<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended June 30, 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)
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 Offices) (Zip Code)
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 July
31, 2000 was 18,090,177.
Page 1
Exhibit Index on Pages A to G
<PAGE> 2
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Form 10-Q for the quarter ended June 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 Sheet 3
Condensed Consolidated Statement of Income 4
Condensed Consolidated Statement of Changes in Stockholders' Equity 5
Condensed Consolidated Statement of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 50
PART II. OTHER INFORMATION 52
ITEM 4. Submission of Matters to a Vote of Security Holders 52
ITEM 6. Exhibits and Reports on Form 8-K 52
SIGNATURES 53
EXHIBIT INDEX A-G
</TABLE>
2
<PAGE> 3
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 22,073 $ 30,478
Receivable from sale of mortgage-backed securities 69,943 --
Receivables 29,212 40,219
Trading securities:
Residual interests in subprime securitizations 48,878 54,382
Mortgage loans held for sale 573,338 480,504
Lease receivables 177,410 155,559
Servicing rights, net 164,979 177,563
Premises and equipment, net 33,826 36,294
Accrued interest receivable 2,305 1,691
Goodwill and other intangibles 12,743 15,478
Other assets 32,332 35,014
----------- -----------
Total assets $ 1,167,039 $ 1,027,182
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 869,133 $ 709,803
Long-term borrowings 6,203 6,259
Accrued expenses 10,006 13,826
Other liabilities 91,633 84,822
----------- -----------
Total liabilities 976,975 814,710
=========== ===========
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 June 30, 2000
and December 31, 1999 316 316
Additional paid-in capital 298,601 300,909
Retained earnings 38,225 56,506
Common stock held by subsidiary at cost - 7,767,099 shares at
June 30, 2000 and December 31, 1999 (98,953) (98,953)
Treasury stock - 5,641,804 and 4,686,391 shares at June 30, 2000
and December 31, 1999, respectively (42,878) (41,148)
Unearned shares of employee stock ownership plan - 469,404 and 537,084
shares at June 30, 2000 and December 31, 1999, respectively (5,247) (5,158)
----------- -----------
Total stockholders' equity 190,064 212,472
=========== ===========
Total liabilities and stockholders' equity $ 1,167,039 $ 1,027,182
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 4
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONDENSED CONSOLIDATED INCOME STATEMENT
($ IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended For the Quarter Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Interest income $ 34,289 $ 47,533 $ 18,995 $ 21,959
Interest expense (25,012) (32,850) (13,834) (14,656)
------------ ------------ ------------ ------------
Net interest income 9,277 14,683 5,161 7,303
Net gain on sale of mortgage loans 17,996 60,452 9,349 24,402
Gain on sale of mortgage servicing rights 1,539 4,823 731 1,825
Servicing fees 17,880 22,862 8,565 10,839
Mark-to-market on residual interests in subprime
securitizations (9,446) (3,967) (1,771) (2,618)
Other income 4,374 3,753 2,318 2,286
------------ ------------ ------------ ------------
Total revenues 41,620 102,606 24,353 44,037
------------ ------------ ------------ ------------
EXPENSES
Salary and employee benefits 24,870 33,963 10,117 15,204
Occupancy expense 6,836 6,097 3,516 3,187
Amortization and provision for impairment of mortgage
servicing rights 12,209 17,320 5,932 8,887
Provision expense 3,683 5,396 1,682 2,341
General and administrative expenses 12,094 16,854 6,645 9,376
------------ ------------ ------------ ------------
Total expenses 59,692 79,630 27,892 38,995
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income taxes (18,072) 22,976 (3,539) 5,042
Income tax benefit (expense) 6,530 (8,269) 1,199 (1,853)
------------ ------------ ------------ ------------
Income (loss) from continuing operations (11,542) 14,707 (2,340) 3,189
Discontinued operations:
Loss on sale of operating assets of Laureate Capital Corp.
(less applicable income taxes of $200) (2,000) (2,000)
Operating profits (losses) of Laureate Capital Corp. for the
six months ended June 30, 2000 and 1999 and for the
quarter ended June 30, 2000 and 1999, respectively
(less applicable income tax expense (benefit) of $(354), $(91),
$111 and $128, respectively) (660) (210) 105 147
------------ ------------ ------------ ------------
Net income (loss) $ (14,202) $ 14,497 $ (4,235) $ 3,336
------------ ------------ ------------ ------------
Weighted average common shares outstanding -- Basic 18,337,723 21,587,836 18,017,764 20,958,060
------------ ------------ ------------ ------------
Net income (loss) per common share from continuing operations
-- Basic $ (0.63) $ 0.68 $ (0.13) $ 0.15
------------ ------------ ------------ ------------
Net income (loss) per common share from discontinued operations
-- Basic $ (0.15) $ (0.01) $ (0.11) $ 0.01
------------ ------------ ------------ ------------
Weighted average common shares outstanding -- Diluted 18,337,723 21,800,285 18,017,764 21,138,487
------------ ------------ ------------ ------------
Net income (loss) per common share from continuing operations
-- Diluted $ (0.63) $ 0.67 $ (0.13) $ 0.15
------------ ------------ ------------ ------------
Net income (loss) per common share from discontinued operations
-- Diluted $ (0.15) $ (0.01) $ (0.11) $ 0.01
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 5
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands, except share information)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Common
Six Months Ended ------------------------ Paid-in Retained Stock Held by
June 30, 1999 Shares Amount Capital Earnings Subsidiary
---------------- ---------- ------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 31,637,331 $ 316 $ 307,114 $ 59,599 $ (98,953)
Issuance of restricted stock 116
Cash dividends (4,538)
Treasury stock purchases
Exercise of stock options (3)
Shares committed to be released
under Employee Stock Ownership
Plan 56
Purchase of shares by Employee
Stock Ownership Plan
Shares issued or purchased under
Dividend Reinvestment and
Stock Purchase Plan and Stock
Investment Plan (158) (60)
Net income 14,497
Total comprehensive income
---------- ------ --------- -------- ----------
Balance, June 30, 1999 31,637,331 $ 316 $ 307,125 $ 69,498 $ (98,953)
========== ====== ========= ======== ==========
<CAPTION>
Unearned Shares
of Employee Total
Treasury Stock Ownership Stockholders'
Stock Plan Equity
------------------ ---------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1998 $(11,499) $ (4,419) 252,158
Issuance of restricted stock 1,285 1,401
Cash dividends (4,538)
Treasury stock purchases (25,700) (25,700)
Exercise of stock options 7 4
Shares committed to be released
under Employee Stock Ownership
Plan 670 726
Purchase of shares by Employee
Stock Ownership Plan (1,500) (1,500)
Shares issued or purchased under
Dividend Reinvestment and
Stock Purchase Plan and Stock
Investment Plan 1,882 1,664
Net income
Total comprehensive income 14,497
-------- -------- ---------
Balance, June 30, 1999 $(34,025) $ (5,249) $ 238,712
======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional Common
Six Months Ended ------------------------ Paid-in Retained Stock Held by
June 30, 2000 Shares Amount Capital Earnings Subsidiary
---------------- ---------- ------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 31,637,331 $ 316 $ 300,909 $ 56,506 $ (98,953)
Issuance of restricted stock (960)
Cash dividends (4,046)
Treasury stock purchases
Shares committed to be released
under Employee Stock Ownership
Plan 162
Shares issued or purchased under
Dividend Reinvestment and
Stock Purchase Plan and Stock
Investment Plan (1,510) (33)
Net income (loss) (14,202)
Total comprehensive income
---------- ------ --------- -------- ----------
Balance, June 30, 2000 31,637,331 $ 316 $ 298,601 $ 38,225 $ (98,953)
========== ====== ========= ======== ==========
<CAPTION>
Shares of Total
Treasury Employee Stock Stockholders'
Stock Ownership Plan Equity
------------------ ---------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1999 $(41,148) $ (5,158) $ 212,472
Issuance of restricted stock 1,750 790
Cash dividends (4,046)
Treasury stock purchases (6,212) (6,212)
Shares committed to be released
under Employee Stock Ownership
Plan (89) 73
Shares issued or purchased under
Dividend Reinvestment and
Stock Purchase Plan and Stock
Investment Plan 2,732 1,189
Net income (loss)
Total comprehensive income (14,202)
-------- -------- ---------
Balance, June 30, 2000 $(42,878) $ (5,247) $ 190,064
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 6
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ (11,542) $ 14,707
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 17,197 19,609
Employee Stock Ownership Plan compensation 73 726
Provision for estimated foreclosure losses and repurchased loans 3,683 5,396
Increase in receivables from sale of mortgage backed securities (69,942) 0
Decrease in receivables 10,022 14,818
Acquisition of mortgage loans (2,431,376) (5,646,110)
Proceeds from sales of mortgage loans
and mortgage-backed securities 2,396,952 6,338,641
Acquisition of mortgage servicing rights (71,133) (166,706)
Sales of mortgage servicing rights 72,237 163,045
Net (loss) gain on sales of mortgage loans and servicing rights 16,457 (65,275)
(Increase) decrease in accrued interest on loans (597) 703
Increase in lease receivables (23,372) (25,918)
Decrease (increase) in other assets 4,077 (4,605)
Decrease (increase) in residual certificates 5,504 (5,114)
Increase in accrued expenses and other liabilities 1,481 11,754
----------- -----------
Net cash (used in) provided by operating activities (80,279) 655,671
----------- -----------
INVESTING ACTIVITIES
Purchases of premises and equipment (1,857) (5,598)
Disposition of premises and equipment 652 0
Discontinued operations (1,706) (1,502)
----------- -----------
Net cash used in investing activities (2,911) (7,100)
----------- -----------
FINANCING ACTIVITIES
Proceeds from borrowings 3,802,900 18,649,983
Repayment of borrowings (3,719,836) (19,275,859)
Issuance of restricted stock 790 1,401
Shares issued under Dividend Reinvestment and Stock Purchase Plan
and Stock Investment Plan 1,189 1,664
Acquisition of treasury stock (6,212) (25,700)
Cash dividends (4,046) (4,538)
Exercise of stock options 0 4
Loans to Employee Stock Ownership Plan 0 (1,500)
----------- -----------
Net cash provided by (used in) financing activities 74,785 (654,545)
----------- -----------
Net increase (decrease) in cash (8,405) (5,974)
Cash, beginning of year 30,478 18,124
----------- -----------
Cash, end of year $ 22,073 $ 12,150
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE> 7
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 six 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 six months and quarter ended June 30, 2000 and 1999,
respectively:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE SIX MONTHS ENDED FOR THE QUARTER ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income from continuing operations $ (11,542) $ 14,707 $ (2,340) $ 3,189
------------ ----------- ------------ -----------
Average common shares outstanding 18,337,723 21,587,836 18,017,764 20,958,060
------------ ----------- ------------ -----------
Earnings per share - basic $ (0.63) $ 0.68 $ (0.13) $ 0.15
------------ ----------- ------------ -----------
Dilutive stock options -- 212,449 -- 180,427
Average common and common equivalent
shares outstanding 18,337,723 21,800,285 18,017,764 21,138,487
------------ ----------- ------------ -----------
Earnings per share - diluted $ (0.63) $ 0.67 $ (0.13) $ 0.15
============ =========== ============ ===========
</TABLE>
During the second quarter, the Company decided to dispose of its
commercial mortgage operation, Laureate Capital, Corp. (Laureate). Based on
market indications to date, the Company expects to realize net proceeds equal to
the tangible book value of Laureate. Accordingly, the Company recorded a $2
million after-tax charge during the quarter, primarily related to the write-off
of intangible assets of Laureate. The following is a reconciliation of basic
earnings (loss) per share from discontinued operations to diluted earnings
(loss) per share from discontinued operations for the six months and quarter
ended June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE SIX MONTHS ENDED FOR THE QUARTER ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income from discontinued operations $ (2,660) $ (210) $ (1,895) $ 147
------------ ----------- ------------ -----------
Average common shares outstanding 18,337,723 21,587,836 18,017,764 20,958,060
------------ ----------- ------------ -----------
Earnings per share - basic $ (0.15) $ (0.01) $ (0.11) $ 0.01
------------ ----------- ------------ -----------
Dilutive stock options -- 212,449 -- 180,427
Average common and common equivalent shares
outstanding 18,337,723 21,800,285 18,017,764 21,138,487
------------ ----------- ------------ -----------
Earnings per share - diluted $ (0.15) $ (0.01) $ (0.11) $ 0.01
============ =========== ============ ===========
</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 six months and quarter ended June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE SIX MONTHS ENDED FOR THE QUARTER ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income from operations $ (14,202) $ 14,497 $ (4,235) $ 3,336
------------ ----------- ------------ -----------
Average common shares outstanding 18,337,723 21,587,836 18,017,764 20,958,060
------------ ----------- ------------ -----------
Earnings per share - basic $ (0.78) $ 0.67 $ (0.24) $ 0.16
------------ ----------- ------------ -----------
Dilutive stock options -- 212,449 -- 180,427
Average common and common equivalent shares
outstanding 18,337,723 21,800,285 18,017,764 21,138,487
------------ ----------- ------------ -----------
Earnings per share - diluted $ (0.78) $ 0.66 $ (0.24) $ 0.16
============ =========== ============ ===========
</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 six months and the quarter ended
June 30, 2000 and 1999, respectively:
9
<PAGE> 10
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (1) (2) --------------------------------------------------
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net interest income $ 913 $ (2,316) $ (39) $ 6,657
Net gain on sale of mortgage loans 11,817 -- -- 6,179
Gain on sale of mortgage servicing rights -- 1,539 -- --
Servicing fees -- 17,906 -- --
Mark to market on residual interests in subprime
securitizations -- -- -- (9,446)
Other income 432 248 1,595 1,320
-------- -------- ------- --------
Total revenues 13,162 17,377 1,556 4,710
-------- -------- ------- --------
Salary and employee benefits 13,123 1,373 90 7,126
Occupancy expense 5,523 111 -- 1,305
Amortization and provision for impairment
of mortgage servicing rights -- 12,209 -- --
Provision expense 1,252 -- -- 910
General and administrative expenses 5,137 2,020 172 3,145
-------- -------- ------- --------
Total expenses 25,035 15,713 262 12,486
-------- -------- ------- --------
Income (loss) before income taxes (11,873) 1,664 1,294 (7,776)
Income tax benefit (expense) 4,369 (612) (454) 2,763
-------- -------- ------- --------
Income (loss) from continuing operations $ (7,504) $ 1,052 $ 840 $ (5,013)
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $200)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $354)
-------- -------- ------- --------
Net income (loss) $ (7,504) $ 1,052 $ 840 $ (5,013)
======== ======== ======= ========
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (1) (2) COMMERCIAL
($ IN THOUSANDS) MORTGAGE LEASING TOTAL SEGMENTS OTHER/ELIMINATION CONSOLIDATED
-----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net interest income $ -- $ 4,420 $ 9,635 $ (358) $ 9,277
Net gain on sale of mortgage loans -- -- 17,996 -- 17,996
Gain on sale of mortgage servicing rights -- -- 1,539 -- 1,539
Servicing fees -- 232 18,138 (258) 17,880
Mark to market on residual interests in subprime
securitizations -- -- (9,446) -- (9,446)
Other income -- 566 4,161 213 4,374
------- ------- -------- ------- --------
Total revenues -- 5,218 42,023 (403) 41,620
------- ------- -------- ------- --------
Salary and employee benefits -- 1,438 23,150 1,720 24,870
Occupancy expense -- 246 7,185 (349) 6,836
Amortization and provision for impairment
of mortgage servicing rights -- -- 12,209 -- 12,209
Provision expense -- 1,521 3,683 -- 3,683
General and administrative expenses -- 622 11,096 998 12,094
------- ------- -------- ------- --------
Total expenses -- 3,827 57,323 2,369 59,692
------- ------- -------- ------- --------
Income (loss) before income taxes -- 1,391 (15,300) (2,772) (18,072)
Income tax benefit (expense) -- (556) 5,510 1,020 6,530
------- ------- -------- ------- --------
Income (loss) from continuing operations $ -- $ 835 $ (9,790) $(1,752) $(11,542)
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp. (less applicable
income taxes of $200) (2,000) (2,000) (2,000)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $354) (660) (660) (660)
------- ------- -------- ------- --------
Net income (loss) $(2,660) $ 835 $(12,450) $(1,752) $(14,202)
======= ======= ======== ======= ========
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the
extent possible. Management believes that these and all other revenues
and expenses have been allocated to the respective divisions on a
reasonable basis.
(2) See discussion of unusual items in Management's Discussion and
Analysis.
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (1) --------------------------------------------------
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net interest income $ 6,412 $ (2,383) $ -- $ 7,456
Net gain on sale of mortgage loans 50,078 -- 10,374 --
Gain on sale of mortgage servicing rights -- 4,823 -- --
Servicing fees -- 22,535 -- --
Mark to market on residual interests in subprime
securitizations (3,967) (3,967) (3,967)
Other income 17 344 441 2,408
-------- -------- -------- --------
Total revenues 56,507 25,319 441 16,271
-------- -------- -------- --------
Salary and employee benefits 22,540 1,805 -- 6,784
Occupancy expense 3,693 207 -- 1,252
Amortization and provision for impairment -- --
of mortgage servicing rights -- 17,320 -- --
Provision expense 3,672 122 932 670
General and administrative expenses 8,884 3,478 82 3,529
-------- -------- -------- --------
Total expenses 38,789 22,810 204 12,497
-------- -------- -------- --------
Income (loss) before income taxes 17,718 2,509 237 3,774
Income tax benefit (expense) (6,277) (792) (84) (1,411)
-------- -------- -------- --------
Income (loss) from continuing operations $ 11,441 $ 1,717 $ 153 $ 2,363
Discontinued operations:
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $91)
-------- -------- -------- --------
Net income (loss) $ 11,441 $ 1,717 $ 153 $ 2,363
======== ======== ======== ========
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (1) COMMERCIAL
($ IN THOUSANDS) MORTGAGE LEASING TOTAL SEGMENTS OTHER/ELIMINATION CONSOLIDATED
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net interest income $ -- $ 3,389 $ 14,874 $ (191) $ 14,683
Net gain on sale of mortgage loans -- 60,452 -- -- 60,452
Gain on sale of mortgage servicing rights -- -- 4,823 -- 4,823
Servicing fees -- 327 22,862 -- 22,862
Mark to market on residual interests in subprime
securitizations
Other income -- 534 3,744 9 3,753
------- -------- --------- -------- ---------
Total revenues -- 4,250 102,788 (182) 102,606
------- -------- --------- -------- ---------
Salary and employee benefits -- 1,353 32,482 1,481 33,963
Occupancy expense -- 214 5,366 731 6,097
Amortization and provision for impairment
of mortgage servicing rights -- -- 17,320 -- 17,320
Provision expense 5,396 5,396
General and administrative expenses -- 686 16,659 195 16,854
------- -------- --------- -------- ---------
Total expenses -- 2,923 77,223 2,407 79,630
------- -------- --------- -------- ---------
Income (loss) before income taxes -- 1,327 25,565 (2,589) 22,976
Income tax benefit (expense) -- (543) (9,107) 838 (8,269)
------- -------- --------- -------- ---------
Income (loss) from continuing operations $ -- $ 784 $ 16,458 $ (1,751) $ 14,707
Discontinued operations:
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $91) (210) (210) (210)
------- -------- --------- -------- ---------
Net income (loss) $ (210) $ 784 $ 16,248 $ (1,751) $ 14,497
======= ======== ========= ======== =========
</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 JUNE 30, 2000 (1) (2) ------------------------------------------------
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net interest income $ 675 $(1,019) $ (23) $ 3,571
Net gain on sale of mortgage loans 5,611 -- -- 3,738
Gain on sale of mortgage servicing rights -- 731 -- --
Servicing fees -- 8,541 -- --
Mark to market on residual interests in subprime
securitizations -- -- -- (1,771)
Other income 312 120 849 427
-------- ------- ------- -------
Total revenues 6,598 8,373 826 5,965
-------- ------- ------- -------
Salary and employee benefits 6,235 680 48 1,581
Occupancy expense 2,833 56 -- 676
Amortization and provision for impairment
of mortgage servicing rights -- 5,932 -- --
Provision expense 352 -- -- 168
General and administrative expenses 2,623 1,082 83 1,691
-------- ------- ------- -------
Total expenses 12,043 7,750 131 4,116
-------- ------- ------- -------
Income (loss) before income taxes (5,445) 623 695 1,849
Income tax benefit (expense) 1,986 (226) (244) (758)
-------- ------- ------- -------
Income (loss) from continuing operations $ (3,459) $ 397 $ 451 $ 1,091
Discontinued operations:
Loss on sale of operating assets of Laureate
Capital Corp. (less applicable income
taxes of $200)
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $111)
-------- ------- ------- -------
Net income (loss) $ (3,459) $ 397 $ 451 $ 1,091
======== ======= ======= =======
<CAPTION>
FOR THE QUARTER ENDED JUNE 30, 2000 (1) (2) COMMERCIAL
($ IN THOUSANDS) MORTGAGE LEASING TOTAL SEGMENTS OTHER/ELIMINATION CONSOLIDATED
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net interest income $ -- $ 2,293 $ 5,497 $ (336) $ 5,161
Net gain on sale of mortgage loans -- -- 9,349 -- 9,349
Gain on sale of mortgage servicing rights -- -- 731 -- 731
Servicing fees -- 133 8,674 (109) 8,565
Mark to market on residual interests in subprime
securitizations -- -- (1,771) -- (1,771)
Other income -- 304 2,012 306 2,318
------- ------- -------- ------- --------
Total revenues -- 2,730 24,492 (139) 24,353
------- ------- -------- ------- --------
Salary and employee benefits -- 678 9,222 895 10,117
Occupancy expense -- 126 3,691 (175) 3,516
Amortization and provision for impairment
of mortgage servicing rights -- -- 5,932 -- 5,932
Provision expense -- 1,162 1,682 -- 1,682
General and administrative expenses -- 328 5,807 838 6,645
------- ------- -------- ------- --------
Total expenses -- 2,294 26,334 1,558 27,892
------- ------- -------- ------- --------
Income (loss) before income taxes -- 436 (1,842) (1,697) (3,539)
Income tax benefit (expense) -- (180) 578 621 1,199
------- ------- -------- ------- --------
Income (loss) from continuing operations $ -- $ 256 $ (1,264) $(1,076) $ (2,340)
Discontinued operations:
Loss on sale of operating assets of Laureate
Capital Corp. (less applicable income
taxes of $200) (2,000) (2,000) (2,000)
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $111) 105 105 105
------- ------- -------- ------- --------
Net income (loss) $(1,895) $ 256 $ (3,159) $(1,076) $ (4,235)
======= ======= ======== ======= ========
</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 JUNE 30, 1999 (1) (2) ------------------------------------------------
($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE SUBPRIME
-----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net interest income $ 2,651 $ (994) $ -- $ 3,983
Net gain on sale of mortgage loans 16,885 -- -- 7,517
Gain on sale of mortgage servicing rights -- 1,825 -- --
Servicing fees -- 10,832 -- --
Mark to market on residual interests in subprime
securitizations -- -- -- (2,618)
Other income (65) 183 (211) 1,991
-------- -------- ----- --------
Total revenues 19,471 11,846 (211) 10,873
-------- -------- ----- --------
Salary and employee benefits 10,902 907 -- 3,483
Occupancy expense 1,759 100 -- 669
Amortization and provision for impairment
of mortgage servicing rights -- 8,887 -- --
Provision expense 1,564 -- 57 433
General and administrative expenses 5,330 1,617 55 2,040
-------- -------- ----- --------
Total expenses 19,555 11,511 112 6,625
-------- -------- ----- --------
Income (loss) before income taxes (84) 335 (323) 4,248
Income tax benefit (expense) 90 (19) 113 (1,579)
-------- -------- ----- --------
Income (loss) from continuing operations $ 6 $ 316 $(210) $ 2,669
Discontinued operations:
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $128)
-------- -------- ----- --------
Net income (loss) $ 6 $ 316 $(210) $ 2,669
======== ======== ===== ========
<CAPTION>
FOR THE QUARTER ENDED JUNE 30, 1999 (1) (2) COMMERCIAL
($ IN THOUSANDS MORTGAGE LEASING TOTAL SEGMENTS OTHER/ELIMINATION CONSOLIDATED
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net interest income $ -- $ 1,744 $ 7,384 $ (81) $ 7,303
Net gain on sale of mortgage loans -- -- 24,402 -- 24,402
Gain on sale of mortgage servicing rights -- -- 1,825 -- 1,825
Servicing fees -- 166 10,998 (159) 10,839
Mark to market on residual interests in subprime
securitizations -- -- (2,618) -- (2,618)
Other income -- 383 2,281 5 2,286
---- ------- -------- ----- --------
Total revenues -- 2,293 44,272 (235) 44,037
---- ------- -------- ----- --------
Salary and employee benefits -- 713 16,005 (801) 15,204
Occupancy expense -- 110 2,638 549 3,187
Amortization and provision for impairment
of mortgage servicing rights -- -- 8,887 -- 8,887
Provision expense -- 287 2,341 -- 2,341
General and administrative expenses -- 316 9,358 18 9,376
---- ------- -------- ----- --------
Total expenses -- 1,426 39,229 (234) 38,995
---- ------- -------- ----- --------
Income (loss) before income taxes -- 867 5,043 (1) 5,042
Income tax benefit (expense) -- (351) (1,746) (107) (1,853)
---- ------- -------- ----- --------
Income (loss) from continuing operations $ -- $ 516 $ 3,297 $(108) $ 3,189
Discontinued operations:
Operating profits of Laureate Capital Corp.
(less applicable income taxes of $128) 147 147 147
---- ------- -------- ----- --------
Net income (loss) $147 $ 516 $ 3,444 $(108) $ 3,336
==== ======= ======== ===== ========
</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 - Proposed Disposal of Commercial Mortgage Segment:
During the second quarter, the Company decided to dispose of its
commercial mortgage operation, Laureate Capital Corp. (Laureate). Based on
market indications to date, the Company expects to realize net proceeds equal
to the tangible book value of Laureate. Accordingly, the Company recorded a
$2 million after-tax charge during the quarter, primarily related to the
write-off of intangible assets of Laureate.
Note 4 - Changes to Benefit Plans:
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 disclaims any obligation
to update any forward-looking statements.
THE COMPANY
The Company is a diversified financial services company engaged
through wholly-owned subsidiaries primarily in the business of mortgage
banking, through the purchase (via a nationwide network of correspondents and
brokers), sale and servicing of agency-eligible and subprime residential,
single-family (i.e. one-four family), first-mortgage loans and the purchase and
sale of servicing rights associated with agency-eligible loans. In addition,
two of the Company's wholly-owned subsidiaries originate, sell and service
small-ticket commercial equipment leases and originate, sell, underwrite for
investors and service commercial mortgage loans.
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 SIX MONTHS AT OR FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Agency-Eligible Loan Production:
Correspondent $ 2,027,643 $ 4,120,525 $ 1,113,609 $ 1,692,504
Wholesale 543,221 1,155,730 295,133 443,908
----------- ----------- ----------- -----------
Total Agency-Eligible Loan Production 2,570,864 5,276,255 1,408,742 2,136,412
Subprime Loan Production 321,314 369,855 168,830 185,744
Commercial Mortgage (for Investors and
Conduits) Loan Production 375,003 308,102 279,528 157,950
Lease Production 53,300 44,865 29,054 24,340
----------- ----------- ----------- -----------
Total Mortgage Loan and Lease Production $ 3,320,481 $ 5,999,077 $ 1,886,154 $ 2,504,446
=========== =========== =========== ===========
</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 and a commercial mortgage loan business. Correspondent operations
accounted for 61% and 69% of the Company's total production for the six months
ended June 30, 2000 and 1999. Wholesale and subprime production accounted for
16% and 10%, respectively, of the Company's production for the six months ended
June 30, 2000 and 19% and 6%, respectively, of the Company's production for the
six months ended June 30, 1999. Lease and commercial mortgage production
accounted for 13% and 6% of the Company's total production for the first six
months of 2000 and 1999, respectively. A summary of key information relevant to
industry loan production activity is set forth below:
<TABLE>
<CAPTION>
AT OR FOR THE QUARTER ENDED JUNE 30,
------------------------------------
2000 1999
------------- -------------
<S> <C> <C>
U.S. 1-4 Family Mortgage Originations Statistics (1):
U.S. 1-4 Family Mortgage Originations $ 276,000,000 $ 368,000,000
Adjustable Rate Mortgage Market Share 31.00% 16.00%
Estimated Fixed Rate Mortgage Originations $ 191,000,000 $ 309,000,000
Company Information:
Residential Loan Production $ 1,577,572 $ 2,322,156
Estimated Company Market Share 0.57% 0.63%
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's total residential mortgage production decreased by 32%
to $1.6 billion for the second quarter of 2000 from $2.3 billion for the second
quarter of 1999. During the second quarter of 2000, interest rates were higher
than during the second quarter of 1999, resulting in a decrease in industry
wide residential loan originations of 25%. Likewise, the higher rate
environment resulted in an increase in ARM market share in the second quarter
of 2000. The Company has historically focused on fixed rate products, and only
recently has
14
<PAGE> 15
commenced offering a broader spectrum of mortgage products, including
adjustable rate products. Further, as often happens in the mortgage banking
industry, a rise in interest rates and resulting decrease in volumes prompted
increasing price competition in the marketplace during the quarter.
Correspondent Loan Production
The Company purchases closed mortgage loans through its network of
approved correspondent lenders. Correspondents are primarily mortgage lenders,
larger mortgage brokers and smaller savings and loan associations and
commercial banks that have met the Company's approval requirements. The Company
continues to emphasize correspondent loan production as its basic business
focus because of the lower fixed expenses and capital investment required of
the Company. A summary of key information relevant to the Company's
correspondent loan production activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Correspondent Loan Production $ 2,027,643 $ 4,120,525 $ 1,113,609 $ 1,692,504
Estimated Correspondent Market Share (1) 0.43% 0.57% 0.40% 0.46%
Approved Correspondents 923 867 923 867
Correspondent Division Expenses $ 20,082 $ 32,365 $ 9,515 $ 15,303
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
The Company's correspondent loan production decreased by 34% to $1.1
billion for the second quarter of 2000 from $1.7 billion for the second quarter
of 1999. During the second quarter of 2000, interest rates were higher than
during the second quarter of 1999, resulting in a decrease in industry wide
residential loan originations of 25%. Likewise, the higher rate environment
resulted in an increase in ARM market share in the second 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 banking
industry, a rise in interest rates and resulting decrease in volumes prompted
increasing price competition in the market place during the quarter. The
correspondent division expenses decreased by 38% to $9.5 million for the second
quarter of 2000 from $15.3 million for the second quarter of 1999 primarily due
to the decrease in correspondent production during the same period.
Wholesale Loan Production
The wholesale division receives loan applications through brokers,
underwrites the loans, funds the loans at closing and prepares all closing
documentation. The Company's wholesale branches and regional operating centers
handle all shipping and follow-up procedures on loans. Typically, mortgage
brokers are responsible for taking applications and accumulating the
information precedent to the Company's processing and underwriting of the
loans. Although the establishment of wholesale branch offices and regional
operating centers involves the incurrence of fixed expenses associated with
maintaining those offices, wholesale operations also generally provide for
higher profit margins than correspondent loan production. Additionally, each
branch office and regional operating center can serve a relatively sizable
geographic area by establishing
15
<PAGE> 16
relationships with large numbers of independent mortgage loan brokers who bear
much of the cost of identifying and interacting directly with loan applicants.
In 1999, the Company closed certain branches and established regional
operations centers to better facilitate service to larger geographic areas. The
Company's nationwide salesforce is supported by these regional operating
centers. A summary of key information relevant to the Company's wholesale
production activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
------------------------ -------------------------
2000 1999 2000 1999
------------------------ -------------------------
<S> <C> <C> <C> <C>
Wholesale Loan Production $ 543,221 $1,155,730 $ 295,133 $ 443,908
Estimated Wholesale Market Share (1) 0.11% 0.16% 0.11% 0.12%
Wholesale Division Direct Operating Expenses $ 4,953 $ 8,474 $ 2,528 $ 3,917
Approved Brokers 4,123 3,669 4,123 3,669
Regional Operation Centers 5 -- 5 --
Number of Branches 2 17 2 17
Number of Employees 96 186 96 186
</TABLE>
(1) Source: Mortgage Bankers Association of America, Economics Department.
Wholesale loan production decreased 34% ($148.8 million) from $443.9
million for the second quarter of 1999 to $295.1 million for the second quarter
of 2000. During the second quarter of 2000, interest rates were higher than
during the second quarter of 1999, resulting in a decrease in industry wide
residential loan origination of 25%. Likewise, the higher rate environment
resulted in an increase in ARM market share in the second quarter of 2000. The
Company has historically focused on fixed rate products, and only recently has
commenced offering a broader spectrum of mortgage products, including
adjustable rate products. Further, as often happens in the mortgage banking
industry, a rise in interest rates and resulting decrease in volumes prompted
increasing price competition in the market place during the quarter.
Subprime Loan Production
The Company conducts subprime business through its wholly-owned
subsidiary, Meritage Mortgage Corporation (Meritage). A summary of key
information relevant to the Company's subprime production activities is set
forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
------------------------ ------------------------
<S> <C> <C> <C> <C>
Subprime Loan Production $321,314 $369,855 $168,830 $185,744
Estimated Subprime Market Share (1) 0.07% 0.05% 0.06% 0.05%
Subprime Division Direct Operating Expenses $ 12,486 $ 12,497 $ 4,116 $ 6,542
Number of Brokers 3,711 2,182 3,711 2,182
Number of Employees 261 332 261 332
Number of Branches 10 19 10 19
</TABLE>
Subprime loan production decreased by 9% to $168.8 million for the
second quarter of 2000 as compared to $185.7 million during the second quarter
of 1999 primarily due to a decrease in industry wide residential loan
originations of 25%. Subprime division direct operating expenses decreased by
37% to $4.1 million for the second quarter of 2000 as compared
16
<PAGE> 17
to $6.5 million during the second quarter of 1999. This reduction in expenses
is primarily due to a decrease in production between quarters. Also, the
Company made certain changes in the organization at its subprime units
resulting in a net reduction in previously established reorganization reserves.
The Company amended its defined benefit pension plan to freeze benefits under
the plan and simultaneously changed the benefits available to employees under
its 401(k) plan. The combined effect of such changes resulted in a decrease of
subprime division direct operating expenses of $0.8 million during the quarter.
Between June 30, 1999 and 2000, respectively, the Company increased the number
of its subprime brokers by 1,529. The number of branches declined from 19 at
June 30, 1999 to 10 as of June 30, 2000 as the Company reassessed the
geographic regions that each branch covers.
Commercial Mortgage Production
During the second quarter, the Company decided to dispose of its
commercial mortgage operation, Laureate Capital Corp. (Laureate). Based on
market indications to date, the Company expects to realize net proceeds equal
to the tangible book value of Laureate. Accordingly, the Company recorded a $2
million after-tax charge during the quarter, primarily related to the write-off
of intangible assets of Laureate.
Lease Production
The Company's wholly-owned subsidiary, Republic Leasing Company, Inc.
(Republic Leasing), originates and services small-ticket commercial equipment
leases. Substantially all of Republic Leasing's lease receivables are acquired
from independent brokers who operate throughout the continental United States.
A summary of key information relevant to the Company's lease production
activities is set forth below:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
------------------------ ------------------------
<S> <C> <C> <C> <C>
Lease Production $ 53,300 $ 44,865 $ 29,054 $ 24,340
Lease Division Direct Operating Expenses $ 3,827 $ 2,923 $ 2,294 $ 1,426
Number of Brokers 173 198 173 198
Number of Employees 70 66 70 66
</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.
17
<PAGE> 18
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:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Underlying Unpaid Principal Balances:
Beginning Balance * $ 7,822,394 $ 9,865,100 $ 7,713,046 $ 9,735,754
Agency-Eligible Loan Production (net of
servicing- released production) * 2,482,696 5,265,702 1,382,399 2,132,353
Bulk Acquisitions* -- -- - -
Net Change in Work-in-Progress* 70,642 196,507 (6,497) 6,052
Sales of Servicing* (2,579,819) (6,104,726) (1,451,283) (3,101,473)
Paid-In-Full Loans* (254,756) (649,056) (147,947) (283,327)
Amortization, Curtailments and Other, net* (101,071) (162,837) (49,632) (78,669)
------------ ------------ ------------ -------------
Ending Balance* 7,440,086 8,410,690 7,440,086 8,410,690
Subservicing Ending Balance 1,089,014 3,111,358 1,089,014 3,111,358
------------ ------------ ------------ ------------
Total Underlying Unpaid Principal Balances $ 8,529,100 $ 11,522,048 $ 8,529,100 $ 11,522,048
</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 second quarter of 2000 and 1999, respectively, includes
$194,553 and -0-, respectively, of subprime loans being temporarily serviced
until these loans are sold.
Of the $7.4 billion and $8.4 billion unpaid principal balance at June
30, 2000 and 1999, $5.7 billion and $5.9 billion, respectively, of the related
mortgage servicing right asset is classified as available-for-sale, while $1.7
billion and $2.5 billion, respectively, of the related mortgage servicing right
asset is classified as held-for-sale.
A summary of agency-eligible servicing statistics follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Average Underlying Unpaid Principal Balances
(including subservicing) $ 9,163,193 $ 13,110,771 $ 9,024,206 $ 12,739,230
Weighted Average Note Rate* 7.64% 7.30% 7.64% 7.30%
Weighted Average Servicing Fee* 0.43% 0.43% 0.43% 0.43%
Delinquency (30+ days) Including Bankruptcies
and Foreclosures* 2.22% 2.27% 2.22% 2.27%
Number of Servicing Division Employees 80 149 80 149
</TABLE>
* These numbers and statistics apply to the Company's owned agency-eligible
servicing portfolio and, therefore, exclude the subservicing portfolio.
18
<PAGE> 19
The $3.7 billion, or 29%, decrease in the average underlying unpaid
principal balance of agency-eligible mortgage loans being serviced and
subserviced for the second quarter of 2000 as compared to the second quarter of
1999 is primarily related to the Company's decreased loan production volumes
during the second quarter of 2000. Since the Company generally sells servicing
rights related to the agency-eligible loans it produces within 90 to 180 days
of purchase or origination, decreased production volumes generally result in a
lower volume of mortgage servicing rights held in inventory pending sale.
Lease Servicing
Republic Leasing services leases that are owned by it and also
services leases for investors. A summary of key information relevant to the
Company's lease servicing activity is set forth below:
<TABLE>
<CAPTION>
AT OR FOR THE QUARTER ENDED JUNE 30,
----------------------------------------
($ IN THOUSANDS) 2000 1999
------------ ------------
<S> <C> <C>
Owned Lease Servicing Portfolio $ 174,344 $ 124,139
Serviced For Investors Servicing Portfolio 7,588 24,068
------------ ------------
Total Managed Lease Servicing Portfolio $ 181,932 $ 148,207
============ ============
Weighted Average Net Yield For Managed Lease
Servicing Portfolio 10.67% 10.76%
Delinquencies (30+ Days) Managed Lease
Servicing Portfolio 2.24% 1.49%
</TABLE>
Consolidated Coverage Ratios
A summary of the Company's consolidated ratios of servicing fees and
interest income from owned leases to cash operating expenses net of
amortization and depreciation follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) AT OR FOR THE SIX MONTHS AT OR FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total Company Servicing Fees $ 17,880 $ 24,995 $ 8,565 $ 11,997
Net Interest Income from Owned Leases 4,420 3,389 2,293 1,744
----------- ----------- ----------- -----------
Total Servicing Fees and Interest from Owned Leases $ 22,300 $ 28,384 $ 10,858 $ 13,741
----------- ----------- ----------- -----------
Total Company Operating Expenses $ 59,692 $ 79,630 $ 27,892 $ 38,995
Total Company Amortization and Depreciation (17,197) (20,778) (7,697) (10,240)
----------- ----------- ----------- -----------
Total Company Operating Expenses, Net of
Amortization and Depreciation $ 42,495 $ 58,852 $ 20,195 $ 28,755
----------- ----------- ----------- -----------
Coverage Ratio 52% 48% 54% 48%
=========== =========== =========== ===========
</TABLE>
The Company's coverage ratios for the second quarter of 2000 and 1999
were 54% and 48%, respectively, and for the first six months of 2000 and 1999
were 52% and 48% respectively. The coverage ratio for the second quarter and
the first six months of 2000 met the Company's target level of between 50% and
80%.
19
<PAGE> 20
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO SIX MONTHS
ENDED JUNE 30, 1999
SUMMARY BY OPERATING DIVISION
Net income (loss) from continuing operations per common share on a
diluted basis for the first six months of 2000 was ($0.63) as compared to $0.67
for the first six months of 1999. Following is a summary of the revenues and
expenses for each of the Company's operating divisions for the six months ended
June 30, 2000 and 1999, respectively:
20
<PAGE> 21
<TABLE>
<CAPTION>
Agency-Eligible
For the six months ended June 30, 2000 (1)(2) ------------------------------------------ Commercial
($ in thousands) Production Servicing Reinsurance Subprime Mortgage
------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net interest income $ 913 $ (2,316) $ (39) $ 6,657 $ --
Net gain on sale of mortgage loans 11,817 -- -- 6,179 --
Gain on sale of mortgage servicing rights -- 1,539 -- -- --
Servicing fees -- 17,906 -- -- --
Mark to market on residual interests in
subprime securitizations -- -- -- (9,446) --
Other income 432 248 1,595 1,320 --
---------------------------------------------------------------------
Total revenues 13,162 17,377 1,556 4,710 --
---------------------------------------------------------------------
Salary and employee benefits 13,123 1,373 90 7,126 --
Occupancy expense 5,523 111 -- 1,305 --
Amortization and provision for impairment
of mortgage servicing rights -- 12,209 -- -- --
Provision expense 1,252 -- -- 910 --
General and administrative expenses 5,137 2,020 172 3,145 --
---------------------------------------------------------------------
Total expenses 25,035 15,713 262 12,486 --
---------------------------------------------------------------------
Income (loss) before income taxes (11,873) 1,664 1,294 (7,776) --
Income tax benefit (expense) 4,369 (612) (454) 2,763 --
---------------------------------------------------------------------
Income (loss) from continuing operations $ (7,504) $ 1,052 $ 840 $ (5,013) $ --
Discontinued operations:
Loss on sale of operating assets of Laureate
Capital Corp. (less applicable income
taxes of $200) (2,000)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $354) (660)
---------------------------------------------------------------------
Net income (loss) $ (7,504) $ 1,052 $ 840 $ (5,013) $ (2,660)
=====================================================================
<CAPTION>
For the six months ended June 30, 2000 (1)(2)
($ in thousands) Leasing Total Segment Other/Elimination Consolidated
--------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net interest income $ 4,420 $ 9,635 $ (358) $ 9,277
Net gain on sale of mortgage loans -- 17,996 -- 17,996
Gain on sale of mortgage servicing rights -- 1,539 -- 1,539
Servicing fees 232 18,138 (258) 17,880
Mark to market on residual interests in
subprime securitizations -- (9,446) -- (9,446)
Other income 566 4,161 213 4,374
-------------------------------------------------------------
Total revenues 5,218 42,023 (403) 41,620
-------------------------------------------------------------
Salary and employee benefits 1,438 23,150 1,720 24,870
Occupancy expense 246 7,185 (349) 6,836
Amortization and provision for impairment
of mortgage servicing rights -- 12,209 -- 12,209
Provision expense 1,521 3,683 -- 3,683
General and administrative expenses 622 11,096 998 12,094
-------------------------------------------------------------
Total expenses 3,827 57,323 2,369 59,692
-------------------------------------------------------------
Income (loss) before income taxes 1,391 (15,300) (2,772) (18,072)
Income tax benefit (expense) (556) 5,510 1,020 6,530
-------------------------------------------------------------
Income (loss) from continuing operations $ 835 $ (9,790) $ (1,752) $ (11,542)
Discontinued operations:
Loss on sale of operating assets of Laureate
Capital Corp. (less applicable income
taxes of $200) (2,000) (2,000)
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $354) (660) (660)
-------------------------------------------------------------
Net income (loss) $ 835 $ (12,450) $ (1,752) $ (14,202)
=============================================================
</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 Production
For the six months ended June 30, 1999 (1) ---------------------------------------- Commercial
($ in thousands) Production Servicing Reinsurance Subprime Mortgage
------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net interest income $ 6,412 $ (2,383) $ -- $ 7,456 $ --
Net gain on sale of mortgage loans 50,078 -- -- 10,374 --
Gain on sale of mortgage servicing rights -- 4,823 -- -- --
Servicing fees -- 22,535 -- -- --
Mark to market on residual interests in
subprime securitizations -- -- -- (3,967) --
Other income 17 344 441 2,408 --
--------------------------------------------------------------------
Total revenues 56,507 25,319 441 16,271 --
--------------------------------------------------------------------
Salary and employee benefits 22,540 1,805 -- 6,784 --
Occupancy expense 3,693 207 -- 1,252 --
Amortization and provision for impairment
of mortgage servicing rights -- 17,320 -- -- --
Provision expense 3,672 -- 122 932 --
General and administrative expenses 8,884 3,478 82 3,529 --
--------------------------------------------------------------------
Total expenses 38,789 22,810 204 12,497 --
--------------------------------------------------------------------
Income (loss) before income taxes 17,718 2,509 237 3,774 --
Income tax benefit (expense) (6,277) (792) (84) (1,411) --
--------------------------------------------------------------------
Income (loss) from continuing operations $ 11,441 $ 1,717 $ 153 $ 2,363 $ --
Discontinued operations:
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $91) (210)
--------------------------------------------------------------------
Net income (loss) $ 11,441 $ 1,717 $ 153 $ 2,363 $ (210)
====================================================================
<CAPTION>
For the six months ended June 30, 1999 (1)
($ in thousands) Leasing Total Segment Other/Elimination Consolidated
--------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net interest income $ 3,389 $ 14,874 $ (191) $ 14,683
Net gain on sale of mortgage loans -- 60,452 -- 60,452
Gain on sale of mortgage servicing rights -- 4,823 -- 4,823
Servicing fees 327 22,862 -- 22,862
Mark to market on residual interests in
subprime securitizations -- (3,967) -- (3,967)
Other income 534 3,744 9 3,753
--------------------------------------------------------------
Total revenues 4,250 102,788 (182) 102,606
--------------------------------------------------------------
Salary and employee benefits 1,353 32,482 1,481 33,963
Occupancy expense 214 5,366 731 6,097
Amortization and provision for impairment
of mortgage servicing rights -- 17,320 -- 17,320
Provision expense 670 5,396 -- 5,396
General and administrative expenses 686 16,659 195 16,854
--------------------------------------------------------------
Total expenses 2,923 77,223 2,407 79,630
--------------------------------------------------------------
Income (loss) before income taxes 1,327 25,565 (2,589) 22,976
Income tax benefit (expense) (543) (9,107) 838 (8,269)
--------------------------------------------------------------
Income (loss) from continuing operations $ 784 $ 16,458 $ (1,751) $ 14,707
Discontinued operations:
Operating losses of Laureate Capital Corp.
(plus applicable income tax benefit of $91) (210) (210)
--------------------------------------------------------------
Net income (loss) $ 784 $ 16,248 $ (1,751) $ 14,497
==============================================================
</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>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
($ IN THOUSANDS) 2000 1999
----------- ----------
<S> <C> <C>
Net interest income $ 913 $ 6,412
Net gain on sale of mortgage loans 11,817 50,078
Other income 432 17
----------- ----------
Total production revenue 13,162 56,507
----------- ----------
Salary and employee benefits 13,123 22,540
Occupancy expense 5,523 3,693
Provision expense 1,252 3,672
General and administrative expenses 5,137 8,884
----------- ----------
Total production expenses 25,035 38,789
----------- ----------
Net pre-tax production margin $ (11,873) $ 17,718
----------- ----------
Production $ 2,570,864 $5,276,255
Pool delivery 2,489,089 5,710,345
Total production revenue to pool delivery 53 bps 99 bps
Total production expenses to production 97 bps 74 bps
----------- ----------
Net pre-tax production margin (44)bps 25 bps
=========== ==========
</TABLE>
Summary
The production revenue to pool delivery ratio decreased 46 basis points for
the first six months of 2000 as compared to the first six months of 1999. Net
gain on sale of mortgage loans (46 basis points for the first six months of 2000
versus 88 basis points for the first six 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 six months of 1999 to 4 basis
points in the first six months of 2000 primarily as a result of a flattened
yield curve. The production expenses to production ratio increased 23 basis
points from the first six months of 1999 to the first six months of 2000. This
is primarily due to the 51% decline in production for the first six months of
2000 as compared to the first six months of 1999 which was only partially offset
by a 36% decline in production expenses. The decline in production expenses
included a $0.4 million reduction in salary and employee benefits as a result of
(1) the curtailment of the Company's pension plan benefits, (2) changes in
401(k) benefits and (3) a reduction of the previously established reorganization
reserves due to certain changes in the organization of the agency-eligible unit.
As a consequence of the foregoing, the Company's net agency-eligible pre-tax
production margin declined 69 basis points.
Net Interest Income
The following table analyzes net interest income allocated to the
Company's agency-eligible mortgage production activities in terms of rate and
volume variances of the interest spread (the difference between interest rates
earned on loans and mortgage-backed securities and interest
22
<PAGE> 23
rates paid on interest-bearing sources of funds) for the six months ended June
30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
Variance
Average Volume Average Rate Interest Attributable to
-------------------------------------- ------------------- -------------------
2000 1999 2000 1999 2000 1999 Variance Rate Volume
-------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Mortgages Held-for-Sale
and Mortgage-Backed
$ 330,381 $ 889,631 8.13% 6.62% Securities $ 13,428 $ 29,454 $ (16,026) $ 2,490 $(18,516)
-------------------------------------- -------------------------------------------------------
INTEREST EXPENSE
$ 298,229 $ 386,100 5.12% 3.62% Warehouse Line * $ 7,616 $ 6,923 $ 693 $ 2,269 $ (1,576)
21,378 492,144 6.90% 5.15% Gestation Line 735 12,559 (11,824) 189 (12,013)
121,503 120,119 7.24% 5.85% Servicing Secured Line 4,385 3,486 899 859 40
3,950 29,790 5.94% 5.22% Servicing Receivables Line 117 771 (654) 15 (669)
7,673 7,728 8.68% 8.22% Other Borrowings 332 315 17 19 (2)
Facility Fees & Other Charges 1,844 1,418 426 -- 426
-------------------------------------- --------------------------------------------------------
$ 452,733 $1,035,881 6.66% 4.96% Total Interest Expense $ 15,029 $ 25,472 $ (10,443) $ 3,351 $(13,794)
-------------------------------------- --------------------------------------------------------
Net Interest Income Before
1.47% 1.66% Interdivisional Allocations $ (1,601) $ 3,982 $ (5,583) $ (861) $ (4,722)
============= ==============================
Allocation to Agency-Eligible
Servicing Division 2,316 2,239
Allocation to Other 289 191
Intercompany Net Interest
Expense Included
In Segment (91) --
---------------------
Net Interest Income $ 913 $ 6,412
=====================
</TABLE>
* The interest-rate yield on the warehouse line is net of the benefit of escrow
deposits.
The 19 basis point decrease in the interest-rate spread was primarily 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 SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Gross proceeds on sales of mortgage loans $ 2,558,467 $ 5,726,984
Initial unadjusted acquisition cost of mortgage loans sold, net of
hedge results 2,563,602 5,724,786
----------- -----------
Unadjusted gain (loss) on sale of mortgage loans (5,135) 2,198
Loan origination and correspondent program administrative fees 4,996 13,148
----------- -----------
Unadjusted aggregate margin (139) 15,346
Acquisition basis allocated to mortgage servicing rights
(SFAS No. 125) 13,478 35,782
Net deferred costs and administrative fees recognized (1,522) (1,050)
----------- -----------
Net gain on sale of agency-eligible mortgage loans $ 11,817 $ 50,078
=========== ===========
</TABLE>
Net gain on sale of agency-eligible mortgage loans decreased $38.3
million from $50.1 million for the first six months of 1999 to $11.8 million for
the first six months of 2000. The
23
<PAGE> 24
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.
Receivable from sale of mortgage-backed securities
The company sold certain mortgage-backed securities during the first six
months of 2000, for which it did not receive the cash settlement until early in
the second quarter of 2000. This resulted in a $69.9 million receivable on the
June 30, 2000 condensed consolidated balance sheet.
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 six months of 2000 and 1999, the Company
recognized premium and investment income of approximately $1.6 million and $0.4
million, respectively, that has been included as other income in the
agency-eligible reinsurance segment.
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the Company's
subprime mortgage production operations:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------
($ IN THOUSANDS) 2000 1999
---------- ---------
<S> <C> <C>
Net interest income $ 6,657 $ 7,456
Net gain on sale of mortgage loans 6,179 10,374
Mark to market on residual interests in subprime securitizations (9,446) (3,967)
Other income 1,320 2,408
--------- ---------
Total production revenue 4,710 16,271
--------- ---------
Salary and employee benefits 7,126 6,784
Occupancy expense 1,305 1,252
Provision expense 910 932
General and administrative expenses 3,145 3,529
--------- ---------
Total production expenses 12,486 12,497
--------- ---------
Net pre-tax production margin $ (7,776) $ 3,774
--------- ---------
Production $ 321,314 $ 369,855
Whole loan sales and securitizations 306,578 322,910
Total production revenue to whole loan sales and securitizations 154 bps 504 bps
Total production expenses to production 389 bps 338 bps
--------- ---------
Net pre-tax production margin (235) bps 166 bps
========= =========
</TABLE>
24
<PAGE> 25
Summary
During the first six months of 2000, subprime production volume of
$321.3 million exceeded whole loan sales and securitizations of $306.6 million
by $14.7 million. At June 30, 2000, the Company had unsold subprime mortgage
loans of $134.9 million as compared to $145.1 million at June 30, 1999. Overall,
the Company operated during the first six months of 2000 at a (2.35)% pre-tax
subprime production margin. The $11.6 million (401 basis point) decline in the
pre-tax subprime production margin is primarily due to the ($9.4) million
adjustment during the first six months of 2000 in the mark to market on residual
interests in subprime securitizations. The Company is currently exploring
options to extract cash in the short-term from these investments. Options being
considered include the outright sale of certain securities and/or a re-REMIC of
residual cash flows. Based upon initial market feedback, the Company reassessed
the assumptions utilized in valuing these relatively illiquid securities,
primarily the discount rate used in the valuation. Absent the ($9.4) million
adjustment to residual interests, the margin on sale of subprime loans was 5%.
Also contributing to the decline in the pre-tax subprime production
margin during the first six months of 2000 is the $4.2 million decline in net
gain on sale of subprime mortgage loans. This decline is primarily attributable
to compressed margins as a result of an intensely competitive pricing
environment.
Salary and employee benefit costs increased by 5%, or $0.4 million,
from the first six months of 1999 to the first six months of 2000. This was
primarily due to recognition of severance benefits of $0.2 million associated
with a planned reorganization of the Company around its primary business
processes (production/sales, order fulfillment, servicing and portfolio
management). The Company also amended its defined benefit pension plan to freeze
benefits under the plan and simultaneously changed the benefits available to
employees under its 401(k) plan. The impact of this was a decrease in salary and
employee benefit expense of $0.4 million. The remaining production expenses
remained relatively flat between periods.
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 six months ended June 30, 2000 and 1999, respectively.
25
<PAGE> 26
$ IN THOUSANDS)
<TABLE>
<CAPTION>
Variance
Average Volume Average Rate Interest Attributable to
------------------------------------------ ----------------- --------------------
2000 1999 2000 1999 2000 1999 Variance Rate Volume
------------------------------------------ ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgages Held-for-Sale
$ 203,577 $ 232,845 11.54% 10.24% and Residual Certificates $ 11,743 $ 11,916 $ (173) $ 1,325 $ (1,498)
------------------------------------------ ------------------------------------------------------
$ 145,068 $ 170,984 7.17% 5.43% Total Interest Expense $ 5,185 $ 4,604 581 $ 1,279 $ (698)
------------------------------------------ ------------------------------------------------------
4.37% 4.81% Net Interest Income $ 6,558 $ 7,312 $ (754) $ 46 $ (800)
================ ================================
Allocation to Agency-Eligible
Servicing Division -- 144
Intercompany Net Interest
Expense Included In
Segment 99 --
-------------------
Net Interest Income $ 6,657 $ 7,456
===================
</TABLE>
Net interest income from subprime products decreased to $6.7 million
for the first six months of 2000 as compared to $7.5 million for the first six
months of 1999. This was primarily a result of a flattened yield curve and the
decline in production volume, which was partially offset by $0.8 million
increase in accretion income from $3.0 million for the first six months of 1999
to $3.8 million for the first six months of 2000.
Net Gain on Sale and Securitization of Subprime Mortgage Loans
The Company sold subprime mortgage loans on a whole loan basis during
the first six months of 2000 and 1999. Whole loans are generally sold without
recourse to third parties with the gain or loss being calculated based on the
difference between the carrying value of the loans sold and the gross proceeds
received from the purchaser less expenses. Generally, no interest in these loans
is retained by the Company.
A reconciliation of the gain on subprime mortgage whole loan sales for the
periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999
---------- ------------
<S> <C> <C>
Gross proceeds on whole loan sales of subprime mortgage loans $ 316,912 $ 204,317
Initial acquisition cost of subprime mortgage loans sold, net of fees 306,578 196,867
---------- -----------
Unadjusted gain on whole loan sales of subprime mortgage loans 10,334 7,450
Net deferred costs and administrative fees recognized (4,155) (2,134)
---------- -----------
Net gain on whole loan sales of subprime mortgage loans $ 6,179 $ 5,316
========== ===========
</TABLE>
The net gain on whole loan sales of subprime mortgage loans increased
16% from $5.3 for the first six months of 1999 to $6.2 million reported for the
first six 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
26
<PAGE> 27
loans by $4.2 million in the first six months of 2000 as compared to
$2.1 million in the first six months of 1999.
There were no securitization transactions during the first six months
of 2000. A reconciliation of the gain on securitization of subprime mortgage
loans for the six months ended June 30, 1999 follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 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. These residual
certificates are adjusted to approximate market value each quarter. For the six
months ended June 30, 2000 and 1999, respectively, mark-to-market gain (loss) on
residuals was approximately ($9.4) million and ($4.0) million, respectively.
Management has initiated a strategic change in the Company's intent to hold
these instruments for the long-term. As a result, there has been a reassessment
of the assumptions utilized for purposes of valuing these relatively illiquid
securities, primarily the discount rate used in the valuation, as described
below. See additional discussion regarding this reassessment elsewhere in this
Management's Discussion and Analysis.
The Company assesses the fair value of residual certificates quarterly,
with assistance from an independent third party. This valuation is based on the
discounted cash flows expected to be available to the holder of the residual
certificates. Significant assumptions used at June 30, 2000 for residual
certificates then held by the Company generally include a discount rate of 15%,
a constant default rate of 3% (5% for 1997-1 and 1998-1) and a loss severity
rate of 25%. Ramping periods are based on prepayment penalty periods and
adjustable rate mortgage first reset dates. Terminal prepayment rate assumptions
specific to the individual certificates for purposes of the June 30, 2000
valuations are set forth below:
<TABLE>
<CAPTION>
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Prepayment Speeds
Fixed rate mortgages 34% cpr 32% cpr 32% cpr 28% cpr 28% cpr 30% cpr
Adjustable rate mortgages 34% cpr 32% cpr 32% cpr 28% cpr 28% cpr 30% cpr
</TABLE>
Terminal prepayment rate assumptions specific to the individual
certificates for purposes of the June 30, 1999 valuations are set forth below:
27
<PAGE> 28
<TABLE>
<CAPTION>
1997-1 1997-2 1998-1 1998-2 1999-1 OTHER
------------ ------------- ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Prepayment speeds
Fixed rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 28% cpr 32% cpr
Adjustable rate mortgages 32% cpr 30% cpr 28% cpr 28% cpr 28% cpr 24% cpr
</TABLE>
The assumptions used in the independent third party valuation referred
to above are estimated based on current conditions for similar instruments that
are subject to prepayment and credit risks. Other factors considered in the
determination of fair value include credit and collateral quality of the
underlying loans, current economic conditions and various fees and costs
associated with ownership of the residual certificate including actual credit
history of the individual residual certificates. Although the Company believes
that the fair values of its residual certificates are reasonable given current
market conditions, the assumptions used are estimates and actual experience may
vary from these estimates. Differences in the actual prepayment speed and loss
experience from the assumptions used, could have a significant effect on the
fair value of the residual certificates.
As summarized in the following analysis, the recorded residual values
imply that the Company's securitizations are valued at 1.69 times the implied
excess yield at June 30, 2000, as compared to the 1.63 multiple implied at June
30, 1999. The table below represents balances as of June 30, 2000, unless
otherwise noted.
28
<PAGE> 29
SECURITIZATION SCHEDULES
<TABLE>
<CAPTION>
SECURITIZATIONS
------------------------------------------------------------------------
1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 TOTAL
-------- -------- -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
($ IN THOUSANDS)
Residual Certificates $ 4,750 $ 5,545 $ 7,913 $ 12,423 $ 9,000 $ 9,247 $ 48,878
Bonds $ 13,422 $ 15,702 * $ 49,981 * $ 115,442 * $ 107,178 * $118,671 * $420,396
-------- -------- -------- --------- --------- -------- --------
Subtotal $ 18,172 $ 21,247 $ 57,894 $ 127,865 $ 116,178 $127,918 $469,274
Unpaid Principal Balance $ 18,142 $ 20,556 * $ 55,606 * $ 121,713 * $ 110,614 * $121,011 * $447,642
-------- -------- -------- --------- --------- -------- --------
Implied Price 100.17 103.36 104.11 105.05 105.03 105.71 104.83
-------- -------- -------- --------- --------- -------- --------
Collateral Yield 12.46 12.48 11.07 9.76 9.81 9.82 10.13
Collateral Equivalent Securitization Costs (0.69) (0.62) (0.59) (0.60) (0.62) (0.68) (0.63)
Collateral Equivalent Bond Rate (5.37) (5.29) (6.14) (6.92) (6.71) (6.86) (6.65)
-------- -------- -------- --------- --------- -------- --------
Implied Collateral Equivalent Excess Yield 6.40 6.57 4.34 2.24 2.48 2.28 2.86
-------- -------- -------- --------- --------- -------- --------
Implied Premium Above Par 0.17 3.36 4.11 5.05 5.03 5.71 4.83
Implied Collateral Equivalent Excess Yield 6.40 6.57 4.34 2.24 2.48 2.28 2.86
-------- -------- -------- --------- --------- -------- --------
Multiple 0.03 0.51 x 0.95 x 2.26 x 2.03 x 2.50 x 1.69 x
-------- -------- -------- --------- --------- -------- --------
</TABLE>
* Amounts were based upon trustee statements dated June 25, 2000 that
covered the period ended May 31, 2000.
A SUMMARY OF KEY INFORMATION RELEVANT TO THE SUBPRIME RESIDUAL ASSETS AT JUNE
30, 2000 IS SET FORTH BELOW:
<TABLE>
<CAPTION>
SECURITIZATIONS
--------------------------------------------------------------
($ IN THOUSANDS) 1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 OTHER TOTAL
-------- -------- --------- ---------- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,1999 $ 5,971 $ 7,153 $ 10,334 $ 12,460 $ 9,566 $ 8,898 $ -- $ 54,382
Initial Capitalization of Residual Certificates -- -- -- -- -- -- -- --
Accretion 511 579 728 836 631 501 -- 3,786
Mark-to-Market (1,526) (1,739) (2,332) (873) (2,053) (1,123) -- (9,646)*
Cash Flow (206) (448) (817) -- -- -- -- (1,471)
Prepayment Penalty Reclassed from MSR 856 971 -- 1,827
------- ------- -------- -------- ------- ------- ----- --------
Balance at June 30, 2000 $ 4,750 $ 5,545 $ 7,913 $ 12,423 $ 9,000 $ 9,247 $ -- $ 48,878
======= ======= ======== ======== ======= ======= ===== ========
</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
six months of 2000 of $9.4 million and a $9.6 million market
-to-market loss on the residual interests remaining on the balance
sheet at June 30, 2000.
A SUMMARY OF KEY INFORMATION RELEVANT TO THE SUBPRIME RESIDUAL ASSETS AT JUNE
30, 1999 IS SET FORTH BELOW:
<TABLE>
<CAPTION>
SECURITIZATIONS
------------------------------------------------------------
($ IN THOUSANDS) 1997-1 1997-2 1998-1 1998-2 1999-1 1999-2 OTHER * TOTAL
---------- -------- -------- --------- ---------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,1998 $ 7,997 $ 9,702 $10,815 $12,569 $ -- $-- $ 4,700 $ 45,783
Initial Capitalization of Residual
Certificates -- -- -- -- 8,867 -- 8,867
Accretion 582 633 641 736 -- -- 363 2,955
Mark-to-Market (602) (92) 212 226 (648) -- (3,063) (3,967)
Cash Flow (1,161) (1,581) -- -- -- -- -- (2,742)
------- ------- ------- ------- ------- --- ------- --------
Balance at June 30, 1999 $ 6,816 $ 8,662 $11,668 $13,531 $ 8,219 $-- $ 2,000 $ 50,896
======= ======= ======= ======= ======= === ======= ========
</TABLE>
* Represents a portion of a residual certificate the Company received in
1997 in settlement of an account receivable. In 1999 the Company
decided to conservatively write off this receivable.
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>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
($ IN THOUSANDS) 2000 1999
----------- ------------
<S> <C> <C>
Net interest expense $ (2,316) $ (2,383)
Loan servicing fees 17,906 22,535
Other income 248 344
----------- ------------
Servicing revenues 15,838 20,496
Salary and employee benefits 1,373 1,805
Occupancy expense 111 207
Amortization and provision for impairment of mortgage
Servicing rights 12,209 17,320
General and administrative expenses 2,020 3,478
----------- ------------
Total loan servicing expenses 15,713 22,810
----------- ------------
Net pre-tax servicing margin 125 (2,314)
Gain on sale of mortgage servicing rights 1,539 4,823
=========== ============
Net pre-tax servicing contribution $ 1,664 $ 2,509
=========== ============
Average servicing portfolio $ 8,028,158 $ 10,004,227
Servicing sold 2,579,819 6,104,726
Net pre-tax servicing margin to average servicing portfolio 0bps (5) bps
Gain on sale of servicing to servicing sold 6bps 8 bps
</TABLE>
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio increased 5 basis points primarily due to the $5.1 million reduction
in amortization and provision for impairment of mortgage servicing rights from
the first six months of 1999 to the first six 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 $3.3 million decline in gain on
sale of mortgage servicing rights is primarily due to the lower volume of sales.
Loan servicing fees were $17.9 million for the first six months of 2000,
compared to $22.5 million for the first six months of 1999, a decrease of 21%,
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 six months of 2000 and the first six
months of 1999 is composed of benefits from escrow accounts of $4.1 million and
$4.1 million, respectively, that is offset by $6.4 million and $6.5 million,
respectively, in interest expense.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage servicing
rights for the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30, 2000,
---------------------------------------
2000 1999
------------- ---------------
<S> <C> <C>
Underlying unpaid principal balances of agency-eligible mortgage
loans on which servicing rights were sold during the period $ 2,579,819 $ 6,104,726
============= ==============
Gross proceeds from sales of mortgage servicing rights $ 72,237 $ 163,046
Initial acquisition basis, net of amortization and hedge results 60,504 118,942
------------- ==============
Unadjusted gain on sale of mortgage servicing rights 11,733 44,104
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 125) (10,194) (39,281)
------------- ==============
Gain on sale of mortgage servicing rights $ 1,539 $ 4,823
============= ==============
</TABLE>
Gain on sale of mortgage servicing rights decreased $3.3 million from $4.8
million for the first six months of 1999 to $1.5 million for the first six
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
During the second quarter, the Company decided to dispose of its commercial
mortgage operation, Laureate Capital Corp. (Laureate). Based on market
indications to date, the Company expects to realize net proceeds equal to the
tangible book value of Laureate. Accordingly, the Company recorded a $2 million
after-tax charge during the quarter, primarily related to the write-off of
intangible assets of Laureate.
LEASING OPERATIONS
Following is a summary of the revenues and expenses of the Company's
small-ticket equipment leasing operations for the periods indicated:
31
<PAGE> 32
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
($ IN THOUSANDS) 2000 1999
-------- ---------
<S> <C> <C>
Net interest income $ 4,420 $ 3,389
Other income 566 534
-------- --------
Leasing production revenue 4,986 3,923
-------- --------
Salary and employee benefits 1,438 1,353
Occupancy expense 246 214
Provision expense 1,521 670
General and administrative expenses 622 686
-------- --------
Total lease operating expenses 3,827 2,923
-------- --------
Net pre-tax leasing production margin 1,159 1,000
Servicing fees 232 327
-------- --------
Net pre-tax leasing margin $ 1,391 $ 1,327
-------- --------
Average owned leasing portfolio $162,047 $110,948
Average serviced leasing portfolio 10,756 30,623
-------- --------
Average managed leasing portfolio $172,803 $141,571
======== ========
Leasing production revenue to average owned portfolio 615 bps 707 bps
Leasing operating expenses to average owned portfolio 472 bps 527 bps
======== ========
Net pre-tax leasing production margin 143 bps 180 bps
======== ========
Servicing fees to average serviced leasing portfolio 431 bps 214 bps
======== ========
</TABLE>
The 27% increase in leasing production revenue for the first six months
of 2000 as compared to the first six months of 1999 is primarily due to the 46%
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 37 bps in the first six months of 2000 as compared to the first six
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 six months of 2000 was $4.4 million
as compared to $3.4 million for the first six months of 1999. This is equivalent
to an annualized net interest margin of 3.92% and 4.29% for the first six months
of 2000 and 1999, respectively, based upon average lease receivables owned of
$162.0 million and $110.9 million, respectively, and average debt outstanding of
$137.4 and $91.5 million, respectively.
OTHER
During the third quarter of 1999, the Company reorganized its reporting
cost centers and is now reporting holding company costs as a reconciling item
between the segmented income statement and the consolidated income statement.
The primary components of holding company costs are 1) interest expense on the
debt on the Company's corporate headquarters; 2) salary and employee benefits of
corporate personnel; 3) depreciation on the corporate headquarters; and 4)
32
<PAGE> 33
income taxes. The segmented income statement for the first six months of 1999
has been restated to conform with the segmented income statement presentation
for the first six 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 continued to
adapt to a smaller overall residential mortgage market and intensely competitive
pricing conditions. During the six month period ended June 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 is continuing 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 $0.7 during the period. In
connection with the planned reorganization, a number of senior management
positions have been scheduled for elimination during the remainder of the year.
During the first six months of 2000, the Company decided to dispose of its
commercial mortgage operation, Laureate Capital Corp. (Laureate). Based on
market indications to date, the Company expects to realize net proceeds equal to
the tangible book value of Laureate. The Company amended its defined benefit
pension plan to freeze benefits under the plan, changed the benefits available
to employees under its 401(k) plan and realized a gain on sale of a branch
facility. The Company contributed to a fund that will benefit qualified
charitable organizations. The Company incurred expenses for consultants who are
assisting management in re-engineering work processes.
The net impact of these unusual items in the first six 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>
Salary and employee
benefits $ (244) $ (45) $ 1,251 $ (22) $ 21 $ 961
General and
administrative expenses 171 452 623
Other income (392) (392)
------- ------- ------- ------- ------- ------ -------
Net pre-tax effect on
continuing operations (73) (45) 1,251 (22) 81 1,192
Estimated allocable
income tax 29 17 (458) 8 (31) (435)
------- ------- ------- ------- ------- ------ -------
Net after-tax impact on
continuing operations (44) (28) 793 (14) 50 757
Loss on sale of
operating assets of
Laureate Capital Corp. $ 2,000 $ 2,000
Operating profits of
Laureate Capital Corp. (105) (105)
======= ======= ======= ======= ======= ====== =======
Net after-tax impact $ (44) $ (28) $ 793 $ 1,895 $ (14) $ 50 $ 2,652
======= ======= ======= ======= ======= ====== =======
</TABLE>
33
<PAGE> 34
RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 2000, COMPARED TO QUARTER ENDED
JUNE 30, 1999
SUMMARY BY OPERATING DIVISION
Net income (loss) from continuing operations per common share on a
diluted basis for the second quarter of 2000 was ($0.13) as compared to $0.15
for the second quarter of 2000. Following is a summary of the revenues and
expenses for each of the Company's operating divisions for the six months ended
June 30, 2000 and 1999, respectively:
34
<PAGE> 35
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
--------------------------------
FOR THE QUARTER ENDED JUNE 30, 2000 SUB- COMMERCIAL TOTAL OTHER/ CONSO-
(1) (2)($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE PRIME MORTGAGE LEASING SEGMENTS ELIMINATIONS LIDATED
-----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 675 $(1,019) $ (23) $ 3,571 $ -- $2,293 $ 5,497 $ (336) $ 5,161
Net gain on sale of mortgage loans 5,611 -- -- 3,738 -- -- 9,349 -- 9,349
Gain on sale of mortgage servicing rights -- 731 -- -- -- -- 731 -- 731
Servicing fees -- 8,541 -- -- -- 133 8,674 (109) 8,565
Mark to market on residual interests in
subprime securitizations -- -- -- (1,771) -- -- (1,771) -- (1,771)
Other income 312 120 849 427 -- 304 2,012 306 2,318
-----------------------------------------------------------------------------------------
Total revenues 6,598 8,373 826 5,965 -- 2,730 24,492 (139) 24,353
-----------------------------------------------------------------------------------------
Salary and employee benefits 6,235 680 48 1,581 -- 678 9,222 895 10,117
Occupancy expense 2,833 56 -- 676 -- 126 3,691 (175) 3,516
Amortization and provision for impairment
of mortgage servicing rights -- 5,932 -- -- -- -- 5,932 -- 5,932
Provision expense 352 -- -- 168 -- 1,162 1,682 -- 1,682
General and administrative expenses 2,623 1,082 83 1,691 -- 328 5,807 838 6,645
-----------------------------------------------------------------------------------------
Total expenses 12,043 7,750 131 4,116 -- 2,294 26,334 1,558 27,892
-----------------------------------------------------------------------------------------
Income (loss) before income taxes (5,445) 623 695 1,849 -- 436 (1,842) (1,697) (3,539)
Income tax benefit (expense) 1,986 (226) (244) (758) -- (180) 578 621 1,199
-----------------------------------------------------------------------------------------
Income (loss) from continuing operations $(3,459) $ 397 $ 451 $ 1,091 $ -- $ 256 $(1,264) $(1,076) $(2,340)
Discontinued operations:
Loss on sale of operating assets of
Laureate Capital Corp.
(less applicable income taxes
of $200) (2,000) (2,000) (2,000)
Operating profits of Laureate
Capital Corp.
(less applicable income taxes of $111) 105 105 105
-----------------------------------------------------------------------------------------
Net income (loss) $ (3,459) $ 397(1) $ 451 $ 1,091 $(1,895) $ 256 $(3,159) $(1,076) $(4,235)
=========================================================================================
</TABLE>
(1) Revenues and expenses have been allocated on a direct basis to the
extent possible.
Management believes that these and all other revenues and expenses have been
allocated to the respective divisions on a reasonable basis.
(2) See discussion of unusual items in Management's Discussion and
Analysis.
<TABLE>
<CAPTION>
AGENCY-ELIGIBLE
--------------------------------
FOR THE QUARTER ENDED JUNE 30, 1999 SUB- COMMERCIAL TOTAL OTHER/ CONSO-
(1) ($ IN THOUSANDS) PRODUCTION SERVICING REINSURANCE PRIME MORTGAGE LEASING SEGMENTS ELIMINATIONS LIDATED
-----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 2,651 $ (994) $ -- $ 3,983 $ -- $ 1,744 $ 7,384 $ (81) $ 7,303
Net gain on sale of mortgage loans 16,885 -- -- 7,517 -- -- 24,402 -- 24,402
Gain on sale of mortgage
servicing rights -- 1,825 -- -- -- -- 1,825 -- 1,825
Servicing fees -- 10,832 -- -- -- 166 10,998 (159) 10,839
Mark to market on residual interests
in subprime securitizations -- -- -- (2,618) -- -- (2,618) -- (2,618)
Other income (65) 183 (211) 1,991 -- 383 2,281 5 2,286
-----------------------------------------------------------------------------------------
Total revenues 19,471 11,846 (211) 10,873 -- 2,293 44,272 (235) 44,037
-----------------------------------------------------------------------------------------
Salary and employee benefits 10,902 907 -- 3,483 -- 713 16,005 (801) 15,204
Occupancy expense 1,759 100 -- 669 -- 110 2,638 549 3,187
Amortization and provision for impairment
of mortgage servicing rights -- 8,887 -- -- -- -- 8,887 -- 8,887
Provision expense 1,564 -- 57 433 -- 287 2,341 -- 2,341
General and administrative expenses 5,330 1,617 55 2,040 -- 316 9,358 18 9,376
-----------------------------------------------------------------------------------------
Total expenses 19,555 11,511 112 6,625 -- 1,426 39,229 (234) 38,995
-----------------------------------------------------------------------------------------
Income (loss) before income taxes (84) 335 (323) 4,248 -- 867 5,043 (1) 5,042
Income tax benefit (expense) 90 (19) 113 (1,579) -- (351) (1,746) (107) (1,853)
-----------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 6 $ 316 $(210) $ 2,669 $ -- $ 516 $ 3,297 $ (108) $ 3,189
Discontinued operations:
Operating profits of Laureate
Capital Corp.
(less applicable income taxes of $128) 147 147 147
-----------------------------------------------------------------------------------------
Net income (loss) $ 6 $ 316 $(210) $ 2,669 $ 147 $ 516 $ 3,444 $ (108) $ 3,336
=========================================================================================
</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.
35
<PAGE> 36
AGENCY-ELIGIBLE MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the
Company's agency-eligible mortgage production operations.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30,
---------------------------------
($ IN THOUSANDS) 2000 1999
----------- -----------
<S> <C> <C>
Net interest income $ 675 $ 2,651
Net gain on sale of mortgage loans 5,611 16,885
Other income 312 (65)
----------- -----------
Total production revenue 6,598 19,471
----------- -----------
Salary and employee benefits 6,235 10,902
Occupancy expense 2,833 1,759
Provision expense 352 1,564
General and administrative expenses 2,623 5,330
----------- -----------
Total production expenses 12,043 19,555
----------- -----------
Net pre-tax production margin $ (5,445) $ (84)
----------- -----------
Production $ 1,408,742 $ 2,136,412
Pool delivery 1,324,183 2,292,046
Total production revenue to pool delivery 50 bps 85 bps
Total production expenses to production 85 bps 92 bps
=========== ===========
Net pre-tax production margin (35) bps (7) bps
=========== ===========
</TABLE>
Summary
The production revenue to pool delivery ratio decreased 35 basis
points for the second quarter of 2000 as compared to the second quarter of
1999. Net gain on sale of mortgage loans (42 basis points for the first six
months of 2000 versus 74 basis points for the second quarter 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 12 basis points in the second quarter of 1999 to
5 basis points in the second quarter of 2000 primarily as a result of a
flattened yield curve. The production expenses to production ratio remained
relatively flat from the second quarter of 1999 to the second quarter of 2000,
in spite of a 34% decrease in production between periods. Total production
expenses declined $7.5 million from $19.5 million for the second quarter of
1999 to $12.0 million for the second quarter of 2000. Such decline in
production expenses included a $0.4 million reduction in salary and employee
benefits as a result of the curtailment of the Company's pension plan benefits
and changes in 401(k) benefits. As a consequence of the foregoing, the
Company's net agency-eligible pre-tax production margin declined 28 basis
points.
Net Interest Income
The following table analyzes net interest income allocated to the
Company's agency-eligible mortgage production activities in terms of rate and
volume variances of the interest spread (the difference between interest rates
earned on loans and mortgage-backed securities and interest rates paid on
interest-bearing sources of funds) for the quarters ended June 30, 2000 and
1999, respectively:
36
<PAGE> 37
<TABLE>
<CAPTION>
($ IN THOUSANDS)
Variance
Average Volume Average Rate Interest Attributable to
------------------------------------------ ------------------ ------------------
2000 1999 2000 1999 2000 1999 Variance Rate Volume
------------------------------------------ ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
---------------
Mortgages Held-for-Sale and
$393,064 $727,722 8.21% 6.50% Mortgage-Backed Securities $8,064 $11,826 $(3,762) $ 1,676 $(5,438)
------------------------------------------ ----------------------------------------------------
INTEREST EXPENSE
$337,325 $337,058 5.29% 2.93% Warehouse Line * $4,448 $ 2,460 $ 1,988 $ 1,986 $ 2
42,756 380,946 6.90% 5.14% Gestation Line 735 4,882 (4,147) 187 (4,334)
119,698 112,631 7.47% 5.79% Servicing Secured Line 2,229 1,625 604 502 102
3,538 31,283 6.01% 5.23% Servicing Receivables Line 53 408 (355) 7 (362)
7,661 7,025 8.74% 8.16% Other Borrowings 167 143 24 11 13
Facility Fees & Other Charges 940 588 352 -- 352
------------------------------------------ ----------------------------------------------------
$510,978 $868,943 6.73% 4.66% Total Interest Expense $8,572 $10,106 $(1,534) $ 2,693 $(4,227)
========================================== ====================================================
Net Interest Income Before
1.48% 1.84% Interdivisional Allocations $ (508) $ 1,720 $ (2,228) $(1,017) $(1,211)
=================== ==============================
Allocation to Agency-Eligible
Servicing Division 1,019 850
Allocation to Other 162 81
Intercompany Net Interest
Expense Included In
Segment 2 --
--------------------
Net Interest Income $ 675 $ 2,651
====================
</TABLE>
* The interest-rate yield on the warehouse line is net of the benefit of
escrow deposits.
The 36 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 JUNE 30,
-------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Gross proceeds on sales of mortgage loans $ 1,350,082 $ 2,297,236
Initial unadjusted acquisition cost of mortgage loans sold,
net of hedge results 1,353,873 2,298,209
----------- -----------
Unadjusted gain (loss) on sale of mortgage loans (3,791) (973)
Loan origination and correspondent program administrative fees 2,716 4,810
----------- -----------
Unadjusted aggregate margin (1,075) 3,837
Acquisition basis allocated to mortgage servicing rights
(SFAS No. 125) 7,683 13,433
Net deferred costs and administrative fees recognized (997) (385)
----------- -----------
Net gain on sale of agency-eligible mortgage loans $ 5,611 $ 16,885
=========== ===========
</TABLE>
Net gain on sale of agency-eligible mortgage loans decreased $11.3
million from $16.9 million for the second quarter of 1999 to $5.6 million for
the second quarter 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.
37
<PAGE> 38
Receivable from sale of mortgage-backed securities
The company sold certain mortgage-backed securities during the second
quarter of 2000, for which it did not receive the cash settlement until early
in the third quarter of 2000. This resulted in a $69.9 million receivable on
the June 30, 2000 Balance Sheet.
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 second quarter of 2000 and 1999, the Company
recognized premium and investment income of approximately $0.8 million and
($0.2) million, respectively, that has been included as other income in the
agency-eligible reinsurance segment.
SUBPRIME MORTGAGE OPERATIONS
Following is a comparison of the revenues and expenses of the
Company's subprime mortgage production operations:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30,
---------------------------------
($ IN THOUSANDS) 2000 1999
--------- ---------
<S> <C> <C>
Net interest income $ 3,571 $ 3,983
Net gain on sale of mortgage loans 3,738 7,517
Mark to market on residual interests in subprime securitizations (1,771) (2,618)
Other income 427 1,991
--------- ---------
Total production revenue 5,965 10,873
--------- ---------
Salary and employee benefits 1,581 3,483
Occupancy expense 676 669
Provision expense 168 433
General and administrative expenses 1,691 2,040
--------- ---------
Total production expenses 4,116 6,625
--------- ---------
Net pre-tax production margin $ 1,849 $ 4,248
--------- ---------
Production $ 168,830 $ 185,744
Whole loan sales and securitizations 171,123 224,286
Total production revenue to whole loan sales and securitizations 349 bps 485 bps
Total production expenses to production 244 bps 357 bps
--------- ---------
Net pre-tax production margin 105 bps 128 bps
========= =========
</TABLE>
Summary
During the second quarter of 2000, the Company produced $168.8 million
of subprime loans and sold $171.1 million in whole loan transactions. At June
30, 2000, the Company had unsold
38
<PAGE> 39
subprime mortgage loans of $134.9 million as compared to $145.1 million at June
30, 1999. Overall, the Company operated during the second quarter of 2000 at a
1.05% pre-tax subprime production margin. The $2.4 million (23 basis point)
decline in the pre-tax subprime production margin is primarily due to lower
volumes.
The $3.8 million decline in net gain on sale of subprime mortgage
loans is primarily attributable to lower volumes and lower margins attributable
to exclusive execution of 2000 whole loan sales versus a combination of
higher-margined securitizations and whole loan sales in the prior period.
Salary and employee benefit costs decreased by 55%, or $1.9 million,
from the second quarter of 1999 to the second quarter of 2000. The Company made
certain changes in the organization at its subprime units resulting in a net
reduction in previously established reorganization reserves of $0.9 million. The
Company also amended its defined benefit pension plan to freeze benefits under
the plan and simultaneously changed the benefits available to employees under
its 401(k) plan. See discussion of these and other unusual items elsewhere in
Management's Discussion and Analysis. Provision expense decreased by 61%, or
$0.3 million, primarily due to the decreased level of nonsaleable loans between
periods. The remaining production expenses remained relatively flat between
periods.
Net Interest Income
The following table analyzes net interest income allocated to the
Company's subprime mortgage production activities in terms of rate and volume
variances of the interest spread (the difference between interest rates earned
on loans and residual certificates and interest rates paid on interest-bearing
sources of funds) for the quarters ended June 30, 2000 and 1999, respectively.
<TABLE>
<CAPTION>
($ IN THOUSANDS)
Variance
Average Volume Average Rate Interest Attributable to
------------------------------------------ ------------------ ------------------
2000 1999 2000 1999 2000 1999 Variance Rate Volume
------------------------------------------ ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgages Held-for-Sale and
$213,650 $259,927 11.51% 10.14% Residual Certificates $6,149 $6,590 $(441) $732 $(1,173)
------------------------------------------ ----------------------------------------------------
$154,173 $197,577 7.10% 5.58% Total Interest Expense $2,729 $2,751 $ (22) $582 $ (604)
------------------------------------------ ----------------------------------------------------
4.41% 4.56% Net Interest Income $3,420 $3,839 $(419) $150 $ (569)
=================== =============================
Allocation to Agency-Eligible
Servicing Division -- 144
Intercompany Net Interest
Expense Included In
Segment 151 --
-------------------
Net Interest Income $3,571 $3,983
===================
</TABLE>
Net interest income from subprime products decreased to $3.6 million
for the second quarter of 2000 as compared to $4.0 million for the second
quarter of 1999. This was primarily a result of a flattened yield curve and the
decline in production volume, which was partially offset by $0.4 million
increase in accretion income from $1.5 million for the second quarter of 1999
to $1.9 million for the second quarter of 2000.
39
<PAGE> 40
Net Gain on Sale and Securitization of Subprime Mortgage Loans
The Company sold subprime mortgage loans on a whole loan basis during
the second quarter of 2000 and 1999. Whole loans are generally sold without
recourse to third parties with the gain or loss being calculated based on the
difference between the carrying value of the loans sold and the gross proceeds
received from the purchaser less expenses. Generally, no interest in these
loans is retained by the Company.
A reconciliation of the gain on subprime mortgage whole loan sales for
the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE QUARTER ENDED JUNE 30,
---------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Gross proceeds on whole loan sales of subprime mortgage loans $ 177,477 $ 102,267
Initial acquisition cost of subprime mortgage loans sold,
net of fees 171,123 98,243
--------- ---------
Unadjusted gain on whole loan sales of subprime mortgage loans 6,354 4,024
Net deferred costs and administrative fees recognized (2,616) (1,565)
--------- ---------
Net gain on whole loan sales of subprime mortgage loans $ 3,738 $ 2,459
========= =========
</TABLE>
The net gain on whole loan sales of subprime mortgage loans increased
52% from $2.5 million for the second quarter of 1999 to $3.7 million reported
for the second 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 loans by $2.6 million in the second quarter of 2000 as compared to
$1.6 million in the second quarter of 1999.
There were no securitization transactions during the second quarter of
2000. A reconciliation of the gain on securitization of subprime mortgage loans
for the quarter ended June 30, 1999 follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE QUARTER ENDED JUNE 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. These residual
certificates are adjusted to approximate market
40
<PAGE> 41
value each quarter. For the quarters ended June 30, 2000 and 1999,
respectively, mark-to-market gain (loss) on residuals was approximately ($1.7)
million and ($2.6) million, respectively.
AGENCY-ELIGIBLE MORTGAGE SERVICING
Following is a comparison of the revenues and expenses of the
Company's agency-eligible mortgage servicing operations for the quarters ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30,
-----------------------------------
($ IN THOUSANDS) 2000 1999
----------- -----------
<S> <C> <C>
Net interest expense $ (1,019) $ (994)
Loan servicing fees 8,541 10,832
Other income 120 183
----------- -----------
Servicing revenues 7,642 10,021
Salary and employee benefits 680 907
Occupancy expense 56 100
Amortization and provision for impairment of mortgage
Servicing rights 5,932 8,887
General and administrative expenses 1,082 1,617
----------- -----------
Total loan servicing expenses 7,750 11,511
----------- -----------
Net pre-tax servicing margin (108) (1,490)
Gain on sale of mortgage servicing rights 731 1,825
=========== ===========
Net pre-tax servicing contribution $ 623 $ 335
=========== ===========
Average servicing portfolio $ 7,935,544 $ 9,623,230
Servicing sold 1,451,283 3,101,473
Net pre-tax servicing margin to average servicing portfolio (1) bp (6) bps
Gain on sale of servicing to servicing sold 5 bps 6 bps
</TABLE>
Summary
The ratio of net pre-tax servicing margin to the average servicing
portfolio increased 5 basis points primarily due to the $3.0 million reduction
in amortization and provision for impairment of mortgage servicing rights from
the second quarter of 1999 to the second quarter 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 rates. The 1 basis point decrease in the gain on sale
of servicing sold is primarily attributable to compressed margins in an
intensely competitive market during the second quarter of 2000. Loan servicing
fees were $8.5 million for the second quarter of 2000, compared to $10.8
million for the second quarter of 1999, a decrease of 21%, 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.
41
<PAGE> 42
Net Interest Expense
The net interest expense for the second quarter of 2000 and the second
quarter of 1999 is composed of benefits from escrow accounts of $2.3 million
and $2.1 million, respectively, that is offset by $3.3 million and $3.1
million, respectively, in interest expense.
Gain on Sale of Mortgage Servicing Rights
A reconciliation of the components of gain on sale of mortgage
servicing rights for the periods indicated follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE QUARTER ENDED JUNE 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Underlying unpaid principal balances of agency-eligible
mortgage loans on which servicing rights were sold
during the period $ 1,451,283 $ 3,101,473
=========== ===========
Gross proceeds from sales of mortgage servicing rights $ 40,308 $ 84,158
Initial acquisition basis, net of amortization and hedge
results 34,976 62,000
----------- -----------
Unadjusted gain on sale of mortgage servicing rights 5,332 22,158
Acquisition basis allocated from mortgage loans, net of
amortization (SFAS No. 125) (4,601) (20,333)
----------- -----------
Gain on sale of mortgage servicing rights $ 731 $ 1,825
=========== ===========
</TABLE>
Gain on sale of mortgage servicing rights decreased $1.1 million from
$1.8 million for the second quarter of 1999 to $0.7 million for the second
quarter 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
During the second quarter, the Company decided to dispose of its
commercial mortgage operation, Laureate Capital Corp. (Laureate). Based on
market indications to date, the Company expects to realize net proceeds equal
to the tangible book value of Laureate. Accordingly, the Company recorded a $2
million after-tax charge during the quarter, primarily related to the write-off
of intangible assets of Laureate.
LEASING OPERATIONS
Following is a summary of the revenues and expenses of the Company's
small-ticket equipment leasing operations for the periods indicated:
42
<PAGE> 43
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30,
------------------------------
($ IN THOUSANDS) 2000 1999
-------- --------
<S> <C> <C>
Net interest income $ 2,293 $ 1,744
Other income 304 383
-------- --------
Leasing production revenue 2,597 2,127
-------- --------
Salary and employee benefits 678 713
Occupancy expense 126 110
Provision expense 1,162 287
General and administrative expenses 328 316
-------- --------
Total lease operating expenses 2,294 1,426
-------- --------
Net pre-tax leasing production margin 303 701
Servicing fees 133 166
-------- --------
Net pre-tax leasing margin $ 436 $ 867
-------- --------
Average owned leasing portfolio $167,767 $117,344
Average serviced leasing portfolio 9,085 27,215
-------- --------
Average managed leasing portfolio $176,852 $144,559
======== ========
Leasing production revenue to average owned portfolio 619 bps 725 bps
Leasing operating expenses to average owned portfolio 547 bps 486 bps
-------- --------
Net pre-tax leasing production margin 72 bps 239 bps
======== ========
Servicing fees to average serviced leasing portfolio 586 bps 243 bps
======== ========
</TABLE>
The 22% increase in leasing production revenue for the second quarter
of 2000 as compared to the second quarter of 1999 is primarily due to the 43%
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 167 bps in the second quarter of 2000 as compared to the
second 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.
Net Interest Income
Net interest income for the second quarter of 2000 was $2.3 million as
compared to $1.7 million for the second quarter of 1999. This is equivalent to
an annualized net interest margin of 3.93% and 2.72% for the second quarter of
2000 and 1999, respectively, based upon average lease receivables owned of
$167.8 million and $117.3 million, respectively, and average debt outstanding
of $142.3 and $80.3 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)
43
<PAGE> 44
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 first quarter of 2000, the Company
began reconsidering it's current positioning in the market and its corporate,
management and leadership structures. As a result, the Company is continuing
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 reduction
in the previously established reorganization reserves of $1.1 million during
the period. In connection with the planned reorganization, a number of senior
management positions have been scheduled for elimination during the remainder
of the year.
During the second quarter of 2000, the Company decided to dispose of
its commercial mortgage operation, Laureate Capital Corp. (Laureate). Based on
market indications to date, the Company expects to realize net proceeds equal
to the tangible book value of Laureate. 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 Company
realized a gain on sale of a branch facility. The Company contributed to a fund
that will benefit qualified charitable organizations. The Company incurred
expenses for consultants who are assisting management in re-engineering work
processes.
The net impact of these unusual items in the second 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>
Salary and employee
benefits $ (380) $ (45) $ (824) $ (22) $ 21 $(1,250)
General and administrative
expenses 452 452
Other income (392) (392)
------------------------------------------------------------------------------------
Net pre-tax effect on
continuing operations (380) (45) (824) (22) 81 (1,190)
Estimated allocable income
tax 142 17 305 8 (31) 441
------------------------------------------------------------------------------------
Net after-tax impact on
continuing operations (238) (28) (519) (14) 50 (749)
Loss on sale of operating
assets of Laureate Capital
Corp. $ 2,000 $ 2,000
Operating profits of
Laureate Capital Corp. (105) (105)
------------------------------------------------------------------------------------
Net after-tax impact $ (238) $ (28) $ (519) $ 1,895 $ (14) $ 50 $ 1,146
====================================================================================
</TABLE>
44
<PAGE> 45
FINANCIAL CONDITION
During the second quarter of 2000, the Company experienced a 32%
increase in the volume of production originated and acquired compared to the
first quarter of 2000. Production increased from $1.4 billion during the first
quarter of 2000 to $1.9 billion during the second quarter of 2000. The June 30,
2000, locked residential mortgage application pipeline (mortgage loans not yet
closed but for which the interest rate has been locked) was approximately $0.6
billion and the application pipeline (mortgage loans for which the interest
rate has not yet been locked) was approximately $0.5 billion. This compares to
a locked mortgage application pipeline of $0.5 billion and a $0.4 billion
application pipeline at March 31, 2000.
Mortgage loans held-for-sale and mortgage-backed securities totaled
$0.6 billion at June 30, 2000, versus $0.5 billion at December 31, 1999, an
increase of 19%. The Company's servicing portfolio (exclusive of loans under
subservicing agreements) decreased to $7.4 billion at June 30, 2000, from $7.8
billion at December 31, 1999, a decrease of 5%. The company sold certain
mortgage-backed securities during the first six months of 2000, for which it
did not receive the cash settlement until early in the second quarter of 2000.
This resulted in a $69.9 million receivable on the June 30, 2000 condensed
consolidated balance sheet.
Short-term borrowings, which are the Company's primary source of
funds, totaled $0.9 billion at June 30, 2000, compared to $0.7 billion at
December 31, 1999, an increase of 22%. At June 30, 2000, there were $6.2
million in long-term borrowings, compared to $6.3 million at December 31, 1999.
Other liabilities totaled $91.6 million as of June 30, 2000, compared to the
December 31, 1999 balance of $84.8 million, an increase of $6.8 million, or 8%.
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 $165 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,
45
<PAGE> 46
(iii) RBMG, Inc.'s eligibility as a servicer of Ginnie Mae, FHA, VA, Fannie Mae
and Freddie Mac mortgage loans, (iv) a mortgage servicing rights portfolio with
an underlying unpaid principal balance of at least $5 billion and (v) a ratio of
consolidated cash flow to consolidated interest expense (these terms are defined
in the loan agreements) of at least 1.25 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 June 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 September 25, 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 August 2000. The interest rate on funds borrowed is
based upon the prime rate announced by a major money center bank.
Republic Leasing, a wholly-owned subsidiary of the Company, has a $200
million credit facility to provide financing for its leasing portfolio. The
warehouse credit agreement matures in 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
46
<PAGE> 47
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 June 30, 2000, the Company had remaining
authority to repurchase up to $1.3 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 June 30, 2000, there
were 5,641,804 shares held in the Company's treasury account at an average cost
of $7.60 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.
47
<PAGE> 48
SUMMARY
On a combined divisional basis, during the six months ended June 30,
2000 and 1999, the Company generated approximately $13.6 million and $54.3
million, respectively, of positive funds from continuing operations.
<TABLE>
<CAPTION>
($ in thousands) FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Agency-eligible production $ (7,897) $ 32,776
Agency-eligible servicing 12,407 16,858
Subprime production 5,993 6,150
Leasing 3,077 2,150
--------- ---------
$ 13,580 $ 57,934
========= =========
</TABLE>
Each of the Company's divisions produced positive operating funds
during both periods except for agency-eligible production in the first six
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 SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Income (loss) before income taxes $ (11,873) $ 17,718
Deduct:
Net gain on sale of mortgage loans, as reported (11,817) (50,078)
Add back:
Cash gains on sale of mortgage loans (139) 15,346
Cash gains on sale of mortgage servicing rights 11,733 44,104
Depreciation 2,947 2,014
Provision expense 1,252 3,672
--------- ---------
$ (7,897) $ 32,776
========= =========
</TABLE>
48
<PAGE> 49
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 SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Income before income taxes $ 1,664 $ 2,509
Deduct:
Net gain on sale of mortgage servicing
rights, as reported (1,539) (4,823)
Add back:
Amortization and provision for impairment of
Mortgage servicing rights 12,209 17,320
Depreciation
73 1,852
---------- ----------
$ 12,407 $ 16,858
========== ==========
</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.
49
<PAGE> 50
<TABLE>
<CAPTION>
($ in thousands) FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Income (loss) before income taxes $ (7,776) $ 3,774
Deduct:
Net gain on sale of subprime loans, as reported (6,179) (10,374)
Accretion income on residuals (3,786) (2,955)
Add back:
Cash gains on sale of whole subprime loans 10,334 7,450
Cash received from investments in residual certificates 1,471 2,742
Depreciation and amortization
of goodwill and intangibles 1,573 614
Provision expense 910 932
Mark to market on residuals 9,446 3,967
---------- ----------
$ 5,993 $ 6,150
========== ==========
</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 SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999
-------- --------
<S> <C> <C>
Income before income taxes $ 1,391 $ 1,327
Add back:
Depreciation and amortization of
goodwill and intangibles 165 153
Provision expense 1,521 670
-------- --------
$ 3,077 $ 2,150
======== ========
</TABLE>
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
50
<PAGE> 51
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.
51
<PAGE> 52
PART II. OTHER INFORMATION
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
DURING THE PERIOD OF APRIL 1, 2000, THROUGH JUNE 30, 2000, THE
FOLLOWING MATTERS WERE SUBMITTED TO A VOTE OF SECURITY HOLDERS:
AT THE ANNUAL MEETING OF THE SHAREHOLDERS OF THE COMPANY ON MAY 3,
2000, THE SHAREHOLDERS ELECTED ROBIN C. KELTON, BOYD M. GUTTERY,
DOUGLAS K. FREEMAN AND JOHN O. WOLCOTT TO SERVE AS DIRECTORS OF THE
COMPANY. MR. KELTON AND MR. FREEMAN WILL SERVE FOR THREE YEAR TERMS
EXPIRING AT THE 2003 ANNUAL MEETING OF SHAREHOLDERS. MR. GUTTERY'S
TERM EXPIRES AT THE 2001 ANNUAL MEETING. MR. WOLCOTT'S TERM EXPIRES AT
THE 2002 ANNUAL MEETING. MR. KELTON RECEIVED 15,751,445 VOTES, 73,362
VOTES WERE WITHHELD WITH NO VOTES AGAINST. MR. GUTTERY RECEIVED
15,748,999 VOTES, 75,808 VOTES WERE WITHHELD WITH NO VOTES AGAINST.
MR. FREEMAN RECEIVED 15,752,627 VOTES, VOTES WERE 72,180 WITHHELD WITH
NO VOTES AGAINST. MR. WOLCOTT RECEIVED 15,750,246 VOTES, 74,561 VOTES
WERE WITHHELD WITH NO VOTES AGAINST.
AT THE ANNUAL MEETING OF THE SHAREHOLDERS OF THE COMPANY ON MAY 3,
2000, THE SHAREHOLDERS VOTED TO APPROVE AN AMENDMENT TO THE STOCK
INVESTMENT PLAN. THE APPROVAL RECEIVED 15,384,538 VOTES, 44,624 SHARES
ABSTAINED AND 395,645 SHARES VOTED AGAINST.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- (A) A LIST OF EXHIBITS FILED WITH THIS FORM 10-Q, ALONG WITH THE
EXHIBIT INDEX CAN BE FOUND ON PAGES A TO G FOLLOWING THE
SIGNATURE PAGE.
- (B) NO REPORTS ON FORM 8K WERE FILED DURING THE QUARTER ENDED JUNE
30, 2000.
52
<PAGE> 53
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
(Registrant)
/s/ Steven F. Herbert
---------------------------------------------
Steven F. Herbert
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: August 14, 2000
53
<PAGE> 54
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Registrant incorporated by *
reference to Exhibit 3.3 of the Registrant's Registration No. 33-53980
3.2 Certificate of Amendment of Certificate of Incorporation of the *
Registrant incorporated by reference to Exhibit 3.2 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997
3.3 Certificate of Designation of the Preferred Stock of the Registrant *
incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-A
filed on February 8, 1998
3.4 Amended and Restated Bylaws of the Registrant incorporated by reference *
to Exhibit 3.4 of the Registrant's Registration No. 33-53980
3.5 Amendment to Bylaws of Resource Bancshares Mortgage Group, Inc. dated *
January 28, 1999 incorporated by reference to Exhibit 3.5 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998
3.6 Amendment to Bylaws of Resource Bancshares Mortgage Group, Inc. *
incorporated by reference to Exhibit 3.1 of the Registrant's
Registration No. 333-82105
3.7 Amendment to Bylaws of Resource Bancshares Mortgage Group, Inc. dated _____
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
</TABLE>
A
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C> <C>
10.4 (A) Deferred Compensation Agreement dated June 3, 1993, between the *
Registrant and David W. Johnson, Jr. incorporated by reference to
Exhibit 10.10 (A) of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993
(B) Deferred Compensation Rabbi Trust, for David W. Johnson, dated *
January 19, 1994, between Registrant and First Union National Bank of
North Carolina incorporated by reference to Exhibit 10.10 (C) of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993
10.5 Employment Agreement dated June 30, 1995, between the Registrant and *
Steven F. Herbert incorporated by reference to Exhibit 10.34 of the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1995
10.6 (A) Employment Agreement dated April 3, 2000, between Resource _____
Bancshares Mortgage Group, Inc. and Harold Lewis, Jr.
(B) Change of Control Agreement dated May 3 by and between Resource _____
Bancshares Mortgage Group, Inc. and Harold Lewis, Jr.
10.7 Office Building Lease dated March 8, 1991, as amended by Modification *
of Office Lease dated October 1, 1991, incorporated by reference to
Exhibit 10.5 of the Registrant's Registration No. 33-53980
10.8 Assignment and Assumption of Office Lease incorporated by reference to *
Exhibit 10.6 of the Registrant's Registration No. 33-53980
10.9 Governmental Real Estate Sub-Lease-Office, between Resource Bancshares *
Mortgage Group, Inc. and the South Carolina Department of Labor,
Licensing and Regulation incorporated by reference to Exhibit 10.19 of
the Registrant's Quarterly Report on Form 10-Q for the period ended
March 31, 1994
10.10 First Sub-Lease Amendment to Governmental Real Estate Sub-Lease-Office, *
between Resource Bancshares Mortgage Group, Inc. and the South Carolina
Department of Labor, Licensing and Regulation incorporated by reference
to Exhibit 10.20 of the Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 1994
10.11 Request for Extension of Governmental Real Estate Sub-Lease-Office, *
between the Registrant and the South Carolina Department of Labor,
Licensing and Regulation dated December 12, 1995 incorporated by
reference to Exhibit 10.39 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995
10.12 Section 125 Plan incorporated by reference to Exhibit 10.17 of the *
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993
10.13 Pension Plan incorporated by reference to Exhibit 10.18 of the *
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993
10.14 Amendment I to Pension Plan incorporated by reference to Exhibit 10.21 *
of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994
</TABLE>
B
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C> <C>
10.15 Amendment II to Pension Plan incorporated by reference to Exhibit 10.22 *
of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994
10.16 (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
(B) Amendment Four to Pension Plan effective May 31, 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 _____
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 accounts under
the Pension Restoration Plan effective May 31, 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 *
</TABLE>
C
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C> <C>
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.
(B) Incentive Stock Option Agreement pursuant to Resource Bancshares *
Mortgage Group, Inc. Omnibus Stock Award Plan between Resource
Bancshares Mortgage Group, Inc. and Douglas K. Freeman dated as of
January 10, 2000 incorporated by reference to Exhibit 10.23 (B) of the
Registrants Quarterly Report on Form 10-Q for the period ended March
31, 2000
(C) 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
(D) Indemnity Agreement between Resource Bancshares Mortgage Group, *
Inc. and Douglas K. Freeman dated as of January 10, 2000 incorporated
by reference to Exhibit 10.23 (D) 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
</TABLE>
D
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C> <C>
(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 Amendment to Resource Bancshares Mortgage Group, Inc. Formula Stock *
Option Plan and Non-Qualified Stock Option Plan incorporated by
reference to Exhibit 10.42 of the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 1997
10.33 First Amendment to the Formula Stock Option Plan incorporated by *
reference to Exhibit 99.8 of the Registrant's Registration No.
333-29245 as filed on December 1, 1997
10.34 Second Amendment to Resource Bancshares Mortgage Group, Inc. Formula *
Stock Option Plan dated October 28, 1998 incorporated by reference to
Exhibit 10.34 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998
10.35 Amended and Restated Omnibus Stock Award Plan incorporated by reference *
to Exhibit 99.10 of the Registrant's Registration No. 333-29245 filed
on December 1, 1997
10.36 First Amendment to Omnibus Stock Award Plan and form of Incentive Stock *
Option Agreement and Release to the Omnibus Stock Award Plan
incorporated by reference to Exhibit 10.44 of the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1998.
10.37 Second Amendment to Resource Bancshares Mortgage Group, Inc. Omnibus *
Stock Award Plan dated October 29, 1998 incorporated by reference to
Exhibit 10.37 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998
10.38 (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) _____
(C) Form of Incentive Stock Option Agreement (Omnibus Stock Award Plan)
effective June 2000 ($16 vesting provisions) _____
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
</TABLE>
E
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C> <C>
10.42 Second Amendment to the Non-Qualified Stock Option Plan dated February *
6, 1998 incorporated by reference to Exhibit 10.40 of the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 1998
10.43 Third Amendment to Resource Bancshares Mortgage Group, Inc. *
Non-Qualified Stock Option Plan dated October 28, 1998 incorporated by
reference to Exhibit 10.43 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998
10.44 Agreement and Release Form of Non-Qualified Stock Option Agreement *
incorporated by reference to Exhibit 10.41 of the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 1998
10.45 Amended and Restated Retirement Savings Plan dated April 1, 1996 *
incorporated by reference to Exhibit 10.34 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996
10.46 First Amendment to Amended and Restated Retirement Savings Plan dated *
as of November 8, 1996 incorporated by reference to Exhibit 10.35 of
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1996
10.47 (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 _____
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
</TABLE>
F
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C> <C>
10.51 Resource Bancshares Mortgage Group, Inc. Flexible Benefits Plan Amended *
and Restated as of January 1, 1998 incorporated by reference to Exhibit
10.51 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998
10.52 The Resource Bancshares Mortgage Group, Inc. Nonqualified Deferred
Compensation Plan effective April 1, 1999 incorporated by reference to
Exhibit 10.52 of the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1999 *
10.53 Voluntary Employees' Beneficiary Association Trust for the Employees 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 _____
10.56 MSC Stock Option Agreement between Resource Bancshares Mortgage Group,
Inc. and Stuart M. Cable dated February 2, 2000 _____
10.57 Director Deferred Compensation Plan dated June 2000 _____
10.58 Outside Director Life Insurance Plan dated June 2000 _____
11.1 Statement re: Computation of Net Income per Common Share _____
27.1 Financial Data Schedule _____
</TABLE>
--------------
* Incorporated by reference
G
