focus. By emphasizing correspondent lending, the Company can
match its costs more directly with the volume
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<PAGE> 7
of agency-eligible loans purchased, so that a substantial portion of the
Company's cost is variable rather than fixed. 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 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
that meet certain financial strength, delinquency ratio, underwriting and
quality control standards.
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.
The Company has implemented a quality control program to monitor
compliance with the Company's established lending and servicing policies and
procedures, as well as with applicable laws
3
<PAGE> 8
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 re-verifying employment and bank information and
obtaining separate credit reports and property appraisals.
Wholesale
The wholesale division receives loan applications through brokers,
underwrites the loans, funds the loans at closing and prepares all closing
documentation. The wholesale branches and regional operating centers 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. 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.
Although the establishment of wholesale branch offices and regional
operating centers involves the incurrence of fixed expenses associated with
maintaining those offices, wholesale operations also generally provide for
higher profit margins than correspondent loan production. Additionally, each
branch office and regional operating center 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. In 1999, the Company closed several branch
offices and established regional operations centers to better facilitate service
to a larger geographic area. At December 31, 1999, the Company had 2 wholesale
branches and 5 regional operating centers serving approximately 4,300 brokers.
The offices are located in California (1), Colorado (1), Georgia (1),
Massachusetts (1), Minnesota (1), Missouri (1) and Utah (1).
Subprime
Subprime loan production increased by 20% to $728.4 million for 1999 as
compared to $607.7 million during 1998 as the Company has expanded its
operations. Between 1998 and 1999 the Company increased the number of its
subprime brokers by 1,265. The number of branches declined from 19 in 1998 to 10
at the end of 1999 as the Company reassessed the geographic regions that each
branch covers.
The following table shows residential production volume by source for
each of the three years in the period ended December 31, 1999.
<TABLE>
<CAPTION>
RESIDENTIAL LOAN PRODUCTION VOLUME Year Ended December 31,
---------------------------------------------
($ in Thousands) 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Correspondent $ 6,363,936 $11,666,560 $ 7,893,583
Wholesale 1,748,415 3,023,961 1,868,726
Retail -- 264,059 675,411
----------- ----------- -----------
Total Agency-Eligible Loan Production $ 8,112,351 $14,954,580 $10,437,720
Subprime Production 728,410 607,664 339,574
----------- ----------- -----------
Total Residential Production $ 8,840,761 $15,562,244 $10,777,294
=========== =========== ===========
</TABLE>
4
<PAGE> 9
The Company purchases and originates conventional and subprime mortgage
loans and mortgage loans insured by the FHA or partially guaranteed by the VA.
All mortgage loans purchased or originated by the Company are purchased or
originated for resale. The majority of the Company's loans are conforming loans,
i.e., mortgage loans that qualify for inclusion in purchase and guarantee
programs sponsored by Fannie Mae, Freddie Mac and Ginnie Mae.
The Company purchases and originates a variety of mortgage loan
products that are designed, in conjunction with the requirements of prospective
purchasers of such loans, to respond to consumer needs and competitive factors.
In addition to 15-year and 30-year conventional mortgage loans and 15-year and
30-year FHA loans and VA loans, the Company purchases and originates products
designed to provide lower interest rates to borrowers or lower principal and
interest payments by borrowers, including balloon mortgage loans that have
relatively short terms (e.g., five or seven years) and longer amortization
schedules (e.g., 25 or 30 years) and adjustable rate mortgage loans. The Company
also purchases and originates mortgage loans featuring a variety of combinations
of interest rates and discount points so that borrowers may elect to pay higher
points at closing and less interest over the life of the loan, or pay a higher
interest rate and reduce or eliminate points payable at closing. The portion of
total loans held for sale at any time that consists of a particular product type
depends upon the interest rate environment at the time such loans are made.
The following table shows residential mortgage loan production volume
by type of loan for each of the three years in the period ended December 31,
1999.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
($ in Millions except as indicated) 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CONVENTIONAL LOANS:
Volume $ 4,892.9 $ 10,674.1 $ 6,126.8
Percentage of total volume 55% 68% 57%
FHA / VA LOANS:
Volume $ 3,219.5 $ 4,280.4 $ 4,310.9
Percentage of total volume 37% 28% 40%
SUBPRIME LOANS
Volume $ 728.4 $ 607.7 $ 339.6
Percentage of total volume 8% 4% 3%
TOTAL LOANS:
Volume $ 8,840.8 $ 15,562.2 $ 10,777.3
Number of loans 79,322 131,630 99,349
Average loan size ($ in Thousands) $ 111.5 $ 118.2 $ 108.5
</TABLE>
The following table shows residential loan production volume by state
for the year ended December 31, 1999, for each state that represented 5% or more
of the Company's total residential loan production volume for 1999.
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Year Ended December 31, 1999
-------------------------------------
($ in Thousands) Percent of
State Amount Total
------------------------------ ---------------- ---------------
California $ 890,638 10.07%
Minnesota 746,244 8.44%
Illinois 733,646 8.30%
Colorado 674,314 7.63%
Ohio 541,283 6.12%
Massachusetts 444,982 5.03%
Georgia 442,624 5.01%
All Other 4,367,030 49.40%
---------------- ---------------
TOTAL $ 8,840,761 100.00%
================ ===============
Sale of Residential Loans
The Company customarily sells all agency-eligible mortgage loans that
it originates or purchases, retaining the mortgage servicing rights, which
currently are sold separately. Under ongoing programs established with Fannie
Mae and Freddie Mac, the Company aggregates its conforming conventional loans
into pools that are assigned to Fannie Mae or Freddie Mac in exchange for
mortgage-backed securities. The Company's FHA mortgage loans and VA mortgage
loans are generally pooled and sold in the form of Ginnie Mae mortgage-backed
securities. The Company pays certain fees to Freddie Mac, Fannie Mae or Ginnie
Mae, as applicable, in connection with these programs. The Company then sells
Freddie Mac, Fannie Mae and Ginnie Mae securities to securities dealers.
Substantially all of the Company's agency-eligible mortgage loans qualify under
the various Fannie Mae, Freddie Mac and Ginnie Mae program guidelines, which
include specific property and credit standards, including a loan size limit.
Subprime and non-conforming 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, with respect to loans that the Company repurchases, the Company
corrects the flaws that had resulted in the repurchase and the loans are resold
in the market or are repurchased by the original correspondent pursuant to prior
agreement.
The Company uses hedging techniques to reduce its exposure to interest
rate risk in connection with loans not yet sold or securitized. 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
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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, which 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.
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 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.
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. 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 retains a relatively small portion of its produced
agency-eligible servicing rights and sells 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 $5.0 billion. The Company's policy with respect to
the sale, purchase or retention of mortgage servicing rights may change in the
future.
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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 date such servicing
rights are actually transferred to the purchaser. The Company receives fees for
servicing residential mortgage loans, ranging generally from 0.25% to 0.44% per
annum on the declining unpaid principal balances of the loans. Servicing fees
are collected by the Company from monthly mortgage loan payments. Other sources
of loan servicing revenues include fees incidental to the services provided.
As a servicer of mortgage loans underlying mortgage-backed securities,
the Company is obligated to make timely payments of principal and interest to
security holders, whether or not such payments have been made by mortgagors on
the underlying mortgage loans. Similarly, in the event of foreclosure, the
Company is responsible for covering with its own funds principal and foreclosure
costs to the extent not covered by FHA insurance or a VA guarantee.
The following table shows the delinquency percentages (excluding
bankruptcies and foreclosures) of the Company's residential mortgage servicing
rights portfolio (excluding loans serviced under subservicing agreements) at
December 31, 1999.
Days Delinquent
---------------
30 1.65%
60 0.30%
90+ days 0.17%
-------------
Total Delinquencies 2.12%
=============
At December 31, 1999, the Company's owned mortgage servicing rights
portfolio had an underlying unpaid principal balance of $7.8 billion. The
portfolio generally reflected characteristics representative of the then-current
market conditions and had a weighted average note rate of 7.50%.
In 1999, the Company produced or purchased servicing rights associated
with agency-eligible residential loans having an aggregate underlying unpaid
principal balance of $8.1 billion and had an average aggregate underlying unpaid
principal balance of loans being serviced of $11.8 billion. Typically, the
Company sells the majority of its produced agency-eligible mortgage servicing
rights between 90 days and 180 days of purchase. Nevertheless, certain market
and operating characteristics, including origination costs, adjusted basis,
market values, coupon rates, delinquency rates and current prepayment rates are
considered to determine whether mortgage servicing rights should be held for
longer periods of time.
The following table provides certain information regarding the
Company's agency-eligible mortgage servicing rights portfolio at December 31,
1999. *
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<TABLE>
<CAPTION>
($ in Thousands) Percentage of
Aggregate Total Unpaid
Year of Number of Percentage of Unpaid Principal Principal
Origination Loans Total Loans Balance Balance
- ------------------------ ----------------- ----------------- ----------------------- -----------------
<S> <C> <C> <C> <C>
1992 or earlier 4,893 6.3% $ 264,255 3.4%
1993 6,412 8.3% 457,650 5.9%
1994 4,451 5.8% 366,708 4.7%
1995 1,520 2.0% 119,121 1.5%
1996 3,168 4.1% 314,113 4.0%
1997 11,689 15.1% 1,214,602 15.5%
1998 22,370 28.9% 2,592,733 33.2%
1999 22,810 29.5% 2,493,212 31.8%
----------------- ----------------- ----------------------- -----------------
Total 77,313 100.00% $ 7,822,394 100.00%
================= ================= ======================= =================
</TABLE>
* Includes $139,376 (1,496 loans) of subprime loans as of December 31, 1999
being temporarily serviced until these loans are sold.
The following table sets forth the Company's agency-eligible mortgage
servicing rights portfolio by loan type:
<TABLE>
<CAPTION>
($ in Thousands) At December 31, 1999
-------------------------------------------------------------------------------
Aggregate
Unpaid Weighted Weighted
Number Principal Average Average
Loan Type of Loans Balance Coupon Service Fee
- ------------------------------- ------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
FHA 9,146 $ 751,604 8.19% 0.5610%
VA 2,326 200,464 8.17% 0.5405%
Fannie Mae 39,596 4,112,007 7.38% 0.4568%
Freddie Mac 21,275 2,243,786 7.38% 0.3622%
Private 523 31,880 8.11% 0.3696%
Other 4,448 482,653 7.89% 0.3621%
------------- --------------- ----------------- ----------------
TOTAL 77,313 $ 7,822,394 7.50% 0.4342%
============= =============== ================= ================
</TABLE>
* Includes $139,376 (1,496 loans) of subprime loans as of December 31, 1999
being temporarily serviced until these loans are sold.
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 $1,499.8 million at December 31, 1999. The Company's
available-for-sale portfolio had an aggregate underlying unpaid principal
balance of $6,322.6 million at December 31, 1999.
As the servicing rights of the available-for-sale portfolio are
generally held as a longer-term investment, there are certain prepayment risks
inherent to it that do not attach to the portion of the portfolio held-for-sale
(the portfolio held-for-sale is generally sold within 90 to 180 days). During
periods of declining interest rates, prepayments of mortgage loans increase as
homeowners seek to refinance at lower rates, resulting in a decrease in the
value of the Company's available-for-sale portfolio. Mortgage loans with higher
interest rates are more likely to result in prepayments. The following table
sets forth certain information regarding the aggregate underlying unpaid
principal balance of mortgage
9
<PAGE> 14
loans in the available-for-sale portfolio serviced by the Company. The table
includes both fixed and adjustable rate loans. AVAILABLE-FOR-SALE PORTFOLIO
<TABLE>
<CAPTION>
($ in Thousands) At December 31, 1999
----------------------------------------------------
Aggregate Percentage of Total
Unpaid Principal Unpaid Principal
Mortgage Interest Rate Balance Balance
- -------------------------------- ----------------------- -----------------------
<S> <C> <C>
Less than 7.00% $ 1,691,167 26.74%
7.00% - 7.49% 2,199,795 34.79%
7.50% - 7.99% 1,435,872 22.71%
8.00% - 8.49% 599,273 9.48%
8.50% - 8.99% 305,078 4.83%
9.00% - 9.49% 58,032 0.92%
Greater than 9.49% 33,374 0.53%
----------------------- -----------------------
TOTAL $ 6,322,591 100.00%
======================= =======================
</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:
<TABLE>
<CAPTION>
($ in Thousands) At December 31, 1999
--------------------------------------------------------
Aggregate Percent of
Unpaid Principal Total Unpaid
State Balance Principal Balance
- ------------------------ ------------------- ----------------------------------
<S> <C> <C>
Massachusetts $ 642,480 10.16%
Minnesota 472,983 7.48%
California 462,769 7.32%
Illinois 378,865 5.99%
New York 363,734 5.75%
Ohio 316,845 5.01%
Texas 302,442 4.78%
Connecticut 283,421 4.48%
Colorado 250,098 3.96%
Michigan 242,784 3.84%
Georgia 206,637 3.27%
Florida 201,469 3.19%
All others 2,198,064 34.77%
------------------- ----------------------------------
TOTAL $6,322,591 100.00%
=================== ==================================
</TABLE>
The following table sets forth certain information regarding the
aggregate underlying unpaid principal balance of the mortgage loans in the
held-for-sale portfolio serviced by the Company. The table includes both fixed
and adjustable rate loans.
10
<PAGE> 15
HELD-FOR-SALE PORTFOLIO
<TABLE>
<CAPTION>
($ in Thousands) At December 31, 1999
--------------------------------------------------
Aggregate Percentage of
Unpaid Principal Total Unpaid
Mortgage Interest Rate Balance Principal Balance
- -------------------------------- ------------------------ -----------------------
<S> <C> <C>
Less than 7.00% $ 49,023 3.27%
7.00% - 7.49% 98,276 6.55%
7.50% - 7.99% 569,928 38.00%
8.00% - 8.49% 478,885 31.93%
8.50% - 8.99% 185,589 12.37%
9.00% - 9.49% 20,178 1.35%
Greater than 9.50% 97,924 6.53%
------------------------ -----------------------
TOTAL $1,499,803 100.00%
======================== =======================
</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
in the event interest rates fall below a certain level. For a more detailed
discussion of interest rate floor contracts, see Note 16 of the Company's
Consolidated Financial Statements, found in the Company's accompanying 1999
Annual Report to shareholders included herein and hereby incorporated by
reference.
Leasing Operations
The Company's wholly-owned subsidiary, Republic Leasing Company, Inc.
(Republic Leasing), 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, 1999 the leasing division had 184 brokers. Lease production was
$100.2 million or 1.0% of the Company's total production volume during 1999. At
December 31, 1999 Republic Leasing managed a lease servicing portfolio of $166.6
million. Of this managed lease portfolio, $152.3 million was owned and $14.3
million was serviced for investors. The weighted average net yield for the
managed lease servicing portfolio at December 31, 1999 was 10.61%. Delinquencies
for the managed lease servicing portfolio at December 31, 1999 were 2.76%.
Commercial Mortgage Operations
The Company's wholly-owned subsidiary, Laureate Capital Corp.
(Laureate) originates commercial mortgage loans for various insurance companies
and other investors, primarily in Alabama, Florida, Indiana, North Carolina,
Pennsylvania, 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 $845.0 million or 9% of the Company's total production volume
during 1999 through 13 commercial mortgage branches. At December 31, 1999,
Laureate was servicing a commercial mortgage loan servicing portfolio of
approximately $4.1 billion. The weighted average note rate for the commercial
mortgage loan servicing portfolio was 7.94% at December 31, 1999. Delinquencies
for the commercial mortgage loan servicing portfolio were 0.29% at December 31,
1999.
11
<PAGE> 16
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 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 banking 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 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, therefore, 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 banking companies,
commercial banks and savings and loan associations and, to a lesser 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 banking 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 or originated by the
Company, thereby likely 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 banking companies for loan
production and enable them to access smaller producers for volume. Due to the
current highly competitive market pricing environment, the Company may be unable
to achieve its planned level of originations or 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.
12
<PAGE> 17
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 the 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 1999 approximately 79% of its sales under
these forward sales contracts were to four major customers. In 1998
approximately 97% of its sales under these forward sales contracts were to three
major customers. The loss of these purchasers would have a material adverse
effect on the Company's business if no suitable replacement could 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, Republic Leasing has in place a $200 million lease
financing facility and an agreement to offer to sell equipment leases to only
one purchaser; however, neither party is obligated to buy or sell. The purchaser
has acquired leases on a regular basis from Republic Leasing since December
1997, but there is no assurance of future sales. At December 31, 1999,
approximately 9% and 9% of the Company's net lease receivables were located in
the states of California and Florida, respectively. At December 31, 1999,
approximately 7% and 9% of the Company's net lease receivables were
collateralized by computer equipment and titled equipment, respectively.
At December 31, 1999, 27% of commercial mortgage loans serviced were
for a single customer. In addition, at December 31, 1999, the Company was
servicing approximately $14.3 million of leases for a third party.
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 any
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.
13
<PAGE> 18
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.
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.
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.
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 170
purported class action lawsuits have been commenced against various mortgage
banking companies,
14
<PAGE> 19
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 banking companies.
Delinquency and Default
The Company's profitability may be negatively impacted by economic
downturns because during such periods the frequency of loan defaults tends to
increase, thereby increasing the cost to service the loans in the Company's
portfolio. Also, the Company is generally at risk for delinquency or default of
newly originated or purchased loans. 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.
Moreover, 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.
Prior to the liquidation of a loan, 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. The servicer generally is reimbursed ultimately by
the mortgage loan owner or from liquidation proceeds. 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. The Company uses
currently available information to make such evaluation, therefore 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.
15
<PAGE> 20
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.
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).
Financing of Operations
The Company's primary cash-flow requirement involves the funding of
loan production, which is met primarily through external borrowings. In August
1999, the Company and its wholly owned subsidiaries RBMG, Inc., Meritage
Mortgage Corporation (Meritage) and RBMG Asset Management Company, Inc. (not
including the Company, the Restricted Group), entered into a $540 million
warehouse line of credit provided by a syndicate of unaffiliated banks that
expires in July 2000. The credit agreement includes covenants requiring the
Restricted Group to maintain (i) a minimum net worth of $170 million, plus the
Restricted Group's net income subsequent to June 30, 1999, plus 90% of capital
contributions to the Restricted Group and minus restricted payments, (ii) a
ratio of total Restricted Group liabilities to tangible net worth of not more
than 8.0 to 1.0, excluding debt incurred pursuant to gestation and repurchase
financing agreements, (iii) RBMG, Inc.'s eligibility as a servicer of Ginnie
Mae, FHA, VA, Fannie Mae and Freddie Mac mortgage loans (iv) a mortgage
servicing rights portfolio with an underlying unpaid principal balance of at
least $5 billion and (v) a ratio of consolidated cash flow to consolidated
interest expense (these terms are defined in the loan agreements) of at least
1.50 to 1.00 (the interest rate coverage ratio). The provisions of the agreement
also restrict the Restricted Group's ability to engage significantly in any type
of business unrelated to the mortgage banking and lending business and the
servicing of mortgage loans.
In August 1999, the Company and the Restricted Group also entered into
a $210 million subprime revolving credit facility and a $250 million servicing
revolving credit facility, which expire in July 2000. These facilities include
covenants identical to those described above with respect to the warehouse line
of credit.
The Restricted Group was in compliance with the debt covenants in place at
December 31, 1999 after it obtained an amendment and waiver dated February 1,
2000. The covenant that had been violated was the interest rate coverage ratio.
The syndicate of unaffiliated banks waived the violation and amended the
agreements. The amended agreements require the Restricted Group to maintain an
interest rate coverage ratio of 1.10 to 1.00 for the quarter ending March 31,
2000; and 1.20 to 1.00 for any period of two consecutive fiscal quarters
thereafter. Although management anticipates continued compliance with current
debt covenants, there can be no assurance that the Restricted Group 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.
16
<PAGE> 21
RBMG Asset Management Company, Inc., a wholly-owned subsidiary of Meritage,
and a bank are parties to a master repurchase agreement, pursuant to which RBMG
Asset Management Company, Inc. is entitled from time to time to deliver to the
bank eligible subprime mortgage loans in an aggregate principal amount of up to
$200 million. The master repurchase agreement has been extended through July
2000.
The Company has 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 executed a $6.6 million note in May 1997. This debt is secured
by the Company's corporate headquarters. The terms of the related 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.
The Company has entered into a $10.0 million unsecured line of credit
agreement that expires in July 2000. The interest rate on funds borrowed is
based upon the prime rate announced by a major money center bank.
Republic Leasing Company, Inc., a wholly-owned subsidiary of the Company,
has a $200 million credit facility to provide financing for its leasing
portfolio. The warehouse credit agreement matures in August 2000 and contains
various covenants regarding characteristics of the collateral and the
performance of the leases originated and serviced by Republic Leasing and that
require the Company to maintain a minimum net worth of $60 million and Republic
Leasing to maintain 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 would 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
typically adversely affect refinancing activity, which has an adverse effect on
the Company's origination revenues.
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 agency-eligible
mortgage loans that are closed and a percentage of the agency-eligible mortgage
loans that are
17
<PAGE> 22
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. 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. 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 because it is
possible that the loans bearing higher interest rates 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.
18
<PAGE> 23
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 might 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 and
lease production, the level of 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 and lease production, which is influenced by the
interest rate environment and other economic factors. Accordingly, it is likely
that the net income of the Company will 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
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
19
<PAGE> 24
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 lenders, 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 the same independent mortgage bankers and mortgage brokers
with whom the Company seeks to do business, none of whom is obligated by
contract or otherwise to continue to do business with the Company. Future
operating and financial results of the Company will be 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 the 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 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.
20
<PAGE> 25
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.
Year 2000 Risks
The Company's growth motivated a generalized review of the adequacy of its
existing software environment and technological infrastructure to meet the
Company's long-term operating requirements. The Company completed implementation
of LoanXchange and other mission critical systems discussed in previous filings
prior to December 31, 1999. All required modifications to existing systems or
systems provided by third parties were completed prior to December 31, 1999. The
Company has had no significant Year 2000 system problems to date.
21
<PAGE> 26
Employees
As of December 31, 1999, the Company had 1,127 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
DOUGLAS K. FREEMAN, age 49, has been Chief Executive Officer of the
Company since January 2000. Mr. Freeman was President of Bank of America's
Consumer Finance Group, a major division of Bank of America. Mr. Freeman was
employed as Consumer Corporate Bank Executive with Barnett Bank, Inc. from 1991
through March 1996. He was then promoted to Chief Consumer Bank Executive in
March 1996 and held that position with Barnett Bank, Inc. until March 1998.
NationsBank, N.A. acquired Barnett Bank, Inc. in March 1998 and Mr. Freeman
became President of the Consumer Finance Division of NationsBank, N.A. until
April 1999. Bank of America merged with NationsBank, N.A. in April 1999 and Mr.
Freeman became the President of the Consumer Finance Group from April 1999
through January 2000.
DAVID W. JOHNSON, JR., age 51, has been President of the Company since
July 1999. Previously he had been Chief Executive Officer of the Company since
October 1999, Vice Chairman since October 1992 and Managing Director since July
1993.
RICHARD M. DUNCAN, age 52, has been President and Chief Executive
Officer of RBMG, Inc. (the Company's wholly-owned subsidiary handling
agency-eligible operations) since July 1999. Previously, Mr. Duncan had been
Senior Executive Vice President of Production since January 1997 and Executive
Vice President of Production since January 1995.
STEVEN F. HERBERT, age 43, has been Corporate Senior Executive Vice
President and Corporate Chief Financial Officer of the Company since July 1999.
Previously, he had been Senior Executive Vice President and Chief Financial
Officer of the Company since January 1997 and 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.
LARRY W. REED, age 54, has been President and Chief Executive Officer
of Meritge Mortgage Corporation (the Company's wholly-owned subsidiary handling
subprime operations) since July 1999. Prior to that he was President of Meritage
Mortgage Corporation since 1997. In August 1996 Mr. Reed came to the Company as
a Senior Vice President and Director of Subprime Lending. Mr. Reed was the
founder, President, and Chief Executive Officer of B First Residential, a
subprime mortgage lender in the Northeast, from 1992 until its sale in 1995.
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, 1999. This facility
comprises a building having approximately 120,000 square feet which houses the
Company's loan production and administrative operating groups and 16.5 acres of
land. The Company purchased an additional 17.9 acres of land adjacent to this
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 24 other states, consisting primarily of its leasing, commercial
mortgage, wholesale and subprime branch offices and regional underwriting
centers.
22
<PAGE> 27
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 are 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 caption "Stock Data" in
the Company's accompanying 1999 Annual Report to Shareholders and is hereby
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial
Highlights" in the Company's accompanying 1999 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 1999 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 1999
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 1999
Annual Report to shareholders is hereby incorporated herein by reference:
23
<PAGE> 28
The Consolidated Financial Statements of Resource Bancshares Mortgage
Group, Inc., together with the report thereon of PricewaterhouseCoopers LLP
dated February 7, 2000, 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 2000 Proxy Statement of the Company furnished to
shareholders in connection with its 2000 Annual Meeting (the "2000 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 "Beneficial Ownership--Section
16(a) Beneficial Ownership Reporting Compliance" in the 2000 Proxy Statement
with respect to Section 16 matters is hereby incorporated herein by reference.
Information with respect to executive officers is set forth in Item 1 of this
Report on Form 10-K under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the remuneration of executive officers and
directors and certain other matters set forth in the 2000 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 2000 Proxy Statement under the caption "Beneficial Ownership
- --Beneficial Owners of 5% or more of the Common Stock and --Stock Ownership of
the Company's Directors, Nominees and Executive Officers" 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 2000 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.
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<PAGE> 29
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, 1999:
<TABLE>
<S> <C>
Consolidated Balance Sheet at December 31, 1999 and 1998 ..................................
Consolidated Statement of Income for each of the three years in the period ended
December 31, 1999 ...............................................................
Consolidated Statement of Changes in Stockholders' Equity
for each of the three years in the period ended December 31, 1999 ...............
Consolidated Statement of Cash Flows for each of the three years in the period ended
December 31, 1999 ...............................................................
Notes to Consolidated Financial Statements ...............................................
</TABLE>
* Incorporated by reference from the indicated pages of the Company's
1999 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 1999 Annual Report to Shareholders and 2000 Proxy
Statement shall not be deemed filed as part of this Annual Report on Form 10-K.
25
<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 29, 2000 By: s/ Douglas K. Freeman
----------------------------------------
Douglas K. Freeman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
s/ Boyd M. Guttery Chairman of the Board March 29, 2000
- --------------------------
Boyd M. Guttery
s/ Douglas K. Freeman Chief Executive Officer March 29, 2000
- -------------------------- (principal executive officer)
Douglas K. Freeman and Director
s/ David W. Johnson, Jr. President and Director March 29, 2000
- --------------------------
David W. Johnson, Jr.
s/ Steven F. Herbert Corporate Senior Executive March 29, 2000
- -------------------------- Vice President and Corporate
Steven F. Herbert Chief Financial Officer (principal
financial and accounting officer)
Director March __, 2000
- --------------------------
Stuart M. Cable
Director March __, 2000
- --------------------------
Robin C. Kelton
s/ John. O. Wolcott Director March 29, 2000
- --------------------------
John O. Wolcott
26
<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 *
incorporated by reference to Exhibit 3.5 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998
3.6 Amendment to Bylaws of Resource Bancshares Mortgage Group, Inc. incorporated by *
reference to Exhibit 3.1 of the Registrant's Registration No. 333-82105
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 Note Agreement between the Registrant and UNUM Life Insurance Company of *
America dated May 16, 1997 incorporated by reference to Exhibit 10.45 of the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997
10.1 Employment Agreement dated June 3, 1993, between the Registrant and *
David W. Johnson, Jr. as amended by amendment dated October 22, 1993
incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993
10.2 (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
</TABLE>
A
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
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
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
</TABLE>
B
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
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 (A) 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
(B) Amendment to Phantom 401(k) Plan incorporated by reference to Exhibit *
10.17(B) of the Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 1999
(C) Merger and Transfer Agreement Between The Resource Bancshares *
Mortgage Group, Inc. and Fidelity Management Trust Company incorporated
by reference to Exhibit 10.53 of the Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 1999.
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 incorporated by reference to Exhibit 10.19 of
the Registrant's Annual Report on Form 10-K for the year ended December 31, 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
</TABLE>
C
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
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
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 (A) ESOP Notes dated January 20, 1998, April 1, 1998, July 1, 1998 and October 1, *
1998 between the Registrant and The Resource Bancshares Mortgage Group, Inc.
Employee Stock Ownership Trust incorporated by reference to Exhibit 10.30 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1998
(B) ESOP Notes dated March 8, 1999, April 26, 1999, July 1, 1999 and October 1, ______
1999 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. Formula Stock *
Option Plan and Non-Qualified Stock Option Plan incorporated by
reference to Exhibit 10.42 of the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 1997
10.33 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 incorporated by reference to Exhibit 10.34 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 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 29, 1998 incorporated by reference to
Exhibit 10.37 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 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
</TABLE>
D
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
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 incorporated
by reference to Exhibit 10.41 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998
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
10.43 Third Amendment to Resource Bancshares Mortgage Group, Inc. *
Non-Qualified Stock Option Plan dated October 28, 1998 incorporated
by reference to Exhibit 10.43 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 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
</TABLE>
E
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
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 incorporated by reference to Exhibit 10.51 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1998
10.52 The Resource Bancshares Mortgage Group, Inc. Nonqualified Deferred Compensation *
Plan effective April 1, 1999 incorporated by reference to Exhibit 10.52
of the Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 1999
10.53 (B) Voluntary Employees' Beneficiary Association Trust for the Employees
of Resource Bancshares Mortgage Group, Inc. _____
11.1 Statement re: Computation of Net Income per Common Share _____
13.1 1999 Annual Report to Shareholders _____
21.1 Subsidiaries of the Registrant _____
23.1 Consents of PricewaterhouseCoopers LLP _____
27.1 Financial Data Schedule _____
</TABLE>
- ----------------------------------
* Incorporated by reference
F
<PAGE> 1
EXHIBIT 10.30(b)
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
$749,998.50 March 8, 1999
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 Seven Hundred Forty Nine Thousand Nine Hundred Ninety Eight and 50/100
Dollars ($749,998.50) 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 6.25% per annum.
The principal amount of this Note shall be due and payable in eight
annual installments on the anniversary date of this Note occurring in each of
the succeeding eight years following the date of this Note. The first seven
annual principal installments shall be in the amount of $100,000, with the
eighth annual principal installment of $49,998.50. 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
1
<PAGE> 2
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: HBSC BANK, USA TRUSTEE
By: ________________________________________
Stephen J. Hartman, Jr., solely in his
capacity as authorized signer for the
Trustee of the Resource Bancshares Mortgage
Group, Inc. Employee Stock Ownership Trust,
and not in his individual capacity
2
<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
$749,955.73 April 26, 1999
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 Seven Hundred Forty Nine Thousand Nine Hundred Fifty Five and 73/100 Dollars
($749,955.73) 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
6.25% per annum.
The principal amount of this Note shall be due and payable in eight
annual installments on the anniversary date of this Note occurring in each of
the succeeding eight years following the date of this Note. The first seven
annual principal installments shall be in the amount of $100,000, with the
eighth annual principal installment of $49,955.73. 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
1
<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: HSBC BANK, USA, TRUSTEE
By: __________________________
Stephen J. Hartman, Jr.,
solely in his capacity as
authorized signer for the
Trustee of the Resource
Bancshares Mortgage Group,
Inc. Employee Stock
Ownership Trust, and not
in his individual capacity
2
<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
$749,924.78 July 1, 1999
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 Seven Hundred Forty Nine Thousand Nine Hundred Twenty Four and 78/100 Dollars
($749,924.78) 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
6.50% per annum.
The principal amount of this Note shall be due and payable in eight
annual installments on the anniversary date of this Note occurring in each of
the succeeding eight years following the date of this Note. The first seven
annual principal installments shall be in the amount of $100,000, with the
eighth annual principal installment of $49,924.78. 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
1
<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: HSBC BANK, USA, TRUSTEE
By: __________________________
Stephen J. Hartman, Jr.,
solely in his capacity as
authorized signer for the
Trustee of the Resource
Bancshares Mortgage Group,
Inc. Employee Stock
Ownership Trust, and not
in his individual capacity
2
<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
$749,988.05 October 1, 1999
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 Seven Hundred Forty Nine Thousand Nine Hundred Eighty Eight and 05/100
Dollars ($749,988.05) 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 eight
annual installments on the anniversary date of this Note occurring in each of
the succeeding eight years following the date of this Note. The first seven
annual principal installments shall be in the amount of $100,000, with the
eighth annual principal installment of $49,988.05. 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
1
<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: HSBC BANK, USA, TRUSTEE
By: __________________________
Stephen J. Hartman, Jr.,
solely in his capacity as
authorized signer for the
Trustee of the Resource
Bancshares Mortgage Group,
Inc. Employee Stock
Ownership Trust, and not
in his individual capacity
2
<PAGE> 1
EXHIBIT 10.53
VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATION TRUST
FOR THE EMPLOYEES OF
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
<PAGE> 2
TABLE OF CONTENTS
Page
----
ARTICLE I
TRUSTEE AND TRUST FUND
1.1 NAME OF TRUST 2
1.2 TRUST FUND 2
1.3 QUALIFIED TRUST 2
ARTICLE II
PLAN
2.1 DELIVERY OF PLAN TO TRUSTEE 3
2.2 PARTICIPANT'S AND BENEFICIARY'S RIGHTS 3
ARTICLE III
ADMINISTRATOR
3.1 NOTIFICATION OF NAME OF ADMINISTRATOR 4
3.2 PLAN ADMINISTRATOR DIRECTIONS 4
ARTICLE IV
CONTRIBUTIONS
4.1 RECEIPT OF CONTRIBUTIONS 5
ARTICLE V
TRUSTEE
5.1 BASIC RESPONSIBILITIES OF THE TRUSTEE 6
5.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE 6
5.3 OTHER POWERS OF THE TRUSTEE 7
5.4 DUTIES OF THE TRUSTEE REGARDING PAYMENTS 10
5.5 POST-RETIREMENT BENEFITS TO KEY EMPLOYEES 10
5.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES 10
5.7 ANNUAL REPORT OF THE TRUSTEE 10
5.8 AUDIT 11
5.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE 12
i
<PAGE> 3
ARTICLE VI
AMENDMENT, TERMINATION, AND MERGERS
6.1 AMENDMENT 13
6.2 TERMINATION 13
ARTICLE VII
MISCELLANEOUS
7.1 ALIENATION 14
7.2 CONSTRUCTION OF AGREEMENT 14
7.3 GENDER AND NUMBER 14
7.4 LEGAL ACTION 15
7.5 PROHIBITION AGAINST DIVERSION OF FUNDS 15
7.6 BONDING 15
7.7 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE 15
7.8 INSURER'S PROTECTIVE CLAUSE 15
7.9 RECEIPT AND RELEASE FOR PAYMENTS 16
7.10 HEADINGS 16
ii
<PAGE> 4
VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATION TRUST
FOR THE EMPLOYEES OF RESOURCE BANCSHARES
MORTGAGE GROUP, INC.
THIS AGREEMENT, made and entered into this day of November, 1999, by
and between RESOURCE BANCSHARES MORTGAGE GROUP, INC. (herein referred to as the
"Employer") and HSBC BANK, USA (herein referred to as the "Trustee").
W I T N E S S E T H :
WHEREAS, the Employer has concurrently herewith adopted a 501(c)(9)
plan known as the VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATION PLAN FOR THE
EMPLOYEES OF RESOURCE BANCSHARES MORTGAGE GROUP, INC. (herein referred to as the
"Plan"); and
WHEREAS, under the terms of the Plan, funds will from time to time be
contributed to the Trust which funds as and when received by the Trustee, will
constitute a trust fund to be held by said Trustee under the Plan for the
benefit of the Participants and of their Beneficiaries; and
WHEREAS, the Employer desires the Trustee to hold and administer such
funds and the Trustee is willing to hold and administer such funds pursuant to
the terms of this Agreement; and
WHEREAS, the Employer intends that this Trust (and the Plan attached
hereto) shall constitute an employee welfare benefit plan under Section 3(1) of
the Employee Retirement Income Security Act of 1974 (ERISA) and as such shall be
subject to the requirements of Parts 1 and 4 of Subtitle B, Title I of ERISA;
NOW, THEREFORE, for and in consideration of the premises and of the
mutual covenants herein contained, the Employer and the Trustee do hereby
covenant and agree as follows:
1
<PAGE> 5
ARTICLE I
TRUSTEE AND TRUST FUND
1.1 NAME OF TRUST
This trust shall be entitled the "VOLUNTARY EMPLOYEES' BENEFICIARY
ASSOCIATION TRUST FOR THE EMPLOYEES OF RESOURCE BANCSHARES MORTGAGE GROUP, INC."
(hereinafter referred to as the "Trust"), and shall carry into effect the
provisions of the Plan created prior to, or concurrently herewith and forming a
part hereof. With the exception of the terms "Employer", "Plan", "Trustee" and
"Trust" which are defined in this Agreement, the definitions in such Plan are
hereby incorporated herein by reference. The Trustee hereby agrees to act as
Trustee of the Trust, and to take, hold, invest, administer and distribute in
accordance with the following provisions, any and all contributions and assets
paid or delivered to the Trustee pursuant to the Plan.
1.2 TRUST FUND
All of the assets at any time held hereunder by the Trustee are
hereinafter referred to collectively as the "Trust Fund". All right, title and
interest in and to the assets of the Trust Fund shall be at all times, vested
exclusively in the Trustee. The Trustee shall receive, take and hold any
contributions paid to the Trustee in cash or in other property acceptable to the
Trustee. All contributions so received together with the income therefrom and
any other increment thereon shall be held, managed and administered by the
Trustee pursuant to the terms of this Agreement without distinction between
principal and income and without liability for the payment of interest thereon.
The Trustee shall not be responsible for collection of any contributions to the
Plan.
1.3 QUALIFIED TRUST
The Trust is hereby designated as constituting a part of the Plan which
is intended to continue to qualify and to be tax exempt under Section 501(c)(9)
of the Code, as amended from time to time. Until advised otherwise, the Trustee
may conclusively presume that this Trust is qualified under Section 501(c)(9) of
the Code as amended from time to time, and that this Trust is exempt from
federal income taxes.
2
<PAGE> 6
ARTICLE II
PLAN
2.1 DELIVERY OF PLAN TO TRUSTEE
The Employer shall deliver to the Trustee a copy of the Plan and of any
amendments thereto for convenience of reference, but rights, powers, titles,
duties, discretion and immunities of the Trustee shall be governed solely by
this instrument without reference to the Plan.
2.2 PARTICIPANT'S AND BENEFICIARY'S RIGHTS
This Plan shall not be deemed to constitute a contract between the
Employer and any Participant or Beneficiary or to be a consideration or an
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 Employer or to interfere with the right of the
Employer to discharge any Participant of Employee at any time regardless of the
effect which such discharge shall have upon him as a Participant of this Plan.
3
<PAGE> 7
ARTICLE III
ADMINISTRATOR
3.1 NOTIFICATION OF NAME OF ADMINISTRATOR
The Plan provides for the appointment of an Administrator or
Administrators to administer the Plan. The Employer shall notify the Trustee in
writing of the name of the Administrator, and of any change in the identity of
such Administrator. Until notified of the change, the Trustee shall be fully
protected in acting upon the assumption that the identity of the Administrator
has not been changed.
3.2 PLAN ADMINISTRATOR DIRECTIONS
The Administrator shall have sole responsibility for determining the
existence, non-existence, nature and amount of the rights and interests of all
persons in the Trust Fund. All directions by the Administrator to the Trustee
shall be in writing signed by such Administrator. The Employer shall furnish to
the Trustee a specimen signature of the Administrator or Administrators at the
time he or they are appointed.
4
<PAGE> 8
ARTICLE IV
CONTRIBUTIONS
4.1 RECEIPT OF CONTRIBUTIONS
The Trustee shall receive all contributions paid in cash or other
property and all contributions so received together with the income therefrom
and any increment thereon shall be held, managed and administered by the Trustee
pursuant to this Agreement without distinction between principal and income. The
Trustee shall have no duty to require any contributions to be made to the Trust
by the Employer or to determine that the amounts received comply with the Plan,
or to determine that the Trust Fund is adequate to provide the benefits payable
pursuant to the Plan.
5
<PAGE> 9
ARTICLE V
TRUSTEE
5.1 BASIC RESPONSIBILITIES OF THE TRUSTEE
The Trustee shall have the following categories of responsibilities:
(a) Consistent with the "funding policy and method" determined by the
Employer to invest, manage, and control the Plan assets subject, however, to the
direction of an Investment Manager if the Employer should appoint such manager
as to all or a portion of the assets of the Plan in accordance with the
provisions of the Plan;
(b) At the direction of the Administrator, to pay benefits required
under the Plan to be paid to Participants or Beneficiaries.
(c) To maintain records of receipts and disbursements and furnish to
the Employer and/or Administrator for each Plan Year a written annual report per
Section 5.7.
If there shall be more than one Trustee, they shall act by a majority
of their number, but may authorize one or more of them to sign papers on their
behalf.
5.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE
(a) The Trustee shall invest and reinvest the Trust Fund to keep the
Trust Fund invested without distinction between principal and income and in such
securities or property, real or personal, wherever situated, as the Trustee
shall deem advisable, including, but not limited to, stocks, common or
preferred, bonds and other evidences of indebtedness or ownership, and real
estate or any interest therein. The Trustee shall at all times in making
investments of the Trust Fund consider, among other factors, the short and
long-term financial needs of the Plan on the basis of information furnished by
the Employer. In making such investments, the Trustee shall not be restricted to
securities or other property of the character expressly authorized by the
applicable law for trust investments; however, the Trustee shall give due regard
to any limitations imposed by the Code or the Act so that at all times this Plan
may qualify as both an employee welfare benefit plan and a voluntary employees'
beneficiary association.
(b) The Trustee may, from time to time with the consent of the
Employer, transfer to a common, collective, or pooled trust fund maintained by
any corporate Trustee hereunder, all or such part of the Trust Fund as the
Trustee may deem advisable, and such part or all of the Trust Fund so
transferred shall be subject to all the terms and provisions of the common,
collective, or pooled trust fund which contemplate the commingling for
investment purposes of such Trust assets with trust assets of other trusts. The
Trustee may, from time to time with the consent of the Employer, withdraw from
such common, collective, or pooled trust fund all or such part of the Trust Fund
as the Trustee may deem advisable.
6
<PAGE> 10
(c) If life insurance policies have been issued under the Plan, the
Trustee, at the direction of the Administrator, shall apply for, own, and pay
premiums on such life insurance policies.
5.3 OTHER POWERS OF THE TRUSTEE
The Trustee, in addition to all powers and authorities under common
law, statutory authority, including the Act, and other provisions of this
Agreement, shall have the following powers and authorities, to be exercised in
the Trustee's sole discretion:
(a) To purchase, or subscribe for, any securities or other property and
to retain the same. In conjunction with the purchase of securities, margin
accounts may be opened and maintained;
(b) To sell, exchange, convey, transfer, grant options to purchase, or
otherwise dispose of any securities or other property held by the Trustee, by
private contract or at public auction. No person dealing with the Trustee shall
be bound to see to the application of the purchase money or to inquire into the
validity, expediency, or propriety of any such sale or other disposition, with
or without advertisement;
(c) To vote upon any stocks, bonds, or other securities; to give
general or special proxies or powers of attorney with or without power of
substitution; to exercise any conversion privileges, subscription rights or
other options, and to make any payments incidental thereto; to oppose, or to
consent to, or otherwise participate in, corporate reorganizations or other
changes affecting corporate securities, and to delegate discretionary powers,
and to pay any assessments or charges in connection therewith; and generally to
exercise any of the powers of an owner with respect to stocks, bonds,
securities, or other property;
(d) To cause any securities or other property to be registered in the
Trustee's own name or in the name of one or more of the Trustee's nominees, and
to hold any investments in bearer form, but the books and records of the Trustee
shall at all times show that all such investments are part of the Trust Fund;
(e) To borrow or raise money for the purposes of the Plan in such
amount, and upon such terms and conditions, as the Trustee shall deem advisable;
and for any sum so borrowed, to issue a promissory note as Trustee, and to
secure the repayment thereof by pledging all, or any part, of the Trust Fund;
and no person lending money to the Trustee shall be bound to see to the
application of the money lent or to inquire into the validity, expediency, or
propriety of any borrowing;
(f) To keep such portion of the Trust Fund in cash or cash balances as
the Trustee may, from time to time, deem to be in the best interests of the
Plan, without liability for interest thereon;
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<PAGE> 11
(g) To accept and retain, for such time as it may deem advisable, any
securities or other property received or acquired by it as Trustee hereunder,
whether or not such securities or other property would normally be purchased as
investments hereunder;
(h) To make, execute, acknowledge, and deliver any and all documents of
transfer and conveyance and any and all other instruments that may be necessary
or appropriate to carry out the powers herein granted.
(i) To settle, compromise, or submit to arbitration any claims, debts
or damages due or owing to or from the Plan, to commence or defend suits or
legal or administrative proceedings, and to represent the Plan in all suits and
legal and administrative proceedings;
(j) To employ suitable agents and counsel and to pay their reasonable
expenses and compensation, and such agent or counsel may or may not be agent or
counsel for the Employer;
(k) To do all such acts and exercise all such rights and privileges,
although not specifically mentioned herein, as the Trustee may deem necessary to
carry out the purposes of the Plan;
(l) To apply for and procure from responsible insurance companies, to
be selected by the Administrator, such endowment or other insurance contracts on
the life of any Participant or Beneficiaries as required to insure or protect
the benefits under the Plan as the Administrator shall deem proper; to exercise,
at any time or from time to time, whatever rights and privileges may be granted
under such endowment or other insurance contracts; to collect, receive, and
settle for the proceeds of all such endowment or other insurance contracts as
and when entitled to do so under the provisions thereof;
(m) To invest funds of the Trust in time deposits or savings accounts
bearing a reasonable rate of interest in the Trustee's bank;
(n) To invest in Treasury Bills and other forms of United States
government obligations;
(o) Except as hereinafter expressly authorized, the Trustee is
prohibited from selling or purchasing stock options. The Trustee is expressly
authorized to write and sell call options under which the holder of the option
has the right to purchase shares of stock held by the Trustee as a part of the
assets of this Trust, if such options are traded on and sold through a national
securities exchange registered under the Securities Exchange Act of 1934, as
amended, which exchange has been authorized to provide a market for option
contracts pursuant to Rule 9B-1 promulgated under such Act, and so long as the
Trustee at all times up to and including the time of exercise or expiration of
any such option holds sufficient stock in the assets of this Trust to meet the
obligations under such option of exercised. In addition, the Trustee is
expressly authorized to
8
<PAGE> 12
purchase and acquire call options for the purchase of shares of stock covered by
such options if the options are traded on and purchased through a national
securities exchange as described in the immediately preceding sentence, and so
long as any such option is purchased solely in a closing purchase transaction,
meaning the purchase of exchange traded call option the effect of which is to
reduce or eliminate the obligations of the Trustee with respect to a stock
option contract or contracts which it has previously written and sold in a
transaction authorized under the immediately preceding sentence.
(p) To deposit monies in federally insured savings accounts or
certificates of deposit in banks or savings and loan associations;
(q) To pool all or any of the Trust Fund, from time to time, with
assets belonging to any other qualified employee benefit trust or created by the
Employer, and to commingle such assets and make joint or common investments and
carry joint accounts on behalf of this Plan and such other trust or trusts,
allocating undivided shares or interests in such investments or accounts or any
pooled assets of the two or more trusts in accordance with their respective
interests.
(r) To acquire by lease, purchase or rent, property, real or personal,
at public or private sale, with or without security, in such manner, at such
time or times, for such purposes, for such prices and upon such terms, credits
and conditions as the Trustee may deem advisable.
(s) To retain such real or personal property for any period, whether or
not the same be of the character permissible for investments by fiduciaries
under any applicable law, and without regard to any effect the retention may
have upon the diversification of the investments.
(t) To sell, transfer, exchange, convert or otherwise dispose of, or
grant options with respect to any property, real or personal, held in the trust
fund, at public or private sale, with or without security, in such manner, at
such time or times, for such purposes, for such prices and upon such terms,
credits and conditions as the Trustee may deem advisable.
(u) To possess, manage, insure against loss by fire or other
casualties, develop, subdivide, control, partition, mortgage, lease (to
Participants or their Beneficiaries) or otherwise deal with any and all real
property; to satisfy and discharge or extend the term of any mortgage thereon;
to execute the necessary instruments and covenants to effectuate the foregoing
powers, including the giving or granting of options in connection therewith; to
make improvements, structural or otherwise, or abandon the same if deemed to be
worthless or not of sufficient value to warrant keeping or protecting; to
abstain from the payment of taxes, water rents, assessments, repairs,
maintenance and upkeep of the same; to permit to be lost by tax sale or other
proceeding or to convey the same for a nominal consideration or without
consideration; to set up appropriate reserves out of income for repairs,
modernization and upkeep of buildings, including reserves for depreciation and
obsolescence, and to add such reserves to principal, and, if the income from the
property itself should not suffice for such purposes, to advance out of the
other income any sums needed therefor, and, to advance any income of the Trust
for the amortization of any mortgage on
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<PAGE> 13
property held in the Trust.
5.4 DUTIES OF THE TRUSTEE REGARDING PAYMENTS
At the direction of the Administrator, the Trustee shall, from time to
time, in accordance with the terms of the Plan, make payments out of the Trust
Fund. The Trustee shall not be responsible in any way for the application of
such payments.
5.5 POST-RETIREMENT BENEFITS TO KEY EMPLOYEES
The Trustee shall establish separate accounts for each key employee (as
defined in Section 416(i) of the Code) for any medical benefits or life
insurance to be provided to such key employee after retirement. The key
employee's post-retirement medical and life insurance benefits may only be paid
from such separate account.
5.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES
The Trustee shall be paid such reasonable compensation as shall from
time to time be agreed upon in writing by the Employer and the Trustee. In
addition, the Trustee shall be reimbursed for any reasonable expenses, including
reasonable counsel fees incurred by it as Trustee. Such compensation and
expenses shall be paid from the Trust Fund unless paid or advanced by the
Employer. All taxes of any kind and all kinds whatsoever that may be levied or
assessed under existing or future laws upon, or in respect of, the Trust Fund or
the income thereof, shall be paid from the Trust Fund.
5.7 ANNUAL REPORT OF THE TRUSTEE
Within ninety (90) days after the end of each Plan Year, the Trustee
shall furnish to the Employer and Administrator a written statement of the
account with respect to the Fiscal Year for which such contribution was made
setting forth:
(1) the net income, or loss, of the Trust Fund;
(2) the gains, or losses, realized by the Trust Fund upon
sales or other disposition of the assets;
(3) the increase, or decrease, in the value of the Trust Fund;
(4) all payments and distributions made from the Trust Fund;
and
(5) such further information as the Trustee and/or
Administrator deems appropriate.
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<PAGE> 14
The Employer, forthwith upon its receipt of each such statement of
account, shall acknowledge receipt thereof in writing and advise the Trustee
and/or Administrator of its approval or disapproval thereof. Failure by the
Employer to disapprove any such statement of account within sixty (60) days
after its receipt thereof shall be deemed an approval thereof. The approval by
the Employer of any statement of account shall be binding as to all matters
embraced therein as between the Employer and the Trustee to the same extent as
if the account of the Trustee had been settled by judgment or decree in an
action for a judicial settlement of its account in a court of competent
jurisdiction in which the Trustee, the Employer and all persons having or
claiming an interest in the Plan were parties; provided, however, that nothing
herein contained shall deprive the Trustee of its right to have its accounts
judicially settled if the Trustee so desires.
5.8 AUDIT
(a) If an audit of the Plan's records shall be required by the Act and
the regulations thereunder for any Plan Year, the Administrator shall engage an
independent certified public accountant for that purpose. Such accountant shall,
after an audit of the books and records of the Plan in accordance with generally
accepted auditing standards, within a reasonable period after the close of the
Plan Year, furnish to the Administrator and the Trustee a report of his audit
setting forth his opinion as to whether each of the following statements,
schedules, or lists, or any others that are required by Section 103 of the Act
or the Secretary of Labor to be filed with the Plan's annual report, are
presented fairly in conformity with generally accepted accounting principles
applied consistently:
(1) statement of the assets and liabilities of the Plan;
(2) statement of changes in net assets available to the
Plan;
(3) statement of receipts and disbursements, a schedule
of all assets held for investment purposes, a
schedule of all loans or fixed income obligations in
default at the close of the Plan Year;
(4) a list of all loans in default or uncollectible
during the Plan Year;
(5) the most recent annual statement of assets and
liabilities of any bank common or collective trust
fund in which Plan assets are invested or such
information regarding separate accounts or trusts
with a bank or insurance company as the Trustee, and
(6) a schedule of each transaction or series of
transactions involving an amount in excess of five
percent (5%) of Plan assets.
All auditing and accounting fees shall be an expense of and may, at the
election of the
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<PAGE> 15
Administrator, be paid from the Trust Fund.
(b) If some or all of the information necessary to enable the
Administrator to comply with Section 103 of the Act is maintained by a bank,
insurance company, or similar institution, regulated and supervised and subject
to periodic examination by a state or federal agency, it shall transmit and
certify the accuracy of that information to the Administrator as provided in
Section 103(b) of the Act within one hundred twenty (120) days after the end of
the Plan Year or such other date as may be prescribed under regulations of the
Secretary of Labor.
5.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE
(a) The Trustee may resign at any time by delivering to the Employer,
at least thirty (30) days before its effective date, a written notice of his
resignation.
(b) The board of directors of the Employer may remove the Trustee by
mailing by registered or certified mail, addressed to such Trustee at his last
known address, at least thirty (30) days before its effective date, a written
notice of his removal and a copy, certified by the Secretary of the Employer, of
the resolution adopted by such board of directors effecting his removal.
(c) Upon the death, resignation, incapacity, or removal of any Trustee,
a successor may be appointed by resolution of the board of directors of the
Employer; and such successor, upon accepting such appointment in writing and
delivering same to the Employer, shall, without further act, become vested with
all the estate, rights, powers, discretions, and duties of his predecessor with
like respect as if he were originally named as Trustee herein. Until such a
successor is appointed, the remaining Trustee or Trustees shall have full
authority to act under the terms of this Agreement.
(d) The board of directors may designate one or more successors prior
to the death, resignation, incapacity, or removal of a Trustee. In the event a
successor is so designated by the board of directors of the Employer and accepts
such designation, the successor shall, without further act, become vested with
all the estate, rights, powers, discretions, and duties of his predecessor with
the like effect as if he were originally named as Trustee herein immediately
upon the death, resignation, incapacity, or removal of his predecessor.
(e) Whenever any Trustee hereunder ceases to serve as such, he shall
furnish to the Employer and Administrator a written statement of account with
respect to the portion of the Plan Year during which he served as Trustee. This
statement shall be either (i) included as part of the annual statement of
account for the Plan Year required under Section 5.7 or (ii) set forth in a
special statement. Any such special statement of account should be rendered to
the Employer no later than the due date of the annual statement of account for
the Plan Year. The procedures set forth in Section 5.7 for the approval by the
Employer of annual statements of account shall apply to any special statement of
account rendered hereunder and approval by the Employer of any such special
statement in the manner provided in Section 5.7 shall have the same effect upon
the statement as the Employer's approval of an annual statement of account. No
successor to the Trustee shall have any duty or responsibility to investigate
the acts or transactions of any predecessor who has
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<PAGE> 16
rendered all statements of account required by Section 5.7 and this
subparagraph.
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ARTICLE VI
AMENDMENT, TERMINATION AND MERGERS
6.1 AMENDMENT
The Employer shall have the right at any time and from time to time to
amend, in whole or in part, any or all of the provisions of this Agreement.
However, no such amendment shall authorize or permit any part of the Trust Fund
(other than such part as is required to pay taxes and administration expenses)
to be used for or diverted to purposes other than for the exclusive benefit of
the Participants or their Beneficiaries or estates; no such amendment shall
cause or permit any portion of the Trust Fund to revert to or become the
property of the Employer; and no such amendment which affects the rights, duties
or responsibilities of the Trustee and Administrator may be made without the
Trustee's and Administrator's written consent. Any such amendment shall become
effective upon delivery of a duly executed instrument to the Trustee, provided
that the Trustee shall in writing consent to the terms of such amendment.
6.2 TERMINATION
The Employer shall have the right at any time to terminate the Plan by
delivering to the Trustee and Administrator written notice of such termination.
Upon such termination of the Plan, the Employer, by written notice to the
Trustee and Administrator, may direct either:
(a) complete distribution of the assets in the Trust Fund to the
Participants or their Beneficiaries as soon as the Trustee deems it to
be in the best interests of the Participants or their Beneficiaries,
except however, such distribution shall only be made (1) pursuant to the
terms of a collective bargaining agreement or (2) on the basis of
objective and reasonable standards which do not result in unequal
payments to similarly situated Participants or their Beneficiaries or in
disproportionate payments to officers, shareholders, or highly
compensated Employees of an Employer contributing to or otherwise
funding this Plan; or
(b) that any assets remaining in the Plan, after the satisfaction of all
liabilities to existing Participants or their Beneficiaries, be applied
to provide such Participants or their Beneficiaries with the benefits
set forth in the Plan, provided, however, that such benefits shall not
be provided in disproportionate amounts to officers, shareholders, or
highly compensated Employees of the Employer.
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ARTICLE VII
MISCELLANEOUS
7.1 ALIENATION
No benefit which shall be payable out of the Trust Fund to any person
(including a Participant or Beneficiary) shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or
charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge,
encumber, or charge the same shall be void; and no such benefit shall in any
manner be liable for, or subject to, the debts, contracts, liabilities,
engagements, or torts of any such person, nor shall it be subject to attachment
or legal process for or against such person, and the same shall not be
recognized by the Trustee, except to such extent as may be required by law.
Except, however, this provision shall not apply to the extent a Participant or
Beneficiary is indebted to the Plan, for any reason, under any provision of this
Agreement and at the time a distribution is to be made or for his benefit, such
proportion of the amount distributed as shall equal such indebtedness shall be
paid by the Trustee to the Trustee or the Administrator, at the direction of the
Administrator, to apply against or discharge such indebtedness. Prior to making
a payment, however, the Participant or Beneficiary must be given written notice
by the Administrator that such indebtedness is to be deducted in whole or part
from his benefits. If the Participant or Beneficiary does not agree that the
indebtedness is a valid claim against his benefits, he shall be entitled to a
review of the validity of the claim by the Administrator.
In the event a Participant 's or Beneficiary's benefits are garnished
or attached by order of any court, the Administrator may bring an action for a
declaratory judgment in a court of competent jurisdiction to determine the
proper recipient of the benefits to be paid by the Plan. During the pendency of
said action, any benefits that become payable shall be paid into the court as
they become payable, to be distributed by the court to the recipient it deems
proper at the close of said action.
7.2 CONSTRUCTION OF AGREEMENT
This Plan shall be construed and enforced according to the Act and the
laws of the State of South Carolina to the extent not preempted by the Act.
7.3 GENDER AND NUMBER
Wherever any words are used herein in the masculine, feminine or neuter
gender, they shall be construed as though they were also used in another gender
in all cases where they would so apply, and whenever any words are used herein
in the singular or plural form, they shall be construed as though they were also
used in the other form in all cases where they would so apply.
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7.4 LEGAL ACTION
In the event any claim, suit, or proceeding is brought regarding the
Trust and/or Plan established hereunder to which the Trustee or the
Administrator may be a party, not arising out of any willful action of such
Trustee or Administrator they shall be entitled to be reimbursed from the Trust
Fund for any and all costs, attorney's fees, and other expenses pertaining
thereto incurred by them for which they shall have become liable.
7.5 PROHIBITION AGAINST DIVERSION OF FUNDS
It shall be impossible by operation of the Plan or of the Trust, by
termination of either, by power of revocation or amendment, by the happening of
any contingency, by collateral arrangement or by any other means, for any part
of the corpus or income of any trust fund maintained pursuant to the Plan or any
funds contributed thereto to be used for, or diverted to, purposes other than
the exclusive benefit of Participants or their Beneficiaries.
7.6 BONDING
Every Fiduciary, except a bank or an insurance company, unless exempted
by the Act and regulations thereunder, shall be bonded in an amount not less
than 10% of the amount of the funds such Fiduciary handles; provided, however,
that the minimum bond shall be $1,000 and the maximum bond, $500,000. The amount
of funds handled shall be determined at the beginning of each Plan Year by the
amount of funds handled by such person, group, or class to be covered and their
predecessors, if any, during the preceding Plan Year, or if there is no
preceding Plan Year, then by the amount of the funds to be handled during the
then current year. The bond shall provide protection to the Plan against any
loss by reason of acts of fraud or dishonesty by the Fiduciary alone or in
connivance with others. The surety shall be a corporate surety company (as such
term is used in Section 412(a)(2) of the Act), and the bond shall be in a form
approved by the Secretary of Labor. Notwithstanding anything in this Agreement
to the contrary, the cost of such bonds shall be an expense of and may, at the
election of the Administrator, be paid from the Trust Fund or by the Employer.
7.7 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE
Neither the Employer nor the Trustee, nor their successors, shall be
responsible for the validity of any contract of insurance issued hereunder or
for the failure on the part of the insurer to make payments provided by any such
contract, or for the action of any person which may delay payment or render a
contract null and void or unenforceable in whole or in part.
7.8 INSURER'S PROTECTIVE CLAUSE
Any insurer who shall issue contracts of insurance hereunder shall not
have any
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<PAGE> 20
responsibility for the validity of this Plan or for the tax or legal aspects of
this Plan. The insurer shall be protected and held harmless in acting in
accordance with any written direction of the Trustee, and shall have no duty to
see to the application of any funds paid to the Trustee, nor be required to
question any actions directed by the Trustee. Regardless of any provision of
this Plan, the insurer shall not be required to take or permit any action or
allow any benefit or privilege contrary to the terms of any Contract which it
issues hereunder, or the rules of the insurer.
7.9 RECEIPT AND RELEASE FOR PAYMENTS
Any payment to any Participant, his legal representative, Beneficiary,
or to any guardian or committee appointed for such Participant or Beneficiary in
accordance with the provisions of this Agreement, shall, to the extent thereof,
be in full satisfaction of all claims hereunder against the Trustee and the
Employer, either of whom may require such Participant, legal representative,
Beneficiary, guardian or committee, as a condition precedent to such payment, to
execute a receipt and release thereof in such form as shall be determined by the
Trustee or Employer.
7.10 HEADINGS
The headings and subheadings of this Agreement have been inserted for
convenience of reference and are to be ignored in any construction of the
provisions hereof.
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IN WITNESS WHEREOF, this Agreement has been executed the day and year
first above written.
RESOURCE BANCSHARES MORTGAGE
GROUP, INC.
WITNESS: By:_______________________________
- -------------------------
HSBC BANK, USA
WITNESS: By:________________________________
- -------------------------
18
<PAGE> 1
EXHIBIT 11.1
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
STATEMENT RE: COMPUTATION OF NET INCOME PER COMMON SHARE,
BASIC AND DILUTED EARNINGS PER SHARE
($ in thousands, except per share amounts)
For the Year Ended
December 31, 1999
--------------------------
Net income $ 5,922
Net income per common share - basic (1) $ 0.29
Net income per common share - diluted (2) $ 0.28
1) The number of common shares outstanding used to compute net income per
share-basic was 20,643,166 for the year ended December 31, 1999, respectively.
2) Diluted earnings per common share for the year ended December 31, 1999, was
calculated based on weighted average common shares outstanding of 20,799,502
which assumes the exercise of options covering 717,035 shares and computes
incremental shares using the treasury stock method for the year ended December
31, 1999, respectively.
<PAGE> 1
Resource Bancshares Mortgage Group, Inc.
1999 Annual Report
A Company with a New Strategy and Mission
Charting the Course for the Future
Description of RBMG
Resource Bancshares Mortgage Group, Inc. is a diversified financial services
company engaged through wholly-owned subsidiaries 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, two of the
Company's wholly-owned subsidiaries originate, sell and service small-ticket
commercial equipment leases and originate, sell, underwrite for investors and
service commercial mortgage loans.
Table of Contents:
Selected Financial Highlights
Letter to Our Shareholders, Customers and Employees
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosure About Market Risk
Consolidated Financial Statements and Notes
Report of Independent Accountants
Stock Data
Directors and Executive Officers
Corporate Information
SELECTED FINANCIAL HIGHLIGHTS
($ IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income $ 26,162 $ 21,778 $ 17,644 $ 16,902 $ 8,635
Net gain on sale of mortgage loans 93,560 171,463 103,370 79,178 33,822
Gain on sale of mortgage servicing rights 7,262 1,753 7,955 1,105 7,346
Servicing fees 46,958 43,156 30,869 28,763 24,205
Total revenues 173,792 243,726 (2) 161,018 126,617 76,697
Salary and employee benefits 72,868 (1) 82,406 62,235 55,578 (4) 31,199
Total expenses (including taxes) 167,870 (1) 195,055 (2) 139,220 (3) 106,994 (4) 62,478
Net income 5,922 (1) 48,671 (2) 21,798 (3) 19,623 (4) 14,219
PER COMMON SHARE DATA
Net income per common share - basic $ 0.29 (1)$ 2.10 (2) $ 1.07 (3)$ 1.02 (4) $ 0.88
Net income per common share - diluted 0.28 (1) 2.07 (2) 1.05 (3) 1.00 (4) 0.86
Market price per common share at year-end(5) 4.53 16.56 16.31 13.57 12.68
Book value per common share at year-end 11.08 10.96 9.21 7.77 5.71
Cash dividends paid per common share 0.43 0.29 0.13 0.06 -
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Mortgage loans held for sale
and mortgage-backed securities $ 480,504 $ 1,441,458 $ 1,179,188 $ 802,335 $ 1,035,229
Lease receivables 155,559 102,029 51,494 - -
Mortgage servicing rights, net 177,563 191,022 127,326 109,815 99,912
Residual interests in subprime securitizations 54,382 45,782 19,684 - -
Total assets 1,027,182 1,969,635 1,556,929 1,028,394 1,231,097
Total long-term borrowings 6,259 6,364 6,461 - 65,530
Total liabilities 814,710 1,717,477 1,341,790 871,093 1,137,693
Stockholders' equity 212,472 252,158 215,139 157,301 93,404
STATISTICS
Total mortgage loan and lease production $ 9,785,966 $ 16,540,016 $ 10,777,294 $ 9,995,725 $ 7,135,774
Total agency-eligible servicing
Portfolio (including subservicing) 9,078,226 13,595,736 10,195,354 8,658,742 7,821,736
Commercial mortgage loan servicing
portfolio 4,104,095 3,255,458 2,760,238 - -
Managed lease servicing portfolio 166,572 (6) 136,521 (6) 123,509 (6) - -
Return on average assets 0.47% (1) 2.73% (2) 1.78% (3) 1.91% (4) 1.95%
Return on average equity 2.52% (1) 21.01% (2) 12.82% (3) 14.43% (4) 17.00%
</TABLE>
(1) Includes work force reduction charge totaling $3,789 pre-tax or $2,377
after-tax. Exclusive thereof, salary and employee benefits, total expenses
(including taxes), 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 $71,849, $165,493, $8,299. $0.41, $0.39, 0.67% and 3.53%,
respectively.
(2) Includes a non-recurring gain relating to sale of retail operations 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.
(3) Includes non-recurring and special charges relating to a terminated merger
agreement and a special charge relating to certain non-recoverable operating
receivables 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.
(4) Includes a non-recurring charge related to certain contractual employment
obligations 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.
(5) Source of market price is Nasdaq.
(6) Managed lease servicing portfolio consists of $152,300, $98,956 and $49,104
of leases owned by the Company and $14,272, $37,565 and $74,405 of leases
serviced for investors as of December 31, 1999, 1998 and 1997, respectively.
<PAGE> 3
To our stockholders, customers and employees:
Just a few short months ago, I assumed responsibility as Chief Executive
Officer. Since that time, the Board, management and I have met extensively to
review your Company's current positioning in the eyes of its customers,
colleagues and investors. We have reconsidered our market function, chosen
markets, and product depth. We have re-assessed our corporate, management and
leadership structures. As a team we have restated the strategy, mission, goals,
business principles and core values which will chart this Company's course into
the future. In this, my first letter to you, I want to articulate this new
vision for your Company.
We cannot successfully compete against better-capitalized industry giants by
providing customers an undifferentiated product at comparable cost. Instead, we
must strive to out-perform our rivals by delivering greater value at lower cost
to us. We believe we can realize this vision by merging world-class customer
relationship management with a diverse product array and a state-of-the-art
order fulfillment process.
We have already launched E-RBMG as part of our larger efforts to develop leading
edge order fulfillment processes. This sophisticated on-line resource
significantly improves the way current and potential customers interact with us.
It accelerates the loan transaction cycle, virtually eliminates data re-keying,
creates a faster feedback loop on loan status inquiries and allows us to provide
faster, more accurate loan origination services. In our view, the capabilities
offered by E-RBMG are unmatched and position us as a leader in Internet based
business-to-business offerings within our industry. We are ahead of the curve
and intend to remain there. By mid-year the Phase II version of E-RBMG will be
on-line, offering a dramatically enhanced set of features and customer benefits.
<PAGE> 4
We have already finalized processes that enable us to offer both prime and
non-prime mortgage products to our customers irrespective of the channel through
which they were originally acquired. We plan to rapidly expand our product
offerings to include competitively priced ARMs, jumbos, seconds and home equity
lines. And, to support these efforts, we will re-engineer our critical loan
origination processes with switch-in front technologies that support seamless
delivery of multiple products across all channels at significantly lower all-in
costs.
In the days ahead, we will continue to implement our bold new vision by
undertaking a company-wide reorganization designed to support effective pursuit
of our new goals. We will reorganize around business processes rather than
traditional product groupings. Specifically, we will reorganize around four
primary business processes which we believe are critical to achievement of our
goals: production/sales; order fulfillment; servicing; and portfolio management.
These business units will continue to be centrally supported by the traditional
corporate functions.
Finally, we will rapidly deploy new internal reporting models which measure "net
value added" across products, customers, salespeople and the newly defined
business units. Deployment of this new tool in tandem with implementation of
risk-based internal pricing processes will make us better managers as we measure
the alignment of business units, products, customers and sales staff with our
broader strategic objectives.
In the months ahead, you will see E-business becoming a primary channel for our
growth. In fact, I believe we have the core competencies, deep experience and
core customer base that uniquely position this Company for success within that
market space. We are mortgage professionals in search of technological solutions
rather than technologists in search of mortgage professionals. In my view, the
electronic mortgage is coming and the next few years will see the traditional
mortgage business radically re-defined. By way of handling that transition, our
size is an advantage. We can move quickly while effecting process changes
rapidly. Ultimately, the market will search out a financial intermediary with a
rich product line, advanced origination technology and the highest levels of
service. We will be that intermediary.
Before closing, I want to acknowledge the many contributions of our former
Chairman and CEO, Ed Sebastian, who retired at the end of 1999. Ed provided
leadership during the critical decade that saw the Company move from its infancy
to its initial public capitalization and on toward maturity. His entrepreneurial
spirit and wisdom will be sorely missed as we build upon the solid foundation
that is his legacy.
Your Board, management, employees and I are all working with enthusiasm to
implement this new vision. I am confident that your Company has great potential.
I thank you for the opportunity to serve as your CEO as we Chart our Course into
the future and as we work together to create a new RBMG.
Douglas K. Freeman
Chief Executive Officer
March 22, 2000
<PAGE> 5
Strategy
Mission
Goals
Business Principles
Core Values
Tactics
Top Mortgage Originators For the Year Ended
December 31, 1999 (dollars in billions)
MARKET
RANK LENDER VOLUME SHARE
- ---------------------------------------------------------------------------
1 Chase Home Finance $93.42 7.3%
2 Norwest Mortgage 81.99 6.4%
3 Countrywide Credit Industries 75.37 5.9%
4 Bank of America Mortgage and Affiliates 63.22 5.0%
5 Washington Mutual 41.50 3.3%
28 Resource Bancshares Mortgage Group 8.84 0.7%
Source: Inside Mortgage Finance, January 21, 2000
Our Strategic Focus Will Move:
FROM TO
- ---- --
Volume Value
Market Share Customer Wallet Share
Volume Driven Price Profit Driven Pricing
Product Profitability Lifetime Customer Value
Undifferentiated Services Differentiated Services
Transaction Oriented Decisions Relationship Driven Decisions
1999 REVENUE BY DIVISION
Prime 69%
Nonprime 18%
Commercial 8%
Leasing 5%
OUR MARKET FUNCTION
Customers
Consumers
Small businesses
Middle market companies
Large corporations
Distribution Networks
<PAGE> 6
Direct
Broker
Bankers
Savings & Loans
Financial Intermediaries
Finance, human resources etcetera
Production
Order fulfillment
Servicing
Portfolio
Products
30 year fixed
15 year fixed
ARMs
Home equity
Non-prime
Investors
GSEs
Insurance Companies
Finance Companies
Banks
Wall Street
Positioning Customers
High quality sales and service
Value-speed, flexibility, simple to do business with
Rich product line
Technology company
Positioning Colleagues
Market value leader
Most professional status
Personal wealth creation via work and ownership in Resource Bancshares Mortgage
Group, Inc.
Positioning Investors
Niche player
Financial intermediary characteristics- low credit risk, low volume risk
Technology play
<PAGE> 7
Strategy
Our strategy is to be a customer centric financial intermediary, which combines
the best of product depth, relationship management and service quality. The
resulting company has world-class operational effectiveness and delivers greater
value to our customers.
Mission Statement
The mission of Resource Bancshares Mortgage Group, Inc. is to be the premiere
provider of financial products and services to our chosen market segments. We
will be our customer's first choice of a financial intermediary by providing
depth, world class relationship management and exceptional customer service.
Resource Bancshares Mortgage Group, Inc.'s mission is to be our customers value
added provider.
Goals
To be in the top decile of like companies in ROE
To be in the top decile of like companies in EPS
To be a .com company
To exceed our customers expectations
To be the best managed business in the industry
To be the place where the best and brightest colleagues want to work
To be a business where our colleagues like each other and we have fun
Business Principles
Run it like you own it
Know your numbers
Know your customers
Develop good people
Manage expenses
Core Values
Teamwork and trust
A commitment to winning
Customers are our main focus
We have pride in our company
Do the right thing
We play win/win with our teammates
We are open and honest in our communications
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements of Resource Bancshares Mortgage Group,
Inc. (the Company) (and the notes thereto) and the other information included or
incorporated by reference into the Company's 1999 Annual Report on Form 10-K.
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, 1999: (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) possible changes in accounting estimates and (xiii)
availability of funding sources and other risks and uncertainties. The Company
disclaims any obligation to update any forward-looking statements.
THE COMPANY
The Company is a diversified financial services company engaged through
wholly-owned subsidiaries 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 (i.e.
one-four family), first-mortgage loans and the purchase and sale of servicing
rights associated with agency-eligible loans. In addition, two of the Company's
wholly-owned subsidiaries originate, sell and service small-ticket commercial
equipment leases and originate, sell, underwrite for investors and service
commercial mortgage loans.
7
<PAGE> 9
LOAN AND LEASE PRODUCTION
A summary of production by source for the periods indicated is set forth
below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Agency-Eligible Loan Production:
Correspondent $ 6,363,936 $11,666,560 $ 7,893,583
Wholesale 1,748,415 3,023,961 1,868,726
Retail -- 264,059 675,411
----------- ----------- -----------
Total Agency-Eligible Loan Production 8,112,351 14,954,580 10,437,720
Subprime Loan Production 728,410 607,664 339,574
Commercial Mortgage (for Investors
and Conduits) Loan Production 844,975 899,674 --
Lease Production 100,230 78,098 --
----------- ----------- -----------
Total Mortgage Loan and Lease Production $ 9,785,966 $16,540,016 $10,777,294
=========== =========== ===========
</TABLE>
Initially, the Company was focused exclusively on purchasing
agency-eligible mortgage loans through its correspondents. To diversify its
sources of residential loan volume, the Company started a wholesale operation in
1994, a retail operation in 1995 (which was sold in 1998) and a subprime
operation in 1997. To further diversify its sources of production and revenue,
the Company acquired a small-ticket commercial equipment lease operation and a
commercial mortgage loan business. These two newer sources of production
accounted for approximately 10% and 6% of the Company's total production for
1999 and 1998, respectively. Historically, correspondent operations have
accounted for a diminishing percentage of the Company's total production (65%
for 1999, 71% for 1998 and 73% for 1997). Wholesale and subprime production
accounted for 18% and 7%, respectively, of the Company's 1999 total production.
A summary of key information relevant to industry loan production activity is
set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
U. S. 1-4 Family Mortgage Originations Statistics (1):
U. S. 1-4 Family Mortgage Originations $1,287,000,000 $1,470,000,000 $ 857,000,000
Adjustable Rate Mortgage Market Share 21% 14% 22%
Estimated Fixed Rate Mortgage Originations 1,017,000,000 1,264,000,000 668,000,000
Company Information:
Residential Loan Production $ 8,840,761 $ 15,562,244 $ 10,777,294
Estimated Company Market Share 0.69% 1.06% 1.26%
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's total residential mortgage production decreased by 43% to
$8.8 billion for 1999 from $15.6 billion for 1998. This decrease is primarily
due to (1) the increase in competition in the market place; (2) an estimated 12%
decline in residential originations within
8
<PAGE> 10
the industry; (3) the increased ARM market share in 1999 (the Company offers
primarily fixed rate products); and (4) the rise in mortgage interest rates
during 1999. The Company's 44% production increase from 1997 to 1998 was
primarily attributed to a 72% nationwide production increase for the same
period.
Correspondent Loan Production
The Company purchases closed mortgage loans through its network of approved
correspondent lenders. Correspondents are primarily mortgage lenders, larger
mortgage brokers and smaller savings and loan associations and commercial banks
that have met the Company's approval requirements. The Company continues to
emphasize correspondent loan production as its basic business focus because of
the lower fixed expenses and capital investment required of the Company. A
summary of key information relevant to the Company's correspondent loan
production activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Correspondent Loan Production $ 6,363,936 $11,666,560 $ 7,893,583
Estimated Correspondent Market Share(1) 0.49% 0.79% 0.92%
Approved Correspondents 909 852 919
Correspondent Division Expenses $ 55,438 $ 68,975 $ 47,618
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's correspondent loan production decreased by 45% to $6.4
billion for 1999 from $11.7 billion for 1998. This decrease in production is
primarily due to (1) the increase in competition in the market place; (2) an
estimated 12% decline in residential originations within the industry; (3) the
increased ARM market share in 1999 (the Company primarily offers fixed rate
products); and (4) the rise in mortgage interest rates during 1999. This decline
in production is the primary reason for the increase in correspondent division
expenses as a percentage of production which increased from 59 basis points for
1998 to 87 basis points for 1999 despite the reduction in correspondent division
expenses. The number of approved correspondent lenders increased 7% from 1998 to
1999. The Company's correspondent loan production increased by 48% to $11.7
billion for 1998 from $7.9 billion for 1997. This increase is primarily a result
of the 72% increase in nationwide mortgage originations for 1998.
Wholesale Loan Production
The wholesale division receives loan applications through brokers,
underwrites the loans, funds the loans at closing and prepares all closing
documentation. The wholesale branches and regional operating centers handle all
shipping and follow-up procedures on loans. Typically, mortgage brokers are
responsible for taking applications and accumulating the information precedent
to the Company's processing of the loans. Although the establishment of
wholesale branch offices and regional operating centers involves the incurrence
of fixed expenses associated with maintaining those offices, wholesale
operations also generally provide for higher profit margins than correspondent
loan production. Additionally, each branch office and regional
9
<PAGE> 11
operating center can serve a relatively sizable geographic area by establishing
relationships with large numbers of independent mortgage loan brokers who bear
much of the cost of identifying and interacting directly with loan applicants.
In 1999, the Company established regional operations centers to better
facilitate service to a larger geographic area. The Company's nationwide
salesforce is supported by these regional operating centers. A summary of key
information relevant to the Company's wholesale production activities is set
forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Wholesale Loan Production $1,748,415 $3,023,961 $1,868,726
Estimated Wholesale Market Share (1) 0.14% 0.21% 0.22%
Wholesale Division Direct Operating Expenses $ 16,362 $ 16,037 $ 11,540
Approved Brokers 4,284 3,401 3,046
Regional Operation Centers 5 -- --
Number of Branches 2 15 15
Number of Employees 107 161 146
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
Wholesale loan production decreased 42% ($1.3 billion) from $3.0 billion
for 1998 to $1.8 billion for 1999 primarily due to (1) the increase in
competition in the market place in 1999; (2) an estimated 12% decline in
residential originations within the industry; (3) the increased ARM market share
in 1999 (the Company offers primarily fixed rate products); and (4) the rise in
mortgage interest rates during 1999. Wholesale division operating expenses as a
percentage of production increased from 53 basis points in 1998 to 94 basis
points in 1999 primarily as a result of the decline in production.
The 62% ($1.2 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.
Retail Loan Production
Effective May 1, 1998, the Company sold its retail production franchise.
Retail loan production and retail divisional direct operating expenses for the
year ended December 31, 1998 were $264.1 million and $6.0 million, respectively.
Subprime Loan Production
10
<PAGE> 12
In 1997, the Company began its initial expansion into subprime lending
activities. The Company does subprime business through its wholly-owned
subsidiary, Meritage Mortgage Corporation (Meritage). A summary of key
information relevant to the Company's subprime production activities is set
forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Subprime Loan Production $728,410 $607,664 $339,574
Subprime Division Direct Operating Expenses $ 28,760 $ 19,896 $ 10,486
Number of Brokers 3,095 1,830 661
Number of Employees 293 271 139
Number of Branches 10 19 14
</TABLE>
Subprime loan production increased by 20% to $728.4 million for 1999 as
compared to $607.7 million during 1998 as the Company has expanded its
operations. Between 1998 and 1999 the Company increased the number of its
subprime brokers by 1,265. The number of branches declined from 19 in 1998 to 10
at the end of 1999 as the Company reassessed the geographic regions that each
branch covers.
Subprime loan production increased by 79% to $607.7 million for 1998 as
compared to $339.6 million during 1997. This increase is partially attributable
to a 28% increase in nationwide subprime originations in 1998, but is primarily
due to expansion of the Company's subprime operations during 1998.
Commercial Mortgage Production
The Company's subsidiary, Laureate Capital Corp. (Laureate), originates
commercial mortgage loans for various insurance companies and other investors.
Commercial mortgage loans are generally originated in the name of the investor
and, in most instances, Laureate retains the right to service the loans under a
servicing agreement. A summary of key information relevant to the Company's
commercial mortgage production activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE PERIOD ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
-------- -------- ------
<S> <C> <C>
Commercial Mortgage Production $844,975 $899,674 N/A
Commercial Mortgage Division
Operating Expenses $ 13,474 $ 11,231 N/A
Number of Branches 13 12 N/A
Number of Employees 88 81 N/A
</TABLE>
Lease Production
The Company's wholly-owned subsidiary, Republic Leasing Company, Inc.
(Republic Leasing), originates and services small-ticket commercial equipment
leases. Substantially all of
11
<PAGE> 13
Republic Leasing's lease receivables are acquired from independent brokers who
operate throughout the continental United States. A summary of key information
relevant to the Company's lease production activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE PERIOD ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
-------- -------- ------
<S> <C> <C>
Lease Production $100,230 $ 78,098 N/A
Lease Division Operating Expenses $ 6,275 $ 5,307 N/A
Number of Brokers 184 218 N/A
Number of Employees 61 66 N/A
</TABLE>
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 as required of
the mortgaged premises, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults and
generally administering mortgage loans.
The Company is somewhat unique in that its strategy is to sell
substantially all of its produced agency-eligible mortgage servicing rights to
other approved servicers. Typically, the Company sells its agency-eligible
mortgage servicing rights within 90 to 180 days of purchase or origination.
However, for strategic reasons, the Company also strives to maintain a servicing
portfolio whose size is determined by reference to the Company's cash operating
costs which, in turn, are largely determined by the size of its loan production
platform.
A summary of key information relevant to the Company's agency-eligible loan
servicing activities is set forth below:
12
<PAGE> 14
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Underlying Unpaid Principal Balances:
Beginning Balance * $ 9,865,100 $ 7,125,222 $ 6,670,267
Agency-Eligible Loan Production (net of
servicing-released production) 8,097,749 14,917,193 10,557,994
Net Change in Work-in-Process 228,712 604,131 26,007
Bulk Acquisitions -- 122,467 774,097
Sales of Servicing (9,104,706) (10,922,288) (9,699,058)
Paid-In-Full Loans (973,780) (1,639,776) (709,052)
Amortization, Curtailments and Other, net (290,681) (341,849) (495,033)
------------ ------------ ------------
Ending Balance* 7,822,394 9,865,100 7,125,222
Subservicing Ending Balance 1,255,832 3,730,636 3,070,132
------------ ------------ ------------
Total Underlying Unpaid Principal Balances $ 9,078,226 $ 13,595,736 $ 10,195,354
============ ============ ============
</TABLE>
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and, therefore, exclude the subservicing portfolio. The
1999, 1998 and 1997 ending balance includes $139,376, $138,619 and -0- of
subprime loans being temporarily serviced until these loans are sold.
Of the $7.8 billion, $9.9 billion and $7.1 billion unpaid principal balance
at December 31, 1999, 1998 and 1997, approximately $6.3 billion, $5.5 billion
and $4.2 billion, respectively, of the related mortgage servicing right asset is
classified as available-for-sale, while $1.5 billion, $4.4 billion and $2.9
billion, respectively, of the related mortgage servicing right asset is
classified as held-for-sale.
A summary of agency-eligible servicing statistics follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Average Underlying Unpaid Principal Balances
(including subservicing) $ 11,820,861 $ 11,864,513 $ 9,468,730
Weighted Average Note Rate* 7.50% 7.20% 7.69%
Weighted Average Servicing Fee* 0.43% 0.42% 0.40%
Delinquency (30+ days) Including
Bankruptcies and Foreclosures* 2.78% 2.01% 3.66%
Number of Servicing Division Employees 86 151 143
</TABLE>
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and, therefore, exclude the subservicing portfolio.
The $0.04 billion, or 0.4%, decrease in the average underlying unpaid
principal balance of agency-eligible mortgage loans being serviced and
subserviced for 1999 as compared to 1998 is primarily related to the Company's
decreased loan production volumes during 1999. Since the Company generally sells
servicing rights related to the agency-eligible loans it produces within
13
<PAGE> 15
90 to 180 days of purchase or origination, decreased production volumes
generally result in a lower volume of mortgage servicing rights held in
inventory pending sale.
Commercial Mortgage Servicing
Laureate originates commercial mortgage loans for investors and in most
cases, Laureate retains the right to service the loans. A summary of key
information relevant to the Company's commercial mortgage servicing activities
is set forth below:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
($ IN THOUSANDS) 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Commercial Mortgage Loan Servicing Portfolio $4,104,095 $3,255,458 $2,760,238
Weighted Average Note Rate 7.94% 8.11% 8.41%
Delinquencies (30+ Days) 0.29% 0.42% 0.60%
</TABLE>
Lease Servicing
Republic Leasing services leases that are owned by it and also services
leases for investors. A summary of key information relevant to the Company's
lease servicing activity is set forth below:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
($ IN THOUSANDS) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Owned Lease Servicing Portfolio $152,300 $ 98,956 $ 49,104
Serviced For Investors Servicing Portfolio 14,272 37,565 74,405
-------- -------- --------
Total Managed Lease Servicing Portfolio $166,572 $136,521 $123,509
======== ======== ========
Weighted Average Net Yield For Managed
Lease Servicing Portfolio 10.61% 10.81% 10.77%
Delinquencies (30+ Days) Managed
Lease Servicing Portfolio 2.76% 2.00% 3.35%
</TABLE>
Consolidated Coverage Ratios
A summary of the Company's consolidated ratios of servicing fees and
interest income from owned leases to cash operating expenses net of amortization
and depreciation follows:
14
<PAGE> 16
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Total Company Servicing Fees $ 46,958 $ 43,156 $ 30,869
Net Interest Income from Owned Leases 7,270 4,637 N/A
--------- --------- ---------
Total Servicing Fees and Interest from Owned
Leases $ 54,228 $ 47,793 $ 30,869
Total Company Operating Expenses $ 165,158 $ 167,123 $ 125,931
Total Company Amortization and
Depreciation (39,249) (34,570) (21,859)
--------- --------- ---------
Total Company Operating Expenses, Net of
Amortization and Depreciation $ 125,909 $ 132,553 $ 104,072
--------- --------- ---------
Coverage Ratio 43% 36% 30%
========= ========= =========
</TABLE>
The Company's coverage ratios for 1999, 1998 and 1997 at 43%, 36% and 30%,
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. 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 of maintaining a coverage ratio of between 50%
and 80%.
15
<PAGE> 17
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED
DECEMBER 31, 1998
SUMMARY BY OPERATING DIVISION
Net income per common share on a diluted basis for 1999 was $0.28 as
compared to $2.07 for 1998. This 86% decrease in net income per common share was
less than the 88% decrease in net income due primarily to the impact of the
Company's stock repurchase program, which reduced the number of weighted average
shares outstanding across comparative periods. Following is a summary of the
revenues and expenses for each of the Company's operating divisions for the
years ended December 31, 1999 and 1998, respectively:
16
<PAGE> 18
<TABLE>
<CAPTION>
($ in thousands) Agency-Eligible
For the year ended ---------------------------------------- Commercial Total
December 31, 1999(1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Net interest income $ 8,240 $ (4,555) $ (12) $ 15,366 $ 323 $ 7,270 $ 26,632
Net gain on sale of
mortgage loans 64,033 -- -- 20,357 9,170 -- 93,560
Gain on sale of mortgage
servicing rights -- 7,262 -- -- -- -- 7,262
Servicing fees -- 41,791 -- -- 4,735 620 47,146
Other income 340 582 1,661 (4,372) 69 1,395 (325)
---------------------------------------------------------------------------------------------
Total revenues 72,613 45,080 1,649 31,351 14,297 9,285 174,275
---------------------------------------------------------------------------------------------
Salary and employee
benefits 38,751(2) 3,399(3) -- 15,840(4) 8,321 2,654 68,965
Occupancy expense 10,079(2) 419 -- 2,567(4) 1,123 453 14,641
Amortization and provision
for impairment of
mortgage servicing rights -- 29,580 -- -- 2,210 -- 31,790
General and administrative
expenses 22,970(2) 5,984 221 10,353(4) 1,820 3,168 44,516
---------------------------------------------------------------------------------------------
Total expenses 71,800(2) 39,382(3) 221 28,760(4) 13,474 6,275 159,912
---------------------------------------------------------------------------------------------
Income before income taxes 813(2) 5,698(3) 1,428 2,591(4) 823 3,010 14,363
Income tax expense (207)(2) (1,448)(3) (356) (1,237)(4) (405) (1,196) (4,849)
---------------------------------------------------------------------------------------------
Net income $ 606(2) $ 4,250(3) $ 1,072 $ 1,354(4) $ 418 $ 1,814 $ 9,514
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
For the year ended Other/
December 31, 1999(1) Eliminations Consolidated
- ----------------------------------------------------------
<S> <C> <C>
(UNAUDITED)
Net interest income $ (470) $ 26,162
Net gain on sale of
mortgage loans -- 93,560
Gain on sale of mortgage
servicing rights -- 7,262
Servicing fees (188) 46,958
Other income 175 (150)
------------------------------
Total revenues (483) 173,792
------------------------------
Salary and employee
benefits 3,903(5) 72,868(6)
Occupancy expense 214(5) 14,855(6)
Amortization and provision
for impairment of --
mortgage servicing rights -- 31,790
General and administrative
expenses 1,129(5) 45,645(6)
------------------------------
Total expenses 5,246(5) 165,158(6)
------------------------------
Income before income taxes (5,729)(5) 8,634(6)
Income tax expense 2,137(5) (2,712)(6)
------------------------------
Net income $(3,592)(5) $ 5,922(6)
==============================
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes work force reduction charge totaling $3,048 pre-tax or $1,912
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $37,931, $8,299,
$22,522, $68,752, $3,861, $1,343 and $2,518 respectively.
(3) Includes work force reduction charge totaling $31 pre-tax or $19 after-tax.
Exclusive thereof, salary and employee benefits, total expenses, net income
before income taxes, income tax expense and net income would have been $3,368,
$39,351, $5,729, $1,460 and $4,269 respectively.
(4) Includes work force reduction charge totaling $516 pre-tax or $324
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $15,674, $2,381,
$10,189, $28,244, $3,107, $1,429 and $1,678 respectively.
(5) Includes work force reduction charge totaling $194 pre-tax or $122
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $3,901, $24, $1,127,
$5,052, $(5,535), $(2,065) and $(3,470) respectively.
(6) Includes work force reduction charge totaling $3,789 pre-tax or $2,377
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $71,849, $12,699,
$45,031, $161,369, $12,423, $4,124 and $8,299 respectively.
<TABLE>
<CAPTION>
($ in thousands) Agency-Eligible
For the year ended ---------------------------------------- Commercial Total
December 31, 1998(1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Net interest income $ 7,422 $ -- $ -- $ 9,565 $ 536 $ 4,637 $ 22,160
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 42,647
Other income 1,756(2) 455 1,189 732 11 753 4,896
---------------------------------------------------------------------------------------------
Total revenues 143,650(2) 40,064 1,189 38,277 13,335 6,404 242,919
---------------------------------------------------------------------------------------------
Salary and employee benefits 53,158 3,449 -- 13,485 7,322 2,347 79,761
Occupancy expense 7,005 443 -- 1,921 840 376 10,585
Amortization and provision
for impairment of mortgage
servicing rights -- 27,897 -- -- 1,335 -- 29,232
General and administrative
expenses 28,046 6,446 196 4,490 1,734 2,584 43,496
---------------------------------------------------------------------------------------------
Total expenses 88,209 38,235 196 19,896 11,231 5,307 163,074
---------------------------------------------------------------------------------------------
Income before income taxes 55,441(2) 1,829 993 18,381 2,104 1,097 79,845
Income tax expense (20,059)(2) (662) (351) (6,656) (952) (435) (29,115)
---------------------------------------------------------------------------------------------
Net income $ 35,382(2) $ 1,167 $ 642 $ 11,725 $ 1,152 $ 662 $ 50,730
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
For the year ended Other/
December 31, 1998(1) Eliminations Consolidated
- ----------------------------------------------------------
<S> <C> <C>
(UNAUDITED)
Net interest income $ (382) $ 21,778
Net gain on sale of
mortgage loans -- 171,463
Gain on sale of mortgage
servicing rights -- 1,753
Servicing fees 509 43,156
Other income 680 5,576(2)
---------------------------
Total revenues 807 243,726(2)
---------------------------
Salary and employee benefits 2,645 82,406
Occupancy expense 634 11,219
Amortization and provision -- --
for impairment of mortgage
servicing rights -- 29,232
General and administrative
expenses 770 44,266
---------------------------
Total expenses 4,049 167,123
---------------------------
Income before income taxes (3,242) 76,603(2)
Income tax expense 1,183 (27,932)(2)
---------------------------
Net income $ (2,059) $ 48,671(2)
===========================
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes a non-recurring gain related to sale of retail operation totaling
$1,490 pre-tax, or $917 after-tax. Exclusive thereof, the year ended December
31, 1998 residential mortgage agency-eligible other income, total revenues,
income before taxes, income tax expense and net income and consolidated other
income, total revenues, income before taxes, income tax expense and net income
would have been $266, $142,160, $53,951, $19,486 and, $34,465; and $4,086,
$242,236, $75,113, $27,359 and, $47,754, respectively.
17
<PAGE> 19
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage production operations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1999 1998
---------- -----------
<S> <C> <C>
Net interest income $ 8,240 $ 7,422
Net gain on sale of mortgage loans 64,033 134,472
Other income 340 1,756
---------- -----------
Total production revenue 72,613 143,650
---------- -----------
Salary and employee benefits 38,751 53,158
Occupancy expense 10,079 7,005
General and administrative expenses 22,970 28,046
---------- -----------
Total production expenses 71,800 88,209
---------- -----------
Net pre-tax production margin $ 813 $ 55,441
---------- -----------
Production $8,112,351 $14,954,580
Pool delivery 8,642,639 14,713,137
Total production revenue to pool delivery 84 BPS 98 bps
Total production expenses to production 89 BPS 59 bps
---------- -----------
Net pre-tax production margin (5)BPS 39 bps
========== ===========
</TABLE>
Summary
The production revenue to pool delivery ratio decreased 14 basis points for
1999 as compared to 1998. Generally, net gain on sale of mortgage loans (74
basis points for 1999 versus 91 basis points for 1998) declined primarily due to
compressed margins attributable to an aggressive competitive pricing environment
and lower overall agency-eligible production volume. Net interest income
increased from 5 basis points in 1998 to 10 basis points in 1999 primarily as a
result of the generally steeper yield curve environment. The production expenses
to production ratio increased 30 basis points for 1999 as compared to 1998. This
is primarily due to the 46% decline in production for 1999 as compared to 1998
which was partially offset by a $16.4 million decline in total production
expenses for 1999 as compared to 1998. As a consequence of the foregoing, the
Company's net agency-eligible pre-tax production margin declined 44 basis
points. Absent workforce reduction charges (discussed in greater detail
elsewhere within Management's Discussion and Analysis), total production
expenses would have declined by $19.5 million.
Net Interest Income
The following table analyzes net interest income allocated to the
Company's agency-eligible mortgage production activities in terms of rate and
volume variances of the interest spread (the difference between interest rates
earned on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds) for the years ended December 31, 1999 and
1998, respectively:
18
<PAGE> 20
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Variance
Average Volume Average Rate Interest Attributable to
- -------------------------------------- ------------------ ---------------------
1999 1998 1999 1998 1999 1998 Variance Rate Volume
- -------------------------------------- ----------------------------------------------------
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
INTEREST INCOME
---------------
Mortgages Held-for-Sale
and Mortgage-Backed
$656,291 $1,172,994 6.85% 6.74% Securities $ 44,982 $79,078 $(34,096) $ 739 $(34,835)
- -------------------------------------- ----------------------------------------------------
INTEREST EXPENSE
----------------
$345,807 $ 457,967 4.14% 4.50% Warehouse Line * $ 14,313 $20,630 $ (6,317) $(1,265) $ (5,052)
303,092 689,711 5.21% 5.79% Gestation Line 15,779 39,958 (24,179) (1,780) (22,399)
110,380 97,422 6.21% 6.58% Servicing Secured Line 6,851 6,413 438 (415) 853
20,596 33,331 5.27% 5.75% Servicing Receivables 1,085 1,918 (833) (100) (733)
Line
7,142 8,726 8.57% 8.50% Other Borrowings 612 742 (130) 5 (135)
Facility Fees & Other 2,968 2,377 591 - 591
Charges
- -------------------------------------- ----------------------------------------------------
$787,017 $ 1,287,157 5.29% 5.60% Total Interest Expense $ 41,608 $72,038 $(30,430) $(3,555) $(26,875)
- -------------------------------------- ----------------------------------------------------
Net Interest Income Before
1.56% 1.14% Interdivisional $ 3,374 $ 7,040 $ (3,666) $ 4,294 $ (7,960)
================== Allocations ================================
Allocation to Other 470 382
Allocation to Agency-
Eligible Servicing 4,396 -
Division -------------------
Net Interest Income $ 8,240 $ 7,422
===================
</TABLE>
* The interest-rate yield on the warehouse line is net of the benefit of escrow
deposits.
The 42 basis point increase in the interest-rate spread was primarily the
result of the steeper yield curve environment during 1999 compared to 1998. The
Company's mortgages and mortgage-backed securities are generally sold and
replaced within 30 to 35 days. Accordingly, the Company generally borrows at
rates based upon short-term indices, while its asset yields are primarily based
upon long-term mortgage rates.
Net Gain on Sale of Agency-Eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Gross proceeds on sales of mortgage loans $ 8,853,967 $14,921,242
Initial unadjusted acquisition cost of mortgage
loans sold, net of hedge results 8,861,915 14,917,751
----------- -----------
Unadjusted gain (loss) on sale of mortgage loans (7,948) 3,491
Loan origination and correspondent program
administrative fees 21,402 36,729
----------- -----------
Unadjusted aggregate margin 13,454 40,220
Acquisition basis allocated to mortgage
servicing rights (SFAS No. 125) 52,702 93,570
Net change in deferred administrative fees (2,123) 682
----------- -----------
Net gain on sale of agency-eligible mortgage loans $ 64,033 $ 134,472
=========== ===========
</TABLE>
Net gain on sale of agency-eligible mortgage loans decreased $70.4
million from $134.5 million for 1998 to $64.0 million for 1999. The decrease is
primarily due to compressed margins attributable to an aggressive competitive
pricing environment in the correspondent channel and lower overall
agency-eligible production volume.
19
<PAGE> 21
Other Income
The $1.4 million decline in other income for 1999 as compared to 1998 is
primarily attributable to the sale of the Company's retail production franchise
in 1998, which resulted in a nonrecurring gain of approximately $1.4 million.
AGENCY-ELIGIBLE REINSURANCE OPERATIONS
In November 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 PMI policies on agency-eligible mortgage loans
initially purchased or produced by the Company. During 1999 and 1998, the
Company recognized premium and investment income of approximately $1.7 million
and $1.2 million, respectively, that has been included as other income in the
agency-eligible reinsurance segment.
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
subprime mortgage production operations:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1999 1998
--------- --------
<S> <C> <C>
Net interest income $ 15,366 $ 9,565
Net gain on sale of mortgage loans 20,357 27,980
Other income (4,372) 732
--------- --------
Total production revenue 31,351 38,277
--------- --------
Salary and employee benefits 15,840 13,485
Occupancy expense 2,567 1,921
General and administrative expenses 10,353 4,490
--------- --------
Total production expenses 28,760 19,896
--------- --------
Net pre-tax production margin $ 2,591 $ 18,381
--------- --------
Production $ 728,410 $607,664
Whole loan sales and securitizations 699,317 551,110
Total production revenue to whole loan sales and securitizations 448 BPS 695 bps
Total production expenses to production 395 BPS 327 bps
--------- --------
Net pre-tax production margin 53 BPS 368 bps
========= ========
</TABLE>
Summary
During 1999, subprime production volume of $728.4 million exceeded
whole loan sales and securitizations of $699.3 million by $29.1 million. At
December 31, 1999, the Company had unsold subprime mortgage loans of $128.8
million as compared to $97.9 million at December 31, 1998. Overall, the Company
operated during 1999 at a 0.53% pre-tax subprime production
20
<PAGE> 22
margin. The 315 basis point decline in the pre-tax subprime production margin is
primarily due to the 217 basis point decline in net gain on the sale of subprime
mortgage loans. This decline is primarily attributable to compressed margins in
the subprime market during 1999 and the higher relative volumes of whole loan
sales as compared to securitizations from year to year. Salary and employee
benefit costs increased by 17%, or $2.4 million from 1998 to 1999. This was
primarily due to an increase in production volume of 20%. Occupancy expense
increased by $0.6 million primarily due to branch expansion cost and the
workforce reduction charge of $0.2 million. Workforce reduction charges are
discussed elsewhere in this Management's Discussion and Analysis. General and
administrative expenses increased approximately $5.9 million primarily due to
(1) an increase in provision expense of $2.6 million and (2) a 20% increase in
production volume for 1999 as compared to 1998.
Net Interest Income
The following table analyzes net interest income allocated to the Company's
subprime mortgage production activities in terms of rate and volume variances of
the interest spread (the difference between interest rates earned on loans and
residual certificates and interest rates paid on interest-bearing sources of
funds) for the years ended December 31, 1999 and 1998, respectively.
<TABLE>
($ IN THOUSANDS) Variance
Average Volume Average Rate Interest Attributable to
- ------------------------------------- --------------------- ---------------------
1999 1998 1999 1998 1999 1998 Variance Rate Volume
- ------------------------------------- ----------------------------------------------------
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
Mortgages Held-for-Sale
and Residual
$ 235,552 $142,685 10.62% 10.29% Certificates $ 25,026 $ 14,684 $ 10,342 $ 785 $ 9,557
- ------------------------------------- ----------------------------------------------------
$ 171,358 $ 97,534 5.73% 5.25% Total Interest Expense $ 9,819 $ 5,119 $ 4,700 $ 825 $ 3,875
- ------------------------------------- ----------------------------------------------------
4.89% 5.04% Net Interest Income $ 15,207 $ 9,565 $ 5,642 $ (40) $ 5,682
================= ===============================
Allocation to Agency-
Eligible Servicing
Division 159 -
---------------------
Net Interest Income $ 15,366 $ 9,565
=====================
</TABLE>
Net interest income from subprime products increased to $15.4 million for
1999 as compared to $9.6 million for 1998. This was primarily the result of the
increase in subprime loan production volume and an increase in accretion income
earned on residual interests to $6.6 million for 1999 as compared to $3.4 for
1998.
Net Gain on Sale and Securitization of Subprime Mortgage Loans
A reconciliation of the gain on securitization of subprime mortgage loans
for the periods indicated follows:
21
<PAGE> 23
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Gross proceeds on securitization of subprime mortgage loans $ 248,456 $ 318,040
Initial acquisition cost of subprime mortgage loans securitized, net
of fees 252,162 324,549
--------- ---------
Unadjusted loss on securitization of subprime mortgage loans (3,706) (6,509)
Initial capitalization of residual certificates 16,394 22,240
Net deferred costs and administrative fees recognized (2,898) 357
--------- ---------
Net gain on securitization of subprime mortgage loans $ 9,790 $ 16,088
========= =========
</TABLE>
The net gain on securitization of subprime mortgage loans declined by $6.3
million or 39% in 1999 as compared to 1998. This decline is primarily
attributable to a 22% decrease in the volume of subprime loans securitized as
well as compressed margins in the subprime market during 1999.
The Company assesses the fair value of residual certificates quarterly,
with assistance from an independent third party. 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, 1999 for residual
certificates then held by the Company generally 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. Terminal prepayment rate assumptions specific to the
individual certificates for purposes of the December 31, 1999 valuations are set
forth below:
<TABLE>
<CAPTION>
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Prepayment Speeds
Fixed rate mortgages 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr
Adjustable rate mortgages 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr
</TABLE>
Terminal 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 used in the independent third party valuation referred to
above are estimated based on current conditions for similar instruments that are
subject to prepayment and credit risks. Other factors considered in the
determination of fair value include credit and collateral quality of the
underlying loans, current economic conditions and various fees and costs
associated with ownership of the residual certificate including actual credit
history of the individual 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
22
<PAGE> 24
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 1.55 times the implied
excess yield at December 31, 1999, as compared to the 1.63 multiple implied at
December 31, 1998. The table below represents balances as of December 31, 1999,
unless otherwise noted.
23
<PAGE> 25
<TABLE>
Securitizations
----------------------------------------------------------------
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 Subtotal Other Total
------- ------- ------- -------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
($ in thousands)
Residual Certificates $ 5,971 $ 7,153 $10,334 $ 12,460 $ 9,566 $ 8,898 $ 54,382 $ -- $ 54,382
Bonds $22,763* $34,349* $74,099* $139,882* $121,887* $125,000* $517,980 $28,763* $546,743
------- ------- ------- -------- -------- -------- -------- ------- --------
Subtotal $28,734 $41,502 $84,433 $152,342 $131,453 $133,898 $572,362 $28,763 $601,125
Unpaid Principal Balance $27,583* $39,203* $79,724* $144,894* $122,689* $125,329* $539,422 $31,253* $570,675
------- ------- ------- -------- -------- -------- -------- ------- --------
Implied Price 104.17 105.86 105.91 105.14 107.14 106.84 106.11 92.03 105.34
------- ------- ------- -------- -------- -------- -------- ------- --------
Collateral Yield 12.03 11.19 9.80 9.73 9.84 9.82 10.01 10.37 10.03
Collateral Equivalent
Securitization Costs (0.71) (0.64) (0.59) (0.60) (0.62) (0.68) (0.63) (0.50) (0.62)
Collateral Equivalent
Bond Rate (5.10) (5.18) (5.55) (6.21) (5.98) (6.18) (5.92) (6.68) (5.96)
------- ------- ------- -------- -------- -------- -------- ------- --------
Implied Collateral
Equivalent Excess Yield 6.22 5.37 3.66 2.92 3.24 2.96 3.46 3.19 3.45
------- ------- ------- -------- -------- -------- -------- ------- --------
Implied Premium Above Par 4.17 5.86 5.91 5.14 7.14 6.84 6.11 -- 5.34
Implied Collateral
Equivalent Excess Yield 6.22 5.37 3.66 2.92 3.24 2.96 3.46 3.19 3.45
------- ------- ------- -------- -------- -------- -------- ------- --------
Multiple 0.67x 1.09x 1.61x 1.76x 2.20x 2.31x 1.76x --x 1.55x
------- ------- ------- -------- -------- -------- -------- ------- --------
</TABLE>
* Amounts were based upon trustee statements dated January 25, 2000 that covered
the period ended December 31, 1999.
A summary of key information relevant to the subprime residual assets at
December 31, 1999 is set forth below:
<TABLE>
<CAPTION>
Securitizations
------------------------------------------------------------------
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 Other * Total
------- ------- -------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ in thousands)
Balance at December 31, 1998 $ 7,997 $ 9,702 $ 10,815 $ 12,569 $ -- $ -- $ 4,700 $ 45,783
Initial Capitalization of
Residual Certificates -- -- -- -- 7,826 6,330 -- 14,156
Accretion 1,140 1,245 1,325 1,521 593 -- 752 6,576
Mark-to-Market (1,641) (1,130) (1,705) (1,630) 1,147 2,568 (5,452) (7,843)
Cash Flow (1,525) (2,664) (101) -- -- -- -- (4,290)
------- ------- -------- -------- ------ ------ -------- --------
Balance at December 31, 1999 $ 5,971 $ 7,153 $ 10,334 $ 12,460 $9,566 $8,898 $ -- $ 54,382
======= ======= ======== ======== ====== ====== ======== ========
</TABLE>
* Represents a portion of a residual certificate the Company received in 1997 in
settlement of an account receivable. In 1999 the Company decided to
conservatively write off this receivable.
A summary of key information relevant to the subprime residual assets at
December 31, 1998 is set forth below:
<TABLE>
<CAPTION>
Securitizations
------------------------------------------------------------------
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 Other Total
------- ------- -------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ in thousands)
Balance at December 31, 1997 $ 7,910 $ 6,507 $ -- $ -- $ -- $ -- $ 5,267 $ 19,684
Initial Capitalization of
Residual Certificates -- 2,164 9,040 11,017 -- -- -- 22,221
Accretion 1,073 1,153 559 -- -- -- 661 3,446
Mark-to-Market (986) (122) 1,216 1,552 -- -- (1,225) 435
Cash Flow -- -- -- -- -- -- (3) (3)
------- ------- -------- -------- ------ ------ -------- --------
Balance at December 31, 1998 $ 7,997 $ 9,702 $ 10,815 $ 12,569 $ -- $ -- $ 4,700 $ 45,783
======= ======= ======== ======== ====== ====== ======== ========
</TABLE>
24
<PAGE> 26
The Company sold subprime mortgage loans on a whole loan basis during 1999
and 1998. Whole loans are generally sold without recourse to third parties with
the gain or loss being calculated based on the difference between the carrying
value of the loans sold and the gross proceeds received from the purchaser 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,
-------------------------------
1999 1998
--------- --------
<S> <C> <C>
Gross proceeds on whole loan sales of subprime mortgage loans $ 463,443 $238,186
Initial acquisition cost of subprime mortgage loans sold, net of fees 447,155 226,561
--------- --------
Unadjusted gain on whole loan sales of subprime mortgage loans 16,288 11,625
Net deferred costs and administrative fees recognized (5,721) 267
--------- --------
Net gain on whole loan sales of subprime mortgage loans $ 10,567 $ 11,892
========= ========
</TABLE>
The $1.3 million decrease in the net gain on whole loan sales of subprime
mortgage loans from the 1998 gain of $11.9 million to $10.6 million reported for
1999 is primarily due to compressed margins in the subprime market during 1999.
Also, in response to the growth in the subprime division, management reassessed
its application of estimates related to Statement of Financial Accounting
Standard No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases" in the fourth
quarter of 1998. This resulted in a $5.7 million reduction in the net gain on
whole loan sales of subprime mortgage loans in 1999 as compared to a $0.3
million increase for 1998.
Other Income
The Company generally retains residual certificates in connection with the
securitization of subprime loans. These residual certificates are adjusted to
approximate market value each quarter. For the years ended December 31, 1999 and
1998, respectively, mark-to-market gain (loss) on residuals was approximately
$(7.8) million and $0.4 million, respectively. This amount is reflected as other
income (loss) within the subprime division. This ($7.8) million other loss was
partially offset by $3.4 million of other subprime income. This other subprime
income consists primarily of prepayment penalties.
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage servicing operations for the years ended December 31,
1999 and 1998:
25
<PAGE> 27
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1999 1998
----------- -----------
<S> <C> <C>
Net interest expense $ (4,555) $ --
Loan servicing fees 41,791 37,856
Other income 582 455
----------- -----------
Servicing revenues 37,818 38,311
Salary and employee benefits 3,399 3,449
Occupancy expense 419 443
Amortization and provision for impairment of mortgage
servicing rights 29,580 27,897
General and administrative expenses 5,984 6,446
----------- -----------
Total loan servicing expenses 39,382 38,235
----------- -----------
Net pre-tax servicing margin (1,564) 76
Gain on sale of mortgage servicing rights 7,262 1,753
----------- -----------
Net pre-tax servicing contribution $ 5,698 $ 1,829
=========== ===========
Average servicing portfolio $ 9,279,848 $ 9,386,653
Servicing sold 9,104,706 10,922,288
Net pre-tax servicing margin to average servicing portfolio (2) BPS 0 bps
Gain on sale of servicing to servicing sold 8 BPS 2 bps
</TABLE>
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio declined 2 basis points primarily due to the Company beginning during
the first quarter of 1999 to allocate net interest expense to the
agency-eligible servicing division. Had the $4.6 million in interest expense not
been allocated to the agency-eligible servicing division in 1999, the net
pre-tax servicing margin to average servicing portfolio would have been 3 basis
points, a slight improvement over the 1998 margin. The 6 basis point increase in
the gain on sale of servicing sold is primarily attributable to rising rates
which benefited the execution of servicing sales in the marketplace. Loan
servicing fees were $41.8 million for 1999, compared to $37.9 million for 1998,
an increase of 10%, primarily due to an increase in the weighted average service
fee on serviced portfolios. Amortization and provision for impairment of
mortgage servicing rights increased to $29.6 million during 1999 from $27.9
million during 1998, an increase of 6%. The increase in amortization is
primarily attributable to higher amortization charges associated with increased
book carrying values of mortgage servicing rights resulting from the rising rate
environment.
Given current market conditions, management continually assesses market
prepay trends and adjusts amortization accordingly. Management believes that the
value of the Company's mortgage servicing rights are 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.
26
<PAGE> 28
Net Interest Expense
During the first quarter of 1999, the Company began to allocate interest
expense to the agency-eligible servicing division. The net interest expense for
1999 is composed of benefits from escrow accounts of $8.0 million that is offset
by $12.6 million in interest expense. Had the Company allocated interest expense
to the agency-eligible servicing division during 1998, net interest expense
would have been $4.6 million. The net interest expense would have been composed
of benefit from escrows of $7.7 million that would have been offset by $12.3 in
interest expense.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
----------- ------------
<S> <C> <C>
Underlying unpaid principal balances of agency-eligible
mortgage loans on which servicing rights were sold
during the period $ 9,104,706 $ 10,922,288
=========== ============
Gross proceeds from sales of mortgage servicing rights $ 245,302 $ 256,292
Initial acquisition basis, net of amortization and hedge results 179,721 189,918
----------- ------------
Unadjusted gain on sale of mortgage servicing rights 65,581 66,374
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 125) (58,319) (64,621)
----------- ------------
Gain on sale of mortgage servicing rights $ 7,262 $ 1,753
=========== ============
</TABLE>
Gain on sale of mortgage servicing rights increased $5.5 million from $1.8
million for 1998 to $7.3 million for 1999. The increase in the gain on sale of
mortgage servicing rights is primarily attributable to rising rates which
benefited the execution of servicing sales into the secondary markets.
COMMERCIAL MORTGAGE OPERATIONS
Following is a summary of the revenues and expenses of the Company's
commercial mortgage production operations.
27
<PAGE> 29
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1999 1998
----------- -----------
<S> <C> <C>
Net interest income $ 323 $ 536
Net gain on sale of mortgage loans 9,170 9,011
Other income 69 11
----------- -----------
Total production revenue 9,562 9,558
----------- -----------
Salary and employee benefits 8,321 7,322
Occupancy expense 1,123 840
General and administrative expenses 1,820 1,734
----------- -----------
Total production expenses 11,264 9,896
----------- -----------
Net pre-tax production margin (1,702) (338)
----------- -----------
Servicing fees 4,735 3,777
Amortization of mortgage servicing rights 2,210 1,335
----------- -----------
Net pre-tax servicing margin 2,525 2,442
----------- -----------
Pre-tax income $ 823 $ 2,104
----------- -----------
Production $ 844,975 $ 899,674
Whole loan sales 868,775 875,874
Average commercial mortgage servicing portfolio $ 3,799,251 $ 3,006,859
Total production revenue to whole loan sales 110 BPS 109 bps
Total production expenses to production 133 BPS 110 bps
----------- -----------
Net pre-tax production margin (23) BPS (1) bps
----------- -----------
Servicing fees to average commercial mortgage servicing portfolio 12 BPS 13 bps
Amortization of mortgage servicing rights to average commercial
mortgage servicing portfolio 6 BPS 4 bps
----------- -----------
Net pre-tax servicing margin 6 BPS 9 bps
----------- -----------
</TABLE>
The net pre-tax production margin declined for 1999 as compared to 1998
primarily due to an increase in production expenses. The production expense
increase is primarily attributable to Laureate opening one new branch in 1999
and a 9% increase in the number of employees from year to year. Laureate
originates commercial mortgage loans for various insurance companies and other
investors, primarily in Alabama, Florida, Indiana, North Carolina, Pennsylvania,
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.
28
<PAGE> 30
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,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Gross proceeds on sales of commercial mortgage loans $868,775 $875,874
Initial unadjusted acquisition cost of commercial
mortgage loans sold 868,775 875,874
-------- --------
Unadjusted gain on sale of commercial mortgage loans -- --
Commercial mortgage and origination fees 7,155 6,831
-------- --------
Unadjusted aggregate margin 7,155 6,831
Initial acquisition cost allocated to basis in commercial
Mortgage servicing rights (SFAS No. 125) 2,015 2,180
-------- --------
Net gain on sale of commercial mortgage loans $ 9,170 $ 9,011
======== ========
</TABLE>
The net gain on sale of commercial mortgage loans increased $0.2 million
(2%) from $9.0 million for 1998 to $9.2 million for 1999. The increase is
primarily attributable to improved margins on sales of commercial mortgage
loans.
LEASING OPERATIONS
Following is a summary of the revenues and expenses of the Company's
small-ticket equipment leasing operations for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1999 1998
-------- --------
<S> <C> <C>
Net interest income $ 7,270 $ 4,637
Other income 1,395 753
-------- --------
Leasing production revenue 8,665 5,390
-------- --------
Salary and employee benefits 2,654 2,347
Occupancy expense 453 376
General and administrative expenses 3,168 2,584
-------- --------
Total lease operating expenses 6,275 5,307
-------- --------
Net pre-tax leasing production margin 2,390 83
Servicing fees 620 1,014
-------- --------
Net pre-tax leasing margin $ 3,010 $ 1,097
-------- --------
Average owned leasing portfolio $125,258 $ 73,508
Average serviced leasing portfolio 24,831 53,480
-------- --------
Average managed leasing portfolio $150,089 $126,988
======== ========
Leasing production revenue to average owned portfolio 692 BPS 733 bps
Leasing operating expenses to average owned portfolio 501 BPS 721 bps
-------- --------
Net pre-tax leasing production margin 191 BPS 12 bps
======== ========
Servicing fees to average serviced leasing portfolio 250 BPS 190 bps
======== ========
</TABLE>
29
<PAGE> 31
The 61% increase in leasing production revenue for 1999 as compared to 1998
is primarily due to the 70% increase in the average owned leasing portfolio
which is due to the policy of retaining originated leases on the balance sheet.
The net pre-tax leasing margin improved in 1999 as compared to 1998 due to the
increase in production revenue which was only partially offset by an 18%
increase in lease operating expenses. Efficiencies in managing costs were able
to be achieved in 1999 as the volume of leases owned substantially increased.
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. The Company has made an effort to increase the
owned portfolio. As it has increased its owned portfolio more cost efficiencies
have been achieved thereby increasing the net pre-tax leasing production margin.
Net Interest Income
Net interest income for 1999 was $7.3 million as compared to $4.6 million
for 1998. This is equivalent to a net interest margin of 3.25% and 4.35% for
1999 and 1998, respectively, based upon average lease receivables owned of
$125.3 million and $73.5 million, respectively, and average debt outstanding of
$92.4 and $53.5 million, respectively.
OTHER
During the third quarter of 1999, the Company reorganized its reporting
cost centers and is now reporting holding company costs as a reconciling item
between the segmented income statement and the consolidated income statement.
The primary components of holding company costs are 1) interest expense on the
debt on the Company's corporate headquarters; 2) salary and employee benefits of
corporate personnel; 3) depreciation on the corporate headquarters and 4) income
taxes. The 1998 segmented income statement has been restated to conform with the
1999 segmented income statement presentation.
WORKFORCE REDUCTION
During the fourth quarter of 1999, the Company incurred a $3.8 million
($2.4 million after-tax) charge related to a workforce reduction. The workforce
reduction became necessary as the Company continued to adapt to a smaller
overall residential mortgage market and intensely competitive pricing
conditions. The impact of the expense related to the workforce reduction is
summarized below by financial statement component and operating division:
30
<PAGE> 32
<TABLE>
<CAPTION>
Agency-Eligible
---------------------- Other/
($ in thousands) Production Servicing Subprime Eliminations Consolidated
---------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Salary and employee
Benefits $ 820 $ 31 $ 166 $ 2 $ 1,019
Occupancy expense 1,780 -- 186 190 2,156
General and
administrative expenses 448 -- 164 2 614
------- ---- ----- ----- -------
Net pre-tax impact 3,048 31 516 194 3,789
Estimated allocable
income tax expense (1,136) (12) (192) (72) (1,412)
------- ---- ----- ----- -------
Net after-tax Impact $ 1,912 $ 19 $ 324 $ 122 $ 2,377
======= ==== ===== ===== =======
</TABLE>
31
<PAGE> 33
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 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:
32
<PAGE> 34
<TABLE>
<CAPTION>
Agency-Eligible
($ in thousands) --------------------------------------------
For the year ended Commercial Total Other/
December 31, 1998 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments Eliminations
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Net interest income $ 7,422 $ -- $ -- $ 9,565 $ 536 $ 4,637 $ 22,160 $ (382)
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 42,647 509
Other income 1,756 (2) 455 1,189 732 11 753 4,896 680
------------------------------------------------------------------------------------------
Total revenues 143,650 (2) 40,064 1,189 38,277 13,335 6,404 242,919 807
------------------------------------------------------------------------------------------
Salary and employee benefits 53,158 3,449 -- 13,485 7,322 2,347 79,761 2,645
Occupancy expense 7,005 443 -- 1,921 840 376 10,585 634
Amortization and provision for
impairment of mortgage --
servicing rights -- 27,897 -- -- 1,335 -- 29,232 --
General and administrative
expenses 28,046 6,446 196 4,490 1,734 2,584 43,496 770
------------------------------------------------------------------------------------------
Total expenses 88,209 38,235 196 19,896 11,231 5,307 163,074 4,049
------------------------------------------------------------------------------------------
Income before income taxes 55,441 (2) 1,829 993 18,381 2,104 1,097 79,845 (3,242)
Income tax expense (20,059)(2) (662) (351) (6,656) (952) (435) (29,115) 1,183
------------------------------------------------------------------------------------------
Net income $ 35,382(2) $ 1,167 $ 642 $11,725 $ 1,152 $ 662 $ 50,730 $ (2,059)
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Non-Recurring
For the year ended and Special
December 31, 1998 (1) Charges Consolidated
- ----------------------------------------------------------
<S> <C> <C>
(UNAUDITED)
Net interest income $ 21,778
Net gain on sale of mortgage
loans 171,463
Gain on sale of mortgage
servicing rights 1,753
Servicing fees 43,156
Other income 5,576 (2)
---------------------------
Total revenues 243,726 (2)
---------------------------
Salary and employee benefits 82,406
Occupancy expense 11,219
Amortization and provision for
impairment of mortgage
servicing rights 29,232
General and administrative
expenses 44,266
---------------------------
Total expenses 167,123
---------------------------
Income before income taxes 76,603 (2)
Income tax expense (27,932)(2)
---------------------------
Net income $ 48,671(2)
===========================
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes a non-recurring gain related to sale of retail operation totaling
$1,490 pre-tax, or $917 after-tax. Exclusive thereof, the year ended December
31, 1998 residential mortgage agency-eligible other income, total revenues,
income before taxes, income tax expense and net income and consolidated other
income, total revenues, income before taxes, income tax expense and net income
would have been $266, $142,160, $53,951, $19,486 and $34,465; and $4,086,
$242,236, $75,113, $27,359 and $47,754, respectively.
<TABLE>
<CAPTION>
Agency-Eligible
($ in thousands) --------------------------------------------
For the year ended Commercial Total Other/
December 31, 1997 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments Eliminations
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Net interest income $ 16,764 $ -- $ -- $ 1,268 $ -- $ -- $ 18,032 $ (388)
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 107,302 38,824 -- 15,280 -- -- 161,406 (388)
------------------------------------------------------------------------------------------
Salary and employee benefits 50,005 3,025 -- 7,754 -- -- 60,784 1,451
Occupancy expense 6,052 318 -- 711 -- -- 7,081 377
Amortization and provision
for impairment of mortgage
servicing rights -- 18,315 -- -- -- -- 18,315 --
General and administrative
expenses 17,799 7,856 -- 2,021 -- -- 27,676 100
------------------------------------------------------------------------------------------
Total expenses 73,856 29,514 -- 10,486 -- -- 113,856 1,928
------------------------------------------------------------------------------------------
Income before income taxes 33,446 9,310 -- 4,794 -- -- 47,550 (2,316)
Income tax expense (12,678) (3,537) -- (1,825) -- -- (18,040) 845
------------------------------------------------------------------------------------------
Net income $ 20,768 $ 5,773 $ -- $ 2,969 $ -- $ -- $ 29,510 $ (1,471)
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Non-Recurring
For the year ended and Special
December 31, 1997 (1) Charges Consolidated
- ----------------------------------------------------------
<S> <C> <C>
(UNAUDITED)
Net interest income $ 17,644
Net gain on sale of mortgage
loans 103,370
Gain on sale of mortgage
servicing rights 7,955
Servicing fees 30,869
Other income 1,180
---------------------------
Total revenues 161,018
---------------------------
Salary and employee benefits 62,235
Occupancy expense 7,458
Amortization and provision
for impairment of mortgage
servicing rights 18,315
General and administrative
expenses 10,147 37,923(2)
---------------------------
Total expenses 10,147 125,931(2)
---------------------------
Income before income taxes (10,147) 35,087(2)
Income tax expense 3,906 (13,289)(2)
---------------------------
Net income $ (6,241) $ 21,798(2)
===========================
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes non-recurring and special charges related to a merger agreement
that was terminated and certain nonrecoverable operating receivables totaling
$10,147 pretax, or $6,241 after tax. Exclusive thereof, the December 31, 1997
consolidated general and administrative expenses, total expenses, income before
income taxes, income tax expense and net income would have been $27,776,
$115,784, $45,235, $17,195 and $28,039, respectively.
33
<PAGE> 35
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses allocated to the
Company's agency-eligible mortgage production operations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ IN THOUSANDS) 1998 1997
----------- -----------
<S> <C> <C>
Net interest income $ 7,422 $ 16,764
Net gain on sale of mortgage loans 134,472 89,358
Other income 1,756 1,180
----------- -----------
Total production revenue 143,650 107,302
----------- -----------
Salary and employee benefits 53,158 50,005
Occupancy expense 7,005 6,052
General and administrative expenses 28,046 17,799
----------- -----------
Total production expenses 88,209 73,856
----------- -----------
Net pre-tax production margin $ 55,441 $ 33,446
----------- -----------
Production $14,954,580 $10,437,720
Pool delivery 14,713,137 10,212,966
Total production revenue to pool delivery 98 BPS 105 bps
Total production expenses to production 59 BPS 71 bps
----------- -----------
Net pre-tax production margin 39 BPS 34 bps
=========== ===========
</TABLE>
Summary
Overall, the Company's net agency-eligible pre-tax production margin
improved 5 basis points, or 15%, to 39 basis points while in absolute dollars it
increased $22.0 million, or 66%. The production revenue to pool delivery ratio
declined seven basis points, or 7%, for 1998 as compared to 1997. Generally, net
gain on sale of mortgage loans (91 basis points for 1998 versus 88 basis points
for 1997) improved due to better overall execution into the secondary markets.
However, net interest income declined and offset this improvement due to the
relatively flatter yield curve environment. The production expenses to
production ratio decreased 12 basis points, or 17%, for 1998 as compared to
1997. Generally, this relates to better leverage of fixed operating expenses in
the higher volume production environment for 1998 versus 1997.
Net Interest Income
The following table analyzes net interest income for the years ended
December 31, 1998 and 1997, allocated to the Company's agency-eligible mortgage
production activities in terms of rate and volume variances of the interest-rate
spread (the difference between interest rates earned on loans and
mortgage-backed securities and interest rates paid on interest-bearing sources
of funds).
34
<PAGE> 36
<TABLE>
<CAPTION>
($ 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 Mortgage-Backed
$1,172,994 $ 917,341 6.74% 7.62% Securities $79,078 $69,889 $ 9,189 $(10,288) $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 1,918 1,401 517 (116) 633
Line
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
- --------------------------------------- -----------------------------------------------------
Net Interest Income
Before Interdivisional
1.14% 2.09% Allocations $ 7,040 $16,376 $(9,336) $(9,736) $ 400
================== ================================
Allocation to Other 382 388
Allocation to Agency-
Eligible Servicing
Division - -
-----------------
Net Interest Income $ 7,422 $16,764
=================
</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 56% to $7.4
million for 1998 compared to $16.8 million for 1997. The 95 basis point decrease
in the interest-rate spread was primarily the result of the narrower spreads
between long and short-term rates in 1998 compared to 1997. The Company's
mortgages and mortgage-backed securities are generally sold and replaced within
30 to 35 days. The Company generally borrows at rates based upon short-term
indices, while its asset yields are primarily based upon long-term mortgage
rates.
Net Gain on Sale of Agency-Eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
<TABLE>
<CAPTION>
($ 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
35
<PAGE> 37
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 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.
General and Administrative Expenses
General and administrative expenses allocated to the production of
agency-eligible mortgage loans increased $10.2 million to $28.0 million for 1998
as compared to $17.8 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.
AGENCY-ELIGIBLE REINSURANCE OPERATIONS
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 $1.2 million categorized as other income in the agency-eligible
production segment.
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses allocated to the
Company's subprime mortgage production operations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ 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>
36
<PAGE> 38
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>
Mortgages Held-for-Sale
and Residual
$142,685 $19,512 10.29% 12.37% 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 $1.3 million for 1997. This was primarily the result of
increased subprime production volumes as subprime operations introduced and made
available through the Company's existing agency-eligible wholesale network
reached full year production levels.
Net Gain on Sale and Securitization of Subprime Mortgage Loans
A reconciliation of the gain on securitization of subprime mortgage loans
for the periods indicated follows:
37
<PAGE> 39
<TABLE>
<CAPTION>
($ 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>
The Company assesses the fair value of residual certificates quarterly,
with assistance from an independent third party. 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 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. The table below represents balances as of
December 31, 1998, unless otherwise noted.
38
<PAGE> 40
<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 1.63 x
--------- ----------- ----------- ---------- ---------- ----------- ------------
</TABLE>
* Amounts were based upon trustee statements dated January 23, 1999 that
covered the period ended December 31, 1998.
** 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
$0.4 million. This amount is reflected as other income within the subprime
39
<PAGE> 41
division. Accretion income for 1998 and 1997 relating to residuals was
approximately $3.4 million and $0.3 million, respectively, and is recorded as a
component of net interest income.
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses allocated to the
Company's agency-eligible mortgage servicing operations for the years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ 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
40
<PAGE> 42
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.
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 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 $38.6 million reduction
in 1997, in accordance with SFAS No. 125. During 1997, certain seasoned
available-for-sale agency-eligible mortgage servicing rights were sold at a
relatively higher margin as compared to 1998, thus causing the decrease in gain
on sale of agency-eligible mortgage servicing rights in 1998.
41
<PAGE> 43
COMMERCIAL MORTGAGE OPERATIONS
Following is a summary of the revenues and expenses allocated to the
Company's commercial mortgage production operations:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
($ 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>
42
<PAGE> 44
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>
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 of 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>
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>
43
<PAGE> 45
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.
44
<PAGE> 46
FINANCIAL CONDITION
During 1999, the Company experienced a 41% decrease in the volume of
production originated and acquired compared to 1998. Production decreased to
$9.8 billion during 1999 from $16.5 billion during 1998. The December 31, 1999,
locked residential mortgage application pipeline (mortgage loans not yet closed
but for which the interest rate has been locked) was approximately $0.4 billion
and the application pipeline (mortgage loans for which the interest rate has not
yet been locked) was approximately $0.3 billion. This compares to a locked
mortgage application pipeline of $1.1 billion and a $0.6 billion application
pipeline at December 31, 1998
Mortgage loans held-for-sale and mortgage-backed securities totaled $0.5
billion at December 31, 1999, versus $1.4 billion at December 31, 1998, a
decrease of 67%. The Company's servicing portfolio (exclusive of loans under
subservicing agreements) decreased to $7.8 billion at December 31, 1999, from
$9.9 billion at December 31, 1998, a decrease of 21%.
Short-term borrowings, which are the Company's primary source of funds,
totaled $0.7 billion at December 31, 1999, compared to $1.6 billion at December
31, 1998, a decrease of 55%. The decrease in the balance outstanding at December
31, 1999, resulted from decreased funding requirements related to the decrease
in the balance of mortgage loans held-for-sale and mortgage-backed securities.
At December 31, 1999, there were $6.3 million in long-term borrowings, compared
to $6.4 million at December 31, 1998. Other liabilities totaled $84.8 million as
of December 31, 1999, compared to the December 31, 1998 balance of $114.7
million, a decrease of $29.9 million, or 26%.
In general the declines in production, the pipeline, mortgage loans
held-for-sale, the servicing portfolio and short-term borrowings are primarily
attributed to (1) the current level of competition in the marketplace; (2) an
estimated 12% decline in estimated residential originations within the industry;
(3) the increased ARM market share (the Company offers primarily fixed rate
products); and (4) the rise in mortgage interest rates during 1999.
The Company continues to face the same challenges as other
production-oriented companies within the mortgage banking industry and as such
is not immune from significant volume declines precipitated by competitive
pricing, a rise in interest rates and other factors beyond the Company's
control. These and other important factors that could cause actual results to
differ materially from those reported are listed under the Risk Factors section
in the Company's 1999 Form 10K.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash-flow requirement involves the funding of loan
production, which is met primarily through external borrowings. In August 1999,
the Company and its wholly owned subsidiaries RBMG, Inc., Meritage Mortgage
Corporation and RBMG Asset Management Company, Inc. (not including the Company,
the Restricted Group), entered into a
45
<PAGE> 47
$540 million warehouse line of credit provided by a syndicate of unaffiliated
banks that expires in July 2000. The credit agreement includes covenants
requiring the Restricted Group to maintain (i) a minimum net worth of $170
million, plus the Restricted Group's net income subsequent to June 30, 1999,
plus 90% of capital contributions to the Restricted Group and minus restricted
payments, (ii) a ratio of total Restricted Group liabilities to tangible net
worth of not more than 8.0 to 1.0, excluding debt incurred pursuant to gestation
and repurchase financing agreements, (iii) RBMG, Inc.'s eligibility as a
servicer of Ginnie Mae, FHA, VA, Fannie Mae and Freddie Mac mortgage loans (iv)
a mortgage servicing rights portfolio with an underlying unpaid principal
balance of at least $5 billion and (v) a ratio of consolidated cash flow to
consolidated interest expense (these terms are defined in the loan agreements)
of at least 1.50 to 1.00 (the interest rate coverage ratio). The provisions of
the agreement also restrict the Restricted Group's ability to engage
significantly in any type of business unrelated to the mortgage banking and
lending business and the servicing of mortgage loans.
In August of 1999, the Company and the Restricted Group also entered into a
$210 million subprime revolving credit facility and a $250 million servicing
revolving credit facility, which expire in July 2000. These facilities include
covenants identical to those described above with respect to the warehouse line
of credit.
The Restricted Group was in compliance with the debt covenants in place at
December 31, 1999 after it obtained an amendment and waiver dated February 1,
2000. The covenant that had been violated was the interest rate coverage ratio.
The syndicate of unaffiliated banks waived the violation and amended the
agreements. The amended agreements now call for the Restricted Group to maintain
an interest rate coverage ratio of 1.10 to 1.00 for the quarter ending March 31,
2000; and 1.20 to 1.00 for any period of two consecutive fiscal quarters
thereafter. Although management anticipates continued compliance with current
debt covenants, there can be no assurance that the Restricted Group 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., a wholly-owned subsidiary of Meritage
and a bank are parties to a master repurchase agreement, pursuant to which RBMG
Asset Management Co. is entitled from time to time to deliver eligible subprime
mortgage loans in an aggregate principal amount of up to $200 million to the
bank. The master repurchase agreement has been extended through July 26, 2000.
The Company has 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 executed a $6.6 million note in May 1997. This debt is secured
by the Company's corporate headquarters. The terms of the related 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.
46
<PAGE> 48
The Company has entered into a $10.0 million unsecured line of credit
agreement that expires in July 2000. The interest rate on funds borrowed is
based upon the prime rate announced by a major money center bank.
Republic Leasing, a wholly-owned subsidiary of the Company, has a $200
million credit facility to provide financing for its leasing portfolio. The
warehouse credit agreement matures in August 2000 and contains various covenants
regarding characteristics of the collateral and the performance of the leases
originated and serviced by Republic Leasing and that require the Company to
maintain a minimum net worth of $60 million and Republic Leasing to maintain a
ratio of total liabilities to net worth of no more than 10.0 to 1.0.
The Company has been repurchasing its stock pursuant to Board authority
since March 1998 and as of December 31, 1999 the Company had remaining authority
to repurchase up to $2.5 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
bonus, stock option, dividend reinvestment and employee stock purchase and ESOP
plans. Shares repurchased are maintained in the Company's treasury account and
are not retired. At December 31, 1999, there were 4,686,391 shares held in the
Company's treasury account at an average cost of $8.78 per share.
YEAR 2000
The Company's growth motivated a generalized review of the adequacy of its
existing software environment and technological infrastructure to meet the
Company's long-term operating requirements. The Company completed implementation
of LoanXchange and other mission critical systems prior to December 31, 1999.
All required modifications to existing systems or systems provided by third
parties were completed prior to December 31, 1999. The Company has had no
significant Year 2000 system problems to date. The amount spent on Year 2000
issues was approximately $1.0 million, which was within the range budgeted.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 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 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 commitment, an available-for-sale security or a
foreign-currency denominated forecasted transaction. SFAS No. 133 is effective
for all fiscal quarters of
47
<PAGE> 49
all fiscal years beginning after June 15, 2000 (January 1, 2001 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, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." This statement requires that any retained
interests in mortgage-backed securities be classified in accordance with the
provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." This standard had no material impact on the Company's
financial position.
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.
SUMMARY
On a combined divisional basis, during the years ended December 31, 1999
and 1998, the Company generated approximately $55.6 million and $54.9 million,
respectively, of positive funds from operations.
($ in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
------- --------
Agency-eligible production $20,626 $ 31,104
Agency-eligible servicing 28,623 28,282
Subprime production 1,624 (7,505)
Commercial mortgage 1,401 1,582
Leasing 3,316 1,407
------- --------
$55,590 $ 54,870
======= ========
Each of the Company's divisions produced positive operating funds during
both periods except for subprime production in 1998. The combined positive
operating funds were invested to reduce indebtedness, pay dividends, repurchase
stock and 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 so
produced. When the loans are sold, current accounting
48
<PAGE> 50
principles require that the Company capitalize the estimated fair value of the
retained mortgage servicing rights sold and subsequently amortize the servicing
rights retained to expense. 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 of the Company's
agency-eligible production activities.
<TABLE>
<CAPTION>
($ in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
-------- ---------
<S> <C> <C>
Income (loss) before income taxes $ 813 $ 55,441
Deduct:
Net gain on sale of mortgage loans, as reported (64,033) (134,472)
Add back:
Cash gains on sale of mortgage loans 13,454 40,220
Cash gains on sale of mortgage servicing rights 65,581 66,374
Depreciation 4,811 3,541
-------- ---------
$ 20,626 $ 31,104
======== =========
</TABLE>
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. However, the Company maintains
a relatively small mortgage servicing portfolio. As discussed above, mortgage
servicing rights produced or 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 of the Company's
agency-eligible mortgage servicing activities.
<TABLE>
<CAPTION>
($ in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Income before income taxes $ 5,698 $ 1,829
Deduct:
Net gain on sale of mortgage servicing
rights, as reported (7,262) (1,753)
Add back:
Amortization and impairment of
mortgage servicing rights 29,580 27,897
Depreciation 607 309
-------- --------
$ 28,623 $ 28,282
======== ========
</TABLE>
49
<PAGE> 51
SUBPRIME PRODUCTION
Generally, the Company purchases subprime loans through a wholesale broker
network. The Company then separately sells or securitizes the loans so produced.
Existing accounting principles require that at the time loans are securitized,
the Company capitalize 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 of the
Company's subprime mortgage production activities.
<TABLE>
<CAPTION>
($ in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Income before income taxes $ 2,591 $ 18,381
Deduct:
Net gain on sale of subprime loans, as reported (20,357) (27,980)
Cash losses on securitization of subprime loans (3,706) (6,509)
Accretion income on residuals (6,576) (3,446)
Add back:
Cash gains on sale of whole subprime loans 16,288 11,625
Cash received from investments in residual certificates 4,290 3
Depreciation and amortization
of goodwill and intangibles 1,251 856
Mark to market on residuals 7,843 (435)
-------- --------
$ 1,624 $ (7,505)
======== ========
</TABLE>
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. Current accounting principles
require that the Company capitalize the estimated fair value of mortgage
servicing rights produced at the time the related loans are sold and
subsequently amortize the servicing rights retained to expense. 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
of commercial mortgage production and servicing activities.
50
<PAGE> 52
<TABLE>
<CAPTION>
($ in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
------- -------
<S> <C> <C>
Income before income taxes $ 823 $ 2,104
Deduct:
Net gain on sale of commercial loans,
as reported (9,170) (9,011)
Add back:
Cash gains on sale of whole
commercial loans 7,155 6,831
Amortization and impairment of
commercial mortgage servicing rights 2,210 1,335
Depreciation and amortization of
goodwill and intangibles 383 323
------- -------
$ 1,401 $ 1,582
======= =======
</TABLE>
LEASING
Generally, the Company originates small-ticket equipment leases for
commercial customers that 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 related
lease. Accordingly, financing activities related to growth in the balance of
leases held for investment do not significantly impact operating cash flow. In
this context, the table below reconciles the major elements of operating funds
flow allocable to leasing activities.
<TABLE>
<CAPTION>
($ in thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
------ ------
<S> <C> <C>
Income before income taxes $3,010 $1,097
Add back:
Depreciation and amortization of
goodwill and intangibles 306 310
------ ------
$3,316 $1,407
====== ======
</TABLE>
Quantitative and Qualitative Disclosure About Market Risk
A primary market risk facing the Company is interest rate risk. The Company
attempts to manages this risk by striving to balance its loan origination and
loan servicing business segments, which are countercyclical in nature. In
addition, the Company uses 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.
51
<PAGE> 53
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 and 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.
<TABLE>
<CAPTION>
1999 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 $ 482,307 a $ 483,606 a $ 483,183 a $ 484,113 a $ 482,940 a $ 484,583 a
Servicing rights, net 183,832 b 201,068 b 206,215 b 196,345 b 209,773 b 192,980 b
Lease receivables 155,559 160,125 c 157,849 c 162,429 c 162,256 c 164,764 c
Residual interests in subprime
securitizations 54,382 54,382 53,547 54,982 52,602 55,492
Other assets 151,102 152,562 152,562 152,562 152,562 152,562
---------- ---------- ---------- ---------- ---------- ----------
Total assets $1,027,182 $1,051,743 $1,053,356 $1,050,431 $1,060,133 $1,050,381
---------- ---------- ---------- ---------- ---------- ----------
Long-term borrowings $ 6,259 $ 6,190 $ 6,190 $ 6,190 $ 6,190 $ 6,190
Other liabilities 808,451 808,451 808,451 808,451 808,451 808,451
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities $ 814,710 $ 814,641 $ 814,641 $ 814,641 $ 814,641 $ 814,641
---------- ---------- ---------- ---------- ---------- ----------
Net equity value $ 212,472 $ 237,102 $ 238,715 $ 235,790 $ 245,492 $ 235,740
========== ========== ========== ========== ========== ==========
</TABLE>
a Estimated fair value has been adjusted to include $(840), $2,209, and $343 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, $1,803 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 $6,269 of
interest rate floor contracts for 1999 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 $3,754, $10,240, $2,506 and $16,517, 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 $(1,358), $(2,349), $(355),
$3,327 and $663, respectively, of interest rate floor contracts for 1999, 50 bps
increase, 50 bps decrease, 100 bps increase and 100 bps decrease, respectively,
which have been allocated as hedges against lease receivables.
<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, $(2,138), respectively, of interest rate floor contracts for 1998, 50 bps
increase, 50 bps decrease, 100 bps increase and 100 bps decrease, respectively,
which have been allocated as hedges against lease receivables.
52
<PAGE> 54
These analyses are limited by the fact that they are performed at a
particular point in time and do not incorporate other factors that would impact
the Company's financial performance in each such scenario. Consequently, the
preceding estimates should not be viewed as a forecast.
Qualitative disclosures about market risk are further discussed in Note 16
of the accompanying financial statements.
53
<PAGE> 55
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED BALANCE SHEET
($ in thousands, except share information)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 30,478 $ 18,124
Receivables 40,219 80,248
Trading securities:
Mortgage-backed securities -- 385,055
Residual interests in subprime securitizations 54,382 45,782
Mortgage loans held-for-sale 480,504 1,056,403
Lease receivables 155,559 102,029
Servicing rights, net 177,563 191,022
Premises and equipment, net 36,294 35,338
Accrued interest receivable 1,691 3,642
Goodwill and other intangibles 15,478 16,363
Other assets 35,014 35,629
----------- -----------
Total assets $ 1,027,182 $ 1,969,635
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 699,803 $ 1,566,287
Long-term borrowings 6,259 6,364
Accrued expenses 23,826 30,098
Other liabilities 84,822 114,728
----------- -----------
Total liabilities 814,710 1,717,477
----------- -----------
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;
31,637,331 shares issued and outstanding at December 31, 1999 and 1998 316 316
Additional paid-in capital 300,909 307,114
Retained earnings 56,506 59,599
Treasury stock at cost-4,686,391 and 869,378 shares at December 31, 1999
and 1998, respectively (41,148) (11,499)
Common stock held by subsidiary at cost- 7,767,099 shares at December
31, 1999 and 1998 (98,953) (98,953)
Unearned shares of employee stock ownership plan 537,084 and 353,641
unallocated shares at December 31, 1999 and December 31, 1998,
respectively (5,158) (4,419)
----------- -----------
Total stockholders' equity 212,472 252,158
----------- -----------
Commitments and contingencies (Notes 7 and 12)
----------- -----------
Total liabilities and stockholders' equity $ 1,027,182 $ 1,969,635
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
54
<PAGE> 56
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
($ in thousands, except share information)
<TABLE>
<CAPTION>
For the Year Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Interest income $84,617 $102,446 $72,302
Interest expense (58,455) (80,668) (54,658)
- --------------------------------------------------------------------------------------------------
Net interest income 26,162 21,778 17,644
Net gain on sale of mortgage loans 93,560 171,463 103,370
Gain on sale of mortgage servicing rights 7,262 1,753 7,955
Servicing fees 46,958 43,156 30,869
Other income (150) 5,576 1,180
- --------------------------------------------------------------------------------------------------
Total revenues 173,792 243,726 161,018
- --------------------------------------------------------------------------------------------------
EXPENSES
Salary and employee benefits 72,868 82,406 62,235
Occupancy expense 14,855 11,219 7,458
Amortization and provision for impairment
of mortgage servicing rights 31,790 29,232 18,315
General and administrative expenses 45,645 44,266 37,923
- --------------------------------------------------------------------------------------------------
Total expenses 165,158 167,123 125,931
- --------------------------------------------------------------------------------------------------
Income before income taxes 8,634 76,603 35,087
Income tax expense (2,712) (27,932) (13,289)
- --------------------------------------------------------------------------------------------------
Net income $5,922 $48,671 $21,798
- --------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding - Basic 20,643,166 23,122,835 20,396,428
Net income per common share - Basic $0.29 $2.10 $ 1.07
Weighted average common shares
outstanding - Diluted 20,799,502 23,501,108 20,800,828
Net income per common share - Diluted $0.28 $2.07 $ 1.05
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
55
<PAGE> 57
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands, except share information)
<TABLE>
<CAPTION>
Additional Unearned Common Total
Common Stock Paid-in Retained ESOP Treasury Stock Held by Stockholders'
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 31,120,470 311 299,516 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 31,637,331 316 307,114 59,599 (4,419) (11,499) (98,953) 252,158
------------------------------------------------------------------------------------------------
Issuance of restricted stock 116 1,285 1,401
Cash dividends (8,902) (8,902)
Treasury stock purchases
(5,051,896 shares net
of issuances 1,234,883 shares) (43,216) (43,216)
Exercise of stock options (3) 7 4
Shares committed to be
released under Employee
Stock Ownership Plan (1,017) 2,261 1,244
Purchase of shares by Employee
Stock Ownership Plan (3,000) (3,000)
Shares issued or purchased
under Dividend Reinvestment
and Stock Purchase Plan
and Stock Investment Plan (5,301) (113) 12,275 6,861
Net income 5,922
Total comprehensive income 5,922
------------------------------------------------------------------------------------------------
Balance, December 31, 1999 31,637,331 $316 $300,909 $56,506 ($5,158) ($41,148) ($98,953) $212,472
================================================================================================
</TABLE>
* - Amounts less than $1.
The accompanying notes are an integral part of these
consolidated financial statements.
56
<PAGE> 58
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,922 $ 48,671 $ 21,798
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 39,249 34,570 21,859
Deferred income tax expense (benefit) 1,585 31,169 3,862
Employee Stock Ownership Plan compensation 1,244 1,623 1,480
Provision for estimated foreclosure losses and repurchased loans 10,608 11,023 4,615
Decrease (increase) in receivables 40,029 7,454 (24,303)
Acquisition of mortgage loans (9,300,681) (16,461,918) (10,777,294)
Proceeds from sales of mortgage loans
and mortgage-backed securities 10,346,580 16,358,939 10,503,811
Acquisition of mortgage servicing rights (252,450) (344,341) (230,503)
Sales of mortgage servicing rights 245,302 256,292 206,868
Net gain on sales of mortgage loans and servicing rights (100,822) (173,216) (111,325)
Decrease in accrued interest on loans 1,951 730 341
Increase in lease receivables (55,438) (50,535) -
Increase in other assets (3,078) (6,879) (764)
Increase in residual certificates (8,600) (26,098) (19,684)
Increase (decrease) in accrued expenses and other liabilities (37,763) 2,817 17,179
- ------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities 933,638 (309,699) (382,060)
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash assets acquired from Resource Bancshares Corporation - - 6,535
Acquisition of Meritage Mortgage Corporation - - (1,750)
Purchases of premises and equipment (8,363) (13,608) (8,613)
Disposition of premises and equipment 520 1,507 -
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,843) (12,101) (3,828)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings 26,248,644 42,977,794 28,328,222
Repayment of borrowings (27,115,233) (42,636,093) (27,929,479)
Debt issuance costs - (283) (553)
Issuance of restricted stock 1,401 328 328
Shares issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan 6,861 5,053 330
Acquisition of treasury stock (43,216) (16,280) -
Cash dividends (8,902) (6,714) (2,536)
Exercise of stock options 4 4,573 630
Loans to Employee Stock Ownership Plan (3,000) (2,000) -
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (913,441) 326,378 396,942
- ------------------------------------------------------------------------------------------------------------------------
Net increase in cash 12,354 4,578 11,054
Cash, beginning of year 18,124 13,546 2,492
- ------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 30,478 $ 18,124 $ 13,546
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL ACTIVITIES
Interest paid $ 58,361 $ 80,219 $ 55,762
Taxes paid net of refunds received 4,112 (3,595) 10,253
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.
57
<PAGE> 59
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 through
wholly-owned subsidiaries 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, two of the Company's wholly-owned
subsidiaries originate, sell and service small-ticket commercial equipment
leases and originate, sell, underwrite for investors and service 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
58
<PAGE> 60
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. Substantially all other
serviced agency-eligible loans are fully guaranteed against such losses by the
securitizing government sponsored enterprise. 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 $401 and $851 at December 31, 1999 and 1998,
respectively.
On occasions the Company has to repurchase certain non-performing loans.
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
$1,798 and $2,330 at December 31, 1999 and 1998, respectively. The inventory of
actual and pending repurchases to which these reserves relate aggregated $20,700
and $46,586 at December 31, 1999 and 1998, 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) based on the estimated market values of those rights.
Impairments are recognized as a valuation
59
<PAGE> 61
allowance for each impaired stratum. The analysis values such rights in
consideration of current forward committed delivery prices, prevailing interest,
prepayment and default rates, and other relevant factors as appropriate or
allocable to each valuation stratum.
Fees for servicing loans and leases 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, with assistance from an independent third party. 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 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, 1999 for residual certificates
then held by the Company generally include a discount rate of 13%, a constant
default rate of 3% and a loss severity rate of 25%, and ramping behaviors are
based on prepayment penalty periods and adjustable rate mortgage first reset
dates. Terminal prepayment rate assumptions specific to the individual
certificates for purposes of the December 31, 1999 valuations are set forth
below:
<TABLE>
<CAPTION>
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Prepayment Speeds
Fixed rate mortgages 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr
Adjustable rate mortgages 34% cpr 32% cpr 32% cpr 32% cpr 30% cpr 30% cpr
</TABLE>
Terminal 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>
60
<PAGE> 62
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 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 loans and on 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, 1998 and 1999, the Company completed six 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 a pool of subprime residential mortgage loans. The owners of
each security receive their monthly principal and interest payments from income
received 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 the sum of (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 finance equipment 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 value 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 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, 1999 and 1998, the allowance for lease losses was
$3,046 and $1,976, respectively. The inventory of lease receivables to which
these reserves
61
<PAGE> 63
relate aggregated $158,605 and $104,005 at December 31, 1999 and 1998,
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.
Goodwill and Other Intangible Assets
Goodwill arising from the acquisitions of RBC and Meritage Mortgage
Corporation (Meritage) is being amortized over 20 years using the straight-line
method. Amortization expense for both acquisitions totaled $884 and $853 for the
years ended December 31, 1999 and 1998, respectively.
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 $1,127 and
$(3,237) for the years ended December 31, 1999 and 1998, are included in other
assets and liabilities.
Statement of Cash Flows
The Company has adopted the indirect method of reporting cash flows.
Note 3 - 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:
DECEMBER 31,
--------------------
1999 1998
------- -------
Mortgage servicing rights sales, net of reserves $26,998 $55,618
Servicing advances 7,613 12,780
Other 5,608 11,850
------- -------
$40,219 $80,248
======= =======
Note 4 - Lease Receivables:
Lease receivables are summarized as follows:
62
<PAGE> 64
DECEMBER 31,
-------------------------
1999 1998
--------- ---------
Lease receivables $ 194,422 $ 129,585
Less-Unearned discount (35,817) (25,580)
Less-Allowance for lease losses (3,046) (1,976)
--------- ---------
$ 155,559 $ 102,029
========= =========
The components of the Company's investment in lease receivables are
summarized as follows:
DECEMBER 31,
----------------------
1999 1998
-------- --------
Minimum lease payments due from lessees $180,164 $119,756
Estimated residuals 6,102 4,167
Initial direct costs, net 8,156 5,662
-------- --------
$194,422 $129,585
======== ========
At December 31, 1999, the maturities of minimum lease receivables,
including lease residuals, are as follows:
2000 $ 62,922
2001 53,264
2002 38,772
2003 22,511
2004 8,529
2005 and thereafter 268
--------
$186,266
========
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, 1999 and 1998, the average lease size was approximately $26 and
$27, respectively, and there were 31 leases and 16 leases, respectively, with a
current lease receivable in excess of $250.
At December 31, 1999 and 1998, respectively, the equipment covered by
approximately 16% and 17% of the Company's net lease receivables were located in
the state of California and approximately 9% and 9% were located in the state of
Florida. At December 31, 1999 and 1998, respectively, approximately 20% and 19%
of the Company's net lease receivables were collateralized by computer equipment
and 7% and 9% were collateralized by titled equipment.
63
<PAGE> 65
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, 1999, the
Company held security deposits and sales and property taxes for the benefit of
lessees of $6,119.
Note 5 - 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 composed
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 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 and Callable Pass Through Certificates (CPC's) to protect
itself against interest and prepayment risk on its available-for-sale portfolio.
At December 31, 1999 and 1998 the following amounts related to the
available-for-sale portfolio:
<TABLE>
<CAPTION>
RESIDENTIAL MORTGAGE SERVICING AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
- -------------------------------------------------------------------------- --------------------
<S> <C> <C>
Underlying unpaid principle balance $ 6,322,591 $ 5,458,334
Fair value of related mortgage servicing
rights $ 146,476 $ 102,454
Fair value/underlying unpaid principle balance 2.31% 1.88%
Net carrying value of related mortgage
servicing rights $ 137,419 $101,533
Net carrying value/underlying unpaid principle
balance 2.17% 1.86%
Weighted average note rate 7.35% 7.49%
Weighted average service fee 0.43% 0.39%
Net basis expressed as a multiple of weighted
average service fee 5.05 x 4.77 x
</TABLE>
64
<PAGE> 66
<TABLE>
<CAPTION>
COMMERCIAL MORTGAGE SERVICING AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
- -------------------------------------------------------------------------- --------------------
<S> <C> <C>
Underlying unpaid principle balance $ 4,104,095 $ 3,255,458
Fair value of related mortgage servicing
rights $ 17,236 $ 8,096
Fair value/underlying unpaid principle balance 0.42% 0.25%
Carrying value of related mortgage servicing
rights $ 9,243 $ 8,096
Net carrying value/underlying unpaid principle
balance 0.23% 0.25%
Weighted average note rate 7.94% 8.11%
Weighted average service fee 0.09% 0.09%
Net basis expressed as a multiple of weighted
average service fee 2.56 x 2.78 x
</TABLE>
The segment of the portfolio designated as held-for-sale is composed 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 is based upon the allocated forward committed delivery
price, which is compared to amortized carrying value for purposes of measuring
potential impairment. At December 31, 1999 and 1998 the following amounts
related to the held-for-sale portfolio:
<TABLE>
<CAPTION>
RESIDENTIAL MORTGAGE SERVICING AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
- -------------------------------------------------------------------------- --------------------
<S> <C> <C>
Underlying unpaid principle balance $ 1,499,803 $ 4,406,766
Fair value of related mortgage servicing
rights $ 31,087 $ 89,489
Fair value/underlying unpaid principle balance 2.07% 2.03%
Net carrying value of related mortgage servicing
rights $30,901 $ 89,489
Net carrying value/underlying unpaid principle
balance 2.06% 2.03%
Weighted average note rate 7.90% 6.81%
Weighted average service fee 0.49% 0.45%
Net basis expressed as a multiple of weighted
average service fee 4.20 x 4.51 x
</TABLE>
Note 6 - Premises and Equipment:
Premises and equipment are summarized as follows:
65
<PAGE> 67
<TABLE>
<CAPTION>
Estimated DECEMBER 31,
Useful Lives 1999 1998
------------ -------- -------
<S> <C> <C> <C>
Building 25 years $ 7,657 $ 7,657
Building improvements 10-15 years 1,682 1,489
Furniture, fixtures and equipment 5-10 years 41,418 39,038
-------- -------
50,757 48,184
Less-Accumulated depreciation (17,560) (15,943)
-------- -------
33,197 32,241
Land 3,097 3,097
-------- -------
$ 36,294 $35,338
======== =======
</TABLE>
Depreciation expense was $6,887 in 1999, $4,486 in 1998, $3,275 in 1997.
Note 7 - Lease Commitments:
The Company has entered into various non-cancelable operating lease
agreements, primarily for office space. Certain of these leases contain renewal
options and escalation clauses. At December 31, 1999, the annual minimum rental
commitments for non-cancelable leases with remaining terms in excess of one year
are as follows:
2000 $ 4,879
2001 4,289
2002 2,269
2003 1,488
2004 1,214
2005 and thereafter 910
---------
$ 15,049
=========
Minimum rental commitments have not been reduced by minimum sublease
rentals of $553 due in the future under non-cancelable subleases. Rent expense
for operating leases, net of sublease rental income of $387 for 1999, $387 for
1998 and $445 for 1997, was $4,304 in 1999, $3,106 in 1998 and $2,181 in 1997.
Note 8 - Short-Term and Long-Term Borrowings:
The Company's primary cash-flow requirement involves the funding of loan
production, which is met primarily through external borrowings. In August 1999,
the Company and its wholly owned subsidiaries RBMG, Inc., Meritage and RBMG
Asset Management Company, Inc. (not including the Company, the Restricted
Group), entered into a $540,000 warehouse line of credit provided by a syndicate
of unaffiliated banks that expires in July
66
<PAGE> 68
2000. The credit agreement includes covenants requiring the Restricted Group to
maintain (i) a minimum net worth of $170,000, plus the Restricted Group's net
income subsequent to June 30, 1999, plus 90% of capital contributions to the
Restricted Group and minus restricted payments, (ii) a ratio of total Restricted
Group liabilities to tangible net worth of not more than 8.0 to 1.0, excluding
debt incurred pursuant to gestation and repurchase financing agreements, (iii)
RBMG, Inc.'s eligibility as a servicer of Ginnie Mae, FHA, VA, Fannie Mae and
Freddie Mac mortgage loans (iv) a mortgage servicing rights portfolio with an
underlying unpaid principal balance of at least $5,000,000 and (v) a ratio of
consolidated cash flow to consolidated interest expense (these terms are defined
in the loan agreements) of at least 1.50 to 1.00 (the interest rate coverage
ratio). The provisions of the agreement also restrict the Restricted Group's
ability to engage significantly in any type of business unrelated to the
mortgage banking and lending business and the servicing of mortgage loans. At
December 31, 1999 and 1998, the total amounts outstanding under this facility
and its predecessor were $329,600 and $468,600, respectively.
In August of 1999, the Company and the Restricted Group also entered into a
$210,000 subprime revolving credit facility and a $250,000 servicing revolving
credit facility, which expire in July 2000. These facilities include covenants
identical to those described above with respect to the warehouse line of credit.
At December 31, 1999 and 1998, the total amount outstanding under these
facilities and their predecessor were $108,200 and $85,000, respectively.
The Restricted Group was in compliance with the debt covenants in place at
December 31, 1999 after it obtained an amendment and waiver dated February 1,
2000. The covenant that had been violated was the interest rate coverage ratio.
The syndicate of unaffiliated banks waived the violation and amended the
agreements. The amended agreements now call for the Restricted Group to maintain
an interest rate coverage ratio of 1.10 to 1.00 for the quarter ending March 31,
2000; and 1.20 to 1.00 for any period of two consecutive fiscal quarters
thereafter. Although management anticipates continued compliance with current
debt covenants, there can be no assurance that the Restricted Group 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., a wholly-owned subsidiary of Meritage
and a bank are parties to a master repurchase agreement, pursuant to which RBMG
Asset Management Co. is entitled from time to time to deliver eligible subprime
mortgage loans in an aggregate principal amount of up to $200,000 to the bank.
The master repurchase agreement has been extended through July 26, 2000. At
December 31, 1999 and 1998, no amounts were outstanding under this facility or
its predecessor.
The Company has 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, 1999 and 1998 were $0 and $753,684,
respectively.
The Company executed a $6,600 note in May 1997. This debt is secured by the
Company's corporate headquarters. The terms of the related 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. The total amounts outstanding under this facility at
December 31, 1999 and 1998 were $6,364 and $6,461, respectively.
67
<PAGE> 69
The Company has entered into a $10,000 unsecured line of credit agreement
that expires in July 2000. The interest rate on funds borrowed is based upon the
prime rate announced by a major money center bank.
Republic Leasing, a wholly-owned subsidiary of the Company, has a $200,000
credit facility to provide financing for its leasing portfolio. The warehouse
credit agreement matures in August 2000 and contains various covenants regarding
characteristics of the collateral and the performance of the leases originated
and serviced by Republic Leasing and that require the Company to maintain a
minimum net worth of $60,000 and Republic Leasing to maintain a ratio of total
liabilities to net worth of no more than 10.0 to 1.0. At December 31, 1999 and
1998, the total amounts outstanding under this facility were $125,652 and
$80,405, respectively.
Note 9 - 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 to $0.10
per share in the fourth quarter of 1998 and finally to $0.11 per share in the
second quarter of 1999.
During 1995, the Company established a dividend reinvestment plan (DRIP).
The DRIP offers stockholders a method of reinvesting cash dividends in the
Company's common stock at a 5% discount from market prices. The Company reserves
the right to modify the pricing terms and any other provisions of the DRIP at
any time. The DRIP agent purchases either original issue 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 4,099,984 shares under the DRIP.
Through December 31, 1999, there were 1,673,989 shares issued under the DRIP.
The Company's Board of Directors has authorized the repurchase of up to
$62,000 of the Company's common stock in either open market transactions or in
private or block trades as of
68
<PAGE> 70
December 31, 1999. Through December 31, 1999, $59,496 of the Company's common
stock has been purchased. At December 31, 1999, there were 4,686,391 shares held
in the Company's treasury account at an average cost of $8.78 per share.
Note 10 - Income Taxes:
Income tax expense (benefit) consists of the following:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
------- -------- -------
Current:
Federal $ 1,871 $ (3,482) $ 8,885
State (744) 245 542
------- -------- -------
Total current 1,127 (3,237) 9,427
------- -------- -------
Deferred:
Federal 821 30,202 3,327
State 764 967 535
------- -------- -------
Total deferred 1,585 31,169 3,862
------- -------- -------
Total tax expense $ 2,712 $ 27,932 $13,289
======= ======== =======
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 made as a result of prior year
returns. During 1999, 1998 and 1997, the Company qualified for state tax credits
of $275, $300 and $202, 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 1999, 1998 and 1997 due to the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- --------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------- ------ -------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate $ 3,022 35.0% $ 26,811 35.0% $12,280 35.0%
State tax, net of federal benefit 64 0.8% 1,571 2.1% 887 2.5%
Other, net (374) (4.3%) (450) (0.6)% 122 0.4%
------- ---- -------- ---- ------- ----
$ 2,712 31.5% $ 27,932 36.5% $13,289 37.9%
======= ==== ======== ==== ======= ====
</TABLE>
Deferred tax (assets) liabilities are summarized as follows:
69
<PAGE> 71
DECEMBER 31,
------------------------
1999 1998
-------- --------
Mark to market $ (1,755) $ (1,864)
Deferred compensation (3,422) (3,235)
Deferred book income -- (4,833)
Foreclosure and repurchase reserves (3,522) (3,672)
State NOL carryforwards (668) (794)
Other, net (19) (45)
-------- --------
(9,386) (14,443)
-------- --------
Intangible Assets 42,632 49,608
Depreciation 6,756 4,864
Securitizations 8,970 7,231
Deferred tax income 7,094 7,094
Other, net 485 612
-------- --------
65,937 69,409
-------- --------
Net deferred tax liability $ 56,551 $ 54,966
======== ========
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 1999 and 1998, non-qualified
stock options were exercised generating a tax benefit of $0 and $1,562,
respectively. This benefit is reflected in additional paid-in capital.
Note 11 - 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 expire in June 2003. At December 31,
1999 all the remaining outstanding executive options were exercisable. No
additional options have been granted and none have been forfeited. During 1999
and 1998, no options and 299,250 options, respectively, were exercised.
In addition, certain executive officers, in connection with their
recruitment, 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:
70
<PAGE> 72
RESTRICTED SHARES ISSUANCE PRICE PER
ISSUANCE DATE ISSUED SHARE
---------------------------------------------------------------
January 21, 1994 13,336 $ 6.93
January 26, 1995 59,136 6.87
January 27, 1996 18,438 13.87
February 1, 1997 24,704 13.27
January 30, 1998 20,048 16.35
February 1, 1999 93,520 15.01
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 certain officers of the Company. During 1996, the
Company terminated all of its phantom stock plans and canceled all outstanding
grants thereunder. In connection therewith, each former participant in the
phantom stock plans was awarded an option under a new non-qualified stock option
plan for each unit canceled under the phantom stock plans. Other terms of the
awarded options were substantially similar to the underlying canceled units. The
number of initially authorized units under the non-qualified stock option plan
was 223,817. Since forfeited units under the plan do not become available for
reissuance, no units are available for future grants under this plan.
Activity in the non-qualified stock option plan is summarized below:
<TABLE>
<CAPTION>
UNITS UNITS
NON-QUALIFIED STOCK OPTION PLAN: GRANTED UNITS EXERCISED UNITS FORFEITED OUTSTANDING
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 223,817 -- -- 223,817
- 1998 activity -- (60,815) (38,801) (99,616)
------- ------- -------- --------
Balance at December 31, 1998 223,817 (60,815) (38,801) 124,201
------- ------- -------- --------
- 1999 activity -- (545) (135) (680)
------- ------- -------- --------
Balance at December 31, 1999 223,817 (61,360) (38,936) 123,521
======= ======= ======== ========
</TABLE>
Of the 123,521 units outstanding at December 31, 1999 under the
non-qualified stock option plan, the following are exercise prices and percents
vested:
EXPIRATION UNITS EXERCISE PERCENT
DATE OUTSTANDING PRICE VESTED
- --------------------------------------------------------------------
January 21, 2004 46,419 $ 6.93 100%
January 26, 2005 20,438 6.85 80%
January 26, 2005 38,968 6.87 80%
July 1, 2005 17,696 10.64 80%
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
71
<PAGE> 73
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
OMNIBUS PLAN: GRANTED UNITS EXERCISED UNITS FORFEITED OUTSTANDING
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 593,293 -- -- 593,293
- 1998 activity 430,500 (32,700) (10,150) 387,650
--------- ------- ------- --------
Balance at December 31, 1998 1,023,793 (32,700) (10,150) 980,943
- 1999 activity 25,000 (55,875) -- (30,875)
--------- ------- ------- --------
Balance at December 31, 1999 1,048,793 (88,575) (10,150) 950,068
========= ======= ======= ========
</TABLE>
Of the 950,068 units outstanding at December 31, 1999 under the Omnibus
Employee Stock Award Plan, the following are exercise prices and percents
vested:
EXPIRATION UNITS EXERCISE PERCENT
DATE OUTSTANDING PRICE VESTED
- ----------------------------------------------------------------
October 30, 2005 112,350 $14.25 100%
January 26, 2006 24,718 13.87 80%
March 21, 2006 56,175 13.36 80%
November 8, 2006 17,850 14.31 80%
December 3, 2006 7,875 13.87 80%
December 30, 2006 5,250 13.85 80%
September 3, 2007 5,250 15.91 60%
August 26, 2007 6,300 16.27 60%
September 16, 2007 6,300 15.94 60%
January 29, 2007 258,300 13.20 60%
April 11, 2007 10,500 14.73 60%
April 18, 2007 31,500 14.53 60%
May 1, 2007 6,300 13.57 60%
April 14, 2008 375,400 16.44 40%
May 1, 2008 6,000 17.75 40%
February 19, 2009 20,000 14.13 20%
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
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<PAGE> 74
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:
GRANT DATE UNITS GRANTED EXERCISE PRICE
- --------------------------------------------------------------------------
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
September 1, 1999 60,000 6.00
The Company's current 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 $351, $(102), and $408 for 1999, 1998 and 1997, respectively.
The Company accounts for options using APB No. 25, "Accounting for Stock
Issued to Employees." For purposes of providing the pro forma disclosures
required under SFAS No. 123, the fair value of stock options granted in 1999,
1998 and 1997 was estimated at the date of grant using a Black-Scholes option
pricing model. The Black-Scholes option pricing model was originally developed
for use in estimating the fair value of traded options which have different
characteristics than the Company's employee stock options. The model is also
sensitive to changes in the subjective assumptions which can materially affect
fair value estimates. As a result, management believes that the Black-Scholes
model may not necessarily provide a reliable single measure of the fair value of
employee stock options.
For purposes of SFAS No. 123, each award was separately valued using the 10
year CMT rate on the date of grant 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. 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 65% was
assigned to the 1999, 1998 and 1997 awards for purposes of the SFAS No. 123
valuation. The following is a summary of the significant assumptions used in the
SFAS No. 123 valuation and the average fair value of the options granted:
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<PAGE> 75
1999 1998 1997
-------- -------- --------
Average risk free interest rate 5.754% 5.565% 6.494%
Average expected life of grants 10 years 10 years 10 years
Average expected dividend yield $ 0.43 $ 0.21 $ 0.12
Average volatility factor 68.42% 49.30% 56.80%
Average fair value of options granted $ 4.39 $ 9.93 $ 9.76
For purposes of the required pro forma disclosures, SFAS No. 123 permits
straight-line amortization of the estimated fair value of the options over the
vesting period. Had compensation cost for the Company's 1999, 1998 and 1997
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 1999, 1998 and 1997.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------- -------- ---------
<S> <C> <C> <C>
Net income as reported $ 5,922 $ 48,671 $ 21,798
After-tax adjustment for SFAS No. 123 (1,485) (1,968) (737)
------- -------- ---------
Pro forma net income as adjusted $ 4,437 $ 46,703 $ 21,061
======= ======== =========
Pro forma net income per common share - basic $ 0.22 $ 2.02 $ 1.03
Pro forma net income per common share - diluted $ 0.21 $ 1.99 $ 1.01
</TABLE>
Due to the inclusion of only 1999, 1998 and 1997 option grants, the effects
of applying SFAS No. 123 in 1999, 1998 and 1997 may not be representative of the
pro forma impact in future years.
Note 12 - Commitments and Contingencies:
The Company was servicing and subservicing 87,810, 125,686 and 110,641,
residential loans owned by others, with unpaid balances aggregating
approximately $9,090,000, $13,600,000 and $10,200,000, at December 31, 1999,
1998 and 1997, respectively. Related escrow funds totaled approximately $44,714,
$80,300 and $72,100 as of December 31, 1999, 1998 and 1997, 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
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<PAGE> 76
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 $4,104,095 and
$3,255,458 at December 31, 1999 and 1998, respectively. At December 31, 1999 and
1998, respectively, 27% and 35% of commercial mortgage loans outstanding were
being serviced for a single customer. In addition, at December 31, 1999 and
1998, respectively, the Company was servicing $14,272 and $37,565 of leases for
third parties, 100% and 98% 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 1999, approximately
79% of its total sales under these forward sales contracts were to four major
customers. In 1998, approximately 97% of its total sales under these forward
sales contracts were to four 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, 1999, $17,255 of these
repurchased loans are included in mortgage loans held-for-sale net of a loss
allowance of $1,798. At December 31, 1998, $33,285 of these repurchased loans
are included in mortgage loans held-for-sale net of a loss allowance of $2,330.
At December 31, 1997, $9,213 of these repurchased loans are included in mortgage
loans held-for-sale net of a loss allowance of $3,399. Provision for losses
related to the repurchases of loans for the years ended December 31, 1999, 1998
and 1997 totaled $5,795, $9,783 and $4,615 respectively. The total number of
loans repurchased for the year ended December 31, 1999, 1998 and 1997 was 356,
479 and 268, respectively. During 1999, 1998 and 1997 the Company repurchased
approximately $34,865, $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 13 - Work Force Reduction Charges and Non-recurring Charges:
During the fourth quarter of 1999, the Company incurred a $3.8 million
($2.4 million after-tax) charge related to a workforce reduction. At December
31, 1999 approximately $2.0 million remained in the accrual related to these
workforce reduction charges. The workforce reduction is summarized below by
financial statement component and operating division:
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<PAGE> 77
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
----------------------
($ in thousands) Production Servicing Subprime Other CONSOLIDATED
---------- --------- -------- ----- ------------
<S> <C> <C> <C> <C> <C>
Salary and employee
benefits $ 820 $ 31 $ 166 $ 2 $ 1,019
Occupancy expense 1,780 -- 186 190 2,156
General and
administrative expenses 448 -- 164 2 614
------- ---- ----- ----- -------
Net pre-tax impact 3,048 31 516 194 3,789
Estimated allocable
income tax expense (1,136) (12) (192) (72) (1,412)
------- ---- ----- ----- -------
Net after-tax impact $ 1,912 $ 19 $ 324 $ 122 $ 2,377
======= ==== ===== ===== =======
</TABLE>
During the second quarter of 1998, the Company sold its retail production
franchise and recognized a $1,490 pre-tax ($917 after-tax) gain on the sale.
This gain is included in other income. 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. These
charges are included in general and administrative expenses.
Note 14 - Employee Benefits:
On July 1, 1993, the Company established a 401(k) Retirement Savings Plan
which is available to all regular, full-time active employees with 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. In 1998 and 1999 the Company's
match percentage was 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 $1,136, $980 and $958 of matching
contributions as compensation expense during 1999, 1998 and 1997, 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
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<PAGE> 78
retirement benefits for eligible employees. Under the Restoration Plan,
retirement benefits are based upon 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 retirement 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:
FOR THE YEAR ENDED DECEMBER 31,
=================================
1999 1998 1997
------- ------- -----
Service cost $ 1,900 $ 1,417 $ 555
Interest cost 786 563 186
Expected return on assets (204) (97) (46)
Amortization of prior service cost 316 316 44
Amortization of actuarial loss 79 17 24
Curtailment credit (220) -- --
------- ------- -----
$ 2,657 $ 2,216 $ 763
======= ======= =====
Change in the combined projected benefit obligation under the plans at
December 31, 1999 and 1998 is as follows:
DECEMBER 31,
-----------------------
1999 1998
-------- --------
Net benefit obligation at beginning of year $ 8,826 $ 3,010
Service cost 1,900 1,417
Interest cost 786 563
Plan amendments -- 3,696
Actuarial (gain) loss (994) 649
Curtailments (258) (477)
Benefits paid (40) (32)
-------- --------
Net benefit obligation at end of year $ 10,220 $ 8,826
======== ========
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<PAGE> 79
The combined change in the plans' assets for the years ended December 31, 1999
and 1998 were:
DECEMBER 31,
---------------------
1999 1998
------- -------
Fair value of plan assets at beginning of year $ 1,862 $ 788
Actual return on plan assets 272 100
Employer contributions 1,349 1,006
Benefits paid (40) (32)
------- -------
Fair value of plan assets at end of year $ 3,443 $ 1,862
======= =======
Funded status at end of year $(6,777) $(6,965)
Unrecognized net actuarial (gain) loss (190) 951
Unrecognized prior service cost 3,451 3,805
------- -------
Net amount recognized at end of year $(3,516) $(2,209)
======= =======
Amounts recognized in the statement of financial position for the combined plans
consist of:
DECEMBER 31,
---------------------
1999 1998
------- -------
Accrued benefit cost $(5,630) $(4,315)
Intangible asset 2,114 2,106
------- -------
Net amount recognized at end of year $(3,516) $(2,209)
======= =======
Weighted-average assumptions used in accounting for the plans as of fiscal
year-end were:
1999 1998 1997
----- ----- -----
Discount rate 8.00% 6.75% 7.00%
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%
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 $113, $121 and $108 relating to the
noncompensatory Stock Plan discount for 1999, 1998 and 1997, respectively.
Through December 31, 1999, there were 255,287 shares issued under the Stock
Plan.
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<PAGE> 80
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 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 1999 and 1998, the ESOP borrowed $3,000 and $2,000, respectively,
from the Company to purchase shares of the Company's common stock and pledged
those shares to secure loans outstanding. The principal amount of the 1999 loan
is repayable in annual installments of $500 commencing in March 2000. The
principal amount of the 1998 loan is repayable in annual installments of $500
commencing in January 1999. In accordance with other loan agreements, the ESOP
repaid $1,400 and $1,000 to the Company in 1999 and 1998, respectively. An
additional $221 and $108 was paid on these loans in 1999 and 1998, respectively,
from the cash dividends paid on the unallocated ESOP shares. For the years ended
December 31, 1999, 1998, and 1997 135,355, 94,593 and 99,545 shares,
respectively were released. Compensation expense related to the ESOP was $1,244,
$1,623 and $1,480 for the years ended December 31, 1999, 1998 and 1997,
respectively. At December 31, 1999, the fair market value of the unallocated
shares of stock held under the ESOP Plan was $2,434.
Note 15 - Net Income Per Common Share:
The following is a reconciliation of basic earnings per share to diluted
earnings per share as calculated under SFAS No. 128 for the years ended December
31, 1999, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 5,922 $ 48,671 $ 21,798
----------- ----------- -----------
Average common shares outstanding 20,643,166 23,122,835 20,396,428
----------- ----------- -----------
Earnings per share - basic $ 0.29 $ 2.10 $ 1.07
----------- ----------- -----------
Dilutive stock options 156,336 378,273 404,400
Average common and common equivalent
shares outstanding 20,799,502 23,501,108 20,800,828
----------- ----------- -----------
Earnings per share - diluted $ 0.28 $ 2.07 $ 1.05
----------- ----------- -----------
</TABLE>
Options to purchase a total of 1,136,439 shares of common stock at prices
ranging from $10.64 to $17.75 per share were outstanding during 1999 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 were still outstanding at December 31, 1999.
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
79
<PAGE> 81
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.
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.
Note 16 - 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, swaps, 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
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<PAGE> 82
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 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, in addition to mandatory delivery commitments,
also buys or sells swaps as part of its hedging activities for rate locked and
closed subprime mortgage loans. Generally, swaps 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.
Swaps also may be similarly used to hedge against price movements when another
financial instrument is illiquid due to temporary market conditions. Because the
changes in value of swaps contracts and the hedged items can be based on
different indices, there is a risk that the changes in value may not correlate.
There were no open futures positions as of December 31, 1999 or 1998.
As discussed in Note 12, 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 $5,480,000 and $3,300,000 at December
31, 1999 and 1998, 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 such 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. Additionally, the
Company utilizes Callable Pass Through Certificates (CPC) to diversify basis
risk and improve hedge efficacy. The Company purchases a long-term call option
on a large pool of mortgage backed securities. When the price of the mortgage
backed securities rises, the value of the CPC will rise. This hedge offers
performance based upon the price and prepayment behavior of mortgage backed
securities, instead of either CMT or CMS basis. 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
81
<PAGE> 83
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 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,
-------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Mortgage loan purchase commitments $ 363,402 $1,089,539
Financial instruments whose contract amounts exceed the amount of
credit risk:
Mandatory delivery commitments (allocated against mortgages
held-for-sale) 484,752 1,263,861
Mandatory delivery commitments (allocated against mortgage
purchase commitments) 273,748 402,139
Purchased option contracts 160,000 310,000
Forward servicing sales contracts 5,480,000 3,300,000
Interest rate floor contracts 2,100,000 1,482,000
Interest rate swaps 125,733 81,147
Callable pass-through certificates 376,100 --
</TABLE>
Mortgage loan purchase commitments expose the Company to credit loss in the
event the purchase commitments are funded as mortgage loans and the Company's
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
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<PAGE> 84
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 companies. The estimated credit exposure on financial instruments
whose contract amounts exceed the amount of credit risk is the increase in
market value of the instrument.
The Company generally does not charge a premium to its correspondents in
connection with issuance of its mortgage purchase commitments nor is a premium
charged to the Company in connection with its acquisition of mandatory delivery
or forward servicing sales contracts.
Premiums paid for purchased put and call option and futures contracts are
initially deferred and included in other assets in the balance sheet. Other
assets included $1,803 and $2,823 at December 31, 1999 and 1998, 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.
The Company uses CMT floors and CMS floors and Callable Pass-Through
Certificates 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 generally correlate with changes in fair value of
mortgage servicing rights. Included in the mortgage servicing right basis are
deferred (losses) gains of $(5,059) and $13,509 and unamortized floor premiums
of $6,349 and $9,000 for 1999 and 1998, respectively. Other assets included
$11,318 and $6,539 at December 31, 1999 and 1998, respectively, of unamortized
premiums. For the years ended December 31, 1999 and 1998, respectively, $3,608
and $1,976 of deferred premiums paid for interest rate floor contracts were
amortized to expense.
The current variable rate index (CMT Treasury rate) was 6.437% and 4.65% at
December 31, 1999 and 1998, respectively. Other terms of the CMT interest rate
floor contracts outstanding at December 31, 1999, are summarized as follows:
83
<PAGE> 85
Notional
Contract Date Expiration Date Amount Floor Rate
- -------------------------------------------------------------------------------
February 13, 1995 February 13, 2000 $20,000 7.067%
February 13, 1995 February 13, 2000 45,000 6.567%
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%
November 10, 1998 November 10, 2003 120,000 5.410%
January 19, 1999 January 19, 2002 200,000 4.200%
March 15, 1999 March 15, 2002 200,000 4.950%
May 15, 1999 May 15, 2006 200,000 7.000%
September 1, 1999 September 30, 2006 200,000 7.500%
------------
$ 2,100,000
============
During 1999, the Company purchased four CMT interest-rate floors contracts
for $8,388 with contract dates as listed above. The notional amounts of these
interest rate floors totaled $800,000. Two interest rate floors with a notional
amounts totaling $132,000 and a contract date of September 19, 1994, expired on
September 19, 1999.
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<PAGE> 86
Note 17 - 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 revenues and expenses for
each of the Company's operating divisions for the years ended December 31, 1999,
1998 and 1997, respectively. Total assets of the operating divisions at December
31, 1999 are also presented. Revenues and expenses for each of the Company's
operating divisions for the years ended December 31, 1998 and 1997 have been
restated to conform to the 1999 presentation.
For purposes of segment reporting the Company operates through five
operating divisions. The agency-eligible production division purchases and sells
agency-eligible residential mortgage loans. The agency-eligible servicing
division services agency-eligible residential mortgage loans and also purchases
and sells servicing rights associated with these agency eligible loans. Mortgage
servicing includes collecting and remitting mortgage loans payments, accounting
for principal and interest, holding escrow funds for payment of mortgage-related
expenses such as taxes and insurance, making advances to cover delinquent
payments, making inspections as required of the mortgaged premises, contacting
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults and generally administering mortgage loans. The
subprime division purchases and sells subprime residential mortgage loans. The
commercial mortgage division 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, the rights to
service the loans under a servicing agreement are retained by the Company. The
leasing division originates and services small-ticket commercial equipment
leases. Substantially all of the leasing division's receivables are acquired
from independent brokers who operate throughout the continental United States.
The agency-eligible reinsurance division operates as a licensed, property and
casualty monoline captive insurance company assuming reinsurance for PMI
policies on agency-eligible mortgage loans initially purchased or produced by
the Company.
Of the total 1999 agency-eligible production and agency-eligible servicing
revenues, $1.0 million and $0.2 million, respectively, are intercompany
revenues. The remaining revenues for the agency-eligible production and
agency-eligible servicing divisions and for all other operating divisions on the
1999 Segmented Income Statement are from external sources.
85
<PAGE> 87
<TABLE>
<CAPTION>
Agency-Eligible
-------------------------------------------
For the year ended Commercial Total
December 31, 1999 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Net interest income $ 8,240 $ (4,555) $ (12) $ 15,366 $ 323 $ 7,270 $ 26,632
Net gain on sale of mortgage
loans 64,033 -- -- 20,357 9,170 -- 93,560
Gain on sale of mortgage
servicing rights -- 7,262 -- -- -- -- 7,262
Servicing fees -- 41,791 -- -- 4,735 620 47,146
Other income 340 582 1,661 (4,372) 69 1,395 (325)
---------------------------------------------------------------------------------------------------
Total revenues 72,613 45,080 1,649 31,351 14,297 9,285 174,275
---------------------------------------------------------------------------------------------------
Salary and employee benefits 38,751(2) 3,399(3) -- 15,840(4) 8,321 2,654 68,965
Occupancy expense 10,079(2) 419 -- 2,567(4) 1,123 453 14,641
Amortization and provision
for impairment of
mortgage servicing rights -- 29,580 -- -- 2,210 -- 31,790
General and administrative
expenses 22,970(2) 5,984 221 10,353(4) 1,820 3,168 44,516
---------------------------------------------------------------------------------------------------
Total expenses 71,800(2) 39,382(3) 221 28,760(4) 13,474 6,275 159,912
---------------------------------------------------------------------------------------------------
Income before income taxes 813(2) 5,698(3) 1,428 2,591(4) 823 3,010 14,363
Income tax expense (207)(2) (1,448)(3) (356) (1,237)(4) (405) (1,196) (4,849)
---------------------------------------------------------------------------------------------------
Net income $ 606(2) $ 4,250(3) $ 1,072 $ 1,354(4) $ 418 $ 1,814 $ 9,514
===================================================================================================
Total Assets $ 446,216 $ 168,320 $ 5,153 $ 213,573 $ 26,533 $ 167,088 $ 1,026,883
========= ========= ======== ========= ======== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
For the year ended Other/
December 31, 1999 (1) Eliminations Consolidated
- -------------------------------------------------------------------------
<S> <C> <C>
(UNAUDITED)
Net interest income $ (470) $ 26,162
Net gain on sale of mortgage
loans -- 93,560
Gain on sale of mortgage
servicing rights -- 7,262
Servicing fees (188) 46,958
Other income 175 (150)
-----------------------------------------
Total revenues (483) 173,792
-----------------------------------------
Salary and employee benefits 3,903(5) 72,868(6)
Occupancy expense 214(5) 14,855(6)
Amortization and provision
for impairment of
mortgage servicing rights -- 31,790
General and administrative
expenses 1,129(5) 45,645(6)
-----------------------------------------
Total expenses 5,246(5) 165,158(6)
-----------------------------------------
Income before income taxes (5,729)(5) 8,634(6)
Income tax expense 2,137(5) (2,712)(6)
-----------------------------------------
Net income $ (3,592)(5) $ 5,922(6)
=========================================
Total Assets $ 299 $ 1,027,182
========= ===========
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes work force reduction charge totaling $3,048 pre-tax or $1,912
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $37,931, $8,299,
$22,522, $68,752, $3,861, $1,343 and $2,518 respectively.
(3) Includes work force reduction charge totaling $31 pre-tax or $19 after-tax.
Exclusive thereof, salary and employee benefits, total expenses, net income
before income taxes, income tax expense and net income would have been $3,368,
$39,351, $5,729, $1,460 and $4,269 respectively.
(4) Includes work force reduction charge totaling $516 pre-tax or $324
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $15,674, $2,381,
$10,189, $28,244, $3,107, $1,429 and $1,678 respectively.
(5) Includes work force reduction charge totaling $194 pre-tax or $122
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $3,901, $24, $1,127,
$5,052, $(5,535), $(2,065) and $(3,470) respectively.
(6) Includes work force reduction charge totaling $3,789 pre-tax or $2,377
after-tax. Exclusive thereof, salary and employee benefits, occupancy expense,
general and administrative expenses, total expenses, net income before income
taxes, income tax expense and net income would have been $71,849, $12,699,
$45,031, $161,369, $12,423, $4,124 and $8,299 respectively.
<PAGE> 88
<TABLE>
<CAPTION>
Agency-Eligible
-------------------------------------------
For the year ended Commercial Total
December 31, 1998 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Net interest income $ 7,422 $ -- $ -- $ 9,565 $ 536 $ 4,637 $ 22,160
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 42,647
Other income 1,756(2) 455 1,189 732 11 753 4,896
---------------------------------------------------------------------------------------------------
Total revenues 143,650(2) 40,064 1,189 38,277 13,335 6,404 242,919
---------------------------------------------------------------------------------------------------
Salary and employee benefits 53,158 3,449 -- 13,485 7,322 2,347 79,761
Occupancy expense 7,005 443 -- 1,921 840 376 10,585
Amortization and provision
for impairment of -- --
mortgage servicing rights -- 27,897 -- -- 1,335 -- 29,232
General and administrative
expenses 28,046 6,446 196 4,490 1,734 2,584 43,496
---------------------------------------------------------------------------------------------------
Total expenses 88,209 38,235 196 19,896 11,231 5,307 163,074
---------------------------------------------------------------------------------------------------
Income before income taxes 55,441(2) 1,829 993 18,381 2,104 1,097 79,845
Income tax expense (20,059)(2) (662) (351) (6,656) (952) (435) (29,115)
---------------------------------------------------------------------------------------------------
Net income $ 35,382(2) $ 1,167 $ 642 $ 11,725 $ 1,152 $ 662 $ 50,730
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
For the year ended Other/
December 31, 1998 (1) Eliminations Consolidated
- -------------------------------------------------------------------------
<S> <C> <C>
(UNAUDITED)
Net interest income $ (382) $ 21,778
Net gain on sale of
mortgage loans 171,463
Gain on sale of mortgage
servicing rights -- 1,753
Servicing fees 509 43,156
Other income 680 5,576(2)
-----------------------------------------
Total revenues 807 243,726(2)
-----------------------------------------
Salary and employee benefits 2,645 82,406
Occupancy expense 634 11,219
Amortization and provision
for impairment of
mortgage servicing rights -- 29,232
General and administrative
expenses 770 44,266
-----------------------------------------
Total expenses 4,049 167,123
-----------------------------------------
Income before income taxes (3,242) 76,603(2)
Income tax expense 1,183 (27,932)(2)
-----------------------------------------
Net income $ (2,059) $ 48,671(2)
=========================================
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes a non-recurring gain related to sale of retail operation totaling
$1,490 pre-tax, or $917 after-tax. Exclusive thereof, the year ended December
31, 1998 residential mortgage agency-eligible other income, total revenues,
income before taxes, income tax expense and net income and consolidated other
income, total revenues, income before taxes, income tax expense and net income
would have been $266, $142,160, $53,951, $19,486 and, $34,465; and $4,086,
$242,236, $75,113, $27,359 and, $47,754, respectively.
<TABLE>
<CAPTION>
Agency-Eligible
-------------------------------------------
For the year ended Commercial Total
December 31, 1997 (1) Production Servicing Reinsurance Subprime Mortgage Leasing Segments
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Net interest income $ 16,764 $ -- $ -- $ 1,268 $ -- $ -- $ 18,032
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 107,302 38,824 -- 15,280 -- -- 161,406
--------------------------------------------------------------------------------------------------
Salary and employee benefits 50,005 3,025 -- 7,754 -- -- 60,784
Occupancy expense 6,052 318 -- 711 -- -- 7,081
Amortization and provision
for impairment of -- --
mortgage servicing rights -- 18,315 -- -- -- -- 18,315
General and administrative
expenses 17,799 7,856 -- 2,021 -- -- 27,676
--------------------------------------------------------------------------------------------------
Total expenses 73,856 29,514 -- 10,486 -- -- 113,856
--------------------------------------------------------------------------------------------------
Income before income taxes 33,446 9,310 -- 4,794 -- -- 47,550
Income tax expense (12,678) (3,537) -- (1,825) -- -- (18,040)
--------------------------------------------------------------------------------------------------
Net income $ 20,768 $ 5,773 $ -- $ 2,969 $ -- $ -- $ 29,510
==================================================================================================
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
Non-Recurring
and
For the year ended Other/ Special
December 31, 1997 (1) Eliminations Charges Consolidated
- ------------------------------------------------------------------------
<S> <C> <C> <C>
(UNAUDITED)
Net interest income $ (388) $ 17,644
Net gain on sale of
mortgage loans 103,370
Gain on sale of mortgage
servicing rights -- 7,955
Servicing fees -- 30,869
Other income -- 1,180
----------------------------------------
Total revenues (388) 161,018
----------------------------------------
Salary and employee benefits 1,451 62,235
Occupancy expense 377 7,458
Amortization and provision
for impairment of
mortgage servicing rights -- 18,315
General and administrative
expenses 100 10,147 37,923(2)
----------------------------------------
Total expenses 1,928 10,147 125,931(2)
----------------------------------------
Income before income taxes (2,316) (10,147) 35,087(2)
Income tax expense 845 3,906 (13,289)(2)
----------------------------------------
Net income $ (1,471) $ (6,241) $ 21,798(2)
========================================
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible.
(2) Includes non-recurring and special charges related to a merger agreement
that was terminated and certain nonrecoverable operating receivables totaling
$10,147 pretax, or $6,241 after tax. Exclusive thereof, the December 31, 1997
consolidated general and administrative expenses, total expenses, income before
income taxes, income tax expense and net income would have been $27,776,
$115,784, $45,235, $17,195 and $28,039, respectively.
86
<PAGE> 90
Note 18 - Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 7,474 $ 7,423 $ 6,461 $ 4,804 $ 26,162
Net gain on sale of mortgage loans 37,289 26,188 16,823 13,260 93,560
Gain on sale of mortgage
servicing rights 2,998 1,825 1,494 945 7,262
Servicing fees 12,998 11,997 10,898 11,065 46,958
Other income 129 (312) 488 (455) (150)
- -------------------------------------------------------------------------------------------------------
Total revenues 60,888 47,121 36,164 29,619 173,792
- -------------------------------------------------------------------------------------------------------
Salary and employee benefits 20,497 16,714 19,511 16,146 (2) 72,868 (2)
Occupancy expense 3,173 3,465 4,062 4,155 (2) 14,855 (2)
Amortization and provision for impairment
of mortgage servicing rights 8,897 9,405 6,280 7,208 31,790
Provision for foreclosure losses and
repurchased loans 3,055 2,341 2,535 2,677 10,608
General and administrative expenses 7,908 9,879 6,935 10,315 (2) 35,037 (2)
- -------------------------------------------------------------------------------------------------------
Total expenses 43,530 41,804 39,323 40,501 (2) 165,158 (2)
- -------------------------------------------------------------------------------------------------------
Income before income taxes 17,358 5,317 (3,159) (10,882)(2) 8,634 (2)
Income tax expense (6,197) (1,981) 1,484 3,982 (2) (2,712)(2)
- -------------------------------------------------------------------------------------------------------
Net income 11,161 3,336 (1,675) (6,900)(2) 5,922 (2)
- -------------------------------------------------------------------------------------------------------
Net income per common share-basic $ 0.50 $ 0.16 $ (0.08) $ (0.36)(2) $ 0.29 (2)
Net income per common share-diluted $ 0.50 $ 0.16 $ (0.08) $ (0.36)(2) $ 0.28 (2)
</TABLE>
<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>
(1) Includes a non-recurring gain relating to sale of retail operation 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 work force reduction charge totaling $3,789 pre-tax or $2,377
after-tax. Exclusive thereof, fourth quarter 1999 and full year 1999 salary and
employee benefits, occupancy expense, general and administrative expenses, total
expenses, net 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 $15,127, $1,999, $9,701, $36,712, ($7,093), ($2,570), $(4,523),
($0.24) and ($0.24) ; and $71,849, $12,699, $34,432, $161,369, $12,423, $4,124,
$8,299 and ($0.40) and ($0.40), respectively.
87
<PAGE> 91
Note 19 - Fair Value of Financial Instruments:
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets
Cash $ 30,478 $ 30,478 $ 18,124 $ 18,124
Receivables 40,219 40,219 80,248 80,248
Lease receivables 155,559 161,483 102,029 107,290
Residual interests in subprime
securitizations 54,382 54,382 45,782 45,782
Mortgage loans held-for-sale and
mortgage-backed securities 480,504 481,894 1,441,458 1,442,532
Liabilities
Short-term borrowings 699,803 699,803 1,566,287 1,566,287
Long-term borrowings 6,259 6,190 6,364 6,371
</TABLE>
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- --------------------------------------
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 $ 363,402 -- $ (840) $1,089,539 -- $ 2,600
Mandatory delivery commitments
(allocated to mortgage purchase
commitments) 273,748 -- 2,209 402,139 -- (451)
Purchased option contracts 160,000 $ 1,803 343 310,000 $ 2,823 1,183
Interest rate floor contracts 2,100,000 6,269 6,269 1,482,000 20,048 20,048
Interest rate swaps 125,733 -- 1,358 81,147 -- (759)
Callable pass-through certificates 376,100 4,621 4,621 -- -- --
</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
88
<PAGE> 92
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
8.50% and a rate of 7.375% for the prior year.
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.
89
<PAGE> 93
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,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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
February 7, 2000
90
<PAGE> 94
STOCK DATA
Information pertaining to high and low stock prices for each quarter during
1999 and 1998 is given in the following chart.
1999 1998
------------------------------------------------
QUARTER HIGH LOW HIGH LOW
- --------------------------------------------------------------------
First $17.00 $11.81 $18.00 $13.50
Second 13.63 9.00 19.63 15.06
Third 11.00 4.50 23.25 15.06
Fourth 6.50 4.44 17.13 9.50
Source: Nasdaq
The Company began paying cash dividends in 1996. The following chart
summarizes cash dividends declared and paid during 1998 and 1999. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for restrictions on the Company's ability to pay cash dividends.)
RECORD DATE PAYMENT DATE CASH DIVIDEND
- -----------------------------------------------------------------------------
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
February 10, 1999 March 10, 1999 0.10
May 20, 1999 June 21, 1999 0.11
August 17, 1999 September 17, 1999 0.11
November 16, 1999 December 14, 1999 0.11
As of March 6, 2000, there were approximately 630 record holders of the
Company's common stock.
91
<PAGE> 95
DIRECTORS
- ---------
Boyd M. Guttery *
Chairman of the Board
Resource Bancshares Mortgage Group, Inc.
Atlanta, Georgia
Stuart M. Cable
Attorney
Goodwin, Proctor, & Hoar LLP
law firm
Boston, Massachusetts
Douglas K. Freeman
Chief Executive Officer
Resource Bancshares Mortgage Group, Inc.
Columbia, South Carolina
David W. Johnson, Jr.
President
Resource Bancshares Mortgage Group, Inc.
Columbia, South Carolina
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
EXECUTIVE OFFICERS
- ------------------
Douglas K. Freeman
Chief Executive Officer
David W. Johnson, Jr.
President
Steven F. Herbert
Corporate Senior Executive Vice President
And Corporate Chief Financial Officer
Richard M. Duncan
President of RBMG, Inc.
Larry W. Reed
President and Chief Executive Officer
Meritage Mortgage Corporation
* Audit Committee
92
<PAGE> 96
CORPORATE INFORMATION
Exchange: NASDAQ
Symbol: RBMG
Internet Address: http://www.rbmg.com/
Investor Relations Contact
Steven F. Herbert
Corporate Senior Executive Vice President
and Corporate 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
plan. Shareholders interested in participating should contact Steven F. Herbert
at the address set forth above.
Form 10K and Other Information
Copies of the Resource Bancshares Mortgage Group, Inc. Annual Report on Form
10K, as filed with the Securities and Exchange Commission, will be furnished
without charge to shareholders upon written request to Steven F. Herbert at the
address set forth above.
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
General Correspondence
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
EquiServe
P.O. Box 2506
Jersey City, NJ 07303-2506
Dividend Reinvestment Plan
EquiServe
Dividend Reinvestment Service
P.O. Box 2598
Jersey City, NJ 07303-2598
Attn: Resource Bancshares Mortgage Group, Inc. DRP
Access Account Information Via Internet
http://gateway.equiserve.com
Internet Helpline: 1-877-843-9327
Operators are available Monday-Friday, 8:30 a.m. to 7:00 p.m. Eastern time.
93
<PAGE> 97
RETURN ON ASSETS / RETURN ON EQUITY*
ROA - ROE -
(RETURN ON (RETURN ON
YEAR ASSETS) EQUITY)
- --------------------------------------------------
1993 4.81% 38.5%
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%
1999 0.67% 3.53%
NET OPERATING INCOME*
Year CONSOLIDATED
- ------------- --------------------------
1993 $ 17,580
1994 18,043
1995 14,219
1996 22,815
1997 28,039
1998 47,754
1999 8,299
DILUTED OPERATING EARNINGS PER SHARE *
Year CONSOLIDATED
- -------------- ------------------
1993 $ 0.76
1994 1.10
1995 0.86
1996 1.17
1997 1.35
1998 2.03
1999 0.39
* Amounts reflect operating amounts only. Excluded are the impact of
nonrecurring charges reported in 1996 and 1997 and non-recurring income reported
in 1998, and workforce reduction charges reported in 1999.
<PAGE> 1
EXHIBIT 21.1
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
1. RBMG, Inc., a wholly owned subsidiary of the Registrant, was formed by the
Registrant in February 1999 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.
6. RBMG Asset Management Company, Inc., a wholly-owned subsidiary of Meritage
Mortgage Corporation, 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.
9. TFP Funding III, Inc., a wholly-owned subsidiary of Republic Leasing Company,
Inc. 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.
11. Republic Leasing Company, Inc., a wholly-owned subsidiary of the Registrant,
was acquired by the Registrant in December 1997 and is incorporated in the state
of South Carolina.
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (Nos. 333-82105, 333-94863) of Resource Bancshares
Mortgage Group, Inc. of our report dated February 7, 2000 relating to the
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Columbia, South Carolina
March 29, 2000
<PAGE> 2
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
February 7, 2000 relating to the financial statements, which appears in the
Annual Report to Shareholders which is incorporated in this Annual Report on
Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Columbia, South Carolina
March 29, 2000
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