<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-12655
Homeside International, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 59-3387041
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7301 Baymeadows Way, Jacksonville, FL 32256
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(Address of principal executive offices) (Zip Code)
(904) 281-3000
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(Registrant's telephone number, including area code)
Indicate the number of shares outstanding of each of the Company's classes of
common stock, as of the latest practicable date.
Title of Each Class Outstanding at December 28, 2000
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Common stock $0.01 par value 1
Class C non-voting common stock $1.00 par value none
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
HomeSide International, Inc. (the "Company"), through its wholly-owned
operating subsidiary, HomeSide Lending, Inc. ("HomeSide Lending"), is one of the
largest full service residential mortgage banking companies in the United
States. The Company was formerly known as HomeSide, Inc. ("HomeSide, Inc.
Predecessor"). On February 10, 1998, National Australia Bank, Ltd. (the
"National") acquired all outstanding shares of the common stock of HomeSide,
Inc. and the Company adopted a fiscal year end of September 30 to conform to the
fiscal year of the National (see Note 2 of the Consolidated Financial
Statements). HomeSide, Inc. Predecessor commenced operations by acquiring
BankBoston Mortgage Corporation, the mortgage banking subsidiary of BankBoston,
N.A., on March 16, 1996 and subsequently purchased the mortgage banking
operations of Barnett Banks, Inc. Unless otherwise designated, the term
"HomeSide" refers to the Company for the periods subsequent to February 10, 1998
and to HomeSide, Inc. Predecessor for the periods March 16, 1996 to February 10,
1998.
HomeSide's strategy emphasizes variable cost mortgage loan originations,
low cost mortgage servicing and effective risk management. Headquartered in
Jacksonville, Florida, HomeSide ranks as the 6th largest mortgage servicer and
the 12th largest mortgage loan originator in the United States at September 30,
2000 based on data published by Inside Mortgage Finance.
The residential mortgage market, which totaled approximately $5.1 trillion
at September 30, 2000, is the largest debt market in the world. The residential
mortgage market has grown at a compound annual rate of approximately 8% since
1985. HomeSide competes in a mortgage banking market which is highly fragmented
with no single company controlling or dominating the market. At September 30,
2000, the largest originator represented 7.1% of the market and the largest
servicer represented 8.4%, while the top 30 originators and servicers
represented 64.7% and 61.2% of their markets, respectively, based on data
published by Inside Mortgage Finance. Residential mortgage lenders compete
primarily on the basis of loan pricing and service, making effective cost
management essential. The industry has experienced rapid consolidation which has
been accelerated by the introduction of significant technology improvements and
the economies of scale present in mortgage servicing. The top 10 mortgage loan
servicers have increased their aggregate market share from 17% in 1990 to 44% as
of September 30, 2000.
HomeSide's business strategy is to increase the volume of its loan
originations and the size of its servicing portfolio while continuing to improve
operating efficiencies. In originating mortgages, HomeSide focuses on variable
cost channels of production, including correspondent, broker, consumer direct,
affinity, and co-issue sources. HomeSide also pursues strategic relationships
with other production sources to acquire and service residential mortgage loans.
Management believes that these variable cost channels of production deliver
consistent origination opportunities for HomeSide without the fixed cost
investment associated with traditional retail mortgage branch networks. HomeSide
believes that its ongoing investment in technology will further enhance and
expand existing processing capabilities and improve its efficiency. Based on
independent surveys of direct cost per loan and loans serviced per employee,
management believes that HomeSide has been one of the industry's most efficient
mortgage servicers. The Company's average cost per employee approximates the
average cost per employee of its major competitors.
HomeSide plans to build its core operations through (i) improved economies
of scale in servicing costs; (ii) increased productivity using proprietary
technology; and (iii) expanded and diversified variable cost origination
channels. In addition, HomeSide intends to pursue additional loan portfolio
acquisitions and strategic origination relationships similar to its existing
relationships with its Preferred Partners (see Note 4 to the Consolidated
Financial Statements).
HomeSide's business activities consist primarily of:
Mortgage production: origination and purchase of residential single
family mortgage loans through multiple channels including correspondents,
strategic partners, mortgage brokers, co-issue partners, direct consumer
telemarketing, affinity programs, and online mortgage services;
Servicing: administration, collection and remittance of monthly
mortgage principal and interest payments, collection and payment of
property taxes and insurance premiums and management of certain loan
default activities;
Secondary marketing: sale of residential single family mortgage loans
as pools underlying mortgage-backed securities guaranteed or issued by
governmental or quasi-governmental agencies or as whole loans or private
securities to investors; and
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Risk management: program designed to protect and manage the value of
the Company's mortgage loans held for sale and mortgage commitment pipeline
and to protect the economic performance of the servicing portfolio that
could otherwise be adversely affected by loan prepayments due to declines
in interest rates.
PRODUCTION
HomeSide participates in several origination channels, with a focus on
wholesale origination. Since the acquisition of BancBoston Mortgage Corporation
("BBMC"), wholesale channels (correspondent, co-issue, and broker) have
represented more than 90% of HomeSide's total production. Excluding the volumes
purchased from BankBoston, N.A., Barnett Bank, N.A. ("Barnett") and Banc One
Mortgage Corporation, no single source within the correspondent, co-issue or
broker channels accounted for more than 7% of total production since March 16,
1996. HomeSide's other origination channels include internet and telemarketing,
direct mail campaigns and other advertising, and mortgages related to affinity
group and co-branding partnerships. HomeSide also purchases servicing rights in
bulk from time to time. HomeSide's strategy is to customarily sell all loans
that it originates or purchases while retaining the servicing rights to such
loans. This multi-channel production base provides access to and flexibility
among production channels in a wide variety of market and economic conditions.
HomeSide competes nationwide by offering a wide variety of mortgage
products designed to respond to consumer needs and tailored to address market
competition. HomeSide is primarily an originator of fixed rate 15- and 30-year
mortgage loans, which collectively represented 96% of the total production in
the fiscal year ended September 30, 2000, 98% of the total production in the
fiscal year ended September 30, 1999, and 98% of the total production in the
period from February 11, 1998 to September 30, 1998. HomeSide also offers other
products, such as ARMs, balloon, and jumbo mortgages.
HomeSide's national loan production operation has resulted in
geographically diverse originations, enabling HomeSide to diversify its risk
across many markets in the United States. HomeSide's servicing portfolio
composition reflects its production markets. The largest segments of the
servicing portfolio by state on September 30, 2000 were California (12.4% of
unpaid principal balance), Florida (8.7%), Illinois (8.1%), Texas (5.9%) and
Michigan (5.5%). The largest segments of the servicing portfolio by state on
September 30, 1999 were California (11.8% of unpaid principal balance), Florida
(9.7%), Illinois (8.5%), Texas (5.6%) and Michigan (5.0%). The largest segments
of the servicing portfolio by state on September 30, 1998 were California (14.1%
of unpaid principal balance), Florida (14.0%), Texas (6.9%), Massachusetts
(5.5%) and Illinois (4.9%). Refer to the table on page seven.
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general national pattern of sales and resales of homes.
Sales and resales of homes typically peak during the spring and summer seasons
and decline to lower levels from mid-November through February. Refinancings
tend to be less seasonal and more closely related to changes in interest rates.
Historically, changes in the interest rate environment have mitigated the impact
of seasonality on HomeSide's results of operations. In addition, delinquency
rates typically rise in the winter months, which result in higher servicing
costs. However, late charge income has historically been sufficient to offset
such incremental expenses.
HomeSide's production strategy is to maintain and improve its reputation as
one of the largest, most efficient originators of mortgage loans nationwide. Its
variable cost loan origination channels can be adjusted to accommodate varying
market sizes and allow HomeSide to remain competitive through interest rate
cycles. HomeSide also plans to continue to pursue bulk acquisitions of mortgage
servicing rights.
WHOLESALE PRODUCTION
Correspondent Production
Through its correspondent program, HomeSide purchases loans from
approximately 900 commercial banks, savings and loan associations, licensed
mortgage lenders and other financial intermediaries. The correspondent takes the
mortgage application and processes the loan, which is either underwritten
through contract underwriters or, in some cases, the correspondent to whom
underwriting authority has been delegated. Closing documents are submitted to
HomeSide for legal review and funding. The participants in this program are
prequalified and monitored on an ongoing basis by HomeSide. If a correspondent
subsequently fails to meet HomeSide's requirements, HomeSide typically
terminates the relationship. Correspondents are also required to repurchase
loans in the event of fraud or misrepresentation in the origination process and
for certain other reasons.
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Co-Issue Production
Co-issue production, which represents the purchase of servicing rights of
new production originated by correspondents under contracts to deliver specified
volumes on a monthly or quarterly basis, is another main source of HomeSide's
production. The co-issue correspondent controls the entire loan process from
application to closing. This arrangement particularly suits large originators
who have the ability to deliver on an automated basis. Reflecting this delegated
underwriting authority, the co-issue correspondent is obligated to make certain
representations and warranties and is required to repurchase loans in the event
of fraud or misrepresentation in the origination process or for certain other
reasons.
Broker Production
Under its broker program, HomeSide funds loans at closing from a network of
approximately 2,000 mortgage brokers nationwide. The broker controls the process
of application and loan processing. A pre-closing quality control review is
performed by HomeSide to verify the borrower's credit. All loans originated
through brokers are underwritten by HomeSide's approved contract underwriters.
Loans are funded by HomeSide and may be closed in either the broker's name or
HomeSide's name. Participants in this program prequalify on the basis of
creditworthiness, mortgage lending experience and reputation. Each broker is
subject to annual and ongoing reviews by HomeSide.
DIRECT PRODUCTION
HomeSide's direct production includes soliciting loans via its website and
the use of telemarketing from several sources, including refinancing of mortgage
loans in HomeSide's existing servicing portfolio, leads generated from direct
mail campaigns and other advertising, and mortgages related to affinity group
and co-branding partnerships. HomeSide believes that these efforts will have a
significant effect on increasing the percentage of loans captured from loan
prepayments in HomeSide's servicing portfolio. Refinancing retention represents
the percentage of loans refinanced through HomeSide's direct channel that were
serviced by HomeSide prior to refinancing.
BULK ACQUISITION
Bulk acquisition is the large scale purchase of mortgage servicing rights.
In connection with such acquisitions, HomeSide does not purchase the underlying
mortgage loans which were originated by other originators. HomeSide may purchase
servicing rights on an exclusive basis or through a competitive bidding process
and plans to continue this practice on an opportunistic basis in order to grow
its servicing portfolio and benefit from economies of scale.
UNDERWRITING AND QUALITY CONTROL
Underwriting
HomeSide's loans are underwritten in accordance with applicable Federal
National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage
Corporation ("FHLMC" or "Freddie Mac"), Veterans Administration ("VA"), and
Federal Housing Administration ("FHA") guidelines, as well as certain private
investor requirements. The underwriting process is organized by origination
channel and by loan type. HomeSide currently employs underwriters with an
average of ten years of underwriting experience.
HomeSide requires approximately 50% of its correspondent lenders to have
their loans underwritten by third party contract underwriters prior to purchase.
These contract underwriters are designated by HomeSide and include Mortgage
Guaranty Insurance Corp. and Republic Mortgage Insurance Company. HomeSide
grants delegated underwriting status to the remaining approximately 50% of
correspondents which enables the correspondents to submit conventional loans to
HomeSide without prior underwriting approval. 100% of HomeSide's broker loans
are underwritten by these contract underwriters or by HomeSide's underwriting
employees. Generally, HomeSide grants delegated underwriting status to its
larger correspondents who meet financial strength, delinquency, underwriting and
quality control standards, and such correspondents are monitored regularly. The
FHA and VA require that loans be underwritten by the originating lender on an
Agency-approved or delegated basis. If issuance of FHA guarantees or VA
insurance certificates is denied, the correspondent must repurchase the loan.
HomeSide's underwriting process for its retail production operation is
fully automated. The automated underwriting technology uses third-party vendor
systems to analyze credit risk. HomeSide believes that these technologies have
contributed to improved productivity and reduced underwriting and processing
turnaround time.
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Quality Control
HomeSide maintains a compliance and quality assurance department that
operates independently of the production, underwriting, secondary marketing and
loan administration department. For its production compliance process, HomeSide
randomly selects a statistical sample or 10% of closed loans monthly, whichever
is less, of certain loan products and customers for review. In addition, a
random risk-based audit of approximately 200 conforming conventional loans
receive a fraud audit monthly. These reviews include reunderwriting of such
loans, ordering second appraisals on 10% of the sample, reverifying funds,
employment and final applications and reordering credit reports. In addition, a
full underwriting review is conducted on (i) all jumbo loans that become thirty
days delinquent in the first four payments and jumbo loans that go into
foreclosure in the first thirty-six months and (ii) all conventional loans that
become sixty days delinquent in the first six payments. Document and file
reviews are also undertaken to ensure regulatory compliance. In addition, random
reviews of the servicing portfolio, covering selected aspects of the loan
administration process, are conducted.
HomeSide monitors the performance of loan underwriting through quality
assurance reports, U.S. Department of Housing and Urban Development ("HUD")
reports and audits, Veterans Administration ("VA") reports and audits, reviews
and audits by regulatory agencies, investor reports and mortgage insurance
company audits. According to HomeSide's quality control findings, less than 5%
of its loans have underwriting issues that affect salability to the secondary
market. Flaws in these loans are generally corrected; otherwise, the holder of
the mortgage-backed security is indemnified against future losses resulting from
such flaws by HomeSide or, ultimately, the originating correspondent.
Correspondents or co-issue partners are required to repurchase any flawed loans
originated by them.
SECONDARY MARKETING
HomeSide customarily sells all loans that it originates or purchases while
retaining the servicing rights to such loans. HomeSide aggregates mortgage loans
into pools and sells these pools, as well as individual mortgage loans, to
investors principally at prices established under forward sales commitments.
HomeSide's FHA and VA loans are generally pooled and sold in the form of
Government National Mortgage Association ("Ginnie Mae" or "GNMA") Mortgage
Backed Securities. Conforming conventional mortgage loans are generally pooled
and exchanged under the purchase and guarantee programs sponsored by Fannie Mae.
HomeSide pays certain guarantee fees to the Agencies in connection with these
programs and then sells the GNMA and Fannie Mae securities to securities
dealers. A limited number of mortgage loans (i.e. non-conforming loans) are sold
to private investors on a servicing-released basis. For the fiscal year ended
September 30, 2000, approximately 97% of the mortgage loans originated by
HomeSide were sold to Fannie Mae (53%) and GNMA (44%). For the fiscal year ended
September 30, 1999, approximately 94% of the mortgage loans originated by
HomeSide were sold to Fannie Mae (49%), GNMA (28%), and FHLMC (17%). For the
period from February 11, 1998 to September 30, 1998, approximately 92% of the
mortgage loans originated by HomeSide were sold to Fannie Mae (36%), GNMA (34%),
and FHLMC (22%). The remaining were sold to private investors.
The sale of mortgage loans may generate a gain or loss to HomeSide. Gains
or losses result primarily from two factors. First, HomeSide may purchase a loan
at a price that may be higher or lower than HomeSide would receive if it
immediately sold the loan in the secondary market. These pricing differences
occur principally as a result of competitive pricing conditions in the primary
loan origination market. Second, gains or losses may result from fluctuations in
interest rates that create changes in the market value of the loans or
commitments to purchase loans, from the time the interest rate commitment is
given to the mortgagor until the loan is sold to an investor.
HomeSide assesses the interest rate risk associated with outstanding
commitments that it has extended to fund loans and hedges the interest rate risk
of these commitments based upon a number of factors, including the remaining
term of the commitment, the interest rate at which the commitment was provided,
current interest rates and interest rate volatility. HomeSide constantly
monitors these factors and adjusts its hedging on a daily basis as needed.
HomeSide uses the Quantitative Risk Management system, a sophisticated hedging,
reporting and evaluation system, which has the ability to perform analyses under
various interest rate scenarios. HomeSide's interest rate risk is currently
hedged using a combination of forward sales of mortgage backed securities and
over-the-counter options, including both puts and calls, on fixed income
securities. HomeSide generally commits to sell to investors for delivery at a
future time for a stated price all of its closed loans and a percentage of the
mortgage loan commitments for which the interest rate has been established.
HomeSide aims to price loans competitively, hedge the interest rate risk of loan
originations and sell loans on a break-even basis. HomeSide realizes net
servicing revenue from the future servicing of the loans sold. For the fiscal
years ended September 30, 2000 and September 30, 1999, and the period from
February 11, 1998 to September 30, 1998, HomeSide has not experienced secondary
marketing losses on an aggregate basis.
HomeSide's policy is to sell mortgage loans on a non-recourse basis.
However, in the case of VA loans aggregated to form GNMA pools, the VA's loan
guarantees do not cover the entire principal balance of the loan and HomeSide is
responsible for losses which exceed the VA's guaranteed limitations. In
connection with HomeSide's loan exchanges and sales, HomeSide makes
representations and warranties customary in the industry relating to, among
other things, compliance with laws, regulations and program standards, and to
the accuracy of information. In the event of a breach of these representations
and warranties, HomeSide typically corrects such problems, but,
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if the problems cannot be corrected, may be required to repurchase such loans.
In cases where loans are originated by a correspondent, HomeSide may sell the
flawed loan back to the correspondent under a repurchase obligation.
LOAN SERVICING
HomeSide derives its revenues predominantly from its servicing operations.
HomeSide anticipates that the sale of servicing rights will not be a significant
component of its business strategy in the future. Since its formation, HomeSide
has also maintained a risk management program designed to protect, within
certain parameters, the economic value of its servicing portfolio, which is
subject to prepayment risk when interest rates decline, providing mortgagors
with refinancing opportunities.
Loan servicing includes collecting payments of principal and interest from
borrowers, remitting aggregate loan payments to investors, accounting for
principal and interest payments, holding escrow funds for payment of mortgage
related expenses such as taxes and insurance, making advances to cover
delinquent payments, inspecting the mortgaged premises as required, contacting
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults, and other miscellaneous duties related to loan
administration. HomeSide collects servicing fees from monthly mortgage payments.
These fees generally range from 0.25% to 0.50% of the declining principal
balances of the loans per annum. HomeSide's weighted average servicing fee net
of guaranty fees and including ancillary income was 0.476% for the fiscal year
ended September 30, 2000, 0.467% for the fiscal year ended September 30, 1999
and 0.468% for the period from February 11, 1998 to September 30, 1998. HomeSide
also maintains certain subservicing relationships whereby servicing is performed
by another servicer under an agreement with HomeSide, which remains
contractually responsible for servicing the loans. Subservicing relationships
are often entered into as part of a bulk servicing acquisition where the selling
institution continues to perform servicing until the loans are transferred to
the purchasing institution.
HomeSide's servicing strategy is to continue to build its mortgage
servicing portfolio and benefit from the economies of scale inherent in the
business. HomeSide services substantially all of the mortgage loans that it
originates. In addition, HomeSide purchases the rights to service mortgage loans
originated by other lenders.
HomeSide's servicing strategy is also to enhance the profitability of its
servicing activities through low cost and efficient processes. This strategy is
pursued through highly automated, cost effective processing systems, strategic
outsourcing of selected servicing functions and effective control of
delinquencies and foreclosures. HomeSide outsources functions relating to
insurance, taxes and default management to third party vendors, contributing to
HomeSide's ability to maintain a highly variable cost structure. Using a variety
of factors, including loans serviced per employee and direct cost per loan,
management believes that HomeSide is one of the nation's most efficient
servicers based on industry surveys. Management believes that its low cost
servicing provides it with a competitive advantage in the industry.
SERVICING PORTFOLIO COMPOSITION
HomeSide originates and purchases servicing rights for mortgage loans
nationwide. The broad geographic distribution of HomeSide's servicing portfolio
reflects the national scope of HomeSide's originations and bulk servicing
acquisitions. Ten states accounted for 59.4% of the outstanding unpaid principal
balance ("UPB") of HomeSide's total servicing portfolio, and the largest volume
by state is California with a 12.4% share of the total portfolio on September
30, 2000. Ten states accounted for 59.8% of the outstanding unpaid principal
balance ("UPB") of HomeSide's total servicing portfolio, and the largest volume
by state was California with a 11.8% share of the total portfolio on September
30, 1999. Ten states accounted for 59.3% of the outstanding unpaid principal
balance ("UPB") of HomeSide's total servicing portfolio on September 30, 1998,
while the largest volume by state was California with a 14.1% share of the total
portfolio. HomeSide actively monitors the geographic distribution of its
servicing portfolio to maintain a mix that it deems appropriate and makes
adjustments as it considers necessary.
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The following table sets forth the geographic distribution of the Company's
servicing portfolio as of September 30, 2000, September 30, 1999 and September
30, 1998:
SERVICING PORTFOLIO BY STATE (a)
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT SEPTEMBER 30, 1999 AT SEPTEMBER 30, 1998
--------------------- --------------------- ---------------------
(DOLLARS IN MILLIONS) UPB % OF UPB UPB % OF UPB UPB % OF UPB
--- -------- --- -------- --- --------
<S> <C> <C> <C> <C> <C> <C>
California $ 18,924 12.4% $ 16,334 11.8% $ 15,859 14.1%
Florida 13,221 8.7 13,424 9.7 15,750 14.0
Illinois 12,322 8.1 11,740 8.5 5,544 4.9
Texas 8,911 5.9 7,825 5.6 7,772 6.9
Michigan 8,346 5.5 6,981 5.0 (b) (b)
Connecticut 6,749 4.4 6,737 4.9 (b) (b)
New York 6,285 4.1 4,809 3.5 3,144 2.8
Massachusetts 5,903 3.9 6,295 4.5 6,190 5.5
Maryland 5,012 3.3 4,924 3.5 4,498 4.0
Georgia 4,669 3.1 3,936 2.8 3,676 3.3
Arizona 4,558 3.0 4,402 3.2 4,405 3.9
Indiana 4,620 3.0 4,240 3.1 (b) (b)
Other (b) 52,724 34.6 47,101 33.9 45,571 40.6
-------- ----- -------- ----- -------- -----
Total $152,244 100.0% $138,748 100.0% $112,409 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
(a) Servicing statistics are based on loans serviced by HomeSide and exclude
loans purchased but not yet on the servicing system of $21.1 billion at
September 30, 2000, $6.9 billion at September 30, 1999, and $3.4 billion at
September 30, 1998. The increased amount in fiscal year 2000 was due to the
increase in bulk acquisitions during the fourth quarter that had not been
transferred onto the servicing system.
(b) No other state represents more than 3.0% of HomeSide's servicing portfolio
at September 30, 2000, September 30, 1999 or September 30, 1998.
SERVICING PORTFOLIO BY LOAN TYPE
At September 30, 2000, HomeSide's servicing portfolio consisted of $53.5
billion of FHA/VA servicing and $119.8 billion of conventional servicing. At
September 30, 1999, HomeSide's servicing portfolio consisted of $44.2 billion of
FHA/VA servicing and $101.4 billion of conventional servicing. At September 30,
1998, HomeSide's servicing portfolio consisted of $47.5 billion of FHA/VA
servicing and $68.3 billion of conventional servicing.
The weighted average interest rate of the loans in the Company's servicing
portfolio was 7.58% at September 30, 2000, 7.44% at September 30, 1999, 7.72% at
September 30, 1998. HomeSide's servicing portfolio of loans was stratified by
interest rate as follows:
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SERVICING PORTFOLIO BY INTEREST RATE (a)
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT SEPTEMBER 30, 1999 AT SEPTEMBER 30, 1998
--------------------- --------------------- ---------------------
UPB UPB UPB
(DOLLARS IN % OF CUMULATIVE (DOLLARS IN % OF CUMULATIVE (DOLLARS IN % OF CUMULATIVE
INTEREST RATE MILLIONS) UPB % OF UPB MILLIONS) UPB % OF UPB MILLIONS) UPB % OF UPB
------------- ----------- ---- ---------- ----------- ---- ---------- ----------- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Less than 6.0% $ 397 0.5% 0.3% $ 631 0.5% 0.5% $ 1,113 1.0% 1.0%
6.0% to 6.9% 30,821 20.2 20.5 32,353 23.3 23.8 13,491 12.0 13.0
7.0% to 7.9% 75,520 49.6 70.1 77,552 56.0 79.8 56,217 50.0 63.0
8.0% to 8.9% 37,596 24.7 94.7 22,258 16.0 95.8 33,012 29.4 92.4
9.0% to 9.9% 6,340 4.2 98.9 4,085 2.9 98.7 5,907 5.2 97.6
10.0% to 10.9% 1,218 0.8 99.7 1,435 1.0 99.7 2,081 1.8 99.4
Over 11.0% 352 0.3 100.0 434 0.3 100.0 588 0.6 100.0
----------------- ------------------ ----------------
Total $152,244 100.0% $138,748 100.0% $112,409 100.0%
================= ================== ================
</TABLE>
(a) Servicing statistics are based on loans serviced by HomeSide and exclude
loans purchased not yet on servicing system.
LOAN SERVICING PORTFOLIO DELINQUENCIES, FORECLOSURES AND LOSSES
HomeSide is affected by loan delinquencies and defaults on loans that it
services. Under certain types of servicing contracts, particularly contracts to
service loans that have been pooled or securitized, HomeSide must forward all or
part of the scheduled payments to the owner of the loan, even when loan payments
are delinquent. Also, to protect their liens on mortgaged properties, owners of
loans usually require a servicer to advance scheduled mortgage and hazard
insurance and tax payments even if sufficient escrow funds are not available.
HomeSide is generally reimbursed, subject to certain limitations with respect to
FHA/VA loans as described below, by the mortgage owner or from liquidation
proceeds for payments advanced that the servicer is unable to recover from the
mortgagor, although the timing of such reimbursements is typically uncertain. In
the interim, HomeSide absorbs the cost of funds advanced during the time the
advance is outstanding. Further, HomeSide bears the increased costs of
collection activities on delinquent and defaulted loans. HomeSide also foregoes
servicing income from the time such loans become delinquent until foreclosure,
when, if any proceeds are available, HomeSide may recover such amounts.
Delinquency rates typically rise in the winter months, which result in higher
servicing costs. However income from late payment fees collected have
historically been sufficient to offset such incremental expenses.
HomeSide periodically incurs losses attributable to servicing FHA and VA
loans for investors, including actual losses for final disposition of loans that
have been foreclosed or assigned to the FHA or VA and accrued interest on such
FHA or VA loans for which payment has not been received. The VA guarantees the
initial losses on a loan. The guaranteed amount generally ranges from 20% to 35%
of the original principal balance. Before each foreclosure sale, the VA
determines whether to bid by comparing the estimated net sale proceeds to the
outstanding principal balance and the servicer's accumulated reimbursable costs
and fees. If this amount is a loss and exceeds the guaranteed amount, the VA
typically issues a no-bid and pays the servicer the guaranteed amount. Whenever
a no-bid is issued, the servicer absorbs the loss, if any, in excess of the sum
of the guaranteed principal and amounts recovered at the foreclosure sale.
HomeSide's historical delinquency and foreclosure rate experience on VA loans
has generally been consistent with that of the industry.
For HomeSide, servicing losses on investor-owned loans and
foreclosure-related expenses, primarily representing losses on VA loans, totaled
$33.3 million for the fiscal year ended September 30, 2000, $31.7 million for
the fiscal year ended September 30, 1999 and $21.2 million for the period
February 11, 1998 to September 30, 1998. Management believes that it has an
adequate level of reserve for servicing losses on investor-owned loans based on
HomeSide's servicing volume, portfolio composition, credit quality and
historical loss rates, as well as estimated future losses. Servicing losses are
generally greatest during the three to six year age of the loan.
SERVICING PORTFOLIO HEDGING PROGRAM
The value of HomeSide's servicing portfolio is subject to volatility in the
event of unanticipated changes in prepayments. As interest rates increase,
prepayments by mortgagors decrease as fewer owners refinance, increasing
expected future cash flows from servicing revenue. Conversely, as interest rates
decrease, prepayments by mortgagors increase as homeowners seek to refinance
their mortgages, reducing expected future cash flows from servicing revenues on
those prepaid mortgages. Since the value of servicing rights is based on the net
present value of future cash flows, the value of the portfolio decreases in a
declining interest rate environment and increases in a rising rate environment.
8
<PAGE> 9
HomeSide's risk management policy is designed to minimize exposure to loss
in the value of the servicing portfolio caused by prepayments due to declines in
interest rates. The servicing portfolio is valued using sophisticated cash flow
valuation tools. Key assumptions involved in the valuation include servicing
costs and revenues, market discount rates, prepayment speeds and a number of
other variables. The value is then analyzed under various interest rate
scenarios that help HomeSide estimate its exposure to loss. This potential loss
exposure determines the hedge profile, which is monitored daily and may be
adjusted to reflect significant moves in key variables such as interest rate and
yield curve changes and revised prepayment speed assumptions. Results of the
risk management program depend on a variety of factors, including the hedge
instruments typically used by HomeSide, the relationship between mortgage rates,
Treasury rates, swap rates, volatility and certain other factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Management Activities" for the fiscal years ended September
30, 2000 and September 30, 1999 and the period from February 11, 1998 to
September 30, 1998.
SERVICING TECHNOLOGY
HomeSide's proprietary servicing technology accommodates all areas of loan
servicing, including loan setup and maintenance, cashiering, escrow
administration, investor accounting, customer service and default management.
The platform is mainframe based, with on-line, real-time architecture and is
supported by an experienced staff of technology providers.
HomeSide expects to achieve significant competitive advantages over time
through the use of its proprietary servicing software. At September 30, 2000,
approximately 1.9 million loans were serviced on the proprietary servicing
system. This architecture will support HomeSide's portfolio growth up to
approximately twice the number of loans typically serviced on a single system
and is also used by the National to service its growing loan portfolio. The
system will also permit continued development of workflow and other
client-server applications, contributing to increased productivity.
REGULATION
As a United States subsidiary of a foreign bank, HomeSide is subject to
regulation, supervision and examination by the Federal Reserve Board. HomeSide's
mortgage banking business is also subject to the rules and regulations of the
U.S. Department of Housing and Urban Development ("HUD"), the Federal Housing
Administration ("FHA"), the Veterans Administration ("VA"), the Federal National
Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation
("FHLMC" or "Freddie Mac"), the Government National Mortgage Association ("GNMA"
or "Ginnie Mae") and other regulatory agencies with respect to originating,
processing, underwriting, selling, securitizing and servicing mortgage loans. In
addition, there are other federal and state statutes and regulations affecting
such activities. These rules and regulations, among other things, impose
licensing obligations on HomeSide, prohibit discrimination and establish
underwriting guidelines which include provisions for inspections and appraisals,
require credit reports on prospective borrowers and set maximum loan amounts.
Moreover, lenders such as HomeSide are required annually to submit audited
financial statements to Fannie Mae, FHLMC, GNMA and HUD and to comply with each
regulatory entity's own financial requirements. HomeSide's business is also
subject to examination by Fannie Mae, FHLMC and GNMA and state regulatory
agencies at all times to assure compliance with applicable regulations, policies
and procedures.
Mortgage origination activities are subject to the provisions of various
federal and state statutes including, among others, the Equal Credit Opportunity
Act, the Federal Truth-in Lending Act, RESPA, the Fair Housing Act, and the
regulations promulgated thereunder, which among other provisions, prohibit
discrimination, prohibit unfair and deceptive trade practices and require the
disclosure of certain basic information to mortgagors concerning credit terms
and settlement costs, limit fees and charges paid by borrowers and lenders, and
otherwise regulate terms and conditions of credit and the procedures by which
credit is offered and administered. Many of the aforementioned regulatory
requirements are designed to protect the interests of consumers, while others
protect the owners or insurers of mortgage loans. Failure to comply with these
requirements can lead to loss of approved status, termination of servicing
contracts without compensation to the servicers, demands for indemnification or
loan repurchases, class action lawsuits and administrative enforcement actions.
Such regulatory requirements are subject to change from time to time and may in
the future become more restrictive, thereby making compliance more difficult or
expensive or otherwise restricting HomeSide's ability to conduct its business as
it is now conducted.
There are various other state and local laws and regulations affecting
HomeSide's operations. HomeSide is licensed in those states that require
licensing to originate, purchase and/or service mortgage loans. Conventional
mortgage operations may also be subject to state usury statutes. FHA and VA
loans are exempt from the effect of such statutes.
9
<PAGE> 10
COMPETITION
Mortgage bankers operate in a highly competitive and fragmented market. As
of September 30, 2000, the largest originator of loans represented 7.1% of the
market and the largest servicer represented 8.4%, while the top 30 originators
and servicers represented 64.7% and 61.2% of their markets, respectively, based
on data published by Inside Mortgage Finance.
TOP 10 ORIGINATORS AND SERVICERS (DOLLARS IN BILLIONS)
<TABLE>
<CAPTION>
ORIGINATIONS FOR FIRST NINE MONTHS - 2000 SERVICING PORTFOLIO AT SEPTEMBER 30, 2000
----------------------------------------- -----------------------------------------
<S> <C> <C> <C>
1 Chase Home Finance, NJ $53.9 1 Wells Fargo Home Mortgage, IA $430.5
2 Wells Fargo Home Mortgage, IA 48.3 2 Chase Home Finance, NJ 353.7
3 Countrywide Credit Industries, CA 43.2 3 Bank of America Consumer Real Estate Lending, NC 334.5
4 Bank of America Mtg. & Affiliates, NC 40.5 4 Countrywide Credit Industries, CA 274.3
5 Washington Mutual, WA 38.0 5 Washington Mutual, WA 180.9
6 ABN AMRO Mortgage Group, IL 16.4 6 HomeSide Lending, Inc., FL 173.3
7 Cendant Mortgage Services, NJ 16.3 7 GMAC Mortgage Corp., PA 160.5
8 National City Mortgage Co., OH 15.5 8 Fleet Mortgage Group, SC 132.9
9 Fleet Mortgage Group, SC 15.3 9 First Nationwide Mortgage, CA 110.6
10 PNC Mortgage, IL 14.9 10 ABN AMRO Mortgage Group, IL 104.2
</TABLE>
Source: Inside Mortgage Finance.
HomeSide competes with other mortgage bankers, financial institutions, and
other providers of financial services. The underwriting guidelines and servicing
requirements set by the participants in the secondary markets are standardized.
As a result, mortgage banking products (i.e., mortgage loans and the servicing
of those loans) have become difficult to differentiate. Therefore, mortgage
bankers compete primarily on the basis of price or service, making effective
cost management essential.
Mortgage bankers generally seek to develop cost efficiencies in one of two
ways: economies of scale or specialization. Large full-service national or
regional mortgage bankers have sought economies of scale through an emphasis on
wholesale originations, the introduction of automated processing systems and
expansion through acquisition. Smaller companies frequently identify and pursue
a particular expertise or customer base in an attempt to create a market niche.
The industry has experienced rapid consolidation which has been accelerated
by the introduction of significant technology improvements and the economies of
scale present in mortgage servicing. The automation of many functions in
mortgage banking, especially those related to servicing, has reduced costs
significantly for industry participants. Many mortgage bankers that were not low
cost, high volume producers or did not operate in a low cost specialized field
experienced earnings declines in the nineties, causing many to exit the business
or to be acquired. Surviving cost effective firms purchased servicing portfolios
or other companies to expand their servicing economies of scale, while others
acquired market niche operations. As evidence of this consolidation, the top 10
mortgage loan servicers have increased their aggregate market share from 17% in
1990 to 44% as of September 30, 2000.
EMPLOYEES
As of September 30, 2000, September 30, 1999 and September 30, 1998,
respectively, HomeSide had approximately 2,340 total employees, 2,611 total
employees and 2,356 total employees, substantially all of whom were full-time
employees. HomeSide has no unionized employees and considers its relationship
with its employees generally to be satisfactory.
ITEM 2. PROPERTIES
HomeSide's corporate, administrative, and servicing headquarters are
located in Jacksonville, Florida, in facilities which comprise 144,227 square
feet of owned space and approximately 397,054 square feet of leased space.
Included in the leased total is approximately 81,025 square feet of warehouse
space used for storing certain loan files, loan servicing documents, furniture,
fixtures and equipment. In addition, HomeSide leases approximately 180,699
square feet of office space in various locations across the United States.
At September 30, 2000, HomeSide owned a 190,000 square feet building in San
Antonio, Texas of which HomeSide occupies 77%, or approximately 146,300 square
feet. In October 2000, HomeSide entered into a sale/lease-back contract on this
building (see Note 20 of the Consolidated Financial Statements).
HomeSide believes that its current facilities are adequate for its present
operations.
10
<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS
HomeSide is a defendant in a number of legal proceedings arising in the
normal course of business. HomeSide, in management's estimation, has recorded
adequate reserves in the financial statements for pending litigation.
Management, after reviewing all actions and proceedings pending against or
involving HomeSide, considers that the aggregate liability or loss, if any,
resulting from the final outcome of these proceedings will not have a material
effect on the financial position of HomeSide.
In recent years, the mortgage banking industry has been subject to class
action lawsuits which allege violations of federal and state laws and
regulations, including the propriety of collecting and paying various fees and
charges. Class action lawsuits may be filed in the future against the mortgage
banking industry.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As a consequence of the acquisition by the National, there is no market for
the Registrant's common equity. HomeSide is an indirect wholly-owned subsidiary
of the National.
11
<PAGE> 12
PART II
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial and operating information of HomeSide set
forth below for the fiscal years ended September 30, 2000 and September 30, 1999
and for the period from February 11, 1998 to September 30, 1998, should be read
in conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements and the notes thereto and in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of HomeSide included elsewhere in this document. See Item 6 on page
46 for the selected consolidated financial data of HomeSide Inc., Predecessor.
The periods presented coincide with the commencement of operations of HomeSide
and the acquisition of HomeSide by the National (see Note 2 of the Consolidated
Financial Statements):
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
OCTOBER 1, 1999 TO OCTOBER 1, 1998 TO FEBRUARY 11, 1998 TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ --------------------
SELECTED STATEMENT OF EARNINGS DATA:
<S> <C> <C> <C>
Revenues:
Mortgage servicing fees $ 732,164 $ 609,522 $ 315,510
Amortization of mortgage servicing rights (405,728) (409,929) (191,693)
------------- ------------- -------------
Net servicing revenue 326,436 199,593 123,817
Interest income 121,951 181,173 99,749
Interest expense (168,651) (132,161) (70,761)
------------- ------------- -------------
Net interest (expense) revenue (46,700) 49,012 28,988
Net mortgage origination revenue 68,475 155,937 79,179
Other income 5,683 5,844 11,028
------------- ------------- -------------
Total revenues 353,894 410,386 243,012
Expenses:
Salaries and employee benefits 112,634 132,716 73,983
Occupancy and equipment 31,980 28,319 13,107
Servicing losses on investor-owned loans 33,301 31,749 21,202
and foreclosure related expenses
Goodwill amortization 35,896 35,817 22,780
Other expenses 52,502 60,939 39,825
------------- ------------- -------------
Total expenses 266,313 289,540 170,897
Income before income taxes 87,581 120,846 72,115
Income tax expense 38,269 59,181 37,009
------------- ------------- -------------
Net income $ 49,312 $ 61,665 $ 35,106
============= ============= =============
SELECTED BALANCE SHEET DATA AT END OF PERIOD:
Mortgage loans held for sale, net $ 1,441,216 $ 1,292,562 $ 2,048,989
Mortgage servicing rights, net 4,464,312 3,488,957 1,779,180
Total assets 7,267,033 6,391,355 5,751,557
Bank credit facility 1,735,400 1,505,401 2,749,000
Commercial Paper 1,500,000 1,163,903 --
Long-term debt 1,899,772 1,331,292 1,337,783
Total liabilities 5,993,816 5,117,813 4,488,605
Total stockholders' equity 1,273,217 1,273,542 1,262,952
============= ============= =============
SELECTED OPERATING DATA:
Volume of loan production $ 20,286,100 $ 30,933,088 $ 16,826,364
Loan servicing portfolio (at period end) 173,310,242 145,551,780 115,800,362
Loan servicing portfolio (average
outstanding during the period) 153,965,875 130,413,226 107,821,822
Weighted average interest rate of the
servicing portfolio (at period end) 7.58% 7.44% 7.72%
Weighted average servicing fee of the
servicing portfolio, net of guaranty fees 0.476% 0.467% 0.468%
and including ancillary income
(for the period)
</TABLE>
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HOMESIDE - FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
AND FOR THE PERIOD FROM FEBRUARY 11, 1998 TO SEPTEMBER 30, 1998
GENERAL
HomeSide International, Inc. (the "Company" or "HomeSide"), through its
wholly-owned subsidiary, HomeSide Lending, Inc., is one of the largest full
service residential mortgage banking companies in the United States. HomeSide's
strategy emphasizes variable cost mortgage loan originations, low cost mortgage
servicing and effective risk management. Headquartered in Jacksonville, Florida,
HomeSide ranks as the 12th largest mortgage loan originator and the 6th largest
servicer in the United States at September 30, 2000 based on data published by
Inside Mortgage Finance.
On February 10, 1998, National Australia Bank, Ltd. (the "National") acquired
all outstanding shares of the common stock of the Company. As consideration, the
National paid $27.825 per share for all of the outstanding common stock and
$17.7 million cash to retire all outstanding stock options. The total purchase
price was approximately $1.2 billion. The transaction was accounted for as a
purchase. As a result, all assets and liabilities were recorded at their fair
value on February 11, 1998, and the purchase price in excess of the fair value
of net assets acquired of $719.6 million was recorded as goodwill, which was
reduced by $15.7 million in September 2000 (see Note 3 of the Consolidated
Financial Statements). Following the transaction described above, the National
owns 100% of the Company's common stock and the Company has become an indirect
wholly-owned subsidiary of the National. The Company also adopted a fiscal year
end of September 30 to conform to the fiscal year of the National.
The following periods presented coincide with the acquisition of HomeSide by the
National (see Note 2 of the Consolidated Financial Statements). HomeSide's
operating results are not directly comparable to the historical operating
results of HomeSide, Inc. Predecessor due, in part, to different balance sheet
valuations (estimated fair value as compared to historical cost).
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. This report contains forward-looking
statements, which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including those identified below, which
could cause actual results to differ materially from historical results or those
anticipated. The words "believe," "expect," "anticipate," "intend," "estimate"
and other expressions, which indicate future events and trends, identify
forward-looking statements, which speak only as of their dates. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
The following factors could cause actual results to differ materially from
historical results or those anticipated: (1) the Company's ability to grow which
is dependent on its ability to obtain additional financing in the future for
originating loans, investment in servicing rights, working capital, capital
expenditures and general corporate purposes, (2) economic factors may negatively
affect the Company's profitability as the frequency of loan default tends to
increase in rising rate environments and (3) changes in interest rates may
affect the volume of loan originations and acquisitions, the interest rate
spread on loans held for sale, the amount of gain or loss on the sale of loans
and the value of the Company's servicing portfolio. These risks and
uncertainties are more fully detailed in the Company's filings with the
Securities and Exchange Commission.
Mortgage Banking
Mortgage banking is a specialized branch of the financial services industry
which primarily involves (i) originating and purchasing mortgage loans
("origination" and/or "production"); (ii) selling the originated mortgages to
third parties either as mortgage-backed securities or as whole loans ("secondary
marketing"); (iii) servicing of mortgage loans on behalf of the ultimate
purchasers, which includes the collection and disbursement of payments of
mortgage principal and interest, the collection of payments of taxes and
insurance premiums to pay property taxes and insurance premiums and management
of certain loan default activities (collectively, "servicing"); and (iv) risk
management, a program designed to protect and manage the value of the Company's
mortgage loans held for sale and mortgage commitment pipeline and to protect the
economic performance of the servicing portfolio that could otherwise be
adversely affected by increased loan prepayments due to declines in interest
rates.
Mortgage bankers originate loans generally through two channels: wholesale and
direct. Wholesale origination involves the origination of mortgage loans from
sources other than homeowners, including mortgage brokers and other mortgage
lenders. Direct origination typically includes (i) networks of retail loan
offices with sales staff that solicit business from homeowners, realtors,
builders and other real estate professionals, (ii) centers that use
telemarketing, direct mail, and advertising to market loans directly to home
buyers or homeowners, (iii) affinity and co-branding partnerships and (iv)
corporate relocation programs. Once originated or purchased, mortgage bankers
hold the
13
<PAGE> 14
loans temporarily ("warehousing") until they are sold, typically earning an
interest spread equal to the difference between the loan's interest rate and the
cost of financing the loan. Each loan is sold either excluding or including the
associated right to service the loan ("servicing retained" or "servicing
released," respectively).
Mortgage bankers rely mainly on short-term borrowings, such as warehouse lines,
to finance the origination of mortgages that are sold. Mortgage bankers also
borrow on a longer term basis to finance their servicing assets and working
capital requirements. Revenues consist primarily of those related to servicing
and, to a lesser extent, fees and interest spreads from originations. The major
expenses of a mortgage banker include costs of financing, operating costs
related to origination and servicing and the amortization of mortgage servicing
rights.
Mortgage bankers typically seek to retain the rights to service the loans they
originate or acquire in order to generate recurring fee income. The purchase and
sale of servicing rights can occur on a loan-by-loan basis ("flow") or on a
portfolio (group of loans) basis ("bulk" or "mini-bulk"). Prices for servicing
rights are typically stated as a multiple of the servicing fee or as a
percentage of the outstanding unpaid principal balance for a group of mortgage
loans. Values of servicing portfolios are generally based on the present value
of the servicing fee income stream, net of servicing costs, expected to be
received over the estimated life of the loans. The assets of a mortgage banking
company consist primarily of mortgage loans held for sale and the value of the
servicing rights.
Loan Production Activities
As a multi-channel loan production lender, HomeSide has one of the industry's
largest correspondent lending production operations, a full-service brokered
loan program and a national production center for consumer direct mortgage
lending. HomeSide also purchases servicing rights in bulk from time to time. By
focusing on production channels with a variable cost structure, HomeSide
minimizes the fixed costs associated with traditional mortgage branch offices.
Without the burden of high fixed cost loan origination networks, HomeSide is
positioned to weather a variety of interest rate environments. For the nine
months ended September 30, 2000, HomeSide was ranked the twelfth largest
originator in the United States, according to Inside Mortgage Finance, with
approximately 1.9% market share of the estimated $.8 trillion single-family
mortgage origination market.
The following information regarding loan production activities for HomeSide is
presented to aid in understanding the results of operations and financial
condition of HomeSide for the fiscal years ended September 30, 2000 and
September 30, 1999 and the period from February 11, 1998 to September 30, 1998
(in millions):
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL FOR THE PERIOD FROM
YEAR ENDED YEAR ENDED FEBRUARY 11, 1998 TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ --------------------
<S> <C> <C> <C>
Wholesale:
Correspondent $ 8,660 $17,927 $11,309
Co-issue(a)
9,053 7,737 2,906
Broker
1,945 3,818 1,980
------- ------- -------
Total wholesale
19,658 29,482 16,195
Direct
628 1,451 631
------- ------- -------
Total production
20,286 30,933 16,826
Bulk acquisitions(b)
28,624 35,608 18,947
------- ------- -------
Total production and acquisitions $48,910 $66,541 $35,773
======= ======= =======
</TABLE>
-----------------
(a) Represents the acquisition of servicing rights, which occurs concurrent
with the origination of the loan by a third party or on a flow basis.
Amounts represent the unpaid principal balance of mortgage debt to which
the acquired servicing rights relate.
(b) Represents the acquisition of servicing rights from another servicer.
Amounts represent the unpaid principal balance of mortgage debt to which
the acquired servicing rights relate.
Total loan production, excluding bulk acquisitions, was $20.3 billion for the
fiscal year ended September 30, 2000 compared to $30.9 billion for the fiscal
year ended September 30, 1999, a 34% decrease year over year. Total loan
production, excluding bulk acquisitions, was $16.8 billion for the period from
February 11, 1998 to September 30, 1998.
Correspondent lending volume decreased 52% from the prior year. For fiscal year
1999, correspondent lending volume was approximately equal to the period from
February 11, 1998 to September 30, 1998, on an annualized basis. Co-issue volume
increased 17% from the prior year. For fiscal year 1999, co-issue volume
increased 66%, on an annualized basis, compared to the period from February 11,
1998 to September 30, 1998. The decrease in fiscal year 2000 in correspondent
lending volume was due to the increased interest rates during the year. A major
contributor to fiscal year 2000 co-issue volumes and fiscal year 1999
correspondent and co-issue volumes were the additions of Bank One and People's
Bank as Preferred Partners on June 5, 1998 and November 23, 1998, respectively.
As Preferred
14
<PAGE> 15
Partners, Bank One and People's Bank will sell a significant portion of the
residential mortgage loans they originate to HomeSide over five years. Another
contributor to the increase in co-issue volume of fiscal year 2000 and 1999 was
the strategic alliance formed on June 15, 1999 between HomeSide and Cendant, one
of the largest retail mortgage loan originators in the United States. Cendant
agreed to sell up to $7 billion of servicing assets annually to HomeSide for a
five-year period. On March 31, 2000, HomeSide and Cendant entered into a
replacement agreement. Cendant has agreed to sell the servicing rights of up to
$9.0 billion in mortgage loans and no less than an amount based on their
quarterly flow volume per year to HomeSide through March 31, 2004.
On May 29, 1998, HomeSide purchased the operations of NationsBank's subsidiary,
Loan America, a national broker network. This purchase is contributing to
HomeSide's expansion of its broker network, a production channel that is key to
HomeSide's variable cost origination strategy. The broker channel volume
decreased 49% from the prior year due to the interest rate environment of fiscal
year 2000. For fiscal year 1999, the broker channel volume increased 21% from
the period from February 11, 1998 to September 30, 1998, on an annualized basis,
due to the low interest rate environment of fiscal year 1999.
Consumer direct lending volume decreased 57% from the prior year due to the
impact of the increased interest rates on the origination market. For fiscal
year 1999, consumer direct lending volume increased 44%, on annualized basis,
from the period from February 11, 1998 to September 30, 1998 due to the high
refinancing levels during fiscal year 1999. HomeSide made significant
investments during the fiscal year ended 1999 in its consumer direct technology
platform. This advanced platform combines telephone and internet loan
origination capabilities. In July 2000, HomeSide announced its online mortgage
solution, an e-commerce based origination service that is powered by Fannie
Mae's technology and features HomeSide's proprietary mortgage platform.
The interest rate environment has significantly affected the size of the
mortgage origination market, primarily refinances. When interest rates decline,
increasing numbers of mortgagors refinance their loans. As a result, the
mortgage origination market grows. During 1998 and 1999, periods of high
refinances, HomeSide strived to keep production at sustainable levels should the
market size decrease. As an alternative, HomeSide emphasizes its acquisitions
strategy to maintain and increase the servicing portfolio.
As part of this acquisition strategy, HomeSide completed bulk acquisitions
totaling $28.6 billion, $35.6 billion, and $18.9 billion for the fiscal years
ended September 30, 2000 and September 30, 1999 and for the period from February
11, 1998 to September 30, 1998, respectively. These purchases were a
continuation of HomeSide's targeted approach to grow the servicing portfolio.
Included in bulk acquisitions for the fiscal year ended 2000 are the rights to
service $6.2 billion in mortgage loans purchased from Old Kent Mortgage Company,
$5.5 billion in mortgage loans purchased from South Trust Mortgage Corporation,
$5.0 billion in mortgage loans purchased from Chase Mortgage Company, and $3.4
billion in mortgage loans purchased from Colonial Bank. Included in bulk
acquisitions for the fiscal year ended 1999 is the March 4, 1999 purchase of
First Chicago NBD Mortgage Company's $18.0 billion servicing portfolio. This
acquisition is an expansion of HomeSide's strategic alliance with Bank One. In
addition, First Chicago has committed to sell the servicing rights associated
with its residential mortgage originations to HomeSide on a flow basis. Also
included in 1999 bulk acquisitions are the rights to service $5.0 billion in
mortgage loans purchased from People's Bank on November 23, 1998 and $8.8
billion in mortgage loans purchased from Cendant during the fiscal year.
Included in bulk acquisitions for the period from February 11, 1998 to September
30, 1998 is the $16.6 billion servicing portfolio purchased from Bank One on
June 5, 1998.
Servicing Portfolio
Management believes that HomeSide is one of the most efficient mortgage loan
servicers in the industry based on its servicing cost per loan and the number of
loans serviced per employee. The servicing operation makes extensive use of
state-of-the-art technology, process re-engineering and expense management. With
a portfolio size of $173.3 billion, HomeSide services the loans of approximately
1.9 million homeowners from across the United States and is committed to
protecting the value of this important asset by a sophisticated risk management
strategy. HomeSide anticipates its low cost of servicing loans will continue to
maximize the bottom-line impact of its growing servicing portfolio. HomeSide's
focus on efficient and low cost processes is pursued through the selective use
of automation as well as the strategic outsourcing of selected servicing
functions and effective control of delinquencies and foreclosures. At September
30, 2000, HomeSide was ranked the sixth largest servicer in the United States,
with approximately 3.4% market share of the $5.1 trillion single family
mortgages outstanding, according to Inside Mortgage Finance
15
<PAGE> 16
The following information on the dollar amounts of loans serviced is presented
to aid in understanding the results of operations and financial condition of
HomeSide for the fiscal years ended September 30, 2000 and September 30, 1999
and for the period from February 11, 1998 to September 30, 1998 (in millions):
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL FOR THE PERIOD FROM
YEAR ENDED YEAR ENDED FEBRUARY 11, 1998 TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ ---------------------
<S> <C> <C> <C>
Balance at beginning of period $145,552 $115,800 $ 99,956
Additions 48,910 66,541 35,773
Reductions:
Scheduled amortization 4,268 3,386 1,749
Prepayments 15,640 30,413 16,959
Foreclosures 1,045 1,296 848
Sales of servicing 199 1,694 373
-------- -------- --------
Total reductions 21,152 36,789 19,929
-------- -------- --------
Balance at end of period $173,310 $145,552 $115,800
======== ======== ========
</TABLE>
The number of loans serviced at September 30, 2000 was 1,932,370 compared to
1,669,051 at September 30, 1999 and 1,409,595 at September 30, 1998. HomeSide's
strategy is to build its mortgage servicing portfolio by concentrating on
variable cost loan origination strategies, and as a result, benefit from
improved economies of scale. A key to efficiently servicing HomeSide's future
portfolio growth is its proprietary servicing software. This system allows
HomeSide to double the number of loans typically serviced on a single system.
HomeSide had substantially converted its loan servicing portfolio to its
proprietary servicing software at September 30, 1998.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO
THE FISCAL YEAR ENDED SEPTEMBER 30, 1999 AND FOR THE PERIOD FROM FEBRUARY 11,
1998 TO SEPTEMBER 30, 1998:
Summary
HomeSide's net income was $49.3 million, $61.7 million, and $35.1 million for
the fiscal years ended September 30, 2000 and September 30, 1999 and the period
from February 11, 1998 to September 30, 1998, respectively. HomeSide's net
income, excluding goodwill amortization from the acquisition of HomeSide by the
National, was $85.2 million for the year ended September 30, 2000, $97.5 million
for the year ended September 30, 1999, and $57.9 million for the period from
February 11, 1998 to September 30, 1998. Total revenues were $353.9 million for
the fiscal year ended September 30, 2000, $410.4 million for the fiscal year
ended September 30, 1999, and $243.0 million for the period from February 11,
1998 to September 30, 1998. Decreases in net income and revenues for the fiscal
year 2000 compared to fiscal year 1999 were primarily attributable to decreases
in loan production volumes due to increased interest rates. Annualized increases
in net income and revenues for the fiscal year 1999 compared to the period from
February 11, 1998 to September 30, 1998 mainly resulted from increases in loan
production volumes and growth in the servicing portfolio through strategic bulk
acquisitions. The U.S. housing market experienced record low mortgage rates and
high mortgage prepayment activity during fiscal year 1999. Total expenses
decreased for the fiscal year ended September 30, 2000 from the fiscal year
ended September 30, 1999 as a result of decreases in production volume. Total
expenses increased on an annualized basis for the fiscal year ended September
30, 1999 from the period February 11, 1998 to September 30, 1998 as a result of
increases in production volume, expenses associated with the growing mortgage
servicing portfolio, and high loan pre-payment activity.
Net Servicing Revenue
Net servicing revenue was $326.4 million for the fiscal year ended September 30,
2000 compared to $199.6 million for the fiscal year ended September 30, 1999 and
$123.8 million for the period from February 11, 1998 to September 30, 1998. Net
servicing revenue is comprised of mortgage servicing fees, ancillary servicing
revenue, and amortization of mortgage servicing rights expense.
Mortgage servicing fees increased 20% to $732.2 million for the fiscal year
ended September 30, 2000 from $609.5 million for the fiscal year ended September
30,1999. Mortgage servicing fees increased 21% in fiscal year 1999, on an
annualized basis, from $315.5 million for the period from February 11, 1998 to
September 30, 1998. These increases were primarily as a result of strategic
acquisitions and growth of the servicing portfolio through loan production
channels. Mortgage servicing fees were $315.5 million for the period from
February 11, 1998 to September 30,1998. The servicing portfolio increased to
$173.3 billion at September 30, 2000 compared to $145.6 billion at September 30,
1999 and $115.8 billion at September 30, 1998, due to additional production
volume and bulk acquisitions, partially offset by loan prepayments and scheduled
amortization. HomeSide's weighted average interest rate of the mortgage loans in
the servicing portfolio was 7.58% at September 30, 2000, 7.44% at September 30,
1999, and 7.72% at September 30, 1998. The weighted
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<PAGE> 17
average servicing fee, including ancillary income, for the servicing portfolio
was 0.476% for the fiscal year ended September 30, 2000, 0.467% for the fiscal
year ended September 30, 1999 and 0.468% for the period from February 11, 1998
to September 30, 1998.
Amortization expense decreased to $405.7 million for the fiscal year ended
September 30, 2000 from $409.9 million for the fiscal year ended September 30,
1999 due to decreased prepayment rates. Amortization expense was $191.7 million
for the period from February 11, 1998 to September 30, 1998. Amortization
expense increased in fiscal year 1999 compared to the period from February 11,
1998 to September 30, 1998 due to increased prepayment rates. Amortization
charges are highly dependent upon the level of prepayments during the period and
changes in prepayment expectations, which are significantly influenced by the
direction and level of long-term interest rate movements. A decrease in mortgage
interest rates results in an increase in prepayment estimates used in
calculating periodic amortization expense, while an increase in rates results in
a decrease in prepayment estimates. Because mortgage servicing rights are
amortized over the expected period of service fee revenues, an increase in
mortgage prepayment activity typically results in a shorter estimated life of
the mortgage servicing assets and, accordingly, higher amortization expense.
Conversely, a decrease in mortgage prepayment activity typically results in a
longer estimated life of the mortgage servicing assets and lower amortization
expense.
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the direction in
which rates are moving, the spread between short and long-term interest rates,
and the rates at which HomeSide is able to borrow. These factors influence the
size of the residential mortgage origination market, HomeSide's loan production
volumes and the interest rates HomeSide earns on loans and pays to its lenders.
Loan refinancing levels are the largest contributor to changes in the size of
the mortgage origination market. To reduce the cost of their home mortgages,
borrowers tend to refinance their loans during periods of declining interest
rates, increasing the size of the origination market and HomeSide's loan
production volumes. Higher loan production volumes result in higher average
balances of loans held for sale and consequently higher levels of interest
income earned on such loans prior to their sale. This higher level of interest
income due to increased volumes is partially offset by the lower rates earned on
the loans. Conversely, as interest rates rise, fewer borrowers refinance their
mortgages, resulting in a decrease in the mortgage origination market. Lower
loan production volumes result in lower average balances of loans held for sale
and consequently lower levels of interest income from interest earned on such
loans prior to their sale. This lower level of interest income due to decreased
volumes is partially offset by the higher rates earned on the loans.
Overall borrowing costs also fluctuate with changes in interest rates.
Currently, the interest expense HomeSide pays to finance mortgage loans held for
sale and other net assets is generally calculated with reference to short-term
interest rates. In addition, because mortgage loans held for sale earn interest
based on longer term interest rates, the level of net interest revenue is also
influenced by the spread between long-term and short-term interest rates.
Net interest (expense) revenue totaled $(46.7) million for the fiscal year ended
September 30, 2000 compared to $49.0 million for the fiscal year ended September
30, 1999, and $29.0 million for the period from February 11, 1998 to September
30, 1998. Net interest earned on mortgage loans held for sale decreased as a
result of decreased production during the fiscal year ended September 30, 2000.
Net interest revenue was also decreased by increased interest expense on
borrowings to fund the mortgage servicing assets. These decreases to net
interest revenue were partially offset by increased credits earned on escrow
deposits due to higher interest rates during the fiscal year ended September 30,
2000. During the fiscal year ended September 30, 1999, net interest earned on
mortgage loans held for sale increased compared to the period from February 11,
1998 to September 30, 1998 as a result of increased production, on an annualized
basis. Credits earned on escrow deposits increased, on an annualized basis, due
to an increase in loan prepayments during the fiscal year ended September 30,
1999 compared to the period from February 11, 1998 to September 30, 1998. These
increases during fiscal year 1999 were partially offset by increased interest
expense on borrowings to fund the growing mortgage servicing assets.
During the fiscal year 1999, HomeSide diversified funding sources by
establishing a $1.5 billion commercial paper program and increasing its
medium-term note shelf registration by $1.0 billion. In June 1998, HomeSide
established a line of credit with the National with the borrowing rate of LIBOR.
The line of credit agreement was amended on June 21, 2000 and June 22, 1999.
Under the credit facility, HomeSide can borrow up to $2.5 billion, subject to
limits imposed by regulatory authorities. As of September 30, 2000, Australian
financial regulations limited the National's ability to lend funds to HomeSide,
a non-bank affiliate, to approximately $2.0 billion.
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<PAGE> 18
Net Mortgage Origination Revenue
Net mortgage origination revenue is comprised of fees earned on the origination
of mortgage loans, gains and losses on the sale of loans, gains and losses
resulting from hedging of secondary marketing activities and fees charged to
review loan documents for purchased loan production.
Net mortgage origination revenue was $68.5 million for the fiscal year ended
September 30, 2000 compared to $155.9 million for the fiscal year ended
September 30, 1999 and $79.2 million for the period from February 11, 1998 to
September 30, 1998. This decrease in fiscal year 2000 is attributable to a
decrease in HomeSide's loan production volumes and margins resulting from
decreases in refinancing levels, pricing competition, and the overall
origination market during fiscal year 2000. Net mortgage origination revenue
increased during fiscal year 1999 compared to the period from February 11, 1998
to September 30, 1998 due to an annualized increase in HomeSide's loan
production volumes resulting from increases in refinancing levels and the
overall origination market through the third quarter of fiscal 1999.
Other Income
Other income of $5.7 million for the fiscal year ended September 30, 2000 was
relatively flat compared to $5.8 million for the fiscal year ended September 30,
1999. Other income was $11.0 million for the period from February 11, 1998 to
September 30, 1998. Other income decreased during fiscal year 1999 compared to
the period from February 11, 1998 to September 30, 1998 primarily due to the
prior year recognition of income in relation to payments received for
termination of the Preferred Seller arrangement with NationsBank that resulted
from the NationsBank acquisition of Barnett.
Salaries and Employee Benefits
Salaries and employee benefits expense was $112.6 million for the fiscal year
ended September 30, 2000 compared to $132.7 million for the fiscal year ended
September 30, 1999 and $74.0 million for the period from February 11, 1998 to
September 30, 1998. The average number of full-time equivalent employees
decreased to 2,340 for the fiscal year ended September 30, 2000 from 2,611 for
the fiscal year ended September 30, 1999 and 2,356 for the period from February
11, 1998 to September 30, 1998. The decrease in fiscal year 2000 was due to
decreased production volume while the increase in fiscal year 1999 was due to
increased production volume.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs and
maintenance costs, certain computer software expenses and depreciation of
HomeSide's premises and equipment. Occupancy and equipment expense for the
fiscal year ended September 30, 2000 was $32.0 million compared to $28.3 million
for the fiscal year ended September 30, 1999 and $13.1 million for the period
from February 11, 1998 to September 30, 1998. The increases were mainly due to
increased expenses incurred to enhance processing systems and technology
expenditures necessary to support targeted business growth.
Servicing Losses on Investor-Owned Loans and Foreclosure-Related Expenses
Servicing losses on investor-owned loans represent anticipated losses primarily
attributable to servicing FHA and VA loans for investors. These amounts include
actual losses for final disposition of loans, non-recoverable foreclosure costs,
accrued interest for which payment has been denied and estimates for potential
losses based on HomeSide's experience as a servicer of government loans.
During the fiscal year ended September 30, 2000, the servicing losses on
investor-owned loans and foreclosure-related expenses totaled $33.3 million
compared to $31.7 million for the fiscal year ended September 30, 1999 and $21.2
million for the period from February 11, 1998 to September 30, 1998. The
increase was primarily attributable to an increase in loan charge-offs related
to the increase in the servicing portfolio.
Included in accounts payable and accrued liabilities is a reserve for estimated
servicing losses on investor-owned loans of $16.7 million at September 30, 2000
and September 30, 1999 and $21.7 million at September 30, 1998. The reserve has
been established for potential losses related to the mortgage servicing
portfolio. Increases to the reserve are charged to earnings as servicing losses
on investor-owned loans. The reserve is decreased for actual losses incurred
related to the mortgage servicing portfolio. HomeSide's historical loss
experience on VA loans generally has been consistent with industry experience.
The reserve was reduced to $16.7 in fiscal 1999 based on a reduction in
charge-off and delinquency trends and changes in HomeSide's portfolio
characteristics. Although the delinquency rates decreased in fiscal year 2000,
the reserve was not reduced in fiscal year 2000 due to an increase in servicing
losses, primarily related to growth in the servicing portfolio. Management
believes that HomeSide has an adequate level of reserve based on servicing
volume,
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<PAGE> 19
portfolio composition, credit quality and historical loss rates, as well as
estimated future losses. Servicing losses are generally greatest during the
three to six year age of the loan.
The following table sets forth HomeSide's delinquency and foreclosure
experience:
SERVICING PORTFOLIO DELINQUENCIES
(PERCENT BY LOAN COUNT)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1999
------------- ------------- -------------
<S> <C> <C> <C>
Servicing Portfolio Delinquencies,
excluding bankruptcies (at end of period)
30 days 2.81% 3.33% 3.72%
60 days 0.62% 0.64% 0.81%
90+ days 0.55% 0.53% 0.65%
----- ----- -----
Total past due 3.98% 4.50% 5.18%
===== ===== =====
Foreclosures pending 0.45% 0.61% 0.70%
===== ===== =====
Weighted average portfolio age in months 47.9 44.1 46.1
</TABLE>
Other Expenses and Goodwill Amortization
Other expenses consist mainly of professional fees, communications expense,
advertising and public relations, data processing expenses and certain loan
origination expenses. The level of other expenses fluctuates in part based upon
the level of HomeSide's mortgage servicing portfolio and loan production
volumes.
Other expenses, excluding goodwill amortization of $35.9 million resulting from
the acquisition of HomeSide by the National, were $52.5 million during the
fiscal year ended September 30, 2000, compared to $60.9 million for the fiscal
year ended September 30, 1999 excluding goodwill amortization of $35.8 million,
a 14% decrease. Other expenses, excluding goodwill amortization of $22.8
million, were $39.8 million for the period from February 11, 1998 to September
30, 1998. The decrease in fiscal year 2000 as well as the annualized decrease in
fiscal year 1999 were primarily due to lower consulting, advertising, litigation
and insurance expenses associated with a decrease in production volumes and loan
pre-payment activity during fiscal year 2000 and the fourth quarter of fiscal
year 1999.
Income Tax Expense
HomeSide's income tax expense was $38.3 million for the fiscal year ended
September 30, 2000, $59.2 million for the fiscal year ended September 30, 1999,
and $37.0 million for the period from February 11, 1998 to September 30, 1998.
The effective income tax rate for the fiscal year ended September 30, 2000, for
the fiscal year ended September 30, 1999, and for the period from February 11,
1998 to September 30, 1998 was approximately 44%, 49%, and 51%, respectively.
The decrease in income tax expense for fiscal year 2000 was due to decreases in
income before income taxes, as well as the decreases in the effective income tax
rate primarily resulting from a change in the geographic mix of the portfolio
into states with lower tax rates and a decrease in production volume in states
with higher tax rates. The annualized increase in fiscal year 1999 compared to
the period from February 11, 1998 to September 30, 1998 was due to the increase
in income before income taxes, on an annualized basis.
RISK MANAGEMENT ACTIVITIES
HomeSide has a risk management program designed to protect the economic value of
its mortgage servicing portfolio from declines in value primarily due to
increases in estimated loan prepayment speeds, which are mainly influenced by
declines in interest rates. When loans prepay faster than anticipated, the cash
flow HomeSide expects to receive from servicing such loans is reduced. When
interest rates increase, prepayment rates decline and influence an increase in
expected cash flows. The value of mortgage servicing rights is based on the
present value of the cash flows to be received over the life of the loan and
therefore, the value of the servicing portfolio declines as prepayments increase
and increases as prepayments decline.
During the fiscal year ended September 30, 2000, HomeSide utilized options on
U.S. Treasury bond and note futures, U.S. Treasury bond and note futures,
options on Eurodollar futures, Eurodollar futures, interest rate swaps, interest
rate swaptions, interest rate caps, mortgage pass-throughs and options on
mortgage pass-throughs to protect a significant portion of the value of its
mortgage servicing portfolio from
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<PAGE> 20
a decline in value. The risk management contracts used by HomeSide have
characteristics such that they tend to increase in value as interest rates
decline. Conversely, these risk management contracts tend to decline in value as
interest rates rise. Accordingly, changes in value of these risk management
instruments will tend to move inversely with changes in the value of HomeSide's
mortgage servicing rights.
These risk management instruments are designated as hedges on the purchase date
and such designation is at a level at least as specific as the level at which
mortgage servicing rights are evaluated for impairment. The risk management
instruments are marked-to-market with changes in market value deferred and
applied as an adjustment to the basis of the related mortgage servicing right
asset being hedged. The effectiveness of HomeSide's hedging activity can be
measured by the correlation between changes in the value of the risk management
instruments and changes in the value of HomeSide's mortgage servicing rights.
This correlation is assessed on a quarterly basis to ensure that high
correlation is maintained over the term of the hedging program. If management's
ongoing assessment of correlation indicates that high correlation is not being
achieved, the Company will discontinue the application of hedge accounting and
recognize a gain or loss to the extent the hedge results have not been offset by
changes in value of the hedged asset during the hedge period. During the periods
presented, HomeSide has experienced a high measure of correlation between
changes in the value of mortgage servicing rights and the risk management
contracts.
During the fiscal year ended September 30, 2000, deferred losses on risk
management contracts aggregated $260.3 million and were substantially offset by
increases in the value of mortgage servicing rights. Activity in the deferred
hedge account during the fiscal year ended September 30, 2000 is as follows (in
thousands):
Net deferred hedge loss at October 1, 1999 $(494,743)
Net deferred hedge losses (260,259)
Amortization of hedge losses 64,386
---------
Net deferred hedge loss at September 30, 2000 $(690,616)
=========
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Hedging Activities - an
Amendment of SFAS 133." SFAS 133, as amended, standardizes the accounting for
derivative instruments and hedging activities by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. If certain conditions are met, a
derivative instrument may be specifically designated as: (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability, or of
an unrecognized firm commitment, (b) a hedge of the exposure to variability in
the cash flows of a recognized asset, liability or forecasted transaction or (c)
a hedge of certain foreign currency exposures. SFAS 133 is effective for fiscal
quarters of fiscal years beginning after June 15, 2000.
Pursuant to SFAS 133, hedge ineffectiveness will be recognized in current period
earnings based on the extent to which changes in the value of designated hedge
instruments do not perfectly offset changes in the value of hedged items.
Accordingly, a level of earnings volatility can be expected which could be
material to future results of operations. The extent of hedge ineffectiveness is
influenced by a number of factors including future interest rate volatility,
hedge performance and correlation. Refer to Note 3 to the Consolidated Financial
Statements.
HomeSide's future cash needs as they relate to its hedging program will be
influenced by such factors as long-term interest rates, loan production levels
and growth in the mortgage servicing portfolio. The fair value of open risk
management contracts at September 30, 2000 was ($44.6) million. This amount is
comprised of over the counter options on U.S. treasury bonds/notes, interest
rate swaps, caps and swaptions with a fair value of $(73.0) million, partially
offset by mortgage pass-throughs and options on mortgage pass-throughs with a
fair market value of $28.4 million. The premiums paid on options along with
amounts due to or from counterparties related to risk management contracts are
included in Other Assets and Other Liabilities in the accompanying consolidated
balance sheets. See "Liquidity and Capital Resources" for further discussion of
HomeSide's sources and uses of cash. See Note 3 of Notes to Consolidated
Financial Statements for a description of HomeSide's accounting policy for its
risk management contracts. See Notes 12 and 13 of Notes to Consolidated
Financial Statements for additional fair value disclosures with respect to
HomeSide's risk management contracts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan origination
activities and the investment in mortgage servicing rights. To meet these needs,
the Company currently utilizes funding from an independent syndicate of banks
and from the National, commercial paper, medium-term notes and cash flow from
operations. In the past, the Company has also utilized short-term credit
facilities.
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<PAGE> 21
HomeSide continues to investigate and pursue alternative and supplementary
methods to finance its growing operations through the public and private capital
markets. These may include methods designed to expand the Company's financial
capacity and reduce its cost of capital. In addition, to facilitate the sale and
distribution of certain mortgage products, HomeSide Mortgage Securities, Inc., a
wholly-owned subsidiary of HomeSide, may continue to issue mortgage backed
securities.
Operations
Net cash provided by operations was $513.4 million for the fiscal year ended
September 30, 2000 and $1,444.6 million for the fiscal year ended September 30,
1999. Net cash used in operations for the period from February 11, 1998 to
September 30, 1998 was $415.7 million. The primary uses of cash in operations
were to fund loan originations and pay corporate expenses. These uses of cash
were offset by cash provided from servicing fee income, loan sales and principal
repayments. Cash flows from loan originations are dependent upon current
economic conditions and the level of long-term interest rates. Decreases in
long-term interest rates generally result in higher loan refinancing activity,
which results in higher cash demands to meet increased loan production levels.
Higher cash demands to meet increased loan production levels are primarily met
through borrowings and loan sales. Increases in long term rates generally result
in lower loan refinancing activity, which results in lower cash demands to meet
production levels.
Investing
Net cash used in investing activities was $1,461.6 million, $1,374.1 million,
and $611.8 million for the fiscal year ended September 30, 2000, for the fiscal
year ended September 30, 1999, and for the period from February 11, 1998 to
September 30, 1998, respectively. For the fiscal years ended September 30, 2000
and September 30, 1999, cash was used for the purchase and origination of
mortgage servicing rights, the purchase of risk management contracts and the
purchase of premises and equipment. Uses of cash were partially offset by cash
provided by early pool buyout reimbursements. For the period from February 11,
1998 to September 30, 1998, cash was used for the purchase and origination of
mortgage servicing rights, funding the early pool buyout program, the
acquisition of Banc One Mortgage servicing assets, and the purchase of premises
and equipment. These uses of cash were offset by net proceeds from risk
management contracts. Future uses of cash for investing activities will be
dependent on the mortgage origination market and HomeSide's hedging needs.
HomeSide is not able to estimate the timing and amount of cash uses for future
acquisitions of other mortgage banking entities, if such acquisitions were to
occur.
Financing
Net cash provided by financing activities was $856.1 million for the fiscal year
ended September 30, 2000, $97.3 million for the fiscal year ended September 30,
1999, and $1,030.4 million for the period from February 11, 1998 to September
30, 1998. The primary source of cash from financing activities during the fiscal
year ended September 30, 2000 was from the issuance of medium-term notes,
issuance of commercial paper, and net borrowings from HomeSide's line of credit.
Cash used in financing activities during the fiscal year ended September 30,
2000 was for the re-payment of medium-term and short-term notes and dividends
paid to the National. The primary source of cash from financing activities
during the fiscal year ended September 30, 1999 was from the issuance of
commercial paper and short-term notes. Cash used in financing activities during
the fiscal year ended September 30, 1999 was for the re-payment of borrowings
from HomeSide's line of credit and dividends to the National. The primary source
of cash from financing activities during the period from February 11, 1998 to
September 30, 1998 was from the issuance of medium-term notes and net borrowings
from HomeSide's line of credit. Cash used in financing activities during the
period from February 11, 1998 to September 30, 1998 was used for the payment of
debt issue costs.
During the fiscal year ended September 30, 2000, net cash provided by operations
was $513.4 million, net cash used in investing activities was $1,461.6 million
and net cash provided by financing activities was $856.1 million, resulting in a
net decrease in cash of $92.1 million. HomeSide expects that to the extent cash
generated from operations is inadequate to meet its liquidity needs, those needs
can be met through financing from its bank credit facility and other facilities
which may be entered into from time to time, as well as from the issuance of
debt securities in the public markets. Accordingly, HomeSide does not currently
anticipate that it will make sales of servicing rights to any significant degree
for the purpose of generating cash. Nevertheless, in addition to its cash and
mortgage loans held for sale balances, HomeSide's portfolio of mortgage
servicing rights provides a potential source of funds to meet liquidity
requirements, especially in periods of rising interest rates when loan
origination volume slows. Repurchase agreements also provide an alternative to
the bank line of credit for mortgages held for sale. Future cash needs are
highly dependent on future loan production and servicing results, which are
influenced by changes in long-term interest rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the most significant market risk affecting HomeSide.
Interest rate risk is the possibility that changes in interest rates will cause
unfavorable changes in net income or in the value of interest rate-sensitive
assets, liabilities and commitments. From a corporate
21
<PAGE> 22
perspective, the economics of the Company's production and servicing
lines-of-business can be leveraged, in part, to mitigate the Company's exposure
to interest rate risk. In addition and as part of its risk management programs,
the Company purchases financial instruments and enters into financial agreements
with off-balance sheet risk in the normal course of business to manage its
exposure to interest rate risk. The Company uses financial instruments for the
purpose of managing interest rate risks to protect the value of its mortgage
loans held for sale and mortgage commitment pipeline. Additionally, risk
management instruments are used by HomeSide to manage interest rate risk
associated with the value of its mortgage servicing rights which have
characteristics such that they tend to decrease in value as interest rates
decline and increase in value as interest rates rise. Interest rate swaps are
also used to effectively convert fixed-rate funding sources to floating rate.
The Company has no market risk sensitive instruments held for trading purposes.
Management actively monitors and manages its exposure to interest rate risk.
Various valuation tools are employed to perform sensitivity analyses in order to
quantify the financial impact of changes in interest rates. These analyses are
performed for various interest rate scenarios to capture the expected economic
change in market value of rate-sensitive assets, liabilities and commitments.
Additionally, the analyses are performed to capture the expected accounting
impact on future earnings for a specified time frame.
Several modeling techniques are utilized including static shock, option adjusted
spread, option pricing, and discounted cash flow models. A number of key rate
sensitive assumptions are included in the modeling such as implied volatility,
prepayment rates, and yield requirements. Various analyses of the Company's
exposure to interest rate risk are reviewed on at least a monthly basis by the
Company's Asset/Liability Committee, which reports to the Board of Directors.
The sensitivity analyses described above were applied to the Company's
rate-sensitive assets, liabilities, commitments and the Company's on- and
off-balance sheet financial instruments at September 30, 2000. The sensitivity
analyses reflect that a sudden and sustained 50 basis point increase in rates
would result in a negative variance to net income of approximately $14.0 million
over a simulated 12-month period. A sudden and sustained 50 basis point decrease
in rates would result in a positive variance to net income of approximately
$10.0 million over a simulated 12-month period. Neither rate scenario reflected
impairment of rate-sensitive assets. The sensitivity analyses are based on
planned product volumes and margins and a number of assumptions, which are
regularly updated to reflect the Company's latest views on the business and
interest rate environments.
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Management Activities",
Note 12, "Disclosures About Fair Value of Financial Instruments" and Note 13,
"Risk Management and Off-Balance Sheet Financial Instruments" in the Notes to
the Consolidated Financial Statements.
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<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
HomeSide International, Inc.
We have audited the accompanying consolidated balance sheets of HomeSide
International, Inc. and subsidiaries as of September 30, 2000 and 1999, and the
related consolidated statements of income, changes in stockholder's equity, and
cash flows for the years ended September 30, 2000 and 1999 and the period from
February 11, 1998 to September 30, 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HomeSide
International, Inc. and subsidiaries as of September 30, 2000 and 1999, and the
results of their operations and their cash flows for the years ended September
30, 2000 and 1999 and the period from February 11, 1998 to September 30, 1998 in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
Jacksonville, Florida
October 20, 2000
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<PAGE> 24
HOMESIDE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 110,737 202,859
Mortgage loans held for sale, net 1,441,216 1,292,562
Mortgage servicing rights, net 4,464,312 3,488,957
Early pool buyout advances 141,255 335,059
Accounts receivable, net 324,028 255,759
Premises and equipment, net 80,052 67,900
Goodwill, net 612,018 663,729
Other assets 93,415 84,530
---------- ----------
Total Assets $7,267,033 $6,391,355
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 587,275 $ 666,442
Notes Payable 3,235,400 2,899,304
Long-term debt 1,899,772 1,331,292
Deferred income taxes, net 271,369 220,775
---------- ----------
$5,993,816 $5,117,813
---------- ----------
Commitments and Contingencies
Stockholder's Equity:
Common stock:
Class A Common stock, $.01 par value;
100 shares authorized and 1 share issued
and outstanding
Class C non-voting common stock,
$1.00 par value, 195,000 shares
authorized; 0 shares issued and outstanding $ -- $ --
Additional paid-in capital 1,231,302 1,231,302
Retained earnings 41,915 42,240
---------- ----------
Total Stockholder's Equity 1,273,217 1,273,542
---------- ----------
Total Liabilities and Stockholder's Equity $7,267,033 $6,391,355
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 25
HOMESIDE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL FOR THE PERIOD FROM
YEAR ENDED YEAR ENDED FEBRUARY 11, 1998 TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ --------------------
<S> <C> <C> <C>
REVENUES:
Mortgage servicing fees $732,164 $609,522 $315,510
Amortization of mortgage servicing rights (405,728) (409,929) (191,693)
-------- -------- --------
Net servicing revenue 326,436 199,593 123,817
Interest income 121,951 181,173 99,749
Interest expense (168,651) (132,161) (70,761)
-------- -------- --------
Net interest (expense) revenue (46,700) 49,012 28,988
-------- -------- --------
Net mortgage origination revenue 68,475 155,937 79,179
Other income 5,683 5,844 11,028
-------- -------- --------
Total Revenues 353,894 410,386 243,012
EXPENSES:
Salaries and employee benefits 112,634 132,716 73,983
Occupancy and equipment 31,980 28,319 13,107
Servicing losses on investor-owned loans
and foreclosure-related expenses 33,301 31,749 21,202
Goodwill amortization 35,896 35,817 22,780
Other expenses 52,502 60,939 39,825
-------- -------- --------
Total Expenses 266,313 289,540 170,897
Income before income taxes 87,581 120,846 72,115
Income tax expense 38,269 59,181 37,009
-------- -------- --------
Net Income $ 49,312 $ 61,665 $ 35,106
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 26
HOMESIDE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
TOTAL ADDITIONAL
NUMBER OF COMMON STOCK PAID-IN RETAINED
---------------------
SHARES CLASS A CLASS C CAPITAL EARNINGS TOTAL
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 11, 1998 1 $ -- $ -- $ 1,227,846 $ -- $1,227,846
Net income 35,106 35,106
-------------------------------------------------------------------------------
Balance, September 30, 1998 1 -- -- 1,227,846 35,106 1,262,952
Net income 61,665 61,665
Dividends declared and (54,531) (54,531)
paid to
parent
Additional paid-in capital
associated with
acquisition by 3,456 3,456
the National
-------------------------------------------------------------------------------
Balance, September 30, 1999 1 -- -- 1,231,302 42,240 1,273,542
Net Income 49,312 49,312
Dividends declared and (49,637) (49,637)
paid to Parent
-------------------------------------------------------------------------------
Balance, September 30, 2000 1 -- -- $ 1,231,302 $ 41,915 $1,273,217
===============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 27
HOMESIDE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands),
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL FOR THE PERIOD FROM
YEAR ENDED YEAR ENDED FEBRUARY 11, 1998 TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ --------------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $49,312 $61,665 $35,106
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of mortgage servicing rights 405,728 409,929 191,693
Depreciation and amortization 45,994 40,444 24,595
Servicing losses on investor-owned loans 8,721 5,523 9,960
Change in deferred income tax liability 50,594 60,255 19,036
Origination, purchase and sale of loans held for sale,
net of repayments (148,654) 756,427 (689,585)
Change in accounts receivable (78,306) 5,473 (11,694)
Change in other assets and accounts payable and accrued
liabilities 179,986 104,894 5,141
---------- --------- ----------
Net cash provided by (used in) operating activities 513,375 1,444,610 (415,748)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (24,594) (30,561) (20,067)
Acquisition of mortgage servicing rights (1,120,824) (1,221,594) (392,396)
Net (purchases of) proceeds from risk management contracts (510,013) (546,421) 387,276
Early pool buyout reimbursements (advances), net 193,798 424,520 (385,580)
Acquisition of Banc One Mortgage servicing assets -- -- (201,000)
---------- --------- ----------
Net cash used in investing activities (1,461,633) (1,374,056) (611,767)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from (repayments to) banks 229,999 (1,240,498) 624,044
Issuance of commercial paper, net of repayments 336,097 1,163,903 --
Issuance of medium term notes 885,000 -- 410,000
Issuance of notes payable -- 230,000 --
Repayment of notes payable (230,000) -- --
Payment of debt issue costs (5,024) (708) (3,262)
Repayment of long-term debt (310,299) (869) (372)
Dividends paid to the National (49,637) (54,531) --
---------- --------- ----------
Net cash provided by financing activities 856,136 97,297 1,030,410
Net (decrease) increase in cash and cash equivalents (92,122) 167,851 2,895
Cash and cash equivalents at beginning of period 202,859 35,008 32,113
---------- --------- ----------
Cash and cash equivalents at end of period $110,737 $202,859 $35,008
========== ========= ==========
Supplemental disclosure of cash flow information:
Interest paid 142,842 128,914 62,325
Income taxes paid 348 18,847 3,313
Income taxes refunded 12,673 4,192 6
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 28
HOMESIDE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
HomeSide International, Inc. ("HomeSide" or the "Company"), through its
wholly-owned subsidiary, HomeSide Lending, Inc. ("HomeSide Lending"), is
primarily engaged in the mortgage banking business and as such originates,
purchases, sells and services mortgage loans throughout the United States.
The Company was formerly known as HomeSide, Inc. ("HomeSide, Inc. Predecessor").
As discussed in Note 2, on February 10, 1998, National Australia Bank, Ltd. (the
"National") acquired all outstanding shares of the common stock of HomeSide,
Inc. Predecessor and the Company adopted a fiscal year end of September 30 to
conform to the fiscal year of the National. HomeSide, Inc. Predecessor commenced
operations by acquiring BankBoston Mortgage Corporation, the mortgage banking
subsidiary of the former BankBoston, N.A. on March 16, 1996. HomeSide, Inc.
Predecessor subsequently purchased the mortgage banking operations of Barnett
Banks, Inc. Unless otherwise designated, the term "HomeSide" refers to the
Company for the periods subsequent to February 10, 1998 and to HomeSide, Inc.
Predecessor for the periods March 16, 1996 to February 28, 1997 and March 1,
1997 to February 10, 1998. The accompanying consolidated financial statements of
HomeSide include the accounts of HomeSide and its subsidiaries, after
elimination of all material intercompany balances and transactions. Amounts of
acquired companies have been included from the date of acquisition. Certain
reclassifications have been made to the financial statements for the period from
February 11, 1998 to September 30, 1998, to conform to the presentation for the
years ended September 30, 2000 and September 30, 1999.
The accompanying financial statements of HomeSide International, Inc. have been
prepared for the fiscal years ended September 30, 2000 and September 30, 1999
and for the period from February 10, 1998 to September 30, 1998 to coincide with
the acquisition of HomeSide by the National and the subsequent adoption of a
September 30 fiscal year end.
2. ORGANIZATION
On December 11, 1995, HomeSide, Inc. Predecessor was formed by an investor
group, consisting of Thomas H. Lee Company and Madison Dearborn Partners
(collectively, the "Investors"), and signed a definitive stock purchase
agreement with The First National Bank of Boston ("BankBoston") for the purpose
of acquiring certain assets and liabilities of the mortgage banking business
owned by BankBoston. BankBoston received cash and an ownership interest in
HomeSide, Inc. Predecessor. The transaction closed on March 15, 1996 and
HomeSide, Inc. Predecessor began operations on March 16, 1996.
On May 31, 1996, Barnett Banks, Inc. ("Barnett") sold certain of its mortgage
banking operations, primarily its servicing portfolio, mortgage servicing
operations and proprietary mortgage banking software systems, to HomeSide, Inc.
Predecessor. Barnett received cash and an ownership interest in HomeSide, Inc.
Predecessor. From May 31, 1996 until the 1997 public offering of common stock,
the Investors as a group, BankBoston and Barnett each owned approximately
one-third of HomeSide, Inc. Predecessor. Following the public offering, the
Investors as a group, BankBoston and Barnett owned in the aggregate
approximately 79% of the outstanding common stock.
On February 10, 1998, National Australia Bank, Ltd. (the "National") acquired
all outstanding shares of the common stock of HomeSide. As consideration, the
National paid $27.825 per share for all of the outstanding common stock and paid
$17.7 million cash to retire all outstanding stock options. The total purchase
price was approximately $1.2 billion. The National paid for the purchase with
borrowed and available funds. The transaction was accounted for as a purchase.
As a result, all assets and liabilities were recorded at their fair value on
February 11, 1998, and the purchase price in excess of the fair value of net
assets acquired of $719.6 million was recorded as goodwill. Goodwill from this
transaction was reduced by $15.7 million in September 2000 (See Note 3).
Following the transaction described above, the National now owns 100% of the
Company's common stock and the Company has become an indirect wholly-owned
subsidiary of the National. HomeSide also adopted a fiscal year end of September
30 to conform to the fiscal year of the National.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements and notes thereto in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosed amount of contingent liabilities. On an
ongoing basis management reviews its estimates, including those related to risk
28
<PAGE> 29
management, litigation, contracts, credit losses and mortgage servicing rights.
Although the Company has internal control systems in place to ensure that
estimates can be reliably measured, actual results may differ from those
estimates. It is not anticipated that such differences would be material.
Risk management of mortgage loan originations
HomeSide utilizes a risk management program to protect and manage the value of
its mortgage loans held for sale and mortgage commitment pipeline. As a result,
the Company is party to various derivative financial instruments to reduce its
exposure to interest rate risk. These financial instruments primarily include
mandatory forward delivery commitments, treasury forwards, and put and call
option contracts on mortgage-backed securities. The Company uses these financial
instruments for the purposes of managing its resale pricing and interest rate
risks. These financial instruments are designated as hedges to the extent they
demonstrate a high degree of correlation with the underlying hedged items.
Accordingly, hedging gains and losses related to this risk management program
are deferred and recognized as a component of the gain or loss on sale of the
underlying mortgage loans or mortgage-backed securities. Such gains and losses
are included in mortgage origination revenue. Hedge losses are recognized
currently if the deferral of such losses would result in mortgage loans held for
sale and the pipeline being valued in excess of their estimated net realizable
value.
Premiums paid for purchased put and call option contracts are included in other
assets and amortized over the options' contract period as a component of
mortgage origination revenue. Unamortized premiums are recognized as a component
of mortgage origination revenue at the earlier of the expiration of the
underlying contract or when exercise of the contract is considered unlikely.
Risk management of mortgage servicing rights
Mortgage servicing rights permit HomeSide to receive a portion of the interest
coupon and fees collected from the mortgagor for performing specified servicing
activities. The mortgage notes underlying the mortgage servicing rights permit
the borrower to prepay the loan. As a result, the value of the related mortgage
servicing rights tends to diminish in periods of declining interest rates and
increase in value in periods of rising rates. This tendency subjects HomeSide to
substantial interest rate risk. It also directly affects the volatility of
reported earnings because mortgage servicing rights are carried at the lower of
amortized cost or fair value. It is HomeSide's policy to mitigate and hedge this
risk through its risk management program.
The risk management instruments used by HomeSide have characteristics such that
they tend to increase in value as interest rates decline. Conversely, these risk
management instruments tend to decline in value as interest rates rise.
Accordingly, changes in the value of these hedge instruments will tend to move
inversely with changes in value of HomeSide's mortgage servicing rights.
Options on U.S. Treasury bond and note futures, U.S. Treasury bond and note
futures, Eurodollar futures, options on Eurodollar futures, mortgage
pass-throughs, options on mortgage pass-throughs and interest rate swaps, caps,
and swaptions are used by HomeSide to manage interest rate risk. When purchased,
the risk management instruments are designated to a specific strata of mortgage
servicing rights. The risk management instrument contracts are marked-to-market
and changes in market value are included as adjustments to the basis of the
related mortgage servicing right asset being hedged. Correlation between changes
in the risk management contracts and changes in the value of HomeSide's mortgage
servicing rights is assessed on a quarterly basis to ensure that high
correlation is maintained over the term of the hedging program. If management's
ongoing assessment of correlation indicates that high correlation is not being
achieved, the Company will discontinue the application of hedge accounting and
recognize a gain or loss to the extent the hedge results have not been offset by
changes in value of the hedged asset during the hedge period.
Mortgage loans
Mortgage loans held for sale are carried at the lower of aggregate cost or fair
value. Fair value is based on the contract prices at which the mortgage loans
will be sold or, if the loans are not committed for sale, the current market
price. Deferred hedge gains and losses on risk management hedge instruments are
included in the cost of the mortgage loans held for sale for the purpose of
determining the lower of aggregate cost or fair value. Mortgage loans are
typically sold within three months.
Mortgage loans held for investment are included in other assets and stated at
the lower of cost or fair value at the time the permanent investment decisions
are made. Discounts, if any, are amortized over the anticipated life of the
investment.
Loans are placed on non-accrual status when any portion of the principal or
interest is ninety days past due or earlier when concern exists as to the
ultimate collectibility of principal or interest. When loans are placed on
nonaccrual status, the related interest receivable is reversed against interest
income of the current period. Interest payments received on nonaccrual loans are
applied as a reduction of the principal balance when concern exists as to the
ultimate collection of principal; otherwise, such payments are recognized as
interest income. Loans are removed from nonaccrual status when principal and
interest become current and they are anticipated to be fully collectible.
29
<PAGE> 30
Mortgage servicing rights
Mortgage servicing rights are the rights to receive a portion of the interest
coupon and fees collected from the mortgagor for performing specified servicing
activities. The total cost of loans originated or acquired is allocated between
the mortgage servicing rights and the mortgage loans, without the servicing
rights, based on relative fair values. The value of servicing rights acquired
through bulk acquisitions is capitalized at cost.
Mortgage servicing rights are amortized in proportion to and over the period of
the estimated net servicing revenue. Mortgage servicing rights along with
deferred hedge gains and losses are evaluated for impairment by comparing the
carrying amount of the servicing rights to their fair value. Fair value is
estimated based on the market prices of similar mortgage servicing assets and on
discounted future net cash flows considering market prepayment estimates,
historical prepayment rates, portfolio characteristics, interest rates and other
economic factors. For purposes of measuring impairment, the mortgage servicing
rights are stratified by the predominant risk characteristics which include
product types of the underlying loans and interest rates of mortgage notes.
Impairment, if any, is recognized through a valuation reserve for each impaired
stratum and is included in amortization of mortgage servicing rights. At
September 30, 2000 and September 30, 1999 book value approximated fair value and
there was no impairment.
Cash
Cash and cash equivalents include cash and due from banks, interest-bearing
deposits and margin deposits with an original maturity of three months or less.
Margin deposits associated with the risk management program for mortgage
servicing rights and interest rate swaps for debt instruments are maintained
with brokers in accordance with the requirements of International Swap Dealer
Agreements. At September 30, 2000 and September 30, 1999, margin deposits
amounted to approximately $84.0 million and $179.5 million, respectively.
Accounts receivable
Accounts receivable includes advances, consisting primarily of payments for
property taxes and insurance premiums, accrued servicing fees, as well as
principal and interest remitted to investors before they are collected from
mortgagors, made in connection with loan servicing activities. Accounts
receivable also includes interest receivable on loans held for sale and on
margin account balances, loans purchased from mortgage-backed securities
serviced by HomeSide for others and mortgage claims filed primarily with the
Federal Housing Authority ("FHA") and the Veterans Administration ("VA").
Early pool buyout advances and sales
Early pool buyout advances consist of delinquent government loans in process of
foreclosure that have been purchased from pools. The program reduces the
unreimbursed interest expense that HomeSide incurs. The funding of the purchases
of these delinquent loans for the early pool buyout program is recorded as
interest expense. Interest income earned from the guarantor agency during the
foreclosure process is accrued to match the funding expense incurred. Scheduled
interest payments made to the investor before the loans were purchased from the
pool are recorded as early pool buyout advances with a reserve for advances
which are estimated as being uncollectible.
On November 30, 1998, HomeSide Lending formed a wholly-owned subsidiary,
HomeSide Funding Corporation ("HomeSide Funding"), whose sole purpose is to
acquire delinquent loans from HomeSide Lending's servicing portfolio that are
insured by the Federal Housing Administration or guaranteed by the Department of
Veterans Affairs. The purchases are funded through sales to a trust.
In December 1998, HomeSide Lending entered into a Pooling and Servicing
Agreement with Bank One Trust Company, N.A., as Trustee, and HomeSide Funding,
as Transferor, pursuant to which approximately $487 million of delinquent
mortgage loans were sold to HomeSide Funding during the fiscal year ended
September 30, 1999. Subsequently, these loans were sold to the HomeSide Mortgage
Loan Buyout Trust 1998-A. Approximately $112 million of delinquent mortgage
loans were sold to HomeSide Funding during the fiscal year ended September
30,2000. At September 30, 2000 HomeSide held a residual interest in loans sold
to HomeSide Funding in the amount of $29.4 million, which approximated fair
value. Fair value is estimated based on discounted future net cash flows
considering market default and prepayment estimates, historical default and
prepayment rates, portfolio characteristics, and other economic factors.
Premises and equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range up to thirty years. Leasehold
improvements are amortized over the shorter of the estimated life of the
improvement or the term of the lease.
30
<PAGE> 31
Long-lived assets are evaluated regularly for other-than-temporary impairment.
If circumstances suggest that their value may be impaired, an assessment of
recoverability is performed prior to any write-down of the asset.
The Company capitalizes certain software development and implementation costs in
accordance with SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Development and implementation costs
are expensed until the Company has determined that the software will result in
probable future economic benefits and management has committed to funding the
project. Thereafter, all direct external implementation costs and purchase
software costs are capitalized and amortized using the straight-line method over
the remaining estimated useful lives, not exceeding five years.
Goodwill
Goodwill, representing the excess of the purchase consideration over the fair
value of the identifiable net assets acquired on the date of acquisition, is
recognized as an asset. Goodwill is amortized from the date of acquisition by
systematic charges on a straight-line basis against income over the period in
which the benefits are expected to arise, but not exceeding 20 years.
Accumulated goodwill amortization was $94.8 million at September 30, 2000 and
$58.8 million at September 30, 1999, respectively. In September 2000, goodwill
was reduced by $15.7 million due to a liability, established as a result of the
merger, deemed no longer necessary. In fiscal year 1999, goodwill was increased
by $3.3 million as a result of an adjustment to the purchase price by the
National to include related acquisition costs. The carrying value of goodwill is
reviewed at least annually and assessed for recoverability based on future
undiscounted cash flows from operations. If the carrying value of goodwill
exceeds the value of the expected future benefits, the difference is charged
against income.
An analysis of goodwill, net is as follows (in thousands):
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
Beginning balance $663,729 $696,350
Amortization * (36,039) (35,960)
Goodwill adjustment (15,672) 3,339
-------- --------
Ending balance $612,018 $663,729
======== ========
* For fiscal year 2000 and 1999, goodwill amortization included amortization
from the acquisition of HomeSide by the National of $35.9 million and $35.8
million, respectively. Amortization also included $0.1 million for fiscal year
2000 and 1999 from the acquisition of Loan America.
Mortgage servicing fees
Mortgage servicing fees represent servicing and other fees earned for servicing
mortgage loans owned by investors. Servicing fees are generally calculated on
the outstanding principal balances of the loans serviced and are recognized as
income over the period of service.
Related custodial deposits are segregated in trust accounts, principally held
with depository institutions, and are not included in the accompanying financial
statements.
Interest expense
Interest expense is reduced by credits received from depository institutions for
custodial balances placed with such institutions.
Net mortgage origination revenue
Mortgage origination revenue includes gains and losses from sales of mortgage
loans and fees associated with the origination and purchase of mortgage loans.
Servicing losses on investor-owned loans and foreclosure-related expenses
HomeSide records losses attributable to servicing FHA and VA loans for
investors. These amounts include actual losses for final disposition of loans,
foreclosure-related expenses, accrued interest for which payment is
uncollectible and estimates for potential losses based on HomeSide's experience
as a servicer of government loans.
31
<PAGE> 32
A reserve for estimated servicing losses on investor-owned loans is available
for potential losses related to the mortgage servicing portfolio and is included
in accounts payable and accrued liabilities (see Note 7).
Income taxes
Current tax liabilities or assets are recognized through charges or credits to
the current tax provision for the estimated taxes payable or refundable for the
current year.
Deferred tax liabilities are recognized for temporary differences that will
result in amounts taxable in the future and deferred tax assets are recognized
for temporary differences and tax benefit carryforwards that will result in
amounts deductible or creditable in the future. Net deferred tax liabilities or
assets are recognized through charges or credits to the deferred tax provision.
A deferred tax valuation reserve is established if it is more likely than not
that all or a portion of the deferred tax assets will not be realized. Changes
in the deferred tax valuation reserve are recognized through charges or credits
to the deferred tax provision. The effect of enacted changes in tax law,
including changes in tax rates, on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date.
New accounting standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Hedging Activities - an
Amendment of SFAS 133." SFAS 133, as amended, standardizes the accounting for
derivative instruments and hedging activities by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. If certain conditions are met, a
derivative instrument may be specifically designated as: (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability, or of
an unrecognized firm commitment, (b) a hedge of the exposure to variability in
the cash flows of a recognized asset, liability or forecasted transaction or (c)
a hedge of certain foreign currency exposures. SFAS 133 is effective for fiscal
quarters of fiscal years beginning after June 15, 2000.
The Company adopted SFAS 133 effective October 1, 2000 and recognized a
cumulative-effect transition adjustment of approximately $1.4 million to
increase pre-tax net income for the effect of the change in the accounting
principle. Additionally, the Company recognized a cumulative-effect transition
adjustment to reduce accumulated other comprehensive income (OCI) by $14.4
million, effective October 1, 2000. The transition adjustment to OCI represents
unrealized losses on derivative instruments that qualify as cash flow hedges of
forecasted loan transactions. Cumulative gains in future cash flows associated
with forecasted loan transactions are expected to offset the aforementioned
unrealized losses included in OCI. Pursuant to SFAS 133, the balance in OCI will
be reclassified into earnings when the hedged forecasted transaction affects
earnings.
Pursuant to SFAS 133, hedge ineffectiveness will be recognized in current period
earnings based on the extent to which changes in the value of designated hedge
instruments do not perfectly offset changes in the value of hedged items.
Accordingly, a level of earnings volatility can be expected which could be
material to future results of operations. The extent of hedge ineffectiveness is
influenced by a number of factors including future interest rate volatility,
hedge performance and correlation.
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 140") which
replaces Statement No. 125. This statement revises the standards of accounting
for securitizations and other transfers of financial assets and collateral along
with requiring certain disclosures. This statement is effective for the
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. It is effective for recognition and
reclassification of collateral for fiscal years ending after December 15, 2000.
Management does not expect the requirements of this standard to have a
significant impact on the financial statements.
4. ACQUISITIONS AND STRATEGIC ALLIANCES
Strategic Alliance with Cendant Mortgage Corporation
On June 15, 1999, HomeSide announced that it had formed a strategic alliance
with Cendant Mortgage Corporation. Cendant Mortgage had agreed to sell the
servicing rights of up to $7.0 billion in mortgage loans annually to HomeSide
over a five year period. For the year ended September 30, 1999, HomeSide
purchased the rights to service $8.8 billion of Cendant Mortgage's portfolio,
representing approximately 78,000 loans. On March 31, 2000, HomeSide and Cendant
Mortgage entered into a replacement agreement. Cendant Mortgage has agreed to
sell the servicing rights of up to $9.0 billion in mortgage loans annually, but
no less than an amount based on their
32
<PAGE> 33
quarterly flow volume. The replacement agreement expires March 31, 2004. For the
year ended September 30, 2000, HomeSide has purchased the rights to service $2.3
billion of Cendant Mortgage's portfolio, representing approximately 19,150
loans.
Strategic Alliance with First Chicago NBD Mortgage Company
On March 4, 1999, HomeSide agreed to purchase or sub-service the servicing
portfolio of First Chicago NBD Mortgage Company ("First Chicago"). This
transaction represents a modification and an expansion of HomeSide's strategic
alliance with Banc One Mortgage Corporation ("Banc One"). This resulted in (i)
an increase in HomeSide's servicing portfolio of approximately $18 billion; (ii)
a change in Banc One's residential mortgage loan delivery method to HomeSide
from a whole loan basis to a servicing rights-only flow basis; and (iii) a
commitment from First Chicago to sell the servicing rights associated with its
residential mortgage production to HomeSide on a flow basis.
Acquisition of the Banc One Mortgage Corporation Servicing Assets
On April 1, 1998, HomeSide entered into an agreement with Banc One Mortgage
Corporation to acquire the mortgage servicing assets of Banc One. HomeSide and
Banc One have also entered into a Preferred Partner agreement, whereby Banc One
will sell a significant portion of its residential mortgage loan production to
HomeSide over five years on a whole loan basis. The total purchase consideration
for the mortgage servicing assets was $201.0 million cash. The mortgage
servicing rights acquired relate to mortgage servicing loans of $16.6 billion.
The transaction closed on June 5, 1998 and was accounted for as a purchase. The
excess of the aggregate purchase price over the fair value of net assets
acquired is being amortized on a straight-line basis over 20 years.
The unaudited condensed pro forma statement of income for the period from
February 11, 1998 to September 30, 1998 and the HomeSide, Inc. period from March
1, 1997 to February 10, 1998, assuming the mortgage servicing assets of Banc One
had been acquired as of the beginning of the period is as follows (in millions):
<TABLE>
<CAPTION>
PRO FORMA FOR THE PERIOD PRO FORMA FOR THE PERIOD
FROM FEBRUARY 11, 1998 TO FROM MARCH 1, 1997 TO
SEPTEMBER 30, 1998 FEBRUARY 10, 1998
------------------------- ------------------------
<S> <C> <C>
Net servicing revenue $129.5 $202.6
Net interest revenue 29.5 1.2
Net mortgage origination revenue 81.1 90.1
Other income
11.0 1.7
------ ------
Total revenues 251.1 295.6
Expenses (174.7) (162.1)
------ ------
Income before income taxes 76.4 133.5
Income tax expense (38.7) (52.1)
------ ------
Net income $ 37.7 $ 81.4
====== ======
</TABLE>
The purchase accounting adjustments in the above pro forma statements of
operations are based on the actual purchase price and the amount of assets and
liabilities actually acquired. No adjustments have been made for restructuring
costs that might have been incurred or for cost efficiencies that might have
been realized during the period presented. Accordingly, these pro forma results
are not indicative of future results.
Strategic Alliance with People's Bank
On November 23, 1998, HomeSide agreed to purchase or sub-service approximately
$5 billion in mortgage servicing from People's Bank, the largest mortgage lender
in Connecticut. People's Bank also became a Preferred Partner, committing to
sell a significant portion of the residential mortgage loans it originates to
HomeSide for five years.
Acquisition of Loan America's Mortgage Loan Network
On April 6, 1998, HomeSide signed an agreement with NationsBank Corporation
("NationsBank") whereby NationsBank agreed to sell HomeSide a national wholesale
mortgage loan network which was formerly owned by Barnett Banks, Inc. The
transaction closed on May
33
<PAGE> 34
29, 1998. The excess of the aggregate purchase price over the fair value of net
assets acquired is being amortized on a straight-line basis over 20 years.
5. MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights is as follows
(in thousands):
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
Beginning balance $3,488,957 $1,779,180
Additions 1,120,824 1,221,594
Net deferred hedge loss 260,259 898,112
Amortization (405,728) (409,929)
---------- ----------
Ending balance $4,464,312 $3,488,957
========== ==========
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following
(in thousands):
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
Land $ 3,451 $ 3,451
Buildings and building improvements 9,969 9,932
Furniture and equipment 37,475 32,922
Software 41,761 22,708
Leasehold improvements 10,889 10,375
--------- ---------
103,545 79,388
Accumulated depreciation and amortization (23,493) (11,488)
--------- ---------
Ending balance $ 80,052 $ 67,900
========= =========
As discussed in Note 20, on October 2, 2000, HomeSide entered into a
sale-leaseback transaction for its facility in San Antonio, Texas. The sale
included land, building, and building improvements with the sales price
exceeding the property's carrying value.
7. RESERVE FOR ESTIMATED SERVICING LOSSES ON INVESTOR-OWNED LOANS
An analysis of the reserve for estimated servicing losses on investor-owned
loans is as follows (in thousands):
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
Beginning balance $ 16,650 $ 21,650
Provision for servicing losses
on investor-owned loans 8,721 5,523
Charge-offs (10,038) (11,040)
Recoveries 1,317 517
-------- --------
Ending balance $ 16,650 $ 16,650
======== ========
34
<PAGE> 35
8. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE INTEREST RATE
-------------------------------------
TOTAL OUTSTANDING AT PERIOD END DURING THE PERIOD
----------------- ------------- -----------------
<S> <C> <C> <C>
Commercial Paper $ 1,500,000 6.63% 6.16%
National Australia Bank Unsecured Facility 1,735,400 6.70% 6.25%
-----------
Total, September 30, 2000 $ 3,235,400 6.67% 6.21%
===========
Floating Rate Notes $ 230,000 5.67% 5.67%
Commercial Paper 1,163,903 5.57% 5.12%
National Australia Bank Unsecured Facility 1,505,401 5.46% 5.22%
-----------
Total, September 30, 1999 $ 2,899,304 5.52% 5.20%
===========
</TABLE>
On October 21, 1998, HomeSide Lending, Inc. established a $1.5 billion
commercial paper program. The program is supported by an independent syndicate
of banks under a $2.0 billion credit facility. The outstanding commercial paper
reduces available borrowings under the credit facility. At September 30, 2000
and September 30, 1999, the primary use of the credit facility was to provide
liquidity back-up for HomeSide's $1.5 billion commercial paper program and there
were no amounts outstanding under the credit line. On October 16, 2000, HomeSide
entered into a replacement agreement with a $1.5 billion credit facility which,
at the request of HomeSide, may be increased to $2.5 billion. On October 15,
2002, the line of credit will terminate (see Note 20). Borrowings under the bank
line of credit bear interest at rates per annum, based on, at HomeSide's option
(A) the highest of (i) the lead bank's prime rate, (ii) the secondary market
rate of certificates of deposit plus 100 basis points and (iii) the federal
funds rate in effect from time to time plus 0.35% or (B) various rates based on
federal fund rates. The credit agreement contains covenants that impose
limitations and restrictions on HomeSide, including requirements to maintain
certain net worth and ratio requirements. HomeSide is in compliance with all
requirements included in the credit agreement.
On June 23, 1998, HomeSide entered into an agreement for an unsecured revolving
credit facility with the National. The facility was renewed on June 21, 2000 and
June 22, 1999. Under the credit facility, HomeSide can borrow up to $2.5
billion, subject to limits imposed by regulatory authorities. As of September
30, 2000, the National's limit to lend funds to HomeSide, a non-bank affiliate,
was approximately $2.0 billion. Borrowings under the credit facility may be
overnight or for periods of 7, 30, 60 or 90 days. For overnight borrowings, the
interest rate is determined by the National at the time of the borrowing. For
LIBOR - based borrowings, the interest rate is charged at the corresponding
LIBOR rate.
On August 16, 1999, HomeSide issued $230.0 million in floating rate notes (the
"Floating Rate Notes") due August 16, 2000. Interest was paid quarterly in
arrears on November 16, February 16, May 16, and August 16. The Floating Rate
Notes were unsecured obligations of HomeSide and ranked equally with all other
unsecured and unsubordinated indebtedness of HomeSide. The per annum interest
rate on the Floating Rate Notes was equal to the three-month LIBOR, reset
quarterly, plus twenty basis points, or 0.20%. The Floating Rate Notes were paid
in full on August 16, 2000.
9. LONG-TERM DEBT
Long-term debt, including the fair value adjustments resulting from the merger
with the National, consists of the following (in thousands):
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
Medium-term notes $1,735,281 $1,160,955
11.25% notes 141,959 146,908
Mortgage note payable 22,532 23,429
---------- ----------
Total $1,899,772 $1,331,292
========== ==========
35
<PAGE> 36
11.25 % Notes
On May 14, 1996, HomeSide issued $200.0 million of 11.25% notes (the "Parent
Notes") maturing on May 15, 2003, and paying interest semiannually in arrears on
May 15 and November 15 of each year. The Parent Notes are redeemable at the
option of HomeSide, in whole or in part, at any time on or after May 15, 2001,
at certain fixed redemption prices. The indenture contains covenants that impose
limitations and restrictions, including requirements to maintain certain net
worth and ratio requirements. In addition, the Parent Notes are secured by a
second priority pledge of the common stock of HomeSide Lending. HomeSide is in
compliance with all net worth and ratio requirements included in the indenture
relating to the Parent Notes. HomeSide used a portion of the proceeds from its
February 5, 1997 offering of common stock to pre-pay $70.0 million of the Parent
Notes at a premium of $7.9 million. The amount outstanding at September 30, 2000
and 1999 was $130.0 million.
Medium-term notes
As of September 30, 2000, the outstanding medium-term notes issued by HomeSide
Lending under its shelf registration statement were as follows (in thousands):
<TABLE>
<CAPTION>
ISSUE DATE OUTSTANDING BALANCE COUPON RATE MATURITY DATE
---------- ------------------- ----------- -------------
<S> <C> <C> <C>
June 30, 1997 $ 200,000 6.88% June 30, 2002
June 30, 1997 40,000 6.82% July 2, 2001
July 1, 1997 15,000 6.86% July 2, 2001
July 31, 1997 200,000 6.75% August 1, 2004
September 15, 1997 45,000 6.77% September 17, 2001
April 23, 1998 125,000 5.79%* April, 24, 2001
May 22, 1998 225,000 6.20% May 15, 2003
June 9, 2000 215,000 7.07%* June 10, 2002
June 9, 2000 200,000 6.89%* April 9, 2002
June 9, 2000 85,000 7.07%* June 10, 2002
August 1, 2000 75,000 6.97%* August 1, 2002
September 14, 2000 75,000 6.79%* September 16, 2002
September 14, 2000 60,000 6.94%* September 15, 2003
September 14, 2000 25,000 7.00% September 16, 2002
September 15, 2000 100,000 6.79%* September 16, 2002
September 15, 2000 50,000 6.86%* September 16, 2002
---------
Total $1,735,000
==========
</TABLE>
* Represents initial interest rate for floating rate note
As of September 30, 2000, the outstanding, fixed rate medium-term notes of
$750.0 million had been effectively converted by interest rate swap agreements
to floating-rate notes. The weighted average borrowing rates on medium-term
borrowings issued for the years ended September 30, 2000 and September 30, 1999
and for the period from February 11, 1998 to September 30, 1998 including the
effect of the interest rate swap agreements, were 6.60%, 6.47%, and 6.00%,
respectively. Net proceeds from the issuances were primarily used to reduce the
amounts outstanding under the bank credit agreement and to fund acquisition of
the servicing rights. As discussed in Note 20, on December 4, 2000, HomeSide
issued additional medium term notes in the amount of $250 million which will
mature on December 4, 2002.
Mortgage note payable
In connection with the acquisition of BancBoston Mortgage Corporation, HomeSide
assumed a mortgage note payable that is due in 2017 and bears interest at a
stated rate of 9.5%. HomeSide's main office building is pledged as collateral
for the mortgage note payable.
36
<PAGE> 37
Principal payments due on long-term debt
Principal payments due on long-term debt at September 30, 2000 are as follows
(in thousands):
FISCAL YEAR
-----------
2001 $ 225,329
2002 1,025,362
2003 415,398
2004 200,437
2005 481
Thereafter 10,608
Unamortized purchase accounting premium 22,157
------------
Total $ 1,899,772
============
10. INCOME TAXES
The Company files a consolidated federal income tax return. All companies
included in the consolidated federal income tax return are jointly and severally
liable for any tax assessments based on such consolidated return.
Components of the provision for income taxes were as follows (in thousands):
FOR THE FISCAL FOR THE FISCAL FOR THE PERIOD FROM
YEAR ENDED YEAR ENDED FEBRUARY 11, 1998 TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ --------------------
Current:
Federal $ -- $ -- $16,593
State -- -- 1,380
------- ------ -------
-- -- 17,973
Deferred
Federal 42,359 52,775 14,661
State (4,090) 6,406 4,375
------- ------ -------
38,269 59,181 19,036
------- ------ -------
Total $38,269 $59,181 $37,009
======= ======= =======
The following is a reconciliation of the statutory federal income tax rate to
the effective income tax rate as reflected in the consolidated statements of
income.
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL FOR THE PERIOD FROM
YEAR ENDED YEAR ENDED FEBRUARY 11, 1998 TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ --------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income and franchise taxes,
net of federal tax effect 1.5% 3.0% 4.0%
Goodwill 12.7% 11.0% 12.3%
Reduction in state accrual rate (5.5%) -- --
---- ---- ----
Effective income tax rate 43.7% 49.0% 51.3%
==== ==== ====
</TABLE>
37
<PAGE> 38
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $244,019 $148,736
Alternative minimum tax credit carry forward 4,001 2,494
Loss reserves -- 42,106
Purchase Accounting Adjustment 35,928 37,404
Other assets 22,272 12,590
-------- --------
Total gross deferred tax assets $306,220 $243,330
======== ========
Deferred tax liabilities:
Mortgage servicing fees $434,727 $354,728
Hedge activities 102,589 85,822
Loss reserves 8,123 --
Other liabilities 32,150 23,555
-------- --------
Total gross deferred tax liabilities 577,589 464,105
-------- --------
Net deferred tax liability $271,369 $220,775
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which these temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. No valuation allowance
was recorded at September 30, 2000 or September 30, 1999. The Company has
consolidated tax net operating loss carryforwards at September 30, 2000. These
carryforwards expire in the years 2012 to 2020.
11. LEASE COMMITMENTS
HomeSide leases office facilities and equipment under noncancelable leases that
include renewal options and escalation clauses which extend into 2010. Rental
expense for leases of office facilities and equipment was $9.8 million, $8.8
million and $4.0 million for the years ended September 30, 2000 and September
30, 1999 and the period from February 11, 1998 to September 30, 1998,
respectively. HomeSide's minimum future lease commitments are as follows (in
thousands):
FISCAL YEAR
-----------
2001 $ 6,962
2002 6,533
2003 6,455
2004 5,205
2005 4,441
Thereafter 17,445
---------
Total $ 47,041
=========
As discussed in Note 20, on October 2, 2000, HomeSide entered into a
sale-leaseback transaction for its facility in San Antonio, Texas. The sale
included land, building, and building improvements with the sales price
exceeding the property's carrying value
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market
information. Where available, quoted market prices are used. In other cases,
fair values are based on estimates using other valuation techniques, such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are significantly affected by the assumptions used and the judgments made
regarding risk characteristics of various financial instruments, prepayments,
discount rates, estimates of future cash flows, future anticipated loss
experience and other factors. Changes in assumptions could significantly affect
these estimates. Independent market data may not be available to validate those
fair value estimates that are based on internal valuation techniques. Moreover,
such fair value estimates may not be indicative of the amounts that could be
realized in an immediate sale of the instrument. Also because of differences in
38
<PAGE> 39
methodologies and assumptions used to estimate fair value, the Company's fair
values should not be compared to those of other companies.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company. For certain assets and liabilities, the
information required is supplemented with additional information relevant to an
understanding of the fair value.
The methods and assumptions used to estimate the fair values of each class of
financial instruments are as follows:
Cash and cash equivalents
The carrying amount reported in the balance sheet approximates fair value.
Mortgage loans held for sale
Fair values are based on the estimated value at which the loans could be sold in
the secondary market. These loans are priced to be sold with servicing rights
retained, as this is the Company's normal business practice.
Accounts receivable, early pool buyout advances, accounts payable and accrued
liabilities Carrying amounts are considered to approximate fair value.
Risk management contracts
Fair values are estimated based on actual market quotes, option models, or
discounted cash flow valuation models. The carrying amount relating to these
contracts is included in accounts payable and accrued liabilities as of
September 30, 2000 and September 30, 1999.
Notes payable
The carrying amount of the notes payable reported in the balance sheet
approximates its fair value due to the short-term nature of the borrowings under
the credit agreements.
Long-term debt
Fair value of long-term debt is estimated by discounting estimated future cash
flows using a rate consistent with the Company's current borrowing rate as
adjusted for the effects of certain prepayment penalties.
Commitments to originate mortgage loans
Fair value is estimated using quoted market prices for securities backed by
similar loans adjusted for differences in loan characteristics.
Forward contracts to sell mortgages
Forward contracts to sell mortgages, which represent legally binding agreements
to sell loans to permanent investors at a specified price or yield, are valued
using market prices for securities backed by similar loans and are reflected in
the fair values of the mortgages held for sale, to the extent that these
commitments relate to mortgage loans already originated, or of the related
commitments to extend credit.
Options on mortgage-backed securities, Eurodollar futures and U.S. Treasury bond
and note futures
The fair values of options are estimated based on actual market quotes.
Interest rate swaps
The fair values of interest rate swaps are based on discounted cash flow
valuation models and are periodically validated against dealer quotes.
39
<PAGE> 40
FAIR VALUE
The fair values of the Company's financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------------------- ----------------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 110,737 $ 110,737 $ 202,859 $ 202,859
Mortgage loans held for sale 1,441,216 1,449,449 1,292,562 1,296,426
Accounts receivable 324,028 324,028 255,759 255,759
Early pool buyout advances 141,255 141,255 335,059 335,059
LIABILITIES
Notes payable 3,235,400 3,235,400 2,899,304 2,899,304
Long-term debt 1,899,772 1,899,919 1,331,292 1,324,465
Accounts payable and accrued liabilities 542,500 542,500 375,978 375,978
Risk management contracts for
mortgage servicing rights 44,568 44,568 290,464 290,464
Risk management contracts for
early pool buyout advances 207 207 -- --
OFF-BALANCE SHEET(1)
Commitments to originate mortgage loans -- 6,974 -- 2,939
Mandatory forward contracts to sell mortgages -- (15,324) -- (8,370)
Options on mortgage-backed securities 832 104 4,747 3,722
Options on U.S treasury bond futures 36 30 56 54
Interest rate swaps on debt instruments -- (147) -- 6,827
</TABLE>
--------------
(1) Parenthesis denote a liability
Fair value estimates are made as of a specific point in time, based on relevant
market data and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale the
Company's entire holding of a particular financial instrument. Because no active
market exists for some portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, current interest rates and prepayment
trends, risk characteristics of various financial instruments and other factors.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and, therefore, cannot be determined with precision.
Changes in any of these assumptions used in calculating fair value would also
significantly affect the estimates. Further, the fair value estimates were
calculated as of September 30, 2000 and September 30, 1999. Subsequent changes
in market interest rates and prepayment assumptions could significantly change
the fair value.
13. RISK MANAGEMENT AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
As discussed in Note 3, HomeSide utilizes risk management financial instruments
to manage interest rate risk related to the value of its mortgage servicing
rights. A summary of HomeSide's positions in risk management financial
instruments at September 30, 2000 and September 30, 1999 is included below.
The fair value of HomeSide's risk management contracts on Treasury options,
mortgage pass-throughs, options on mortgage pass-throughs, Eurodollar futures,
and options on Eurodollar futures is based on quoted market prices of the
underlying instruments at September 30, 2000 and September 30, 1999. The
notional amounts represent the par value of the underlying U.S. Treasury bonds
or notes and mortgages, as applicable. However, the notional amounts are not
recognized in the balance sheet and should not be considered as a measure of
credit risk or future cash requirements.
The fair value of HomeSide's risk management contracts in Interest Rate Swaps,
Interest Rate Swaps with a Cap, and Options on Interest Rate Swaps (Swaptions)
is based on discounted cash flow valuation models and is periodically validated
against dealer quotes (see Footnote 12). The notional amounts represent only the
balances upon which future interest payments are based. Therefore, the notional
amounts are not recognized in the balance sheet and should not be considered as
a measure of credit risk or future cash requirements.
40
<PAGE> 41
The amount of the risk management contracts maintained depends on a number of
factors including the size of the mortgage servicing portfolio, projected
convexity of the mortgage servicing rights, interest rates, and interest rate
volatility. HomeSide is subject to market risk to the extent that interest rates
fluctuate; however, the purpose of the risk management contracts is to hedge the
value of the mortgage servicing rights portfolio. HomeSide's risk management
financial instruments qualify as hedges, and gains or losses on the risk
management instruments correlate with movements in the value of the mortgage
servicing rights. Cap structures are included with certain interest rate swaps
to create the desired hedge profile and to limit the Company's losses in a
rising rate environment.
Cash requirements for HomeSide's swaps and swaption contracts are based on
interest rate movements over time, with cash receipts based on a predetermined
fixed rate and cash payments based on a floating rate. Cash requirements for
option contracts are limited to premiums paid. Cash requirements for futures
contracts, when held, are managed based on limits established by HomeSide's risk
management committee.
The risk associated with these instruments is the exposure to current and
expected market movements in interest rates and the ability of the
counterparties to meet the terms of the contracts. The options, futures,
mortgage pass-throughs and swaption contracts generally require future
performance on the part of the counterparty upon exercise of the option contract
by HomeSide. The swap contracts require regular cash payments between HomeSide
and the counterparties for the term of the contract.
HomeSide is exposed to credit loss in the event of nonperformance by the
counterparties to the various instruments. HomeSide controls credit and market
risk associated with interest rate products by establishing and monitoring
limits with counterparties as to the types and degree of risks that may be
undertaken. HomeSide's exposure to credit risk in the event of default by the
counterparties for the risk management option contracts on mortgage servicing
rights was $31.5 million at September 30, 2000 and $30.1 million at September
30, 1999.
The amount of credit risk associated with risk management interest rate swaps,
interest rate swaps with caps, and interest rate swaptions related to mortgage
servicing rights if all counterparties failed completely was approximately
$118.1 million at September 30, 2000 and $0.1 million at September 30, 1999.
As discussed in Note 3, HomeSide purchases financial instruments and enters into
financial agreements with off-balance sheet risk in the normal course of
business through the origination and selling of mortgage loans and as part of
its risk management programs. These instruments involve, to varying degrees,
elements of credit and interest rate risk. Credit risk is the possibility that a
loss may occur if a counterparty to a transaction fails to perform according to
the terms of the contract. Interest rate risk is the possibility that a change
in interest rates will cause the value of a financial instrument to decrease or
become more costly to settle.
HomeSide regularly enters into commitments to originate and purchase mortgage
loans at a future date subject to compliance with stated conditions. Commitments
to originate mortgage loans have off-balance sheet risk to the extent HomeSide
does not have matching commitments to sell loans, which exposes HomeSide to
lower of cost or market valuation adjustments in a rising interest rate
environment. Additionally, the extension of a commitment, which is subject to
HomeSide's credit review and approval policies, gives rise to credit exposure
when certain borrowing conditions are met and the loan is made. Until such time,
it represents only potential exposure. The obligation to lend may be voided if
the customer's financial condition deteriorates or if the customer fails to meet
certain conditions. Commitments to originate mortgage loans do not necessarily
reflect future cash requirements since some of the commitments will not be drawn
upon before expiration. Commitments to originate mortgage loans totaled $1.7
billion at September 30, 2000 and September 30, 1999.
HomeSide's exposure to credit risk in the event of default by the counterparty
for mandatory forward commitments to sell mortgage loans and related options is
the difference between the contract price and the current market price, offset
by any available margins retained by HomeSide or an independent clearing agent,
which was approximately $0 at September 30, 2000 and totaled $0.1 million at
September 30, 1999.
As discussed in Note 3, HomeSide utilizes risk management financial instruments
to manage interest rate risk related to the value of its early pool buyout
advances. There was no credit risk associated with these instruments (options on
Eurodollar futures) at September 30, 2000.
The amount of credit risk as of September 30, 2000 and September 30, 1999, if
all counterparties failed completely and if the margins, if any, retained by
HomeSide or an independent clearing agent were to become unavailable, was
approximately $149.6 million and $30.3 million, respectively, for all risk
management instruments related to mortgage servicing rights, early pool buyout
advances and the origination and selling of mortgage loans.
The amounts of credit risk associated with interest rate swaps related to debt
instruments at September 30, 2000 and September 30, 1999 were approximately $1.7
million and $6.8 million, respectively.
41
<PAGE> 42
The following is a summary of HomeSide 's notional amounts and fair values of
interest rate products (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
----------------------------- -----------------------------
NOTIONAL NOTIONAL
AMOUNT FAIR VALUE(1) AMOUNT FAIR VALUE (1)
------ ------------- ------ --------------
<S> <C> <C> <C> <C>
Purchased commitments to sell mortgage loans:
Mandatory forward contracts $2,468,602 $ (15,324) $1,942,890 $ (8,370)
Options on mortgage-backed securities 507,000 104 640,000 3,722
Options on U.S. treasury bond futures 30,000 30 30,000 54
Risk management contracts on mortgage servicing rights:
Options on U.S. treasury bond futures -- -- 3,552,400 29,206
Options on mortgage pass-throughs 1,200,000 739 -- --
Over the counter options on U.S. treasury
bonds / notes 900,000 (189) 1,450,000 27,301
Options on Eurodollar futures -- -- 4,000,000 2,844
Mortgage pass-throughs 4,435,000 27,707 -- --
Interest rate swaps and
interest rate swaps with caps 18,675,000 (206,150) 16,150,000 (384,029)
Interest rate swaptions 22,347,500 133,325 9,450,000 34,214
Risk management contracts on early pool buyout
advances:
Eurodollar futures 175,000 (207) -- --
Interest rate swaps on debt instruments 750,000 (147) 950,000 6,827
</TABLE>
(1) Parentheses denote liability. Fair value represents the amount at which a
given instrument could be exchanged in an arms length transaction with a
third party as of the balance sheet date. See also Note 12 regarding fair
value disclosures of financial instruments.
Mortgage loans sold with recourse
HomeSide sells mortgage loans with recourse to various investors and retains the
servicing rights and responsibility for credit losses on these loans. The total
outstanding balance of loans sold with recourse does not necessarily represent
future cash outflows. The total outstanding principal balance of loans sold with
recourse was $25.5 million and $21.6 million at September 30, 2000 and September
30, 1999, respectively.
Servicing commitment to investors
HomeSide is required to submit to certain investors, primarily Ginnie Mae,
guaranteed principal and interest payments from the underlying mortgage loans
regardless of actual collections.
Purchase mortgage servicing rights commitments
HomeSide routinely enters into commitments to purchase mortgage servicing rights
associated with mortgages originated by third parties, subject to compliance
with stated conditions. These commitments to purchase mortgage servicing rights
correspond to mortgage loans having an aggregate loan principal balance of
approximately $2.7 billion and $3.0 billion at September 30, 2000 and September
30, 1999, respectively.
Geographical concentration of credit risk
HomeSide is engaged in business nationwide and has no material concentration of
credit risk in any geographic region.
42
<PAGE> 43
14. STOCKHOLDERS' EQUITY
On April 3, 2000 and October 20, 1999 the Company paid dividends to the Parent
in the amounts of $24.0 million and $24.0 million, respectively. On September
30, 2000 the Company paid dividends to the Parent in the amount of $1.6 million.
15. CONTINGENCIES
HomeSide, along with its subsidiaries, is a defendant in a number of legal
proceedings arising in the normal course of business. HomeSide, in management's
estimation, has recorded adequate reserves in the financial statements for
pending litigation. Management, after reviewing all actions and proceedings
pending against or involving HomeSide, considers that the aggregate liabilities
or loss, if any, resulting from the final outcome of these proceedings will not
have a material effect on the financial position, results of operations or
liquidity of HomeSide.
16. EMPLOYEE BENEFITS
HomeSide offers a 401(k) defined contribution benefit plan in which employees
may contribute a portion of their compensation. Substantially all employees are
eligible for participation in the plan. The Company matches 100% of amounts
contributed up to 4% of an employee's compensation. Further, the Company may
contribute additional amounts at its discretion. Total expense related to the
benefit plan was approximately $5.5 million, $5.2 million and $4.1 million for
the fiscal years ended September 30, 2000 and September 30, 1999 and the period
from February 11, 1998 to September 30, 1998, respectively.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) FOR THE THREE FOR THE THREE FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 2000 JUNE 30, 2000 MARCH 31, 2000 DECEMBER 31, 1999
------------------ ------------- -------------- -----------------
<S> <C> <C> <C> <C>
Revenue $86,125 $82,422 $93,210 $92,134
Expenses 71,026 66,949 59,264 69,071
Provision for income taxes 8,786 8,923 15,666 4,893
------- ------- ------- -------
Net income $ 6,313 $ 6,550 $18,280 $18,170
======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
(in thousands) FOR THE THREE FOR THE THREE FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1999 JUNE 30, 1999 MARCH 31, 1999 DECEMBER 31, 1998
------------------ ------------- -------------- -----------------
<S> <C> <C> <C> <C>
Revenue $96,833 $103,910 $105,211 $104,432
Expenses 64,366 74,784 74,268 76,122
Provision for income taxes 14,747 14,354 15,561 14,519
------- -------- -------- --------
Net income $17,720 $ 14,772 $ 15,382 $ 13,791
======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
(in thousands) FOR THE THREE FOR THE THREE FOR THE PERIOD FROM
MONTHS ENDED MONTHS ENDED FEBRUARY 11, 1998 TO
SEPTEMBER 30, 1998 JUNE 30, 1998 MARCH 31, 1998
------------------ ------------- --------------------
<S> <C> <C> <C>
Revenue $102,193 $96,192 $44,627
Expenses 71,722 67,192 31,983
Provision for income taxes 15,363 14,788 6,858
-------- ------- -------
Net income $ 15,108 $14,212 $ 5,786
======== ======= =======
</TABLE>
43
<PAGE> 44
18. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Investment in subsidiary $1,366,996 $1,374,965
Other assets 54,094 51,413
---------- ----------
Total Assets $1,421,090 $1,426,378
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 5,914 $ 5,928
Long-term debt 141,959 146,908
---------- ----------
Total Liabilities 147,873 152,836
---------- ----------
Commitments and Contingencies
Stockholder's Equity:
Common stock -- --
Additional paid-in capital 1,231,302 1,231,302
Retained earnings 41,915 42,240
---------- ----------
Total stockholder's equity 1,273,217 1,273,542
---------- ----------
Total Liabilities and Stockholder's Equity $1,421,090 $1,426,378
========== ==========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL FOR THE PERIOD FROM
YEAR ENDED YEAR ENDED FEBRUARY 11, 1998 TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Dividends from subsidiary $64,294 $69,166 $ 7,318
------- ------- -------
Total Revenues 64,294 69,166 7,318
------- ------- -------
EXPENSES:
Interest expense 9,702 9,680 7,798
Other expenses 852 852 497
------- ------- -------
Total Expenses 10,554 10,532 8,295
------- ------- -------
Income (loss) before income taxes
and equity in Undistributed income
of subsidiary 53,740 58,634 (977)
Income tax benefit 3,541 3,652 3,041
------- ------- -------
Income before equity in undistributed
income of subsidiary 50,199 62,286 2,064
Distributions to Parent in excess of
income from subsidiary (887) (621) 33,042
------- ------- -------
Net Income $49,312 $61,665 $35,106
======= ======= =======
</TABLE>
44
<PAGE> 45
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL FOR THE PERIOD FROM
YEAR ENDED YEAR ENDED FEBRUARY 11, 1998 TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $49,312 $61,665 $ 35,106
Adjustments to reconcile net income to net
Cash used in operating activities
Amortization (4,950) (5,810) (1,072)
Equity in undistributed earnings of subsidiary 887 621 (33,042)
Deferred income tax benefit -- -- (3,041)
Change in other assets and accounts payable
And accrued liabilities 4,388 (1,945) 2,049
------- ------- --------
Net cash provided by operating activities 49,637 54,531 --
------- ------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Dividends paid to the National (49,637) (54,531) --
------- ------- --------
Net cash used in financing activities (49,637) (54,531) --
------- ------- --------
Cash and cash equivalents at beginning of period -- -- --
Cash and cash equivalents at end of period -- -- --
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>
19. OTHER RELATED PARTY TRANSACTIONS
On June 23, 1998, HomeSide entered into an agreement for an unsecured revolving
credit facility with the National. The facility was renewed on June 21, 2000 and
June 22, 1999. Under the credit facility, HomeSide can borrow up to $2.5
billion, subject to limits imposed by regulatory authorities. As of September
30, 2000, the National's limit to lend funds to HomeSide, a non-bank affiliate,
was approximately $2.0 billion. Borrowings under the credit facility may be
overnight or for periods of 7, 30, 60 or 90 days. For overnight borrowings, the
interest rate is determined by the National at the time of the borrowing. For
LIBOR - based borrowings, the interest rate is charged at the corresponding
LIBOR rate.
HomeSide earned management fees charged to affiliate companies of approximately
$2.5 million for the fiscal year ended September 30, 2000, $0.5 million for the
fiscal year ended September 30, 1999, and $0 for the period from February 11,
1998 to September 30, 1998.
20. SUBSEQUENT EVENTS
On October 2, 2000, HomeSide sold its facility located in San Antonio, Texas.
The sale included land, building, and building improvements with the sales price
exceeding the property's carrying value. HomeSide subsequently entered into an
operating lease agreement to lease back the property for a term of five years.
This transaction met the qualifications of a sale-leaseback, in accordance with
SFAS No. 98 "Accounting for Leases", resulting in the immediate recognition of a
gain in the amount of $4.5 million and a deferred gain of $7.3 million which
will be amortized over the life of the lease.
On October 16, 2000, HomeSide entered into a $1.5 billion revolving credit
facility with an independent syndicate of banks. This agreement replaces
HomeSide's previous bank credit facility. The primary purpose of this credit
facility is to provide liquidity back-up for HomeSide's $1.5 billion commercial
paper program.
On December 4, 2000 HomeSide issued three medium-term notes in the amounts of
$125 million, $75 million, and $50 million which will mature on December 4,
2002. These notes are floating rate notes with initial interest rates of 6.98%,
6.98%, and 6.87%, respectively.
45
<PAGE> 46
ITEM 6. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
HOMESIDE, INC. PREDECESSOR (PRIOR TO ACQUISITION BY THE NATIONAL
ON FEBRUARY 10, 1998)
The selected consolidated financial and operating information of Homeside, Inc.
Predecessor set forth below is for the periods from March 1, 1997 to February
10, 1998 and March 16, 1996 to February 28, 1997 and should be read in
conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements and the Notes thereto and in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of Homeside, Inc. Predecessor included elsewhere in this document.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
(IN THOUSANDS, EXCEPT SHARE DATA) MARCH 1, 1997 TO MARCH 16, 1996 TO
FEBRUARY 10, 1998 FEBRUARY 28, 1997
------------------- -------------------
<S> <C> <C>
SELECTED STATEMENT OF INCOME DATA:
Revenues:
Mortgage servicing fees $ 398,159 $ 312,341
Amortization of mortgage servicing rights (210,200) (155,827)
---------- ----------
Net servicing revenue 187,959 156,514
Interest income 97,050 81,507
Interest expense (97,028) (87,700)
---------- ----------
Net interest revenue 22 (6,193)
Net mortgage origination revenue 85,206 66,073
Other income 1,671 682
---------- ----------
Total revenues 274,858 217,076
Expenses:
Salaries and employee benefits 75,419 72,976
Occupancy and equipment 15,447 11,770
Servicing losses on investor-owned loans and
foreclosure-related expenses 21,974 17,934
Other expenses 39,415 41,714
---------- ----------
Total expenses 152,255 144,394
Income before provision for income taxes and 122,603 72,682
extraordinary loss
Provision for income taxes 47,816 29,273
---------- ----------
Income before extraordinary loss 74,787 43,409
Extraordinary loss (Note 9) -- 6,440
---------- ----------
Net income $ 74,787 $ 36,969
========== ==========
PER SHARE DATA (diluted):
Net income per share before extraordinary loss $ 1.69 $ 1.33
Weighted average shares outstanding 44,365,823 32,687,780
========== ==========
SELECTED BALANCE SHEET DATA AT END OF PERIOD:
Mortgage loans held for sale $1,292,403 $ 805,274
Mortgage servicing rights 1,781,134 1,614,307
Total assets 3,883,603 2,752,182
Bank credit facility 2,074,956 1,818,503
Long-term debt 900,466 151,128
Total liabilities 3,294,470 2,239,886
Total stockholders' equity 589,133 512,296
========== ==========
SELECTED OPERATING DATA:
Volume of loan production $20,529,530 $ 20,877,535
Loan servicing portfolio (at period end) 99,956,050 90,192,247
Loan servicing portfolio (average outstanding
during the period) 96,083,220 75,692,214
Weighted average interest rate of the servicing
portfolio (at period end) 7.85% 7.92%
Weighted average servicing fee of the servicing
portfolio, including ancillary income (during the
period) 0.439% 0.431%
</TABLE>
46
<PAGE> 47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HOMESIDE, INC. PREDECESSOR-- FOR THE PERIOD FROM MARCH 1, 1997 TO
FEBRUARY 10, 1998 AND FOR THE PERIOD FROM MARCH 16, 1996 TO FEBRUARY 28, 1997
GENERAL
Homeside, Inc. Predecessor, through its wholly-owned operating subsidiary
HomeSide Lending, Inc., is one of the largest full service residential mortgage
banking companies in the United States, formed through the acquisition of the
mortgage banking operations of BankBoston, N.A., formerly known as The First
National Bank of Boston ("BankBoston"), and Barnett Banks, Inc. ("Barnett").
Homeside, Inc. Predecessor's strategy emphasizes variable cost mortgage loan
originations, low cost mortgage servicing and effective risk management.
Headquartered in Jacksonville, Florida, Homeside, Inc. Predecessor ranks as the
4th largest mortgage loan originator and the 6th largest servicer in the United
States for the twelve months ended December 31, 1997 based on data published by
Inside Mortgage Finance.
Homeside, Inc. Predecessor plans to build its core operations through (i)
improved economies of scale in servicing costs; (ii) increased productivity
using proprietary technology; and (iii) expanded and diversified variable cost
origination channels. In addition, Homeside, Inc. Predecessor intends to pursue
additional loan portfolio acquisitions and strategic origination relationships
similar to the existing BankBoston and Barnett arrangements (see Note 4).
On February 10, 1998, National Australia Bank Limited (the "National") acquired
all outstanding shares of common stock of Homeside, Inc. Predecessor for $27.825
per share or approximately $1.2 billion. Following this transaction, the
National owns 100% of the registrant's common stock and Homeside, Inc.
Predecessor became an indirect wholly-owned subsidiary of the National.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. This report contains forward-looking
statements, which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including those identified below, which
could cause actual results to differ materially from historical results or those
anticipated. The words "believe," "expect," "anticipate," "intend," "estimate"
and other expressions, which indicate future events and trends, identify
forward-looking statements, which speak only as of their dates. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
The following factors could cause actual results to differ materially from
historical results or those anticipated: (1) the Company's ability to grow which
is dependent on its ability to obtain additional financing in the future for
originating loans, investment in servicing rights, working capital, capital
expenditures and general corporate purposes, (2) economic factors may negatively
affect the Company's profitability as the frequency of loan default tends to
increase in such environments and (3) changes in interest rates may affect the
volume of loan originations and acquisitions, the interest rate spread on loans
held for sale, the amount of gain or loss on the sale of loans and the value of
the Company's servicing portfolio. These risks and uncertainties are more fully
detailed in the Company's filings with the Securities and Exchange Commission.
Mortgage Banking
Mortgage banking is a specialized branch of the financial services industry
which primarily involves (i) originating and purchasing mortgage loans
("origination" and/or "production"); (ii) selling the originated mortgages to
third parties either as mortgage-backed securities or as whole loans ("secondary
marketing"); (iii) servicing of mortgage loans on behalf of the ultimate
purchasers, which includes the collection and disbursement of payments of
mortgage principal and interest, the collection of payments of taxes and
insurance premiums to pay property taxes and insurance premiums and management
of certain loan default activities (collectively, "servicing"); and (iv) risk
management, a program primarily designed to protect the economic performance of
the servicing portfolio that could otherwise be adversely affected by increased
loan prepayments due to declines in interest rates.
Mortgage bankers originate loans generally through two channels: wholesale and
direct. Wholesale origination involves the origination of mortgage loans from
sources other than homeowners, including mortgage brokers and other mortgage
lenders. Direct origination typically includes (i) networks of retail loan
offices with sales staff that solicit business from homeowners, realtors,
builders and other real estate professionals, (ii) centers that use
telemarketing, direct mail, and advertising to market loans directly to home
buyers or homeowners, (iii) affinity and co-branding partnerships and (iv)
corporate relocation programs. Once originated or purchased, mortgage bankers
hold the loans temporarily ("warehousing") until they are sold, typically
earning an interest spread equal to the difference between the loan's interest
rate and the cost of financing the loan. Each loan is sold either excluding or
including the associated right to service the loan ("servicing retained" or
"servicing released," respectively).
47
<PAGE> 48
Mortgage bankers rely mainly on short-term borrowings, such as warehouse lines,
to finance the origination of mortgages that are sold. Mortgage bankers also
borrow on a longer term basis to finance their servicing assets and working
capital requirements. Revenues consist primarily of those related to servicing
and, to a lesser extent, fees and interest spreads from originations. The major
expenses of a mortgage banker include costs of financing, operating costs
related to origination and servicing and the amortization of mortgage servicing
rights.
Mortgage bankers typically seek to retain the rights to service the loans they
originate or acquire in order to generate recurring fee income. The purchase and
sale of servicing rights can occur on a loan-by-loan basis ("flow") or on a
portfolio (group of loans) basis ("bulk" or "mini-bulk"). Prices for servicing
rights are typically stated as a multiple of the servicing fee or as a
percentage of the outstanding unpaid principal balance for a group of mortgage
loans. Values of servicing portfolios are generally based on the present value
of the servicing fee income stream, net of servicing costs, expected to be
received over the estimated life of the loans. The assets of a mortgage banking
company consist primarily of mortgage loans held for sale and the value of the
servicing rights.
Loan Production Activities
As a multi-channel loan production lender, Homeside, Inc. Predecessor has one of
the industry's largest correspondent lending production operations, a
full-service brokered loan program and a national production center for consumer
direct mortgage lending. By focusing on production channels with a variable cost
structure, Homeside, Inc. Predecessor eliminates the fixed costs associated with
traditional mortgage branch offices. Without the burden of high fixed cost loan
origination networks, Homeside, Inc. Predecessor is positioned to weather a
variety of interest rate environments.
The following information regarding loan production activities for Homeside,
Inc. Predecessor is presented to aid in understanding the results of operations
and financial condition of Homeside, Inc. Predecessor for the period from March
1, 1997 to February 10, 1998 and for the period from March 16, 1996 to February
28, 1997 (in millions):
FOR THE PERIOD FROM FOR THE PERIOD FROM
MARCH 1, 1997 TO MARCH 16, 1996 TO
FEBRUARY 10, 1998 FEBRUARY 28, 1997
------------------- -------------------
Correspondent $13,304 $11,113
Co-issue 5,584 8,222
Broker 1,305 843
------- -------
Total wholesale 20,193 20,178
Consumer Direct 337 700
------- -------
Total production 20,530 20,878
Bulk acquisitions 3,446 4,073
------- -------
Total production and acquisitions $23,976 $24,951
======= =======
Total loan production, excluding bulk acquisitions, was $20.5 billion for the
period from March 1, 1997 to February 10, 1998, relatively equal to the period
from March 16, 1996 to February 28, 1997. Homeside, Inc. Predecessor also
purchased bulk servicing acquisitions of $3.4 billion and $4.1 billion during
the period from March 1, 1997 to February 10, 1998 and the period from March 16,
1996 to February 28, 1997, respectively.
Homeside, Inc. Predecessor continues to examine a number of ways to diversify
and grow revenue sources from its existing and new customer base. As part of
this effort, Homeside, Inc. Predecessor has announced an alliance with a
subprime lender, which allows Homeside, Inc. Predecessor to offer additional
mortgage-related products to the production network. Homeside, Inc. Predecessor
then sells the loans, servicing released, to its strategic partners. The
subprime lending unit began operations in January 1998.
Servicing Portfolio
Management believes that Homeside, Inc. Predecessor is one of the most efficient
mortgage loan servicers in the industry based on its servicing cost per loan and
the number of loans serviced per employee. The servicing operation makes
extensive use of state-of-the-art technology, process re-engineering and expense
management. With a portfolio size of $100 billion, Homeside, Inc. Predecessor
services the loans of approximately 1.2 million homeowners from across the
United States and is committed to protecting the value of this important asset
by a sophisticated risk management strategy. Homeside, Inc. Predecessor
anticipates its low cost of servicing loans will continue to maximize the
bottom-line impact of its growing servicing portfolio. Homeside, Inc.
Predecessor's focus on efficient and low
48
<PAGE> 49
cost processes is pursued through the selective use of automation as well as the
strategic outsourcing of selected servicing functions and effective control of
delinquencies and foreclosures.
The following information on the dollar amounts of loans serviced is presented
to aid in understanding the results of operations and financial condition of
Homeside, Inc. Predecessor for the period from March 1, 1997 to February 10,
1998 and for the period from March 16, 1996 to February 28, 1997 (in millions):
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
MARCH 1, 1997 TO MARCH 16, 1996 TO
FEBRUARY 10, 1998 FEBRUARY 28, 1997
------------------- ------------------
<S> <C> <C>
Balance at beginning of period $90,192 $42,907
Acquisition of Barnett Mortgage Company -- 33,082
Other additions 23,976 25,252
------- -------
Total additions 23,976 58,334
------- -------
Scheduled amortization 2,038 1,822
Prepayments 11,097 6,226
Foreclosures 682 514
Sales of servicing 395 2,487(a)
------- -------
Total reductions 14,212 11,049
------- -------
BALANCE AT END OF PERIOD $99,956 $90,192
======= =======
</TABLE>
(a) Includes $1.9 billion of servicing sold as part of the sale of Honolulu
Mortgage Company.
The number of loans serviced at February 10, 1998 was 1,185,241, compared to
1,087,336 at February 28, 1997. Homeside, Inc. Predecessor's strategy is to
build its mortgage servicing portfolio by concentrating on variable cost loan
origination strategies, and as a result, benefit from improved economies of
scale. A key to Homeside, Inc. Predecessor's future growth is the proprietary
servicing software purchased from Barnett. This system will allow Homeside, Inc.
Predecessor to double the number of loans serviced on a single system. During
the period from March 1, 1997 to February 10, 1998, Homeside, Inc. Predecessor
transferred approximately 210,000 of the loans serviced to its proprietary
servicing software. After the transfer, over half the servicing portfolio is
serviced on the proprietary system. The transfer of the remaining portfolio is
expected to occur by the end of calendar 1998.
RESULTS OF OPERATIONS
FOR THE PERIOD FROM MARCH 1, 1997 TO FEBRUARY 10, 1998 COMPARED TO THE PERIOD
FROM MARCH 16, 1996 TO FEBRUARY 28, 1997
Summary
Homeside, Inc. Predecessor's net income increased 102% to $74.8 million for the
period from March 1, 1997 to February 10, 1998 from $37.0 million for the period
from March 16, 1996 to February 28, 1997. Total revenues for the period from
March 1, 1997 to February 10, 1998 increased 27% to $274.9 million from $217.1
million for the period from March 16, 1996 to February 28, 1997. The increases
in net income and revenues for the period from March 1, 1997 to February 10,
1998 compared to the period from March 16, 1996 to February 28, 1997 were
primarily attributable to the acquisition of Barnett Mortgage Company ("BMC") on
May 31, 1996 and increases of $31.4 million in net servicing revenue, $19.1
million in net mortgage origination revenue and $6.2 million in net interest
revenue. The BMC servicing portfolio was $33.1 billion at May 31, 1996. Its
acquisition increased Homeside, Inc. Predecessor's servicing portfolio by 75% on
that date, and was a major factor in the increase in net servicing revenue. In
addition, subsequent increases in the size of the servicing portfolio
contributed to the increased revenue. The servicing portfolio increased to
$100.0 billion at February 10, 1998 from $90.2 billion at February 28, 1997, a
11% increase. As part of the BMC acquisition, Barnett agreed to sell Homeside,
Inc. Predecessor the loans produced by the loan production networks retained by
Barnett, which contributed to the increase in net mortgage origination revenue.
Net interest revenue increased primarily because of lower borrowing costs
resulting from the lower interest rate environment during the period ending
February 10, 1998, improved terms for the bank line of credit and the issuance
of medium-term notes. The Company's improved credit ratings lowered the cost of
borrowing under the bank line of credit and enabled Homeside, Inc. Predecessor
to issue publicly traded notes, which expanded borrowing capacity.
49
<PAGE> 50
Net Servicing Revenue
Net servicing revenue was $188.0 million for the period from March 1, 1997 to
February 10, 1998 compared to $156.5 million for the period from March 16, 1996
to February 28, 1998. Net servicing revenue is comprised of mortgage servicing
fees, ancillary servicing revenue, and amortization of mortgage servicing rights
expense.
Mortgage servicing fees increased 28% to $398.2 million for the period from
March 1, 1997 to February 10, 1998 from $312.3 million for the period from March
16, 1996 to February 28,1997, primarily as a result of the BMC acquisition and
growth of the servicing portfolio through loan production channels and bulk
servicing acquisitions. The servicing portfolio increased to $100.0 billion at
February 10, 1997 compared to $90.2 billion at February 28, 1997. Homeside, Inc.
Predecessor's weighted average interest rate of the mortgage loans in the
servicing portfolio was 7.85% at February 10, 1998 and 7.92% at February 28,
1997. The weighted average servicing fee, including ancillary income, for the
servicing portfolio was 0.439% and 0.431% for the period from March 1, 1997 to
February 10, 1998 and the period from March 16, 1996 to February 28, 1997,
respectively. The increase in the weighted average servicing fee for the period
from March 1, 1997 to February 10, 1998 compared to the period from March 16,
1996 to February 28, 1997 was due to growth of ancillary revenues, including
late fees and other mortgage-related products.
Amortization expense increased to $210.2 million for the period March 1, 1997 to
February 10, 1998 from $155.8 million for the period from March 16, 1996 to
February 28, 1997 mainly as a result of a higher average balance of mortgage
servicing rights and a decrease of 86 basis points in average mortgage interest
rates from the period from March 16, 1996 to February 28, 1997 to the period
from March 1, 1997 to February 10, 1998. Amortization charges are highly
dependent upon the level of prepayments during the period and changes in
prepayment expectations, which are significantly influenced by the direction and
level of long-term interest rate movements. A decrease in mortgage interest
rates results in an increase in prepayment estimates used in calculating
periodic amortization expense. Because mortgage servicing rights are amortized
over the expected period of service fee revenues, an increase in mortgage
prepayment activity typically results in a shorter estimated life of the
mortgage servicing assets and, accordingly, higher amortization expense.
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the direction in
which rates are moving and the spread between short and long-term interest
rates. These factors influence the size of the residential mortgage origination
market, Homeside, Inc. Predecessor's loan production volumes and the interest
rates Homeside, Inc. Predecessor earns on loans and pays to its lenders.
Loan refinancing levels are the largest contributor to changes in the size of
the mortgage origination market. To reduce the cost of their home mortgages,
borrowers tend to refinance their loans during periods of declining interest
rates, increasing the size of the origination market and Homeside, Inc.
Predecessor's loan production volumes. Higher loan production volumes resulted
in higher average balances of loans held for sale and consequently higher levels
of interest income earned on such loans prior to their sale. This higher level
of interest income due to increased volumes is partially offset by the lower
rates earned on the loans.
Overall borrowing costs also fluctuate with changes in interest rates.
Currently, the interest expense Homeside, Inc. Predecessor pays to finance
mortgage loans held for sale and other net assets is generally calculated with
reference to short-term interest rates. In addition, because mortgage loans held
for sale earn interest based on longer term interest rates, the level of net
interest revenue is also influenced by the spread between long-term and
short-term interest rates.
Net interest revenue increased $6.2 million for the period from March 1, 1997 to
February 10, 1998 to $0.02 million from ($6.2) million for the period from March
16, 1996 to February 28, 1997, primarily due to improved funding rates obtained
through improved credit ratings, the issue of medium-term notes and the adoption
of an early pool buyout program. During the period from March 1, 1997 to
February 10, 1998, Homeside, Inc. Predecessor's primary operating subsidiary,
HomeSide Lending, Inc. issued $750.0 million of medium-term notes to the public
market at an average cost of 6.251% as of February 10, 1998. The proceeds were
used to pay down existing bank debt, increasing Homeside, Inc. Predecessor's
borrowing capacity. An immediate benefit of this increased borrowing capacity
was the initiation of an early pool buyout program, which involves the purchase
of delinquent government loans from pools early in the foreclosure process,
thereby reducing the unreimbursed interest expense that Homeside, Inc.
Predecessor incurs.
Interest income increased from the period from March 16, 1996 to February 28,
1997 to the period from March 1, 1997 to February 10, 1998, primarily as a
result of an increase of $246.6 million in the average balance of loans held for
sale. Interest expense increased from the period from March 16, 1996 to February
28, 1997 to the period from March 1, 1997 to February 10, 1998 as a result of
increased borrowings to fund growth of the servicing portfolio and loan
origination activity. These expenses were offset by an increase in credits
received on borrowings as a result of higher average balances of custodial
deposits.
50
<PAGE> 51
Net Mortgage Origination Revenue
Net mortgage origination revenue is comprised of fees earned on the origination
of mortgage loans, gains and losses on the sale of loans, gains and losses
resulting from hedging of secondary marketing activities and fees charged to
review loan documents for purchased loan production.
Net mortgage origination revenue was $85.2 million for the period from March 1,
1997 to February 10, 1998 compared to $66.1 million for the period from March
16, 1996 to February 28, 1997, a 29% increase. The increase in net mortgage
origination revenue during the period from March 1, 1997 to February 10, 1998 as
compared to the period from March 16, 1996 to February 28, 1998 is due in part
to an increase in loan production volumes resulting from the preferred seller
relationships with Barnett and BankBoston and Homeside, Inc. Predecessor's
broker and correspondent lending channels. The increase also reflects larger
gains from secondary marketing activities.
Salaries and Employee Benefits
Salaries and employee benefits expense was $75.4 million for the period from
March 1, 1997 to February 10, 1998 compared to $73.0 million for the period from
March 16, 1996 to February 28, 1997 due to growth in the number of employees as
a result of the purchase of the BMC mortgage servicing operations acquired on
May 31, 1996. The average number of full-time equivalent employees increased to
1,805 for the period from March 1, 1997 to February 10, 1998 from 1,593 for the
period from March 16, 1996 to February 28, 1997.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs and
maintenance costs, certain computer software expenses and depreciation of
Homeside, Inc. Predecessor's premises and equipment. Occupancy and equipment
expense for the period from March 1, 1997 to February 10, 1998 was $15.4 million
compared to $11.8 million for the period from March 16, 1996 to February 28,
1997. The increase in expense was mainly due to increases in the costs of
information systems required to handle the growing mortgage servicing portfolio.
Servicing Losses on Investor-Owned Loans and Foreclosure-Related Expenses
Servicing losses on investor-owned loans represent anticipated losses primarily
attributable to servicing FHA and VA loans for investors. These amounts include
actual losses for final disposition of loans, non-recoverable foreclosure costs,
accrued interest for which payment has been denied and estimates for potential
losses based on Homeside, Inc. Predecessor's experience as a servicer of
government loans.
During the period from March 1, 1997 to February 10, 1998, the servicing losses
on investor-owned loans and foreclosure-related expenses totaled $22.0 million
compared to $17.9 million for the period from March 16, 1996 to February 28,
1997. The increase was largely attributable to the growth of the servicing
portfolio resulting from loan production and increased foreclosure losses.
Included in accounts payable and accrued liabilities at February 10, 1998 and
February 28, 1997 is a reserve for estimated servicing losses on investor-owned
loans of $21.7 million. The reserve has been established for potential losses
related to the mortgage servicing portfolio. Increases to the reserve are
charged to earnings as servicing losses on investor-owned loans. The reserve is
decreased for actual losses incurred related to the mortgage servicing
portfolio. Homeside, Inc. Predecessor's historical loss experience on VA loans
generally has been consistent with industry experience. Management believes that
Homeside, Inc. Predecessor has an adequate level of reserve based on servicing
volume, portfolio composition, credit quality and historical loss rates, as well
as estimated future losses. Servicing portfolio delinquencies increased from
prior year due to an increased delinquency trend throughout the industry.
The following table sets forth Homeside, Inc. Predecessor's delinquency and
foreclosure experience:
SERVICING PORTFOLIO DELINQUENCIES
(PERCENT BY LOAN COUNT)
FEBRUARY 10, 1998 FEBRUARY 28, 1997
----------------- -----------------
Servicing Portfolio Delinquencies,
excluding bankruptcies
(at end of period)
30 days 3.52% 3.27%
60 days 0.78% 0.69%
90+ days 0.72% 0.54%
---- ----
Total past due 5.02% 4.50%
==== ====
Foreclosures pending 0.74% 0.72%
==== ====
51
<PAGE> 52
Other Expenses
Other expenses consist mainly of professional fees, communications expense,
advertising and public relations, data processing expenses and certain loan
origination expenses. The level of other expenses fluctuates in part based upon
the level of Homeside, Inc. Predecessor's mortgage servicing portfolio and loan
production volumes.
Other expenses during the period from March 1, 1997 to February 10, 1998 were
$39.4 million, compared to $41.7 million for the period from March 16, 1996 to
February 28, 1997. The decrease was primarily due to decreases in advertising
and certain loan origination expenses.
Income Tax Expense
Homeside, Inc. Predecessor's income tax expense was $47.8 million for the period
from March 1, 1997 to February 10, 1998 and $29.3 million for the period from
March 16, 1996 to February 28, 1997. The increase was attributable to an
increase in net income. The effective income tax rate for the period from March
1, 1997 to February 10, 1998 and the period from March 16, 1996 to February 28,
1997 was approximately 39% and 40%, respectively.
RISK MANAGEMENT ACTIVITIES
Homeside, Inc. Predecessor has a risk management program designed to protect the
economic value of its mortgage servicing portfolio from declines in value due to
increases in estimated loan prepayment speeds, which are primarily influenced by
declines in interest rates. When loans prepay faster than anticipated, the cash
flow Homeside, Inc. Predecessor expects to receive from servicing such loans is
reduced. The value of mortgage servicing rights is based on the present value of
the cash flows to be received over the life of the loan and therefore, the value
of the servicing portfolio declines as prepayments increase.
During the period from March 1, 1997 to February 10, 1998, Homeside, Inc.
Predecessor utilized options on U.S. Treasury bond futures and U.S. Treasury
bond futures to protect a significant portion of the market value of its
mortgage servicing portfolio from a decline in value. The risk management
contracts used by Homeside, Inc. Predecessor have characteristics such that they
tend to increase in value as interest rates decline. Conversely, these risk
management contracts tend to decline in value as interest rates rise.
Accordingly, changes in value of these risk management instruments will tend to
move inversely with changes in value of Homeside, Inc. Predecessor's mortgage
servicing rights.
These risk management instruments are designated as hedges on the purchase date
and such designation is at a level at least as specific as the level at which
mortgage servicing rights are evaluated for impairment. The risk management
instruments are marked-to-market with changes in market value deferred and
applied as an adjustment to the basis of the related mortgage servicing right
asset being hedged. As a result, any changes in market value that are deferred
are amortized and evaluated for impairment in the same manner as the related
mortgage servicing rights. The effectiveness of Homeside, Inc. Predecessor's
hedging activity can be measured by the correlation between changes in the value
of the risk management instruments and changes in the value of Homeside, Inc.
Predecessor's mortgage servicing rights. This correlation is assessed on a
quarterly basis to ensure that high correlation is maintained over the term of
the hedging program. During the periods presented, Homeside, Inc. Predecessor
has experienced a high measure of correlation between changes in the value of
mortgage servicing rights and the risk management contracts. However, in periods
of rising interest rates, the increase in value of mortgage servicing rights may
outpace the decline in value of the options included in the hedge position,
because the loss on the options is limited to the premium paid.
During the period from March 1, 1997 to February 10, 1998, deferred gains and
losses on risk management contracts resulted in net deferred hedge gains of
$142.7 million. As of February 10, 1998, net deferred hedge gains of $39.5
million are included in the carrying value of mortgage servicing rights.
Activity in the deferred hedge account during the period from March 1, 1997 to
February 10,1998 is as follows (in thousands):
Net deferred hedge loss at February 28, 1997 ($110,637)
Amortization of net deferred hedge losses 7,423
Net deferred hedge gains 142,667
---------
Net deferred hedge gain at February 10, 1998 $ 39,453
=========
Homeside, Inc. Predecessor's future cash needs as they relate to its hedging
program will be influenced by such factors as long-term interest rates, loan
production levels and growth in the mortgage servicing portfolio. The fair value
of open risk management contracts at February 10, 1998 was $43.9 million, which
was equal to their carrying amount because the risk management contracts are
marked-to-market at each reporting date. See "-- Liquidity and Capital
Resources" for further discussion of Homeside, Inc. Predecessor's sources and
52
<PAGE> 53
uses of cash. See Note 3 of Notes to Consolidated Financial Statements for a
description of Homeside, Inc. Predecessor's accounting policy for its risk
management contracts. See Notes 14 and 15 of Notes to Consolidated Financial
Statements for additional fair value disclosures with respect to Homeside, Inc.
Predecessor's risk management contracts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan origination
activities and the investment in mortgage servicing rights. To meet these needs,
the Company currently utilizes funding from an independent syndicate of banks,
including a warehouse credit facility and a servicing-related facility,
medium-term notes and cash flow from operations. In the past, the Company has
also utilized short-term credit facilities and public offerings of common stock.
Homeside, Inc. Predecessor continues to investigate and pursue alternative and
supplementary methods to finance its growing operations through the public and
private capital markets. These may include methods designed to expand the
Company's financial capacity and reduce its cost of capital. In addition, to
facilitate the sale and distribution of certain mortgage products, HomeSide
Mortgage Securities, Inc., a wholly-owned subsidiary of HomeSide Lending, Inc.,
may continue to issue mortgage backed securities.
Operations
Net cash used in operations for the period from March 1, 1997 to February 10,
1998 was $247.7 million. Net cash provided by operations for the period from
March 16, 1996 to February 28, 1997 was $203.8 million. The primary uses of cash
in operations were to fund loan originations and pay corporate expenses. These
uses of cash were offset by cash provided from servicing fee income, loan sales
and principal repayments. Cash flows from loan originations are dependent upon
current economic conditions and the level of long-term interest rates. Decreases
in long-term interest rates generally result in higher loan refinancing
activity, which results in higher cash demands to meet increased loan production
levels. Higher cash demands to meet increased loan production levels are
primarily met through borrowings and loan sales.
Investing
Net cash used in investing activities was $773.7 million for the period from
March 1, 1997 to February 10, 1998 and $862.2 million for the period from March
16, 1996 to February 28, 1997. Cash used in investing activities was for the
purchase and origination of mortgage servicing rights. For the period from March
1, 1997 to February 10, 1998, cash was also used for funding the early pool
buyout program. During the period from March 1, 1997 to February 10, 1998, these
uses of cash were offset by net proceeds from risk management contracts, while
during the period from March 16, 1997 to February 28, 1997, cash was used to
purchase risk management contracts. Other assets increased $41.7 million to
$134.6 million at February 10, 1998 from $92.9 million at February 28, 1997
primarily as a result of an increase in Homeside, Inc. Predecessor's hedge
assets. Early pool buyout advances, a program initiated in fiscal 1998, totaled
$374.1 million at February 10, 1998. During the period from March 16, 1996 to
February 28, 1997, Homeside, Inc. Predecessor also made net payments of $133.4
million and $106.2 million to acquire certain mortgage banking operations of
BBMC and BMC, respectively (see Note 4 of Notes to Consolidated Financial
Statements). Future uses of cash for investing activities will be dependent on
the mortgage origination market and Homeside, Inc. Predecessor's hedging needs.
Except for the Banc One acquisition, Homeside, Inc. Predecessor is not able to
estimate the timing and amount of cash uses for future acquisitions of other
mortgage banking entities, if such acquisitions were to occur. Homeside, Inc.
Predecessor will fund the Banc One acquisition under existing borrowing
capacity.
Financing
Net cash provided by financing activities was $1,000.8 million for the period
from March 1, 1997 to February 10, 1998 and $711.1 million for the period from
March 16, 1996 to February 28, 1997. The primary source of cash from financing
activities during the period from March 1, 1997 to February 10, 1998 was $750.0
million from the issuance of medium-term notes and net borrowings of $256.5 from
Homeside, Inc. Predecessor's line of credit. The primary sources of cash from
financing activities during the period from March 16, 1996 to February 28, 1997
were net borrowings under Homeside, Inc. Predecessor's lines of credit of $334.2
million, $269.6 million from proceeds from issuance of common stock and $200.0
million from the issuance of Notes. Cash used in financing activities during the
period ended February 10, 1998 was used for the payment of debt issue costs.
Cash used in financing activities for the period ended February 28, 1997 was
used to repay a $90.0 million bridge loan, $70.6 million of Notes and the
payment of debt issue costs.
During the period from March 1, 1997 to February 10, 1998, net cash used in
operations was $247.7 million, net cash used in investing activities was $773.7
million and net cash provided by financing activities was $1000.8 million,
resulting in a net decrease in cash of $20.6 million. Homeside, Inc. Predecessor
expects that to the extent cash generated from operations is inadequate to meet
its liquidity needs, those needs can be met through financing from its bank
credit facility and other facilities which may be entered into from time to
time, as well as from the issuance of debt securities in the public markets.
Accordingly, Homeside, Inc. Predecessor does not currently anticipate that it
will make sales of servicing rights to any significant degree for the purpose of
generating cash. Nevertheless, in addition to its cash and mortgage loans held
for sale balances, Homeside, Inc. Predecessor's portfolio of mortgage servicing
rights provides a potential source of funds to meet liquidity requirements,
especially in periods of rising interest rates when loan origination volume
slows. Repurchase agreements also provide an alternative to the bank line of
credit for mortgages held for sale. Future cash needs are highly dependent on
future loan production and servicing results, which are influenced by changes in
long-term interest rates.
53
<PAGE> 54
YEAR 2000 COMPLIANCE
HomeSide uses and is dependent upon a significant number of computer software
programs and operating systems to conduct its business. Such programs and
systems include those developed and maintained by HomeSide, software and systems
purchased from outside vendors and software and systems used by HomeSide's third
party providers. HomeSide has initiated a review and assessment of all hardware
and software to determine whether it will function properly in the Year 2000. It
is anticipated that some level of modification or replacement of hardware and
software will be necessary in order to make HomeSide's systems "Year 2000
Compliant." HomeSide presently estimates these remediation costs to total
approximately $15.0 million. Remediation costs are expected to be expensed as
incurred, with the exception of new software purchases, which will be
capitalized. The Company has not incurred significant remediation costs prior to
February 10, 1998. Year 2000 remediation costs are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. In addition, HomeSide has relationships with vendors, customers and
other third parties that rely on software and systems that may not be Year 2000
compliant. With respect to such third parties, Year 2000 compliance matters will
not be within HomeSide's direct control. There can be no assurance that Year
2000 compliance failures by such third parties will not have a material adverse
effect on HomeSide's results of operations.
54
<PAGE> 55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholder of Homeside, Inc. Predecessor
We have audited the accompanying consolidated balance sheets of Homeside, Inc.,
(a Delaware corporation, see Note 1) and subsidiaries as of February 10, 1998
and February 28, 1997, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the periods from March 1,
1997 to February 10, 1998 and March 16, 1996 to February 28, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Homeside, Inc. and
subsidiaries as of February 10, 1998 and February 28, 1997 and the results of
their operations and their cash flows for the periods from March 1, 1997 to
February 10, 1998 and March 16, 1996 to February 28, 1997, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Jacksonville, Florida
April 15, 1998
55
<PAGE> 56
HOMESIDE, INC. PREDECESSOR AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
FEBRUARY 10, 1998 FEBRUARY 28, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 32,113 $ 52,691
32,113
Mortgage loans held for sale, net 1,292,403 805,274
Mortgage servicing rights, net 1,781,134 1,614,307
Accounts receivable, net 227,294 157,518
Early pool buyout advances 374,097 --
Premises and equipment, net 41,982 29,515
Other assets 134,580 92,877
----------- -----------
Total Assets $ 3,883,603 $ 2,752,182
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 2,074,956 $ 1,818,503
Accounts payable and accrued liabilities 143,870 140,304
Deferred income taxes 175,178 129,951
Long-term debt 900,466 151,128
----------- -----------
Total Liabilities 3,294,470 2,239,886
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock:
Common stock, $.01 par value, 119,610,000 shares authorized; 43,394,861
and 43,375,430 shares issued and outstanding in 1998 and 1997, 434 434
respectively
Class C non-voting common stock, $1.00 par value, 195,000 shares
authorized; 97,138 shares issued and outstanding 97 97
Additional paid-in capital 476,846 476,646
Retained earnings 111,756 36,969
----------- -----------
589,133 514,146
Less: Notes received in payment for capital stock -- (1,850)
----------- -----------
Total Stockholders' Equity 589,133 512,296
----------- -----------
Total Liabilities and Stockholders' Equity $ 3,883,603 $ 2,752,182
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE> 57
HOMESIDE, INC. PREDECESSOR AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
MARCH 1, 1997 TO MARCH 16, 1996 TO
FEBRUARY 10, 1998 FEBRUARY 28, 1997
-------------------------- -----------------------
<S> <C> <C>
REVENUES:
Mortgage servicing fees $398,159 $312,341
Amortization of mortgage servicing rights (210,200) (155,827)
-------------------------- -----------------------
Net servicing revenue 187,959 156,514
Interest income 97,050 81,507
Interest expense (97,028) (87,700)
-------------------------- -----------------------
Net interest revenue 22 (6,193)
Net mortgage origination revenue 85,206 66,073
Other income 1,671 682
-------------------------- -----------------------
Total Revenues 274,858 217,076
EXPENSES:
Salaries and employee benefits 75,419 72,976
Occupancy and equipment 15,447 11,770
Servicing losses on investor-owned loans
and foreclosure-related expenses 21,974 17,934
Other expenses 39,415 41,714
-------------------------- -----------------------
Total Expenses 152,255 144,394
Income before income taxes and extraordinary loss 122,603 72,682
Income tax expense 47,816 29,273
-------------------------- --------------------------
Income before extraordinary loss 74,787 43,409
Extraordinary loss, net of tax (Note 9) - 6,440
-------------------------- --------------------------
Net Income $74,787 $36,969
========================== ==========================
Basic income per share:
Income per share before extraordinary loss $ 1.72 $ 1.34
Extraordinary loss, net of tax - .20
-------------------------- --------------------------
Net income $ 1.72 $ 1.14
========================== ==========================
Diluted income per share:
Income per share before extraordinary loss $ 1.69 $ 1.33
Extraordinary loss, net of tax - .20
-------------------------- --------------------------
Net income $ 1.69 $ 1.13
========================== ==========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
57
<PAGE> 58
HOMESIDE, INC. PREDECESSOR AND SUBSIDIARIES
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
NOTES
TOTAL COMMON STOCK ADDITIONAL RECEIVED IN
NUMBER OF --------------------------- SUBSCRIPTION PAID-IN PAYMENT FOR RETAINED
SHARES(d) CLASS A CLASS B CLASS C RECEIVABLE CAPITAL CAPITAL STOCK EARNINGS TOTAL
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
March 15, 1996(a) 19,457,724 $ 193 $ - $ 97 $ (200,000) $199,710 $ - $ - $ -
Subscription payment
associated with
acquisition of
BancBoston Mortgage
Corporation
200,000 (1,850) 198,150
Issuance of common
stock associated
with acquisition of
Barnett Mortgage
Company(b)
15,562,344 156 160,135 160,291
Public offering of
common stock(c)
8,452,500 85 116,801 116,886
Net income
36,969 36,969
--------------------------------------------------------------------------------------------------------
Balance,
February 28, 1997
43,472,568 434 - 97 476,646 (1,850) 36,969 512,296
Exercise of stock
options for common
stock 19,431 200 200
Repayment of notes
received in payment
for capital stock 1,850 1,850
Net income
74,787 74,787
--------------------------------------------------------------------------------------------------------
Balance,
February 10, 1998 43,491,999 $ 434 $ - $ 97 $ - $ 476,846 $ - $ 111,756 $ 589,133
========================================================================================================
</TABLE>
---------------------------
(a) Total number of shares includes 19,263,448 shares of Class A common stock
(par value $.01), 97,138 shares of Class B common stock (par value $.01)
and 97,138 shares of Class C common stock (par value $1.00).
(b) Total number of shares includes 15,562,344 shares of Class A common stock.
(c) Total number of shares includes 8,452,500 shares of Class A common stock of
which 97,138 shares of Class B common stock were converted to Class A on a
1-for-1 basis.
(d) Number of shares reflects a 17-for-1 stock split resulting from the initial
public offering.
The accompanying notes are an integral part of these financial statements.
58
<PAGE> 59
HOMESIDE, INC. PREDECESSOR AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
MARCH 1, 1997 TO MARCH 16, 1996 TO
FEBRUARY 10, 1998 FEBRUARY 28, 1997
------------------- -------------------
<S> <C> <C>
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net income $ 74,787 $ 36,969
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Amortization of mortgage servicing rights 210,200 155,827
Depreciation and amortization 10,439 9,015
Servicing losses on investor-owned loans 12,346 13,683
Deferred income tax expense 45,227 24,973
Capitalized servicing rights -- (21,015)
Mortgage loans originated and purchased for sale (23,975,752) (12,504,567)
Proceeds and principal repayments of mortgage loans held
for sale 23,540,371 12,572,217
Change in accounts receivable (82,121) (63,378)
Change in other assets and accounts payable and
accrued liabilities (83,250) (19,900)
------------ ------------
Net cash (used in) provided by operating activities (247,753) 203,824
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (17,252) (4,929)
Acquisition of mortgage servicing rights (519,694) (475,729)
Net proceeds from (purchases of) risk management contracts 137,393 (141,944)
Purchase of early pool buyout advances, net of repayments (374,097) --
Acquisition of BancBoston Mortgage Corp., net of cash -- (133,392)
acquired
Acquisition of Barnett Mortgage Co., net of cash acquired -- (106,244)
------------ ------------
Net cash used in investing activities (773,650) (862,238)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings 256,453 334,170
Issuance of notes payable 750,000 200,000
Payment of debt issue costs (7,017) (22,090)
Repayment of long-term debt (661) (70,567)
Repayment of stockholder loans 1,850 --
Proceeds from issuance of common stock 200 269,592
Issuance of bridge financing -- 90,000
Repayment of bridge financing -- (90,000)
------------ ------------
Net cash provided by financing activities 1,000,825 711,105
Net (decrease) increase in cash and cash equivalents (20,578) 52,691
Cash and cash equivalents at beginning of period 52,691 --
------------ ------------
Cash and cash equivalents at end of period $ 32,113 $ 52,691
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
59
<PAGE> 60
HOMESIDE, INC. PREDECESSOR AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Homeside, Inc. Predecessor, through its primary operating subsidiary HomeSide
Lending, Inc., is engaged in the mortgage banking business and as such
originates, purchases, sells and services mortgage loans throughout the United
States. The accompanying consolidated financial statements of Homeside, Inc.
Predecessor include the accounts of Homeside, Inc. Predecessor and its
subsidiaries, after elimination of all material intercompany balances and
transactions. Amounts of acquired companies have been included from the date of
acquisition.
The accompanying financial statements of Homeside, Inc. Predecessor have been
prepared for the period March 1, 1997 to February 10, 1998 and for the period
March 16, 1996 to February 28, 1997 to coincide with the commencement of
operations of Homeside, Inc. Predecessor and the merger as discussed in Note 2
below. The financial statements do not reflect the effects of Homeside, Inc.
Predecessor's acquisition by National Australia Bank Limited ("the National").
Homeside, Inc. Predecessor will adopt a fiscal year end of September 30 to
conform to the fiscal year of the National.
2. ORGANIZATION
On December 11, 1995, Homeside, Inc. Predecessor was formed by an investor
group, consisting of Thomas H. Lee Company and Madison Dearborn Partners
(collectively, the "Investors"), and signed a definitive stock purchase
agreement with The First National Bank of Boston ("BankBoston") for the purpose
of acquiring certain assets and liabilities of the mortgage banking business
owned by BankBoston. BankBoston received cash and an ownership interest in
Homeside, Inc. Predecessor. The transaction closed on March 15, 1996 and
Homeside, Inc. Predecessor began operations on March 16, 1996 through its
operating subsidiary, HomeSide Lending, Inc.
On May 31, 1996, Barnett Banks, Inc. ("Barnett") sold certain of its mortgage
banking operations, primarily its servicing portfolio, mortgage servicing
operations and proprietary mortgage banking software systems, to Homeside, Inc.
Predecessor. Barnett received cash and an ownership interest in Homeside, Inc.
Predecessor. The accompanying financial statements reflect the effects of both
of these acquisitions. For more information on these acquisitions, see Note 4.
From May 31, 1996 until the 1997 public offering of common stock, the Investors
as a group, BankBoston and Barnett each owned approximately one-third of
Homeside, Inc. Predecessor. Following the public offering, the Investors as a
group, BankBoston and Barnett owned in the aggregate approximately 79% of the
outstanding common stock.
On January 9, 1998, Nations Bank Corporation acquired all the outstanding common
stock of Barnett Banks, Inc. (see Note 16).
On February 10, 1998, the National acquired all outstanding shares of the common
stock of Homeside, Inc. Predecessor, Inc. As consideration, the National paid
$27.825 per share for all of the outstanding common stock and paid $17.7 million
cash to retire all outstanding stock options. The total purchase price was
approximately $1.2 billion. The National paid for the purchase with borrowed and
available funds. The transaction was accounted for as a purchase. As a result,
all assets and liabilities were recorded at their fair value on February 11,
1998, and the purchase price in excess of the fair value of net assets acquired
of $713.6 million was recorded as goodwill. Following the transaction described
above, the National now owns 100% of Homeside, Inc. Predecessor's common stock
and Homeside, Inc. Predecessor has become an indirect wholly-owned subsidiary of
the National.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Risk management of mortgage loan originations
Homeside, Inc. Predecessor utilizes a risk management program to protect and
manage the value of its mortgage loans held for sale and mortgage commitment
pipeline. As a result, Homeside, Inc. Predecessor is party to various derivative
financial instruments to reduce its
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exposure to interest rate risk. These financial instruments primarily include
mandatory forward delivery commitments, put and call option contracts and
treasury futures contracts. HomeSide, Inc. Predecessor uses these financial
instruments for the purposes of managing its resale pricing and interest rate
risks. These financial instruments are designated as hedges to the extent they
demonstrate a high degree of correlation with the underlying hedged items.
Accordingly, hedging gains and losses related to this risk management program
are deferred and recognized as a component of the gain or loss on sale of the
underlying mortgage loans or mortgage-backed securities. Such gains and losses
are included in mortgage origination revenue. Hedge losses are recognized
currently if the deferral of such losses would result in mortgage loans held for
sale and the pipeline being valued in excess of their estimated net realizable
value.
Premiums paid for purchased put and call option contracts are included in other
assets and amortized over the options' contract period as a component of
mortgage origination revenue. Unamortized premiums are recognized as a component
of the gain or loss on sale of loans at the earlier of the expiration of the
underlying contract or when exercise of the contract is considered unlikely.
Risk management of mortgage servicing rights
Mortgage servicing rights permit Homeside, Inc. Predecessor to receive a portion
of the interest coupon and fees collected from the mortgagor for performing
specified servicing activities. The mortgage notes underlying the mortgage
servicing rights permit the borrower to prepay the loan. As a result, the value
of the related mortgage servicing rights tends to diminish in periods of
declining interest rates and increase in value in periods of rising rates. This
tendency subjects Homeside, Inc. Predecessor to substantial interest rate risk.
It also directly affects the volatility of reported earnings because mortgage
servicing rights are carried at the lower of amortized cost or fair value. It is
Homeside, Inc. Predecessor's policy to mitigate and hedge this risk through its
risk management program.
The risk management instruments used by Homeside, Inc. Predecessor have
characteristics such that they tend to increase in value as interest rates
decline. Conversely, these risk management instruments tend to decline in value
as interest rates rise. Accordingly, changes in value of these hedge instruments
will tend to move inversely with changes in value of Homeside, Inc.
Predecessor's mortgage servicing rights.
Options on U.S. Treasury bond futures and U.S. Treasury bond futures have been
purchased by Homeside, Inc. Predecessor to manage interest rate risk. When
purchased, the options and futures contracts are designated to a specific strata
of mortgage servicing rights. The risk management instruments are
marked-to-market and changes in market value are included as adjustments to the
basis of the related mortgage servicing right asset being hedged. Deferred hedge
gains and losses are amortized and evaluated for impairment in the same manner
as the related mortgage servicing rights. Correlation between changes in the
risk management contracts and changes in value of Homeside, Inc. Predecessor's
mortgage servicing rights is assessed on a quarterly basis to ensure that high
correlation is maintained over the term of the hedging program.
Mortgage loans
Mortgage loans held for sale are carried at the lower of aggregate cost or fair
value. Fair value is based on the contract prices at which the mortgage loans
will be sold or, if the loans are not committed for sale, the current market
price. Deferred hedge gains and losses on risk management hedging instruments
are included in the cost of the mortgage loans held for sale for the purpose of
determining the lower of aggregate cost or fair value.
Mortgage loans held for investment are included in other assets and stated at
the lower of cost or fair value at the time the permanent investment decisions
are made. Discounts, if any, are amortized over the anticipated life of the
investment.
Loans are placed on non-accrual status when any portion of the principal or
interest is ninety days past due or earlier when concern exists as to the
ultimate collectibility of principal or interest. When loans are placed on
nonaccrual status, the related interest receivable is reversed against interest
income of the current period. Interest payments received on nonaccrual loans are
applied as a reduction of the principal balance when concern exists as to the
ultimate collection of principal; otherwise, such payments are recognized as
interest income. Loans are removed from nonaccrual status when principal and
interest become current and they are anticipated to be fully collectible.
Mortgage servicing rights
The total cost of loans originated or acquired is allocated between the mortgage
servicing rights and the mortgage loans (without the servicing rights) based on
relative fair values. The value of servicing rights acquired through bulk
acquisitions is capitalized at cost.
Effective January 1, 1997, Homeside, Inc. Predecessor adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 125 supersedes SFAS No. 122 and is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. SFAS No. 125 is based on a
financial-components
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<PAGE> 62
approach which focuses on control. Under the approach required by this standard,
after a transfer of financial assets (for example, the sale of mortgage loans),
an entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered and derecognizes liabilities when extinguished. The capitalization,
amortization and impairment principles of SFAS No. 125 are substantially
consistent with the principles previously defined by SFAS No. 122, insofar as
they relate to the mortgage banking activities of Homeside, Inc. Predecessor.
Accordingly, the impact of the adoption of SFAS No.125 was not material to
Homeside, Inc. Predecessor's financial statements.
Mortgage servicing rights are amortized in proportion to and over the period of
the estimated net servicing revenue. They are evaluated for impairment by
comparing the carrying amount of the servicing rights to their fair value. Fair
value is estimated based on the market prices of similar servicing assets and on
discounted anticipated future net cash flows considering market prepayment
estimates, historical prepayment rates, portfolio characteristics, interest
rates and other economic factors. For purposes of measuring impairment, the
mortgage servicing rights are stratified by the predominant risk characteristics
which include product types of the underlying loans and interest rates of
mortgage notes. Impairment is recognized through a valuation reserve for each
impaired stratum and is included in amortization of mortgage servicing rights.
An analysis of Homeside, Inc. Predecessor's mortgage servicing rights is
included in Note 5.
Prior to January 1, 1997, mortgage servicing rights included excess mortgage
servicing rights, which represent the present value of servicing fee income in
excess of a normal servicing fee rate. Until the adoption of SFAS No. 125 on
January 1, 1997, when loans were sold, the estimated excess servicing was
recognized as income and amortized over the estimated servicing period in
proportion to the aggregate net cash flows from the loans serviced. Remaining
asset balances were evaluated for impairment based on current estimates of
future discounted cash flows. Such write-downs were included in amortization of
mortgage servicing rights. Upon the adoption of SFAS No. 125, previously
recognized excess mortgage servicing rights were combined with and accounted for
as mortgage servicing rights.
Accounts receivable
Accounts receivable includes advances, consisting primarily of payments for
property taxes and insurance premiums, as well as principal and interest
remitted to investors before they are collected from mortgagors, made in
connection with loan servicing activities. Accounts receivable also includes
loans purchased from mortgage-backed securities serviced by Homeside, Inc.
Predecessor for others and mortgage claims filed primarily with the FHA and the
VA.
Early pool buyout advances
Early pool buyout advances consist of delinquent government loans in foreclosure
process that have been purchased from pools. The program reduces the
unreimbursed interest expense that Homeside, Inc. Predecessor incurs. The
funding of the purchases of these delinquent loans for the early pool buyout
program is recorded as interest expense. Interest income earned from the
guarantor agency during the foreclosure process is accrued to match the funding
expense incurred. Scheduled interest payments made to the investor before the
loans were purchased from the pool are recorded as early pool buyout advances
with a reserve for advances which will not ultimately be collected.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the
shorter of the estimated life of the improvement or the term of the lease.
Long-lived assets are evaluated regularly for the other-than- temporary
impairment. If circumstances suggest that their value may be impaired and the
write-down would be material, an assessment of recoverability is performed prior
to any write-down of the asset. Impairment, if any, is recognized through a
valuation allowance with a corresponding charge recorded in the statement of
income.
Goodwill
Net assets acquired in purchase transactions are recorded at fair value at the
inception of the date of acquisition. Goodwill, representing the excess of the
purchase price over the fair value of the net assets purchased, is amortized on
a straight-line basis over 15 years. Goodwill is reviewed periodically for
events or changes in circumstances that may indicate that the carrying amounts
of the assets are not recoverable on an undiscounted cash flow basis.
Mortgage servicing fees
Mortgage servicing fees represent servicing and other fees earned for servicing
mortgage loans owned by investors. Servicing fees are generally calculated on
the outstanding principal balances of the loans serviced and are recognized as
income on an accrual basis.
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Homeside, Inc. Predecessor's mortgage servicing portfolio totaled $100.0 billion
at February 10, 1998. Related custodial deposits are segregated in trust
accounts, principally held with depository institutions, and are not included in
the accompanying financial statements.
Interest expense
Interest expense is reduced by credits received from depository institutions for
custodial balances placed with such institutions.
Net mortgage origination revenue
Mortgage origination revenue includes gains and losses from sales of mortgage
loans and fees associated with the origination and purchase of mortgage loans.
Servicing losses on investor-owned loans and foreclosure-related expenses
Homeside, Inc. Predecessor records losses attributable to servicing FHA and VA
loans for investors. These amounts include actual losses for final disposition
of loans, foreclosure-related expenses, accrued interest for which payment is
uncollectible and estimates for potential losses based on Homeside, Inc.
Predecessor's experience as a servicer of government loans.
A reserve for estimated servicing losses on investor-owned loans is available
for potential losses related to the mortgage servicing portfolio and is included
in accounts payable and accrued liabilities (see Note 7).
Income taxes
Current tax liabilities or assets are recognized through charges or credits to
the current tax provision for the estimated taxes payable or refundable for the
current year.
Deferred tax liabilities are recognized for temporary differences that will
result in amounts taxable in the future and deferred tax assets are recognized
for temporary differences and tax benefit carryforwards that will result in
amounts deductible or creditable in the future. Net deferred tax liabilities or
assets are recognized through charges or credits to the deferred tax provision.
A deferred tax valuation reserve is established if it is more likely than not
that all or a portion of the deferred tax assets will not be realized. Changes
in the deferred tax valuation reserve are recognized through charges or credits
to the deferred tax provision. The effect of enacted changes in tax law,
including changes in tax rates, on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date.
Statement of cash flow
For purposes of reporting on the statement of cash flows, cash and cash
equivalents include cash and due from banks and interest-bearing deposits with
an original maturity of three months or less.
Income per share
Homeside, Inc. Predecessor adopted Statement of Financial Accounting Standard
("SFAS") No. 128, "Earnings Per Share," as of December 31, 1997. Accordingly,
all prior period earnings per share amounts have been restated in accordance
with this standard.
Basic income per share amounts were computed by dividing net income by the
weighted average number of common shares outstanding. Diluted income per share
amounts were computed by dividing net income, adjusted for the effect of assumed
conversions, by the weighted average number of common shares outstanding plus
dilutive potential common shares calculated for stock options outstanding using
the treasury stock method.
New accounting standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements
with the same prominence as other financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Management expects
that the impact of this statement on the presentation of the financial
statements of Homeside, Inc. Predecessor will be immaterial.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and
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<PAGE> 64
services, geographic areas, and major customers. This statement is effective for
fiscal years beginning after December 15, 1997. Management expects that the
impact of this statement on the presentation of the financial statements of
Homeside, Inc. Predecessor will be immaterial.
4. ACQUISITIONS
Acquisition of BancBoston Mortgage Corporation
On March 15, 1996, Homeside, Inc. Predecessor acquired from BankBoston all of
the outstanding stock of BancBoston Mortgage Corporation ("BBMC"), which was
subsequently renamed HomeSide Lending, Inc. Certain assets and liabilities of
BBMC were retained by BankBoston, including BBMC's mortgage retail production
operations in New England.
Homeside, Inc. Predecessor made cash payments of $139.5 million in cash and
issued $86.8 million of common stock to BankBoston in consideration for certain
assets, net of assumed liabilities, and the stock of BBMC. Also, in connection
with the BBMC acquisition, the Investors purchased approximately 55% of the then
outstanding common stock of Homeside, Inc. Predecessor for $107.2 million in
cash. Simultaneously, BankBoston paid approximately $1.0 million in cash for all
of Homeside, Inc. Predecessor's class C non-voting common stock. In
consideration of services rendered to Homeside, Inc. Predecessor with respect to
the BBMC Acquisition, class B non-voting stock valued at $1.0 million was issued
to an investment bank. Management purchased common stock for $4.1 million in
cash, $1.9 million of which was financed by loans from Homeside, Inc.
Predecessor. On May 31, 1996, Homeside, Inc. Predecessor paid an additional $5.0
million to BankBoston in connection with the closing of the Barnett Mortgage
Company ("BMC") acquisition. The transaction was accounted for under the
purchase method of accounting. The assets and liabilities of BBMC were recorded
at their fair values at March 16, 1996, which totaled $1.5 billion and $1.2
billion, respectively. The total purchase price paid for BBMC, including
transaction costs and interest, was $247.0 million. The excess of fair value of
net assets acquired over cost was $56.0 million and was allocated as a reduction
mortgage servicing period rights.
Acquisition of Barnett Mortgage Company
On May 31, 1996, Homeside, Inc. Predecessor acquired from Barnett certain
assets, net of assumed liabilities, and the outstanding common stock of BMC (the
"BMC Acquisition"). Certain assets and liabilities of BMC were retained by
Barnett, including those assets of BMC and its subsidiaries (other than Honolulu
Mortgage Company, Inc.) associated with the loan origination or production
activities.
Homeside, Inc. Predecessor made cash payments of $228.0 million to Barnett in
consideration for certain assets, net of assumed liabilities, and the stock of
BMC. In connection with the BMC Acquisition, an affiliate of Barnett purchased
shares of Homeside, Inc. Predecessor common stock for an aggregate purchase
price of $118.0 million. Also in connection with the BMC Acquisition, BankBoston
and the Investors paid approximately $42.3 million in cash for additional shares
of Homeside, Inc. Predecessor. The transaction was accounted for using the
purchase method of accounting and, accordingly, the results of operations of
Homeside, Inc. Predecessor include BMC from the date of acquisition. The assets
and liabilities of BMC were recorded by Homeside, Inc. Predecessor at their
estimated fair values at May 31, 1996, which totaled $764.8 million and $521.4
million, respectively. The total purchase price paid for BMC, including
transaction costs and interests, was $235.0 million. The excess of the purchase
price over the fair value of net assets acquired was $8.4 million and was
allocated to goodwill and is being amortized on a straight-line basis over 15
years.
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The unaudited condensed pro forma statement of income for the period from March
16, 1996 to February 28, 1997, assuming BMC had been acquired as of March 16,
1996 is as follows (in millions, except per share data):
PRO FORMA FOR
THE PERIOD FROM
MARCH 16, 1996 TO
FEBRUARY 28, 1997
-----------------
Net servicing revenue $ 167.3
Net interest revenue (4.5)
Net mortgage origination revenue 67.1
Other income 0.7
-------
Total revenues 230.6
Expenses (157.5)
-------
Income before income taxes
and extraordinary loss 73.1
Income tax expense 29.5
-------
Income before extraordinary loss 43.6
Extraordinary loss (6.4)
-------
Net income $ 37.2
=======
Net income per share:
Basic $ 1.15
=======
Diluted $ 1.14
=======
The purchase accounting adjustments in the above pro forma statement of
operations are based on the actual purchase price and the amount of assets and
liabilities actually acquired. No adjustments have been made for restructuring
costs that might have been incurred or for cost efficiencies that might have
been realized during the period presented. Accordingly, these pro forma results
are not indicative of future results.
5. MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights is as follows (in thousands):
FEBRUARY 10, 1998 FEBRUARY 28, 1997
----------------- -----------------
Beginning balance $1,614,307 $ --
Additions, including BBMC and BMC
acquisitions 416,822 1,685,242
Sales of servicing (342) (25,745)
Net deferred hedge (gain) loss, net
of amortization (39,453) 110,637
Amortization (210,200) (155,827)
---------- ----------
Ending balance $1,781,134 $1,614,307
========== ==========
At February 10, 1998, the net deferred hedge gain of $39.5 million consists of
the net deferred loss for the period from March 16, 1996 to February 28, 1997 of
$110.6 million adjusted for gains of $195.2 million, losses of $52.5 million,
and amortization of $7.4 million. For the period from March 16, 1996 to February
28, 1997, the net deferred hedge loss of $ 110.6 million consists of gains of
$133.3 million and losses of $254.9 million, less $11.0 million of amortization.
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6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following (in thousands):
FEBRUARY 10, 1998 FEBRUARY 28, 1997
----------------- -----------------
Land $ 3,451 $ 3,451
Buildings and building improvements 10,604 10,986
Furniture and equipment 22,464 15,739
Leasehold improvements 14,717 3,808
-------- --------
51,236 33,984
Accumulated depreciation and
amortization (9,254) (4,469)
-------- --------
Ending balance $ 41,982 $ 29,515
======== ========
7. RESERVE FOR ESTIMATED SERVICING LOSSES ON INVESTOR-OWNED LOANS
An analysis of the reserve for estimated servicing losses on investor-owned
loans is as follows (in thousands):
FOR THE PERIOD FOR THE PERIOD
MARCH 1, 1997 TO MARCH 16, 1996 TO
FEBRUARY 10, 1998 FEBRUARY 28, 1997
--------------------- --------------------
Beginning balance $ 21,650 $ 11,100
Provision for servicing losses on
investor-owned loans 12,346 13,683
Charge-offs (12,747) (10,295)
Recoveries 401 60
Additions from acquisition of BMC -- 7,102
-------- --------
Ending balance $ 21,650 $ 21,650
======== ========
8. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE INTEREST RATE
-----------------------------------
Total Outstanding At Period End During the Period
----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Bank line of credit, February 10, 1998 $2,074,956 6.00% 6.04%
==========
Bank line of credit, February 28, 1997 $1,778,496 5.65% 5.83%
Short-term credit facilities 40,007 8.25% 8.25%
----------
Total, February 28, 1997 $1,818,503
==========
</TABLE>
Homeside, Inc. Predecessor borrows funds on a demand basis from an independent
syndicate of banks under a $2.5 billion credit facility which, at the request of
Homeside, Inc. Predecessor, may be increased to $3.0 billion. The line of credit
is used to provide funds for Homeside, Inc. Predecessor's business of
originating, acquiring and servicing mortgage loans. The line of credit includes
both a warehouse credit facility, which is limited to 98% of the fair value of
eligible mortgage loans held for sale, and a servicing-related facility, which
is capped at $950.0 million. On February 14, 2000, the line of credit will
terminate. The credit agreement contains covenants that impose limitations and
restrictions on Homeside, Inc. Predecessor, including the maintenance of certain
net worth and ratio requirements. Under certain circumstances set forth in the
credit agreement, borrowings under the agreement become collateralized by
substantially all of Homeside, Inc. Predecessor's assets. Homeside, Inc.
Predecessor is in compliance with all requirements included in the credit
agreement. At February 10, 1998 and February 28, 1997, $2.1 billion and $1.8
billion, respectively, was outstanding under the credit line. Amounts
outstanding at February 10, 1998 and February 28, 1997 under the bank line of
credit are comprised of a warehouse credit facility of $1.2 billion and $0.8
billion and a servicing-related credit facility of $0.9 billion and $0.9
billion, respectively. The amount of the unused bank line of credit was $0.4
billion and $0.7 billion as of February 10, 1998 and February 28, 1997,
respectively.
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Borrowings under the bank line of credit bear interest at rates per annum, based
on, at Homeside, Inc. Predecessor's option (A) the highest of (i) the lead
bank's prime rate, (ii) the secondary market rate of certificates of deposit
plus 100 basis points and (iii) the federal funds rate in effect from time to
time plus 0.5% or (B) various rates based on federal fund rates.
On January 15, 1997, Homeside, Inc. Predecessor entered into a short-term credit
facility with a bank in a maximum aggregate principal amount of $85.0 million.
On March 14, 1997, Homeside, Inc. Predecessor entered into another short-term
credit facility in an aggregate principal amount of $100.0 million. The
facilities each expired on May 1, 1997 and amounts borrowed under these lines
were repaid.
9. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
FEBRUARY 10, 1998 FEBRUARY 28, 1997
----------------- -----------------
Medium-term notes $750,000 $ --
11.25% Notes 130,000 130,000
Mortgage note payable 20,466 21,128
-------- ---------
Total $900,466 $ 151,128
======== =========
Medium-term notes
As of February 10, 1998, $650.0 million of the outstanding medium-term notes had
been effectively converted by interest rate swap agreements to floating-rate
notes. The weighted average borrowing rates on medium-term borrowings issued for
the period from March 1, 1997 to February 10, 1998, including the effect of the
interest rate swap agreements, was 6.251%. Net proceeds from the issuance were
primarily used to reduce the amounts outstanding under the bank credit
agreement. Amounts were subsequently reborrowed under the bank credit facility
to fund the early pool buyout program.
As of February 10, 1998, outstanding medium-term notes issued by Homeside
Lending, Inc., under a $1.0 billion shelf registration statement were as follows
(in thousands):
Issue Date Outstanding Balance Stated Interest Rate Maturity Date
----------------- ------------------- -------------------- --------------
May 20, 1997 $250,000 6.890% May 15, 2000
June 30, 1997 200,000 6.883% June 30, 2002
June 30, 1997 40,000 6.820% July 2, 2001
July 1, 1997 15,000 6.860% July 2, 2001
July 31, 1997 200,000 6.818% August 1, 2004
September 15, 1997 45,000 6.770% September 17, 2001
--------
Total $750,000
========
As of February 10, 1998, $250.0 million was available for future issuances under
the shelf registration. On March 6, 1998, HomeSide Lending, Inc. filed an
amendment increasing the shelf registration to $1.5 billion.
11.25% Notes
On May 14, 1996, Homeside, Inc. Predecessor issued $200,000,000 of 11.25% notes
("Notes") maturing on May 15, 2003 and paying interest semiannually in arrears
on May 15 and November 15 of each year, commencing on November 15, 1996. The
Notes are redeemable at the option of Homeside, Inc. Predecessor, in whole or in
part, at any time on or after May 15, 2001, at certain redemption prices. The
indenture contains covenants that impose limitations and restrictions on
Homeside, Inc. Predecessor, including the maintenance of certain net worth and
ratio requirements. In addition, the Notes are secured by a second priority
pledge of the common stock of HomeSide Lending, Inc. Homeside, Inc. Predecessor
is in compliance with all net worth and ratio requirements contained in the
indenture relating to the notes. The amount of Notes outstanding at February 10,
1998 is $130.0 million.
On February 5, 1997, Homeside, Inc. Predecessor issued 8,452,500 shares of
common stock to the public at $15 per share. A portion of the proceeds from the
offering was used to pre-pay $70.0 million of the Notes at a premium of $7.9
million. In connection with the early repayment of the Notes, Homeside, Inc.
Predecessor wrote off a portion of the unamortized debt issuance costs related
to the Notes and incurred a prepayment penalty equal to one year's interest on
the Notes retired. The loss amounted to $6.4 million, net of tax, and was
recorded as an extraordinary item. The remaining proceeds were used to reduce
amounts outstanding under the bank line of credit.
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<PAGE> 68
Mortgage note payable
Homeside, Inc. Predecessor assumed a mortgage note payable that is due in
2017 and bears interest at a stated rate of 9.50%. Homeside, Inc. Predecessor's
main office building is pledged as collateral. A purchase accounting premium was
recorded in connection with Homeside, Inc. Predecessor assuming the mortgage
note payable.
Principal payments due on long-term debt at February 10, 1998 are as follows (in
thousands):
FISCAL YEAR
-----------
1999 $ 256
2000 250,281
2001 100,309
2002 200,340
2003 130,373
Thereafter 211,724
Unamortized purchase accounting premium 7,183
--------
Total $900,466
========
10. INCOME TAXES
Homeside, Inc. Predecessor files a consolidated federal income tax return. All
companies included in the consolidated federal income tax return are jointly and
severally liable for any tax assessments based on such consolidated return.
Components of the provision for income taxes before the effect of the tax
benefit associated with the early extinguishment of debt were as follows (in
thousands):
For the For the
Period From Period From
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
----------------- -----------------
Current:
Federal $ 2,589 --
State -- --
-------- --------
$ 2,589 --
Deferred
Federal 38,043 23,756
State 7,184 5,517
-------- --------
$ 45,227 $ 29,273
-------- --------
Total $ 47,816 $ 29,273
======== ========
The following is a reconciliation of the statutory federal income tax rate to
the effective income tax rate as reflected in the consolidated statements of
income.
For The For The
Period From Period From
March 1, 1997 March 16, 1996
to February to February 28,
10, 1998 1997
-------------- ---------------
Statutory federal income tax rate 35.0% 35.0%
State income and franchise taxes,
net of federal tax effect 3.5% 4.0%
Other .5% 1.0%
---- ----
Effective income tax rate 39.0% 40.0%
==== ====
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For the period from March 16, 1996 to February 28, 1997, the extraordinary loss
on the early extinguishment of debt is stated net of the related tax benefit of
$4.3 million at an effective tax rate of 40%.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):
FEBRUARY 10, 1998 FEBRUARY 28, 1997
----------------- -----------------
Deferred tax assets:
Net operating loss carryforwards $ 45,446 $ 53,355
Alternative minimum tax credit carry
forward 2,589 --
Loss reserves 25,404 17,563
Hedge activities 30,754 --
Other assets 4,879 12,087
-------- --------
Total gross deferred tax assets $109,072 $ 83,005
======== ========
Deferred tax liabilities:
Mortgage servicing fees $267,871 $207,278
Other liabilities 16,379 5,678
-------- --------
Total gross deferred tax liabilities 284,250 212,956
-------- --------
Net deferred tax liability $175,178 $129,951
======== ========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which these temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. No valuation allowance
was recorded at February 10, 1998 or February 28, 1997.
Homeside, Inc. Predecessor has consolidated tax net operating loss
carryforwards at February 10, 1998. These carryforwards expire in the years 2002
to 2012.
11. LEASE COMMITMENTS
Homeside, Inc. Predecessor leases office facilities and equipment under
noncancelable leases that include renewal options and escalation clauses which
extend into 2004. Rental expense for leases of office facilities and equipment
was $4.5 million and $3.9 million for the period March 1, 1997 to February 10,
1998 and for the period March 16, 1996 to February 28, 1997, respectively.
Homeside, Inc. Predecessor's minimum future lease commitments are as follows (in
thousands):
FISCAL YEAR
-----------
1999 $ 2,124
2000 984
2001 800
2002 710
2003 625
Thereafter 700
-------
Total $ 5,943
=======
12. STOCKHOLDERS' EQUITY
On March 15, 1996, in connection with the BBMC acquisition discussed in Note 4,
the Investors contributed cash of $107.3 million for 10,863,293 shares of common
stock. Also on March 15, 1996, Homeside, Inc. Predecessor issued 8,427,155
shares of common stock and cash to BankBoston in exchange for BBMC. The common
stock issued to BankBoston was assigned a value of $86.8 million.
Simultaneously with the closing of the BBMC acquisition, Homeside, Inc.
Predecessor also issued 97,138 shares of its class B non-voting common stock to
an investment bank in consideration of services rendered to Homeside, Inc.
Predecessor in connection with the BBMC acquisition. BankBoston also paid $1.0
million in cash for 97,138 shares of Homeside, Inc. Predecessor's class C
non-voting common stock. BankBoston then sold the class C shares to an
unaffiliated third party.
69
<PAGE> 70
On May 31, 1996, in connection with the BMC Acquisition discussed in Note 4,
BankBoston, the Investors and certain directors and executive managers of
Homeside, Inc. Predecessor contributed a total of approximately $46.0 million in
cash for 4,100,944 shares of common stock. Approximately, $1.9 million of the
amount contributed by management was financed by Homeside, Inc. Predecessor and,
accordingly, was reported as a reduction of stockholders' equity. Also on May
31, 1996, Homeside, Inc. Predecessor issued 11,461,400 shares of common stock
and cash to Barnett in exchange for BMC. The common stock issued to Barnett was
assigned a value of $118.0 million.
On February 5, 1997, Homeside, Inc. Predecessor issued 8,452,500 shares of
common stock to the public at $15 per share. The stock was listed on the New
York Stock Exchange under the symbol HSL. The transaction resulted in net
proceeds to Homeside, Inc. Predecessor of $116.9 million. A portion of the
proceeds from the sale was to pre-pay $70.0 million of Notes at a pre-tax
premium of $7.9 million. Pro forma earnings per share giving effect for the
public offering as of the date of the issuance of the Notes and the related use
of proceeds to repay $70.0 million of the Notes and to reduce the bank line of
credit borrowings was $1.27 per share. Upon completion of the issue, all shares
of class B non-voting common stock converted automatically, on a 1-for-1 basis,
into shares of common stock.
On December 31, 1997, Homeside, Inc. Predecessor issued 19,431 shares of
common stock at $10.29 per share for stock options exercised under the Homeside,
Inc. Predecessor 1996 Employee Stock Option Plan.
13. SUPPLEMENTAL CASH FLOW INFORMATION
During the period March 16, 1996 to February 28, 1997, Homeside, Inc.
Predecessor extended loans totaling $1.9 million to certain members of
management in connection with their purchase of shares of common stock. These
loans were repaid in fiscal 1998 in anticipation of Homeside, Inc. Predecessor's
acquisition by the National.
In connection with the acquisitions of BBMC and BMC, Homeside, Inc. Predecessor
recorded non-cash assets and assumed liabilities, including fair value
adjustments, of approximately $2.3 billion and $1.7 billion in 1998 and 1997,
respectively.
Homeside, Inc. Predecessor paid $70.5 million and $81.8 million of interest
during the period from March 1, 1997 to February 10, 1998 and March 16, 1996 to
February 28, 1997, respectively. Homeside, Inc. Predecessor paid taxes totaling
$0.3 million and received $51.7 million cash for reinstated loans from early
pool buyout advances for the period from March 1, 1997 to February 10, 1998.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market
information. Where available, quoted market prices are used. In other cases,
fair values are based on estimates using other valuation techniques, such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are significantly affected by the assumptions used and the judgments made
regarding risk characteristics of various financial instruments, prepayments,
discount rates, estimates of future cash flows, future anticipated loss
experience and other factors. Changes in assumptions could significantly affect
these estimates. Derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
an immediate sale of the instrument. Also because of differences in
methodologies and assumptions used to estimate fair value, Homeside, Inc.
Predecessor's fair values should not be compared to those of other companies.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of Homeside, Inc. Predecessor. For certain assets and
liabilities, the information required is supplemented with additional
information relevant to an understanding of the fair value.
The methods and assumptions used to estimate the fair values of each class of
financial instruments are as follows:
Cash and cash equivalents
The carrying amount reported in the balance sheet approximates fair value.
Mortgage loans held for sale
Fair values are based on the estimated value at which the loans could be sold in
the secondary market. These loans are priced to be sold with servicing rights
retained, as this is Homeside, Inc. Predecessor's normal business practice.
Accounts receivable, early pool buyout advances and accounts payable
Carrying amounts are considered to approximate fair value. Accounts payable do
not include the effects of additional costs incurred and additional liabilities
assumed in connection with Homeside, Inc. Predecessor's acquisition by the
National.
70
<PAGE> 71
Risk management contracts
Fair values are estimated based on actual market quotes or option models.
Notes payable
The carrying amount of the notes payable reported in the balance sheet
approximates its fair value due to the short-term nature of the borrowings under
the credit agreements.
Long-term debt
Fair value of long-term debt is estimated by discounting estimated future cash
flows using a rate consistent with Homeside, Inc. Predecessor's current
borrowing rate as adjusted for the effects of certain prepayment penalties.
Commitments to originate mortgage loans
Fair value is estimated using quoted market prices for securities backed by
similar loans adjusted for differences in loan characteristics.
Forward contracts to sell mortgages
Forward contracts to sell mortgages, which represent legally binding agreements
to sell loans to permanent investors at a specified price or yield, are valued
using market prices for securities backed by similar loans and are reflected in
the fair values of the mortgages held for sale, to the extent that these
commitments relate to mortgage loans already originated, or of the related
commitments to extend credit.
Options on mortgage-backed securities and U.S. treasury bond futures
The fair values of options are estimated based on actual market quotes. In some
instances, quoted prices for the underlying loans or valuations determined by
option models are used.
Interest rate swaps
The fair values of interest rate swaps are estimated based on dealer quotes.
Fair Value
The fair values of Homeside, Inc. Predecessor's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 10, 1998 FEBRUARY 28, 1997
------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 32,113 $ 32,113 $ 52,691 $ 52,691
Mortgage loans held for sale 1,292,403 1,296,685 805,274 806,432
Accounts receivable and early pool buyout
advances 601,391 601,391 157,518 157,518
Risk management contracts for
mortgage servicing rights 43,947 43,947 45,212 45,212
LIABILITIES
Notes payable 2,074,956 2,074,956 1,818,503 1,818,503
Long-term debt 900,466 929,893 151,128 151,128
Accounts payable and accrued liabilities 143,870 143,870 140,304 140,304
OFF-BALANCE SHEET(1)
Commitments to originate mortgage loans -- (1,510) -- (2,805)
Mandatory forward contracts to sell
mortgages -- (3,621) -- 3,588
Mandatory forward contracts to sell U.S.
treasuries -- 65 -- 7
Options on mortgage-backed securities 3,543 5,890 2,025 1,741
Options on U.S treasury bond futures 743 604 321 (147)
Interest rate swaps -- 13,496 -- --
</TABLE>
---------
(1) Parenthesis denote a liability
71
<PAGE> 72
Fair value estimates are made as of a specific point in time, based on relevant
market data and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale
Homeside, Inc. Predecessor's entire holding of a particular financial
instrument. Because no active market exists for some portion of Homeside, Inc.
Predecessor's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, current
interest rates and prepayment trends, risk characteristics of various financial
instruments and other factors.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and, therefore, cannot be determined with precision.
Changes in any of these assumptions used in calculating fair value would also
significantly affect the estimates. Further, the fair value estimates were
calculated as of February 10, 1998 and February 28, 1997. Subsequent changes in
market interest rates and prepayment assumptions could significantly change the
fair value.
15. RISK MANAGEMENT AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
As discussed in Note 3, Homeside, Inc. Predecessor utilizes risk management
financial instruments to manage interest rate risk related to the value of its
mortgage servicing rights. A summary of Homeside, Inc. Predecessor's position in
risk management financial instruments at February 10, 1998 and February 28, 1997
is included below.
The fair value of Homeside, Inc. Predecessor's risk management contracts is
based on quoted market prices of the underlying instruments at February 10, 1998
and February 28, 1997. The notional amounts represent the par value of the
underlying U.S. Treasury bonds. However, the notional amounts are not recognized
in the balance sheet and should not be considered as a measure of credit risk or
future cash requirement.
The amount of the risk management contracts maintained depends on factors such
as interest rates, interest volatility and growth in the mortgage servicing
portfolio. Homeside, Inc. Predecessor is subject to market risk to the extent
that interest rates fluctuate; however, the purpose of the risk management
contracts is to hedge the value of the mortgage servicing rights portfolio.
Homeside, Inc. Predecessor's risk management financial instruments qualify as
hedges, and gains or losses on the risk management instruments correlate to
movements in the value of the mortgage servicing rights. Cash requirements for
Homeside, Inc. Predecessor's option contracts are limited to premiums paid. Cash
requirements for futures contracts are managed based on limits established by
Homeside, Inc. Predecessor's risk management committee. Homeside, Inc.
Predecessor's credit risk on its risk management contracts is limited because
the contracts are traded on a national exchange which guarantees counterparty
performance.
As discussed in Note 3, Homeside, Inc. Predecessor purchases financial
instruments and enters into financial agreements with off-balance sheet risk in
the normal course of business through the origination and selling of mortgage
loans and as part of its risk management programs. These instruments involve, to
varying degrees, elements of credit and interest rate risk. Credit risk is the
possibility that a loss may occur if a counterparty to a transaction fails to
perform according to the terms of the contract. Interest rate risk is the
possibility that a change in interest rates will cause the value of a financial
instrument to decrease or become more costly to settle.
Options and forward contracts
The notional amount of the options and forward contracts used in Homeside, Inc.
Predecessor's risk management programs is the amount upon which interest and
other payments under the contract are based and is generally not exchanged.
Therefore, the notional amounts should not be taken as the measure of credit
risk or a reflection of future cash requirements. The risk associated with
options and forwards is the exposure to current and expected market movements in
interest rates and the ability of the counterparties to meet the terms of the
contracts. The cash requirements associated with these options and forward
contracts, aside from the initial purchase price, are minimal. These contracts
generally require future performance on the part of the counterparty upon
exercise of the option or execution of the forward contract by Homeside, Inc.
Predecessor.
Homeside, Inc. Predecessor is exposed to credit loss in the event of
nonperformance by the counterparties to the various instruments. Homeside, Inc.
Predecessor controls credit and market risk associated with interest rate
products by establishing and monitoring limits with counterparties as to the
types and degree of risks that may be undertaken. Homeside, Inc. Predecessor's
exposure to credit risk in the event of default by the counterparties for the
options is $57.0 million at February 10, 1998.
Homeside, Inc. Predecessor's exposure to credit risk in the event of default by
the counterparty for mandatory forward commitments to sell mortgage loans is the
difference between the contract price and the current market price, offset by
any available margins retained by Homeside, Inc. Predecessor or an independent
clearing agent, which totaled $30.2 million at February 10, 1998. The amount of
credit risk as of February 10, 1998, if all counterparties failed completely and
if the margins, if any, retained by Homeside, Inc. Predecessor or an independent
clearing were to become unavailable, was approximately $4.4 million for
mandatory forward commitments of mortgage-backed securities.
72
<PAGE> 73
The following is a summary of Homeside, Inc. Predecessor's notional amounts and
fair values of interest rate products (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 10, 1998 FEBRUARY 28, 1997
------------------------------ --------------------------------
NOTIONAL NOTIONAL
AMOUNT FAIR VALUE(1) AMOUNT FAIR VALUE (1)
---------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Purchased commitments to sell mortgage loans:
Mandatory forward contracts $2,847,668 $(3,556) $1,445,345 $ 3,588
Options on mortgage-backed
securities 835,000 5,890 755,000 1,741
Options on U.S. treasury
bond futures 145,000 604 140,000 (147)
Risk management contracts on
mortgage servicing rights:
Options on U.S. treasury
bond futures 4,440,100 50,487 3,572,300 45,212
Futures contracts on U.S. treasury
bonds 2,121,800 (6,540) -- --
</TABLE>
----------------
(1) Fair value represents the amount at which a given instrument could be
exchanged in an arms length transaction with a third party as of the
balance sheet date.
Commitments to originate mortgage loans
Homeside, Inc. Predecessor regularly enters into commitments to originate and
purchase mortgage loans at a future date subject to compliance with stated
conditions. Commitments to originate mortgage loans have off-balance sheet risk
to the extent Homeside, Inc. Predecessor does not have matching commitments to
sell loans, which exposes Homeside, Inc. Predecessor to lower of cost or market
valuation adjustments in a rising interest rate environment. Additionally, the
extension of a commitment, which is subject to Homeside, Inc. Predecessor's
credit review and approval policies, gives rise to credit exposure when certain
borrowing conditions are met and the loan is made. Until such time, it
represents only potential exposure. The obligation to lend may be voided if the
customer's financial condition deteriorates or if the customer fails to meet
certain conditions. Commitments to originate mortgage loans do not necessarily
reflect future cash requirements since some of the commitments will not be drawn
upon before expiration. Commitments to originate mortgage loans totaled $3.2
billion and $2.7 billion at February 10, 1998 and February 28, 1997,
respectively.
Mortgage loans sold with recourse
Homeside, Inc. Predecessor sells mortgage loans with recourse to various
investors and retains the servicing rights and responsibility for credit losses
on these loans. The total outstanding balance of loans sold with recourse does
not necessarily represent future cash outflows. The total outstanding principal
balance of loans sold with recourse was $16.7 million and $14.2 million at
February 10, 1998 and February 28, 1997, respectively.
For five years following the May 31, 1996 acquisition of BMC, Barnett is
obligated to repurchase or reimburse Homeside, Inc. Predecessor for any credit
losses related to $101.0 million of loans serviced with recourse.
Servicing commitment to investors
Homeside, Inc. Predecessor is required to submit to certain investors, primarily
GNMA, guaranteed principal and interest payments from the underlying mortgage
loans regardless of actual collections.
Purchase mortgage servicing rights commitments
Homeside, Inc. Predecessor routinely enters into commitments to purchase
mortgage servicing rights associated with mortgages originated by third parties,
subject to compliance with stated conditions. These commitments to purchase
mortgage servicing rights correspond to mortgage loans having an aggregate loan
principal balance of approximately $0.6 billion and $2.3 billion at February 10,
1998 and February 28, 1997, respectively.
73
<PAGE> 74
Geographical concentration of credit risk
Homeside, Inc. Predecessor is engaged in business nationwide and has no
material concentration of credit risk in any geographic region.
16. OTHER RELATED PARTY TRANSACTIONS
Homeside, Inc. Predecessor entered into an agreement with BankBoston and Barnett
for certain corporate support services. For the period March 1, 1997 through
February 10, 1998, Homeside, Inc. Predecessor paid BankBoston and Barnett
approximately $5.2 million and $0.5 million, respectively, for these services.
For the period March 16, 1996 to February 28, 1997, Homeside, Inc. Predecessor
paid BankBoston and Barnett approximately $2.5 million and $0.9 million,
respectively, for these services.
Homeside, Inc. Predecessor purchases mortgage loans eligible for sale from
BankBoston and Barnett. For the period March 1, 1997 through February 10, 1998,
Homeside, Inc. Predecessor paid approximately $5.3 million and $45.4 million,
respectively, to BankBoston and Barnett for the purchase of mortgage servicing
rights. For the period from March 1, 1996 through February 28, 1997, Homeside,
Inc. Predecessor paid approximately $4.7 million and $27.6 million,
respectively, to BankBoston and Barnett for the purchase of mortgage servicing
rights. Homeside, Inc. Predecessor also purchases the mortgage servicing rights
to the mortgage loans BankBoston and Barnett hold in their portfolios. For the
period March 1, 1997 through February 10, 1998, Homeside, Inc. Predecessor
purchased mortgage servicing rights for loans retained by BankBoston and Barnett
totaling approximately $1.6 million and $9.5 million, respectively. For the
period from March 16, 1996 to February 28, 1997 Homeside, Inc. Predecessor
purchased mortgage servicing rights for loans retained by BankBoston and Barnett
totaling approximately $1.3 million and $8.2 million, respectively. The
BankBoston and Barnett purchases represent 2.8% and 20.4%, respectively, of
Homeside, Inc. Predecessor's total production for the period from March 1, 1997
to February 10, 1998. For the period of March 16, 1996 through February 28,
1997, the BankBoston and Barnett purchases represented 2.8% and 16.0%,
respectively, of Homeside, Inc. Predecessor's total production.
Homeside, Inc. Predecessor services residential mortgage loans held in portfolio
by BankBoston and Barnett. The servicing fees paid by BankBoston and Barnett to
Homeside, Inc. Predecessor are market-based fees consistent with the fees
charged by Homeside, Inc. Predecessor to other investors. For the period March
1, 1997 to February 10, 1998, BankBoston and Barnett paid $3.8 million and $29.1
million in servicing fees, respectively. For the period March 16, 1996 to
February 28, 1997, BankBoston and Barnett paid $5.3 million and $23.6 in
servicing fees, respectively.
As a result of NationsBank Corporation's acquisition of Barnett Banks, Inc.,
Homeside, Inc. Predecessor agreed to release Barnett from a five year agreement
to sell certain of its mortgage loans to Homeside, Inc. Predecessor. In
consideration, Homeside, Inc. Predecessor received the right to purchase $5.0
billion in mortgage servicing rights, an increase in the weighted average
servicing fee for Barnett portfolio loans currently serviced, and will receive
$3.0 million cash in June 1998.
As of February 28, 1997, certain members of management owed $1.9 million related
to loans granted to purchase shares of Homeside, Inc. Predecessor's common
stock. During the period from March 1, 1997 to February 10, 1998, all related
loans were repaid.
17. STOCK BASED COMPENSATION
Homeside, Inc. Predecessor established the Homeside, Inc. Predecessor 1996
Employee Stock Option Plan under which 582,845 shares of Common Stock are
reserved for issuance. Options issued under the plan may be either non-qualified
or incentive stock options. The options will be exercisable at such prices as
are set by Homeside, Inc. Predecessor's board of directors.
Homeside, Inc. Predecessor has also adopted a 1996 Time Accelerated Restricted
Stock Option Plan under which 1,165,724 shares of Common Stock are reserved for
issuance. Options granted under this plan will be non-qualified and will be
exercisable at such prices as are set by the board of directors. Options granted
under the plan will vest nine years from the date of grant. Vesting will
accelerate upon the achievement of certain performance criteria.
There was no compensation expense associated with the above option grants since
the exercise price was equal to the estimated fair value of the Common Stock at
the date of grant.
74
<PAGE> 75
Options outstanding and the activity for the period from March 1, 1997 to
February 10, 1998 and for the period from March 16, 1996 to February 28, 1997
are presented below:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
MARCH 1, 1997 TO MARCH 16, 1996 TO
FEBRUARY 10, 1998 FEBRUARY 28, 1997
-------------------------- ----------------------------
WEIGHTED WEIGHTED
OPTIONS AVERAGE PRICE OPTIONS AVERAGE PRICE
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Employee stock option plans:
Outstanding at beginning of year 1,321,716 $10.294 -- --
Granted 415,000 20.386 1,341,198 $10.294
Exercised 19,431 10.294 -- --
Forfeited -- -- (19,482) $10.294
---------- ------- ---------- -------
Outstanding at period end 1,717,285 $12.733 1,321,716 $10.294
========== ======= ========== =======
Options exercisable at period end 244,912 $10.294 -- --
========== ======= ========== =======
Weighted average fair value of
options granted during the period $ 11.06 $ 3.21
========== ==========
</TABLE>
Homeside, Inc. Predecessor applies the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
its stock option plans and has adopted the disclosure-only option under SFAS No.
123, "Accounting for Stock-Based Compensation." If Homeside, Inc. Predecessor
had adopted the accounting provisions of SFAS 123 and recognized expense for the
fair value of employee stock options granted during the period from March 1,
1997 to February 10, 1998 and March 16, 1996 to February 28, 1997, over the
vesting life of the options, pro forma net income before extraordinary loss
would be as indicated below (dollars in thousands, except share data):
<TABLE>
<CAPTION>
As Reported Pro Forma
-------------------------------------------- --------------------------------------------
For the Period From For the Period From For the Period From For the Period From
March 1, 1997 to March 16, 1996 to March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997 February 10, 1998 February 28, 1997
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Net income $74,787 $36,969 $74,158 $36,692
Basic income per share $ 1.72 $ 1.14 $ 1.71 $ 1.14
Diluted income per share $ 1.69 $ 1.13 $ 1.67 $ 1.12
</TABLE>
In determining the pro forma disclosures above, the fair value of options
granted was estimated on the date of grant using the Black-Scholes
option-pricing model. The Black-Scholes model was developed to estimate the fair
value of traded options, which have different characteristics than employee
stock options, and changes to the subjective assumptions used in the model can
result in materially different fair value estimates. The weighted-average grant
date fair values of the options granted during the period from March 1, 1997 to
February 28, 1998 and the period from March 16, 1996 to February 28, 1997 were
based on the following assumptions:
<TABLE>
<CAPTION>
RISK-FREE INTEREST RATES DIVIDEND YIELD
-------------------------------------------- --------------------------------------------
For the Period From For the Period From For the Period From For the Period From
March 1, 1997 to March 16, 1996 to March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997 February 10, 1998 February 28, 1997
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
1996 Time accelerated restricted
option plan 6.31 to 6.97% 6.61 to 6.98% 0.0 0.0
1996 Employee stock option plan 6.27 to 6.93% 6.50 to 6.86% 0.0 0.0
<CAPTION>
Expected Lives Volatility
-------------------------------------------- --------------------------------------------
For the Period From For the Period From For the Period From For the Period From
March 1, 1997 to March 16, 1996 to March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997 February 10, 1998 February 28, 1997
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
1996 Time accelerated restricted
option plan 8.5 years 8.5 years .35 .35
1996 Employee stock option plan 7.5 years 7.5 years .35 .35
</TABLE>
75
<PAGE> 76
Compensation expense under the fair value-based method is recognized over the
vesting period of the related stock options. Accordingly, the pro forma results
of applying SFAS No. 123 may not be indicative of future amounts.
The following table summarizes information about stock options outstanding at
February 10, 1998:
OUTSTANDING EXERCISABLE
------------------------------------------------------ ------------------------
AVERAGE EXERCISE AVERAGE
Shares AVERAGE LIFE PRICE SHARES EXERCISE PRICE
--------------------------------------------------------------------------------
1,302,285 7.3 $10.29 244,912 $10.29
10,000 8.2 15.75 -- --
405,000 8.2 20.50 -- --
--------------------------------------------------------------------------------
1,717,285 7.5 $12.73 244,912 $10.29
================================================================================
In connection with the National merger, vesting of all outstanding stock options
was accelerated or the related options were canceled.
18. EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. It replaces the presentation of primary EPS with a presentation of
basic EPS and requires dual presentation of basic and diluted EPS on the face of
the income statement and a reconciliation of the numerator and denominator of
the diluted EPS computation.
This statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. Homeside, Inc. Predecessor
is required to retroactively adopt this standard when reporting its operating
results for periods after December 15, 1997. Income per share after
extraordinary loss and weighted average shares are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM MARCH 1, 1997 TO FEBRUARY 10, 1998
------------------------------------------------------
BASIC EARNINGS PER SHARE INCOME SHARES PER-SHARE AMOUNT
-------------- ---------- ----------------
<S> <C> <C> <C>
Net income available to common stockholders $ 74,787,000 43,474,864 $ 1.72
======
Option issued (See Note 17) -- 890,959
----------
DILUTED EARNINGS PER SHARE
Income available to common stockholders plus
assumed conversions $ 74,787,000 44,365,823 $ 1.69
======
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD FROM MARCH 16, 1996 TO FEBRUARY 28, 1997
-------------------------------------------------------
BASIC EARNINGS PER SHARE INCOME SHARES PER-SHARE AMOUNT
------------- ---------- ----------------
<S> <C> <C> <C>
Net Income available to common stockholders $ 36,969,000 32,288,313 $ 1.14
======
Options issued (See Note 17) 399,467
----------
DILUTED EARNINGS PER SHARE
Income available to common stockholders plus
assumed conversions $ 36,969,000 32,687,780 $ 1.13
======
</TABLE>
19. CONTINGENCIES
Homeside, Inc. Predecessor, along with its subsidiaries, is a defendant in a
number of legal proceedings arising in the normal course of business. Homeside,
Inc. Predecessor, in management's estimation, has recorded adequate reserves in
the financial statements for pending litigation. Management, after reviewing all
actions and proceedings pending against or involving Homeside, Inc. Predecessor,
considers that the aggregate liabilities or loss, if any, resulting from the
final outcome of these proceedings will not have a material effect on the
financial position, results of operations or liquidity of Homeside, Inc.
Predecessor.
76
<PAGE> 77
20. EMPLOYEE BENEFITS
Homeside, Inc. Predecessor offers a 401(k) defined contribution benefit plan in
which employees may contribute a portion of their compensation. Substantially
all employees are eligible for participation in the plan. Homeside, Inc.
Predecessor matches 100% of amounts contributed up to 4% of an employee's
compensation. Further, Homeside, Inc. Predecessor may contribute additional
amounts at its discretion. Total expense related to the benefit plan was
approximately $3.0 million and $4.0 million for the period from March 1, 1997 to
February 10, 1998 and the period from March 16, 1996 to February 28, 1997,
respectively.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
For the Period
From FOR THE THREE FOR THE THREE FOR THE THREE
DECEMBER 1, 1997 TO MONTHS ENDED MONTHS ENDED MONTHS ENDED
FEBRUARY 10, 1998 NOVEMBER 30, 1997 AUGUST 31, 1997 TO MAY 31, 1997
------------------- ----------------- --------------- ---------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Revenue $ 62,523 $ 72,131 $ 72,746 $ 67,458
Expenses 36,254 38,537 39,733 37,731
Provision for income taxes 10,245 13,102 12,875 11,594
----------- ----------- ----------- -----------
Net income $ 16,024 $ 20,492 $ 20,138 $ 18,133
=========== =========== =========== ===========
Net income per share(1)
Basic $ 0.37 $ 0.47 $ 0.46 $ 0.42
Diluted $ 0.36 $ 0.46 $ 0.46 $ 0.41
Weighted average shares
outstanding(1)
Basic 43,483,633 43,472,568 43,472,568 43,472,568
Diluted 44,425,067 44,350,533 44,132,639 43,968,011
</TABLE>
----------------------------------------
(1) Net income per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share amounts
may not equal the annual amount. This is caused by rounding and the
averaging effect of the number of share equivalents utilized throughout the
year, which changes with the market price of the common stock.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE FOR THE THREE FOR THE PERIOD FROM
MONTHS ENDED MONTHS ENDED MONTHS ENDED MARCH 16, 1996
FEBRUARY 28, 1997 NOVEMBER 30, 1996 AUGUST 31, 1996 TO MAY 31, 1996
----------------- ----------------- --------------- -------------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Revenue $ 63,171 $ 62,325 $ 57,863 $ 33,717
Expenses 40,288 40,655 40,842 22,609
Provision for income taxes 8,750 9,015 6,954 4,554
Extraordinary loss from the
early extinguishment
of debt, net of tax 6,440 -- -- --
----------- ----------- ----------- -----------
Net income $ 7,693 $ 12,655 $ 10,067 $ 6,554
=========== =========== =========== ===========
Net income per share before
extraordinary loss on early
extinguishment of debt(1)
Basic $ 0.37 $ 0.36 $ 0.29 $ 0.34
Diluted $ 0.37 $ 0.36 $ 0.29 $ 0.34
Net income per share (1)
Basic $ 0.20 $ 0.36 $ 0.29 $ 0.34
Diluted $ 0.20 $ 0.36 $ 0.29 $ 0.34
Weighted average shares
outstanding (1)
Basic 37,743,651 35,020,068 35,020,068 19,040,000
Diluted 38,143,118 35,329,380 35,329,380 19,349,312
</TABLE>
-----------------------------------------
(1) Net income per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share amounts
may not equal the annual amount. This is caused by rounding and the
averaging effect of the number of share equivalents utilized throughout the
year, which changes with the market price of the common stock.
77
<PAGE> 78
22. PARENT COMPANY ONLY
CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 10, 1998 FEBRUARY 28, 1997
----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Investment in subsidiary $700,374 $629,513
Other assets 22,202 17,105
-------- --------
Total Assets $722,576 $646,618
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 3,443 $ 4,322
Long-term debt 130,000 130,000
-------- --------
Total Liabilities 133,443 134,322
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock 531 531
Additional paid-in capital 476,846 476,646
Retained earnings 111,756 36,969
-------- --------
589,133 514,146
Less: Notes received in payment for capital stock -- (1,850)
-------- --------
Total stockholders' equity 589,133 512,296
-------- --------
Total Liabilities and Stockholders' Equity $722,576 $646,618
======== ========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
MARCH 1, 1997 TO MARCH 16, 1996 TO
FEBRUARY 10, 1998 FEBRUARY 28, 1997
------------------ -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
REVENUES:
Dividends from subsidiary $14,712 $ 16,965
------- --------
Total Revenues 14,712 16,965
------- --------
EXPENSES:
Interest expense 14,518 19,445
Other expenses 131 842
------- --------
Total Expenses 14,649 20,287
------- --------
Income (loss) before income taxes, equity in
undistributed income of subsidiary
and extraordinary loss 63 (3,322)
Income tax benefit 5,713 8,171
------- --------
Income before equity in undistributed income
of subsidiary and extraordinary loss 5,776 4,849
Equity in undistributed income of subsidiary 69,011 38,560
Extraordinary loss, net of tax -- 6,440
------- --------
NET INCOME $74,787 $ 36,969
======= ========
</TABLE>
78
<PAGE> 79
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
MARCH 1, 1997 TO MARCH 16, 1996 TO
FEBRUARY 10, 1998 FEBRUARY 28, 1997
------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income $ 74,787 $ 36,969
Adjustments to reconcile net income to net
Cash provided by (used in) operating activities
Amortization -- 842
Equity in undistributed earnings of subsidiary (69,011) (38,560)
Deferred income tax benefit (5,713) (8,171)
Change in other assets and accounts payable
and accrued liabilities (2,113) (3,810)
--------- --------
Net cash used in operating activities $ (2,050) (12,730)
--------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital contribution to subsidiary -- (376,453)
--------- ---------
Net cash used in investing activities -- (376,453)
--------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Issuance of bridge financing -- 90,000
Repayment of bridge financing -- (90,000)
Issuance of Notes -- 200,000
Payment of debt issue costs -- (10,409)
Repayment of long-term debt -- (70,000)
Repayment of stockholder loans 1,850 --
Proceeds from issuance of common stock 200 269,592
--------- ---------
Net cash provided by financing activities 2,050 389,183
--------- ---------
Cash and cash equivalents at beginning of period -- --
Cash and cash equivalents at end of period -- --
--------- ---------
$ -- $ --
========= =========
</TABLE>
23. SUBSEQUENT EVENTS
On April 1, 1998, Homeside, Inc. Predecessor primary operating subsidiary,
HomeSide Lending, Inc. ("HomeSide Lending"), entered into an agreement with Banc
One Mortgage Corporation ("Banc One") to acquire the mortgage servicing assets
of Banc One. HomeSide Lending and Banc One have also entered into a Preferred
Partner agreement, whereby Banc One will sell a significant portion of its
residential mortgage loans to HomeSide Lending over the next five years. The
total purchase consideration is $201.0 million cash. The mortgage servicing
rights acquired relate to mortgage servicing loans of approximately $18 billion.
The transaction is subject to regulatory approvals and is expected to close late
in the second calendar quarter of 1998.
On April 6, 1998, Homeside, Inc. Predecessor signed an agreement with
NationsBank Corporation whereby NationsBank agreed to sell Homeside, Inc.
Predecessor a national wholesale mortgage loan network which was formerly owned
by Barnett Banks, Inc.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective April 1,1998, Homeside, Inc. dismissed its prior certifying
accountants, Arthur Andersen L.L.P. and retained as its new certifying
accountants, KPMG LLP. Arthur Andersen's report on HomeSide's financial
statements during the two most recent fiscal years and all subsequent interim
periods preceding the date hereof contained no adverse opinion or a disclaimer
of opinions, and was not qualified as to uncertainty, audit scope or accounting
principles. The decision to change accountants was approved by Homeside, Inc.
Predecessor's Board of Directors.
During the last three fiscal years and the subsequent interim period to the
date hereof, there were no disagreements between Homeside, Inc. Predecessor and
Arthur Andersen on any matters of accounting principles or practices, financial
statement disclosure, or auditing
79
<PAGE> 80
scope or procedure, which disagreements, if not resolved to the satisfaction of
Arthur Andersen would have caused it to make a reference to the subject matter
of the disagreements in connection with its reports.
None of the "reportable events" described in Item 304(a)(1) of Regulation
S-K occurred with respect to HomeSide within the last two fiscal years and the
subsequent interim period to the date hereof.
Effective April 1, 1998, HomeSide engaged KPMG LLP as its principal
accountants. During the last three fiscal years and the subsequent interim
period to the date hereof, HomeSide did not consult KPMG regarding any of the
matters or events set forth in Item 304(a)(2) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
None of the following directors are related to any other director or to any
executive officer of the Company.
<TABLE>
<CAPTION>
Position with the Company Year First
or Principal Occupation Elected a
Name of Nominee During the Past Five Years Age Director
--------------- -------------------------- --- ----------
<S> <C> <C> <C>
Joe K. Pickett Chairman of the Board and Chief Executive Officer of the 55 1996
Company since March 14, 1996. Chairman of the Board and a
Director of the Company's wholly-owned
subsidiary HomeSide Lending, Inc. ("HomeSide
Lending") since April 1990. Chief Executive
Officer of HomeSide Lending from April 1990 to
April 1999. Director of Fannie Mae and Baptist
Medical Center, Jacksonville, Florida.
Hugh R. Harris President and Chief Operating Officer of the Company since 49 1996
March 16, 1996. Chief Executive Officer of HomeSide
Lending since April 1999. President and Chief Operating
Officer of HomeSide Lending from January 1993 to April
1999. Previously, Vice-Chairman of HomeSide Lending.
Kevin D. Race Vice President of the Company since October 1996. 40 1999
President, and Chief Operating Officer of HomeSide Lending
since April 1999. Executive Vice President and Chief
Financial Officer of HomeSide Lending from October 1996
to April 1999.
Frank J. Cicutto Managing Director and Chief Executive Officer of National 49 1998
Australia Bank, Ltd., the parent since 1998.
Robert M. Prowse Executive General Manager of National Australia Bank, Ltd., 56 1998
the parent since 1999. Chief Financial Officer of National
Australia Bank, Ltd., the parent, from 1998 to 1999.
Previously Managing Director of Bank of New Zealand from
1992 to 1997.
Douglas E. Ebert Chief Executive Officer of Michigan National Corporation 56 1998
and Michigan National Bank since December 1993. Previously
President and Chief Executive Officer of Lincoln National
Corporation.
</TABLE>
80
<PAGE> 81
<TABLE>
<CAPTION>
<S> <C> <C> <C>
W. Blake Wilson Vice President and Chief Financial Officer and Director of 34 2000
Capital Markets of the Company since 1999.
Director of Capital Markets of the Company since
1996. Capital Markets for Prudential Home
Mortgage ("PHM") from 1992 through June 1996.
Joseph J. Whiteside Executive Vice President and Senior Advisor U.S.A. for 51 2000
National Australia Bank since 1997. Prior to 1997,
Executive Vice President and CFO of Michigan National Bank.
Richard E. McKinnon Chief Financial Officer of National Australia Bank since 50 2000
2000. Prior to 2000, Head of Investments and Acquisitions
Advisory for National Australia Bank.
</TABLE>
MANAGEMENT
The following table sets forth the name, age and position with the Company of
each person who is an executive officer or director of the Company:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Joe K. Pickett............... 55 Chairman of the Board and Chief Executive Officer, Director
Hugh R. Harris............... 49 President and Chief Operating Officer; Director
Kevin D. Race................ 40 Vice President and Director
W. Blake Wilson.............. 34 Vice President and Chief Financial Officer, Director
Robert J. Jacobs............. 48 Vice President, Secretary and General Counsel
Mark F. Johnson.............. 46 Vice President - Production
William Glasgow, Jr.......... 51 Vice President - Servicing
Daniel T. Scheuble........... 42 Vice President - Technology
</TABLE>
The directors and officers of the Company are elected each year by vote of the
shareholder and directors, respectively. Each of the officers and directors
shall serve until their successors are elected and qualified or until their
earlier resignation or removal. It is expected that corporate officers of the
Company will be appointed annually by its Board of Directors.
JOE K. PICKETT has served as Chairman of the Board and Chief Executive
Officer of the Company since March 14, 1996. Mr. Pickett also served the
Company's wholly-owned subsidiary, HomeSide Lending, Inc., as Chairman of the
Board and a Director since April 1990 and as Chief Executive Officer from April
1990 to April 1999. From October 1994 through October 1995, Mr. Pickett served
concurrently as President of the Mortgage Bankers Association of America. Mr.
Pickett also serves as a Director of Fannie Mae and of Baptist Medical Center,
Jacksonville, Florida.
HUGH R. HARRIS has served as President and Chief Operating Officer of the
Company since March 1996 and as Chief Executive Officer of HomeSide Lending
since April 1999. Mr. Harris served as President and Chief Operating Officer of
HomeSide Lending from January 1993 to April 1999. From January 1988 to January
1993, Mr. Harris served as Vice Chairman of HomeSide in charge of production and
secondary marketing. Mr. Harris serves as a Director of Freedom Securities, Inc.
KEVIN D. RACE has served as Vice President of the Company since October
1996 and as Chief Financial Officer from October 1996 to April 1999. Mr. Race
has served as President and Chief Operating Officer of HomeSide Lending since
April 1999. Mr. Race served as Executive Vice President and Chief Financial
Officer of HomeSide Lending from October 1996 to April 1999. From 1993 to 1996,
Mr. Race served as Executive Vice President, Chief Financial Officer and
Treasurer of Fleet Mortgage Group. In 1996, Mr. Race was named president of
Fleet Mortgage Group. In 1989, Mr. Race served in the mortgage capital markets
and non-conforming products areas of Fleet Mortgage Group. From 1985 to 1989,
Mr. Race served as Vice President and National Product Manager for Mortgage
Backed Securities for Citicorp. From 1982 to 1985, Mr. Race served in the
secondary marketing area of North American Mortgage Company.
W. BLAKE WILSON has served as Director since May 2000, Vice President and
Chief Financial Officer since April 1999 and Executive Vice President and
Director of Capital Markets of HomeSide Lending from September 1997 to April
1999. He previously served as Senior Vice President and Director of Capital
Markets of HomeSide Lending from June 1996. Before joining HomeSide, Mr. Wilson
served in Capital Markets for Prudential Home Mortgage ("PHM") from 1992 through
June 1996. Prior to joining PHM, he worked in KPMG Peat Marwick's National
Mortgage and Structured Finance Group in Washington, D.C.
81
<PAGE> 82
ROBERT J. JACOBS has served as Secretary of the Company since March 14,
1996 and as Vice president of the Company since April 10, 1996. Mr. Jacobs has
served as Executive Vice President and Secretary of HomeSide Lending since
February 2, 1996. Mr. Jacobs has served as a Director of HomeSide since March
14, 1996. From 1987 to 1996, Mr. Jacobs served as a Senior Vice President and
Chief Legal Officer of Chase Manhattan Mortgage Corporation, and served as
General Counsel for Citicorp Savings of Florida from 1984 to 1986. Mr. Jacobs is
a former President of the Mortgage Bankers Association of Florida.
MARK F. JOHNSON has served as Vice President of Production of HomeSide
since April 1, 1992. From 1988 to 1992, Mr. Johnson served as Senior Vice
President and Director of Wholesale Lending for HomeSide. Mr. Johnson also has
served as Executive Vice President of HomeSide Lending since April 10, 1996.
WILLIAM GLASGOW, JR. has served as Vice President of Loan Administration
since July 1991. From October 1989 to July 1991, Mr. Glasgow served as Senior
Vice President with Citicorp Mortgage Inc. in St. Louis, Missouri. Mr.Glasgow
has also served as Executive Vice President of HomeSide Lending since April 10,
1996.
DANIEL T. SCHEUBLE currently serves as Global IT and Chief Information Officer.
He served as Vice President for Technology and for Loan Processing since 1993
and Vice President for Consumer Direct Lending from 1993 to 1999. From 1990 to
1992, Mr. Scheuble served as a Senior Technology and Operational Manager at Bank
of Boston. Mr. Scheuble has also served as Executive Vice President of HomeSide
Lending since April 10, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or paid to
the Company's Chief Executive Officer and the Company's four most highly
compensated executive officers other than the CEO for all services rendered in
all capacities to the Company and its subsidiaries for the fiscal years ended
September 30, 2000 and September 30, 1999 and the period from February 11, 1998
to September 30, 1998 and the HomeSide, Inc. Predecessor periods from March 1,
1997 to February 10, 1998 and March 16, 1996 to February 28, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
Annual Compensation ----------------------
Name and Principal Fiscal ------------------------ Securities Underlying All Other
HomeSide International Position Year Salary Bonus Options Compensation
------------------------------------- ------- -------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Joe K. Pickett ...................... 2000 $450,000 $500,000(c) 100,000(d) $ 814,800(l)
Chairman & CEO 1999 450,000 500,000(c) 150,000(d) 816,000(j)
1998(a) 291,000 500,000(c) 50,000(d) 4,781,171(f)(g)(h)
1998(b) 372,000 500,000 45,000 23,954
1997 312,000 362,000 242,862(e) 16,135(i)
------------------------------------- ---- ------- ------- ------- ----------
Hugh R. Harris....................... 2000 470,000 500,000(c) 100,000(d) 814,800(l)
President and COO 1999 435,385 470,000(c) 100,000(d) 816,000(j)
1998(a) 266,000 470,000(c) 45,000(d) 4,748,128(f)(g)(h)
1998(b) 360,000 470,000 45,000 14,411
1997 300,000 350,000 242,862(e) 7,842(i)
------------------------------------- ---- ------- ------- ------- ----------
Kevin D. Race ....................... 2000 350,000 350,000(c) 60,000(d) 352,300(l)
Vice President 1999 321,154 300,000(c) 60,000(d) 353,500(j)
1998(a) 194,000 300,000(c) 35,000(d) 2,374,906(f)(g)(h)
1998(b) 250,000 300,000 45,000 9,333
1997 250,000(j) 100,000 97,155(e) 419,145(i)(k)
------------------------------------- ---- ------- ------- ------- ----------
Mark F. Johnson ..................... 2000 255,000 215,000(c) 40,000(d) 377,300(l)
Vice President 1999 240,577 170,000(c) 40,000(d) 378,500(j)
1998(a) 150,000 200,000(c) 30,000(d) 1,738,281(f)(g)(h)
1998(b) 230,000 200,000 30,000 10,623
1997 200,000 150,000 97,155(e) 6,714(i)
------------------------------------- ---- ------- ------- ------- ----------
William Glasgow, Jr. ................ 2000 255,000 215,000(c) 40,000(d) 377,300(l)
Vice President 1999 240,577 170,000(c) 40,000(d) 378,500(j)
1998(a) 150,000 200,000(c) 30,000(d) 1,738,281(f)(g)(h)
1998(b) 230,000 200,000 30,000 14,299
1997 200,000 150,000 97,155(e) 6,522(i)
------------------------------------- ---- ------- ------- ------- ----------
</TABLE>
82
<PAGE> 83
(a) For the fiscal period from February 11, 1998 to September 30, 1998.
(b) For the fiscal period from March 1, 1997 to February 10, 1998.
(c) Bonus amounts relate to the annual bonus under employment agreements
with the National paid during the years ended September 30, 2000 and
September 30, 1999 and the period from February 11, 1998 to September
30, 1998, respectively.
(d) Options to purchase common stock of National Australia Bank, Ltd., the
parent.
(e) Reflects a 17 for 1 stock split of the Company's Common Stock effected
immediately prior to the Company's January 1997 initial public
offering.
(f) Includes amounts received for (1) matching contributions under the
Company's 401K plan of $6,400 with respect to each individual, (2)
profit sharing contributions of $9,600 with respect to each individual,
and (3) relocation expenses of $33,043 with respect to Mr. Pickett.
(g) In consideration of entering into the Confidentiality and
Noncompetition Agreements with the National, Messrs. Pickett, Harris,
Race, Johnson and Glasgow received a one time cash payment in the
amount of $1,500,000, $1,500,000, $1,000,000, $400,000 and $400,000,
respectively, immediately following the Merger with the National.
(h) Executive officers received the following amounts with respect to
accelerated Options pursuant to the Merger Agreement: Joe K. Pickett -
$2,380,595, Hugh R. Harris - $2,380,595, Kevin D. Race - $1,018,261,
Mark F. Johnson - $981,636, and William Glasgow, Jr. - $981,636. In
addition, such individuals received the following amounts with respect
to previously vested options pursuant to the Merger Agreement: Joe
K. Pickett - $851,533, Hugh R. Harris - $851,533, Kevin D. Race -
$340,645, Mark F. Johnson $340,645 and William Glasgow, Jr. - $340,645.
(i) Includes amounts received for (1) matching contributions under the
Company's savings plan of $6,000 with respect to each of Messrs.
Pickett, Harris, Johnson Glasgow; and (2) the dollar value of life
insurance premiums paid by the Company of $10,135 with respect to Mr.
Pickett, $1,842 with respect to Mr. Harris, $74 with respect to Mr.
Race, $714 with respect to Mr. Johnson, and $522 with respect to Mr.
Glasgow.
(j) Includes amounts received for (1) matching contributions under the
Company's 401K plan of $6,400 with respect to each individual, (2)
profit sharing contributions of $9,600 with respect to each individual,
and (3) an annual bonus pursuant to their respective employment
agreements (See "Employment Contracts and Termination of Employment
Arrangements") of $800,000 with respect to Messrs. Pickett and Harris,
$337,500 with respect to Mr. Race, and $362,500 with respect to Messrs.
Johnson and Glasgow.
(k) The salary of Mr. Race was per annum. Mr. Race has been employed by
the Company since October 1996. Includes a bonus of $375,000 received
by Mr. Race as an inducement to join the Company and $38,071 in
relocation expenses.
(l) Includes amounts received for (1) matching contributions under the
Company's 401K plan of $6,800 with respect to each individual, (2)
profit sharing contributions of $8,000 with respect to each individual,
and (3) an annual bonus pursuant to their respective employment
agreements (See "Employment Contracts and Termination of Employment
Arrangements") of $800,000 with respect to Messrs. Pickett and Harris,
$337,500 with respect to Mr. Race, and $362,500 with respect to Messrs.
Johnson and Glasgow.
83
<PAGE> 84
OPTION GRANTS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2000
AND SEPTEMBER 30, 1999 AND THE PERIOD FROM FEBRUARY
11, 1998 TO SEPTEMBER 30, 1998
The following table provides information on option grants with respect
to common stock of the parent, National Australia Bank, Ltd., for the fiscal
years ended September 30, 2000 and September 30, 1999 and the period from
February 11, 1998 to September 30, 1998 to the named executive officers.
Pursuant to applicable regulations of the Securities and Exchange commission
(the "Commission"), the following table also sets forth the hypothetical value
which might have been realized with respect to such options based on assumed
rates of stock appreciation of 5% and 10% compounded annually from date of grant
to the end of the option terms:
<TABLE>
<CAPTION>
Individual
Grants
------------------------------------------------------------
Number of
Securities % of Total Potential Realizable Value at
Underlying Options Assumed Annual Rates of Stock
Options Granted to Exercise Price Appreciation for Option Term(e)
Fiscal Granted Employees in Price Expiration ------------------------------------
Name Year (#) the period ($/Sh) Date 5% 10%
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joe K. Pickett 2000 100,000 (a) (d) $11.54 03/23/08 $839,523 $1,361,503
1999 150,000 (b) 1% $18.43 03/19/04 37,500 772,500
1998 50,000 (c) (d) 11.81 02/26/03 160,233 332,211
---------------------------------------------------------------------------------------------------------------------------------
Hugh R. Harris 2000 100,000 (a) (d) 11.54 03/23/08 839,523 1,361,503
1999 100,000 (b) (d) 18.43 03/19/04 25,000 515,000
1998 45,000 (c) (d) 11.81 02/26/03 144,210 298,990
---------------------------------------------------------------------------------------------------------------------------------
Kevin D. Race 2000 60,000 (a) (d) 11.54 03/23/08 503,714 816,902
1999 60,000 (b) (d) 18.43 03/19/04 15,000 309,000
1998 35,000 (c) (d) 11.81 02/26/03 112,163 232,548
---------------------------------------------------------------------------------------------------------------------------------
Mark F. Johnson 2000 40,000 (a) (d) 11.54 03/23/08 335,809 544,601
1999 40,000 (b) (d) 18.43 03/19/04 10,000 206,000
1998 30,000 (c) (d) 11.81 02/26/03 96,140 199,327
---------------------------------------------------------------------------------------------------------------------------------
William Glasgow, Jr. 2000 40,000 (a) (d) 11.54 03/23/08 335,809 544,601
1999 40,000 (b) (d) 18.43 03/19/04 10,000 206,000
1998 30,000 (c) (d) 11.81 02/26/03 96,140 199,327
</TABLE>
(a) Options granted during the fiscal year ended September 30, 2000
pursuant to National Australia Bank's Executive Share Option Plan. The
options may be exercised during the period from March 23, 2003 to March
23, 2008 only if on any day during this period the total return to
shareholders exceeds 65% of the exercise price. In addition, a
performance hurdle based on the maximum total shareholder return of NAB
relative to the total shareholder return of a group of companies during
the exercise period of the options is required to be met before the
options can be exercised. This group of companies is to be based on the
ASX Top 50, when the options are granted. The total return includes the
value of dividends and the share price growth over the relevant period.
(b) Options granted during the fiscal year ended September 30, 1999
pursuant to National Australia Bank's Executive Share Option Plan. The
options may be exercised during the period from March 19, 2002 to March
19, 2004 only if on any day during this period the total return to
shareholders exceeds 65% of the exercise price. The total return
includes the value of dividends and the share price growth over the
relevant period.
(c) Options granted during the period from February 11, 1998 to September
30, 1998 pursuant to National Australia Bank's Executive Share Option
Plan. The options may be exercised during the period from February 26,
2001 to February 26, 2003 only if on any day during this period the
total return to shareholders exceeds 65% of the exercise price. The
total return includes the value of dividends and the share price growth
over the relevant period.
(d) Represents less than 1% of the total options granted to the National's
employees during the fiscal year ended September 30, 1998.
(e) These values are based on assumed rates of appreciation only. Actual
gains, if any, on shares acquired on option exercises are dependent on
the future performance of the National's Common Stock and in accordance
with the Executive Share Option Plan. The market price of the
National's common stock was $13.82, $14.64 and $12.10 at September 30,
2000, September 30, 1999 and September 30, 1998, respectively.
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<PAGE> 85
AGGREGATED OPTION EXERCISES AND OPTION VALUES
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 AND THE
PERIOD FROM FEBRUARY 11, 1998 TO SEPTEMBER 30, 1998
The following table provides information on option exercises during the
fiscal years ended September 30, 2000 and September 30, 1999 and the period from
February 11, 1998 to September 30, 1998 with respect to the Common Stock of the
National and on the values of the named executive officers' unexercised options
at September 30, 2000, September 30, 1999 and September 30, 1998:
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money
Fiscal on Value Options at Year-End (#) Options at Year-End
Name Year Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joe K. Pickett........... 2000 0 $0 0 100,000 $0 $228,000(a)
1999 0 0 0 150,000 0 (b)
1998 0 0 0 50,000 0 14,500(c)
------------------------------------------------------------------------------------------------------------------------------------
Hugh R. Harris........... 2000 0 0 0 100,000 0 228,000(a)
1999 0 0 0 100,000 0 (b)
1998 0 0 0 45,000 0 13,050(c)
------------------------------------------------------------------------------------------------------------------------------------
Kevin D. Race............ 2000 0 0 0 60,000 0 136,800(a)
1999 0 0 0 60,000 0 (b)
1998 0 0 0 35,000 0 10,150(c)
------------------------------------------------------------------------------------------------------------------------------------
Mark F. Johnson.......... 2000 0 0 0 40,000 0 91,200(a)
1999 0 0 0 40,000 0 (b)
1998 0 0 0 30,000 0 8,700(c)
------------------------------------------------------------------------------------------------------------------------------------
William Glasgow, Jr..... 2000 0 0 0 40,000 0 91,200(a)
1999 0 0 0 40,000 0 (b)
1998 0 0 0 30,000 0 8,700(a)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Value of unexercised in-the-money stock options represents the
difference between the exercise price of the stock options and the
closing price of the National's Common Stock on September 30, 2000.
(b) No options granted during the fiscal year ended September 30, 1999
were in-the-money at September 30, 1999.
(c) Value of unexercised in-the-money stock options represents the
difference between the exercise price of the stock options and the
closing price of the National's Common Stock on September 30, 1998.
LONG-TERM INCENTIVE PLANS
On November 16, 1999, the company's primary operating subsidiary, HomeSide
Lending, Inc., adopted a Long-Term Incentive Plan (the "1999 LTIP") for the
benefit of designated members of senior management and key employees
("Participants"). The maximum aggregate amount of awards under the 1999 LTIP is
$15,000,000. The Company's parent, National Australia Bank Limited, is funding
the 1999 LTIP. The Company adopted the 1999 LTIP in satisfaction of commitments
made by National Australia Bank in connection with its acquisition of the
Company in 1998. The 1999 LTIP is intended to advance the best interests of the
Company and its subsidiaries by providing annual and long-term incentives to
senior management and key employees who have substantial responsibility for
corporate management and growth. Specifically, the 1999 LTIP provides for
performance-based cash incentive awards to senior management and key employees
based on their individual contributions to the Company's achievement of specific
annual net income targets, thereby increasing the personal stake of Participants
in both the annual and long-term success and growth of the Company and
encouraging them to remain in the employ of the Company. The 1999 LTIP is the
only long-term incentive plan adopted by the Company.
The 1999 LTIP provides for awards to Participants based on a number of factors,
including the size of the accumulated pool on the termination date of the 1999
LTIP, the past and continued performance of the Participant, the achievement of
specific annual net income goals by the Company, and the discretion of the Plan
Committee (as defined in the 1999 LTIP).
The following table sets forth an estimate of long-term incentive compensation
earned by the Company's Chief Executive Officer and the Company's four most
highly compensated executive officers for the fiscal year ended September 30,
2000. No long-term incentive compensation was paid to any executive officer or
other Participant during fiscal years 2000 and 1999.
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<PAGE> 86
LONG-TERM INCENTIVE PLANS
<TABLE>
<CAPTION>
Estimated Future Payouts under
non-stock price-based plans (in thousands)
------------------------------------------
Number of
shares,
units or
other Performance or other period
Name of Officer(a) rights(b) until maturation or payout(c) Threshold(d) Target(e) Maximum(f)
------------------------------ ------------- ----------------------------- --------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Joe K. Pickett NA March 31, 2001 0 N/A $2,500
------------------------------ ------------- ----------------------------- --------------- ---------- -----------
Hugh R. Harris NA March 31, 2001 0 N/A 2,500
------------------------------ ------------- ----------------------------- --------------- ---------- -----------
Kevin D. Race NA March 31, 2001 0 N/A 1,750
------------------------------ ------------- ----------------------------- --------------- ---------- -----------
Mark F. Johnson NA March 31, 2001 0 N/A 1,000
------------------------------ ------------- ----------------------------- --------------- ---------- -----------
William Glasgow, Jr. NA March 31, 2001 0 N/A 1,000
------------------------------ ------------- ----------------------------- --------------- ---------- -----------
</TABLE>
(a) Pursuant to Item 402(a)3 of Regulation S-K, disclosure is made as to Mr.
Pickett, Chief Executive Officer, and the Company's four most highly compensated
officers other than the CEO.
(b) The 1999 LTIP does not provide for a specified number of shares, units or
other rights on a per Participant basis. Rather, the Plan Committee has full
discretion to allocate incentive compensation awards among Participants.
(c) The 1999 LTIP provides incentive compensation for performance over a 3-year
Plan Period (as defined in the 1999 LTIP), with awards payable at the end of the
Plan Period. The Plan Period commences March 31, 1998 and ends on March 31,
2001, provided however in the event the total award pool has not been earned by
March 31, 2001, the Plan Period will extend to March 31, 2002. Payments to
Participants will be made on or before May 15, 2001 (subject to extension in
accordance with the provisions of the Plan), provided the Participants satisfies
the continued employment requirement of the 1999 LTIP or the individual
Participant's employment agreement, as applicable. However, payments may be made
to Participants prior to that date under certain circumstances, including death,
disability, retirement, termination other than for cause, resignation and
transfer, subject to applicable provisions in the employment agreements of
certain Participants.
(d) There is no minimum award payable under the 1999 LTIP. Rather, the Plan
Committee (or, in certain instances as set forth in the Plan, individual members
of the Plan Committee) has full discretion to award incentive compensation or
not.
(e) The 1999 LTIP does not provide for individual target goals or specified
incentive compensation payable to individual Participants for achieving any
target.
(f) The 1999 LTIP does not provide for a maximum incentive compensation award.
However, the table sets forth estimated maximum payouts to the named executive
officers.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Certain of the Company's executive officers including each of the named
executive officers are party to employment agreements and/or non-competition
agreements with the Company. The Company is therefore contractually obligated to
continue to pay such salaries during the executive officer's term of employment
with the Company.
Employment Agreements with the National and the Company. In connection with
the acquisition of HomeSide by the National, the National and the Company
entered into employment agreements (the "Employment Agreement") with Joe K.
Pickett, Hugh R. Harris, Kevin D. Race, W. Blake Wilson, Mark F. Johnson,
William Glasgow, Jr. and five other officers of the Company (the "Executives").
Each Employment Agreement became effective upon the consummation of the merger
with the National (the "Merger") and provides for a three-year term of
employment commencing upon the consummation of the Merger. Mr. Pickett serves as
Chairman and Chief Executive Officer of the Company. Mr. Harris serves as
President and Chief Operating Officer of the Company. Mr. Race serves as Vice
President of the Company. Mr. Wilson serves as Vice President and Chief
Financial Officer of the Company. Mr. Johnson serves as Vice President, Loan
Production, for the Company. Mr. Glasgow serves as Vice President, Loan
Administration, for the Company.
Pursuant to their respective Employment Agreements, Messrs. Pickett,
Harris, Race, Wilson, Johnson and Glasgow each (i) receives an annual base
salary of at least $450,000, $410,000, $300,000, $200,000, $230,000 and
$230,000, respectively, (ii) receives a guaranteed annual bonus of $800,000,
$800,000, $337,500, $200,000, $362,500 and $362,500 respectively, payable on
each of the first and second anniversaries of the Effective Time, February 10,
1998, of the Merger, (iii) is eligible to participate in the Company's annual
bonus plan ("ABP"), (iv) is eligible to participate in the National's Executive
Share Option Plan, and received an initial grant of options to purchase 50,000,
45,000, 35,000, 30,000, 30,000, and 30,000 NAB ordinary shares, respectively,
and (v) is eligible to participate in a long-term incentive plan (funded by the
National with a cash pool not in excess of $15,000,000), the first award under
such plan (the "Anniversary Award") to be payable in a lump sum cash payment
within 30 days following the third anniversary of the effective time of the
Merger (the
86
<PAGE> 87
"Anniversary Date"), provided that the Executive is employed by the Company on
the Anniversary Date. The Employment Agreements provide that the National shall
cause the entire long-term incentive plan cash pool to be distributed to
eligible Company executives. The Employment Agreements for the five other
officers provide for annual base salaries aggregating $920,000, and guaranteed
annual bonuses aggregating $512,500; and such officers will receive in the
aggregate initial grants of options to purchase 120,000 NAB ordinary shares and
will be eligible to participate in the Company's annual bonus plan and in the
long-term incentive plan referred to in clause (v) above. The Employment
Agreements also provide that each Executive will be (i) entitled to participate
in employee benefit plans as may be in effect for senior executives of the
Company from time to time, (ii) entitled to paid vacation in accordance with the
vacation policy applicable to the Company's senior executives, (iii) reimbursed
by the Company for reasonable business expenses and (iv) entitled to receive the
same perquisites that such Executives received immediately prior to the
Effective Time. The Employment Agreements further provide that each Executive
will be eligible to participate in a nonqualified deferred compensation plan to
which such Executive may elect to defer any amount of such Executive's cash
compensation.
Each Employment Agreement may be terminated by the applicable Executive for
"good reason" and by the Company for "cause," as such terms are defined in the
Employment Agreements, or by voluntary resignation of the Executive, upon ninety
(90) days' written notice provided the Executive waives any amounts payable
under the Employment Agreement and provided further that Executive's obligations
under the Confidentiality and Noncompetition Agreement (described below) to
which such Executive is a party remain unaffected by such resignation. In the
event that the Company terminates the Executive's employment for any reason
other than cause or disability or the Executive terminates his employment for
good reason, the Company is obligated to (A) pay to the Executive his
Anniversary Award pursuant to the long-term incentive plan if he is terminated
prior to the third anniversary of the Merger and (B) (i) pay to the Executive
for the twenty-four (24) month period ( the eighteen (18) month period, in the
case of each Executive other than Messrs. Pickett and Harris) following the
Executive's termination (the "Continuation Period"), an amount equal to his
average monthly base salary for the two year period (or portion thereof)
immediately preceding the date of termination, plus (ii) at the end of the
Continuation Period, an amount equal to two times (1.5 times, in the case of
each Executive other than Messrs. Pickett and Harris) the average of (x) the
Executive's target bonus under the ABP for the year in which termination occurs
and (y) the annual bonus under the ABP for the year immediately preceding the
year in which termination occurs, (iii) the pro rata portion of the guaranteed
annual bonus, if any, for the year of termination and (iv) the pro rata portion
of Executive's ABP award for the year of termination, and (C) provide the
Executive during the Continuation Period with continued coverage under the
Company's health, life and disability insurance plans, provided that Executive
continues to contribute the employee share of the cost applicable to such
coverages. The amounts under clauses (B) (i) and (ii) and the coverage under
clause (C) in the immediately preceding sentence will be payable or provided, as
the case may be, only so long as the Executive complies with his obligations
under the confidentiality and Noncompetition Agreement (described below) to
which such Executive is a party.
In the event an Executive's employment is terminated by reason of death or
disability, the Company shall pay such Executive (or his designated beneficiary
or estate, as the case may be) the pro-rated portion of (i) the guaranteed
annual bonus, if any, for the year of termination of employment, (ii) any ABP
award such Executive would have received for the year of termination of
employment, and (iii) any applicable award payable under the long-term incentive
plan (which is the Anniversary Award in the event of termination of employment
on or before the third anniversary of the Merger).
Each Employment Agreement provides that the Executive waives any and all
rights to benefits payable under any prior severance agreement to which the
Executive and the Company are parties and agrees that such severance agreement
shall be void and of no further effect and shall be superseded in its entirety
by the Employment Agreement.
DEFERRED COMPENSATION PLAN
The Company has adopted that certain NAB Group - USA Deferred Compensation
Plan, effective as of February 10, 1998 (the "Plan"), for the benefit of certain
employees of the Company's subsidiary, HomeSide Lending, Inc., all of whom
constitute a select group of management or highly compensated employees
("Participants"). Pursuant to the provisions of Section 2.16 of the Plan,
HomeSide Lending, Inc. was designated a Participating Employer.
The purpose of the Plan is to provide participants the opportunity to defer
receipt of salary, bonus, and other specified cash compensation. The Plan is
intended to benefit a "select group of management or highly compensated
employees" within the meaning of Sections 201, 301 and 401 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and to be
therefore exempt from the requirements of Parts 2, 3 and 4 of Title I of ERISA.
Payments from the Plan are made to Participants upon termination,
disability, death, or upon approval of a withdrawal request based on financial
hardship. In addition, the Plan provides that, upon a Change in Control (as
defined in the Plan) of the Company, each Participant's account balance will be
valued as of the last date of the month in which the Change in Control occurs,
and shall be paid to each Participant in accordance with the payment provisions
of the Plan.
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<PAGE> 88
The Company has the right to withhold from any payment made under the Plan
(or any amount deferred into the Plan) any taxes required by law to be withheld
in respect of such payment (or deferral). The Company, together with other
Participating Employers (as defined in the Plan), bears the expenses of
administering the Plan.
The Deferred Compensation Committee (as that term is defined in the Plan)
may at any time modify, amend, or terminate the Plan, provided that such
modification, amendment, or termination shall not cancel, reduce, or otherwise
adversely affect the amount of benefits of any Participant accrued (and any form
of payment elected) as of the date of any such modification, amendment, or
termination, without the consent of the Participant.
The Company has entered into a trust agreement with SunTrust Bank pursuant
to which it will fund its obligations under the plan. This type of trust
instrument is commonly referred to as a "Rabbi Trust."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CAPITAL STOCK OF THE COMPANY
All of the outstanding common stock of HomeSide International, Inc.,
consisting of 1 share, is owned by the National.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 23, 1998, HomeSide entered into an agreement for an unsecured revolving
credit facility with the National. The facility was renewed on June 21, 2000 and
June 22, 1999. Under the credit facility, HomeSide can borrow up to $2.5
billion, subject to limits imposed by regulatory authorities. As of September
30, 2000, Australian financial regulations limited the National's ability to
lend funds to HomeSide, a non-bank affiliate, to approximately $2.0 billion.
Borrowings under the credit facility may be overnight or for periods of 7, 30,
60 or 90 days. For overnight borrowings, the interest rate is determined by
HomeSide and the National at the time of the borrowing. For LIBOR - based
borrowings, the interest rate is charged at the corresponding LIBOR rate. The
weighted average interest rate on outstanding borrowings under this credit
facility during fiscal years ended September 30, 2000 and September 30, 1999
were 6.25% and 5.22%, respectively. HomeSide's interest expense on this facility
was approximately $100.4 million for the fiscal year ended September 30, 2000.
HomeSide earned management fees charged to affiliate companies of approximately
$2.5 million for the fiscal year ended September 30, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements: See Part II, Item 8 hereof.
2. Financial Statement Schedule and Auditors' Report
All schedules omitted are inapplicable or the information required is shown in
the Consolidated Financial Statements or notes thereto.
3. The following exhibits are submitted herewith:
Unless otherwise indicated, all Exhibits are incorporated by reference to the
Company's Registration Statement on Form S-4, No. 333-06737.
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of HomeSide Lending, Inc. (incorporated
by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000)
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<PAGE> 89
3.2*** By-Laws of HomeSide Lending, Inc.
4.1 Form of Common Stock Certificate
10.1 Stock Purchase Agreement dated December 11, 1995 between HomeAmerica
Capital, Inc. (currently known as HomeSide, Inc.) and The First
National Bank of Boston (the "BBMC Purchase Agreement")
10.2 Amendment No. 1, dated as of March 15, 1996, to the BBMC Purchase
Agreement
10.3 Marketing Agreement dated as of March 15, 1996 between HomeSide,
Inc. and The First National Bank of Boston
10.4 Repurchase of Mortgage Loan Servicing Rights Letter Agreement
between The First National Bank of Boston (currently known as
BankBoston, N.A.) and BancBoston Mortgage Corporation (currently
known as HomeSide Lending, Inc.)
10.5 Operating Agreement effective as of March 15, 1996 between The First
National Bank of Boston (currently known as BankBoston, N.A.) and
BancBoston Mortgage Corporation (currently known as HomeSide
Lending, Inc.)
10.6 Brokered Loan Purchase and Sale Agreement dated as of March 15, 1996
between BancBoston Mortgage Corporation (currently known as HomeSide
Lending, Inc.) and each of The First National Bank of Boston
(currently known as BankBoston N.A.), Bank of Boston Connecticut,
Rhode Island Hospital Trust National Bank and Bank of Boston
Florida, N.A.
10.7 Master Take-Out Commitment dated as of March 15, 1996 between
BancBoston Mortgage Corporation (currently known as HomeSide
Lending, Inc.) and each of The First National Bank of Boston
(currently known as BankBoston, N.A.), Bank of Boston Connecticut,
Rhode Island Hospital Trust National Bank and Bank of Boston
Florida, N.A.
10.8 Neighborhood Assistance Corporation of America Mortgage Loan
Take-Out Commitment dated as of March 15, 1996 between BancBoston
Mortgage Corporation (currently known as HomeSide Lending, Inc.) and
The First National Bank of Boston (currently known as BankBoston,
N.A.)
10.9- PMSR Flow Agreement dated as of March 15, 1996 between BancBoston
Mortgage Corporation (currently known as HomeSide Lending, Inc.) and
each of The First national Bank of Boston (currently known as
BankBoston, N.A.), Bank of Boston Connecticut, Rhode Island Hospital
Trust National Bank and Bank of Boston Florida, N.A.
10.10- Mortgage Loan Servicing Agreement dated as of March 15, 1996 between
BancBoston Mortgage Corporation (currently known as HomeSide
Lending, Inc.) and each of the First National Bank of Boston, Bank
of Boston Connecticut, Rhode Island Hospital Trust National Bank and
Bank of Boston Florida, N.A.
10.11 Stock Purchase Agreement dated as of March 4, 1996 between Grant
America, Inc. (currently known as HomeSide, Inc.) and Barnett Banks,
Inc. (the "BMC Purchase Agreement")
10.12 Amendment No. 1, dated as of May 31, 1996, to the BMC Purchase
Agreement
10.13 Tax Indemnity Letter Agreement dated as of March 4, 1996 between
Barnett Mortgage Company (currently known as HomeSide Holdings,
Inc.) and Barnett Banks, Inc.
10.14 Amended and Restated Shareholder Agreement dated as of May 31, 1996
among HomeSide, Inc. and the shareholders thereof
10.15 Amended and Restated Registration Rights Agreement dated as of May
31, 1996 between HomeSide, Inc. and certain shareholders thereof
10.16 Marketing Agreement dated as of May 31, 1996 between HomeSide, Inc.
and Barnett Banks, Inc. 10.17 Transitional Services Agreement dated
as of may 31, 1996 between Barnett Banks, Inc., Barnett Mortgage
Company (currently known as HomeSide Holdings, Inc.) and HomeSide,
Inc.
10.18 Operating Agreement dated as of May 31, 1996 between HomeSide
Lending, Inc. and Barnett Banks, Inc.
10.19- Mortgage Loan Servicing Agreement dated as of April, 1996 between
HomeSide Lending, Inc. and Barnett Banks, Inc.
10.20- PMSR Flow Agreement dated as of May 31, 1996 between HomeSide
Lending, Inc. and Barnett Banks, Inc.
10.21 Correspondent Agreement dated May 16, 1996 between HomeSide Lending,
Inc. and Barnett Banks, Inc.
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<PAGE> 90
10.22 Delegated Underwriting Agreement dated as of May 15, 1996 between
HomeSide Lending, Inc. and HomeSide Holdings, Inc.
10.23* Amended and Restated Credit Agreement dated as of January 31, 1997
among HomeSide Lending, Inc., Honolulu Mortgage Company, Inc., the
Lenders parties thereto, and The Chase Manhattan Bank as
Administrative Agent (the "Credit Agreement")
10.24* Amended and Restated Holdings Pledge Agreement dated as of January
31, 1997 between HomeSide Lending, Inc. and The Chase Manhattan
Bank, as Administrative Agent for the Lenders parties to the Credit
Agreement
10.25* Amended and Restated HomeSide Lending Pledge Agreement dated as of
January 31, 1997 between HomeSide Lending, Inc. and The Chase
Manhattan Bank, as Administrative Agent for the Lenders parties to
the Credit Agreement
10.26* Amended and Restated BMC Pledge Agreement dated as of January 31,
1997 between HomeSide Holdings, Inc. and The Chase Manhattan Bank,
as Administrative Agent for the Lenders parties to the Credit
Agreement
10.27 Registration Rights Agreement dated as of May 14, 1996 among
HomeSide, Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Smith Barney Inc. and Friedman,
Billings, Ramsey & Co., Inc.
10.28* Amended and Restated Holdings Guaranty dated as of January 31, 1997
by HomeSide, Inc. in favor of The Chase Manhattan Bank, as
Administrative Agent for the Lenders parties to the Credit Agreement
10.29* Amended and Restated HomeSide Lending Guaranty dated as of January
31, 1997 by HomeSide Lending, Inc. in favor of The Chase Manhattan
Bank, as Administrative Agent for the Lenders parties to the Credit
Agreement
10.30* Amended and Restated Subsidiaries Guaranty dated as of January 31,
1997 by each of SWD Properties, Inc., Stockton Plaza, Inc., HomeSide
Lending Mortgage Securities, Inc. and Honolulu Mortgage Company,
Inc. in favor of The Chase Manhattan Bank, as Administrative Agent
for the Lenders parties to the Credit Agreement
10.31* Amended and Restated BMC Guaranty dated as of January 31, 1997 by
HomeSide Holdings, Inc. in favor of The Chase Manhattan Bank, as
Administrative Agent for the Lenders parties to the Credit Agreement
10.32* Amended and Restated Security and Collateral Agency Agreement dated
as of January 31, 1997 between HomeSide Lending, Inc. and The Chase
Manhattan Bank, as Administrative Agent for the Lenders parties to
the Credit Agreement
10.33* Amended and Restated Security and Collateral Agency Agreement dated
as of January 31, 1997 between Honolulu Mortgage Company, Inc. and
The Chase Manhattan Bank, as Administrative Agent for the Lenders
parties to the Credit Agreement
10.34* Amended and Restated Security and Collateral Agency Agreement dated
as of January 31, 1997 between HomeSide Holdings, Inc. and The Chase
Manhattan Bank, as Administrative Agent for the Lenders parties to
the Credit Agreement
10.35 Intercreditor Agreement dated as of May 31, 1996 between HomeSide
Lending, Inc. HomeSide Holdings, The Bank of New York, as Trustee,
and The Chase Manhattan Bank, as Administrative Agent under the
Credit Agreement
10.36 HomeSide, Inc. Time Accelerated Restricted Stock Option Plan
10.37 HomeSide, Inc. Non-Qualified Stock Option Plan
10.38 Class B Non-Voting Common Stock Issuance Agreement dated as of March
14, 1996 between HomeSide, Inc. and Smith Barney Inc.
10.39 Transitional Services Agreement dated as of March 15, 1996 between
The First National Bank of Boston (currently known as BankBoston,
N.A.) and BancBoston Mortgage Corporation (currently known as
HomeSide Lending, Inc.)
10.40 Transitional Services Agreement dated as of March 15, 1996 between
The First National Bank of Boston (currently known as BankBoston,
N.A.) and BancBoston Mortgage corporation (currently known as
HomeSide Lending, Inc.)
10.41 Management Agreement dated as of March 15, 1996 between BancBoston
Mortgage Corporation (currently known as HomeSide Lending, Inc.) and
The First National Bank of Boston (currently known as BankBoston,
N.A.)
10.42 Management Agreement dated as of March 15, 1996 between BancBoston
Mortgage Corporation (currently known as HomeSide Lending, Inc.) and
Thomas H. Lee Company
10.43 Management Agreement dated as of March 15, 1996 between BancBoston
Mortgage Corporation (currently known as HomeSide Lending, Inc.) and
Madison Dearborn Partners, Inc.
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<PAGE> 91
10.44 Management Stockholder Agreement dated as of May 15, 1996 between
HomeSide, Inc., The First National Bank of Boston (currently known
BankBoston, N.A.), Thomas H. Lee Equity Fund III, L.P. and certain
affiliates thereof, Madison Dearborn Capital Partners, L.P. and
certain employees of HomeSide Lending, Inc. and its subsidiaries
10.45 Management Agreement dated as of May 31, 1996 between HomeSide
Lending, Inc. and Barnett Banks, Inc.
10.46 Form of HomeSide Severance Agreement
10.47 Loan and Security Agreement dated January 15, 1997 between HomeSide
Lending, Inc. and The Chase Manhattan Bank (incorporated by
reference to Company's Registration Statement on Form S-1
Registration No. 333-17685).
10.48* First Amendment dated February 28, 1997 to Loan and Security
Agreement dated January 15, 1997 between HomeSide Lending, Inc. and
The Chase Manhattan Bank
10.49* Second Amendment dated March 31, 1997 to Loan and Security Agreement
dated January 15, 1997 between HomeSide Lending, Inc. and The Chase
Manhattan Bank.
10.50* Loan and Security Agreement dated March 14, 1997 between HomeSide
Lending, Inc. and Merrill Lynch Mortgage Capital Inc.
10.51* First Amendment dated March 31, 1997 to Loan and Security Agreement
dated March 14, 1997 between HomeSide Lending, Inc. and Merrill
Lynch Mortgage Capital Inc.
10.52* Third Amendment dated April 11, 1997 to Loan and Security Agreement
dated January 15, 1997 between HomeSide Lending, Inc. and The Chase
Manhattan Bank.
10.53* Second Amendment dated April 14, 1997 to Loan and Security Agreement
dated March 14, 1997 between HomeSide Lending, Inc. and Merrill
Lynch Mortgage Capital Inc.
10.54* Fourth Amendment dated April 29, 1997 to Loan and Security Agreement
dated January 15, 1997 between HomeSide Lending, Inc. and The Chase
Manhattan Bank.
10.55* Third Amendment dated April 29, 1997 to Loan and Security Agreement
dated March 14, 1997 between HomeSide Lending, Inc. and Merrill
Lynch Mortgage Capital Inc.
10.56 Amendment dated as of September 30, 1997 to the Credit Agreement
dated as of January 31, 1997 (incorporated by reference to Quarterly
Report on Form 10-Q of Company's for Quarter ended November
30,1997).
10.57* Second Amendment dated as of December 31, 1997 to the Credit
Agreement dated as of January 31, 1997.
10.58* Employment Agreement and Confidentiality and Non-Competition
Agreement, each dated as of October 25, 1997, each between HomeSide
Lending, Inc. and Joe K. Pickett.
10.59* Employment Agreement and Confidentiality and Non-Competition
Agreement, each dated as of October 25, 1997, each between HomeSide
Lending, Inc. and Hugh R. Harris.
10.60* Employment Agreement and Confidentiality and Non-Competition
Agreement, each dated as of October 25, 1997, each between HomeSide
Lending, Inc. and Kevin D. Race.
10.61* Employment Agreement and Confidentiality and Non-Competition
Agreement, each dated as of October 25, 1997, each between HomeSide
Lending, Inc. and William Glasgow.
10.62* Employment Agreement and Confidentiality and Non-Competition
Agreement, each dated October 25, 1997, each between HomeSide
Lending, Inc., and Mark F. Johnson.
10.63** HomeSide Lending, Inc. Long Term Incentive Plan.
10.64** NAB Group - USA Deferred Compensation Plan, effective February 10,
1998.
10.65** Revolving Credit Agreement dated as of October 18, 1999 among
HomeSide Lending, the lenders thereto and Chase Manhattan Bank as
Administrator.
10.66 Unsecured Revolving Credit Agreement and Promissory Note dated June
23, 1998 between HomeSide Lending, Inc. and National Australia Bank
(incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998).
10.67 First Amendment dated June 22, 1999 to Unsecured Revolving Credit
Agreement dated June 23, 1998 between HomeSide Lending , Inc. and
National Australia Bank Limited (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999)
10.68 Amended and Restated Renewal Promissory Note dated June 22, 1999
between HomeSide Lending, Inc. and National Australia Bank Limited
(incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999)
10.69*** Second Amendment dated June 21, 2000 to Unsecured Revolving Credit
Agreement between HomeSide Lending, Inc. and National Australia Bank
Ltd.
10.70*** Second Amended and Restated Renewal Promissory Note dated June 21,
2000 between HomeSide Lending, Inc. and National Australia Bank,
Ltd.
10.71*** Revolving Credit Agreement dated as of October 16, 2000 among
HomeSide Lending, the lenders thereto and
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Chase Manhattan as Administrator.
10.72*** Trust under NAB Group - USA Deferred Compensation Plan Dated as of
July 6, 2000 between HomeSide Lending Inc, and SunTrust Bank.
21.1*** List of subsidiaries of HomeSide International, Inc.
27.1*** Financial Data Schedule
----------------
* Incorporated by reference to Exhibits of HomeSide Lending, Inc.'s (a wholly-
owned subsidiary of the Registrant) Registration Statement on Form S-1,
Registration No. 333-21193
- Portions of this Exhibit have been omitted pursuant to an order by the
Securities and Exchange Commission granting confidential treatment.
** Incorporated by reference to Annual Report on Form 10-K of the Company for
the fiscal year ended September 30, 1999.
*** Filed Herewith.
(b) Reports on form 8-K
HomeSide filed no reports on form 8-K during the three months ended
September 30, 2000.
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<PAGE> 93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HomeSide International, Inc.
(Registrant)
By: /s/
-------------------------------------
Joe K. Pickett
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Chairman of the Board, Chief Executive Officer December 22, 2000
---------------------------
Joe K. Pickett
/s/ President, Chief Operating Officer and Director December 22, 2000
---------------------------
Hugh R. Harris
/s/ Vice President, Chief Financial Officer and Director December 22, 2000
---------------------------
W. Blake Wilson
/s/ Vice President and Director December 22, 2000
---------------------------
Kevin D. Race
Director December 22, 2000
---------------------------
Frank J. Cicutto
Director December 22, 2000
---------------------------
Robert M. Prowse
/s/ Director December 22, 2000
---------------------------
Douglas E. Ebert
Director December 22, 2000
---------------------------
Joseph J. Whiteside
Director December 22, 2000
---------------------------
Richard E. McKinnon
</TABLE>
93
