<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------- --------------
Commission File Number 000-21786
---------
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
STATE OF DELAWARE 57-0962375
------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7909 Parklane Road, Columbia, SC 29223
------------------------------------ ------------------------------------
(Address of Principal Executive (Zip Code)
Offices)
</TABLE>
Registrant's telephone number, including area code (803)741-3000
------------------------------
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for each shorter period that the registrant was
required to file reports) and (ii) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
The number of shares of common stock of the Registrant outstanding as of
October 31, 2000 was 17,369,831.
Page 1
Exhibit Index on Pages A to G
<PAGE> 2
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Form 10-Q for the quarter ended September 30, 2000
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
---------------------------------
Item 1. Financial Statements - (Unaudited)
----------------------------------------------
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Changes in Stockholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of 13
---------------------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 53
----------------------------------------------------------------------
PART II. OTHER INFORMATION 54
-----------------------------
ITEM 6. Exhibits and Reports on Form 8-K 54
--------------------------------------------
SIGNATURES 55
----------
EXHIBIT INDEX A-G
-------------
</TABLE>
2
<PAGE> 3
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------------ --------------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash $ 16,704 $ 30,478
Receivables 42,270 40,219
Trading securities:
Residual interests in subprime securitizations 20,384 54,382
Mortgage loans held for sale 517,188 480,504
Lease receivables 185,463 155,559
Servicing rights, net 150,875 177,563
Premises and equipment, net 31,821 36,294
Accrued interest receivable 2,794 1,691
Goodwill and other intangibles 12,554 15,478
Other assets 34,032 35,014
------------------------ --------------------
Total assets $ 1,014,085 $ 1,027,182
------------------------ --------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 762,299 $ 709,803
Long-term borrowings 6,175 6,259
Accrued expenses 8,006 13,826
Other liabilities 78,910 84,822
------------------------ --------------------
Total liabilities 855,390 814,710
------------------------ --------------------
Preferred stock - par value $0.01 - 5,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock - par value $0.01 - 50,000,000 shares authorized;
31,637,331 shares issued at September 30, 2000
and December 31, 1999 316 316
Additional paid-in capital 298,543 300,909
Retained earnings 10,541 56,506
Common stock held by subsidiary at cost - 7,767,099 shares at
September 30, 2000 and December 31, 1999 (98,953) (98,953)
Treasury stock - 6,434,558 and 4,686,391 shares at September 30, 2000
and December 31, 1999, respectively (46,900) (41,148)
Unearned shares of employee stock ownership plan - 417,967 and 537,084
shares at September 30, 2000 and December 31, 1999, respectively (4,852) (5,158)
------------------------ --------------------
Total stockholders' equity 158,695 212,472
------------------------ --------------------
Total liabilities and stockholders' equity $ 1,014,085 $ 1,027,182
------------------------ --------------------
</TABLE>
See accompanying notes
3
<PAGE> 4
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
INCOME STATEMENTS
($ IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months For the Quarter Ended
Ended September 30, September 30,
----------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
REVENUES
<S> <C> <C> <C> <C>
Interest income $ 52,896 $ 66,847 $ 18,607 $ 19,314
Interest expense (39,469) (45,774) (14,457) (12,924)
----------- ----------- ----------- -----------
Net interest income 13,427 21,073 4,150 6,390
Net gain on sale of mortgage loans 26,456 73,942 8,460 13,490
Gain on sale of mortgage servicing rights 2,212 6,317 673 1,494
Servicing fees 26,351 32,493 8,471 9,631
Mark-to-market on residual interests in subprime securitizations (39,338) (4,896) (29,892) (929)
Other income 4,828 5,152 454 1,399
----------- ----------- ----------- -----------
Total revenues 33,936 134,081 (7,684) 31,475
----------- ----------- ----------- -----------
EXPENSES
Salary and employee benefits 38,302 51,040 13,432 17,077
Occupancy expense 10,469 9,870 3,633 3,773
Amortization and provision for impairment of mortgage servicing rights 18,278 22,985 6,069 5,665
Provision expense 5,661 7,931 1,978 2,535
General and administrative expenses 19,452 23,361 7,358 6,507
----------- ----------- ----------- -----------
Total expenses 92,162 115,187 32,470 35,557
----------- ----------- ----------- -----------
Income (loss) from continuing operations before income taxes (58,226) 18,894 (40,154) (4,082)
Income tax benefit (expense) 21,389 (6,396) 14,859 1,873
----------- ----------- ----------- -----------
Income (loss) from continuing operations (36,837) 12,498 (25,295) (2,209)
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $435 and $235 for the nine months and quarter
ended September 30, 2000) (1,607) 393
Operating profits (losses) of Laureate Capital Corp. for the nine months ended
September 30, 2000 and 1999 and for the quarter ended September 30, 2000 and
1999, respectively (less applicable income tax expense (benefit) of ($354),
$298, $-0- and $389, respectively (660) 324 - 534
----------- ----------- ----------- -----------
Net income (loss) $ (39,104) $ 12,822 $ (24,902) $ (1,675)
----------- ----------- ----------- -----------
Weighted average common shares outstanding - Basic 18,034,854 21,158,547 17,435,701 20,310,289
----------- ----------- ----------- -----------
Net income (loss) per common share from continuing operations - Basic ($2.04) $0.59 ($1.45) ($0.11)
----------- ----------- ----------- -----------
Net income (loss) per common share from discontinued operations - Basic ($0.13) $0.02 $0.02 $0.03
----------- ----------- ----------- -----------
Weighted average common shares outstanding - Diluted 18,034,854 21,351,034 17,435,701 20,310,289
----------- ----------- ----------- -----------
Net income (loss) per common share from continuing operations - Diluted ($2.04) $0.59 ($1.45) ($0.11)
----------- ----------- ----------- -----------
Net income (loss) per common share from discontinued operations - Diluted ($0.13) $0.01 $0.02 $0.03
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes
4
<PAGE> 5
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands, except share information)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
Nine Months Ended -------------------------------------- Paid-in Retained
September 30, 1999 Shares Amount Capital Earnings
-------------------------------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 31,637,331 $ 316 $ 307,114 $ 59,599
Issuance of restricted stock 116
Cash dividends (6,786)
Treasury stock purchases
Exercise of stock options (3)
Shares committed to be released
under Employee Stock Ownership
Plan (158)
Purchase of shares by Employee
Stock Ownership Plan
Shares issued or purchased under
Dividend Reinvestment and
Stock Purchase Plan and Stock
Investment Plan (3,451) (86)
Net income 12,822
Total comprehensive income
------------------ ------------------ ------------------ ------------------
Balance, September 30, 1999 31,637,331 $ 316 $ 303,618 $ 65,549
------------------ ------------------ ------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
Common Unearned Shares Total
Nine Months Ended Stock Held by Treasury of Employee Stock Stockholders'
September 30, 1999 Subsidiary Stock Ownership Plan Equity
-------------------------------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $ (98,953) $ (11,499) $ (4,419) 252,158
Issuance of restricted stock 1,285 1,401
Cash dividends (6,786)
Treasury stock purchases (35,648) (35,648)
Exercise of stock options 7 4
Shares committed to be released
under Employee Stock Ownership
Plan 1,213 1,055
Purchase of shares by Employee
Stock Ownership Plan (2,250) (2,250)
Shares issued or purchased under
Dividend Reinvestment and
Stock Purchase Plan and Stock
Investment Plan 8,974 5,437
Net income
Total comprehensive income 12,822
------------------ ------------------ ------------------ ------------------
Balance, September 30, 1999 $ (98,953) $ (36,881) (5,456) 228,193
------------------ ------------------ ------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional
Nine Months Ended -------------------------------------- Paid-in Retained
September 30, 1999 Shares Amount Capital Earnings
-------------------------------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1999 31,637,331 $ 316 $ 300,909 $ 56,506
Issuance of restricted stock (960)
Cash dividends (6,815)
Treasury stock purchases
Shares committed to be released
under Employee Stock Ownership
Plan 157
Shares issued or purchased under
Dividend Reinvestment and
Stock Purchase Plan and Stock
Investment Plan (1,563) (46)
Net income (loss) (39,104)
Total comprehensive income
------------------ ------------------ ------------------ ------------------
Balance, September 30, 2000 31,637,331 $ 316 $ 298,543 $ 10,541
------------------ ------------------ ------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
Common Unearned Shares Total
Nine Months Ended Stock Held by Treasury of Employee Stock Stockholders'
September 30, 1999 Subsidiary Stock Ownership Plan Equity
-------------------------------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1999 $ (98,953) $ (41,148) $ (5,158) $ 212,472
Issuance of restricted stock 1,750 790
Cash dividends (6,815)
Treasury stock purchases (10,527) (10,527)
Shares committed to be released
under Employee Stock Ownership
Plan 306 463
Shares issued or purchased under
Dividend Reinvestment and
Stock Purchase Plan and Stock
Investment Plan 3,025 1,416
Net income (loss)
Total comprehensive income (39,104)
------------------ ------------------ ------------------ ------------------
Balance, September 30, 2000 $ (98,953) $ (46,900) $ (4,852) $ 158,695
------------------ ------------------ ------------------ ------------------
</TABLE>
See accompanying notes
5
<PAGE> 6
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
($ in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
-------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) from continuing operations (36,837) 12,498
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 24,588 27,874
Employee Stock Ownership Plan compensation 463 1,055
Provision for estimated foreclosure losses and repurchased loans 5,661 7,931
Decrease in receivables 11,554 17,611
Acquisition of mortgage loans (4,590,507) (7,259,294)
Proceeds from sales of mortgage loans and mortgage-backed securities 4,576,826 8,180,400
Acquisition of mortgage servicing rights (108,942) (208,695)
Sales of mortgage servicing rights 110,321 210,110
Net (loss) gain on sales of mortgage loans and servicing rights (28,668) (92,975)
(Increase) decrease in accrued interest on loans (1,103) 1,782
Increase in lease receivables (32,112) (44,161)
Decrease (increase) in other assets 556 (5,712)
Decrease (increase) in residual certificates 33,998 (5,142)
Increase in accrued expenses and other liabilities (8,754) 16,492
-------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (42,956) 859,774
-------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of premises and equipment (2,392) (7,264)
Disposition of premises and equipment 485 0
Discontinued operations (6,187) 1,360
-------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,094) (5,904)
-------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings 5,651,248 23,720,794
Repayment of borrowings (5,598,836) (24,545,131)
Issuance of restricted stock 790 1,401
Shares issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan 1,416 5,437
Acquisition of treasury stock (10,527) (35,648)
Cash dividends (6,815) (6,786)
Exercise of stock options 0 4
Loans to Employee Stock Ownership Plan 0 (2,250)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 37,276 (862,179)
-------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (13,774) (8,309)
Cash, beginning of year 30,478 15,530
-------------------------------------------------------------------------------------------------------------------------
Cash, end of year 16,704 7,221
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
6
<PAGE> 7
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
Note 1 - Basis of Presentation:
The financial information included herein should be read in conjunction
with the consolidated financial statements and related notes of Resource
Bancshares Mortgage Group, Inc. (the Company), included in the Company's
December 31, 1999, Annual Report on Form 10-K. Certain financial
information, which is normally included in financial statements prepared in
accordance with generally accepted accounting principles, is not required
for interim financial statements and has been omitted. The accompanying
interim consolidated financial statements are unaudited. However, in the
opinion of management of the Company, all adjustments, consisting of normal
recurring items, necessary for a fair presentation of operating results for
the periods shown have been made.
During the first nine months of 2000, management and the Board of
Directors reconsidered the Company's current positioning in the market and
its corporate, management and leadership structures. As a result, the
Company is reorganizing around the primary business processes that are
critical to achieving its new vision: production/sales, customer
fulfillment, servicing and portfolio management. These business units will
continue to be centrally supported by traditional corporate functions.
Segment reporting, which is done based upon the current holding company
organization structure, will change in future periods when the new
organization structure is fully implemented.
Certain prior period amounts have been reclassified to conform to
current period presentation and for comparability purposes.
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 all fiscal years beginning after June
15, 2000 (January 1, 2001 for the Company). However, early adoption is
permitted. The FASB has a Derivatives Implementation Group ("DIG") that is
assisting various industry groups in interpreting SFAS No. 133. The DIG has
numerous open issues relating to the mortgage banking industry. As a
result, the Company has not yet determined
7
<PAGE> 8
the impact that the adoption of SFAS 133 will have on its earnings or
statement of financial position.
Note 2 - Earnings (Loss) Per Share:
The following is a reconciliation of basic earnings (loss) per share
from continuing operations to diluted earnings (loss) per share from
continuing operations for the nine months and quarters ended September 30,
2000 and 1999, respectively:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED FOR THE QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income from continuing operations $ (36,837) $ 12,498 $ (25,295) $ (2,209)
------------- ------------- ------------- --------------
Average common shares outstanding 18,034,854 21,158,547 17,435,701 20,310,289
------------- ------------- ------------- --------------
Earnings per share - basic $ (2.04) $ 0.59 $ (1.45) $ (0.11)
------------- ------------- ------------- --------------
Dilutive stock options - 192,487 - -
Average common and common equivalent
shares outstanding 18,034,854 21,351,034 17,435,701 20,310,289
------------- ------------- ------------- --------------
Earnings per share - diluted $ (2.04) $ 0.59 $ (1.45) $ (0.11)
------------- ------------- ------------- --------------
</TABLE>
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of Laureate to BB&T Corporation of
Winston-Salem, N.C. Accordingly, the Company recorded a $1.6 million
after-tax charge during the period primarily related to the write-off of
intangible assets of Laureate. The following is a reconciliation of basic
earnings (loss) per share from discontinued operations to diluted earnings
(loss) per share from discontinued operations for the nine months and
quarter ended September 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED FOR THE QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net income from discontinued operations $ (2,267) $ 324 $ 393 $ 534
----------- ----------- ----------- -----------
Average common shares outstanding 18,034,054 21,158,547 17,435,701 20,310,289
----------- ----------- ----------- -----------
Earnings per share - basic $ (0.13) $ 0.02 $ 0.02 $ 0.03
----------- ----------- ----------- -----------
Dilutive stock options - 192,487 17,206 72,425
Average common and common equivalent shares
outstanding 18,034,054 21,351,034 17,452,907 20,382,814
----------- ----------- ----------- -----------
Earnings per share - diluted $ (0.13) $ 0.01 $ 0.02 $ 0.03
----------- ----------- ----------- -----------
</TABLE>
8
<PAGE> 9
The following is a reconciliation of combined basic earnings (loss) per
share from operations to diluted earnings (loss) per share from operations
for the nine months and quarter ended September 30, 2000 and 1999,
respectively:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED FOR THE QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net income from operations $ (39,104) $ 12,822 $ (24,902) $ (1,675)
----------- ----------- ----------- -----------
Average common shares outstanding 18,034,854 21,158,547 17,435,701 20,310,289
----------- ----------- ----------- -----------
Earnings per share - basic $ (2.17) $ 0.61 $ (1.43) $ (.08)
----------- ----------- ----------- -----------
Dilutive stock options -- 192,487 -- --
Average common and common equivalent shares
outstanding 18,034,854 21,351,034 17,435,701 20,310,289
----------- ----------- ----------- -----------
Earnings per share - diluted $ (2.17) $ 0.60 $ (1.43) $ (0.08)
----------- ----------- ----------- -----------
</TABLE>
Note 3 - Allocated Revenues and Expenses:
Following is a summary of the allocated revenues and expenses for each
of the Company's operating divisions for the nine months and the quarter
ended September 30, 2000 and 1999, respectively:
9
<PAGE> 10
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
------------ ------------ ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (1) (2) COMMERCIAL
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE
-------------------------------------------------------------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net interest income 1,252 (3,661) (71) 9,890 0
Net gain on sale of mortgage loans 16,255 0 0 10,201 0
Gain on sale of mortgage servicing rights 0 2,212 0 0 0
Servicing fees 0 26,241 0 0 0
Mark to market on residual interests in subprime
securitizations 0 0 0 (39,338) 0
Other income 534 365 2,408 544 0
------------ ------------ ------------ ------------ ------------
Total revenues 18,041 25,157 2,337 (18,703) 0
------------ ------------ ------------ ------------ ------------
Salary and employee benefits 20,860 2,057 0 9,911 0
Occupancy expense 8,484 146 0 1,991 0
Amortization and provision for impairment
of mortgage servicing rights 0 18,278 0 0 0
Provision expense 1,702 0 0 1,751 0
General and administrative expenses 8,271 3,168 245 5,311 0
------------ ------------ ------------ ------------ ------------
Total expenses 39,317 23,649 245 18,964 0
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (21,276) 1,508 2,092 (37,667) 0
Income tax benefit (expense) 7,841 (556) (735) 13,842 0
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations (13,435) 952 1,357 (23,825) 0
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $435) (1,607)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $354) (660)
------------ ------------ ------------ ------------ ------------
Net income (loss) (13,435) 952 1,357 (23,825) (2,267)
------------ ------------ ------------ ------------ ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (1) (2) TOTAL OTHER/
($ IN THOUSANDS) LEASING SEGMENTS ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net interest income 6,763 14,173 (746) 13,427
Net gain on sale of mortgage loans 0 26,456 0 26,456
Gain on sale of mortgage servicing rights 0 2,212 0 2,212
Servicing fees 368 26,609 (258) 26,351
Mark to market on residual interests in subprime
securitizations 0 (39,338) 0 (39,338)
Other income 859 4,710 118 4,828
------------ ------------ ------------ ------------
Total revenues 7,990 34,822 (886) 33,936
------------ ------------ ------------ ------------
Salary and employee benefits 2,107 34,935 3,367 38,302
Occupancy expense 373 10,994 (525) 10,469
Amortization and provision for impairment
of mortgage servicing rights 0 18,278 0 18,278
Provision expense 2,208 5,661 0 5,661
General and administrative expenses 948 17,943 1,509 19,452
------------ ------------ ------------ ------------
Total expenses 5,636 87,811 4,351 92,162
------------ ------------ ------------ ------------
Income (loss) before income taxes 2,354 (52,989) (5,237) (58,226)
Income tax benefit (expense) (934) 19,458 1,931 21,389
------------ ------------ ------------ ------------
Income (loss) from continuing operations 1,420 (33,531) (3,306) (36,837)
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $435) (1,607) (1,607)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $354) (660) (660)
------------ ------------ ------------ ------------
Net income (loss) 1,420 (35,798) (3,306) (39,104)
------------ ------------ ------------ ------------
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible. Management believes that these and all other revenues and
expenses have been allocated to the respective divisions on a reasonable
basis.
(2) See discussion of unusual items in Management's Discussion and Analysis.
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
------------ ------------ ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (1) COMMERCIAL
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE
-------------------------------------------------------------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net interest income 7,949 (3,287) 0 11,552 0
Net gain on sale of mortgage loans 58,717 0 15,225 0
Gain on sale of mortgage servicing rights 0 6,317 0 0 0
Servicing fees 0 31,993 0 0 0
Mark to market on residual interests in subprime
securitizations 0 (4,896)
Other income 204 495 1,018 2,154 0
------------ ------------ ------------ ------------ ------------
Total revenues 66,870 35,518 1,018 24,035 0
------------ ------------ ------------ ------------ ------------
Salary and employee benefits 32,133 2,609 21 11,981 0
Occupancy expense 7,019 317 0 1,862 0
Amortization and provision for impairment
of mortgage servicing rights 0 22,985 0 0 0
Provision expense 4,722 203 1,702
General and administrative expenses 11,909 4,542 100 5,604 0
------------ ------------ ------------ ------------ ------------
Total expenses 55,783 30,453 324 21,149 0
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 11,087 5,065 694 2,886 0
Income tax benefit (expense) (3,707) (1,693) (245) (928) 0
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations 7,380 3,372 449 1,958 0
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes -0-) 0
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $298) 324
------------ ------------ ------------ ------------ ------------
Net income (loss) 7,380 3,372 449 1,958 324
------------ ------------ ------------ ------------ ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (1) TOTAL OTHER/
($ IN THOUSANDS) LEASING SEGMENT ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net interest income 5,299 21,513 (440) 21,073
Net gain on sale of mortgage loans 0 73,942 0 73,942
Gain on sale of mortgage servicing rights 0 6,317 0 6,317
Servicing fees 500 32,493 0 32,493
Mark to market on residual interests in subprime
securitizations (4,896) (4,896)
Other income 958 4,829 323 5,152
------------ ------------ ------------ ------------
Total revenues 6,757 134,198 (117) 134,081
------------ ------------ ------------ ------------
Salary and employee benefits 2,028 48,772 2,268 51,040
Occupancy expense 330 9,528 342 9,870
Amortization and provision for impairment 0 0
of mortgage servicing rights 0 22,985 0 22,985
Provision expense 1,304 7,931 7,931
General and administrative expenses 932 23,087 274 23,361
------------ ------------ ------------ ------------
Total expenses 4,594 112,303 2,884 115,187
------------ ------------ ------------ ------------
Income (loss) before income taxes 2,163 21,895 (3,001) 18,894
Income tax benefit (expense) (879) (7,452) 1,056 ( 6,396)
------------ ------------ ------------ ------------
Income (loss) from continuing operations 1,284 14,443 (1,945) 12,498
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes -0-) 0 0
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $298) 324 324
------------ ------------ ------------ ------------
Net income (loss) 1,284 14,767 (1,945) 12,822
------------ ------------ ------------ ------------
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible. Management believes that these and all other revenues and
expenses have been allocated to the respective divisions on a reasonable
basis.
10
<PAGE> 11
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
----------------------------------------
FOR THE QUARTER ENDED SEPTEMBER 30, 2000 (1) (2) COMMERCIAL
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE
-------------------------------------------------------------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net interest income 339 (1,345) (32) 3,233 0
Net gain on sale of mortgage loans 4,438 0 0 4,022 0
Gain on sale of mortgage servicing rights 0 673 0 0 0
Servicing fees 0 8,335 0 0 0
Mark to market on residual interests in subprime
securitizations 0 0 0 (29,892) 0
Other income 102 117 813 (776) 0
------------ ------------ ------------ ------------ ------------
Total revenues 4,879 7,780 781 (23,413) 0
------------ ------------ ------------ ------------ ------------
Salary and employee benefits 7,737 684 (90) 2,785 0
Occupancy expense 2,961 35 0 686 0
Amortization and provision for impairment
of mortgage servicing rights 0 6,069 0 0 0
Provision expense 450 0 0 841 0
General and administrative expenses 3,134 1,148 73 2,166 0
------------ ------------ ------------ ------------ ------------
Total expenses 14,282 7,936 (17) 6,478 0
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (9,403) (156) 798 (29,891) 0
Income tax benefit (expense) 3,472 56 (281) 11,079 0
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations (5,931) (100) 517 (18,812) 0
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $235) 393
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $-0-) 0
------------ ------------ ------------ ------------ ------------
Net income (loss) (5,931) (100) 517 (18,812) 393
------------ ------------ ------------ ------------ ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (1) (2) TOTAL OTHER/
($ IN THOUSANDS) LEASING SEGMENTS ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net interest income 2,343 4,538 (388) 4,150
Net gain on sale of mortgage loans 0 8,460 0 8,460
Gain on sale of mortgage servicing rights 0 673 0 673
Servicing fees 136 8,471 0 8,471
Mark to market on residual interests in subprime
securitizations 0 (29,892) 0 (29,892)
Other income 293 549 (95) 454
------------ ------------ ------------ ------------
Total revenues 2,772 (7,201) (483) (7,684)
------------ ------------ ------------ ------------
Salary and employee benefits 669 11,785 1,647 13,432
Occupancy expense 127 3,809 (176) 3,633
Amortization and provision for impairment
of mortgage servicing rights 0 6,069 0 6,069
Provision expense 687 1,978 0 1,978
General and administrative expenses 326 6,847 511 7,358
------------ ------------ ------------ ------------
Total expenses 1,809 30,488 1,982 32,470
------------ ------------ ------------ ------------
Income (loss) before income taxes 963 (37,689) (2,465) (40,154)
Income tax benefit (expense) (378) 13,948 911 14,859
------------ ------------ ------------ ------------
Income (loss) from continuing operations 585 (23,741) (1,554) (25,295)
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $235) 393 393
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $-0-) 0 0
------------ ------------ ------------ ------------
Net income (loss) 585 (23,348) (1,554) (24,902)
------------ ------------ ------------ ------------
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible. Management believes that these and all other revenues and
expenses have been allocated to the respective divisions on a reasonable
basis.
(2) See discussion of unusual items in Management's Discussion and Analysis.
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
---------------------------------------
FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (1) COMMERCIAL
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE
-------------------------------------------------------------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net interest income 1,438 (904) 0 4,096 0
Net gain on sale of mortgage loans 8,639 0 0 4,851 0
Gain on sale of mortgage servicing rights 0 1,494 0 0 0
Servicing fees 0 9,458 0 0 0
Mark to market on residual interests in subprime
securitizations 0 0 0 (929) 0
Other income 187 151 577 (254) 0
------------ ------------ ------------ ------------ ------------
Total revenues 10,264 10,199 577 7,764 0
------------ ------------ ------------ ------------ ------------
Salary and employee benefits 9,781 804 21 5,197 0
Occupancy expense 2,942 110 0 610 0
Amortization and provision for impairment
of mortgage servicing rights 0 5,665 0 0 0
Provision expense 1,050 0 82 770 0
General and administrative expenses 2,888 1,201 17 2,075 0
------------ ------------ ------------ ------------ ------------
Total expenses 16,661 7,780 120 8,652 0
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (6,397) 2,419 457 (888) 0
Income tax benefit (expense) 2,570 (901) (161) 483 0
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations (3,827) 1,518 296 (405) 0
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of -0-) 0
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $389) 534
------------ ------------ ------------ ------------ ------------
Net income (loss) (3,827) 1,518 296 (405) 534
------------ ------------ ------------ ------------ ------------
FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (1) TOTAL OTHER/
($ IN THOUSANDS) LEASING SEGMENT ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------- ------------ ------------ ------------ ------------
(UNAUDITED)
Net interest income 1,910 6,540 (150) 6,390
Net gain on sale of mortgage loans 0 13,490 0 13,490
Gain on sale of mortgage servicing rights 0 1,494 0 1,494
Servicing fees 173 9,631 0 9,631
Mark to market on residual interests in subprime
securitizations 0 (929) 0 (929)
Other income 424 1,085 314 1,399
------------ ------------ ------------ ------------
Total revenues 2,507 31,311 164 31,475
------------ ------------ ------------ ------------
Salary and employee benefits 675 16,478 599 17,077
Occupancy expense 116 3,778 (5) 3,773
Amortization and provision for impairment
of mortgage servicing rights 0 5,665 0 5,665
Provision expense 633 2,535 0 2,535
General and administrative expenses 247 6,428 79 6,507
------------ ------------ ------------ ------------
Total expenses 1,671 34,884 673 35,557
------------ ------------ ------------ ------------
Income (loss) before income taxes 836 (3,573) (509) (4,082)
Income tax benefit (expense) (336) 1,655 218 1,873
------------ ------------ ------------ ------------
Income (loss) from continuing operations 500 (1,918) (291) (2,209)
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of -0-) 0 0
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $389) 534 534
------------ ------------ ------------ ------------
Net income (loss) 500 (1,384) (291) (1,675)
------------ ------------ ------------ ------------
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible. Management believes that these and all other revenues and
expenses have been allocated to the respective divisions on a reasonable
basis.
11
<PAGE> 12
Note 4 - Disposal of Commercial Mortgage Segment:
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of Laureate to BB&T Corporation of
Winston-Salem, N.C. Accordingly, the Company recorded a $1.6 million after-tax
charge during the period primarily related to the write-off of intangible assets
of Laureate.
Note 5 - Changes to Benefit Plans:
During the second quarter of 2000 the Company amended its defined benefit
pension plan to freeze benefits under the plan. Simultaneously, the Company
changed the benefits available to employees under its 401(k) plan. The combined
impact of the curtailment of pension plan benefits and the change of 401(k)
benefits was to increase pre-tax income by $0.7 million.
12
<PAGE> 13
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
quarterly 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) changes in accounting
estimates and (xiii) availability of funding sources and other risks and
uncertainties. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
THE COMPANY
The Company is a 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, one of the Company's wholly-owned
subsidiaries originates, sells and services small-ticket commercial equipment
leases.
13
<PAGE> 14
LOAN AND LEASE PRODUCTION
A summary of production by source for the periods indicated is set forth
below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE NINE MONTHS AT OR FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Agency-Eligible Loan Production:
Correspondent $ 3,277,105 $ 5,259,196 $ 1,249,462 $ 1,138,671
Wholesale 831,451 1,447,891 288,230 292,161
----------- ----------- ----------- -----------
Total Agency-Eligible Loan Production 4,108,556 6,707,087 1,537,692 1,430,832
Subprime Loan Production 481,951 552,142 160,637 182,287
Lease Production 78,215 75,181 24,915 30,316
----------- ----------- ----------- -----------
Total Mortgage Loan and Lease Production $ 4,668,722 $ 7,334,410 $ 1,723,244 $ 1,643,435
=========== =========== =========== ===========
</TABLE>
The Company purchases agency-eligible mortgage loans through its
correspondents and originates loans through its wholesale and subprime
divisions. The Company also has a small-ticket commercial equipment lease
operation. Correspondent operations accounted for 70% and 72% of the Company's
total production for the nine months ended September 30, 2000 and 1999,
respectively. Wholesale and subprime production accounted for 18% and 10%,
respectively, of the Company's production for the nine months ended September
30, 2000 and 20% and 8%, respectively, of the Company's production for the nine
months ended September 30, 1999. Lease production accounted for 2% and 1% of the
Company's total production for the first nine months of 2000 and 1999,
respectively. A summary of key information relevant to industry loan production
activity is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE QUARTER ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
U. S. 1-4 Family Mortgage Originations Statistics (1):
U. S. 1-4 Family Mortgage Originations $290,000,000 $306,000,000
Adjustable Rate Mortgage Market Share 28.00% 25.00%
Estimated Fixed Rate Mortgage Originations $209,000,000 $230,000,000
Company Information:
Residential Loan Production $ 1,698,329 $ 1,613,119
Estimated Company Market Share 0.59% 0.53%
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's total residential mortgage production increased by 5% to
$1.7 billion for the third quarter of 2000 from $1.6 billion for the third
quarter of 1999. During the third quarter of 2000, interest rates were higher
than during the third quarter of 1999, resulting in a decrease in industry wide
residential loan originations of 5%. Likewise, the higher rate environment
resulted in an increase in ARM market share in the third quarter of 2000. The
Company has historically focused on fixed rate products, and only recently has
commenced offering a broader spectrum of mortgage products, including adjustable
rate products. Further, as often happens in the mortgage
14
<PAGE> 15
banking industry, a rise in interest rates and resulting decrease in volumes
prompted increasing price competition in the marketplace during the quarter.
Correspondent Loan Production
The Company purchases closed mortgage loans through its network of approved
correspondent lenders. Correspondents are primarily mortgage lenders, larger
mortgage brokers and smaller savings and loan associations and commercial banks
that have met the Company's approval requirements. The Company continues to
emphasize correspondent loan production as its basic business focus because of
the lower fixed expenses and capital investment required of the Company. A
summary of key information relevant to the Company's correspondent loan
production activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE NINE MONTHS AT OR FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Correspondent Loan Production $3,277,105 $5,259,196 $1,249,462 $1,138,671
Estimated Correspondent Market Share (1) 0.43% 0.51% 0.43% 0.37%
Approved Correspondents 918 886 918 886
Correspondent Division Expenses $ 30,780 $ 43,531 $ 10,698 $ 12,883
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's correspondent loan production increased by 10% to $1.2
billion for the third quarter of 2000 from $1.1 billion for the third quarter of
1999. During the third quarter of 2000, interest rates were higher than during
the third quarter of 1999, resulting in a decrease in industry wide residential
loan originations of 5%. Likewise, the higher rate environment resulted in an
increase in ARM market share in the third quarter of 2000. The Company has
historically focused on fixed rate products, and only recently has commenced
offering a broader spectrum of mortgage products, including adjustable rate
products. The correspondent division expenses decreased by 17% to $10.7 million
for the third quarter of 2000 from $12.9 million for the third quarter of 1999.
This is a result of the Company's continued plans to reduce operating expenses.
Wholesale Loan Production
The wholesale division receives loan applications through brokers,
underwrites the loans, funds the loans at closing and prepares all closing
documentation. The Company's regional operating centers handle all shipping and
follow-up procedures on loans. Typically, mortgage brokers are responsible for
taking applications and accumulating the information precedent to the Company's
processing and underwriting of the loans. Although the establishment of regional
operating centers involves the incurrence of fixed expenses associated with
maintaining those offices, wholesale operations also generally provide for
higher profit margins than correspondent loan production. Additionally, each
regional operating center can serve a relatively sizable geographic area by
establishing relationships with large numbers of independent mortgage loan
brokers who bear much of the cost of identifying and interacting directly with
loan applicants. During 2000 the Company completed the closure of all branches
and consolidated from an 18 branch environment into regional operations centers
to improve operating cost efficiency levels. The Company's nationwide wholesale
salesforce is supported by these regional operating centers. At September 30,
2000, the Company had 6 such regional operating centers as noted in
15
<PAGE> 16
the table below. However, during October of 2000 two of the 6 remaining regional
operations centers were closed. A summary of key information relevant to the
Company's wholesale production activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE NINE MONTHS AT OR FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Wholesale Loan Production $831,451 $1,447,891 $288,230 $292,161
Estimated Wholesale Market Share (1) 0.11% 0.14% 0.10% 0.10%
Wholesale Division Direct Operating Expenses $ 8,537 $ 12,252 $ 3,584 $ 3,778
Approved Brokers 4,128 3,939 4,128 3,939
Regional Operation Centers 6 - 6 -
Number of Branches - 18 - 18
Number of Employees 123 209 123 209
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
Wholesale loan production decreased 1% ($3.9 million) from $292.2 million
for the third quarter of 1999 to $288.2 million for the third quarter of 2000.
During the third quarter of 2000, interest rates were higher than during the
third quarter of 1999, resulting in a decrease in industry wide residential loan
origination of 5%. Likewise, the higher rate environment resulted in an increase
in ARM market share in the third quarter of 2000. The Company has historically
focused on fixed rate products, and only recently has commenced offering a
broader spectrum of mortgage products, including adjustable rate products.
Subprime Loan Production
The Company conducts subprime business through its wholly-owned subsidiary,
Meritage Mortgage Corporation (Meritage). A summary of key information relevant
to the Company's subprime production activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE NINE MONTHS AT OR FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Subprime Loan Production $481,951 $552,142 $160,637 $182,287
Estimated Subprime Market Share (1) 0.06% 0.05% 0.06% 0.06%
Subprime Division Direct Operating Expenses $ 18,964 $ 21,149 $ 6,478 $ 8,652
Number of Brokers 2,925 2,434 2,925 2,434
Number of Employees 240 354 240 354
Number of Branches - 18 - 18
</TABLE>
Subprime loan production decreased by 12% to $160.6 million for the
third quarter of 2000 as compared to $182.3 million during the third quarter of
1999 primarily due to a decrease in industry wide residential loan originations
of 5%. Subprime division direct operating expenses decreased by 25% to $6.5
million for the third quarter of 2000 as compared to $8.7 million during the
third quarter of 1999. This reduction in expenses is due to a decrease in
production between quarters and reduction in the number of branches. Between
September 30, 1999 and September 30, 2000, respectively, the Company increased
the number of its subprime brokers by 491. As a result of reassessment of the
geographic regions serviced by branches, during the third
16
<PAGE> 17
quarter of 2000 the Company restructured its subprime units from branch
facilities to sales staff servicing eight market areas supported by three
processing centers.
Commercial Mortgage Production
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of Laureate to BB&T Corporation of
Winston-Salem, N.C. Accordingly, the Company recorded a $1.6 million after-tax
charge during the period primarily related to the write-off of intangible assets
of Laureate.
Lease Production
The Company's wholly-owned subsidiary, Republic Leasing Company, Inc.
(Republic Leasing), originates and services small-ticket commercial equipment
leases. Substantially all of Republic Leasing's lease receivables are acquired
from independent brokers who operate throughout the continental United States. A
summary of key information relevant to the Company's lease production activities
is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE NINE MONTHS AT OR FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Lease Production $78,215 $75,181 $24,915 $30,316
Lease Division Direct Operating Expenses $ 5,636 $ 4,594 $ 1,809 $ 1,671
Number of Brokers 193 207 193 207
Number of Employees 67 67 67 67
</TABLE>
SERVICING
Residential Mortgage Servicing
Residential 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:
17
<PAGE> 18
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE NINE MONTHS AT OR FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Underlying Unpaid Principal Balances:
Beginning Balance * $7,822,394 $ 9,865,100 $ 8,529,100 $ 8,410,690
Agency-Eligible Loan Production (net of
servicing- released production) 3,989,019 6,695,685 1,506,323 1,429,830
Bulk Acquisitions* - - - -
Net Change in Work-in-Progress* 40,493 312,272 (1,119,163) 115,918
Sales of Servicing* (3,928,087) (7,848,456) (1,348,268) (1,743,730)
Paid-In-Full Loans* (396,066) (851,143) (141,310) (202,087)
Amortization, Curtailments and Other, net* (149,484) (225,788) (48,413) (62,951)
------------ ----------- ----------- -----------
Ending Balance* 7,378,269 7,947,670 7,378,269 7,947,670
Subservicing Ending Balance 1,354,124 1,874,201 1,354,124 1,874,201
------------ ----------- ----------- -----------
Total Underlying Unpaid Principal Balances $ 8,732,393 $ 9,821,871 $ 8,732,393 $ 9,821,871
============ =========== =========== ===========
</TABLE>
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and, therefore, exclude the subservicing portfolio. The
ending balance for the third quarter of 2000 and 1999, respectively, includes
$194,015 and $242,296, respectively, of subprime loans being temporarily
serviced until these loans are sold.
Of the $7.4 billion and $8.0 billion unpaid principal balance at September
30, 2000 and 1999, $5.6 billion and $6.1 billion, respectively, of the related
mortgage servicing right asset is classified as available-for-sale, while $1.8
billion and $1.9 billion, respectively, of the related mortgage servicing right
asset is classified as held-for-sale.
A summary of agency-eligible servicing statistics follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE NINE MONTHS AT OR FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Average Underlying Unpaid Principal Balances
(including subservicing) $9,082,315 $12,490,733 $8,826,384 $11,163,496
Weighted Average Note Rate* 7.64% 7.45% 7.64% 7.45%
Weighted Average Servicing Fee* 0.42% 0.43% 0.42% 0.43%
Delinquency (30+ days) Including Bankruptcies
and Foreclosures* 2.40% 2.55% 2.40% 2.55%
Number of Servicing Division Employees 71 119 71 119
</TABLE>
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and, therefore, exclude the subservicing portfolio.
The average underlying unpaid principal balance of agency-eligible
mortgage loans being serviced and subserviced for the third quarter of 2000 as
compared to the third quarter of 1999 decreased $2.3 billion, or 21%. The
Company generally sells servicing rights related to the agency-eligible loans it
produces within 90 to 180 days of purchase or origination. While production
levels increased during the third quarter, the average underlying unpaid
principal balance of agency-eligible mortgage loans being serviced and
subserviced decreased due to the timing of sales which historically have
occurred during the latter part of the quarter.
18
<PAGE> 19
Lease Servicing
Republic Leasing services leases that are owned by it and also services
leases for investors. A summary of key information relevant to the Company's
lease servicing activity is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE QUARTER ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Owned Lease Servicing Portfolio $182,444 $141,509
Serviced For Investors Servicing Portfolio 5,392 18,795
-------- --------
Total Managed Lease Servicing Portfolio $187,836 $160,304
======== ========
Weighted Average Net Yield For Managed Lease Servicing
Portfolio 10.73% 10.66%
Delinquencies (30+ Days) Managed Lease Servicing Portfolio
2.27% 1.95%
</TABLE>
Consolidated Coverage Ratios
A summary of the Company's consolidated ratios of servicing fees and net
interest income from owned leases to cash operating expenses net of amortization
and depreciation follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE NINE MONTHS AT OR FOR THE QUARTER
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Total Company Servicing Fees $ 26,351 $ 32,493 $ 8,471 $ 9,631
Net Interest Income from Owned Leases 6,763 5,299 2,343 1,910
-------- -------- ------- -------
Total Servicing Fees and Interest from Owned Leases $ 33,114 $ 37,792 $10,814 $11,541
-------- -------- ------- -------
Total Company Operating Expenses $ 92,162 $115,187 $32,470 $35,557
Total Company Amortization and Depreciation (24,588) (27,874) (7,391) (8,675)
-------- -------- ------- -------
Total Company Operating Expenses, Net of
Amortization and Depreciation $67,574 $ 87,313 $25,079 $26,882
-------- -------- ------- -------
Coverage Ratio 49% 43% 43% 43%
======== ======== ======= =======
</TABLE>
The Company's coverage ratios for the third quarter of 2000 and 1999 were 43%
and 43%, respectively, and for the first nine months of 2000 and 1999 were 49%
and 43% respectively. These coverage ratios were lower than the Company's target
level of between 50% and 80%. In the opinion of Company's management, market
prices for servicing rights were attractive throughout that period. Accordingly,
management consciously determined on a risk-versus-return basis to allow this
ratio to stay below its stated goals. Opportunistically and as market conditions
permit, management would expect to remain in line with the stated objective of
maintaining a coverage ratio of between 50% and 80%.
19
<PAGE> 20
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1999
SUMMARY BY OPERATING DIVISION
Net income (loss) from continuing operations per common share on a
diluted basis for the first nine months of 2000 was ($2.04) as compared to $0.59
for the first nine months of 1999. Following is a summary of the revenues and
expenses for each of the Company's operating divisions for the nine months ended
September 30, 2000 and 1999, respectively:
20
<PAGE> 21
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
------------ ------------ ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (1) (2) COMMERCIAL
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE
-------------------------------------------------------------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net interest income 1,252 (3,661) (71) 9,890 0
Net gain on sale of mortgage loans 16,255 0 0 10,201 0
Gain on sale of mortgage servicing rights 0 2,212 0 0 0
Servicing fees 0 26,241 0 0 0
Mark to market on residual interests in subprime
securitizations 0 0 0 (39,338) 0
Other income 534 365 2,408 544 0
------------ ------------ ------------ ------------ ------------
Total revenues 18,041 25,157 2,337 (18,703) 0
------------ ------------ ------------ ------------ ------------
Salary and employee benefits 20,860 2,057 0 9,911 0
Occupancy expense 8,484 146 0 1,991 0
Amortization and provision for impairment
of mortgage servicing rights 0 18,278 0 0 0
Provision expense 1,702 0 0 1,751 0
General and administrative expenses 8,271 3,168 245 5,311 0
------------ ------------ ------------ ------------ ------------
Total expenses 39,317 23,649 245 18,964 0
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (21,276) 1,508 2,092 (37,667) 0
Income tax benefit (expense) 7,841 (556) (735) 13,842 0
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations (13,435) 952 1,357 (23,825) 0
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $435) (1,607)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $354) (660)
------------ ------------ ------------ ------------ ------------
Net income (loss) (13,435) 952 1,357 (23,825) (2,267)
------------ ------------ ------------ ------------ ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (1) (2) TOTAL OTHER/
($ IN THOUSANDS) LEASING SEGMENTS ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net interest income 6,763 14,173 (746) 13,427
Net gain on sale of mortgage loans 0 26,456 0 26,456
Gain on sale of mortgage servicing rights 0 2,212 0 2,212
Servicing fees 368 26,609 (258) 26,351
Mark to market on residual interests in subprime
securitizations 0 (39,338) 0 (39,338)
Other income 859 4,710 118 4,828
------------ ------------ ------------ ------------
Total revenues 7,990 34,822 (886) 33,936
------------ ------------ ------------ ------------
Salary and employee benefits 2,107 34,935 3,367 38,302
Occupancy expense 373 10,994 (525) 10,469
Amortization and provision for impairment
of mortgage servicing rights 0 18,278 0 18,278
Provision expense 2,208 5,661 0 5,661
General and administrative expenses 948 17,943 1,509 19,452
------------ ------------ ------------ ------------
Total expenses 5,636 87,811 4,351 92,162
------------ ------------ ------------ ------------
Income (loss) before income taxes 2,354 (52,989) (5,237) (58,226)
Income tax benefit (expense) (934) 19,458 1,931 21,389
------------ ------------ ------------ ------------
Income (loss) from continuing operations 1,420 (33,531) (3,306) (36,837)
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $435) (1,607) (1,607)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $354) (660) (660)
------------ ------------ ------------ ------------
Net income (loss) 1,420 (35,798) (3,306) (39,104)
------------ ------------ ------------ ------------
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible. Management believes that these and all other revenues and
expenses have been allocated to the respective divisions on a reasonable
basis.
(2) See discussion of unusual items in Management's Discussion and Analysis.
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
------------ ------------ ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (1) COMMERCIAL
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE
-------------------------------------------------------------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net interest income 7,949 (3,287) 0 11,552 0
Net gain on sale of mortgage loans 58,717 0 15,225 0
Gain on sale of mortgage servicing rights 0 6,317 0 0 0
Servicing fees 0 31,993 0 0 0
Mark to market on residual interests in subprime
securitizations 0 (4,896)
Other income 204 495 1,018 2,154 0
------------ ------------ ------------ ------------ ------------
Total revenues 66,870 35,518 1,018 24,035 0
------------ ------------ ------------ ------------ ------------
Salary and employee benefits 32,133 2,609 21 11,981 0
Occupancy expense 7,019 317 0 1,862 0
Amortization and provision for impairment
of mortgage servicing rights 0 22,985 0 0 0
Provision expense 4,722 203 1,702
General and administrative expenses 11,909 4,542 100 5,604 0
------------ ------------ ------------ ------------ ------------
Total expenses 55,783 30,453 324 21,149 0
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 11,087 5,065 694 2,886 0
Income tax benefit (expense) (3,707) (1,693) (245) (928) 0
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations 7,380 3,372 449 1,958 0
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes -0-) 0
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $298) 324
------------ ------------ ------------ ------------ ------------
Net income (loss) 7,380 3,372 449 1,958 324
------------ ------------ ------------ ------------ ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (1) TOTAL OTHER/
($ IN THOUSANDS) LEASING SEGMENT ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net interest income 5,299 21,513 (440) 21,073
Net gain on sale of mortgage loans 0 73,942 0 73,942
Gain on sale of mortgage servicing rights 0 6,317 0 6,317
Servicing fees 500 32,493 0 32,493
Mark to market on residual interests in subprime
securitizations (4,896) (4,896)
Other income 958 4,829 323 5,152
------------ ------------ ------------ ------------
Total revenues 6,757 134,198 (117) 134,081
------------ ------------ ------------ ------------
Salary and employee benefits 2,028 48,772 2,268 51,040
Occupancy expense 330 9,528 342 9,870
Amortization and provision for impairment 0 0
of mortgage servicing rights 0 22,985 0 22,985
Provision expense 1,304 7,931 7,931
General and administrative expenses 932 23,087 274 23,361
------------ ------------ ------------ ------------
Total expenses 4,594 112,303 2,884 115,187
------------ ------------ ------------ ------------
Income (loss) before income taxes 2,163 21,895 (3,001) 18,894
Income tax benefit (expense) (879) (7,452) 1,056 ( 6,396)
------------ ------------ ------------ ------------
Income (loss) from continuing operations 1,284 14,443 (1,945) 12,498
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes -0-) 0 0
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $298) 324 324
------------ ------------ ------------ ------------
Net income (loss) 1,284 14,767 (1,945) 12,822
------------ ------------ ------------ ------------
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible. Management believes that these and all other revenues and
expenses have been allocated to the respective divisions on a reasonable
basis.
21
<PAGE> 22
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage production operations.
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
------------ -----------
<S> <C> <C>
Net interest income $ 1,252 $ 7,949
Net gain on sale of mortgage loans 16,255 58,717
Other income 534 204
---------- ----------
Total production revenue 18,041 66,870
---------- ----------
Salary and employee benefits 20,860 32,133
Occupancy expense 8,484 7,019
Provision expense 1,702 4,722
General and administrative expenses 8,271 11,909
---------- ----------
Total production expenses 39,317 55,783
---------- ----------
Net pre-tax production margin $ (21,276) $ 11,087
---------- ----------
Production $4,108,556 $6,707,087
Pool delivery $3,946,280 $7,278,856
Total production revenue to pool delivery 46 bps 92 bps
Total production expenses to production 96 bps 83 bps
---------- ----------
Net pre-tax production margin (50) bps 9 bps
========== ==========
</TABLE>
Summary
The production revenue to pool delivery ratio decreased 46 basis points for
the first nine months of 2000 as compared to the first nine months of 1999. Net
gain on sale of mortgage loans (41 basis points for the first nine months of
2000 versus 81 basis points for the first nine months of 1999) declined
primarily due to compressed margins attributable to an aggressive competitive
pricing environment and lower overall agency-eligible production volume. Net
interest income decreased from 11 basis points in the first nine months of 1999
to 3 basis points in the first nine months of 2000 primarily as a result of a
flattened yield curve and, in part, due to higher financing costs associated
with the renewal of the Company's bank lines during the third quarter of 2000.
The production expenses to production ratio increased 12 basis points from the
first nine months of 1999 to the first nine months of 2000. This is primarily
due to the 39% decline in production for the first nine months of 2000 as
compared to the first nine months of 1999 which was only partially offset by a
30% decline in production expenses. For the nine months ended September 30,
2000, production expenses included a net $1.5 million in unusual charges related
to the (1) restructuring of regional processing offices, (2) certain changes in
the Company's senior management team, (3) compensation expense associated with
the repricing of certain options and (4) expenses for consultants who are
assisting management in re-engineering work processes. Included in these net
charges were reductions in production expenses as a result of curtailment of the
Company's pension plan benefits and changes in the 401(k) benefits. As a
consequence of the foregoing, the Company's net agency-eligible pre-tax
production margin declined 59 basis points. Absent the $1.5 million in unusual
charges, the Company's net agency-eligible pre-tax production margin would have
only declined 55 basis points. See further discussion of unusual items elsewhere
in this Management's Discussion and Analysis.
22
<PAGE> 23
Net Interest Income
The following table analyzes net interest income allocated to the
Company's agency-eligible mortgage production activities in terms of rate and
volume variances of the interest spread (the difference between interest rates
earned on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds) for the nine months ended September 30, 2000
and 1999, respectively:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
Variance
Average Volume Average Rate Interest Attributable to
-------------------- ----------------- ----------------- ------------------
2000 1999 2000 1999 2000 1999 Variance Rate Volume
-------- -------- ------- -------- ------- -------- --------- -------- ----------
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
INTEREST INCOME
Mortgages Held-for-Sale
and Mortgage-Backed
$352,717 $764,763 8.16% 6.70% Securities $21,598 $38,414 $(16,816) $ 3,881 $(20,697)
-------- -------- ----- ----- ------- ------- -------- ------- --------
INTEREST EXPENSE
$288,355 $364,787 5.39% 3.77% Warehouse Line * $11,633 $10,274 $ 1,359 $ 3,512 $ (2,153)
54,631 390,606 6.81% 5.20% Gestation Line 2,781 15,191 (12,410) 656 (13,066)
122,443 110,487 7.17% 6.00% Servicing Secured Line 6,564 4,959 1,605 1,068 537
3,610 26,760 5.96% 5.28% Servicing Receivables 161 1,056 (895) 19 (914)
8,807 7,327 8.94% 8.03% Other Borrowings 58 440 149 60 89
Facility Fees & Other
Charges 2,594 2,113 481 0 481
-------- -------- ----- ----- ------- ------- -------- ------- --------
$477,846 $899,967 6.81% 5.06% Total Interest Expense $24,322 $34,033 $ (9,711) $ 5,315 $(15,026)
======== ======== ===== ===== ======= ======= ======== ======= ========
Net Interest Income
Before Interdivisional
1.35% 1.64% Allocations $(2,724) $ 4,381 $ (7,105) $ (1,434) $ (5,671)
===== ===== ------- ------- ========= ======== =========
Allocation to
Agency-Eligible
Servicing Division 3,661 3,128
Allocation to Other 531 440
Intercompany Net Interest
Expense Included In
Segment (216)
------- --------
Net Interest Income $ 1,252 $ 7,949
======= ========
</TABLE>
* The interest-rate yield on the warehouse line is net of the benefit of escrow
deposits.
The 29 basis point decrease in the interest-rate spread was primarily a
result of a flattened yield curve and, in part, due to higher financing costs
associated with the renewal of the Company's bank lines during the third quarter
of 2000. 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:
23
<PAGE> 24
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
2000 1999
---------- -----------
<S> <C> <C>
Gross proceeds on sales of mortgage loans $4,042,380 $7,288,196
Initial unadjusted acquisition cost of mortgage loans sold, net of
hedge results 4,052,805 7,293,015
---------- ----------
Unadjusted gain (loss) on sale of mortgage loans (10,425) (4,819)
Loan origination and correspondent program administrative fees 7,771 19,243
---------- ----------
Unadjusted aggregate margin (2,654) 14,424
Acquisition basis allocated to mortgage servicing rights
(SFAS No. 125) 21,280 45,573
Net deferred costs and administrative fees recognized (2,371) (1,280)
---------- ----------
Net gain on sale of agency-eligible mortgage loans $ 16,255 $ 58,717
========== ==========
</TABLE>
Net gain on sale of agency-eligible mortgage loans decreased $42.5
million from $58.7 million for the first nine months of 1999 to $16.2 million
for the first nine months of 2000. 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.
AGENCY-ELIGIBLE REINSURANCE OPERATIONS
The Company has 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 the first nine months of 2000 and 1999, the Company
recognized premium and investment income of approximately $2.4 million and $1.0
million, respectively, that has been included as other income in the
agency-eligible reinsurance segment.
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
subprime mortgage production operations for the periods indicated:
24
<PAGE> 25
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
---------- -----------
<S> <C> <C>
Net interest income $ 9,890 $ 11,552
Net gain on sale of mortgage loans 10,201 15,225
Mark to market on residual interests in subprime securitizations (39,338) (4,896)
Other income 544 2,154
-------- --------
Total production revenue (18,703) 24,035
-------- --------
Salary and employee benefits 9,911 11,981
Occupancy expense 1,991 1,862
Provision expense 1,751 1,702
General and administrative expenses 5,311 5,604
-------- --------
Total production expenses 18,964 21,149
-------- --------
Net pre-tax production margin $(37,667) $ 2,886
-------- --------
Production $481,951 $552,142
Whole loan sales and securitizations $489,184 501,500
Total production revenue to whole loan sales and securitizations (382)bps 479 bps
Total production expenses to production 393 bps 383 bps
-------- --------
Net pre-tax production margin (775)bps 96 bps
======== ========
</TABLE>
Summary
During the first nine months of 2000, the Company executed delivery of all
of its subprime loan production into secondary markets through whole loan sales.
At September 30, 2000, the Company had unsold subprime mortgage loans of $111.9
million as compared to $145.7 million at September 30, 1999. The $40.6 million
decline in the pre-tax subprime production margin is primarily due to the
($39.3) million adjustment during the first nine months of 2000 in the mark to
market on residual interests in subprime securitizations and a $1.7 million
adjustment to the residual hedges. During the period the Company marked down its
residual interests in prior subprime securitizations as a result of changes in
valuation assumptions due to changing market conditions and also wrote down
such residuals and the associated residual hedges (including hedge amortization
expense) as a result of signing a definitive agreement to sell all of the
Company's residuals. Absent the ($39.3) million mark-to-market adjustment to
residual interests and the ($1.1) million adjustment to the residual hedges, the
margin on sale of subprime loans was 444 bps. Also contributing to the decline
in pretax production margin is the $5.0 million decline in net gain on sale of
subprime mortgage loans. This decline is primarily attributable to lower sales
volume and tighter margins associated with selling exclusively into the cash
markets for 2000 versus securitizations for 1999.
The production expenses to production ratio increased 10 bps during the
first nine months of 2000 as compared to the first nine months of 2000.
Contributing to this increase were $1.5 million in unusual charges to salary and
employee benefits and $0.8 million in unusual charges to general and
administratives expenses during the first nine months of 2000 as compared to the
same period for 1999 related to (1) restructuring of regional processing
offices, (2) certain changes in the Company's senior management team, (3)
compensation expense associated with
25
<PAGE> 26
the repricing of certain options and (4) expenses for consultants who are
assisting management in re-engineering work process. Offsetting the increase in
the production expenses to production ratio were reductions in salary and
employee benefit costs primarily due to a 32% reduction in the number of
subprime employees from the first nine months of 1999 to the first nine months
of 2000.
Absent the $42.7 million in unusual charges during the first nine months of
2000, the Company's net agency-eligible pre-tax production margin would have
increased 1 basis point. See further discussion of unusual items elsewhere in
this Management's Discussion and Analysis.
Net Interest Income
The following table analyzes net interest income allocated to the Company's
subprime mortgage production activities in terms of rate and volume variances of
the interest spread (the difference between interest rates earned on loans and
residual certificates and interest rates paid on interest-bearing sources of
funds) for the nine months ended September 30, 2000 and 1999, respectively.
<TABLE>
<CAPTION>
($ IN THOUSANDS)
Variance
Average Volume Average Rate Interest Attributable to
------------------- ----------------- ----------------- --------------------
2000 1999 2000 1999 2000 1999 Variance Rate Volume
-------- -------- ------- -------- ------- -------- --------- -------- ----------
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
Mortgages Held-for-Sale
and Residual
$196,991 $253,973 11.63% 9.76% Certificates $17,181 $18,600 $(1,419) $2,754 $(4,173)
-------- -------- ------ ----- ------- ------- ------- ------ -------
$141,309 $176,730 7.20% 5.45% Total Interest Expense $ 7,615 $ 7,207 $ 408 $1,859 $(1,451)
-------- -------- ------ ----- ------- ------- ------- ------ -------
4.42% 4.31% Net Interest Income $ 9,566 $11,393 $(1,827) $ 895 $(2,722)
===== ===== ======= ====== =======
Allocation to
Agency-Eligible
Servicing Division 159
Intercompany Net Interest
Expense Included In
Segment 324
------- -------
Net Interest Income $ 9,890 $11,552
======= =======
</TABLE>
Net interest income from subprime products decreased to $9.9 million for
the first nine months of 2000 as compared to $11.6 million for the first nine
months of 1999. This was primarily a result of a flattened yield curve and the
decline in production volume, which was partially offset by a $0.8 million
increase in accretion income from $4.8 million for the first nine months of 1999
to $5.6 million for the first nine months of 2000.
Net Gain on Sale and Securitization of Subprime Mortgage Loans
The Company sold subprime mortgage loans for cash on a whole loan basis
during the first nine months of 2000 and 1999. Whole loans are generally sold
without recourse to third parties with the gain or loss being calculated based
on the difference between the carrying value of the
26
<PAGE> 27
loans sold and the gross proceeds received from the purchaser less expenses.
Generally, no interest in these loans is retained by the Company.
A reconciliation of the gain on subprime mortgage whole loan sales for the
periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
---------- -----------
<S> <C> <C>
Gross proceeds on whole loan sales of subprime mortgage loans $506,278 $390,839
Initial acquisition cost of subprime mortgage loans sold, net of fees 489,184 375,457
-------- --------
Unadjusted gain on whole loan sales of subprime mortgage loans 17,094 15,382
Net deferred costs and administrative fees recognized (6,893) (5,215)
-------- --------
Net gain on whole loan sales of subprime mortgage loans $ 10,201 $ 10,167
======== ========
</TABLE>
The net gain on whole loan sales of subprime mortgage loans remained
constant at $10.2 for the first nine months of 1999 and the first nine months of
2000. Also, in accordance with 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" the Company reduced its net
gain on whole loan sales of subprime mortgage loans to $6.9 million in the first
nine months of 2000 as compared to $5.2 million in the first nine months of
1999.
There were no securitization transactions during the first nine months of
2000. A reconciliation of the gain on securitization of subprime mortgage loans
for the nine months ended September 30, 1999 follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
---------- -----------
<S> <C> <C>
Gross proceeds on securitization of subprime mortgage loans N/A $124,242
Initial acquisition cost of subprime mortgage loans securitized, net
of fees N/A 126,043
-------- --------
Unadjusted loss on securitization of subprime mortgage loans N/A (1,801)
Initial capitalization of residual certificates N/A 8,867
Net deferred costs and administrative fees recognized N/A (2,008)
-------- --------
Net gain on securitization of subprime mortgage loans N/A $ 5,058
======== ========
</TABLE>
Mark to Market on Residual Interests in Subprime Securitizations
The Company historically has retained residual certificates in connection
with the securitization of subprime loans. However, during the first nine months
of 2000 the Company executed no securitization transactions of subprime loans
and marked down its residual interests in prior subprime securitizations as a
result of signing a definitive agreement to sell all of the residual interests
remaining on its balance sheet at September 30, 2000. Following is a summary
27
<PAGE> 28
of key information relevant to the subprime residual assets for the nine months
ended September 30, 2000 and 1999, respectively:
28
<PAGE> 29
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000:
<TABLE>
<CAPTION>
SECURITIZATIONS
----------------------------------------------
($ IN THOUSANDS) 1997-1 1997-2 1998-1 1998-2
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31,1999 $ 5,971 $ 7,153 $ 10,334 $ 12,460
Initial Capitalization of Residual Certificates - - - -
Accretion 737 850 1,111 1,275
Mark-to-Market (4,159) (5,132) (6,996) (8,072)
Cash Flow (206) (511) (1,205) -
Prepayment Penalty Reclassed from MSR - - - -
---------- ---------- ---------- ----------
Balance at September 30, 2000 $ 2,343 $ 2,360 $ 3,244 $ 5,663
---------- ---------- ---------- ----------
SECURITIZATIONS
----------------------
($ IN THOUSANDS) 1999-1 1999-2 OTHER TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31,1999 $ 9,566 $ 8,898 $ - $ 54,382
Initial Capitalization of Residual Certificates - - - -
Accretion 930 731 - 5,634
Mark-to-Market (7,012) (8,166) - (39,537)*
Cash Flow - - - (1,922)
Prepayment Penalty Reclassed from MSR 856 971 - 1,827
---------- ---------- ---------- ----------
Balance at September 30, 2000 $ 4,340 $ 2,434 $ - $ 20,384
---------- ---------- ---------- ----------
</TABLE>
* In 1999 the Company decided to conservatively write off the remaining
portion of a residual certificate it received in 1997 in settlement of an
account receivable. In the first quarter of 2000 the Company disposed of
this residual certificate and recovered approximately $0.2 million, which
had been previously reported as a mark-to-market loss. Thus the Company
reported a total market-to-market loss for the first nine months of 2000 of
$39.3 million net of this $0.2 recovery.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999:
<TABLE>
<CAPTION>
SECURITIZATIONS
----------------------------------------------
($ IN THOUSANDS) 1997-1 1997-2 1998-1 1998-2
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31,1998 $ 7,997 $ 9,702 $ 10,815 $ 12,569
Initial Capitalization of Residual Certificates - - - -
Accretion 867 941 978 1,123
Mark-to-Market (957) (216) (480) 34
Cash Flow (1,478) (2,106) - -
---------- ---------- ---------- ----------
Balance at September 30, 1999 $ 6,429 $ 8,321 $ 11,313 $ 13,726
---------- ---------- ---------- ----------
SECURITIZATIONS
------------------------
($ IN THOUSANDS) 1999-1 1999-2 OTHER * TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31,1998 $ - $ - $ 4,700 $ 45,783
Initial Capitalization of Residual Certificates 8,867 - 8,867
Accretion 291 - 554 4,754
Mark-to-Market 1,027 - (4,304) (4,896)
Cash Flow - - - (3,584)
---------- ---------- ---------- ----------
Balance at September 30, 1999 $ 10,185 $ - $ 950 $ 50,924
---------- ---------- ---------- ----------
</TABLE>
* Represents a portion of a residual certificate the Company received in 1997
in settlement of an account receivable. In the fourth quarter of 1999 the
Company decided to conservatively write off this residual.
29
<PAGE> 30
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage servicing operations:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
----------- ------------
<S> <C> <C>
Net interest expense $ (3,661) $ (3,287)
Loan servicing fees 26,241 31,993
Other income 365 495
---------- ----------
Servicing revenues 22,945 29,201
Salary and employee benefits 2,057 2,609
Occupancy expense 146 317
Amortization and provision for impairment of mortgage
Servicing rights 18,278 22,985
General and administrative expenses 3,168 4,542
---------- ----------
Total loan servicing expenses 23,649 30,453
---------- ----------
Net pre-tax servicing margin (704) (1,252)
Gain on sale of mortgage servicing rights 2,212 6,317
---------- ----------
Net pre-tax servicing contribution $ 1,508 $ 5,065
========== ==========
Average servicing portfolio $7,964,645 $9,598,947
Servicing sold $3,928,087 $7,848,456
Net pre-tax servicing margin to average servicing portfolio (1)bps (2)bps
Gain on sale of servicing to servicing sold 6 bps 8 bps
</TABLE>
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio increased 1 basis points primarily due to the $4.7 million reduction
in amortization and provision for impairment of mortgage servicing rights from
the first nine months of 1999 to the first nine months of 2000. This reduction
in amortization and provision for impairment of mortgage servicing rights is
primarily due to the generally smaller size of the portfolio and slowing
prepayments due to higher interest rates. The $4.1 million decline in gain on
sale of mortgage servicing rights is primarily due to the lower production
volumes that resulted in a lower balance of agency-eligible servicing rights
sold. Loan servicing fees were $26.2 million for the first nine months of 2000,
compared to $32.0 million for the first nine months of 1999, a decrease of 18%,
primarily due to lower production volumes which resulted in a lower average
balance of agency-eligible servicing rights held in inventory pending sale.
Management regularly 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.
30
<PAGE> 31
Net Interest Expense
The net interest expense for the first nine months of 2000 and the first
nine months of 1999 is composed of benefits from escrow accounts of $6.1 million
and $6.3 million, respectively, that is offset by $9.8 million and $9.6 million,
respectively, in interest expense.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
----------- ------------
<S> <C> <C>
Underlying unpaid principal balances of agency-eligible mortgage
loans on which servicing rights were sold during the period $3,928,087 $7,848,456
========== ==========
Gross proceeds from sales of mortgage servicing rights $ 110,321 $ 210,110
Initial acquisition basis, net of amortization and hedge results 92,364 154,356
---------- ----------
Unadjusted gain on sale of mortgage servicing rights 17,957 55,754
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 125) 15,745 (49,437)
---------- ----------
Gain on sale of mortgage servicing rights $ 2,212 $ 6,317
========== ==========
</TABLE>
Gain on sale of mortgage servicing rights decreased $4.1 million from $6.3
million for the first nine months of 1999 to $2.2 million for the first nine
months of 2000. The decrease in the gain on sale of mortgage servicing rights is
primarily attributable to lower production volumes which resulted in a lower
balance of agency-eligible servicing rights sold.
COMMERCIAL MORTGAGE OPERATIONS
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of Laureate to BB&T Corporation of
Winston-Salem, N.C. Accordingly, the Company recorded a $1.6 million after-tax
charge during the period primarily related to the write-off of intangible assets
of Laureate.
LEASING OPERATIONS
Following is a summary of the revenues and expenses of the Company's
small-ticket equipment leasing operations for the periods indicated:
31
<PAGE> 32
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
----------- ------------
<S> <C> <C>
Net interest income $ 6,763 $ 5,299
Other income 859 958
-------- --------
Leasing production revenue 7,622 6,257
-------- --------
Salary and employee benefits 2,107 2,028
Occupancy expense 373 330
Provision expense 2,208 1,304
General and administrative expenses 948 932
-------- --------
Total lease operating expenses 5,636 4,594
-------- --------
Net pre-tax leasing production margin 1,986 1,663
Servicing fees 368 500
-------- --------
Net pre-tax leasing margin $ 2,354 $ 2,163
-------- --------
Average owned leasing portfolio $167,278 $118,322
Average serviced leasing portfolio 9,348 27,570
-------- --------
Average managed leasing portfolio $176,626 $145,892
======== ========
Leasing production revenue to average owned portfolio 608 bps 705 bps
Leasing operating expenses to average owned portfolio 449 bps 518 bps
-------- --------
Net pre-tax leasing production margin 159 bps 187 bps
======== ========
Servicing fees to average serviced leasing portfolio 525 bps 242 bps
======== ========
</TABLE>
The 22% increase in leasing production revenue for the first nine months of
2000 as compared to the first nine months of 1999 is primarily due to the 41%
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
decreased 28 bps in the first nine months of 2000 as compared to the first nine
months of 1999 primarily as a result of the increased provision expenses
associated with higher delinquencies as the small business sectors are beginning
to exhibit signs of stress. 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.
Net Interest Income
Net interest income for the first nine months of 2000 was $6.8 million as
compared to $5.3 million for the first nine months of 1999. This is equivalent
to an annualized net interest margin of 3.86% and 2.96% for the first nine
months of 2000 and 1999, respectively, based upon average lease receivables
owned of $167.3 million and $118.3 million, respectively, and average debt
outstanding of $142.3 and $82.4 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
32
<PAGE> 33
employee benefits of corporate personnel; 3) depreciation on the corporate
headquarters; and 4) income taxes. The segmented income statement for the first
nine months of 1999 has been restated to conform with the segmented income
statement presentation for the first nine months of 2000.
UNUSUAL ITEMS
During the fourth quarter of 1999, the Company initiated a workforce
reduction. The workforce reduction became necessary as the Company adapted to a
smaller overall residential mortgage market and intensely competitive pricing
conditions. During the nine month period ended September 30, 2000, the Company
began reconsidering it's current positioning in the market and its corporate,
management and leadership structures. As a result, the Company continued its
efforts during the current period to reorganize around primary business
processes (production/sales, customer fulfillment, servicing and portfolio
management) and has thus made certain changes in organization at its
agency-eligible and subprime units. These changes resulted in a net increase in
the previously established reorganization reserves of $2.5 million during the
nine month period ending September 30, 2000. In connection with the planned
reorganization, the Company is making certain changes in its senior management
team and has closed certain regional processing offices.
Also, during the first nine months of 2000, the Company (1) redesignated a
lease of a former operations center as a nonoperating lease, (2) marked down its
residual interests in prior subprime securitizations as a result of changes in
valuation assumptions due to changing market conditions, (3) marked down its
residual interests in prior securitizations, and the associated residual hedges
(including hedge amortization expense) as a result of signing a definitive
agreement to sell all of the Company's residuals. (3) disposed of its commercial
mortgage operation, Laureate Capital Corp., (4) amended its defined benefit
pension plan to freeze benefits under the plan, (5) changed the benefits
available to employees under its 401(k) plan, (6) realized a gain on sale of a
branch facility, (5) contributed to a fund that will benefit qualified
charitable organizations, (6) incurred expenses for consultants who are
assisting management in re-engineering work processes, (7) restructured and
closed certain regional processing offices and (8) made changes in the Company's
senior management team.
33
<PAGE> 34
The net impact of these unusual items in the first nine months of 2000 is
summarized below by financial statement component and operating division:
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
---------------------
COMMERCIAL
PRODUCTION SERVICING SUBPRIME MORTGAGE LEASING OTHER TOTAL
---------- --------- ---------- ------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark-to market on
residual interest in
subprime securitizations $ 39,338 $ 39,338
Residual hedge
mark-to-market and
amortization 1,077 1,077
Salary and employee
benefits $ 307 $(45) 1,454 $(22) $ 234 $ 1,928
Occupancy expense 171
General and
administrative expenses 1,027 796 741 2,735
Other income (392) (392)
------ ---- -------- ------ ---- ----- -------
Net pre-tax effect on
continuing operations 1,505 (45) 42,665 (22) 583 44,686
Estimated allocable
income tax (563) 17 (15,771) 8 (219) (16,528)
------ ---- -------- ------ ---- ----- --------
Net after-tax impact on
continuing operations 942 (28) 26,894 (14) 364 28,158
Loss on sale of
operating assets of
Laureate Capital Corp. $1,607 1,607
Operating loss of
Laureate Capital Corp. 660 660
------ ---- -------- ------ ---- ----- --------
Net after-tax impact $ 942 $(28) $ 26,894 $2,267 $(14) $ 364 $ 30,425
====== ==== ======== ====== ==== ===== ========
</TABLE>
34
<PAGE> 35
RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 2000, COMPARED TO
QUARTER ENDED SEPTEMBER 30, 1999
SUMMARY BY OPERATING DIVISION
Net income (loss) from continuing operations per common share on a
diluted basis for the third quarter of 2000 was ($1.45) as compared to ($0.11)
for the third quarter of 1999. Following is a summary of the revenues and
expenses for each of the Company's operating divisions for the nine months ended
September 30, 2000 and 1999, respectively:
35
<PAGE> 36
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
----------------------------------------
FOR THE QUARTER ENDED SEPTEMBER 30, 2000 (1) (2) COMMERCIAL
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE
-------------------------------------------------------------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net interest income 339 (1,345) (32) 3,233 0
Net gain on sale of mortgage loans 4,438 0 0 4,022 0
Gain on sale of mortgage servicing rights 0 673 0 0 0
Servicing fees 0 8,335 0 0 0
Mark to market on residual interests in subprime
securitizations 0 0 0 (29,892) 0
Other income 102 117 813 (776) 0
------------ ------------ ------------ ------------ ------------
Total revenues 4,879 7,780 781 (23,413) 0
------------ ------------ ------------ ------------ ------------
Salary and employee benefits 7,737 684 (90) 2,785 0
Occupancy expense 2,961 35 0 686 0
Amortization and provision for impairment
of mortgage servicing rights 0 6,069 0 0 0
Provision expense 450 0 0 841 0
General and administrative expenses 3,134 1,148 73 2,166 0
------------ ------------ ------------ ------------ ------------
Total expenses 14,282 7,936 (17) 6,478 0
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (9,403) (156) 798 (29,891) 0
Income tax benefit (expense) 3,472 56 (281) 11,079 0
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations (5,931) (100) 517 (18,812) 0
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $235) 393
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $-0-) 0
------------ ------------ ------------ ------------ ------------
Net income (loss) (5,931) (100) 517 (18,812) 393
------------ ------------ ------------ ------------ ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (1) (2) TOTAL OTHER/
($ IN THOUSANDS) LEASING SEGMENTS ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net interest income 2,343 4,538 (388) 4,150
Net gain on sale of mortgage loans 0 8,460 0 8,460
Gain on sale of mortgage servicing rights 0 673 0 673
Servicing fees 136 8,471 0 8,471
Mark to market on residual interests in subprime
securitizations 0 (29,892) 0 (29,892)
Other income 293 549 (95) 454
------------ ------------ ------------ ------------
Total revenues 2,772 (7,201) (483) (7,684)
------------ ------------ ------------ ------------
Salary and employee benefits 669 11,785 1,647 13,432
Occupancy expense 127 3,809 (176) 3,633
Amortization and provision for impairment
of mortgage servicing rights 0 6,069 0 6,069
Provision expense 687 1,978 0 1,978
General and administrative expenses 326 6,847 511 7,358
------------ ------------ ------------ ------------
Total expenses 1,809 30,488 1,982 32,470
------------ ------------ ------------ ------------
Income (loss) before income taxes 963 (37,689) (2,465) (40,154)
Income tax benefit (expense) (378) 13,948 911 14,859
------------ ------------ ------------ ------------
Income (loss) from continuing operations 585 (23,741) (1,554) (25,295)
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $235) 393 393
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $-0-) 0 0
------------ ------------ ------------ ------------
Net income (loss) 585 (23,348) (1,554) (24,902)
------------ ------------ ------------ ------------
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible. Management believes that these and all other revenues and
expenses have been allocated to the respective divisions on a reasonable
basis.
(2) See discussion of unusual items in Management's Discussion and Analysis.
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
---------------------------------------
FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (1) COMMERCIAL
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME MORTGAGE
-------------------------------------------------------------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net interest income 1,438 (904) 0 4,096 0
Net gain on sale of mortgage loans 8,639 0 0 4,851 0
Gain on sale of mortgage servicing rights 0 1,494 0 0 0
Servicing fees 0 9,458 0 0 0
Mark to market on residual interests in subprime
securitizations 0 0 0 (929) 0
Other income 187 151 577 (254) 0
------------ ------------ ------------ ------------ ------------
Total revenues 10,264 10,199 577 7,764 0
------------ ------------ ------------ ------------ ------------
Salary and employee benefits 9,781 804 21 5,197 0
Occupancy expense 2,942 110 0 610 0
Amortization and provision for impairment
of mortgage servicing rights 0 5,665 0 0 0
Provision expense 1,050 0 82 770 0
General and administrative expenses 2,888 1,201 17 2,075 0
------------ ------------ ------------ ------------ ------------
Total expenses 16,661 7,780 120 8,652 0
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (6,397) 2,419 457 (888) 0
Income tax benefit (expense) 2,570 (901) (161) 483 0
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations (3,827) 1,518 296 (405) 0
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of -0-) 0
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $389) 534
------------ ------------ ------------ ------------ ------------
Net income (loss) (3,827) 1,518 296 (405) 534
------------ ------------ ------------ ------------ ------------
FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (1) TOTAL OTHER/
($ IN THOUSANDS) LEASING SEGMENT ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------- ------------ ------------ ------------ ------------
(UNAUDITED)
Net interest income 1,910 6,540 (150) 6,390
Net gain on sale of mortgage loans 0 13,490 0 13,490
Gain on sale of mortgage servicing rights 0 1,494 0 1,494
Servicing fees 173 9,631 0 9,631
Mark to market on residual interests in subprime
securitizations 0 (929) 0 (929)
Other income 424 1,085 314 1,399
------------ ------------ ------------ ------------
Total revenues 2,507 31,311 164 31,475
------------ ------------ ------------ ------------
Salary and employee benefits 675 16,478 599 17,077
Occupancy expense 116 3,778 (5) 3,773
Amortization and provision for impairment
of mortgage servicing rights 0 5,665 0 5,665
Provision expense 633 2,535 0 2,535
General and administrative expenses 247 6,428 79 6,507
------------ ------------ ------------ ------------
Total expenses 1,671 34,884 673 35,557
------------ ------------ ------------ ------------
Income (loss) before income taxes 836 (3,573) (509) (4,082)
Income tax benefit (expense) (336) 1,655 218 1,873
------------ ------------ ------------ ------------
Income (loss) from continuing operations 500 (1,918) (291) (2,209)
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of -0-) 0 0
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $389) 534 534
------------ ------------ ------------ ------------
Net income (loss) 500 (1,384) (291) (1,675)
------------ ------------ ------------ ------------
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the extent
possible. Management believes that these and all other revenues and
expenses have been allocated to the respective divisions on a reasonable
basis.
36
<PAGE> 37
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage production operations.
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30,
----------------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net interest income $ 339 $ 1,438
Net gain on sale of mortgage loans 4,438 8,639
Other income 102 187
---------- ----------
Total production revenue 4,879 10,264
---------- ----------
Salary and employee benefits 7,737 9,781
Occupancy expense 2,961 2,942
Provision expense 450 1,050
General and administrative expenses 3,134 2,888
---------- ----------
Total production expenses 14,282 16,661
---------- ----------
Net pre-tax production margin $ (9,403) $ (6,397)
---------- ----------
Production $1,537,692 $1,430,832
Pool delivery $1,457,191 $1,568,512
Total production revenue to pool delivery 33 bps 65 bps
Total production expenses to production 93 bps 116 bps
---------- ----------
Net pre-tax production margin (60)bps (51)bps
========== ==========
</TABLE>
Summary
The production revenue to pool delivery ratio decreased 32 basis points for
the third quarter of 2000 as compared to the third quarter of 1999. Net gain on
sale of mortgage loans (30 basis points for the first nine months of 2000 versus
55 basis points for the third quarter of 1999) declined primarily due to
compressed margins attributable to an aggressive competitive pricing
environment. Net interest income decreased from 9 basis points in the third
quarter of 1999 to 2 basis points in the third quarter of 2000 primarily as a
result of a flattened yield curve and, in part, due to higher financing costs
associated with the renewal of its bank line during the third quarter of 2000.
The production expenses to production ratio decreased from the third quarter of
1999 to the third quarter of 2000, in spite of a 7% increase in production
between periods. Total production expenses declined $2.4 million from $16.7
million for the third quarter of 1999 to $14.3 million for the third quarter of
2000. For the quarter ended September 30, 2000, production expenses included a
$1.6 million in unusual charges related to the (1) restructuring of regional
processing offices, (2) certain changes in the Company's senior management team,
(3) compensation expense associated with the repricing of certain options and
(4) expenses for consultants who are assisting management in re-engineering work
process As a consequence of the foregoing, the Company's net agency-eligible
pre-tax production margin declined 9 basis points. Absent the $1.0 million in
unusual charges, the Company's net agency-eligible pre-tax production margin
would have only increased 1 basis points. See further discussion of unusual
items elsewhere in this Management's Discussion and Analysis.
37
<PAGE> 38
<PAGE> 39
Net Interest Income
The following table analyzes net interest income allocated to the
Company's agency-eligible mortgage production activities in terms of rate and
volume variances of the interest spread (the difference between interest rates
earned on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds) for the quarters ended September 30, 2000 and
1999, respectively:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
Variance
Average Volume Average Rate Interest Attributable to
------------------- ----------------- ----------------- --------------------
2000 1999 2000 1999 2000 1999 Variance Rate Volume
-------- -------- ------- ------- ------- -------- --------- -------- ----------
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
INTEREST INCOME
Mortgages Held-for-Sale
and Mortgage-Backed
$397,390 $519,101 8.22% 6.68% Securities $ 8,170 $8,669 $ (499) $1,534 $(2,033)
-------- -------- ----- ----- ------- ------ ------- ------ -------
INTEREST EXPENSE
$268,608 $323,169 5.93% 4.71% Warehouse Line * $ 4,017 $3,837 $ 180 $ 828 $ (648)
121,138 190,378 6.70% 5.48% Gestation Line 2,046 2,632 (586) 371 (957)
124,323 91,624 6.95% 4.27% Servicing Secured Line 2,179 987 1,192 840 352
2,929 20,846 5.96% 5.42% Servicing Receivables
Line 44 285 (241) 4 (245)
11,074 6,555 9.21% 7.57% Other Borrowings 257 125 132 46 86
Facility Fees & Other
Charges 750 695 55 0 55
-------- -------- ----- ----- ------- ------ ------- ------ -------
$528,072 $632,572 6.98% 5.37% Total Interest Expense $ 9,293 $8,561 $ 732 $2,089 $(1,357)
======== ======== ----- ----- ------- ------ ------- ------ -------
Net Interest Income
Before Interdivisional
1.24% 1.31% Allocations $(1,123) $ 108 $(1,231) $ (555) $ (676)
===== ===== ======= ====== =======
Allocation to
Agency-Eligible
Servicing Division 1,345 890
Allocation to Other 242 440
Intercompany Net Interest
Expense Included
In Segment (125) -
------- ------
Net Interest Income $ 339 $1,438
======= ======
</TABLE>
* The interest-rate yield on the warehouse line is net of the benefit of escrow
deposits.
The 7 basis point decrease in the interest-rate spread was primarily as a
result of a flattened yield curve. The Company's mortgages and mortgage-backed
securities are generally sold and replaced within 30 to 35 days. Accordingly,
the Company generally borrows at rates based upon short-term indices, while its
asset yields are primarily based upon long-term mortgage rates.
Net Gain on Sale of Agency-Eligible Mortgage Loans
A reconciliation of gain on sale of agency-eligible mortgage loans for
the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30,
----------------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Gross proceeds on sales of mortgage loans $1,483,913 $1,563,392
Initial unadjusted acquisition cost of mortgage loans sold, net of
hedge results 1,489,203 1,568,228
---------- ----------
Unadjusted gain (loss) on sale of mortgage loans (5,290) (4,836)
Loan origination and correspondent program administrative fees 2,775 3,913
---------- ----------
Unadjusted aggregate margin (2,515) (923)
Acquisition basis allocated to mortgage servicing rights
(SFAS No. 125) 7,802 9,791
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
<S> <C> <C>
Net deferred costs and administrative fees recognized (849) (229)
---------- ----------
Net gain on sale of agency-eligible mortgage loans $ 4,438 $ 8,639
========== ==========
</TABLE>
Net gain on sale of agency-eligible mortgage loans decreased $4.2
million from $8.6 million for the third quarter of 1999 to $4.4 million for the
third quarter of 2000. The decrease is primarily due to compressed margins
attributable to an aggressive competitive pricing environment in the
correspondent channel.
AGENCY-ELIGIBLE REINSURANCE OPERATIONS
The Company has 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 the third quarter of 2000 and 1999, the Company recognized
premium and investment income of approximately $0.8 million and $0.6 million,
respectively, that has been included as other income in the agency-eligible
reinsurance segment.
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
subprime mortgage production operations for the periods indicated:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30,
----------------------------------------
2000 1999
-------- --------
<S> <C> <C>
Net interest income $ 3,233 $ 4,096
Net gain on sale of mortgage loans 4,022 4,851
Mark to market on residual interests in subprime securitizations (29,892) (929)
Other income (776) (254)
---------- --------
Total production revenue (23,413) 7,764
---------- --------
Salary and employee benefits 2,785 5,197
Occupancy expense 686 610
Provision expense 841 770
General and administrative expenses 2,166 2,075
---------- --------
Total production expenses 6,478 8,652
---------- --------
Net pre-tax production margin $(29,891) $ (888)
---------- --------
Production $160,637 $182,287
Whole loan sales and securitizations $182,606 $178,590
Total production revenue to whole loan sales and securitizations (1,282)bps 435 bps
Total production expenses to production 403 bps 475 bps
---------- --------
Net pre-tax production margin (1,685)bps (40)bps
========== ========
</TABLE>
39
<PAGE> 41
Summary
During the third quarter of 2000, the Company executed delivery of all of
its subprime loan production into secondary markets for cash through whole loan
sales. At September 30, 2000, the Company had unsold subprime mortgage loans of
$111.9 million as compared to $145.7 million at September 30, 1999. Overall, the
Company operated during the third quarter of 2000 at a (16.85)% pre-tax subprime
production margin. The $29.0 million (1,645 basis point) decline in the pre-tax
subprime production margin is primarily due to the ($29.9) million adjustment
during the third quarter of 2000 in the mark to market on residual interests in
subprime securitizations and a ($1.1) million adjustment to the residual hedges.
The Company marked down its residual interests in prior subprime securitizations
as a result of signing a definitive agreement to sell all of the Company's
residuals. During the period the Company marked down its residual interests in
subprime securitizations and the associated residual hedges (including hedge
amortization expense) as a result of signing a definitive agreement to sell all
of the Company's residuals. Absent the ($39.3) million mark-to-market adjustment
to residual interests and the ($1.7) million adjustment to the residual hedges,
the margin on sale of subprime loans was 414 bps. Also contributing to the
decline in the pre-tax subprime production margin during the third quarter of
2000 is the $0.8 million decline in net gain on sale of subprime mortgage loans.
This decline is primarily attributable to compressed margins as a result of a
competitive pricing environment.
The production expenses to production ratio decreased 72 bps during the
first quarter of 2000 as compared to the first quarter of 2000. This was
primarily due to reductions in salary and employee benefit costs primarily due
to a 32% reduction in the number of subprime employees from the third quarter of
1999 to the third quarter of 2000. This reduction was partially offset by $0.2
million in unusual charges to salary and employee benefits and $0.8 million in
unusual charges to general and administratives expenses during the third quarter
of 2000 as compared to the same period for 1999 related to (1) restructuring of
regional processing offices, (2) certain changes in the Company's senior
management team, (3) compensation expense associated with the repricing of
certain options and (4) expenses for consultants who are assisting management in
re-engineering work process.
Absent the $32.0 million in unusual charges during the third quarter of
2000, the Company's net agency-eligible pre-tax production margin would have
increased 113 basis point. See further discussion of unusual items elsewhere in
this Management's Discussion and Analysis.
Net Interest Income
The following table analyzes net interest income allocated to the Company's
subprime mortgage production activities in terms of rate and volume variances of
the interest spread (the difference between interest rates earned on loans and
residual certificates and interest rates paid on interest-bearing sources of
funds) for the quarters ended September 30, 2000 and 1999, respectively.
40
<PAGE> 42
<TABLE>
<CAPTION>
($ IN THOUSANDS)
Variance
Average Volume Average Rate Interest Attributable to
------------------- ----------------- ----------------- --------------------
2000 1999 2000 1999 2000 1999 Variance Rate Volume
-------- -------- ------- ------- ------- -------- --------- -------- ----------
<C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
Mortgages Held-for-Sale
and Residual
$185,120 $253,973 11.76% 10.53% Certificates $5,438 $6,684 $(1,246) $569 $(1,815)
-------- -------- ------ ------ ------ ------ ------- ---- -------
$133,789 $188,036 7.21% 5.49% Total Interest Expense $2,430 $2,603 $ (173) $578 $ (751)
4.55% 5.04% Net Interest Income $3,008 $4,081 $(1,073) $ (9) $(1,064)
====== ====== ======= ==== =======
Allocation to
Agency-Eligible - 15
Servicing Division
Intercompany Net Interest
Expense Included
In Segment 225 -
------ ------
Net Interest Income $3,233 $4,096
====== ======
</TABLE>
Net interest income from subprime products decreased to $3.2 million for
the third quarter of 2000 as compared to $4.1 million for the third quarter of
1999. This was primarily a result of a flattened yield curve and the decline in
production volume. Accretion income for the third quarter of 2000 and 1999,
respectively, remained constant at $1.8 million and therefore offered no offset
to the decline in net interest income between quarters.
Net Gain on Sale and Securitization of Subprime Mortgage Loans
The Company sold subprime mortgage loans on a whole loan basis for cash
during the third quarter of 2000 and 1999. Whole loans are generally sold
without recourse to third parties with the gain or loss being calculated based
on the difference between the carrying value of the loans sold and the gross
proceeds received from the purchaser less expenses. Generally, no interest in
these loans is retained by the Company.
A reconciliation of the gain on subprime mortgage whole loan sales for the
periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30,
----------------------------------------
2000 1999
-------- --------
<S> <C> <C>
Gross proceeds on whole loan sales of subprime mortgage loans $189,366 $186,522
Initial acquisition cost of subprime mortgage loans sold, net of fees 182,606 178,590
-------- --------
Unadjusted gain on whole loan sales of subprime mortgage loans 6,760 7,932
Net deferred costs and administrative fees recognized (2,738) (3,081)
-------- --------
Net gain on whole loan sales of subprime mortgage loans $ 4,022 $ 4,851
======== ========
</TABLE>
The net gain on whole loan sales of subprime mortgage loans decreased 17%
from $4.9 million for the third quarter of 1999 to $4.0 million reported for the
third quarter of 2000. Also, in accordance with 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" the Company reduced its net gain on whole loan sales of subprime
mortgage
41
<PAGE> 43
loans by $2.7 million in the third quarter of 2000 as compared to $3.1 million
in the third quarter of 1999.
There were no securitization transactions during the third quarter of 2000
or 1999.
Mark to Market on Residual Interests in Subprime Securitizations
The Company historically has retained residual certificates in
connection with the securitization of subprime loans. However, during the first
nine months of 2000 the Company executed no securitization transactions of
subprime loans and marked down its residual interests in prior subprime
securitizations as a result of signing a definitive agreement to sell 100% of
the residual interests remaining on its balance sheet at September 30, 2000.
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses of the Company's
agency-eligible mortgage servicing operations for the quarters ended September
30, 2000 and 1999:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net interest expense $ (1,345) $ (904)
Loan servicing fees 8,335 9,458
Other income 117 151
---------- ----------
Servicing revenues 7,107 8,705
---------- ----------
Salary and employee benefits 684 804
Occupancy expense 35 110
Amortization and provision for impairment of mortgage
Servicing rights 6,069 5,665
General and administrative expenses 1,148 1,201
---------- ----------
Total loan servicing expenses 7,936 7,780
---------- ----------
Net pre-tax servicing margin (829) 925
Gain on sale of mortgage servicing rights 673 1,494
---------- ----------
Net pre-tax servicing contribution $ (156) $ 2,419
========== ==========
Average servicing portfolio $7,722,359 $8,592,644
Servicing sold $1,348,268 $1,743,730
Net pre-tax servicing margin to average servicing portfolio (4)bps 4 bps
Gain on sale of servicing to servicing sold 5 bps 9 bps
</TABLE>
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio decreased 8 bps between the third quarter of 1999 and the third
quarter of 2000. The 4 basis point decrease in the gain on sale of servicing
sold is primarily attributable to compressed margins in a competitive market
during the third quarter of 2000. Loan servicing fees were $8.3 million for the
third quarter of 2000, compared to $9.5 million for the third quarter of 1999, a
decrease of 12%, primarily related to lower average balance of agency-eligible
servicing rights held in inventory pending sale.
42
<PAGE> 44
Management regularly assesses market prepay trends and adjusts
amortization accordingly. Management believes that the value of the Company's
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.
Net Interest Expense
The net interest expense for the third quarter of 2000 and the third
quarter of 1999 is composed of benefits from escrow accounts of $2.0 million and
$0.5 million, respectively, that is offset by $3.3 million and $1.4 million,
respectively, in interest expense.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Underlying unpaid principal balances of agency-eligible mortgage loans
on which servicing rights were sold during the period $1,348,268 $1,743,730
========== ==========
Gross proceeds from sales of mortgage servicing rights $ 38,084 $ 47,065
Initial acquisition basis, net of amortization and hedge results 31,860 35,415
---------- ----------
Unadjusted gain on sale of mortgage servicing rights 6,224 11,650
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 125) (5,551) (10,156)
---------- ----------
Gain on sale of mortgage servicing rights $ 673 $ 1,494
========== ==========
</TABLE>
Gain on sale of mortgage servicing rights decreased $0.8 million from $1.5
million for the third quarter of 1999 to $0.7 million for the third quarter of
2000. The decrease in the gain on sale of mortgage servicing rights is primarily
attributable to a lower balance of agency-eligible servicing rights sold.
COMMERCIAL MORTGAGE OPERATIONS
On September 29, 2000, the Company closed on an agreement to sell
substantially all of the assets of Laureate to BB&T Corporation of
Winston-Salem, N.C. Accordingly, the Company recorded a $1.6 million after-tax
charge during the period primarily related to the write-off of intangible assets
of Laureate
LEASING OPERATIONS
Following is a summary of the revenues and expenses of the Company's
small-ticket equipment leasing operations for the periods indicated:
43
<PAGE> 45
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE QUARTER ENDED SEPTEMBER 30,
--------------------------------------
2000 1999
-------- --------
<S> <C> <C>
Net interest income $ 2,343 $ 1,910
Other income 293 424
-------- --------
Leasing production revenue 2,636 2,334
-------- --------
Salary and employee benefits 669 675
Occupancy expense 127 116
Provision expense 687 633
General and administrative expenses 326 247
-------- --------
Total lease operating expenses 1,809 1,671
-------- --------
Net pre-tax leasing production margin 827 663
Servicing fees 136 173
-------- --------
Net pre-tax leasing margin $ 963 $ 836
-------- --------
Average owned leasing portfolio $178,199 $132,682
Average serviced leasing portfolio 6,445 21,353
-------- --------
Average managed leasing portfolio $184,644 $154,035
======== ========
Leasing production revenue to average owned portfolio 592 bps 704 bps
Leasing operating expenses to average owned portfolio 406 bps 504 bps
-------- --------
Net pre-tax leasing production margin 186 bps 200 bps
======== ========
Servicing fees to average serviced leasing portfolio 844 bps 324 bps
======== ========
</TABLE>
The 13% increase in leasing production revenue for the third quarter of
2000 as compared to the third quarter of 1999 is primarily due to the 34%
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
decreased 14 bps in the third quarter of 2000 as compared to the third quarter
of 1999 primarily as a result of the increased provision expenses associated
with higher delinquencies as the small business sectors are beginning to exhibit
signs of stress. 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.
44
<PAGE> 46
Net Interest Income
Net interest income for the third quarter of 2000 was $2.3 million as
compared to $1.9 million for the third quarter of 1999. This is equivalent to an
annualized net interest margin of 3.75% and 2.14% for the third quarter of 2000
and 1999, respectively, based upon average lease receivables owned of $178.1
million and $132.7 million, respectively, and average debt outstanding of $152.6
and $84.1 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 segmented income statement for the second quarter of 1999 has
been restated to conform with the segmented income statement presentation for
the second quarter of 2000.
UNUSUAL ITEMS
During the fourth quarter of 1999, the Company initiated 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. During the third quarter ended September 30, 2000, the
Company continued to reconsider it's current positioning in the market and its
corporate, management and leadership structures. As a result, the Company
continued its efforts during the current period to reorganize around primary
business processes (production/sales, customer fulfillment, servicing and
portfolio management) and has thus made certain changes in organization at its
agency-eligible and subprime units. These changes resulted in a net increase in
the previously established reorganization reserves of $1.8 during the period. In
connection with the planned reorganization, the Company is making certain
changes in its senior management team and has closed regional processing
offices.
During the third quarter of 2000, the Company (1) disposed of its
commercial mortgage operation, Laureate Capital Corp., (3) marked down its
residual interests in prior securitizations, and the associated residual hedges
(including hedge amortization expense) as a result of signing a definitive
agreement to sell all of the Company's residuals. (3) incurred expenses for
consultants who are assisting management in re-engineering work processes, (4)
restructured and closed certain regional processing offices and (5) made changes
in the Company's senior management team.
The net impact of these unusual items in the third quarter of 2000 is
summarized below by financial statement component and operating division:
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
---------------------
COMMERCIAL
PRODUCTION SERVICING SUBPRIME MORTGAGE LEASING OTHER TOTAL
---------- --------- ---------- ------------ ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark-to market on
residual interest in
subprime securitizations $ 29,892 $ 29,892
Residual hedge
mark-to-market and
amortization 1,077 1,077
</TABLE>
45
<PAGE> 47
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C> <C> <C>
Salary and employee
benefits $ 551 203 $ 213 967
General and
administrative expenses 1,027 796 289 2,112
Other income
------ --------- -------- ----- ----------- ----- --------
Net pre-tax effect on
continuing operations 1,578 31,968 502 34,048
Estimated allocable
income tax (592) (11,833) (188) (12,613)
------ --------- -------- ----- ----------- ----- --------
Net after-tax impact on
continuing operations 986 20,135 314 21,435
Loss on sale of
operating assets of
Laureate Capital Corp. $(393) (393)
Operating profits of
Laureate Capital Corp.
------ --------- -------- ----- ----------- ----- --------
Net after-tax impact $ 986 $ 20,135 $ (393) $ 314 $ 21,042
====== ========= ======== ===== =========== ===== ========
</TABLE>
46
<PAGE> 48
FINANCIAL CONDITION
During the third quarter of 2000, the Company experienced a 9% decrease in
the volume of production originated and acquired compared to the second quarter
of 2000. Production decreased from $1.9 billion during the second quarter of
2000 to $1.7 billion during the third quarter of 2000. The September 30, 2000,
locked residential mortgage application pipeline (mortgage loans not yet closed
but for which the interest rate has been locked) was approximately $0.5 billion
and the application pipeline (mortgage loans for which the interest rate has not
yet been locked) was approximately $0.4 billion. This compares to a locked
mortgage application pipeline of $0.6 billion and a $0.5 billion application
pipeline at June 30, 2000.
Mortgage loans held-for-sale and mortgage-backed securities totaled $0.52
billion at September 30, 2000, versus $0.48 billion at December 31, 1999, an
increase of 8%. The Company's servicing portfolio (exclusive of loans under
subservicing agreements) decreased to $7.4 billion at September 30, 2000, from
$7.8 billion at December 31, 1999, a decrease of 6%.
Short-term borrowings, which are the Company's primary source of funds,
totaled $0.8 billion at September 30, 2000, compared to $0.7 billion at December
31, 1999, an increase of 7%. At September 30, 2000, there were $6.18 million in
long-term borrowings, compared to $6.26 million at December 31, 1999. Other
liabilities totaled $78.9 million as of September 30, 2000, compared to the
December 31, 1999 balance of $84.8 million, a decrease of $5.9 million, or 7%.
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 July 2000,
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 $325 million warehouse line of credit
provided by a syndicate of unaffiliated banks that expires in July 2001. The
credit agreement includes covenants requiring the Restricted Group to maintain
(i) a minimum net worth of $150 million, plus the Restricted Group's net income
subsequent to June 30, 2000, 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
47
<PAGE> 49
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 1.25 to 1.00 for any period of two
consecutive fiscal quarters. (the interest rate coverage ratio). The Company is
required to maintain $10 million of liquidity pursuant to the agreement. 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 July 2000, the Company and the Restricted Group also entered into a $65
million subprime revolving credit facility and a $200 million servicing
revolving credit facility, which expire in July 2001. 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
September 30, 2000. 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 Company, Inc. is entitled from time to time to deliver eligible
subprime mortgage loans in an aggregate principal amount of up to $150 million
to the bank. The master repurchase agreement has been extended through November
30, 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 2001. 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 February 2001 and contains various
covenants regarding characteristics of the collateral and the performance of the
leases originated and serviced by Republic Leasing. The warehouse credit
agreement also requires the Company to maintain a minimum net worth of $60
million and
48
<PAGE> 50
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 September 30, 2000, the Company had remaining
authority to repurchase up to $2.0 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. Shares repurchased are maintained in
the Company's treasury account and are not retired. At September 30, 2000, there
were 6,434,558 shares held in the Company's treasury account at an average cost
of $7.29 per share.
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 all fiscal years beginning after June 15, 2000
(January 1, 2001 for the Company). However, early adoption is permitted. The
FASB has a Derivatives Implementation Group ("DIG") that is assisting various
industry groups in interpreting SFAS No. 133. The DIG has numerous open issues
relating to the mortgage banking industry. As a result, the Company has not yet
determined the impact that the adoption of SFAS 133 will have on its earnings or
statement of 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 nine months ended September 30,
2000 and 1999, the Company generated approximately $14.2 million and $65.9
million, respectively, of positive funds from continuing operations.
49
<PAGE> 51
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDING SEPTEMBER 30,
----------------------------------------
2000 1999
-------- --------
<S> <C> <C>
Agency-eligible production $(16,151) $30,659
Agency-eligible servicing 17,673 22,161
Subprime production 7,849 9,389
Leasing 4,810 3,698
-------- -------
$ 14,181 $65,907
======== =======
</TABLE>
Each of the Company's divisions produced positive operating funds during
both periods except for agency-eligible production in the first nine months of
2000. The combined positive operating funds were invested to reduce
indebtedness, pay dividends, repurchase stock and purchase fixed assets.
AGENCY-ELIGIBLE PRODUCTION
Generally, the Company purchases agency-eligible mortgage loans which are
resold with the rights to service the loans being retained by the Company. The
Company then separately sells a large percentage of the servicing rights so
produced. When the loans are sold, current accounting principles require that
the Company capitalize the estimated fair value of the retained mortgage
servicing rights sold and subsequently amortize the servicing rights retained to
expense. Accordingly, amounts reported as gains on sale of agency-eligible
mortgage loans may not represent positive funds flow to the extent that the
associated servicing rights are not sold for cash but are instead retained and
capitalized. In this context, the table below reconciles the major elements of
pre-tax operating funds flow of the Company's agency-eligible production
activities.
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999
-------- --------
<S> <C> <C>
Income (loss) before income taxes $(21,276) $ 11,087
Deduct:
Net gain on sale of mortgage loans, as reported (16,255) (58,717)
Add back:
Cash gains on sale of mortgage loans (2,654) 14,424
Cash gains on sale of mortgage servicing rights 17,957 55,754
Depreciation 4,375 3,389
Provision expense 1,702 4,722
-------- --------
$(16,151) $ 30,659
======== ========
</TABLE>
50
<PAGE> 52
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 NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999
-------- --------
<S> <C> <C>
Income before income taxes $ 1,508 $ 5,065
Deduct:
Net gain on sale of mortgage servicing rights, as reported (2,212) (6,317)
Add back:
Amortization and provision for impairment of
Mortgage servicing rights 18,278 22,985
Depreciation 99 428
------- -------
$17,673 $22,161
======= =======
</TABLE>
SUBPRIME PRODUCTION
Generally, the Company purchases subprime loans through a wholesale broker
network. The Company then separately sells or securitizes the loans so produced.
Existing accounting principles require that at the time loans are securitized,
the Company capitalize the estimated fair value of future cash flows to be
received in connection with retention by the Company of a residual interest in
the securitized loans. Accordingly, amounts reported as gains on sale of
subprime mortgage loans may not represent cash gains to the extent that
associated residual interests are retained and capitalized. In this context, the
table below reconciles the major elements of pre-tax operating funds flow of the
Company's subprime mortgage production activities.
51
<PAGE> 53
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999
-------- --------
<S> <C> <C>
Income (loss) before income taxes $(37,667) $ 2,886
Deduct:
Net gain on sale of subprime loans, as reported (10,201) (15,225)
Accretion income on residuals (5,634) (4,754)
Add back:
Cash gains on sale of whole subprime loans 17,094 15,382
Cash received from investments in residual certificates 1,922 3,584
Depreciation and amortization
of goodwill and intangibles 1,246 918
Provision expense 1,751 1,702
Mark to market on residuals 39,338 4,896
------- --------
$ 7,849 $ 9,389
======= ========
</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 NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999
------ ------
<S> <C> <C>
Income before income taxes $2,354 $2,163
Add back:
Depreciation and amortization of goodwill and intangibles 248 231
Provision expense 2,208 1,304
------ ------
$4,810 $3,698
====== ======
</TABLE>
52
<PAGE> 54
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk. The
Company manages this risk by striving to balance its loan origination and loan
servicing business segments, which are countercyclical in nature. In addition,
the Company utilizes various financial instruments, including derivatives
contracts, to manage the interest rate risk related specifically to its
committed pipeline, mortgage loan inventory, mortgage backed securities held
for sale, servicing rights, leases and residual interests retained in
securitizations. The overall objective of the Company's interest rate risk
management policies is to mitigate potentially significant adverse effects
that changes in the values of these items resulting from changes in interest
rates might have on the Company's consolidated balance sheet. The Company does
not speculate on the direction of interest rates in its management of interest
rate risk.
For purposes of disclosure in the 1999 Annual Report on Form 10-K, the
Company performed various sensitivity analyses that quantify the net financial
impact of hypothetical changes in interest rates on its interest
rate-sensitive assets, liabilities and commitments. These analyses presume an
instantaneous parallel shift of the yield curve. Various techniques are
employed to value the underlying financial instruments which rely upon a
number of critical assumptions. Actual experience may differ materially from
the estimated. 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. The Company has
procedures in place that monitor whether material changes in market risk are
likely to have occurred since December 31, 1999. The Company does not believe
that there have been any material changes in market risk from those reported
in the 1999 Annual Report on Form 10-K.
53
<PAGE> 55
PART II. OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- (A) A LIST OF EXHIBITS FILED WITH THIS FORM 10-Q, ALONG WITH THE
EXHIBIT INDEX CAN BE FOUND ON PAGES A TO F FOLLOWING THE
SIGNATURE PAGE.
- (B) NO REPORTS ON FORM 8-K WERE FILED DURING THE THIRD QUARTER OF
2000.
54
<PAGE> 56
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
----------------------------------------
(Registrant)
/s/ Steven F. Herbert
----------------------------------------
Corporate Senior Executive Vice President and
Corporate Chief Financial Officer
(signing in the capacity of (i) duly
authorized officer of the registrant and
(ii) principal financial officer of the
registrant)
DATED: November 13, 2000
55
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INDEX TO EXHIBITS
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EXHIBIT NO. DESCRIPTION PAGE
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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 dated as of December 7, 1999 _____
4.1 Specimen Certificate of Registrant's Common Stock incorporated by *
reference to Exhibit 4.1 of the Registrant's Registration No. 33-53980
4.2 Rights Plan dated as of February 6, 1998 between the Registrant and First Chicago Trust *
Company of New York incorporated by reference to Exhibit 4.1 of the Registrant's
Form 8-A filed on February 8, 1998
4.3 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
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
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EXHIBIT NO. DESCRIPTION PAGE
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10.5 (A) 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
(B) Change of Control Agreement by and between Resource Bancshares _____
Mortgage Group, Inc. and Steven F. Herbert, dated as of July 27,
2000.
10.6 (A) Employment Agreement dated April 3, 2000, between Resource Bancshares Mortgage *
Group, Inc. and Harold Lewis, Jr. incorporated by reference to Exhibit 10.6 (A) of the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000
(B) Change of Control Agreement dated May 3, 2000, by and between Resource Bancshares *
Mortgage Group, Inc. and Harold Lewis, Jr.. incorporated by reference to Exhibit 10.6 (B)
of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000
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
10.16 (A)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
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EXHIBIT NO. DESCRIPTION PAGE
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(B)Amendment Four to Pension Plan effective May 31, 2000 incorporated by *
reference to Exhibit 10.16 (B) of the Registrant's Quarterly Report on
Form 10-Q for the period ended June 30, 2000
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 (A) 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
(B) Second Amendment to Resource Bancshares Mortgage Group, Inc. *
Supplemental Executive Retirement Plan dated May 31, 2000
incorporated by reference to Exhibit 10.19 (B) of the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 2000
10.20 (A) 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
(B)Resolution of Board of Directors freezing additional accruals under *
the Pension Restoration Plan effective May 31, 2000 incorporated by
reference to Exhibit 10.20 (B) of the Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 2000
10.21 Stock Investment Plan incorporated by reference to Exhibit 4.1 of the Registrant's *
Registration No. 33-87536
10.22 (A) 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
(B) 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
(C) Amendment III to Stock Investment Plan dated February 2, 2000 *
incorporated by reference to Exhibit 10.22 (C) of the Registrants
Quarterly Report on Form 10-Q for the period ended March 31, 2000
10.23 (A) Change of Control Agreement by and between Resource Bancshares *
Mortgage Group, Inc. and Douglas K. Freeman, dated as of January 10, 2000
incorporated by reference to Exhibit 10.23 (A) of the Registrants Quarterly Report
on Form 10-Q for the period ended March 31, 2000.
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EXHIBIT NO. DESCRIPTION PAGE
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(B) Employment Agreement between Resource Bancshares Mortgage Group, Inc. *
and Douglas K. Freeman dated as of January 10, 2000 incorporated by
reference to Exhibit 10.23 (C) of the Registrants Quarterly Report on
Form 10-Q for the period ended March 31, 2000
10.24 Employee Stock Ownership Plan incorporated by reference to Exhibit 10.29 *
of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994
10.25 First Amendment to Employee Stock Ownership Plan dated October 31, 1995 *
incorporated by reference to Exhibit 10.41 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
10.26 Second Amendment to Employee Stock Ownership Plan dated August 12, 1996 *
incorporated by reference to Exhibit 10.45 of the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 1996
10.27 Amended Resource Bancshares Mortgage Group, Inc. Successor Employee Stock *
Ownership Trust Agreement dated December 1, 1994, between the Registrant and
Marine Midland Bank incorporated by reference to Exhibit 10.30 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994
10.28 ESOP Loan and Security Agreement dated January 12, 1995, between the Registrant *
and The Resource Bancshares Mortgage Group, Inc. Employee Stock Ownership Trust
incorporated by reference to Exhibit 10.31 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994
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 incorporated by
reference to Exhibit 10.30(B) of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1999
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 (A) 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
(B) 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
(C) 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
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(D) Third Amendment to Resource Bancshares Mortgage Group, Inc. Formula Stock Option Plan _____
10.33 Form of Indemnity Agreement by and between Resource Mortgage Bancshares Group, Inc. and _____
Directors and/or Officers of the Corporation.
10.34 Resource Bancshares Mortgage Group, Inc. Outside Directors' Stock Option Plan effective as of _____
July 27, 2000.
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 (A)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
(B)Form of Incentive Stock Option Agreement (Omnibus Stock Award Plan) effective *
June 2000 (officer vesting provisions) incorporated by reference to Exhibit 10.38 (B)
of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000
(C)Form of Incentive Stock Option Agreement (Omnibus Stock Award Plan) effective *
June 2000 ($16 vesting provisions) incorporated by reference to Exhibit 10.38 (C)
of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000
10.39 Resource Bancshares Mortgage Group, Inc. Non-Qualified Stock Option Plan *
dated September 1, 1996 incorporated by reference to Exhibit 10.33 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996
10.40 Form of Non-Qualified Stock Option Agreement (Non-Qualified Stock *
Option Plan), incorporated by reference to Exhibit 10.41 of the
Registrant's Quarterly Report on Form 10-Q for the period ended March
31, 1997
10.41 First Amendment to Resource Bancshares Mortgage Group, Inc. *
Non-Qualified Stock Option Plan dated January 29, 1997 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
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EXHIBIT NO. DESCRIPTION PAGE
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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 (A) 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
(B) Third Amendment to Amended and Restated Retirement Savings Plan dated *
May 31, 2000 incorporated by reference to Exhibit 10.47 (B) of the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 2000
10.48 (A) Agreement of Merger dated April 18, 1997 between Resource Bancshares *
Mortgage Group, Inc., RBC Merger Sub, Inc. and Resource Bancshares Corporation
incorporated by reference to Annex A of the Registrant's Registration No.333-29245
(B) First Amendment to Agreement of Merger dated April 18, 1997 between *
Resource Bancshares Mortgage Group, Inc., RBC Merger Sub, Inc. and
Resource Bancshares Corporation incorporated by reference to Exhibit
10.42 of the Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 1997
(C) Second Amendment to Agreement of Merger dated April 18, 1997 *
between Resource Bancshares Mortgage Group, Inc., RBC Merger Sub,
Inc. and Resource Bancshares Corporation incorporated by reference to
Annex A of the Registrant's Registration No.
333-29245
10.49 (A) Mutual Release and Settlement Agreement between the Registrant, Lee E. Shelton *
and Constance P. Shelton dated January 31, 1997 incorporated by reference to Exhibit
10.44 of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997
(B) Amendment to Mutual Release and Settlement Agreement between *
Registrant, Lee E. Shelton and Constance P. Shelton dated January 31,
1997 incorporated by reference to Exhibit 10.44 of the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1997
10.50 Preferred Provider Organization Plan for Retired Executives incorporated by reference to *
Exhibit 10.43 of the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1998
10.51 Resource Bancshares Mortgage Group, Inc. Flexible Benefits Plan Amended *
and Restated as of January 1, 1998 incorporated by reference to Exhibit 10.51 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1998
</TABLE>
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EXHIBIT NO. DESCRIPTION PAGE
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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 Voluntary Employees' Beneficiary Association Trust for the Employees of *
of Resource Bancshares Mortgage Group, Inc. incorporated by reference to Exhibit 10.53
of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999
10.54 Voluntary Employees' Beneficiary Association Plan for the Employees *
of Resource Bancshares Mortgage Group, Inc. incorporated by reference to Exhibit
10.54 of the Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 2000
10.55 MSC Stock Option Agreement between Resource Bancshares Mortgage Group, *
Inc. and Boyd M. Guttery dated February 2, 2000 incorporated by
reference to Exhibit 10.55 of the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 2000
10.56 MSC Stock Option Agreement between Resource Bancshares Mortgage Group, Inc. and *
Stuart M. Cable dated February 2, 2000 incorporated by reference to Exhibit 10.56
of the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000
10.57 Director Deferred Compensation Plan dated June 2000 incorporated by *
reference to Exhibit 10.57 of the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 2000
10.58 Outside Director Life Insurance Plan dated June 2000 incorporated by *
reference to Exhibit 10.58 of the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 2000
11.1 Statement re: Computation of Net Income per Common Share _____
27.1 Financial Data Schedule _____
</TABLE>
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* Incorporated by reference
G
