<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 8, 1997
REGISTRATION NO. 333-21193
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
<TABLE>
<S> <C> <C>
HOMESIDE LENDING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 6162 59-2725415
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
7301 BAYMEADOWS WAY
JACKSONVILLE, FL 32256
(904) 281-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT J. JACOBS, EXECUTIVE VICE PRESIDENT AND SECRETARY
HOMESIDE LENDING, INC.
7301 BAYMEADOWS WAY
JACKSONVILLE, FL 32256
(904) 281-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C> <C>
MARY ELLEN O'MARA AND JONATHAN B. MILLER
HUTCHINS, WHEELER & DITTMAR BROWN & WOOD LLP
A PROFESSIONAL CORPORATION ONE WORLD TRADE CENTER
101 FEDERAL STREET NEW YORK, NEW YORK 10048
BOSTON, MASSACHUSETTS 02110 (212) 839-5300
(617) 951-6600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This Pricing Supplement and the accompanying Prospectus
and Prospectus Supplement shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PRICING SUPPLEMENT DATED APRIL 8, 1997
Pricing Supplement (To Prospectus Dated --, 1997
and Prospectus Supplement Dated --, 1997)
HOMESIDE LENDING, INC. [LOGO]
$--,000,000
- --% NOTES DUE --
Interest on the --% Notes due -- (the "Notes") is payable semiannually in
arrears on -- and -- of each year, commencing on --, 1997. The Notes will mature
on --, are not subject to redemption or repayment at the option of HomeSide
Lending, Inc. (the "Issuer") or the holders thereof prior to maturity and will
not be subject to any sinking fund. The Notes represent senior unsecured
obligations of the Issuer.
The Notes will be initially represented by one or more global securities
("Global Securities") registered in the name of The Depository Trust Company
(the "Depository") or its nominee. Beneficial interests in the Global Securities
will be shown on, and transfers thereof will be effected through, records
maintained by the Depository or its participants. Except as provided herein,
Notes in definitive form will not be issued. See "Description of
Notes--Book-Entry Notes" in the accompanying Prospectus Supplement. Settlement
for the Notes will be made in immediately available funds. All payments of
principal and interest will be made by the Issuer in immediately available
funds. See "Description of Notes--Same-Day Settlement and Payment" in the
accompanying Prospectus Supplement.
- --------------------------------------------------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-12 OF THE ACCOMPANYING PROSPECTUS
SUPPLEMENT FOR CERTAIN CONSIDERATIONS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE NOTES OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PRICING SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS
AND PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) ISSUER(1)(3)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER NOTE % % %
TOTAL $ $ $
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from --, 1997.
(2) The Issuer has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Supplemental Plan of Distribution."
(3) Before deducting expenses payable by the Issuer estimated at $--.
----------------------------------------------------------------------------
The Notes are offered by the several Underwriters, subject to prior sale, when,
as and if issued to and accepted by them and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Notes will be made in book-entry form through the facilities of
the Depository in New York, New York on or about --, 1997.
CHASE SECURITIES INC.
MERRILL LYNCH & CO.
NATIONSBANC CAPITAL MARKETS, INC.
SMITH BARNEY INC.
The date of this Pricing Supplement is --, 1997.
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF NOTES TO COVER
UNDERWRITERS' SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"SUPPLEMENTAL PLAN OF DISTRIBUTION."
------------------------
USE OF PROCEEDS
The net proceeds to be received by the Issuer from the sale of the Notes
offered hereby are estimated to be $ . The Issuer intends to use $
of the net proceeds to repay in full revolving credit loans (the "Chase
Revolving Loans") outstanding under a loan agreement, dated as of January 15,
1997, as amended (the "Chase Loan Agreement"), between the Issuer and The Chase
Manhattan Bank ("Chase"). On , 1997, the amount outstanding under the
Chase Loan Agreement was $ . The Issuer intends to use $ of the
net proceeds to repay in full revolving credit loans (the "Merrill Revolving
Loans", and together with the Chase Revolving Loans, the "Revolving Loans")
outstanding under a loan agreement dated as of March 14, 1997, as amended (the
"Merrill Loan Agreement"), between the Issuer and an affiliate of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") (the "Merrill Lender").
The Revolving Loans mature, and will be terminated, on the earlier to occur of
(i) May 1, 1997, or (ii) the consummation of the sale of Notes offered hereby.
As of , 1997, the Revolving Loans carry a weighted average interest rate
on amounts borrowed of % per annum. See "Description of Certain
Indebtedness--Other Lending Arrangements" in the accompanying Prospectus. In
addition, approximately $ of the net proceeds will be used to reduce the
amounts outstanding under that certain credit agreement entered into by the
Issuer on January 31, 1997, which amended and restated credit agreement was
originally entered into on May 31, 1996 (as amended and restated, the "Bank
Credit Agreement"). On , 1997, the amount outstanding under the Bank
Credit Agreement was $ . The loans under the Bank Credit Agreement mature
on February 14, 2000 and, as of , 1997, carry a weighted average interest
rate on amounts borrowed of % per annum. See "Description of Certain
Indebtedness--Bank Credit Agreement" in the accompanying Prospectus. The balance
of the net proceeds, if any, will be used for working capital and general
corporate purposes, including the purchase of servicing rights. Amounts repaid
under the Bank Credit Agreement may be reborrowed by the Issuer for corporate
purposes. Chase, the lender under the Chase Loan Agreement, and the
administrative agent and a lender under the Bank Credit Agreement and an
affiliate of Chase Securities Inc. will receive all amounts to be repaid under
the Chase Loan Agreement with the proceeds of this offering, and Chase also will
receive its proportionate share of any repayments under the Bank Credit
Agreement with the proceeds of this offering. The Merrill Lender, the lender
under the Merrill Loan Agreement and an affiliate of Merrill Lynch, will receive
all amounts to be repaid under the Merrill Loan Agreement with the proceeds of
this offering. NationsBank, a lender under the Bank Credit Agreement and an
affiliate of NationsBanc Capital Markets, Inc., will receive its proportionate
share of any repayments under the Bank Credit Agreement with the proceeds from
this offering. See "Supplemental Plan of Distribution."
PS-2
<PAGE> 4
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Issuer and its consolidated subsidiaries ("HomeSide") as of November 30,
1996 and as adjusted to give effect to the public offering in January 1997 of
the common stock of HomeSide, Inc. (the "Parent") and the sale of the Notes and
the application of the estimated net proceeds therefrom as described in "Use of
Proceeds." The information in this table should be read in conjunction with the
consolidated financial statement and related notes appearing in the accompanying
Prospectus.
<TABLE>
<CAPTION>
AT PUBLIC OFFERING OFFERING OF
NOVEMBER 30, 1996 OF PARENT STOCK(A) NOTES(B) AS ADJUSTED
----------------- ------------------ ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Short-term debt:
Warehouse credit facility.......... $ 1,074.8 $ -- $ -- $
============== ============== ======== =========
Long-term debt:
Servicing secured credit
facility......................... 936.2 38.2
Notes.............................. -- --
Other.............................. 21.3 -- --
----------------- ------ ----------- -----------
Total long-term debt.......... 957.5 (38.2)
Stockholder's equity
Common Stock, par value $1.00 per
share, 100 shares authorized,
issued and outstanding........... -- -- --
Additional paid-in capital......... 533.2 38.8 572.0
Retained earnings.................. 24.1 (2.6) -- 21.5
----------------- ------ ----------- -----------
Total stockholder's equity.... 557.3 36.2 -- 593.5
----------------- ------ ----------- -----------
Total capitalization.......... $ 1,514.8 $ (0.0) $ $
============== ============== ======== =========
</TABLE>
(a) Gives effect to the capital injection received from the Parent as part of
the Parent's public offering of common stock in January 1997. The Parent
issued 8,462,500 shares at an initial public offering price of $15.00 per
share. Net proceeds to the Parent were $116,673,100. A portion of the
proceeds was used to repay $70,000,000 principal amount of Parent notes at a
premium of $7,875,000. The remaining proceeds were contributed to the Issuer
and are being used to repay amounts outstanding under the Bank Credit
Agreement. In connection with the repayment of Parent notes, the Issuer paid
dividends of $2.6 million to the Parent for accrued interest on the notes
repaid.
(b) Gives effect to the offering of $ of Medium-Term Notes hereunder.
The Notes will bear interest at %, payable semiannually beginning
and will mature on . The proceeds from the
Notes will be used to repay existing indebtedness of the Issuer. See "Use of
Proceeds."
PS-3
<PAGE> 5
DESCRIPTION OF NOTES
The following summaries of certain provisions of the Notes do not purport
to be complete and are qualified in their entirety by reference to the actual
provisions of the Notes. The particular terms of the Notes contained herein
supplements, and, to the extent inconsistent therewith, replaces, the
description of the general terms and provisions of the Medium-Term Notes as set
forth and described in the accompanying Prospectus and Prospectus Supplement, to
which description reference is hereby made.
The -- % Notes due -- (the "Notes") are Fixed Rate Notes (as defined in the
accompanying Prospectus Supplement) and are part of the Medium-Term Notes series
of Debt Securities of the Issuer described in the accompanying Prospectus and
Prospectus Supplement. The Notes will be issued under an Indenture, dated as of
, 1997 (the "Indenture"), between the Issuer and The Bank of New York,
as trustee (the "Trustee"). The following summaries of certain provisions of the
Notes and the Indenture do not purport to be complete and are qualified in their
entirety by reference to the actual provisions of the Notes and the Indenture,
including the definitions therein of certain terms.
The Indenture does not limit the aggregate principal amount of Debt
Securities that may be issued thereunder and the Issuer may, from time to time,
without the consent of the holders of the Notes, provide for the issuance of
additional Notes or other Debt Securities under the Indenture in addition to the
Notes offered hereby. The Bank Credit Agreement and an indenture relating to
outstanding debt of the Parent contain certain covenants limiting the Issuer's
ability to incur indebtedness. See "Description of Certain Indebtedness" and
"Description of Debt Securities -- General" in the accompanying Prospectus.
The Notes will be unsecured and unsubordinated obligations of the Issuer
and will rank on a parity with other unsecured and unsubordinated indebtedness
of the Issuer. As of , 1997, the Issuer had an aggregate of
$ of indebtedness outstanding, all of which was secured.
Interest on the Notes will be payable semiannually on and
of each year (each, an "Interest Payment Date"), commencing on
, 1997, to the persons in whose names the Notes are registered at
the close of business on the preceding or , as the
case may be (whether or not a Business Day, as defined below). The Notes will
bear interest at the rate per annum shown on the cover of this Pricing
Supplement from --, 1997, or from the most recent date to which interest has
been paid or duly made available for payment to, but excluding, the applicable
Interest Payment Date or the maturity date, as the case may be. Interest payable
at maturity will be payable to the persons to whom principal shall then be
payable. Interest on the Notes will be computed on the basis of a 360-day year
of twelve 30-day months. If an Interest Payment Date or the maturity date of the
Notes falls on a day that is not a Business Day, the payment will be made on the
next succeeding Business Day as if made on the date such payment was due, and no
interest will accrue on such payment for the period from and after such Interest
Payment Date or the maturity date, as the case may be, to the date of such
payment on the next succeeding Business Day. "Business Day" means any day, other
than a Saturday or Sunday, that is neither a legal holiday nor a day on which
banking institutions are authorized or required by law, regulation or executive
order to close in The City of New York. The Notes will mature on --, may not be
redeemed at the option of the Issuer or repaid at the option of the holders
prior to maturity and will not be subject to any sinking fund. See "Description
of Notes" in the accompanying Prospectus Supplement.
The Notes will be issued in book-entry form through the facilities of the
Depository in New York. New York in minimum denominations of $1,000 and integral
multiples thereof. See "Description of Notes -- Book-Entry Notes" in the
accompanying Prospectus Supplement.
PS-4
<PAGE> 6
SUPPLEMENTAL PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in a distribution agreement,
dated , 1997 (the "Distribution Agreement"), as supplemented by a
terms agreement, dated , 1997 (the "Terms Agreement"), relating to the
Issuer's Medium-Term Notes (including the Notes), the Issuer has agreed to sell
to each of the Underwriters named below (the "Underwriters"), and each of the
Underwriters has severally agreed to purchase, the respective principal amount
of the Notes set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
-------------------------------------------------------------------- ----------------
<S> <C>
Chase Securities Inc. .............................................. $
Merrill Lynch, Pierce, Fenner & Smith Incorporated..................
NationsBanc Capital Markets, Inc. ..................................
Smith Barney Inc. ..................................................
----------
Total.................................................. $ ,000,000
</TABLE>
In the Distribution Agreement and the Terms Agreement, the several
Underwriters have agreed, subject to the terms and conditions set forth therein,
to purchase all of the Notes offered hereby if any are purchased.
The Underwriters have advised the Issuer that they propose to offer the
Notes directly to the public at the public offering price set forth on the cover
page of this Pricing Supplement, and to certain dealers at such price less a
concession not in excess of % of the principal amount per Note. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of % of the principal amount per Note to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
The Notes are a new issue of securities with no established trading market.
The Issuer has been advised by the Underwriters that they intend to make a
market in the Notes but are not obligated to do so and may discontinue any
market making at any time without notice. [The Notes will not be listed on any
stock exchange or through the National Association of Securities Dealers
Automated Quotation System,] and there can be no assurance that there will be a
secondary market for the Notes or that there will be liquidity in such market if
one develops.
The Underwriters and/or certain of their affiliates have engaged and may in
the future engage in various investment banking and/or commercial banking
transactions with the Issuer and certain of its affiliates in the ordinary
course of business. See "Plan of Distribution" in the accompanying Prospectus.
Chase, an affiliate of Chase Securities Inc., an Underwriter of the Notes, and
the Merrill Lender, an affiliate of Merrill Lynch an Underwriter of the Notes,
are lenders under the Chase Loan Agreement and the Merrill Loan Agreement,
respectively, each of which is to be repaid in full with the proceeds from the
sale of the Notes offered hereby. In addition, Chase is the administrative agent
and a lender, and NationsBanc, an affiliate of NationsBanc Capital Markets,
Inc., an Underwriter of the Notes, is a lender, in each case under the Bank
Credit Agreement which is to be repaid in part with such proceeds. Aggregate
repayments to Chase, the Merrill Lender and NationsBank would comprise more than
10% of the net proceeds from the offering of the Notes. Accordingly, this
offering of the Notes is being made in accordance with the provisions of Rule
2710(c)(8) of the Conduct Rules of the National Association of Securities
Dealers, Inc. Chase Securities Inc., Merrill Lynch and NationsBanc Capital
Markets, Inc. are each participating in this offering on the same terms as the
other Underwriters and will not receive any benefit in connection with this
offering other than customary managing, underwriting and selling fees.
The Issuer has agreed to indemnify the several Underwriters against, or to
provide contribution with respect to, certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Plan of Distribution" in the
accompanying Prospectus and Prospectus Supplement.
The Underwriters are permitted to engage in certain transactions that
stabilize the price of the Notes. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Notes. If the
Underwriters create a short position in the Notes in connection with the
offering, i.e., if they sell
PS-5
<PAGE> 7
Notes in an aggregate principal amount exceeding that set forth on the cover
page of this Pricing Supplement, the Underwriters may reduce that short position
by purchasing Notes in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Issuer nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Notes. In addition, neither the
Issuer nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
PS-6
<PAGE> 8
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED APRIL 8, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1997)
HOMESIDE LENDING, INC.
MEDIUM-TERM NOTES
DUE NINE MONTHS OR MORE FROM DATE OF ISSUE
------------------------
HomeSide Lending, Inc. (the "Issuer") may offer on a continuing basis up to
$1,000,000,000 aggregate initial offering price of its Medium-Term Notes Due
Nine Months or More From Date of Issue (the "Notes"). Such aggregate initial
offering price is subject to reduction as a result of the sale by the Issuer of
other Debt Securities described in the accompanying Prospectus. Each Note will
mature on any day nine months or more from the date of issue, as specified in
the applicable pricing supplement hereto (each, a "Pricing Supplement"), and may
be subject to redemption at the option of the Issuer or repayment at the option
of the holder thereof, in each case, in whole or in part, prior to its Stated
Maturity Date, if specified in the applicable Pricing Supplement. The Notes will
be issued in minimum denominations of $1,000 and integral multiples thereof,
unless otherwise specified in the applicable Pricing Supplement. All Notes will
be unsecured general obligations of the Issuer and will rank pari passu with all
other unsecured and unsubordinated indebtedness of the Issuer from time to time
outstanding. As of December 31, 1996, the amount of outstanding indebtedness of
the Issuer senior to the Notes was $2,069.0 million.
The Issuer may issue Notes that bear interest at fixed rates ("Fixed Rate
Notes") or at floating rates ("Floating Rate Notes"). The applicable Pricing
Supplement will specify whether a Floating Rate Note is a Regular Floating Rate
Note, a Floating Rate/Fixed Rate Note or an Inverse Floating Rate Note and
whether the rate of interest thereon is determined by reference to one or more
of the CD Rate, the CMT Rate, the Commercial Paper Rate, the Eleventh District
Cost of Funds Rate, the Federal Funds Rate, LIBOR, the Prime Rate or the
Treasury Rate (each, an "Interest Rate Basis"), as adjusted by any Spread and/or
Spread Multiplier. Interest on each Floating Rate Note will accrue from its date
of issue and, unless otherwise specified in the applicable Pricing Supplement,
will be payable monthly, quarterly, semiannually or annually in arrears, as
specified in the applicable Pricing Supplement, and on the Maturity Date. Unless
otherwise specified in the applicable Pricing Supplement, the rate of interest
on each Floating Rate Note will be reset daily, weekly, monthly, quarterly,
semiannually or annually, as specified in the applicable Pricing Supplement.
Interest on each Fixed Rate Note will accrue from its date of issue and, unless
otherwise specified in the applicable Pricing Supplement, will be payable
semiannually in arrears on and of each year and on the Maturity Date.
The Issuer may also issue Discount Notes, Indexed Notes and Amortizing Notes.
The interest rate, or formula for the determination of the interest rate, if
any, applicable to each Note and the other variable terms thereof will be
established by the Issuer on the date of issue of such Note and will be
specified in the applicable Pricing Supplement. Interest rates or formulas and
other terms of Notes are subject to change by the Issuer, but no such change
will affect any Note previously issued or as to which an offer to purchase has
been accepted by the Issuer.
Each Note will be issued in book-entry form (a "Book-Entry Note") or in
fully registered certificated form (a "Certificated Note"), as specified in the
applicable Pricing Supplement. Each Book-Entry Note will be represented by one
or more fully registered global securities (the "Global Securities") deposited
with or on behalf of The Depository Trust Company (or such other depositary
identified in the applicable Pricing Supplement) (the "Depository") and
registered in the name of the Depository or the Depository's nominee. Interests
in the Global Securities will be shown on, and transfers thereof will be
effected only through, records maintained by the Depository (with respect to its
participants) and the Depository's participants (with respect to beneficial
owners). Except in limited circumstances, Book-Entry Notes will not be
exchangeable for Certificated Notes.
SEE "RISK FACTORS" COMMENCING ON PAGE S-12 FOR A DISCUSSION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT, THE PROSPECTUS OR ANY
SUPPLEMENT HERETO. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PRICE TO AGENTS' DISCOUNTS PROCEEDS TO
PUBLIC(1) AND COMMISSIONS(1)(2) ISSUER(1)(3)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note............................. 100% [.125% - .750%] [99.875% - 99.250%]
- ----------------------------------------------------------------------------------------------------------------------------------
Total................................ $1,000,000,000 $ -$ $ -$
==================================================================================================================================
</TABLE>
(1) Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Chase Securities Inc., NationsBanc Capital Markets, Inc. and Smith Barney
Inc. (the "Agents"), individually or in a syndicate, may purchase Notes, as
principal, from the Issuer for resale to investors and other purchasers at
varying prices relating to prevailing market prices at the time of resale as
determined by the applicable Agent or, if so specified in the applicable
Pricing Supplement, for resale at a fixed offering price. Unless otherwise
specified in the applicable Pricing Supplement, any Note sold to an Agent as
principal will be purchased by such Agent at a price equal to 100% of the
principal amount thereof less a percentage of the principal amount equal to
the commission applicable to an agency sale (as described below) of a Note
of identical maturity. If agreed to by the Issuer and an Agent, such Agent
may utilize its reasonable efforts on an agency basis to solicit offers to
purchase the Notes at 100% of the principal amount thereof, unless otherwise
specified in the applicable Pricing Supplement. The Issuer will pay a
commission to an Agent, ranging from [.125% to .750%] of the principal
amount of a Note, depending upon its stated maturity, sold through an Agent.
Commissions with respect to Notes with stated maturities in excess of 30
years that are sold through such Agent will be negotiated between the Issuer
and such Agent at the time of such sale. See "Plan of Distribution."
(2) The Issuer has agreed to indemnify the Agents against, and to provide
contribution with respect to, certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Plan of Distribution."
(3) Before deducting expenses payable by the Issuer estimated at $ .
------------------------
The Notes are being offered on a continuing basis by the Issuer to or
through the Agents. Unless otherwise specified in the applicable Pricing
Supplement, the Notes will not be listed on any securities exchange. There is no
assurance that the Notes offered hereby will be sold or, if sold, that there
will be a secondary market for the Notes or liquidity in the secondary market if
one develops. The Issuer reserves the right to cancel the offer made hereby
without notice. The Issuer or an Agent, if it solicits the offer on an agency
basis, may reject any offer to purchase Notes in whole or in part. See "Plan of
Distribution."
------------------------
MERRILL LYNCH & CO.
CHASE SECURITIES INC.
NATIONSBANC CAPITAL MARKETS, INC.
SMITH BARNEY INC.
The date of this Prospectus Supplement is , 1997.
<PAGE> 9
Unless otherwise referred to herein or in the accompanying Prospectus, or
the context otherwise requires, references to "HomeSide" shall mean HomeSide
Lending, Inc. (the "Issuer"), a Florida corporation, and its consolidated
subsidiaries. The Issuer was formerly known as BancBoston Mortgage Corporation
("BBMC"). The Issuer is an indirect wholly-owned subsidiary of HomeSide, Inc.
(the "Parent"), a Delaware corporation. The Parent was formed in December 1995,
but had no operations prior to its acquisition of BBMC on March 15, 1996
(hereafter the "HLI Acquisition"), which was accounted for as a purchase
transaction. BBMC prior to its acquisition is hereinafter sometimes referred to
as "HLI". The Parent acquired Barnett Mortgage Company ("BMC"), now known as
HomeSide Holdings, Inc. ("HHI"), on May 31, 1996 (the "HHI Acquisition"), which
was accounted for as a purchase transaction. HHI is a wholly-owned subsidiary of
the Parent, and the Issuer is a wholly-owned subsidiary of HHI. All of the
assets and liabilities of HHI, except for certain portions of HHI's GNMA
servicing rights, have been transferred to the Issuer. BBMC and BMC operated on
a fiscal year end of December 31. The Parent, HHI and the Issuer have adopted a
February 28 fiscal year end and all references herein to 1997 refer to the
fiscal year ending February 28, 1997.
All combined or pro forma financial information for HomeSide as of November
30, 1996 or for the period March 16, 1996 to November 30, 1996 has been prepared
using HomeSide information as of November 30, 1996 or for the period beginning
March 16, 1996 and HHI information (excluding the net income related to the
assets retained by HHI) beginning April 1, 1996 to May 30, 1996. All information
for HomeSide presented as of or for the period ended March 31, 1996 has been
prepared by combining information for BBMC for the period ended March 15, 1996
with information for HomeSide for the period March 16, 1996 to March 31, 1996.
HomeSide's executive offices are located at 7301 Baymeadows Way, Jacksonville,
Florida 32256, telephone number (904) 281-3000.
S-2
<PAGE> 10
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information, risk factors and financial statements, including the related notes,
appearing elsewhere in this Prospectus Supplement or the Prospectus. To
understand all of the terms of the Notes, the holders and prospective investors
should read the complete Prospectus, Prospectus Supplement and the relevant
Pricing Supplement, along with the Indenture and forms of Notes filed as
exhibits to the Registration Statement of which this Prospectus Supplement forms
a part. Copies of the Indenture and the forms of Notes are available for
inspection at the corporate trust office of the trustee or upon request from the
Issuer. See also "Additional Information" in the accompanying Prospectus.
HOMESIDE
HomeSide 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 The First National Bank of Boston ("Bank of Boston" or
"BKB") and Barnett Banks, Inc. ("Barnett"). HomeSide's strategy emphasizes
variable cost mortgage origination and low cost servicing. On a combined basis
HomeSide's origination volume and servicing portfolio would have been $14.7
billion and $73.9 billion, respectively, for and as of the year ended December
31, 1995. HomeSide ranks as the 5th largest originator and 7th largest servicer
in the United States for 1996 based on data published by National Mortgage News.
For and as of the nine months ended November 30, 1996, HomeSide's loan
originations and acquisitions were $18.9 billion and its servicing portfolio was
$87.7 billion.
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
such as its existing 5-year agreements to acquire and service residential
mortgage loans from BKB and Barnett production sources, which, for the period
May 31, 1996 through November 30, 1996, represented 19.5% of HomeSide's loan
production. 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 is not higher than
the average cost per employee of its 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 the existing BKB
and Barnett arrangements.
Ownership. The Issuer is an indirect wholly-owned subsidiary of the
Parent. Thomas H. Lee Equity Fund III, L.P. (the "Fund") and certain affiliates
of Thomas H. Lee Company (collectively, "THL"), Madison Dearborn Capital
Partners, L.P. ("MDP"), Bank of Boston and Siesta Holdings, Inc., an affiliate
of Barnett ("Siesta") own in the aggregate approximately 79% of the outstanding
common stock, par value $0.01 per share, of the Parent (the "Common Stock").
THL, MDP, Bank of Boston and Siesta are collectively referred to herein as the
"Principal Shareholders." See "Security Ownership of Certain Beneficial Owners
and Management" in the accompanying Prospectus.
THE NOTES
NOTES OFFERED................. The Notes are being offered by the Issuer on a
continuing basis. The specific terms, including
the maturity date and interest payment dates,
of each Note issued will be set forth in the
applicable Pricing Supplement. See "Description
of Notes."
S-3
<PAGE> 11
AMOUNT........................ The Notes are currently limited to up to
$1,000,000,000 aggregate initial offering
price. The Indenture does not limit the
aggregate principal amount of Debt Securities
that the Issuer may issue. See "Description of
Notes".
RANKING....................... The Notes will be unsecured and will rank pari
passu with all other unsecured and
unsubordinated indebtedness of the Issuer. As
of February 28, 1997, the amount of outstanding
indebtedness of the Issuer senior to the Notes
was $ million. See "Description of Debt
Securities" in the accompanying Prospectus.
REDEMPTION OR REPAYMENT....... The Notes will not be subject to any sinking
fund and will not be subject to redemption at
the option of the Issuer or repayment at the
option of the holders prior to the Stated
Maturity Date unless otherwise specified in the
applicable Pricing Supplement. See "Description
of Notes".
MERGER OR SALE................ The Indenture does not provide holders any
protection should there be a highly leveraged
transaction involving the Issuer. The Indenture
allows the Issuer to merge or consolidate with
another company, or sell all or substantially
all of its assets to another company. If these
events occur, the other company will be
required to assume the Issuer's
responsibilities on the Notes, and the Issuer
will be released from all liabilities and
obligations. See "Description of Debt
Securities" in the accompanying Prospectus.
USE OF PROCEEDS............... Except as otherwise specified in the applicable
Pricing Supplement, the net proceeds from the
sale of the Notes will be used to reduce
amounts outstanding under the Issuer's Bank
Credit Agreement (as defined herein) or to
repay other outstanding indebtedness and for
working capital and general corporate purposes,
including the purchase of servicing rights. See
"Use of Proceeds" in the accompanying
Prospectus.
DEFEASANCE.................... The Issuer may discharge the Notes at any time
by depositing sufficient funds with the trustee
under the Indenture to pay the obligations when
due. All amounts due to the holders on the
Notes would be paid by the Trustee from the
deposited funds. See "Description of Debt
Securities" in the accompanying Prospectus.
EVENTS OF DEFAULT; REMEDIES... If any of the following Events of Default
occurs under the Notes, the Indenture provides
the remedies set forth below:
Events of Default
- Principal not paid when due
- Sinking fund payment not made when due
- Failure to pay interest for 30 days
- Covenants not performed for 60 days
- Acceleration in excess of $25,000,000 in
principal amount of other debt not rescinded
in 10 days after notice
S-4
<PAGE> 12
- Failure by the Issuer or any subsidiary to
pay within 60 days any uninsured judgment or
court order for the payment of money in
excess of $25,000,000
- Certain events in bankruptcy, insolvency or
reorganization of the Issuer or any
subsidiary
- Any other event of default in the Indenture
Remedies
The trustee under the Indenture or holders of
25% of the principal amount of Notes outstanding
may declare principal immediately payable,
subject to rescission by a majority in principal
amount of the holders, except that upon the
occurrence of certain events in bankruptcy,
insolvency or reorganization as described above,
principal shall become immediately due and
payable without any act by the trustee or any
holder.
RISK FACTORS
See "Risk Factors" starting on page S-12 for a discussion of certain
factors which should be considered by prospective investors in evaluating an
investment in the securities offered hereby.
S-5
<PAGE> 13
HOMESIDE
SUMMARY UNAUDITED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The following table sets forth summary unaudited historical consolidated
financial and operating information for the Issuer and its subsidiaries for the
period ended May 31, 1996, for each of the three months ended August 31, 1996
and November 30, 1996 and for the period March 16, 1996 to November 30, 1996. As
a result of the acquisition of HHI by the Parent on May 31, 1996, certain assets
and liabilities were transferred to the Issuer and consequently are included in
results for HomeSide as of and for the period commencing May 31, 1996. Such
information should be read in conjunction with, and is qualified in its entirety
by reference to, HomeSide's consolidated financial statements, pro forma
financial information and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE FOR THE PERIOD
FOR THE PERIOD MONTHS ENDED MONTHS ENDED MARCH 16, 1996
MARCH 16, 1996 AUGUST 31, NOVEMBER 30, TO NOVEMBER 30,
TO MAY 31, 1996 1996 1996 1996
--------------- -------------- ---------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Mortgage servicing fees.......... $ 41,485 $ 82,179 $ 90,492 $ 214,156
Amortization of mortgage
servicing rights............... (16,442) (39,753) (48,120) (104,315)
----------- ----------- ----------- -----------
Net servicing revenue.......... 25,043 42,426 42,372 109,841
Interest income.................. 12,719 22,270 25,241 60,230
Interest expense................. (12,592) (17,684) (16,140) (46,416)
----------- ----------- ----------- -----------
Net interest revenue........... 127 4,586 9,101 13,814
Net mortgage origination
revenue........................ 10,810 16,273 16,521 43,604
Other income..................... 107 355 79 541
----------- ----------- ----------- -----------
Total revenues......... 36,087 63,640 68,073 167,800
Expenses:
Salaries and employee benefits... 11,480 21,177 20,650 53,307
Occupancy and equipment.......... 1,846 3,084 3,337 8,267
Servicing losses on
investor-owned loans........... 3,938 4,058 4,957 12,953
Other expenses................... 5,345 12,196 11,391 28,932
----------- ----------- ----------- -----------
Total expenses......... 22,609 40,515 40,335 103,459
Income before income taxes....... 13,478 23,125 27,738 64,341
Income tax expense............... 5,526 9,481 11,373 26,380
----------- ----------- ----------- -----------
Net income(e).................... $ 7,952 $ 13,644 $ 16,365 $ 37,961
=========== =========== =========== ===========
SELECTED OPERATING DATA:
Volume of loans originated and
acquired....................... $ 3,780,236 $ 9,565,199(b) $ 5,540,875 $18,886,310(b)
Loan servicing portfolio
(at period end)................ 77,351,849 84,818,725(b) 87,712,746 87,712,746
Loan servicing portfolio
(average during the period).... 43,670,497(a) 81,223,664 86,535,928 69,643,494(c)
Weighted average interest rate
for the servicing portfolio (at
period end).................... 7.86% 7.92% 7.91% 7.91%
Weighted average servicing fee
for the servicing portfolio (at
period end).................... 0.367% 0.363% 0.359% 0.359%
EBITDA(d)........................ $ 43,743 $ 83,720 $ 93,868 $ 221,331
Cash flows (used in) provided by:
Operating activities........... (127,037) (210,540) 168,591 (168,986)
Investing activities........... (363,156) (205,776) (106,784) (675,716)
Financing activities........... 748,607 185,893 (88,615) 845,885
Ratio of EBITDA to total interest
expense........................ 3.47x 4.73x 5.82x 4.77x
</TABLE>
(footnotes on following page)
S-6
<PAGE> 14
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT AT AT
MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996
------------ --------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Mortgage loans held for sale...................... $ 974,484 $1,290,841 $1,101,229
Mortgage servicing rights......................... 1,216,106 1,409,226 1,321,639
Total assets...................................... 2,640,669 2,909,346 2,833,601
Warehouse credit facility......................... 954,994 1,245,591 1,074,583
Long-term debt(e)................................. 968,059 864,067 957,508
Total liabilities................................. 2,101,703 2,356,705 2,276,265
Total stockholder's equity........................ 538,966 552,641 557,336
- ---------------
(a) Period information is for the period March 1, 1996 through May 31, 1996.
(b) Includes bulk purchases of $4.1 billion.
(c) Period information is for the period March 1, 1996 through November 30,
1996.
(d) EBITDA represents earnings before total other interest expense, taxes,
depreciation and amortization, including amortization of mortgage servicing
rights. Total other interest expense excludes interest expense to fund
mortgage loans held for sale of $11.2 million, $18.0 million, $18.5 million,
and $47.7 million for the period March 16, 1996 to May 31, 1996, the three
months ended August 31, 1996 and November 30, 1996, and the period March 16,
1996 to November 30, 1996, respectively. Depreciation and amortization,
excluding amortization of mortgage servicing rights, was $1.2 million, $3.2
million, $1.9 million and $6.3 million, respectively, for these periods. In
addition to EBITDA, other major elements of cash flows from investing and
financing activities are important in determining available cash flow. Cash
flows used in operating activities totaled $127.0 million, $210.5 million
and $169.0 million for the period March 16, 1996 to May 31, 1996, the three
months ended August 31, 1996 and the period March 16, 1996 to November 30,
1996, respectively, and cash flows provided by operating activities totaled
$168.6 million for the three months ended November 30, 1996. EBITDA includes
substantially all expenditures for operating expenses.
Cash flows used in investing activities were $363.2 million, $205.8 million,
$106.8 million and $675.7 million for the period March 16, 1996 to May 31,
1996, the three months ended August 31, 1996 and November 30, 1996 and the
period March 16, 1996 to November 30, 1996, respectively. Significant
adjustments to EBITDA from investing activities include the value of
originated mortgage servicing rights (OMSR), cash purchases and proceeds
from risk management contracts, the purchase of mortgage servicing rights.
Revenue from OMSR represents a future cash flow stream and therefore should
be excluded from the determination of the current period's cash flow. OMSR
totaled $3.4 million, $3.8 million, $2.0 million, and $9.2 million for the
period ended March 16, 1996 to May 31, 1996, the three months ended August
31, 1996 and November 30, 1996 and the period March 16, 1996 to November 30,
1996, respectively. During the period March 16, 1996 to November 30, 1996,
cumulative gains and losses on risk management contracts resulted in $60.2
million net gain which reduced the cost basis of mortgage servicing rights
at November 30, 1996 and $88.4 million in cash expenditures was excluded
from net income for the period ended November 30, 1996. The Issuer also
purchases mortgage servicing rights which totaled $77.6 million, $162.8
million, $94.6 million, and $335.0 million for the period March 16, 1996 to
May 31, 1996, the three months ended August 31, 1996 and November 30, 1996,
and the period March 16, 1996 to November 30, 1996, respectively. A portion
of the available financing under the Bank Credit Agreement is based upon the
market value of mortgage servicing rights. Both OMSR and purchases of
mortgage servicing rights increase the available cash flow under the Bank
Credit Agreement.
The Bank Credit Agreement, as hereinafter defined, represents the major
source of financing for cash flows. Cash flow provided by financing
activities totaled $748.6 million, $185.9 million and $845.9 million for the
period March 16, 1996 to May 31, 1996, the three months ended August 31,
1996 and the period March 16, 1996 to November 30, 1996, respectively. Cash
flow used in financing activities was $88.6 million for the three months
ended November 30, 1996. Unused line of credit (i.e., the difference between
the total amount outstanding under the Bank Credit Agreement and the total
amount available thereunder) totaled approximately $489.2 million at
November 30, 1996.
Management believes that the presentation of EBITDA facilitates the reader's
evaluation of the Issuer's debt service capacity, and that EBITDA is a
generally recognized statistic for performing such evaluations. EBITDA
should not be considered as an alternative to net income as an indicator of
the Issuer's operating performance or to cash flow as a measure of
liquidity, but rather to provide additional information related to the
Issuer's ability to service debt.
(e) On May 14, 1996 the Parent issued $200 million of 11.25% Notes due 2003. All
of the outstanding common stock of HomeSide and HHI is pledged as security
on the notes. The only significant asset of the Parent is its investment in
HomeSide and HHI common stock. The Parent is dependent on cash payments from
HomeSide to service its debt obligations. The notes, and related interest
expense, are not reflected in the financial statements of HomeSide.
</TABLE>
- --------------------------------------------------------------------------------
S-7
<PAGE> 15
- --------------------------------------------------------------------------------
HOMESIDE
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The summary unaudited pro forma consolidated financial information for
HomeSide set forth below has been derived from financial information included in
the accompanying Prospectus and all such information is presented on a pro forma
basis, giving effect to the HHI Acquisition and the HLI Acquisition by the
Parent. In addition, the unaudited pro forma consolidated financial information
gives effect to the issuance of Common Stock by the Parent to the public as if
such transaction occurred on March 16, 1996, for income statement data as if
each such transaction had occurred on March 15, 1996. The unaudited pro forma
consolidated financial information does not purport to represent what HomeSide's
results of operations would have been if the HLI Acquisition and the HHI
Acquisition had actually been completed as of the dates indicated and is not
intended to project HomeSide's financial position or results of operations for
any future period. The following summary information should be read in
conjunction with, and is qualified in its entirety by reference to, the
historical financial statements of BBMC and HHI and the unaudited pro forma
consolidated financial information for HomeSide and the related notes thereto
included in the accompanying Prospectus.
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
PERIOD THREE FOR THE PERIOD
FOR THE YEAR MARCH 16, MONTHS THREE MARCH 16,
ENDED 1996 ENDED MONTHS ENDED 1996 TO
DECEMBER 31, TO MAY 31, AUGUST 31, NOVEMBER 30, NOVEMBER 30,
1995 1996 1996 1996 1996
------------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues:
Mortgage servicing fees........................ $ 296.4 $ 61.3 $ 82.1 $ 90.5 $ 233.9
Gain on risk management contracts(a)........... 108.7 -- -- -- --
Amortization of mortgage servicing rights...... (170.0) (25.7) (39.8) (48.1) (113.6)
-------- -------- -------- -------- --------
Net servicing revenue........................ 235.1 35.6 42.3 42.4 120.3
Interest income................................ 66.9 19.3 22.3 25.2 66.8
Interest expense............................... (49.0) (15.3) (17.7) (16.0) (49.0)
-------- -------- -------- -------- --------
Net interest revenue......................... 17.9 4.0 4.6 9.2 17.8
Net mortgage origination revenue............... 0.7 11.8 16.3 16.5 44.6
Other income................................... 0.7 0.1 0.4 0.1 0.6
-------- -------- -------- -------- --------
Total revenues........................ 254.4 51.5 63.6 68.2 183.3
Total expenses........................ 142.7 35.3 40.6 40.3 116.2
-------- -------- -------- -------- --------
Income before income taxes..................... 111.7 16.2 23.0 27.9 67.1
Income tax expense............................. 45.7 6.7 9.5 11.5 27.7
-------- -------- -------- -------- --------
Net income(e).................................. $ 66.0 $ 9.5 $ 13.5 $ 16.4 $ 39.4
======== ======== ======== ======== ========
SELECTED OPERATING DATA:
Volume of loans originated and acquired........ $ 14,652 $ 4,762 $ 9,565(c) $ 5,541 $ 19,868(c)
Loan servicing portfolio (at period end)....... 73,886 77,352 84,819(c) 87,713 87,713
Loan servicing portfolio (average during the
period)...................................... 68,873 76,708(b) 81,224 86,536 69,643(d)
Weighted average interest rate for the
servicing portfolio (at period end).......... 8.01% 7.86% 7.92% 7.91% 7.91%
Weighted average servicing fee for the
servicing portfolio (at period end).......... 0.351% 0.355% 0.363% 0.359% 0.359%
</TABLE>
(footnotes on following page)
- --------------------------------------------------------------------------------
S-8
<PAGE> 16
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT NOVEMBER 30, 1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
SELECTED BALANCE SHEET DATA:
Total assets...................................................................... $2,833,601
Warehouse credit facility......................................................... 1,074,583
Long-term debt(e)................................................................. 957,508
Total liabilities................................................................. 2,276,265
Total stockholder's equity........................................................ 557,336
</TABLE>
- ---------------
(a) The non-cash portion of gain on risk management contracts was $86.5 million
pro forma HomeSide for the HLI Acquisition and HHI Acquisition for the year
ended December 31, 1995. See Note 3 of HomeSide's November 30, 1996
financial statements on F-5 in the accompanying Prospectus for a description
of HomeSide's hedge accounting policy.
(b) Period information is for the period March 1, 1996 through May 31, 1996.
(c) Includes bulk purchases of $4.1 billion.
(d) Period information is for the period March 1, 1996 through November 30,
1996.
(e) On May 14, 1996, the Parent issued $200 million of 11.25% Notes due 2003.
All of the outstanding common stock of HomeSide and HHI is pledged as
security on the notes. The only significant asset of the Parent is its
investment in HomeSide common stock. The Parent is dependent on cash
payments from HomeSide to service its debt obligations. The notes, and
related interest expense, are not reflected in the financial statements of
HomeSide.
- --------------------------------------------------------------------------------
S-9
<PAGE> 17
- -------------------------------------------------------------------------------
HLI (ACQUIRED BY HOMESIDE, INC. ON MARCH 15, 1996 AND NOW KNOWN AS HOMESIDE
LENDING, INC.)
Summary Historical Consolidated Financial and Operating Information
<TABLE>
The following table sets forth summary historical consolidated financial
and operating information for HLI (formerly BancBoston Mortgage Corporation) for
the periods prior to its acquisition by the Parent. Such information should be
read in conjunction with, and is qualified in its entirety by reference to, the
consolidated financial statements, pro forma financial information and related
notes included in the accompanying Prospectus.
<CAPTION>
FOR THE THREE FOR THE PERIOD
YEARS ENDED DECEMBER 31, MONTHS ENDED JANUARY 1,
------------------------------------------------------------------- MARCH 31, 1996 TO MARCH 15,
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Mortgage servicing fees.... $ 92,362 $ 105,890 $ 111,822 $ 140,491 $ 173,038 $ 43,657 $ 38,977
Gain (loss) on risk
management contracts..... -- -- 6,688 (6,702) 108,702 3,612 (128,795)
Amortization of mortgage
servicing rights......... (37,213) (73,908) (112,492) (66,801) (108,013) (23,103) (7,245)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net servicing revenue.... 55,149 31,982 6,018 66,988 173,727 24,166 (97,063)
Interest income............ 41,252 46,865 50,156 31,585 24,324 4,122 8,423
Interest expense........... (27,686) (38,855) (44,199) (33,952) (27,128) (6,079) (10,089)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest revenue..... 13,566 8,010 5,957 (2,367) (2,804) (1,957) (1,666)
Net mortgage origination
revenue (expense)........ 6,508 1,123 6,173 4,983 3,417 (1,083) 7,638
Gain on sales of servicing
rights................... 12,034 14,769 651 10,862 10,230 4,285 --
Other income............... 52 17 50 147 511 13 253
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues..... 87,309 55,901 18,849 80,613 185,081 25,424 (90,838)
Expenses:
Salaries and employee
benefits............... 27,328 30,053 33,096 40,370 45,381 11,696 10,287
Occupancy and equipment.. 7,809 7,788 7,966 9,012 10,009 2,358 2,041
Servicing losses on
investor-owned loans... 2,880 8,138 2,770 7,177 9,981 733 5,560
Real estate acquired..... 1,195 1,124 1,600 253 1,054 218 291
Other expenses........... 17,552 20,461 22,058 19,326 21,896 4,713 7,377
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses..... 56,764 67,564 67,490 76,138 88,321 19,718 25,556
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes and cumulative
effects of changes in
accounting principles.... $ 30,545 $ (11,663) $ (48,641) $ 4,475 $ 96,760 $ 5,706 $ (116,394)
=========== =========== =========== =========== =========== =========== ===========
Net income (loss).......... $ 18,377 $ (7,834) $ (85,185) $ 5,405 $ 58,826 $ 3,429 $ (73,861)
=========== =========== =========== =========== =========== =========== ===========
SELECTED OPERATING DATA:
Volume of loans originated
and acquired............. $ 5,196,996 $ 9,705,875 $13,682,761 $14,473,000 $ 9,567,521 $ 1,181,642 $ 4,187,603(a)
Loan servicing portfolio
(at period end).......... 20,600,569 23,705,642 27,999,100 37,971,200 41,555,354 37,800,120 44,158,163(a)
Loan servicing portfolio
(average)................ 19,663,100 22,153,100 25,852,400 33,178,600 39,283,700 38,099,730 43,158,072(a)
Weighted average interest
rate (at period end)..... 9.65% 9.05% 8.07% 7.91% 7.97% 7.90% 7.92%(a)
Weighted average servicing
fee (average for
period).................. 0.400% 0.390% 0.372% 0.389% 0.383% 0.384% 0.380%(a)
SELECTED BALANCE SHEET
DATA (AT PERIOD END):
Mortgage loans held for
sale..................... $ 507,776 $ 495,455 $ 607,506 $ 271,215 $ 388,436 $ 70,978 $ 641,465
Mortgage servicing
rights................... 296,393 337,307 281,727 431,148 551,338 414,974 542,862
Total assets............... 1,034,269 1,073,686 1,193,583 1,006,887 1,254,303 858,001 1,512,902
Note payable to parent..... 748,827 799,992 1,019,011 779,021 966,000 648,499 1,256,000
Total liabilities.......... 818,890 866,141 1,071,223 879,122 1,067,712 726,807 1,400,172
Total stockholder's
equity................... 215,379 207,545 122,360 127,765 186,591 131,194 112,730
- ---------------
(a) Period information is for the period January 1, 1996 to March 31, 1996 and
period end information is at March 31, 1996.
</TABLE>
- --------------------------------------------------------------------------------
S-10
<PAGE> 18
HHI (ACQUIRED BY HOMESIDE, INC. ON MAY 31, 1996 AND NOW KNOWN AS HOMESIDE
HOLDINGS, INC.)
Summary Historical Consolidated Financial and Operating Information
The following table sets forth summary historical consolidated financial
and operating information for HHI (formerly Barnett Mortgage Company) for the
periods prior to its acquisition by the Parent. Such information should be read
in conjunction with, and is qualified in its entirety by reference to, the
consolidated financial statements, pro forma financial information and related
notes included in the accompanying Prospectus.
<TABLE>
<CAPTION>
FOR THE
THREE FOR THE
YEARS ENDED DECEMBER 31, MONTHS ENDED PERIOD APRIL
------------------------------------------------------ JUNE 30, 1, 1996 TO
1991 1992 1993 1994(a) 1995(b) 1995 MAY 30, 1996
------- ------- -------- -------- -------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Mortgage origination revenue:
Mortgage origination fees...... $ -- $ -- $ 358 $ 3,276 $ 17,104 $ 3,469 $ 1,646
Gain (loss) on sales of loans,
net.......................... 3,184 8,187 5,688 692 (13,920) 995 (3,383)
------- ------- -------- -------- -------- -------- --------
Total mortgage origination
revenue................. 3,184 8,187 6,046 3,968 3,184 4,464 (1,737)
Interest income (expense):
Interest income................ 765 657 855 3,460 27,264 4,420 5,638
Interest expense, substantially
all to affiliates............ (568) (531) (1,415) (4,911) (20,427) (6,766) (3,480)
------- ------- -------- -------- -------- -------- --------
Net interest income
(expense)............... 197 126 (560) (1,451) 6,837 (2,346) 2,158
Mortgage servicing revenue:
Mortgage servicing income...... 10,143 13,427 20,560 27,130 83,502 22,439 15,709
Mortgage servicing income from
affiliates................... 6,986 16,143 18,326 20,017 25,057 6,407 5,464
Amortization of capitalized
mortgage servicing rights.... (2,453) (6,013) (11,547) (17,783) (48,282) (12,124) (8,456)
Gain on sales of servicing..... -- -- -- -- 9,096 -- --
------- ------- -------- -------- -------- -------- --------
Net mortgage servicing
revenue................. 14,676 23,557 27,339 29,364 69,373 16,722 12,717
Other income.................... 2,860 7,750 6,296 4,492 2,592 6,203 1,678
------- ------- -------- -------- -------- -------- --------
Total revenues............ 20,917 39,620 39,121 36,373 81,986 25,043 14,816
Expenses:
Salaries and benefits.......... 7,778 13,698 13,914 17,474 53,070 14,301 10,402
General and administrative..... 10,349 11,401 12,432 14,924 41,849 12,119 6,816
Affiliate profit sharing....... 1,699 12,471 10,774 3,534 6,242 -- --
Occupancy and equipment........ 1,091 1,167 1,810 2,702 5,960 2,424 1,569
Amortization of goodwill....... -- -- -- 259 4,840 1,673 928
------- ------- -------- -------- -------- -------- --------
Total expenses............ 20,917 38,737 38,930 38,893 111,961 30,517 19,715
------- ------- -------- -------- -------- -------- --------
Income (loss) before income
taxes.......................... $ 0 $ 883 $ 191 $ (2,520) $(29,975) $ (5,474) $ (4,899)
======= ======= ======== ======== ======== ======== ========
Net income (loss)............... $ (34) $ 17 $ 104 $ (2,058) $(20,386) $ (3,356) $ (3,985)
======= ======= ======== ======== ======== ======== ========
SELECTED OPERATING DATA (DOLLARS
IN MILLIONS):
Volume of loans originated and
acquired....................... $ 1,945 $ 3,507 $ 3,360 $ 3,410 $ 5,767 $ 1,330 $ 982
Loan servicing portfolio (at
period end).................... 10,034 11,524 13,085 18,411 33,411 33,070 (d)
Loan servicing portfolio
(average)...................... 9,639 10,779 12,305 15,748 30,669 32,839 33,057
Weighted average interest rate
(at period end)(c)............. -- -- 7.34% 7.44% 8.05% 7.98% (d)
Weighted average servicing fee
(average for period)(c)........ -- -- 0.259% 0.261% 0.299% 0.301% 0.346%
SELECTED BALANCE SHEET DATA (AT
PERIOD END):
Mortgage loans held for sale.... $ -- $ -- $ -- $183,914 $465,880 $331,184 (e)
Mortgage servicing rights....... 12,959 25,458 48,941 92,461 250,788 259,796 (e)
Total assets.................... 42,082 61,166 96,186 359,472 994,630 857,046 (e)
Notes payable................... 16,107 20,325 63,329 248,214 653,056 503,000 (e)
Total liabilities............... 22,676 38,541 69,930 274,570 762,802 612,311 (e)
Total stockholder's equity...... 19,406 22,625 26,257 84,902 231,828 244,735 (e)
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE PERIOD
JUNE 30, JANUARY 1, 1996
1995 TO MAY 30, 1996
------------ ---------------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Mortgage origination revenue:
Mortgage origination fees...... $ 6,005 $ 7,288
Gain (loss) on sales of loans,
net.......................... 1,514 482
-------- ---------
Total mortgage origination
revenue................. 7,519 7,770
Interest income (expense):
Interest income................ 7,003 14,216
Interest expense, substantially
all to affiliates............ (9,685) (9,574)
-------- ---------
Net interest income
(expense)............... (2,682) 4,642
Mortgage servicing revenue:
Mortgage servicing income...... 35,723 38,833
Mortgage servicing income from
affiliates................... 12,503 13,626
Amortization of capitalized
mortgage servicing rights.... (20,475) (25,467)
Gain on sales of servicing..... -- --
-------- ---------
Net mortgage servicing
revenue................. 27,751 26,992
Other income.................... 7,054 1,740
-------- ---------
Total revenues............ 39,642 41,144
Expenses:
Salaries and benefits.......... 23,433 25,173
General and administrative..... 20,403 20,748
Affiliate profit sharing....... -- --
Occupancy and equipment........ 3,941 3,720
Amortization of goodwill....... 2,226 2,324
-------- ---------
Total expenses............ 50,003 51,965
-------- ---------
Income (loss) before income
taxes.......................... $(10,361) $ (10,821)
======== =========
Net income (loss)............... $ (7,484) $ (8,343)
======== =========
SELECTED OPERATING DATA (DOLLARS
IN MILLIONS):
Volume of loans originated and
acquired....................... $ 2,886 $ 2,538
Loan servicing portfolio (at
period end).................... 33,070 (d)
Loan servicing portfolio
(average)...................... 28,153 33,182
Weighted average interest rate
(at period end)(c)............. 7.98% (d)
Weighted average servicing fee
(average for period)(c)........ 0.299% 0.337%
SELECTED BALANCE SHEET DATA (AT
PERIOD END):
Mortgage loans held for sale.... $331,184 (e)
Mortgage servicing rights....... 259,796 (e)
Total assets.................... 857,046 (e)
Notes payable................... 503,000 (e)
Total liabilities............... 612,311 (e)
Total stockholder's equity...... 244,735 (e)
</TABLE>
- ---------------
(a) Includes operations of Loan America Financial Corporation since its
acquisition in October 1994.
(b) Includes operations of BancPLUS Financial Corporation since its acquisition
in February 1995.
(c) Information not available for 1991 and 1992.
(d) BMC was acquired by HomeSide on May 31, 1996 and, accordingly, its servicing
portfolio is included in HomeSide's servicing portfolio as of May 31, 1996.
(e) BMC was acquired by HomeSide on May 31, 1996 and, accordingly, all of its
assets and liabilities are included in the consolidated balance sheet of
HomeSide as of May 31, 1996.
S-11
<PAGE> 19
RISK FACTORS
In addition to the other information in this Prospectus Supplement and the
accompanying Prospectus, the following factors should be considered carefully
before investing in the securities offered hereby.
The Notes are not an appropriate investment for investors who are
unsophisticated with respect to transactions involving the applicable interest
rate or other indices or formulas. Prospective investors should carefully
consider, among other factors, the matters described below.
VOLATILITY OF INTEREST RATE INDICES; REDEMPTION FEATURES
An investment in Notes indexed, as to principal, premium, if any, and/or
interest, if any, to one or more interest rate or other indices or formulas,
either directly or inversely, entails significant risks that are not associated
with similar investments in a conventional fixed rate or floating rate debt
security. Such risks include, without limitation, the possibility that such
indices or formulas may be subject to significant changes, that no interest will
be payable in respect of such Notes or will be payable at a rate lower than one
applicable to a conventional fixed rate or floating rate debt security issued by
the Issuer at the same time, that repayment of the principal and/or premium, if
any, in respect of such Notes may occur at times other than that expected by the
investors, and that the investors could lose all or a substantial portion of
principal and/or premium, if any, payable with respect to such Notes on the
Maturity Date (as defined under "Description of Notes--General"). Such risks
depend on a number of interrelated factors, including economic, financial and
political events, over which the Issuer has no control. Additionally, if the
formula used to determine the amount of principal, premium, if any, and/or
interest, if any, payable with respect to such Notes contains a multiplier or
leverage factor, the effect of any change in the applicable index or indices or
formula or formulas will be magnified. In recent years, values of certain
indices and formulas have been highly volatile and such volatility may be
expected to continue in the future. Fluctuations in the value of any particular
index or formula that have occurred in the past are not necessarily indicative,
however, of fluctuations that may occur in the future.
Any optional redemption feature of Notes might affect the market value of
such Notes. Since the Issuer may be expected to redeem such Notes when
prevailing interest rates are relatively low, holders generally will not be able
to reinvest the redemption proceeds in a comparable security at an effective
interest rate as high as the current interest rate on such Notes.
ABSENCE OF PUBLIC MARKET; NO LISTING
Prior to the offering of any Notes hereby, there has been no public market
for such Notes and there can be no assurance that an active trading market for
such Notes will develop after this offering or if one does develop, the
continued liquidity of such market, or as to the price at which holders would be
able to sell such Notes. Unless otherwise specified in the applicable Pricing
Supplement, HomeSide does not intend to apply for listing of the securities
offered hereby on any securities exchange or through the National Association of
Securities Dealers Automated Quotation System. See "Plan of Distribution."
The secondary market, if any, for Notes will be affected by a number of
factors independent of the creditworthiness of the Issuer and the value of the
applicable index or indices or formula or formulas, including the complexity and
volatility of each such index or formula, the method of calculating the
principal, premium, if any, and/or interest, if any, in respect of such Notes,
the time remaining to the maturity of such Notes, the outstanding amount of such
Notes, any redemption features of such Notes, the amount of other debt
securities linked to such index or formula and the level, direction and
volatility of market interest rates generally. Such factors also will affect the
market value of such Notes. In addition, certain Notes may be designed for
specific investment objectives or strategies and, therefore, may have a more
limited secondary market and experience more price volatility than conventional
debt securities. Holders may not be able to sell such Notes readily or at prices
that will enable them to realize their anticipated yield. No investor should
purchase Notes unless such investor understands and is able to bear the risk
that such Notes may not be readily saleable, that the value of such Notes will
fluctuate over time and that such fluctuations may be significant.
S-12
<PAGE> 20
CREDIT RATINGS
The credit ratings assigned to the Issuer's medium-term note program may
not reflect the potential impact of all risks related to structure and other
factors on the value of the Notes. Accordingly, prospective investors should
consult their own financial and legal advisors as to the risks entailed by an
investment in the Notes and the suitability of investing in such Notes in light
of their particular circumstances.
SUBSTANTIAL LEVERAGE
HomeSide requires substantial financing for its business operations. Such
financing is currently provided under a credit agreement entered into by the
Issuer on January 31, 1997, which amended and restated the credit agreement
originally entered into in connection with the HHI Acquisition (as amended and
restated, the "Bank Credit Agreement"). As of November 30, 1996, the Issuer had
aggregate outstanding indebtedness of approximately $2,010.8 million, and $489.2
million of additional availability under the Bank Credit Agreement. HomeSide may
incur additional indebtedness in the future, subject to certain limitations
contained in the instruments governing its current indebtedness. See
"Description of Certain Indebtedness -- Bank Credit Agreement" in the
accompanying Prospectus. The financial statements of the Issuer do not reflect
debt issued by the Parent. See Note 7 of Notes to Consolidated Financial
Statements of HomeSide on F-11 and "Description of the Parent Notes" in the
accompanying Prospectus.
The degree to which HomeSide is leveraged could have important consequences
to holders of the securities offered hereby, including the following: (i)
HomeSide's ability to grow will depend 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, and that
ability may be impaired; (ii) a substantial portion of HomeSide's cash flow from
operations must be dedicated to the payment of the principal of and interest on
its indebtedness, thereby reducing the funds available to finance operations;
and (iii) HomeSide may be more highly leveraged than certain of its competitors,
which may place HomeSide at a competitive disadvantage and make it more
vulnerable to economic downturns.
POTENTIAL NON-AVAILABILITY OF FUNDING SOURCES
In order to operate its business, HomeSide requires substantial financing.
To the extent that HomeSide is not successful in negotiating renewals of its
current borrowings or in arranging new financing, it may have to curtail its
origination activities and/or sell significant portions of its servicing
portfolio, which would have a material adverse effect on HomeSide's business and
results of operations. Among the factors that will affect the Issuer's ability
to refinance its bank credit facilities or the securities offered hereby are
financial market conditions and the value and performance of the Issuer prior to
the time of such refinancing. There can be no assurance that any such
refinancing can be successfully completed. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
HomeSide -- for the Period March 16, 1996 to November 30, 1996 and the Three
Months Ended November 30, 1996 -- Liquidity and Capital Resources," "Description
of Certain Indebtedness -- Bank Credit Agreement," "Description of the Parent
Notes" and "Description of Debt Securities" in the accompanying Prospectus.
LIMITED OPERATING HISTORY AS AN INDEPENDENT COMPANY; RELATIONSHIP WITH BKB AND
BARNETT
Prior to the consummation of the HLI Acquisition, HLI was a wholly-owned
subsidiary of BKB, and prior to the HHI Acquisition, HHI was a wholly-owned
subsidiary of Barnett. Each has engaged in various intercompany transactions and
arrangements with, and was provided certain administrative services by, its
parent. As a former subsidiary of a national bank and a bank holding company,
HLI and HHI, respectively, have benefitted from their ability to finance certain
acquisitions, their loan production funding and to a lesser extent, their
capital expenditure and working capital requirements, through borrowings from
their respective parents. Following the consummation of the HLI Acquisition,
certain arrangements, including all borrowing arrangements, with BKB were
terminated or modified and, following the consummation of the HHI Acquisition,
such arrangements with Barnett were similarly terminated or modified.
Accordingly, HomeSide no longer relies on such entities and has a limited
history operating as an independent company, and there can be no assurances that
it will be able to successfully operate as an independent company. See "Certain
Relationships and Related Transactions" in the accompanying Prospectus.
S-13
<PAGE> 21
IMPACT OF CHANGES IN INTEREST RATES
Changes in interest rates can have a variety of effects on HomeSide's
business. In particular, changes in interest rates 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 HomeSide's
servicing portfolio.
During periods of declining interest rates, HomeSide typically experiences
an increase in loan originations because of increased home purchases and,
particularly, increased refinancing activity. During 1990 to 1993, a period of
generally declining interest rates, refinancing activity as a percentage of
total originations in the industry increased from 13% in 1990 to 55% in 1993. In
contrast, refinancing activity decreased to 32% of total originations in 1994
and 25% in 1995 as the result of generally increasing interest rates. Increases
in interest rates may adversely affect refinancing activity, which could have an
adverse effect on HomeSide's origination revenues.
HomeSide's loans held for sale are generally funded by borrowings under its
revolving warehouse credit line. HomeSide's net warehouse interest income is the
difference between the interest income it earns on loans held for sale
(generally based on long-term interest rates) and the interest it pays on its
borrowings (generally based on short-term interest rates). To the extent this
spread narrows or becomes negative, HomeSide's results of operations could be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- HomeSide -- for the Period March 16, 1996
to November 30, 1996 and the Three Months Ended November 30, 1996 -- Liquidity
and Capital Resources" in the accompanying Prospectus.
In addition, the value of HomeSide's servicing portfolio may be adversely
affected if mortgage interest rates decline and loan prepayments increase. In
periods of declining interest rates, the economic advantages to borrowers of
refinancing their mortgage loans become greater. Increases in the rate of
mortgage loan prepayments reduce the period during which HomeSide receives
servicing income from such loans. HomeSide capitalizes the cost of the
acquisition of servicing rights from third parties and began in 1996 to
capitalize servicing rights on loans that it originates. The value of servicing
rights is based upon the net present value of future cash flows. If the rate of
prepayment of the related loans exceeds the rate assumed by HomeSide, due to a
significant reduction in interest rates or otherwise, the value of the servicing
portfolio will decrease and accelerated amortization of servicing rights may
become necessary. Interest rate changes can also adversely affect the ability to
sell servicing rights to a third party or the proceeds from such a sale.
RESULTS OF RISK MANAGEMENT ACTIVITIES
Gain or loss on sales of mortgage loans may result from changes in interest
rates from the time the interest rate on the customer's loan application is
established to the time HomeSide sells the loan. To manage interest rate risk
HomeSide uses a hedging strategy that is designed to minimize the negative
effect of changes in interest rates on loans that have closed and loans for
which interest rate commitments have been given that are expected to close.
HomeSide then enters into forward sale commitments and option contracts with
Fannie Mae, Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac")
and the private investors to whom HomeSide sells loans based on this analysis.
The results of HomeSide's hedging program depends on a variety of factors,
including the relationship between mortgage rates and Treasury securities, the
hedge instruments used and other factors. To the extent that this strategy
utilized by HomeSide is not successful, HomeSide's profitability may be
adversely affected. For each year since 1990, HomeSide has not experienced
secondary market losses. See "Business -- HomeSide -- Servicing Portfolio
Hedging Program" in the accompanying Prospectus.
LOAN DELINQUENCIES AND DEFAULTS ON LOANS
HomeSide's profitability may be negatively impacted by economic downturns
as the frequency of loan defaults tends to increase. From the time that HomeSide
funds the loans it originates to the time it sells the loans, generally 10 to 40
days, HomeSide is generally at risk for any loan defaults. Once HomeSide sells
the loans it originates, the risk of loss from loan defaults and foreclosure
generally passes to the purchaser or insurer of the loans. In connection
therewith, HomeSide typically makes certain representations and warranties to
the purchasers and insurers of loans and to the purchasers of servicing rights.
Such representations and warranties generally relate to the origination and
servicing of loans in substantial conformance with state and federal laws and
applicable investor guidelines. If a loan defaults and there has been a breach
of
S-14
<PAGE> 22
these representations and warranties, HomeSide becomes liable for the unpaid
principal and interest on the defaulted mortgage loan. In such a case, HomeSide
may be required to repurchase the loan and bear the subsequent loss, if any.
Historically, the impact of loans repurchased by HomeSide as the result of such
breaches of representations and warranties has not been material. However, the
number and amount of loans repurchased in the future could increase due to the
high volume of loans which HomeSide originates, acquires and sells. Accordingly,
HomeSide believes that future charges to net income relating to loan repurchases
may be necessary as loan origination volume increases. See
"Business -- HomeSide -- Secondary Marketing" in the accompanying Prospectus.
HomeSide is also 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, the servicer must advance
all or part of the scheduled payments to the owner of the loan, even when loan
payments are delinquent. Also, to protect their liens on mortgaged properties,
owners of loans usually require the servicer to advance mortgage and hazard
insurance and tax payments on schedule even if sufficient escrow funds are not
available. The servicer will be reimbursed, subject to certain limitations with
respect to Federal Housing Administration ("FHA") and Veterans Administration
("VA") loans, 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 reimbursement is typically uncertain. In the interim, the
servicer must absorb the cost of funds advanced during the time the advance is
outstanding. Further, the servicer must bear the increased costs of attempting
to collect on delinquent and defaulted loans. HomeSide also foregoes servicing
income from the time such loan becomes delinquent until foreclosure when, if any
proceeds are available, such amounts may be recovered.
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. HLI's servicing losses
on investor-owned loans have historically primarily represented losses on VA
loans. Because the total principal amount of FHA loans is guaranteed, losses on
such loans are generally limited to expenses of collection. HomeSide has
experienced minimal losses from FHA loans. With respect to VA loans, the VA
guarantees the initial losses on a loan. The guaranteed amount generally ranges
from 20% to 35% of the original principal balance. Before each foreclosure sale,
the VA determines whether to bid 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. There can be no
assurance that HomeSide's servicing losses on investor-owned loans will not be
greater in the future.
Economic downturns in states in which HomeSide has a significant
concentration of business could have an adverse impact on HomeSide's results of
operations. Loans in Florida and California represented 19.6% and 15.6%,
respectively, of HomeSide's servicing portfolio at November 30, 1996. HomeSide
originates and purchases servicing rights for mortgage loans nationwide and
actively monitors the geographic distribution of its servicing portfolio to
maintain a mix that it deems appropriate and makes adjustments as it deems
necessary. There can be no assurance that HomeSide's monitoring of and
adjustments to such geographic distribution will prevent any material adverse
impact on HomeSide's business, results of operations and financial condition in
the future.
COMPETITION
The mortgage banking business is highly competitive. HomeSide competes with
other mortgage banking companies, commercial banks, savings associations, credit
unions and other financial institutions in every aspect of its business,
including funding and purchasing loans from mortgage brokers, purchasing loans
from correspondents and acquiring loan servicing rights and origination
capabilities. HomeSide competes with mortgage banking companies and other
financial institutions that have substantially greater financial resources,
greater operating efficiencies and longer operating histories than HomeSide.
Furthermore, increasing consolidation in the mortgage industry is leading to an
increased market share for the largest mortgage
S-15
<PAGE> 23
companies. At the same time, Fannie Mae and FHLMC are developing technologies
and business practices that could reduce their reliance on large mortgage
companies for loan production and enable them to access smaller producers for
volume. To the extent that market pricing becomes more competitive, HomeSide may
be unable to achieve its planned level of originations or consummate
acquisitions of servicing rights at a satisfactory cost. Retail mortgage banking
companies have direct access to borrowers and generally are able to sell their
loans to the same entities that purchase HomeSide's loans. HomeSide depends
primarily on mortgage brokers and correspondents for originating new loans.
Competitors also seek to establish relationships with mortgage brokers and
correspondents, who are not obligated by contract or otherwise to continue to do
business with HomeSide.
REGULATION, POSSIBLE CHANGES AND RELATED LEGAL MATTERS
HomeSide's mortgage banking business is subject to the rules and
regulations of the Department of Housing and Urban Development ("HUD"), FHA, VA,
Fannie Mae, FHLMC, Government National Mortgage Association ("GNMA") 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 fix 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, the Real Estate Settlement Procedures 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 such business is now
conducted.
HomeSide's net income reflects a reduction in interest expense on its
borrowings with depository institutions for custodial balances placed with such
institutions. Net income could be adversely affected to the extent that proposed
revisions of applicable bank regulations cause these escrow accounts to be
recharacterized as demand deposit accounts, thereby requiring reserves to be
established with Federal Reserve Banks, which would reduce the amount of the
credit. Other regulatory changes or interpretations if applied retroactively to
change the ability of HomeSide to receive credit for escrow balances would
adversely affect HomeSide.
In addition, certain states require that interest be paid to mortgagors on
funds deposited by them in escrow to cover mortgage-related payments such as
property taxes and insurance premiums. Federal legislation has in the past been
introduced that would, if ever enacted, revise current escrow regulations and
establish a uniform interest payment requirement in all states. If such federal
legislation were enacted or if other states enact legislation relating to
payment of, or increases in the rate of, interest on escrow balances, or if such
legislation were retroactively applied to loans in HomeSide's servicing
portfolio, HomeSide's earnings would be adversely affected.
S-16
<PAGE> 24
Prior to the HLI Acquisition, HLI was a wholly-owned operating subsidiary
of a national bank, and subject to substantially all of the regulations and
restrictions applicable to a national bank. Prior to the HHI Acquisition, HHI
was a wholly-owned subsidiary of a bank holding company. During the period that
BKB or Barnett, or any of their subsidiaries, retains a material ownership
interest in HomeSide (either directly or through the Parent), HomeSide (i) will
continue to be under the jurisdiction, supervision, and examining authority of
the Office of the Comptroller of the Currency ("OCC") and (ii) may only engage
in activities that are part of, or incidental to, the business of banking. The
OCC has specifically ruled that mortgage banking is a proper incident to the
business of banking.
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 and the calculation of escrow amounts. Class action lawsuits may
continue to be filed in the future against the mortgage banking industry
generally. In recently denying a motion to dismiss in a purported class action
brought against certain unrelated mortgage companies in a federal court in
Virginia, the court stated that the payment of certain fees to mortgage brokers
violates RESPA. No prediction can be made as to whether the ultimate decision in
such class action will be adverse to the defendant mortgage companies, and,
while the matter is still in a preliminary stage, based upon available
information, management of HomeSide believes that an adverse result ultimately
having general application to the mortgage banking industry (including
HomeSide), would not have a material adverse impact on the consolidated
financial position of HomeSide, nor upon the consolidated results of operations
for any fiscal period. Defending such lawsuits in the future may be expensive
and any adverse judgments may make it more expensive or difficult for HomeSide
to conduct its business as currently conducted. See "Business -- HomeSide --
Litigation" in the accompanying Prospectus.
CONTINUATION OF FEDERAL PROGRAMS; AVAILABILITY OF ACTIVE SECONDARY MARKET
HomeSide's ability to sell mortgage loans and mortgage-backed securities is
largely dependent upon the continuation of programs of Fannie Mae, FHLMC, GNMA
and private investors. These entities facilitate the sale of mortgage loans and
mortgage-backed securities. HomeSide's continued eligibility to participate in
such programs is also a necessary element to the ability to sell mortgage loans.
Although HomeSide is not aware of any proposed discontinuation of, or
significant reduction in, the various programs of Fannie Mae, FHLMC, GNMA or
private investors, any such discontinuation or reduction in the operation of
such programs could have a material adverse effect on HomeSide's operations.
HomeSide expects that it will continue to remain eligible to participate in such
programs but any significant impairment of such eligibility could also
materially and adversely affect its operations.
The requirements of loans accepted under such programs may be changed from
time to time by the sponsoring entity. The profitability of participating in
specific programs may vary depending on a number of factors, including the
administrative costs to HomeSide of originating and purchasing qualifying loans.
There can be no assurance that HomeSide will be successful in effecting the
sale of mortgage loans at the historic price or volume levels in any particular
future periods. Any significant change in the secondary market level of activity
or underwriting criteria of Fannie Mae, FHLMC or private investors could have a
material adverse effect on the gain or loss on sales of mortgage loans recorded
by HomeSide and therefore on HomeSide's results of operations.
CONCENTRATION OF CONTROL IN PRINCIPAL SHAREHOLDERS
The Principal Shareholders of the Parent collectively own approximately 79%
of the outstanding shares of Common Stock of the Parent. Accordingly, the
Principal Shareholders of the Parent, if they act in concert, are able to
control the election of the Board of Directors of the Parent and thus the
direction and future operations of the Issuer without the supporting vote of any
other stockholder of the Parent, including decisions regarding acquisitions and
other business opportunities, the declaration of dividends and the issuance of
additional shares of common stock and other securities of the Issuer. Certain
decisions concerning the operations or financial structure of HomeSide may
present conflicts of interest between the owners of the Parent's capital stock
and the holders of the securities offered hereby. See "Security Ownership of
Certain Beneficial Owners and Management" and "Certain Relationships and Related
Transactions" in the accompanying Prospectus.
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DESCRIPTION OF NOTES
The Notes will be issued as a series of Debt Securities under an Indenture,
dated as of 1997, as amended or modified from time to time (the
"Indenture"), between the Issuer and The Bank of New York, as trustee (the
"Trustee"). The Indenture is subject to, and governed by, the Trust Indenture
Act of 1939, as amended. The following summary of certain provisions of the
Notes and the Indenture does not purport to be complete and is qualified in its
entirety by reference to the actual provisions of the Notes and the Indenture.
Capitalized terms used but not defined herein shall have the meanings given to
them in the accompanying Prospectus, the Notes or the Indenture, as the case may
be. The term "Debt Securities," as used in this Prospectus Supplement, refers to
all debt securities, including the Notes, issued and issuable from time to time
under the Indenture. The following description of Notes will apply to each Note
offered hereby unless otherwise specified in the applicable Pricing Supplement.
GENERAL
All Debt Securities, including the Notes, issued and to be issued under the
Indenture will be unsecured general obligations of the Issuer and will rank pari
passu with all other unsecured and unsubordinated indebtedness of the Issuer
from time to time outstanding. The Indenture does not limit the aggregate
initial offering price of Debt Securities that may be issued thereunder and Debt
Securities may be issued thereunder from time to time in one or more series up
to the aggregate initial offering price from time to time authorized by the
Issuer for each series. The Issuer may, from time to time, without the consent
of the holders of the Notes, provide for the issuance of Notes or other Debt
Securities under the Indenture in addition to the $1,000,000,000 aggregate
initial offering price of Notes offered hereby. The Indenture does not provide
holders of the Notes any protection should there be a highly leveraged
transaction involving the Issuer. See "Description of Debt Securities --
General" in the accompanying Prospectus.
The Notes are currently limited to up to $1,000,000,000 aggregate initial
offering price. Each Note will mature on any day nine months or more from its
date of issue (the "Stated Maturity Date"), as specified in the applicable
Pricing Supplement, unless the principal thereof (or any installment of
principal thereof) becomes due and payable prior to the Stated Maturity Date,
whether by the declaration of acceleration of maturity, notice of redemption at
the option of the Issuer, notice of the holder's option to elect repayment or
otherwise (the Stated Maturity Date or such prior date, as the case may be, is
herein referred to as the "Maturity Date" with respect to the principal of such
Note repayable on such date). Unless otherwise specified in the applicable
Pricing Supplement, interest-bearing Notes will either be Fixed Rate Notes or
Floating Rate Notes, as specified in the applicable Pricing Supplement. The
Issuer may also issue Discount Notes, Indexed Notes and Amortizing Notes (as
such terms are hereinafter defined).
The Notes will be denominated in, and payments of principal, premium, if
any, and/or interest, if any, in respect thereof will be made in, United States
dollars. References herein to "United States dollars," "U.S. dollars" or "$" are
to the lawful currency of the United States of America (the "United States").
Interest rates offered by the Issuer with respect to the Notes may differ
depending upon, among other factors, the aggregate principal amount of Notes
purchased in any single transaction. Notes with different variable terms other
than interest rates may also be offered concurrently to different investors.
Interest rates or formulas and other terms of Notes are subject to change by the
Issuer from time to time, but no such change will affect any Note previously
issued or as to which an offer to purchase has been accepted by the Issuer.
Each Note will be issued as a Book-Entry Note represented by one or more
fully registered Global Securities or as a fully registered Certificated Note.
The minimum denominations of each Note will be $1,000 and integral multiples
thereof, unless otherwise specified in the applicable Pricing Supplement.
Payments of principal of, and premium, if any, and interest, if any, on,
Book-Entry Notes will be made by the Issuer through the Trustee to the
Depository. See "--Book-Entry Notes." In the case of Certificated Notes, payment
of principal and premium, if any, due on the Maturity Date will be made in
immediately available funds upon presentation and surrender thereof (and, in the
case of any repayment on an Optional Repayment Date, upon submission of a duly
completed election form in accordance with the provisions
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described below) at the office or agency maintained by the Issuer for such
purpose in the Borough of Manhattan, The City of New York, currently the
principal corporate trust office of the Trustee located at 101 Barclay Street,
Floor 21 West, New York, New York 10286. Payment of interest, if any, due on the
Maturity Date of a Certificated Note will be made to the person to whom payment
of the principal thereof and premium, if any, thereon shall be made. Payment of
interest, if any, due on a Certificated Note on any Interest Payment Date (as
hereinafter defined) other than the Maturity Date will be made by check mailed
to the address of the Holder entitled thereto as such address shall appear in
the Security Register of the Issuer. Notwithstanding the foregoing, a Holder of
$10,000,000 or more in aggregate principal amount of Certificated Notes (whether
having identical or different terms and provisions) will be entitled to receive
interest payments, if any, on any Interest Payment Date other than the Maturity
Date by wire transfer of immediately available funds if appropriate wire
transfer instructions have been received in writing by the Trustee not less than
15 days prior to such Interest Payment Date. Any such wire transfer instructions
received by the Trustee shall remain in effect until revoked by such Holder.
As used herein, "Business Day" means any day, other than a Saturday or
Sunday, that is neither a legal holiday nor a day on which banking institutions
are authorized or required by law, regulation or executive order to close in The
City of New York; provided, however, that, with respect to Notes as to which
LIBOR is an applicable Interest Rate Basis, such day is also a London Business
Day (as hereinafter defined). "London Business Day" means a day on which
dealings in the Designated LIBOR Currency (as hereinafter defined) are
transacted in the London interbank market.
Book-Entry Notes may be transferred or exchanged only through the
Depository. See "--Book-Entry Notes." Registration of transfer or exchange of
Certificated Notes will be made at the office or agency maintained by the Issuer
for such purpose in the Borough of Manhattan, The City of New York, currently
the principal corporate trust office of the Trustee located at 101 Barclay
Street, Floor 21 West, New York, New York 10286. No service charge will be made
by the Issuer or the Trustee for any such registration of transfer or exchange
of Notes, but the Issuer may require payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection therewith
(other than exchanges pursuant to the Indenture not involving any transfer).
The defeasance and covenant defeasance provisions contained in the
Indenture shall apply to the Notes.
REDEMPTION AT THE OPTION OF THE ISSUER
Unless otherwise specified in the applicable Pricing Supplement, the Notes
will not be subject to any sinking fund. The Notes will be redeemable at the
option of the Issuer prior to the Stated Maturity Date only if an Initial
Redemption Date is specified in the applicable Pricing Supplement. If so
specified, the Notes will be subject to redemption at the option of the Issuer
on any date on and after the applicable Initial Redemption Date in whole or from
time to time in part in increments of $1,000 or such other minimum denomination
specified in such Pricing Supplement (provided that any remaining principal
amount thereof shall be at least $1,000 or such minimum denomination), at the
applicable Redemption Price (as hereinafter defined), together with unpaid
interest accrued thereon to the date of redemption, on written notice given to
the holders thereof not more than 60 nor less than 30 calendar days prior to the
date of redemption and in accordance with the provisions of the Indenture.
"Redemption Price," with respect to a Note, means an amount equal to the Initial
Redemption Percentage specified in the applicable Pricing Supplement (as
adjusted by the Annual Redemption Percentage Reduction, if applicable)
multiplied by the unpaid principal amount to be redeemed. The Initial Redemption
Percentage, if any, applicable to a Note shall decline at each anniversary of
the Initial Redemption Date by an amount equal to the applicable Annual
Redemption Percentage Reduction, if any, until the Redemption Price is equal to
100% of the unpaid principal amount to be redeemed. For a discussion of the
redemption of Discount Notes, see "--Discount Notes."
REPAYMENT AT THE OPTION OF THE HOLDER
The Notes will be repayable by the Issuer at the option of the holders
thereof prior to the Stated Maturity Date only if one or more Optional Repayment
Dates are specified in the applicable Pricing Supplement. If so specified, the
Notes will be subject to repayment at the option of the holders thereof on any
Optional Repayment Date in whole or from time to time in part in increments of
$1,000 or such other minimum denomination specified in the applicable Pricing
Supplement (provided that any remaining principal amount
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thereof shall be at least $1,000 or such other minimum denomination), at a
repayment price equal to 100% of the unpaid principal amount to be repaid,
together with unpaid interest accrued thereon to the date of repayment. The
Issuer's ability to redeem the Notes at the option of the holders at any time is
subject to the availability to the Issuer of funding sources at such time,
including its existing credit facilities or any refinancing or extension
thereof. Among the factors affecting the Issuer's ability to refinance its
credit facilities and the Notes are financial market conditions and the value
and performance of the Issuer prior to such time of refinancing. See "Risk
Factors -- Potential Non-Availability of Funding Sources." For any Note to be
repaid, such Note must be received, together with the form thereon entitled
"Option to Elect Repayment" duly completed, by the Trustee at its office
maintained for such purpose in the Borough of Manhattan, The City of New York,
currently the principal corporate trust office of the Trustee located at 101
Barclay Street, Floor 21 West, New York, New York 10286, not more than 60 nor
less than 30 calendar days prior to the date of repayment. Exercise of such
repayment option by the holder will be irrevocable. For a discussion of the
repayment of Discount Notes, see "--Discount Notes."
Only the Depository may exercise the repayment option in respect of Global
Securities representing Book-Entry Notes. Accordingly, Beneficial Owners (as
hereinafter defined) of Global Securities that desire to have all or any portion
of the Book-Entry Notes represented by such Global Securities repaid must
instruct the Participant (as hereinafter defined) through which they own their
interest to direct the Depository to exercise the repayment option on their
behalf by delivering the related Global Security and duly completed election
form to the Trustee as aforesaid. In order to ensure that such Global Security
and election form are received by the Trustee on a particular day, the
applicable Beneficial Owner must so instruct the Participant through which it
owns its interest before such Participant's deadline for accepting instructions
for that day. Different firms may have different deadlines for accepting
instructions from their customers. Accordingly, Beneficial Owners should consult
the Participants through which they own their interest for the respective
deadlines for such Participants. All instructions given to Participants from
Beneficial Owners of Global Securities relating to the option to elect repayment
shall be irrevocable. In addition, at the time such instructions are given, each
such Beneficial Owner shall cause the Participant through which it owns its
interest to transfer such Beneficial Owner's interest in the Global Security or
Securities representing the related Book-Entry Notes, on the Depository's
records, to the Trustee. See "--Book-Entry Notes."
If applicable, the Issuer will comply with the requirements of Section
14(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules promulgated thereunder, and any other securities laws or
regulations in connection with any such repayment.
The Issuer may at any time purchase Notes at any price or prices in the
open market or otherwise. Notes so purchased by the Issuer may, at the
discretion of the Issuer, be held, resold or surrendered to the Trustee for
cancellation.
INTEREST
General
Unless otherwise specified in the applicable Pricing Supplement, each
interest-bearing Note will bear interest from its date of issue at the rate per
annum, in the case of a Fixed Rate Note, or pursuant to the interest rate
formula, in the case of a Floating Rate Note, in each case as specified in the
applicable Pricing Supplement, until the principal thereof is paid or duly made
available for payment. Unless otherwise specified in the applicable Pricing
Supplement, interest payments in respect of Fixed Rate Notes and Floating Rate
Notes will be made in an amount equal to the interest accrued from and including
the immediately preceding Interest Payment Date in respect of which interest has
been paid or duly made available for payment (or from and including the date of
issue, if no interest has been paid or duly made available for payment) to but
excluding the applicable Interest Payment Date or the Maturity Date, as the case
may be (each, an "Interest Period").
Interest on Fixed Rate Notes and Floating Rate Notes will be payable in
arrears on each Interest Payment Date and on the Maturity Date. Unless otherwise
specified in the applicable Pricing Supplement, the first payment of interest on
any such Note originally issued between a Record Date (as hereinafter defined)
and the related Interest Payment Date will be made on the Interest Payment Date
immediately following the
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next succeeding Record Date to the holder on such next succeeding Record Date.
Unless otherwise specified in the applicable Pricing Supplement, a "Record Date"
shall be the fifteenth calendar day (whether or not a Business Day) immediately
preceding the related Interest Payment Date.
Fixed Rate Notes
Interest on Fixed Rate Notes will be payable on and
of each year or on such other date(s) specified in the applicable
Pricing Supplement (each, an "Interest Payment Date" with respect to Fixed Rate
Notes) and on the Maturity Date. Unless otherwise specified in the applicable
Pricing Supplement, interest on Fixed Rate Notes will be computed on the basis
of a 360-day year of twelve 30-day months.
If any Interest Payment Date or the Maturity Date of a Fixed Rate Note
falls on a day that is not a Business Day, the required payment of principal,
premium, if any, and/or interest will be made on the next succeeding Business
Day as if made on the date such payment was due, and no interest will accrue on
such payment for the period from and after such Interest Payment Date or the
Maturity Date, as the case may be, to the date of such payment on the next
succeeding Business Day.
Floating Rate Notes
Interest on Floating Rate Notes will be determined by reference to the
applicable Interest Rate Basis or Interest Rate Bases, which may, as described
below, include (i) the CD Rate, (ii) the CMT Rate, (iii) the Commercial Paper
Rate, (iv) the Eleventh District Cost of Funds Rate, (v) the Federal Funds Rate,
(vi) LIBOR, (vii) the Prime Rate or (viii) the Treasury Rate. The applicable
Pricing Supplement will specify certain terms with respect to which each
Floating Rate Note is being delivered, including: whether such Floating Rate
Note is a "Regular Floating Rate Note," a "Floating Rate/Fixed Rate Note" or an
"Inverse Floating Rate Note," the Fixed Rate Commencement Date, if applicable,
Fixed Interest Rate, if applicable, Interest Rate Basis or Bases, Initial
Interest Rate, if any, Initial Interest Reset Date, Interest Reset Dates,
Interest Payment Dates, Index Maturity, Maximum Interest Rate and/or Minimum
Interest Rate, if any, and Spread and/or Spread Multiplier, if any, as such
terms are defined below. If one or more of the applicable Interest Rate Bases is
LIBOR or the CMT Rate, the applicable Pricing Supplement will also specify the
Designated LIBOR Currency and Designated LIBOR Page or the Designated CMT
Maturity Index and Designated CMT Telerate Page, respectively, as such terms are
defined below.
The interest rate borne by the Floating Rate Notes will be determined as
follows:
(i) Unless such Floating Rate Note is designated as a "Floating
Rate/Fixed Rate Note" or an "Inverse Floating Rate Note," or as having an
Addendum attached or having "Other/Additional Provisions" apply, in each
case relating to a different interest rate formula, such Floating Rate Note
will be designated as a "Regular Floating Rate Note" and, except as
described below or in the applicable Pricing Supplement, will bear interest
at the rate determined by reference to the applicable Interest Rate Basis
or Bases (a) plus or minus the applicable Spread, if any, and/or (b)
multiplied by the applicable Spread Multiplier, if any. Commencing on the
Initial Interest Reset Date, the rate at which interest on such Regular
Floating Rate Note shall be payable shall be reset as of each Interest
Reset Date; provided, however, that the interest rate in effect for the
period, if any, from the date of issue to the Initial Interest Reset Date
will be the Initial Interest Rate.
(ii) If such Floating Rate Note is designated as a "Floating
Rate/Fixed Rate Note," then, except as described below or in the applicable
Pricing Supplement, such Floating Rate Note will bear interest at the rate
determined by reference to the applicable Interest Rate Basis or Bases (a)
plus or minus the applicable Spread, if any, and/or (b) multiplied by the
applicable Spread Multiplier, if any. Commencing on the Initial Interest
Reset Date, the rate at which interest on such Floating Rate/Fixed Rate
Note shall be payable shall be reset as of each Interest Reset Date;
provided, however, that (y) the interest rate in effect for the period, if
any, from the date of issue to the Initial Interest Reset Date will be the
Initial Interest Rate and (z) the interest rate in effect for the period
commencing on the Fixed Rate Commencement Date to the Maturity Date shall
be the Fixed Interest Rate, if such rate is specified in
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the applicable Pricing Supplement or, if no such Fixed Interest Rate is
specified, the interest rate in effect thereon on the day immediately
preceding the Fixed Rate Commencement Date.
(iii) If such Floating Rate Note is designated as an "Inverse Floating
Rate Note," then, except as described below or in the applicable Pricing
Supplement, such Floating Rate Note will bear interest at the Fixed
Interest Rate minus the rate determined by reference to the applicable
Interest Rate Basis or Bases (a) plus or minus the applicable Spread, if
any, and/or (b) multiplied by the applicable Spread Multiplier, if any;
provided, however, that, unless otherwise specified in the applicable
Pricing Supplement, the interest rate thereon will not be less than zero.
Commencing on the Initial Interest Reset Date, the rate at which interest
on such Inverse Floating Rate Note shall be payable shall be reset as of
each Interest Reset Date; provided, however, that the interest rate in
effect for the period, if any, from the date of issue to the Initial
Interest Reset Date will be the Initial Interest Rate.
The "Spread" is the number of basis points to be added to or subtracted
from the related Interest Rate Basis or Bases applicable to such Floating Rate
Note. The "Spread Multiplier" is the percentage of the related Interest Rate
Basis or Bases applicable to such Floating Rate Note by which such Interest Rate
Basis or Bases will be multiplied to determine the applicable interest rate on
such Floating Rate Note. The "Index Maturity" is the period to maturity of the
instrument or obligation with respect to which the related Interest Rate Basis
or Bases will be calculated.
Unless otherwise specified in the applicable Pricing Supplement, the
interest rate with respect to each Interest Rate Basis will be determined in
accordance with the applicable provisions below. Except as set forth above or in
the applicable Pricing Supplement, the interest rate in effect on each day shall
be (i) if such day is an Interest Reset Date, the interest rate determined as of
the Interest Determination Date (as hereinafter defined) immediately preceding
such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the
interest rate determined as of the Interest Determination Date immediately
preceding the most recent Interest Reset Date.
The applicable Pricing Supplement will specify whether the rate of interest
on the related Floating Rate Note will be reset daily, weekly, monthly,
quarterly, semiannually or annually or on such other specified basis (each, an
"Interest Reset Period") and the dates on which such rate of interest will be
reset (each, an "Interest Reset Date"). Unless otherwise specified in the
applicable Pricing Supplement, the Interest Reset Dates will be, in the case of
Floating Rate Notes which reset: (i) daily, each Business Day; (ii) weekly, the
Wednesday of each week (with the exception of weekly reset Floating Rate Notes
as to which the Treasury Rate is an applicable Interest Rate Basis, which will
reset the Tuesday of each week, except as described below); (iii) monthly, the
third Wednesday of each month (with the exception of monthly reset Floating Rate
Notes as to which the Eleventh District Cost of Funds Rate is an applicable
Interest Rate Basis, which will reset on the first calendar day of the month);
(iv) quarterly, the third Wednesday of March, June, September and December of
each year; (v) semiannually, the third Wednesday of the two months specified in
the applicable Pricing Supplement; and (vi) annually, the third Wednesday of the
month specified in the applicable Pricing Supplement; provided, however, that,
with respect to Floating Rate/Fixed Rate Notes, the rate of interest thereon
will not reset after the applicable Fixed Rate Commencement Date. If any
Interest Reset Date for any Floating Rate Note would otherwise be a day that is
not a Business Day, such Interest Reset Date will be postponed to the next
succeeding Business Day, except that in the case of a Floating Rate Note as to
which LIBOR is an applicable Interest Rate Basis and such Business Day falls in
the next succeeding calendar month, such Interest Reset Date will be the
immediately preceding Business Day.
The interest rate applicable to each Interest Reset Period commencing on
the related Interest Reset Date will be the rate determined by the Calculation
Agent as of the applicable Interest Determination Date and calculated on or
prior to the Calculation Date (as hereinafter defined), except with respect to
LIBOR and the Eleventh District Cost of Funds Rate, which will be calculated on
such Interest Determination Date. The "Interest Determination Date" with respect
to the CD Rate, the CMT Rate, the Commercial Paper Rate, the Federal Funds Rate
and the Prime Rate will be the second Business Day immediately preceding the
applicable Interest Reset Date; the "Interest Determination Date" with respect
to the Eleventh District Cost of Funds Rate will be the last working day of the
month immediately preceding the applicable Interest Reset
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Date on which the Federal Home Loan Bank of San Francisco (the "FHLB of San
Francisco") publishes the Index (as hereinafter defined); and the "Interest
Determination Date" with respect to LIBOR will be the second London Business Day
immediately preceding the applicable Interest Reset Date, unless the Designated
LIBOR Currency is British pounds sterling, in which case the "Interest
Determination Date" will be the applicable Interest Reset Date. With respect to
the Treasury Rate, the "Interest Determination Date" will be the day in the week
in which the applicable Interest Reset Date falls on which day Treasury Bills
(as hereinafter defined) are normally auctioned (Treasury Bills are normally
sold at an auction held on Monday of each week, unless that day is a legal
holiday, in which case the auction is normally held on the following Tuesday,
except that such auction may be held on the preceding Friday); provided,
however, that if an auction is held on the Friday of the week preceding the
applicable Interest Reset Date, the "Interest Determination Date" will be such
preceding Friday; provided, further, that if the Interest Determination Date
would otherwise fall on an Interest Reset Date, then such Interest Reset Date
will be postponed to the next succeeding Business Day. The "Interest
Determination Date" pertaining to a Floating Rate Note the interest rate of
which is determined by reference to two or more Interest Rate Bases will be the
most recent Business Day which is at least two Business Days prior to the
applicable Interest Reset Date for such Floating Rate Note on which each
Interest Rate Basis is determinable. Each Interest Rate Basis will be determined
as of such date, and the applicable interest rate will take effect on the
applicable Interest Reset Date.
Notwithstanding the foregoing, a Floating Rate Note may also have either or
both of the following: (i) a Maximum Interest Rate, or ceiling, that may accrue
during any Interest Period and (ii) a Minimum Interest Rate, or floor, that may
accrue during any Interest Period. In addition to any Maximum Interest Rate that
may apply to any Floating Rate Note, the interest rate on Floating Rate Notes
will in no event be higher than the maximum rate permitted by New York law, as
the same may be modified by United States law of general application.
Except as provided below or in the applicable Pricing Supplement, interest
will be payable, in the case of Floating Rate Notes which reset: (i) daily,
weekly or monthly, on the third Wednesday of each month or on the third
Wednesday of March, June, September and December of each year, as specified in
the applicable Pricing Supplement; (ii) quarterly, on the third Wednesday of
March, June, September and December of each year; (iii) semiannually, on the
third Wednesday of the two months of each year specified in the applicable
Pricing Supplement; and (iv) annually, on the third Wednesday of the month of
each year specified in the applicable Pricing Supplement (each, an "Interest
Payment Date" with respect to Floating Rate Notes) and, in each case, on the
Maturity Date. If any Interest Payment Date other than the Maturity Date for any
Floating Rate Note would otherwise be a day that is not a Business Day, such
Interest Payment Date will be postponed to the next succeeding Business Day,
except that in the case of a Floating Rate Note as to which LIBOR is an
applicable Interest Rate Basis and such Business Day falls in the next
succeeding calendar month, such Interest Payment Date will be the immediately
preceding Business Day. If the Maturity Date of a Floating Rate Note falls on a
day that is not a Business Day, the required payment of principal, premium, if
any, and interest will be made on the next succeeding Business Day as if made on
the date such payment was due, and no interest will accrue on such payment for
the period from and after the Maturity Date to the date of such payment on the
next succeeding Business Day.
All percentages resulting from any calculation on Floating Rate Notes will
be rounded to the nearest one hundred-thousandth of a percentage point, with
five one-millionths of a percentage point rounded upwards (e.g., 9.876545% (or
.09876545) would be rounded to 9.87655% (or .0987655)), and all amounts used in
or resulting from such calculation on Floating Rate Notes will be rounded, in
the case of United States dollars, to the nearest cent or, in the case of a
foreign or composite currency, to the nearest unit (with one-half cent or unit
being rounded upwards).
With respect to each Floating Rate Note, accrued interest is calculated by
multiplying its principal amount by an accrued interest factor. Such accrued
interest factor is computed by adding the interest factor calculated for each
day in the applicable Interest Period. Unless otherwise specified in the
applicable Pricing Supplement, the interest factor for each such day will be
computed by dividing the interest rate applicable to such day by 360, in the
case of Floating Rate Notes for which an applicable Interest Rate Basis is the
CD Rate, the Commercial Paper Rate, the Eleventh District Cost of Funds Rate,
the Federal Funds Rate, LIBOR
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or the Prime Rate, or by the actual number of days in the year in the case of
Floating Rate Notes for which an applicable Interest Rate Basis is the CMT Rate
or the Treasury Rate. Unless otherwise specified in the applicable Pricing
Supplement, the interest factor for Floating Rate Notes for which the interest
rate is calculated with reference to two or more Interest Rate Bases will be
calculated in each period in the same manner as if only the applicable Interest
Rate Basis specified in the applicable Pricing Supplement applied.
Unless otherwise specified in the applicable Pricing Supplement, The Bank
of New York will be the "Calculation Agent." Upon request of the holder of any
Floating Rate Note, the Calculation Agent will disclose the interest rate then
in effect and, if determined, the interest rate that will become effective as a
result of a determination made for the next succeeding Interest Reset Date with
respect to such Floating Rate Note. Unless otherwise specified in the applicable
Pricing Supplement, the "Calculation Date," if applicable, pertaining to any
Interest Determination Date will be the earlier of (i) the tenth calendar day
after such Interest Determination Date or, if such day is not a Business Day,
the next succeeding Business Day or (ii) the Business Day immediately preceding
the applicable Interest Payment Date or the Maturity Date, as the case may be.
Unless otherwise specified in the applicable Pricing Supplement, the
Calculation Agent shall determine each Interest Rate Basis in accordance with
the following provisions.
CD Rate. Unless otherwise specified in the applicable Pricing Supplement,
"CD Rate" means, with respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference to
the CD Rate (a "CD Rate Interest Determination Date"), the rate on such date for
negotiable United States dollar certificates of deposit having the Index
Maturity specified in the applicable Pricing Supplement as published by the
Board of Governors of the Federal Reserve System in "Statistical Release
H.15(519), Selected Interest Rates" or any successor publication ("H.15(519)")
under the heading "CDs (Secondary Market)," or, if not published by 3:00 P.M.,
New York City time, on the related Calculation Date, the rate on such CD Rate
Interest Determination Date for negotiable United States dollar certificates of
deposit of the Index Maturity specified in the applicable Pricing Supplement as
published by the Federal Reserve Bank of New York in its daily statistical
release "Composite 3:30 P.M. Quotations for U.S. Government Securities" or any
successor publication ("Composite Quotations") under the heading "Certificates
of Deposit." If such rate is not yet published in either H.15(519) or Composite
Quotations by 3:00 P.M., New York City time, on the related Calculation Date,
then the CD Rate on such CD Rate Interest Determination Date will be calculated
by the Calculation Agent and will be the arithmetic mean of the secondary market
offered rates as of 10:00 A.M., New York City time, on such CD Rate Interest
Determination Date, of three leading nonbank dealers in negotiable United States
dollar certificates of deposit in The City of New York (which may include the
Agents or their affiliates) selected by the Calculation Agent for negotiable
United States dollar certificates of deposit of major United States money center
banks for negotiable certificates of deposit with a remaining maturity closest
to the Index Maturity specified in the applicable Pricing Supplement in an
amount that is representative for a single transaction in that market at that
time; provided, however, that if the dealers so selected by the Calculation
Agent are not quoting as mentioned in this sentence, the CD Rate determined as
of such CD Rate Interest Determination Date will be the CD Rate in effect on
such CD Rate Interest Determination Date.
CMT Rate. Unless otherwise specified in the applicable Pricing Supplement,
"CMT Rate" means, with respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference to
the CMT Rate (a "CMT Rate Interest Determination Date"), the rate displayed on
the Designated CMT Telerate Page under the caption "...Treasury Constant
Maturities...Federal Reserve Board Release H.15...Mondays Approximately 3:45
P.M.," under the column for the Designated CMT Maturity Index for (i) if the
Designated CMT Telerate Page is 7055, the rate on such CMT Rate Interest
Determination Date and (ii) if the Designated CMT Telerate Page is 7052, the
weekly or monthly average, as specified in the applicable Pricing Supplement,
for the week or the month, as applicable, ended immediately preceding the week
or the month, as applicable, in which the related CMT Rate Interest
Determination Date falls. If such rate is no longer displayed on the relevant
page or is not displayed by 3:00 P.M., New York City time, on the related
Calculation Date, then the CMT Rate for such CMT Rate Interest Determination
Date will be such treasury constant maturity rate for the Designated CMT
Maturity Index as
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published in H.15(519). If such rate is no longer published or is not published
by 3:00 P.M., New York City time, on the related Calculation Date, then the CMT
Rate on such CMT Rate Interest Determination Date will be such treasury constant
maturity rate for the Designated CMT Maturity Index (or other United States
Treasury rate for the Designated CMT Maturity Index) for the CMT Rate Interest
Determination Date with respect to such Interest Reset Date as may then be
published by either the Board of Governors of the Federal Reserve System or the
United States Department of the Treasury that the Calculation Agent determines
to be comparable to the rate formerly displayed on the Designated CMT Telerate
Page and published in H.15(519). If such information is not provided by 3:00
P.M., New York City time, on the related Calculation Date, then the CMT Rate on
the CMT Rate Interest Determination Date will be calculated by the Calculation
Agent and will be a yield to maturity, based on the arithmetic mean of the
secondary market offered rates as of approximately 3:30 P.M., New York City
time, on such CMT Rate Interest Determination Date reported, according to their
written records, by three leading primary United States government securities
dealers in The City of New York (which may include the Agents or their
affiliates) (each, a "Reference Dealer") selected by the Calculation Agent (from
five such Reference Dealers selected by the Calculation Agent and eliminating
the highest quotation (or, in the event of equality, one of the highest) and the
lowest quotation (or, in the event of equality, one of the lowest)), for the
most recently issued direct noncallable fixed rate obligations of the United
States ("Treasury Notes") with an original maturity of approximately the
Designated CMT Maturity Index and a remaining term to maturity of not less than
such Designated CMT Maturity Index minus one year. If the Calculation Agent is
unable to obtain three such Treasury Note quotations, the CMT Rate on such CMT
Rate Interest Determination Date will be calculated by the Calculation Agent and
will be a yield to maturity based on the arithmetic mean of the secondary market
offered rates as of approximately 3:30 P.M., New York City time, on such CMT
Rate Interest Determination Date of three Reference Dealers in The City of New
York (from five such Reference Dealers selected by the Calculation Agent and
eliminating the highest quotation (or, in the event of equality, one of the
highest) and the lowest quotation (or, in the event of equality, one of the
lowest)), for Treasury Notes with an original maturity of the number of years
that is the next highest to the Designated CMT Maturity Index and a remaining
term to maturity closest to the Designated CMT Maturity Index and in an amount
of at least $100 million. If three or four (and not five) of such Reference
Dealers are quoting as described above, then the CMT Rate will be based on the
arithmetic mean of the offered rates obtained and neither the highest nor the
lowest of such quotes will be eliminated; provided, however, that if fewer than
three Reference Dealers so selected by the Calculation Agent are quoting as
mentioned herein, the CMT Rate determined as of such CMT Rate Interest
Determination Date will be the CMT Rate in effect on such CMT Rate Interest
Determination Date. If two Treasury Notes with an original maturity as described
in the second preceding sentence have remaining terms to maturity equally close
to the Designated CMT Maturity Index, the Calculation Agent will obtain
quotations for the Treasury Note with the shorter remaining term to maturity.
"Designated CMT Telerate Page" means the display on the Dow Jones Telerate
Service (or any successor service) on the page specified in the applicable
Pricing Supplement (or any other page as may replace such page on such service)
for the purpose of displaying Treasury Constant Maturities as reported in
H.15(519). If no such page is specified in the applicable Pricing Supplement,
the Designated CMT Telerate Page shall be 7052 for the most recent week.
"Designated CMT Maturity Index" means the original period to maturity of
the U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years)
specified in the applicable Pricing Supplement with respect to which the CMT
Rate will be calculated or, if no such maturity is specified in the applicable
Pricing Supplement, 2 years.
Commercial Paper Rate. Unless otherwise specified in the applicable
Pricing Supplement, "Commercial Paper Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the Commercial Paper Rate (a "Commercial Paper
Rate Interest Determination Date"), the Money Market Yield (as hereinafter
defined) on such date of the rate for commercial paper having the Index Maturity
specified in the applicable Pricing Supplement as published in H.15(519) under
the heading "Commercial Paper." In the event that such rate is not published by
3:00 P.M., New York City time, on the related Calculation Date, then the
Commercial Paper Rate on such
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Commercial Paper Rate Interest Determination Date will be the Money Market Yield
of the rate for commercial paper having the Index Maturity specified in the
applicable Pricing Supplement as published in Composite Quotations under the
heading "Commercial Paper" (with an Index Maturity of one month or three months
being deemed to be equivalent to an Index Maturity of 30 days or 90 days,
respectively). If such rate is not yet published in either H.15(519) or
Composite Quotations by 3:00 P.M., New York City time, on the related
Calculation Date, then the Commercial Paper Rate on such Commercial Paper Rate
Interest Determination Date will be calculated by the Calculation Agent and will
be the Money Market Yield of the arithmetic mean of the offered rates at
approximately 11:00 A.M., New York City time, on such Commercial Paper Rate
Interest Determination Date of three leading dealers of commercial paper in The
City of New York (which may include the Agents or their affiliates) selected by
the Calculation Agent for commercial paper having the Index Maturity specified
in the applicable Pricing Supplement placed for an industrial issuer whose bond
rating is "Aa", or the equivalent, from a nationally recognized statistical
rating organization; provided, however, that if the dealers so selected by the
Calculation Agent are not quoting as mentioned in this sentence, the Commercial
Paper Rate determined as of such Commercial Paper Rate Interest Determination
Date will be the Commercial Paper Rate in effect on such Commercial Paper Rate
Interest Determination Date.
"Money Market Yield" means a yield (expressed as a percentage) calculated
in accordance with the following formula:
D X 360
Money Market Yield = -------------- X 100
360 - (D X M)
where "D" refers to the applicable per annum rate for commercial paper quoted on
a bank discount basis and expressed as a decimal, and "M" refers to the actual
number of days in the applicable Interest Reset Period.
Eleventh District Cost of Funds Rate. Unless otherwise specified in the
applicable Pricing Supplement, "Eleventh District Cost of Funds Rate" means,
with respect to any Interest Determination Date relating to a Floating Rate Note
for which the interest rate is determined with reference to the Eleventh
District Cost of Funds Rate (an "Eleventh District Cost of Funds Rate Interest
Determination Date"), the rate equal to the monthly weighted average cost of
funds for the calendar month immediately preceding the month in which such
Eleventh District Cost of Funds Rate Interest Determination Date falls, as set
forth under the caption "11th District" on Telerate Page 7058 as of 11:00 A.M.,
San Francisco time, on such Eleventh District Cost of Funds Rate Interest
Determination Date. If such rate does not appear on Telerate Page 7058 on such
Eleventh District Cost of Funds Rate Interest Determination Date, then the
Eleventh District Cost of Funds Rate on such Eleventh District Cost of Funds
Rate Interest Determination Date shall be the monthly weighted average cost of
funds paid by member institutions of the Eleventh Federal Home Loan Bank
District that was most recently announced (the "Index") by the FHLB of San
Francisco as such cost of funds for the calendar month immediately preceding
such Eleventh District Cost of Funds Rate Interest Determination Date. If the
FHLB of San Francisco fails to announce the Index on or prior to such Eleventh
District Cost of Funds Rate Interest Determination Date for the calendar month
immediately preceding such Eleventh District Cost of Funds Rate Interest
Determination Date, the Eleventh District Cost of Funds Rate determined as of
such Eleventh District Cost of Funds Rate Interest Determination Date will be
the Eleventh District Cost of Funds Rate in effect on such Eleventh District
Cost of Funds Rate Interest Determination Date.
Federal Funds Rate. Unless otherwise specified in the applicable Pricing
Supplement, "Federal Funds Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the Federal Funds Rate (a "Federal Funds Rate
Interest Determination Date"), the rate on such date for United States dollar
federal funds as published in H.15(519) under the heading "Federal Funds
(Effective)" or, if not published by 3:00 P.M., New York City time, on the
related Calculation Date, the rate on such Federal Funds Rate Interest
Determination Date as published in Composite Quotations under the heading
"Federal Funds/Effective Rate." If such rate is not published in either
H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the
related Calculation Date, then the Federal Funds Rate on such Federal Funds Rate
Interest Determination Date will be
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calculated by the Calculation Agent and will be the arithmetic mean of the rates
for the last transaction in overnight United States dollar federal funds
arranged by three leading brokers of federal funds transactions in The City of
New York (which may include the Agents or their affiliates) selected by the
Calculation Agent prior to 9:00 A.M., New York City time, on such Federal Funds
Rate Interest Determination Date; provided, however, that if the brokers so
selected by the Calculation Agent are not quoting as mentioned in this sentence,
the Federal Funds Rate determined as of such Federal Funds Rate Interest
Determination Date will be the Federal Funds Rate in effect on such Federal
Funds Rate Interest Determination Date.
LIBOR. Unless otherwise specified in the applicable Pricing Supplement,
"LIBOR" means the rate determined in accordance with the following provisions:
(i) With respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference
to LIBOR (a "LIBOR Interest Determination Date"), LIBOR will be either: (a)
if "LIBOR Reuters" is specified in the applicable Pricing Supplement, the
arithmetic mean of the offered rates (unless the Designated LIBOR Page by
its terms provides only for a single rate, in which case such single rate
shall be used) for deposits in the Designated LIBOR Currency having the
Index Maturity specified in such Pricing Supplement, commencing on the
applicable Interest Reset Date, that appear (or, if only a single rate is
required as aforesaid, appears) on the Designated LIBOR Page as of 11:00
A.M., London time, on such LIBOR Interest Determination Date, or (b) if
"LIBOR Telerate" is specified in the applicable Pricing Supplement or if
neither "LIBOR Reuters" nor "LIBOR Telerate" is specified in the applicable
Pricing Supplement as the method for calculating LIBOR, the rate for
deposits in the Designated LIBOR Currency having the Index Maturity
specified in such Pricing Supplement, commencing on such Interest Reset
Date, that appears on the Designated LIBOR Page as of 11:00 A.M., London
time, on such LIBOR Interest Determination Date. If fewer than two such
offered rates so appear, or if no such rate so appears, as applicable,
LIBOR on such LIBOR Interest Determination Date will be determined in
accordance with the provisions described in clause (ii) below.
(ii) With respect to a LIBOR Interest Determination Date on which
fewer than two offered rates appear, or no rate appears, as the case may
be, on the Designated LIBOR Page as specified in clause (i) above, the
Calculation Agent will request the principal London offices of each of four
major reference banks (which may include affiliates of the Agents) in the
London interbank market, as selected by the Calculation Agent, to provide
the Calculation Agent with its offered quotation for deposits in the
Designated LIBOR Currency for the period of the Index Maturity specified in
the applicable Pricing Supplement, commencing on the applicable Interest
Reset Date, to prime banks in the London interbank market at approximately
11:00 A.M., London time, on such LIBOR Interest Determination Date and in a
principal amount that is representative for a single transaction in the
Designated LIBOR Currency in such market at such time. If at least two such
quotations are so provided, then LIBOR on such LIBOR Interest Determination
Date will be the arithmetic mean of such quotations. If fewer than two such
quotations are so provided, then LIBOR on such LIBOR Interest Determination
Date will be the arithmetic mean of the rates quoted at approximately 11:00
A.M., in the applicable Principal Financial Center, on such LIBOR Interest
Determination Date by three major banks (which may include affiliates of
the Agents) in such Principal Financial Center selected by the Calculation
Agent for loans in the Designated LIBOR Currency to leading European banks,
having the Index Maturity specified in the applicable Pricing Supplement
and in a principal amount that is representative for a single transaction
in the Designated LIBOR Currency in such market at such time; provided,
however, that if the banks so selected by the Calculation Agent are not
quoting as mentioned in this sentence, LIBOR determined as of such LIBOR
Interest Determination Date will be LIBOR in effect on such LIBOR Interest
Determination Date.
"Designated LIBOR Currency" means the currency or composite currency
specified in the applicable Pricing Supplement as to which LIBOR shall be
calculated or, if no such currency or composite currency is specified in the
applicable Pricing Supplement, United States dollars.
"Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified in the
applicable Pricing Supplement, the display on the Reuter Monitor Money Rates
Service (or any successor service) on the page
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specified in such Pricing Supplement (or any other page as may replace such page
on such service) for the purpose of displaying the London interbank rates of
major banks for the Designated LIBOR Currency, or (b) if "LIBOR Telerate" is
specified in the applicable Pricing Supplement or neither "LIBOR Reuters" nor
"LIBOR Telerate" is specified in the applicable Pricing Supplement as the method
for calculating LIBOR, the display on the Dow Jones Telerate Service (or any
successor service) on the page specified in such Pricing Supplement (or any
other page as may replace such page on such service) for the purpose of
displaying the London interbank rates of major banks for the Designated LIBOR
Currency.
"Principal Financial Center" means the capital city of the country to which
the Designated LIBOR Currency relates (or, in the case of European Currency
Units ("ECU"), Luxembourg), except, in each case, that with respect to United
States dollars, Australian dollars, Canadian dollars, Deutsche marks, Dutch
guilders, Italian lire and Swiss francs, the "Principal Financial Center" shall
be The City of New York, Sydney, Toronto, Frankfurt, Amsterdam and Zurich,
respectively.
Prime Rate. Unless otherwise specified in the applicable Pricing
Supplement, "Prime Rate" means, with respect to any Interest Determination Date
relating to a Floating Rate Note for which the interest rate is determined with
reference to the Prime Rate (a "Prime Rate Interest Determination Date"), the
rate on such date as such rate is published in H.15(519) under the heading "Bank
Prime Loan." If such rate is not published prior to 3:00 P.M., New York City
time, on the related Calculation Date, then the Prime Rate shall be the
arithmetic mean of the rates of interest publicly announced by each bank that
appears on the Reuters Screen USPRIME1 Page (as hereinafter defined) as such
bank's prime rate or base lending rate as in effect for such Prime Rate Interest
Determination Date. If fewer than four such rates appear on the Reuters Screen
USPRIME1 Page for such Prime Rate Interest Determination Date, then the Prime
Rate shall be the arithmetic mean of the prime rates or base lending rates
quoted on the basis of the actual number of days in the year divided by a
360-day year as of the close of business on such Prime Rate Interest
Determination Date by four major money center banks (which may include
affiliates of the Agents) in The City of New York selected by the Calculation
Agent. If fewer than four such quotations are so provided, then the Prime Rate
shall be the arithmetic mean of four prime rates quoted on the basis of the
actual number of days in the year divided by a 360-day year as of the close of
business on such Prime Rate Interest Determination Date as furnished in The City
of New York by the major money center banks, if any, that have provided such
quotations and by a reasonable number of substitute banks or trust companies
(which may include affiliates of the Agents) to obtain four such prime rate
quotations, provided such substitute banks or trust companies are organized and
doing business under the laws of the United States, or any State thereof, each
having total equity capital of at least $500 million and being subject to
supervision or examination by Federal or State authority, selected by the
Calculation Agent to provide such rate or rates; provided, however, that if the
banks or trust companies so selected by the Calculation Agent are not quoting as
mentioned in this sentence, the Prime Rate determined as of such Prime Rate
Interest Determination Date will be the Prime Rate in effect on such Prime Rate
Interest Determination Date.
"Reuters Screen USPRIME1 Page" means the display on the Reuter Monitor
Money Rates Service (or any successor service) on the "USPRIME1" page (or such
other page as may replace the USPRIME1 page on such service) for the purpose of
displaying prime rates or base lending rates of major United States banks.
Treasury Rate. Unless otherwise specified in the applicable Pricing
Supplement, "Treasury Rate" means, with respect to any Interest Determination
Date relating to a Floating Rate Note for which the interest rate is determined
by reference to the Treasury Rate (a "Treasury Rate Interest Determination
Date"), the rate from the auction held on such Treasury Rate Interest
Determination Date (the "Auction") of direct obligations of the United States
("Treasury Bills") having the Index Maturity specified in the applicable Pricing
Supplement, as such rate is published in H.15(519) under the heading "Treasury
Bills-auction average (investment)" or, if not published by 3:00 P.M., New York
City time, on the related Calculation Date, the auction average rate of such
Treasury Bills (expressed as a bond equivalent on the basis of a year of 365 or
366 days, as applicable, and applied on a daily basis) as otherwise announced by
the United States Department of the Treasury. In the event that the results of
the Auction of Treasury Bills having the Index Maturity specified in the
applicable Pricing Supplement are not reported as provided by 3:00 P.M., New
York City time, on the related Calculation Date, or if no such Auction is held,
then the Treasury Rate will be
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calculated by the Calculation Agent and will be a yield to maturity (expressed
as a bond equivalent on the basis of a year of 365 or 366 days, as applicable,
and applied on a daily basis) of the arithmetic mean of the secondary market bid
rates, as of approximately 3:30 P.M., New York City time, on such Treasury Rate
Interest Determination Date, of three leading primary United States government
securities dealers (which may include the Agents or their affiliates) selected
by the Calculation Agent, for the issue of Treasury Bills with a remaining
maturity closest to the Index Maturity specified in the applicable Pricing
Supplement; provided, however, that if the dealers so selected by the
Calculation Agent are not quoting as mentioned in this sentence, the Treasury
Rate determined as of such Treasury Rate Interest Determination Date will be the
Treasury Rate in effect on such Treasury Rate Interest Determination Date.
OTHER/ADDITIONAL PROVISIONS; ADDENDUM
Any provisions with respect to the Notes, including the specification and
determination of one or more Interest Rate Bases, the calculation of the
interest rate applicable to a Floating Rate Note, the Interest Payment Dates,
the Stated Maturity Date, any redemption or repayment provisions or any other
term relating thereto, may be modified and/or supplemented as specified under
"Other/Additional Provisions" on the face thereof or in an Addendum relating
thereto, if so specified on the face thereof and described in the applicable
Pricing Supplement. Only information permitted by Rule 430A and/or Rule 424(b)
under the Securities Act will be included in any Pricing Supplement.
DISCOUNT NOTES
The Issuer may offer Notes ("Discount Notes") from time to time that have
an Issue Price (as specified in the applicable Pricing Supplement) that is less
than 100% of the principal amount thereof (i.e., par) by more than a percentage
equal to the product of 0.25% and the number of full years to the Stated
Maturity Date. Discount Notes may not bear any interest currently or may bear
interest at a rate that is below market rates at the time of issuance. The
difference between the Issue Price of a Discount Note and par is referred to
herein as the "Discount." In the event of redemption, repayment or acceleration
of maturity of a Discount Note, the amount payable to the holder of such
Discount Note will be equal to the sum of (i) the Issue Price (increased by any
accruals of Discount) and, in the event of any redemption of such Discount Note
(if applicable), multiplied by the Initial Redemption Percentage (as adjusted by
the Annual Redemption Percentage Reduction, if applicable) and (ii) any unpaid
interest accrued thereon to the date of such redemption, repayment or
acceleration of maturity, as the case may be.
Unless otherwise specified in the applicable Pricing Supplement, for
purposes of determining the amount of Discount that has accrued as of any date
on which a redemption, repayment or acceleration of maturity occurs for a
Discount Note, such Discount will be accrued using a constant yield method. The
constant yield will be calculated using a 30-day month, 360-day year convention,
a compounding period that, except for the Initial Period (as hereinafter
defined), corresponds to the shortest period between Interest Payment Dates for
the applicable Discount Note (with ratable accruals within a compounding
period), a coupon rate equal to the initial coupon rate applicable to such
Discount Note and an assumption that the maturity of such Discount Note will not
be accelerated. If the period from the date of issue to the initial Interest
Payment Date for a Discount Note (the "Initial Period") is shorter than the
compounding period for such Discount Note, a proportionate amount of the yield
for an entire compounding period will be accrued. If the Initial Period is
longer than the compounding period, then such period will be divided into a
regular compounding period and a short period with the short period being
treated as provided in the preceding sentence. The accrual of the applicable
Discount may differ from the accrual of original issue discount for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"), certain Discount
Notes may not be treated as having original issue discount within the meaning of
the Code, and Notes other than Discount Notes may be treated as issued with
original issue discount for federal income tax purposes. See "United States
Federal Income Tax Considerations".
INDEXED NOTES
The Issuer may from time to time offer Notes ("Indexed Notes") with the
amount of principal, premium and/or interest payable in respect thereof to be
determined with reference to the price or prices of specified
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commodities or stocks or to other items, in each case as specified in the
applicable Pricing Supplement. In certain cases, holders of Indexed Notes may
receive a principal payment on the Maturity Date that is greater than or less
than the principal amount of such Indexed Notes depending upon the relative
value on the Maturity Date of the specified indexed item. Information as to the
method for determining the amount of principal, premium, if any, and/or
interest, if any, payable in respect of Indexed Notes, certain historical
information with respect to the specified indexed item and any material tax
considerations associated with an investment in Indexed Notes will be specified
in the applicable Pricing Supplement. See also "Risk Factors."
AMORTIZING NOTES
The Issuer may from time to time offer Notes ("Amortizing Notes") with the
amount of principal thereof and interest thereon payable in installments over
the term of such Notes. Unless otherwise specified in the applicable Pricing
Supplement, interest on each Amortizing Note will be computed on the basis of a
360-day year of twelve 30-day months. Payments with respect to Amortizing Notes
will be applied first to interest due and payable thereon and then to the
reduction of the unpaid principal amount thereof. Further information concerning
additional terms and provisions of Amortizing Notes will be specified in the
applicable Pricing Supplement, including a table setting forth repayment
information for such Amortizing Notes.
BOOK-ENTRY NOTES
The Issuer has established a depositary arrangement with the Depository
with respect to the Book-Entry Notes, the terms of which are summarized below.
Any additional or differing terms of the depositary arrangement with respect to
the Book-Entry Notes will be described in the applicable Pricing Supplement.
Upon issuance, all Book-Entry Notes of like tenor and terms up to
$200,000,000 aggregate principal amount will be represented by a single Global
Security. Each Global Security representing Book-Entry Notes will be deposited
with, or on behalf of, the Depository and will be registered in the name of the
Depository or a nominee of the Depository. No Global Security may be transferred
except as a whole by the Depository to a nominee of the Depository or by a
nominee of the Depository to the Depository or to another nominee of the
Depository, or by the Depository or such nominee to a successor of the
Depository or a nominee of such successor.
So long as the Depository or its nominee is the registered owner of a
Global Security, the Depository or its nominee, as the case may be, will be the
sole holder of the Book-Entry Notes represented thereby for all purposes under
the Indenture. Except as otherwise provided below, the Beneficial Owners of the
Global Security or Securities representing Book-Entry Notes will not be entitled
to receive physical delivery of Certificated Notes and will not be considered
the holders thereof for any purpose under the Indenture, and no Global Security
representing Book-Entry Notes shall be exchangeable or transferable.
Accordingly, each Beneficial Owner must rely on the procedures of the Depository
and, if such Beneficial Owner is not a Participant, on the procedures of the
Participant through which such Beneficial Owner owns its interest in order to
exercise any rights of a holder under such Global Security or the Indenture. The
laws of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in certificated form. Such limits and laws
may impair the ability to transfer beneficial interests in a Global Security
representing Book-Entry Notes.
Unless otherwise specified in the applicable Pricing Supplement, each
Global Security representing Book-Entry Notes will be exchangeable for
Certificated Notes of like tenor and terms and of differing authorized
denominations in a like aggregate principal amount, only if (i) the Depository
notifies the Issuer that it is unwilling or unable to continue as Depository for
the Global Securities or the Issuer becomes aware that the Depository has ceased
to be a clearing agency registered under the Exchange Act and, in any such case,
the Issuer shall not have appointed a successor to the Depository within 90 days
thereafter, (ii) the Issuer, in its sole discretion, determines that the Global
Securities shall be exchangeable for Certificated Notes or (iii) an Event of
Default shall have occurred and be continuing with respect to the Notes under
the Indenture. Upon any such exchange, the Certificated Notes shall be
registered in the names of the Beneficial Owners of the Global Security or
Securities representing Book-Entry Notes, which names shall be provided by the
Depository's relevant Participants (as identified by the Depository) to the
Trustee.
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The following is based on information furnished by the Depository:
The Depository will act as securities depository for the Book-Entry
Notes. The Book-Entry Notes will be issued as fully registered securities
registered in the name of Cede & Co. (the Depository's partnership
nominee).
The Depository is a limited-purpose trust company organized under the
New York Banking Law, a "banking organization" within the meaning of the
New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. The Depository holds securities that its
participants ("Participants") deposit with the Depository. The Depository
also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Direct Participants of the Depository ("Direct Participants")
include securities brokers and dealers (including the Agents), banks, trust
companies, clearing corporations and certain other organizations. The
Depository is owned by a number of its Direct Participants and by the New
York Stock Exchange, Inc., the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Access to the Depository's
system is also available to others such as securities brokers and dealers,
banks and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to the Depository and its
Participants are on file with the Securities and Exchange Commission.
Purchases of Book-Entry Notes under the Depository's system must be
made by or through Direct Participants, which will receive a credit for
such Book-Entry Notes on the Depository's records. The ownership interest
of each actual purchaser of each Book-Entry Note represented by a Global
Security ("Beneficial Owner") is in turn to be recorded on the records of
Direct Participants and Indirect Participants. Beneficial Owners will not
receive written confirmation from the Depository of their purchase, but
Beneficial Owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their
holdings, from the Direct Participants or Indirect Participants through
which such Beneficial Owner entered into the transaction. Transfers of
ownership interests in a Global Security representing Book-Entry Notes are
to be accomplished by entries made on the books of Participants acting on
behalf of Beneficial Owners. Beneficial Owners of a Global Security
representing Book-Entry Notes will not receive Certificated Notes
representing their ownership interests therein, except in the event that
use of the book-entry system for such Book-Entry Notes is discontinued.
To facilitate subsequent transfers, all Global Securities representing
Book-Entry Notes which are deposited with, or on behalf of, the Depository
are registered in the name of the Depository's nominee, Cede & Co. The
deposit of Global Securities with, or on behalf of, the Depository and
their registration in the name of Cede & Co. effect no change in beneficial
ownership. The Depository has no knowledge of the actual Beneficial Owners
of the Global Securities representing the Book-Entry Notes; the
Depository's records reflect only the identity of the Direct Participants
to whose accounts such Book-Entry Notes are credited, which may or may not
be the Beneficial Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depository to
Direct Participants, by Direct Participants to Indirect Participants, and
by Direct Participants and Indirect Participants to Beneficial Owners will
be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
The Depository and Cede & Co. will take any action permitted to be
taken by a holder of Notes only at the direction of one or more
Participants to whose accounts interests in the Global Securities are
credited and only in respect of such portion of the aggregate principal
amount of Notes as to which such Participant or Participants has or have
given such direction.
Principal, premium, if any, and/or interest, if any, payments on the
Global Securities representing the Book-Entry Notes will be made in
immediately available funds to the Depository. The Depository's practice is
to credit Direct Participants' accounts on the applicable payment date in
accordance with their
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respective holdings shown on the Depository's records unless the Depository
has reason to believe that it will not receive payment on such date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices, as is the case with securities held
for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of such Participant and not of the
Depository, the Trustee or the Issuer, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
principal, premium, if any, and/or interest, if any, to the Depository is
the responsibility of the Issuer and the Trustee, disbursement of such
payments to Direct Participants shall be the responsibility of the
Depository, and disbursement of such payments to the Beneficial Owners
shall be the responsibility of Direct Participants and Indirect
Participants.
If applicable, redemption notices shall be sent to Cede & Co. If less
than all of the Book-Entry Notes of like tenor and terms are being
redeemed, the Depository's practice is to determine by lot the amount of
the interest of each Direct Participant in such issue to be redeemed.
A Beneficial Owner shall give notice of any option to elect to have
its Book-Entry Notes repaid by the Issuer, through its Participant, to the
Trustee, and shall effect delivery of such Book-Entry Notes by causing the
Direct Participant to transfer the Participant's interest in the Global
Security or Securities representing such Book-Entry Notes, on the
Depository's records, to the Trustee. The requirement for physical delivery
of Book-Entry Notes in connection with a demand for repayment will be
deemed satisfied when the ownership rights in the Global Security or
Securities representing such Book-Entry Notes are transferred by Direct
Participants on the Depository's records.
The Depository may discontinue providing its services as securities
depository with respect to the Book-Entry Notes at any time by giving
reasonable notice to the Issuer or the Trustee. Under such circumstances,
in the event that a successor securities depository is not obtained,
Certificated Notes are required to be printed and delivered.
The Issuer may decide to discontinue use of the system of book-entry
transfers through the Depository (or a successor securities depository). In
that event, Certificated Notes will be printed and delivered.
The information in this section concerning the Depository and the
Depository's system has been obtained from sources that the Issuer believes to
be reliable, but the Issuer takes no responsibility for the accuracy thereof.
Neither the Issuer, the Trustee nor the Agents will have any responsibility
or obligation to Participants, or the persons for whom they act as nominees,
with respect to the accuracy of the records of the Depository, its nominee or
any Participant with respect to any ownership interest in the Notes, or payments
to, or the providing of notice to Participants or Beneficial Owners.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Agents, and, so long as the
Notes trade in the Depository's Same-Day Funds Settlement System, secondary
market trading activity in the Notes will settle, in immediately available
funds. All payments of principal and interest will be made by the Issuer in
immediately available funds.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material United States Federal income tax
consequences of the purchase, ownership and disposition of the Notes is based
upon laws, regulations, rulings and decisions now in effect, all of which are
subject to change (including changes in effective dates) or possible differing
interpretations. It deals only with Notes held as capital assets and does not
purport to deal with persons in special tax situations, such as financial
institutions, insurance companies, regulated investment companies, dealers in
securities or currencies, persons holding Notes as a hedge against currency
risks or as a position in a "straddle" for tax purposes, or persons whose
functional currency is not the United States dollar. Persons considering the
purchase of the Notes should consult their own tax advisors concerning the
application of United States Federal income tax laws to their particular
situations as well as any consequences of the purchase, ownership and
disposition of the Notes arising under the laws of any other taxing
jurisdiction.
The Issuer has been advised by its counsel, Hutchins, Wheeler & Dittmar, A
Professional Corporation, that in its opinion, the following fairly describes
the material United States tax consequences expected to apply to the purchase,
ownership and dispositions of the Notes under currently applicable law.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is for United States Federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate that is described in Section 7701(a)(30)(D)
of the Internal Revenue Code of 1986, as amended (the "Code"), or a trust that
is described in Section 7701(a)(30)(E) of the Code or (iv) any other person
whose income or gain in respect of a Note is effectively connected with the
conduct of a United States trade or business. As used herein, the term "non-U.S.
Holder" means a beneficial owner of a Note that is not a U.S. Holder.
U.S. HOLDERS
Payments of Interest
Payments of interest on a Note generally will be taxable to a U.S. Holder
as ordinary interest income at the time such payments are accrued or are
received (in accordance with the U.S. Holder's regular method of tax
accounting).
Original Issue Discount
The following summary is a general discussion of the United States Federal
income tax consequences to U.S. Holders of the purchase, ownership and
disposition of Notes issued with original issue discount ("Original Issue
Discount Notes"). The following summary is based upon final Treasury regulations
(the "OID Regulations") released by the Internal Revenue Service ("IRS") on
January 27, 1994, as amended on June 11, 1996, under the original issue discount
provisions of the Code.
For United States Federal income tax purposes, original issue discount is
the excess of the stated redemption price at maturity of a Note over its issue
price, if such excess equals or exceeds a de minimis amount (generally 1/4 of 1%
of the Note's stated redemption price at maturity multiplied by the number of
complete years to its maturity from its issue date or, in the case of a Note
providing for the payment of any amount other than qualified stated interest (as
hereinafter defined) prior to maturity, multiplied by the weighted average
maturity of such Note). The issue price of each Note in an issue of Notes equals
the first price at which a substantial amount of such Notes has been sold
(ignoring sales to bond houses, brokers, or similar persons or organizations
acting in the capacity of underwriters, placement agents, or wholesalers). The
stated redemption price at maturity of a Note is the sum of all payments
provided by the Note other than "qualified stated interest" payments. The term
"qualified stated interest" generally means stated interest that is
unconditionally payable in cash or property (other than debt instruments of the
issuer) at least annually at a single fixed rate. In addition, under the OID
Regulations, if a Note bears interest for one or more accrual periods at a rate
below the rate applicable for the remaining term of such Note (e.g., Notes with
teaser rates or interest holidays), and if the greater of either the resulting
foregone interest on such Note or any "true" discount on such Note (i.e., the
excess of the Note's stated principal amount over its issue price) equals or
exceeds a specified de minimis amount, then the stated interest on the Note
would be treated as original issue discount rather than qualified stated
interest.
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Payments of qualified stated interest on a Note are taxable to a U.S.
Holder as ordinary interest income at the time such payments are accrued or are
received (in accordance with the U.S. Holder's regular method of tax
accounting). A U.S. Holder of an Original Issue Discount Note must include
original issue discount in income as ordinary interest for United States Federal
income tax purposes as it accrues under a constant yield method in advance of
receipt of the cash payments attributable to such income, regardless of such
U.S. Holder's regular method of tax accounting. In general, the amount of
original issue discount included in income by the initial U.S. Holder of an
Original Issue Discount Note is the sum of the daily portions of original issue
discount with respect to such Original Issue Discount Note for each day during
the taxable year (or portion of the taxable year) on which such U.S. Holder held
such Original Issue Discount Note. The "daily portion" of original issue
discount on any Original Issue Discount Note is determined by allocating to each
day in any accrual period a ratable portion of the original issue discount
allocable to that accrual period. An "accrual period" may be of any length and
the accrual periods may vary in length over the term of the Original Issue
Discount Note, provided that each accrual period is no longer than one year and
each scheduled payment of principal or interest occurs either on the final day
of an accrual period or on the first day of an accrual period. The amount of
original issue discount allocable to each accrual period is generally equal to
the difference between (i) the product of the Original Issue Discount Note's
adjusted issue price at the beginning of such accrual period and its yield to
maturity (determined on the basis of compounding at the close of each accrual
period and appropriately adjusted to take into account the length of the
particular accrual period) and (ii) the amount of any qualified stated interest
payments allocable to such accrual period. The "adjusted issue price" of an
Original Issue Discount Note at the beginning of any accrual period is the sum
of the issue price of the Original Issue Discount Note plus the amount of
original issue discount allocable to all prior accrual periods minus the amount
of any prior payments on the Original Issue Discount Note that were not
qualified stated interest payments. Under these rules, U.S. Holders generally
will have to include in income increasingly greater amounts of original issue
discount in successive accrual periods.
A U.S. Holder who purchases an Original Issue Discount Note for an amount
that is greater than its adjusted issue price as of the purchase date and less
than or equal to the sum of all amounts payable on the Original Issue Discount
Note after the purchase date other than payments of qualified stated interest,
will be considered to have purchased the Original Issue Discount Note at an
"acquisition premium." Under the acquisition premium rules, the amount of
original issue discount which such U.S. Holder must include in its gross income
with respect to such Original Issue Discount Note for any taxable year (or
portion thereof in which the U.S. Holder holds the Original Issue Discount Note)
will be reduced (but not below zero) by the portion of the acquisition premium
properly allocable to the period.
Under the OID Regulations, Floating Rate Notes and Indexed Notes ("Variable
Notes") are subject to special rules whereby a Variable Note will qualify as a
"variable rate debt instrument" if (a) its issue price does not exceed the total
noncontingent principal payments due under the Variable Note by more than a
specified de minimis amount and (b) it provides for stated interest, paid or
compounded at least annually, at current values of (i) one or more qualified
floating rates, (ii) a single fixed rate and one or more qualified floating
rates, (iii) a single objective rate, or (iv) a single fixed rate and a single
objective rate that is a qualified inverse floating rate.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Note is denominated. Although a multiple of a qualified floating rate
will generally not itself constitute a qualified floating rate, a variable rate
equal to the product of a qualified floating rate and a fixed multiple that is
greater than .65 but not more than 1.35 will constitute a qualified floating
rate. A variable rate equal to the product of a qualified floating rate and a
fixed multiple that is greater than .65 but not more than 1.35, increased or
decreased by a fixed rate, will also constitute a qualified floating rate. In
addition, under the OID Regulations, two or more qualified floating rates that
can reasonably be expected to have approximately the same values throughout the
term of the Variable Note (e.g., two or more qualified floating rates with
values within 25 basis points of each other as determined on the Variable Note's
issue date) will be treated as a single qualified floating rate. Notwithstanding
the foregoing, a variable rate that would otherwise constitute a qualified
floating rate but which is subject to one or more restrictions such as a maximum
numerical limitation
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(i.e., a cap) or a minimum numerical limitation (i.e., a floor) may, under
certain circumstances, fail to be treated as a qualified floating rate under the
OID Regulations unless such cap or floor is fixed throughout the term of the
Note. An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. A rate will not qualify as an
objective rate if it is based on information that is within the control of the
issuer (or a related party) or that is unique to the circumstances of the issuer
(or a related party), such as dividends, profits or the value of the issuer's
stock (although a rate does not fail to be an objective rate merely because it
is based on the credit quality of the issuer). A "qualified inverse floating
rate" is any objective rate where such rate is equal to a fixed rate minus a
qualified floating rate, as long as variations in the rate can reasonably be
expected to inversely reflect contemporaneous variations in the qualified
floating rate. The OID Regulations also provide that if a Variable Note provides
for stated interest at a fixed rate for an initial period of one year or less
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Note's issue date is
intended to approximate the fixed rate (e.g., the value of the variable rate on
the issue date does not differ from the value of the fixed rate by more than 25
basis points), then the fixed rate and the variable rate together will
constitute either a single qualified floating rate or objective rate, as the
case may be.
If a Variable Note that provides for stated interest at either a single
qualified floating rate or a single objective rate throughout the term thereof
qualifies as a "variable rate debt instrument" under the OID Regulations and if
interest on such Note is unconditionally payable in cash or property (other than
debt instruments of the issuer) at least annually, then all stated interest on
such Note will constitute qualified stated interest and will be taxed
accordingly. Thus, a Variable Note that provides for stated interest at either a
single qualified floating rate or a single objective rate throughout the term
thereof and that qualifies as a "variable rate debt instrument" under the OID
Regulations will generally not be treated as having been issued with original
issue discount unless the Variable Note is issued at a "true" discount (i.e., at
a price below the Note's stated principal amount) in excess of a specified de
minimis amount. The amount of qualified stated interest and the amount of
original issue discount, if any, that accrues during an accrual period on such
Variable Note is determined under the rules applicable to fixed rate debt
instruments by assuming that the variable rate is a fixed rate equal to (i) in
the case of a qualified floating rate or qualified inverse floating rate, the
value as of the issue date, of the qualified floating rate or qualified inverse
floating rate, or (ii) in the case of an objective rate (other than a qualified
inverse floating rate), a fixed rate that reflects the yield that is reasonably
expected for the Variable Note. The qualified stated interest allocable to an
accrual period is increased (or decreased) if the interest actually paid during
an accrual period exceeds (or is less than) the interest assumed to be paid
during the accrual period pursuant to the foregoing rules.
In general, any other Variable Note that qualifies as a "variable rate debt
instrument" will be converted into an "equivalent" fixed rate debt instrument
for purposes of determining the amount and accrual of original issue discount
and qualified stated interest on the Variable Note. The OID Regulations
generally require that such a Variable Note be converted into an "equivalent"
fixed rate debt instrument by substituting any qualified floating rate or
qualified inverse floating rate provided for under the terms of the Variable
Note with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Variable Note's
issue date. Any objective rate (other than a qualified inverse floating rate)
provided for under the terms of the Variable Note is converted into a fixed rate
that reflects the yield that is reasonably expected for the Variable Note. In
the case of a Variable Note that qualifies as a "variable rate debt instrument"
and provides for stated interest at a fixed rate in addition to either one or
more qualified floating rates or a qualified inverse floating rate, the fixed
rate is initially converted into a qualified floating rate (or a qualified
inverse floating rate, if the Variable Note provides for a qualified inverse
floating rate). Under such circumstances, the qualified floating rate or
qualified inverse floating rate that replaces the fixed rate must be such that
the fair market value of the Variable Note as of the Variable Note's issue date
is approximately the same as the fair market value of an otherwise identical
debt instrument that provides for either the qualified floating rate or
qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Variable Note is then converted into an "equivalent"
fixed rate debt instrument in the manner described above.
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Once the Variable Note is converted into an "equivalent" fixed rate debt
instrument pursuant to the foregoing rules, the amount of original issue
discount and qualified stated interest, if any, are determined for the
"equivalent" fixed rate debt instrument by applying the general original issue
discount rules to the "equivalent" fixed rate debt instrument and a U.S. Holder
of the Variable Note will account for such original issue discount and qualified
stated interest as if the U.S. Holder held the "equivalent" fixed rate debt
instrument. Each accrual period appropriate adjustments will be made to the
amount of qualified stated interest or original issue discount assumed to have
been accrued or paid with respect to the "equivalent" fixed rate debt instrument
in the event that such amounts differ from the actual amount of interest accrued
or paid on the Variable Note during the accrual period.
If a Variable Note does not qualify as a "variable rate debt instrument"
under the OID Regulations, then the Variable Note would be treated as a
contingent payment debt obligation. U.S. Holders should be aware that on June
11, 1996 the Treasury Department issued final regulations (the "CPDI
Regulations") concerning the proper United States Federal income tax treatment
of contingent payment debt instruments. In general, the CPDI Regulations would
cause the timing and character of income, gain or loss reported on a contingent
payment debt instrument to substantially differ from the timing and character of
income, gain or loss reported on a contingent payment debt instrument under
general principles of current United States Federal income tax law.
Specifically, the CPDI Regulations generally require a U.S. Holder of such an
instrument to include future contingent and noncontingent interest payments in
income as such interest accrues based upon a projected payment schedule.
Moreover, in general, under the CPDI Regulations, any gain recognized by a U.S.
Holder on the sale, exchange, or retirement of a contingent payment debt
instrument will be treated as ordinary income and all or a portion of any loss
realized could be treated as ordinary loss as opposed to capital loss (depending
upon the circumstances). The CPDI Regulations apply to debt instruments issued
on or after August 13, 1996. The proper United States Federal income tax
treatment of Variable Notes that are treated as contingent payment debt
obligations will be more fully described in the applicable Pricing Supplement.
Furthermore, any other special United States Federal income tax considerations,
not otherwise discussed herein, which are applicable to any particular issue of
Notes will be discussed in the applicable Pricing Supplement.
Certain of the Notes (i) may be redeemable at the option of the Issuer
prior to their stated maturity (a "call option") and/or (ii) may be repayable at
the option of the holder prior to their stated maturity (a "put option"). Notes
containing such features may be subject to rules that differ from the general
rules discussed above. Investors intending to purchase Notes with such features
should consult their own tax advisors, since the original issue discount
consequences will depend, in part, on the particular terms and features of the
purchased Notes.
U.S. Holders may generally, upon election, include in income all interest
(including stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount,
and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium) that accrues on a debt instrument by using the constant
yield method applicable to original issue discount, subject to certain
limitations and exceptions.
Short-Term Notes
Notes that have a fixed maturity of one year or less ("Short-Term Notes")
will be treated as having been issued with original issue discount. In general,
an individual or other cash method U.S. Holder is not required to accrue such
original issue discount unless the U.S. Holder elects to do so. If such an
election is not made, any gain recognized by the U.S. Holder on the sale,
exchange or maturity of the Short-Term Note will be ordinary income to the
extent of the original issue discount accrued on a straight-line basis, or upon
election under the constant yield method (based on daily compounding), through
the date of sale or maturity, and a portion of the deductions otherwise
allowable to the U.S. Holder for interest on borrowings allocable to the
Short-Term Note will be deferred until a corresponding amount of income is
realized. U.S. Holders who report income for United States Federal income tax
purposes under the accrual method, and certain other holders including banks and
dealers in securities, are required to accrue original issue discount on a
Short-
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Term Note on a straight-line basis unless an election is made to accrue the
original issue discount under a constant yield method (based on daily
compounding).
Market Discount
If a U.S. Holder purchases a Note, other than an Original Issue Discount
Note, for an amount that is less than its issue price (or, in the case of a
subsequent purchaser, its stated redemption price at maturity) or, in the case
of an Original Issue Discount Note, for an amount that is less than its adjusted
issue price as of the purchase date, such U.S. Holder will be treated as having
purchased such Note at a "market discount," unless such market discount is less
than a specified de minimis amount.
Under the market discount rules, a U.S. Holder will be required to treat
any partial principal payment (or, in the case of an Original Issue Discount
Note, any payment that does not constitute qualified stated interest) on, or any
gain realized on the sale, exchange, retirement or other disposition of, a Note
as ordinary income to the extent of the lesser of (i) the amount of such payment
or realized gain or (ii) the market discount which has not previously been
included in income and is treated as having accrued on such Note at the time of
such payment or disposition. Market discount will be considered to accrue
ratably during the period from the date of acquisition to the maturity date of
the Note, unless the U.S. Holder elects to accrue market discount on the basis
of semiannual compounding.
A U.S. Holder may be required to defer the deduction of all or a portion of
the interest paid or accrued on any indebtedness incurred or maintained to
purchase or carry a Note with market discount until the maturity of the Note or
certain earlier dispositions, because a current deduction is only allowed to the
extent the interest expense exceeds an allocable portion of market discount. A
U.S. Holder may elect to include market discount in income currently as it
accrues (on either a ratable or semiannual compounding basis), in which case the
rules described above regarding the treatment as ordinary income of gain upon
the disposition of the Note and upon the receipt of certain cash payments and
regarding the deferral of interest deductions will not apply. Generally, such
currently included market discount is treated as ordinary interest for United
States Federal income tax purposes. Such an election will apply to all debt
instruments acquired by the U.S. Holder on or after the first day of the first
taxable year to which such election applies and may be revoked only with the
consent of the IRS.
Premium
If a U.S. Holder purchases a Note for an amount that is greater than the
sum of all amounts payable on the Note after the purchase date other than
payments of qualified stated interest, such U.S. Holder will be considered to
have purchased the Note with "amortizable bond premium" equal in amount to such
excess. A U.S. Holder may elect to amortize such premium using a constant yield
method over the remaining term of the Note and may offset interest otherwise
required to be included in respect of the Note during any taxable year by the
amortized amount of such excess for the taxable year. However, if the Note may
be optionally redeemed after the U.S. Holder acquires it at a price in excess of
its stated redemption price at maturity, special rules would apply which could
result in a deferral of the amortization of some bond premium until later in the
term of the Note. Any election to amortize bond premium applies to all taxable
debt instruments then owned and thereafter acquired by the U.S. Holder on or
after the first day of the first taxable year to which such election applies and
may be revoked only with the consent of the IRS.
Disposition of a Note
Except as discussed above, upon the sale, exchange or retirement of a Note,
a U.S. Holder generally will recognize taxable gain or loss equal to the
difference between the amount realized on the sale, exchange or retirement
(other than amounts representing accrued and unpaid interest) and such U.S.
Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax basis in a
Note generally will equal such U.S. Holder's initial investment in the Note
increased by any original issue discount included in income (and accrued market
discount, if any, if the U.S. Holder has included such market discount in
income) and decreased by the amount of any payments, other than qualified stated
interest payments, received and amortizable bond
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premium taken with respect to such Note. Such gain or loss generally will be
long-term capital gain or loss if the Note were held for more than one year.
NON-U.S. HOLDERS
A non-U.S. Holder will not be subject to United States Federal income taxes
on payments of principal, premium (if any) or interest (including original issue
discount, if any) on a Note, unless such non-U.S. Holder is a direct or indirect
10% or greater shareholder of the Issuer, a controlled foreign corporation
related to the Issuer or a bank receiving interest described in section
881(c)(3)(A) of the Code. To qualify for the exemption from taxation, the last
United States payor in the chain of payment prior to payment to a non-U.S.
Holder (the "Withholding Agent") must have received in the year in which a
payment of interest or principal occurs, or in either of the two preceding
calendar years, a statement that (i) is signed by the beneficial owner of the
Note under penalties of perjury, (ii) certifies that such owner is not a U.S.
Holder and (iii) provides the name and address of the beneficial owner. The
statement may be made on an IRS Form W-8 or a substantially similar form, and
the beneficial owner must inform the Withholding Agent of any change in the
information on the statement within 30 days of such change. If a Note is held
through a securities clearing organization or certain other financial
institutions, the organization or institution may provide a signed statement to
the Withholding Agent. However, in such case, the signed statement must be
accompanied by a copy of the IRS Form W-8 or the substitute form provided by the
beneficial owner to the organization or institution. The Treasury Department is
considering implementation of further certification requirements aimed at
determining whether the issuer of a debt obligation is related to holders
thereof.
Generally, a non-U.S. Holder will not be subject to Federal income taxes on
any amount which constitutes capital gain upon retirement or disposition of a
Note, provided the gain is not effectively connected with the conduct of a trade
or business in the United States by the non-U.S. Holder. Certain other
exceptions may be applicable, and a non-U.S. Holder should consult its tax
advisor in this regard.
The Notes will not be includible in the estate of a non-U.S. Holder unless
the individual is a direct or indirect 10% or greater shareholder of the Issuer
or, at the time of such individual's death, payments in respect of the Notes
would have been effectively connected with the conduct by such individual of a
trade or business in the United States.
BACKUP WITHHOLDING
Backup withholding of United States Federal income tax at a rate of 31% may
apply to payments made in respect of the Notes to registered owners who are not
"exempt recipients" and who fail to provide certain identifying information
(such as the registered owner's taxpayer identification number) in the required
manner. Generally, individuals are not exempt recipients, whereas corporations
and certain other entities generally are exempt recipients. Payments made in
respect of the Notes to a U.S. Holder must be reported to the IRS, unless the
U.S. Holder is an exempt recipient or establishes an exemption. Compliance with
the identification procedures described in the preceding section would establish
an exemption from backup withholding for those non-U.S. Holders who are not
exempt recipients.
In addition, upon the sale of a Note to (or through) a broker, the broker
must withhold 31% of the entire purchase price, unless either (i) the broker
determines that the seller is a corporation or other exempt recipient or (ii)
the seller provides, in the required manner, certain identifying information
and, in the case of a non-U.S. Holder, certifies that such seller is a non-U.S.
Holder (and certain other conditions are met). Such a sale must also be reported
by the broker to the IRS, unless either (i) the broker determines that the
seller is an exempt recipient or (ii) the seller certifies its non-U.S. status
(and certain other conditions are met). Certification of the registered owner's
non-U.S. status would be made normally on an IRS Form W-8 under penalties of
perjury, although in certain cases it may be possible to submit other
documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
S-38
<PAGE> 46
PLAN OF DISTRIBUTION
The Notes are being offered on a continuing basis for sale by the Issuer to
or through Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Chase Securities Inc., NationsBanc Capital Markets, Inc. and Smith
Barney Inc. (the "Agents"). The Agents, individually or in a syndicate, may
purchase Notes, as principal, from the Issuer for resale to investors and other
purchasers at varying prices relating to prevailing market prices at the time of
resale as determined by the applicable Agent or, if so specified in the
applicable Pricing Supplement, for resale at a fixed offering price. If agreed
to by the Issuer and an Agent, such Agent may also utilize its reasonable
efforts on an agency basis to solicit offers to purchase the Notes at 100% of
the principal amount thereof, unless otherwise specified in the applicable
Pricing Supplement. The Issuer will pay a commission to an Agent, ranging from
[.125% to .750%] of the principal amount of each Note, depending upon its stated
maturity, sold through such Agent as an agent of the Issuer. Commissions with
respect to Notes with stated maturities in excess of 30 years that are sold
through an Agent as an agent of the Issuer will be negotiated between the Issuer
and such Agent at the time of such sale.
Unless otherwise specified in the applicable Pricing Supplement, any Note
sold to an Agent as principal will be purchased by such Agent at a price equal
to 100% of the principal amount thereof less a percentage of the principal
amount equal to the commission applicable to an agency sale of a Note of
identical maturity. An Agent may sell Notes it has purchased from the Issuer as
principal to certain dealers less a concession equal to all or any portion of
the discount received in connection with such purchase. Such Agent may allow,
and such dealers may reallow, a discount to certain other dealers. After the
initial offering of Notes, the offering price (in the case of Notes to be resold
on a fixed offering price basis), the concession and the reallowance may be
changed.
The Issuer reserves the right to withdraw or cancel the offer made hereby
without notice and may reject offers in whole or in part (whether placed
directly with the Issuer or through an Agent). Each Agent will have the right,
in its discretion reasonably exercised, to reject in whole or in part any offer
to purchase Notes received by it on an agency basis.
Unless otherwise specified in the applicable Pricing Supplement, payment of
the purchase price of the Notes will be required to be made in immediately
available funds in The City of New York on the date of settlement. See
"Description of Notes -- General" and "-- Same Day Settlement and Payment."
Upon issuance, the Notes will not have an established trading market. The
Notes will not be listed on any securities exchange. The Agents may from time to
time purchase and sell Notes in the secondary market, but the Agents are not
obligated to do so, and there can be no assurance that there will be a secondary
market for the Notes or that there will be liquidity in the secondary market if
one develops. From time to time, the Agents may make a market in the Notes, but
the Agents are not obligated to do so and may discontinue any market-making
activity at any time.
The Agents may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). The Issuer has agreed
to indemnify the Agents against, and to provide contribution with respect to,
certain liabilities (including liabilities under the Securities Act). The Issuer
has agreed to reimburse the Agents for certain other expenses.
In the ordinary course of its business, the Agents and their affiliates
have engaged and may in the future engage in investment and commercial banking
transactions with the Issuer and certain of its affiliates. See "Plan of
Distribution" in the accompanying Prospectus.
The Issuer may issue and sell other Debt Securities described in the
accompanying Prospectus, and the amount of Notes offered hereby is subject to
reduction as a result of such sales.
S-39
<PAGE> 47
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 8, 1997
PROSPECTUS
$1,000,000,000
HOMESIDE LENDING, INC.
DEBT SECURITIES
------------------------
HomeSide Lending, Inc. (the "Issuer" and, together with its consolidated
subsidiaries, "HomeSide") may offer, in one or more series, its debt securities
(the "Debt Securities") in the amounts, at prices and on the terms to be
determined at the time of the offering. The Debt Securities may be issued in one
or more series or issuances and will have an aggregate initial public offering
price of up to $1,000,000,000. Certain specific terms of the Debt Securities in
respect of which this Prospectus is being delivered are set forth in the
accompanying Prospectus Supplement (the "Prospectus Supplement"), including,
where applicable, the specific title, the aggregate principal amount, aggregate
offering price, the denomination, the maturity, the premium, if any, the
interest rate (which may be fixed, floating or adjustable), if any, the time and
method of calculating payment of interest, if any, the place or places where
principal of, premium, if any, and interest, if any, on such Debt Securities
will be payable, any terms of redemption at the option of the Issuer, or
repayment at the option of the holder, any sinking fund provisions, any other
special terms, and the public offering price and other terms of the offering and
sale thereof. The Debt Securities will not be convertible into any other
securities. If so specified in the applicable Prospectus Supplement, Debt
Securities of a series may be issued in whole or in part in the form of one or
more temporary or permanent global securities.
The applicable Prospectus Supplement also will contain information, where
applicable, about U.S. federal income tax considerations relating to, and any
listing on a securities exchange of, the Debt Securities covered by such
Prospectus Supplement.
Unless otherwise specified in a Prospectus Supplement, the Debt Securities,
when issued, will be unsecured and unsubordinated obligations of the Issuer and
will rank pari passu in right of payment with all other unsecured and
unsubordinated indebtedness of the Issuer.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Debt Securities may be sold through underwriting syndicates represented
by managing underwriters, by underwriters without a syndicate, through agents
designated from time to time, or directly to institutional purchasers. Any such
managing underwriters, underwriters or agents may include Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc.,
NationsBanc Capital Markets, Inc. and Smith Barney Inc. The names of any
underwriters or agents of the Issuer involved in the sale of the Debt Securities
in respect of which this Prospectus is being delivered and any applicable
commissions or discounts are set forth in the Prospectus Supplement. See "Plan
of Distribution." This Prospectus may not be used to consummate sales of Debt
Securities unless accompanied by a Prospectus Supplement.
------------------------
The date of this Prospectus is , 1997
<PAGE> 48
------------------------
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH
FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR
A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.
ADDITIONAL INFORMATION
The Issuer has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement," which term shall include all amendments, exhibits, annexes and
schedules thereto) pursuant to the Securities Act of 1933 (the "Act" or the
"Securities Act"), and the rules and regulations promulgated thereunder,
covering the securities being offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the Commission
and to which reference is hereby made. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. For
further information with respect to the Issuer, reference is made to such
Registration Statement. The Registration Statement may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth St., N.W., Washington, D.C. 20549, and at the
Regional Offices of the Commission at 7 World Trade Center, 13th Floor, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can be
obtained from the public reference facilities of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of such site is http://www.sec.gov.
The Issuer's audited annual financial statements, unaudited quarterly
financial statements and certain other reports will be furnished to the Trustee
under the Indenture. Following the effectiveness of the Registration Statement
under the Securities Act, the Issuer will be subject to the reporting
requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Notwithstanding that the Issuer may not be required to
remain subject to the reporting requirements of Section 13 or Section 15(d) of
the Exchange Act, so long as any of the Debt Securities are outstanding, the
Issuer will continue to file with the Commission and provide to the Trustee and,
upon request, to the holders of the Debt Securities, annual reports containing
financial statements audited by its independent certified public accountants and
quarterly reports containing unaudited financial statements for each of the
first three quarters of each fiscal year.
------------------------
2
<PAGE> 49
HOMESIDE
The Issuer, formerly the mortgage banking subsidiary of The First National
Bank of Boston ("Bank of Boston"), was acquired by HomeSide, Inc. (the "Parent")
on March 15, 1996. The Issuer prior to its acquisition is sometimes referred to
herein as "HLI". HomeSide Holdings, Inc. ("HHI"), formerly the mortgage banking
subsidiary of Barnett Banks, Inc. ("Barnett") was acquired by the Parent on May
31, 1996. Upon the acquisition of HHI by the Parent, all of the assets and
liabilities of HHI, with the exception of certain GNMA servicing rights, were
transferred to the Issuer. HHI is a wholly-owned subsidiary of the Parent, and
the Issuer is a wholly-owned subsidiary of HHI. The Issuer was incorporated in
Florida on September 18, 1986. HomeSide's executive offices are located at 7301
Baymeadows Way, Jacksonville, Florida 32256, telephone number (904) 281-3000.
HomeSide is one of the largest full-service residential mortgage banking
companies in the United States. HomeSide's strategy emphasizes variable cost
mortgage origination and low cost servicing. On a combined basis HomeSide's
origination volume and servicing portfolio would have been $14.7 billion and
$73.9 billion, respectively, as of and for the year ended December 31, 1995,
ranking HomeSide as the 5th largest originator and 7th largest servicer in the
United States for 1995 based on data published by National Mortgage News. As of
and for the nine months ended November 30, 1996, HomeSide's loan originations
and acquisitions were $18.9 billion and the servicing portfolio was $87.7
billion.
The table below sets forth the historical production and servicing
portfolio volumes for HLI and HHI.
<TABLE>
HLI AND HHI COMBINED PRODUCTION AND SERVICING SUMMARY
<CAPTION>
YEARS ENDED AND AT DECEMBER 31,
-------------------------------------------------------
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
PRODUCTION
HLI................................ $ 4,437 $ 8,660 $11,371 $ 8,935 $ 8,885 $4,187(b)
HHI(a)............................. 1,945 3,507 3,360 3,410 5,767 2,538(c)
------- ------- ------- ------- ------- ------
Combined production.............. $ 6,382 $12,167 $14,731 $12,345 $14,652 $6,725
======= ======= ======= ======= ======= ======
SERVICING PORTFOLIO
HLI................................ $20,601 $23,706 $27,999 $37,971 $41,555
HHI................................ 10,034 11,524 13,085 18,411 33,411
------- ------- ------- ------- -------
Combined servicing portfolio..... $30,635 $35,230 $41,084 $56,382 $74,966
======= ======= ======= ======= =======
- ---------------
(a) If Loan America Financial Corporation ("LAFC" or "Loan America") and
BancPLUS Financial Corporation loan production had been included for years
prior to their acquisitions, then production would have been $4,742 million,
$8,480 million, $9,589 million, $6,401 million and $5,767 million for 1991,
1992, 1993, 1994 and 1995, respectively.
(b) Period information is for January 1, 1996 through March 15, 1996.
(c) Period information is for January 1, 1996 through May 31, 1996.
</TABLE>
3
<PAGE> 50
The table below sets forth the servicing statistics for HomeSide:
<TABLE>
HOMESIDE SERVICING STATISTICS
<CAPTION>
PRO FORMA
HOMESIDE FOR THE
HLI AND HHI
ACQUISITIONS AT ACTUAL AT
DECEMBER 31, 1995 NOVEMBER 30, 1996
----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
FHA/VA............................................ $24,823 $31,431
Conventional...................................... 48,429 51,389
------- -------
Total serviced unpaid principal balance
("UPB")...................................... 73,252 (a) 82,820(b)
ARM (adjustable rate mortgages)................... 23% 26%
Fixed............................................. 77% 74%
Weighted average coupon........................... 8.01% 7.91%
Weighted average servicing fee (% of UPB)......... 0.351%(c) 0.359%
Weighted average maturity (months)................ 278 279
- ---------------
(a) Excludes loans purchased not yet on servicing system of approximately $0.6
billion.
(b) Excludes loans purchased not yet on servicing system of $4.9 billion.
(c) HHI's weighted average servicing fees are adjusted to reflect market rates
under contractual arrangements between HomeSide and Barnett.
</TABLE>
4
<PAGE> 51
USE OF PROCEEDS
Except as may be otherwise stated in the applicable Prospectus Supplement,
the Issuer intends to use the net proceeds from the sale of the securities
offered hereby to reduce amounts outstanding under the Bank Credit Agreement or
to repay other outstanding indebtedness and for working capital and general
corporate purposes, including the purchase of servicing rights. The loans under
the Bank Credit Agreement mature on February 14, 2000 and as of November 30,
1996 carry a weighted average interest on amounts borrowed of 5.98% per annum.
See "Description of Certain Indebtedness -- Bank Credit Agreement."
5
<PAGE> 52
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SELECTED UNAUDITED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION OF HOMESIDE
The selected unaudited consolidated financial and operating information of
HomeSide set forth below is for the period March 16, 1996 to May 31, 1996, each
of the three months ended August 31, 1996 and November 30, 1996 and the period
March 16, 1996 to November 30, 1996 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"
included elsewhere in this Prospectus. See also "Unaudited Pro Forma
Consolidated Financial Information." The consolidated operating results for
these periods and the consolidated balance sheet data at November 30, 1996 are
unaudited but, in the opinion of management, contain all material adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. The results of operations for the periods ended November 30, 1996
are not necessarily indicative of results to be expected for the full year.
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE FOR THE THREE FOR THE PERIOD
MARCH 16, 1996 MONTHS ENDED MONTHS ENDED MARCH 16, 1996 TO
TO MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996 NOVEMBER 30, 1996
--------------- --------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Mortgage servicing fees............. $ 41,485 $ 82,179 $ 90,492 $ 214,156
Amortization of mortgage servicing
rights............................ (16,442) (39,753) (48,120) (104,315)
----------- ----------- ----------- -----------
Net servicing revenue............. 25,043 42,426 42,372 109,841
Interest income..................... 12,719 22,270 25,241 60,230
Interest expense.................... (12,592) (17,684) (16,140) (46,416)
----------- ----------- ----------- -----------
Net interest revenue.............. 127 4,586 9,101 13,814
Net mortgage origination revenue.... 10,810 16,273 16,521 43,604
Other income........................ 107 355 79 541
----------- ----------- ----------- -----------
Total revenues............ 36,087 63,640 68,073 167,800
Expenses:
Salaries and employee benefits...... 11,480 21,177 20,650 53,307
Occupancy and equipment............. 1,846 3,084 3,337 8,267
Servicing losses on investor-owned
loans............................. 3,938 4,058 4,957 12,953
Other expenses...................... 5,345 12,196 11,391 28,932
----------- ----------- ----------- -----------
Total expenses............ 22,609 40,515 40,335 103,459
Income before income taxes.......... 13,478 23,125 27,738 64,341
Income tax expense.................. 5,526 9,481 11,373 26,380
----------- ----------- ----------- -----------
Net income(e)....................... $ 7,952 $ 13,644 $ 16,365 $ 37,961
=========== =========== =========== ===========
SELECTED OPERATING DATA:
Volume of loans originated and
acquired.......................... $ 3,780,236 $ 9,565,199(b) $ 5,540,875 $18,886,310(b)
Loan servicing portfolio (at period
end).............................. 77,351,849 84,818,725(b) 87,712,746 87,712,746
Loan servicing portfolio (average
outstanding during the period).... 43,670,497(a) 81,223,664 86,535,928 69,643,494(c)
Weighted average interest rate for
the servicing portfolio (at period
end).............................. 7.86% 7.92% 7.91% 7.91%
Weighted average servicing fee for
the servicing portfolio (at period
end).............................. 0.367% 0.363% 0.359% 0.359%
Ratio of earnings to fixed
charges........................... 2.05x(d) 2.28x(d) 2.67x(d) 2.35x(d)
(footnotes on following page)
</TABLE>
6
<PAGE> 53
<TABLE>
<CAPTION>
AT NOVEMBER 30, 1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
SELECTED BALANCE SHEET DATA:
Mortgage loans held for sale....................................................... $1,101,229
Mortgage servicing rights.......................................................... 1,321,639
Total assets....................................................................... 2,833,601
Warehouse credit facility.......................................................... 1,074,583
Long-term debt(e).................................................................. 957,508
Total liabilities.................................................................. 2,276,265
Total stockholder's equity......................................................... 557,336
</TABLE>
- ---------------
(a) Period information is for March 1, 1996 through May 31, 1996.
(b) Includes bulk purchases of $4.1 billion.
(c) Period information is for March 1, 1996 through November 30, 1996.
(d) The ratio of earnings to fixed charges does not include the effect of $200
million of 11.25% Notes due 2003 (the "Parent Notes") which were issued by
the Parent on May 14, 1996. The Parent Notes are not reflected in the
consolidated financial statements of HomeSide, however, debt service on the
Parent Notes is highly dependent on the ability of HomeSide to generate
funds sufficient to meet such obligations.
(e) On May 14, 1996 the Parent issued $200 million of Parent Notes. All of the
outstanding common stock of HomeSide and HHI is pledged as security on the
Parent Notes. The only significant asset of the Parent is its investment in
HomeSide and HHI common stock. The Parent is dependent on cash payments from
HomeSide to service its debt obligations. The Parent Notes, and related
interest expense, are not reflected in the financial statements of HomeSide.
7
<PAGE> 54
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION OF
HLI (ACQUIRED BY HOMESIDE, INC. ON MARCH 15, 1996 AND NOW KNOWN AS HOMESIDE
LENDING, INC.)
The selected consolidated financial information of HLI (formerly BancBoston
Mortgage Corporation) set forth below has been derived from the financial
statements of HLI and the related notes thereto for the periods prior to its
acquisition by the Parent. The selected consolidated financial information
should be read in conjunction with, and is qualified in its entirety by
reference to, HLI's Consolidated Financial Statements and the Notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- HLI -- for the Period March 16, 1996 to November 30, 1996 and the
Three Months Ended November 30, 1996" included elsewhere in this Prospectus. See
also "Unaudited Pro Forma Consolidated Financial Information."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, FOR THE THREE FOR THE PERIOD
---------------------------------------------------------------- MONTHS ENDED JANUARY 1, 1996
1991 1992 1993 1994 1995 MARCH 31, 1995 TO MARCH 15, 1996
----------- ----------- ----------- ----------- ----------- -------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Mortgage servicing fees.... $ 92,362 $ 105,890 $ 111,822 $ 140,491 $ 173,038 $ 43,657 $ 38,977
Gain (loss) on risk
management contracts..... -- -- 6,688 (6,702) 108,702 3,612 (128,795)
Amortization of mortgage
servicing rights......... (37,213) (73,908) (112,492) (66,801) (108,013) (23,103) (7,245)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net servicing revenue.... 55,149 31,982 6,018 66,988 173,727 24,166 (97,063)
Interest income............ 41,252 46,865 50,156 31,585 24,324 4,122 8,423
Interest expense........... (27,686) (38,855) (44,199) (33,952) (27,128) (6,079) (10,089)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest revenue..... 13,566 8,010 5,957 (2,367) (2,804) (1,957) (1,666)
Net mortgage origination
revenue (expense)........ 6,508 1,123 6,173 4,983 3,417 (1,083) 7,638
Gain on sales of servicing
rights................... 12,034 14,769 651 10,862 10,230 4,285 --
Other income............... 52 17 50 147 511 13 253
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues..... 87,309 55,901 18,849 80,613 185,081 25,424 (90,838)
Expenses:
Salaries and employee
benefits............... 27,328 30,053 33,096 40,370 45,381 11,696 10,287
Occupancy and
equipment.............. 7,809 7,788 7,966 9,012 10,009 2,358 2,041
Servicing losses on
investor-owned loans... 2,880 8,138 2,770 7,177 9,981 733 5,560
Real estate acquired..... 1,195 1,124 1,600 253 1,054 218 291
Other expenses........... 17,552 20,461 22,058 19,326 21,896 4,713 7,377
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses..... 56,764 67,564 67,490 76,138 88,321 19,718 25,556
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes and cumulative
effects of changes in
accounting principles.... 30,545 (11,663) (48,641) 4,475 96,760 5,706 (116,394)
Income tax expense
(benefit) before
cumulative effects of
changes in accounting
principles............... 12,168 (3,829) (17,284) 2,525 37,934 2,277 (42,533)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effects of
changes in accounting
principles............... 18,377 (7,834) (31,357) 1,950 58,826 3,429 (73,861)
Change in purchased
mortgage servicing
rights ("PMSR")
valuation method, net
of tax................. -- -- (59,921)(a) -- -- -- --
Change in accounting for
income taxes........... -- -- 6,093(b) -- -- -- --
Change in accounting for
mortgage servicing fee
income, net of tax..... -- -- -- 3,455(c) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss).......... $ 18,377 $ (7,834) $ (85,185) $ 5,405 $ 58,826 $ 3,429 $ (73,861)
=========== =========== =========== =========== =========== =========== ===========
SELECTED OPERATING DATA:
Volume of loans originated
and acquired............. $ 5,196,996 $ 9,705,875 $13,682,761 $14,473,000 $ 9,567,521 $ 1,181,642 $ 4,187,603(d)
Loan servicing portfolio
(at period end).......... 20,600,569 23,705,642 27,999,100 37,971,200 41,555,354 37,800,120 44,158,163(d)
Loan servicing portfolio
(average)................ 19,663,100 22,153,100 25,852,400 33,178,600 39,283,700 38,099,730 43,158,072(d)
Weighted average interest
rate (at period end)..... 9.65% 9.05% 8.07% 7.91% 7.97% 7.90% 7.92%(d)
Weighted average servicing
fee (average for
period).................. 0.400% 0.390% 0.372% 0.389% 0.383% 0.384% 0.380%(d)
Ratio of earnings to fixed
charges.................. 2.06x --(e) --(e) 1.13x 4.40x 1.88x --(e)
SELECTED BALANCE SHEET DATA
(AT PERIOD END):
Mortgage loans held for
sale..................... $ 507,776 $ 495,455 $ 607,506 $ 271,215 $ 388,436 $ 70,978 $ 641,465
Mortgage servicing
rights................... 296,393 337,307 281,727 431,148 551,338 414,974 542,862
Total assets............... 1,034,269 1,073,686 1,193,583 1,006,887 1,254,303 858,001 1,512,902
Note payable to parent..... 748,827 799,992 1,019,011 779,021 966,000 648,499 1,256,000
Long-term debt............. 14,483 14,339 14,180 14,007 13,816 13,961 13,790
Total liabilities.......... 818,890 866,141 1,071,223 879,122 1,067,712 726,807 1,400,172
Total stockholder's
equity................... 215,379 207,545 122,360 127,765 186,591 131,194 112,730
</TABLE>
- ---------------
(a) On January 1, 1993, HLI changed its method of accounting for PMSR to conform
to the accounting rules adopted in 1993 by the banking regulators. Under
these new rules, the carrying value of PMSR is recorded at the lesser of
amortized cost or the discounted cash flows from servicing the underlying
mortgages. Previously, this valuation was performed on an undiscounted
basis. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Consolidated Financial
Statements on F-40.
(b) On January 1, 1993, HLI adopted SFAS No. 109, "Accounting for Income Taxes,"
which principally affects accounting for deferred taxes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Notes 2 and 10 of Notes to Consolidated Financial Statements on F-40 and
F-47, respectively.
(c) On January 1, 1994, HLI changed its method of recognizing servicing fee
income to the accrual method. Previously, these fees were recorded as income
when the payments were received. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 2 of Notes to
Consolidated Financial Statements on F-40.
(d) Period information is for the period January 1, 1996 to March 31, 1996 and
period end information is at March 31, 1996.
(e) Fixed charges exceeded income before income taxes, cumulative effect of
changes in accounting principles and fixed charges by $11.7 million and
$48.6 million in 1992 and 1993, respectively, and $116.4 million for the
period January 1, 1996 to March 15, 1996.
8
<PAGE> 55
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION OF
HHI
(ACQUIRED BY HOMESIDE, INC. ON MAY 31, 1996 AND NOW KNOWN AS HOMESIDE HOLDINGS,
INC.)
The selected consolidated financial information of HHI (formerly Barnett
Mortgage Company) set forth below has been derived from the financial statements
of HHI and the related notes thereto for the periods prior to its acquisition by
the Parent. The selected consolidated financial information should be read in
conjunction with, and is qualified in its entirety by reference to, HHI's
Consolidated Financial Statements and the Notes thereto and in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- HHI -- for the Two Years Ended December 31, 1995; for the Period
April 1, 1996 to May 30, 1996 and Three Months Ended June 30, 1995; and for the
Period January 1, 1996 to May 30, 1996 and the Six Months Ended June 30, 1995"
included elsewhere in this Prospectus. See also "Unaudited Pro Forma
Consolidated Financial Information."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, FOR THE THREE FOR THE PERIOD FOR THE SIX FOR THE PERIOD
-------------------------------------------------- MONTHS ENDED APRIL 1, 1996 MONTHS ENDED JANUARY 1, 1996
1991 1992 1993 1994(a) 1995(b) JUNE 30, 1995 TO MAY 30, 1996 JUNE 30, 1995 TO MAY 30, 1996
------- ------- -------- -------- -------- ------------- --------------- ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Mortgage
Origination
Revenue:
Mortgage
origination
fees......... $ -- $ -- $ 358 $ 3,276 $ 17,104 $ 3,469 $ 1,646 $ 6,005 $ 7,288
Gain (loss) on
sales of
loans, net... 3,184 8,187 5,688 692 (13,920) 995 (3,383) 1,514 482
------- ------- -------- -------- -------- -------- -------- -------- --------
Total
mortgage
origination
revenue... 3,184 8,187 6,046 3,968 3,184 4,464 (1,737) 7,519 7,770
Interest Income
(expense):
Interest
income....... 765 657 855 3,460 27,264 4,420 5,638 7,003 14,216
Interest
expense,
substantially
all to
affiliates... (568) (531) (1,415) (4,911) (20,427) (6,766) (3,480) (9,685) (9,574)
------- ------- -------- -------- -------- -------- -------- -------- --------
Net
interest
income
(expense)... 197 126 (560) (1,451) 6,837 (2,346) 2,158 (2,682) 4,642
Mortgage
Servicing
Revenue:
Mortgage
servicing
income....... 10,143 13,427 20,560 27,130 83,502 22,439 15,709 35,723 38,833
Mortgage
servicing
income from
affiliates... 6,986 16,143 18,326 20,017 25,057 6,407 5,464 12,503 13,626
Amortization of
capitalized
mortgage
servicing
rights....... (2,453) (6,013) (11,547) (17,783) (48,282) (12,124) (8,456) (20,475) (25,467)
Gain on sales
of
servicing.... -- -- -- -- 9,096 -- -- -- --
------- ------- -------- -------- -------- -------- -------- -------- --------
Net mortgage
servicing
revenue.... 14,676 23,557 27,339 29,364 69,373 16,722 12,717 27,751 26,992
Other Income..... 2,860 7,750 6,296 4,492 2,592 6,203 1,678 7,054 1,740
------- ------- -------- -------- -------- -------- -------- -------- --------
Total
revenues... 20,917 39,620 39,121 36,373 81,986 25,043 14,816 39,642 41,144
Expenses:
Salaries and
benefits..... 7,778 13,698 13,914 17,474 53,070 14,301 10,402 23,433 25,173
General and
administrative... 10,349 11,401 12,432 14,924 41,849 12,119 6,816 20,403 20,748
Affiliate
profit
sharing...... 1,699 12,471 10,774 3,534 6,242
Occupancy and
equipment.... 1,091 1,167 1,810 2,702 5,960 2,424 1,569 3,941 3,720
Amortization of
goodwill..... -- -- -- 259 4,840 1,673 928 2,226 2,324
------- ------- -------- -------- -------- -------- -------- -------- --------
Total
expenses... 20,917 38,737 38,930 38,893 111,961 30,517 19,715 50,003 51,965
------- ------- -------- -------- -------- -------- -------- -------- --------
Income (loss)
before income
taxes.......... 0 883 191 (2,520) (29,975) (5,474) (4,899) (10,361) (10,821)
Income tax
provision
(benefit)...... 34 359 87 (462) (9,589) (2,118) (914) (2,877) (2,478)
------- ------- -------- -------- -------- -------- -------- -------- --------
Income (loss)
before changes
in accounting
principles..... (34) 524 104 (2,058) (20,386) -- -- -- --
Cumulative effect
of changes in
accounting
principles..... -- (507)(c) -- -- -- -- -- -- --
------- ------- -------- -------- -------- -------- -------- -------- --------
Net income
(loss)......... $ (34) $ 17 $ 104 $ (2,058) $(20,386) $ (3,356) $ (3,985) $ (7,484) $ (8,343)
======= ======= ======== ======== ======== ======== ======== ======== ========
SELECTED OPERATING DATA (DOLLARS IN MILLIONS):
Volume of loans
originated and
acquired....... $ 1,945 $ 3,507 $ 3,360 $ 3,410 $ 5,767 $ 1,330 $ 982 $ 2,886 $ 2,538
Loan servicing
portfolio (at
period end).... 10,034 11,524 13,085 18,411 33,411 33,070 (e) 33,070 (e)
Loan servicing
portfolio
(average)...... 9,639 10,779 12,305 15,748 30,669 32,839 33,057 28,153 33,182
Weighted average
interest rate
(at period
end)(d)........ -- -- 7.34% 7.44% 8.05% 7.98% (e) 7.98% (e)
Weighted average
servicing fee
(average for
period)(d)..... -- -- 0.259% 0.261% 0.299% 0.301% 0.346% 0.299% 0.337%
Ratio of earnings
to fixed
charges........ 1.00x 2.10x 1.10x --(f) --(f) --(f) --(f) --(f) --(f)
SELECTED BALANCE SHEET DATA (AT PERIOD END):
Mortgage loans
held for
sale........... $ -- $ -- $ -- $183,914 $465,880 $ 331,184 (g) $331,184 (g)
Mortgage
servicing
rights......... 12,959 25,458 48,941 92,461 250,788 259,796 (g) 259,796 (g)
Total assets..... 42,082 61,166 96,186 359,472 994,630 857,046 (g) 857,046 (g)
Notes payable.... 16,107 20,325 63,329 248,214 653,056 503,000 (g) 503,000 (g)
Total
liabilities.... 22,676 38,541 69,930 274,570 762,802 612,311 (g) 612,311 (g)
Total
stockholder's
equity......... 19,406 22,625 26,257 84,902 231,828 244,735 (g) 244,735 (g)
(footnotes on following page)
</TABLE>
9
<PAGE> 56
- ---------------
(a) Includes Loan America since its acquisition in October 1994.
(b) Includes BancPLUS Financial Corporation since its acquisition in February
1995.
(c) In 1992, HHI adopted two new accounting standards. Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
changed HHI's accounting for income taxes to the asset/liability method from
the deferred method previously required by Accounting Principles Board
Opinion No. 11. HHI also adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," which requires that the
projected future cost of providing postretirement health care and other
benefits be recognized during the periods employees provide services to earn
those benefits. Prior to adopting SFAS No. 106, these costs were expensed as
incurred. HHI adopted both of these changes on a prospective basis effective
January 1, 1992. As permitted under SFAS No. 106, HHI chose to immediately
recognize the transition obligation for postretirement benefits other than
pensions in net income for 1992 rather than on a delayed basis over the
remaining average service period of active plan members.
(d) Information not available for 1991 and 1992.
(e) HHI was acquired by HomeSide on May 31, 1996 and, accordingly, its servicing
portfolio is included in HomeSide's servicing portfolio as of May 31, 1996.
(f) Fixed charges exceeded income before income taxes, cumulative effect of
changes in accounting principles and fixed charges by $2.5 million and $30.0
million in 1994 and 1995, respectively, $4.9 million for the period April 1,
1996 to May 30, 1996, $5.5 million for the three months ended June 30, 1995,
$10.8 million for the period January 1, 1996 to May 30, 1996 and $10.4
million for the six months ended June 30, 1995.
(g) HHI was acquired by the Parent on May 31, 1996 and, accordingly, all of its
assets and liabilities are included in the consolidated balance sheet of the
Parent as of May 31, 1996.
10
<PAGE> 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HOMESIDE -- FOR THE PERIOD MARCH 16, 1996 TO NOVEMBER 30, 1996
AND THE THREE MONTHS ENDED NOVEMBER 30, 1996
GENERAL
The Issuer is the primary operating subsidiary of HomeSide, Inc. (the
"Parent"). The Parent was formed on December 11, 1995 by an investor group,
consisting of Thomas H. Lee Company and its affiliates and Madison Dearborn
Partners (collectively, the "Investors"), and signed a definitive stock purchase
agreement with The First National Bank of Boston ("Bank of Boston" or "BKB") for
the purpose of acquiring certain assets and liabilities of the mortgage banking
business ("HLI") owned by Bank of Boston. The transaction closed on March 15,
1996 and HomeSide began operations on March 16, 1996.
On May 31, 1996, Barnett Banks, Inc. ("Barnett") sold certain of its
mortgage banking operations ("HHI"), primarily its servicing portfolio and
proprietary mortgage banking software systems, to the Parent. Barnett received
cash and an ownership interest in the Parent. Barnett Mortgage Company was
subsequently renamed HomeSide Holdings, Inc. For more information on these
acquisitions see Note 4 of Notes to Consolidated Financial Statements of the
Issuer on F-9. From May 31, 1996 until the January 1997 public offering of
Common Stock of the Parent each of the Investors as a group, Bank of Boston and
Barnett owned approximately one-third of the Parent. Following the public
offering, the Investors as a group, Bank of Boston and Barnett own in the
aggregate approximately 79% of the outstanding Common Stock of the Parent.
The Issuer, in conjunction with the Parent, has adopted a February 28
fiscal year end. The consolidated financial statements of HomeSide have been
prepared for the period March 16, 1996 to November 30, 1996 to coincide with the
Parent's acquisition of HLI and the end of HomeSide's third quarter of fiscal
1997. The purchase method of accounting was used for the HLI and HHI
acquisitions and, accordingly, assets acquired and liabilities assumed were
recorded at their estimated fair values at the date of acquisition.
Comparative financial statements for the same period in the prior year have
not been presented due to a lack of comparability between HomeSide and the
historical financial statements of HLI and HHI. As noted above, the assets
acquired and liabilities assumed by HomeSide in each of the acquisitions were
recorded at their estimated fair values as of the date of acquisition. As a
result, HomeSide's operating results are not directly comparable to HLI and BMC
historical operating results due, in part, to different balance sheet valuations
(estimated fair value as compared to historical cost). In addition, certain
production channels were retained by BKB and all of BMC's production channels
were retained by Barnett. The results of operations for the three months ended
November 30, 1996 are, therefore, most directly comparable to the results of
operations for the three months ended August 31, 1996. Results of operations
prior to May 31, 1996 do not include the results of operations of HHI, which was
acquired by the Parent on May 31, 1996.
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) the
purchase and sale of the rights to service mortgage loans.
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).
11
<PAGE> 58
Mortgage bankers rely mainly on short-term borrowings, such as warehouse
lines, to finance the origination of mortgages that are then typically 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 and to acquire rights to service additional loans 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 UPB for a
group of mortgage loans. Values of servicing portfolios are determined on the
basis of 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 loans in warehouse and the
value of the servicing rights purchased ("purchased mortgage servicing rights"
or "PMSR") or originated ("originated mortgage servicing rights" or "OMSR").
The following operating statistics for HomeSide are presented to aid in
understanding the results of operations and financial condition of HomeSide for
the period March 16, 1996 to May 31, 1996, and each of the three months ended
August 31, 1996 and November 30, 1996 and the period March 16, 1996 to November
30, 1996. References to the first quarter of fiscal 1997 relate to the period
March 16, 1996 to May 31, 1996. References to the second quarter of fiscal 1997
relate to the three months ended August 31, 1996 and references to the third
quarter of fiscal 1997 relate to the three months ended November 30, 1996.
Loan Production Activities
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE FOR THE THREE FOR THE PERIOD
MARCH 16, 1996 MONTHS ENDED MONTHS ENDED MARCH 16, 1996 TO
TO MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996 NOVEMBER 30, 1996
--------------- --------------- ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Correspondent (includes volumes
purchased from BKB and
Barnett)....................... $ 1,893 $ 2,950 $ 3,249 $ 8,092
Co-issue (a)..................... 1,419 2,208 1,985 5,612
Broker........................... 220 155 168 543
------- ------- ------- -------
Total wholesale.................. 3,532 5,313 5,402 14,247
Direct........................... 248 179 139 566
------- ------- ------- -------
Total purchases.................. 3,780 5,492 5,541 14,813
Bulk acquisitions................ -- 4,073 -- 4,073
------- ------- ------- -------
Total purchases and
acquisitions................... $ 3,780 $ 9,565 $ 5,541 $18,886
======= ======= ======= =======
</TABLE>
- ---------------
(a) Co-issue production represents the purchase of servicing rights from a
correspondent under contracts to deliver specified volumes on a monthly or
quarterly basis. The substance of this transaction is the purchase of a
loan and mortgage servicing right with the instantaneous sale of the loan
with the servicing right retained. Amounts represent the unpaid principal
balance of mortgage debt to which the acquired servicing rights relate.
During each of the second and third quarters of fiscal 1997, HomeSide's
loan production totaled approximately $5.5 billion. Total loan production
increased from $3.8 billion in the period March 16, 1996 to May 31, 1996 to $5.5
billion for the three months ended August 31, 1996. This increase was due to the
additional production resulting from the acquisition of HHI on May 31, 1996 and
growth in HomeSide's existing wholesale channel. In addition, HomeSide made bulk
servicing acquisitions of $4.1 billion during the second quarter of fiscal 1997.
12
<PAGE> 59
Servicing Portfolio
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE FOR THE THREE FOR THE PERIOD
MARCH 1, 1996 TO MONTHS ENDED MONTHS ENDED MARCH 1, 1996 TO
MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996 NOVEMBER 30, 1996
---------------- --------------- ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Balance at beginning of period....... $41,844 $77,351 $84,819 $41,844
Acquisition of HHI................... 33,082 -- -- 33,082
Other additions...................... 4,102 9,842 5,244 19,188
------- ------- ------- -------
Total additions................. 37,184 9,842 5,244 52,270
------- ------- ------- -------
Scheduled amortization............... 212 470 494 1,176
Prepayments.......................... 1,321 1,702 1,529 4,552
Foreclosures......................... 130 137 106 373
Sale of servicing.................... 14 65 221 300
------- ------- ------- -------
Total reductions................ 1,677 2,374 2,350 6,401
------- ------- ------- -------
Balance at end of period............. $77,351 $84,819 $87,713 $87,713
======= ======= ======= =======
</TABLE>
At November 30, 1996, HomeSide's servicing portfolio stood at $87.7 billion
compared to $84.8 billion at August 31, 1996, $77.4 billion at May 31, 1996 and
$41.8 billion at March 1, 1996. The number of loans being serviced at November
30, 1996 was 1,068,000, compared to 1,041,000 as of August 31, 1996, 966,000 as
of May 31, 1996 and 492,000 as of March 1, 1996. HomeSide's strategy is to build
its mortgage servicing portfolio and benefit from the economies of scale
inherent in the business.
RESULTS OF OPERATIONS
Summary
HomeSide reported net income of $16.4 million during the third quarter of
fiscal 1997 compared to net income of $13.6 million during the second quarter of
fiscal 1997 and $8.0 million during the first quarter of fiscal 1997. Net income
for the period March 16, 1996 to November 30, 1996 was $38.0 million. Total
revenue for the third quarter of fiscal 1997 was primarily comprised of net
servicing revenue of $42.4 million, net interest revenue of $9.1 million, and
net mortgage origination revenue of $16.5 million. These revenues were partially
offset by operating expenses of $40.3 million and income taxes of $11.4 million.
The primary reason for the growth in revenues was increased net interest revenue
during the third quarter of fiscal 1997 as compared to the second quarter of
fiscal 1997. Interest income and expense during the second quarter of fiscal
1997 were $22.3 million and $17.7 million, respectively. The increase in
interest income during the third quarter of fiscal 1997 was the result of an
increase in the average balance of loans held for sale from $1.3 billion in the
second quarter of fiscal 1997 to $1.4 billion during the third quarter of fiscal
1997. Interest expense decreased from $17.7 million in the second quarter of
fiscal 1997 to $16.1 million during the third quarter of fiscal 1997. Higher
average balances of mortgage loans held for sale during the third fiscal quarter
compared to the second fiscal quarter contributed to the $3.0 million increase
in interest income. Lower short-term interest rates and the improved pricing on
borrowings under the Bank Credit Agreement lowered the interest expense for
third quarter of fiscal 1997 compared to the second fiscal quarter.
HomeSide reported net income of $13.6 million during the second quarter of
fiscal 1997 compared to net income of $8.0 million during the first quarter of
fiscal 1997. Total revenue for the second quarter was primarily comprised of net
servicing revenue of $42.4 million, net interest revenue of $4.6 million and net
mortgage origination revenue of $16.3 million. These revenues were partially
offset by operating expenses of $40.5 million and income tax expense of $9.5
million. The primary reason for the increase in revenues and expenses during the
second quarter as compared to the first quarter was the acquisition of HHI on
May 31, 1996. Results of operations for HHI are included from the date of
acquisition and, therefore, are not included in HomeSide's first quarter of
fiscal 1997 results.
Net Servicing Revenue
During the third quarter of fiscal 1997, HomeSide had net servicing revenue
of $42.4 million, compared to net servicing revenue of $42.4 million during the
second quarter of fiscal 1997. Net servicing revenue during the third quarter of
fiscal 1997 was comprised of mortgage servicing fees of $90.5 million, offset by
mortgage servicing rights amortization of $48.1 million. Mortgage servicing fees
generally range from 0.25% to 0.50% of
13
<PAGE> 60
the declining principal balances of the loans per annum. HomeSide's weighted
average servicing fee during the third quarter of fiscal 1997 was 0.368%
compared to 0.367% during the second quarter of fiscal 1997. Amortization of
mortgage servicing rights is recorded over the estimated servicing period in
proportion to estimated servicing revenue and increased from $39.8 million in
the second quarter of fiscal 1997 to $48.1 million in the third quarter of
fiscal 1997 as a result of a higher average servicing portfolio balance and
higher projected mortgage loan prepayment speeds.
During the second quarter of fiscal 1997, HomeSide had net servicing
revenue of $42.4 million, compared to net servicing revenue of $25.0 million
during the first quarter of fiscal 1997. Net servicing revenue during the second
quarter of fiscal 1997 was comprised of mortgage servicing fees of $82.2
million, offset by mortgage servicing rights amortization of $39.8 million.
HomeSide's weighted average servicing fee during the second quarter of fiscal
1997 was 0.367% compared to 0.389% during the first quarter of fiscal 1997. The
decrease in the weighted average servicing fee was due to the servicing rights
acquired from HHI. These servicing rights generally had lower servicing fees due
to the lower proportion of government loans in HHI's servicing portfolio.
Amortization of mortgage servicing rights is recorded over the estimated
servicing period in proportion to estimated servicing revenue and increased from
$16.4 million in the first quarter of fiscal 1997 to $39.8 million in the second
quarter of fiscal 1997 as a result of a higher average servicing portfolio.
Risk Management Activities
HomeSide 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 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 March 16, 1996 to November 30, 1996, HomeSide purchased
options on 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
option contracts used by HomeSide have characteristics such that they tend to
increase in value as interest rates decline. Conversely, these option contracts
tend to decline in value as interest rates rise. Accordingly, changes in value
of these securities will tend to move inversely with changes in value of
HomeSide's mortgage servicing rights.
These option contracts are designated as hedges on the purchase date and
such designation must be at a level at least as specific as the level at which
mortgage servicing rights are evaluated for impairment. The option contracts are
marked-to-market with changes in market value deferred and recognized as an
adjustment to the cost 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's hedging activity can be
measured by the correlation between changes in the value of the option 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. During the periods presented, HomeSide has
experienced a high measure of correlation between changes in the value of
mortgage servicing rights and the option contracts. However, in periods of
rising interest rates, the increase in value of mortgage servicing rights may
outpace the decline in value of the option contracts since the loss on the
options is limited to the premium paid.
Since HomeSide's inception, cumulative gains and losses on risk management
contracts resulted in a $60.2 million net gain which reduced the cost basis of
mortgage servicing rights at November 30, 1996. Of the $60.2 million of net
gains included in the carrying value of HomeSide's mortgage servicing rights
portfolio, $133.3 million of gains occurred during the third quarter of fiscal
1997 and offset deferred losses of $74.7 million recorded during the first and
second quarters of fiscal 1997. 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 November 30, 1996 was $162.4
million, which was equal to their carrying amount because the options are
marked-to-market at each reporting date. 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 on F-5 for a
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<PAGE> 61
description of HomeSide's accounting policy for its risk management contracts.
See Notes 10 and 11 of Notes to Consolidated Financial Statements on pages F-12
through F-14 for additional fair value disclosures with respect to HomeSide's
risk management contracts.
Net Interest Revenue
Net interest revenue was $4.6 million during the second quarter of fiscal
1997 compared to $9.1 million during the third quarter of fiscal 1997. Net
interest revenue during the third quarter of fiscal 1997 was comprised of
interest income of $25.2 million, which was offset by interest expense of $16.1
million on HomeSide's borrowings. Interest income and expense during the second
quarter of fiscal 1997 were $22.3 million and $17.7 million, respectively. The
increase in interest income during the third quarter of fiscal 1997 was the
result of an increase in the average balance of loans held for sale from $1.3
billion in the second quarter of fiscal 1997 to $1.4 billion during the third
quarter of fiscal 1997. Interest expense decreased from $17.7 million in the
second quarter of fiscal 1997 to $16.1 million during the third quarter of
fiscal 1997. Lower short-term interest rates and the improved pricing on
borrowings under the Bank Credit Agreement contributed to this reduction.
Net interest revenue increased from $0.1 million during the first quarter
of fiscal 1997 to $4.6 million during the second quarter of fiscal 1997. Net
interest revenue during the second quarter was comprised of interest income of
$22.3 million and was offset by interest expense of $17.7 million on HomeSide's
borrowings. Interest income and expense during the first quarter of fiscal 1997
were $12.7 million and $12.6 million, respectively. The increases in interest
income and interest expense during the second quarter are the result of an
increase in the average balance of mortgage loans held for sale from $770
million in the first quarter of fiscal 1997 to $1.3 billion during the second
quarter of fiscal 1997 and an increase in the average balance of notes payable
to banks from $1.3 billion to $2.0 billion, from the first quarter to the second
quarter of fiscal 1997, respectively. The Parent's acquisition of HHI on May 31,
1996, and subsequent transfer of assets to HomeSide, generally contributed to
the increased balances of mortgage loans held for sale and borrowings. Interest
income during the second quarter was also positively affected by a general
increase in long-term interest rates during the second quarter.
Interest expense for HomeSide does not include interest expense associated
with $200 million of 11.25% Parent Notes issued by the Parent. Payment of
principal and interest on these notes is dependent on the cash flows generated
by HomeSide and HHI. During the first, second and third quarters of fiscal 1997,
the Parent recorded interest expense on the Parent Notes of $2.3 million, $6.0
million and $6.0 million, respectively.
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's production volumes, and the interest rates
HomeSide earns on loans and pays to its lenders.
Loan refinancing levels are the biggest 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 market and Homeside's production volumes.
Higher production volumes result in higher average balances of loans held for
sale and consequently higher levels of interest income. 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 pays to finance loans held for sale and
other net assets is generally calculated with reference to short term interest
rates. In addition, because 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 Mortgage Origination Revenue
Net mortgage origination revenue was $16.5 million during the third quarter
of fiscal 1997 compared to $16.3 million during the second quarter of fiscal
1997, a $0.2 million increase. 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 hedges of secondary marketing activity
and fees charged to correspondents for the review of loan documents. Net
mortgage origination revenue also includes gains from excess mortgage
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servicing receivables. As noted above, loan production, exclusive of bulk
servicing acquisitions, was $5.5 billion for the third quarter of fiscal 1997,
slightly higher than the second quarter of fiscal 1997 loan production,
excluding bulk acquisitions. HomeSide's primary origination activities during
the second and third quarters of fiscal 1997 took place through correspondent
and co-issue channels. Currently, HomeSide expects these channels to continue to
be the primary loan origination sources in the future.
Net mortgage origination revenue was $16.3 million during the second
quarter of fiscal 1997 compared to $10.8 million during the first quarter of
fiscal 1997, a 51% increase. As noted above, loan production, exclusive of bulk
servicing acquisitions, was $5.5 billion for the second quarter of fiscal 1997,
$1.7 billion, or 45% higher than the first fiscal quarter loan production of
$3.8 billion. The increase in loan production is reflective of the production
from the preferred seller relationship with Barnett established as part of the
HHI Acquisition. HomeSide's primary origination activities during the first and
second quarters of fiscal 1997 were through correspondent and co-issue channels.
HomeSide expects these channels to continue to be the primary loan origination
sources in the future.
Salaries and Employee Benefits
Salaries and employee benefits expense decreased $0.5 million, or 2.5%,
from $21.2 million in the second quarter of fiscal 1997 to $20.7 million during
the third quarter of fiscal 1997. The decrease was due to the continuing
integration of the Barnett servicing operations. The average number of full-time
equivalent employees fell from 1,879 during the second quarter of fiscal 1997 to
1,708 during the third quarter of fiscal 1997.
Salaries and employee benefits expense increased $9.7 million, or 84%, from
$11.5 million in the first quarter of fiscal 1997 to $21.2 million during the
second quarter of fiscal 1997. The increase was due to growth in the number of
employees as a result of the acquisition of HHI on May 31, 1996. The average
number of full-time equivalent employees grew from 1,096 during the first
quarter of fiscal 1997 to 1,879 during the second quarter of fiscal 1997.
Occupancy and Equipment Expense
Occupancy and equipment expense increased $0.2 million from $3.1 million
during the second quarter of fiscal 1997 to $3.3 million during the third
quarter of fiscal 1997. 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 increased $1.3 million, or 67%, from $1.8
million during the first quarter to $3.1 million during the second quarter of
fiscal 1997. The increase in occupancy and equipment expense was due to certain
premises and equipment acquired from HHI and increases in information systems
required to handle the growing mortgage servicing portfolio.
Servicing Losses on Investor-Owned Loans
Servicing losses on investor-owned loans increased from $4.1 million for
the second quarter of fiscal 1997 to $5.0 million for the third quarter of
fiscal 1997, a 22% increase. Servicing losses on investor-owned loans primarily
represent anticipated losses primarily attributable to servicing FHA and VA
loans for investors. These amounts include actual losses for final disposition
of loans, accrued interest for which payment has been denied, and estimates for
potential losses based on HomeSide's experience as a servicer of government
loans.
Servicing losses on investor-owned loans increased slightly from $3.9
million for the first quarter of fiscal 1997 to $4.1 million for the second
quarter of fiscal 1997, a 3% increase.
Included in the balance of accounts payable and accrued liabilities at
November 30, 1996 is a reserve for estimated servicing losses on investor-owned
loans of $21.6 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's historical loss experience on VA loans generally has been
consistent with industry experience.
Other Expense
Other expense decreased $0.8 million from $12.2 million for the second
quarter of fiscal 1997 to $11.4 million during the third quarter of fiscal 1997.
Other expense consists mainly of professional fees, communica-
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tions expense, advertising and public relations and certain loan origination
expenses. The level of other expense will fluctuate in part based upon the level
of HomeSide's mortgage servicing portfolio and loan production volumes. Future
production levels are dependent on the level of long-term interest rates and
other economic factors, which are difficult to accurately predict.
Other expense increased $6.9 million from $5.3 million for the first
quarter of fiscal 1997 to $12.2 million during the second quarter of fiscal
1997.
Provision for Income Taxes
HomeSide's provision for income taxes was $11.4 million during the third
quarter of fiscal 1997, an increase of $1.9 million over the $9.5 million
provision recorded during the second quarter of fiscal 1997. The provision for
income taxes for the period March 16, 1996 to May 31, 1996 was $5.5 million. The
effective income tax rate for the first, second and third quarters of fiscal
1997 was approximately 41%.
LIQUIDITY AND CAPITAL RESOURCES
Operations
Net cash used in operations was $169.0 million for the period March 16,
1996 to November 30, 1996. The primary uses of cash in operations were to fund
loan originations and pay corporate expenses. These uses of cash were partially
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.
Cash needs in times of increased production are primarily met through borrowings
and loan sales.
Investing
Net cash used in investing activities was $675.7 million during the period
March 16, 1996 to November 30, 1996. Cash used in investing activities was
primarily used for the purchase and origination of mortgage servicing rights and
the purchase of options on U.S. Treasury bond futures as part of HomeSide's
hedging program. During the period March 16, 1996 to November 30, 1996, HomeSide
also made payments of $133.4 million and $106.2 million to acquire certain
mortgage banking operations of HLI and HHI, 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'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
During the period March 16, 1996 to November 30, 1996, HomeSide had $845.9
million of net cash provided by financing activities. The primary sources of
cash from financing activities during the period were $346.4 million of capital
contributed from the Parent and net borrowings under HomeSide's line of credit
of $526.5 million. Cash used in financing activities was used to fund operations
of the Parent, primarily interest payment obligations on the Parent Notes, and
the payment of debt issue costs related to the Bank Credit Agreement.
Cash from financing activities was also provided by the three-year senior
secured revolving credit facility that was entered into by the Issuer on March
15, 1996 and re-issued as part of the Bank Credit Agreement on May 31, 1996. The
line of credit is subject to a $2.5 billion limit and is secured by primarily
all of the assets of the Issuer and the servicing rights retained by HHI. The
$2.5 billion commitment is comprised of a servicing secured credit facility,
capped at $950 million, and a warehouse loan commitment. Drawings under the 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 0.5%, or (B) a eurodollar rate. Cash provided
by the Issuer's line of credit facility is the result of borrowings needed to
finance loan origination activity. In periods of higher loan origination
activity, cash needs are greater and, accordingly, HomeSide must borrow under
the credit facility in order to meet production demand. In periods of reduced
loan demand, proceeds from loan sales can be used to pay down the credit
facility. In future periods, it is expected that cash financing needs will
primarily be met from drawings under the Bank Credit Agreement and other bank
facilities which may be entered into from
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time to time, as well as from the issuance of Debt Securities in the public
markets. There can be no assurance that such additional bank facilities will be
available or that market conditions at any given time will be such that public
issuances of Debt Securities can be effected on favorable terms. On January 15,
1997, the Issuer entered into a short term credit facility (as amended on
February 28, 1997 and March 31, 1997, the "Chase Facility") with The Chase
Manhattan Bank in an aggregate principal amount of $85.0 million. On March 14,
1997, the Issuer entered into a short term credit facility (as amended on March
31, 1997, the "Merrill Facility") with an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") in an aggregate principal amount
of $50.0 million. The Chase Facility and the Merrill Facility each expire on the
earlier to occur of (i) May 1, 1997, or (ii) the consummation of the initial
sale of the Debt Securities covered by this Prospectus. Drawings under both the
Chase Facility and the Merrill Facility bear interest at the greater of (i) The
Chase Manhattan Bank's prime rate, (ii) the secondary market rate for
certificates of deposit (grossed up for maximum statutory requirements) plus 1%
and (iii) the federal funds effective rate from time to time plus 0.5%.
On January 31, 1997, the Bank Credit Facility was amended and restated in
connection with the issuance of the Parent's Common Stock to the public. See
"Description of Certain Indebtedness -- Bank Credit Agreement."
HomeSide expects to pay dividends to the Parent only to the extent
necessary to meet debt obligations and income tax expense of the Parent. The
ability of HomeSide to pay dividends to the Parent for other purposes is
restricted by covenants contained in the Bank Credit Agreement. During the
period March 16, 1996 to November 30, 1996, HomeSide declared and paid dividends
of $13,820,000 to the Parent. For more information, see Note 7 of Notes to
Consolidated Financial Statements of HomeSide.
During the period March 16, 1996 to November 30, 1996, net cash used in
operations and investing activities was $169.0 million and $675.7 million,
respectively, while cash provided by financing activities was $845.9 million,
resulting in a net increase in cash of $1.2 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.
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 servicing rights portfolio provides a potential source of funds to
meet liquidity requirements, especially in periods of rising interest rates when
loan origination volume slows. Future cash needs are highly dependent on future
loan production and servicing results, which are influenced by changes in
long-term interest rates.
New Accounting Standard
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
125"). SFAS 125, among other things, provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS 125 requires that after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS 125 also
requires that liabilities and derivatives incurred or obtained by transferors as
part of a transfer of financial assets be initially measured at fair value. SFAS
125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996 and is to be
applied prospectively. Management expects that the impact of SFAS 125 on the
results of operations, financial condition, or liquidity of HomeSide will be
immaterial.
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HLI-FOR THE PERIODS JANUARY 1, 1996 TO MARCH 15, 1996 AND JANUARY 1, 1995 TO
MARCH 31, 1995 AND FOR THE TWO YEARS ENDED DECEMBER 31, 1995
As used herein the term "HLI" means the Issuer prior to the closing of the
HLI Acquisition.
GENERAL
Prior to March 15, 1996, HLI was a wholly-owned subsidiary of Bank of
Boston, a subsidiary of Bank of Boston Corporation ("BKBC"). In December 1995,
Bank of Boston signed an agreement to sell HLI to the Parent. At the closing of
the HLI Acquisition, Bank of Boston received cash and approximately a 45% equity
interest in the Parent. Also at the closing of the HLI Acquisition, THL and MDP
collectively acquired approximately a 55% interest in the Parent.
On June 1, 1995, HLI purchased certain assets and assumed certain
liabilities of Bell Mortgage Company ("Bell Mortgage"), a privately-held
mortgage origination company located in Minneapolis, Minnesota. The acquisition
of Bell Mortgage was accounted for under the purchase method of accounting.
Results of operations of Bell Mortgage are included in the 1995 consolidated
financial statements from the date of acquisition. See Note 16 of Notes to
Consolidated Financial Statements of HLI on F-54 for further discussion.
The interim financial statements of HLI have been prepared for the period
January 1, 1996 to March 15, 1996 to coincide with the closing of the HLI
Acquisition. Results of operations for periods subsequent to March 15, 1996 are
included in the financial statements of HomeSide. Results of operations for the
three months ended March 31, 1995 have been presented for comparative purposes.
Unless otherwise noted, references to the first quarter 1996 pertain to the
period January 1, 1996 to March 15, 1996.
HLI operates as a full-service mortgage banking firm emphasizing wholesale
mortgage originations and low cost mortgage servicing. Servicing activities
represent HLI's primary revenue source. HLI also generates revenue, to a lesser
extent, from mortgage loan origination fees. HLI incurs expenses for
amortization of mortgage servicing rights, interest on its line of credit and
general corporate activities.
RESULTS OF OPERATIONS
Summary
HLI reported net income of $58.8 million in 1995 and $5.4 million in 1994.
Net income in 1994 included an after tax positive effect of $3.5 million from a
change in the accounting for mortgage servicing fee income. Prior to the effect
of such adjustment, HLI had income of $58.8 million in 1995 and $2.0 million in
1994. See Notes 2 and 10 of Notes to Consolidated Financial Statements for
further discussion of HLI's accounting changes.
The increase in net income in 1995 as compared to 1994 was primarily due to
factors that resulted from a decrease in interest rates coupled with growth in
HLI's servicing portfolio. The lower interest rate environment resulted in a
gain related to HLI's risk management activities in 1995 as compared to a loss
in 1994. See "-- Risk Management Activities." HLI also benefited from a 9%
increase in its residential servicing portfolio from $38.0 billion at December
31, 1994 to $41.6 billion at December 31, 1995. The increases were partially
offset, however, by higher mortgage servicing rights amortization charges as a
result of increased servicing volumes and higher prepayment activity in 1995.
Long-term interest rates declined through mid-February 1996, the
continuation of a trend which began in 1995. This decline led to an increase in
loan production to $4.2 billion during the first quarter of 1996 from $1.2
billion during the first quarter of 1995, and resulted in growth in HLI's
servicing portfolio, which increased from $41.6 billion at December 31, 1995 to
$44.2 billion at March 31, 1996. Beginning in late February and continuing
through March 1996, long-term interest rates increased and negatively impacted
HLI's results of operations for the first quarter. HLI reported a net loss of
$73.9 million during the first quarter of 1996, compared to net income of $3.4
million in the first quarter of 1995. The decrease in net income was primarily
due to losses on HLI's risk management contracts of $128.8 million during the
first quarter of 1996 as a result of increasing interest rates in late February
and March 1996.
Net Servicing Revenue
Servicing activities include collection of mortgage principal, interest and
escrow payments; remitting these payments to investors; and maintaining records
of loans and escrows. Servicing fees are typically expressed as a percentage of
the unpaid principal balance ("UPB") and are collected from the monthly
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remittances of the borrower before being paid to the investor. HLI is one of the
largest servicers of government insured and guaranteed loans. These loans
receive a higher servicing fee as compared to conventional loans to compensate
for the additional risks associated with FHA/VA loans (see "-- Servicing Losses
on Investor-Owned Loans").
The following table sets forth the composition of HLI's servicing portfolio
by UPB:
<TABLE>
<CAPTION>
AT DECEMBER 31,(a)
---------------------
1994 1995
------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C>
FHA/VA............................................. $15,695 $19,880
Conventional....................................... 20,113 21,041
------- -------
Total.................................... $35,808 $40,921
======= =======
</TABLE>
- ---------------
(a) Excludes loans purchased not yet on servicing system.
Net servicing revenue increased from $67.0 million to $173.7 million, an
increase of $106.7 million or 159.3%, from 1994 to 1995. This increase was
comprised of a $115.4 million rise in gain on risk management contracts and a
$32.5 million increase in mortgage servicing fees, offset by a $41.2 million
increase in amortization of mortgage servicing rights. The gain on risk
management contracts resulted primarily from a decline in interest rates in the
fourth quarter of 1995 and was substantially offset by a related decrease in the
economic value of the servicing portfolio, which was not reflected in earnings
for the period. The cost of acquiring the right to service mortgage loans
originated by others is capitalized and amortized as a reduction of servicing
fee revenue over the estimated servicing period. The increases in mortgage
servicing fees and amortization of mortgage servicing rights were primarily due
to growth in HLI's average servicing portfolio during 1995. Average servicing
fees decreased slightly from 0.389% in 1994 to 0.383% in 1995.
At December 31, 1995, HLI serviced approximately 510,000 loans, including
loans purchased not yet on HLI's servicing system, with UPB of $41.6 billion,
compared to approximately 484,000 loans with UPB of $38.0 billion at December
31, 1994, an increase of $3.6 billion, or 9.5%. The average servicing volume
increased from $33.2 billion in 1994 to $39.3 billion in 1995, an increase of
$6.1 billion or 18.4%. Growth in HLI's servicing portfolio has been primarily
generated by wholesale loan production, which includes correspondent, co-issue
and broker channels. HLI also purchases servicing rights in bulk from other
mortgage servicing entities. Bulk purchases totalled $5.5 billion and $0.7
billion in 1994 and 1995, respectively.
In addition to growth in the servicing portfolio, an increase in late fee
income contributed to the rise in mortgage servicing revenue during 1995. Late
fees are included in the consolidated statement of operations as a component of
mortgage servicing revenue. HLI instituted efforts to improve the collection of
ancillary fee income during the year which contributed to an increase in late
fee charges collected from $10.5 million in 1994 to $14.4 million in 1995. Late
fee income also increased as a result of increases in HLI's servicing portfolio
and average loan balance. The higher average loan balance translates into higher
loan payments on which late fees are based. There was little or no change in the
rate on which late fees were computed during 1995 as compared to 1994.
During the first quarter of 1996, HLI had servicing expenses in excess of
servicing revenues ("net servicing expense") of $97.1 million, as compared to
servicing revenues in excess of servicing expenses ("net servicing revenue") of
$24.2 million in the first quarter of 1995. The net servicing expense in 1996
was primarily due to losses on HLI's risk management contracts. Excluding the
effect of risk management contracts, net servicing revenue increased from $20.6
million in the first quarter 1995 to $31.7 million in the first quarter 1996. In
the first quarter of 1995, HLI recorded gains on risk management contracts of
$3.6 million. Due to an increase in long-term interest rates in late February
and early March 1996, HLI experienced losses on risk management contracts of
$128.8 million during the quarter. Changes in the value of HLI's mortgage
servicing rights substantially offset the loss on risk management contracts.
However, such changes in value were not fully recorded in the financial
statements of HLI because servicing rights were recorded at the lower of
amortized cost or market value.
The decrease in net servicing revenue was partially offset by a reduction
in amortization of mortgage servicing rights from $23.1 million in the first
quarter of 1995 to $7.2 million in the first quarter of 1996. The reduction in
amortization was due to the increase in long-term interest rates noted above,
which had a
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favorable effect on prepayment estimates used in calculating HLI's periodic
amortization expense. Since mortgage servicing rights are amortized over the
expected period of service fee revenues, a reduction in prepayment activity
typically results in a longer amortization period and, accordingly, lower
amortization expense for each reporting period. Amortization charges are highly
dependent upon the level of prepayments during the period and the change in
prepayment expectations, which are significantly influenced by the direction and
level of long-term interest rate movements.
Risk Management Activities
HLI 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 prepayment speeds, which are primarily influenced by declines in
interest rates. When loans prepay faster than anticipated, the cash flow HLI
expects to receive from servicing such loans is reduced. Since the value of the
mortgage servicing rights is based on the present value of the cash flows to be
received over the life of the loan, the value of the servicing portfolio
declines as prepayments increase. Prior to 1994, risk management of the mortgage
servicing rights value was principally conducted by BKB as part of a
consolidated risk management program. Through the third quarter of 1995, BKB
continued to manage a portion of the risk associated with the servicing
portfolio.
To implement its risk management objectives, HLI purchases risk management
contracts that increase in value when long-term interest rates decline, or when
prepayment speeds increase above a specified level. During 1994 and 1995, HLI
purchased options on long-term United States Treasury bond futures to protect a
significant portion of the market value of its mortgage servicing portfolio from
a decline in value. The value of HLI's risk management position is designed to
perform inversely with changes in value of mortgage servicing rights due to the
effects of the changes in interest rates. The options were marked to market at
each reporting date with changes in value reported in revenues. HLI recognized a
gain on risk management contracts of $108.7 million in 1995. While the value of
the servicing portfolio declined, the full effect of such decline was not
reflected in HLI's financial results because its value exceeded its book value.
Due to a rising interest rate environment, HLI experienced a $6.7 million loss
related to its risk management contracts in 1994.
HLI recognized a gain on risk management contracts of $108.7 million in
1995, of which $86.5 million was unrealized. During the first quarter of 1996,
long-term interest rates increased, reversing the declining trend which
prevailed during 1995. As a result, through the date of the sale of HLI in March
1996, HLI recognized a loss on risk management contracts of $128.8 million,
which included a reversal of such $86.5 million unrealized gain recognized
during 1995. In 1995 and 1996, changes in the value of HLI's mortgage servicing
rights substantially offset the gain and loss on the risk management contracts.
However, such changes in value were not fully recorded in the financial
statements of HLI because servicing rights are recorded at the lower of
amortized cost or market value.
Net Interest Revenue/Expense
Net interest revenue represents interest earned on warehouse loans and on
mortgage loans held for investment purposes, less interest expense incurred to
fund such loans and certain other assets, including mortgage servicing rights.
HLI's net interest position was negatively impacted by a compression of its net
interest spread from 2.57% in 1994 to 1.49% in 1995. In addition, HLI's net
interest revenue and expense position is affected by the volume of loan
originations, which have a direct effect on interest earned on warehouse loans
and interest paid on borrowings. During periods of reduced production volume,
HLI will have lower average balances of interest-earning loans and
interest-bearing warehouse debt. The entire mortgage loan origination industry
experienced a decline in production from 1994 to 1995. As reported by Fannie
Mae, United States total residential mortgage originations declined from $769
billion in 1994 to $654 billion in 1995.
During 1994 and 1995, HLI incurred net interest expense of $2.4 million and
$2.8 million, respectively. Interest revenue decreased $7.3 million during 1995
primarily as a result of a decrease in the average rate earned on warehouse
loans from 9.52% in 1994 to 7.78% in 1995. The reduction in interest revenue on
warehouse loans was partially offset by a $2.1 million increase in interest
earned on mortgage loans held for investment and a decrease in interest expense
of $6.8 million resulting from a decline in the average rate paid on HLI's
borrowings from 7.14% in 1994 to 6.89% in 1995.
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Net interest expense decreased from $2.0 million in the first quarter of
1995 to $1.7 million in the first quarter of 1996, primarily due to an increase
in long-term interest rates during February and March 1996 without a
corresponding increase in short-term interest rates on its credit facility. This
increase in long-term interest rates had a positive impact on HLI's interest
spread, which was the difference between interest revenue and interest expense,
by increasing HLI's yield on its loans held for sale. The increase in interest
income was impacted by an increase in the average balance of HLI's loans held
for sale from $124.6 million during the first quarter of 1995 to $535.6 million
during the first quarter of 1996. An increase in the average balance of loans
held for sale, therefore, increased HLI's interest revenue during the first
quarter of 1996 as compared to 1995. Interest expense was incurred on HLI's
credit facility with Bank of Boston, which was primarily influenced by
short-term interest rates. For the periods presented, interest earned on loans
held for sale was less than interest expense on borrowings, thereby creating net
interest expense for HLI.
Net Mortgage Origination Revenue
HLI maintains various loan origination channels, including correspondent
flow and co-issue, brokered, telemarketing, affinity programs and retail
branches. Additionally, HLI purchases servicing rights in bulk from time to
time. HLI has continued to deemphasize its retail branch network in favor of
wholesale production. By primarily relying on wholesale originations, HLI avoids
high fixed costs in periods of lower market volumes as well as the high start-up
costs associated with entering new markets through retail expansion. This shift
to a more variable cost structure is expected to continue as HLI actively
reduces its retail production network. In connection with the sale of HLI, Bank
of Boston agreed to retain its retail production facilities in New England, and
HLI has sold or closed most of its remaining retail branches.
The following table sets forth HLI's origination activity:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, FIRST FIRST
------------------- QUARTER QUARTER
1994 1995 1995 1996
------ ------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Wholesale:
Correspondent........................ $3,364 $3,778 $ 314 $2,031
Co-Issue............................. 4,285 3,901 755 1,597
Broker............................... 498 291 28 191
------ ------ ------ ------
Total wholesale................. 8,147 7,970 1,097 3,819
Retail.................................... 788 915 85 368
------ ------ ------ ------
Total production................ $8,935 $8,885 $1,182 $4,187
======= ====== ====== ======
</TABLE>
Through its correspondent production channel, HLI buys loans from
approximately 500 financial intermediaries. Co-issue loan production is the
purchase of servicing rights from a correspondent subject to contracts to
deliver specified volumes on a monthly or quarterly basis. Under its broker
program, HLI funds loans at closing from a network of approximately 450 mortgage
brokers nationwide.
Net mortgage origination revenue includes gains and losses from sales of
mortgage loans, deferred origination fees and expenses (see "-- Salaries and
Employee Benefits") and the gains from excess servicing rights. Net mortgage
origination revenue decreased from $5.0 million in 1994 to $3.4 million in 1995,
or 31.4%.
During 1995 and 1994, HLI's loan production, excluding co-issue volume, was
$5.0 billion and $4.7 billion, respectively. The majority of these loans were
purchased through HLI's correspondent channel.
Net mortgage origination revenue (expense) increased from ($1.1) million in
the first quarter of 1995 to $7.6 million in the first quarter of 1996. The
increase in net origination revenue during the first quarter of 1996 was
partially due to the adoption of Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" ("SFAS 122") as of January 1,
1996, which had the effect of increasing net mortgage origination revenue by
$2.1 million. In previous periods, the cost of mortgage servicing rights on a
loan originated by HLI was included in the basis of the related loan. SFAS 122
requires that the cost of an originated loan that is sold with servicing
retained be allocated between the loan sold and the servicing rights
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<PAGE> 69
retained. Consequently, the cost basis of loans originated in 1996 by HLI was
lower than the basis that would have been recorded prior to the adoption of SFAS
122 and resulted in additional gain on the sale of loans. The remaining increase
was due to increases in origination income resulting from higher loan production
volumes.
Gain on Sales of Servicing Rights
Gain on sales of servicing rights decreased $0.7 million from $10.9 million
in 1994 to $10.2 million in 1995. HLI sold servicing rights on loans of $1.9
billion, and $0.8 billion during 1995 and 1994, respectively. The sales of
servicing rights during 1994 consisted of primarily retail originated loans, for
which a servicing right asset was not recognized, and therefore there was little
or no basis in the servicing rights sold. The servicing rights sales in 1995
consisted of a higher percentage of servicing on purchased loans, which had a
higher basis because servicing rights on purchased loans are capitalized. Since
gain on sales of servicing rights is determined as the excess of proceeds from
the sale over HLI's cost basis in the asset, gains will tend to be higher on
sales of servicing rights with little or no cost basis, as was the case for the
sales in 1994. HLI's decision to sell mortgage servicing rights depends on a
variety of factors, including the available markets and current prices for such
servicing rights and the working capital requirements of HLI. The likelihood of
future sales of mortgage servicing rights, or the profitability on such sales,
cannot be predicted. HomeSide anticipates that the sale of servicing rights by
HLI will not be a significant component of its business strategy in the future.
Gain on sales of servicing rights during the first quarter of 1995 were
$4.3 million. The gain was due to the sale of servicing rights on loans with a
principal balance of $1.1 billion. There were no sales of servicing rights
during the first quarter of 1996, since the factors that would have made such a
sale advantageous were not present. HLI's decision to sell mortgage servicing
rights depends on a variety of factors, including the available markets and
current prices for such servicing rights and the working capital requirements of
HLI. The likelihood of future sales of mortgage servicing rights, or the
profitability on such sales, cannot be predicted.
Salaries and Employee Benefits
Salaries and employee benefits increased from $40.4 million in 1994 to
$45.4 million in 1995, or 12.4%. Direct loan origination costs, principally
salary and employee benefit costs, are included in the cost basis of the
mortgage loans and, therefore, they are not recognized until the sale of the
loans. Including these capitalized costs, salaries and employee benefits
increased from $51.5 million to $56.5 million from 1994 to 1995, or 9.7%.
The $5.0 million increase, including capitalized costs, in 1995 over 1994
included a $3.9 million increase in salaries and a $1.1 million increase in
benefits. The salary and benefit increases were the result of a larger
production staff needed to support HLI's growing servicing portfolio. Loan
production headcount grew from 498 full-time equivalent ("FTE") employees at
December 31, 1994 to 523 FTE employees at December 31, 1995. The increases to
salaries and benefits were partially offset by the outsourcing of certain
default administration and tax payment administration activities during 1995.
HLI determined that the performance of these services on a contracted basis was
more cost effective than maintaining the personnel and infrastructure necessary
to carry out these functions in-house.
Salaries and employee benefits decreased $1.4 million, or 12.1%, from $11.7
million in the first quarter of 1995 to $10.3 million in the first quarter of
1996. Direct loan origination costs, principally salary and employee benefit
costs, were included in the cost basis of the mortgage loans and, therefore,
they were not recognized until the sale of the loans. Including these
capitalized loan costs, salaries and employee benefits increased $0.7 million,
or 5.8%, from $12.8 million in the first quarter of 1995 to $13.5 million in the
first quarter of 1996. The increase reflected general salary and benefit
increases as compared to the first quarter of 1995 and a slight increase in the
number of full-time equivalent employees from 1,117 as of March 31, 1995 to
approximately 1,120 as of March 15, 1996.
Occupancy and Equipment Expense
Occupancy and equipment expense increased from $9.0 million in 1994 to
$10.0 million in 1995, or 11.1%, due primarily to the acquisition of Bell
Mortgage and the larger servicing operations.
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<PAGE> 70
Occupancy and equipment expense decreased $0.4 million, from $2.4 million
for the first quarter of 1995 to $2.0 million for the first quarter of 1996. The
decrease was primarily due to a decline in equipment repair and maintenance
expenses in the first quarter of 1996 as compared to the first quarter of 1995.
Servicing Losses on Investor-Owned Loans
HLI 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. Servicing losses on investor-
owned loans totaled $7.2 million and $10.0 million for 1994 and 1995,
respectively, primarily representing losses on VA loans. Because the total
principal amount of FHA loans is guaranteed, losses on such loans are generally
limited to expenses of collection. HLI has experienced minimal losses from FHA
loans. In respect of VA loans, the VA guarantees the initial losses on a loan.
The guaranteed amount generally ranges from 20% to 35% of the original principal
balance. Before each foreclosure sale, the VA determines whether to bid 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 the amounts recovered at the foreclosure sale. HLI's historical
loss experience on VA loans has generally been consistent with industry
experience.
In 1994 and 1995, HLI recorded provisions in excess of actual foreclosure
losses. Management believes that HLI has an adequate level of reserve based on
its servicing volume, portfolio composition, credit quality and historical loss
rates, as well as estimated future losses. For an analysis of changes in the
reserve for estimated servicing losses on investor-owned loans for each of the
two years ended December 31, 1995, see Note 4 of Notes to Consolidated Financial
Statements of HLI.
Servicing losses on investor-owned loans increased from $0.7 million in the
first quarter of 1995 to $5.6 million in the first quarter of 1996. The increase
was primarily due to a change in the VA's method of calculating the amount it
will guarantee on any loan, coupled with planned military base closings in
California that may have an impact on the performance of certain VA loans
serviced by HLI. The increase in the VA marketing rate effectively represents a
potential increase in HLI's exposure on properties conveyed to the VA. HLI
analyzed the effect of these factors on the level of its reserve for estimated
servicing losses and recorded a higher provision in the first quarter of 1996 in
order to bring the reserve to an acceptable level.
Real Estate Owned Expense
Real estate owned expense increased from $0.3 million in 1994 to $1.1
million in 1995. Real estate owned expense is incurred from foreclosed
properties on which HLI has taken title and includes declines in the value of
the property, as well as the incurrence of property holding and maintenance
costs. The change in real estate owned expense in 1995 was due primarily to an
increase in the average balance of real estate owned from $1.4 million in 1994
to $1.6 million in 1995. As part of the HLI Acquisition, BKB retained all real
estate owned.
Real estate owned expense is incurred from foreclosed properties on which
HLI has taken title and includes declines in the value of the property, as well
as the incurrence of property holding and maintenance costs. Real estate owned
expense increased from $0.2 million in the first quarter of 1995 to $0.3 million
in the first quarter of 1996. The change was due to an increase in the average
balance of real estate owned from $1.2 million during the first quarter of 1995
to $2.6 million during the first quarter of 1996.
Other Expense
Other expense increased from $19.3 million to $21.9 million, or 13.3%, from
1994 to 1995. The increase in other expense from 1994 to 1995 included increases
of $1.1 million in advertising and public relations, $1.0 million in contracted
services, $0.9 million in software costs and $0.6 million in communication
expenses. These increases were partially offset by a $0.7 million reduction in
loan related expenses. The increase in advertising and public relations expense
was due to a $1.0 million major advertising campaign carried out during 1995 in
addition to normal advertising activity. Contracted services increased due to an
increase in bank service charges for loan payment processing, which increased
with the rise in HLI's servicing volume. Software costs increased as HLI
continued to expand and redesign its computer platform in order to deliver more
efficient and reliable service. The increase in communications expense was due
to higher telephone postage and delivery expenses resulting from higher loan
production levels.
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<PAGE> 71
Other expense increased $2.7 million, from $4.7 million during the first
quarter of 1995 to $7.4 million in the first quarter of 1996. The increase was
the result of a $0.5 million increase in communications expense and a $0.4
million increase in loan expense, coupled with a decrease in expense credits
resulting from a decline in early pool buyout activity in 1996. These increases
are reflective of the increase in HLI's servicing portfolio, $44.2 billion at
March 31, 1996 as compared to $37.8 billion at March 31, 1995, and higher loan
production levels in the first quarter of 1996 as compared to the first quarter
of 1995.
Provision for (benefit from) Income Taxes
HLI recorded a provision for income taxes of $2.5 million and $37.9 million
for 1994 and 1995, respectively. The effective income tax rate was 39.2% and
56.4% for 1995 and 1994, respectively. The difference between these rates and
the statutory federal tax rate was primarily due to state income taxes, net of
federal tax benefit. The changes in the provisions for, and benefit from, income
taxes were the result of variances in HLI's pre-tax income and loss for each of
the years presented. For additional information regarding income taxes, refer to
Note 10 of Notes to Consolidated Financial Statements of HLI on F-47 and F-48.
HLI's benefit from income taxes was $42.5 million during the first quarter
of 1996 as compared to a provision for income taxes of $2.3 million in the first
quarter of 1995. The change in HLI's income tax provision was the result of a
decline in pre-tax income during the first quarter of 1996 as compared to the
first quarter of 1995, and a decrease in the effective tax rate from 39.9%
during the first quarter of 1995 to 36.5% during the first quarter of 1996.
Accounting Changes
On January 1, 1994, HLI changed its method of accounting for mortgage
servicing fees from the cash basis to the accrual basis. See Notes 2 and 10 of
Notes to Consolidated Financial Statements of HLI on F-40 and F-47 for further
discussion of HLI's accounting changes. See "-- Liquidity and Capital
Resources -- New Accounting Standard" for a discussion of Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights," which
was adopted by HLI in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Overview
HLI's primary sources of cash are revenues earned from the servicing of
mortgage loans, sales of mortgage loans and servicing rights and borrowings
under HLI's warehouse line of credit. HLI has entered into a new credit facility
(see "-- Post-Acquisition Financing"). HLI's primary uses of cash are to fund
loan originations and purchases, purchase bulk servicing rights, repay its
warehouse line of credit and pay general corporate expenses. HLI had a net
increase (decrease) in cash of ($4.8 million) and $0.3 million in 1995 and 1994,
respectively.
Operations
Net cash provided by (used in) operating activities was ($65.9 million) in
1995 and $394.6 million in 1994. The decrease in cash provided by operating
activities from 1994 to 1995 was attributable to cash needed to meet growth in
loan origination volume coupled with a reduction in proceeds on sales of
mortgage loans.
Net cash used in operations was $112.5 million for the first quarter of
1996 as compared to net cash provided by operations of $197.6 million for the
first quarter of 1995. The decrease in net cash provided by operating activities
was principally the result of a $453.3 million increase in net cash used in the
origination and purchase of loans held for sale. This is evidenced by the
increase in loan production from $1.2 billion during the first quarter of 1995
to $4.2 billion during the first quarter of 1996. The increase in cash used in
loan production activities was partially offset by a $62.6 million increase in
collection of accounts and mortgage claims receivable.
Investing
Cash used in investing activities was $125.7 million in 1995 and $154.2
million in 1994. The decrease in cash used in investing activities from 1994 to
1995 was comprised primarily of a $36.8 million increase in proceeds from risk
management contracts and a $17.8 million increase in proceeds from sales of
mortgage servicing rights. These cash inflows were partially offset by a $29.0
million increase in purchases of mortgage servicing rights. The increase in
proceeds from risk management contracts was a result of a decline in interest
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<PAGE> 72
rates during 1995 that increased the value of HLI's risk management contracts
and, accordingly, the proceeds received by HLI upon settlement. The increase in
proceeds from sales of mortgage servicing rights was principally due to an
increase in sales activity in 1995 as compared to 1994. HLI sold servicing
rights of $1.9 billion in 1995 as compared to $0.8 billion in 1994. The increase
in cash used to purchase mortgage servicing rights during 1995 was related to an
increase in mortgage loans purchased through HLI's warehouse channels as a
result of declining interest rates that increased loan production across the
industry.
Net cash used in investing activities increased $83.7 million to $155.1
million in the first quarter of 1996 from $71.4 million during the first quarter
of 1995. The increase in cash used in investing activities was due to a $53.2
million increase in cash used for the purchase and origination of mortgage
servicing rights and a $66.7 million increase in the purchase of risk management
contracts. These increases were the result of higher loan production levels and
an increasing loan servicing portfolio. The increases noted above were partially
offset by a $40.0 million decrease in net originations of loans held for
investment.
Financing
Cash provided by (used in) financing activities was $186.8 million in 1995
and ($240.2 million) in 1994. Prior to the HLI Acquisition, the primary source
and use of cash related to financing activities was attributable to the line of
credit with Bank of Boston. This line of credit was used to fund the origination
and purchase of mortgage loans until the loans were sold to investors. The
proceeds of such sales were typically used to pay down the related warehouse
debt with any excess retained by HLI. Maximum borrowings under the line of
credit were $1.25 billion. The higher level of borrowings in 1995 was indicative
of higher loan production and purchase volumes during that year as compared to
1994.
During the first quarter of 1996, HLI had $290.0 million of net cash
provided by financing activities as compared to net cash used in financing
activities of $130.6 million during the first quarter of 1995. During the first
quarter of 1995, HLI had net repayments on its line of credit with Bank of
Boston of $130.5 million, as opposed to net borrowings of $290.0 million during
the first quarter of 1996. The level of borrowings is highly dependent on loan
production and servicing activity. As loan production and servicing increases,
HLI draws more from its credit line, and conversely, as production and servicing
levels decrease, HLI is able to use excess cash to pay down the credit line. The
net borrowings for the first quarter of 1996, therefore, are the result of
increased loan production and held for sale balances as compared to the first
quarter of 1995.
Impact of Inflation
Inflation affects HLI primarily through its effect on interest rates since
interest rates normally increase during periods of high inflation and decrease
during periods of low inflation. See "Risk Factors -- Impact of Changes in
Interest Rates; Results of Risk Management Activities".
New Accounting Standard
In May 1995, FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights." This Statement, among other
provisions, requires that the value of mortgage servicing rights associated with
mortgage loans originated by an entity be capitalized as assets, which results
in an increase in mortgage origination revenues. The value of originated
mortgage servicing rights is determined by allocating the total costs of the
mortgage loans between the loans and the mortgage servicing rights based on
their relative fair values. Also, the Statement requires that capitalized
servicing rights be evaluated for impairment based on the fair value of these
rights. For the purposes of determining impairment, mortgage servicing rights
that are capitalized after the adoption of this Statement are stratified based
on one or more of the predominant risk characteristics of the underlying loans.
Impairment is recognized through a valuation allowance for each impaired
stratum. HLI adopted this Statement effective January 1, 1996.
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<PAGE> 73
HHI-FOR THE TWO YEARS ENDED DECEMBER 31, 1995; FOR THE PERIOD APRIL 1, 1996 TO
MAY 30, 1996 AND THREE MONTHS ENDED JUNE 30, 1995; AND FOR THE PERIOD JANUARY 1,
1996 TO MAY 30, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1995
As used herein, the term "HHI" means HHI and its subsidiaries prior to the
closing of the HHI Acquisition.
GENERAL
Prior to May 31, 1996, HHI was a wholly-owned mortgage banking subsidiary
of Barnett and a full-service mortgage banking company, engaged in the
origination, sale and servicing of first mortgage loans secured by residential
properties. On March 4, 1996, Barnett entered into an agreement to sell HHI to
the Parent. At the closing of the HHI Acquisition, the Parent acquired HHI's and
its subsidiaries' $33.4 billion servicing portfolio and servicing platform, its
proprietary mortgage servicing software and Honolulu Mortgage, a full-service
mortgage banking company in Honolulu, Hawaii, which has since been sold.
HHI acquired Loan America, a wholesale mortgage banking company with a $4.0
billion servicing portfolio in October 1994. Headquartered in Miami, Florida,
Loan America originated loans through brokers in twelve states. The acquisition
of Loan America, an established wholesale mortgage banking company, gave HHI
entry into the wholesale origination business.
In February 1995, HHI acquired BPFC, a full-service mortgage company with a
$13.9 billion servicing portfolio. Headquartered in San Antonio, Texas,
BancPLUS, a wholly-owned subsidiary of BPFC, was primarily a retail originator
with thirty-six branch offices in seventeen states. HHI's acquisition of BPFC
also included Honolulu Mortgage, with its $1.7 billion servicing portfolio.
Prior to HHI's acquisition of Loan America and BPFC, HHI originated
mortgage loans primarily through the retail banking offices of Barnett. Among
other things, the acquisitions were made as part of a strategy to: (i) increase
the volume of HHI's origination and servicing activities; (ii) obtain geographic
expansion and diversity; and (iii) acquire an expertise in managing retail and
wholesale origination activities outside of retail banking offices.
The BancPLUS and Loan America acquisitions were accounted for as purchases
and, accordingly, their results are only included in HHI's results since the
dates of their acquisitions. On May 31, 1996, BPFC was merged into BancPLUS,
which in turn was merged, together with Loan America, into HLI.
In connection with the HHI Acquisition, HHI transferred all of its
servicing rights to HLI, except for the servicing of certain GNMA loans, which
it retained. HomeSide currently believes that HHI will not acquire any
additional servicing rights in the future. As a result of the acquisition of HHI
by the Parent, HHI ceased to originate loans as a separate company and results
of operations for periods subsequent to that date will be included in the
results of operations of the Parent. Accordingly, statement of operations data
does not include periods subsequent to May 30, 1996. Comparative information in
the prior year is presented through June 30, 1995 because this was the end of
HHI's 1995 second quarter. Reasons for variances which are not attributed solely
to differences in the number of months in the periods presented have been
discussed where appropriate. Reasons for variances due to differences in the
number of months in the periods presented have been noted where applicable.
RESULTS OF OPERATIONS
During 1993, 1994 and 1995, HHI experienced significant growth through its
acquisitions of BancPLUS and Loan America. HHI reported a net loss of $20.4
million in 1995 and a net loss of $2.1 million in 1994. The net loss in 1995 was
mainly attributable to costs associated with the BancPLUS acquisition and
secondary market losses, partially offset by a $9.1 million gain on the sales of
servicing rights. HHI reported a net loss of $4.0 million for the period April
1, 1996 to May 30, 1996 and a net loss of $3.4 million for the quarter ended
June 30, 1995. HHI reported a net loss of $8.3 million for the period January 1,
1996 to May 30, 1996 and a net loss of $7.5 million for the six months ended
June 30, 1995. The loss for the first five months of 1996 was mainly
attributable to servicing hedging costs, while the loss for the first six months
of 1995 was attributable to costs associated with the BancPLUS acquisition.
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<PAGE> 74
Net Servicing Revenue
HHI's revenues were primarily earned from servicing mortgage loans for
investors. Servicing activities include collection of mortgage principal,
interest and escrow payments; remitting these payments to investors; and
maintaining records of loans and escrows. Servicing fees are typically expressed
as a percentage of UPB and are collected from the monthly remittances of the
borrower before being paid to the investor. Mortgage servicing income also
includes late charges assessed for delinquent customer payments.
The following table sets forth the composition of HHI's servicing
portfolio:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MAY
------------------- 30,
1994 1995 1996
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
FHA/VA..................................... $ 1,082 $ 6,023 $ 5,588
Conventional............................... 17,329 27,388 27,494
------- ------- -------
Total............................ $18,411 $33,411 $33,082
======= ======= =======
</TABLE>
Net servicing revenue increased from $29.4 million to $69.4 million, or
136% from 1994 to 1995. This increase was comprised of a $9.1 million increase
in gain on the sales of servicing and a $61.4 million growth in mortgage
servicing fees, offset by a $30.5 million increase in amortization of mortgage
servicing rights. Mortgage servicing fees are earned for servicing mortgage
loans owned by investors. The cost of acquiring the right to service mortgage
loans originated by others is capitalized and amortized as a reduction of
servicing fee revenue over the estimated servicing period. The increases in
mortgage servicing fees and amortization of mortgage servicing rights were
primarily due to growth in HHI's servicing portfolio during 1995. In addition,
the average servicing fee increased from 0.261% in 1994 to 0.277% in 1995.
At December 31, 1995, HHI serviced approximately 446,000 loans with UPB of
$33.4 billion, compared to approximately 243,000 loans with UPB of $18.4 billion
at December 31, 1994. Growth in HHI's servicing portfolio was primarily
generated from the acquisition of BancPLUS.
The 1995 gain on the sales of servicing is a result of two servicing sales
totalling $1.2 billion of UPB. There were no servicing sale gains during 1994.
HHI's decision to sell mortgage servicing rights depended on a variety of
factors, including the available markets and current prices for such servicing
rights and the working capital requirements of HHI.
Net servicing revenue was $12.7 million for the period April 1, 1996 to May
30, 1996 and $16.7 million for the three months ended June 30, 1995. Net
servicing revenue was $27.8 million for the first six months of 1995 compared to
$27.0 million for the period January 1, 1996 to May 30, 1996. The increases in
mortgage servicing fees and amortization of mortgage servicing rights were
primarily due to growth in the servicing portfolio related to the BancPLUS
acquisition. The average servicing fee increased from 0.307% at June 30, 1995 to
0.337% at May 30, 1996. At May 30, 1996, before the acquisition by the Parent,
HHI serviced approximately 440,000 loans with UPB of $33.1 billion, compared to
approximately 446,000 loans with UPB of $33.1 billion at June 30, 1995 and
approximately 243,000 loans with UPB of $18.4 billion at December 31, 1994.
Growth in HHI's servicing portfolio has ben pimarily generated from the
acquisition of BancPLUS.
Risk Management Activities
HHI has actively monitored and managed risk of loss related to the value of
its mortgage servicing portfolio and its origination and subsequent sale of
loans into the secondary market.
Servicing Values
HHI's operating results have been affected by changes in the economic value
of its mortgage servicing portfolio due to increases in prepayment speeds, which
are primarily influenced by interest rates. When loans prepay faster than
anticipated, the estimated cash flow HHI expected to receive from servicing such
loans is reduced. Since the value of the mortgage servicing rights is based on
the present value of the cash flows to be received over the life of the loan,
the value of the servicing portfolio declines as prepayments increase.
During 1994 and most of 1995, hedging of the mortgage servicing rights
value was handled by Barnett as part of its overall risk management program.
During this period, no hedges were specifically implemented for risk management
of mortgage servicing rights. During 1995, Barnett and HHI evaluated the risks,
benefits and costs related to servicing hedges and in December 1995 commenced a
partial hedging program. While the
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<PAGE> 75
market value of HHI's servicing portfolio declined, such decline was not
reflected in HHI's financial results because its market value exceeded its book
value.
Secondary Marketing Gain/Loss
Gains or losses on the sales of loans result primarily from two factors.
First, HHI may have made a loan to a borrower at a price (i.e., interest rate
and discount) which is higher or lower than it would have received if it
immediately sold the loan in the secondary market. HHI adjusted the pricing on
its loans depending on competitive pressure. Generally, prior to the acquisition
of Loan America at the end of 1994 and BancPLUS in the beginning of 1995, HHI
priced its loans based on interest rate levels prevalent in the secondary
market. After the acquisition of those companies, HHI began aggressively
competing in national markets where pricing below the secondary market often
occurred, especially for loans sourced through wholesale brokers. Price
competition intensified in 1994 due to the sharp decline in origination volumes
and industry overcapacity and aggressive price pressure continued through 1995.
Second, gains or losses may result from changes in interest rates which
result in changes in the market value of the loans, or commitments to purchase
loans, from the time the price commitment is given to the borrower until the
time that the loan is sold to investors. HHI has employed sophisticated
modelling tools to provide information to hedge this latter interest rate risk.
HHI has employed forward delivery contracts for mortgage-backed securities and
whole loan sales as hedging instruments. There is close correlation of risk as
the borrower's loan was used to satisfy the forward delivery contract. HHI's
secondary marketing activities have been generally negatively impacted during
periods of high interest rate volatility and periods when there is a significant
overall change in the direction of interest rates, both of which occurred in
1994 and 1995. Additionally, during the period following the integration of
BancPLUS' secondary marketing operations during 1995, the magnitude of the
conversion task caused a temporary operational delay in selling borrowers' loans
into the secondary market, reducing the normally close correlation of loans to
forward delivery contracts. This condition had an additional temporary negative
impact on results from sales of mortgages.
HHI had losses on the sale of loans of $3.4 million for the period April 1,
1996 to May 30, 1996, compared to gain on sales of loans of $1.0 million for the
three months ended June 30, 1995. The losses incurred during the period April 1,
1996 to May 30, 1996 were due to an increase in long-term interest rates, which
negatively impacted the market value of loans in HHI's pipeline, and competitive
pricing pressures.
Net Interest Revenue/Expense
In 1995, HHI recorded net interest revenue of $6.8 million, an increase
from net interest expense of $1.5 million in 1994. HHI recorded net interest
expense of $2.3 million and net interest revenue of $2.2 million for the second
quarter ended June 30, 1995 and the period April 1, 1996 to May 30, 1996,
respectively. HHI recorded net interest expense of $2.7 million and net interest
revenue of $4.6 million for the six months ended June 30, 1995 and the period
January 1, 1996 to May 30, 1996, respectively. The net interest revenue was
mainly derived from interest earned on warehouse loans originated by the
BancPLUS and Loan America branches, less interest expense incurred to fund such
loans. The interest expense for 1995 was incurred at a rate reduced by the
benefit for the escrow balances maintained in the Barnett banks for the
servicing portfolio. Prior to 1995, when the primary origination source was the
Barnett bank branches, HHI's net interest revenue was comprised of interest
income on a small portfolio of mortgage loans that HHI held for investment
purposes, offset by interest expense on a line of credit from Barnett to fund
servicing acquisitions and servicing advances since Barnett banks held loans
until they were sold by HHI.
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<PAGE> 76
Net Mortgage Origination Revenue
HHI built a multi-channel production network as part of its strategy to
become a national participant in the mortgage banking business. Until the HHI
Acquisition, HHI maintained several channels, including Barnett's retail bank
franchise, a national retail network obtained from BancPLUS, a national
wholesale broker group obtained from the Loan America, traditional correspondent
business and production from Honolulu Mortgage. This varied production base was
designed to provide flexibility, allowing HHI to shift production focus to the
most attractive source given specific market conditions. The following table
sets forth HHI's origination activity:
<TABLE>
<CAPTION>
YEARS ENDED FOR THE PERIOD
DECEMBER 31, SIX MONTHS JANUARY 1, 1996
--------------- ENDED TO MAY 30,
1994 1995 JUNE 30, 1995 1996
------ ------ ------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Barnett bank branch retail....... $2,559 $1,932 $1,053 $ 955
BancPLUS retail(a)............... -- 606 335 323
Loan America broker(a)........... 401 1,386 629 680
Honolulu Mortgage(a)............. -- 244 159 142
Correspondent.................... 450 1,599 710 438
------ ------ ------ ------
Total production............ $3,410 $5,767 $2,886 $2,538
====== ====== ====== ======
</TABLE>
- ---------------
(a) Since date of acquisition by HHI.
Net mortgage origination revenue includes origination fees received from
borrowers and gains and losses from sales of mortgage loans. Net mortgage
origination revenue decreased from $4.0 million to $3.2 million, or 20% from
1994 to 1995. The decrease was comprised of a $14.6 million decrease in gains on
sales of loans, offset by a $13.8 million increase in loan origination fees. The
decline in gains on sales of loans, excess servicing gains and pricing subsidies
was due to an increase in loan originations and sales over 1994. This volume
increase was driven by the acquisitions of BancPLUS and Loan America. Prior to
October 1994, the primary source of loan originations was the Barnett bank
retail network, and related origination fees were recognized by such banks. The
BancPLUS acquisition in February 1995 resulted in HHI collecting and recording
the origination fee income for loans originated through these channels.
Following the January 1, 1996 implementation of SFAS 122, net mortgage
origination revenue includes not only origination fees received from borrowers,
gains and losses from mortgage sales, but also capitalized OMSR. The
requirements of SFAS 122 are discussed in Note 3 to the Consolidated Financial
Statements of HHI on F-34. Net mortgage origination revenue was $4.5 million for
the second quarter 1995 compared to net mortgage origination expense of $1.7
million for the period April 1, 1996 to May 30, 1996. The decrease was
attributable to a $10.2 million decline in gain on sale of loans, offset by a
$5.9 million increase in OMSR income. The decline in gains on sales of loans,
excess servicing gains and pricing subsidies was due to an increase in loan
origination and sales from the second quarter 1995 compared to the period April
1, 1996 to May 30, 1996. This volume increase was due to additional loan
origination channels resulting from the acquisition of BancPLUS. Net mortgage
origination revenue increased from $7.5 million to $7.8 million from the first
six months of 1995 to the period January 1, 1996 to May 30, 1996. This volume
increase was due to additional loan origination volume resulting from the
acquisition of BancPLUS.
Salaries and Employee Benefits
Salaries and employee benefits increased from $17.5 million in 1994 to
$53.1 million in 1995. The salary and benefit increases were the result of
additional employees assumed in the 1994 Loan America and 1995 BancPLUS
acquisitions. Total employee headcount grew from 464 FTE employees at December
31, 1993 to 555 FTE employees at December 31, 1994 to 1,341 FTE employees at
December 31, 1995. The increase in the 1995 headcount was net of approximately
200 job eliminations resulting from the consolidation of the administrative and
operational functions of the three mortgage companies that occurred throughout
the year.
Salaries and employee benefits increased from $23.4 million during the
first six months of 1995 to $25.2 million during the period January 1, 1996 to
May 30, 1996. The salary and benefit increased was the result of
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<PAGE> 77
an increase in loan origination activity from the first six months of 1995
versus the period January 1, 1996 to May 30, 1996. For the first six months of
1995, origination volume was $2,250 million versus $2,538 million for the period
January 1, 1996 to May 30, 1996.
Occupancy and Equipment Expense
Occupancy and equipment expense increased from $2.7 million in 1994 to $6.0
million in 1995 due to the increases in rental and depreciation expense related
to assets and production offices acquired in the acquisition of BancPLUS in
February 1995.
General and Administrative Expense
General and administrative expenses increased from $14.9 million in 1994 to
$41.8 million in 1995, and increased from $12.4 million in 1993 to $14.9 million
in 1994. The increases in both 1995 and 1994 were largely a result of the
acquisition of Loan America and BancPLUS.
Provision for Income Taxes
HHI's results of operations were included in Barnett's consolidated income
tax return. HHI's income tax provision and related asset or liability were
computed based on income tax rates as if HHI filed a separate income tax return.
Pursuant to a tax-sharing agreement with Barnett, HHI was reimbursed for the tax
effect of current operating losses utilized in the consolidated return.
In 1995, HHI recorded a benefit for income taxes of $9.6 million compared
to a tax benefit of $0.5 million for 1994. The increased benefit was
attributable to the significantly higher operating loss reported in 1995. During
second quarter 1995, HHI recorded a benefit for income taxes of $2.1 million
compared to a tax benefit of $0.9 million for the period April 1, 1996 to May
30, 1996. During the first six months of 1995, HHI recorded a benefit for income
taxes of $2.9 million compared to a tax benefit of $2.5 million for the period
January 1, 1996 to May 30, 1996. For additional information regarding the
reconciliation between the statutory federal tax rate and the effective tax
rate, refer to Note 4 of Notes to Consolidated Financial Statements of HHI on
F-64.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Prior to the HHI Acquisition, HHI's primary sources of cash were revenues
earned from the servicing of mortgage loans, sales of mortgage loans and
servicing rights, which historically have offered a high measure of liquidity,
and borrowings under HHI's lines of credit. Prior to the HHI Acquisition, HHI's
primary uses of cash were to fund loan originations and purchases, repay its
lines of credit and pay general corporate expenses. HHI had a net increase of
cash of $11.1 million and $2.4 million in 1995 and 1994, respectively. HHI had a
net increase in cash of $9.6 million for the six months ended June 30, 1995 and
a net decrease in cash of $3.8 million for the period January 1, 1996 to May 30,
1996.
Operations
Net cash used in operating activities was $185.5 million in 1995 and $39.0
million in 1994. The increase in cash used in operating activities from 1994 to
1995 was attributable to cash needed to meet growth in loan origination volume
which was related to the acquisition of BancPLUS, a full year impact of the
October 1994 acquisition of Loan America, and increased correspondent business.
Net cash used in operating activities was $57.0 million for the six months
ended June 30, 1995 and net cash provided by operating activities was $211.0
million for the period January 1, 1996 to May 30, 1996. The cash used in
operating activities during the first six months of 1995 was attributable to
cash needed to meet growth in loan origination volume which related to the
acquisition of BancPLUS in February 1995. The cash provided from operating
activities for the period January 1, 1996 to May 30, 1996 was attributable to an
increase in loan sales.
Investing
Cash used in investing activities was $182.3 million in 1995 and $83.3
million in 1994. The increase in cash used is primarily due to the cost of the
acquisitions of BancPLUS in 1995 and Loan America in 1994. The increase in cash
used to purchase BancPLUS and Loan America was part of HHI's overall strategy to
increase its servicing portfolio and nationwide loan originations.
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<PAGE> 78
Cash used in investing activities was $171.5 million the first six months
of 1995, primarily due to the acquisition of BancPLUS, and $9.3 million for the
period January 1, 1996 to May 30, 1996, primarily due to an increased servicing
portfolio.
Financing
Cash provided by financing activities was $378.9 million in 1995 and $124.8
million in 1994. Cash provided by financing activities was $238.2 million during
the first six months of 1995 compared to cash used in financing activities of
$205.4 million for the period January 1, 1996 to May 30, 1996. The primary
sources and uses of cash related to financing activities were the lines of
credit with Barnett and its affiliates, to which some of HHI's assets were
pledged as collateral. These lines of credit were used to fund the origination
and purchase of mortgage loans until the loans were sold to investors. The
proceeds of such sales were typically used to pay down the related warehouse
debt with any excess retained by HHI. The net increase in the lines of credit
with Barnett was $211.7 million in 1995 and $65.0 million in 1994. The higher
level of borrowings in 1995 and 1994 are indicative of increasingly higher loan
production and purchase volumes during these years.
Additionally, cash provided as capital contributions from Barnett increased
from $59.8 million in 1994 $167.2 in 1995. These contributions were provided
primarily for the acquisitions of BancPLUS in 1995 and Loan America in 1994.
Cash provided as capital contributions from Barnett were $167.3 million for the
six months ended June 30, 1995 and $28.2 million for the period January 1, 1996
to May 30, 1996, respectively. The 1995 contribution was to fund the acquisition
of BancPLUS and the 1996 contribution was primarily to fund servicing hedging
activities.
Impact of Inflation
Inflation has affected HHI primarily through its effect on interest rates
since interest rates normally increase during periods of high inflation and
decrease during periods of low inflation. See "Risk Factors -- Impact of Changes
in Interest Rates; Results of Risk Management Activities".
New Accounting Standard
In May 1995, FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights." This Statement, among other
provisions, requires that the value of mortgage servicing rights associated with
mortgage loans originated by an entity be capitalized as assets, which results
in an increase in mortgage origination revenues. The value of originated
mortgage servicing rights is determined by allocating the total costs of the
mortgage loans between the loans and the mortgage servicing rights based on
their relative fair values. Also, the Statement requires that capitalized
servicing rights be evaluated for impairment based on the fair value of these
rights. For purposes of determining impairment, mortgage servicing rights that
are capitalized after the adoption of this Statement are stratified based on one
or more of the predominant risk characteristics of the underlying loans.
Impairment is recognized through a valuation allowance for each impaired
stratum. HHI adopted this Statement effective January 1, 1996. The actual effect
of implementing this Statement on HHI's financial position and results of
operations will depend on factors determined at the end of a reporting period,
including the amount and mix of originated and purchased production, the level
of interest rates and market estimates of future prepayment rates.
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<PAGE> 79
INDUSTRY OVERVIEW
MORTGAGE MARKET
Mortgage bankers operate in the second largest debt market in the world,
which is exceeded only by the United States Treasury market. One to four family
residential mortgage debt in the United States grew to over $3.6 trillion in
1995 from $1.7 trillion in 1985, approximately an 8% compound annual growth
rate. Management believes that the industry category of one-to-four family
residential mortgage debt is relevant to HomeSide as that is the industry
category on which substantially all of HomeSide's business is based.
Over the past five years mortgage bankers have emerged as the dominant
players in the United States' mortgage origination and servicing business.
Mortgage bankers held market shares of 55% and 41%, respectively, of the United
States' residential mortgage origination and servicing markets in 1995, up from
35% and 37% in 1990. The bulk of the remaining origination and servicing market
share is held by commercial banks and thrifts. The mortgage bankers' market
share improvement began in the late 1980s and early 1990s when the thrift
industry, historically the largest provider of residential mortgage loans,
experienced serious financial difficulties. Mortgage bankers expanded market
share not only by supplanting thrifts as the primary mortgage originators and
servicers in the marketplace but also by purchasing the mortgage banking
operations and assets of certain of these entities. Mortgage bankers gained
additional momentum and increased their market share during the decline in
interest rates in the early 1990s.
Although mortgage loan demand is affected by a number of factors, including
economic conditions, demographics and consumer confidence, it is most heavily
influenced by interest rates and correlates inversely with interest rate
movements. When mortgage rates dropped below 10% in 1990, mortgagors began to
seek mortgages at lower interest rates, resulting in a growing refinancing boom
that lasted through 1993.
TOTAL RESIDENTIAL MORTGAGE ORIGINATIONS
<TABLE>
<CAPTION>
PURPOSE OF MORTGAGE(B)
-----------------------------
TOTAL PURCHASE REFINANCING FIXED ADJUSTABLE
ORIGINATIONS(a) (% OF TOTAL) (% OF TOTAL) RATE(b)(c)(e) RATE(b)(d)(e)
--------------------- ------------ -------------- ------------- --------------
(DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C>
1985...................... $ 290 82% 18% 12.42% 10.04%
1986...................... 499 68 32 10.18 8.42
1987...................... 507 71 29 10.20 7.82
1988...................... 446 82 18 10.33 7.90
1989...................... 453 81 19 10.32 8.80
1990...................... 458 87 13 10.13 8.36
1991...................... 562 70 30 9.25 7.10
1992...................... 894 52 48 8.40 5.63
1993...................... 1,020 45 55 7.33 4.59
1994...................... 769 68 32 8.36 5.33
1995...................... 636 75 25 N/A N/A
</TABLE>
- ---------------
(a) Source: Fannie Mae
(b) Sources: Board of Governors of the Federal Reserve System; FHLMC; Federal
Home Loan Bank of San Francisco.
(c) 30-year conventional contract loan rate with 20% down payment.
(d) 1-year Treasury-indexed conventional contract loan rate with 20% down
payment.
(e) Figures are annual averages of monthly data.
SECONDARY MORTGAGE MARKETS
The secondary mortgage market and its evolution have been significantly
influenced by two government-sponsored enterprises, Fannie Mae and FHLMC, and
one government agency, GNMA (collectively, the "Agencies"). Through these
entities, the United States government provides support and liquidity to the
market for residential mortgage debt.
Mortgage originators sell their loans directly to Fannie Mae and FHLMC
either as whole loans or, more typically, as pools of loans used to
collateralize mortgage-backed securities ("MBS") issued or guaranteed by these
entities. Similarly, the originators can issue MBS collateralized by pools of
loans that are guaranteed by GNMA. In order to effect these sales or obtain
these guarantees, the originator must underwrite its loans to
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<PAGE> 80
conform ("conforming loans") with standards established by Fannie Mae or FHLMC
or by the FHA or VA in the case of GNMA. All loans other than FHA and VA loans
("government loans") are considered conventional loans. Loans with principal
balances exceeding Agency guidelines ("jumbo loans"), currently in excess of
$214,600, are sold to private investors or aggregated into pools and sold as
MBS.
The role of the Agencies has grown substantially over the past ten years.
In 1994, Fannie Mae, FHLMC, and GNMA mortgage-backed securities accounted for,
in the aggregate, $1.4 trillion, or 42.0% of total residential mortgage debt
outstanding, approximately a fivefold increase from $287 billion ten years
earlier. The mortgage banking industry relies heavily on these Agencies to
provide liquidity.
There are a number of other participants in the market that primarily
purchase MBS. These participants include institutional investors such as life
insurance companies, pension funds and mutual funds. More recently, investors
that purchase pools of loans to collateralize MBS issued in their own name
("private investor securities") have entered the market. The development of the
private investor securities market has provided mortgage bankers the liquidity
essential to effect the sale of the loans the mortgage banker originates that do
not conform ("non-conforming") to Agency guidelines.
MORTGAGE BANKING MARKET CHARACTERISTICS
The mortgage banking market is highly fragmented. Despite the market share
growth of the industry as a whole, no single company controls or dominates the
market. In 1995 the largest originator represented 5.2% of the market and the
largest servicer represented 3.7%, while the top 25 originators and servicers
represented 38.1% and 39.1% of their markets, respectively.
TOP 10 ORIGINATORS AND SERVICERS
(DOLLARS IN BILLIONS)
<TABLE>
<C> <S> <C> <C> <C> <C>
1995 ORIGINATIONS SERVICING PORTFOLIO AT DECEMBER 31, 1995
1 Norwest Mortgage................. $34.2 1 Countrywide Funding.............. $134.0
2 Countrywide Funding.............. 31.5 2 General Electric Mortgage........ 109.5
3 Prudential Home Mortgage......... 15.7 3 Norwest Mortgage................. 107.4
4 Fleet Mortgage................... 14.9 4 Fleet Mortgage................... 105.5
5 Chase Manhattan Mortgage......... 13.9 5 Prudential Home Mortgage......... 81.8
6 Chemical Mortgage................ 13.3 6 NationsBank...................... 81.4
7 NationsBank...................... 11.0 7 Bank of America.................. 63.1
8 Bank of America.................. 10.3 8 Home Savings of America.......... 60.7
9 BancBoston Mortgage.............. 8.9 9 Chase Manhattan Mortgage......... 59.4
10 North American Mortgage.......... 7.6 10 Chemical Mortgage................ 57.2
</TABLE>
- ---------------
Source: National Mortgage News.
Mortgage bankers operate in a highly competitive market. 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.
RECENT TRENDS
The introduction of significant technological improvements to the mortgage
banking industry began in the mid 1980s. From the use of laptop computers for
originations to the electronic scanning of loan documents, technological
advances have allowed mortgage bankers to accommodate higher volumes of
business. This trend has continued, contributing to the consolidation in
mortgage banking. The automation of many functions
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<PAGE> 81
in mortgage banking, especially those related to servicing, has reduced costs
significantly for industry participants.
Just as declining interest rates contributed to the growth of the mortgage
bankers' role in the early 1990s, rising interest rates in 1994 caused a
reduction in overall demand for mortgage loans, particularly refinancings. Many
mortgage bankers had expanded their operations in response to the increased
refinancing activities of 1992 and 1993. The contraction of the refinancing
demand in 1994 created substantial excess capacity in the industry, resulting in
further industry consolidation.
Many mortgage bankers that were not low cost, high volume producers or did
not operate in a low cost specialized field experienced earnings declines during
this period, 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 25 mortgage loan
servicers increased their market share from 20.7% in 1990 to 39.1% in 1995.
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<PAGE> 82
BUSINESS
HOMESIDE
HomeSide is one of the largest full-service residential mortgage banking
companies in the United States. HomeSide's strategy emphasizes variable cost
mortgage origination and low cost servicing. On a combined basis HomeSide's
origination volume and servicing portfolio would have been $14.7 billion and
$73.9 billion, respectively, for and as of the year ended December 31, 1995.
HomeSide ranks as the 5th largest originator and 7th largest servicer in the
United States for 1996 based on data published by National Mortgage News. For
and as of the nine months ended November 30, 1996, HomeSide's loan originations
and acquisitions were $18.9 billion and its servicing portfolio was $87.7
billion.
The residential mortgage market totaled over $3.6 trillion in 1995 and is
the second largest debt market in the world, exceeded only by the United States
Treasury market. 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. In 1995 the largest originator represented 5.2% of the
market and the largest servicer represented 3.7%, while the top 25 originators
and servicers represented 38.1% and 39.1% of their markets, respectively.
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 25 mortgage loan servicers have increased their
aggregate market share from 20.7% in 1990 to 39.1% in 1995.
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 pursues strategic relationships such as
its existing 5-year agreements to acquire residential mortgage loans from BKB
and Barnett production sources, which, for the period May 31, 1996 through
November 30, 1996, represented 19.5% of HomeSide's loan production. 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 is not higher than
the average cost per employee of its 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 the existing BKB
and Barnett arrangements.
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 (BKB and Barnett), mortgage
brokers, co-issue partners, direct consumer telemarketing and affinity
programs;
- 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
- Risk management: management of a program designed primarily to
protect the economic performance of the servicing portfolio that could
otherwise be adversely affected by loan prepayments due to declines in
interest rates.
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<PAGE> 83
PRODUCTION
HomeSide participates in several origination channels, with a focus on
wholesale originations. Since the HLI Acquisition, wholesale channels
(correspondent, co-issue and broker) have represented more than 95% of
HomeSide's total production. No single source within the correspondent or broker
channels accounted for more than 2% of total production during the period March
16, 1996 to November 30, 1996. HomeSide's other origination channels include
telemarketing, affinity programs and retail branches. HomeSide also purchases
servicing rights in bulk from time to time. This multi-channel production base
provides access to and flexibility among production channels in a wide variety
of market and economic conditions. The table below details production by
HomeSide's origination channels:
RESIDENTIAL LOAN PRODUCTION BY CHANNEL
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE FOR THE THREE FOR THE PERIOD
MARCH 16, 1996 MONTHS ENDED MONTHS ENDED MARCH 16, 1996
TO MAY 31, 1996 (B) AUGUST 31, 1996 NOVEMBER 30, 1996 TO NOVEMBER 30, 1996
------------------- --------------- ----------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Wholesale:
Correspondent (includes
volumes purchased from
BKB and Barnett)...... $1,893 $2,950 $3,249 $ 8,092
Co-issue(a).............. 1,419 2,208 1,985 5,612
Broker................... 220 155 168 543
------- ------- ------- -------
Total wholesale....... 3,532 5,313 5,402 14,247
Direct..................... 248 179 139 566
------- ------- ------- -------
Total production...... 3,780 5,492 5,541 14,813
Bulk acquisitions(a)....... -- 4,073 -- 4,073
------- ------- ------- -------
Total production and
acquisitions........ $3,780 $9,565 $5,541 $18,886
======= ======= ======= =======
</TABLE>
- ---------------
(a) Represents the acquisition of servicing rights, not the underlying loans.
Amounts represent the UPB of mortgage debt to which the acquired servicing
rights relate.
(b) The Parent acquired HHI, and transferred all the assets and liabilities of
HHI, except for certain servicing rights, to the Issuer, on May 31, 1996 and
therefore HHI's loan production is not included in these amounts. During the
three months ended May 31, 1996, HHI's loan production totaled $1.5 billion.
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 78% of the total production in
the period March 16, 1996 to November 30, 1996. HomeSide also offers other
products, such as ARMs and 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 largest markets by state in
the period ended November 30, 1996 were California (17.5% of UPB of production),
Florida (9.1%), Texas (7.5%), Georgia (5.7%), and Maryland (5.5%).
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
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<PAGE> 84
HomeSide's production strategy is to maintain and improve its reputation as
one of the largest, most cost effective originators of mortgage loans
nationwide. HomeSide pursues this strategy through an emphasis on wholesale and
centralized direct production, the use of contract and delegated underwriters, a
high degree of automation in its processing and direct originations and quality
control. HomeSide plans to expand production through its low cost wholesale and
direct channels and to continue to streamline its production operation. HomeSide
plans to continue to pursue bulk acquisitions in the secondary market for
mortgage servicing rights on an opportunistic basis.
WHOLESALE PRODUCTION
Correspondent Production
Through its correspondent program, HomeSide purchases loans from
approximately 500 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.
Co-Issue Production
Co-issue production, which represents the purchase of servicing rights from
a correspondent 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,
co-issue correspondents are subject to more extensive credit and quality control
reviews. Contractually, 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 450 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 the use of telemarketing to solicit
loans from several sources, including refinancings 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 acquired HLI's telemarketing system which was
established in May 1995. HomeSide believes that these efforts will have a
significant effect on increasing the percentage of loans captured by the direct
division 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.
In April 1996, pursuant to a two-year agreement, HomeSide began offering
mortgage loans through the American Airlines AAdvantage Program, which
encompasses approximately 14 million households. Under
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this program, a borrower receives one frequent flyer mile for every dollar of
interest paid on time. HomeSide offers loans in four out of five geographic
regions in the United States, along with two other lenders in each region. Each
lender receives one third of the referrals from the AAdvantage program, or
prospective borrowers may contact the lender directly. HomeSide pays American
Airlines a fee for each mile earned by a borrower. Under the program, such fees
are paid to American Airlines on a monthly basis as the borrower earns miles by
making monthly interest payments. The program is in its infancy and fees paid to
American Airlines by HomeSide for miles earned have thus far been insignificant.
HomeSide plans to establish additional affinity relationships.
Under the terms of the HLI and HHI Acquisitions, BKB has retained all of
its retail production facilities in the New England area and Barnett retained
all of its loan production facilities except for Honolulu Mortgage. Upon selling
HLI and HHI to the Parent, BKB and Barnett entered into exclusive five-year
agreements to sell, subject to certain limitations, all loans originated from
these sources to HomeSide on a broker or correspondent basis at market rates. In
1996, HomeSide sold or closed HLI's remaining retail branches.
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 Fannie Mae,
FHLMC, VA, and 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 80% 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 General
Electric Capital Corp., Mortgage Guaranty Insurance Corp., and Private Mortgage
Insurance Corp. HomeSide grants delegated underwriting status to the remaining
approximately 20% of correspondents which enables the correspondent to submit
conventional loans to HomeSide without prior underwriting approval. 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 implemented an automated underwriting process for its retail
production operation in 1994. The automated underwriting technology incorporates
credit scoring and appraisal evaluation systems. These systems employ
rules-based and statistical technologies to evaluate the borrower, the property
and salability of the loan to the secondary market. HomeSide believes that these
technologies have contributed to improved productivity and reduced underwriting
and processing turnaround time.
Quality Control
HomeSide maintains a compliance and quality assurance department that
operates independently of the production, underwriting, secondary marketing and
loan administration departments. For its production compliance process, HomeSide
randomly selects a statistical sample of all closed loans monthly for review.
The sample generally comprises 3 1/2% - 4% of all loans closed each month. This
review includes a credit scoring and reunderwriting of such loans; ordering
second appraisals on 10% of the sample; reverifying funds, employment and final
applications; and reordering credit reports on all loans selected. In addition,
a full underwriting review is conducted on (i) all jumbo loans that go into
default during the first thirty-six months from the date of origination and (ii)
all other loans that go into default during the first six months from the date
of origination. Document and file reviews are also undertaken to ensure
regulatory compliance. In
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addition, random reviews of the servicing portfolio, covering selected aspects
of the loan administration process, are conducted.
HomeSide monitors the performance of the underwriting department through
quality assurance reports, HUD/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 1% 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 MBS 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. See "Risk
Factors -- Loan Delinquencies and Defaults on Loans" in the Prospectus
Supplement.
SECONDARY MARKETING
HomeSide customarily sells all loans that it originates 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 GNMA MBS.
Conforming conventional mortgage loans are generally pooled and exchanged under
the purchase and guarantee programs sponsored by Fannie Mae and FHLMC for Fannie
Mae MBS or FHLMC participation certificates, respectively. HomeSide pays certain
guarantee fees to the Agencies in connection with these programs and then sells
the GNMA, Fannie Mae and FHLMC securities to securities dealers. A limited
number of mortgage loans (i.e. non-conforming loans) are sold to private
investors. In the period March 16, 1996 to November 30, 1996, approximately 92%
of the mortgage loans originated by HomeSide were sold to GNMA (48%), Fannie Mae
(31%) or FHLMC (13%). The remaining approximately 8% 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 MBS 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 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. For the period March 16, 1996 to November 30, 1996,
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 used 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. See "--
Loan Servicing Credit Issues". 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 accuracy of information. In the event of a breach of these
representations and warranties, HomeSide typically corrects such flaws, but, if
the flaws cannot be corrected, may be required to
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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 rate declines provide mortgagors with
refinancing opportunities.
CHANGES IN SERVICING PORTFOLIO
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE FOR THE THREE FOR THE PERIOD
MARCH 1, 1996 MONTHS ENDED MONTHS ENDED MARCH 1, 1996
TO MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996 TO NOVEMBER 30, 1996
--------------- ---------------- ------------------ --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Balance, beginning of
period...................... $41,844 $77,351 $84,819 $41,844
Total additions............. 37,184 9,842 5,244 52,270
Scheduled amortization........ 212 470 494 1,176
Prepayments................... 1,321 1,702 1,529 4,552
Foreclosures.................. 130 137 106 373
Servicing sales............... 14 65 221 300
------- ------- ------- -------
Total reductions............ 1,677 2,374 2,350 6,401
------- ------- ------- -------
Balance, end of period........ $77,351 $84,819 $87,713 $87,713
======= ======= ======= =======
</TABLE>
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 was
0.359% at November 30, 1996. 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.
As part of the HHI Acquisition, the Parent acquired and contributed to the
Issuer a full-service mortgage company in Hawaii, Honolulu Mortgage. Honolulu
Mortgage's servicing portfolio totaled $1.9 billion at November 30, 1996 and its
loan production was $257.4 million since its acquisition on May 31, 1996. In
February 1997, Honolulu Mortgage sold substantially all its assets to an
unaffiliated third party. The Issuer does not expect the sale to materially
affect HomeSide's financial results.
HomeSide's servicing strategy is also to enhance the profitability of its
servicing revenue 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 to third party vendors
functions related to insurance, taxes and default management, contributing to
HomeSide's ability to maintain a highly variable cost structure. Using a variety
of factors,
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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. The nine largest states accounted for 64.7% of outstanding UPB of
the total servicing portfolio of HomeSide at November 30, 1996, while the
largest volume by state is Florida with a 19.6% share of the total portfolio at
November 30, 1996. HomeSide actively monitors the geographic distribution of its
servicing portfolio to maintain a mix that it deems appropriate and makes
adjustments as it deems necessary.
At November 30, 1996, HomeSide's servicing portfolio consisted of $31.4
billion of FHA/VA servicing and $51.4 billion of conventional servicing.
SERVICING PORTFOLIO BY STATE(a)
<TABLE>
<CAPTION>
AT NOVEMBER 30, 1996
------------------------
STATE UPB % OF UPB
------------------------------------------------------------- ----------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Florida...................................................... $16,262 19.6%
California................................................... 12,934 15.6
Texas........................................................ 5,081 6.1
Massachusetts................................................ 4,199 5.1
Maryland..................................................... 3,865 4.7
Georgia...................................................... 3,251 3.9
Virginia..................................................... 3,087 3.7
Illinois..................................................... 2,692 3.3
Colorado..................................................... 2,240 2.7
Other(b)..................................................... 29,209 35.3
------- -----
Total........................................................ $82,820 100.0%
======= =====
</TABLE>
- ---------------
(a) Servicing statistics are based on loans serviced by HomeSide and exclude
loans purchased not yet on servicing system.
(b) No other state represents more than 2.7% of HomeSide's servicing portfolio.
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SERVICING PORTFOLIO BY COUPON(A)
<TABLE>
<CAPTION>
AT NOVEMBER 30, 1996
---------------------------------------
CUMULATIVE
INTEREST RATE UPB % OF UPB % OF UPB
- ---------------------------------------------------------- ----------- -------- ----------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Less than 6.0%............................................ $ 1,016 1.2% 1.2%
6.0% to 6.9%.............................................. 9,254 11.2 12.4
7.0% to 7.9%.............................................. 34,698 41.9 54.3
8.0% to 8.9%.............................................. 26,843 32.4 86.7
9.0% to 9.9%.............................................. 7,198 8.7 95.4
10.0% to 10.9%............................................ 2,963 3.6 99.0
Over 11.0%................................................ 848 1.0 100.0
------- -----
Total........................................... $82,820 100.0%
======= =====
</TABLE>
- ---------------
(a) Servicing statistics are based on loans serviced by HomeSide and exclude
loans purchased not yet on servicing system.
LOAN SERVICING CREDIT ISSUES
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 reimbursement 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 loan becomes delinquent until foreclosure,
when, if any proceeds are available, it may recover such amounts. In addition,
delinquency rates typically rise in the winter months, which results in higher
servicing costs. However, late charge income has 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. For HomeSide, servicing
losses on investor-owned loans totaled $13.0 million for the period March 16,
1996 to November 30, 1996, primarily representing losses on VA loans. Because
the total principal amount of FHA loans is guaranteed, losses on such loans are
generally limited to expenses of collection. HomeSide experiences minimal losses
from FHA loans. In respect of VA loans, the VA guarantees the initial losses on
a loan. The guaranteed amount generally ranges from 20% to 35% of the original
principal balance. Before each foreclosure sale, the VA determines whether to
bid 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.
HomeSide's management believes that it has an adequate level of reserve
based on HomeSide's servicing volume, portfolio composition, credit quality and
historical loss rates, as well as estimated future losses.
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Set forth below is HomeSide's delinquency and foreclosure experience.
SERVICING PORTFOLIO DELINQUENCIES
(PERCENT BY LOAN COUNT)
<TABLE>
<CAPTION>
TOTAL FORECLOSURE
30 DAYS 60 DAYS 90+ DAYS PAST DUE INVENTORY
------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
At May 31, 1996.......................... 2.97% 0.60% 0.35% 3.92% 0.66%
At August 31, 1996....................... 3.08% 0.64% 0.48% 4.20% 0.95%
At November 30, 1996..................... 3.50% 0.68% 0.58% 4.76% 1.02%
</TABLE>
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.
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 market discount rates
and market consensus prepayment speeds, among other variables. The value is then
analyzed under various interest rate scenarios that help HomeSide estimate the
exposure to loss. This potential loss exposure determines the hedge profile,
which profile 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 and Treasury securities and certain
other factors. See "Risk Factors -- Impact of Changes in Interest Rates; Results
of Risk Management Activities" in the Prospectus Supplement and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
HomeSide -- for the Period March 16, 1996 to November 30, 1996 and the Three
Months Ended November 30, 1996 -- Results of Operations -- Risk Management
Activities".
The FASB has been evaluating the accounting for derivative financial
instruments and hedging activities. The FASB has issued an exposure draft and
numerous comments have been received. It is unclear what changes will ultimately
be made to such exposure draft. Under current practice, derivative financial
instruments may be accounted for as hedges with changes in the value deferred as
a component of the asset or liability being hedged, provided the instruments are
designated as a hedge and reduce exposure to loss with a high correlation.
Management of HomeSide is unable to predict what effect, if any, changes in
accounting principles would have on HomeSide's financial statements or
HomeSide's use of hedge accounting.
SERVICING INTEGRATION
To facilitate administration and to effect the economies of scale targeted
by management, HomeSide's servicing operations are expected to be integrated
over the next year. HomeSide has one servicing site located in Jacksonville,
Florida, which at March 1, 1996 serviced approximately 522,000 loans with a
servicing staff of approximately 400. HHI had servicing operations located in
Jacksonville, Florida and San Antonio, Texas. Prior to the sale of substantially
all the assets of Honolulu Mortgage in February, 1997 to an unaffiliated third
party, approximately 11,000 loans were serviced at Honolulu Mortgage. These
loans and the servicing rights were sold as part of the February, 1997 sale.
HomeSide plans to integrate the existing former HLI portfolio with the former
HHI portfolio in stages based on the capacity and capabilities of each of the
respective
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servicing sites. HomeSide has completed the transfer of its approximately
145,000 loans at HHI's Jacksonville facility to San Antonio for servicing.
In addition to the physical consolidation of servicing operations, HomeSide
intends to pursue the conversion of the entire servicing platform to HHI's
proprietary software. This 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 over 30 technology
providers.
HomeSide expects to achieve significant competitive advantages over time by
converting to the proprietary servicing software, which is expected to cost less
to operate than HomeSide's current outsourced system and is configured to
accommodate growth more efficiently than the current HomeSide system. Once the
conversion has been completed, this architecture is expected to support
HomeSide's portfolio growth to a size of up to approximately twice its size. The
system is also expected to permit continued development of workflow and other
client-server applications, contributing to increased productivity.
Several other measures are expected to be undertaken by HomeSide in order
to operate more efficiently. HomeSide has outsourced HHI's hazard insurance, tax
payments and default functions to specialized vendors, as was the historic
practice at HLI. The consolidation of the two servicing operations in
Jacksonville is expected to result in a reduction in headcount. In addition, the
plan to have dedicated centers for conventional and FHA/VA servicing in
Jacksonville and San Antonio, respectively, is expected to yield additional
economies through specialization.
EMPLOYEES
As of November 30, 1996, HomeSide had approximately 1,718 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. Upon consummation of the HHI Acquisition, HomeSide had
approximately 2,300 total employees, substantially all of whom were full-time
employees.
PROPERTIES
HomeSide's corporate, administrative, and servicing headquarters are
located in Jacksonville, Florida, in facilities, which comprise approximately
145,000 square feet of owned space and approximately 135,000 square feet of
leased space. The servicing center lease expires on August 31, 1999 unless
HomeSide exercises its options to renew, which could extend the lease for an
additional six years. The Issuer also leases approximately 53,000 square feet of
warehouse space in Jacksonville, Florida for storing certain loan files, loan
servicing documents and other corporate records. In addition, HomeSide leases
190,000 square feet of space in San Antonio, Texas. HomeSide believes that its
present facilities are adequate for its operations.
REGULATION
HomeSide's mortgage banking business is subject to the rules and
regulations of HUD, FHA, VA, Fannie Mae, FHLMC, GNMA 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.
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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, the Real Estate Settlement Procedures
Act, 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 such business is now conducted.
Prior to the HLI Acquisition, HLI was a wholly-owned operating subsidiary
of a national bank, and subject to substantially all of the regulations and
restrictions applicable to a national bank. Prior to the HHI Acquisition, HHI
was a wholly-owned subsidiary of a bank holding company. During the period that
BKB or Barnett, or any of their subsidiaries, retains a material ownership
interest in HomeSide or the Parent, HomeSide (i) will be under the jurisdiction,
supervision, and examining authority of the OCC, and (ii) may only engage in
activities that are part of, or incidental to, the business of banking. The OCC
has specifically ruled that mortgage banking is a proper incident to the
business of banking.
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. See "Risk Factors --
Regulation, Possible Changes and Related Matters" in the Prospectus Supplement.
LITIGATION
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. In recently denying a motion to dismiss in a purported class
action brought against certain unrelated mortgage companies in a federal court
in Virginia, the court stated that the payment of certain fees to mortgage
brokers violates RESPA. No prediction can be made as to whether the ultimate
decision in such class action will be adverse to the defendant mortgage
companies, and, while the matter is still in a preliminary stage, based upon
available information, management of HomeSide believes that an adverse result
ultimately having general application to the mortgage banking industry
(including HomeSide), would not have a material adverse impact on the
consolidated financial position of HomeSide, nor upon the consolidated results
of operations for any fiscal period.
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HLI -- HISTORICAL BUSINESS
HLI, at the time its loan servicing and production operations were acquired
by the Parent, was one of the largest full-service mortgage banking companies in
the United States, emphasizing wholesale mortgage originations and low cost
mortgage servicing. As of and for the year ended December 31, 1995 and the three
months ended March 31, 1996, HLI originated approximately $8.9 billion and $4.2
billion of mortgage loans, respectively, including co-issue production, and
serviced a loan portfolio of $41.6 billion and $44.2 billion, respectively, at
the end of such periods. For 1995, HLI was ranked as the 9th largest originator
of residential mortgage loans (including co-issue volume) and as the 16th
largest servicer of residential mortgage loans, according to National Mortgage
News, and as the 5th largest wholesale originator of mortgage loans (including
co-issue volume) according to Wholesale Access. HomeSide is headquartered in
Jacksonville, Florida. The following discussion summarizes HLI's operations up
to the date it was acquired by the Parent.
PRODUCTION
HLI participated in several origination channels, with a focus on wholesale
originations. In 1995, wholesale channels (correspondent, co-issue and broker)
represented approximately 90% of HLI's total production. No single source within
the correspondent or broker channels accounted for more than 2% of total
production in 1995. HLI's other origination channels included telemarketing,
affinity programs and retail branches. HLI also purchased servicing rights in
bulk from time to time. This multi-channel production base provided access to
and flexibility among production channels in a wide variety of market and
economic conditions. The table below details production by HLI's origination
channels:
RESIDENTIAL LOAN PRODUCTION BY CHANNEL
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------ THREE MONTHS ENDED
1991 1992 1993 1994 1995 MARCH 31, 1996
------ ------ ------- ------- ------ ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Wholesale:
Correspondent................ $2,096 $2,947 $ 4,955 $ 3,364 $3,778 $2,031
Co-issue(a).................. 1,200 2,955 2,860 4,285 3,901 1,597
Broker....................... 231 934 1,431 498 291 191
------ ------ ------- ------- ------ ------
Total wholesale........... 3,527 6,836 9,246 8,147 7,970 3,819
Retail......................... 910 1,824 2,125 788 915 368
------ ------ ------- ------- ------ ------
Total production.......... 4,437 8,660 11,371 8,935 8,885 4,187
Bulk acquisitions(a)........... 760 1,046 2,311 5,538 683 --
------ ------ ------- ------- ------ ------
Total production and
acquisitions............ $5,197 $9,706 $13,682 $14,473 $9,568 $4,187
====== ====== ======= ======= ====== ======
</TABLE>
- ---------------
(a) Represents the acquisition of servicing rights, not the underlying loans.
Amounts represent the UPB of mortgage debt to which the acquired servicing
rights relate.
HLI competed nationwide by offering a wide variety of mortgage products
designed to respond to consumer needs and tailored to address market
competition. HLI was primarily an originator of fixed rate 15-and 30-year
mortgage loans, which collectively represented 77% of total production in 1995
and 81% of the total production in the first three months of 1996.
HLI's national loan production operation resulted in geographically diverse
originations, enabling HLI to diversify its risk across many markets in the
United States. HLI originated loans in 48 states and the District of Columbia
and its largest markets by state in 1995 were California (18.4% of UPB of
production), Texas (9.4%), Florida (7.1%), Georgia (5.1%) and Massachusetts
(4.5%). HomeSide's largest markets by state in the three months ended March 31,
1996 were California (19.5% of UPB of production), Maryland (7.5%), Texas
(6.9%), Florida (6.4%), and Georgia (5.1%).
47
<PAGE> 94
SECONDARY MARKETING
HLI customarily sold all loans that it originated while retaining the
servicing rights to such loans. HLI aggregated mortgage loans into pools and
sold these pools, as well as individual mortgage loans, to investors principally
at prices established under forward sales commitments. In 1995, approximately
83% of the mortgage loans originated by HLI were sold to GNMA (43%), Fannie Mae
(31%) or FHLMC (9%). The remaining approximately 17% were sold to private
investors. In the three months ended March 31, 1996, approximately 92% of the
mortgage loans originated by HLI were sold to GNMA (48%), Fannie Mae (35%) or
FHLMC (9%). The remaining approximately 8% were sold to private investors. For
each year since 1990, HLI has not experienced secondary marketing losses.
LOAN SERVICING
HLI derived its revenues predominantly from its servicing operations. Since
1991, HLI's servicing portfolio has grown as originations and bulk servicing
acquisitions have exceeded scheduled principal reductions, prepayments,
foreclosures and sales of servicing rights. Since 1994, HLI 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 rate declines provide mortgagors with refinancing opportunities.
CHANGES IN SERVICING PORTFOLIO
<TABLE>
<CAPTION>
THREE MONTHS
1991 1992 1993 1994 1995 ENDED MARCH 31, 1996
------- ------- ------- ------- ------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
January 1st
balance............ $18,726 $20,601 $23,706 $27,999 $37,971 $41,555
Total additions.... 5,375 9,733 13,669 14,970 9,389 4,243
Scheduled
amortization....... 337 434 501 523 869 241
Prepayments.......... 1,303 4,345 8,123 3,372 2,740 1,274
Foreclosures......... 174 157 223 258 334 113
Servicing sales...... 1,686 1,692 529 845 1,862 12
------- ------- ------- ------- ------- -------
Total reductions... 3,500 6,628 9,376 4,998 5,805 1,640
------- ------- ------- ------- ------- -------
December 31st balance
or at end of
period............. $20,601 $23,706 $27,999 $37,971 $41,555 $44,158
======= ======= ======= ======= ======= =======
</TABLE>
Over the past five years, HLI's servicing portfolio grew steadily, from
$20.6 billion at December 31, 1991 to $41.6 billion at December 31, 1995, a 19%
compounded annual growth rate. HLI's weighted average servicing fee was 0.386%
at December 31, 1995.
SERVICING PORTFOLIO COMPOSITION
HLI originated and purchased servicing rights for mortgage loans
nationwide. The broad geographic distribution of HLI's servicing portfolio
reflected the national scope of HLI's originations and bulk servicing
acquisitions. The nine largest states accounted for 63.6% and 63.4% of
outstanding UPB of the total servicing portfolio of HLI at December 31, 1995,
and March 31, 1996, respectively, while the largest volume by state was
California with a 16.8% and 16.9% share of the total portfolio at December 31,
1995 and March 31, 1996, respectively.
48
<PAGE> 95
The following tables set forth certain information regarding HLI's
servicing portfolio:
SERVICING PORTFOLIO COMPOSITION(a)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
----------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
FHA/VA....................... $ 9,898 $10,751 $12,524 $15,695 $19,880 $20,680
Conventional................. 10,703 12,955 14,130 20,113 21,041 21,636
------- ------- ------- ------- ------- -------
Total serviced (UPB)....... $20,601 $23,706 $26,654 $35,808 $40,921 $42,316
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Servicing statistics are based on loans serviced by HLI and exclude loans
purchased not yet on servicing system.
SERVICING PORTFOLIO BY STATE(a)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT MARCH 31, 1996
------------------------ ------------------------
STATE UPB % OF UPB UPB % OF UPB
--------------------------------------- ----------- -------- ----------- --------
(DOLLARS IN (DOLLARS IN
MILLIONS) MILLIONS)
<S> <C> <C> <C> <C>
California............................. $ 6,863 16.8% $ 7,168 16.9%
Massachusetts.......................... 3,784 9.2 3,759 8.9
Florida................................ 3,094 7.6 3,198 7.6
Maryland............................... 2,748 6.7 2,859 6.8
Texas.................................. 2,605 6.4 2,727 6.4
Virginia............................... 2,297 5.6 2,350 5.6
Georgia................................ 1,879 4.6 1,961 4.6
Connecticut............................ 1,430 3.5 1,449 3.4
Washington............................. 1,293 3.2 1,340 3.2
Other(b)............................... 14,928 36.4 15,505 36.6
------- ----- ------- -----
Total.................................. $40,921 100.0% $42,316 100.0%
======= ===== ======= =====
</TABLE>
- ---------------
(a) Servicing statistics are based on loans serviced by HLI and exclude loans
purchased not yet on servicing system.
(b) No other state represents more than 3.0% of HLI's servicing portfolio.
49
<PAGE> 96
SERVICING PORTFOLIO BY COUPON(a)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT MARCH 31, 1996
--------------------------------------- ---------------------------------------
CUMULATIVE CUMULATIVE
INTEREST RATE UPB % OF UPB % OF UPB UPB % OF UPB % OF UPB
- ------------------------- ----------- -------- ---------- ----------- -------- ----------
(DOLLARS IN (DOLLARS IN
MILLIONS) MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Less than 6.0%........... $ 515 1.3% 1.3% $ 636 1.5% 1.5%
6.0% to 6.9%............. 4,636 11.3 12.6 4,633 11.0 12.5
7.0% to 7.9%............. 16,621 40.6 53.2 18,550 43.8 56.3
8.0% to 8.9%............. 11,752 28.7 81.9 11,648 27.5 83.8
9.0% to 9.9%............. 4,923 12.0 93.9 4,532 10.7 94.5
10.0% to 10.9%........... 2,024 5.0 98.9 1,893 4.5 99.0
Over 11.0%............... 450 1.1 100.0 424 1.0 100.0
------- ----- ------- -----
Total.......... $40,921 100.0% $42,316 100.0%
======= ===== ======= =====
</TABLE>
- ---------------
(a) Statistics based on loans serviced by HLI and exclude loans purchased not
yet on servicing system.
LOAN SERVICING CREDIT ISSUES
For HLI, servicing losses on investor-owned loans totaled $2.8 million,
$7.2 million, $10.0 million and $5.6 million for the years ended 1993, 1994 and
1995 and the period January 1 to March 15, 1996, respectively, primarily
representing losses on VA loans. HLI's historical delinquency and foreclosure
rate experience on VA loans has generally been consistent with that of the
industry.
Set forth below is a comparison of HLI's historical delinquency and
foreclosure experience to national industry statistics compiled by the Mortgage
Bankers Association:
SERVICING PORTFOLIO DELINQUENCIES
(PERCENT BY LOAN COUNT)
<TABLE>
<CAPTION>
AT TOTAL FORECLOSURE
DECEMBER 31, 30 DAYS 60 DAYS 90+ DAYS PAST DUE INVENTORY
- ------------ ------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
1993 HLI ........................... 2.91% 0.70% 1.00% 4.61% 1.41%
Industry Average (adjusted for
servicing portfolio mix)....... 3.77 0.88 1.10 5.75 1.27
1994 HLI............................ 3.13 0.70 0.97 4.80 1.19
Industry Average (adjusted for
servicing portfolio mix)....... 3.62 0.87 1.01 5.50 1.08
1995 HLI............................ 3.51 0.73 1.04 5.28 1.16
Industry Average (adjusted for
servicing portfolio mix)....... 3.89 0.84 0.95 5.68 1.11
</TABLE>
<TABLE>
<CAPTION>
AT
MARCH 31,
- ------------
<S> <C> <C> <C> <C> <C> <C>
1996 HLI............................ 2.65 0.56 0.59 3.80 1.00
</TABLE>
50
<PAGE> 97
HHI -- HISTORICAL BUSINESS
Prior to its acquisition by the Parent, HHI operated as a full-service
mortgage banking company, engaged in the origination, sale and servicing of
mortgage loans secured by residential properties. A significant portion of the
loans originated by HHI were underwritten to the standards and requirements of
secondary market investors and were sold as pools underlying mortgage-backed
securities guaranteed by Fannie Mae, FHLMC, GNMA and other institutional
investors. The balance was underwritten and retained by Barnett. In 1995 and the
three months ended March 31, 1996, HHI reported total production of $5.8 billion
and $1.6 billion, respectively and had a servicing portfolio of $33.4 billion at
December 31, 1995 and $33.0 billion at March 31, 1996. HHI was ranked as the
19th largest originator and as the 18th largest servicer of residential mortgage
loans for 1995, according to National Mortgage News. The following discussion
summarizes HHI's operations up to the date it was acquired by the Parent.
Prior to 1994, HHI originated loans primarily on a retail basis through
bank branches in Florida and Georgia. In 1994, HHI grew its origination business
and servicing portfolio substantially, primarily through two acquisitions. HHI
acquired Loan America, a wholesale mortgage banking company with a $4.0 billion
servicing portfolio, in October 1994. Headquartered in Miami, Florida, Loan
America originated loans through brokers in twelve states. The acquisition of
Loan America represented HHI's first entry into the wholesale origination
business.
In February 1995, HHI acquired BancPLUS, a full service mortgage company
with a $13.9 billion servicing portfolio. Headquartered in San Antonio, Texas,
BancPLUS was primarily a retail originator with thirty-six branch offices in
seventeen states. HHI's acquisition of BancPLUS included the company's
proprietary mortgage banking software for retail origination, secondary
marketing and servicing. It also included BancPLUS' wholly-owned subsidiary
Honolulu Mortgage, a full-service mortgage banking company based in Honolulu,
Hawaii with a $1.7 billion servicing portfolio.
In connection with the HHI Acquisition, the Parent acquired HHI's and its
subsidiaries' $33.0 billion servicing portfolio and servicing platform, its
proprietary mortgage servicing software, and Honolulu Mortgage, including its
production and servicing operations. Barnett retained its retail bank branch
network, the retail branch network acquired from BancPLUS, the broker network
acquired from Loan America and all of the related facilities. Barnett also
retained the facility which housed HHI's Jacksonville servicing unit. In
connection with the HHI Acquisition, BPFC was merged into BancPLUS, which in
turn was merged, together with LoanAmerica, into HLI. Also concurrently with the
HHI Acquisition, all of HHI's servicing portfolio was transferred to the Issuer,
except for certain portions of HHI's GNMA loans, which HHI retained. In the
future, it is expected that HHI will neither originate nor service any loans,
except for the GNMA loans retained by it on May 31, 1996. As part of the HHI
Acquisition, Barnett agreed to sell, subject to certain limitations, to HomeSide
all of its mortgage loan production on market terms pursuant to an exclusive,
five-year correspondent contract. See "Certain Relationships and Related
Transactions."
PRODUCTION
Prior to the HHI Acquisition, HHI expanded its production capabilities
primarily through recent acquisitions. Originations grew from $1.9 billion in
1991 to $5.8 billion in 1995. In 1995 and the three months ended March 31, 1996,
wholesale originations represented approximately 52% and 49%, respectively, of
HHI's total production and retail represented the balance.
Subsequent to the HHI Acquisition, Barnett sells, subject to certain
limitations, to HomeSide all of its mortgage loan production on market terms
pursuant to an exclusive, five-year correspondent contract, with the exception
of the loans held by Barnett. However, Barnett sells HomeSide the servicing
rights related to these loans on a co-issue basis. Under the terms of its
correspondent agreement, loans originated through the Barnett network are
underwritten on a delegated basis. HomeSide performs the secondary marketing
functions of pricing and hedging related to the correspondent production.
51
<PAGE> 98
Like HLI, HHI built a multi-channel production network as part of its
strategy to become a national mortgage banking business through several
channels, including Barnett's retail bank branch franchise; a national wholesale
broker group obtained through the Loan America acquisition; a national retail
network obtained through the BancPLUS acquisition; traditional correspondent
business; and production from the Honolulu Mortgage subsidiary. This
multi-channel production base provided HHI with the flexibility to shift its
production focus to the most appropriate channel given specific market
conditions.
RESIDENTIAL LOAN PRODUCTION BY CHANNEL
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------ FIVE MONTHS ENDED
1991 1992 1993 1994 1995 MAY 31, 1996
------ ------ ------ ------ ------ ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Barnett banks branch retail.... $1,945 $3,507 $3,360 $2,559 $1,932 $ 537
BancPLUS retail (a)............ -- -- -- -- 606 192
Loan America broker (a)........ -- -- -- 401 1,386 378
Honolulu Mortgage (a).......... -- -- -- -- 244 83
Correspondent.................. -- -- -- 450 1,599 366
------ ------ ------ ------ ------ ------
Total production.......... $1,945 $3,507 $3,360 $3,410 $5,767 $1,556
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(a) Since date of acquisitions by HHI.
HHI's loan production operation, historically limited to the Florida and
Georgia markets, became national in scope over the last two years. This
expansion was achieved primarily through HHI's acquisitions of Loan America and
BancPLUS. Historically, the mortgage origination leader in Florida with a market
share in excess of 11%, HHI originated loans in 45 states and the District of
Columbia. Its largest markets by state in 1995 were Florida (34% of UPB of
production), California (8%), Ohio (7%), New York (6%) and Hawaii (6%) and its
largest markets by state in the five months ended May 31, 1996 were Florida (33%
of UPB of production), California (8%), New York (7%), Hawaii (7%) and Ohio
(6%).
Secondary Marketing
Prior to the acquisitions of LoanAmerica and BancPLUS, HHI sold
approximately 20% of the loans originated by the Barnett banks into the
secondary market, predominately to Fannie Mae. The remaining 80% were retained
in Barnett's portfolio. Subsequent to its recent acquisitions, HHI began to
deliver some loans to FHLMC and issue GNMA securities. In 1995 and the first
three months of 1996, approximately 81% and 95%, respectively, of the mortgage
loans originated by HHI were eligible for inclusion in the programs of GNMA,
Fannie Mae, or FHLMC. Those loans not sold under these programs were sold to
approximately seven private investors, including several state housing finance
agency programs. The integration of HHI's production profile into HomeSide is
expected to provide greater balance in originations overall and is expected to
increase the weighting toward conventional product.
Loan Servicing
As with HLI, HHI's strategy had been to build its mortgage servicing
portfolio to benefit from economies of scale and productivity improvements. The
HHI portfolio increased from $10.0 billion at the end of 1991 to $33.4 billion
at the end of 1995, primarily as a result of the Loan America and BancPLUS
acquisitions.
52
<PAGE> 99
CHANGES IN SERVICING PORTFOLIO
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
January 1st balance........................... $ 9,243 $10,034 $11,524 $13,085 $18,411 $33,411
Total additions(a).......................... 2,039 3,744 5,237 7,469 20,312 1,526
Reductions.................................... 1,248 2,254 3,016 2,143 4,241 1,911
Servicing sales............................... 0 0 660 0 1,071 7
------- ------- ------- ------- ------- -------
Total reductions............................ 1,248 2,254 3,676 2,143 5,312 1,918
------- ------- ------- ------- ------- -------
December 31st balance or end of period
balance..................................... $10,034 $11,524 $13,085 $18,411 $33,411 $33,019
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Includes $13.9 billion of servicing from BancPLUS which includes $1.7
billion of servicing from Honolulu Mortgage in 1995 and $4.0 billion of
servicing from LoanAmerica acquisition in 1994.
SERVICING PORTFOLIO COMPOSITION
Historically, HHI was primarily a servicer of conventional loans,
consisting of Fannie Mae and FLHMC product. The acquisition of HHI's servicing
portfolio reduced the percentage of HomeSide's government loans in the combined
servicing portfolios. Based on the combined servicing portfolios of HLI and HHI,
the percentage of conventional loans and FHA/VA loans serviced was 65% and 35%,
respectively, at December 31, 1995 and 65% and 35%, respectively, at March 31,
1996.
SERVICING PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
AT
AT DECEMBER 31, MARCH
------------------------------- 31,
1993 1994 1995 1996
------- ------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
FHA/VA........................................................ $ 1,032 $ 1,082 $ 6,023 $ 5,586
Conventional.................................................. 12,053 17,329 27,388 27,433
------- ------- ------- -------
Total serviced (UPB)...................................... $13,085 $18,411 $33,411 $33,019
======= ======= ======= =======
ARM........................................................... 48% 41% 28% 27%
Fixed......................................................... 52% 59% 72% 73%
Weighted average coupon....................................... 7.34% 7.44% 8.05% 8.04%
Weighted average servicing fee (% of UPB)..................... 0.259% 0.261% 0.277% 0.346%
Weighted average maturity (months)............................ 257 259 261 260
</TABLE>
53
<PAGE> 100
The following table sets forth information regarding the geographic
distribution of HHI's servicing portfolio at March 31, 1996. Because of
Barnett's market presence in Florida, that state comprised approximately 38.8%
share of HHI's total portfolio at such date:
SERVICING PORTFOLIO BY STATE
<TABLE>
<CAPTION>
% OF
STATE UPB UPB
---------------------------------------------------- --------------------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Florida............................................... $12,803 38.8%
California............................................ 4,689 14.2
Texas................................................. 1,739 5.3
Massachusetts......................................... 236 0.7
Maryland.............................................. 536 1.6
Virginia.............................................. 491 1.5
Georgia............................................... 870 2.6
Hawaii................................................ 2,015 6.1
Illinois.............................................. 1,060 3.2
Washington............................................ 864 2.6
Other................................................. 7,716 23.4
------- -----
Total....................................... $33,019 100.0%
======= =====
</TABLE>
The following table sets forth the coupon stratification of HHI's servicing
portfolio at March 31, 1996:
SERVICING PORTFOLIO BY COUPON
<TABLE>
<CAPTION>
% OF CUMULATIVE
INTEREST RATE UPB UPB % OF UPB
--------------------------------------- --------------------- ----- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Less than 6.0%........................... $ 195 0.6% 0.6%
6.0% to 6.9%............................. 4,075 12.3 12.9
7.0% to 7.9%............................. 12,236 37.1 50.0
8.0% to 8.9%............................. 10,904 33.0 83.0
9.0% to 9.9%............................. 3,390 10.3 93.3
10.0% to 10.9%........................... 1,615 4.9 98.2
Over 11.0%............................... 604 1.8 100.0
------- -----
Total.......................... $33,019 100.0%
======= =====
</TABLE>
54
<PAGE> 101
LOAN SERVICING CREDIT ISSUES
The table below sets forth a comparison of HHI's historical delinquency and
foreclosure experience to national statistics compiled by the Mortgage Bankers
Association at December 31, 1995 and March 31, 1996:
SERVICING PORTFOLIO DELINQUENCIES
(PERCENT BY LOAN COUNT)
<TABLE>
<CAPTION>
TOTAL FORECLOSURE
30 DAYS 60 DAYS 90+ DAYS PAST DUE INVENTORY
------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1995
HHI..................................... 3.47% 0.66% 0.49% 4.62% 0.55%
Industry Average (adjusted for servicing
portfolio mix)........................ 3.17 0.65 0.63 4.45 0.80
AT MARCH 31, 1996
HHI..................................... 2.95 0.59 0.39 3.93 0.66
</TABLE>
Under the terms of the HHI Acquisition, if HHI originated loans are
required to be repurchased out of a pool existing at May 31, 1996, Barnett is
obligated to purchase these loans from HomeSide for the following five-year
period. See "Certain Relationships and Related Transactions".
55
<PAGE> 102
THE ACQUISITIONS
THE HLI ACQUISITION
On March 15, 1996 the Parent acquired from Bank of Boston all of the
outstanding stock of HLI. Certain assets and liabilities of HLI were retained by
Bank of Boston, including HLI's mortgage retail production operations in New
England.
The Parent paid approximately $139.2 million in cash and issued 8,427,155
shares of Common Stock, representing approximately 45% of the then outstanding
Common Stock (having a value of approximately $86.8 million), to Bank of Boston
in consideration of all the stock of HLI. Also in connection with the HLI
Acquisition, Bank of Boston paid approximately $1.0 million in cash for 97,138
shares of the Parent's Class C Non-Voting Common Stock ("Class C Common Stock"),
representing 100% of the outstanding Class C Common Stock. Additionally, the
Parent agreed that if it acquired directly or indirectly all or any portion of
the capital stock or all or any substantial portion of the assets of another
person during the six-month period from the closing of the HLI Acquisition, the
Parent would pay to Bank of Boston, on the effective date of such acquisition,
cash in an additional amount determined pursuant to a formula set forth in the
Stock Purchase Agreement between the Parent and Bank of Boston dated December
11, 1995, as amended. Accordingly, upon the consummation of the HHI Acquisition,
the Parent paid an additional $5.0 million in cash to Bank of Boston.
Simultaneously with the closing of the HLI Acquisition, THL purchased
7,813,931 shares of Common Stock of the Parent, representing approximately 41%
of the then outstanding Common Stock, for approximately $80.4 million in cash
and MDP purchased 2,604,638 shares of Common Stock, representing approximately
14% of the then outstanding Common Stock, for approximately $26.8 million in
cash. The Parent also reserved shares of its Common Stock for issuance to
members of management of HomeSide at a price of $10.294 per share (the same
price paid by the Investors). Management of HomeSide has, since May 15, 1996,
purchased a total of 441,592 shares of Common Stock of the Parent, for an
aggregate purchase price of approximately $4.5 million. Simultaneously with the
closing of the HLI Acquisition, the Parent also issued 97,138 shares of its
Class B Non-Voting Common Stock ("Class B Common Stock"), representing 100% of
the outstanding Class B Common Stock, to Smith Barney Inc. in consideration of
services rendered to the Parent in connection with the HLI Acquisition pursuant
to an agreement dated March 14, 1996. Immediately following consummation of the
HLI Acquisition, Bank of Boston sold its shares of Class C Common Stock to an
unaffiliated third party pursuant to an agreement dated March 13, 1996.
Upon consummation of the HLI Acquisition, HLI terminated its former line of
credit with Bank of Boston and entered into a new credit agreement with certain
other lenders. In connection with the HHI Acquisition, HomeSide modified its
credit facility entered into on March 15, 1996 by entering into the Bank Credit
Agreement. See "Description of Bank Credit Agreement". Also in connection with
the HLI Acquisition, HomeSide entered into various contractual arrangements with
Bank of Boston and its affiliates regarding the provision of certain operational
services between the parties and the purchase by HomeSide from Bank of Boston of
certain mortgage production and servicing rights of Bank of Boston. See "Certain
Relationships and Related Transactions".
THE HHI ACQUISITION
On May 31, 1996, the Parent acquired from Barnett all of the outstanding
stock of HHI. Certain assets and liabilities of HHI were retained by Barnett,
including those assets of HHI and its subsidiaries (other than Honolulu
Mortgage) associated with the loan origination or production activities of such
entities.
As consideration for all the stock of HHI, the Parent paid Barnett
approximately $228.2 million in cash. In connection with the HHI Acquisition,
Siesta, an affiliate of Barnett, BKB, THL and MDP paid to the Parent
approximately $118.0 million, $31.2 million, $8.1 million and $2.7 million,
respectively, in cash in exchange for shares of Common Stock of the Parent. As a
result, immediately prior to the January 1997 public offering of Common Stock of
the Parent, Siesta owned approximately 33% of the Parent, and THL and MDP,
collectively, and BKB each owned approximately 33% of the Parent.
56
<PAGE> 103
Upon consummation of the HHI Acquisition, HHI and its subsidiaries
terminated their former line of credit with Barnett. In connection with the HHI
Acquisition, HomeSide has entered into various contractual arrangements with
Barnett regarding the provision of certain operational services between the
parties and the purchase by HomeSide from Barnett of certain mortgage production
and servicing rights of Barnett. See "Certain Relationships and Related
Transactions".
Upon closing of the HHI Acquisition, the Parent contributed all of the
stock of HLI to HHI, whereupon the Issuer became a wholly-owned subsidiary of
HHI. All of HHI's servicing portfolio was transferred to HomeSide, except for
certain of HHI's GNMA loans, which HHI retained. All of HHI's former
subsidiaries, except Honolulu Mortgage, were merged with and into the Issuer.
All new business is expected to be carried on by HomeSide. The Parent may in the
future dissolve HHI if this would cause administrative convenience without
adverse tax or business consequences.
The following table sets forth the approximate sources and uses of cash and
equity related to (i) the HLI Acquisition and (ii) the HHI Acquisition as of the
respective dates of acquisition:
<TABLE>
<CAPTION>
HLI
ACQUISITION
HLI HHI AND
ACQUISITION ACQUISITION HHI
(MARCH 15, 1996) (MAY 31, 1996) ACQUISITION
---------------- -------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
SOURCES:
Issuance of common stock of Parent.................... $ 200.0 $160.0 $ 360.0
Notes offering of Parent.............................. 112.5 87.5 200.0
Borrowings under Bank Credit Agreement................ 1,479.1 408.3 1,887.4
Cash acquired......................................... 23.2 11.2 34.4
-------- ------ --------
Total Sources.................................... $1,814.8 $667.0 $2,481.8
======== ====== ========
USES:
Acquisition of HLI.................................... $ 225.9 $ -- $ 225.9
Acquisition of HHI.................................... -- 228.2 228.2
Net purchase of certain Bank of Boston assets(a)...... 292.1 -- 292.1
Net purchase of certain Barnett assets................ -- 44.7 44.7
Repayment of pre-acquisition facility................. 1,256.0 378.1 1,634.1
Payment of debt issuance and acquisition expenses..... 38.8 11.0 49.8
Contingent payment to Bank of Boston.................. -- 5.0 5.0
Pro forma cash balances............................... 2.0 -- 2.0
-------- ------ --------
Total Uses....................................... $1,814.8 $667.0 $2,481.8
======== ====== ========
</TABLE>
- ---------------
(a) Represents the net effect of purchasing loans held for sale previously
attributable to participations of an affiliate of Bank of Boston of $507.3
million and excluding net assets retained by Bank of Boston of $215.2
million.
57
<PAGE> 104
MANAGEMENT
The following table sets forth the name, age and position with the Issuer
and Parent of each person who is an executive officer or director of the Issuer
or Parent.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- --------------------------------------------------------
<S> <C> <C>
Joe K. Pickett.............. 51 Chairman of the Board and Chief Executive Officer (the
Issuer and the Parent); Director (the Issuer and the
Parent)
Hugh R. Harris.............. 45 President and Chief Operating Officer (the Issuer and
the Parent); Director (the Issuer and the Parent)
Kevin D. Race............... 36 Vice President, Chief Financial Officer and Treasurer
(the Parent); Executive Vice President and Chief
Financial Officer (the Issuer)
Robert J. Jacobs............ 44 Secretary and Vice President (the Parent); Executive
Vice President, Secretary and General Counsel (the
Issuer); Director (the Issuer)
Betty L. Francis............ 50 Vice President (the Parent); Chief Credit Officer and
Executive Vice President (the Issuer)
Mark. F. Johnson............ 42 Vice President (the Parent); Executive Vice President --
Secondary Marketing and Production (the Issuer)
William Glasgow, Jr......... 47 Vice President (the Parent); Executive Vice President
(the Issuer)
Daniel T. Scheuble.......... 38 Vice President (the Parent); Executive Vice President --
Technology (the Issuer)
Thomas H. Fish.............. 64 Vice President and Assistant Secretary (the Parent);
Executive Vice President and Assistant Secretary (the
Issuer)
W. Blake Wilson............. 31 Senior Vice President, Director of Capital Markets (the
Issuer)
Charles D. Gilmer........... 49 Senior Vice President and Treasurer (the Issuer)
Ann R. Mackey............... 39 Senior Vice President and Finance Director (the Issuer)
Thomas M. Hagerty........... 34 Director (the Parent); Risk Management Committee (the
Parent)
David V. Harkins............ 55 Director (the Parent)*
Justin S. Huscher........... 43 Director (the Parent); Risk Management Committee (the
Parent)**
Peter J. Manning............ 57 Director (the Parent)**
William J. Shea............. 48 Director (the Parent)*
Kathleen M. McGillycuddy.... 47 Director (the Parent); Risk Management Committee (the
Parent)
Hinton F. Nobles, Jr. ...... 51 Director (the Parent)
Douglas K. Freeman.......... 46 Director (the Parent)*
Charles W. Newman........... 47 Director (the Parent)**
</TABLE>
- ---------------
* Also serves as a member of the Compensation Committee of the Parent.
** Also serves as a member of the Audit Committee of the Parent.
The directors of the Issuer are elected each year by vote of HHI, a
wholly-owned subsidiary of the Parent. 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 Issuer
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 Issuer since April 1990 and as Chairman of the Board, Chief
Executive Officer and a Director of the Parent since March 14, 1996. 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.
58
<PAGE> 105
HUGH R. HARRIS has served as President and Chief Operating Officer of the
Issuer since January 1993 and as President, Chief Operating Officer and a
Director of the Parent since March 14, 1996. From January 1988 to January 1993,
Mr. Harris served as Vice Chairman of HLI in charge of production and secondary
marketing. Mr. Harris currently serves as a Director of Republic Mortgage
Insurance Company (RMIC).
KEVIN D. RACE has served as Executive Vice President and Chief Financial
Officer of the Issuer and Vice President, Chief Financial Officer and Treasurer
of the Parent since October 1996. 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.
ROBERT J. JACOBS has served as Executive Vice President and Secretary of
the Issuer since February 2, 1996. Mr. Jacobs has served as a Director of HLI
since March 14, 1996. Mr. Jacobs has also served as Secretary of the Parent
since March 14, 1996 and as Vice President of the Parent since April 10, 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 currently serves
as President and Legislative Chairman of the Mortgage Bankers Association of
Florida.
BETTY L. FRANCIS has served as Chief Credit Officer and as Executive Vice
President of the Issuer since October 1996 and as Vice President of the Parent
since April 10, 1996. Ms. Francis served from March 1994 to October 1996 as
Chief Financial Officer of HLI. Ms. Francis served from April 1993 to March 1994
as the Senior Finance Officer of the Personal Banking Group, and from April 1990
to April 1993 as the Comptroller of Bank of Boston and BKBC. Ms. Francis is a
Trustee of Commonwealth Energy Services, a gas and electric utility in
Massachusetts.
MARK F. JOHNSON has served as Executive Vice President of Secondary
Marketing and Production of the Issuer since April 1, 1992. From 1988 to 1992,
Mr. Johnson served as Senior Vice President and Director of Wholesale Lending
for HLI. Mr. Johnson also has served as Vice President of the Parent since April
10, 1996.
WILLIAM GLASGOW, JR. has served as Executive Vice President of the Issuer
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 Vice President of the Parent since April 10, 1996.
DANIEL T. SCHEUBLE has served as Executive Vice President for Technology,
Loan Processing and Consumer Direct Lending of the Issuer since 1993. From 1990
to 1992, Mr. Scheuble served as a Senior Technology and Operational Manager at
Bank of Boston. Mr. Scheuble has also served as Vice President of the Parent
since April 10, 1996.
THOMAS H. FISH has served as Executive Vice President of the Issuer since
1988. Mr. Fish has served as Assistant Secretary of HLI since March 14, 1996.
Mr. Fish served as Secretary and General Counsel of HLI from 1988 to March 14,
1996.
W. BLAKE WILSON has served as Senior Vice President and Director of Capital
Markets of the Issuer since June, 1996. Before joining HLI, 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.
CHARLES D. GILMER has served as Senior Vice President and Treasurer of the
Issuer since October 1993. Mr. Gilmer previously served as the Director of
Liability Management for Citicorp from November 1989 to October 1993.
ANN R. MACKEY has served as Senior Vice President and Finance Director of
the Issuer since July 1993. From September 1992 to July 1993, Ms. Mackey served
as a manager in International Risk Management for Bank of Boston. Ms. Mackey
previously served as Senior Audit Manager at KPMG Peat Marwick from 1985 to
1992.
THOMAS M. HAGERTY served as Treasurer of the Parent from March 14, 1996 to
October 1996. Mr. Hagerty served as President of the Parent from its
organization, December 11, 1995 through March 14,
59
<PAGE> 106
1996. Mr. Hagerty has served as a Director of the Parent since December 11,
1995. Mr. Hagerty has been employed by the Thomas H. Lee Company since 1988, and
currently serves as a Managing Director. Mr. Hagerty is also a Vice President
and Trustee of THL Equity Trust III, the General Partner of THL Equity Advisors
III Limited Partnership, which is the General Partner of Thomas H. Lee Equity
Fund III, L.P. Mr. Hagerty also serves as a Director of Select Beverages, Inc.
DAVID V. HARKINS has served as a Director of the Parent since December 11,
1995. Mr. Harkins has been employed by the Thomas H. Lee Company since 1986 and
currently serves as a Senior Managing Director. Mr. Harkins has been Chairman
and Director of National Dentex Corporation, an operator of dental laboratories,
since 1983. Mr. Harkins also serves as Senior Vice President and Trustee of
Thomas H. Lee Advisors I, and T.H. Lee Mezzanine II, affiliates of ML-Lee
Acquisition Fund, L.P., and the ML-Lee Acquisition Funds, respectively,
President and Trustee of THL Equity Trust III, the General Partner of THL Equity
Advisors III Limited Partnership, which is the General Partner of Thomas H. Lee
Equity Fund III, L.P. and is a Director of Stanley Furniture Company, Inc.,
First Alert, Inc., and various private corporations.
JUSTIN S. HUSCHER has served as a Director of the Parent since December 11,
1995. Mr. Huscher has been principally employed as a Vice President of Madison
Dearborn Partners, Inc. since January 1993. From April 1990 until January 1993,
Mr. Huscher served as Senior Investment Manager of First Chicago Venture
Capital. Mr. Huscher is a member of the operating committees of the general
partners of Huntway Partners, L.P. and Golden Oak Mining Company, L.P.,
respectively, and a member of the board of directors of Bay State Paper Holding
Company.
PETER J. MANNING has served as a Director of the Parent since December 11,
1995. Mr. Manning has been employed by Bank of Boston and BKBC as Executive Vice
President, Mergers & Acquisitions since 1993. From 1990 to 1993, Mr. Manning
served as Executive Vice President, Chief Financial Officer and Treasurer of
BKBC and Chief Financial Officer of Bank of Boston.
WILLIAM J. SHEA has served as a Director of the Parent since October 2,
1996. Mr. Shea has served as Vice Chairman, Chief Financial Officer and
Treasurer of BKBC since October 28, 1993. Mr. Shea served as Executive Vice
President, Chief Financial Officer and Treasurer of BKBC from December, 1992
through October 28, 1993. Prior to joining BKBC, Mr. Shea spent 19 years with
Coopers and Lybrand where he was Vice Chairman and Senior Partner.
KATHLEEN M. MCGILLYCUDDY has served as a Director of the Parent since March
14, 1996. Ms. McGillycuddy has been employed by Bank of Boston since 1992 and
currently serves as Group Managing Director, Global Asset Liability Management.
Previously, Ms. McGillycuddy was employed by Fleet/Norstar Bank as Executive
Vice President, Corporate Liquidity and Funds Management from 1991 to 1992 and
by Bank of New England as Executive Vice President, Corporate Liquidity and
Capital Markets Manager prior to 1991.
HINTON F. NOBLES JR. has served as a Director of the Parent since May 31,
1996. Mr. Nobles has been employed by Barnett since 1974 and currently serves as
Executive Vice President and a member of the Management Executive Committee. He
was elected Vice President in 1981, Senior Vice President for Special Services
in 1983 and Executive Vice President in 1985. Mr. Nobles was named to his
current position in 1989.
DOUGLAS K. FREEMAN has served as a Director of the Parent since May 31,
1996. Mr. Freeman joined Barnett in 1991 and currently serves as Chief Consumer
Credit Executive and a member of Barnett's Management Operating Committee. From
1991 to 1995 Mr. Freeman served as Chief Corporate Banking Executive.
Previously, Mr. Freeman was employed by Wells Fargo Bank as Executive Vice
President of Business Banking and by Citizens & Southern Corporation as Senior
Vice President of Product and Sales Management. Mr. Freeman is past chairman of
the Consumer Bankers Association. He also chairs the Governor's Capital
Partnership Board of Florida and serves on the board of The Small Business
Foundation of America, Inc.
CHARLES W. NEWMAN has served as a Director of the Parent since May 31,
1996. Mr. Newman has been employed by Barnett since 1983 and currently serves as
Chief Financial Officer and a member of the Management Executive Committee. From
1983 to 1991, Mr. Newman served as Vice President and Deputy Controller, Senior
Vice President and Controller, and Executive Vice President of Barnett. Mr.
Newman was elected to his current position in 1992.
60
<PAGE> 107
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to the Issuer's Chief Executive Officer and the Issuer's five most highly
compensated Executive Officers other than the Chief Executive Officer whose
total annual salary and bonus exceeded $100,000 for all services rendered in all
capacities to HomeSide and its subsidiaries for the fiscal year ended February
28, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
PAYOUTS
AWARDS ---------
ANNUAL ----------------------- LONG-TERM
COMPENSATION(a) RESTRICTED SECURITIES INCENTIVE
NAME AND PRINCIPAL FISCAL ---------------- STOCK UNDERLYING PLAN ALL OTHER
HLI POSITION YEAR SALARY BONUS AWARDS OPTIONS(b) PAYOUTS COMPENSATION(c)
- --------------------------------- ------ -------- ----- ---------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joe K. Pickett................... 1997 $312,000 $ 0 $0 242,862 $ 0 $ 50,000
Chairman & CEO
Hugh R. Harris................... 1997 300,000 0 0 242,862 0 225,000
President and Chief Operating
Officer
Kevin D. Race.................... 1997 250,000 0 0 97,155 0 0
Executive Vice President and
Chief Financial Officer
Mark F. Johnson.................. 1997 200,000 0 0 97,155 0 200,000
Executive Vice President --
Secondary Marketing and
Production
William Glasgow, Jr.............. 1997 200,000 0 0 97,155 0 200,000
Executive Vice President
Charles D. Gilmer................ 1997 175,000 0 0 97,155 0 175,000
Senior Vice President and
Treasurer
</TABLE>
- ---------------
(a) The salary of Mr. Race is per annum. Mr. Race has only been employed by HLI
since October 1996. Bonuses for the fiscal year ended February 28, 1997 have
not yet been determined. All bonuses will be subject to approval of the
Compensation Committee.
(b) Involves Common Stock of Parent. Reflects a 17 for 1 stock split of Parent's
Common Stock effected immediately prior to Parent's January 1997 initial
public offering.
(c) These payments reflect bonuses paid to the named executive officers in 1996
in connection with the closing of the HLI Acquisition.
61
<PAGE> 108
OPTION GRANTS FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997
The following table provides information on option grants with respect to
Parent Common Stock for the fiscal year ended February 28, 1997 to the named
executive officers. Pursuant to applicable regulations of 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>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT
----------------------------------------------- ASSUMED
NUMBER OF ANNUAL RATES
SECURITIES % OF TOTAL OF STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(b)
GRANTED EMPLOYEES PRICE EXPIRATION ----------------------
NAME (#)(a) IN 1996 ($/SH)(a) DATE 5% 10%
- --------------------------------- ---------- ----------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joe K. Pickett................... 80,954(c) 18.11% $10.294 5/31/06 $523,772 $1,328,455
161,908(d) 18.11% $10.294 11/30/05 $984,401 $2,461,002
Hugh R. Harris................... 80,954(c) 18.11% $10.294 5/31/06 $523,772 $1,328,455
161,908(d) 18.11% $10.294 11/30/05 $984,401 $2,461,002
Kevin D. Race.................... 32,385(c) 7.24% $10.294 10/08/06 $209,531 $ 531,438
64,770(b) 7.24% $10.294 4/08/06 $393,802 $ 984,504
Charles D. Gilmer................ 32,385(c) 7.24% $10.294 5/31/06 $209,531 $ 531,438
64,770(d) 7.24% $10.294 11/30/05 $393,802 $ 984,504
Mark F. Johnson.................. 32,385(c) 7.24% $10.294 5/31/06 $209,531 $ 531,438
64,770(d) 7.24% $10.294 11/30/06 $393,802 $ 984,504
William Glasgow, Jr.............. 32,385(c) 7.24% $10.294 5/31/05 $209,531 $ 531,438
64,770(d) 7.24% $10.294 11/30/05 $393,802 $ 984,504
</TABLE>
- ---------------
(a) Reflects a 17 for 1 stock split of the Parent's Common Stock effected
immediately prior to its January 1997 initial public offering.
(b) 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 Parent's Common Stock.
(c) Non-qualified timed-based options granted pursuant to the Parent's 1996
Employee Stock Option Plan. Options vest in five equal installments in
arrears, or 20% per year, with the first 20% vesting on April 30, 1997.
(d) Non-qualified, time-accelerated restricted stock options which vest nine
years from the date of grant, and may be exercised at any time within six
months thereafter. Vesting accelerates upon the achievement of certain
performance criteria.
62
<PAGE> 109
AGGREGATED OPTION EXERCISES AND OPTION VALUES
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997
The following table provides information on option exercises during the
fiscal year ended February 28, 1997 with respect to the Parent Common Stock and
on the values of the named executive officers' unexercised options at February
28, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT YEAR-END(#)(a) OPTIONS AT YEAR-END
ON VALUE ---------------------------- -------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(b)
- ------------------------- ---------- --------- ------------ -------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Joe K. Pickett........... 0 $ 0 0 242,862 $0 $ 1,962,568
Hugh R. Harris........... 0 0 0 242,862 0 1,962,568
Kevin D. Race............ 0 0 0 97,155 0 785,110
Charles D. Gilmer........ 0 0 0 97,155 0 785,110
Mark F. Johnson.......... 0 0 0 97,155 0 785,110
William Glasgow, Jr...... 0 0 0 97,155 0 785,110
</TABLE>
- ---------------
(a) None of the options granted to the named executive officers become
exercisable prior to April 30, 1997.
(b) Value of unexercised in-the-money stock options represents the difference
between the exercise prices of the stock options and the closing price of
the Parent's Common Stock on The New York Stock Exchange on February 28,
1997.
See "Certain Relationships and Related Transactions -- Management
Ownership" for information regarding shares of Common Stock of the Parent sold
to members of management.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Although none of the Issuer's executive officers are party to any
employment or non-competition agreements with the Issuer, and the Issuer is not,
therefore, contractually obligated to continue to pay such salaries, it is
expected that the annual salaries of the named executive officers will not be
reduced during the executive officers' term of employment with the Issuer.
Pursuant to severance agreements with the Issuer, certain executive
officers, including each of the named executive officers, will be entitled to
severance benefits if he is terminated, or constructively terminated through
diminution in job responsibilities or compensation following an acquisition (a
"Trigger Event"). If such named executive officer offers to remain in the employ
of the Issuer for one year following any Trigger Event, and is either terminated
during that first year or has his job responsibilities or compensation
diminished, he is entitled to a severance benefit. The severance benefit will be
a lump sum payment in cash equal in the case of each of Messrs. Pickett and
Harris to the sum of (i) twice his annual salary in effect at the time of
termination, (ii) his annual bonus received for the preceding two years and
(iii) a pro rata portion of the bonus he would have received for the year in
which termination occurs (paid at the time the amount of such bonus would have
been determined). The severance benefit for the other named executive officers
will be equal to the sum of (i) such officer's annual salary in effect at the
time of termination, (ii) his annual bonus received for the preceding year, and
(iii) a pro rata portion of the bonus he would have received for the year in
which termination occurs (paid at the time the amount of such bonus would have
been determined). The named executive officers will also receive continued
coverage under the Issuer's medical benefit plans for one year following such
termination, or two years following termination in the case of Messrs. Pickett
and Harris. Each of the Severance Agreements is for a term of one (1) year which
is automatically renewed on April 1 of each year for additional one-year periods
unless either the Issuer or the executive has given notice not later than
December 31st of the previous year to the other not to extend the term of the
Agreement. If a Trigger Event has occurred during the term of the Severance
Agreement, however, the Agreement continues for one (1) year following the
closing of the Trigger Event.
63
<PAGE> 110
HLI HISTORICAL EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to the Issuer's Chief Executive Officer and the Issuer's four most highly
compensated Executive Officers other than the Chief Executive Officer whose
total annual salary and bonus exceeded $100,000 for all services rendered in all
capacities to HLI and its subsidiaries for HLI's fiscal year ended December 31,
1995. None of the Issuer's named executive officers received any compensation
from HHI during 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
PAYOUTS
AWARDS(b) -----------
----------------------- LONG-TERM
ANNUAL COMPENSATION RESTRICTED SECURITIES INCENTIVE
NAME AND PRINCIPAL ---------------------- STOCK UNDERLYING PLAN ALL OTHER
HLI POSITION YEAR SALARY(a) BONUS(a) AWARDS OPTIONS PAYOUT(c) COMPENSATION(d)
- --------------------------------- ----- --------- -------- ---------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joe K. Pickett................... 1995 $287,000 $200,000 $ 68,700 9,600 $ 215,156 $11,480
Chairman & CEO
Hugh R. Harris................... 1995 275,000 225,000 42,938 6,000 0 11,000
President
Charles D. Gilmer................ 1995 170,769 155,000 0 0 0 0
Director, Risk Management
Mark F. Johnson.................. 1995 190,577 125,000 28,625 4,000 0 7,623
Director, Wholesale/Securities
Marketing
William Glasgow, Jr.............. 1995 189,230 125,000 28,625 4,000 0 7,569
Director Loan Administration
</TABLE>
- ---------------
(a) The salary and bonus amounts presented were earned in 1995. The payment of
certain of such amounts occurred in 1996. The amounts reflected in the table
do not include the following bonuses paid to the named executive officers in
1996 in connection with the closing of the HLI Acquisition: Mr. Pickett,
$50,000; Mr. Harris, $225,000; Mr. Gilmer, $175,000; Mr. Johnson, $200,000;
and Mr. Glasgow, $200,000.
(b) Involves common stock of BKBC. As of December 31, 1995, the named executive
officers held the following number of restricted shares of BKBC common stock
having the corresponding year-end market values:
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL NUMBER OF AGGREGATE
NAME RESTRICTED SHARES HELD MARKET VALUE
------------------------------------------------- ----------------------- ------------
<S> <C> <C>
Joe K. Pickett................................... 5,600 $259,000
Hugh R. Harris................................... 4,135 191,244
Charles D. Gilmer................................ 0 0
Mark F. Johnson.................................. 1,784 82,510
William Glasgow, Jr. ............................ 1,700 78,625
</TABLE>
In connection with the HLI Acquisition, vesting on all of the restricted
stock owned by HLI employees, including the restricted stock listed above,
was accelerated and all prior forfeiture and transferability restrictions
thereon were removed.
(c) Represents the dollar value of vested shares of performance restricted stock
calculated by multiplying the closing price of BKBC common stock on each
vesting date by the number of shares that vested on that date.
(d) Includes matching employer contributions and credits under the Bank of
Boston thrift-incentive plan and the Bank of Boston deferred compensation
plan for the named executive officers.
64
<PAGE> 111
OPTION GRANTS IN 1995
The following table provides information on option grants with respect to
BKBC common stock in fiscal 1995 to the named executive officers. Pursuant to
applicable regulations of the Commission, the following table also sets forth
the hypothetical value which might have been realized with respect to such
options based on assumed rates of stock appreciation of 5% and 10% compounded
annually from date of grant to March 15, 1996, the end of the option terms:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------------------------------ ASSUMED
NUMBER OF ANNUAL RATES
SECURITIES % OF TOTAL OF STOCK PRICE
UNDERLYING OPTIONS APPRECIATION
OPTIONS GRANTED TO EXERCISE FOR OPTION TERM
GRANTED EMPLOYEES PRICE EXPIRATION --------------------
NAME (#)(a) IN 1995 ($/SH) DATE 5% 10%
- ---------------------------------------------- --------- ----------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Joe K. Pickett................................ 9,600 .90 $28.625 3/15/96 $15,631 $31,362
Hugh R. Harris................................ 6,000 .53 $28.625 3/15/96 $ 9,769 $19,601
Charles D. Gilmer............................. 0 0 0 -- --
Mark F. Johnson............................... 4,000 .40 $28.625 3/15/96 $ 6,513 $13,067
William Glasgow, Jr........................... 4,000 .40 $28.625 3/15/96 $ 6,513 $13,067
</TABLE>
- ---------------
(a) All options were exercised prior to March 15, 1996.
AGGREGATED OPTION EXERCISES IN 1995
AND DECEMBER 31, 1995 OPTION VALUES
The following table provides information on option exercises during 1995
with respect to BKBC common stock and on the values of the named executive
officers' unexercised options at December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT YEAR-END(#) OPTIONS AT YEAR-END
ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joe K. Pickett..................... 0 $ 0 32,100 4,800 $ 687,575 $84,600
Hugh R. Harris..................... 0 0 10,200 3,000 202,275 52,875
Charles D. Gilmer.................. 0 0 0 0 0 0
Mark F. Johnson.................... 0 0 5,200 2,000 108,250 32,250
William Glasgow, Jr................ 4,000 32,750 0 2,000 0 32,250
</TABLE>
In connection with the HLI Acquisition, vesting of all stock options listed
in the preceding table was accelerated and all such options listed as being
unexercised at year end were exercised with values realized as follows: Mr.
Pickett, $753,725; Mr. Harris, $248,550; Mr. Johnson, $139,900; and Mr. Glasgow,
$26,000.
RETIREMENT BENEFITS
The following table shows the years of service and the estimated annual
retirement benefits that are payable at age 65 from BKBC to each of the named
executive officers in the form of a single lifetime annuity with an assumed
future annual interest rate of 6.3% through 1996 and 5.5% thereafter on each
individual's cash balance account:
<TABLE>
<CAPTION>
PRIOR YEARS OF SERVICE ESTIMATED ANNUAL
NAME AS OF 12/31/95 RETIREMENT BENEFIT
- ------------------------------------------------------------------------- ---------------------- ------------------
<S> <C> <C>
Joe K. Pickett........................................................... 15 $ 73,883
Hugh R. Harris........................................................... 12 50,676
Charles D. Gilmer........................................................ 2 2,386
Mark F. Johnson.......................................................... 13 48,616
William Glasgow, Jr...................................................... 4 6,836
</TABLE>
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<PAGE> 112
The estimates shown above reflect Bank of Boston's cash balance formula as
of December 31, 1995 (under which credits are made annually to an individual's
account at a rate based on the individual's age and years of service), plus any
accrued benefits under the prior plan formula. These benefits are provided under
a combination of Bank of Boston's tax-qualified retirement plan and certain
supplemental plans.
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<PAGE> 113
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CAPITAL STOCK OF THE ISSUER
All of the outstanding common stock of HHI, consisting of 10,000 shares, is
owned by the Parent, and all of the outstanding common stock of the Issuer,
consisting of 100 shares, is owned by HHI.
CAPITAL STOCK OF THE PARENT
The following table and the paragraphs that follow set forth information
with respect to the beneficial ownership of shares of the Parent's voting
securities as of March 31, 1997 by (i) all shareholders of the Parent who own
more than 5% of any class of such voting securities; (ii) each director who is a
stockholder; (iii) certain executive officers; and (iv) all directors and
executive officers as a group, as determined in accordance with Section 13(d) of
the Exchange Act.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF PERCENTAGE OF VOTING
NAME OF BENEFICIAL OWNER COMMON STOCK STOCK OUTSTANDING
------------------------ ------------ ---------------------
<S> <C> <C>
The First National Bank of Boston............ 11,461,400 26.42%
100 Federal Street
Boston, MA
Siesta Holdings, Inc. ....................... 11,461,400 26.42%
3800 Howard Hughes Parkway
Suite 1560
Las Vegas, NV
THL.......................................... 8,596,050 19.82%
75 State Street
Boston, MA
Madison Dearborn Capital Partners, L.P....... 2,865,350 6.60%
Three First National Plaza
Chicago, IL
Joe K. Pickett............................... 77,824 *
Hugh R. Harris............................... 72,862 *
Kevin D. Race................................ 29,155 *
Charles D. Gilmer............................ 34,000 *
William Glasgow.............................. 43,724 *
Mark F. Johnson.............................. 48,620 *
Thomas M. Hagerty............................ 25,194(a) *
David V. Harkins............................. 39,661(b) *
All Directors and Executive Officers as a
Group (21 persons)......................... 431,946(c) *
</TABLE>
- ---------------
*Less than 1%.
(a) Does not include 8,570,856 shares owned by THL, as to which Mr. Hagerty
disclaims beneficial ownership.
(b) Does not include 8,556,389 shares owned by THL, as to which Mr. Harkins
disclaims beneficial ownership.
(c) Does not include the shares held by THL, MDP, Bank of Boston and Siesta,
with which certain directors are affiliated.
Each of the Principal Shareholders and certain of the stockholders set
forth above are party to a stockholder agreement which places certain
limitations on transactions with affiliated parties. All other terms of the
stockholder agreement have been terminated. See "Certain Relationships and
Related Transactions -- Amended and Restated Shareholder Agreement."
The Parent has issued 441,592 shares of the Parent's Common Stock to
members of management of HomeSide. The Parent has also granted options to
purchase shares of the Parent's Common Stock pursuant to employee stock option
plans. See "Management -- Executive Compensation," "The Acquisitions" and
"Certain Relationships and Related Transactions."
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<PAGE> 114
In addition to those shares of capital stock set forth in the preceding
table, 97,138 shares of Class C Common Stock (non-voting) of the Parent are
beneficially owned by Robert Morrissey, constituting 100% of the outstanding
Class C Common Stock. Within 180 days of the initial public offering of common
stock of the Parent, a holder of Class C Common Stock may require the Parent to
purchase any portion of its shares of Class C Common Stock at a price based upon
the average bid prices of the Common Stock for the preceding 20 days. In
addition, upon consummation of a merger or sale of substantially all the assets
of the Parent, a holder of Class C Common Stock may require the Parent to
purchase any portion of its shares of Class C Common Stock at an appraised fair
market value price.
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<PAGE> 115
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AMENDED AND RESTATED SHAREHOLDER AGREEMENT
Each of the Principal Shareholders and certain other stockholders named
therein entered into an Amended and Restated Shareholder Agreement with the
Parent dated May 31, 1996 in connection with the HHI Acquisition (the
"Shareholder Agreement"). The Shareholder Agreement terminated upon the
consummation of the January 1997 public offering of Common Stock of the Parent,
except for provisions pursuant to which the Parent has agreed not to enter into
transactions with certain affiliated parties except on terms which the Parent
could have received in comparable arms-length transactions.
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
Subject to certain limitations, pursuant to the Amended and Restated
Registration Rights Agreement among the Parent and the Principal Shareholders
dated May 31, 1996, upon the request of (i) holders of shares of Common Stock of
the Parent aggregating more than 50% of the number of shares of such Common
Stock then held by THL, (ii) the Bank of Boston, (iii) MDP, or (iv) Siesta
(provided that no request may be made for registration of securities with an
expected aggregate offering price to the public of less than $20,000,000), the
Parent will use its best efforts to effect the registration of the Common Stock
of the Parent requested by such stockholder to be registered and the Common
Stock of all other holders who have requested registration in connection
therewith; provided that the Parent is not required to effect more than two
registrations pursuant to any request made by any of the foregoing parties.
Under certain circumstances, if the Parent proposes to register shares of its
Common Stock, it will, upon the written request of any stockholder, register
such requesting stockholder's Common Stock, subject to pro rata reduction in the
event all securities requested to be included in the registration statement
cannot, in the opinion of the managing underwriter, be so included.
EXCLUSIVE MARKETING AGREEMENTS
The Issuer has entered into a Marketing Agreement dated March 15, 1996 (the
"BKBC Marketing Agreement") with BKBC pursuant to which HomeSide and BKBC may
market services to HomeSide customers who are also BKBC customers ("BKBC
Customers") and other customers of HomeSide. Under this agreement: (a) HomeSide
has the exclusive right, subject to certain limitations, to market to all
customers any mortgage loan refinancings, (b) HomeSide has the non-exclusive
right to market first mortgage loans (other than refinancings) to BKBC Customers
and the exclusive right to market such loans to other HomeSide customers, (c)
HomeSide has the exclusive right to market "other" mortgage loans to customers
who are not BKBC Customers, and BKBC has the exclusive right to market such
mortgage loans to BKBC Customers, (d) HomeSide has the non-exclusive right,
subject to certain limitations, to offer certain "Eligible Products" (mortgage
credit insurance, relocation services, title insurance, title search, appraisal
services, private mortgage insurance, escrow services, hazard insurance services
and certain other products) to BKBC Customers and the exclusive right to offer
Eligible Products to other customers, and (e) BKBC has the exclusive right to
offer certain banking services to BKBC Customers and the non-exclusive right to
offer such services to other customers.
Under the BKBC Marketing Agreement, BKBC may not engage in a formal program
to solicit HomeSide's customers for refinancings.
The term of the BKBC Marketing Agreement is the later of: (a) eight years,
or (b) the third anniversary of the termination of the Operating Agreement
(which has a term of five years). See "-- Other BKBC Agreements -- Operating
Agreement" below.
The Issuer has also entered into a Marketing Agreement dated May 31, 1996
(the "Barnett Marketing Agreement") with Barnett which is substantially similar
to the BKBC Marketing Agreement, except that it governs rights with respect to
"Barnett Customers" as defined therein rather than with respect to BKBC
Customers.
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<PAGE> 116
HomeSide does not pay any fee or monies (other than certain reimbursement
obligations) to BKBC or Barnett for its marketing and other rights under the
BKBC Marketing Agreement or Barnett Marketing Agreement.
TRANSITIONAL SERVICES AGREEMENTS
Bank of Boston and its affiliate banks (the "BKB Banks") and the Issuer
have entered into a series of Transitional Services Agreements dated March 15,
1996, pursuant to which the BKB Banks agreed to make available to HomeSide, at
the BKB Banks' cost, certain corporate services, including travel and
relocation, general ledger support, audit, payroll, retirement plans, computer
services, disbursement accounting, purchasing, telecommunications/workstation
support and human resources. HomeSide also agreed to make available to the BKB
Banks, at HomeSide's cost, certain administrative services, including mortgage
loan origination support, mortgage loan quality control services, affordable
housing loan support and pledged loan support services. For the period March 16,
1996 through February 28, 1997, HomeSide paid to BKB Banks approximately $0.7
million under such Transitional Services Agreements.
Barnett and the Issuer have entered into a Transitional Services Agreement
dated May 31, 1996, pursuant to which Barnett agreed to make available to
HomeSide office space and certain corporate services, including finance
services, accounting services, purchasing services, benefits and compensation
administration, human resources and staffing services and technology services.
HomeSide pays Barnett a monthly fee based on rates established under a fee
schedule for the different services provided to HomeSide. For the period March
16, 1996 through February 28, 1997, HomeSide paid to Barnett approximately $0.1
million under such Transitional Services Agreement.
The terms of the services provided under the Transitional Services
Agreements vary. As a general matter, the services will be provided to the
receiving party until the receiving party no longer requires the services, but
in no event later than December 31, 1996. The term may be extended for 90 days
for most services, upon 60 days' prior written notice.
OTHER BKBC AGREEMENTS
Operating Agreement
The BKB Banks and the Issuer have entered into an Operating Agreement,
dated March 15, 1996 (the "BKBC Operating Agreement"), which sets forth the
parties' roles with respect to new loan originations and servicing rights. With
certain exceptions, the BKB Banks are required to sell all mortgage loan
production to HomeSide during the term of the BKBC Operating Agreement. In
particular, among other things, the BKBC Operating Agreement: (a) describes the
mortgage loan products to be purchased by HomeSide from BKB Banks, (b) ensures
that the BKB Banks receive the most favorable pricing and service released
premiums offered by HomeSide to correspondent lenders, (c) describes HomeSide's
customer service levels, (d) sets forth warehouse and pipeline management rights
and obligations, (e) describes the technology support which the parties provide
to one another, (f) describes the mortgage loan production and support functions
to be provided by the parties, (g) describes the reports and information
provided periodically by HomeSide to the BKB Banks, including, but not limited
to, risk management, internal performance and management reports, (h) sets forth
the penalties to be paid by the BKB Banks for failing to satisfy the buy price
expiration dates, (i) describes BKB Banks' mortgage loan repurchase obligations,
and (j) restricts HomeSide's ability to sell servicing rights relating to BKB
Banks' portfolio mortgage loans.
The term of the BKBC Operating Agreement is five years. The termination of
the BKBC Operating Agreement will not affect HomeSide's right to service
mortgage loans serviced prior to the termination date.
Correspondent Loan Purchase and Sale Agreement
The Issuer and the BKB Banks have also entered into a Correspondent Loan
Purchase and Sale Agreement, dated March 15, 1996 (the "BKB Correspondent Loan
Purchase Agreement"), which describes the mortgage loans eligible for sale to
HomeSide by BKB, and related pricing and delivery requirements for such loans.
The BKB Banks receive the most favorable pricing offered by HomeSide to
correspondent lenders. For the period March 16, 1996 through February 28, 1997,
HomeSide paid approximately $4.7 million to the
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<PAGE> 117
BKB Banks under the BKB Correspondent Loan Purchase and Sale Agreement. Under
certain conditions, the BKB Banks must indemnify HomeSide or repurchase mortgage
loans from HomeSide. The agreement provides certain underwriting, appraisal,
mortgage insurance and escrow requirements.
The term of the BKB Correspondent Loan Purchase Agreement is five years but
will automatically terminate upon the termination of the Operating Agreement.
PMSR Flow Agreement
The Issuer and the BKB Banks have entered into a PMSR Flow Agreement dated
March 15, 1996, which requires the BKB Banks, subject to certain exceptions, to
sell to HomeSide the servicing rights to the BKB Banks' portfolio mortgage
loans. The purchase price for the servicing rights is based upon a percentage
(which varies depending on the type of loan) of the principal balance of the
loan, as may be adjusted based on an independent third party's revaluation. For
the period March 16, 1996 through February 28, 1997,, HomeSide paid
approximately $1.3 million to the BKB Banks under this PMSR Flow Agreement. The
agreement also requires the BKB Banks to provide certain notices to government
agencies, flood service providers, insurance carriers and borrowers upon the
transfer of servicing rights to HomeSide. The agreement describes the BKB Banks'
obligation to prepare and record assignments of mortgage and pay tax, service-
related fees and flood service fees. Under certain conditions, the BKB Banks
must reimburse the servicing rights purchase price to HomeSide.
The term of the PMSR Flow Agreement is five years but will automatically
terminate upon the termination of the BKBC Operating Agreement.
Mortgage Loan Servicing Agreement
The Issuer and the BKB Banks have entered into a Mortgage Loan Servicing
Agreement dated March 15, 1996 (the "BKBC Servicing Agreement"), which requires
HomeSide, subject to certain exceptions, to service the BKB Banks' portfolio
mortgage loans. HomeSide is also required to use reasonable efforts to collect
mortgage loan payments, to remit principal and interest to the BKB Banks each
month and to perform general ledger reconciliations and other related tasks.
HomeSide is also required to perform certain default loan administration and
foreclosure activities. HomeSide provides additional services for the BKB Banks'
private banking clients.
The servicing fees paid by the BKB Banks to HomeSide are market-based fees
consistent with the fees charged by HomeSide to other mortgagees. For the period
March 16, 1996 through February 28, 1997,, the BKB Banks paid approximately
$0.04 million to HomeSide under the BKBC Servicing Agreement.
The term of the BKBC Servicing Agreement is five years. The BKB Banks will
not be obligated to deliver portfolio mortgage loan servicing rights to HomeSide
upon the termination of the BKBC Operating Agreement. However, the termination
of the BKBC Operating Agreement will not affect HomeSide's right to continue
servicing the BKB Banks' portfolio loans that are being serviced by HomeSide as
of such termination date.
OTHER BARNETT AGREEMENTS
Operating Agreement
Barnett and the Issuer have entered into an Operating Agreement, dated May
31, 1996 (the "Barnett Operating Agreement"), which sets forth the parties'
roles with respect to new loan originations and servicing rights. With certain
exceptions, Barnett and its affiliate banks (the "Barnett Banks") are required
to sell all mortgage loan production to HomeSide during the term of the Barnett
Operating Agreement. In particular, among other things, the Barnett Operating
Agreement: (a) describes the mortgage loan products to be purchased by HomeSide
from Barnett Banks, (b) ensures that the Barnett Banks receive the most
favorable pricing and servicing released premiums offered by HomeSide to
mortgage correspondents, (c) describes HomeSide's customer service levels, (d)
sets forth warehousing and pipeline management rights and obligations, (e)
describes the technology support which the parties provide to one another, (f)
describes the mortgage loan production and support functions to be provided by
the parties, (g) describes the reports and information provided periodically by
HomeSide to the Barnett Banks, including, but not limited to, risk
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<PAGE> 118
management, internal performance and management reports, (h) sets forth
penalties to be paid by the Barnett Banks for failing to satisfy the buy price
expiration dates, (i) describes Barnett Banks' mortgage loan repurchase
obligations, and (j) restricts HomeSide's ability to sell servicing rights
relating to the Barnett Banks' portfolio mortgage loans. The servicing fees paid
by the Barnett Banks to HomeSide are market-based fees consistent with the fees
charged by HomeSide to other mortgagees. For the period May 31, 1996 through
February 28, 1997, the Barnett Banks paid $6,383 to HomeSide under the Barnett
Servicing Agreement.
The term of the Barnett Operating Agreement is 5 years, subject to earlier
termination in certain specified instances. The termination of the Barnett
Operating Agreement will not affect HomeSide's rights to service mortgage loans
serviced prior to the termination date.
Correspondent Loan Purchase Agreement
The Issuer and Barnett Banks have entered into a Correspondent Loan
Purchase Agreement, dated May 16, 1996 (the "Barnett Correspondent Loan Purchase
Agreement"), which describes the mortgage loans which are eligible for sale to
HomeSide by the Barnett Banks and related pricing and delivery requirements for
such loans. The Barnett Banks receive the most favorable pricing offered by
HomeSide to other correspondents. For the period March 16, 1996 through February
28, 1997, HomeSide paid approximately $27.6 million to Barnett under the Barnett
Correspondent Agreement. Under certain conditions, the Barnett Banks must
repurchase mortgage loans for HomeSide. The Barnett Correspondent Loan Purchase
Agreement provides certain underwriting, appraisal, mortgage insurance and
escrow requirements.
The term of the Barnett Correspondent Loan Purchase Agreement is 5 years
but will automatically terminate upon the termination of the Barnett Operating
Agreement.
PMSR Flow Agreement
The Issuer and the Barnett Banks have entered into a PMSR Flow Agreement
dated May 31, 1996 ("PMSR Flow Agreement"), which requires the Barnett Banks,
subject to certain exceptions, to sell to HomeSide the servicing rights to the
Barnett Banks' portfolio mortgage loans. The purchase price for the servicing
rights is based upon a percentage (which varies depending on the type of loan)
of the principal balance of the loan, as may be adjusted based on an independent
third party's revaluation. For the period March 16, 1996 through February 28,
1997, HomeSide paid approximately $8.2 million to Barnett under this PMSR Flow
Agreement. The agreement also requires the Barnett Banks to provide certain
notices to government agencies, flood service providers, insurance carriers and
borrowers upon the transfer of servicing rights to HomeSide. The agreement
describes the Barnett Banks' obligation to prepare and record assignments of
mortgage and pay tax, service-related fees and flood service fees. Under certain
conditions, the Barnett Banks must reimburse the servicing rights purchase price
to HomeSide.
The term of the PMSR Flow Agreement is 5 years but will automatically
terminate upon the termination of the Barnett Operating Agreement.
Mortgage Loan Servicing Agreement
The Issuer and the Barnett Banks have entered into a Mortgage Loan
Servicing Agreement dated as of May 31, 1996 (the "Barnett Servicing Agreement")
which requires HomeSide, subject to certain exceptions, to service the Barnett
Banks' portfolio mortgage loans. HomeSide is also required to use reasonable
efforts to collect mortgage loan payments, to remit principal and interest to
the Barnett Banks each month and to perform general ledger reconciliations and
other related tasks. HomeSide is also required to perform certain default loan
administration and foreclosure activities. HomeSide provides additional services
for the Barnett Banks' private banking clients.
The servicing fees paid by the Barnett Banks to HomeSide are market-based
fees consistent with those charged by HomeSide to other mortgagees. For the
period March 16, 1996 through February 28, 1997, Barnett paid approximately
$0.007 million to HomeSide under the Barnett Servicing Agreement.
The term of the Barnett Servicing Agreement is 5 years. The Barnett Banks
will not be obligated to deliver portfolio mortgage loan servicing rights to
HomeSide upon the termination of the Barnett Operating
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<PAGE> 119
Agreement. However, the termination of the Barnett Operating Agreement will not
affect HomeSide's right to continue servicing the Barnett Banks' portfolio loans
that are being serviced by HomeSide as of such termination date.
Each of the foregoing agreements described under "Certain Relationships and
Related Transactions" was entered into in connection with either the HLI
Acquisition or the HHI Acquisition. No additional consideration was paid or
received by HomeSide in connection with the execution and delivery thereof.
MANAGEMENT AGREEMENTS
The Issuer agreed to pay the Thomas H. Lee Company, MDP, Bank of Boston and
Barnett pursuant to management agreements entered into in connection with the
HLI Acquisition and the HHI Acquisition, an annual management fee of $250,000,
$83,334, $333,333 and $333,333, respectively. Such management agreements had a
term of five years automatically extended for successive one year terms, except
either party could terminate the agreement by delivering notice thereof 90 days
prior to the end of any such term. The management agreements terminated upon
consummation of the January 1997 offering of Common Stock of the Parent.
MANAGEMENT OWNERSHIP
The Parent has established option plans for employees of HomeSide pursuant
to which the Parent has reserved 1,748,569 shares of its Common Stock for grants
to employees of HomeSide.
In addition, certain members of management have purchased in the aggregate
441,592 shares of Common Stock of the Parent at a price of $10.294 per share,
the same price paid by the Principal Shareholders. In the case of certain
purchasers, the shares have been acquired with the proceeds of loans from HLI.
Such loans are evidenced by recourse notes secured by a pledge of the shares
purchased, having a term of approximately 5 years and bearing interest at 8.25%
per annum. In the case of the executive officers of HomeSide, the executives
executed promissory notes for the purchase of their Common Stock in the
following amounts: Mr. Pickett ($400,000); Mr. Harris ($350,000); Mr. Jacobs
($50,000); Mr. Race ($150,000); Ms. Francis ($100,000); Mr. Johnson ($250,000);
Mr. Wilson ($50,000); Mr. Glasgow ($225,000); Ms. Mackey ($10,000). The
management purchasers are party to a Management Stockholders' Agreement that
contains various restrictions on transfer. Management holders also have
piggyback registration rights. There is no right of repurchase by the Parent
upon termination of employment. Upon death of a management shareholder, such
management shareholder's estate has a right to require the Parent to acquire the
shares owned by such management shareholder and his or her permitted
transferees, subject to certain conditions and restrictions, for the lower of
$10.294 per share and fair market value.
DESCRIPTION OF CERTAIN INDEBTEDNESS
BANK CREDIT AGREEMENT
Each of the Issuer and Honolulu Mortgage is a party to the Bank Credit
Agreement that includes a warehouse credit facility (the "Warehouse Credit
Facility") and a servicing receivables credit facility ("Servicing Credit
Facility") (collectively, the "Facilities"). The Bank Credit Agreement provides
for availability of up to $2.5 billion which may be used to provide funds for
the Issuer's and Honolulu Mortgage's business of making, originating, acquiring
and servicing mortgage loans.
Warehouse Credit Facility
The Warehouse Credit Facility provides for availability up to $2.5 billion
of borrowings, less amounts borrowed under the Servicing Credit Facility,
governed by a borrowing base which includes loans that are subject to binding
sale commitments or hedge contracts and certain mortgage-backed securities. The
borrowing base used for determining availability under the Warehouse Credit
Facility is reduced by the principal amount of commercial paper of the Issuer
outstanding. The Warehouse Credit Facility terminates on February 14, 2000 (the
"Warehouse Termination Date").
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<PAGE> 120
Servicing Credit Facility
The Servicing Credit Facility provides for availability of up to $950.0
million of borrowings governed by a borrowing base which includes (i) eligible
receivables arising from the Issuer's or Honolulu Mortgage's, as the case may
be, required monthly principal and interest payments for FHLMC, Fannie Mae and
GNMA mortgage-backed securities, (ii) eligible claims receivable related to
foreclosed loans serviced by the Issuer or Honolulu Mortgage, (iii) eligible
receivables in respect of payments of real estate taxes or receivables arising
from insurance premiums in respect of serviced loans, (iv) a portion of the
value of the servicing portfolio, (v) eligible receivables in respect of
advances made by the Issuer or Honolulu Mortgage, as the case may be, to
repurchase certain loans which are to be prepaid, and (vi) advances made by the
Issuer or Honolulu Mortgage, as the case may be, with respect to certain
defaulted loans. The amount of servicing portfolio included in the borrowing
base used for determining availability under the Servicing Credit Facility is
reduced by the principal amount of medium term notes of the Issuer outstanding.
The Servicing Credit Facility terminates on the Warehouse Termination Date.
Security
Borrowings under the facilities are guaranteed by the Parent. In addition,
the Parent has pledged to the Lenders (as defined in the Bank Credit Agreement)
all of the capital stock of HHI, HHI has pledged all the capital stock of the
Issuer and the Issuer has pledged all the capital stock of its subsidiaries as
security under the Bank Credit Agreement. Upon certain events, including the
Issuer having ratings on its unsecured long-term senior non-credit-enhanced debt
("Rated Debt") of less than BBB by Standard & Poor's Rating Services ("S&P") and
less than Baa2 by Moody's Investor Services, Inc. ("Moody's"), the Facilities
also become secured by (i) all mortgage loans and mortgage-backed securities
submitted for inclusion in the Warehouse Credit Facility borrowing base and all
take-out commitments and hedge contracts related thereto, (ii) all servicing
rights and hedge contracts and receivables related thereto, and (iii) any other
assets included in determining the borrowing bases under the facilities. The
Facilities will again become unsecured (except for the stock pledges) upon the
occurrence of certain other events.
Optional and Mandatory Prepayments
The entire unpaid principal balance under the Warehouse Credit Facility and
the Servicing Credit Facility will be due and payable on the Warehouse
Termination Date. The Issuer or Honolulu Mortgage, as the case may be, may
prepay (without premium) all or any part of the loans under the Bank Credit
Agreement or reduce the commitment (without penalty) under the Warehouse Credit
Facility at any time or from time to time in certain minimum increments
following specified notice periods. In addition, mandatory prepayments will be
required (i) in the amounts by which borrowings outstanding exceed the related
borrowing base at any time, (ii) with certain proceeds from debt issuances and
(iii) with proceeds of certain termination and similar fees under servicing
agreements. Amounts repaid under the Facilities may, absent any uncured or
unwaived default under the Bank Credit Agreement, be reborrowed during the term
of the Warehouse Credit Facility.
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<PAGE> 121
Interest Rates and Fees
Loans under the Bank Credit Agreement bear interest at rates per annum,
based on, at the Issuer's option, (A) the highest of (i) Chase Manhattan Bank's
prime rate, (ii) the secondary market rate for certificates of deposit plus 1%,
and (iii) the federal funds rate in effect from time to time plus 0.5%, or (B) a
eurodollar rate, in each case with a margin based upon the rating of the Rated
Debt as announced by S&P and Moody's, in accordance with the following:
<TABLE>
<CAPTION>
APPLICABLE MARGIN APPLICABLE MARGIN APPLICABLE MARGIN
FOR WAREHOUSE FOR SERVICING FOR SERVICING
RATING LEVEL LOANS ADVANCE LOANS PORTFOLIO LOANS
----------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
A- (A3) or higher.................. 0.350% 0.350% 0.550%
BBB+ (Baa1)........................ 0.375% 0.375% 0.625%
BBB (Baa2)......................... 0.375% 0.375% 0.625%
BBB- (Baa3)........................ 0.450% 0.450% 0.750%
BB+ (Ba1) or lower................. 0.600% 0.600% 1.000%
</TABLE>
In the event that at any time the Moody's rating differs from the S&P
rating then in effect (i) by two increments or more, the applicable rating level
shall be that which would apply to a rating one increment lower than the higher
of the Moody's rating and the S&P rating or (ii) by one increment, the
applicable rating level shall be that which would apply to the higher of the
Moody's rating and the S&P rating. The margins set forth in the middle column
above apply only to portions of the Servicing Credit Facility borrowing base
constituting advance receivables, while the margins in last column above apply
to all other portions of the Servicing Credit Facility borrowing base.
In addition to the foregoing interest rates, the Issuer has the ability
under the Bank Credit Agreement to solicit offers from the Banks for improved
interest rates on an advance by advance basis and, upon receipt of any such
offers, to obtain interest rates for some of its borrowings at more favorable
interest rates.
The annual commitment fee on the Facilities ranges from 0.100% to 0.250% of
the commitments thereunder depending upon the rating of the Rated Debt.
Restrictive Covenants
The Bank Credit Agreement contains certain covenants that impose
limitations and requirements on HomeSide, HHI and the Parent, including
limitations with respect to payments, dividends or distributions from the Issuer
to the Parent.
Other covenants in the Bank Credit Agreement impose limitations on HomeSide
with respect to, among other things: (i) the incurrence of certain additional
indebtedness; (ii) the incurrence of liens; (iii) the making of certain
investments other than certain permitted investments; (iv) fundamental changes
in HomeSide's business activities or the sale or disposition of a substantial
part of HomeSide's business or the acquisition of substantially all of the
assets or stock of any other person other than the dissolution of inactive
subsidiaries of the Issuer or intercompany mergers, sales or consolidation; (v)
capital expenditures in excess of $15.0 million in any fiscal year; (vi)
transactions with affiliates; (vii) entering into new lines of business; (viii)
making optional prepayments or redeeming or purchasing any indebtedness
evidenced by the Notes or modifying any such indebtedness; or (ix) amending the
material terms of the Parent's Shareholder Agreement. These covenants are
subject to various other customary exceptions under the Bank Credit Agreement.
The Issuer is also required to maintain compliance with certain financial
covenants, including:
(a) Maintaining an Adjusted Consolidated Tangible Net Worth (as
defined in the Bank Credit Agreement) equal to the sum of (i) an amount
equal to 80% of Adjusted Consolidated Tangible Net Worth (as defined in the
Bank Credit Agreement) as of February 14, 1997 plus (ii) an amount equal to
50% of the excess of (A) the aggregate amount of net proceeds received
during the period from February 14, 1997 through such date by the Company
from the issuance of capital stock other than to Principal Shareholders
over (B) the amount thereof applied to prepay or redeem the Notes plus
(iii) an
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amount equal to 80% of the sum of Consolidated Net Income (as defined in
the Bank Credit Agreement) for each fiscal quarter for which Consolidated
Net Income is positive during the period from February 14, 1997 through the
last day of the most recently ended fiscal quarter of the Issuer less (iv)
the amount of Restricted Payments (as defined in the Bank Credit Agreement)
actually made by the Issuer and permitted under the Bank Credit Agreement
during the period February 14, 1997 through such date (to the extent such
Restricted Payments were not deducted in determining such Adjusted
Consolidated Tangible Net Worth).
(b) Not permitting the ratio of Consolidated Total Liabilities (as
defined in the Bank Credit Agreement) to Adjusted Consolidated Tangible Net
Worth to exceed (i) 7.75:1.0 at any time during the period from February
14, 1997 through and including August 31, 1997, (ii) 7.5:1.0 at any time
during the period from September 1, 1997 through and including November 30,
1998 or (iii) 7.0:1.0 at any time thereafter.
(c) Not permitting the ratio of Consolidated Servicing-Related Debt
(as defined in the Bank Credit Agreement) to Adjusted Consolidated Tangible
Net worth to exceed (i) 2.0:1.0 at any time during the period from February
14, 1997 through and including August 31, 1997, (ii) 1.75:1.0 at any time
during the period from and including September 1, 1997 through and
including August 31, 1998 or (iii) 1.5:1.0 at any time thereafter.
(d) Not permitting (i) for the period of three consecutive fiscal
quarters of HomeSide ending on February 28, 1997, or (ii) for any period of
four consecutive fiscal quarters of HomeSide ending thereafter, the ratio
of (A) the sum of (1) Consolidated Cash Flow (as defined in the Bank Credit
Agreement) for such period plus (2) Consolidated Interest and Dividend
Expense (as defined in the Bank Credit Agreement) for such period to (B)
Consolidated Interest and Dividend Expense for such period to be less than
3.0:1.0.
Events of Default
The Bank Credit Agreement contains certain standard payment, covenant, and
bankruptcy-related events of default, as well as other events of default,
including, among other things, (i) the failure of the Issuer to pay any amount
of principal under the Bank Credit Agreement when due or any interest or fees
under the Bank Credit Agreement within five days after such amounts are due;
(ii) the failure of any party to a loan document (each, a "Loan Party") to
comply with any covenant, agreement, condition, provision, or term of any Loan
Document (as defined in the Bank Credit Agreement), provided that, in certain
cases, such Loan Party has a 30-day grace period in which to remedy such
failure; (iii) the default by the Parent, the Issuer or any of its subsidiaries
in payment of indebtedness aggregating $15.0 million or more, or the default by
the Parent, the Issuer or any of its subsidiaries in the observance of any
agreement or condition relating to indebtedness aggregating $15.0 million or
more which permits or causes the holder thereof to cause such indebtedness to
become due prior to its stated maturity; (iv) entry of unpaid judgments against
HomeSide of $12.0 million or more other than judgments that have been stayed
pending appeal within 60 days of entry; (v) the occurrence of certain events
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
that would have a material adverse effect on HomeSide; (vi) except upon a
Positive Security Event, the failure of any Security Document (as defined in the
Bank Credit Agreement) to remain in full force and effect or any lien granted
pursuant thereto to remain legal, valid and enforceable; (vii) the failure of
any Guarantee (as defined in the Bank Credit Agreement) to remain in full force
and effect, (viii) certain bankruptcy and insolvency events; (ix) any execution
or attachment whereby a substantial part of the Issuer's property is taken or
attempted to be taken and that is not vacated or stayed within 60 days; and (x)
certain changes of control relating to the Parent and the Issuer, including
where (a) HHI ceases to own 100% of the capital stock of the Issuer and/or the
ownership of the Parent by the Principal Shareholders on February 14, 1997 falls
below certain percentages or (b) a certain number of directors of the Parent as
of February 14, 1997 fail to continue as directors of the Parent.
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OTHER LENDING ARRANGEMENTS
On January 15, 1997 the Issuer entered into a Loan Agreement (as amended on
February 28, 1997 and March 31, 1997) with The Chase Manhattan Bank ("Chase")
pursuant to which it may borrow up to $85.0 million on a revolving basis (the
"Chase Revolving Loans"). On March 14, 1997 the Issuer entered into a Loan
Agreement (as amended on March 31, 1997) with an affiliate of Merrill Lynch
pursuant to which it may borrow up to $50.0 million on a revolving basis (the
"Merrill Revolving Loans", and together with the Chase Revolving Loans, the
"Revolving Loans"). The Revolving Loans bear interest at a rate per annum equal
to the highest of (x) Chase's prime rate, as announced from time to time; (y)
the secondary market rate for certificates of deposit (grossed up for maximum
statutory requirements) plus 1%; and (z) the federal funds effective rate
announced from time to time plus 0.5%. The Revolving Loans mature on the earlier
of (i) May 1, 1997, or (ii) the consummation of the initial sale of the Debt
Securities covered by this Prospectus. The Revolving Loans are secured by
certain servicing assets of the Issuer.
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DESCRIPTION OF THE PARENT NOTES
The Parent has outstanding $200,000,000 in aggregate principal amount of
11 1/4% Series B Senior Secured Second Priority Notes due 2003 issued pursuant
to the terms of an indenture dated as of May 14, 1996 (the "Parent Note
Indenture") between the Parent, as issuer, and The Bank of New York, as trustee
("BONY"). The following summary of the material provisions of the Parent Note
Indenture does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the Parent Note Indenture. The
Parent Notes will mature on May 15, 2003 and bear interest at the rate of
11 1/4% per annum. The Parent Notes are secured by a second priority pledge,
subject to a first priority pledge in favor of the lenders under the Bank Credit
Agreement, of all of the capital stock of each of the Parent's current and
future subsidiaries held directly by the Parent, including all of the capital
stock of the Issuer held by HHI. The Parent Notes are not secured by any lien
on, or other security interest in, any other properties or assets of the Parent
or its subsidiaries. The Parent Notes are senior obligations of the Parent and
the Indebtedness evidenced by the Parent Notes will rank pari passu in right of
payment with all other existing and future senior indebtedness of the Parent.
The Parent Notes are redeemable at the option of the Parent, as a whole or
from time to time in part, at any time on or after May 15, 2001, on not less
than 30 nor more than 60 days' prior notice at the redemption prices (expressed
as percentages of principal amount) set forth below, together with accrued
interest, if any, to the redemption date, if redeemed during the 12-month period
beginning on May 15 of the years indicated below (subject to the right of
holders of record on relevant record dates to receive interest due on an
interest payment date):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
-------------------------------------------------- ----------
<S> <C>
2001.............................................. 105.625%
2002.............................................. 102.813%
</TABLE>
In addition, at any time or from time to time prior to May 15, 1999, the
Parent may redeem up to 35% of the aggregate principal amount of the Parent
Notes within 60 days of one or more equity offerings with the net proceeds of
such offering at a redemption price equal to 111.25% of the principal amount
thereof, together with accrued interest, if any, to the date of redemption
(subject to the right of holders of record on relevant record dates to receive
interest due on an interest payment date); provided that immediately after
giving effect to any such redemption at least $75 million of the original
aggregate principal amount of the Parent Notes remains outstanding. The Parent
completed its initial public offering in January 1997. The Parent used a portion
of these proceeds to redeem $70.0 million principal amount of the Notes,
together with the applicable premium and interest accrued thereon.
The Parent Note Indenture contains covenants which, among other things,
limit the right of the Parent or its subsidiaries to incur indebtedness, permit
liens to exist on its properties, pay dividends on or make distributions to
holders of the Parent's capital stock, purchase or redeem any shares of the
Parent's capital stock, sell or issue additional shares of the capital stock of
its subsidiaries, consolidate or merge with any other persons or sell all or
substantially all of its assets.
The Parent Note Indenture provides that if a change of control (which term
is specifically defined in the Parent Note Indenture) shall occur at any time,
then each holder of Parent Notes shall have the right to require that the Parent
purchase such holder's Parent Notes, in whole or in part in integral multiples
of $1,000, at a purchase price in cash in an amount equal to 101% of the
principal amount thereof, plus accrued interest, if any, to the date of
purchase. Among the events which constitute a change of control under the Parent
Note Indenture is the acquisition by a person or group of more than 40% of the
outstanding voting stock of the Parent. The Parent Note Indenture contains
certain standard payment, covenant and bankruptcy-related events of default,
including, among other things, (i) the failure of the Parent to pay any interest
payment within thirty days after such amounts are due; (ii) the failure of any
person party to the Parent Note Indenture or any guaranty or pledge executed in
connection therewith to perform any covenant, warranty or other agreement
contained in the Parent Note Indenture, such guaranty or pledge; (iii) the
failure of the Parent to
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pay any of its indebtedness aggregating $15 million or more when such amounts
become due (after giving effect to applicable grace periods, cures and waivers);
(iv) any pledge or guarantee given to secure the Parent Notes ceases to be in
full force and effect; or (v) the occurrence of certain events of bankruptcy,
insolvency or reorganization with respect to the Parent or any of its
subsidiaries deemed significant.
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DESCRIPTION OF DEBT SECURITIES
The following description of the terms of the Debt Securities sets forth
certain general terms and provisions of the Debt Securities. The extent, if any,
to which such general provisions do not apply to the Debt Securities offered by
any Prospectus Supplement will be described in such Prospectus Supplement.
The Debt Securities are to be issued under an indenture (the "Indenture"),
between the Issuer and The Bank of New York , as trustee (the "Trustee"), a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. Each series of Debt Securities issued pursuant to the
Indenture will be issued pursuant to an amendment or supplement thereto in the
form of a supplemental indenture or pursuant to an Officers' Certificate, in
each case delivered pursuant to resolutions of the Board of Directors of the
Issuer and in accordance with the provisions of Section 3.1 or Article 9 of the
Indenture, as the case may be. The terms of the Debt Securities include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the "TIA"). The Debt Securities are
subject to all such terms, and the holders of Debt Securities are referred to
the Indenture and the TIA for a statement of such terms.
The following summaries of certain provisions of the Indenture and the Debt
Securities are not complete and are qualified in their entirety by reference to
the provisions of the Indenture, including the definitions of capitalized terms
used herein without definition. Unless otherwise indicated capitalized terms
have the meaning given them in the Indenture. A copy of the Indenture is
available for inspection at the corporate trust office of the Trustee or upon
request from the Issuer. See "Available Information."
GENERAL
The Indenture does not limit the aggregate principal amount of Debt
Securities that may be issued thereunder from time to time in one or more
series.
The Debt Securities will constitute unsecured and unsubordinated
indebtedness of the Issuer and will rank pari passu in right of payment with the
Issuer's other unsecured and unsubordinated indebtedness. However, the Debt
Securities will be effectively subordinated to all present and future secured
indebtedness of the Issuer as to the assets of the Issuer securing such
indebtedness and to the claims of creditors of the Issuer's subsidiaries as to
the assets of such subsidiaries. As of December 31, 1996, the Issuer had an
aggregate of $2,069.0 million of total indebtedness, all of which was secured.
Other than as described below under "Consolidation, Merger and Transfer of
Assets," the Indenture does not contain any provision that would limit the
ability of the Issuer to incur indebtedness or to substantially reduce or
eliminate the Issuer's assets or that would afford holders of Debt Securities
protection in the event of a decline in the credit quality of the Issuer or a
takeover, recapitalization or highly leveraged or similar transaction involving
the Issuer. In addition, subject to the limitations set forth under
"Consolidation, Merger and Transfer of Assets," the Issuer may, in the future,
enter into certain transactions, such as the sale of all or substantially all of
its assets or the merger or consolidation of the Issuer, that would increase the
amount of the Issuer's indebtedness or substantially reduce or eliminate the
Issuer's assets, which may have an adverse effect on the Issuer's ability to
service its indebtedness, including the Debt Securities. Reference is made to
the Prospectus Supplement relating to the particular series of Debt Securities
offered thereby, to the extent not otherwise described herein, for any
information with respect to any deletions from, modifications of or additions to
the Events of Default described below or covenants of the Issuer contained in
the Indenture, including any addition of a covenant or other provision providing
event risk or similar protection. The Bank Credit Agreement and the Parent Notes
Indenture contain certain covenants restricting the Issuer's ability to incur
indebtedness. Such covenants permit the Issuer to issue Debt Securities in an
aggregate principal amount of up to $ at , . See "Description of
Certain Indebtedness -- Bank Credit Agreement" and "Description of the Parent
Notes."
The Indenture provides that there may be more than one Trustee thereunder,
each with respect to one or more series of Debt Securities. Any Trustee under
the Indenture may resign or be removed with respect to one or more series of
Debt Securities, and a successor Trustee may be appointed to act with respect to
such series
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(Section 6.8). In the event that two or more persons are acting as Trustee with
respect to different series of Debt Securities, each such Trustee shall be a
Trustee of a trust under the Indenture separate and apart from the trust
administered by any other Trustee (Section 6.9), and, except as otherwise
indicated herein, any action described herein to be taken by the Trustee may be
taken by each such Trustee with respect to, and only with respect to, the one or
more series of Debt Securities for which it is Trustee under the Indenture.
Reference is made to the Prospectus Supplement and pricing supplement, if
any, relating to the particular series of Debt Securities offered thereby for a
description of the terms of such Debt Securities in respect of which this
Prospectus is being delivered, including, where applicable: (i) the designation,
aggregate principal amount and authorized denominations of such Debt Securities;
(ii) the percentage of the principal amount at which such Debt Securities will
be issued; (iii) the date (or the manner of determining or extending the date or
dates) on which the principal of such Debt Securities will be payable; (iv)
whether such Debt Securities will be issued in fully registered form or in
bearer form or any combination thereof; (v) whether such Debt Securities will be
issued in the form of one or more global securities and whether such global
securities are to be issuable in a temporary global form or permanent global
form; (vi) the rate or rates per annum at which such Debt Securities will bear
interest, if any, or the method or methods of determination of such rate or
rates and the basis upon which interest will be calculated if other than that of
a 360-day year consisting of twelve 30-day months; (vii) the date or dates from
which such interest, if any, on such Debt Securities will accrue or the method
or methods, if any, by which such date or dates are to be determined, the date
or dates on which such interest, if any, will be payable, the date on which
payment of such interest, if any, will commence and the Regular Record Dates for
such Interest Payment Dates, if any; (viii) the date or dates, if any, on or
after which, or the period or periods, if any, within which, and the price or
prices at which the Debt Securities may, pursuant to any optional redemption
provisions, be redeemed at the option of the Issuer or the holder thereof and
the other terms and provisions of such optional redemption; (ix) information
with respect to book-entry procedures relating to global Debt Securities; (x)
whether and under what circumstances the Issuer will pay Additional Amounts as
contemplated by Section 10.4 of the Indenture (the term "interest," as used in
this Prospectus, shall include such Additional Amounts) on such Debt Securities
to any holder who is a United States Alien (as defined in the
Indenture)(including any modification to the definition of such terms contained
in the Indenture as originally executed) in respect of any tax, assessment or
governmental charge and, if so, whether the Issuer will have the option to
redeem such Debt Securities rather than pay such Additional Amounts (and the
terms of any such option); (xi) any deletions from, modifications of or
additions to the Events of Default or covenants of the Issuer with respect to
any such Debt Securities; (xii) if either or both of Section 4.2(2) relating to
defeasance or Section 4.2(3) relating to covenant defeasance shall not be
applicable to the Debt Securities of such series, or any covenants in addition
to those specified in Section 4.2(3) relating to the Debt Securities of such
series shall be subject to covenant defeasance, and any deletions from, or
modifications or additions to, the provision of Article 4 of the Indenture
relating to satisfaction and discharge in respect of the Debt Securities of such
series; (xiii) any index or other method used to determine the amount of
payments of principal, premium (if any) and interest, if any, on such Debt
Securities; (xiv) if a trustee other than The Bank of New York is named for such
Debt Securities, the name of such trustee; and (xv) any other specific terms of
the Debt Securities (Section 3.1). All Debt Securities of any one series need
not be issued at the same time and all the Debt Securities of any one series
need not bear interest at the same rate or mature on the same date (Section
3.1).
One or more series of Debt Securities may be sold at a substantial discount
below their stated principal amount, bearing no interest or interest at a rate
which at the time of issuance is below market rates. One or more series of Debt
Securities may be floating rate debt securities, and may be exchangeable for
fixed rate debt securities. Federal income tax consequences and special
considerations applicable to any such series will be described in the Prospectus
Supplement relating thereto.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise indicated in the Prospectus Supplement relating thereto,
the Debt Securities will be issued only in fully registered form without coupons
(Section 3.2). Debt Securities will be issued in
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denominations of $1,000 or any integral multiple thereof unless otherwise
provided in the Prospectus Supplement relating thereto (Section 3.2).
Unless otherwise indicated in the Prospectus Supplement relating thereto,
the principal of, and any premium or interest on, any series of Debt Securities
will be payable at the principal corporate trust office of the Trustee,
initially at 101 Barclay Street, New York, New York 10286, provided that, at the
option of the Issuer, payment of interest may be made by check mailed to the
address of the Person entitled thereto as it appears in the related Security
Register or by wire transfer of funds to such Person at an account maintained
within the United States (Sections 3.1, 3.7 and 10.2).
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the holder of such Debt Security on the
applicable regular record date and may either be paid to the Person in whose
name such Debt Security is registered at the close of business on a special
record date (the "Special Record Date") for the payment of such Defaulted
Interest to be fixed by the Trustee, notice whereof shall be given to the holder
of such Debt Security not less than ten days prior to such Special Record Date,
or may be paid at any time in any other lawful manner, all as more completely
described in the Indenture (Section 3.7).
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the principal corporate trust office of the Trustee referred
to above (Section 3.5). In addition, subject to certain limitations imposed upon
Debt Securities issued in book-entry form, the Debt Securities of any series may
be surrendered for conversion or registration or transfer or exchange thereof at
the corporate trust office of the Trustee. Every Debt Security surrendered for
conversion, registration of transfer or exchange must be duly endorsed or
accompanied by a written instrument of transfer (Section 3.5). No service charge
will be made for any registration of transfer or exchange of any Debt
Securities, but the Issuer may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith (Section 3.5).
If the applicable Prospectus Supplement refers to any transfer agent (in
addition to the Trustee) initially designated by the Issuer with respect to any
series of Debt Securities, the Issuer may at any time rescind the designation of
any such transfer agent or approve a change in the location through which any
such transfer agent acts, except that the Issuer will be required to maintain a
transfer agent in each place of payment for such series. The Issuer may at any
time designate additional transfer agents with respect to any series of Debt
Securities (Section 10.2).
Neither the Issuer nor the Trustee shall be required to (i) issue, register
the transfer of or exchange Debt Securities of any series during a period
beginning at the opening of business 15 days before the mailing of notice of
redemption of any Debt Securities of that series to be redeemed and ending at
the close of business on the day of mailing of the relevant notice of
redemption; (ii) register the transfer of or exchange any Debt Security, or
portion thereof, called for redemption, except the unredeemed portion of any
Debt Security being redeemed in part; or (iii) issue, register the transfer of
or exchange any Debt Security that has been surrendered for repayment at the
option of the holder, except the portion, if any, of such Debt Security not to
be so repaid (Section 3.5).
No Debt Security shall be entitled to any benefit under the Indenture or be
valid or obligatory for any purpose unless there appears on such Debt Security a
certificate of authentication substantially in the form provided for in the
Indenture duly executed by the Trustee by manual signature of one of its
authorized signatories, and such certificate upon any Debt Security shall be
conclusive evidence, and the only evidence, that such Debt Security has been
duly authenticated and delivered under the Indenture and is entitled to the
benefits of the Indenture (Section 3.3).
CONSOLIDATION, MERGER AND TRANSFER OF ASSETS
The Indenture provides that the Issuer may not (i) consolidate with or
merge into any Person or convey, transfer or lease its properties and assets as
an entirety or substantially as an entirety to any Person, or (ii) permit any
Person to consolidate with or merge into the Issuer, or convey, transfer or
lease its properties and
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assets as an entirety or substantially as an entirety to the Issuer, unless (a)
in the case of (i) above, such Person is organized and existing under the laws
of the United States of America, and State thereof or the District of Columbia
and shall expressly assume, by supplemental indenture satisfactory in form to
the Trustee, the due and punctual payment of the principal of and premium, if
any, and interest on all of the Debt Securities, and the performance of the
Issuer's obligations under the Indenture and the Debt Securities; (b)
immediately after giving effect to such transaction and treating any
indebtedness which becomes an obligation of the Issuer or a Subsidiary as a
result of such transaction as having been incurred by the Issuer or such
Subsidiary at the time to such transaction, no Event of Default, and no event
which after notice or lapse of time or both would become an Event of Default,
shall have happened and be continuing; and (c) certain other conditions are met
(Section 8.1).
ADDITIONAL COVENANT AND/OR MODIFICATIONS TO THE COVENANTS DESCRIBED ABOVE
Any additional covenants of the Issuer and/or modifications to the
covenants described above with respect to any Debt Securities or series thereof
will be described in the Prospectus Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Each of the following events will constitute an Event of Default with
respect to any series of Debt Securities issued under the Indenture (whatever
the reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body): (i) default in the payment of any interest
on any Debt Security of such series, or any Additional Amounts payable with
respect thereto, when such interest becomes or such Additional Amounts become
due and payable, and continuance of such default for a period of 30 days; (ii)
default in the payment of principal of or any premium on any Debt Security of
such series, or any Additional Amounts payable with respect thereto, when such
principal or premium becomes or such Additional Amounts become due and payable
either at maturity, upon any redemption, by declaration of acceleration or
otherwise; (iii) default in the deposit of any sinking fund payment, when and as
due by the terms of any Debt Security of such series; (iv) default in the
performance, or breach, of any covenant or warranty of the Issuer contained in
the Indenture for the benefit of such series or in the Debt Securities of such
series, and the continuance of such default or breach for period of 60 days
after there has been given written notice as provided in the Indenture; (v) if
any event of default as defined in any mortgage, indenture or instrument under
which there may be issued, or by which there may be secured or evidenced, any
Indebtedness (as defined below) of the Issuer or any Subsidiary, whether such
Indebtedness now exists or shall hereafter be created, shall happen and shall
result in such Indebtedness in principal amount in excess of $25,000,000
becoming or being declared due and payable prior to the date on which it would
otherwise become due and payable, and such acceleration shall not be rescinded
or annulled within a period of 10 days after there shall have been given written
notice as provided in the Indenture; (vi) the Issuer or any Subsidiary shall
fail within 60 days to pay, bond or otherwise discharge any uninsured judgment
or court order for the payment of money in excess of $25,000,000, which is not
stayed on appeal or is not otherwise being appropriately contested in good
faith; (vii) certain events in bankruptcy, insolvency or reorganization of the
Issuer or any Subsidiary, and (viii) any other Event of Default provided in or
pursuant to the Indenture with respect to Debt Securities of such series
(Section 5.1). The term "Indebtedness" means, with respect to any Person,
without duplication, (a) any liability of such Person (1) for borrowed money, or
under any reimbursement obligation relating to a letter of credit, or (2)
evidenced by a bond, note, debenture or similar instrument, or (3) for payment
obligations arising under any conditional sale or other title retention
arrangement (including a purchase money obligation) given in connection with the
acquisition of any businesses, properties or assets of any kind, or (4) for the
payment of money relating to a capitalized lease obligation; (b) any liability
of others of a type described in the preceding clause (a) that such Person has
guaranteed or that is otherwise its legal liability; and (c) any amendment,
supplement, modification, deferral, renewal, extension or refunding of any
liability of the types referred to in clauses (a) and (b) above (Section 1.1).
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If an Event of Default with respect to the Debt Securities of any series
(other than an Event of Default described in (vii) of the preceding paragraph)
occurs and is continuing, either the Trustee or the holders of at least 25% in
principal amount of the outstanding Debt Securities of such series by written
notice as provided in the Indenture may declare the principal amount (or such
lesser amount as may be provided for in the Debt Securities of such series) of
all outstanding Debt Securities of such series to be due and payable immediately
(Section 5.2). At any time after a declaration of acceleration has been made,
but before a judgment or decree for payment of money has been obtained by the
Trustee, and subject to applicable law and certain other provisions of the
Indenture, the holders of a majority in aggregate principal amount of the Debt
Securities of such series may, under certain circumstances, rescind and annul
such acceleration (Section 5.2). An Event of Default described in (vii) of the
preceding paragraph shall cause the principal amount and accrued interest (or
such lesser amount as provided for in the Debt Securities of such series) to
become immediately due and payable without any declaration or other act by the
Trustee or any holder (Section 5.2).
The Indenture provides that, within 90 days after the occurrence of any
event which is, or after notice or lapse of time or both would become, an Event
of Default thereunder with respect to the Debt Securities of any series (a
"default"), the Trustee shall transmit, in the manner set forth in the
Indenture, notice of such default to the holders of the Debt Securities of such
series unless such default has been cured or waived; provided, however, that
except in the case of a default in the payment of principal of, or premium, if
any, or interest, if any, on, or Additional Amounts or any sinking fund or
purchase fund installment with respect to, any Debt Security of such series, the
Trustee may withhold such notice if and so long as the board of directors, the
executive committee or a trust committee of directors and/or Responsible
Officers of the Trustee in good faith determine that the withholding of such
notice is in the best interest of the holders of Debt Securities of such series;
and provided, further, that in the case of any default of the character
described in (v) of the second preceding paragraph, no such notice to holders
will be given until at least 30 days after the occurrence thereof (Section 6.2).
If an Event of Default occurs and is continuing with respect to the Debt
Securities of any series, the Trustee may in its discretion proceed to protect
and enforce its rights and the rights of the holders of Debt Securities of such
series by all appropriate judicial proceedings (Section 5.3).
The Indenture provides that, subject to the duty of the Trustee during any
default to act with the required standard of care, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the holders of Debt Securities, unless such
holders shall have offered to the Trustee reasonable indemnity (Section 6.1).
Subject to such provisions for the indemnification of the Trustee, and subject
to applicable law and certain other provisions of the Indenture, the holders of
a majority in aggregate principal amount of the outstanding Debt Securities of
any series will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, with respect to the Debt Securities
of such series (Section 5.12).
Under the Indenture, the Issuer is required to furnish the Trustee annually
a statement as to performance by the Issuer of certain of its obligations under
the Indenture and as to any default in such performance (Section 7.4). The
Issuer is also required to deliver to the Trustee, within five days after
occurrence thereof, written notice of any Event of Default or any event which
after notice or lapse of time or both would constitute an Event of Default
(Section 10.9).
MODIFICATION AND WAIVER
Modification and amendments of the Indenture may be made by the Issuer and
the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Debt Securities of each series
affected thereby; provided, however, that no such modification or amendment may,
without the consent of the holder of each outstanding Debt Security affected
thereby, (i) change the Stated Maturity (except as otherwise permitted in the
Indenture in connection with Debt Securities for which the Stated Maturity is
extendible) of the principal of, or any premium or installment of interest on,
or any Additional Amounts with respect to, any Debt Security, (ii) reduce the
principal amount of, or the rate (or
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modify the calculation of such rate) of interest (except as otherwise permitted
in the Indenture in connection with Debt Securities for which the interest rate
may be reset) on, or any Additional Amounts with respect to, or any premium
payable upon the redemption of, any Debt Security, (iii) change the obligation
of the Issuer to pay Additional Amounts with respect to any Debt Security or
reduce the amount of the principal of an Original Issue Discount Security that
would be due and payable upon a declaration of acceleration of the Maturity
thereof or the amount thereof provable in bankruptcy, (iv) change the redemption
provisions of any Debt Security or adversely affect the right of repayment at
the option of any holder of any Debt Security, (v) change the place of payment
or the coin or currency in which the principal of, any premium or interest on or
any Additional Amounts with respect to any Debt Security is payable, (vi) impair
the right to institute suit for the enforcement of any payment on or after the
Stated Maturity of any Debt Security (or, in the case of redemption, on or after
the Redemption Date or, in the case of repayment at the option of any holder, on
or after the date for repayment), (vii) reduce the percentage in principal
amount of the outstanding Debt Securities, the consent of whose holders is
required in order to take certain actions, (viii) reduce the requirements for
quorum or voting by holders of Debt Securities in Section 15.4 of the Indenture,
(ix) modify any of the provisions in the Indenture regarding the waiver of past
defaults and the waiver of certain covenants by the holders of Debt Securities
except to increase any percentage vote required or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent of
the holder of each Debt Security affected thereby, (x) make any change that
adversely affects the right to convert or exchange any Debt Security into or for
common stock of the Issuer or other securities in accordance with its terms, or
(xi) modify any of the above provisions (Section 9.2).
The holders of at least a majority in aggregate principal amount of the
Debt Securities of any series may, on behalf of the holders of all Debt
Securities of such series, waive compliance by the Issuer with certain
restrictive provisions of the Indenture (Section 10.8). The holders of not less
than a majority in aggregate principal amount of the outstanding Debt Securities
of any series may, on behalf of the holders of all Debt Securities of such
series, waive any past default and its consequences under the Indenture with
respect to the Debt Securities of such series, except a default (a) in the
payment of principal of (or premium, if any), any interest on or any Additional
Amounts with respect to Debt Securities of such series or (b) in respect of a
covenant or provision of the Indenture that cannot be modified or amended
without the consent of the holder of each Debt Security of any series (Section
5.13).
The Indenture also contains provisions permitting the Issuer and the
Trustee, without the consent of any holders of Debt Securities under such
Indenture, to enter into supplemental indentures, in form satisfactory to the
Trustee, for any of the following purposes: (i) to evidence the succession of
another corporation to the Issuer and the assumption by such successor of the
obligations and covenants of the Issuer contained in the Indenture and in the
Debt Securities; (ii) to add to the covenants of the Issuer, for the benefit of
the holders of all or any series of Debt Securities issued under the Indenture
(and if such covenants are to be for the benefit of less than all series of Debt
Securities issued under the Indenture, stating that such covenants are expressly
being included solely for the benefit of such series), or to surrender any right
or power herein conferred upon the Issuer; (iii) to add any additional Events of
Default (and if such Events of Default are to be applicable to less than all
series of Debt Securities issued under the Indenture, stating that such Events
of Default are expressly being included solely to be applicable to such series);
(iv) to add or change any of the provisions of the Indenture to such extent as
shall be necessary to permit or facilitate the issuance of Debt Securities in
bearer form, registrable or not registrable as to principal, and with or without
interest coupons; (v) to change or eliminate any of the provisions of the
Indenture, provided that any such change or elimination shall become effective
only when there is no Debt Security outstanding of any series created prior to
the execution of such supplemental indenture which is entitled to the benefit of
such provision; (vi) to establish the form or terms of Debt Securities of any
series as otherwise permitted by the Indenture; (vii) to evidence and provide
for the acceptance of appointment under the Indenture by a successor Trustee
with respect to the Debt Securities of one or more series issued under the
Indenture and to add to or change any of the provisions of the Indenture as
shall be necessary to provide for or facilitate the administration of the trusts
thereunder by more than one Trustee, pursuant to the requirements of the
Indenture; (viii) to secure the Debt Securities issued under the Indenture; (ix)
to cure any ambiguity, to correct or supplement any provision in such Indenture
which may be defective or inconsistent with any other provision of the
Indenture, or to make any other provisions with
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respect to matters or questions arising under the Indenture which shall not be
inconsistent with any provision of the Indenture, provided such other provisions
shall not adversely affect the interests of the holders of Debt Securities of
any series issued under the Indenture in any material respect; or (x) to modify,
eliminate or add to the provisions of the Indenture to such extent as shall be
necessary to effect the qualification of the Indenture under the TIA or under
any similar federal statute subsequently enacted and to add to the Indenture
such other provisions as may be expressly required under the TIA (Section 9.1).
The Indenture provides that in determining whether the holders of the
requisite principal amount of Outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of a Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (i) above), (iii) the
principal amount of an Indexed Security that shall be deemed outstanding shall
be the principal face amount of such Indexed Security at original issuance,
unless otherwise provided with respect to such Indexed Security pursuant to
Section 3.1 of the Indenture, and (iv) Debt Securities owned by the Issuer or
any other obligor upon the Debt Securities or any Affiliate of the Issuer or of
such other obligor shall be disregarded (Section 1.1).
The Indenture contains provisions for convening meetings of the holders of
Debt Securities of a series (Section 15.1). A meeting may be called at any time
by the Trustee, and also, upon request, by the Company or the holders of at
least 10% in principal amount of the Outstanding Debt Securities of such series,
in any such case upon notice given as provided in the Indenture (Section 15.2).
Except for any consent that must be given by the holder of each Debt Security
affected by certain modifications and amendments of the Indenture, any
resolution presented at a meeting or adjourned meeting duly reconvened at which
a quorum is present may be adopted by the affirmative vote of the holders of a
majority in principal amount of the Outstanding Debt Securities of that series;
provided, however, that, except as referred to above, any resolution with
respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the holders of a
specified percentage, which is less than a majority, in principal amount of the
Outstanding Debt Securities of a series may be adopted at a meeting or adjourned
meeting duly reconvened at which a quorum is present by the affirmative vote of
the holders of such specified percentage in principal amount of the Outstanding
Debt Securities of that series. Any resolution passed or decision taken at any
meeting of holders of Debt Securities of any series duly held in accordance with
the Indenture will be binding on all holders of Debt Securities of that series.
The quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be Persons holding or representing a majority in principal amount
of the Outstanding Debt Securities of a series; provided, however, that if any
action is to be taken at such meeting with respect to a consent or waiver which
may be given by the holders of not less than a specified percentage in principal
amount of the Outstanding Debt Securities of a series, the Persons holding or
representing such specified percentage in principal amount of the Outstanding
Debt Securities of such series will constitute a quorum (Section 15.4).
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of holders of Debt Securities of any series with respect to any request,
demand, authorization, direction, notice, consent, waiver or other action that
the Indenture expressly provides may be made, given or taken by the holders of a
specified percentage in principal amount of all Outstanding Debt Securities
affected thereby, or of the holders of such series and one or more additional
series: (i) there shall be no minimum quorum requirement for such meeting and
(ii) the principal amount of the Outstanding Debt Securities of such series that
vote in favor of such request, demand, authorization, direction, notice,
consent, waiver or other action shall be taken into account in determining
whether such request, demand, authorization, direction, notice, consent, waiver
or other action has been made, given or taken under the Indenture (Section
15.4).
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DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may discharge certain obligations to holders of any series of
Debt Securities that have not already been delivered to the Trustee for
cancellation and that either have become due and payable or will become due and
payable within one year (or scheduled for redemption within one year) by
depositing with the Trustee, in trust, funds in U.S. dollars or in the Foreign
Currency in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities with respect to principal
(and premium, if any) and interest to the date of such deposit (if such Debt
Securities have become due and payable) or to the Maturity thereof, as the case
may be (Section 4.1).
The Indenture provides that, unless the provisions of Section 4.2 thereof
are made inapplicable to the Debt Securities of or within any series pursuant to
Section 3.1 thereof, the Issuer may elect either (a) to defease and be
discharged from any and all obligations with respect to such Debt Securities
(except for, among other things, the obligation to pay Additional Amounts, if
any, upon the occurrence of certain events of taxation, assessment or
governmental charge with respect to payments on such Debt Securities and other
obligations to register the transfer or exchange of such Debt Securities, to
replace temporary or mutilated, destroyed, lost or stolen Debt Securities, to
maintain an office or agency with respect to such Debt Securities and to hold
moneys for payment in trust) ("defeasance") or (b) to be released from its
obligations with respect to such Debt Securities under the covenants described
under "Consolidation, Merger and Transfer of Assets" above or, if provided
pursuant to Section 3.1 of the Indenture, its obligations with respect to any
other covenant, and any omission to comply with such obligations shall not
constitute a default or an Event of Default with respect to such Debt Securities
("covenant defeasance"). Defeasance or covenant defeasance, as the case may be,
shall be conditioned upon the irrevocable deposit by the Company with the
Trustee, in trust, of an amount in U.S. dollars or in the Foreign Currency in
which such Debt Securities are payable at Stated Maturity, or Government
Obligations (as defined below), or both, applicable to such Debt Securities
which through the scheduled payment of principal and interest in accordance with
their terms will provide money in an amount sufficient to pay the principal of
(and premium, if any) and interest on such Debt Securities on the scheduled due
dates therefor (Section 4.2).
Such a trust may only be established if, among other things, (i) the
applicable defeasance or covenant defeasance does not result in a breach or
violation of, or constitute a default under, the Indenture or any other material
agreement or instrument to which the Issuer is a party or by which it is bound,
(ii) no Event of Default or event which with notice or lapse of time or both
would become an Event of Default with respect to the Debt Securities to be
defeased shall have occurred and be continuing on the date of establishment of
such a trust and, with respect to defeasance only, at any time during the period
ending on the 123rd day after such date and (iii) the Issuer has delivered to
the Trustee an Opinion of Counsel (as specified in the Indenture) to the effect
that the holders of such Debt Securities will not recognize income, gain or loss
for U.S. federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to U.S. federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance or covenant defeasance had not occurred, and such Opinion of Counsel,
in the case of defeasance, must refer to and be based upon a letter ruling of
the Internal Revenue Service received by the Issuer, a Revenue Ruling published
by the Internal Revenue Service or a change in applicable U.S. federal income
tax law occurring after the date of the Indenture (Section 4.2).
"Foreign Currency" means any currency, currency unit or composite currency,
including, without limitation, the ECU, issued by the government of one or more
countries other than the United States of America or by any recognized
confederation or association of such governments (Section 1.1).
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government or the governments in the
confederation which issued the Foreign Currency in which the Debt Securities of
a particular series are payable, for the payment of which its full faith and
credit is pledged or (ii) obligations of a Person controlled or supervised by
and acting as an agency or instrumentality of the United States of America or
such government or governments, in each case where the timely payment or
payments thereunder are unconditionally guaranteed as a full faith and credit
obligation by the United States of America or such other government or
governments, and which, in the case of clause (i) or (ii), are
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not callable or redeemable at the option of the issuer or issuers thereof, and
shall also include a depository receipt issued by a bank or trust company as
custodian with respect to any such Government Obligation or a specific payment
of interest on or principal of or any other amount with respect to any such
Government Obligation held by such custodian for the account of the holder of
such depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian with
respect to the Government Obligation or the specific payment of interest on or
principal of or any other amount with respect to the Government Obligation
evidenced by such depository receipt (Section 1.1).
If after the Issuer has deposited funds and/or Government Obligations to
effect defeasance or covenant defeasance with respect to Debt Securities of any
series, (a) the holder of a Debt Security of such series is entitled to, and
does, elect pursuant to Section 3.1 of the Indenture or the terms of such Debt
Security to receive payment in a currency other than that in which such deposit
has been made in respect of such Debt Security or (b) a Conversion Event (as
defined below) occurs in respect of the Foreign Currency in which such deposit
has been made, the indebtedness represented by such Debt Security shall be
deemed to have been, and will be fully discharged and satisfied through the
payment of the principal of (and premium, if any) and interest if any, on such
Debt Security as such Debt Security becomes due out of the proceeds yielded by
converting the amount or other properties so deposited in respect of such Debt
Security into the currency in which such Debt Security becomes payable as a
result of such election or such Conversion Event based on (x) in the case of
payments made pursuant to clause (a) above, the applicable market exchange rate
for such currency in effect on the second business day prior to such payment
date, or (y) with respect to a Conversion Event, the applicable market exchange
rate for such Foreign Currency in effect (as nearly as feasible) at the time of
the Conversion Event (Section 4.2).
"Conversion Event" means the cessation of use of (i) a Foreign Currency
other than the ECU both by the government of the country or the confederation
which issued such Foreign Currency and for the settlement of transactions by a
central bank or other public institutions of or within the international banking
community (ii) the ECU both within the European Monetary System and for the
settlement of transactions by public institutions of or within the European
Union or (iii) any currency unit or composite currency other than the ECU for
the purposes for which it was established. All payments of principal of (and
premium, if any) and interest on any Debt Security that are payable in a Foreign
Currency that ceases to be used by the government or confederation of issuance
shall be made in U.S. dollars (Section 1.1).
In the event the Issuer effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any Event of Default other than an Event of Default with
respect to Sections 10.5 and 10.6 of the Indenture (which Sections would no
longer be applicable to such Debt Securities after such covenant defeasance) or
with respect to any other covenant as to which there has been covenant
defeasance, the amount in such Foreign Currency in which such Debt Securities
are payable, and Government Obligations on deposit with the Trustee, will be
sufficient to pay amounts due on such Debt Securities at the time of the Stated
Maturity but may not be sufficient to pay amounts due on such Debt Securities at
the time of the acceleration resulting from such Event of Default. However, the
Issuer would remain liable to make payment of such amounts due at the time of
acceleration.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities ("Global Securities") that will be
deposited with, or on behalf of, a depository (the "Depository") identified in
the Prospectus Supplement relating to such series. Global Securities may be
issued in either registered or bearer form and in either temporary or permanent
form. Unless and until it is exchanged in whole or in part for individual
certificates evidencing Debt Securities in definitive form represented thereby,
a Global Security may not be transferred except as a whole by the Depository for
such Global Security to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository or by such
Depository or any such nominee to a successor of such Depository or a nominee of
such successor.
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The specific terms of the depositary arrangement with respect to a series
of Debt Securities will be described in the Prospectus Supplement relating to
such series.
BEARER SECURITIES
The Issuer also may offer from time to time Debt Securities in bearer form
("Bearer Securities") outside the United States at varying prices and terms.
Such offerings of Bearer Securities may be separate from, or simultaneous with,
offerings of registered Securities in the United States. The Bearer Securities
are not offered by this Prospectus and may not be purchased by U.S. persons
other than foreign branches of certain U.S. financial institutions. For purposes
of this Prospectus, "U.S. person" means a citizen, national or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
or an estate or trust which is subject to United States income taxation
regardless of its source of income.
GOVERNING LAW
The Indenture and the Debt Securities will be governed by, and construed in
accordance with, the laws of the State of New York.
REGARDING THE TRUSTEE
The Trustee is permitted to engage in other transactions with the Issuer
and its subsidiaries and affiliates from time to time provided that if the
Trustee acquires any conflicting interest it must eliminate such conflict upon
the occurrence of an Event of Default, or else resign. The Trustee also acts as
trustee under the indenture relating to the Parent Notes.
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PLAN OF DISTRIBUTION
The Issuer may sell the Debt Securities being offered hereby: (i) through
one or more underwriters or dealers; (ii) through agents; (iii) directly to a
limited number of purchasers or to a single purchaser; or (iv) through a
combination of any such methods of sale. Such underwriters, agents or dealers
may include, and may include a group of underwriters managed by, one or more of
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch & Co."), Chase Securities Inc., NationsBanc Capital Markets,
Inc. and Smith Barney Inc. The Prospectus Supplement with respect to each series
of Debt Securities will set forth the terms of the offering of the Debt
Securities of such series, including the name or names of any underwriters,
dealers or agents, the purchase price of such Debt Securities, the proceeds to
the Issuer from such sale, any underwriting discounts and other items
constituting underwriters' compensation or agents' commissions, any initial
public offering price, any discounts or concessions allowed or reallowed or paid
to dealers, and any securities exchanges on which the Debt Securities of such
series may be listed. Only underwriters or agents named in the Prospectus
Supplement are deemed to be underwriters or agents in connection with the Debt
Securities offered hereby.
If one or more underwriters are used in the sale, the Debt Securities will
be acquired by such underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price, or at varying prices determined at the time of
sale. The Debt Securities may be offered to the public through underwriting
syndicates represented by managing underwriters or by one or more underwriters
without a syndicate. Unless otherwise set forth in the Prospectus Supplement,
the obligations of the underwriters to purchase Debt Securities will be subject
to certain conditions precedent and the underwriters will be obligated to
purchase all the Debt Securities of a series if any are purchased. Any initial
public offering price and any discounts or concessions allowed or reallowed or
paid to dealers may be changed from time to time.
The Debt Securities may be sold directly by the Issuer or through agents
designated by the Issuer from time to time. Any agent involved in the offer or
sale of the Debt Securities in respect of which this Prospectus is delivered
will be named, and any commissions payable by the Issuer to such agent will be
set forth, in the Prospectus Supplement or any supplement thereto. Unless
otherwise indicated in the Prospectus Supplement, any such agent will be acting
on a reasonable efforts basis for the period of its appointment.
If so indicated in the Prospectus Supplement, the Issuer will authorize
agents, underwriters or dealers to solicit offers by certain specified entities
to purchase Debt Securities from the Issuer at the public offering price set
forth in the Prospectus Supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date. Institutions with which
such contracts may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and others, but in all cases such institutions must be approved by
the Issuer. The obligations of any purchaser under such contracts will be
subject to the condition that the purchase of the offered Debt Securities shall
not at the time of delivery be prohibited under the laws of the jurisdiction to
which such purchaser is subject. The underwriters and such other agents will not
have any responsibility in respect of the validity of performance of such
contracts.
Agents and underwriters may from time to time purchase and sell Debt
Securities in the secondary market, but are not obligated to do so, and there
can be no assurance that there will be a secondary market for the Debt
Securities or that there will be liquidity in the secondary market if one
develops. From time to time, agents and underwriters may, but are not obligated
to, make a market in the Debt Securities.
Agents and underwriters may be entitled under agreements entered into with
the Issuer to indemnification by the Issuer against certain civil liabilities,
including liabilities under the Securities Act of 1933, or to contribution with
respect to payments which the agents or underwriters may be required to make in
respect thereof.
Agents and underwriters may be customers of, engage in transactions with or
perform services for, the Issuer or its affiliates in the ordinary course of
business. The Issuer has entered into an arrangement in the ordinary course of
business with an affiliate of Merrill Lynch & Co. to sell to such affiliate, and
provide
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ongoing lending services and subservicing for, certain mortgage loans originated
by the Issuer. An affiliate of Merrill Lynch & Co. is also a lender under the
Revolving Loans. Smith Barney Inc. currently owns beneficially 97,138 shares of
Common Stock of the Parent, representing approximately 0.229% of the total
outstanding capital stock of the Parent. Chase Securities Inc. ("CSI") is an
affiliate of Chase, which is administrative agent and a lender under the Bank
Credit Agreement, and a lender under the Revolving Loans. CSI, Chase and/or
certain of their affiliates have engaged in and may in the future engage in
general financing and banking transactions with the Issuer and certain of its
subsidiaries and affiliates in the ordinary course of business. An affiliate of
CSI owns approximately a one percent interest in Thomas H. Lee Equity Fund III,
L.P., which together with certain of its affiliates, owns more than 10% of the
Parent's Common Stock. In addition, NationsBanc Capital Markets, Inc. is an
affiliate of NationsBank, a lender under the Bank Credit Agreement.
The place and time of delivery for the Debt Securities of any series in
respect of which this Prospectus is delivered are set forth in the accompanying
Prospectus Supplement.
LEGAL MATTERS
Certain legal matters with respect to the securities offered hereby will be
passed upon for the Issuer by Hutchins, Wheeler & Dittmar, A Professional
Corporation, Boston, Massachusetts and for any underwriters or agents by Brown &
Wood LLP, New York, New York. Hutchins, Wheeler & Dittmar, A Professional
Corporation, will rely as to certain matters of New York law upon the opinion of
Brown & Wood LLP. Hutchins, Wheeler & Dittmar, A Professional Corporation, and
Brown & Wood LLP will rely as to certain matters of Florida law upon the opinion
of Robert J. Jacobs, Executive Vice President and Secretary of the Issuer.
EXPERTS
The consolidated balance sheets of BancBoston Mortgage Corporation, as of
December 31, 1995 and 1994 and the related consolidated statements of operations
and retained earnings and cash flows for each of the three years in the period
ended December 31, 1995, included in this Prospectus, have been audited by
Coopers & Lybrand L.L.P., independent accountants, as indicated in their report
with respect thereto, and is included herein in reliance upon the authority of
said firm as experts in accounting and auditing in giving said reports.
The consolidated balance sheets of Barnett Mortgage Company and
subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of operations, stockholder's equity, and cash flows for each of the
three years in the period ended December 31, 1995, included in this Prospectus,
and the related financial statement schedule included elsewhere in the
Registration Statement, have been audited by Arthur Andersen LLP, independent
certified public accountants, as indicated in their report with respect thereto,
and is included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
The consolidated statements of financial condition of BancPLUS Financial
Corporation and subsidiary as of December 31, 1994 and 1993 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended, included in this Prospectus, and the related financial
statement schedules included elsewhere in the Registration Statement, have been
audited by KPMG Peat Marwick LLP, independent auditors, as set forth in their
report included herein. In that report, that firm states that with respect to a
certain subsidiary, Honolulu Mortgage Company, Inc., its opinion is based on the
report of other independent auditors, namely Ernst & Young LLP. The financial
statements referred to above have been included herein in reliance upon the
authority of those firms as experts in accounting and auditing in giving said
reports.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
HOMESIDE LENDING, INC. (THE SUCCESSOR)
Unaudited Consolidated Balance Sheet at November 30, 1996.................................. F-2
Unaudited Consolidated Statement of Income and Retained Earnings for the Three Months Ended
November 30, 1996 and the Period March 16, 1996 through November 30, 1996................ F-3
Unaudited Consolidated Statement of Cash Flows for the Period March 16, 1996 through
November 30, 1996........................................................................ F-4
Notes to Unaudited Consolidated Financial Statements....................................... F-5
HOMESIDE LENDING, INC. (THE SUCCESSOR)
Unaudited Pro Forma Consolidated Financial Information..................................... F-16
Unaudited Pro Forma Consolidated Income Statement for the Period March 16, 1996 to November
30, 1996................................................................................. F-17
Unaudited Pro Forma Consolidated Income Statement for the Year Ended December 31, 1995..... F-19
BANCBOSTON MORTGAGE CORPORATION (THE PREDECESSOR, ACQUIRED BY HOMESIDE, INC. ON MARCH 15,
1996 AND NOW KNOWN AS HOMESIDE LENDING, INC.)
Consolidated Balance Sheets at December 31, 1995 and March 15, 1996........................ F-24
Consolidated Statements of Income and Retained Earnings (Deficit) for the Quarter Ended
March 31, 1995 and the Period January 1, 1996 through March 15, 1996..................... F-25
Consolidated Statements of Cash Flows for the Quarter Ended March 31, 1995 and the Period
January 1, 1996 through March 15, 1996................................................... F-26
Notes to Consolidated Financial Statements................................................. F-27
BARNETT MORTGAGE COMPANY (ACQUIRED BY HOMESIDE, INC. ON MAY 31, 1996 AND NOW KNOWN AS
HOMESIDE HOLDINGS, INC.)
Consolidated Statements of Operations for the Period April 1, 1996 to May 30, 1996, the
Period January 1, 1996 to May 30, 1996 and the Three and Six Months Ended June 30,
1995..................................................................................... F-29
Consolidated Statements of Cash Flows for the Period January 1, 1996 to May 30, 1996 and
the Six Months Ended June 30, 1995....................................................... F-30
Notes to Consolidated Financial Statements................................................. F-31
BANCBOSTON MORTGAGE CORPORATION (THE PREDECESSOR, ACQUIRED BY HOMESIDE, INC. ON MARCH 15,
1996 AND NOW KNOWN AS HOMESIDE LENDING, INC.)
Report of Independent Accountants.......................................................... F-32
Consolidated Balance Sheets at December 31, 1994 and 1995.................................. F-33
Consolidated Statements of Operations and Retained Earnings for the Years Ended December
31, 1993, 1994 and 1995.................................................................. F-34
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995..................................................................................... F-35
Notes to Consolidated Financial Statements................................................. F-37
BARNETT MORTGAGE COMPANY (ACQUIRED BY HOMESIDE, INC. ON MAY 31, 1996 AND NOW KNOWN AS
HOMESIDE HOLDINGS, INC.)
Report of Independent Certified Public Accountants......................................... F-52
Consolidated Balance Sheets at December 31, 1994 and 1995.................................. F-53
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and
1995..................................................................................... F-54
Consolidated Statements of Stockholder's Equity for the Years Ended December 31, 1993, 1994
and 1995................................................................................. F-55
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995..................................................................................... F-56
Notes to Consolidated Financial Statements................................................. F-57
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY (ACQUIRED BY BARNETT MORTGAGE COMPANY ON
FEBRUARY 28, 1995)
Independent Auditors' Report............................................................... F-69
Consolidated Statements of Financial Condition at December 31, 1993 and 1994............... F-70
Consolidated Statements of Operations for the Years Ended December 31, 1993 and 1994....... F-71
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993 and
1994..................................................................................... F-72
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993 and 1994....... F-73
Notes to Consolidated Financial Statements................................................. F-74
</TABLE>
F-1
<PAGE> 139
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
UNAUDITED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
--------------------
<S> <C>
ASSETS
Cash and cash equivalents............................................. $ 1,183
Mortgage loans held for sale, net..................................... 1,101,229
Mortgage servicing rights receivable, net............................. 1,321,639
Accounts receivable................................................... 173,145
Premises and equipment, net........................................... 29,221
Other assets.......................................................... 207,184
----------
Total Assets.......................................................... $2,833,601
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Notes payable to banks................................................ $2,010,813
Accounts payable and accrued liabilities.............................. 140,550
Deferred income taxes payable......................................... 103,624
Long term debt........................................................ 21,278
----------
Total Liabilities..................................................... 2,276,265
----------
Common stock:
Common stock, $1.00 par value, 100 shares authorized, issued and
outstanding, all pledged as a second priority pledge on
long-term debt of the Parent Company (Notes 1 and 7)............ --
Additional paid in capital............................................ 533,195
Retained earnings..................................................... 24,141
----------
Total Stockholder's Equity............................................ 557,336
----------
Total Liabilities and Stockholder's Equity............................ $2,833,601
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-2
<PAGE> 140
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE THREE MARCH 16, 1996
MONTHS ENDED TO
NOVEMBER 30, NOVEMBER 30,
1996 1996
---------------- ----------------
<S> <C> <C>
REVENUES:
Mortgage servicing fees....................................... $ 90,492 $ 214,156
Amortization of mortgage servicing rights..................... (48,120) (104,315)
-------- ----------
Net servicing revenue.................................... 42,372 109,841
Interest income............................................... 25,241 60,230
Interest expense.............................................. (16,140) (46,416)
-------- ----------
Net interest revenue..................................... 9,101 13,814
Net mortgage origination revenue.............................. 16,521 43,604
Other income.................................................. 79 541
-------- ----------
Total revenue............................................ 68,073 167,800
EXPENSES:
Salaries and employee benefits................................ 20,650 53,307
Occupancy and equipment....................................... 3,337 8,267
Servicing losses on investor-owned loans...................... 4,957 12,953
Other expenses................................................ 11,391 28,932
-------- ----------
Total expenses........................................... 40,335 103,459
Income before income taxes.................................... 27,738 64,341
Income tax expense............................................ 11,373 26,380
-------- ----------
Net income.................................................... 16,365 37,961
Retained earnings at beginning of period...................... 21,596 --
Less: Dividends declared and paid to HomeSide, Inc............ (13,820) (13,820)
-------- ----------
Retained earnings at end of period............................ $ 24,141 $ 24,141
======== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 141
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
MARCH 16, 1996
TO
NOVEMBER 30,
1996
----------------
<S> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income............................................................. $ 37,961
Amortization........................................................... 107,396
Depreciation........................................................... 3,178
Servicing losses on investor-owned loans............................... 12,953
Deferred income tax expense............................................ 26,380
Capitalized excess servicing rights.................................... (16,373)
Mortgage loans originated and purchased for sale....................... (9,081,815)
Proceeds and principal repayments of mortgage loans held for sale...... 8,853,510
Change in accounts receivable.......................................... (78,235)
Change in other assets and accounts payable and accrued liabilities.... (33,941)
------------
Net cash used in operating activities.................................. (168,986)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment..................................... (3,354)
Acquisition of mortgage servicing rights............................... (344,288)
Net purchases of risk management contracts............................. (88,438)
Acquisition of BBMC, net of cash acquired.............................. (133,392)
Acquisition of BMC, net of cash acquired............................... (106,244)
------------
Net cash used in investing activities.................................. (675,716)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from banks.............................................. 526,480
Payment of debt issue costs............................................ (12,773)
Repayment of long term debt............................................ (417)
Capital contribution from parent....................................... 346,415
Dividends paid to parent............................................... (13,820)
------------
Net cash provided by financing activities.............................. 845,885
Net increase in cash................................................... 1,183
Cash and cash equivalents at beginning of period....................... --
------------
Cash and cash equivalents at end of period............................. $ 1,183
============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE> 142
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of HomeSide
Lending, Inc. ("HomeSide") have been prepared in accordance with generally
accepted accounting principles for interim financial information and in
accordance with Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management of HomeSide, all
material adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
period from March 16, 1996 (date operations began) to November 30, 1996 and the
three months ended November 30, 1996 are not necessarily indicative of the
results that may be expected for the fiscal year ended February 28, 1997.
HomeSide is an indirect wholly-owned subsidiary of HomeSide, Inc. (the
"Parent") (see Note 2). The Parent has no operations and its only significant
assets are its investment in HHI, HomeSide and capitalized debt issuance costs.
The Parent has $70 million in outstanding long-term debt. All of the stock of
HomeSide is pledged as collateral on the debt of the Parent. The Parent is
dependent upon dividends from HHI and HomeSide for the cash flow to service the
Parent's debt.
The accompanying financial statements of HomeSide have been prepared for
the period March 16, 1996 to February 28, 1997 to coincide with the commencement
of operations of the Parent as discussed in "ORGANIZATION" below and the end of
the Parent's third fiscal quarter based on a February 28 year end. The financial
statements for the third quarter of fiscal 1997 include the period September 1,
1996 to November 30, 1996.
References to the first quarter of fiscal 1997 relate to the period March
16, 1996 to May 31, 1996. References to the second quarter of fiscal 1997 relate
to the three months ended August 31, 1996. References to the third quarter of
fiscal 1997 relate to the three months ended November 30, 1996. Year to date
operating results include the period March 16, 1996 to November 30, 1996.
2. ORGANIZATION
On December 11, 1995, the Parent 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 ("Bank of Boston") for the purpose of acquiring
certain assets and liabilities of the mortgage banking business ("BBMC") owned
by Bank of Boston. HomeSide, Inc. is the parent company of HomeSide, which is
the primary operating entity. The BBMC transaction closed on March 15, 1996 and
HomeSide, Inc. began operations on March 16, 1996 through its operating
subsidiary, HomeSide.
On May 31, 1996, Barnett sold certain of its mortgage banking operations,
primarily its servicing portfolio and proprietary mortgage banking software
systems, to the Parent. Barnett received cash and an ownership interest in the
Parent. For more information on these acquisitions see Note 4.
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.
F-5
<PAGE> 143
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Risk Management of Mortgage Loan Originations
HomeSide has a risk management program in place to offset the risk that a
change in interest rates will result in a decrease in the value of HomeSide's
mortgage loan inventory and commitments to originate loans. To manage its
interest rate risk exposure, HomeSide enters into forward sales agreements and
purchases option contracts. These agreements and contracts are not considered
trading instruments and are primarily entered into for purposes of managing
interest rate risk relative to commitments to originate mortgage loans against
market value declines resulting from fluctuations in interest rates.
The cost of option contracts to manage HomeSide's fixed and variable rate
loan origination commitments are capitalized and amortized as an adjustment of
gain or loss on the sale of the loan over the life of the underlying option
contract. Unamortized premiums are included in other assets in the accompanying
consolidated balance sheet. HomeSide is not exposed to loss beyond its initial
outlay to acquire the option contract.
Risk Management of Mortgage Servicing Rights
Mortgage servicing rights are a significant asset of HomeSide and possess
economic value as they permit the owner to receive a portion of the interest
coupon from the mortgagor for performing specified servicing activities. Because
the underlying mortgage loan note permits the borrower to prepay the loan, the
value of the related servicing rights tends to diminish in periods of declining
interest rates and increase in value in periods of rising rates. This tendency
of the mortgage servicing rights portfolio to change in value with changes in
interest rates subjects HomeSide to substantial interest rate risk, which
directly affects the volatility of reported earnings as capitalized mortgage
servicing rights are carried at the lower of amortized cost or fair value. It is
the policy of HomeSide to mitigate this risk through its risk management
program.
Qualifying risk management instruments with a demonstrated ability to
mitigate this risk are used in this 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 value of these
contracts will tend to move inversely with changes in value of HomeSide's
mortgage servicing rights.
To date, option contracts on U.S. Treasury bond futures have been purchased
to manage interest rate risk on HomeSide's mortgage servicing rights. These
option contracts are designated as hedges on the purchase date and such
designation must be at a level at least as specific as the level at which
mortgage servicing rights are evaluated for impairment. The option contracts are
marked-to-market with changes in market value deferred and recognized as an
adjustment to the cost 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. Correlation between changes in value of the option 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.
At November 30, 1996, the carrying value of the risk management contracts
included in other assets was $162,351,000, the market value of the contracts.
Further, net gains on risk management contracts of $60,181,000 were deferred as
a component of mortgage servicing rights as of November 30, 1996. During the
third fiscal quarter, $133,348,000 of gains were deferred as a component of
mortgage servicing rights, which offset the deferred losses recorded as of the
end of the second fiscal quarter. Of the gains deferred during the third fiscal
quarter, $107,256,000 were realized. At any point in time, HomeSide's maximum
loss exposure on its option contracts is limited to the amount paid for such
contracts.
F-6
<PAGE> 144
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 estimated to be fully collectible.
Mortgage servicing rights
Mortgage servicing rights are initially recorded at fair value as of their
date of acquisition or origination. Purchased mortgage servicing rights ("PMSR")
represent the value of rights to service mortgage loans originated by others.
Originated mortgage servicing rights ("OMSR") represent the value of mortgage
servicing rights associated with mortgage loans originated by HomeSide. OMSR are
capitalized in accordance with Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). Mortgage servicing
rights are amortized as a reduction of servicing fee income over the estimated
servicing period in proportion to the estimated future net cash flows from the
loans serviced.
SFAS 122 also requires that capitalized mortgage servicing rights be
evaluated for impairment based on the fair value of these rights. For purposes
of determining impairment, HomeSide's mortgage servicing rights are stratified
based on interest rate and type of loan (conventional/government). Impairment,
if any, is recognized through a valuation allowance for each impaired stratum
and included in the amortization of mortgage servicing rights.
Mortgage servicing rights also includes excess mortgage servicing
receivables ("EMSR"), which represent the present value of servicing fee income
in excess of a normal servicing fee. When loans are sold, the estimated excess
servicing is recognized as income and amortized over the estimated servicing
period in proportion to the estimated future aggregate net cash flows from the
loans serviced. Remaining asset balances are evaluated for impairment based on
current estimates of future discounted cash flows. Such write-downs are included
in amortization of mortgage servicing rights.
The following table presents a breakdown of the components of mortgage
servicing rights at November 30, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Mortgage servicing rights and excess servicing receivables....... $1,486,135
Deferred gains on risk management contracts, net................. (60,181)
----------
1,425,954
Less: Accumulated amortization................................... (104,315)
----------
$1,321,639
==========
</TABLE>
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
F-7
<PAGE> 145
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
mortgage-backed securities serviced by HomeSide for others and mortgage claims
filed primarily with the FHA and the VA.
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 lesser
of the estimated life of the improvement or the term of the lease.
Deferred Charges
Included in other assets are deferred charges of $10,297,000, representing
costs incurred to obtain a $2.5 billion line of credit from an independent
syndicate of banks. The deferred charges are being amortized to interest expense
over the term of the related line of credit (3 years).
Mortgage servicing fees
Mortgage servicing fees represent fees earned for servicing mortgage loans
owned by investors. The fees are generally calculated on the outstanding
principal balances of the loans serviced and are recognized as income on an
accrual basis.
Servicing losses on investor-owned loans
HomeSide records losses attributable to servicing FHA and VA loans for
investors. These amounts include actual losses for final disposition of loans,
accrued interest for which payment has been denied, and estimates for potential
losses based on HomeSide'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 the balance of accounts payable and accrued liabilities.
Interest expense
Interest expense is reduced by credits received on borrowings with
depository institutions for custodial balances placed with such institutions.
Net mortgage origination revenue
Net mortgage origination revenue includes gains and losses from sales of
mortgage loans.
Income taxes
HomeSide accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the
Statement, 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.
F-8
<PAGE> 146
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS
Acquisition of BancBoston Mortgage Corporation
On March 15, 1996, the Parent acquired from Bank of Boston all of the
outstanding stock of BBMC, which was subsequently renamed HomeSide Lending, Inc.
Certain assets and liabilities of BBMC were retained by Bank of Boston,
including BBMC's mortgage retail production operations in New England.
HomeSide made cash payments of $139,500,000 and issued $86,750,000 of
common stock of HomeSide, Inc. to Bank of Boston in consideration for certain
assets, net of assumed liabilities, and the stock of BBMC. On May 31, 1996,
HomeSide paid an additional $5,000,000 to Bank of Boston in connection with the
closing of the BMC acquisition. The transaction was accounted for under the
purchase method of accounting and, accordingly, the results of operations of
HomeSide are included from the date of purchase. The assets and liabilities of
BBMC were recorded by HomeSide at their fair values at March 15, 1996, which
totaled $1,525,314,000 and $1,221,808,000, respectively. The total purchase
price paid for BBMC, including transaction costs and interest, was $247,403,000.
The excess of fair value of net assets acquired over cost was $56,103,000 and
was allocated entirely to mortgage servicing rights. The excess is being
amortized over the estimated servicing period in proportion to the estimated
future net cash flows from the loans serviced, in the same manner as mortgage
servicing rights.
Acquisition of Barnett Mortgage Company
On May 31, 1996, the Parent acquired from Barnett certain assets, net of
assumed liabilities, and the outstanding common stock of BMC, which was
subsequently renamed HomeSide Holdings, Inc. (the "BMC Acquisition"). HomeSide
Holdings, Inc. then became the parent company of HomeSide Lending, Inc. and
transferred all of the assets and liabilities of HomeSide Holdings, Inc., with
the exception of certain portions of HomeSide Holdings, Inc.'s GNMA servicing
rights, to HomeSide Lending, Inc. 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 of such entities.
HomeSide made cash payments of $228,234,000 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 11,461,400 shares of
common stock of the Parent for an aggregate purchase price of $117,985,000. The
transaction was accounted for under the purchase method of accounting and,
accordingly, the results of operations of HomeSide include BMC from the date of
acquisition. The assets and liabilities of BMC were recorded by HomeSide at
their fair values at May 31, 1996, which totaled $764,825,000 and $516,129,000,
respectively. The total purchase price paid for BMC, including transaction costs
and interest, was $235,432,000. The excess of fair value of net assets acquired
over cost was $13,264,000 and was allocated entirely to mortgage servicing
rights. The excess is being amortized over the estimated servicing period in
proportion to the estimated future net cash flows from the loans serviced, in
the same manner as mortgage servicing rights.
The assets acquired and liabilities assumed in each of the transactions
noted above have been recorded at their estimated fair value as of the date of
the acquisition. Changes in those estimates may affect the amounts recorded and
the resulting allocation of purchase price.
F-9
<PAGE> 147
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited pro forma statements of operations for the year ended December
31, 1995 and the period from March 16, 1996 to November 30, 1996, assuming BBMC
and BMC had been acquired as of January 1, 1995, and assuming BMC had been
acquired as of March 15, 1996 are as follows (in millions):
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED PRO FORMA PERIOD
DECEMBER 31, MARCH 16, 1996 TO
1995 NOVEMBER 30, 1996
---------------- -----------------
<S> <C> <C>
Net servicing revenue.................. $ 235.1 $ 120.3
Net warehouse interest (expense)
revenue.............................. 17.9 17.8
Net mortgage origination revenue....... 0.7 44.6
Other income........................... 0.7 0.6
------- -------
Total revenues.................... 254.4 183.3
Expenses............................... (142.7) (116.2)
------- -------
Income before income taxes............. 111.7 67.1
Income tax expense..................... (45.7) (27.7)
------- -------
Net income........................ $ 66.0 $ 39.4
------- -------
</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
actually acquired. In addition, gains on sales of mortgage servicing rights are
not included in net servicing revenue in these pro forma results. No adjustments
have been made for restructuring costs that might have been incurred during the
periods presented or for cost efficiencies that might have been realized. In
addition, no adjustments have been made for the capital contributions received
from the Parent in connection with the Parent's offering of common stock to the
public in January 1997. Accordingly, these pro forma results are not indicative
of future results.
5. NOTES PAYABLE TO BANKS
HomeSide borrows funds on a demand basis from a syndicate of banks under a
$2.5 billion line of credit collateralized by substantially all of HomeSide's
assets and the servicing rights retained by HHI. The line of credit is used to
provide funds for HomeSide's business of making, originating, acquiring and
servicing mortgage loans. The line of credit includes both a warehouse credit
facility and servicing-secured credit facility, of which the servicing secured
facility is capped at $950 million. The line of credit terminates on May 31,
1999. The line of credit agreement contains covenants that impose limitations
and restrictions on HomeSide, including the maintenance of certain net worth and
ratio requirements. (See "Description of Bank Credit Agreement"). The amount of
the unused line of credit was $489,200,000 as of November 30, 1996.
Drawings under the 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 0.5%, or (B) a
eurodollar rate. As of November 30, 1996, the weighted average interest rate on
the amounts borrowed was 5.98%.
On January 15, 1997, HomeSide entered into a short term credit facility
with The Chase Manhattan Bank in an aggregate principal amount of $85 million
(as amended on February 28, 1997 and March 31, 1997, the "Chase Facility"). On
March 14, 1997, HomeSide entered into a short term credit facility with an
affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated in an aggregate
principal amount of $50.0 million (as amended on March 31, 1997, the "Merrill
Facility") The Chase Facility and the Merrill Facility each expire on the
earlier of (i) May 1, 1997, or (ii) the consummation of the initial sale of the
Issuer's debt securities. Drawings under each facility bear interest at the
greater of (i) The Chase Manhattan Bank's prime rate, (ii) the secondary market
rate for certificates of deposit (grossed up for maximum statutory requirements)
plus 1%, and (iii) the federal funds effective rate from time to time plus 0.5%.
F-10
<PAGE> 148
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG TERM DEBT
HomeSide has a mortgage note payable on its headquarters building that is
due in 2017 and bears interest at 9.50%. HomeSide's main office building is
pledged as collateral. Principal payments due on the mortgage note payable are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
------------------------------------------------------------
<S> <C>
1997........................................................ $ 56
1998........................................................ 234
1999........................................................ 258
2000........................................................ 283
2001........................................................ 312
Thereafter.................................................. 12,481
--------
$ 13,624
========
</TABLE>
7. LONG TERM DEBT OF PARENT AND TRANSACTIONS WITH AFFILIATES
On May 14, 1996, the Parent 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 the Parent, in whole or in part, at any time on or
after May 15, 2001, at certain pre-set redemption prices. The indenture contains
covenants that impose limitations and restrictions on HomeSide, including the
maintenance of certain net worth and ratio requirements. In addition, the Notes
are secured by the common stock of HomeSide, Inc. and the common stock of each
of its subsidiaries. In accordance with certain of these restrictions, effective
August 15, 1996, the interest rate on the Notes was increased to 11.75% until
the exchange notes discussed below were issued. The Company is in compliance
with all net worth and ratio requirements contained in the indenture relating to
the Notes.
The Notes were initially issued as part of a private placement offering.
The Parent filed a Form S-4 with the SEC to register notes, with terms identical
to the Notes, under the Securities Act of 1933 (such registered notes also
referred to herein as the "Notes"). The registration statement was declared
effective during October 1996. The exchange was completed on December 9, 1996.
The exchange notes are obligations of the Parent and are not included in
the consolidated financial statements of HomeSide. However, ultimate repayment
of principal and interest on the notes is dependent on the cash flows of
HomeSide. During the period ended November 30, 1996, HomeSide funded $11,563,000
of interest payments on the Notes.
On February 5, 1997, the Parent issued 8,452,500 shares of its common stock
to the public at a price of $15.00 per share. The net proceeds from the offering
were used to repay $70 million of the Notes at a premium of $7.9 million. The
remaining $38.8 million of net proceeds were contributed to HomeSide as
additional capital and used to repay amounts outstanding under the Bank Credit
Agreement.
F-11
<PAGE> 149
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the period from March 16, 1996 to November 30, 1996, HomeSide paid
$13,820,000 in dividends to the Parent to enable the Parent to service the debt
and pay certain debt issuance costs. Total remaining debt service requirements
(principal and interest) of the Parent which must be funded by dividends
received from HomeSide (including pro forma requirements related to the
repayment of $70,000,000 in principal amount of Notes from the net proceeds of
the Parent's common stock offering) are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR HISTORICAL PRO FORMA
------------------------------------------------------------- ---------- ---------
<S> <C> <C>
1997......................................................... $ -- $ --
1998......................................................... 22,500 14,625
1999......................................................... 22,500 14,625
2000......................................................... 22,500 14,625
2001......................................................... 22,500 14,625
Thereafter................................................... 256,250 106,563
-------- --------
$346,250 $165,063
======== ========
</TABLE>
HomeSide fulfills servicing obligations on behalf of HHI with respect to
certain GNMA loans with an unpaid principal balance ("UPB") of approximately
$1.0 billion as of November 30, 1996. Since the acquisition of BMC on May 31,
1996, HomeSide allocates to HHI a portion of the servicing fee income it
receives based on the UPB of loans it services on behalf of HHI. HomeSide also
allocates to HHI a portion of the costs incurred to service the loans and fund
the related servicing rights. The allocation of income and expense to HHI did
not have a material impact on HomeSide's results of operations for the periods
presented.
8. STOCKHOLDER'S EQUITY
HomeSide's capital structure consists of 100 shares of authorized and
issued, $1.00 per share par value common stock which is wholly-owned by HomeSide
Holdings, Inc., a wholly-owned subsidiary of the Parent. The common stock of
HomeSide is pledged as security for the Parent Notes discussed in Note 7 of
Notes to Consolidated Financial Statements.
9. SUPPLEMENTAL CASH FLOW INFORMATION
In connection with the acquisitions of BBMC and BMC, HomeSide recorded
non-cash assets and assumed liabilities, including fair value adjustments, of
approximately $2,251,676,000 and $1,737,937,000, respectively.
HomeSide paid $46,117,000 and $1,000 of interest and income taxes,
respectively, during the period ended November 30, 1996.
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value.
Financial instruments include such items as mortgage loans held for sale,
mortgage loans held for investment, interest rate contracts, notes payable, and
other 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 suspected 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
F-12
<PAGE> 150
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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's fair values should not be compared to those of
other companies.
Under the Statement, 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. For certain assets and
liabilities, the information required under the Statement 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 is HomeSide's normal business practice.
Accounts receivable
Carrying amounts are considered to approximate fair value. All amounts that
are assumed to be uncollectible within a reasonable time are written off.
Risk management contracts
Fair values are estimated based on actual market quotes or option models.
Notes payable to banks
The carrying amount of the notes payable to banks reported in the balance
sheet approximates its fair value.
Long-term debt
Fair value of long-term debt is estimated by discounting estimated future
cash flows using a rate commensurate with the risks involved.
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.
F-13
<PAGE> 151
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options on mortgage-backed securities
The fair values of options are estimated based on actual market quotes. In
some instances, quoted prices for the underlying loans or option models are
used.
Fair Value
The fair values of HomeSide's financial instruments as of November 30, 1996
are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................... $ 1,183 $ 1,183
Mortgage loans held for sale.................... 1,101,229 1,101,229
Accounts receivable............................. 173,145 173,145
Risk management contracts....................... 162,351 162,351
Other assets.................................... 44,833 44,833
LIABILITIES
Notes payable to banks.......................... 2,010,813 2,010,813
Long-term debt.................................. 21,278 21,278
OFF-BALANCE SHEET(1)
Commitments to originate mortgage loans......... -- 20,836
Mandatory forward contracts to sell mortgages... -- (19,954)
Options on mortgage-backed securities........... -- (391)
</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 HomeSide's entire holding of a particular financial instrument. Because
no active market exists for some portion of HomeSide'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 November 30, 1996. Changes in market interest rates and
prepayment assumptions could significantly change the fair value.
11. RISK MANAGEMENT OF FINANCIAL INSTRUMENTS
As discussed in Note 3, HomeSide purchases options contracts on U.S.
Treasury bond futures to manage the interest rate risk related to the value of
HomeSide's mortgage servicing rights. A summary of HomeSide's investments in
purchased option instruments as of November 30, 1996 is as follows:
<TABLE>
<S> <C>
Notional amount of U.S. Treasury bond future options........... $3.5 billion
Fair value of outstanding options.............................. $162.4 million
</TABLE>
Cash requirements for HomeSide's option contracts are limited to the
initial premium paid. The amount of contracts purchased depends on certain
factors, such as interest rates and growth in the mortgage servicing portfolio.
HomeSide is subject to market risk to the extent that interest rates fluctuate;
however, the purpose of the option contracts is to hedge the value of its
mortgage servicing rights portfolio, which tends to react inversely with changes
in the value of HomeSide's option contracts. HomeSide's credit risk on its
option
F-14
<PAGE> 152
HOMESIDE LENDING, INC.
(THE SUCCESSOR)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contracts is limited since the option contracts are traded on a national
exchange, which guarantees performance by the counterparty.
12. CONTINGENCIES
HomeSide, along with its parent, 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, operations or liquidity of
HomeSide.
For five years following the consummation of the BMC Acquisition, which
occurred on May 31, 1996, Barnett is obligated to repurchase or reimburse
HomeSide for any credit losses related to $101.0 million of loans serviced with
recourse, which is less than 1.0% of HomeSide's total mortgage servicing
portfolio.
13. SUBSEQUENT EVENTS
In February 1997, HomeSide filed a Shelf Registration Statement in
connection with a public offering of various debt securities. The proceeds from
the issuance of such securities, if drawn upon, will be used to fund HomeSide's
operations and to repay outstanding indebtedness of HomeSide.
On February 5, 1997, the Parent issued 8,452,500 shares of its Common Stock
to the public at a price of $15.00 per share. A portion of the net proceeds from
the Offering was used to repay $70 million of the Parent's $200 million 11.25%
notes at a premium of $7.9 million. The remaining net proceeds of $38.8 million
was contributed to HomeSide as additional capital and was used to repay
borrowings under the Bank Credit Facility.
F-15
<PAGE> 153
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
The unaudited pro forma consolidated financial information set forth below
which is based upon management's assumptions and includes adjustments as
described in the notes which follow, should be read in conjunction with the
historical financial statements and notes thereto included elsewhere in this
Prospectus. The Unaudited Pro Forma Consolidated Income Statement set forth
below gives effect to the HLI Acquisition and the HHI Acquisition as though such
transactions occurred on January 1, 1995. Results of operations for the period
March 16, 1996 to November 30, 1996 include the period March 16, 1996 to
November 30, 1996 for HomeSide and the period April 1, 1996 to May 30, 1996 for
HHI. Results of operations for the year ended December 31, 1995 include the
results of HLI and HHI for the twelve months ended December 31, 1995. Results of
operations for the period ended November 30, 1996 reflect the consummation of
such offering and the application of the proceeds thereof as if such
transactions had occurred on March 16, 1996. The unaudited pro forma
consolidated financial information does not purport to represent the results
that actually would have occurred if the acquisition of HLI or the acquisition
of HHI had in fact occurred as of the dates and is not intended to project
HomeSide's financial position or results of operations that may be achieved for
any future period.
F-16
<PAGE> 154
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE PERIOD MARCH 16, 1996 TO NOVEMBER 30, 1996(A)
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
HOMESIDE HHI HHI ACQUISITION HOMESIDE AND
HISTORICAL(a) HISTORICAL(a) ADJUSTMENTS(b) HHI
------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Mortgage servicing fees................... $ 214.1 $20.6 $ (0.8)(c) $ 233.9
Amortization of mortgage servicing
rights................................. (104.3) (8.3) (1.0)(d) (113.6)
------- ----- ------ -------
Net servicing revenue............. 109.8 12.3 (1.8) 120.3
Interest income........................... 60.2 4.9 1.7(e) 66.8
Interest expense.......................... (46.4) (3.5) 0.9(e) (49.0)
------- ----- ------ -------
Net interest revenue.............. 13.8 1.4 2.6 17.8
Net mortgage origination revenue.......... 43.6 5.0 (4.0)(f) 44.6
Other income.............................. 0.6 0.7 (0.7)(g) 0.6
------- ----- ------ ----
Total revenue..................... 167.8 19.4 (3.9) 183.3
Expenses:
Salaries and employee benefits............ 53.3 10.4 (5.5)(h) 58.2
Occupancy and equipment................... 8.3 1.6 (1.2)(i) 8.7
Servicing losses on investor-owned
loans.................................. 12.9 -- -- 12.9
Other expenses............................ 28.9 12.2 (4.7)(j) 36.4
------- ----- ------ -------
Total expenses.................... 103.4 24.2 (11.4) 116.2
Income before income taxes.................. 64.4 (4.8) 7.5 67.1
Income tax expense.......................... 26.4 (0.9) 2.2(k) 27.7
------- ----- ------ -------
Net income.................................. $ 38.0 $(3.9) $ 5.3 $ 39.4
======= ===== ====== =======
</TABLE>
- ---------------
(a) Reflects HomeSide's and HHI's historical consolidated financial statements
for the period March 16, 1996 to November 30, 1996 for HomeSide and for the
period April 1, 1996 to May 30, 1996 for HHI. Pro forma adjustments to the
historical financial statements have been completed in a manner consistent
with the calendar periods of the related financial statements of HomeSide
and HHI, respectively.
(b) Reflects pro forma adjustments related to the HHI Acquisition as if such
acquisition occurred on March 16, 1996. The adjustments reflect the
application of purchase accounting to the HHI Acquisition and, as a result,
the assets and liabilities have been adjusted to reflect the allocation of
the purchase price.
(c) In connection with the HHI Acquisition, all of the assets and liabilities
of HHI were transferred to HomeSide, with the exception of certain
servicing rights associated with GNMA loans retained by HHI. Mortgage
servicing fees were reduced $0.8 million for servicing income earned on the
loans not transferred. The income was earned during the period prior to
being acquired by the Parent.
(d) Amortization was increased by $1.5 million to reflect the allocation of the
HHI purchase price to mortgage servicing rights and reduced $0.5 million to
reflect amortization on mortgage servicing rights retained by HHI.
(e) In 1996, HHI sold loans held for sale as participations to an affiliate of
Barnett. The funding source was replaced with the Bank Credit Agreement.
Consequently, interest income was increased by $1.7 million to adjust for
interest income passed to the participations.
Interest expense was reduced by $0.8 million to reflect the Bank Credit
Agreement and $0.1 million to reflect the funding of mortgage servicing
rights retained by HHI.
F-17
<PAGE> 155
Pro Forma interest expense is comprised of the following components:
<TABLE>
<S> <C>
Warehouse interest expense.......................................... $(34.1)
Interest credit on escrow deposits.................................. 30.1
Other interest expense
Servicing secured interest expense................................ (20.0)
Other interest expense............................................ (2.7)
------
Total other interest expense........................................ (22.7)
------
Total interest expense.................................... $(26.7)
======
</TABLE>
(f) Origination revenue of $4.0 million generated by the loan production units
retained by Barnett was eliminated.
(g) Barnett retained mortgage loans held for investment. The interest earned on
these loans of $0.7 million has been eliminated.
(h) Salaries and employee benefits of $5.5 million for mortgage loan production
units retained by Barnett were eliminated. The personnel associated with
these positions were retained by Barnett.
(i) Occupancy and equipment expenses of $1.2 million for loan production units
retained by Barnett have been eliminated. The assets and operations
associated with these functions were retained by Barnett.
(j) Expenses have been reduced for mortgage loan production units retained by
Barnett and certain mortgage servicing obligations retained by HHI. Other
expenses have been adjusted to reflect amortization of debt issuance costs.
<TABLE>
<S> <C>
Decrease in other expenses for loan production units retained by
Barnett............................................................ $(3.8)
Decrease in other expenses for mortgage servicing obligations
retained by HHI.................................................... (0.2)
Elimination of goodwill amortization................................. (1.0)
Amortization of debt issuance costs.................................. 0.3
-----
Net decrease in other expenses............................. $(4.7)
=====
</TABLE>
(k) Adjusts income tax expense for HomeSide's expected effective income tax
rate.
- ---------------
Note: Numbers may not total or agree to financial statements due to rounding.
F-18
<PAGE> 156
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HOMESIDE HOMESIDE FOR
HLI HLI FOR THE HLI HHI HLI THE HLI AND HHI
HISTORICAL(A) ACQUISITION(B) ACQUISITION HISTORICAL(A) ACQUISITION(C) ACQUISITIONS
------------- -------------- --------------- ------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Mortgage servicing fees....... $ 173.0 $ 173.0 $ 108.6 $ 14.8(m) $ 296.4
Gain on risk management
contracts................... 108.7 -- 108.7 -- --(n) 108.7
Amortization of mortgage
servicing rights............ (108.0) $ (7.7)(d) (115.7) (48.3) (6.0)(o) (170.0)
------- ------ ------- ------- ------ -------
Net servicing revenue......... 173.7 (7.7) 166.0 60.3 8.8 235.1
Interest income............... 24.3 5.4(e) 29.7 27.3 9.9(p) 66.9
Interest expense.............. (27.1) 1.7(f) (25.4) (20.4) (3.2)(q) (49.0)
------- ------ ------- ------- ------ -------
Net interest revenue.......... (2.8) 7.1 4.3 6.9 6.7 17.9
Net mortgage origination
revenue..................... 3.4 (2.9)(g) 0.5 3.2 (3.0)(r) 0.7
Gain on sales of servicing
rights...................... 10.2 (10.2)(h) -- 9.1 (9.1)(s) --
Other income.................. 0.5 -- 0.5 2.5 (2.3)(t) 0.7
------- ------ ------- ------- ------ -------
Total revenue................. 185.0 (13.7) 171.3 82.0 1.1 254.4
Expenses:
Salaries and employee
benefits.................... 45.4 (5.8)(i) 39.6 53.1 (21.5)(u) 71.2
Occupancy and equipment....... 10.0 (6.4)(j) 3.6 6.0 (4.2)(v) 5.4
Servicing losses on
investor-owned loans........ 10.0 -- 10.0 -- -- 10.0
Real estate acquired.......... 1.1 -- 1.1 -- -- 1.1
Other expenses................ 21.8 3.3(k) 25.1 52.9 (23.0)(w) 55.0
------- ------ ------- ------- ------ -------
Total expenses................ 88.3 (8.9) 79.4 112.0 (48.7) 142.7
Income before income tax
expense..................... 96.7 (4.8) 91.9 (30.0) 49.8 111.7
Income tax expense............ 37.9 (3.0)(l) 34.9 (9.6) 20.4(x) 45.7
------- ------ ------- ------- ------ -------
Net income.................... $ 58.8 $ (1.8) $ 57.0 $ (20.4) $ 29.4 $ 66.0(y)
======= ====== ======= ======= ====== =======
</TABLE>
- ---------------
(a) Reflects HLI's and HHI's historical consolidated income statements for the
year ended December 31, 1995 subject to certain reclassifications to
conform with the pro forma income statement presentation. For HHI,
amortization of goodwill and affiliate profit sharing amounts have been
reclassified to conform with this pro forma presentation.
(b) Reflects pro forma adjustments related to HomeSide's initial capitalization
and the HLI Acquisition, including related financing. The adjustments
reflect the application of purchase accounting to the HLI Acquisition and,
as a result, the assets and liabilities have been adjusted to reflect the
allocation of the purchase price.
(c) Reflects pro forma adjustments related to the HHI Acquisition. The
adjustments reflect the application of purchase accounting to the HHI
Acquisition and, as a result, the assets and liabilities have been adjusted
to reflect the allocation of the purchase price.
(d) Amortization of mortgage servicing rights was increased by $7.7 million to
reflect the allocation of the HLI purchase price to servicing rights.
(e) In 1995, HLI sold loans held for sale as participations to an affiliate of
Bank of Boston. This funding source was replaced with the Bank Credit
Agreement. Consequently, interest income has been increased by $13.3
million to adjust for interest income passed to the participations. Bank of
Boston retained mortgage loans held for investment. The interest earned on
these loans of $7.9 million has been eliminated.
F-19
<PAGE> 157
(f) Reflects the Bank Credit Agreement and initial HomeSide capital structure.
The Bank Credit Agreement also replaced the funding of loans held for sale
as participations to an affiliate of Bank of Boston. Consequently, interest
expense has been increased by $10.3 million.
The income earned on the escrow deposit accounts associated with the loan
servicing portfolio reduces interest expense. Before the HLI Acquisition,
these deposits were held at Bank of Boston and earned a higher benefit than
would have been earned had they been held by an independent party.
Reduction of $2.6 million is based on the benefit that would have been
received from an independent party.
<TABLE>
<S> <C>
New Bank Credit Agreement and capital structure.............. $ 14.6
Participations to affiliate of Bank of Boston................ (10.3)
Reduced benefit from escrow deposits......................... (2.6)
-----
$ 1.7
=====
</TABLE>
Pro Forma interest expense is comprised of the following components:
<TABLE>
<S> <C>
Warehouse interest expense................................... $(24.8)
Interest credit on escrow deposits........................... 32.1
Other interest expense
Servicing secured interest expense......................... (31.3)
Other interest expense..................................... (1.4)
-----
Total other interest expense................................. (32.7)
-----
Total interest expense............................. $(25.4)
=====
</TABLE>
(g) Mortgage origination revenue of $2.9 million generated by the branches
retained by Bank of Boston was eliminated.
(h) Mortgage servicing rights were adjusted to fair value as part of the
purchase accounting adjustments. Therefore no gain on sales would have been
recognized since the proceeds received on the sales would have been equal
to the cost basis of the mortgage servicing rights.
(i) The salaries and employee benefits incurred at the retail branches and the
loan processing center retained by Bank of Boston of $5.8 million have been
eliminated. The personnel associated with these positions were retained by
Bank of Boston.
(j) Occupancy expenses for the retail branches and the loan processing center
retained by Bank of Boston of $6.4 million have been eliminated. The assets
and operations associated with these functions were retained by Bank of
Boston.
(k) Reflects amortization of debt issuance costs of $3.6 million and
elimination of goodwill amortization of $0.3 million.
(l) Adjusts income tax expense for the HLI Acquisition and the Parent's equity
offering adjustments and HomeSide's expected effective rate.
(m) BancPLUS was acquired by HHI on February 28, 1995. Income for the period
January 1, 1995 through February 28, 1995 was added to reflect the period
BancPLUS was not owned by HHI. Also, servicing fee income was increased to
reflect the new agreement on servicing fee rates paid on Barnett's mortgage
loan portfolio.
In connection with the HHI Acquisition, all of the assets and liabilities
of HHI were transferred to HomeSide, with the exception of certain
servicing rights associated with GNMA loans retained by HHI. Mortgage
servicing fees were reduced $5.1 million for servicing income earned on
these loans during the year.
<TABLE>
<S> <C>
Period BancPLUS not owned by HHI................................ $ 9.9
Servicing fee income............................................ 10.0
Servicing income on servicing retained by HHI................... (5.1)
-----
Net increase in mortgage servicing revenues................ $14.8
=====
</TABLE>
F-20
<PAGE> 158
(n) At HHI, risk management contracts were not in place throughout 1995 and no
gains were recognized in income to offset the decline in the value of the
mortgage servicing rights and accelerated amortization due to changes in
interest rates. No adjustments have been included to reflect the results of
a risk management program had one been in place at HHI. After the HHI
Acquisition, HomeSide extended its risk management practices to the
combined servicing portfolio.
(o) Amortization of mortgage servicing rights was increased to reflect the
period from January 1, 1995 through February 28, 1995 during which BancPLUS
was not owned by HHI. Amortization was also increased to reflect the
allocation of the HHI purchase price to mortgage servicing rights.
Amortization was decreased to reflect amortization on mortgage servicing
rights retained by HHI.
<TABLE>
<S> <C>
Amortization for BancPLUS during period not owned by HHI........ $(2.9)
Increased amortization.......................................... (5.9)
Amortization on mortgage servicing rights retained by HHI....... 2.8
-----
Net increase in amortization of mortgage servicing
rights................................................... $(6.0)
=====
</TABLE>
(p) In 1995, HHI sold loans held for sale as participations to an affiliate of
Barnett. This funding source will be replaced with the Bank Credit
Agreement. Consequently, interest income was increased to adjust for
interest income passed to the participations. Income for the period January
1, 1995 through February 28, 1995 was added to reflect the period BancPLUS
was not owned by BMC. Barnett is retaining mortgage loans held for
investment. The interest earned on these loans has been eliminated.
<TABLE>
<S> <C>
Interest income on participations................................... $ 9.6
Period BancPLUS not owned by HHI.................................... 1.4
Elimination of interest income on mortgage loans held for
investment........................................................ 1.1
------
Net increase in warehouse interest income...................... $ 9.9
======
</TABLE>
(q) Reflects the Bank Credit Agreement and the initial HomeSide capital
structure as well as interest expense incurred to fund the mortgage
servicing rights retained by HHI.
Interest expense for the period January 1, 1995 through February 28, 1995
was added to reflect the period BancPLUS was not owned by BMC.
The income earned on the escrow deposit accounts associated with the loan
servicing portfolio reduces interest expense. Before the HHI Acquisition,
these deposits were held at Barnett and earned a higher benefit than would
have been earned had they been held by an independent party. Reduction of
$0.6 million is based on the benefit that would have been received from an
independent party.
<TABLE>
<S> <C>
New Bank Credit Agreement and capital structure................ $ (1.6)
Interest expense to fund mortgage servicing rights retained by
HHI........................................................... 0.9
Period BancPLUS not owned by HHI............................... (1.9)
Reduced benefit from escrow deposits........................... (0.6)
------
$ (3.2)
======
</TABLE>
Pro Forma interest expense is comprised of the following components:
<TABLE>
<S> <C>
Warehouse interest expense........................................ $(40.9)
Interest credit on escrow deposits................................ 31.2
Servicing secured interest expense................................ (13.9)
-----
Total interest expense....................................... $(23.6)
=====
</TABLE>
(r) Origination revenue of $3.0 million generated by the loan production units
retained by Barnett was eliminated.
(s) Mortgage servicing rights were adjusted to fair value as part of the
purchase accounting adjustments. Because the proceeds received on the sales
would have been equal to the adjusted carrying value of the mortgage
servicing rights, no gain on sales would have been recognized.
F-21
<PAGE> 159
(t) Other income of $2.3 million generated by the branches retained by Barnett
was eliminated.
(u) Salaries and employee benefits for the period January 1, 1995 through
February 28, 1995 were added to reflect the period BancPLUS was not owned
by HHI. Salaries and employee benefits for mortgage loan production units
retained by Barnett were eliminated.
<TABLE>
<S> <C>
Period BancPLUS not owned by HHI............................... $ 5.6
Decrease in salaries and employee benefits for loan production
units retained by Barnett..................................... (27.1)
------
Net decrease in salaries and employee benefits................. $(21.5)
======
</TABLE>
(v) Occupancy and equipment expenses of $4.2 million for loan production units
retained by Barnett have been eliminated.
(w) Expenses have been reduced for mortgage loan production units retained by
Barnett and certain mortgage servicing obligations retained by HHI. Other
expenses for the period January 1, 1995 through February 28, 1995 were
added to reflect the period BancPLUS was not owned by HHI. Other expenses
have been adjusted to reflect amortization of debt issuance costs and
amortization of goodwill.
<TABLE>
<S> <C>
Decrease in other expenses for loan production units retained
by Barnett.................................................... $(25.8)
Decrease in expenses for certain mortgage servicing obligations
retained by HHI............................................... (1.4)
Period BancPLUS not owned by HHI -- other expenses............. 3.9
Amortization of debt issuance costs............................ 2.0
Adjustment to amortization of goodwill......................... (1.7)
------
Net decrease in other expenses............................ $(23.0)
======
</TABLE>
(x) Adjusts income tax expense for the HHI Acquisition and Offering Adjustments
and HomeSide's expected effective rate.
(y) The pro forma financial statements for the year ended December 31, 1995
have been prepared under the accounting policies used by HLI and HHI during
that period. Effective January 1, 1996, HLI and HHI prospectively adopted
SFAS 122, "Accounting for Mortgage Servicing Rights." This statement, among
other provisions, requires that the value of mortgage servicing rights
associated with mortgage loans originated by an entity be capitalized as
assets. The value of originated mortgage servicing rights (OMSR) is
determined by allocating the total costs of the mortgage loans between the
loans and the mortgage servicing rights based on their relative fair
values. Also, the new statement requires that capitalized mortgage
servicing rights be evaluated for impairment based on the fair value of
these rights. For purposes of determining impairment, mortgage servicing
rights that are capitalized after the adoption of this statement are
stratified based on one or more of the predominant risk characteristics of
the underlying loans. Impairment is recognized through a valuation
allowance for each impaired stratum.
Had this statement been adopted January 1, 1995, net mortgage origination
revenue would have increased by $10.6 million and $2.8 million for pro
forma HLI and pro forma HHI, respectively, for the effect on income of
recording OMSR. If these provisions of SFAS 122 were applied to the pro
forma financial statements for the year ended December 31, 1995, additional
amortization of mortgage servicing rights of $45.0 million and $10.0
million would have been recorded for pro forma HLI and pro forma HHI,
respectively, due to the interest rate environment during 1995. As a result
of the above adjustments, pro forma HomeSide for the HLI Acquisition and
the Offering net income would have been $27.8 million and pro forma
HomeSide for the HLI and HHI Acquisitions and the Offering net income would
have been $28.1 million for the year ended December 31, 1995.
- ---------------
Note: Numbers may not total or agree to financial statements due to rounding.
F-22
<PAGE> 160
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-23
<PAGE> 161
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 15, 1996
----------------- --------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents..................................... $ 830 $ 23,216
Mortgage loans:
Held for sale............................................ 388,436 641,465
Held for investment...................................... 33,183 65,068
Accounts receivable........................................... 82,473 45,183
Accounts receivable from Bank of Boston and affiliates........ 343 --
Pool loan purchases........................................... 65,272 56,261
Mortgage claims receivable, net............................... 45,422 17,563
Mortgage servicing rights receivable, net..................... 533,891 522,469
Excess mortgage servicing rights receivable, net.............. 17,447 20,393
Accrued and deferred income taxes............................. 40,724 77,257
Real estate acquired.......................................... 2,627 2,797
Premises and equipment, net................................... 25,386 25,071
Other assets.................................................. 18,269 16,159
----------- ----------
Total assets.................................................. $ 1,254,303 $1,512,902
=========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Note payable to Bank of Boston................................ $ 966,000 $1,256,000
Accounts payable and accrued liabilities...................... 51,683 130,382
Accrued income taxes payable.................................. 36,213 --
Long term debt................................................ 13,816 13,790
----------- ----------
Total liabilities............................................. 1,067,712 1,400,172
----------- ----------
Common stock, $1 par value per share; 10,000 shares
authorized;
100 shares issued and outstanding........................... -- --
Additional paid in capital.................................... 156,666 156,666
Retained earnings (accumulated deficit)....................... 29,925 (43,936)
----------- ----------
Total stockholder's equity.................................... 186,591 112,730
----------- ----------
Total liabilities and stockholder's equity.................... $ 1,254,303 $1,512,902
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 162
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE QUARTER JANUARY 1, 1996
ENDED THROUGH
MARCH 31, 1995 MARCH 15, 1996
--------------- ----------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Revenues:
Mortgage servicing fees..................................... $ 43,657 $ 38,977
Gain (loss) on hedge contracts.............................. 3,612 (128,795)
Amortization of mortgage servicing rights................... (23,103) (7,245)
--------- ----------
Net servicing revenue.................................. 24,166 (97,063)
Interest income............................................. 4,122 8,423
Interest expense............................................ (6,079) (10,089)
--------- ----------
Net interest revenue................................... (1,957) (1,666)
Net mortgage origination revenue............................ (1,083) 7,638
Gain on sale of servicing rights............................ 4,285 --
Other income................................................ 13 253
--------- ----------
Total revenue.......................................... 25,424 (90,838)
Expenses:
Salaries and employee benefits.............................. 11,696 10,287
Occupancy and equipment..................................... 2,358 2,041
Servicing losses on investor-owned loans.................... 733 5,560
Real estate acquired........................................ 218 291
Other expenses.............................................. 4,713 7,377
--------- ----------
19,718 25,556
Income (loss) before income taxes........................... 5,706 (116,394)
Income tax expense (benefit)................................ 2,277 (42,533)
--------- ----------
Net income (loss)........................................... 3,429 (73,861)
Retained (deficit) earnings at beginning of period.......... (28,901) 29,925
--------- ----------
Accumulated deficit at end of period........................ $ (25,472) $ (43,936)
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 163
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD
QUARTER JANUARY 1, 1996
ENDED THROUGH
MARCH 31, 1995 MARCH 15, 1996
-------------- ---------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss).......................................... $ 3,429 $ (73,861)
Amortization............................................... 23,185 7,327
Depreciation............................................... 769 719
Servicing losses on investor-owned loans................... 733 5,560
Write down of real estate owned............................ 109 1,067
Gain (loss) on risk management contracts................... (3,612) 128,795
Loss on sale of mortgage servicing rights.................. (4,285) --
Capitalized excess mortgage servicing receivable........... 355 (3,967)
Mortgage loans originated and purchased for sale........... (426,918) (2,027,741)
Proceeds and principal repayments of mortgage loans held
for sale................................................. 627,155 1,774,712
Change in accounts receivable.............................. 394 37,633
Change in accrued and deferred income taxes................ (3,371) (72,746)
Change in pool loan purchases.............................. (2,269) 9,011
Change in mortgage claims receivable....................... 477 25,863
Change in other assets and accounts payable and accrued
liabilities.............................................. (18,578) 75,167
---------- -----------
Net cash provided by (used in) operating activities............. 197,573 (112,461)
---------- -----------
Cash flows used in investing activities:
Net origination of loans held for investment............... (71,908) (31,885)
Purchase of premises and equipment......................... (668) (404)
Purchase and origination of mortgage servicing rights...... (6,934) (60,171)
Proceeds from (purchase of) risk management contracts...... 3,262 (63,426)
Proceeds from sale of mortgage servicing rights............ 4,285 --
Proceeds from sale of real estate owned.................... 559 759
---------- -----------
Net cash used in investing activities........................... (71,404) (155,127)
---------- -----------
Cash flows (used in) provided by financing activities:
Net (repayments to) borrowings from Bank of Boston......... (130,522) 290,000
Repayment of long term debt................................ (46) (26)
---------- -----------
Net cash (used in) provided by financing activities........ (130,568) 289,974
---------- -----------
Net (decrease) increase in cash................................. (4,399) 22,386
Cash at beginning of period................................ 5,653 830
---------- -----------
Cash at end of period........................................... $ 1,254 $ 23,216
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................... $ 9,165 $ 9,211
========== ===========
Income taxes............................................... $ 5,648 $ 30,213
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 164
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of BancBoston
Mortgage Corporation (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in accordance with Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
audited consolidated financial statements of the Company for the year ended
December 31, 1995. In the opinion of management of the Company, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the period January 1,
1996 to March 15, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996.
The accompanying interim financial statements of the Company have been
prepared for the period January 1, 1996 to March 15, 1996, the date the Company
was sold, as discussed in "ORGANIZATION" below. Results of operations for
periods subsequent to March 15, 1996 will be included in future financial
statements of HomeSide, Inc. Results of operations for the three months ended
March 31, 1995 have been presented for comparative purposes.
2. ORGANIZATION
Prior to March 15, 1996, the Company was a wholly-owned subsidiary of the
First National Bank of Boston (Bank of Boston), which is a wholly-owned
subsidiary of Bank of Boston Corporation. Upon the close of business on March
15, 1996, Bank of Boston Corporation sold the Company to certain affiliates of
Thomas H. Lee Company and Madison Dearborn Capital Partner, L.P. (Investors),
creating an independent mortgage company, which was named HomeSide, Inc. Under
terms of the transaction, Bank of Boston received cash and an equity interest in
the new company. The investors retained a majority interest in the new company.
On May 31, 1996, Barnett Banks, Inc. (Barnett) sold Barnett Mortgage
Company (now HomeSide Holdings, Inc.), which owned certain of Barnett's mortgage
banking operations, primarily its servicing portfolio and proprietary mortgage
banking software systems, to HomeSide, Inc. Barnett received cash and an
affiliate of Barnett acquired an ownership interest in HomeSide, Inc. for cash.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting policies are discussed in Note 2 of the audited
consolidated financial statements of the Company for the year ended December 31,
1995. The accounting policies of the Company for the periods presented in the
accompanying interim financial statements conform to the policies presented in
the audited consolidated financial statements for the year ended December 31,
1995, except for the adoption of Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" (SFAS 122).
On January 1, 1996, the Company adopted SFAS 122 which, among other
provisions, requires that the value of mortgage servicing rights associated with
mortgage loans originated by an entity be capitalized as assets. The value of
the Company's originated mortgage servicing rights (OMSR) is determined by
allocating the total costs of the mortgage loans between the loans and the
mortgage servicing rights based on their relative fair values. Previously, OMSR
were included with the cost of the related loans and considered in determining
the gain or loss on sale when the loans were sold. Through March 15, 1996, the
Company capitalized $2,067,000 of OMSR, which had the effect of increasing net
mortgage origination revenue by $2,067,000 for the period January 1, 1996 to
March 15, 1996 since a portion of the basis of loans originated for sale was
allocated to OMSR.
F-27
<PAGE> 165
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 122 also requires that capitalized mortgage servicing rights be
evaluated for impairment based on the fair value of these rights. For purposes
of determining impairment, the Company's mortgage servicing rights are
stratified based on interest rate and type of loan (conventional/government).
Impairment, if any, is recognized through a valuation allowance for each
impaired stratum. The Company did not record any impairment charges related to
its mortgage servicing right portfolio for the period January 1, 1996 to March
15, 1996. Since SFAS 122 prohibits retroactive application, historical
accounting results have not been restated and, accordingly, the accounting
results for the quarter ended March 31, 1995 are not directly comparable with
the period January 1, 1996 to March 15, 1996.
4. RISK MANAGEMENT ACTIVITIES
As discussed in the Company's audited financial statements for the year
ended December 31, 1995, the Company has a risk management policy designed to
protect the economic value of its mortgage servicing portfolio from declines in
value due to increases in estimated prepayment speeds, which are primarily
influenced by declines in interest rates. During the first quarter of 1996,
long-term interest rates increased, reversing the declining trend which
prevailed during 1995. As a result, from January 1, 1996 to March 15, 1996, the
Company recognized a loss on risk management contracts of $128,795,000, which
included a reversal of $86,500,000 in unrealized gains recognized during 1995.
F-28
<PAGE> 166
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD APRIL 1, 1996 TO MAY 30, 1996,
THE PERIOD JANUARY 1, 1996 TO MAY 30, 1996 AND
THE THREE AND SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE THREE APRIL 1, 1996 FOR THE SIX FOR THE PERIOD
MONTHS ENDED TO MAY 30, MONTHS ENDED JANUARY 1, 1996
JUNE 30, 1995 1996 JUNE 30, 1995 TO MAY 30, 1996
------------- -------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Mortgage Origination Revenue:
Mortgage origination fees........ $ 3,469,496 $ 1,646,405 $ 6,004,619 $ 7,288,487
Gain on sales of loans, net...... 994,681 (3,382,960) 1,513,615 482,097
------------ ----------- ------------ ------------
Total mortgage origination
revenue................... 4,464,177 (1,736,555) 7,518,234 7,770,584
------------ ----------- ------------ ------------
Interest Income (Expense):
Interest income.................. 4,420,002 5,637,821 7,002,527 14,216,288
Interest expense, substantially
all to affiliates.............. (6,766,123) (3,479,782) (9,684,960) (9,574,047)
------------ ----------- ------------ ------------
Net interest income
(expense)................. (2,346,121) 2,158,039 (2,682,433) 4,642,241
------------ ----------- ------------ ------------
Mortgage Servicing Revenue:
Mortgage servicing income........ 22,438,636 15,706,692 35,723,498 38,833,222
Mortgage servicing income from
affiliates..................... 6,407,273 5,464,308 12,502,709 13,626,195
Amortization of capitalized
mortgage servicing rights...... (12,123,793) (8,455,734) (20,474,792) (25,467,112)
------------ ----------- ------------ ------------
Net mortgage servicing revenue... 16,722,116 12,715,266 27,751,415 26,992,305
------------ ----------- ------------ ------------
Other Income.......................... 6,203,385 1,678,385 7,054,383 1,739,967
------------ ----------- ------------ ------------
Total revenues................... 25,043,557 14,815,135 39,641,599 41,145,097
------------ ----------- ------------ ------------
Expenses:
Salaries and benefits............ 14,300,768 10,401,903 23,433,243 25,172,581
General and administrative....... 12,119,341 6,816,094 20,402,735 20,748,278
Occupancy and equipment.......... 2,424,081 1,568,623 3,941,229 3,719,982
Amortization of goodwill......... 1,673,052 928,449 2,225,827 2,323,547
------------ ----------- ------------ ------------
Total expenses.............. 30,517,242 19,715,069 50,003,034 51,964,388
------------ ----------- ------------ ------------
Loss Before Income Taxes.............. (5,473,685) (4,899,934) (10,361,435) (10,819,291)
Income Tax Benefit.................... (2,117,689) (914,901) (2,876,941) (2,476,272)
------------ ----------- ------------ ------------
Net Loss.............................. $ (3,355,996) $ (3,985,033) $ (7,484,494) $ (8,343,019)
============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 167
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1996 TO MAY 30, 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED JANUARY 1, 1996
JUNE 30, 1995 TO MAY 30, 1996
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $ (7,484,494) $ (8,343,019)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Amortization of purchased mortgage servicing rights... 19,334,513 24,141,074
Amortization of excess servicing fees................. 1,140,279 1,326,038
Amortization of goodwill.............................. 2,225,827 2,323,547
Depreciation and amortization of property and
equipment........................................... 1,379,438 1,389,879
Capitalization of excess servicing fees............... (131,847) (6,436,908)
Gain on sale of mortgage servicing rights............. (4,849,738) --
Proceeds from sale of mortgage servicing rights....... 8,393,052 --
Origination of loans held for sale.................... (1,068,052,000) (1,204,553,000)
Sales of mortgage loans held for sale................. 992,831,897 1,422,203,868
Changes in assets and liabilities:
Accounts receivable, net......................... 1,770,362 32,354,311
Other assets..................................... 787,082 (22,768,003)
Accounts payable and accrued liabilities......... (4,477,798) (17,277,852)
Other, net....................................... 106,024 --
--------------- ---------------
Total adjustments........................... (49,542,909) 232,702,954
--------------- ---------------
Net cash (used in) provided by operating
activities................................ (57,027,403) 224,359,935
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchased and originated mortgage servicing rights....... (3,149,621) (17,869,158)
Net increase in loans held for investment................ (8,709,611) (14,137,015)
Net increase in real estate owned........................ (484,074) (837,758)
Purchase of property and equipment, net of retirements... (437,833) (647,946)
Net assets acquired by Barnett........................... -- 10,784,220
Business acquisitions, net of cash acquired.............. (158,747,064) --
--------------- ---------------
Net cash used in investing activities............ (171,528,203) (22,707,657)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable................. 70,819,419 (233,671,822)
Capital contributions.................................... 167,331,263 28,233,505
--------------- ---------------
Net cash provided by (used in) financing
activities................................................. 238,150,682 (205,438,317)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH............................ 9,595,076 (3,786,039)
CASH AT BEGINNING OF PERIOD................................ 3,900,572 14,987,783
============== ==============
CASH AT END OF PERIOD...................................... $ 13,495,648 $ 11,201,744
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 168
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 30, 1996 AND JUNE 30, 1995
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Barnett
Mortgage Company ("BMC") and its wholly owned subsidiaries, BancPLUS Financial
Corporation ("BancPLUS") and Loan America Financial Corporation ("LAFC"). Wholly
owned subsidiaries of BancPLUS include BancPLUS Mortgage Corp. and Honolulu
Mortgage Company, Inc. ("HMC"). As discussed in Note 2, BancPLUS and LAFC were
acquired in 1995 and 1994, respectively. These acquisitions were accounted for
as purchases; therefore, BancPLUS and LAFC are included in the consolidated
financial statements from their respective dates of acquisition. BMC is a wholly
owned subsidiary of Barnett Banks, Inc. (the "Parent"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
2. ORGANIZATION
On February 28, 1995, BMC completed the acquisition of BancPLUS for
approximately $167 million in cash. BancPLUS and its wholly owned subsidiaries
are full service mortgage bankers based in San Antonio, Texas and Honolulu,
Hawaii, who had total assets of $244 million and a servicing portfolio of $13.9
billion at the date of acquisition. The purchase price in excess of net assets
acquired was $113 million.
On October 1, 1994, BMC completed the acquisition of LAFC for $60 million.
LAFC was a Miami based wholesale mortgage banking company which had assets of
$180 million and a servicing portfolio of approximately $4 billion at the date
of acquisition. The purchase price in excess of net assets acquired was $29
million.
On May 31, 1996, the parent sold BMC to HomeSide, Inc. Barnett received
cash and an affiliate of Barnett received an ownership interest in HomeSide,
Inc. for cash. As of May 31, 1996, BMC ceased to exist as a separate company and
operations for periods subsequent to that date will be included in the results
of operations of HomeSide, Inc. Accordingly, a May 31, 1996, balance sheet is
not presented for BMC and statement of operations data does not include periods
subsequent to May 30, 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BMC's accounting policies are discussed in Note 1 of the audited
consolidated financial statements for the year ended December 31, 1995. The
accounting policies of BMC for the periods presented in the accompanying interim
financial statements conform to the policies presented in the audited
consolidated financial statements for the year ended December 31, 1995, except
for the adoption of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122").
On January 1, 1996, BMC adopted SFAS 122 which, among other provisions,
requires that the value of mortgage servicing rights associated with mortgage
loans originated by an entity be capitalized as assets. The adoption of SFAS 122
resulted in capitalized originated mortgage servicing rights ("OMSR") of
$5,892,000 and $13,353,000 for the periods April 1, 1996 to May 30, 1996 and
January 1, 1996 to May 30, 1996, respectively.
SFAS 122 requires that capitalized mortgage servicing rights be evaluated
for impairment based on the fair value of these rights. For purposes of
determining impairment, BMC's mortgage servicing rights are stratified based on
interest rate, fixed rate versus adjustable rate, and type of loan (conventional
versus government). Impairment, if any, is recognized through a valuation
allowance for each stratum. BMC did not recognize any impairment charges related
to its mortgage servicing rights portfolio for the periods April 1, 1996 to May
30, 1996 and January 1, 1996 to May 30, 1996.
Since SFAS 122 prohibits retroactive application, historical accounting
results have not been restated and, accordingly, the accounting results for the
periods April 1, 1996 to May 30, 1996 and January 1, 1996 to May 30, 1996 are
not directly comparable with the three and six months ended June 30, 1995.
F-31
<PAGE> 169
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
BancBoston Mortgage Corporation
We have audited the accompanying consolidated balance sheets of BancBoston
Mortgage Corporation as of December 31, 1994 and 1995, and the related
consolidated statements of operations and retained earnings and cash flows for
each of the three years in the period then ended. 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 BancBoston
Mortgage Corporation as of December 31, 1994 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period then ended, in conformity with generally accepted accounting
principles.
As discussed in Notes 2 and 10, BancBoston Mortgage Corporation adopted
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, and changed its method of accounting for purchased mortgage servicing
rights, effective January 1, 1993. BancBoston Mortgage Corporation also changed
its method of accounting for mortgage servicing fee income, effective January 1,
1994.
COOPERS & LYBRAND L.L.P.
Jacksonville, Florida
January 18, 1996, except
for the second paragraph
of Note 1 and the fifth
paragraph of Note 2, as to
which the date is March 4, 1996
F-32
<PAGE> 170
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash................................................................ $ 5,653 $ 830
Mortgage loans
Held for sale..................................................... 271,215 388,436
Held for investment............................................... 28,589 33,183
Purchased mortgage servicing rights, net............................ 415,815 533,891
Excess mortgage servicing receivable, net........................... 15,333 17,447
Accounts receivable................................................. 66,390 82,473
Accounts receivable from Bank of Boston and affiliates.............. 373 343
Pool loan purchases................................................. 77,477 65,272
Mortgage claims receivable, net..................................... 48,835 45,422
Deferred tax asset.................................................. 31,012 40,724
Real estate acquired................................................ 924 2,627
Premises and equipment, net......................................... 25,279 25,386
Other assets........................................................ 19,992 18,269
---------- ----------
Total Assets.............................................. $1,006,887 $1,254,303
========== ==========
LIABILITIES & STOCKHOLDER'S EQUITY
Note payable to Bank of Boston...................................... $ 779,021 $ 966,000
Accounts payable and accrued liabilities............................ 81,269 51,683
Accrued income taxes................................................ 4,825 36,213
Long-term debt...................................................... 14,007 13,816
---------- ----------
Total Liabilities......................................... 879,122 1,067,712
---------- ----------
Commitments and Contingencies (Notes 1, 9, 11, 13 and 15)
Stockholder's Equity:
Common stock, $1 par value per share: 10,000 shares authorized;
100 shares issued and outstanding
Additional paid-in capital........................................ 156,666 156,666
Retained earnings (Accumulated deficit)........................... (28,901) 29,925
---------- ----------
Total Stockholder's Equity..................................... 127,765 186,591
---------- ----------
Total Liabilities & Stockholder's Equity.................. $1,006,887 $1,254,303
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 171
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Mortgage servicing fees................................ $ 111,822 $140,491 $ 173,038
Gain (loss) on risk management contracts............... 6,688 (6,702) 108,702
Amortization of mortgage servicing rights.............. (112,492) (66,801) (108,013)
--------- --------- ---------
Net servicing revenue............................... 6,018 66,988 173,727
--------- --------- ---------
Interest income........................................ 50,156 31,585 24,324
Interest expense....................................... (44,199) (33,952) (27,128)
--------- --------- ---------
Net interest revenue................................ 5,957 (2,367) (2,804)
--------- --------- ---------
Net mortgage origination revenue....................... 6,173 4,983 3,417
Gain on sales of servicing rights...................... 651 10,862 10,230
Other income........................................... 50 147 511
--------- --------- ---------
Total Revenue.................................. 18,849 80,613 185,081
--------- --------- ---------
Expenses:
Salaries and employee benefits......................... 33,096 40,370 45,381
Occupancy and equipment................................ 7,966 9,012 10,009
Servicing losses on investor-owned loans............... 2,770 7,177 9,981
Real estate acquired................................... 1,600 253 1,054
Other expenses......................................... 22,058 19,326 21,896
--------- --------- ---------
Total Expenses................................. 67,490 76,138 88,321
--------- --------- ---------
Income (loss) before income taxes and cumulative
effects of changes in accounting principles............ (48,641) 4,475 96,760
Income tax expense (benefit) before cumulative
effects of changes in accounting principles:
Current................................................ (1,425) 4,773 47,646
Deferred............................................... (15,859) (2,248) (9,712)
--------- --------- ---------
Total Income Tax Expense (Benefit)............. (17,284) 2,525 37,934
--------- --------- ---------
Income (loss) before cumulative effects of changes
in accounting principles............................... (31,357) 1,950 58,826
Cumulative effect on prior years of:
Change in purchased mortgage servicing rights (PMSR)
valuation method, net of tax........................... (59,921) -- --
Change in accounting for income taxes.................... 6,093 -- --
Change in accounting for mortgage servicing fee income,
net of tax............................................. -- 3,455 --
--------- --------- ---------
Net Income (Loss)................................... (85,185) 5,405 58,826
Retained Earnings (Accumulated Deficit), January 1....... 50,879 (34,306) (28,901)
--------- --------- ---------
Retained Earnings (Accumulated Deficit), December 31..... $ (34,306) $(28,901) $ 29,925
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 172
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows (used in) provided by operating
activities:
Net income (loss)................................. $ (85,185) $ 5,405 $ 58,826
Adjustments to reconcile net income (loss) to cash
(used in) provided by operations:
Cumulative effects of change in:
PMSR valuation, net of tax................... 59,921 -- --
Accounting for income taxes.................. (6,093) -- --
Accounting for mortgage servicing fees, net
of tax.................................... -- (3,455) --
Amortization................................... 117,177 67,207 108,404
Depreciation................................... 2,243 2,621 3,133
Servicing losses on investor-owned loans....... 2,770 7,177 9,981
Deferred tax benefit........................... (15,859) (2,248) (9,712)
Gain on sale of mortgage servicing rights...... (651) (10,862) (10,230)
(Gain) loss on risk management contracts....... (6,688) 6,702 (108,702)
Write down of real estate acquired............. 1,113 1,066 1,699
Capitalized excess mortgage servicing
receivable................................... (13,557) (3,653) (7,513)
Mortgage loans originated and purchased for
sale......................................... (8,525,347) (4,673,100) (4,816,964)
Proceeds and principal repayments of mortgage
loans held for sale.......................... 8,395,528 5,005,969 4,694,909
Change in accounts receivable.................. (13,827) (7,482) (16,053)
Change in pool loan purchases.................. (1,345) 9,002 12,205
Change in mortgage claims receivable........... (13,681) 4,574 (5,383)
Change in accrued income taxes................. (3,584) (1,231) 31,388
Change in other assets and accounts payable and
accrued liabilities.......................... (3,154) (13,051) (11,899)
----------- ----------- -----------
Net cash (used in) provided by operating
activities................................... (110,219) 394,641 (65,911)
----------- ----------- -----------
Cash flows used in investing activities:
Principal payments on mortgage loans
held for investment............................ 7,038 11,216 12,966
Purchase of premises and equipment................ (4,170) (5,355) (3,141)
Acquisition of Bell Mortgage...................... -- -- (891)
Purchase of mortgage servicing rights............. (124,693) (164,047) (193,013)
Proceeds from risk management contracts, net...... 6,688 (9,641) 27,120
Proceeds from real estate acquired................ 5,010 2,773 2,610
Proceeds from sales of mortgage servicing
rights......................................... 651 10,862 28,649
----------- ----------- -----------
Net cash used in investing activities.......... (109,476) (154,192) (125,700)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 173
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows provided by (used in) financing
activities:
Borrowings from Bank of Boston.................... 7,674,500 3,988,224 3,669,085
Repayments to Bank of Boston...................... (7,455,481) (4,228,214) (3,482,106)
Repayment of long-term debt....................... (159) (173) (191)
----------- ----------- -----------
Net cash provided by (used in) financing
activities................................... 218,860 (240,163) 186,788
----------- ----------- -----------
Net (decrease) increase in cash..................... (835) 286 (4,823)
Cash at January 1................................. 6,202 5,367 5,653
----------- ----------- -----------
Cash at December 31............................... $ 5,367 $ 5,653 $ 830
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest....................................... $ 44,809 $ 32,819 $ 27,498
=========== =========== ===========
Income taxes................................... $ 2,158 $ 7,864 $ 16,258
=========== =========== ===========
Supplemental schedule of non-cash investing
activities:
BBMC purchased bulk mortgage servicing rights
during the years 1993, 1994 and 1995. In
conjunction with purchases, liabilities were
assumed as follows:
Accounts payable.................................. $ 14,586 $ 60,188 $ 23,022
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 174
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
BancBoston Mortgage Corporation (BBMC) is a wholly-owned subsidiary of The
First National Bank of Boston (Bank of Boston), which is a wholly-owned
subsidiary of Bank of Boston Corporation. In December 1995, Bank of Boston
Corporation signed an agreement with Thomas H. Lee Company and Madison Dearborn
Partners (Investors) to sell BBMC, creating an independent mortgage company.
Under the terms of the agreement, Bank of Boston will receive cash and an equity
interest in the new company. The Investors will acquire a majority interest in
the new company. The transaction is expected to close in the first half of 1996.
On March 4, 1996, Barnett Banks, Inc. (Barnett) entered into an agreement
to sell certain of its mortgage banking operations, primarily its servicing
portfolio and proprietary mortgage banking software systems to the new company.
Barnett will receive cash and an ownership interest in the new company. The
transaction is expected to close in the second quarter of 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include BBMC and its wholly-owned
subsidiaries. All material intercompany transactions have been eliminated.
Certain reclassifications have been made to the 1993 and 1994 financial
statements to conform to the 1995 presentation.
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 assets and 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.
Interest rate products
BBMC enters into financial agreements and purchases financial instruments
as part of its interest rate risk management strategy. These agreements are not
considered trading instruments and are primarily entered into for purposes of
managing the prepayment risk associated with mortgage servicing rights and
interest rate risk relative to commitments to originate mortgage loans against
market value declines resulting from fluctuations in interest rates. These
instruments and agreements are designated as a part of BBMC's risk management
strategy and are linked to the related assets being managed.
BBMC acquires financial instruments, including derivative contracts (risk
management contracts), to partially protect the value of mortgage servicing
rights from the effects of prepayment activity caused by interest rate declines.
These financial instruments increase or decrease in value in an inverse
relationship to changes in market interest rates. Accordingly, as interest rates
decline, these financial instruments will increase in value, and as interest
rates increase, these financial instruments will decline in value. The value of
these financial instruments will fluctuate daily with interest rate changes, and
these fluctuations may be significant. However, the decline in the value of
these financial instruments is limited to the value recorded in the balance
sheet. These financial instruments primarily include options on U.S. treasury
futures, forward contracts, and interest rate floors.
As of March 4, 1996, due to rising interest rates, the risk management
contracts had declined in value by the carrying amount recorded on the balance
sheet at December 31, 1995 (see Note 14).
The cost of option contracts to manage BBMC's fixed and variable rate loan
origination commitments are capitalized and amortized as an adjustment of gain
or loss over the life of the underlying option contract.
F-37
<PAGE> 175
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unamortized premiums are included in other assets on the balance sheet. At
December 31, 1995, BBMC had call options to purchase mortgage-backed securities
with a total face amount of $315.0 million. The unamortized premiums associated
with these options was $1.1. million at December 31, 1995. There were no put
options outstanding as of the balance sheet date.
Short-term option contracts that are used to manage interest rate risk on
BBMC's mortgage servicing rights are marked-to-market with gains or losses
recognized in current income. The current market value of these option contracts
are included in the balance of capitalized mortgage servicing rights. At
December 31, 1995, the current market value of these option contracts included
in mortgage servicing rights was $84.9 million. Unrealized gains (losses) at
December 31, 1995 and 1994 included in the consolidated statements of operations
were $86.5 million and ($2.9) million for 1995 and 1994, respectively. All gains
and losses recognized in 1993 were realized.
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. Loan origination fees and certain direct costs are deferred until
the related mortgage loans are sold.
Mortgage loans held for investment are 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 nonaccrual 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 estimated to be fully collectible.
Purchased and originated mortgage servicing rights
Purchased mortgage servicing rights (PMSR) represent the cost of purchasing
the right to service mortgage loans originated by others. PMSR are amortized as
a reduction of servicing fee income over the estimated servicing period in
proportion to the estimated future net cash flows from the loans serviced.
Remaining PMSR asset balances are evaluated for impairment by determining their
estimated recoverable amount through applying the discount rate in effect at the
time the servicing was purchased to the estimated future aggregate net cash
flows from the underlying mortgages. The carrying value is written down for any
impairment; such write-downs are included in the amortization of mortgage
servicing rights. Prior to 1993, this valuation was performed on an undiscounted
basis.
In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 122, Accounting for
Mortgage Servicing Rights. This Statement, among other provisions, requires that
the value of mortgage servicing rights associated with mortgage loans originated
by an entity be capitalized as assets. The value of originated mortgage
servicing rights (OMSR) is determined by allocating the total costs of the
mortgage loans between the loans and the mortgage servicing rights based on
their relative fair values. Presently, OMSR are included with the cost of the
related loans and considered in determining the gain or loss on sale when the
loans are sold. Also, the new Statement requires that capitalized mortgage
servicing rights be evaluated for impairment based on the fair value of these
rights. For the purposes of determining impairment, mortgage servicing rights
that are capitalized after the adoption of this Statement
F-38
<PAGE> 176
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are stratified based on one or more of the predominate risk characteristics of
the underlying loans. Impairment is recognized through a valuation allowance for
each impaired stratum.
The Statement applies prospectively to fiscal years beginning after
December 15, 1995. BBMC plans to adopt the Statement beginning January 1, 1996.
The actual effect of implementing this new Statement on BBMC's financial
position and results of operations will depend on factors including the amount
and mix of originated and purchased production, the level of interest rates, and
market estimates of future prepayment rates.
Accordingly, BBMC cannot determine at this time the ultimate impact on its
future earnings of applying the new methodologies of recording all mortgage
servicing rights as assets, of calculating impairment, and of applying the other
provisions of the Statement.
Excess mortgage servicing receivable
Excess mortgage servicing receivable (EMSR) represents the present value of
servicing fee income in excess of a normal servicing fee. When loans are sold,
the estimated excess servicing is recognized as income and amortized over the
estimated servicing period in proportion to the estimated future aggregate net
cash flows from the loans serviced. Remaining asset balances are evaluated for
impairment based on current estimates of future discounted cash flows. Such
write-downs are included in amortization of mortgage servicing rights.
Accounts receivable
Accounts receivable includes advances made in connection with loan
servicing activities. These advances consist primarily of payments for property
taxes and insurance premiums, as well as, principal and interest remitted to
investors before they are collected from mortgagors.
Pool loan purchases
Pool loan purchases are carried at cost and consist of FHA-insured,
VA-guaranteed, and conventional loans purchased from mortgage-backed securities
serviced by BBMC for others. At the purchase date, these loans were delinquent
or in the process of foreclosure or repayment. Losses associated with pool loan
purchases are largely reimbursed by the insurer.
Mortgage claims receivable
Mortgage claims receivable includes claims filed primarily with the FHA and
the VA. These receivables are carried at cost, less an allowance for estimated
amounts that are not collectible from the mortgage insuring agencies.
Real estate acquired
Real estate acquired includes properties on which BBMC has foreclosed and
taken title. It is initially reported at the lower of the carrying value of the
loan or the fair value of the real estate obtained, less estimated selling
costs. The excess, if any, of the loan balance over the fair value of the
property at the time of transfer to real estate acquired is charged to the
reserve for estimated servicing losses on investor-owned loans. Subsequent
declines in the value of the property and costs related to holding the property
are charged against income.
F-39
<PAGE> 177
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 lesser
of the estimated life of the improvement or the term of the lease.
Other assets
Other assets consist primarily of a prepaid pension asset of $10.1 million,
allocated from the Bank of Boston, and the excess of cost over fair value of net
assets acquired. The excess of cost over fair value of net assets acquired is
amortized using a straight-line basis over periods varying from seven to
twenty-five years.
Mortgage servicing fees
Mortgage servicing fees represent fees earned for servicing mortgage loans
owned by investors. The fees are generally calculated on the outstanding
principal balances of the loans serviced and are recognized as income on an
accrual basis. Prior to 1994, these fees were recorded as income when the
payments were received.
Servicing losses on investor-owned loans
BBMC records losses attributable to servicing FHA and VA loans for
investors. These amounts include actual losses for final disposition of loans,
accrued interest for which payment has been denied, and estimates for potential
losses based on BBMC'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 the balance of accounts payable and accrued liabilities.
Net mortgage origination revenue
Net mortgage origination revenue includes gains and losses from sales of
mortgage loans, deferred origination fees and expenses, and the present value of
gains from the EMSR.
Income taxes
BBMC files its federal tax return through inclusion in Bank of Boston
Corporation's consolidated return. Accordingly, Bank of Boston's federal tax
provision is allocated to all member subsidiaries as if each member were a
separate taxpayer. However, the timing of utilization of certain of BBMC's tax
attributes may differ from a stand-alone tax-paying basis.
BBMC accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes, which was prospectively adopted effective January 1, 1993.
Note 10 includes additional information with respect to the adoption of this
Statement. Under the Statement, 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.
F-40
<PAGE> 178
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Accounting changes
Effective January 1, 1993, BBMC elected to change its method of valuing its
mortgage servicing rights from an undiscounted basis to a discounted basis to
conform its financial reporting to the regulatory accounting rules adopted by
the bank regulators in 1993.
The cumulative effect to January 1, 1993 of adopting this change in
accounting principle was an increase in net loss of approximately $59.9 million,
which is net of $30.9 million of income tax benefit. Effective January 1, 1994,
BBMC changed its method of accounting for mortgage servicing fees from the cash
basis to the accrual basis. The cumulative effect to January 1, 1994 of this
accounting change was an increase in net income of approximately $3.5 million,
which is net of income taxes of $1.9 million.
BBMC's income (loss) before income taxes and cumulative effects of changes
in accounting principles and net income (loss) for 1993 and 1994, as if the
changes for the valuing of mortgage servicing rights and the change in
accounting for mortgage servicing fees had been retroactively applied, would
have been as follows:
<TABLE>
<CAPTION>
1993 1994
-------- ------
(IN THOUSANDS)
<S> <C> <C>
Income (loss) before income taxes and cumulative effects of
changes in accounting principles............................... $(48,013) $4,475
-------- ------
Net income (loss)................................................ $(24,850) $1,950
======== ======
</TABLE>
3. PURCHASED MORTGAGE SERVICING RIGHTS AND EXCESS MORTGAGE SERVICING RECEIVABLE
PMSR consist of the following:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
PMSR....................................................... $ 732,775 $ 954,931
Accumulated amortization................................... (316,960) (421,040)
--------- ---------
Balance at December 31..................................... $ 415,815 $ 533,891
========= =========
</TABLE>
EMSR consists of the following:
<TABLE>
<CAPTION>
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
EMSR......................................................... $ 60,419 $ 66,465
Accumulated amortization..................................... (45,086) (49,018)
-------- --------
Balance at December 31....................................... $ 15,333 $ 17,447
======== ========
</TABLE>
F-41
<PAGE> 179
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. 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:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1.................................. $(5,000) $(4,700) $(6,650)
Servicing losses on investor-owned loans.............. (2,770) (7,177) (9,981)
Charge-offs........................................... 3,462 5,304 7,473
Recoveries............................................ (392) (77) (242)
------- ------- -------
Balance at December 31................................ $(4,700) $(6,650) $(9,400)
======= ======= =======
</TABLE>
5. MORTGAGE SERVICING PORTFOLIO
BBMC's residential mortgage servicing portfolio totaled $37.9 billion and
$41.5 billion at December 31, 1994 and 1995, respectively, and included
mortgage-backed securities of $24.0 billion and $28.5 billion in 1994 and 1995,
respectively. In addition, BBMC's commercial loan servicing portfolio totaled
$1.0 billion and $0.9 billion in 1994 and 1995, respectively. Related fiduciary
funds are segregated in trust accounts, principally deposited with Bank of
Boston, and are not included in the accompanying consolidated financial
statements.
BBMC has in force an errors and omissions policy in the amount of $20
million. Fidelity coverage up to a limit of $75 million, subject to a $1 million
deductible, is provided under a Bank of Boston master program.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land......................................................... $ 4,086 $ 4,086
Building..................................................... 14,251 14,477
Furniture and equipment...................................... 24,300 26,870
Leasehold improvements....................................... 752 824
-------- --------
43,389 46,257
Accumulated depreciation and amortization.................... (18,110) (20,871)
-------- --------
Balance at December 31....................................... $ 25,279 $ 25,386
======== ========
</TABLE>
7. NOTE PAYABLE TO BANK OF BOSTON
BBMC borrows funds on a demand basis from Bank of Boston under a $1.25
billion line of credit, collateralized by substantially all of BBMC's assets. At
December 31, 1994 and 1995, the interest rate was 8.5% and 6.8%, respectively,
less the benefit received from balances held at Bank of Boston. Interest
expense, net of this benefit, was $25.0 million, $24.6 million, and $20.5
million in 1993, 1994, and 1995, respectively.
F-42
<PAGE> 180
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of a 30-year mortgage note, payable monthly with
interest at 9 1/2%, maturing in 2017. BBMC's main office building is pledged as
collateral. Principal payments due on long-term debt are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996........................................... $ 210
1997........................................... 231
1998........................................... 233
1999........................................... 279
2000........................................... 307
Thereafter..................................... 12,556
--------
Total Due............................ $ 13,816
========
</TABLE>
9. EMPLOYEE BENEFITS
BBMC participates with Bank of Boston and its affiliates in a
non-contributory defined benefit pension plan (Plan) covering substantially all
full-time employees. Bank of Boston funds the Plan in compliance with the
requirements of the Employee Retirement Income Security Act.
The Plan is an account balance defined benefit plan in which each employee
has an account to which amounts are allocated based on level of pay and years of
service and which grows at a specific rate of interest. Benefits accrued prior
to 1989 are based on years of service, highest average compensation, and social
security benefits. Expense (income) associated with this Plan was ($0.9)
million, ($1.1) million and $0.5 million in 1993, 1994 and 1995, respectively.
BBMC also maintains non-qualified deferred compensation and retirement
plans for certain officers. All benefits provided under these plans are unfunded
and any payments to plan participants are made by BBMC. As of December 31, 1994
and 1995, approximately $0.8 million and $0.7 million, respectively, were
included in accrued expenses and other liabilities for these plans. For the
years ended December 31, 1993, 1994, and 1995, expense related to these plans
was $0.1 million, $0.2 million and $0.2 million, respectively.
BBMC also participates with Bank of Boston and its affiliates in a thrift
incentive plan. Under this plan, employer contributions are generally based on
the amount of eligible employee contributions. The amounts charged to operating
expense under this plan were $0.5 million, $0.8 million, and $0.2 million in
1993, 1994, and 1995, respectively.
BBMC participates with Bank of Boston and its affiliates by providing
certain health and life insurance benefits for retired employees. Eligible
employees currently receive credits up to $10 thousand based on years of
service, which are used to purchase post-retirement health care coverage. Life
insurance coverage is dependent on years of service at retirement. Amounts
charged to employee benefits expense for these benefits were $0.6 million in
1993, $0.6 million in 1994, and $0.5 million in 1995.
F-43
<PAGE> 181
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of post-retirement benefits expense for the three years
ended December 31 were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost (benefits earned during the period).............. $ 44 $ 63 $ 53
Interest cost on projected benefit obligation................. 280 282 264
Amortization:
Unrecognized net asset...................................... 250 250 250
Unamortized gain............................................ (20) (11) (53)
---- ---- ----
Net post-retirement benefit cost.............................. $554 $584 $514
==== ==== ====
</TABLE>
BBMC's unfunded accumulated post-retirement benefit obligation for the two
years ended December 31 was as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated post-retirement benefit obligation for retirees...... $ 3,711 $ 3,515
Unrecognized net gain............................................ 1,385 1,541
Unrecognized net obligation...................................... (4,500) (4,250)
------- -------
Post-retirement benefit liability................................ $ 596 $ 806
======= =======
</TABLE>
Assumptions used in actuarial computations were:
<TABLE>
<CAPTION>
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Rate of increase in future
compensation
levels.............................. 4.50% 4.50% 4.50%
Weighted average discount rate........ 7.50% 8.25% 7.25%
Medical inflation rate................ 12% declining 11% declining 8% declining
to 5% in 2001 to 5% in 2001 to 5% in 1999
</TABLE>
An increase of 1% in the assumed health care cost trend rate would result
in an increase of 4.8%, 5.9%, and 5.8% in the accumulated post-retirement
benefit obligation and 4.1%, 4.9%, and 4.9% in annual post-retirement benefit
expense in 1993, 1994, and 1995, respectively.
10. INCOME TAXES
The components of the net deferred tax asset at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
PMSR............................................................. $27,223 $34,008
EMSR............................................................. 9,303 8,957
Reserve for estimated servicing losses on investor-owned loans... 2,529 3,657
Other............................................................ (2,385) (1,301)
Valuation reserve................................................ (5,658) (4,597)
------- -------
Net deferred tax assets, net of reserve.......................... $31,012 $40,724
======= =======
</TABLE>
The deferred tax assets, net of the valuation reserve, can be realized from
the reversal of existing deferred tax liabilities and by carryback to previous
years with taxable income. The valuation reserve has been primarily established
against state deferred tax assets where carryback is not permitted.
F-44
<PAGE> 182
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision for (benefit from) income taxes for the
years ending December 31 are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax provision (benefit)...................... $ (1,425) $ 4,773 $47,646
Deferred tax
Benefit on income.................................. (15,859) (2,587) (8,651)
Change in valuation reserve........................ -- 339 (1,061)
-------- ------- -------
Net deferred tax benefit............................. (15,859) (2,248) (9,712)
Income tax provision (benefit) before cumulative
effect of changes in accounting principles......... (17,284) 2,525 37,934
Change in accounting for:
PMSR............................................... (30,868) -- --
Income taxes....................................... (6,093) -- --
Mortgage servicing fee............................. -- 1,860 --
-------- ------- -------
Total income tax provision (benefit)................. $(54,245) $ 4,385 $37,394
======== ======= =======
</TABLE>
Effective January 1, 1993, BBMC adopted prospectively SFAS No. 109, which
principally affects accounting for deferred taxes. The cumulative effect to
January 1, 1993 of adopting this new Standard was a decrease in net loss of $6.1
million.
The following table reconciles the expected federal tax provision (benefit)
on income (loss) before cumulative effect of changes in accounting principles,
based on the federal statutory tax rate of 35% in 1993, 1994, and 1995, to the
actual tax provision (benefit) before cumulative effect of changes in accounting
principles:
<TABLE>
<CAPTION>
1993 1994 1995
-------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected tax provision (benefit) applicable to income (loss)
before cumulative effect of changes in accounting
principles.................................................. $(17,024) $1,567 $33,866
Effect of:
State income taxes, net of federal tax benefits............. -- 381 3,774
Federal tax rate change to 35% on deferred tax assets....... (408) -- --
Other....................................................... 148 577 294
-------- ------ -------
Actual tax provision (benefit) before cumulative effect of
changes in accounting principles............................ $(17,284) $2,525 $37,934
======== ====== =======
</TABLE>
F-45
<PAGE> 183
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LEASE COMMITMENTS
BBMC leases office facilities and equipment under noncancelable leases that
include renewal options and escalation clauses which extend into 1999. Rental
expense for leases of office facilities and equipment was $3.6 million in both
1993 and 1994 and $3.9 million in 1995. BBMC's minimum future lease commitments
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996................................................... $1,996
1997................................................... 622
1998................................................... 280
1999................................................... 52
Thereafter............................................. --
------
Total........................................ $2,950
======
</TABLE>
12. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
BBMC 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 the management of the risk of
fluctuations in interest rates. 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. Financial instruments primarily used by BBMC
include commitments to extend credit, mandatory and optional forward
commitments, commitments to purchase mortgage servicing rights, and other
instruments to minimize the interest rate risk of capitalized servicing assets,
primarily options on treasury bond futures.
Options and forward contracts
BBMC purchases options and forward contracts to protect the value of
mortgage servicing assets from exposure to increases in prepayment activity and
to reduce the impact of interest rate fluctuations on its lending commitments.
The notional amount of the options and forward contracts 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 the 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
BBMC.
BBMC is exposed to credit loss in the event of nonperformance by the
counterparties to the various instruments. BBMC controls credit and market risk
associated with interest rate products by establishing and monitoring limits as
to the types and degree of risks that may be undertaken. BBMC's exposure to
credit risk in the event of default by the counterparties for the options is
$123.3 million which was due at December 31, 1995.
BBMC'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 BBMC or an independent clearing agent. The amount of credit
risk as of December 31, 1995, if all counterparties failed completely and if the
margins, if any, retained by BBMC
F-46
<PAGE> 184
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or an independent clearing were to become unavailable, was approximately $24.1
million for mandatory forward commitments of mortgage-backed securities.
The following is a summary of BBMC's notional amounts and fair values of
interest rate products as of December 31, 1994 and 1995.
<TABLE>
<CAPTION>
1994 1995
---------------------- ------------------------
ESTIMATED ESTIMATED
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE(1) AMOUNT VALUE(1)
-------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchased commitments to sell mortgage loans:
Mandatory forward contracts.................... $286,430 $ 4,413 $1,169,559 $ (9,798)
Options on mortgage-backed securities.......... 87,000 172 315,000 --
Risk management contracts:
Purchased...................................... 371,000 2,157 3,107,500 118,753
Sold........................................... -- -- 295,000 (33,833)
</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.
(2) See Note 14 for additional disclosures on fair value of financial
instruments.
Commitments to originate mortgage loans
BBMC regularly enters into commitments to originate 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 BBMC does not
have matching commitments to sell loans, which exposes BBMC to lower of cost or
market valuation adjustments in a rising interest rate environment.
Additionally, the extension of a commitment, which is subject to BBMC'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 are expected to
expire without being drawn upon. Commitments to originate mortgage loans totaled
$194.5 million at December 31, 1994 and $885.6 million at December 31, 1995.
Mortgage loans sold with recourse
BBMC sells mortgage loans with recourse to various investors and retains
the servicing rights 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 $9.0 million at
December 31, 1994 and $6.8 million at December 31, 1995.
Servicing commitments to investors
BBMC 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
BBMC 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
F-47
<PAGE> 185
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase mortgage servicing rights, expiring during 1996, correspond to mortgage
loans having an aggregate loan principal balance of approximately $2.7 billion
at December 31, 1995.
Geographical concentration of credit risk
BBMC is engaged in business nationwide and has no material concentration of
credit risk in any geographic region.
13. OTHER RELATED PARTY TRANSACTIONS
BBMC services mortgage loans for Bank of Boston and its affiliates. The
balances of those portfolios totaled $3.3 billion and $2.0 billion at December
31, 1994 and 1995, respectively. Related servicing fees are included in mortgage
servicing fees and were $5.4 million, $8.4 million and $7.6 million in 1993,
1994, and 1995, respectively.
BBMC reimburses Bank of Boston and its affiliates for certain occupancy and
supplies costs. Total costs reimbursed were $.0.7 million in 1993, 1994, and
1995.
BBMC services real estate acquired by the Bank of Boston and its
affiliates. Related expenses are reimbursed and were $0.3 million in 1993, $2.1
million in 1994, and $1.7 million in 1995.
An affiliate of Bank of Boston purchases a 99.25% participation in
mortgages in the process of being sold to permanent investors. The principal
balances sold under this agreement aggregated approximately $3.6 billion and
$6.5 billion in 1994 and 1995, respectively.
BBMC purchased mortgage servicing rights from Bank of Boston during 1995
and capitalized $4.8 million in mortgage servicing rights associated with this
transaction.
BBMC sold mortgage loans to Bank of Boston and its affiliates in its normal
course of business. These sales totaled $1.3 billion, $0.4 billion, and $0.5
billion in 1993, 1994, and 1995, respectively. Included in mortgage loans held
for sale at December 31 are loans which will be sold to Bank of Boston and its
affiliates totaling $94.5 million and $18.1 million for 1994 and 1995,
respectively.
Miscellaneous administrative services are provided by related companies.
These services did not have a material impact on the consolidated financial
statements.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value.
Financial instruments include such items as mortgage loans held for sale,
mortgage loans held for investment, interest rate contracts, notes payable, and
other 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 expected 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
F-48
<PAGE> 186
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in methodologies and assumptions used to estimate fair value, BBMC's fair values
should not be compared to those of other companies.
Under the Statement, 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 BBMC. For certain assets and
liabilities, the information required under the Statement 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
The carrying amount reported in the balance sheet approximates fair value.
Mortgages 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 is BBMC's normal business practice.
Mortgages held for investment
Fair value is estimated using market quotes for securities backed by
similar loans or by discounting contractual cash flows, adjusted for credit risk
and prepayment estimates. These loans are priced with servicing rights retained.
Discount rates are obtained from secondary market sources.
Accounts receivable, pool loan purchases, and mortgage claims receivable, net
Carrying amounts are considered to approximate fair value. All amounts that
are assumed to be uncollectible within a reasonable time are written off.
Excess mortgage servicing receivable
Fair value is based on the present value of expected future net cash flows
and the current estimated servicing life.
Risk management contracts
Fair values are estimated based on actual market quotes or option models.
Note payable to Bank of Boston
The carrying amount of the note payable to Bank of Boston reported in the
balance sheet approximates its fair value.
Long-term debt
Fair value of long-term debt is estimated by discounting estimated future
cash flows using a rate commensurate with the risks involved.
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.
F-49
<PAGE> 187
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
The fair values of options are estimated based on actual market quotes. In
some instances, quoted prices for the underlying loans or option models are
used.
The estimated fair values of BBMC's financial instruments are as follows:
<TABLE>
<CAPTION>
1994 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash.................................... $ 5,653 $ 5,653 $ 830 $ 830
Mortgages held for sale................. 271,215 272,535 388,436 395,984
Mortgages held for investment........... 28,589 26,988 33,183 35,003
Accounts receivable..................... 66,763 66,763 82,816 82,816
Pool loan purchases..................... 77,477 77,477 65,272 65,272
Mortgage claims receivable.............. 48,835 48,835 45,422 45,422
Excess mortgage servicing receivable.... 15,333 20,700 17,447 19,117
Risk management contracts, classified
as PMSR, and other assets(2).......... 3,727 2,157 84,520 84,920
LIABILITIES
Note payable to Bank of Boston.......... 779,021 779,021 966,000 966,000
Long-term debt.......................... 14,007 13,853 13,816 16,211
OFF-BALANCE SHEET(1)
Commitments to originate mortgage
loans................................. (1,455) 1,094
Mandatory forward contracts to sell
mortgages(2).......................... 4,413 (9,798)
Options on mortgage-backed
securities(2)......................... 172 --
Risk management contracts............... (6,998) --
</TABLE>
- ---------------
(1) Parentheses denote a liability
(2) See Note 12 for additional disclosures on notional amounts
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 BBMC's entire holding of a particular financial instrument. Because no
active market exists for some portion of BBMC's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, current interest rates and repayment
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
F-50
<PAGE> 188
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1994 and 1995. Changes in market interest rates and prepayment
assumption could significantly change the fair value.
15. CONTINGENCIES
BBMC is a defendant in a number of legal proceedings arising in the normal
course of business. BBMC, 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 BBMC,
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 or results of operations of BBMC.
During 1994, BBMC settled a class action lawsuit pertaining to escrow
practices. BBMC agreed to change its escrow calculations to the aggregate method
and, as a result, refunded approximately $45.0 million in excess escrow balance
to mortgagors. In addition, BBMC paid interest on these excess funds in the
amount of approximately $1.3 million. The change in escrow calculations did not
have a material impact on the consolidated financial statements.
16. ACQUISITION OF BELL MORTGAGE
On June 1, 1995, BBMC purchased the assets and liabilities of Bell Mortgage
Company (Bell Mortgage), a privately-held mortgage origination company located
in Minneapolis, Minnesota, for $0.9 million in cash. The acquisition of Bell
Mortgage was accounted for as a purchase. Accordingly, the purchase price was
allocated to net assets acquired based upon their estimated fair market value.
As of a result of the acquisition, goodwill of $0.4 million was recorded and is
being amortized over a 7-year period using the straight-line method.
Also, under the terms of the agreement, the shareholders of Bell Mortgage
will receive additional contingent cash payments based on Bell Mortgage reaching
specific performance goals over the next 3 years. These additional cash payments
will be recorded as additions to goodwill and will be amortized over the
remainder of the original 7-year period using the straight-line method.
Results of operations after the acquisition date are included in the 1995
consolidated financial statements. Proforma financial results would not have
been materially different as a result of this acquisition.
F-51
<PAGE> 189
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Barnett Mortgage Company:
We have audited the accompanying consolidated balance sheets of BARNETT
MORTGAGE COMPANY (a Florida corporation and a wholly owned subsidiary of Barnett
Banks, Inc.) and subsidiaries as of December 31, 1994 and 1995 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
each of the three years in the period ended December 31, 1995. 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 financial position of Barnett Mortgage Company and
subsidiaries as of December 31, 1994 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
March 8, 1996
F-52
<PAGE> 190
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
CASH............................................................ $ 3,900,572 $ 14,987,783
MORTGAGE LOANS:
Held for sale, net............................................ 183,913,568 465,879,840
Held for investment, net...................................... 14,699,097 19,225,181
CAPITALIZED MORTGAGE SERVICING RIGHTS:
Purchased mortgage servicing rights, net...................... 85,574,002 240,059,235
Excess mortgage servicing rights, net......................... 6,887,431 10,729,518
ACCOUNTS RECEIVABLE, Net:
Mortgage claims receivable.................................... 14,667,507 40,810,317
Amounts due from affiliates................................... 170,894 3,296,638
Other receivables............................................. 3,704,721 20,784,599
PROPERTY AND EQUIPMENT, net..................................... 18,565,631 25,263,834
REAL ESTATE OWNED, net.......................................... 731,091 600,061
GOODWILL, net................................................... 25,690,047 138,674,988
OTHER ASSETS.................................................... 967,476 14,318,185
------------ ------------
$359,472,037 $994,630,179
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Notes payable................................................. $248,214,485 $653,055,514
Drafts payable................................................ 9,208,104 11,573,446
Accounts payable and accrued liabilities...................... 9,791,502 63,789,362
Deferred tax liability........................................ 7,355,676 34,383,877
------------ ------------
Total liabilities..................................... 274,569,767 762,802,199
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $100 par value; 10,000 shares authorized,
issued, and outstanding.................................... 1,000,000 1,000,000
Additional paid-in capital.................................... 81,141,958 248,453,974
Retained earnings (accumulated deficit)....................... 2,760,312 (17,625,994)
------------ ------------
Total stockholder's equity............................ 84,902,270 231,827,980
------------ ------------
$359,472,037 $994,630,179
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-53
<PAGE> 191
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
MORTGAGE ORIGINATION REVENUE:
Mortgage origination fees...................... $ 357,900 $ 3,276,304 $ 17,103,976
Gain (loss) on sales of loans, net............. 5,687,882 691,969 (13,920,382)
------------ ------------ ------------
Total mortgage origination revenue..... 6,045,782 3,968,273 3,183,594
------------ ------------ ------------
INTEREST INCOME (EXPENSE):
Interest income................................ 855,053 3,459,860 27,264,470
Interest expense, substantially all to
affiliates.................................. (1,415,372) (4,911,433) (20,427,661)
------------ ------------ ------------
Net interest income (expense).......... (560,319) (1,451,573) 6,836,809
------------ ------------ ------------
MORTGAGE SERVICING REVENUE:
Mortgage servicing income...................... 20,559,829 27,130,545 83,502,311
Mortgage servicing income from affiliates...... 18,325,974 20,016,790 25,057,174
Amortization of capitalized mortgage servicing
rights...................................... (11,547,048) (17,783,184) (48,282,193)
Gain on sales of servicing..................... 0 0 9,096,134
------------ ------------ ------------
Net mortgage servicing revenue......... 27,338,755 29,364,151 69,373,426
------------ ------------ ------------
OTHER INCOME..................................... 6,296,519 4,491,999 2,592,125
------------ ------------ ------------
Total revenues......................... 39,120,737 36,372,850 81,985,954
------------ ------------ ------------
EXPENSES:
Salaries and benefits.......................... 13,913,978 17,473,917 53,070,150
General and administrative..................... 12,432,134 14,923,734 41,849,355
Affiliate profit sharing....................... 10,773,786 3,533,551 6,242,191
Occupancy and equipment........................ 1,809,949 2,702,169 5,959,537
Amortization of goodwill....................... 0 259,275 4,839,536
------------ ------------ ------------
Total expenses......................... 38,929,847 38,892,646 111,960,769
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES................ 190,890 (2,519,796) (29,974,815)
INCOME TAX PROVISION (BENEFIT)................... 87,040 (461,411) (9,588,509)
------------ ------------ ------------
NET INCOME (LOSS)................................ $ 103,850 $ (2,058,385) $(20,386,306)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-54
<PAGE> 192
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) TOTAL
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992.......... $1,000,000 $ 16,910,146 $ 4,714,847 $ 22,624,993
Capital contributions............. 0 3,527,674 0 3,527,674
Net income........................ 0 0 103,850 103,850
---------- ------------ ------------ ------------
BALANCE, December 31, 1993.......... 1,000,000 20,437,820 4,818,697 26,256,517
Capital contributions............. 0 60,704,138 0 60,704,138
Net loss.......................... 0 0 (2,058,385) (2,058,385)
---------- ------------ ------------ ------------
BALANCE, December 31, 1994.......... 1,000,000 81,141,958 2,760,312 84,902,270
Capital contributions............. 0 167,312,016 0 167,312,016
Net loss.......................... 0 0 (20,386,306) (20,386,306)
---------- ------------ ------------ ------------
BALANCE, December 31, 1995.......... $1,000,000 $248,453,974 $(17,625,994) $231,827,980
========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-55
<PAGE> 193
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(NOTE 7)
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 103,850 $ (2,058,385) $ (20,386,306)
------------ ------------- -------------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Amortization of purchased mortgage servicing
rights.................................... 9,321,064 15,288,479 45,816,361
Amortization of excess servicing fees....... 2,225,984 2,494,705 2,465,832
Amortization of goodwill.................... 0 259,275 4,839,536
Depreciation and amortization of property
and equipment............................. 1,430,339 1,776,267 3,191,009
Capitalization of excess servicing fees..... (3,657,824) (1,258,180) (7,081,112)
Origination of loans held for sale.......... 0 (508,150,116) (3,318,208,729)
Sales of mortgage loans held for sale....... 0 456,864,511 3,106,918,971
Proceeds from sales of mortgage servicing
rights.................................... 0 0 10,437,502
Gain on sales of servicing rights........... 0 0 (9,096,134)
Deferred income tax provision (benefit)..... (309,391) 91,933 (1,250,725)
Changes in assets and liabilities:
Accounts receivable, net.................. (3,931,488) 2,067,746 (8,164,924)
Other assets.............................. (292,732) 1,254,075 (11,285,808)
Accounts payable and accrued
liabilities............................ (11,438,834) (7,700,318) 9,488,879
Other, net................................ 209,676 45,104 6,807,216
------------ ------------- -------------
Total adjustments...................... (6,443,206) (36,966,519) (165,122,126)
------------ ------------- -------------
Net cash used in operating
activities........................... (6,339,356) (39,024,904) (185,508,432)
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchased mortgage servicing rights............ (31,569,835) (22,487,973) (21,563,279)
Net increase in loans held for investment...... (457,402) (1,593,575) (3,152,365)
Net increase (decrease) in real estate owned... (421) (166,405) 1,751,036
Purchases of property and equipment, net of
retirements................................. (4,232,868) (220,543) (556,054)
Business acquisitions, net of cash acquired.... 0 (58,824,244) (158,747,064)
------------ ------------- -------------
Net cash used in investing
activities........................... (36,260,526) (83,292,740) (182,267,726)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in notes payable.................. 43,004,351 64,990,122 211,666,829
Capital contributions.......................... 0 59,765,851 167,196,540
------------ ------------- -------------
Net cash provided by financing
activities........................... 43,004,351 124,755,973 378,863,369
------------ ------------- -------------
NET INCREASE IN CASH............................. 404,469 2,438,329 11,087,211
CASH AT BEGINNING OF YEAR........................ 1,057,774 1,462,243 3,900,572
------------ ------------- -------------
CASH AT END OF YEAR.............................. $ 1,462,243 $ 3,900,572 $ 14,987,783
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-56
<PAGE> 194
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
Barnett Mortgage Company and its wholly owned subsidiaries (the "Company")
originate, purchase, and service residential mortgage loans. The Company
operates nationally with offices in 25 states.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and prevailing practices within the mortgage
banking industry.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Barnett
Mortgage Company ("BMC") and its wholly owned subsidiaries, BancPLUS Financial
Corporation ("BancPLUS") and Loan America Financial Corporation ("LAC").
Wholly-owned subsidiaries of BancPLUS include BancPLUS Mortgage Corp. and
Honolulu Mortgage Company ("HMC"). As discussed in Note 2, BancPLUS and LAC were
acquired in 1994 and 1995, respectively. These acquisitions were accounted for
as purchases; therefore, BancPLUS and LAC are included in the consolidated
financial statements from their respective dates of acquisition. BMC is a wholly
owned subsidiary of Barnett Banks, Inc. (the "Parent"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain previously reported amounts have been reclassified to conform to
current presentation.
Use of Estimates in the Preparation of Financial Statements
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 and
disclosed amount of contingent assets and 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.
Mortgage Loans
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. Cost is defined as the unpaid principal balance of the mortgage loans,
adjusted for discounts and premiums, including deferred costs and fees.
Differences between the net carrying amount of mortgage loans held for sale and
the amount received from the sale, net of the recognition of any commitment fees
paid, are recognized as gains or losses from the sale of mortgage loans. At
December 31, 1994 and 1995, mortgage loans held for sale were carried at cost,
which was less than their market values. Mortgage loans held for sale originated
by the Parent's banking subsidiaries (the "Affiliate Banks") are not included in
the Company's mortgage loans held for sale. These loans are funded and owned by
the Affiliate Banks. The Company will purchase such loans from the Affiliate
Banks and sell them to the secondary market simultaneously. Gains and losses
from the sales of loans are recorded in the accompanying statements of
operations. At December 31, 1995, the Affiliate Banks owned approximately
$135,323,000 in mortgage loans held for sale.
Mortgage loans held for investment are stated at the lower of cost or fair
market value at the time the permanent investment decisions are made and
primarily consist of (i) mortgage loans originated on behalf of employees of the
Parent and the Affiliate Banks who are relocating, (ii) seasoned loans obtained
in acquisitions by the Affiliate Banks which management has chosen to retain
rather than sell, and (iii) loans in the final stages of foreclosure which were
repurchased by the Company.
F-57
<PAGE> 195
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest income on mortgage loans is recorded on the accrual basis. Loans
are placed on nonaccrual status and accrued interest is reversed when the
collectibility of interest and principal is uncertain, generally after the loans
become 120 days past due.
Capitalized Mortgage Servicing Rights
Capitalized mortgage servicing rights include purchased mortgage servicing
rights ("PMSRs") and excess servicing fees. The Company capitalizes the cost of
purchased mortgage servicing rights ("bulk"), servicing rights acquired through
the purchase of mortgage loans originated by others ("flow") and servicing
rights acquired in connection with acquisitions ("acquired") (Note 2). These
amounts are capitalized and amortized in proportion to and over the life of the
net servicing income, primarily using a discounted cash flow method for flow and
acquired purchases and to a maximum of seven years using the
sum-of-the-years-digits method for bulk purchases. PMSRs, net, represent PMSRs
of $116,326,941 and $308,722,024 at December 31, 1994 and 1995, respectively,
net of accumulated amortization of $30,752,939 and $68,662,789, respectively.
Excess servicing fees are stated net of accumulated amortization and
represent the present value of servicing yields in excess of industry standards.
These amounts are capitalized and amortized over the estimated life of the
underlying loans, primarily to a maximum of eight years using the
sum-of-the-years-digits method, to provide for the recognition of a normal
servicing fee in each year. Excess servicing fees, net, represent excess
servicing fees at December 31, 1994 and 1995 of $14,876,068 and $20,640,470,
respectively, net of accumulated amortization of $7,988,637 and $9,910,952,
respectively.
The Company evaluates the effect of prepayments on the net realizable value
of purchased mortgage servicing rights and excess servicing fees on a
disaggregated undiscounted basis. If needed, the Company records additional
amortization or write-downs based on this evaluation.
Accounts Receivable
Mortgage claims receivable includes loan servicing advances made in
connection with loan servicing activities and claims receivable. Loan servicing
advances consist primarily of payments for property taxes and insurance
premiums, as well as principal and interest remitted to investors before they
are collected from mortgagors. Claims receivable includes claims filed on
foreclosed mortgages, primarily with the FHA and the VA.
Reserves for estimated losses on loan servicing advances are based on
management's continuing evaluation of potential losses. The allowance for losses
included in accounts receivable was $320,654 and $1,542,989 at December 31, 1994
and 1995, respectively.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is provided on a straight-line basis using estimated useful lives
of 12 to 50 years for buildings and improvements and 3 to 20 years for furniture
and equipment. Leasehold improvements are amortized over their estimated useful
lives or the terms of the related leases, whichever is shorter.
Real Estate Owned
Real estate owned represents real estate acquired by foreclosure and is
carried at the lower of cost or appraised value minus estimated costs to sell.
Any additional declines are charged to other expense and are recorded in a
valuation reserve on an asset-by-asset basis. Net costs of maintaining and
operating foreclosed properties are charged to expense as incurred.
F-58
<PAGE> 196
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Commitment Fees
Deferred commitment fees, which are included in other assets, primarily
consist of fees paid to permanent investors to ensure the ultimate sale of loans
and put option fees paid for the option of selling mortgage-backed securities.
Fees paid to permanent investors are recognized as an adjustment to the sales
price when loans are sold. Any gain or loss resulting from either the exercise
or expiration of put option fees is included in gain (loss) on sales of loans.
Goodwill
Net assets acquired in purchase transactions (Note 2) are recorded at fair
value at the date of acquisition. Goodwill, representing the excess of the
purchase price over the fair value of the net assets purchased, is being
amortized on a straight-line basis over 25 years. The Company reviews its
goodwill 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.
Reserve for Losses
A reserve for losses is maintained for estimated foreclosure losses. The
required level of reserves is determined on an undiscounted basis by analysis of
such factors such as the prevailing stages of delinquencies, anticipated
reinstatement rates from the various stages of delinquency, and loss experience
on similar loans serviced. This reserve represents that portion of the estimated
foreclosure losses for which the Company does not have an outstanding receivable
as of the date of the financial statements, but for which an expected loss is
estimated based on loan delinquencies and other characteristics of the loans
serviced. This reserve is included in accounts payable and accrued liabilities
in the accompanying financial statements.
Mortgage Origination Fees
Mortgage origination fees consist primarily of (i) fees received from
borrowers on loans originated for sale, (ii) fees received from certain
correspondents, and (iii) fees received from an affiliate (Note 5). Mortgage
origination fees are deferred and recognized as income when the related loans
are sold.
Mortgage Servicing Revenue
Mortgage servicing fees consist primarily of servicing fees and late
charges received for servicing loans owned by investors and affiliates.
Servicing fees are calculated on the basis of the outstanding principal balance
of loans serviced and are recorded as income when received. Loan servicing costs
are charged to expense as incurred.
Late charges are recognized when assessed and are recorded in mortgage
claims receivable net of an allowance for estimated waived or otherwise
uncollectible amounts. Accrued late fees, net of allowance, totaled $1,998,380
and $1,554,393 at December 31, 1994 and 1995, respectively. In addition, amounts
greater than 120 days past due are written off.
Statement of Financial Accounting Standards No. 122
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights". This statement, among other provisions, requires
that the value of mortgage servicing rights associated with mortgage loans
originated by an entity be capitalized as assets. The value of originated
mortgage servicing rights ("OMSRs") is determined by allocating the total cost
of the mortgage loans between the loans and the mortgage servicing rights based
on their relative fair values. Presently, OMSRs are included with the cost of
the related loans and
F-59
<PAGE> 197
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
considered in determining the gain or loss on sale when the loans are sold.
Also, the statement requires that capitalized mortgage servicing rights be
evaluated for impairment based on the fair value of these rights. For the
purposes of determining impairment, mortgage servicing rights that are
capitalized after the adoption of this statement are stratified based on one or
more of the predominate risk characteristics of the underlying loans. Impairment
is recognized through a valuation allowance for each impaired stratum.
The statement applies prospectively to fiscal years beginning after
December 15, 1995. The Company plans to adopt the statement beginning January 1,
1996. The actual effect of implementing this statement on the Company's
financial position and results of operations will depend on factors determined
at the end of a reporting period, including the amount and mix of originated and
purchased production, the level of interest rates, and market estimates of
future prepayment rates. Accordingly, the Company cannot determine at this time
the ultimate impact on its future earnings of applying the new methodologies of
recording all mortgage servicing rights as assets, of calculating impairment,
and of applying the other provisions of the statement; however, the adoption of
the statement will accelerate the timing of income recognition from origination
activities.
Consolidated Statements of Cash Flows
The Company defines cash as cash in banks.
2. ACQUISITIONS
On February 28, 1995, the Company completed the acquisition of BancPLUS for
approximately $167 million in cash. BancPLUS and its wholly owned subsidiaries,
BancPLUS Mortgage Corp. and HMC, are full-service mortgage bankers based in San
Antonio, Texas, and Honolulu, Hawaii, who had total assets of $244 million and a
servicing portfolio of $13.9 billion at the date of acquisition. The purchase
price in excess of net assets acquired was $113 million.
On October 1, 1994, the Company completed the acquisition of LAC for $60
million. LAC was a Miami-based wholesale mortgage banking company which had
assets of $180 million and a servicing portfolio of approximately $4 billion at
the date of acquisition. The purchase price in excess of net assets acquired, as
adjusted for changes in estimates in 1995, was $29 million.
These acquisitions are included in the consolidated financial statements
from their respective dates of acquisition. Unaudited pro forma statements of
operations for 1994 and 1995, assuming BancPLUS and LAC had been acquired as of
January 1, 1994, are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- --------
<S> <C> <C>
Mortgage origination revenue.................................. $ 26,149 $ 4,631
Interest income (expense), net................................ (148) 6,137
Mortgage servicing revenue.................................... 87,437 74,646
Other income.................................................. 5,830 2,744
--------- --------
Total revenues...................................... 119,268 88,158
Expenses...................................................... (136,439) (115,997)
--------- --------
Loss before income taxes and affiliate profit sharing......... (17,171) (27,839)
Affiliate profit sharing...................................... (3,534) (6,242)
Income tax benefit............................................ 4,741 10,780
--------- --------
Net loss............................................ $ (15,964) $(23,301)
========= ========
</TABLE>
F-60
<PAGE> 198
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above pro forma statements of operations assume that the Parent contributed
capital equal to the purchase price as of January 1, 1994. The purchase
accounting adjustments are reflected based on the actual purchase price and the
amount of assets actually acquired. In addition, gains on sales of mortgage
servicing rights are included in mortgage servicing revenue in these pro forma
results. No adjustments have been made for restructuring costs that might have
been incurred during the periods presented or for cost efficiencies that might
have been realized. Accordingly, these pro forma results are not indicative of
future results.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Building and improvements......................... $ 14,720,814 $ 23,494,585
Furniture and equipment........................... 11,584,787 12,881,277
------------ ------------
26,305,601 36,375,862
Less accumulated depreciation..................... 7,739,970 11,112,028
------------ ------------
$ 18,565,631 $ 25,263,834
========== ==========
</TABLE>
4. INCOME TAXES
The Company's results of operations are included in the Parent's
consolidated income tax return. The Company's income tax provision and related
asset or liability are computed based on income tax rates as if the Company
filed a separate income tax return. Pursuant to a tax-sharing agreement with the
Parent, the Company is reimbursed for the tax effect of current operating losses
utilized in the consolidated return.
The components of the provision (benefit) for income taxes for the years
ended December 31, 1993, 1994, and 1995 are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
Current:
Federal.............................. $ 377,258 $(514,431) $(7,504,840)
State................................ 19,173 (38,913) (832,944)
--------- --------- -----------
396,431 (553,344) (8,337,784)
--------- --------- -----------
Deferred:
Federal.............................. (296,983) 87,016 (1,080,141)
State................................ (12,408) 4,917 (170,584)
--------- --------- -----------
(309,391) 91,933 (1,250,725)
--------- --------- -----------
Provision (benefit) for income taxes... $ 87,040 $(461,411) $(9,588,509)
========= ========= ==========
</TABLE>
F-61
<PAGE> 199
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between federal income tax computed at the statutory rate
of 35 percent and the actual tax provision are shown below:
<TABLE>
<CAPTION>
1993 1994 1995
-------- ----------- ------------
<S> <C> <C> <C>
Income (loss) before taxes................... $190,890 $(2,519,796) $(29,974,815)
======== =========== ============
Tax provision (benefit) at the statutory
rate....................................... $ 66,812 $ (881,929) $(10,491,185)
Increase (decrease) in taxes:
State income tax, net of federal benefit... 4,590 (22,098) (539,470)
Goodwill................................... 0 90,746 1,693,838
Other...................................... 15,638 351,870 (251,692)
-------- ----------- ------------
Total income tax provision
(benefit)........................ $ 87,040 $ (461,411) $ (9,588,509)
======== =========== ============
Effective tax rate........................... 46% (18)% (32)%
======== =========== ============
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities due to differences in the timing of recognition of revenues and
expenses and differences related to acquisitions. The tax effects of temporary
differences which create deferred tax assets and liabilities at December 31,
1994 and 1995 are detailed below:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Reserves................................................ $ 0 $ 5,109,268
Net operating loss carryforwards........................ 4,044,430 3,146,010
Late charges............................................ 629,351 954,969
Property and equipment.................................. 651,825 321,215
Other................................................... 930,060 1,571,175
----------- ----------
Gross deferred tax assets....................... 6,255,666 11,102,637
Valuation allowance............................. 0 (3,146,010)
----------- ----------
Deferred tax asset.............................. 6,255,666 7,956,627
----------- ----------
Deferred tax liabilities:
Capitalized servicing rights............................ 13,310,651 41,520,994
Other................................................... 300,691 819,510
----------- ----------
Deferred tax liability.......................... 13,611,342 42,340,504
----------- ----------
Net deferred tax liability................................ $ 7,355,676 $34,383,877
=========== ==========
</TABLE>
The Company's $34,383,877 net deferred tax liability includes a valuation
allowance of $3,146,010, representing LAC's preaffiliation federal and state net
operating loss carryforwards for which realization is uncertain.
5. RELATED-PARTY TRANSACTIONS
The Company services loans (Note 8) for the Affiliate Banks. Total loan
servicing income relating to loans owned by the Affiliate Banks was
approximately $18,326,000, $20,017,000, and $25,057,000 in 1993, 1994, and 1995,
respectively.
Through March 1995, the Company received earnings credits from the Parent
or its subsidiaries in exchange for maintaining fiduciary deposit accounts.
Revenue recognized as a result of this arrangement was
F-62
<PAGE> 200
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2,456,000, $2,365,000, and $523,000 in 1993, 1994, and 1995, respectively, and
has been included in other income. Subsequent to March 1995, the Company
received earnings credits in the form of reduced interest expense.
Notes payable at December 31, 1995, includes advances from lines of credit
with the Parent and the Affiliate Banks which bear interest at a rate of LIBOR
plus 1%, reduced in proportion to compensating balances maintained with
Affiliate Banks.
Amounts payable to the Parent and Affiliate Banks which are included in
accounts payable and accrued liabilities at December 31, 1994 and 1995 were
$2,170,000 and $7,680,000, respectively.
The Company performs certain centralized processing functions for certain
Affiliate Banks. Included in other income was approximately $2,559,000,
$2,171,000, and $1,972,000 in fees for these services for the years ended
December 31, 1993, 1994, and 1995, respectively.
The Company recorded certain expenses related to transactions with the
Parent and the Affiliate Banks as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Management fees............................. $ 465,729 $ 721,141 $ 2,914,794
Affiliate revenue sharing................... 10,773,786 3,533,551 6,242,191
Rent expense................................ 1,267,130 1,292,498 1,316,448
Interest expense............................ 1,415,372 3,281,503 17,588,548
Information processing support.............. 328,556 1,953,244 3,505,484
Internal audit fees......................... 91,933 358,800 421,392
------------ ------------ ------------
$ 14,342,506 $ 11,140,737 $ 31,988,857
========== ========== ==========
</TABLE>
The Company pays its Parent a management fee for traditional corporate
support functions, such as accounting operations, financial reporting and
analysis, human resources, marketing, and strategic planning. Affiliate revenue
sharing is a distribution to the Affiliate Banks and is based on each
affiliate's annual loan production.
The Parent funds certain additions to building and improvements through
capital contributions. The Parent made noncash capital contributions of
$3,527,674, $938,287, and $115,476 to the Company for the net cost of building
facilities in 1993, 1994, and 1995, respectively. In addition, the Parent has
made additional capital contributions to fund acquisitions. During 1994 and
1995, the Parent contributed $59,800,000 and $167,100,000, respectively to the
Company to fund the acquisitions of LAC and BancPLUS, respectively.
LAC and BancPLUS Mortgage Corp. sell a certain amount of their loan
production to an Affiliate Bank. Total loans sold to the Affiliate Bank, at
cost, during 1994 and 1995 were $204 million and $324 million, respectively.
Additionally, BMC charges the Affiliate Bank a fee, which totaled $509,000 and
$809,000 during 1994 and 1995, respectively, for arranging these transactions
and providing certain support services.
F-63
<PAGE> 201
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES PAYABLE
At December 31, 1994, LAC had available mortgage warehouse credit
facilities which permitted the Company to borrow a maximum amount of $275
million, collateralized by the mortgage loans held for sale by LAC. The
following table summarizes information regarding these facilities as of December
31, 1994:
<TABLE>
<S> <C>
Balance at end of year....................................... $ 174,015,589
Weighted average interest rate at end of year................ 7.23%
Maximum amount outstanding................................... $ 174,015,589
Average amount outstanding................................... 150,825,062
Contractual interest rate at end of year..................... 1.25% to 8.5%
Weighted average interest rate during the year............... 5.58%
</TABLE>
These facilities expired on May 27, 1995. The Company replaced these
facilities with a borrowing arrangement from the Parent and the Affiliate Banks
(Note 5). Also, during 1995, the Company entered into a credit facility for $200
million, of which $0 was outstanding at December 31, 1995.
7. SUPPLEMENTAL CASH FLOW INFORMATION
The Company transferred $890,203, $235,000, and $1,669,000 from mortgage
loans to real estate acquired by foreclosure in 1993, 1994, and 1995,
respectively. These transactions have been excluded from the accompanying
consolidated statements of cash flows.
For the years ended December 31, 1993, 1994, and 1995, income taxes of
$255,605, $396,431 and $2,852,641, respectively, were paid to the Parent.
Interest paid during the same years was $1,259,372, $4,578,611 and $18,529,118,
respectively.
8. LOAN SERVICING
The Company was servicing 243,116 and 445,665 loans at December 31, 1994
and 1995, respectively. The remaining principal balances on serviced loans
totaled approximately $18.4 billion and $33.4 billion at December 31, 1994 and
1995, respectively. At December 31, 1995, the geographic distribution of loans
serviced was 38% in Florida, 14% in California, and 48% in other states. Loans
serviced for others are not included in the accompanying consolidated balance
sheets. The accompanying balance sheets also do not include funds held in
fiduciary deposit accounts, as these funds are not assets of the Company. These
amounts averaged $262,000,000 and $407,000,000 during 1994 and 1995,
respectively.
In connection with its loan servicing activities, the Company makes certain
payments of property taxes and insurance premiums in advance of collecting them
from specific mortgagors and makes certain payments of attorneys' fees and other
costs related to loans in foreclosure. Also, in connection with servicing
mortgage-backed securities guaranteed by Government National Mortgage
Association ("GNMA") or Federal National Mortgage Association ("FNMA"), the
Company advances certain principal and interest payments to security holders
prior to their collection from specific mortgagors. These advances are presented
as receivables in the accompanying consolidated balance sheets.
Conforming conventional loans serviced by the Company are securitized
through FNMA or Federal Home Loan Mortgage Corporation ("FHLMC") programs on a
nonrecourse basis, whereby foreclosure losses are generally the responsibility
of FNMA and FHLMC and not the Company. Similarly, the government loans serviced
by the Company are securitized through GNMA programs, whereby the Company is
insured against loss by the FHA or partially guaranteed against loss by the VA.
F-64
<PAGE> 202
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is exposed to potential losses on loans partially guaranteed by
the VA in the event the VA elects to pay its guarantee amount instead of
repurchasing the loans. The Company incurred losses of $809,000, in 1995, but
did not incur any significant losses in 1993 or 1994 related to these loans. The
Company has also fulfilled certain pool commitments with loans that were sold
with recourse. Total principal outstanding of loans sold with recourse was
$64,415,000 and $144,490,000 at December 31, 1994 and 1995, respectively.
Management believes that its reserves for losses are adequate for any
contingencies that may arise from these loans.
9. COMMITMENTS AND CONTINGENCIES
The Company's fidelity bond requirements are satisfied through a policy
with underwriters at Lloyd's of London ("Lloyd's"). Maximum coverage is
$75,000,000 per occurrence, with a self-insurance program covering losses under
the deductible of $5,000,000 for the Parent as a whole. The Company is only
liable for losses up to its $250,000 deductible. At December 31, 1995, the
Company had errors and omissions insurance coverage through a policy with
Lloyd's in the amount of $35,000,000. Premiums on both policies have been paid
through August 1996.
The Company leases office space and equipment under various operating
leases expiring through 1998. Substantially all lease agreements for office
space contain renewal options and provide for increases in rental payments based
on the lessor's operating costs or the consumer price index.
The following is a schedule of future minimum rental payments, exclusive of
any contingent operating charges under certain leasing arrangements that have
initial or remaining noncancelable lease terms in excess of one year at December
31, 1995:
<TABLE>
<S> <C>
Year ending December 31:
1996................................................... $2,274,796
1997................................................... 1,200,805
1998................................................... 681,885
1999................................................... 395,047
----------
Total.......................................... $4,552,533
==========
</TABLE>
The Company is a party to certain pending legal proceedings arising from
matters incidental to its business. In the opinion of management and counsel,
the aggregate unreserved liability or loss, if any, of legal proceedings will
not have a significant effect on the consolidated financial condition, results
of operations or liquidity of the Company.
F-65
<PAGE> 203
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments as of December 31, 1995 is made in accordance with the requirements
of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts:
<TABLE>
<CAPTION>
1994
-------------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------------ ------------
<S> <C> <C>
Assets:
Cash................................................ $ 3,900,572 $ 3,900,572
Accounts receivable, net............................ 18,543,122 18,543,122
Mortgage loans held for sale, net................... 183,913,568 185,101,884
Mortgage loans held for investment, net............. 14,699,097 14,365,427
Liabilities:
Notes payable....................................... 248,214,485 248,214,485
Accounts payable and accrued liabilities............ 9,791,502 9,791,502
Off-balance sheet financial instruments:
Commitments to extend credit and sell loans......... 0 605,854
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------------ ------------
<S> <C> <C>
Assets:
Cash................................................ $ 14,987,783 $ 14,987,783
Accounts receivable, net............................ 64,891,554 64,891,554
Mortgage loans held for sale, net................... 465,879,840 471,241,851
Mortgage loans held for investment, net............. 19,225,181 19,225,181
Liabilities:
Notes payable....................................... 653,055,514 653,055,514
Accounts payable and accrued liabilities............ 63,789,362 63,789,362
Off-balance sheet financial instruments:
Commitments to extend credit and sell loans......... 0 (4,084,450)
</TABLE>
The fair value estimates as of December 31, 1994 and 1995 are based on
pertinent information available to management as of the respective dates.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
The following describes the methods and assumptions used by the Company in
estimating fair value amounts:
Cash, Accounts Receivable, Notes Payable, and Accounts Payable and Accrued
Liabilities
The carrying amount approximates fair value.
F-66
<PAGE> 204
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mortgage Loans Held for Sale
Fair value is estimated using the quoted market prices for securities
backed by similar types of loans and dealer commitments to purchase loans on a
servicing retained basis.
Mortgage Loans Held for Investment
Fair value is estimated using quoted market prices for sales of whole loans
with similar characteristics, such as repricing dates, product type, and size.
In 1995, management's estimates of fair value of these loans does not materially
differ from cost.
Off-Balance Sheet Financial Instruments
Fair value represents the gain or loss on the Company's unclosed
commitments to originate or purchase loans and the Company's commitments to sell
loans. Both types of commitments take into consideration the remaining terms of
the agreements and the present creditworthiness of the counterparties.
11. DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET RISK
During December, 1995, the Company purchased options to buy $500 million of
U.S. Treasury securities in order to reduce its exposure to the impact of
falling interest rates on the value of its capitalized mortgage servicing
assets. The cost of the options of $6,600,000, net of accumulated amortization
of $41,000, is included in other assets. These options were terminated in
January 1996 and the realized gain was reflected as a reduction of PMSRs.
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business through the production and sale of mortgage
loans and the management of interest rate risk. These instruments include
short-term commitments (interest rate and points) to extend credit,
mortgage-backed securities mandatory forward commitments, put options to sell
mortgage-backed securities, and loans sold with recourse. These instruments
involve, to varying degrees, elements of credit and interest rate risk.
The Company's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit, mortgage-backed securities
mandatory forward commitments, put options to sell mortgage-backed securities,
and loans sold with recourse is represented by the contractual or notional
amounts of these instruments. As these off-balance sheet financial instruments
have essentially the same credit risk involved in extending loans, the Company
generally uses the same credit and collateral policies in making these
commitments and conditional obligations as it does for on-balance sheet
instruments.
At December 31, 1994 and 1995, financial instruments having potential
credit risk in excess of those reported in the consolidated balance sheets are
as follows:
<TABLE>
<CAPTION>
CONTRACTUAL OR NOTIONAL AMOUNTS 1994 1995
---------------------------------------------------------- ------------ ------------
<S> <C> <C>
Commitments to extend credit.............................. $133,000,000 $418,000,000
Commitments to sell mortgage loans and mortgage-backed
securities.............................................. 288,000,000 863,000,000
Loans sold with recourse.................................. 64,415,000 144,490,000
</TABLE>
F-67
<PAGE> 205
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. CONCENTRATION OF CREDIT RISK
The Company has identified certain credit risk concentrations in relation
to its on- and off-balance sheet financial instruments. A credit risk
concentration results when the Company has a significant credit exposure to an
individual or a group engaged in similar activities or is affected similarly by
economic conditions.
A significant portion of the Company's financial instruments is transacted
with other financial institutions, various government agencies, and individual
investors. The Company does not have a credit risk concentration with any one
financial institution, agency, or individual. However, of the loans held by the
Company and sold with recourse, a majority are secured by residential real
estate in Florida.
13. RETIREMENT PLAN
The Company participates in the Parent's retirement, management and
incentive compensation, and health and welfare plans. The Company's share of
pension and 401(k) plans' costs and expenses allocated annually by the Parent
are as follows:
<TABLE>
<CAPTION>
PENSION 401(K)
PLANS PLAN
-------- --------
<S> <C> <C>
Year ended December 31:
1993......................................................... $ 96,192 $240,367
1994......................................................... 143,148 245,739
1995......................................................... 268,938 837,956
</TABLE>
The Company remits amounts expensed to the Parent for retirement plans and
for health and welfare plans. Amounts for the management and incentive
compensation plans are remitted directly to employees or to plans maintained on
their behalf.
Information from the Parent's retirement plans' administrator is not
available to permit the Company to determine its share of the vested and
nonvested retirement plan benefit obligations and plan assets. The weighted
average discount rate and rate of increase in future compensation levels used in
determining the actual present value of the projected benefit obligations were
8.90% and 4.50%, respectively, in 1994 and 7.30% and 4.00% in 1995. The expected
long-term rate of return on assets was 9.00% and 9.50% in 1994 and 1995,
respectively.
The Parent has estimated the accumulated postretirement benefit obligation
on a consolidated basis only and allocates costs to each subsidiary. No specific
estimate has been made for each subsidiary.
14. SUBSEQUENT EVENT
On March 4, 1996, the Parent entered into a transaction in which the stock
of Barnett Mortgage Company would be acquired by a newly formed entity in
exchange for one-third ownership of the new entity and cash. Under the terms of
the transaction, the Parent would retain its mortgage production units, continue
to originate mortgages and retain certain other assets.
F-68
<PAGE> 206
INDEPENDENT AUDITORS' REPORT
Board of Directors
BancPLUS Financial Corporation:
We have audited the accompanying consolidated statements of financial
condition of BancPLUS Financial Corporation and subsidiary as of December 31,
1993 and 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. 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 did not audit the financial
statements of Honolulu Mortgage Company, Inc., a wholly-owned subsidiary of
BancPLUS Mortgage Corp., which statements reflect total assets constituting 16%
and 20% and total revenues constituting 17% and 14% of the related 1993 and 1994
consolidated totals, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Honolulu Mortgage Company, Inc., is based
solely on the report of the other auditors.
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, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of BancPLUS Financial Corporation and
subsidiary as of December 31, 1993 and 1994, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
As discussed in note 2(j) to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
KPMG PEAT MARWICK LLP
San Antonio, Texas
March 17, 1995
F-69
<PAGE> 207
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1993 AND 1994
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................................. $ 4,096 $ 7,901
Mortgage loans held for sale, at lower of cost or market (note 6)...... 417,695 120,871
Accounts receivable and accrued interest, net of allowance for
uncollectible amounts of $3,031 in 1993 and $2,621 in 1994........... 33,941 29,836
Mortgage loan administration contracts, net of accumulated amortization
of $91,079 in 1993 and $116,167 in 1994 (note 3)..................... 118,265 117,716
Real estate acquired through foreclosure............................... 599 1,694
Properties and equipment, net (note 4)................................. 10,595 10,435
Prepaid expenses and other assets...................................... 8,100 5,640
-------- --------
Total assets................................................. $593,291 $294,093
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable (note 5)............................................... 508,342 237,586
Accounts payable and accrued expenses................................ 54,073 23,490
Reserves for losses.................................................. 13,300 11,400
-------- --------
Total liabilities............................................ 575,715 272,476
-------- --------
Commitments and contingencies (notes 3, 5, 6, 8, 10 and 11)
Stockholders' equity (note 5):
Common stock, par value $.01 per share -- 200,000 shares authorized;
100,000 shares issued and outstanding............................. 1 1
Preferred stock, par value $.01 per share ($10,000 liquidation
preference) -- 100,000,000 shares authorized; 1,284,783 and
1,460,125 shares issued and outstanding in 1993 and 1994,
respectively...................................................... 13 15
Additional paid-in capital........................................... 20,174 20,173
Retained earnings (accumulated deficit).............................. (2,612) 1,428
-------- --------
Total stockholders' equity................................... 17,576 21,617
-------- --------
Total liabilities and stockholders' equity................... $593,291 $294,093
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-70
<PAGE> 208
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1993 1994
-------- -------
<S> <C> <C>
INCOME
Loan administration..................................................... $ 69,471 $62,253
Loan origination........................................................ 42,053 16,184
Gain on sale of mortgage loan administration contracts.................. 11,334 24,348
Interest income, net of interest expense of $23,732 in 1993 and $15,959
in 1994.............................................................. (1,004) (2,019)
Other................................................................... 1,199 1,190
------- --------
Total income.................................................... 123,053 101,956
------- --------
EXPENSES
Personnel............................................................... 48,977 42,798
Occupancy and equipment................................................. 5,803 6,924
Provision for foreclosure costs......................................... 4,528 3,050
Amortization of mortgage loan administration contracts.................. 58,808 25,175
Other general and administrative........................................ 17,198 15,797
------- --------
Total expenses.................................................. 135,314 93,744
------- --------
Income (loss) before income taxes, extraordinary item, and
cumulative effect of a change in accounting principle............. (12,261) 8,212
Income taxes (note 9)..................................................... (4,228) 3,107
------- --------
Income (loss) before extraordinary item and cumulative effect of
a change in accounting principle.................................. (8,033) 5,105
Extraordinary loss resulting from extinguishment of debt, net of income
tax benefit of $548 (note 5)............................................ -- (1,064)
Cumulative effect on prior years of a change in accounting for income
taxes................................................................... (264) --
------- --------
Net income (loss)............................................... $ (8,297) $ 4,041
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-71
<PAGE> 209
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
COMMON PREFERRED PAID-IN (ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT) EQUITY
------ --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992....... $1 $12 $ 20,175 $ 5,685 $ 25,873
Net loss......................... -- -- -- (8,297) (8,297)
Preferred stock
dividends-in-kind............. -- 1 (1) -- --
--
--- -------- ------- --------
Balance at December 31, 1993....... 1 13 20,174 (2,612) 17,576
Net income....................... -- -- -- 4,041 4,041
Preferred stock
dividends-in-kind............. -- 2 (1) (1) --
--
--- -------- ------- --------
Balance at December 31, 1994....... $1 $15 $ 20,173 $ 1,428 $ 21,617
== === ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-72
<PAGE> 210
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1993 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................. $ (8,297) $ 4,041
----------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................... 1,559 1,958
Amortization............................................... 58,832 25,199
Provision for foreclosure costs............................ 4,528 3,050
Capitalized excess servicing fees.......................... (1,161) (330)
Non-cash interest expense.................................. 1,168 1,497
Gain on sales of servicing................................. (11,334) (24,348)
Proceeds from sales of servicing........................... 8,924 32,065
Extraordinary loss resulting from extinguishment of debt... -- 1,064
Cumulative effect of a change in accounting principle...... 264 --
Deferred tax benefit....................................... (4,583) (270)
Changes in operating assets and liabilities:
Increase in accounts receivable and other assets......... (9,040) (4,713)
Loans originated or acquired for sale.................... (3,240,339) (1,703,896)
Proceeds from sales of loans............................. 3,127,539 1,991,424
Net increase (decrease) in warehouse debt................ 110,735 (269,085)
Increase (decrease) in accounts payable and accrued
expenses.............................................. 9,823 (9,647)
----------- -----------
Total adjustments to net income (loss)................ 56,915 43,968
----------- -----------
Net cash provided by operating activities............. 48,618 48,009
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of mortgage loan administration contracts........... (33,455) (38,198)
Real estate acquired through foreclosure...................... (1,421) (1,648)
Proceeds from sales of foreclosed real estate................. 816 1,259
Purchases of properties and equipment......................... (4,117) (1,796)
----------- -----------
Net cash used in investing activities................. (38,177) (40,383)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable................................... 725,150 400,936
Principal payments on notes payable........................... (739,084) (402,630)
Loan fees paid................................................ -- (2,127)
----------- -----------
Net cash used in financing activities................. (13,934) (3,821)
----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... (3,493) 3,805
CASH AND CASH EQUIVALENTS
Beginning of year............................................. 7,589 4,096
----------- -----------
End of year................................................... $ 4,096 $ 7,901
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-73
<PAGE> 211
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
(1) REPORTING ENTITY
BancPLUS Financial Corporation (the Company) was incorporated in 1991 for
the purpose of acquiring all of the capital stock of BancPLUS Mortgage Corp.
(BancPLUS Mortgage), and its only substantive operations to date have involved
such activities. The purchase of the stock of BancPLUS Mortgage was effective as
of September 1, 1991.
The accompanying consolidated financial statements include the operations
of the Company and BancPLUS Mortgage. All significant intercompany balances and
transactions have been eliminated in consolidation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Mortgage Loans Held for Sale
Mortgage loans held for sale are stated at the lower of cost or market
value as determined in the aggregate. The cost basis of mortgage loans includes
loan principal outstanding, adjusted for discounts or premiums. Loan fees and
direct costs associated with the origination of mortgage loans, which are
deferred and recognized when the loans are sold, are reflected as deferred
revenue in the financial statements. Commitment fees paid to permanent investors
are recognized as expense when the related loans are sold or when it becomes
evident that the commitment will not be used. The market value of mortgage loans
covered by investor commitments is based on commitment prices. The market value
of uncommitted mortgage loans is determined by current investor yield
requirements. Differences between the carrying amounts of mortgage loans and
sales proceeds are recognized at the time of sale.
When mortgage loans are sold with servicing rights retained and the actual
servicing fees to be received differ from normal servicing fees for similar
loans, an additional gain or loss is recognized. This gain or loss represents
the present value of the difference between the actual and the normal servicing
fees over the remaining lives of the loans, adjusted for anticipated
prepayments. The excess servicing fees receivable resulting from the recognition
of these gains are included in mortgage loan administration contracts.
Loans are placed on nonaccrual 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 estimated to be fully collectible.
(b) Allowance for Uncollectible Receivables
An allowance is maintained for estimated uncollectible advances made
primarily in connection with BancPLUS Mortgage's responsibilities as servicer
for loans in Government National Mortgage Association (GNMA) pools. The
allowance represents that portion of the advances made as of the date of the
financial statements that are not expected to be reimbursed. The allowance is
increased by provisions charged to earnings and reduced by receivable
charge-offs, net of recoveries.
(c) Mortgage Loan Administration Contracts
Mortgage loan administration contracts are recorded at cost, which does not
exceed the present value of future net servicing income, net of amortization.
Mortgage loan administration contracts are amortized in the
F-74
<PAGE> 212
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
current period on an accelerated method that approximates the proportion that
current net servicing income bears to anticipated total net servicing income
from the related loans. In connection with the periodic evaluation of the
amortization of mortgage loan administration contracts, the Company compares the
recorded investment in mortgage loan administration contracts to the value of
the expected future net servicing income determined on a disaggregated,
undiscounted basis. Differences representing an excess of recorded investment
over expected future net servicing income are charged to earnings through an
additional current period charge to amortization.
Included in mortgage loan administration contracts at December 31, 1994 was
$2,428,000 of excess servicing fees receivable. This amount represents the
present value of future servicing fees in excess of the normal fee. These
receivables are amortized in the current period on an accelerated method that
approximates the proportion that the current servicing fees bear to anticipated
total servicing fees to be received from the related loans. The receivable
balance is revalued periodically using current prepayment estimates and original
discount rates and, if so indicated, is written down to the present value of the
estimated remaining future excess service fee revenue through an additional
charge to amortization. If the receivable balance is less than the present value
of the estimated remaining future excess service fee revenue due to favorable
prepayment experience, amortization is adjusted prospectively.
(d) Reserve for Losses
A reserve for losses is maintained for estimated foreclosure losses
associated primarily with BancPLUS Mortgage's responsibilities as servicer for
loans in GNMA pools. The required level of reserves is determined on an
undiscounted basis by analysis of such factors as the prevailing level of loan
delinquencies, anticipated reinstatement rates from the various stages of
delinquency, and loss experience on similar loans serviced. This reserve
represents that portion of the estimated foreclosure losses for which BancPLUS
Mortgage does not have an outstanding receivable as of the date of the financial
statements, but for which an expected loss is estimable based on loan
delinquencies and other characteristics of the loans serviced. The reserve is
increased by provisions charged to earnings and by purchase price adjustments on
certain acquisitions of mortgage loan administration contracts. The reserve is
reduced by charge-offs, net of recoveries.
(e) Real Estate Acquired Through Foreclosure
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value on their acquisition dates and at the lower of such
initial amount or current fair value thereafter.
(f) Properties and Equipment
Properties and equipment are stated at cost less accumulated depreciation
and are depreciated using the straight-line method over their estimated useful
lives.
Maintenance, repairs, and minor renewals are charged to expense.
Betterments and major renewals are capitalized. Upon retirement or disposition,
both the asset cost and the related accumulated depreciation are written off and
gains or losses are included in operations.
(g) Loan Administration
Loan administration fees represent a participation in interest collections
on loans serviced for investors, normally based on a stipulated percentage of
the outstanding monthly principal balance of the loans. Loan administration fees
are recognized as income when received. Loan administration costs are charged to
expense as incurred.
F-75
<PAGE> 213
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(h) Loan Origination
Fees and direct loan costs associated with the origination of single-family
residential loans held for sale are recognized when the related loans are sold.
Direct loan costs have not been reclassified against loan origination income.
(i) Cash Equivalents
Cash equivalents include all highly liquid investments with a maturity of
three months or less at the date of acquisition.
(j) Federal Income Taxes
BancPLUS Financial Corporation files a consolidated federal income tax
return which includes the operations of BancPLUS Mortgage.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" and has reported the
cumulative effect of this change in accounting for income taxes in the
consolidated statement of operations for the year ended December 31, 1993.
Statement 109 required a change from the deferred method of accounting for
income taxes required under APB Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability method specified in
Statement 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recoverable or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date.
(3) SERVICING INFORMATION
BancPLUS Mortgage acts as a correspondent for investors in securing and
servicing loans. BancPLUS Mortgage was servicing approximately 197,000 loans
with an aggregate unpaid principal balance of approximately $14,013,000,000 at
December 31, 1994. Amounts capitalized in connection with acquiring the right to
service mortgage loans were approximately $35,970,000 and $25,980,000 for the
years ended December 31, 1993 and 1994, respectively.
As of December 31, 1994, 24% of the servicing portfolio balance was secured
by properties in California, 13% in Texas, and 13% in Hawaii. There were no
other state concentrations in excess of 10% and there were loans in all 50
states. The portfolio included approximately 26% Federal Housing Administration
(FHA) loans in Government National Mortgage Association (GNMA) pools and 11%
Department of Veterans Affairs (VA) loans in GNMA pools. Federal National
Mortgage Association (FNMA) loans comprised approximately 37% of the portfolio
and Federal Home Loan Mortgage Corporation (FHLMC) loans comprised approximately
19% of the portfolio. The remaining 7% of the portfolio was spread among various
other investors.
BancPLUS Mortgage is generally required to advance, from corporate funds,
escrow and foreclosure costs for loans which it services. A portion of these
advances is not recoverable for the loans in GNMA pools. Upon foreclosure, an
FHA or VA property is typically conveyed to the Department of Housing and Urban
Development (HUD) or VA. However, VA has the authority to deny conveyance of the
foreclosed property and to reimburse BancPLUS Mortgage based on a percentage of
the loan's outstanding principal balance. BancPLUS Mortgage assumes
responsibility for the disposition of properties on which VA has denied
conveyance.
F-76
<PAGE> 214
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the servicing portfolio at December 31, 1994 were approximately
$79,656,000 of loans serviced for FNMA or private investors and $1,166,000 of
uninsured conventional loans for which there is recourse to BancPLUS Mortgage in
the event of foreclosure.
Anticipated losses associated with these activities are provided for in the
consolidated financial statements. Actual losses have been within management's
expectations.
Custodial funds for the payment of insurance and taxes and unremitted
principal and interest are segregated in separate bank accounts excluded from
BancPLUS Mortgage's assets and liabilities. Such custodial funds approximated
$212,754,000 at December 31, 1994.
The Company carries blanket fidelity bond coverage in the aggregate amount
of $15,700,000 and errors and omissions coverage in the aggregate amount of
$16,000,000 at December 31, 1994.
(4) PROPERTIES AND EQUIPMENT
The following is a detail of properties and equipment at December 31, 1993
and 1994 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
IN YEARS 1993 1994
----------- ------- -------
<S> <C> <C> <C>
Building and improvements............................ 5 - 30 $ 6,660 $ 7,186
Data processing equipment............................ 3 - 7 3,439 4,109
Furniture, fixtures, and equipment................... 5 - 7 3,573 4,042
------- -------
13,672 15,337
Less accumulated depreciation........................ (3,077) (4,902)
------- -------
Properties and equipment, net.............. $10,595 $10,435
======= =======
</TABLE>
(5) NOTES PAYABLE
Notes payable consisted of the following at December 31, 1993 and 1994 (in
thousands):
<TABLE>
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
Committed operating lines of credit:
Mortgage loans credit facility............................... $258,645 $ 88,239
Receivables credit facility.................................. 12,183 3,800
Working capital credit facility.............................. 2,600 --
Pool advance credit facility................................. -- 198
-------- --------
Total committed operating lines of credit................. 273,428 92,237
Uncommitted operating lines of credit:
Mortgage loans and mortgage backed securities credit
facility.................................................. 123,444 24,764
Term debt.................................................... 62,500 76,368
Subordinated notes........................................... 40,857 40,880
Mortgage on corporate headquarters........................... 3,613 3,337
Notes payable to related party............................... 4,500 --
-------- --------
Total notes payable.................................. $508,342 $237,586
======== ========
</TABLE>
The committed operating lines permitted BancPLUS Mortgage to borrow an
aggregate maximum amount of $282,000,000 at December 31, 1994. These agreements
expire during 1995. The uncommitted operating lines permitted BancPLUS Mortgage
to borrow an additional aggregate maximum amount of
F-77
<PAGE> 215
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$275,000,000 at December 31, 1994. These agreements also expire during 1995.
Borrowings under these agreements bear interest at rates ranging from the
federal funds rate plus 1% to a range of prime minus .75% to prime plus 1.25%,
reduced in proportion to compensating balances maintained at the banks.
Commitment fees paid relating to committed operating lines of credit outstanding
at December 31, 1994 totaled $901,000 and ranged from .31% to .57%. These
amounts are amortized over the term of the commitments and are included as a
component of interest expense. Non-usage fees for the committed operating lines
range from .125% to .25%.
These operating lines of credit are secured by mortgage loans and mortgage
backed securities and all rights relating to or to be reimbursed for principal
and interest advances and foreclosure advances. All of these operating lines of
credit are cross-collateralized and cross-defaulted.
The agreements provide for various financial covenants, the most
restrictive of which place limitations on debt, other investments, transactions
with affiliates, and the payment of dividends. The agreements also require the
maintenance of certain financial ratios, including minimums for net worth,
portfolio size, and funds from operations. As of December 31, 1994, BancPLUS
Mortgage was in compliance with all requirements of the creditor banks.
BancPLUS Mortgage had notes payable outstanding to a group of banks which
provided $76,368,000 of acquisition term financing at December 31, 1994. The
notes mature in 2000 and bear interest at prime plus 1.25%, reduced in
proportion to the amount of compensating balances maintained at the banks.
Quarterly installments of principal in the amount of $3,632,000 plus interest
are due through the year 1999. A final principal payment of $3,728,000 plus
interest is due February 7, 2000. The notes are secured by the servicing
portfolios of both BancPLUS Mortgage and Honolulu Mortgage Company, Inc., a
wholly-owned subsidiary of BancPLUS Mortgage (subject to the restrictions
required by GNMA, FNMA, and FHLMC), and all of the issued and outstanding shares
of capital stock of certain BancPLUS Mortgage subsidiaries. These notes contain
financial covenants similar to those contained in the operating lines of credit
agreements. BancPLUS Mortgage met all of the requirements of the creditor banks
at December 31, 1994.
As of December 31, 1993 and 1994, BancPLUS Financial Corporation had
$41,000,000 of 11.5% subordinated notes outstanding. The notes become due
February 26, 2001 with annual redemptions of one-third of the original principal
to begin February 26, 1999. In connection with the issuance of those notes, the
note holders also acquired warrants to purchase 9,170 Stock Units (see note 10).
BancPLUS Mortgage has executed as co-maker with its subsidiary, Fiesta
Investments, Inc., a mortgage in the face amount of $4,150,000 to provide
financing for the purchase and improvement of its corporate headquarters. As of
December 31, 1994, $3,337,000 was outstanding on the note, which bears interest
at prime plus 1% (prime plus 2% beginning in 1995). The note requires monthly
principal installments of approximately $23,000 and matures on December 31,
1996.
Substantially all of the BancPLUS Mortgage debt is guaranteed by BancPLUS
Financial Corporation.
Aggregate cash payments for interest were $22,779,000 and $14,733,000
during the years ended December 31, 1993 and 1994, respectively.
During the first quarter of 1994, BancPLUS Mortgage refinanced all of its
operating lines of credit and term debt through a group of banks. As a result of
this refinancing, the Company recognized an extraordinary loss of $1,064,000
resulting from the write-off of certain unamortized commitment fees relating to
the refinanced debt.
F-78
<PAGE> 216
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) COMMITMENTS AND CONTINGENCIES
BancPLUS Mortgage had commitments at set prices and rates, which generally
were less than a year in duration, to make and purchase loans of approximately
$61,259,000 and to sell loans of approximately $107,344,000 at December 31,
1994. BancPLUS Mortgage also had commitments to make and purchase loans of
approximately $55,200,000 at December 31, 1994 for which prices and rates had
not been set. Market risk exists on the commitments to make and purchase loans
for which prices and rates are set as a result of potential future fluctuations
in mortgage interest rates. To mitigate this risk, BancPLUS Mortgage has entered
into sales agreements which, viewed independent of the related commitments to
make or purchase loans, are subject to offsetting market risk should there be
fluctuations in mortgage interest rates. All loans in the warehouse are covered
by these forward sales agreements. BancPLUS Mortgage conducts forward sales on a
percentage of the loans in process and, to a lesser extent, may use options to
hedge all or a portion of any remaining loans in process. Gains or losses on
options are deferred and recognized at the time the related mortgage loans are
sold or upon expiration of the option term. At December 31, 1994, such options
had a carrying value of $197,000 and a fair value of $134,000.
All loans are collateralized by the underlying real estate. The gross
amount of the commitments to make and purchase loans represents BancPLUS
Mortgage's maximum exposure to credit risk. To mitigate credit risk, BancPLUS
Mortgage securitizes and sells conventional loans on a non-recourse basis, and
securitizes and sells government loans through programs under which VA partially
guarantees or FHA insures BancPLUS Mortgage against credit risk.
BancPLUS Mortgage has been named as a defendant in various lawsuits arising
in the normal course of business. Management intends to vigorously defend the
lawsuits and is of the opinion that their resolution will not have a material
adverse effect on the accompanying financial statements.
BancPLUS Mortgage has obligations under various operating leases. Lease
expense was $3,670,000 and $4,628,000 for the years ended December 31, 1993 and
1994, respectively. Additionally, BancPLUS Mortgage leases a portion of its
corporate headquarters facility to outside tenants. The future minimum rent
payments and receipts as of December 31, 1994 relating to these leasing
activities were as follows (in thousands):
<TABLE>
<CAPTION>
LEASE LEASE
PAYMENTS INCOME
-------- ------
<S> <C> <C>
1995...................................................... $2,272 $601
1996...................................................... 1,713 449
1997...................................................... 978 247
1998...................................................... 532 95
1999 and thereafter....................................... 399 13
</TABLE>
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates along
with the methods and assumptions used in developing such estimates are set forth
below for the Company's financial instruments.
Cash, Receivables and Payables -- The carrying amount approximates fair
value because these instruments are of short duration and do not present
significant credit concerns.
Mortgage Loans Held for Sale -- The fair value of mortgage loans held for
sale and covered by investor commitments is based on commitment prices. The fair
value of uncommitted mortgage loans is determined using current investor yield
requirements.
F-79
<PAGE> 217
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Excess Servicing Fees Receivable -- The fair value of excess servicing fees
receivable is determined by discounting the expected future cash flows using
current prepayment estimates.
Notes Payable -- The carrying amount approximates fair value due to the
variable interest rates associated with this debt. The fair value of the
subordinated notes is determined in accordance with the redemption requirements
of the notes.
The estimated fair values of the Company's financial instruments are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
-----------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents.................................... $ 7,901 $ 7,901
Mortgage loans held for sale................................. 120,871 120,895
Receivables, net of allowance................................ 29,836 29,836
Excess servicing fees receivable............................. 2,428 4,230
-------- ----------
Total financial assets............................... $161,036 $ 162,862
======== ========
FINANCIAL LIABILITIES:
Notes payable................................................ 237,586 237,706
Payables..................................................... 23,490 23,490
-------- ----------
Total financial liabilities.......................... $261,076 $ 261,196
======== ========
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Fixed commitments to make and purchase loans................. 61,259 61,294
Floating commitments to make and purchase loans.............. 51,359 51,359
-------- ----------
Total commitments to make and purchase loans......... $112,618 $ 112,653
======== ========
Commitments to sell loans, into which specific loans have not
been allocated............................................ $ 14,830 $ 14,877
======== ========
</TABLE>
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no ready market exists for a portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected losses, current economic conditions, 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 assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
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. Other significant assets that are not considered
financial instruments include mortgage loan administration contracts, net of
excess servicing fees receivable and properties and equipment. In addition, the
tax ramifications related to the realization of unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in the estimates.
F-80
<PAGE> 218
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) EMPLOYEE BENEFIT PLANS
BancPLUS Mortgage sponsors a savings and investment plan in which employees
may contribute a portion of their compensation. BancPLUS Mortgage matches a
portion of employee contributions, subject to the plan's defined vesting
schedule.
Honolulu Mortgage Company, Inc. sponsors a retirement plan which covers
substantially all of its employees. This retirement plan includes an employee
savings option with partial matching by Honolulu Mortgage Company, Inc. Annual
contributions are discretionary as defined in the plan agreement and such
contributions are funded on a current basis.
Total expense relating to these plans was $468,000 and $680,000 for the
years ended December 31, 1993 and 1994, respectively.
(9) INCOME TAXES
The components of income taxes for the years ended December 31, 1993 and
1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994
------- ------
<S> <C> <C>
Current expense........................................... $ 355 $3,377
Deferred benefit.......................................... (4,583) (270)
------ ------
Total................................................ $(4,228) $3,107
====== ======
</TABLE>
The expected income taxes for the years ended December 31, 1993 and 1994
differ from the recorded amounts as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994
-------- ------
<S> <C> <C>
Income (loss) before income taxes, extraordinary item, and
cumulative effect of a change in accounting principle........ $(12,261) $8,212
======== ======
Income tax at 34% statutory rate............................... (4,169) 2,792
Increase (decrease) in tax resulting from:
State and local income taxes................................. 28 248
Other, net................................................... (87) 67
-------- ------
Income tax expense (benefit)......................... $ (4,228) $3,107
======== ======
</TABLE>
F-81
<PAGE> 219
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1993 and 1994 are presented below (in thousands):
<TABLE>
<CAPTION>
1993 1994
------ ------
<S> <C> <C>
Deferred tax assets:
Accruals not currently deductible for income tax purposes...... $ 673 $1,005
Valuation allowances........................................... 5,475 4,771
Excess of tax over book basis for organization costs........... 896 700
Properties and equipment, principally due to differences in
depreciation................................................ 130 88
Deferred installment sale income............................... -- 304
Other.......................................................... 103 150
------ ------
Total deferred tax assets.............................. 7,277 7,018
------ ------
Deferred tax liabilities:
Excess of book over tax basis for mortgage loan administration
contracts................................................... 5,972 5,136
Accounts receivable, principally due to allowance for
uncollectible accounts...................................... 412 533
Other.......................................................... -- 186
------ ------
Total deferred tax liabilities......................... 6,384 5,855
------ ------
Net deferred tax asset................................. $ 893 $1,163
====== ======
</TABLE>
Management believes that realization of the deferred tax assets is more
likely than not based on the expectation that such benefits will be utilized in
future consolidated tax returns.
At December 31, 1993, the net deferred tax asset of $893,000 was comprised
of $1,377,000 of deferred income tax benefit (included in prepaid expenses and
other assets) and $484,000 of deferred state income taxes payable (included in
accounts payable and accrued expenses). Prepaid expenses and other assets also
included $983,000 of current income taxes recoverable at December 31, 1993. At
December 31, 1994, the net deferred tax asset of $1,163,000 was comprised of
$1,473,000 of deferred income tax benefit (included in prepaid expenses and
other assets) and $310,000 of deferred state income taxes payable (included in
accounts payable and accrued expenses). Accounts payable and accrued expenses
also included $1,411,000 of current income taxes payable at December 31, 1994.
Aggregate cash payments for income taxes were $1,907,000 and $1,470,000
during the years ended December 31, 1993 and 1994, respectively.
(10) STOCKHOLDERS' EQUITY AND RELATED PARTY TRANSACTIONS
Under a Management Shareholders Agreement between the Company and its
shareholders, certain restrictions exist with respect to the transfer of shares
between shareholders which provide that the Company has a right of first refusal
on any transfer of shares to third parties. The terms of this Management
Shareholders Agreement include provisions whereby the Company may be required to
acquire the outstanding shares of specified "management shareholders" at "fair
value" in the event of termination of employment of such individuals in certain
cases. The agreement provides that any requirement of the Company to purchase
shares of terminated management shareholders expires on the day the common stock
of the Company is listed or admitted to trading on a national securities
exchange or quoted by NASDAQ.
The Company's preferred stock outstanding has a stated $1.30 per share
annual dividend which is payable quarterly and is cumulative. The Company
declared preferred stock dividends-in-kind, recorded at par value, of 159,300
and 181,041 shares during 1993 and 1994, respectively of which 41,755 and 47,454
were issued
F-82
<PAGE> 220
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
January 1, 1994 and 1995, respectively. The preferred shares have a liquidation
preference of $10 per share (exclusive of accrued dividends) and are redeemable
at the Company's option on or after October 31, 1996 for $10 per share.
In connection with the issuance of the 11.5% subordinated notes, the note
holders acquired warrants to purchase 9,170 Stock Units at a price of $202.71
per Unit. The warrants expire February 26, 2001. Each Stock Unit entitles the
holder to acquire 1 share of common stock and 10.271 shares of preferred stock
as of the warrant issuance date, adjusted proportionately for subsequent
issuances of stock. The value of the warrants of $186,000 was allocated to
additional paid in capital at the date of issuance.
Effective October 18, 1991, the Company granted options to the Chairman and
Chief Executive Officer of BancPLUS Mortgage to purchase up to 5,263 shares of
common stock at $95 per share and 52,632 shares of preferred stock at $9.50 per
share. The options are exercisable immediately and expire in ten years. Any
exercise must be made to acquire a proportionate number of common and preferred
shares. As of December 31, 1994, none of the options had been exercised.
From time to time, the Company's mortgage banking subsidiaries may make
mortgage loans to its officers and employees in the normal course of business.
The terms of such mortgage loans will be substantially similar to those provided
to the public, but may, in certain circumstances, be more favorable to such
officers or employees. It is the Company's policy to waive the origination fee
on officer and employee residential mortgage loans. Such mortgage loans are sold
to investors in the secondary market in the ordinary course of business.
Substantially all of the Company's net assets are attributable to BancPLUS
Mortgage's net assets, which are restricted. (See Note 5).
(11) BANCPLUS GROUP PERFORMANCE SHARE PLAN
Effective April 28, 1993, the Company adopted the BancPLUS Group
Performance Share Plan, pursuant to which designated employees of BancPLUS
Mortgage may be awarded "Performance Shares" entitling them to cash bonus
payments in the event of (1) distributions to common shareholders (after
outstanding preferred stock has been effectively redeemed and specified
distributions have been made to existing common shareholders), (2) termination
of employment in certain cases or (3) a change of control of the Company. These
Performance Shares vest ratably over a five-year period subsequent to the date
of grant unless the Company determines a different vesting schedule at the time
of grant. As of December 31, 1994, none of the events which trigger a cash bonus
have occurred.
A maximum of 3,627 Performance Shares are currently authorized under the
BancPLUS Group Performance Share Plan. As of December 31, 1994, a total of 3,500
Performance Shares have been issued under the Plan.
(12) SUBSEQUENT EVENTS
On February 28, 1995, all of the outstanding stock of BancPLUS Financial
Corporation was acquired by Barnett Mortgage Company. Barnett Mortgage Company
is a wholly-owned subsidiary of Barnett Banks, Inc., a registered bank holding
company headquartered in Jacksonville, Florida. The acquisition will be
accounted for as a purchase.
On February 28, 1995, the Company also repaid all its subordinated notes
outstanding and redeemed all of its outstanding preferred stock, stock warrants,
stock options, and Performance Shares. Additionally, BancPLUS Mortgage repaid
the mortgage on its corporate headquarters.
F-83
<PAGE> 221
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PRICING SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND PROSPECTUS SUPPLEMENT IN
CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE ISSUER OR THE UNDERWRITERS. THIS PRICING SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS AND PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER OR SOLICITATION
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PRICING SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND
PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
AFFAIRS OF THE ISSUER SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
UNTIL --, 1997 (90 DAYS AFTER THE DATE OF THIS PRICING SUPPLEMENT), ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS, PROSPECTUS SUPPLEMENT AND
PRICING SUPPLEMENT. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS, PROSPECTUS SUPPLEMENT AND PRICING SUPPLEMENT WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PRICING SUPPLEMENT
Use of Proceeds................................ PS-2
Capitalization................................. PS-3
Description of Notes........................... PS-4
Supplemental Plan of Distribution.............. PS-5
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.................. S-3
Risk Factors................................... S-12
Description of Notes........................... S-18
United States Federal Income Tax
Considerations............................... S-33
Plan of Distribution........................... S-39
PROSPECTUS
Additional Information......................... 2
HomeSide....................................... 3
Use of Proceeds................................ 5
Selected Consolidated Financial Information.... 6
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 11
The Acquisitions............................... 56
Management..................................... 58
Security Ownership of Certain Beneficial Owners
and Management............................... 67
Certain Relationships and Related
Transactions................................. 69
Description of Certain Indebtedness............ 73
Description of the Parent Notes................ 78
Description of Debt Securities................. 80
Plan of Distribution........................... 90
Legal Matters.................................. 91
Experts........................................ 91
Index to Financial Statements.................. F-1
</TABLE>
Pricing Supplement
HOMESIDE LENDING, INC.
$--,000,000
- --% NOTES DUE --
[LOGO]
CHASE SECURITIES INC.
MERRILL LYNCH & CO.
NATIONSBANC CAPITAL MARKETS, INC.
SMITH BARNEY INC.
Dated --, 1997
<PAGE> 222
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions, to be paid by the Registrants, are estimated as follows:
<TABLE>
<S> <C>
Registration fee under Securities Act.............. $303,031
Legal fees......................................... *
Accounting fees.................................... *
Printing and engraving............................. *
Miscellaneous...................................... *
--------
Total......................................... $ *
========
</TABLE>
- ---------------
* To be provided by Amendment.
All amounts except the Registration fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 607.0850 of the Florida Business Corporation Act permits a
corporation to indemnify its directors and officers against liability incurred
in their capacity as such or by reason of service at the request of the
corporation as a director, officer, employee or agent of another corporation (i)
if such director or officer acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful; and (ii) in certain
other circumstances.
Article IX of the By-laws of the HLI provides as follows:
INDEMNIFICATION
SEC. 1. The corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending, or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a Director or officer of the corporation or
served, at the written request of the President of the corporation, as a
Director or officer of another corporation (all of whom are hereinafter in this
Article referred to in the aggregate as "indemnified persons" and in the
singular as an "indemnified person") against expenses (including attorneys' fees
except as otherwise stated in Section 3 of this Article), judgements, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, has no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by a judgement, order, settlement, adjudication or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
SEC. 2. The corporation shall indemnify any indemnified person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgement in its favor against expenses (including attorneys' fees except as
otherwise stated in Section 3 of this Article) actually and reasonably incurred
by him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and except that no
indemnification shall be made in respect of any
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<PAGE> 223
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
SEC. 3. The corporation will be entitled to participate at it own expense
in the defense and, if it so elects, to assume the defense of any claim, action,
suit or proceeding. If the corporation elects to assume the defense, such
defense shall be conducted by counsel of good standing, chosen by it. In the
event the corporation elects to assume the defense of any such claim, action,
suit or proceeding and retain such counsel, the indemnified persons shall bear
the fees and expense of any additional counsel retained by them, unless there
are conflicting interests as between the corporation and the indemnified persons
that are for valid reasons objected to in writing by the indemnified persons.
SEC. 4. In discharging his duty to the corporation, an indemnified person,
when acting in good faith, may rely upon financial statements of the corporation
represented to him to be correct by the officer of the corporation having charge
of its books of accounts, or stated in a written report by an independent public
or certified public accountant or firm of such accountants fairly to reflect the
financial condition of such corporation.
SEC. 5. Any indemnification under this Article IX (unless ordered by a
court) shall be made only as authorized in the specific case upon a
determination (1) by the Board of Directors by a majority vote of a quorum
consisting of Directors who were not parties to such action, suit or proceeding,
or (2) if such quorum is not obtainable, or, even if obtainable, when a quorum
of disinterested Directors so directs, by independent legal counsel in a written
opinion that the indemnified person has met the standards of conduct set forth
in this Article IX or (3) by the stockholder or stockholders.
SEC. 6. Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Corporation in advance of the final disposition of
such action, suit or proceeding as authorized by the Board of Directors in the
manner provided in Section 5 of this Article IX upon receipt of an undertaking
by or on behalf of the indemnified person to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
corporation as authorized in this Article IX.
SEC. 7. The indemnification provided by this Article IX shall not be
deemed exclusive of any other rights to which any indemnified person may be
entitled under any agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office and shall inure to the benefit of the
heirs, executors and administrators of such a person.
SEC. 8. The Board of Directors shall have power on behalf of the
corporation to grant indemnification to any person other than an indemnified
person to such extent as the Board in its discretion may from time to time and
at any time determine, but in no event to exceed the indemnification provided by
this Article IX.
SEC. 9. If any part of this Article IX shall be found, in any action, suit
or proceeding, to be invalid or ineffective, the validity and the effect of the
remaining parts shall not be affected.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years the Company has not issued any securities.
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<PAGE> 224
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. Unless otherwise indicated, all Exhibits have been previously
filed or are incorporated by reference to the Parent's Registration Statement on
Form S-4, No. 333-06737.
<TABLE>
<S> <C>
1.1 Form of Distribution Agreement.
3.1 Certificate of Incorporation of HomeSide Lending, Inc.
3.2 By-Laws of HomeSide Lending, Inc.
4.1 Form of Indenture.
4.2 Form of Fixed Rate Medium-Term Note.
4.3 Form of Floating Rate Medium-Term Note.
5.1(a)* Form of opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation,
regarding legality of the securities being registered.
5.1(b)* Form of opinion of Robert J. Jacobs, Esq., regarding certain matters relating
to Florida law.
5.1(c)* Form of opinion of Brown & Wood, LLP, regarding certain matters relating to
New York law.
8.1* Form of opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation,
regarding certain tax matters.
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 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 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, 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, 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.
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, 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 GrantAmerica, Inc.
(currently known as HomeSide, Inc.) and Barnett Banks, Inc. (the "BMC Purchase
Agreement").
</TABLE>
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<PAGE> 225
<TABLE>
<S> <C>
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.
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, Inc. and The Chase Manhattan Bank, as Administrative Agent
for the Lenders parties to the Credit Agreement.
10.25 Amended and Restated HomeSide 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 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 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.
</TABLE>
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<PAGE> 226
<TABLE>
<S> <C>
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, Inc.,
HomeSide Holdings, The Bank of New York, as Trustee, and Chemical 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 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 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.
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.
10.44 Management Stockholder Agreement dated as of May 15, 1996 between HomeSide,
Inc., The First National Bank of Boston, Thomas H. Lee Equity Fund III, L.P.
and certain affiliates thereof, Madison Dearborn Capital Partners, L.P. and
certain employees of HomeSide, 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.
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 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 and Merrill Lynch Mortgage Capital
Inc.
12.1 HomeSide Lending, Inc. -- Computation of the Ratio of Earnings to Fixed
Charges.
12.2 BancBoston Mortgage Corporation -- Computation of the Ratio of Earnings to
Fixed Charges.
</TABLE>
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<PAGE> 227
<TABLE>
<S> <C>
12.3 Barnett Mortgage Company -- Computation of the Ratio of the Ratio of Earnings
to Fixed Charges.
21.1 List of subsidiaries of HomeSide Lending, Inc.
23.1* Consent of Arthur Andersen LLP
23.2* Consent of Coopers & Lybrand L.L.P.
23.3* Consent of KPMG Peat Marwick LLP
23.4 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included
in Exhibit 5.1)
24.1 Powers of Attorney (contained on the signature page to this Registration
Statement).
25.1 Form of T-1 Statement of Eligibility Under Trust Indenture Act of 1939 of The
Bank of New York.
27.1 Financial Data Schedule
</TABLE>
- ---------------
+ Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment filed with the Securities and Exchange Commission.
* This Exhibit is filed with this Amendment No. 2 to Registration Statement.
(b) Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts and Reserves For the three
years ended December 31, 1995 For Barnett Mortgage Company (at page S-1).
Schedule II -- Valuation and Qualifying Accounts and Reserves For the year
ended December 31, 1994 For BancPLUS Financial Corporation and Subsidiary (at
page S-2).
Schedules other than those listed above have been omitted since the
information is not applicable, not required or is included in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under Item 14 above or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes (1) that for purposes of
determining any liability under the Act, the information omitted from the form
of prospectus filed as part of a registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and (2) that
for the purpose of determining any liability under the Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
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<PAGE> 228
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
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<PAGE> 229
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
JACKSONVILLE, STATE OF FLORIDA, ON THE 5TH DAY OF APRIL, 1997.
HOMESIDE LENDING, INC.
By: /s/ JOE K. PICKETT
----------------------------------
JOE K. PICKETT
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOE K. PICKETT Chairman of the Board, Chief April 5, 1997
- ---------------------------------------- Executive Officer and Director
JOE K. PICKETT (Principal Executive Officer)
/s/ HUGH R. HARRIS President, Chief Operating Officer April 5, 1997
- ---------------------------------------- and Director
HUGH R. HARRIS
/s/ KEVIN D. RACE Executive Vice President and Chief April 5, 1997
- ---------------------------------------- Financial Officer (Principal
KEVIN D. RACE Financial and Accounting Officer)
/s/ ROBERT J. JACOBS Executive Vice President, April 5, 1997
- ---------------------------------------- Secretary, General Counsel and
ROBERT J. JACOBS Director
</TABLE>
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<PAGE> 230
BARNETT MORTGAGE COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------------
BALANCE AT ACQUIRED CHARGED TO CHARGES TO BALANCE AT
BEGINNING FROM COSTS AND OTHER END
DESCRIPTION OF PERIOD BANCPLUS EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------------------------------- ---------- --------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Reserve for losses $ -- $11,300 $ $ -- $ -- $ 11,300
YEAR ENDED DECEMBER 31, 1994
Reserve for losses -- -- -- -- --
YEAR ENDED DECEMBER 31, 1993
Reserve for losses $ -- $ -- $ -- $ -- $ --
</TABLE>
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<PAGE> 231
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE TWO YEARS ENDED DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Reserve for losses $ 13,300 $-- $-- $ (1,900)(a) $ 11,400
Year ended December 31, 1993
Reserve for losses 14,700 -- -- (1,400)(a) 13,300
</TABLE>
- ---------------
(a) Represents losses incurred on dispositions of foreclosure claims and VA
buydowns.
S-2
<PAGE> 232
EXHIBIT INDEX
Unless otherwise indicated, all Exhibits have been previously filed or are
incorporated by reference to the Parent's Registration Statement on Form S-4,
No. 333-06737.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
1.1 Form of Distribution Agreement.......................................
3.1 Certificate of Incorporation of HomeSide Lending, Inc................
3.2 By-Laws of HomeSide Lending, Inc.....................................
4.1 Form of Indenture....................................................
4.2 Form of Fixed Rate Medium-Term Note..................................
4.3 Form of Floating Rate Medium-Term Note...............................
5.1(a)* Form of opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation regarding legality of the securities being registered....
5.1(b)* Form of opinion of Robert J. Jacobs, Esq., regarding certain matters
relating to Florida law.
5.1(c)* Form of opinion of Brown & Wood, LLP, regarding certain matters
relating to New York law.
8.1* Form of opinion of Hutchins, Wheeler & Dittmar, a Professional
Corporation, regarding certain tax matters...........................
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 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 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, 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, 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..............................................
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, Bank of Boston
Connecticut, Rhode Island Hospital Trust National Bank and Bank of
Boston Florida, N.A..................................................
</TABLE>
<PAGE> 233
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
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
GrantAmerica, 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..........................................
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, Inc. and The Chase Manhattan Bank, as
Administrative Agent for the Lenders parties to the Credit
Agreement............................................................
10.25 Amended and Restated HomeSide 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............................................................
</TABLE>
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<TABLE>
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<S> <C> <C>
10.29 Amended and Restated HomeSide 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
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,
Inc., HomeSide Holdings, The Bank of New York, as Trustee, and
Chemical 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 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 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....................................
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.......................................
10.44 Management Stockholder Agreement dated as of May 15, 1996 between
HomeSide, Inc., The First National Bank of Boston, Thomas H. Lee
Equity Fund III, L.P. and certain affiliates thereof, Madison
Dearborn Capital Partners, L.P. and certain employees of HomeSide,
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.................................
</TABLE>
<PAGE> 235
<TABLE>
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<S> <C> <C>
10.47 Loan and Security Agreement dated January 15, 1997 between HomeSide
Lending, Inc. and The Chase Manhattan Bank...........................
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.
12.1 HomeSide Lending, Inc. -- Computation of the Ratio of Earnings to
Fixed Charges........................................................
12.2 BancBoston Mortgage Corporation -- Computation of the Ratio of
Earnings to Fixed Charges............................................
12.3 Barnett Mortgage Company -- Computation of the Ratio of the Ratio of
Earnings to Fixed Charges............................................
21.1 List of subsidiaries of HomeSide Lending, Inc........................
23.1* Consent of Arthur Andersen LLP.......................................
23.2* Consent of Coopers & Lybrand L.L.P...................................
23.3* Consent of KPMG Peat Marwick LLP.....................................
23.4 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation
(included in Exhibit 5.1)............................................
24.1 Powers of Attorney (contained on the signature page to this
Registration Statement)..............................................
25.1 Form of T-1 Statement of Eligibility Under Trust Indenture Act of
1939 of The Bank of New York.........................................
27.1 Financial Data Schedule..............................................
</TABLE>
- ---------------
+ Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment filed with the Securities and Exchange Commission.
* This Exhibit is filed with this Amendment No. 2 to Registration Statement.
<PAGE> 1
EXHIBIT 5.1
April __, 1997
HomeSide Lending, Inc.
7301 Baymeadows Way
Jacksonville, Florida 32256
Ladies and Gentlemen:
We have acted as counsel to HomeSide Lending, Inc., a Florida
corporation (the "Company") in connection with the proceedings being taken to
register under the Securities Act of 1933, as amended, $1,000,000,000 aggregate
initial public offering price of debt securities pursuant to a Registration
Statement on Form S-1 (File No. 333-21193) filed with the Securities and
Exchange Commission (the "Registration Statement"). The debt securities are
being issued pursuant to an indenture in the form filed as an exhibit to the
Registration Statement (the "Indenture").
As such counsel, we have examined such corporate records, certificates
and other documents of or relating to the Company, and opinions of counsel in
jurisdictions other than Massachusetts, as we have deemed necessary as a basis
for the opinions hereinafter expressed. We have assumed the genuineness of all
signatures, the authenticity of all original or certified copies and the
conformity to original or certified copies of all copies submitted to us as
conformed or reproduction copies. We have also assumed, with respect to all
parties to agreements or instruments relevant hereto other than the Company,
that such parties had the requisite power and authority (corporate or otherwise)
to execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties and that such
agreements or instruments are valid, binding and enforceable obligations of such
parties.
Based upon the foregoing, subject to the limitations set forth herein
and having regard for such legal considerations as we deem relevant, we are of
the opinion that when the terms of the debt securities being offered pursuant to
the Registration Statement and their issue and sale have been duly established
in conformity with the Indenture and in conformity with any applicable law or
agreement or instrument then binding on the Company, and the debt securities
have been duly executed and authenticated in accordance with the terms of the
Indenture and issued and sold as contemplated in the Registration Statement, the
debt securities will constitute legal, valid and binding obligations of the
Company subject to (i) bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and similar laws of general application relating to or
affecting the enforcement of creditors' rights, (ii) the effect of
<PAGE> 2
HomeSide Lending, Inc.
March 14, 1997
Page 2
general principles of equity, including without limitation, concepts of
materiality, reasonableness, good faith and fair dealing and the possible
unavailability of specific performance or injunctive relief, whether considered
in a proceeding in equity or at law.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to us under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
HUTCHINS, WHEELER & DITTMAR
A Professional Corporation
<PAGE> 1
HOMESIDE LENDING INC. -- JACOBS OPINION
April , 1997
HomeSide Lending Inc.
7301 Baymeadows Way
Jacksonville, FL 32256
Ladies and Gentlemen:
I am General Counsel and Executive Vice President of HomeSide Lending,
Inc., a Florida corporation (the "Company"). The Company is registering under
the Securities Act of 1933, as amended, $1,000,000,000 aggregate initial
offering price of debt securities pursuant to a registration statement on Form
S-1 (File No. 333-21193) filed with the Securities and Exchange Commission (the
"Registration Statement"). The debt securities are being issued pursuant to an
indenture in the form filed as an exhibit to the Registration Statement (the
"Indenture").
As such counsel, I have examined such corporate records, certificates and
other documents of or relating to the Company as I have deemed necessary as a
basis for the opinions hereinafter expressed. I have assumed the genuineness of
all signatures, the authenticity of all original or certified copies and the
conformity to original or certified copies of all copies submitted to me as
conformed or reproduction copies. I have also assumed, with respect to all
parties to agreements or instruments relevant hereto other than the Company,
that such parties had the requisite power and authority (corporate or otherwise)
to execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties and that such
agreements or instruments are valid, binding and enforceable obligations of such
parties.
<PAGE> 2
HomeSide Lending Inc.
April , 1997
Page 2
I am a member of the bar of the State of Florida. I express no opinion
herein as to the laws of any jurisdiction other than the laws of the State of
Florida.
Based upon the foregoing, subject to the limitations set forth herein and
having regard for such legal considerations as I deem relevant, I am of the
opinion that, when the terms of the debt securities being offered pursuant to
the Registration Statement have been duly established in conformity with the
Indenture and in conformity with any applicable law or agreement or instrument
then binding on the Company, then, such debt securities will be duly authorized
by all requisite action (corporate or otherwise) by the Company.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to my name under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement and to
the reliance by Hutchins, Wheeler & Dittmar, a Professional Corporation and
Brown & Wood, LLP on this opinion as to matters of Florida law in rendering
their opinions of even date herewith filed as Exhibits to the Registration
Statement.
Very truly yours,
Robert J. Jacobs
Executive Vice President, Secretary and General
Counsel
HomeSide Lending Inc.
167187-1
<PAGE> 1
April __, 1997
HomeSide Lending, Inc.
7301 Baymeadows Way
Jacksonville, Florida 32256
Ladies and Gentlemen;
We have acted as special counsel as to the law of the State of New York in
connection with the filing by HomeSide Lending, Inc. (the "Company") of a
Registration Statement on Form S-1 (File No. 333-21193) (the "Registration
Statement") relating to $1,000,000,000 aggregate initial public offering price
of its debt securities (the "Debt Securities"). The Debt Securities are to be
issued pursuant to an indenture in the form filed as an exhibit to the
Registration Statement (the "Indenture").
We have examined such documents and records and made such investigation as
we deemed appropriate or necessary, including examining the Registration
Statement and the Indenture.
Based upon the foregoing, subject to the limitations set forth herein and
having regard for such legal considerations as we deem relevant, we are of the
opinion that when the terms of the Debt Securities being offered pursuant to the
Registration Statement and their issue and sale have been duly established in
conformity with the Indenture and in conformity with any applicable law or
agreement or instrument then binding on the Company, and the Debt Securities
have been duly executed and authenticated in accordance with the terms of the
Indenture and issued and sold as contemplated in the Registration Statement, the
Debt Securities will constitute legal, valid and binding obligations of the
Company subject to (i) bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and similar laws of general application relating to or
affecting the enforcement of creditors' rights, (ii) the effect of general
principles of equity, including without limitation, concepts of materiality,
reasonableness, good faith and fair dealing and the possible unavailability of
specific performance or injunctive relief, whether considered in a proceeding in
equity or at law.
This opinion is confined to and is given on the basis of the laws of the
State of New York as they exist on the date hereof. In giving this opinion, we
have, with your permission, relied as to matters of Florida law upon the opinion
of Robert J. Jacobs, Executive Vice President and Secretary of the Company.
<PAGE> 2
HomeSide Lending, Inc.
April __, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reliance by Hutchins, Wheeler & Dittmar, a
Professional Corporation, on this opinion as to matters of New York law in
rendering their opinion of even date herewith filed as an exhibit to the
Registration Statement.
Very truly yours,
Brown & Wood LLP
MXF/cdr:167201-2
- 2 -
<PAGE> 1
EXHIBIT 8.1
April __, 1997
HomeSide Lending, Inc.
7301 Baymeadows Way
Jacksonville, Florida 32256
Ladies and Gentlemen:
We have acted as counsel to HomeSide Lending, Inc., a Florida
corporation (the "Company") in connection with the proceedings being taken to
register under the Securities Act of 1933, as amended $1,000,000,000 principal
amount of debt securities pursuant to a Registration Statement on Form S-1 (File
No. 333-21193) filed with the Securities and Exchange Commission (the
"Registration Statement"). The debt securities will be issued pursuant to an
Indenture in the form filed as an exhibit to the Registration Statement.
As such counsel, we have examined such documents as we have deemed
necessary as a basis for the opinions hereinafter expressed. Based upon the
foregoing, and having regard for such legal considerations as we deem relevant,
we are of the opinion that the material United States federal income tax
consequences to holders of the debt securities under currently applicable law
are set forth under the heading "United States Federal Income Tax
Considerations" in the Prospectus Supplement forming a part of the Registration
Statement, subject to the assumptions and qualifications set forth therein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
HUTCHINS, WHEELER & DITTMAR
A Professional Corporation
<PAGE> 1
EXHIBIT 10.9
PMSR FLOW AGREEMENT
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SELLER NAME: THE FIRST NATIONAL BANK OF BOSTON, 100 FEDERAL STREET, BOSTON,
MASSACHUSETTS 02110
SELLER CONTACT PERSON: PARKS AVERY PHONE NO: (401) 278-8275
FAX NO: (401)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SELLER NAME: BANK OF BOSTON CONNECTICUT, 31 PRATT STREET, HARTFORD,
CONNECTICUT 06103
SELLER CONTACT PERSON: _____________________ PHONE NO: ____________________
FAX NO: ______________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SELLER NAME: RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, ONE HOSPITAL TRUST
PLAZA, PROVIDENCE, RI
SELLER CONTACT PERSON: _____________________ PHONE NO: ____________________
FAX NO: ______________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SELLER NAME: BANK OF BOSTON FLORIDA, N.A., 450 ROYAL PALM WAY, PALM BEACH,
FL 33480
SELLER CONTACT PERSON: _____________________ PHONE NO: ____________________
FAX NO: ______________________
- --------------------------------------------------------------------------------
This PMSR Flow Agreement (the "PMSR Flow Agreement") is entered into as of the
date shown above by and between the Buyer and the Seller and applies to any of
the transactions described below.
RECITALS.
1. The Seller originates Mortgage Loans from time to time.
2. The Seller desires to sell to the Buyer the right, title, and interest in and
to the Servicing Rights to certain Mortgage Loans on the terms and conditions
set forth below in this PMSR Flow Agreement.
3. The Buyer desires to buy from the Seller the right, title, and interest in
and to the Servicing Rights on the terms and conditions set forth below in this
PMSR Flow Agreement.
IN CONSIDERATION of the mutual promises made in this PMSR Flow Agreement and
other good and valuable consideration, the receipt and sufficiency of which are
acknowledged, the Buyer and the Seller agree as follows:
ARTICLE 1.
DEFINITIONS.
As used in this PMSR Flow Agreement, the following capitalized terms shall have
the meanings given to them below:
1.1. "ADJUSTMENT DATE" The third Business Day after the Transfer Date.
1.2. "AGENCY" means FHA, HUD, VA, and/or a private mortgage insurance company,
as applicable.
1.3. "BORROWER" means each obligor under a Mortgage Note.
1.4. "BUSINESS DAY" means any day other than a Saturday, Sunday, federal
holiday, or any other day on which the Buyer or the Seller is not open for
business.
1.5. "BUYDOWN" means any reduction in a Borrower's monthly Mortgage Loan payment
required under a Mortgage Note or otherwise provided for in a related document.
The funds for each Buydown must
<PAGE> 2
be deposited into an Escrow Account and used to supplement the Borrower's
monthly Mortgage Loan payment.
1.6. "BUYER" means BancBoston Mortgage Corporation, a business corporation
organized under the laws of the state of Florida and with its principal place of
business at 7301 Baymeadows Way, Jacksonville, Florida 32256. The Seller
understands that the Buyer intends to change its name after the date of this
PMSR Flow Agreement.
1.7. "CUSTODIAL ACCOUNT" means each deposit account maintained by the Seller
which: (a) complies with Agency requirements and the Servicing PMSR Flow
Agreement, and (b) contains P&I or T&I.
1.8. "CUSTODIAL FILE" means a file to be delivered to the Custodian which
contains documents required by the Seller, including, but not limited to,
original Mortgage Notes endorsed in blank by the Buyer, original recorded
assignments from the Seller to the Buyer, any original recorded interim
assignments relating to the Mortgage Loans, original recorded Mortgage, original
title policies and any endorsements to such policies or other forms of evidence
of title, and appraisals.
1.9. "CUSTODIAN" means the financial institution designated by the Buyer to hold
in trust the Custodial Files. Unless otherwise (i) required by a secured party
having a security interest in the Servicing Rights, or (ii) selected by the
Buyer in accordance with the Servicing Agreement, the Custodian shall be The
First National Bank of Boston.
1.10. "CUTOFF DATE" means the Business Day immediately preceding each Transfer
Date.
1.11. "ESCROW ACCOUNTS" means Mortgage Loan escrow/impound accounts for taxes,
insurance, assessments, ground rents, Buydowns, loss drafts, suspense balances,
and any other such amounts which are maintained by the Seller as a fiduciary for
the Borrowers and relate to the Servicing Rights.
1.12. "EXCLUDED MORTGAGE LOAN" A Mortgage Loan which is: (a) delinquent by three
(3) or more monthly payments as of the Transfer Date, (b) in litigation as of
the Transfer Date, (c) in bankruptcy as of the Transfer Date, (d) in foreclosure
or subject to an assignment of deed in lieu of foreclosure as of the Transfer
Date, (e) repurchased prior to the Transfer Date, (f) paid in full within sixty
(60) days after the Sale Date, (g) subject to an interest rate subsidy under the
Soldiers' and Sailors' Relief Act as of the Transfer Date, or (h) a HUD Repo or
VA Vendee Mortgage Loan .
1.13. "FHA" means the Federal Housing Administration or any successor to the
FHA.
1.14. "FLOOD SERVICE FEE" means a flood service fee paid by the Seller to the
Flood Service Provider or the Buyer to obtain certain flood certification and
"life of loan" tracking services for the Mortgage Loans.
1.15. "FLOOD SERVICE PROVIDER" means the company which provides a transferable
flood certification and "life of loan" tracking service for the Mortgage Loans.
The list of Flood Service Providers acceptable to the Buyer is set forth in
EXHIBIT E to this PMSR Flow Agreement. The Flood Servicer Provider must guaranty
the accuracy of the flood status determination and any future flood zone
changes.
1.16. "GUIDE" means: (a) the HUD 4155.1 REV-4, Mortgage Credit Analysis for
Mortgage Insurance on 1-to-4 Family Properties, HUD 4000.2 REV-2, Mortgagee
Handbook Application Through Insurance (Single Family), HUD 4000.4 REV-1, Single
Family Direct Endorsement Program, HUD 4145.1 REV-2, Architectural Processing
and Inspections For Home Mortgage Insurance, 4150.1 REV-1 Valuation Analysis for
Home Mortgage Insurance, HUD 4060.1 REV-1, Mortgagee Approval Handbook, (b) the
VA Lender's Handbook, and/or (c) the provisions of the Servicing Agreement
relating to the servicing procedures to be followed by the Buyer.
1.19. "HUD" means the United States Department of Housing and Urban Development,
or any successor to HUD.
1.20. "MANDATORY DELIVERY" means the required delivery of Servicing Rights by
the Seller to the Buyer under the terms of this PMSR Flow Agreement. The
delivery of Servicing Rights by the Seller and the acceptance of Servicing
Rights by the Buyer are not optional unless this PMSR Flow Agreement is
terminated in the manner set forth below. The Seller's failure to sell and
deliver the Servicing Rights to the Buyer will be a breach of this PMSR Flow
Agreement.
1.21. "MARKETING AGREEMENT" means the Marketing Agreement to be entered into by
and between GrantAmerica, Inc., which may later change its name, and Bank of
Boston Corporation on or
- 2 -
<PAGE> 3
before the Closing Date and which will govern the terms under which Newco
Mortgage Corporation's mortgagors may be solicited for certain products and
services.
1.22. "MASTER TAKE-OUT COMMITMENT" means the take-out commitment entered or to
be entered into by and between the Buyer and the Seller and pursuant to which
the Seller will repurchase Mortgage Loans from the Buyer.
1.23. "MORTGAGE" means a mortgage, deed of trust, or other such security
instrument which is executed by a Mortgagor pledging the Mortgaged Property as
security for repayment of a Mortgage Note.
1.24. "MORTGAGE DOCUMENTS" means all documents required by an Agency and/or the
Seller to service a Mortgage Loan.
1.25. "MORTGAGE LOAN" means a residential mortgage loan originated by the Seller
which is: (a) secured by a Mortgage, and (b) the subject of the Servicing Rights
purchased by the Buyer.
1.26. "MORTGAGE NOTE" means the written promise of a Borrower to pay a sum of
money in United States' dollars at a stated interest rate over a specified term,
and which is secured by a Mortgage.
1.27. "MORTGAGED PROPERTY" means the real property, together with the
one-to-four family dwelling and any other improvements situated on such real
property, which have been pledged by a Mortgagor under a Mortgage as collateral
to secure the obligation under a related Mortgage Note.
1.28. "MORTGAGOR" means each person who executes a Mortgage.
1.29. "OPERATING AGREEMENT" means the Operating Agreement entered into by and
between the Buyer and the Seller pursuant to which this PMSR Flow Agreement is
attached as EXHIBIT E.
1.30. "P & I" means principal and interest.
1.31. "PMSR FLOW AGREEMENT" has the meaning set forth in the recitals.
1.32. "PRIOR ORIGINATOR" means each entity which originated a Mortgage Loan,
other than the Seller.
1.33. "PURCHASE PRICE" means the purchase price for the Servicing Rights, as
described in SECTION 4.1 below.
1.34. "PURCHASE PRICE PERCENTAGE" means the percentage set forth in EXHIBIT A to
this PMSR Flow Agreement.
1.35. "SALE DATE" means (a) each date on which the Seller repurchases a Mortgage
Loan from the Buyer under the Master Take-Out Commitment, or (b) upon expiration
of the Master Take-Out Commitment, when the Buyer and the Seller mutually agree
but in no event later than the date necessary to properly commence Servicing
after the Mortgage Loan closing.
1.36. "SELLER" means the entity identified at the top of the first page of this
PMSR Flow Agreement as the Seller.
1.37. "SERVICER" means the entity which is responsible for Servicing the
Mortgage Loans.
1.38. "SERVICING" means the performance of Mortgage Loan servicing functions,
including, but not limited to, (a) collecting and disbursing of funds held in
trust to pay taxes, hazard insurance, mortgage insurance and other items as they
become due, (b) collecting and remitting principal and interest payments to
investors, and (c) resolving defaulted Mortgage Loans, in each case as set forth
in the Servicing Agreement.
1.39. "SERVICING AGREEMENT" means the Mortgage Loan Servicing Agreement entered
into by and between the Buyer and the Seller pursuant to which the Buyer agrees
to service certain mortgage loans.
1.40. "SERVICING FEE" means the fee collected by the Servicer for Servicing the
Mortgage Loans. The servicing fee shall be equal to the amount set forth in the
Servicing Agreement.
1.41. "SERVICING FILE" means a file containing any and all documents required by
an Agency and the Buyer to service Mortgage Loans on behalf of such Agency or
the Seller.
1.42. "SERVICING RIGHTS" means the right to receive the Servicing Fee and any
other income relating to or arising out of the Servicing Rights purchased by the
Buyer under this PMSR Flow Agreement, including, but not limited to, the right
to hold the Escrow Accounts.
- 3 -
<PAGE> 4
1.43. "T & I" means the taxes, insurance and any additional amount other than
P&I which is contained in an Escrow Account.
1.44. "TRANSFER DATE" means the Sale Date.
1.45. "TRETS" means Transamerica Real Estate Tax Service.
1.46. "TRETS FEE" means a tax service fee paid by the Seller to TRETS to obtain
tax services from TRETS.
1.47. "VA" means the Department of Veterans Affairs or any successor to VA.
ARTICLE 2.
THE BUYER'S AND SELLER'S OBLIGATIONS BEFORE EACH TRANSFER DATE.
The Buyer and the Seller shall comply with the following terms and conditions
before each Transfer Date.
2.1. CONSISTENT WITH THE SERVICING AGREEMENT. All Mortgage Loans delivered to
the Buyer will be consistent with the criteria set forth in the Servicing
Agreement and the Operating Agreement.
2.2. AGENCY NOTIFICATION OF TRANSFER.
The Seller will, at its sole cost, notify the applicable Agency of the transfer
of the Servicing Rights to the Buyer within the time period required by the
applicable Agency. The Seller shall pay any and all transfer fees charged by
such Agency.
2.3. BORROWER COMMUNICATIONS.
The Seller will give written notice to each Borrower of the transfer of the
Servicing Rights to the Buyer in compliance with applicable law, including, but
not limited to, the Real Estate Settlement Procedures Act and its implementing
Regulation X. Such notice will include, but not be limited to, instructions
about when and where the Borrower should make the Borrower's next Mortgage Loan
payment. The notice will instruct Borrowers to forward future Mortgage Loan
payments to an address to be provided to the Borrower in the Seller's mortgage
servicing transfer letter (the "good-bye letter").
2.4. FLOOD SERVICE COMMUNICATIONS WITH FLOOD SERVICE PROVIDER.
The Seller will give written notice to each Flood Service Provider of the
transfer of Servicing Rights to the Buyer. The Seller will provide any
information required by such Flood Service Provider to effect the creation
and/or transfer of "life of loan" tracking service to the Buyer.
2.5. INSURANCE COMMUNICATIONS.
2.5.1. COMMERCIAL INSURANCE CARRIERS. The Seller will give written notice to
each insurance carrier of the transfer of Servicing Rights to the Buyer. Such
notice will include the following requests:
(a) Name the Buyer and its successors and assigns as an insured in the lender's
policy of title insurance for the Mortgage Loan (unless the lender's policy of
title insurance for the Mortgage Loan defines "insured" to include any owner of
indebtedness secured by the insured Mortgage),
(b) Name the Buyer and its successors and assigns as an insured, and include a
lender's loss payable endorsement, in the fire and extended coverage policy for
the Mortgaged Property,
(c) Name the Buyer and its successors and assigns as an insured, and include a
lender's loss payable endorsement, in the flood insurance policy and in the
catastrophe insurance policy, if any, for the Mortgaged Property, and
(d) Name the Buyer and its successors and assigns as an insured, and include a
lender's loss payable endorsement, in the private mortgage insurance policy for
the Mortgage Loan.
The Buyer's Mortgage Loan numbers must be included as part of the information
provided by the Seller to the insurance carrier under this SECTION 2.5.1.
2.5.2. FHA INSURANCE. The Seller will give notice to FHA of the transfer of the
Servicing Rights to the Buyer in accordance with FHA guidelines.
2.6. NO OBLIGATION TO BUY.
Nothing in this PMSR Flow Agreement will be
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construed as obligating the Buyer to purchase any Servicing Rights from the
Seller unless the related Mortgage Loan conforms in all respects to the terms,
conditions, representations, warranties, and covenants contained in this PMSR
Flow Agreement.
2.7. SOLICITATION FOR REFINANCES.
The Seller's ability to solicit a Borrower for a refinancing is described in the
Marketing Agreement.
2.8. ACCESS TO INFORMATION.
The Seller will give to the Buyer and its counsel, accountants, and other
representatives reasonable access, upon reasonable prior notice, during normal
business hours throughout the period before each Transfer Date, to all of
Seller's files, books and records relating to the Mortgage Loans, Servicing
Rights and/or Escrow Accounts.
ARTICLE 3.
THE BUYER'S AND SELLER'S OBLIGATIONS ON AND AFTER THE TRANSFER DATE.
3.1. SELLER TRANSFERS SERVICING RIGHTS.
The Seller will transfer the applicable Servicing Rights to the Buyer on each
Transfer Date.
3.2. SELLER ASSIGNS SERVICING RIGHTS.
The Seller will prepare and record the assignments of lien required to service
the Mortgage Loans at its sole cost and expense. The Seller will not use: (a)
blanket assignments, or (b) facsimile signatures on any assignment.
3.3. TRETS FEES.
TRETS will provide all tax related services for the Mortgage Loans. For each
Mortgage Loan, the Seller will pay any and all TRETS fees as negotiated with
TRETS for the "life of loan" transferable contracts.
3.4. FLOOD CERTIFICATION FEES
For each Mortgage Loan, the Seller will: (a) transfer and assign a "life of
loan" transferable flood tracking service contract to the Buyer, and (b) pay any
and all Flood Service Provider fees as negotiated with the applicable Flood
Service Provider for the "life of loan" transferable tracking services.
3.5. MORTGAGE PAYMENTS RECEIVED AFTER TRANSFER DATE.
The Seller will deliver to the Buyer by overnight courier each Mortgage Loan
payment received by the Seller each day during the sixty (60)-day period
following each Transfer Date. The Seller will deliver to the Buyer by first
class mail each Mortgage Loan payment received by the Seller each day after such
sixty (60)-day period has ended. Each Mortgage Loan payment will be accompanied
by: (a) an endorsement assigning such payment to the Buyer, and (b) information
sufficient to permit the Buyer to process each such payment.
3.6. SUPPLEMENTARY INFORMATION.
The Seller will give the Buyer any and all information which is reasonably
necessary for the Buyer to Service the Mortgage Loans no later than ten (10)
Business Days after the Seller receives the Buyer's request for such
information.
ARTICLE 4.
THE PURCHASE PRICE.
4.1. CALCULATING THE PURCHASE PRICE.
With respect to Servicing Rights purchased by the Buyer under a flow
arrangement, the Buyer will pay the Purchase Price to the Seller in an amount
equal to:
(a) the Purchase Price Percentage shown in EXHIBIT A to this PMSR Flow
Agreement, as amended from time to time by the Buyer,
(b) multiplied by the outstanding principal balance of the applicable Mortgage
Loans as of the Sales Date, less the amount of the outstanding principal balance
of the Excluded Mortgage Loans.
(c) adjusted in the manner set forth in EXHIBIT A to this PMSR Flow Agreement,
as amended from time to time by the Buyer.
4.2. WHEN THE PURCHASE PRICE WILL BE PAID TO THE SELLER.
The Buyer will pay the Purchase Price to the Seller on the applicable Sale Date.
4.3. ADJUSTMENTS FOR MORTGAGE LOAN PAYOFFS.
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If a Mortgage Loan, with the exception of an Excluded Mortgage Loan, is paid off
within sixty (60) days after the Sale Date, the Purchase Price shall be reduced
in an amount equal to: (a) the outstanding principal balance of the Mortgage
Loan as of the Sale Date, and (b) multiplied by the Purchase Price Percentage
applicable to the Servicing Rights at the time the Buyer purchased such
Servicing Rights.
4.4. CORRECTIONS.
If, within one hundred and eighty (180) days after the Transfer Date: (i) the
principal balance of any Mortgage Loan used in computing the amount of the
Purchase Price were found to be incorrect, or (ii) any other item which affects
the Purchase Price is found to be incorrect, the Purchase Price will be adjusted
promptly, and adjustments will be made to the appropriate party.
ARTICLE 5.
REIMBURSEMENT FOR DELINQUENT MORTGAGE LOANS.
5.1 REASONS WHY.
The Seller will reimburse the Purchase Price to the Buyer if a Mortgage Loan
becomes sixty (60) days or more delinquent during the first twelve (12) months
following the first payment due to the Buyer and the Mortgage Loan subsequently
becomes ninety (90) days or more delinquent.
5.2. REIMBURSEMENT AMOUNT.
If the Seller reimburses the Purchase Price to the Buyer, the Seller will pay to
the Buyer an amount equal to:
(a) the then current unpaid principal balance of the Mortgage Loan,
(b) multiplied by the Purchase Price Percentage applicable to the Servicing
Rights at the time the Buyer purchased such Servicing Rights..
5.3. TIMING FOR REIMBURSEMENT.
The Seller will complete each such reimbursement transaction no later than ten
(10) Business Days after the Seller has received notice of such reimbursement
requirement from the Buyer.
ARTICLE 6.
SELLER'S REPRESENTATIONS AND WARRANTIES RELATING TO THE MORTGAGE LOANS.
The Seller represents and warrants to the Buyer with respect to each Mortgage
Loan that, as of the Sale Date, to and including each Transfer Date:
6.1. NOTE AND MORTGAGE ARE VALID OBLIGATIONS OF THE OBLIGORS.
The Mortgage Note and the related Mortgage are genuine and each is the legal,
valid, and binding obligation of the related Borrower and Mortgagor, enforceable
in accordance with their terms, except as such enforceability may be limited by
(a) applicable bankruptcy, reorganization, insolvency, moratorium and other laws
affecting creditors' rights or debtors' obligations from time to time in effect,
and (b) the availability of the remedy of specific performance or injunctive
relief or any other equitable remedy.
All parties to the Mortgage Note and the Mortgage had legal capacity to execute
the Mortgage Note and the Mortgage, and each Mortgage Note and Mortgage have
been duly and properly executed by such parties.
6.2. LIENS FREE OF ENCUMBRANCE.
The Mortgage is a valid and existing lien on the Mortgaged Property described in
the Mortgage, and the Mortgaged Property is free and clear of all encumbrances
and liens, including but not limited to mechanics' liens and materialmen's
liens, having priority over the first lien of the Mortgage except for liens for
real estate taxes and special assessments not yet due and payable, and no rights
are outstanding that under the law could give rise to such lien.
6.3. LOANS SATISFY THE GUIDE.
Each Mortgage Loan satisfies the requirements and terms set forth in the
applicable Guide in effect at the time of delivery to the applicable Agency.
There is no circumstance or condition relating to a Mortgage Loan, the Mortgaged
Property, the Mortgage Documents, the Borrower or the Borrower's credit standing
that can reasonably be expected to cause an Agency to regard a Mortgage Loan as
not eligible for insurance coverage or guaranty, as applicable.
6.4. NO PERSON OR MORTGAGE RELEASED.
No party to the Mortgage Note or Mortgage has been released in whole or in part
from the Mortgage Note
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or the Mortgage, and no part of the Mortgaged Property has been released from
the Mortgage.
6.5. NO TAX LIENS.
There was no delinquent tax or delinquent assessment lien against the Mortgaged
Property at the time the related Mortgage Loan was closed or on the Transfer
Date. If the Seller receives knowledge of any such delinquency, the Seller must
notify the Buyer within two (2) Business Days after obtaining such knowledge and
cure such event within thirty (30) days after such notice. In any event, the
Seller will indemnify and hold Buyer harmless from and against any and all
costs, losses, and expenses relating to or arising out of such delinquency.
6.6. SELLER HAS PAID ALL TAXES AND ASSESSMENTS.
All taxes, governmental assessments, all hazard insurance premiums, flood
insurance premiums, mortgage insurance premiums, leasehold payments or ground
rents which previously became due have been paid by the Seller or, if not
escrowed, by the applicable Borrower.
6.7. NO DEFENSE TO PAYMENT.
The Mortgage Loan is not subject to any right of rescission, set-off,
counterclaim, or defense, including the defense of usury, nor will the operation
of any of the terms of the Mortgage Note or the Mortgage, or the exercise of any
right thereunder, render either the Mortgage Note or the Mortgage unenforceable,
in whole or in part, or subject it to any right of rescission, set-off,
counterclaim or defense, including the defense of usury and no such right of
rescission, set-off, counterclaim or defense has been asserted with respect
thereto.
6.8. LOANS COMPLY WITH LAW.
Each Mortgage Loan application was taken and processed, and each Mortgage Loan
was made in compliance in all material respects with all applicable local, state
and federal laws, regulations, rules and orders, including without limitation;
usury, the Equal Credit Opportunity Act and its implementing Regulation B, the
Real Estate Settlement Procedures Act and its implementing Regulation X, the
Financial Institutions Reform Recovery And Enforcement Act and its implementing
regulations, Federal Deposit Insurance Corporation Improvement Act, the
Truth-In-Lending Act and its implementing Regulation Z, the Fair Credit
Reporting Act and any applicable state credit reporting laws, the Fair Debt
Collection Practices Act, the Fair Housing Act, and Fair Lending Laws in all
material respects, and consummation of the transactions contemplated hereby, by
the Seller will not involve the violation in any material respect of any such
laws.
6.9. ADEQUATE REMEDIES OF HOLDER.
Each Mortgage contains customary and enforceable provisions which give the
holder of the Mortgage adequate rights and remedies to realize against the
Mortgaged Property and to benefit from its security, including, but not limited
to: (a) in the case of a Mortgage designated as a Deed of Trust, by trustee's
sale; and (b) otherwise by foreclosure subject, in each case, to any limitations
arising from any bankruptcy, insolvency or other similar laws for the benefit of
debtors.
6.10. TITLE INSURANCE.
A title insurance policy has been issued for each Mortgage Loan insuring the
Seller, its successors and assigns, in an amount no less than the outstanding
Mortgage Loan principal balance, that the related Mortgage is a valid lien on
the Mortgaged Property and that the Mortgaged Property is free and clear of all
encumbrances and liens having priority over the lien of the Mortgage, except
for: (a) liens for real estate taxes and special assessments not yet due and
payable, (b) covenants, restrictions, rights of way, easements, and other
matters customary and acceptable to institutional lenders and title insurance
companies in the jurisdictions in which such Mortgaged Property is located, and
(c) easements and restrictions of record being acceptable to the Agencies and to
the Buyer, and specifically identified in the title insurance policy. Unless the
Mortgaged Property is within a jurisdiction where title insurance was
unavailable, or the form of title evidence is not the general form, a mortgage
title insurance policy on current prescribed ALTA form, or such other form of
title insurance policy with a carrier acceptable to the Agencies and reasonably
acceptable to the Buyer, is in effect as to the Mortgaged Property.
6.11. NO CONDEMNATION PROCEEDINGS.
There is no proceeding pending for the total or partial condemnation of the
Mortgaged Property and such property is undamaged by waste, fire, earthquake or
earth movement, windstorm, flood, tornado or other casualty, so as to affect
adversely the value of the
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Mortgaged Property as security for the Mortgage Loan or the use for which the
premises were intended.
6.12. NO VIOLATION OF ZONING LAWS.
No improvements located on or being part of the Mortgaged Property are in
violation of any applicable zoning law or regulation. All inspections, licenses
and certificates required to be made or issued with respect to all occupied
portions of the Mortgaged Property and, with respect to the use and occupancy of
the same, including, but not limited to, certificates of occupancy and fire
underwriting certificates have been made or obtained from the appropriate
authorities.
6.13. PROCEEDS FULLY DISBURSED.
Except for Escrows Account funds retained for completion of Mortgaged Property
improvements, the proceeds of the Mortgage Loan have been fully disbursed, there
is no requirement for future advances thereunder and any and all requirements as
to completion of any on-site or off-site improvements and as to disbursements of
any Escrow Account funds therefore have been complied with. All costs, fees and
expenses incurred in making, closing or recording the Mortgage Loans has been
paid by the Seller.
6.14. DUE ON SALE.
Each Mortgage contains an enforceable provision for the acceleration of the
payment of the unpaid principal balance of the Mortgage Loan in the event the
related Mortgaged Property is sold or transferred without the prior consent of
the mortgagee thereunder, unless prohibited by state law, and subject to any
limitations arising from any bankruptcy, insolvency or other similar laws for
the benefit of debtors.
6.15. ORIGINATION AND COLLECTION PRACTICES.
The origination and collection practices used by the Seller for each Mortgage
Loan have been in all respects legal, proper, prudent, customary in the mortgage
servicing business, and in accordance with the applicable Agency's Guide. There
are no deficiencies in any Escrow Account deposit or payment, and no Escrow
Account deposits or payments or other charges or prepayments due to the Seller
have been capitalized under any Mortgage or the related Mortgage Note.
6.16. HAZARD INSURANCE.
There is in force for each Mortgaged Property a hazard insurance policy which:
(a) is acceptable to the applicable Agency and reasonably acceptable to the
Buyer, (b) contains a standard mortgagee clause, (c) insures against loss or
damage by fire, all other hazards set forth in the standard extended coverage
form of endorsement, and any other insurable risks against hazards required by
the applicable Agency, (d) has been issued in an amount equal to at least the
lesser of the outstanding principal balance of the Mortgage Loan or the full
insurable value of the improvements to the Mortgaged Property, and (e) if
required by the Flood Disaster Protection Act of 1973 and the National Flood
Insurance Reform Act of 1994, a flood insurance policy in an amount representing
coverage at least equal to the lesser of the outstanding principal balance of
the Mortgage Loan or the maximum amount of insurance which is available under
the Flood Disaster Protection Act of 1973 and the National Flood Insurance
Reform Act of 1994. The improvements to the Mortgaged Property have not been
affected in any substantial manner or suffered any material loss as a result of
any fire, explosion, accident, strike, riot, war or act of God or the public
enemy as of the Transfer Date, except as disclosed by the Seller to the Buyer in
accordance with EXHIBIT B to this PMSR Flow Agreement. All such insurance
policies remain in full force and effect.
6.17. SURVEYS AND FLOOD INSURANCE.
A survey, where required, has been made of the Mortgaged Property, and if in a
flood zone A or V in a FEMA flood map area in a participating community, flood
insurance has been provided. All of the improvements which were included for the
purpose of determining the appraised value of the Mortgaged Property lie wholly
within the boundaries and building restriction lines of such property, and no
improvements on adjoining properties encroach upon the Mortgaged Property unless
covered by title insurance and/or waivers.
6.18. PMI.
All Mortgage Loans which are the subject of private mortgage insurance are
evidenced by a private mortgage insurance policy. With respect to each such
policy: (a) all provisions of such private mortgage insurance policy have been
and are being complied with, (b) such policy is in full force and effect, and
(c) all premiums due under such policy have been paid by
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the Seller. Any Mortgage Loan subject to any such private mortgage insurance
policy obligates the Borrower to maintain such private mortgage insurance policy
and pay all such premiums and charges in connection therewith. Each private
mortgage insurance company will be reasonably acceptable to the Buyer.
6.19. FHA INSURANCE AND VA GUARANTY.
Each Mortgage Loan to be insured by the FHA is eligible for FHA insurance, and
the FHA insurance premiums which are due and payable for each such Mortgage Loan
have been paid by the Seller. Each Mortgage Loan to be guaranteed by the VA is
eligible for a VA guaranty.
6.20. APPRAISALS.
An appraisal has been made of each Mortgaged Property which conforms with: (a)
the applicable Guide, (b) the applicable Agency's requirements, (c) the Buyer's
requirements, and (d) applicable laws, rules, regulations and orders, including,
but not limited to, the Financial Institutions Reform Recovery And Enforcement
Act and its implementing regulations.
6.21. MORTGAGED PROPERTY LOCATED IN THE U.S.
The Mortgaged Property is located in the continental United States or the State
of Hawaii, and all such Mortgage Loans consist of a single parcel of real
property with a detached one-to-four family dwelling, a townhouse, or an
individual condominium unit in a development or an individual unit in a planned
unit development.
6.22. NO SUPERFUND SITE.
The Mortgaged Property is not located on a superfund site.
6.23. DOCUMENTS COMPLY WITH GUIDE.
The Mortgage Documents satisfy each of the requirements of the applicable Guide
and the Buyer, and the Mortgage Documents have been duly executed and are in a
form acceptable to the applicable Agency and the Buyer.
Each Mortgage Note, Mortgage and appraisal are on forms acceptable to the
applicable Agency and the Buyer, and the Mortgage Loan was originated, serviced,
and delivered, as applicable, in accordance with the applicable Guide and the
Buyer's requirements.
6.24. SERVICING FILES.
All documents which are required to be in the Servicing File have been provided
to the Buyer by the Seller in accordance with the applicable Agency's Guide.
6.25. ASSIGN MORTGAGE TO BUYER.
Each Mortgage, has been properly assigned to the Buyer by the Seller.
6.26. MORTGAGED PROPERTY TAX IDENTIFICATION.
Each Mortgaged Property tax identifications and Mortgaged Property description
is, in all material respects, accurate, complete and legally sufficient. Tax
segregation, where required, has been completed.
6.27. INTEREST ON ESCROW ACCOUNTS.
The Seller has credited to each Borrower's account all interest required to be
paid on any Escrow Account through each Transfer Date. The Seller will provide
to the Buyer evidence of each such payment upon the Buyer's request. If required
by applicable law, rules, regulations or orders, the Seller has implemented
backup withholding of interest accrual on each such Escrow Account, and the
Seller will provide to the Buyer evidence of each such backup withholding on or
before each Transfer Date.
6.28. PAYOFF STATEMENTS.
Each Mortgage Loan payoff and assumption statement provided by the Seller to a
Mortgagor, Borrower, or his/her agent is complete and accurate.
6.29. ESCROW ACCOUNTS.
There is an Escrow Account for each Mortgage Loan which is required by an
applicable Agency to have an Escrow Account. Each Escrow Account (whether
voluntary or required by an Agency or the Seller, has been created, maintained,
serviced, and disbursed in compliance, in all material respects, with: (a) the
applicable Guide, (b) the applicable Agency's requirements, (c) the Mortgage
Documents, and (d) applicable laws, rules, regulations and orders. All payments
for taxes, assessments, ground rents, hazard insurance, mortgage insurance,
flood insurance, optional insurance and any other such items constituting an
expenditures from each Escrow Account have been made before such amounts became
delinquent or lost any possible discount. Each item in an Escrow Account
contains funds in the proper amount.
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6.30. ESCROW ANALYSIS.
The Seller has: (a) analyzed the payments into each Escrow Account, (b) analyzed
disbursements from each Escrow Account, (c) made the appropriate adjustments to
each Escrow Account which has a deficiency or surplus, (d) performed any
additional analysis and made any additional adjustments as may be required by
the applicable Guide, the applicable Agency's requirements, and applicable laws,
rules, regulations and orders, including, but not limited to, the Real Estate
Settlement Procedures Act and its implementing Regulation X.
6.31. PLEDGED ACCOUNTS.
There are no pledged accounts relating to a Mortgage Loan which are used in lieu
of Escrow Account deposits or because a Borrower is a resident alien.
6.32. TAX SERVICE CONTRACTS.
Each Mortgage Loan has in full force and effect a "life of loan" transferable
tax service contracts, which contracts are either with TRETS or are fully
transferable to TRETS, without the payment of any fee by the Buyer.
6.33. FLOOD CERTIFICATION AND TRACKING SERVICES.
Each Mortgage Loan has in full force and effect a transferable flood insurance
certification and a "life of loan" tracking service contract, which contract is
either with a Flood Service Provider or is fully transferable to the Buyer's
Flood Service Provider, without the payment of any fee by the Buyer.
6.34. SELLER'S STATEMENTS ARE TRUE AND ACCURATE.
No representation, warranty or written statement made by the Seller in this PMSR
Flow Agreement, or in any schedule, written statement or certificate given to
the Buyer in connection with the transactions contemplated by this PMSR Flow
Agreement contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements in
this PMSR Flow Agreement or in any of such statements and certificates not
misleading.
6.35. DISCLOSURE OF MORTGAGE LOAN ACCOUNT INFORMATION.
Except as otherwise indicated in writing to the Buyer prior to the date of this
PMSR Flow Agreement, the Seller has not disclosed Mortgage Loan information,
including, but not limited to, the names and addresses of the Mortgagors or the
Borrowers, to any person or entity unless such disclosure was necessary to
comply with an Agency Agreement or with applicable state or federal law, rule,
regulation, or order. Notwithstanding the above, any disclosure of Mortgage Loan
information to credit bureaus is governed by contracts that prohibit any person
from directly or indirectly using such information for solicitation of the
Mortgagors or Borrowers for financial, insurance and/or related services or
products.
6.36. SELLER'S BOOKS AND RECORDS.
The Seller's books, records and accounts relating to the Mortgage Loans comply
in all material respects with all applicable Agency requirements and the Guides.
6.37. SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940.
Each Mortgage Loan which is the subject of a Borrower's request for an
adjustment under the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, is separately identified by the Seller in writing.
6.38. FRAUD.
No Mortgage Loan has been originated through any type of fraud or deceit. The
Seller shall retain the risk of bankruptcy, foreclosure, delinquency, fraud and
other such matters relating to the Mortgage Loans.
6.39. SOCIAL SECURITY NUMBERS.
The Seller has complied with all Internal Revenue Service requirements relating
to or arising out of the procurement of a Social Security number.
6.40. WARRANTIES SURVIVE.
The Seller agrees that all warranties and obligations under this PMSR Flow
Agreement are perpetual and will survive the termination of this PMSR Flow
Agreement.
ARTICLE 7.
SELLER'S REPRESENTATIONS AND WARRANTIES
WITH RESPECT TO SERVICING RIGHTS.
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The Seller represents and warrants to the Buyer with respect to the Servicing
Rights that, as of each Transfer Date:
7.1. GOOD AND MARKETABLE TITLE.
The Seller has good and marketable title to the Servicing Rights, and has the
complete right and power to transfer the Servicing Rights to the Buyer, free and
clear of all liens, claims, charges, defenses, offsets, and encumbrances,
including, but not limited to, those of the Seller arising by, through, or under
the Seller. The Seller is not obligated either contractually or otherwise to
sell the Servicing Rights to any other person or entity.
7.2. NO ENCUMBRANCES.
Each transfer of the Servicing Rights by the Seller to the Buyer is free and
clear of any and all adverse claims and encumbrances, and there is no existing
assignment, sale or hypothecation thereof, except as contemplated by this PMSR
Flow Agreement.
7.3. ALL REPORTS FILED.
The Seller has filed all reports required by all government agencies with
jurisdiction over the Servicing Rights.
7.4. COMPLIANCE WITH CONTRACTS AND AGENCY AGREEMENTS.
The Seller has complied in all material respects with all of the terms and
obligations of all contracts to which the Seller is a party, and with all
applicable federal, state and local laws, regulations, rules and orders, in each
case, which might materially and adversely affect any of the Servicing Rights
and/or the Mortgage Loans. No event has occurred and is continuing which under
the provisions of any Guide or any other document or agreement, but for the
passage of time or the giving of notice, or both, would constitute an event of
default by the Seller thereunder. The laws and regulations with which the Seller
has complied in all material respects include, but are not limited to, all
applicable Guides and Agency requirements. The Seller has not done or failed to
do any act or thing which could reasonably be expected to materially and
adversely affect the Servicing Rights.
7.5. LITIGATION.
There is no litigation, proceeding or governmental investigation pending or
threatened, and the Seller does not know of any facts which could reasonably be
expected to result in any such litigation, proceeding or governmental
investigation, or any order, injunction or decree outstanding which does or
could reasonably be expected to materially and adversely affect any of the
Mortgage Loans or the Servicing Rights.
7.6. COMPLIANCE WITH LAW AND AGENCY REQUIREMENTS.
The Seller has not violated any: (a) applicable law, regulation, rule or order,
(b) Guide, (c) Agency requirement, or (c) any other requirement of any
governmental body which may materially affect any of the Servicing Rights.
7.7. WARRANTIES SURVIVE.
The Seller agrees that all warranties and obligations under this PMSR Flow
Agreement are perpetual and will survive the termination of this PMSR Flow
Agreement.
ARTICLE 8.
MUTUAL REPRESENTATIONS AND WARRANTIES.
The Seller represents and warrants to the Buyer with respect to the following
statements relating to the Seller, and the Buyer represents and warrants to the
Seller with respect to the following statements relating to the Buyer, that as
of the date of this PMSR Flow Agreement:
8.1. PARTY IS DULY ORGANIZED.
The First National Bank of Boston, Rhode Island Hospital Trust National Bank and
Bank of Boston-Florida, N.A. are each duly organized and validly existing
national banking associations; Bank of Boston Connecticut is a duly organized
and validly existing state-chartered savings bank and the Buyer is a duly
organized and validly existing corporation. Each is in good standing under the
laws of its jurisdiction of organization, and has the requisite power and
authority to enter into this PMSR Flow Agreement and any other agreements to
which it is a party and that are contemplated by this PMSR Flow Agreement.
8.2. AGREEMENT IS DULY AUTHORIZED.
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It has all requisite power, authority and capacity to enter into this PMSR Flow
Agreement and to perform the obligations required of it under this PMSR Flow
Agreement. The execution and delivery of this PMSR Flow Agreement by it and the
consummation of the transactions contemplated by this PMSR Flow Agreement by it,
have been duly and validly authorized by all necessary action. This PMSR Flow
Agreement constitutes its valid and legally binding agreement, enforceable in
accordance with its terms, except as it may be limited by bankruptcy,
insolvency, reorganization or other laws affecting the enforcement of creditors'
rights and by general equity principles, and no offset, counterclaim or defense
exists to the full performance of this PMSR Flow Agreement by such party.
8.3. AGREEMENT DOES NOT VIOLATE ANY OTHER OBLIGATION.
Insofar as its capacity to carry out any obligation under this PMSR Flow
Agreement is concerned, it is not in violation in any material respect of any
provision of any charter, certificate of incorporation, by-law, mortgage,
indenture, indebtedness, agreement, instrument, judgment, decree, order,
statute, rule or regulation, and there is no such provision that materially and
adversely affects its capacity to carry out such obligations. Its execution of,
and performance pursuant to, this PMSR Flow Agreement will not result in such
violation.
8.4. PARTY IS DULY LICENSED.
It holds the required licenses and is in compliance with all applicable state
and federal laws governing the transfer and Servicing of Mortgage Loans
transferred under this PMSR Flow Agreement.
8.5. WARRANTIES SURVIVE.
It agrees that all warranties and obligations under this PMSR Flow Agreement are
perpetual and will survive the termination of this PMSR Flow Agreement.
ARTICLE 9.
CONDITIONS PRECEDENT TO THE BUYER'S OBLIGATIONS.
The Buyer's obligations under this PMSR Flow Agreement are subject to the
satisfaction of each of the following conditions:
9.1. INSPECTION AND VERIFICATION.
The Buyer may from time to time upon reasonable prior notice during normal
business hours inspect and review the Seller's books, records, accounts, quality
control policies and procedures, and underwriting policies and procedures
relating to the Mortgage Loans, but in no event more than two (2) such reviews
each year. Such books, records, accounts, quality control policies and
procedures and underwriting policies will be reasonably satisfactory to the
Buyer.
9.2. CORRECT REPRESENTATIONS AND WARRANTIES .
Each of the Seller's representations and warranties under this PMSR Flow
Agreement are true and correct in all material respects and remain true and
correct in all material respects as of each Sale Date and each Transfer Date.
9.3. SELLER COMPLIES WITH EACH OBLIGATION.
As of each Transfer Date, the Seller has complied in all material respects with
each term, covenant, condition of this PMSR Flow Agreement applicable to the
Seller as of such date.
9.4. REGULATORY APPROVALS.
The Seller will, at its sole expense, obtain the approval of each Agency to
transfer the Servicing Rights from the Seller to the Buyer under this PMSR Flow
Agreement.
9.5. NO ACTIONS.
Through and including the Sale Date, there will not have been commenced or
threatened any action, suit, or proceeding against the Seller, which could
reasonably be expected to materially and adversely affect the Servicing Rights,
the Mortgage Loans, the Escrow Accounts, and/or the consummation of the
transactions contemplated hereby.
ARTICLE 10.
- 12 -
<PAGE> 13
CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATIONS.
The Seller's obligations under this PMSR Flow Agreement are subject to the
satisfaction of each of the following conditions:
10.1. CORRECT REPRESENTATIONS AND WARRANTIES.
Each of the Buyer's representations and warranties under this PMSR Flow
Agreement are true and correct in all material respects and remain true and
correct in all material respects as of each Sale Date and each Transfer Date.
10.2. BUYER COMPLIES WITH EACH OBLIGATION.
As of each Transfer Date, the Buyer has complied in all material respects with
each term, covenant, condition of this PMSR Flow Agreement applicable to the
Buyer as of such date.
10.3. NO MATERIAL ADVERSE CHANGE.
There will not have been any material adverse change in the Buyer's relationship
with, or authority from, an Agency.
10.4. NO ACTIONS.
Through and including the Sale Date, there will not have been commenced or
threatened any action, suit, or proceeding against the Buyer, which could
reasonably be expected to materially and adversely affect the Buyer's ability to
consummate the transactions contemplated hereby.
10.5. SERVICING AGREEMENT.
The Servicing Agreement shall remain in full force and effect and the
representations and warranties of the Buyer in the Servicing Agreement shall be
true and correct in all material respects.
ARTICLE 11.
MISCELLANEOUS.
11.1. TERM OF THIS PMSR FLOW AGREEMENT.
This PMSR Flow Agreement will have the same term as set forth in SECTION 6.6 of
the Operating Agreement, which SECTION 6.6 is incorporated herein by reference.
11.2. TERMINATION OF THIS PMSR FLOW AGREEMENT.
This Agreement shall be terminated only in accordance with the provisions of
SECTION 6.7 of the Operating Agreement.
11.3. FURTHER ASSURANCES.
The Buyer and the Seller will from time to time execute and promptly deliver to
each other such documents, assignments, endorsements, applications or other
instruments necessary or reasonably proper or convenient to effectuate the
assignments, transfers and other transactions contemplated by this PMSR Flow
Agreement.
11.4. INDEMNIFICATION.
The Seller shall indemnify the Buyer and shall hold the Buyer harmless from and
against any and all losses, liabilities, penalties, damages, expenses or other
harm or injury which the Buyer may incur or suffer or which may be asserted by
any person or entity, including reasonable attorneys' fees and court costs,
arising out of any action at any time taken or omitted to be taken (a) by the
Seller under or in connection with this PMSR Flow Agreement and/or any
applicable Exhibit to the Agreement, including, without limitation, any failure
by the Seller to observe and perform properly each and every covenant of this
PMSR Flow Agreement and/or any applicable Exhibit to the Agreement, or (b) by
the Buyer in reliance upon information provided to the Buyer by the Seller.
Without limiting the above, the Seller shall indemnify the Buyer and shall hold
the Buyer harmless from and against any and all losses, liabilities, penalties,
damages, expenses or other harm or injury which the Buyer may incur or suffer or
which may be asserted by any person or entity, including reasonable attorneys'
fees and court costs, arising out of any Mortgage Loan or the Servicing Rights
relating to such Mortgage Loan which result from:
(a) Any misrepresentation made by the Seller in this PMSR Flow Agreement or any
initial offering information provided to the Buyer,
(b) Any breach by the Seller or Prior Originator of any of the Seller's
representations or warranties under this PMSR Flow Agreement,
- 13 -
<PAGE> 14
(c) Any act, or failure to act or perform any term, covenant, condition or
obligation of the Seller under this PMSR Flow Agreement, or any act or failure
to act by any Prior Originator of a Mortgage Loan,
(d) Any defect in any Mortgage Loan existing as of the Transfer Date,
(e) Errors in originating, closing, pooling, or Servicing any Mortgage Loan
prior to the Transfer Date, including any improper act or failure to act when
required to do so,
(f) The Seller's failure to: (i) allow the Buyer to inspect the Seller's
records, (ii) comply with the terms and conditions of this PMSR Flow Agreement,
(iii) comply with the Buyer's instructions relating to the transfer of the
Servicing Rights for the Mortgage Loans, (iv) give the Buyer accurate
information relating to the Mortgage Loans when requested by the Buyer,
(g) Any Agency demand for indemnification or repurchase relating to an error or
omission of the Seller or Prior Originator,
(h) Any and all losses incurred as a result of the forfeiture of any Mortgaged
Property to the United States under 21 U.S.C. Section 881 or to any other
governmental entity, including, but not limited to, any state or municipality
under any comparable state or local law by reason that: (i) the Mortgaged
Property is proceeds traceable to an exchange for a controlled substance, (ii)
the Mortgage Property was purchased with proceeds traceable to an exchange for a
controlled substance, (iii) the Mortgaged Property was used and was intended to
be used to facilitate the commission of a violation of 21 U.S.C. Section 841,
and/or (iv) the Mortgaged Property was used in a manner violating a comparable
state or local law, such that the Buyer cannot prevail in asserting an "innocent
owner" defense due to the acts or omissions of the Seller or any Prior
Originator of a Mortgage Loan,
(i) Any representation or promise by the Seller or any Prior Originator of a
Mortgage Loan to a Mortgagor or Borrower that a Mortgage Loan could be
refinanced at any time after the closing with any term or condition which is
more favorable than the terms and conditions offered by the Buyer to members of
the general public, and/or
(j) Any and all losses incurred as a result of a VA no bid or buydown in lieu of
such no-bid for Mortgage Loans on which foreclosure action is commenced within
three (3) years after the Transfer Date.
The Buyer shall indemnify the Seller and shall hold the Seller harmless from and
against any and all losses, liabilities, penalties, damages, expenses or other
harm or injury which the Seller may incur or suffer or which may be asserted by
any person or entity, including reasonable attorneys' fees and court costs,
arising out of any action at any time taken or omitted to be taken (a) by the
Buyer under or in connection with this PMSR Flow Agreement and/or any applicable
Exhibit to the Agreement, including, without limitation, any failure by the
Buyer to observe and perform properly each and every covenant of this PMSR Flow
Agreement and/or any applicable Exhibit to the Agreement, or (b) by the Seller
in reliance upon information provided to the Seller by the Buyer. Without
limiting the above, the Buyer shall indemnify the Seller and shall hold the
Seller harmless from and against any and all losses, liabilities, penalties,
damages, expenses or other harm or injury which the Seller may incur or suffer
or which may be asserted by any person or entity, including reasonable
attorneys' fees and court costs, arising out of any Mortgage Loan or the
Servicing Rights relating to such Mortgage Loan which result from:
(a) Any misrepresentation made by the Buyer in this PMSR Flow Agreement or any
initial offering information provided to the Seller,
(b) Any breach by the Buyer of any of the Buyer's representations or warranties
under this PMSR Flow Agreement,
(c) Any act, or failure to act or perform any term, covenant, condition or
obligation of the Buyer under this PMSR Flow Agreement,
11.5. POWER OF ATTORNEY.
The Seller irrevocably constitutes and appoints the Buyer and its duly
authorized officers as the Seller's agent and attorney-in-fact coupled with an
interest, to endorse checks and other instruments of payment with respect to the
Mortgage Loans.
11.6. NOTICES.
All notices and other communications required or permitted to be given under
this Agreement shall be in writing and shall be deemed given if delivered
personally, transmitted by facsimile (and telephonically confirmed), mailed by
registered or certified mail with postage prepaid and return receipt requested,
or sent by commercial overnight courier, courier fees prepaid, to the parties at
the following addresses:
- 14 -
<PAGE> 15
If to Buyer, to:
Debra F. Watkins
Senior Vice President
BancBoston Mortgage Corporation
7301 Baymeadows Way
Jacksonville, FL 32256
With a copy to:
Robert J. Jacobs
General Counsel
BancBoston Mortgage Corporation
7301 Baymeadows Way
Jacksonville, FL 32256
If to Seller to:
Parks Avery
Rhode Island Hospital Trust National Bank
15 Westminster Street
Providence, Rhode Island 02903
Cathy Elder
The First National Bank of Boston
100 Federal Street
Boston, Massachusetts 02110
With a copy to:
Ryan S. Stinneford
Senior Counsel
The First National Bank of Boston
100 Federal Street
Boston, Massachusetts 02110
or to such other address as the Buyer or the Seller will have specified in
writing to the other.
11.7. EXHIBITS PART OF THIS PMSR FLOW AGREEMENT.
The Exhibits are incorporated by reference into this PMSR Flow Agreement, are
made a part of this PMSR Flow Agreement, and will be binding on the Buyer and
the Seller. The Exhibits to this PMSR Flow Agreement may not be amended or
supplemented by the Buyer or the Seller without the prior written agreement of
the other party.
11.8. ATTORNEYS' FEES AND COSTS.
If it is determined in a judicial proceeding that either party has failed under
any provision of this PMSR Flow Agreement, and if either party will employ
attorneys or incur other expenses for the enforcement, performance, or
observance of the terms of this PMSR Flow Agreement, then said party, to the
extent permitted by law, will be reimbursed by the losing party, for reasonable
attorneys' fees and other out-of-pocket expenses.
11.10. BROKER'S FEE.
Each of the Buyer and the Seller represents and warrants to each other that it :
(a) has made no agreement to pay any agent, finder, or broker or any other
representative, any fee or commission in the nature of a finder's or
originator's fee arising out of or in connection with the subject matter of this
PMSR Flow Agreement, except as they have otherwise disclosed in writing, and (b)
is liable for any and all such fees and commissions.
11.11. ASSIGNMENT AND DELEGATION.
No party may assign this PMSR Flow Agreement or delegate any of its functions
hereunder to any other party without the prior written consent of Buyer or the
respective Seller; provided, however, that either party may assign and/or
delegate, in whole or in part, any of its rights under this PMSR Flow
Agreement to any of its affiliates or subsidiaries without the prior written
consent of the Buyer or the respective Seller.
11.12. AMENDMENT.
No amendment or modification to this PMSR Flow Agreement will be valid unless
executed in writing by the Buyer and the Seller.
11.13. WAIVER.
No waiver of any right or obligation under this PMSR Flow Agreement by any party
on any occasion will be deemed to operate as a waiver on any subsequent
occasion.
11.14. PROVISIONS SEVERABLE.
If any provision of this PMSR Flow Agreement will be held to be void or
unenforceable by any court of competent jurisdiction or any governmental
regulatory agency, such provision will be considered by all parties to be
severed from this PMSR Flow Agreement. All remaining provisions of this PMSR
Flow Agreement will be considered by the parties to remain in full force and
effect.
11.15. GOVERNING LAW.
This PMSR Flow Agreement is entered into in the state of Florida. Its
construction and rights, remedies and obligations arising by, under, through, or
on account of it will be governed by the laws of the State of Florida excluding
its conflict of laws rules and will be deemed performable in the State of
Florida.
- 15 -
<PAGE> 16
11.16. NO AGENCY OR JOINT VENTURE CREATED.
This PMSR Flow Agreement will not be deemed to constitute the Buyer and the
Seller as partners or joint venturers, nor will the Buyer or the Seller be
deemed to constitute the other as its agent.
11.17. SUCCESSORS.
This PMSR Flow Agreement will inure to the benefit of and be binding upon the
parties hereto and their successors and assigns. Nothing in this PMSR Flow
Agreement expressed or implied is intended to confer on any person other that
the parties hereto and their successors and assigns, any rights, obligations,
remedies or liabilities.
11.18. FORCE MAJEURE.
No party shall be liable for delays or errors occurring by reason of
circumstances beyond such party's control, including, without limitation, acts
of civil, military, or banking authorities, national emergencies, labor
difficulties, fire, flood or other catastrophes, acts of God, insurrection, war,
riots, failure of transportation or equipment, or failure of vendors,
communication or power supply.
11.19. SECTION HEADINGS.
Section headings are intended only to assist in the organization of this PMSR
Flow Agreement and do not in any way limit or otherwise define the rights and
liabilities of the parties.
11.20. ENTIRE AGREEMENT.
This PMSR Flow Agreement and the Exhibits to this PMSR Flow Agreement constitute
the entire agreement among the parties and supersede all other prior
communications and understandings, written or oral, among the parties with
respect to the subject matter of this PMSR Flow Agreement. There are no
contemporaneous oral agreements.
11.21. COUNTERPARTS.
This PMSR Flow Agreement may be executed in multiple counterparts each of which
will be deemed an original. Regardless of the number of counterparts, the total
will constitute only one agreement.
11.22. PLURALS AND GENDER.
In construing the words of this PMSR Flow Agreement, plural constructions will
include the singular, and singular constructions will include plural. No
significance will be attached to whether a pronoun is masculine, feminine, or
neuter.
- 16 -
<PAGE> 17
IN WITNESS WHEREOF, the Buyer and the Seller, as of the day first set forth
above, have caused their seals to be affixed on this instrument to be signed on
their behalf by their duly authorized officers.
BANCBOSTON MORTGAGE CORPORATION
By /s/ Joseph K. Pickett
----------------------------
Joseph K. Pickett
- --------------------------------
(Print Name)
Title: Chairman
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Peter J. Manning
----------------------------
Peter J. Manning
- --------------------------------
(Print Name)
Title: Creative Director
BANK OF BOSTON CONNECTICUT
By: /s/ William J. Shea
----------------------------
William J. Shea
- --------------------------------
(Print Name)
Title: Vice Chairman
RHODE ISLAND HOSPITAL TRUST NATIONAL BANK
By: /s/ William J. Shea
----------------------------
William J. Shea
- --------------------------------
(Print Name)
Title: Vice Chairman
BANK OF BOSTON-FLORIDA, N.A.
By: /s/ Susan P. Hancy
----------------------------
Susan P. Hancy
- --------------------------------
(Print Name)
Title: Chairman
- 17 -
<PAGE> 18
LIST OF EXHIBITS
EXHIBIT A Purchase Price Percentage Schedule
EXHIBIT B Transfer Instructions
EXHIBIT C List of Flood Service Providers Acceptable to the Buyer
- 18 -
<PAGE> 19
EXHIBIT A
PURCHASE PRICE PERCENTAGE SCHEDULE
<TABLE>
<CAPTION>
I. PURCHASE PRICE PERCENTAGE TABLE FOR PORTFOLIO MORTGAGE LOANS PURCHASED ON A FLOW BASIS.
- ------------------------------------------------------------------------------------------------------------------------
PRODUCT TYPE ANNUAL BASE RATE BASE RATE BASE RATE
SERVICING [ * ]%
TO
FEE RATE [ * ]% [ * ]% BASE RATE
AND UNDER TO BASE [ * ]%
RATE
========================================================================================================================
<S> <C> <C> <C> <C>
A and A- 30-year conforming fixed rate [* ]% [* ]% [* ]% [* ]%
A and A- 15-year conforming fixed rate [* ]% [* ]% [* ]% [* ]%
A and A- conforming conventional ARM [* ]% [* ]% [* ]% [* ]%
FHA 30-year fixed rate [* ]% [* ]% [* ]% [* ]%
FHA 15-year fixed rate [* ]% [* ]% [* ]% [* ]%
FHA ARM [* ]% [* ]% [* ]% [* ]%
CRA low-to-moderate conventional 30-year fixed rate [* ]% [* ]% [* ]% [* ]%
CRA low-to-moderate conventional 15-year fixed rate [* ]% [* ]% [* ]% [* ]%
CRA low-to-moderate conventional ARM [* ]% [* ]% [* ]% [* ]%
A and A- non-conforming conventional 30-year fixed rate [* ]% [* ]% [* ]% [* ]%
A and A- non-conforming conventional 15-year fixed rate [* ]% [* ]% [* ]% [* ]%
A and A- non-conforming conventional ARM [* ]% [* ]% [* ]% [* ]%
A quality conforming 2nd mortgage loans with Escrow
Accounts [* ]% [* ]% [* ]% [* ]%
A quality conforming 2nd mortgage loans w/o Escrow
Accounts [* ]% [* ]% [* ]% [* ]%
A- quality conforming 2nd mortgage loans with Escrow
Accounts [* ]% [* ]% [* ]% [* ]%
A- quality conforming 2nd mortgage loans w/o Escrow
Accounts [* ]% [* ]% [* ]% [* ]%
A quality non-conforming 2nd mortgage loans with escrow [* ]% [* ]% [* ]% [* ]%
A quality non-conforming 2nd mortgage loans w/o Escrow
Accounts [* ]% [* ]% [* ]% [* ]%
A- quality non-conforming 2nd mortgage loans with Escrow
Accounts [* ]% [* ]% [* ]% [* ]%
A- quality non-conforming 2nd mortgage loans w/o Escrow
Accounts [* ]% [* ]% [* ]% [* ]%
Less than A- quality mortgage loans TBD TBD TBD TBD
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* At the 3-year anniversary of the original Servicing Agreement dated 3/1/95,
and every 3 years afterwards, the servicing fee will be adjusted by the change
in the consumer price index over the prior 3 years. Such change will be based
upon the most recently published consumer price index.
Unless otherwise specifically indicated, all Mortgage Loans described above are
first Mortgage Loans.
- ------------------------
* Confidential treatment requested. Confidential portion has been filed
separately with the Commission.
- 19 -
<PAGE> 20
EXHIBIT A
CONTINUED
II. ADJUSTMENTS TO THE PURCHASE PRICE.
- - Deduct [ * ] basis points [ * ]% for VA Mortgage Loans.
- - Deduct [ * ] basis points [ * ]% for First-Lien Mortgage Loans w/o Escrow
Accounts for taxes and hazard insurance.
- - Deduct [ * ] basis points [ * ]% for Buydown Mortgage Loans.
- - Deduct [ * ] dollar [ * ] TRETS fee for each Mortgage Loan (post BayBank
merger).
- - Deduct [ * ] basis points [ * ]% for A, A- and CRA 30 and 15-year conforming
fixed rate Mortgage Loans with original principal balances less than $100,000
and greater than or equal to $80,000.
- - Deduct [ * ] basis points [ * ]% for A, A- and CRA 30 and 15-year conforming
fixed rate MortgagE Loans with original principal balances less than $80,000
and greater than or equal to $60,000.
- - Deduct [ * ] basis points [ * ]% for FHA or VA fixed rate Mortgage Loans with
original principal balances less than $100,000 and greater than or equal to
$80,000.
- - Deduct [ * ] basis points [ * ]% for FHA or VA fixed rate Mortgage Loans with
original principal balances less than $80,000 and greater than or equal to
$60,000.
- - Deduct [ * ] basis points [ * ]% for FHA or VA adjustable rate Mortgage Loans
with original principal balances less than $100,000 and greater than or equal
to $80,000.
- - Deduct [ * ] basis points [ * ]% for FHA or VA adjustable rate Mortgage Loans
with original principal balances less than $80,000 and greater than or equal
to $60,000.
- - The servicing released premium to be paid for Mortgage Loans with original
principal balances of $60,000 or less will be negotiated on a case-by-case
basis.
III. PRICING ASSUMPTIONS.
- - Assumes Mortgage Loan balance is $100,000.
Note: The annual servicing fee rates shown above apply to all Servicing Rights
acquired by the Buyer after March 15, 1996. All annual servicing fee rates
remain the same on the Mortgage Loan portfolio existing on March 15, 1996.
- ------------------------
* Confidential treatment requested. Confidential portion has been filed
separately with the Commission.
- 20 -
<PAGE> 1
EXHIBIT 10.10
MORTGAGE LOAN SERVICING AGREEMENT
MORTGAGEE NAME: THE FIRST NATIONAL BANK OF BOSTON, 100 FEDERAL STREET, BOSTON,
MASSACHUSETTS 02110
MORTGAGEE CONTACT PERSON: PHONE NO:
FAX NO:
MORTGAGEE NAME: BANK OF BOSTON CONNECTICUT, 31 PRATT STREET, HARTFORD,
CONNECTICUT 06103
MORTGAGEE CONTACT PERSON: PHONE NO:
FAX NO:
MORTGAGEE NAME: RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, ONE HOSPITAL TRUST
PLAZA, PROV, RI 02903
MORTGAGEE CONTACT PERSON: PHONE NO:
FAX NO:
MORTGAGEE NAME: BANK OF BOSTON FLORIDA, N.A., 450 ROYAL PALM WAY, PALM BEACH,
FL 33480
MORTGAGEE CONTACT PERSON: PHONE NO:
FAX NO:
This Servicing Agreement (the "Servicing Agreement") is entered into as of the
date shown above by and between the Servicer and the Mortgagee, both as defined
below, and applies to any of the transactions described below.
RECITALS.
1. The Servicer is in the business of servicing residential mortgage loans,
including, but not limited to, conventional, FHA, VA and certain other Mortgage
Loans, including, but not limited to, first and second lien Mortgage Loans.
2. The Mortgagee is now or will be the owner of certain Notes secured by
Mortgages.
3. The Mortgagee desires the Servicer to service the Mortgage Loans under the
terms set forth in this Servicing Agreement.
4. The Servicer desires to service the Mortgage Loans under the terms set forth
in this Servicing Agreement.
IN CONSIDERATION of the mutual promises made in this Servicing Agreement and
other good and valuable consideration, the receipt and sufficiency of which are
acknowledged, the Servicer and the Mortgagee agree as follows:
1. DEFINITIONS.
1.1. "AGENCY" means FNMA, FHLMC, FHA, HUD, VA, GNMA.
1.2. "BORROWER" means each obligor under a Mortgage Note.
1.3. "DELINQUENT MORTGAGE LOAN" means a Mortgage Loan with respect to which: (a)
one or more Mortgage Loan payments have not been received by the holder of the
Mortgage Note before the end of the month during which any such Mortgage Loan
payment was due, (b) Mortgage Loans in bankruptcy with one or more Mortgage Loan
payments which have not been received by the holder of the Mortgage Note on or
before the due date in the Mortgage Note, (c) Mortgage Loans in foreclosure, (d)
Mortgage Loan subject to an assignment of deed in lieu of foreclosure, or (e)
Mortgage Loan subject to the HUD assignment program.
- 1 -
<PAGE> 2
1.4. "ESCROW ACCOUNTS" means Mortgage Loan escrow/impound accounts for taxes,
insurance, assessments, ground rents, buydowns, loss drafts, and any other such
amounts which are maintained by the Servicer as a fiduciary for the Borrowers
and investors, and relate to the Servicing Rights.
1.5. "FHA" means the Federal Housing Administration or any successor to the FHA.
1.6. "FNMA" means the Federal National Mortgage Association or any successor to
FNMA.
1.7. "FHLMC" means the Federal Home Loan Mortgage Corporation or any successor
to FHLMC.
1.8. "GNMA" means the Government National Mortgage Association or any successor
to GNMA.
1.9. GUIDE" means: (a) the Handbook GNMA 5500.1, Government National Mortgage
Association GNMA I Mortgage-Backed Securities Guide, Handbook GNMA 5500.2, in
each case as such Guide may be amended from time to time, (b) the HUD 4155.1
REV-4, Single Family Direct Endorsement Program, HUD 4060.1 REV-1, Mortgagee
Approval Handbook, (c) the FNMA Selling and Servicing Guides, (d) the FHLMC
Mortgagees' and Servicers' Guides, and/or (e) any guide or instructions provided
from time to time by a private investor, in each case as such Agency Guide may
be amended from time to time.
1.10. "HUD" means the United States Department of Housing and Urban Development,
or any successor to HUD.
1.11. "MORTGAGE" means a mortgage, deed of trust, or other such security
instrument which is executed by a Mortgagor pledging the Mortgaged Property as
security for repayment of a Mortgage Note.
1.12. "MORTGAGE DOCUMENTS" means all documents required by applicable law, an
Agency, the Servicer, and/or a private mortgage insurer to service a Mortgage
Loan.
1.13. "MORTGAGEE" means each entity identified at the top of the first page of
this Servicing Agreement as the Mortgagee.
1.14. "MORTGAGE LOAN" means a residential mortgage loan which is: (a) secured by
a Mortgage, (b) owned by the Mortgagee, and (c) currently serviced by the
Servicer or the subject of the Broker Agreement or the PMSR Flow Agreement.
1.15. "MORTGAGE NOTE" means the written promise of a Borrower to pay a sum of
money in United States' dollars at a stated interest rate over a specified term,
and which is secured by a Mortgage.
1.16. "MORTGAGED PROPERTY" means the real property, together with the
one-to-four family dwelling and any other improvements situated on such real
property, which have been pledged by a Mortgagor under a Mortgage as collateral
to secure the obligation under a related Mortgage Note.
1.17. "MORTGAGOR" means each person who executes a Mortgage.
1.18. "OPERATING AGREEMENT" means the Operating Agreement entered into by and
among the Servicer and each Mortgagee and to which this Servicing Agreement is
attached as EXHIBIT C.
1.19. "OREO PROPERTY:" means a Mortgaged Property acquired by the Mortgagee or
its designee through foreclosure or by deed in lieu of foreclosure.
1.20 "SERVICER" means BancBoston Mortgage Corporation, a business corporation
organized under the laws of the state of Florida and with its principal place of
business at 7301 Baymeadows Way, Jacksonville, Florida 32256.
1.21. "SERVICING RIGHTS" means the rights to service the Mortgage Loans and
collect the servicing fees, late fees and certain other ancillary amounts
relating to the Mortgage Loans, including, but not limited to, amounts under an
Escrow Account.
1.22 "SBO LOAN" means a Mortgage Loan which is "serviced by others". The terms
and conditions of the servicing of such Mortgage Loans by third party
subservicers are set forth in EXHIBIT D to this Servicing Agreement.
1.23.. "SERVICING AGREEMENT has the meaning set forth in the recitals above.
1.24.. "TRETS" means TransAmerica Real Estate Tax Service, Inc.
- 2 -
<PAGE> 3
1.25 "VA" means the Department of Veterans Affairs, or any successor to the VA.
2. STANDARD OF CARE.
2.1. IN GENERAL. The Servicer will perform its duties and obligations under this
Servicing Agreement for all Mortgage Loans in accordance with: (a) applicable
laws, rules, regulations, and orders, and (b) prudent mortgage banking
practices.
2.2. GOVERNMENT MORTGAGE LOANS. Without limiting the scope of the foregoing, the
Servicer will perform its duties and obligations under this Servicing Agreement
for FHA and VA Mortgage Loans in accordance with the Guides, regulations and
practices of the applicable Agency.
2.3. MORTGAGE LOANS OTHER THAN GOVERNMENT MORTGAGE LOANS. Without limiting the
scope of the foregoing, the Servicer will perform its duties and obligations
under this Servicing Agreement for Mortgage Loans other than FHA and VA Mortgage
Loans in accordance with the Guides, regulations and practices of: (a) FNMA, (b)
FHLMC, and (b) the applicable private mortgage insurance, if a Mortgage Loan is
required to have private mortgage insurance. If any provision of a FNMA Guide,
regulation, or practice is inconsistent with a provision in a FHLMC Guide,
regulation, or practice, the FNMA provision will control.
2.4. PRIVATE BANK MORTGAGE LOANS. Without limiting the scope of the foregoing,
the Servicer will provide to Mortgagors who are private banking clients of the
Mortgagee the additional tasks and services requested by the Mortgagee and
described in EXHIBIT A to this Servicing Agreement. The Mortgage Loans which are
provided by the Mortgagee's private banking department to certain borrowers
under the Mortgagee's Community Reinvestment Act efforts will be serviced under
the provisions of EXHIBIT A to this Servicing Agreement. Each Mortgage Loan with
such a Mortgagor who is a private banking client of the Mortgagee will be
subject to the special private banking fees and charges described in EXHIBIT B
to this Servicing Agreement in addition to the standard servicing fees and
charges described in such exhibit.
3. COLLECTING PAYMENTS AND ENFORCING OBLIGATIONS.
The Servicer will use reasonable efforts to collect each Mortgage Loan payment
when such payments become due until all amounts due and owing under or in
connection with each such Mortgage Loan has been paid in full.
4. SERVICING TASKS.
4.1. REMITTING PRINCIPAL AND INTEREST. The Servicer will pay to the Mortgagee
each month all Mortgage Loan principal and interest payments received by the
Servicer from each Mortgagor, less the amount of the servicing fee set forth in
EXHIBIT B to this Servicing Agreement. Such remittance will be made in
accordance with the FNMA actual/actual remittance method. The Servicer will
deliver to the Mortgagee a remittance advice and a full accounting report
containing information relating to the servicing fee on such dates as shall be
requested by the Mortgagee.
4.2. GENERAL LEDGER RECONCILIATIONS. The Servicer will reconcile the principal,
interest, and interest receivable accounts which are interfaced with the
Servicer's Mortgage Servicing Package System for a period equal to the lesser
of: (a) six (6) months from the date of this Servicing Agreement, or (b) the
period ending on the date when the Servicer no longer has direct on-line
computer access to the Mortgagee's general ledger.
4.3. OTHER RELATED TASKS. If requested by Mortgagee the Servicer will perform
certain reporting, investor service, custodial liaison and other credit-related
services described in EXHIBITS B and D to this Servicing Agreement.
5. COMPENSATION.
5.1. GENERAL FEE SCHEDULE. The Mortgagee will pay to the Servicer the fees and
charges set forth in EXHIBITS B and D TO this Servicing Agreement.
5.2. SERVICER MAY RETAIN CERTAIN OTHER CHARGES AND FEES. The Servicer will
charge and retain the full amount of any late charges, returned check charges,
partial release and assumption processing fees, and other administrative fees
and charges allowed by: (a) FNMA and/or FHLMC in their Guides or other rules or
regulations with respect to Mortgage Loans other than FHA and VA Mortgage Loans,
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and (b) the applicable Agency in its Guide or other rules or regulations with
respect to FHA and VA Mortgage Loans.
5.3. MORTGAGEE WILL PAY ALL CUSTODIAL FEES AND EXPENSES. The Mortgagee will pay
any and all costs, expenses and fees relating to the Mortgagee's custodian and
the custodial services provided by such custodian for the Mortgage Loans.
5.4. MORTGAGEE WILL PAY ALL TRETS AND FLOOD CERTIFICATION AND TRACKING FEES. The
Mortgagee will collect from the Mortgagor and pay over to the Servicer any and
all fees relating to or arising out of each: (a) "life of loan" transferable tax
service contract, which contract is either with TRETS or are fully transferable
to TRETS, and (b) transferable flood insurance certification and "life of loan"
tracking service from a flood service provider acceptable to the Servicer.
5.5. MORTGAGEE WILL PAY ALL FEES RELATING TO CERTAIN ADDITIONAL SERVICES. The
Mortgagee will pay to the Servicer any fees relating to any additional service
which the Servicer: (a) is required to perform by applicable law, rule,
regulation or order, and (b) reasonably believes the Servicer is unable to
collect directly from a Mortgagor or Borrower.
6. CUSTODIAL ACCOUNT.
6.1. INSURED DEPOSIT ACCOUNTS. The Servicer will hold all funds relating to the
Mortgage Loans in a custodial bank account or accounts at a depository financial
institution(s) with deposits insured by the Federal Deposit Insurance
Corporation, and will maintain all records necessary to secure and obtain the
maximum Federal Deposit Insurance Corporation insurance for each beneficiary of
the account(s).
6.2. MORTGAGE LOANS WITH AN ESCROW ACCOUNT. The Servicer will pay promptly all
hazard insurance premiums, mortgage insurance premiums, real estate taxes, and
other obligations which have funds in an Escrow Account during the term of this
Servicing Agreement promptly after receiving a bill for any such amount. If an
Escrow Account does not contain funds sufficient to pay such amounts, the
Servicer will advance funds for the payment of such amounts in the manner and to
the extent required by applicable law. The Servicer may elect to terminate any
Escrow Account without the express permission of the Mortgagee, consistent with
the Servicer's past servicing practices with respect to the existing Mortgage
Loans.
6.3. MORTGAGE LOANS WITH NO ESCROW ACCOUNTS. The Servicer will advance funds on
behalf of a Mortgagor who does not maintain an Escrow Account for the payment of
taxes and certain other amounts. The Servicer will use its best efforts to
collect any such funds from each such Mortgagor. If the Servicer is unable to
recover any such funds from a Mortgagor, the Mortgagee will pay such funds to
the Servicer immediately.
6.4. ANNUAL CERTIFICATION. The Servicer will certify once each year that all
general property taxes, special assessments, and hazard insurance premiums and,
if applicable, flood insurance premiums have been paid on the Mortgaged
Properties securing the Mortgaged Loans.
7. DELINQUENT MORTGAGE LOANS.
The Servicer's Delinquent Mortgage Loan collection efforts will be made in
accordance with the standard of care described in SECTION 2 above. The Servicer
will provide Computer Power, Inc.'s standard Mortgage Servicing Package
delinquency reports to the Mortgagee once each month during the term of this
Servicing Agreement.
Except as otherwise set forth in EXHIBIT A, the Servicer will deliver an initial
late payment notice to each Borrower who has a Delinquent Mortgage Loan if the
Servicer does not receive the full amount of a periodic payment by the end of
any grace period following the due date set forth in the Mortgage Note. Such
notice will set forth the amount of the periodic payment, together with any late
or other charges required or allowed under the Mortgage Note. The Servicer will
also use reasonable efforts to contact each such Borrower by telephone in
accordance with the Servicer's standard operating policies in effect from time
to time.
8. INSURANCE.
The Servicer will use reasonable efforts to ensure that there is in force for
each Mortgaged Property a hazard insurance policy which: (a) is acceptable to
the applicable Agency, (b) contains the mortgagee clause: "BancBoston Mortgage
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Corporation, its successors and/or assigns" or such other clause which is
acceptable to the Servicer, (c) insures against loss or damage by fire, all
other hazards set forth in the standard extended coverage form of endorsement,
and any other insurable risks against hazards required by the applicable Agency,
(d) has been issued in an amount equal to the lesser of the outstanding
principal balance of the Mortgage Loan or the full insurable value of the
improvements to the Mortgaged Property, and (e) if required by the Flood
Disaster Protection Act of 1973 and/or the National Flood Insurance Reform Act
of 1994, a flood insurance policy in an amount representing coverage equal to
the lesser of the outstanding principal balance of the Mortgage Loan or the
maximum amount of insurance which is available under the Flood Disaster
Protection Act of 1973 and/or the National Flood Insurance Reform Act of 1994,
as may be amended from time to time. If a Mortgagor fails to maintain such
insurance coverage, the Servicer will obtain such coverage on behalf of such
Mortgagor, and the Servicer will collect the insurance premiums from the
Mortgagor under the terms of the Mortgage. The Servicer will retain, service,
and continually maintain evidence of such insurance coverage, as required by the
Mortgagee. The Mortgagee will reimburse the Servicer for the cost of maintaining
and administering insurance coverage in the event of default by the Mortgagor.
The Servicer is authorized to sign on behalf of the Mortgagee for all loss
drafts relating to such insurance coverage in the manner and to the extent set
forth in the FNMA Servicing Guide, as amended from time to time.
9. INSPECTIONS.
The Servicer will inspect a Mortgaged Property to determine its physical
condition and occupancy status: (a) each month following the Mortgagor's default
until such Mortgaged Property has been foreclosed or the Mortgage Loan has been
reinstated, and (b) in accordance with the applicable Agency's Guide and/or the
Servicer's standard operating procedures with respect to damaged Mortgaged
Properties. The Servicer will use its best efforts to recover from each
Mortgagor all costs and expenses relating to or arising out of such inspections.
If the Servicer is unable to recover such costs and expenses from the Mortgagor,
the Mortgagee will reimburse the Servicer for all such costs and expenses at the
time of any foreclosure sale, presale, or acceptance of a deed in lieu of
foreclosure.
10. SPECIAL NOTICE TO MORTGAGEE.
The Servicer will notify the Mortgagee in writing promptly after the Servicer
discovers that: (a) there is a material default under the terms of a Mortgage or
Mortgage Note, and (b) a Mortgaged Property has been sold or transferred (if
required by the Mortgagee).
11. PREPAYMENT.
The Servicer will not accept any full or partial principal prepayment of a
Mortgage Loan unless: (a) the Mortgage and/or Mortgage Note allows such
prepayment, (b) the Mortgagee authorizes such prepayment in writing, and/or (c)
applicable law, rule, regulation or order requires the Servicer to accept such
prepayment.
12. FORECLOSURE.
12.1. COMPLIANCE WITH APPLICABLE RULES. The Servicer or its designated agent
will begin foreclosure proceedings or otherwise begin to acquire a Mortgaged
Property promptly after a Mortgagor has defaulted on a Mortgage Loan. These
proceedings will be conducted in the manner described in SECTION 2 above. If the
Mortgaged Property is conveyed to the Federal Housing Administration or the
Veterans Administration, the Servicer will facilitate any settlement with
applicable Agency or private mortgage insurance company. The Mortgagee will be
responsible for any deficiency in any claim settled by the Servicer with such an
Agency or private mortgage insurance company.
12.2. MANNER OF CONDUCTING FORECLOSURES. The Servicer or its designated agent
will conduct all such proceedings in the manner described in SECTION 2 above,
and will take title to the Mortgaged Property in the name designated by the
Mortgagee. The Mortgagee under this Servicing Agreement provides the Servicer
with full delegated authority to mitigate all foreclosures, if applicable, on
behalf of the Mortgagee. The Mortgagee will pay to the Servicer the mitigation
fees set forth in EXHIBIT B to this Servicing Agreement. The Servicer will
perform only those foreclosure or related procedures which are normal and
customary for foreclosures in each jurisdiction where the Mortgaged Property is
situated.
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12.3. MANAGING AND PROTECTING THE MORTGAGED PROPERTY. Unless otherwise directed
by the Mortgagee, the Servicer will manage and protect the Mortgaged Property
from the date the Servicer commences foreclosure until the date when such
proceedings have been terminated and title to the property has been conveyed to
the appropriate person or entity. The manner of such services will be consistent
with the management of real estate in the jurisdiction in which the Mortgaged
Property is situated including, but not limited to, the: (a) placement and
payment of certain insurance relating to the Mortgaged Property, (b) management
and supervision of repairs to and maintenance of the Mortgaged Property, and (c)
preparation of such reports as may be reasonably required by the Mortgagee. The
Servicer will obtain any authorization from any Agency or such other authority
required to manage and protect the Mortgage Property. The Servicer will
administer and sell OREO owned by the Mortgagee following the procedures
outlined in EXHIBIT F.
12.4. DEFICIENCY BALANCE AFTER DISPOSING OF MORTGAGED PROPERTY. The Servicer
will pursue any deficiency owed by any Mortgagor to the Mortgagee after the
Servicer has disposed of the Mortgaged Property if the Mortgagee: (a) requests
such services in writing, and (b) pays the Servicer the applicable fees
described in EXHIBIT B to this Servicing Agreement. Such deficiency services
will include, but not be limited to, initiating legal proceedings against a
Mortgagor. The Servicer's collection of any such deficiency will: (a) be
reasonable and customary for the collection of such deficiencies relating to
real estate in the jurisdiction in which the Mortgaged Property is situated, and
(b) comply with applicable laws, rules, regulations, and orders.
12.5. MORTGAGEE WILL APPOINT CONTACT PERSON. The Mortgagee will designate an
employee of the Mortgagee who will be responsible for: (a) approving
extraordinary foreclosure matters and loss mitigation-related expenses,
including, but not limited to, litigation expenses, (b) Mortgage Loan
charge-offs in an amount greater than the Servicer's delegated signing
authority, (c) Mortgaged Property donations, and (d) other credit-related
matters requiring the prior approval of the Mortgagee. Such designated employee
shall respond promptly to all of the Servicer's inquiries and requests.
12.6. MORTGAGEE WILL REIMBURSE SERVICER FOR COSTS. The Servicer will bill the
Mortgagee for any and all expenses relating to or arising out of a foreclosure,
deed in lieu of foreclosure, deficiency proceeding, and other disposition of the
Mortgaged Property and actions relating thereto, including, but not limited to,
reasonable attorneys' fees, court costs, appraisals, filing costs, process fees,
and all other actual out-of-pocket expenses paid to third parties. The Mortgagee
will reimburse the Servicer for such costs and expenses no later than thirty
(30) calendar days after the Mortgagee receives the Servicer's consolidated
invoice for such costs and expenses. The Servicer may collect any such cost or
expense or any fee set forth in EXHIBIT B from the proceeds of any disposition
of any Mortgaged Property.
12.7. MORTGAGEE WILL GIVE SIGNING AUTHORITY TO SERVICER. From time to time, the
Mortgagee will delegate in writing to the Servicer certain authority to charge
off certain foreclosure-related expenses.
13. FIDELITY COVERAGE.
The Servicer will maintain a fidelity bond with a responsible surety company on
all of the Servicer's employees who may have access to the Mortgagee's funds,
monies, and documents. The bond will protect the Servicer against losses,
including theft, embezzlement, fraud, and misplacement. The Servicer will
maintain Fire and Extended Coverage Errors and Omissions Insurance, which will
reimburse the Servicer for any losses relating to the Servicer's failure to
require, procure, maintain or provide Fire and Extended Coverage Insurance on
the Mortgaged Properties.
14. MUTUAL REPRESENTATIONS AND WARRANTIES.
The Mortgagee represents and warrants to the Servicer with respect to the
following statements relating to the Mortgagee, and the Servicer represents and
warrants to the Mortgagee with respect to the following statements relating to
the Servicer, that as of the date of this Servicing Agreement:
14.1. PARTY IS DULY ORGANIZED.
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The First National Bank of Boston, Rhode Island Hospital Trust National Bank and
Bank of Boston-Florida, N.A. are each duly organized and validly existing
national banking associations, Bank of Boston Connecticut is a duly organized
and validly existing state-chartered savings bank and the Buyer is a duly
organized and validly existing corporation. Each is in good standing under the
laws of its jurisdiction of organization, and has the requisite power and
authority to enter into this Servicing Agreement and any other agreements to
which it is a party and that are contemplated by this Servicing Agreement.
14.2. AGREEMENT IS DULY AUTHORIZED.
It has all requisite power, authority and capacity to enter into this Servicing
Agreement and to perform the obligations required of it under this Servicing
Agreement. The execution and delivery of this Servicing Agreement by it and the
consummation of the transactions contemplated by this Servicing Agreement by it,
have been duly and validly authorized by all necessary action. This Servicing
Agreement constitutes its valid and legally binding agreement, enforceable in
accordance with its terms, except as it may be limited by bankruptcy,
insolvency, reorganization or other laws affecting the enforcement of creditors'
rights and by general equity principles, and no offset, counterclaim or defense
exists to the full performance of this Servicing Agreement by such party.
14.3. AGREEMENT DOES NOT VIOLATE ANY OTHER OBLIGATION.
Insofar as its capacity to carry out any obligation under this Servicing
Agreement is concerned, it is not in violation of any provision of any charter,
certificate of incorporation, by-law, mortgage, indenture, indebtedness,
agreement, instrument, judgment, decree, order, statute, rule or regulation, and
there is no such provision that adversely affects its capacity to carry out such
obligations. Its execution of, and performance pursuant to, this Servicing
Agreement will not result in such violation.
14.4. PARTY IS DULY LICENSED.
It holds the required licenses is in compliance with all state and federal laws
governing the transfer and Servicing of Mortgage Loans transferred under this
Servicing Agreement.
14.5. WARRANTIES SURVIVE.
It agrees that all warranties and obligations under this Servicing Agreement are
perpetual and will survive the termination of this Servicing Agreement.
15. INDEMNIFICATION.
15.1. MORTGAGEE WILL INDEMNIFY SERVICER. The Mortgagee shall indemnify the
Servicer and shall hold the Servicer harmless from and against any and all
losses, liabilities, penalties, damages, expenses or other harm or injury which
the Servicer may incur or suffer or which may be asserted by any person or
entity, including reasonable attorneys' fees and court costs, arising out of any
action at any time taken or omitted to be taken (a) by the Mortgagee under or in
connection with this Servicing Agreement and/or any applicable Exhibit to the
Agreement, including, without limitation, any failure by the Mortgagee to
observe and perform properly each and every covenant of this Servicing Agreement
and/or any applicable Exhibit to the Agreement, or (b) by the Servicer in
reliance upon information provided to the Servicer by the Mortgagee. Without
limiting the above, the Mortgagee shall indemnify the Servicer and shall hold
the Servicer harmless from and against any and all losses, liabilities,
penalties, damages, expenses or other harm or injury which the Servicer may
incur or suffer or which may be asserted by any person or entity, including
reasonable attorneys' fees and court costs, arising out of any Mortgage Loan or
the Servicing Rights relating to such Mortgage Loan which result from
(a) The failure of any prior servicer of a Mortgage Loan to perform servicing
obligations in accordance with the standards set forth in this Servicing
Agreement for any Mortgage Loan transferred from a prior servicer to the
Servicer.
(b) Any claim asserted by any person or entity which was not the result of any
negligence, willful misconduct, violation of law, or breach of this Servicing
Agreement by the Servicer.
(c) Any act or failure to act in connection with the origination, processing, or
closing of a Mortgage Loan, including but not limited to, the failure to provide
and/or complete the Mortgage Documents, which results in a tax penalty, tax
sale, lost Mortgage Documents and other such adverse consequences.
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15.2. SERVICER WILL INDEMNIFY MORTGAGEE. The Servicer shall indemnify the
Mortgagee and shall hold the Mortgagee harmless from and against any and all
losses, liabilities, penalties, damages, expenses or other harm or injury which
the Mortgagee may incur or suffer or which may be asserted by any person or
entity, including reasonable attorneys' fees and court costs, arising out of any
action at any time taken or omitted to be taken (a) by the Servicer under or in
connection with this Servicing Agreement and/or any applicable Exhibit to the
Agreement, including, without limitation, any failure by the Servicer to observe
and perform properly each and every covenant of this Servicing Agreement and/or
any applicable Exhibit to the Agreement, or (b) by the Mortgagee in reliance
upon information provided to the Mortgagee by the Servicer.
16. TERM OF THIS SERVICING AGREEMENT.
This Servicing Agreement will remain in full force and effect until terminated
by either party under the terms of SECTION 17 below.
17. TERMINATION.
This Agreement may be terminated for any reason set forth in SECTION 6.7 of the
Operating Agreement.
SECTIONS 17.1 THROUGH 17.3 INTENTIONALLY LEFT BLANK
17.4. MORTGAGEE'S SALE OF MORTGAGE LOAN ASSETS. The Mortgagee may sell its
interest in any or all of the Mortgage Loans, other than the Servicing Rights.
The Servicer consents to the sale of all or any part of such Mortgage Loan
(other than the related Servicing Rights) as long as:
(a) the sale of the Mortgage Loans remains subject to the terms of this
Servicing Agreement and the Servicer's rights under this Servicing Agreement,
including, but not limited to, the Servicer's continuing right to service the
Mortgage Loans and to receive the servicing fees set forth in this Servicing
Agreement, and
(b) the method of servicing the Mortgage Loans for such purchaser is
substantially the same as the servicing under this Servicing Agreement, and
(c) the Servicer may terminate its servicing responsibilities for any such
Mortgage Loans designated by the Servicer upon thirty (30) days' prior written
notice to the Mortgagee. Nothing in this Servicing Agreement will be considered
by either party to require the Servicer to terminate any such servicing
responsibilities for any such Mortgage Loans.
Notwithstanding the above, the Mortgagee may sell Mortgage Loans with Mortgagors
who are private banking clients of the Mortgagee to an investor with which the
Servicer has an existing servicing agreement. The Servicer will service such
Mortgage Loans under the terms of such existing servicing agreements with such
investors.
The Mortgagee will reimburse the Servicer for any costs or expenses incurred by
the Servicer relating to or arising out of any such sale of Mortgage Loans,
including, but not limited to, the costs of any additional reports created by
the Servicer for the Mortgagee in connection with any such sale.
17.5. SERVICER'S SALE OF SERVICING RIGHTS. Except as provided in SECTION 5.12 of
the Operating Agreement during the term of such Operating Agreement, the
Servicer may not sell or otherwise transfer the Servicing Rights (other than as
a result of the Servicer's pledge of the Servicing Rights as collateral for
certain extensions of credit to the Servicer) to any other person or entity
without the prior written consent of the Mortgagee. The Mortgagee understands
and acknowledges that the Servicer has pledged all or part of the Servicing
Rights to a third party creditor to secure certain amounts owing by the Servicer
under a credit agreement entered into by and between the Servicer and such
creditor.
17.6. SERVICER'S RESPONSIBILITIES UPON TERMINATION. The Servicer will perform
the following tasks for any Mortgage loans affected by any termination of part
or all of this Servicing Agreement:
(a) Make a full accounting of such Mortgage Loans to the Mortgagee.
(b) Pay all amounts due and owing to the Mortgagee and/or other persons or
entities.
(c) Deliver to the Mortgagee: (i) all Mortgage Documents held by the Servicer
which are the
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property of the Mortgagee, (ii) a written summary of all taxes and fire
insurance premiums which have been paid by the Servicer on behalf of Mortgagors,
and (iii) such other information reasonably necessary for a subsequent servicer
to service the Mortgage Loans.
18. POWER OF ATTORNEY.
The Mortgagee irrevocably constitutes and appoints the Servicer and its duly
authorized officers as the Mortgagee's agent and attorney-in-fact coupled with
an interest, to endorse checks and other instruments of payment with respect to
the Mortgage Loans.
19. NOTICES.
All notices and other communications required or permitted to be given under
this Agreement shall be in writing and shall be deemed given if delivered
personally, transmitted by facsimile (and telephonically confirmed), mailed by
registered or certified mail with postage prepaid and return receipt requested,
or sent by commercial overnight courier, courier fees prepaid, to the parties at
the following addresses:
If to Servicer, to:
William Glasgow, Jr.
Executive Vice President
BancBoston Mortgage Corporation
7301 Baymeadows Way
Jacksonville, FL 32256
With a copy to:
Robert J. Jacobs
General Counsel
BancBoston Mortgage Corporation
7301 Baymeadows Way
Jacksonville, FL 32256
If to Mortgagee to:
Parks Avery
Rhode Island Hospital Trust National Bank
15 Westminster Street
Providence, Rhode Island 02903
Cathy Elder
The First National Bank of Boston
100 Federal Street
Boston, Massachusetts 02110
With a copy to:
Ryan S. Stinneford
Senior Counsel
The First National Bank of Boston
100 Federal Street
Boston, Massachusetts 02110
or to such other address as the Servicer or the Mortgagee will have specified in
writing to the other.
20. EXHIBITS PART OF THIS SERVICING AGREEMENT.
The Exhibits are incorporated by reference into this Servicing Agreement, are
made a part of this Servicing Agreement, and will be binding on the Servicer and
the Mortgagee. The Exhibits to this Servicing Agreement may not be amended or
supplemented by the Servicer or the Mortgagee without the prior written
agreement of the other party.
21. ATTORNEYS' FEES AND COSTS.
If it is determined in a judicial proceeding that either party has failed under
any provision of this Servicing Agreement, and if either party will employ
attorneys or incur other expenses for the enforcement, performance, or
observance of the terms of this Servicing Agreement, then said party, to the
extent permitted by law, will be reimbursed by the losing party, for reasonable
attorneys' fees and other out-of-pocket expenses.
22. ASSIGNMENT AND DELEGATION.
No party may assign this Servicing Agreement, in whole or part, to any other
party without the prior written consent of the other party; except that (i)
either party may assign, in whole or in part, any of its rights under this
Servicing Agreement to any of its affiliates or subsidiaries, (ii) Servicer may
assign, in whole or in part, any of its rights under this Servicing Agreement to
secure payment of money borrowed and such assignee shall have the rights and
remedies of a secured party, (iii) Servicer may sell, transfer or assign, in
whole or in part, any of its rights, pursuant to a Sale of Servicing Rights, in
accordance with the provisions set forth in SECTION 17.5 of this Servicing
Agreement, and (iv) any Mortgagee may sell, transfer or assign, all or a portion
of its ownership interest in the
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Mortgage Loans which are serviced under this Servicing Agreement in accordance
with the provisions set forth in SECTION 17.4 of this Servicing Agreement.
The Mortgagee understands and acknowledges that the Servicer has delegated:
(a) foreclosure, bankruptcy, claims and conveyance, and other default-related
services to the Law Offices of Gerald Shapiro,
(b) tax bill procurement and tax payment services to TransAmerica Real Estate
Tax Service, Inc., and
(c) hazard insurance tracking, forced place, and other related insurance
services to American Sterling Corporation.
The Servicer may delegate additional servicing responsibilities and duties under
this Servicing Agreement from time to time without the prior consent of the
Mortgagee.
The Servicer may not delegate any additional material customer service
responsibilities or duties under this Servicing Agreement without the written
consent of the Mortgagee.
Neither party may assign this Servicing Agreement to any other party without the
prior written consent of the other party; provided, however, that either party
may assign and/or delegate, in whole or in part, any of its rights under this
Servicing Agreement to any of its affiliates or subsidiaries without the prior
written consent of the other party.
23. AMENDMENT.
No amendment or modification to this Servicing Agreement will be valid unless
executed in writing by the Servicer and the Mortgagee.
24. WAIVER.
No waiver of any right or obligation under this Servicing Agreement by any party
on any occasion will be deemed to operate as a waiver on any subsequent
occasion.
25. PROVISIONS SEVERABLE.
If any provision of this Servicing Agreement will be held to be void or
unenforceable by any court of competent jurisdiction or any governmental
regulatory agency, such provision will be considered by all parties to be
severed from this Servicing Agreement. All remaining provisions of this
Servicing Agreement will be considered by the parties to remain in full force
and effect.
26. GOVERNING LAW.
This Servicing Agreement is entered into in the state of Florida. Its
construction and rights, remedies and obligations arising by, under, through, or
on account of it will be governed by the laws of the State of Florida excluding
its conflict of laws rules and will be deemed performable in the State of
Florida.
27. FORCE MAJEURE.
No party shall be liable for delays or errors occurring by reason of
circumstances beyond such party's control, including, without limitation, acts
of civil, military, or banking authorities, national emergencies, labor
difficulties, fire, flood or other catastrophes, acts of God, insurrection, war,
riots, failure of transportation or equipment, or failure of vendors,
communication or power supply.
28. FURTHER ASSURANCES.
Each party to this Servicing Agreement will, from time to time, execute and
promptly deliver to the other party to this Servicing Agreement such documents,
assignments, endorsements, applications or other instruments, and provide such
other party with such information, and take all such other actions, consistent
with the terms of this Servicing Agreement, as the other party may reasonably
request in order to effectuate the provisions and purposes of this Servicing
Agreement and the transactions contemplated by this Servicing Agreement.
29. NO AGENCY OR JOINT VENTURE CREATED.
This Servicing Agreement will not be deemed to constitute the Servicer and the
Mortgagee as partners or joint venturers, nor will the Servicer or the Mortgagee
be deemed to constitute the other as its agent.
30. SUCCESSORS.
This Servicing Agreement will inure to the benefit of and be binding upon the
parties hereto and their successors and assigns. Nothing in this Servicing
Agreement expressed or implied is intended to confer on any person other than
the
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parties hereto and their successors and assigns, any rights, obligations,
remedies or liabilities.
31. SECTION HEADINGS.
Section headings are intended only to assist in the organization of this
Servicing Agreement and do not in any way limit or otherwise define the rights
and liabilities of the parties.
32. ENTIRE AGREEMENT.
This Servicing Agreement and the Exhibits to this Servicing Agreement constitute
the entire agreement among the parties and supersede all other prior
communications and understandings, written or oral, among the parties with
respect to the subject matter of this Servicing Agreement. There are no
contemporaneous oral agreements.
33. COUNTERPARTS.
This Servicing Agreement may be executed in multiple counterparts each of which
will be deemed an original. Regardless of the number of counterparts, the total
will constitute only one agreement.
34. PLURALS AND GENDER.
In construing the words of this Servicing Agreement, plural constructions will
include the singular, and singular constructions will include plural. No
significance will be attached to whether a pronoun is masculine, feminine, or
neuter.
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<PAGE> 12
IN WITNESS WHEREOF, the Servicer and the Mortgagee, as of the day first set
forth above, have caused their seals to be affixed on this instrument to be
signed on their behalf by their duly authorized officers.
BANCBOSTON MORTGAGE CORPORATION
By: /s/ Joseph K. Pickett
-----------------------------
Joseph K. Pickett
- ---------------------------------
(Print Name)
Title: Chairman
--------------------------
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Peter J. Manning
-----------------------------
Peter J. Manning
- ---------------------------------
(Print Name)
Title: Executive Director
--------------------------
BANK OF BOSTON CONNECTICUT
By: /s/ William J. Shea
-----------------------------
William J. Shea
- ---------------------------------
(Print Name)
Title: Vice Chairman
--------------------------
RHODE ISLAND HOSPITAL TRUST NATIONAL BANK
By: /s/ William J. Shea
-----------------------------
William J. Shea
- ---------------------------------
(Print Name)
Title: Vice Chairman
--------------------------
BANK OF BOSTON-FLORIDA, N.A.
By: /s/ Susan P. Hancy
-----------------------------
Susan P. Hancy
- ---------------------------------
(Print Name)
Title: Chairman
--------------------------
- 12 -
<PAGE> 13
EXHIBIT B
BASE SERVICING FEES - PORTFOLIO LOANS (INCLUDING THE PRIVATE BANK)
<TABLE>
<CAPTION>
AMOUNT / % BILLING
DESCRIPTION OF FEE OF FEE FREQUENCY NOTES
- ------------------ ------ --------- -----
<S> <C> <C>
All Base Servicing Fee Rates for All [ * ] Monthly
Mortgage Loans Which Were Serviced by
the Servicer Prior to the Date of this
Agreement
Servicing Fee for Each A and A- [ * ]% Per Annum Monthly
Conventional Fixed Rate 1st Mortgage
Loan
Servicing Fee for Each A and A- Fixed [ * ]% Per Annum Monthly
Rate CRA/1st Mortgage Loan (including
FHA / VA Loans)
Servicing Fee for Each A and A- Paper [ * ]% Per Annum Monthly
Conventional ARM First Mortgage Loan
Servicing Fee for Conforming A Quality $[ * ] Per Month (2) Monthly
Non-Escrowed 2nd Mortgage Loan
Servicing Fee for Conforming A Quality $[ * ] Per Month (2) Monthly
Escrowed 2nd Mortgage Loan
Servicing Fee for Non-Conforming A- $[ * ] Per Month (2) Monthly
Quality 2nd Mortgage Loan
Servicing Fee for Non-Conforming Less Subject to Negotiation (not to exceed To Be Determined
Than A- Quality Mortgage Loans and Other [ * ]% per annum)
Non-Conforming Mortgage Loans
</TABLE>
(2) At the three year anniversary of the original Servicing Agreement dated
3/1/95 and every three years thereafter, the servicing fee will be adjusted by
the change in the Consumer Price Index over the prior three years. The change
will be based upon the most recently published CPI.
INCREMENTAL SERVICES FEE SCHEDULE - PORTFOLIO LOANS (INCLUDING THE PRIVATE BANK)
<TABLE>
<CAPTION>
AMOUNT / % BILLING
DESCRIPTION OF FEE OF FEE FREQUENCY NOTES
<S> <C> <C>
REO Servicing: Fee for Managing, [ * ]% of the Sales Price of the Mortgaged Upon the Sale
Protecting, Renting and Disposing of Property Date of the
Mortgaged Property Which Has Been Mortgaged Property
Foreclosed, Abandoned or Received By
Deed in Lieu of Foreclosure or Otherwise
Placed Into the Possession of the
Servicer.
Fee for Initiating and Conducting [ * ]% of the Amount of any Deficiency Upon Collection
Proceedings to Obtain a Deficiency Balances Collected From the Mortgagor.
Judgment Against Mortgagor in Default.
</TABLE>
- ------------------------
* Confidential treatment requested. Confidential portion has been filed
separately with the Commission
Page B-1
<PAGE> 14
EXHIBIT - B
INCREMENTAL SERVICES FEE SCHEDULE - PORTFOLIO LOANS (INCLUDING THE PRIVATE BANK)
<TABLE>
<CAPTION>
BILLING BKB BILLING
DEPARTMENT DESCRIPTION OF SERVICE UNIT COST FREQUENCY CONTACT & RC NO. NOTES
- ---------- ---------------------- --------- --------- ---------------- -----
<S> <C> <C> <C> <C> <C>
Document Services Paper retrieval requests - per Document $[*]/Request (1) Monthly
Document Services Film retrieval requests $[*]/Request (1) Monthly
Document Services Whole file copy $[*]/loan file (1) Monthly
Default Management* Presale $[*]/loan Monthly Will change as FNMA
standard fee changes
A financial analysis is made to
determine if the mortgagor has
experienced a financial hardship beyond
their control. An appraisal is made to
determine the value of the property. If
the property value is less than the
amount of the debt, a presale may be
appropriate. A BBMC representative will
work with the mortgagor's Realtor to
obtain the best possible sales price and
will request investor approval of the
sale. The entire process is closely
monitored through receipt of the payoff
funds. If the mortgagor is in the
presale program for a minimum of 3
months and a reasonable purchase offer
has not been obtained, a deed in lieu
may be recommended as an alternative to
foreclosure.
Default Management* Deed In Lieu $[*]/loan Monthly Will change as FNMA
standard fee changes
A financial analysis is made to
determine if the mortgagor has
experienced a financial hardship beyond
their control. If foreclosure is deemed
inevitable, and there is no equity in
the property, it may be in the best
interest of BBMC and the investor to
accept a Deed in Lieu, rather than incur
the additional cost of pursuing a
foreclosure. A BBMC representative will
request our foreclosure attorney to
prepare a deed for the mortgagor's
signature and an estoppel letter. After
the deed is executed and recorded, the
loan is referred to the OREO for
disposition of the property.
Default Management* Modification $[*]/loan Monthly Will change as FNMA
standard fee changes
A financial analysis is made to
determine if the mortgagor has
experienced a financial hardship beyond
their control. Next, a title update is
obtained to determine if there are other
liens. A BBMC representative will
thoroughly review the terms of the loan
to decide if a change in the interest
rate, maturity date, principal and
interest payment or capitalization of
arrearages will be most beneficial to
the mortgagor and the investor. If
modification is not a viable solution,
the mortgagor may be referred to the
presale program.
Default Management* CRA (O.N.E.) Support Hourly (1) Monthly Currently $[ * ]/
month - plus travel
Investor Services* Master Servicing - SBO Agreement [ ] bps/loan Monthly Refer to Exhibit D
- plus $[*] / hr
Investor Services* G/L Reconciliations $[*]/hour (1) Monthly Currently 110 hrs/mo.
Custodial Liaison* Bond loan follow up $[*]/loan (1) Monthly Does not include cost
of Post Closing
function
Custodial Liaison* Pledge loans $[*] / new Quarterly Additional Doc pull
asset loan (1) fees apply
Special Loans Special "Prime"/ARM loans $[*] / loan (1) Annual BKB to provide
permission to modify
</TABLE>
* These services and fees will not apply to private bank loans
(1) At the three year anniversary of this agreement and every three years
thereafter, the unit costs will be adjusted by the change in the Consumer Price
Index over the prior three years. the change will be based upon the most
recently published CPI.
- ------------------------
* Confidential treatment requested. Confidential portion has been filed
separately with the Commission.
PAGE B-2
<PAGE> 15
EXHIBIT - B
INCREMENTAL SERVICES FEE SCHEDULE - PORTFOLIO LOANS (INCLUDING THE PRIVATE BANK)
<TABLE>
<CAPTION>
BILLING BKB BILLING
DEPARTMENT DESCRIPTION OF SERVICE UNIT COST FREQUENCY CONTACT & RC NO. NOTES
- ---------- ---------------------- --------- --------- ---------------- -----
REPORTING: - SEE EXHIBIT G - SOME REPORTS LISTED IN EXHIBIT G MARKED WITH AN "S" ARE CONSIDERED STANDARD REPORTS
AND NO ADDITIONAL FEE APPLIES. CUSTOM REPORTS ARE BILLED AT AN HOURLY RATE.
<S> <C> <C> <C> <C> <C>
Default Management Loan level delinquency reporting $[*]/hour (1) Monthly 26 hours/month for
current rpts
Financial/Credit Financial/Credit Reporting - $[*]/hour (1) Monthly 30 hours/month for
Reporting custom & Ad hoc current rpts
ACQUISITIONS, SALES
AND O/ SPECIAL
PROJECTS* (3) Senior Manager $[*]/hour (1) Monthly Plus out of pocket
expenses
Middle Manager $[*]/hour (1) Monthly Plus out of pocket
expenses
Support Exempt Personnel $[*]/hour (1) Monthly Plus out of pocket
expenses
Support Non-Exempt Personnel $[*]/hour (1) Monthly Plus out of pocket
expenses
External conversion expense At cost Alltel currently
charges $[*]
ARM Note Review $[*] / loan (1) Per bulk acq.
All key data pertaining to the current status of the ARM loan as well as the original loan
information is placed on a worksheet. The key loan documents are obtained and the
information in the note is compared to the data from the worksheet to verify that the loan
setup is accurate.
Audit historical adjustments $[*] / loan (1) Per bulk acq. Financial losses
if errors covered by FNBB
The index used to determine the rate changes for every ARM loan is reviewed to determine
if the loan has been serviced in accordance with the terms of the note or any subsequent
modifications. The mortgagor will be provided with a letter of the findings of the audit,
and is advised of any effects the audit will have on their payment amount, loan balance,
etc.
Incomplete loan documentation $[*] / loan (1) Quarterly Covers title
search /
Doc re-creation
When key loan documents are missing from the loan file, an impasse is created for various
servicing areas; Customer Service is unable to resolve mortgagor disputes concerning loan
amortization, origination or maturity dates, verify specific servicing requirements
specified in the individual documents, etc.; Special Loans is unable to complete the audit
of the ARM loan accounts because vital information cannot be verified; Paid In Full is
unable to discharge liens when recording information is unavailable or when documents are
missing that create a clear chain of title. A title search or other necessary documentation
will be ordered to recreate a loan file.
Document Services Rush request for documents-same $[*] next day / Monthly
day/next day $[*] same day (1)
Escrow Escrow Waiver Fee [*]% of principal Monthly Collected from cust. Based on customer
balance and Mortgagee
requests
Loan Modifications P&I adjustment based on principal $[*]/adjustment(1) Collected from cust.
curtailment
Loan Modifications* Partial Release Based on FNMA Collected from cust.
guidelines
</TABLE>
* These services and fees will not apply to Private Bank Loans
This is not an exhaustive list of fees and services provided. Refer to the
servicing agreement, master agreement and standard industry fees supported by
FNMA and/or HUD.
(1) At the three year anniversary of this Agreement and every three years
thereafter, the unit costs will be adjusted by the change in the Consumer Price
Index over the prior three years. The change will be based upon the most
recently published CPI.
(3) Servicer will be reimbursed its direct expenses on due diligence projects
supporting Mortgagee Bank Acquisitions if the servicing rights are sold to a
third party. Otherwise the Servicer will pay its own expenses when the Servicer
acquires the servicing rights.
- ------------------------
* Confidential treatment requested. Confidential portion has been filed
separately with the Commission.
PAGE B-3
<PAGE> 16
EXHIBIT - B
INCREMENTAL SERVICES FEE SCHEDULE - PRIVATE BANK PORTFOLIO LOANS
(PRIORITY SERVICE)
<TABLE>
<CAPTION>
BILLING BKB CONTACT
DEPARTMENT DESCRIPTION OF SERVICE UNIT COST FREQUENCY & RC NO. NOTES
- ---------- ---------------------- --------- --------- -------- -----
<S> <C> <C> <C> <C> <C>
Customer Service / Esc. Direct 800# access to $[*]/loan/year + Quarterly Ellen Rosenblatt See Loan Servicing Policies and
dedicated CSR's normal Svc Fee (1) Procedures Addendum for the
Private Bank
The Private Bank and
their mortgagors
will be provided
with a dedicated 800
number staffed by
representatives
trained to handle
the special needs of
Private Bank
customers. This
number provides
direct access,
bypassing the voice
response unit that
answers all incoming
calls on the main
800 line. Target
response time for
research items is 48
hours.
Exception processing Included in $[*] /
of tax & hazard ln charge
If a renewal policy
is not received by
the expiration date
of the policy, a
representative will
contact the
insurance
agent/carrier to
obtain coverage
information. If the
representative is
unable to obtain the
needed information,
the Operations
Manager will be
contacted to obtain
permission to send
notification to the
mortgagor. A BBMC
representative will
request permission
from the Operations
Manager, before
contacting a
mortgagor regarding
a tax delinquency.
An open items report
of open hazard items
will be sent
monthly.
Exception processing Included in $[*] /
of special lns ln charge
A monthly loan level
detail report is
provided to the
Senior Mortgage
Lender for all
maturing balloon
notes beginning 6
months prior to the
maturity date.
Approval from the
Private Bank is
obtained prior to
contacting the
mortgagor regarding
loan maturity,
accepting payments
past maturity, or
extending the
maturity date. A
representative will
work with the
Private Bank to
modify or refinance
the loan. In
addition, special
monthly or quarterly
statements are
prepared for those
loans that require
such service.
Exception collection Included in $[*] /
process ln charge
A dedicated
representative
personally works
with the Private
Bank to resolve
delinquent accounts,
or obtains
permission to
contact the
mortgagor directly.
All calls to
mortgagors must be
made manually vs.
using an
auto-dialer. Demand
letters are manually
sent when the
delinquency is >
than 90 days. Demand
letters to the
remainder of the
portfolio are sent
at day 50 via an
Easytrieve program.
Financial / Credit Rptg Financial / Credit $[*] / hour (1) Annual Aprox. 5 hours / month currently
- see Exhibit G Reporting
</TABLE>
All other fees described in Exhibit 'B' apply to the Private Bank Portfolio
Loans as applicable - see * on pages B-1 to B-3 for exceptions
(1) At the three year anniversary of this agreement and every three years
thereafter, the unit costs will be adjusted by the change in the Consumer Price
Index over the prior three years. The change will be based upon the most
recently published CPI.
- ------------------------
* Confidential treatment requested. Confidential portion has been filed
separately with the Commission.
PAGE B-4
<PAGE> 17
EXHIBIT C
SERVICE LEVELS
I. CUSTOMER SERVICE TIME FRAMES.
<TABLE>
<CAPTION>
SERVICE TRANSITION GOAL
INDICATORS (12-15 MONTHS) POST-TRANSITION GOALS*
---------- --------------- ----------------------
<S> <C> <C>
Average Speed of Answer TBD 30-60 seconds**
Abandonment Rate TBD 3% - 5%
Blockage Rate TBD 3% - 5%
Call Per Mortgage Loan Per Year TBD 2
VRU Usage TBD 40%
</TABLE>
*Post-transition goals will be assessed from time to time, based upon analysis
of Mortgagor expectations and return on investment.
**Range of ASA used to adjust for seasonality of activities.
All Customer Service Indicators will be measured on a monthly basis.
II. Investor Accounting Time Frames.
<TABLE>
<CAPTION>
FUNCTION TIME FRAME
-------- ----------
<S> <C>
System Balancing Daily
Bank Reconciliation 30 days from receipt of bank statement
Resolve items within the bank reconciliation 90 days from date of bank deposit account reconciliation
Reconcile investor shortages/surplus 21 days from receipt of investor reports
Resolve items within investor shortage/surplus 120 days after shortage/surplus reconciliation
</TABLE>
III. Other Time Frames.
<TABLE>
<CAPTION>
FUNCTION TIME FRAME
-------- ----------
<S> <C>
Mail payment coupons and welcome letters 5 business days after loan set-up
Refund Escrow Account balances after pay-off 16 days after pay-off Simple
Mortgage Loan assumptions 8 business days after receipt of all required documents
Qualifying assumptions Best efforts to complete within 45 days
Maturing balloon Mortgage Loan notice to Mortgagor First notice 180 days before maturity
Second notice 120 days before maturity
Third notice 30 days before maturity
Deliver Mortgage Loan documents to Mortgagee 3 business days
</TABLE>
<PAGE> 18
EXHIBIT E
ADDITIONAL SERVICING PRACTICES AND PROCEDURES
1.1. DOCUMENT REQUESTS. The Servicer will accept telefaxed orders for individual
Mortgage Loan documents and files or for groups of these items. The Servicer
will deliver Mortgage Loan files or Mortgage Loan documents stored by the
Servicer to a central location designated by the Mortgagee within three (3)
business days after receiving the Mortgagee's request for such documents. The
Servicer will deliver Mortgage Loan files and Mortgage Loan documents which are
not stored with the Servicer to a central location designated by the Mortgagee
within two (2) business days after the Servicer receives such documents and
files from its offsite vendor. The Mortgagee will distribute all Mortgage Loan
documents from its central location to the applicable branch location through
the Mortgagee's interoffice mail.
The Servicer will classify as "projects" all Mortgage Loan documents and
Mortgage Loan files requested in groups of twenty (20) to five hundred (500).
The Servicer will deliver all "project" Mortgage Loan documents and Mortgage
Loan files which are stored by the Servicer to the Mortgagee no later than ten
(10) business days after the Servicer receives the Mortgagee's request. The
Servicer will deliver all "project" Mortgage Loan documents and Mortgage Loan
files which are not stored by Servicer to a centralized location designated by
the Mortgagee no later than two (2) business days after receiving such documents
from the Servicer's offsite vendor. The Mortgagee will distribute all Mortgage
Loan documents from its central location to the applicable branch bank location
through the Mortgagee's interoffice mail.
The Servicer will classify as "special projects" all Mortgage Loan documents and
Mortgage Loan files requested in groups of more than five hundred (500). The
Servicer will deliver all special project Mortgage Loan documents and Mortgage
Loan files to the Mortgagee within a reasonable time, which may vary depending
upon the size of the special project.
The Mortgagee will provide Mortgage Loan files and Mortgage Loan documents to
the Servicer upon request according to the above schedule to allow the Servicer
to execute certain tasks and duties contemplated by this Agreement.
The Mortgagee's requests for same-day or next-day delivery will be available for
the fees and charges described in EXHIBIT B to this Agreement.
1.2. SERVICE LEVEL INTERRUPTIONS. The Servicer will give written notice to an
individual designated by the Mortgagee of any servicing interruption or error
which has a material adverse effect upon the Mortgage Loans or the related
Servicing Rights no later than twenty-four (24) hours after the Servicer becomes
aware of such interruption or error. Such notice shall contain a description of
the Servicer's plan to correct such servicing interruption or error.
1.3. NOTICE OF MASS MAILINGS. The Servicer will give written notice to an
individual designated by the Mortgagee of any category of mass mailings to
Mortgagors which the Servicer and the Mortgagor mutually agree is "non-routine".
2.1. PROCESSING BRANCH PAYMENTS. The Mortgagee will process each Mortgage Loan
payments in accordance with the terms of the Lockbox Agreement.
2.2. ACCEPTING PAYMENTS FOR MORTGAGE LOANS IN DEFAULT. The Mortgagee will
indemnify and hold the Servicer harmless from any costs, expenses, penalties,
losses or other harm relating to the Mortgagee's acceptance of a payment
relating to a portfolio Mortgage Loan or secondary market mortgage loan which is
in default.
2.3. PAYMENT CLEARING AND NSF ACCOUNT. The Servicer will establish and maintain
at the First National Bank of Boston a single Payment Clearing Account at The
First National Bank of Boston into which the Mortgagee will deposit all of the
Mortgagee's bank teller Mortgage Loan
1
<PAGE> 19
payments along with the lock box payments. The Servicer will also establish and
maintain at The First National Bank of Boston a single NSF Account at The First
National Bank of Boston which will be used to process all returned Mortgagee's
bank teller Mortgage Loan payments. The Servicer will redeposit all Mortgage
Loan payment checks which are returned unpaid by the payor bank unless the
payor bank is also the depository bank. These procedures will apply as long as
the Servicer utilizes The First National Bank of Boston as a lock-box service.
2.4. MORTGAGE LOAN PAYMENT ACCEPTED AT SERVICER LOCATION ONLY. The Mortgagee
acknowledges that the Servicer accepts Mortgage Loan "payment in full
transactions" only at locations designated by the Servicer. If the Mortgagee
accepts a Mortgage Loan payment in full transaction from a Borrower or any other
person which is short, fraudulent, or otherwise fails to satisfy all amounts due
and owing under the Mortgage Note and Mortgage, the Mortgagee will indemnify and
hold the Servicer harmless for all costs, expenses, loss and other harm incurred
by the Servicer relating to such payment in full transaction, including, but not
limited to, lost interest and other outstanding charges due and owing.
2.5. ESCROWS NOT APPLIED TO PAYOFF. When quoting a payoff amount to a Mortgagor,
the Servicer will not subtract any Escrow Account balances from such payoff
amount. The Servicer will refund Escrow Account balances to each Borrower not
later than 16 days after the Servicer has received all funds necessary to pay a
Mortgage Loan in full.
3.1. ACCOUNTING CUT-OFF. The Servicer will provide the Mortgagee with a complete
accounting of all financial transactions relating to its Mortgage Loan portfolio
once each month. Each financial accounting report will contain information
relating to activity from the date of the immediately preceding report through
the 23rd day of each month.
3.2. Magnetic Tape. The Servicer will transmit a magnetic tape monthly to
Mortgagee or overnight the magnetic tape to Mortgagee if the transmission is
unsuccessful. The magnetic tape shall be in a format acceptable to the Servicer
and the Mortgagee.
3.3. CHANGE IN REPORT CONFIGURATION. The Servicer will give the Mortgagee
written notice that the Servicer's software vendor will change its current
configuration of report sets no later than ten (10) business days after the
Servicer receives notice of such change from its software vendor.
4.1. ESCROW WAIVER POLICY. Except as provided below, the Servicer will not waive
an Escrow Account requirement for a Mortgage Loan. The Servicer may, but will
not be required to, consider an Escrow Account waiver request if each of the
following criteria has been satisfied:
(a) The Mortgage Loan must have been serviced by the Servicer for at least six
(6) months.
(b) No Mortgage Loan payment has been more than thirty (30) days past due during
the six (6) months immediately preceding such waiver request.
(c) The Mortgage Loan is current at the time the waiver request is completed.
(d) All Escrow Account advances have been repaid.
(e) The Mortgagor pays the escrow waiver fee described in EXHIBIT B to this
Agreement, to the extent permitted by applicable law.
The Servicer may, in its sole discretion and with the Mortgagee's prior written
consent, waive Escrow Account requirements for a Mortgage Loan if the Servicer
has committed a servicing error relating to Escrow Account disbursements and
such error has caused the Mortgagor to request such a waiver.
The Servicer will also waive escrow Account requirements for a Mortgage loan
upon the written request of the Mortgagee and receipt of the Escrow Account
waiver fee described in EXHIBIT B to this Agreement.
4.2. FLOOD DETERMINATIONS. Life of loan flood determinations shall be performed
by a flood insurance provider acceptable to Buyer for all
2
<PAGE> 20
Mortgage Loans, or the Mortgagee will pay to the Servicer the life of loan
contract conversion fee of $10.
4.3. INSURANCE DEDUCTIBLES. The deductible amount of any homeowner's/hazard
insurance or flood insurance may not exceed the greater of: (a) one thousand
dollars ($1,000), or (b) one percent (1%) of the outstanding principal balance
of the Mortgage Loan.
4.4. INSURANCE LOSS CLAIMS. The Servicer will endorse over to a Mortgagor any
insurance loss claim check or draft in the amount of five thousand dollars
($5,000) or less if the related Mortgage Loan is current. The Servicer will
require the Mortgagor to endorse over to the Servicer any insurance loss claim
check or draft if:
(a) the insurance loss claim check or draft is in an amount greater than five
thousand dollars ($5,000), or
(b) the Mortgage Loan is delinquent,
If an insurance loss claim check or draft is endorsed over to the Servicer, the
Servicer will deposit the funds in a restricted Escrow Account and disburse such
funds as satisfactory repairs are made to the Mortgaged Property. The Servicer
may require property inspection from time to time to ensure that such repairs
are made in a satisfactory manner.
5.1. ARM RATE CHANGES. The Servicer will service and maintain each adjustable
rate Mortgage Loan in accordance with the provisions contained in each such
Mortgage Note and related Mortgage.
The Servicer will deliver periodic interest rate and payment changes to
Mortgagors thirty (30) days prior to the payment change date, unless otherwise
specified in the Mortgage Note. The Servicer's mass escrow analysis for Mortgage
Loans undergoing payment changes will be performed as of the payment adjustment
date. Coupon books and escrow analysis statements for Mortgagors not on
automatic drafting will be mailed no later than twenty (20) days prior to the
new Mortgage Loan payment due date.
5.2. PAYMENT ADJUSTMENTS UPON PRINCIPAL CURTAILMENT. The principal and interest
portion of a Mortgage Loan payment for a conventional fixed rate or adjustable
rate portfolio Mortgage Loan may be adjusted when an additional principal
payment of five thousand dollars ($5,000) or more is made and the following
requirements are met:
(a) The Servicer receives such a request from the Mortgagor.
(b) All Mortgage Loan payments are current at the time the Servicer receives
such a request.
(c) The Mortgagor executes a recast Agreement for Modification prepared by the
Servicer.
(d) The Mortgagor pays the payment adjustment processing fee described in
EXHIBIT B to this Agreement.
Principal and interest adjustments will not be made on FHA and VA Mortgage Loans
and non-portfolio conventional Mortgage Loans.
6.1. ASSUMPTION REQUESTS. The Servicer will process a request for assumption
information, as long as such request is made by the Mortgagor or an authorized
third party.
Simple changes of ownership in the Mortgaged Property will be initiated within
eight (8) business days following the Servicer's receipt of documentation
reasonably requested by the Servicer which identifies and confirms such change
in ownership. The data system will be updated with the new information and new
payment coupons will be provided to the Mortgagor.
If the assumption transaction requires the new Mortgagor's credit to be
approved, the credit will be approved, denied or pended within 45 days following
the Servicer's receipt of a completed credit package. The Mortgagee authorizes
the Servicer to process the credit request in accordance with standard FNMA
underwriting guidelines.
The Servicer will charge the Mortgagor, and retain as compensation for it's
services hereunder, a fee for the assumption in
3
<PAGE> 21
accordance with FNMA guidelines and as described in EXHIBIT B.
7.1. WAIVER OF LATE CHARGES. The Servicer may, in its sole discretion, waive a
late charge if the Mortgagor provides information satisfactory to the Servicer
that the Mortgage Loan payment was lost in the mail or was paid at a Mortgagee
bank branch location prior to the end of the business day on which the late
charge was assessed.
The Servicer will always waive a late charge if: (a) the charge was imposed in
error, (b) the charge was caused by the Servicer's misposting or misapplication,
or (c) the Mortgagee has a business relationship with the Mortgagor and the
Mortgagee requests the Servicer to waive such charge and agrees to reimburse the
late charge to the Servicer.
7.2. FORECLOSURES. The Servicer will refer a delinquent Mortgage Loan file to
the Servicer's Foreclosure Review Committee after the servicer has completed its
collection efforts, including any forbearance or special payment plans. The
Mortgagee will advise the Servicer in writing of any mitigating circumstances of
which the Mortgagee is aware and which the Mortgagee believes should prevent a
delinquent portfolio Mortgage Loan from being referred to foreclosure. The
Servicer will delay foreclosure action relating to any such delinquent portfolio
Mortgage Loan until the Mortgagee asks the Servicer to resume foreclosure
activities. The Mortgagee will indemnify and hold the Servicer harmless from any
costs, expenses, damages and loss relating to the Servicer's deferral of such
foreclosure activities.
7.3. FORECLOSURE REVIEW COMMITTEE. The Servicer's Foreclosure Review Committee
will review each potential foreclosure. The Servicer, or its designated agent,
will be responsible for all foreclosure activity and will ensure compliance with
all Investor and Insurer regulations and procedures. The Service will use its
best efforts to complete foreclosure activity within the timeframes established
by FNMA.
7.4. PROPERTY PRESERVATION EXPENSES. The Mortgagee will reimburse the Servicer
for all of the Servicer's out-of-pocket expenses incurred for property
inspections, property preservation and maintenance costs, attorney fees and
other reasonable expenses. The Mortgagee acknowledges that the Servicer does not
routinely obtain transactional environmental screenings on properties to be
acquired through foreclosure, unless Servicer is made aware of potential
environmental issues. The Mortgagee will reimburse the Servicer for expenses
incurred in obtaining a transactional environmental screening, if, in the
opinion of the Servicer, a screening is warranted, or if the Mortgagee requests
the Servicer to obtain the screening.
7.5. MANAGEMENT AND DISPOSITION OF OREO PROPERTY.
(a) The Servicer shall manage, conserve, protect, and operate each OREO
property on behalf of the Mortgagee in the same manner that it manages,
conserves, protects and operates other foreclosed property for its own account.
(b) The Servicer shall maintain on each OREO Property fire and hazard insurance
with extended coverage in an amount which is at least equal to the maximum
insurable value of the improvements which are a party of such property,
liability insurance and, to the extent required and available under the
National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of
1973, each as amended, flood insurance in the amount required above.
(c) With respect to each OREO Property, the Servicer shall hold all funds
collected and received in connection with the operation of such OREO Property
separate and apart from its own funds or general assets in the Mortgagor T&I
custodial account.
(d) The Servicer shall deposit, or cause to be redeposited, on a daily basis in
each OREO Account all revenues received with respect to the conservation and
disposition of the related OREO Property and shall withdraw therefrom funds
necessary for the proper operation, management and maintenance of the OREO
Property, including the cost of maintaining any hazard insurance and the fees
of any managing agent acting on behalf of the Servicer. Any disbursement in
excess of ($5,000) shall be
4
<PAGE> 22
made only with the written approval of the Mortgagee. Such approval or Denial
to be given within 48 hours of receipt. The Servicer shall not be entitled to
retain interest paid or other earnings, if any, on funds deposited in such OREO
Account. The Servicer shall pay to the Mortgagee monthly the net cash flow from
the OREO Property (which shall equal the revenues from such OREO Property net
of the expenses described above and of any reserves reasonably required from
time to time to be maintained to satisfy anticipated liabilities).
(e) The disposition of OREO Property shall be carried out by the Servicer only
with the prior written consent given within 48 hours of our recommendation of
the Mortgagee and shall be made at such price, and upon such terms and
conditions, as the Servicer reasonably deems to be in the best interests of the
Mortgagee. The proceeds of sale of the OREO Property shall be promptly
deposited in the OREO Account and, as soon as practical thereafter, the expenses
of such sale shall be paid and the net cash proceeds of such sale remaining in
the OREO Account shall be paid to the Mortgagee.
(f) Upon request, with respect to any OREO Property, the Servicer shall furnish
to the Mortgagee a statement covering the Servicer's efforts in connection with
the sale of such OREO Property and any rental of the OREO Property incidental
to the sale thereof for the previous month (together with an operating
statement). Such statement shall be accompanied by such other information as
the Mortgagee shall reasonably request.
(g) OREO fees will be paid to Servicer in accordance with Exhibit B.
8.1. PARTIAL RELEASE. The Servicer will process all requests for a partial
release of mortgage in accordance with FNMA guidelines. If such partial release
conforms with FNMA guidelines, the Servicer shall have full authority to make
the decision to approve or deny the request without further discussion or
approvals from the Mortgagee.
The Servicer will execute partial releases on behalf of the Mortgagee. The
Mortgagee will provide, from time to time, whatever consents, board approvals,
ratifications or other documentation necessary to execute such a release.
As compensation for its services hereunder, Servicer shall retain any and all
fees charged to the Mortgagors in connection with the partial release process,
to the extent such fees conform with standard FNMA guidelines.
9.1. MODIFICATIONS. The Mortgagee will process and approve all portfolio
Mortgage Loan modifications. The Mortgagee will notify the Servicer upon
completion of such modifications.
10.1. MATURING BALLOON LOANS. The Servicer will process the renewal of maturing
balloon Mortgage Loans and will track delinquent matured Mortgage Loans in
accordance with the timelines described in EXHIBIT C to this Servicing
Agreement.
11.1. The First National Bank of Boston will reimburse Servicer for expenses
which may be incurred by Servicer after the date hereof related to prior
affiliate bank mergers wherein Servicer paid FNBB for the servicing rights.
5
<PAGE> 23
MASTER REPORT LISTING - EXHIBIT G
BKB & PRIVATE BANK - STANDARD (S) VS CUSTOM REPORTS (X)
================================================================================
<TABLE>
<CAPTION>
PRICING
S = STANDARD SOURCE RESPONSIBLE
REPORT X = CUSTOM OF DATA PARTY RECIPIENT
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Delinquency Report S CPI P-195 Wendy Woodcock/ Investors
Default Reporting
Monthly Statement of Mortgage S CPI P-139 Gerald Perkinson/ Investors
Accounts S-53W Investor Accounting
Report of Mortgage Accruals S CPI P-185 Gerald Perkinson/ Investors
S-28W Investor Accounting
Single Debit Reconciliation S CPI T-303 Gerald Perkinson/ Investors
T-30J Investor Accounting
Consolidation of Remittance Reports S CPI S-215 Gerald Perkinson/ Investors
S-21F Investor Accounting
Loans Added / Deleted Report S CPI S-263, S26K Gerald Perkinson/ Investors
and Paid in Full Reports S-264, 26L Investor Accounting
S-214, S-21J
Affiliate Delinquency Report X FOCUS, MSP Sharen Silvers Affiliate Credit
Default Administration Officers
Affiliate REO Report S REO System, Lotus Sharen Silvers Affiliate Credit
- part of 2% fee Default Administration Officers, Bob
Hartmann
Affiliate Portfolio Tracking X Easytrieve, Focus Patrice Dickman/ Jeff Mouhalis, Bill
MIS Glasgow, Megan
Fannin, Affiliate
Credit Officers.
<CAPTION>
REPORT BRIEF DESCRIPTION OF REPORT FREQUENCY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investor Delinquency Report Lists loans 30 or more days delinquent within the Monthly
Investor's portfolio. Gives units and dollar volume.
Monthly Statement of Mortgage Loan level detail by investor of the status of loans (UPB, P & I Monthly
Accounts Constant, Due Date, etc.)
Report of Mortgage Accruals Loan level detail by investor that shows accrual status of loan Monthly
(Accruing or non-accruing) Also includes loan type, IR, Due Date.
Single Debit Reconciliation Aggregate forecast report for for next months payments. Monthly
Consolidation of Remittance Reports Loan level detail of payments received from cut-off to cut-off. Monthly
(Application of P & I, service fees, etc.)
Loans Added / Deleted Report Monthly
and Paid in Full Reports
Affiliate Delinquency Report Details collection information on affiliate loans over 60 days delq. Monthly
with principal balance greater than $150,000 and loans 90 or more
days delinquent with principal balance greater than $100,000.
Report lists loan number, prin. balance, loan type, address and due
datas of loans 30 or more days past due. An easytrieve gives the same data
for private banking loans only. Also includes details on loans in F/C process.
Affiliate REO Report Details loans in Affiliate REO portfolio (Investor 019) by loan Monthly
- part of 2% fee number, borrower, address, date acquired, principal balance,
charge-offs, book value, list price, date listed, comments and
functional owner.
Affiliate Portfolio Tracking Details affiliate portfolios based on dollar volume, Monthly
loan count, function, LTV, Loan size, Property type,
Occupancy type, Payment type, year of origination.
Report gives delinquency figures for each of the
sorts. Report also gives same data for private
banking loans only.
</TABLE>
<PAGE> 24
MASTER REPORT LISTING - EXHIBIT G
BKB & PRIVATE BANK - STANDARD (S) VS CUSTOM REPORTS (X)
================================================================================
<TABLE>
<CAPTION>
PRICING
S = STANDARD SOURCE RESPONSIBLE
REPORT X = CUSTOM OF DATA PARTY RECIPIENT
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Early Charge-Off YTD Report X Patrice Dickman/
MIS
Charge-Off by Affiliate X Patrice Dickman/
MIS
FASB Reporting X P46T Gerald Perkinson/
P56W Investor Accounting
Affiliate Portfolio by State Summary X Easytrieve, Focus Patrice Dickman/
and Pay Type Summary MIS
Master Servicing Delinquency Rpt X Master Servicing Kari Sherman
(part of Master Serv. Fee)
Affiliate Residential Mtg Report for X Easytrieve Albert Keaton/ Mark Henderson, Linda
Treasury EZM6B251 Data Services Boucher (Bank of Vermont)
Affiliate FDIC RC Reports X Easytrieve Albert Keaton/ Kari Sherman
VTMTHEND Data Services Accounting
Interest Income for MA and other X Easytrieve Gerald Perkinson/ Rosemary Gall
States Investor Accounting FNBB
<CAPTION>
REPORT BRIEF DESCRIPTION OF REPORT FREQUENCY
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Early Charge-Off YTD Report Database with detailed reports are considered custom reporting. Monthly
Individual charge-off sheets sent to BKB for rollup is standard rptg.
Charge-Off by Affiliate Database with detailed reports are considered custom reporting. Monthly
Individual charge-off sheets sent to BKB for rollup is standard rptg.
FASB Reporting Net origination fees amortization
Monthly fee amortization
Affiliate Portfolio by State Summary Summary of dollar volume, loan count and non-accrual dollars by Monthly
and Pay Type Summary affiliate, by state for 1st mortgages, 2nd mortgages and total
Master Servicing Delinquency Rpt Detail of delinquency for Master Servicing accounts Monthly
(part of Master Serv. Fee)
Affiliate Residential Mtg Report for Fixed rate and adjustable rate mortgage reports for affiliates Monthly
Treasury CT, RIHT, BKB and BKB CLN. Reports include
Average Years to Interest Rate Change, Average Years
to Maturity, Average Coupon Rate, Maturity Loan Term
Affiliate FDIC RC Reports FNBB, RIHT & BKB-CT FDIC Schedule reports RC-J, RC-C, RC-J Monthly
non-accruals listing data by weighted average/yield, loan type
and property code.
Interest Income for MA and other FNBB - Tax reporting for MA Monthly/
States Annual
</TABLE>
Note: See Systems Term Sheet for information re. FFR Data Set transmissions
<PAGE> 25
MASTER REPORT LISTING - EXHIBIT G
BKB & PRIVATE BANK - STANDARD (S) VS CUSTOM REPORTS (X)
================================================================================
<TABLE>
<CAPTION>
PRICING
S = STANDARD SOURCE RESPONSIBLE
REPORT X = CUSTOM OF DATA PARTY RECIPIENT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Step Delinquency Report X Focus Sharen Silvers Jeff Mouhalis, Linda
Default Administration Bullard, Judy Garfinkel,
Warren Bacon,
Gail Snowden,
Carolyn Hart, Glenda
Edgy, Jeff Graham, Bill
Glasgow
Affiliate Risk Rating X Easytrieve, Focus Patrice Dickman/ BBMC Senior Mmgmt
MIS Affiliate Credit officers
Affiliate Loan Type Delinquency X Easytrieve, Focus Patrice Dickman/ Bob Hartmann/
Report MIS BKB Domestic Acctg
Affiliate Loan Type Report X Easytrieve, Focus Patrice Dickman/ Pam Mattson/
MIS BKB Domestic Acctg
Affiliate Full Accrual Report X Easytrieve, Focus Patrice Dickman/ Bob Hartmann/
MIS BKB Domestic Acctg
Monthly Charge-Off Summary Rpt X Focus Report Run Patrice Dickman/ Warren Bacon
Against In-House Data MIS
Time on Books Delinquency Rpt X Cindy Lucas/ Warren Bacon
Default Reporting
Correlation of Delinquencies with X Warren Bacon
Credit Scores
Fidicia Reports X Greg Neitling/ Warren Bacon
Quality Control
Detail Report of Charge-Offs X Patrice Dickman/
MIS
<CAPTION>
REPORT BRIEF DESCRIPTION OF REPORT FREQUENCY
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First Step Delinquency Report Gives delinquency statistics (30, 60, 90, FC) loans in First Step Monthly
program.
Affiliate Risk Rating Breaks down Affiliate exposure loans by dollar volume based on Monthly
Risk Rating table.
Affiliate Loan Type Delinquency Breaks down affiliate portfolio by affiliate, by loan type, by dollar Quarterly
Report volume and loan count for loans 30 days past due through
non-accrual
Affiliate Loan Type Report Breaks down affiliate portfolio by affiliate, by loan type, by dollar Quarterly
volume and loan count for loans current through non-accrual
Affiliate Full Accrual Report Gives total affiliate portfolios by principal balance and units which Quarterly
owe two or three payments.
Monthly Charge-Off Summary Rpt Loan level listing of approved charge-offs for delinquent affiliate Monthly
loans.
Time on Books Delinquency Rpt Monthly
Correlation of Delinquencies with
Credit Scores
Fidicia Reports Quarterly
Detail Report of Charge-Offs Database with detailed reports are considered custom reporting. Monthly
Individual charge off-sheets sent to BKB for rollup is standard rptg.
</TABLE>
<PAGE> 1
EXHIBIT 10.19
MORTGAGE LOAN SERVICING AGREEMENT
- -------------------------------------------------------------------------------
MORTGAGEE NAME: BARNETT BANKS, INC.
MORTGAGEE ADDRESS: 50 N. LAURA STREET, JACKSONVILLE, FLORIDA 32202-3638
TYPE OF BUSINESS ENTITY: BANK HOLDING COMPANY
DATE OF AGREEMENT: APRIL ___, 1996 MORTGAGEE CONTACT PERSON: HINTON NOBLES
PHONE NO: (904) 791-7741
FAX NO: (904) 791-5448
- -------------------------------------------------------------------------------
This Mortgage Loan Servicing Agreement (the "Servicing Agreement") is entered
into as of the date shown above by and between the Servicer and the Mortgagee,
and applies to any of the transactions described below.
RECITALS.
1. The Servicer is in the business of servicing residential mortgage loans,
including, but not limited to, conventional, FHA, VA and certain other Mortgage
Loans, including, but not limited to, first and second lien Mortgage Loans.
2. The Mortgagee is now or will be the owner of certain Notes secured by
Mortgages.
3. The Mortgagee desires the Servicer to service the Mortgage Loans under the
terms set forth in this Servicing Agreement.
4. The Servicer desires to service the Mortgage Loans under the terms set forth
in this Servicing Agreement.
IN CONSIDERATION of the mutual promises made in this Servicing Agreement and
other good and valuable consideration, the receipt and sufficiency of which are
acknowledged, the Servicer and the Mortgagee agree as follows:
1. DEFINITIONS.
1.1. "AFFILIATE" means an entity that, directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, another entity. For purposes of this definition, "control", "controlled
by", and "under common control with" means the direct or indirect possession of
ordinary voting power to elect a majority of the board of directors or
comparable body of an entity.
1.2. "AGENCY" means FNMA, FHLMC, FHA, HUD, VA, GNMA.
1.3. "BORROWER" means each obligor under a Mortgage Note.
1.4. "DELINQUENT MORTGAGE LOAN" means a Mortgage Loan with respect to which: (a)
one or more Mortgage Loan payments have not been received by the holder of the
Mortgage Note before the end of the month during which any such Mortgage Loan
payment was due, (b) Mortgage Loans in bankruptcy with one or more Mortgage Loan
payments which have not been received by the holder of the Mortgage Note on or
before the due date in the Mortgage Note, (c) Mortgage Loans in foreclosure, (d)
Mortgage Loan subject to an assignment of deed in lieu of foreclosure, or (e)
Mortgage Loan subject to the HUD assignment program.
1.5. "ESCROW ACCOUNTS" means Mortgage Loan escrow/impound accounts for taxes,
insurance, assessments, ground rents, buydowns, loss drafts, and any other such
amounts which are maintained by the Servicer as a fiduciary for the Borrowers
and investors, and relate to the Servicing Rights.
1.6. "FHA" means the Federal Housing Administration or any successor to the FHA.
1.7. "FNMA" means the Federal National Mortgage Association or any successor to
FNMA.
1.8. "FHLMC" means the Federal Home Loan Mortgage Corporation or any successor
to FHLMC.
<PAGE> 2
SERVICING AGREEMENT
1.9. "GNMA" means the Government National Mortgage Association or any successor
to GNMA.
1.10. GUIDE" means: (a) the Handbook GNMA 5500.1, Government National Mortgage
Association GNMA I Mortgage-Backed Securities Guide, Handbook GNMA 5500.2, in
each case as such Guide may be amended from time to time, (b) the HUD 4155.1
REV-4, Single Family Direct Endorsement Program, HUD 4060.1 REV-1, Mortgagee
Approval Handbook, (c) the FNMA Selling and Servicing Guides, (d) the FHLMC
Mortgagees' and Servicers' Guides, and/or (e) any guide or instructions provided
from time to time by a private investor, in each case as such Agency Guide may
be amended from time to time.
1.11. "HUD" means the United States Department of Housing and Urban Development,
or any successor to HUD.
1.12. "MORTGAGE" means a mortgage, deed of trust, or other such security
instrument which is executed by a Mortgagor pledging the Mortgaged Property as
security for repayment of a Mortgage Note.
1.13. "MORTGAGE DOCUMENTS" means all documents required by applicable law, an
Agency, the Servicer, and/or a private mortgage insurer to service a Mortgage
Loan.
1.14. "MORTGAGEE" means: (a) the entity defined as "Mortgagee" above, (b) any of
its Affiliate banks, and (c) its Affiliate mortgage company, as applicable
within the context used.
1.15. "MORTGAGE LOAN" means a residential mortgage loan which is: (a) secured by
a Mortgage, (b) owned by the Mortgagee, and (c) serviced by the Servicer under
the terms of this Servicing Agreement.
1.16. "MORTGAGE NOTE" means the written promise of a Borrower to pay a sum of
money in United States' dollars at a stated interest rate over a specified term,
and which is secured by a Mortgage.
1.17. "MORTGAGED PROPERTY" means the real property, together with the
one-to-four family dwelling and any other improvements situated on such real
property, which have been pledged by a Mortgagor under a Mortgage as collateral
to secure the obligation under a related Mortgage Note.
1.18. "MORTGAGOR" means each person who executes a Mortgage.
1.19. "OPERATING AGREEMENT" means the Operating Agreement entered into by and
between the Servicer and the Mortgagee pursuant to which this Servicing
Agreement is attached as EXHIBIT C.
1.20. "SERVICER" means HomeSide Lending, Inc., a business corporation organized
under the laws of the state of Florida and with its principal place of business
at 7301 Baymeadows Way, Jacksonville, Florida 32256.
1.21. "SERVICING AGREEMENT" means this Servicing Agreement and all Exhibits
attached hereto.
1.22. "SERVICING RIGHTS" means the rights to service the Mortgage Loans and
collect the servicing fees, late fees and certain other ancillary amounts
relating to the Mortgage Loans, including, but not limited to, amounts under an
Escrow Account.
1.23. "TRETS" means TransAmerica Real Estate Tax Service, Inc.
1.24. "VA" means the Department of Veterans Affairs, or any successor to the VA.
2. STANDARD OF CARE.
2.1. IN GENERAL. The Servicer will perform its duties and obligations under this
Servicing Agreement for all Mortgage Loans in accordance with: (a) applicable
Federal, State and local laws, rules, regulations, and orders, and (b) prudent
mortgage banking practices.
2.2. GOVERNMENT MORTGAGE LOANS. In addition to 2.1 above, the Servicer will
perform its duties and obligations under this Servicing Agreement for FHA and VA
Mortgage Loans in accordance with the Guides, regulations and practices of the
applicable Agency.
2.3. MORTGAGE LOANS OTHER THAN GOVERNMENT MORTGAGE LOANS. In addition to 2.1
above the Servicer will perform its duties and obligations under this Servicing
Agreement for Mortgage Loans other than FHA and VA Mortgage Loans in accordance
with the Guides, regulations and practices of: (a) FNMA, (b) FHLMC, and (c) the
applicable private mortgage insurance if a Mortgage Loan is required to have
-2-
<PAGE> 3
SERVICING AGREEMENT
private mortgage insurance and (d) this Servicing Agreement. If any provision of
a FNMA Guide, regulation, or practice is inconsistent with a provision in a
FHLMC Guide, regulation, or practice, the FNMA provision will control.
2.4. PRIVATE BANK MORTGAGE LOANS. Without limiting the scope of the foregoing,
the Servicer will provide to Mortgagors who are private banking clients of the
Mortgagee the additional tasks and services listed on EXHIBIT A of this
Servicing Agreement and requested by the Mortgagee, the fees for which are
described in EXHIBIT A to this Servicing Agreement. The Mortgage Loans which are
provided by the Mortgagee's private banking department to certain borrowers
under the Mortgagee's Community Reinvestment Act efforts will be serviced under
the general provisions of this Servicing Agreement rather than under the special
provisions of EXHIBIT A to this Servicing Agreement. Each Mortgage Loan with
such a Mortgagor will be subject to the special private banking fees and charges
described in EXHIBIT A TO this Servicing Agreement in addition to the standard
servicing fees and charges described in such EXHIBIT B.
3. COLLECTING PAYMENTS.
The Servicer will use reasonable efforts to collect each Mortgage Loan payment
when such payments become due until all amounts due and owing under or in
connection with each such Mortgage Loan has been paid in full.
4. SERVICING TASKS.
4.1. REMITTING PRINCIPAL AND INTEREST. The Servicer will pay to the Mortgagee
each month all Mortgage Loan principal and interest payments received by the
Servicer from each Mortgagor, less the amount of the servicing fees set forth in
EXHIBIT A AND EXHIBIT B to this Servicing Agreement. Such remittance will be
made in accordance with the actual/actual remittance method. The Servicer will
deliver to the Mortgagee a remittance advice and a full accounting report
containing information relating to the servicing fee on such dates as shall be
mutually acceptable to the Servicer and the Mortgagee.
4.2. INCREMENTAL SERVICES AS REQUESTED. If requested by the Mortgagee, the
Servicer will perform certain reporting, investor service, custodial liaison and
other credit-related services described in EXHIBITS A, B AND D to this Servicing
Agreement.
5. COMPENSATION.
5.1. GENERAL FEE SCHEDULE. The Mortgagee will pay to the Servicer the fees and
charges set forth in EXHIBITS A AND B to this Servicing Agreement.
5.2. SERVICER MAY RETAIN CERTAIN OTHER CHARGES AND FEES. The Servicer will
charge and retain the full amount of any late charges, returned check charges,
partial release and assumption processing fees, and other administrative fees
and charges described in EXHIBIT A AND EXHIBIT B to this Servicing Agreement and
allowed by: (a) FNMA and/or FHLMC in their Guides or other rules or regulations
with respect to Mortgage Loans other than FHA and VA Mortgage Loans, and (b) the
applicable Agency in its Guide or other rules or regulations with respect to FHA
and VA Mortgage Loans.
5.3. MORTGAGEE WILL PAY ALL CUSTODIAL FEES AND EXPENSES. The Mortgagee will pay
any and all costs, expenses and fees relating to the Mortgagee's custodian and
the custodial services provided by such custodian for the Mortgage Loans.
5.4. MORTGAGEE WILL PAY ALL TRETS AND FLOOD CERTIFICATION AND TRACKING FEES. The
Mortgagee will collect from the Mortgagor and pay over to the Servicer any and
all fees relating to or arising out of each: (a) "life of loan" transferable tax
service contract, which contract is either with TRETS or are fully transferable
to TRETS, and (b) transferable flood insurance certification and "life of loan"
tracking service from a flood service provider acceptable to the Servicer.
5.5. MORTGAGEE WILL PAY ALL FEES RELATING TO CERTAIN ADDITIONAL SERVICES. The
Mortgagee will pay to the Servicer any fees relating to any additional service
which the Servicer: (a) is required to perform by applicable law, rule,
regulation or order, and (b) reasonably believes the Servicer is unable to
collect directly from a Mortgagor or Borrower.
-3-
<PAGE> 4
SERVICING AGREEMENT
6. CUSTODIAL ACCOUNT.
6.1. INSURED DEPOSIT ACCOUNTS. The Servicer will hold all funds relating to the
Mortgage Loans in a custodial bank account at a depository financial institution
with deposits insured by the Federal Deposit Insurance Corporation, and will
maintain all records necessary to secure and obtain the maximum Federal Deposit
Insurance Corporation insurance for each beneficiary of the account.
6.2. MORTGAGE LOANS WITH AN ESCROW ACCOUNT. The Servicer will pay promptly all
hazard insurance premiums, mortgage insurance premiums, real estate taxes, and
other obligations which have funds in an Escrow Account during the term of this
Servicing Agreement promptly after receiving a bill for any such amount. If an
Escrow Account does not contain funds sufficient to pay such amounts, the
Servicer will advance funds for the payment of such amounts in the manner and to
the extent required by applicable law. The Servicer may elect to waive the
collection of such escrow charges without the express permission of the
Mortgagee in accordance with this Servicing Agreement.
6.3. MORTGAGE LOANS WITH NO ESCROW ACCOUNTS. The Servicer will advance funds on
behalf of a Mortgagor who does not maintain an Escrow Account for the payment of
taxes and certain other amounts. The Servicer will use its best efforts to
collect any such funds from each such Mortgagor. If the Servicer is unable to
recover any such funds from a Mortgagor, the Mortgagee will pay such funds to
the Servicer monthly.
6.4. ANNUAL CERTIFICATION. At the request of the Mortgagee, the Servicer will
certify once each year that all general property taxes, special assessments, and
hazard insurance premiums have been paid on the Mortgaged Properties securing
the Mortgaged Loans.
7. DELINQUENT MORTGAGE LOANS.
The Servicer's Delinquent Mortgage Loan collection efforts will be made in
accordance with the standard of care described in SECTION 2 above. The Servicer
will provide standard mortgage servicing package delinquency reports to the
Mortgagee once each month during the term of this Servicing Agreement.
8. INSURANCE.
The Servicer will use reasonable efforts to ensure that there is in force for
each Mortgaged Property a hazard insurance policy which: (a) is acceptable to
the applicable Agency, (b) contains the mortgagee clause: " HomeSide Lending,
Inc., its successors and/or assigns" or such other clause which is acceptable to
the Servicer, (c) insures against loss or damage by fire, all other hazards set
forth in the standard extended coverage form of endorsement, and any other
insurable risks against hazards required by the applicable Agency, (d) has been
issued in an amount equal to the lesser of the outstanding principal balance of
the Mortgage Loan or the full insurable value of the improvements to the
Mortgaged Property, and (e) if required by the Flood Disaster Protection Act of
1973 and/or the National Flood Insurance Reform Act of 1994, a flood insurance
policy in an amount representing coverage equal to the lesser of the outstanding
principal balance of the Mortgage Loan or the maximum amount of insurance which
is available under the Flood Disaster Protection Act of 1973 and/or the National
Flood Insurance Reform Act of 1994, as may be amended from time to time. If a
Mortgagor fails to maintain such insurance coverage, the Servicer may obtain
such coverage on behalf of such Mortgagor, and the Servicer may collect the
insurance premiums from the Mortgagor under the terms of the Mortgage. The
Servicer will retain, service, and continually maintain evidence of such
insurance coverage, as required by the Mortgagee. The Mortgagee will reimburse
the Servicer for the cost of maintaining insurance coverage in the event the
loan completes foreclosure.
The Servicer is authorized to sign on behalf of the Mortgagee for all loss
drafts relating to such insurance coverage in the manner and to the extent set
forth in EXHIBIT E And the FNMA Servicing Guide, as amended from time to time.
9. INSPECTIONS.
The Servicer will inspect a Mortgaged Property to determine its physical
condition and occupancy status: (a) each month following the Mortgagor's default
until such Mortgaged Property has been foreclosed or the Mortgage Loan has been
reinstated, and (b) in accordance with the applicable Agency's Guide and/or the
Servicer's standard operating procedures with respect to
-4-
<PAGE> 5
SERVICING AGREEMENT
damaged Mortgaged Properties. The Servicer will use its best efforts to recover
from each Mortgagor all costs and expenses relating to or arising out of such
inspections. If the Servicer is unable to recover such costs and expenses from
the Mortgagor, the Mortgagee will reimburse the Servicer for all such costs and
expenses at the time of any foreclosure sale, presale, or acceptance of a deed
in lieu of foreclosure.
10. SPECIAL NOTICE TO MORTGAGEE.
The Servicer will notify the Mortgagee in writing promptly after the Servicer
discovers that: (a) there is a material default under the terms of a Mortgage or
Mortgage Note, or (b) a Mortgaged Property has been sold or transferred.
11. PREPAYMENT.
The Servicer will not accept any full or partial principal prepayment of a
Mortgage Loan unless: (a) the Mortgage and/or Mortgage Note allows such
prepayment, (b) the Mortgagee authorizes such prepayment in writing, and/or (c)
applicable law, rule, regulation or order requires the Servicer to accept such
prepayment.
12. FORECLOSURES
12.1. COMPLIANCE WITH APPLICABLE RULES. The Servicer or its designated agent
will begin foreclosure proceedings or otherwise begin to acquire a Mortgaged
Property promptly after a Mortgagor has defaulted on a Mortgage Loan. These
proceedings will be conducted in the manner described in SECTION 2 above. If the
Mortgaged Property is conveyed to the FHA or the VA, the Servicer will
facilitate any settlement with applicable Agency. The Mortgagee will be
responsible for any deficiency in any claim settled by the Servicer with such an
Agency or private mortgage insurance company.
12.2. MANNER OF CONDUCTING FORECLOSURES. The Servicer or its designated agent
will conduct all such proceedings in the manner described in SECTION 2 above,
and will take title to the Mortgaged Property in the name designated by the
Mortgagee. The Mortgagee will pay to the Servicer the mitigation fees set forth
in EXHIBIT B to this Servicing Agreement for services requested by the
Mortgagee. The Servicer will perform only those foreclosure or related
procedures which are normal and customary for foreclosures in each jurisdiction
where the Mortgaged Property is situated.
12.3. MANAGING AND PROTECTING THE MORTGAGED PROPERTY. Unless otherwise directed
by the Mortgagee, the Servicer will manage and protect the Mortgaged Property
from the date the Servicer commences foreclosure until the date when such
proceedings have been terminated and title to the property has been conveyed to
the appropriate person or entity. The manner of such services will be consistent
with the management of real estate in the jurisdiction in which the Mortgaged
Property is situated including, but not limited to, the: (a) placement and
payment of certain insurance relating to the Mortgaged Property, (b) management
and supervision of repairs to and maintenance of the Mortgaged Property, and (c)
preparation of such reports as may be reasonably required by the Mortgagee. The
Servicer will obtain any authorization from any Agency or such other authority
required to manage and protect the Mortgaged Property.
12.4. MORTGAGEE WILL APPOINT CONTACT PERSON. The Mortgagee will designate an
employee of the Mortgagee who will be responsible for: (a) approving
extraordinary foreclosure matters and loss mitigation-related expenses,
including, but not limited to, litigation expenses, (b) Mortgaged Property
donations, and (c) other credit-related matters requiring the prior approval of
the Mortgagee. Such designated employee shall be authorized by Mortgagee to
instruct Servicer with respect to each of said matters and shall respond
promptly to all of the Servicer's inquiries and requests.
12.5. MORTGAGEE WILL REIMBURSE SERVICER FOR COSTS. The Servicer will bill the
Mortgagee for any and all expenses relating to or arising out of a foreclosure,
deed in lieu of foreclosure, deficiency proceeding, and other disposition of the
Mortgaged Property and actions relating thereto, including, but not limited to,
reasonable attorneys' fees, court costs, appraisals, filing costs, process fees,
and all other actual out-of-pocket expenses paid to third parties. The Mortgagee
will reimburse the Servicer for such costs and expenses no later than thirty
(30) calendar days after the Mortgagee receives the Servicer's consolidated
invoice for such costs and expenses. The Servicer may collect any such cost or
expense or any fee set forth in EXHIBIT B from
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<PAGE> 6
SERVICING AGREEMENT
the proceeds of any disposition of any Mortgaged Property.
13. FIDELITY AND E & O COVERAGE.
The Servicer will maintain a fidelity bond with a responsible surety company on
all of the Servicer's employees who may have access to the Mortgagee's funds,
monies, and documents. The bond will protect the Servicer against losses,
including theft, embezzlement, fraud, and misplacement. The Servicer will
maintain Fire and Extended Coverage Errors and Omissions Insurance, which will
reimburse the Servicer for any losses relating to the Servicer's failure to
require, procure, maintain or provide Fire and Extended Coverage Insurance on
the Mortgaged Properties.
14. MORTGAGEE REPRESENTATIONS AND WARRANTIES.
The Mortgagee represents, warrants and agrees that, as of the date of this
Servicing Agreement:
14.1. PARTY IS DULY ORGANIZED.
The Mortgagee is a duly organized and validly existing bank holding company. The
Seller's Affiliate banks are each duly organized and validly existing national
banking associations organized under the laws of the United States. The Seller's
Affiliate mortgage company is a duly organized and validly existing business
corporation. Each is in good standing under the laws of the jurisdiction of
organization, and has the requisite power and authority to enter into this
Servicing Agreement and any other agreements to which Mortgagee is party and
that are contemplated by this Servicing Agreement.
14.2. AGREEMENT IS DULY AUTHORIZED.
Mortgagee has all requisite corporate power, authority and capacity to enter
into this Servicing Agreement and to perform the obligations required of it
under this Servicing Agreement. The execution and delivery of this Servicing
Agreement, and the consummation of the transactions contemplated by this
Servicing Agreement, have each been duly and validly authorized by all necessary
corporate action. This Servicing Agreement constitutes the valid and legally
binding agreement of each party, enforceable in accordance with its terms,
except as they may be limited by bankruptcy, insolvency, reorganization or other
laws affecting the enforcement of creditors' rights and by general equity
principles, and no offset, counterclaim or defense exists to the full
performance of this Servicing Agreement.
14.3. AGREEMENT DOES NOT VIOLATE ANY OTHER OBLIGATION.
Insofar as Mortgagee's capacity to carry out any obligation under this Servicing
Agreement is concerned, Mortgagee is not in violation of any provision of any
charter, certificate of incorporation, by-law, mortgage, indenture,
indebtedness, agreement, instrument, judgment, decree, order, statute, rule or
regulation, and there is no such provision that adversely affects its capacity
to carry out such obligations. Mortgagee's execution of, and performance
pursuant to, this Servicing Agreement will not result in such violation.
14.4. PARTY IS DULY LICENSED.
Mortgagee holds the required licenses and, to the extent required, is in
compliance with all state and federal laws governing the transfer and Servicing
of Mortgage Loans transferred under this Servicing Agreement.
14.5. WARRANTIES SURVIVE.
Mortgagee agrees that all warranties and obligations under this Servicing
Agreement are perpetual and will survive the termination of this Servicing
Agreement.
15. SERVICER REPRESENTATIONS AND WARRANTIES.
The Servicer represents, warrants and agrees that, as of the date of this
Servicing Agreement:
15.1. PARTY IS DULY ORGANIZED.
The Servicer is a duly organized and validly existing corporation and is in good
standing under the laws of the jurisdiction of organization, and has the
requisite power and authority to enter into this Servicing Agreement and any
other agreements to which Servicer is party and that are contemplated by this
Servicing Agreement.
15.2. AGREEMENT IS DULY AUTHORIZED.
Servicer has all requisite corporate power, authority and capacity to enter into
this Servicing Agreement and to perform the obligations required
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<PAGE> 7
SERVICING AGREEMENT
of it under this Servicing Agreement. The execution and delivery of this
Servicing Agreement, and the consummation of the transactions contemplated by
this Servicing Agreement, have each been duly and validly authorized by all
necessary corporate action. This Servicing Agreement constitutes the valid and
legally binding agreement of each party, enforceable in accordance with its
terms, except as they may be limited by bankruptcy, insolvency, reorganization
or other laws affecting the enforcement of creditors' rights and by general
equity principles, and no offset, counterclaim or defense exists to the full
performance of this Servicing Agreement.
15.3. AGREEMENT DOES NOT VIOLATE ANY OTHER OBLIGATION.
Insofar as Servicer's capacity to carry out any obligation under this Servicing
Agreement is concerned, Servicer is not in violation of any provision of any
charter, certificate of incorporation, by-law, mortgage, indenture,
indebtedness, agreement, instrument, judgment, decree, order, statute, rule or
regulation, and there is no such provision that adversely affects its capacity
to carry out such obligations. Servicer's execution of, and performance pursuant
to, this Servicing Agreement will not result in such violation.
15.4. PARTY IS DULY LICENSED.
Servicer holds the required licenses and is in compliance with all state and
federal laws governing the transfer and Servicing of Mortgage Loans transferred
under this Servicing Agreement.
15.5. WARRANTIES SURVIVE.
Servicer agrees that all warranties and obligations under this Servicing
Agreement are perpetual and will survive the termination of this Servicing
Agreement.
16. INDEMNIFICATION.
16.1. MORTGAGEE WILL INDEMNIFY SERVICER. The Mortgagee shall indemnify the
Servicer and shall hold the Servicer harmless from and against any and all
losses, liabilities, penalties, damages, expenses or other harm or injury which
the Servicer may incur or suffer or which may be asserted by any person or
entity, including reasonable attorneys' fees and court costs, arising out of any
action at any time taken or omitted to be taken (a) by the Mortgagee under or in
connection with this Servicing Agreement and/or any applicable Exhibit to the
Agreement, including, without limitation, any failure by the Mortgagee to
observe and perform properly each and every covenant of this Servicing Agreement
and/or any applicable Exhibit to the Agreement, or (b) by the Servicer in
reliance upon information provided to the Servicer by the Mortgagee, or (c) by
Servicer in accordance with the terms hereof. Without limiting the above, the
Mortgagee shall indemnify the Servicer and shall hold the Servicer harmless from
and against any and all losses, liabilities, penalties, damages, expenses or
other harm or injury which the Servicer may incur or suffer or which may be
asserted by any person or entity, including reasonable attorneys' fees and court
costs, arising out of any Mortgage Loan or the Servicing Rights relating to such
Mortgage Loan which result from
(a) The failure of any prior servicer of a Mortgage Loan to perform servicing
obligations in accordance with the standards set forth in this Servicing
Agreement for any Mortgage Loan transferred from a prior servicer to the
Servicer.
(b) Any claim asserted by any person or entity which was not the result of any
negligence, willful misconduct, violation of law, or breach of this Servicing
Agreement by the Servicer.
(c) Any act or failure to act in connection with the origination, processing, or
closing of a Mortgage Loan, including but not limited to, the failure to provide
and/or complete the Mortgage Documents, which results in a tax penalty, tax
sale, lost Mortgage Documents and other such adverse consequences.
16.2. OTHER. Indemnification provisions of SECTION 16.1 shall apply only to
Mortgage Loans made subject to this Servicing Agreement subsequent to the
Closing Date as such term is defined in the Stock Purchase Agreement between
Grant America, Inc. (now known as HomeSide, Inc.) and Barnett Bank, Inc. dated
March 4, 1996.
16.3. SERVICER WILL INDEMNIFY MORTGAGEE. The Servicer shall indemnify the
Mortgagee and shall hold the Mortgagee harmless from and against any and all
losses, liabilities, penalties, damages, expenses or other harm or injury which
the Mortgagee may incur or suffer or which may be asserted by any person or
entity, including reasonable attorneys' fees and court costs, arising
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<PAGE> 8
SERVICING AGREEMENT
out of any action at any time taken or omitted to be taken (a) by the Servicer
under or in connection with this Servicing Agreement and/or any applicable
Exhibit to the Agreement, including, without limitation, any failure by the
Servicer to observe and perform properly each and every covenant of this
Servicing Agreement and/or any applicable Exhibit to the Agreement, or (b) by
the Mortgagee in reliance upon information provided to the Mortgagee by the
Servicer, or (c) by Mortgagee in accordance with the terms hereof.
17. TERM OF THIS SERVICING AGREEMENT.
This Servicing Agreement will remain in full force and effect until terminated
by either party under the terms of SECTION 18 below.
18. TERMINATION.
This Servicing Agreement may be terminated for any reason set forth in SECTION
5.7 of the Operating Agreement.
18.1. MORTGAGEE'S SALE OF MORTGAGE LOAN ASSETS. The Mortgagee may sell its
interest in any or all of the Mortgage Loans, other than the servicing rights
relating to such Mortgage Loans. The Servicer consents to the sale of all or any
part of such Mortgage Loan assets (other than the related servicing rights), as
long as:
(a) the sale of the Mortgage Loans remains subject to the terms of this
Servicing Agreement and the Servicer's rights under this Servicing Agreement,
including, but not limited to, the Servicer's continuing right to service the
Mortgage Loans and to receive the servicing fees set forth in this Servicing
Agreement, and
(b) the method of servicing the Mortgage Loans for such purchaser is
substantially the same as the servicing under this Servicing Agreement.
The Mortgagee will reimburse the Servicer for any costs or expenses incurred by
the Servicer relating to or arising out of any such sale of Mortgage Loans,
including, but not limited to, the costs of any additional reports created by
the Servicer for the Mortgagee in connection with any such sale.
18.2. SERVICER'S RESPONSIBILITIES UPON TERMINATION. The Servicer will perform
the following tasks for any Mortgage Loans affected by any termination of part
or all of this Servicing Agreement:
(a) Make a full accounting of such Mortgage Loans to the Mortgagee.
(b) Pay all amounts due and owing to the Mortgagee and/or other persons or
entities.
(c) Deliver to the Mortgagee: (i) all Mortgage Documents held by the Servicer
which are the property of the Mortgagee, (ii) a written summary of all taxes and
fire insurance premiums which have been paid by the Servicer on behalf of
Mortgagors, and (iii) such other information reasonably necessary for and
otherwise cooperate with a subsequent servicer to service the Mortgage Loans.
19. POWER OF ATTORNEY.
The Mortgagee irrevocably constitutes and appoints the Servicer and its duly
authorized officers and agents as the Mortgagee's agent and attorney-in-fact
coupled with an interest, to endorse checks and other instruments of payment and
documents with respect to the Mortgage Loans.
20. CONFIDENTIALITY.
The Mortgagee and the Servicer and their affiliates and subsidiaries will cause
their respective directors, officers, employees, agents and other authorized
representatives to hold in strict confidence, and not use or disclose to any
other party without the prior written consent of the other party, the
proprietary business procedures of the other party, the servicing fees or
prices, the policies or plans of the other party or any of its affiliates. The
Mortgagee and the Servicer agree that the terms of this Servicing Agreement,
including, but not limited to, the financial terms relating to any transaction
under this Servicing Agreement, are confidential and, except as required by law,
regulation, administrative or court order, neither party shall disclose, and
shall prevent any other person not authorized in writing by the other party from
disclosing, any such confidential information without the prior written consent
of the other party. Neither party is required to give such consent to the other
party.
21. NOTICES.
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<PAGE> 9
SERVICING AGREEMENT
All notices, requests, demands and other communications which are required or
permitted to be given under this Servicing Agreement will be in writing and will
be deemed to have been duly given upon the delivery of mailing thereof, sent by
registered or certified mail, return receipt requested, postage paid or fax:
If to Servicer, to:
William Glasgow, Jr.
Executive Vice President
HomeSide Lending, Inc.
7301 Baymeadows Way
Jacksonville, FL 32256
With a copy to:
Robert J, Jacobs
General Counsel
HomeSide Lending, Inc.
7301 Baymeadows Way
Jacksonville, FL 32256
If to Mortgagee to:
Fran Seabrook
Chairman, President and CEO
Barnett Mortgage Company
9000 Southside Boulevard
Building 700
Jacksonville, Florida 32256
With a copy to:
Karen Lugar
Senior Counsel
Barnett Banks, Inc.
9000 Southside Boulevard, Building 700
Jacksonville, Florida 32256
or to such other address as the Servicer or the Mortgagee will have specified in
writing to the other.
22. EXHIBITS PART OF THIS SERVICING AGREEMENT.
The Exhibits are incorporated by reference into this Servicing Agreement, are
made a part of this Servicing Agreement, and will be binding on the Servicer and
the Mortgagee. The Exhibits to this Servicing Agreement may not be amended or
supplemented by the Servicer or the Mortgagee without the prior written
agreement of the other party.
23. ATTORNEYS' FEES AND COSTS.
If it is determined in a judicial proceeding that either party has failed under
any provision of this Servicing Agreement, and if either party will employ
attorneys or incur other expenses for the enforcement, performance, or
observance of the terms of this Servicing Agreement, then said party, to the
extent permitted by law, will be reimbursed by the losing party, for reasonable
attorneys' fees and other out-of-pocket expenses.
24. ASSIGNMENT AND DELEGATION.
Neither party may assign this Servicing Agreement, in whole or part, to any
other party without the prior written consent of the other party; except that
(i) either party may assign, in whole or in part, any of its rights under this
Servicing Agreement to any of its affiliates or subsidiaries, (ii) Servicer may
assign, in whole or in part, any of its rights under this Servicing Agreement to
secure payment of money borrowed and such assignee shall have the rights and
remedies of a secured party, and (iii) the Servicer may assign, in whole or in
part, any of its rights, pursuant to a sale of Servicing in accordance with the
provisions of SECTION 4.17 of the Operating Agreement.
The Mortgagee understands and acknowledges that the Servicer has delegated:
(a) foreclosure, bankruptcy, claims and conveyance, and other default-related
services to the Law Offices of Gerald Shapiro,
(b) tax bill procurement and tax payment services to TransAmerica Real Estate
Tax Service, Inc., and
(c) hazard insurance tracking, forced place, and other related insurance
services to American Sterling Corporation.
The Servicer shall not delegate any additional material customer service
responsibilities or duties under this Servicing Agreement without the prior
written consent of the Mortgagee. The Servicer may delegate other additional
servicing responsibilities without the approval of the Mortgagee.
25. AMENDMENT.
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<PAGE> 10
SERVICING AGREEMENT
No amendment or modification to this Servicing Agreement will be valid unless
executed in writing by the Servicer and the Mortgagee.
26. WAIVER.
No waiver of any right or obligation under this Servicing Agreement by any party
on any occasion will be deemed to operate as a waiver on any subsequent
occasion.
27. PROVISIONS SEVERABLE.
If any provision of this Servicing Agreement will be held to be void or
unenforceable by any court of competent jurisdiction or any governmental
regulatory agency, such provision will be considered by all parties to be
severed from this Servicing Agreement. All remaining provisions of this
Servicing Agreement will be considered by the parties to remain in full force
and effect.
28. GOVERNING LAW.
This Servicing Agreement is entered into in the state of Florida. Its
construction and rights, remedies and obligations arising by, under, through, or
on account of it will be governed by the laws of the State of Florida excluding
its conflict of laws rules and will be deemed performable in the State of
Florida.
29. FORCE MAJEURE
Notwithstanding any language in this Servicing Agreement to the contrary,
Servicer shall not be held responsible nor subject to indemnification for any
loss suffered by Mortgagee stemming from acts or events beyond its reasonable
control, including (i) lightning, earthquakes, hurricanes or other acts of God,
as well as (ii) civil unrest, riots or war.
30. NO AGENCY OR JOINT VENTURE CREATED.
This Servicing Agreement will not be deemed to constitute the Servicer and the
Mortgagee as partners or joint venturers, nor will the Servicer or the Mortgagee
be deemed to constitute the other as its agent.
31. SUCCESSORS.
This Servicing Agreement will inure to the benefit of and be binding upon the
parties hereto and their successors and assigns. Nothing in this Servicing
Agreement expressed or implied is intended to confer on any person other than
the parties hereto and their successors and assigns, any rights, obligations,
remedies or liabilities.
32. SECTION HEADINGS.
Section headings are intended only to assist in the organization of this
Servicing Agreement and do not in any way limit or otherwise define the rights
and liabilities of the parties.
33. ENTIRE AGREEMENT.
This Servicing Agreement and the Exhibits to this Servicing Agreement constitute
the entire agreement among the parties and supersede all other prior
communications and understandings, written or oral, among the parties with
respect to the subject matter of this Servicing Agreement. There are no
contemporaneous oral agreements. Notwithstanding the above, this Servicing
Agreement is subject to the provisions of the Operating Agreement, including,
but not limited to, SECTIONS 3.3 and 3.4 thereof.
34. COUNTERPARTS.
This Servicing Agreement may be executed in multiple counterparts each of which
will be deemed an original. Regardless of the number of counterparts, the total
will constitute only one agreement.
35. PLURALS AND GENDER.
In construing the words of this Servicing Agreement, plural constructions will
include the singular, and singular constructions will include plural. No
significance will be attached to whether a pronoun is masculine, feminine, or
neuter.
IN WITNESS WHEREOF, the Servicer and the Mortgagee, as of the day first set
forth above, have caused their seals to be affixed on this instrument to be
signed on their behalf by their duly authorized officers.
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<PAGE> 11
SERVICING AGREEMENT
HOMESIDE LENDING, INC.
/s/ Joe K. Pickett
By:__________________________
_____________________________
(Print Name)
Title:_______________________
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<PAGE> 12
<TABLE>
<CAPTION>
EXHIBIT A TO SERVICING AGREEMENT
INCREMENTAL SERVICES AVAILABLE -- FEE SCHEDULE FOR PRIVATE BANK LOANS (PRIORITY SERVICES)
- ------------------------------------------------------------------------------------------------------------------------------------
DEPARTMENT DESCRIPTION OF SERVICES UNIT COST(1) BILLING PRIVATE BANK
FREQUENCY CONTACT
====================================================================================================================================
<S> <C> <C>
Customer Service/Esc. DIRECT 800 NUMBER ACCESS TO DEDICATED CSRS. Servicer will $[*]/loan/yr +
provide the Mortgagee's private banking Mortgagors with a normal servicing
dedicated 800 number staffed by representatives trained to Fee
handle the special needs of such Mortgagors. The 800 number
will by-pass the voice response unit for all incoming calls.
48 hour target response time for research items.
EXCEPTION PROCESSING FOR TAXES AND HAZARD INSURANCE. If a Included in $[*]/
renewal policy is not received by the expiration date of the loan charge
policy, a representative will contact the insurance
agent/carrier to obtain coverage information. If the
representative is unable to obtain the needed information,
the Operations Manager will be contacted to obtain
permission to send notification to the Mortgagor. A
servicing representative will request permission from the
Operations Manager, before contacting a Mortgagor, regarding
a tax delinquency. The Servicer will send the Mortgagor an
open hazard insurance items report each month.
EXCEPTION PROCESSING OF SPECIAL LOANS. The Servicer will Included in $[*]/
provide a monthly loan level detail report to the loan charge
Mortgagee's private banking department for all maturing
balloon loans beginning 6 months prior to the maturity date
of each such loan. The Servicer will obtain the Mortgagee's
approval prior to contacting the Mortgagor about the loan
maturity, accepting payments past the maturity date, or
extending the maturity date. The Servicer's representative
will work with the Mortgagee's private banking department to
modify or refinance the loan. In addition, the Servicer will
prepare special monthly or quarterly statements for those
loans requiring such statements.
EXCEPTION COLLECTION PROCESSING. A dedicated representative Included in $[*]/
will work with the Mortgagee's private banking department to loan charge
resolve delinquent accounts, or to obtain the Mortgagee's
permission to contact the Mortgagor directly. The Servicer
will mail demand letters manually when the delinquency is
greater than 90 days. The Servicer will mail demand letters
to the remainder of the portfolio on the 50th day using a
custom program. The Servicer and the Mortgagee will mutually
agree to the timing of Mortgagor notices and contacts.
Financial/Credit ADHOC FINANCIAL/CREDIT REPORTING(2) $[*]/hour Monthly
Reporting
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All other fees described in EXHIBIT B to the Servicing Agreement will be charged
to private banking Mortgage Loans, as applicable.
(1) At the 3-year anniversary of this Servicing Agreement and every 3 years
afterwards, the Servicer will adjust the unit costs according to changes in the
Consumer Price Index over the prior 3 years. Such change will be based upon the
most recently published Consumer Price Index.
(2) The list of standard reports is set forth in EXHIBIT D to this Servicing
Agreement.
- ------------------------
* Confidential treatment requested. Confidential portion has been filed
separately with the Commission.
<PAGE> 13
<TABLE>
<CAPTION>
EXHIBIT B TO THE SERVICING AGREEMENT
I. BASE SERVICING FEES -- PORTFOLIO LOANS (INCLUDING THE PRIVATE BANK)
- ------------------------------------------------------------------------------------------------------------------------------------
FEE DESCRIPTION AMOUNT OR PERCENTAGE OF FEE BILLING
FREQUENCY
====================================================================================================================================
<S> <C> <C>
All base servicing fee rates for all Mortgage The same amount and percentage in effect as of the
Loans which were serviced by the Mortgagee business day immediately preceding the effective Monthly
prior to the effective date of this Servicing date of this Servicing Agreement (minimum of [*]%
Agreement. for fixed rate Mortgage Loans and [*]% for
adjustable rate Mortgage Loans).
Servicing Fee for each fixed rate A and A- [*]% per annum Monthly
conventional fixed rate 1st Mortgage Loans
(including, but not limited to, FHA and VA
Mortgage Loans).
Servicing Fee for each fixed rate A and A- [*]% per annum Monthly
CRA/low-to-moderate income 1st Mortgage Loans
(including, but not limited to, FHA and VA
Mortgage Loans).
Servicing fee for each A and A- paper [*]% per annum Monthly
conventional ARM 1st Mortgage Loans
(including, but not limited to, FHA and VA
Mortgage Loans).
Servicing Fee for non-conforming less than A- To be determined. To be determined
quality Mortgage Loans and other (Not to exceed [*]% per annum.)
non-conforming Mortgage Loans.
</TABLE>
<TABLE>
<CAPTION>
II. INCREMENTAL SERVICES FEE SCHEDULE -- PORTFOLIO LOANS (INCLUDING THE PRIVATE BANK)
- ------------------------------------------------------------------------------------------------------------------------------------
DEPARTMENT DESCRIPTION OF SERVICES Unit Cost(1) or BILLING MORTGAGE
Amount/ FREQUENCY CONTACT
Percentage of
Fee
====================================================================================================================================
<S> <C> <C> <C>
REO SERVICING: Fee for managing, protecting, [*]% of On the sale date
renting and disposing of Mortgaged Property Mortgaged of the Mortgaged
which has been foreclosed, abandoned or Property Sales Property
received by deed in lieu of foreclosure or Price
otherwise placed into the possession of the
Servicer.
Fee for initiating and conducting proceedings [*]% of any Upon Servicer's
to obtain a deficiency judgment against a deficiency collection.
Mortgagor in default. balances
collected from
the Mortgagor.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) At the 3-year anniversary of this Servicing Agreement and every 3 years
afterwards, the Servicer will adjust the unit costs according to changes in the
Consumer Price
- ------------------------
* Confidential treatment requested. Confidential portion has been filed
separately with the Commission.
<PAGE> 14
Index over the prior 3 years. Such change will be based upon the
most recently published Consumer Price Index.
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT B TO THE SERVICING AGREEMENT (CONTINUED)
II. INCREMENTAL SERVICES FEE SCHEDULE -- PORTFOLIO LOANS (INCLUDING THE PRIVATE BANK)
- ------------------------------------------------------------------------------------------------------------------------------------
DEPARTMENT DESCRIPTION OF SERVICES UNIT COST(1) OR AMT/ BILLING MORTGAGE
% OF FEE FREQUENCY CONTACT
====================================================================================================================================
<S> <C> <C>
Default Management PRESALE - LOSS MITIGATION: The Servicer will cause an $[*]/loan(2) Monthly
appraisal of the Mortgaged Property to be made if the
Servicer determines that the Mortgagor has experienced a
financial hardship beyond his/her control. If the Mortgaged
Property's value is less than the amount of the debt, a
presale may be appropriate. A servicing representative will
work with the Mortgagor's real estate agent to obtain the
best possible sales price and will request the investor's
approval of the sale. The entire process will be closely
monitored through receipt of the payoff funds. If a
reasonable purchase offer has not been made after the
Mortgagor has been in the presale program for a minimum of 3
months, the Servicer mat recommend a deed in lieu of
foreclosure.
Default Management DEED IN LIEU - LOSS MITIGATION. The Servicer may determine $[*]/loan(2) Monthly
that it is in the Mortgagee's best interests to accept a
deed in lieu of foreclosure if: (a) the Mortgagor has
experienced financial hardships beyond his/her control, and
(b) foreclosure appears inevitable, and (c) there is
little/no equity on the Mortgaged Property. A servicing
representative will ask the Servicer's foreclosure attorney
to prepare an estopple letter and a deed for the Mortgagor's
signature. The Servicer will refer the Mortgaged Property to
OREO for disposition after the deed has been executed and
recorded.
Default Management MODIFICATION-LOSS MITIGATION: The Servicer will obtain a $[*]/loan(2) Monthly
title update to locate any additional liens on the Mortgaged
Property if the Servicer determines that the Mortgagor has
experienced financial hardships beyond his/her control. The
Servicer will thoroughly review the Mortgage Loan terms to
determine if a change in the interest rate, maturity date,
principal and interest payment, or capitalization of
arrearages will be most beneficial to the Mortgagor and the
Mortgagee. The Servicer may refer the Mortgagor to the
presale program if modification is inappropriate.
Custodial Liaison Bond loan follow-up $[*]/loan(1) Monthly
Custom Report: Ad hoc reports $[*]/hour Monthly
Financial/Credit Report DEVELOPMENT(1),(3)
Acquisitions, Sales or Senior manager $[*]/hour(1) + Monthly
Special Projects out-of-pocket
expenses
Middle manager $[*]/hour(1) + Monthly
out-of-pocket
expenses
</TABLE>
(1) At the 3-year anniversary of this Servicing Agreement and every 3 years
afterwards, the Servicer will adjust the unit costs according to changes in the
Consumer Price Index over the prior 3 years. Such change will be based upon the
most recently published Consumer Price Index.
(2) Will change as standard FNMA fee changes.
(3) See EXHIBIT D for a list of standard reports.
- ------------------------
* Confidential treatment requested. Confidential portion has been filed
separately with the Commission.
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT B TO THE SERVICING AGREEMENT (CONTINUED)
II. INCREMENTAL SERVICES FEE SCHEDULE -- PORTFOLIO LOANS (INCLUDING THE PRIVATE BANK)
- ------------------------------------------------------------------------------------------------------------------------------------
DEPARTMENT DESCRIPTION OF SERVICES UNIT COST(1) OR BILLING MORTGAGE
AMOUNT/ PERCENTAGE FREQUENCY CONTACT
OF FEE
====================================================================================================================================
<S> <C> <C> <C>
Acquisitions, Sales and/or Support exempt personnel $[*]/hour(1) + Monthly
Special Projects (continued) out-of-pocket
expenses
Support non-exempt personnel $[*]/hour(1) + Monthly
out-of-pocket
expenses
ARM note review(4) $[*]/loan(1) + Per bulk
out-of-pocket acquisition
expenses
Audit historical adjustments if errors(4) $[*]/loan(1) Per bulk
acquisition
INCOMPLETE LOAN DOCUMENTATION(5): Covers title $[*]/loan(1) Quarterly
search, document recreation on Portfolio
Mortgage Loans with missing documents and/or
missing recording information.
Document Services Paper retrieval requests-per document $[*]/ request(1) Monthly
Document Services Film retrieval request - on paper $[*]/ request(1) Monthly
Document Services Whole File Copy $[*]/loan file(1) Monthly
Document Services Rush document request - same day/next day $[*] next day(1) Monthly
$[*] same day(1)
</TABLE>
(1) At the 3-year anniversary of this Servicing Agreement and every 3 years
afterwards, the Servicer will adjust the unit costs according to changes in the
Consumer Price Index over the prior 3 years. Such change will be based upon the
most recently published Consumer Price Index.
(4) The Servicer will place all key data relating to the current status of the
ARM loan, together with the original loan information, into a worksheet. The
Servicer will obtain the key Mortgage Loan documents and compare the information
in the Mortgage Note with the information in the worksheet to verify the
accuracy of the Mortgage Loan set-up.
(5) An impasse occurs in various servicing areas when key Mortgage Loan
documents are missing from the Mortgage loan file. The Servicer's customer
service department is then unable to resolve Mortgagor disputes concerning
Mortgage Loan amortization, origination, or maturity dates, verify specific
servicing requirements set forth in the individual documents, etc. The
Servicer's special loan department is unable to complete the audit of the ARM
loan accounts because vital information cannot be verified. The Servicer's
paid-in-full department is unable to discharge liens when recording information
is unavailable or when Mortgage Loan documents are missing that create a clear
chain of title. A title search or other necessary documentation will be ordered
to recreate a loan file.
- ------------------------
* Confidential treatment requested. Confidential portion has been filed
separately with the Commission.
<PAGE> 17
<TABLE>
<CAPTION>
EXHIBIT B TO THE SERVICING AGREEMENT (CONTINUED)
II. INCREMENTAL SERVICES FEE SCHEDULE -- PORTFOLIO LOANS (INCLUDING THE PRIVATE BANK)
- ------------------------------------------------------------------------------------------------------------------------------------
DEPARTMENT DESCRIPTION OF SERVICES UNIT COST(1) BILLING MORTGAGE
OR AMOUNT/ FREQUENCY CONTACT
PERCENTAGE OF
FEE
====================================================================================================================================
<S> <C> <C> <C>
Escrow Escrow waiver fee. (Based on Mortgagor and [*]% of Monthly Collected from
Mortgagee requests.) principal Mortgagor
balance
Escrow Life of loan flood contract conversion fee. $[*]/contract(1)
(Convert flood certification to
life of loan coverage.)
Loan Modifications Principal and interest adjustment based on $[*]/adjustment(1) Collected from
principal curtailment Mortgagor
Loan Modifications Partial release Based on FNMA Collected from
guidelines/fees Mortgagor
Special Loans Track and convert maturing balloon loans (Fee Based on loan
retained by the Servicer) documentation
</TABLE>
(1) At the 3-year anniversary of this Servicing Agreement and every 3 years
afterwards, the Servicer will adjust the unit costs according to changes in the
Consumer Price Index over the prior 3 years. Such change will be based upon the
most recently published Consumer Price Index.
- ------------------------
* Confidential treatment requested. Confidential portion has been filed
separately with the Commission.
<PAGE> 1
EXHIBIT 10.20
PMSR FLOW AGREEMENT
SELLER NAME: BARNETT BANKS, INC.
SELLER ADDRESS: 50 N. LAURA STREET, JACKSONVILLE, FLORIDA
32202-3638
TYPE OF BUSINESS ENTITY: BANK HOLDING COMPANY
DATE OF AGREEMENT: MAY 31, 1996 SELLER CONTACT PERSON: HINTON NOBLES
PHONE NO: (904) 791-7741
FAX NO: (904) 791-5448
This PMSR Flow Agreement (the "PMSR Flow Agreement") is entered into as of the
date shown above by and between the Buyer and the Seller and applies to any of
the transactions described below.
RECITALS.
1. The Seller, through its Affiliate Banks and/or other Affiliates, originates
Mortgage Loans from time to time.
2. The Seller desires to sell to the Buyer the right, title, and interest in and
to the Servicing Rights to certain Mortgage Loans on the terms and conditions
set forth below in this PMSR Flow Agreement.
3. The Buyer desires to buy from the Seller the right, title, and interest in
and to the Servicing Rights on the terms and conditions set forth below in this
PMSR Flow Agreement.
IN CONSIDERATION of the mutual promises made in this PMSR Flow Agreement and
other good and valuable consideration, the receipt and sufficiency of which are
acknowledged, the Buyer and the Seller agree as follows:
ARTICLE 1.
DEFINITIONS.
As used in this PMSR Flow Agreement, the following capitalized terms shall have
the meanings given to them below:
1.1. "AFFILIATE" means an entity that, directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, another entity. For purposes of this definition, "control", "controlled
by", and "under common control with" means the direct or indirect possession of
ordinary voting power to elect a majority of the board of directors or
comparable body of an entity.
1.2. "AGENCY" means FHA, HUD, VA, a private mortgage insurance company, and/or
the Seller, as applicable.
1.3. "BORROWER" means each obligor under a Mortgage Note.
1.4. "BUSINESS DAY" means any day other than a Saturday, Sunday, federal
holiday, or any other day on which the Buyer or the Seller is not open for
business.
1.5. "BUYDOWN" means any reduction in a Borrower's monthly Mortgage Loan payment
required under a Mortgage Note or otherwise provided for in a related document.
The funds for each Buydown must be deposited into Escrow Funds and used to
supplement the Borrower's monthly Mortgage Loan payment.
1.6. "BUYER" means HomeSide Lending, Inc., a business corporation organized
under the laws of the state of Florida and with its principal place of business
at 7301 Baymeadows Way, Jacksonville, Florida 32256.
1.7. "ESCROW FUNDS" means those Mortgage Loan escrow/impound funds for taxes,
insurance, assessments, ground rents, Buydowns and any other such amounts which
were established at the Mortgage Loan closing and held by the Seller until such
funds are transferred to the Buyer on the Sale Date.
1.8. "EXCLUDED MORTGAGE LOAN" A Mortgage Loan which is: (a) delinquent by three
(3) or more monthly payments as of the Sale Date, (b) in litigation as of the
Sale Date which has a material adverse affect upon the value of the Servicing
Rights, (c) in bankruptcy as of the Sale Date, (d) in foreclosure or subject to
an assignment of deed in lieu of foreclosure as of the
<PAGE> 2
Sale Date, (e) paid in full within sixty (60) days after the Sale Date, or (f)
on a case-by-case basis, a HUD Repo or VA Vendee Mortgage Loan .
1.9. "FHA" means the Federal Housing Administration or any successor to the FHA.
1.10. "FLOOD SERVICE FEE" means a flood service fee paid by the Seller to the
Flood Service Provider or the Buyer to obtain certain flood certification and
"life of loan" tracking services for the Mortgage Loans.
1.14. "FLOOD SERVICE PROVIDER" means the company which provides a transferable
flood certification and "life of loan" tracking service for the Mortgage Loans.
The list of Flood Service Providers acceptable to the Buyer is set forth in
EXHIBIT C to this PMSR Flow Agreement. The Flood Service Provider must guaranty
the accuracy of the flood status determination and any future flood zone
changes.
1.11. "GUIDE" means: (a) the HUD 4155.1 REV-4, Mortgage Credit Analysis for
Mortgage Insurance on 1-to-4 Family Properties, HUD 4000.2 REV-2, Seller
Handbook Application Through Insurance (Single Family), HUD 4000.4 REV-1, Single
Family Direct Endorsement Program, HUD 4145.1 REV-2, Architectural Processing
and Inspections For Home Mortgage Insurance, 4150.1 REV-1 Valuation Analysis for
Home Mortgage Insurance, HUD 4060.1 REV-1, Seller Approval Handbook, (b) the VA
Lender's Handbook, (c) the requirements of any private mortgage insurer, and/or
(d) the provisions of the Servicing Agreement relating to the servicing
procedures to be followed by the Buyer.
1.12. "HUD" means the United States Department of Housing and Urban Development,
or any successor to HUD.
1.13. "MANDATORY DELIVERY" means the required delivery of Servicing Rights by
the Seller to the Buyer under the terms of this PMSR Flow Agreement. The
delivery of Servicing Rights by the Seller and the acceptance of Servicing
Rights by the Buyer are not optional unless this PMSR Flow Agreement is
terminated in the manner set forth below. The Seller's failure to sell and
deliver the Servicing Rights to the Buyer will be a breach of this PMSR Flow
Agreement. Notwithstanding the above, nothing in this PMSR Agreement shall be
deemed to limit any right which the Seller may have under the Operating
Agreement to sell Servicing Rights to third parties.
1.14. "MARKETING AGREEMENT" means the Marketing Agreement to be entered into by
and between HomeSide, Inc. and Barnett Banks, Inc. on or before the Closing Date
and which will govern the terms under which the Buyer's mortgagors may be
solicited for certain products and services.
1.15. "MORTGAGE" means a mortgage, deed of trust, or other such security
instrument which is executed by a Mortgagor pledging the Mortgaged Property as
security for repayment of a Mortgage Note.
1.16. "MORTGAGE DOCUMENTS" means all documents required by an Agency and/or the
Seller to service a Mortgage Loan.
1.17. "MORTGAGE LOAN" means a residential mortgage loan originated by the Seller
which is: (a) secured by a Mortgage, and (b) the subject of the Servicing Rights
purchased by the Buyer.
1.18. "MORTGAGE NOTE" means the written promise of a Borrower to pay a sum of
money in United States' dollars at a stated interest rate over a specified term,
and which is secured by a Mortgage.
1.19. "MORTGAGED PROPERTY" means the real property, together with the
one-to-four family dwelling and any other improvements situated on such real
property, which have been pledged by a Mortgagor under a Mortgage as collateral
to secure the obligation under a related Mortgage Note.
1.20. "MORTGAGOR" means each person who executes a Mortgage.
1.21. "OPERATING AGREEMENT" means the Operating Agreement entered into by and
between the Buyer and the Seller pursuant to which this PMSR Flow Agreement is
attached as EXHIBIT B.
1.22. "P & I" means principal and interest.
1.23. "PMSR FLOW AGREEMENT" has the meaning set forth in the recitals.
1.24. "PRIOR ORIGINATOR" means each entity which originated a Mortgage Loan
relating to SECTION 4.5 below, other than the Seller.
1.25. "PURCHASE PRICE" means the purchase price for the Servicing Rights, as
described in SECTION 4.1 and 4.5 below.
1.26. "PURCHASE PRICE PERCENTAGE" means the percentage set forth in EXHIBIT A to
this PMSR Flow Agreement.
1.27. "SALE DATE" means the date on which the Buyer pays the Purchase Price to
the Seller.
-2-
<PAGE> 3
1.28. "SELLER" means: (a) the entity defined as "Seller" above, and/or (b) any
of its Affiliate banks.
1.29. "SERVICER" means the entity which is responsible for Servicing the
Mortgage Loans.
1.30. "SERVICING" means the performance of Mortgage Loan servicing functions,
including, but not limited to, (a) collecting and disbursing of funds held in
trust to pay taxes, hazard insurance, mortgage insurance and other items as they
become due, (b) collecting and remitting principal and interest payments to
investors, and (c) resolving defaulted Mortgage Loans, in each case as set forth
in the Servicing Agreement.
1.31. "SERVICING AGREEMENT" means the Mortgage Loan Servicing Agreement entered
into by and between the Buyer and the Seller pursuant to which the Buyer agrees
to service certain mortgage loans.
1.32. "SERVICING FEE" means the fee collected by the Servicer for Servicing the
Mortgage Loans. The Servicing Fee shall be equal to the amount set forth in the
Servicing Agreement.
1.33. "SERVICING FILE" means a file containing any and all documents required by
an Agency and the Buyer to service Mortgage Loans on behalf of such Agency or
the Seller.
1.34. "SERVICING RIGHTS" means the rights to service the Mortgage Loans and
collect the Servicing Fees, late fees and certain other ancillary amounts
relating to the Mortgage Loans, including, but not limited to, amounts contained
in escrow accounts.
1.35. "T & I" means the taxes, insurance and any additional amount other than
P&I which is held in Escrow Funds.
1.36. "TRETS" means Transamerica Real Estate Tax Service.
1.37. "TRETS FEE" means a tax service fee paid by the Seller to TRETS to obtain
tax services from TRETS.
1.38. "VA" means the Department of Veterans Affairs or any successor to VA.
ARTICLE 2.
THE BUYER'S AND SELLER'S OBLIGATIONS BEFORE EACH SALE DATE.
The Buyer and the Seller shall comply with the following terms and conditions
before each Sale Date.
2.1. CONSISTENT WITH THE SERVICING AGREEMENT.
All Mortgage Loans delivered to the Buyer will be consistent with the criteria
set forth in the Servicing Agreement and the Operating Agreement.
2.2. AGENCY NOTIFICATION OF TRANSFER.
The Seller will, at its sole cost, notify the applicable Agency of the transfer
of the Servicing Rights to the Buyer within the time period required by the
applicable Agency.
2.3. BORROWER COMMUNICATIONS.
The Seller will give written notice to each Borrower of the transfer of the
Servicing Rights to the Buyer in compliance with applicable law, including, but
not limited to, the Real Estate Settlement Procedures Act and its implementing
Regulation X.
2.4. FLOOD SERVICE COMMUNICATIONS WITH FLOOD SERVICE PROVIDER.
The Seller will give written notice to each Flood Service Provider of the
transfer of Servicing Rights to the Buyer. Such notice may be satisfied by a
"blanket" notification to each such Flood Service Provider. The Seller will
provide any information required by such Flood Service Provider to effect the
creation and/or transfer of "life of loan" tracking service to the Buyer.
2.5. TAX SERVICE COMMUNICATIONS WITH TRETS.
TRETS will provide all tax related services for the Mortgage Loans.
2.6. INSURANCE COMMUNICATIONS.
2.6.1. COMMERCIAL INSURANCE CARRIERS. The Seller will give written notice to
each insurance carrier of the transfer of Servicing Rights to the Buyer. Such
notice will include the following requests:
(a) Name the Buyer and its successors and assigns as an insured in the lender's
policy of title insurance for the Mortgage Loan (unless the lender's policy of
title
-3-
<PAGE> 4
insurance for the Mortgage Loan defines "insured" to include any owner of
indebtedness secured by the insured Mortgage),
(b) Name the Buyer and its successors and assigns as an insured, and include a
lender's loss payable endorsement, in the fire and extended coverage policy for
the Mortgaged Property,
(c) Name the Buyer and its successors and assigns as an insured, and include a
lender's loss payable endorsement, in the flood insurance policy and in the
catastrophe insurance policy, if any, for the Mortgaged Property, and
(d) Name the Buyer and its successors and assigns as an insured, and include a
lender's loss payable endorsement, in the private mortgage insurance policy for
the Mortgage Loan.
The Buyer's Mortgage Loan numbers must be included as part of the information
provided by the Seller to the insurance carrier under this SECTION 2.6.1.
2.6.2. FHA INSURANCE. The Seller will give notice to FHA of the transfer of the
Servicing Rights to the Buyer in accordance with FHA guidelines.
2.7. NO OBLIGATION TO BUY.
Nothing in this PMSR Flow Agreement will be construed as obligating the Buyer to
purchase any Servicing Rights if the Buyer, in good faith, determines that it
is unable to service the related Mortgage Loan under the Servicing Agreement.
The Seller shall consult with the Buyer before offering new Mortgage loan
products to ensure that the Seller is able to service such Mortgage Loans. In
such event, the Seller may sell such Servicing Rights to a Third Party.
2.8. SOLICITATION FOR REFINANCES.
The Seller's ability to solicit a Borrower for a refinancing is described in the
Marketing Agreement.
2.9. ACCESS TO INFORMATION.
The Seller will give to the Buyer and its counsel, accountants, and other
representatives reasonable access, upon reasonable prior notice, during normal
business hours throughout the period before each Sale Date, to all of Seller's
files, books and records relating to the Mortgage Loans, Servicing Rights and/or
Escrow Funds.
ARTICLE 3.
THE BUYER'S AND SELLER'S OBLIGATIONS ON AND AFTER THE SALE DATE.
3.1. SELLER TRANSFERS SERVICING RIGHTS.
The Seller will transfer the applicable Servicing Rights to the Buyer on each
Sale Date.
3.2. NO ASSIGNMENT OF SERVICING RIGHTS.
The Seller shall not be required to prepare and record assignments of lien.
However, the Seller shall implement policies and procedures, and provide the
Buyer with powers of attorney necessary to assist the Buyer in properly
servicing the Mortgage Loans.
3.3. TRETS FEES.
For each Mortgage Loan, the Seller will pay any and all TRETS Fees, as
negotiated by the Buyer with TRETS, for the "life of loan" transferable
contracts. The Buyer will give the Seller written notice of any change to such
TRETS Fees no later than sixty (60) days prior to the effective date of such
change.
3.4. FLOOD CERTIFICATION FEES
For each Mortgage Loan, the Seller will transfer and assign a "life of loan"
transferable flood tracking service contract to the Buyer.
3.5. MORTGAGE PAYMENTS RECEIVED AFTER SALE DATE.
With respect to Mortgage Loan payments accepted by the Seller at an Affiliate
branch bank, the Seller shall ensure that each such payment is promptly
delivered to the Buyer. If any such Affiliate branch bank misdirects such a
payment, the Seller shall make the Buyer whole in the amount of any such
misdirected payment. If the Buyer receives such misdirected payment, the Buyer
will return such amount to the Seller.
3.6. SUPPLEMENTARY INFORMATION.
The Seller will give the Buyer any and all information which is reasonably
necessary for the Buyer to Service the Mortgage Loans, and which is reasonably
available to the Seller. The Seller shall provide such information to the Buyer
no later than ten (10) Business Days after the Seller receives the Buyer's
request for such information.
-4-
<PAGE> 5
ARTICLE 4.
THE PURCHASE PRICE.
4.1. CALCULATING THE PURCHASE PRICE.
Except as described in SECTION 4.5 below, the Buyer will pay the Purchase Price
to the Seller for the Servicing Rights in an amount equal to:
(a) the Purchase Price Percentage shown in EXHIBIT A to this PMSR Flow
Agreement, as amended from time to time by the Buyer upon receipt of a
revaluation by a third party mutually acceptable to the Buyer and the Seller,
(b) multiplied by the outstanding principal balance of the applicable Mortgage
Loans as of the Sale Date, and
(c) adjusted in the manner set forth in EXHIBIT A to this PMSR Flow Agreement,
as amended from time to time by the Buyer upon receipt of a revaluation by a
third party mutually acceptable to the Buyer and the Seller.
If the Buyer uses the services of a third party other than BayView Financial
Services for such revaluation, the Seller and the Buyer shall share the costs
of such revaluation equally.
4.2. WHEN THE PURCHASE PRICE WILL BE PAID TO THE SELLER.
The Buyer will pay the Purchase Price to the Seller on the applicable Sale Date,
which shall occur monthly. The Buyer shall work with the Seller to change the
payment process and increase the frequency of Sale Dates. Upon completion of
such change to the payment process, it is the parties' intent that a Sale Date
shall occur no less frequently than once each week.
4.3. ADJUSTMENTS FOR MORTGAGE LOAN PAYOFFS.
If a Mortgage Loan, with the exception of an Excluded Mortgage Loan, is paid off
within sixty (60) days after the Sale Date, the seller will reimburse the
Purchase Price to the Seller.
4.4. CORRECTIONS.
If, within one hundred and eighty (180) days after the Sale Date: (i) the
principal balance of any Mortgage Loan used in computing the amount of the
Purchase Price were found to be incorrect, or (ii) any item described in EXHIBIT
A or any other item which has a material affect upon the Purchase Price is found
to be incorrect, the Purchase Price will be adjusted promptly, and adjustments
will be made to the appropriate party.
4.5. MORTGAGE LOANS REPURCHASED FROM INVESTORS.
The parties acknowledge that, from time to time, the Seller may repurchase
certain mortgage loans from investors and hold such mortgage loans in the
Seller's portfolio. The Seller may sell the related Servicing Rights to the
Buyer for a Purchase Price to be determined on a case-by-case basis
ARTICLE 5.
REIMBURSEMENT FOR DELINQUENT MORTGAGE LOANS.
5.1 REASONS WHY.
The Seller will reimburse the Purchase Price to the Buyer if a Mortgage Loan
becomes sixty (60) days or more delinquent during the first six (6) months
following the first payment due to the Buyer after the related Sale Date and the
Mortgage Loan subsequently goes into foreclosure within twelve (12) months
following the first payment due to the Buyer.
5.2. REIMBURSEMENT AMOUNT.
If the Seller reimburses the Purchase Price to the Buyer, the Seller will pay to
the Buyer an amount equal to:
(a) the then current unpaid principal balance of the Mortgage Loan,
(b) multiplied by the Purchase Price Percentage applicable to the Servicing
Rights at the time the Buyer purchased such Servicing Rights.
5.3. TIMING FOR REIMBURSEMENT.
The Seller will complete each such reimbursement transaction no later than ten
(10) Business Days after the Seller has received notice of such reimbursement
requirement from the Buyer.
-5-
<PAGE> 6
PSMR Agreement
ARTICLE 6.
SELLER'S REPRESENTATIONS AND WARRANTIES RELATING TO THE MORTGAGE LOANS.
The Seller represents and warrants to the Buyer with respect to each Mortgage
Loan that, as of the Sale Date:
6.1. NOTE AND MORTGAGE ARE VALID OBLIGATIONS OF THE OBLIGORS.
The Mortgage Note and the related Mortgage are genuine and each is the legal,
valid, and binding obligation of the related Borrower and Mortgagor, enforceable
in accordance with their terms, except as such enforceability may be limited by
(a) applicable bankruptcy, reorganization, insolvency, moratorium and other laws
affecting creditors' rights or debtors' obligations from time to time in effect,
and (b) the availability of the remedy of specific performance or injunctive
relief or any other equitable remedy.
All parties to the Mortgage Note and the Mortgage had legal capacity to execute
the Mortgage Note and the Mortgage, and each Mortgage Note and Mortgage have
been duly and properly executed by such parties.
6.2. LIENS FREE OF ENCUMBRANCE.
The Mortgage is a valid and existing lien on the Mortgaged Property described in
the Mortgage, and the Mortgaged Property is free and clear of all encumbrances
and liens which have or will have a material adverse affect on the value of the
Servicing Rights.
6.3. LOANS SATISFY THE GUIDE.
Each Mortgage Loan satisfies the requirements and terms set forth in the
applicable Guide in effect at the time the Servicing Rights are delivered to the
Buyer. There is no circumstance or condition relating to a Mortgage Loan, the
Mortgaged Property, the Mortgage Documents, the Borrower or the Borrower's
credit standing that can reasonably be expected to cause an Agency to regard a
Mortgage Loan as not eligible for insurance coverage or guaranty, as applicable.
6.4. NO PERSON OR MORTGAGE RELEASED.
No party to the Mortgage Note or Mortgage has been released in whole or in part
from the Mortgage Note or the Mortgage, and no part of the Mortgaged Property
has been released from the Mortgage.
6.5. NO TAX LIENS.
There was no delinquent tax or delinquent assessment lien against the Mortgaged
Property at the time the related Mortgage Loan was closed or on the Sale Date.
If the Seller receives knowledge of any such delinquency, the Seller must notify
the Buyer within two (2) Business Days after obtaining such knowledge and cure
such event within thirty (30) days after such notice.
6.6. SELLER HAS PAID ALL TAXES AND ASSESSMENTS.
The Seller has caused the settlement agent to pay all taxes, governmental
assessments, all hazard insurance premiums, flood insurance premiums, mortgage
insurance premiums, leasehold payments or ground rents which are due and payable
as of the closing date.
6.7. NO DEFENSE TO PAYMENT.
The Mortgage Loan is not subject to any right of rescission, set-off,
counterclaim, or defense, including the defense of usury, nor will the operation
of any of the terms of the Mortgage Note or the Mortgage, or the exercise of any
right thereunder, render either the Mortgage Note or the Mortgage unenforceable,
in whole or in part, or subject it to any right of rescission, set-off,
counterclaim or defense, including the defense of usury and no such right of
rescission, set-off, counterclaim or defense has been asserted with respect
thereto.
6.8. LOANS COMPLY WITH LAW.
Each Mortgage Loan application was taken and processed, and each Mortgage Loan
was made in compliance in all material respects with all applicable local, state
and federal laws, regulations, rules and orders, including without limitation;
usury, the Equal Credit Opportunity Act and its implementing Regulation B, the
Real Estate Settlement Procedures Act and its implementing Regulation X, the
Financial Institutions Reform Recovery And Enforcement Act and its implementing
regulations, Federal Deposit Insurance Corporation Improvement Act, the
Truth-In-Lending Act and its implementing Regulation Z, the Fair Credit
Reporting Act and any applicable state credit reporting laws, the Fair Debt
Collection Practices Act, the Fair Housing Act, and Fair Lending Laws in all
material respects, and consummation of the transactions contemplated
QUARTERLY BULK PURCHASE
-6-
<PAGE> 7
PMSR Agreements
hereby, by the Seller will not involve the violation in any material respect of
any such laws.
6.9. ADEQUATE REMEDIES OF HOLDER.
Each Mortgage contains customary and enforceable provisions which give the
holder of the Mortgage adequate rights and remedies to realize against the
Mortgaged Property and to benefit from its security, including, but not limited
to: (a) in the case of a Mortgage designated as a Deed of Trust, by trustee's
sale; and (b) otherwise by foreclosure subject, in each case, to any limitations
arising from any bankruptcy, insolvency or other similar laws for the benefit of
debtors.
6.10. NO CONDEMNATION PROCEEDINGS.
There is no proceeding pending for the total or partial condemnation of the
Mortgaged Property and such property is undamaged by waste, fire, earthquake or
earth movement, windstorm, flood, tornado or other casualty, so as to affect
adversely the value of the Mortgaged Property as security for the Mortgage Loan
or the use for which the premises were intended.
6.11. PROCEEDS FULLY DISBURSED.
Except for Escrow Funds retained for completion of Mortgaged Property
improvements, the proceeds of the Mortgage Loan have been fully disbursed, there
is no requirement for future advances thereunder and any and all requirements as
to completion of any on-site or off-site improvements and as to disbursements of
any funds therefore have been complied with. All costs, fees and expenses
incurred in making, closing or recording the Mortgage Loans has been paid by the
Seller or a Prior Originator.
6.12. ORIGINATION PRACTICES.
The origination practices used by the Seller or a Prior Originator for each
Mortgage Loan have been in all respects legal, proper, prudent, customary in the
mortgage servicing business, and in accordance with the applicable Agency's
Guide. There are no deficiencies in any Escrow Funds and none of the Escrow
Funds have been capitalized under any Mortgage or the related Mortgage Note.
6.13. HAZARD INSURANCE.
There is in force for each Mortgaged Property a hazard insurance policy which:
(a) is acceptable to the applicable Agency and reasonably acceptable to the
Buyer, (b) contains a standard mortgagee clause, (c) insures against loss or
damage by fire, all other hazards set forth in the standard extended coverage
form of endorsement, and any other insurable risks against hazards required by
the applicable Agency, (d) has been issued in an amount equal to at least the
lesser of the outstanding principal balance of the Mortgage Loan or the full
insurable value of the improvements to the Mortgaged Property, and (e) if
required by the Flood Disaster Protection Act of 1973 and the National Flood
Insurance Reform Act of 1994, a flood insurance policy in an amount representing
coverage at least equal to the lesser of the outstanding principal balance of
the Mortgage Loan or the maximum amount of insurance which is available under
the Flood Disaster Protection Act of 1973 and the National Flood Insurance
Reform Act of 1994. The improvements to the Mortgaged Property have not been
affected in any substantial manner or suffered any material loss as a result of
any fire, explosion, accident, strike, riot, war or act of God or the public
enemy as of the Transfer Date, except as disclosed by the Seller to the Buyer in
accordance with EXHIBIT B to this PMSR Flow Agreement. All such insurance
policies remain in full force and effect.
6.14. SURVEYS AND FLOOD INSURANCE.
A survey, where required, has been made of the Mortgaged Property, and if in a
flood zone A or V in a FEMA flood map area in a participating community, flood
insurance has been provided. All of the improvements which were included for the
purpose of determining the appraised value of the Mortgaged Property lie wholly
within the boundaries and building restriction lines of such property, and no
improvements on adjoining properties encroach upon the Mortgaged Property unless
covered by title insurance and/or waivers.
6.15. PMI.
All Mortgage Loans with Escrow Funds relating to private mortgage insurance are
evidenced by a private mortgage insurance policy. With respect to each such
policy: (a) all provisions of such private mortgage insurance policy have been
and are being complied with, (b) such policy is in full force and effect, and
(c) all premiums due under such policy have been paid by the Seller. Any
Mortgage Loan subject to any such private mortgage insurance policy obligates
the Borrower to maintain such private mortgage insurance policy and pay all such
premiums and charges in
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PMSR Agreements
connection therewith. Each private mortgage insurance company will be reasonably
acceptable to the Buyer.
6.16. FHA INSURANCE AND VA GUARANTY.
Each Mortgage Loan to be insured by the FHA is eligible for FHA insurance, and
the FHA insurance premiums which are due and payable for each such Mortgage Loan
have been paid by the Seller. Each Mortgage Loan to be guaranteed by the VA is
eligible for a VA guaranty.
6.17. MORTGAGED PROPERTY LOCATED IN THE U.S.
The Mortgaged Property is located in the continental United States or the State
of Hawaii, and all such Mortgage Loans consist of a detached one-to-four family
dwelling, a townhouse, or an individual condominium unit in a development or an
individual unit in a planned unit development.
6.18. NO SUPERFUND SITE.
The Mortgaged Property is not located on a superfund site.
6.19. DOCUMENTS COMPLY WITH GUIDE.
The Mortgage Documents satisfy each of the requirements of the applicable Guide,
and the Mortgage Documents have been duly executed and are in a form acceptable
to the applicable Agency.
Each Mortgage Note, Mortgage and appraisal are on forms acceptable to the
applicable Agency, and the Mortgage Loan was originated, serviced, and
delivered, as applicable, in accordance with the applicable Guide.
6.20. SERVICING FILES.
All documents which are required to be in the Servicing File have been provided
to the Buyer by the Seller in accordance with the applicable Agency's Guide.
6.21. MORTGAGED PROPERTY TAX IDENTIFICATION.
Each Mortgaged Property tax identifications and Mortgaged Property description
is, in all material respects, accurate, complete and legally sufficient. Tax
segregation, where required, has been completed.
6.22. ESCROW FUNDS.
There are Escrow Funds for each Mortgage Loan which is required by an applicable
Agency to have Escrow Funds. All Escrow Funds (whether voluntary or required by
an Agency or the Seller, have been created and maintained in compliance, in all
material respects, with: (a) the applicable Guide, (b) the applicable Agency's
requirements, (c) the Mortgage Documents, and (d) applicable laws, rules,
regulations and orders. Each item contained within the Escrow Funds contains
funds in the proper amount.
6.23. ESCROW ANALYSIS.
The Seller has complied with applicable laws, rules, regulations and orders,
including, but not limited to, the Real Estate Settlement Procedures Act and its
implementing Regulation X with respect to the establishment of Escrow Funds.
6.24. PLEDGED ACCOUNTS.
There are no pledged accounts relating to a Mortgage Loan which must be
maintained or administered by the Buyer.
6.25. FLOOD CERTIFICATION AND TRACKING SERVICES.
Each Mortgage Loan has in full force and effect a transferable flood insurance
certification and a "life of loan" tracking service contract, which contract is
with a Flood Servicer Provider.
6.26. SELLER'S STATEMENTS ARE TRUE AND ACCURATE.
No representation, warranty or written statement made by the Seller in this PMSR
Flow Agreement, or in any schedule, written statement or certificate given to
the Buyer in connection with the transactions contemplated by this PMSR Flow
Agreement contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements in
this PMSR Flow Agreement or in any of such statements and certificates not
misleading.
6.27. DISCLOSURE OF MORTGAGE LOAN ACCOUNT INFORMATION.
Except as otherwise indicated in writing to the Buyer prior to the date of this
PMSR Flow Agreement, the Seller has not disclosed Mortgage Loan information,
including, but not limited to, the names and addresses of the Mortgagors or the
Borrowers, to any person or entity other than an Affiliate unless such
disclosure was necessary to comply with an Agency Agreement
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PMSR Agreement
or with applicable state or federal law, rule, regulation, or order.
Notwithstanding the above, any disclosure of Mortgage Loan information to credit
bureaus is governed by contracts that prohibit any person from directly or
indirectly using such information for solicitation of the Mortgagors or
Borrowers for financial, insurance and/or related services or products. To the
extent that there are any inconsistencies between the provisions of this SECTION
6.26 and the provisions of the Marketing Agreement, the provisions of the
Marketing Agreement shall control during the term of the Marketing Agreement.
After the term of the Marketing Agreement, the Seller will not directly or
indirectly solicit a refinance of any Mortgage Loan, nor will the Seller
directly or indirectly assist or be employed by or participate with any other
party in soliciting a refinance of a Mortgage Loan.
6.28. SELLER'S BOOKS AND RECORDS.
The Seller's books, records and accounts relating to the Mortgage Loans comply
in all material respects with all applicable Agency requirements and the Guides.
6.29. SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940.
Each Mortgage Loan which is the subject of a Borrower's request for an
adjustment under the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, is separately identified by the Seller in writing.
6.30. FRAUD.
No Mortgage Loan has been originated through any type of fraud or deceit.
6.31. SOCIAL SECURITY NUMBERS.
The Seller has complied with all Internal Revenue Service requirements relating
to or arising out of the procurement of a Social Security number.
6.32. WARRANTIES SURVIVE.
The Seller agrees that all warranties and obligations under this PMSR Flow
Agreement are perpetual and will survive the termination of this PMSR Flow
Agreement.
ARTICLE 7.
SELLER'S REPRESENTATIONS AND WARRANTIES
WITH RESPECT TO SERVICING RIGHTS.
The Seller represents and warrants to the Buyer with respect to the Servicing
Rights that, as of each Sale Date:
7.1. GOOD AND MARKETABLE TITLE.
The Seller has good and marketable title to the Servicing Rights, and has the
complete right and power to transfer the Servicing Rights to the Buyer, free and
clear of all liens, claims, charges, defenses, offsets, and encumbrances,
including, but not limited to, those of the Seller arising by, through, or under
the Seller. The Seller is not obligated either contractually or otherwise to
sell the Servicing Rights to any other person or entity.
7.2. NO ENCUMBRANCES.
Each transfer of the Servicing Rights by the Seller to the Buyer is free and
clear of any and all adverse claims and encumbrances, and there is no existing
assignment, sale or hypothecation thereof, except as contemplated by this PMSR
Flow Agreement.
7.3. ALL REPORTS FILED.
The Seller has filed all reports required by all government agencies with
jurisdiction over the Servicing Rights.
7.4. COMPLIANCE WITH CONTRACTS AND AGENCY AGREEMENTS.
The Seller has complied in all material respects with all of the terms and
obligations of all contracts to which the Seller is a party, and with all
applicable federal, state and local laws, regulations, rules and orders, in each
case, which might materially and adversely affect any of the Servicing Rights
and/or the Mortgage Loans. No event has occurred and is continuing which under
the provisions of any Guide or any other document or agreement, but for the
passage of time or the giving of notice, or both, would constitute an event of
default by the Seller thereunder. The laws and regulations with which the Seller
has complied in all material respects include, but are not limited to, all
applicable Guides and Agency requirements. The Seller has not done or failed to
do any act or thing which could reasonably be expected to materially and
adversely affect the Servicing Rights.
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PMSR Agreement
7.5. LITIGATION.
There is no litigation, proceeding or governmental investigation pending or
threatened, and the Seller does not know of any facts which could reasonably be
expected to result in any such litigation, proceeding or governmental
investigation, or any order, injunction or decree outstanding which does or
could reasonably be expected to materially and adversely affect any of the
Servicing Rights.
7.6. COMPLIANCE WITH LAW AND AGENCY REQUIREMENTS.
The Seller has not violated any: (a) applicable law, regulation, rule or order,
(b) Guide, (c) Agency requirement, or (c) any other requirement of any
governmental body which may materially affect any of the Servicing Rights.
7.7. WARRANTIES SURVIVE.
The Seller agrees that all warranties and obligations under this PMSR Flow
Agreement are perpetual and will survive the termination of this PMSR Flow
Agreement.
ARTICLE 8.
MUTUAL REPRESENTATIONS AND WARRANTIES.
The Seller represents and warrants to the Buyer with respect to the following
statements relating to the Seller, and the Buyer represents and warrants to the
Seller with respect to the following statements relating to the Buyer, that as
of the date of this PMSR Flow Agreement:
8.1. PARTY IS DULY ORGANIZED.
The Seller is a duly organized and validly existing bank holding company. The
Seller's Affiliate banks are each duly organized and validly existing national
banking associations organized under the laws of the United States. The Buyer is
a duly organized and validly existing business corporation. Each is in good
standing under the laws of its jurisdiction of organization, and has the
requisite power and authority to enter into this PMSR Flow Agreement and any
other agreements to which is a party and that are contemplated by this PMSR Flow
Agreement.
8.2. AGREEMENT IS DULY AUTHORIZED.
It has all requisite power, authority and capacity to enter into this PMSR Flow
Agreement and to perform the obligations required of it under this PMSR Flow
Agreement. The execution and delivery of this PMSR Flow Agreement by it and the
consummation of the transactions contemplated by this PMSR Flow Agreement by it,
have been duly and validly authorized by all necessary action. This PMSR Flow
Agreement constitutes its valid and legally binding agreement, enforceable in
accordance with its terms, except as it may be limited by bankruptcy,
insolvency, reorganization or other laws affecting the enforcement of creditors'
rights and by general equity principles, and no offset, counterclaim or defense
exists to the full performance of this PMSR Flow Agreement by such party.
8.3. AGREEMENT DOES NOT VIOLATE ANY OTHER OBLIGATION.
Insofar as its capacity to carry out any obligation under this PMSR Flow
Agreement is concerned, it is not in violation in any material respect of any
provision of any charter, certificate of incorporation, by-law, mortgage,
indenture, indebtedness, agreement, instrument, judgment, decree, order,
statute, rule or regulation, and there is no such provision that materially and
adversely affects its capacity to carry out such obligations. Its execution of,
and performance pursuant to, this PMSR Flow Agreement will not result in such
violation.
8.4. PARTY IS DULY LICENSED.
It holds the required licenses, is in good standing with applicable states and
Agencies and is in compliance with all applicable state and federal laws
governing the transfer and Servicing of Mortgage Loans transferred under this
PMSR Flow Agreement.
8.5. WARRANTIES SURVIVE.
It agrees that all warranties and obligations under this PMSR Flow Agreement are
perpetual and will survive the termination of this PMSR Flow Agreement.
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PMSR Agreement
ARTICLE 9.
CONDITIONS PRECEDENT TO THE BUYER'S OBLIGATIONS.
The Buyer's obligations under this PMSR Flow Agreement are subject to the
satisfaction of each of the following conditions:
9.1. INSPECTION AND VERIFICATION.
Once each year, or twice each year "for cause", the Buyer may, upon reasonable
prior notice during normal business hours inspect and review the Seller's books,
records, accounts, quality control policies and procedures, and underwriting
policies and procedures relating to the Mortgage Loans, but in no event more
than two (2) such reviews each year. Such books, records, accounts, quality
control policies and procedures and underwriting policies will be reasonably
satisfactory to the Buyer.
9.2. CORRECT REPRESENTATIONS AND WARRANTIES .
Each of the Seller's representations and warranties under this PMSR Flow
Agreement are true and correct in all material respects and remain true and
correct in all material respects as of each Sale Date.
9.3. SELLER COMPLIES WITH EACH OBLIGATION.
As of each Sale Date, the Seller has complied in all material respects with each
term, covenant, condition of this PMSR Flow Agreement applicable to the Seller
as of such date.
9.4. REGULATORY APPROVALS.
The Seller will, at its sole expense, obtain any required approval of each
Agency to transfer the Servicing Rights from the Seller to the Buyer under this
PMSR Flow Agreement.
9.5. NO ACTIONS.
Through and including the Sale Date, there will not have been commenced or
threatened any action, suit, or proceeding against the Seller, which could
reasonably be expected to materially and adversely affect the Servicing Rights,
the Mortgage Loans, the Escrow Funds, and/or the consummation of the
transactions contemplated hereby.
ARTICLE 10.
CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATIONS.
The Seller's obligations under this PMSR Flow Agreement are subject to the
satisfaction of each of the following conditions:
10.1. CORRECT REPRESENTATIONS AND WARRANTIES.
Each of the Buyer's representations and warranties under this PMSR Flow
Agreement are true and correct in all material respects and remain true and
correct in all material respects as of each Sale Date and each Sale Date.
10.2. BUYER COMPLIES WITH EACH OBLIGATION.
As of each Sale Date, the Buyer has complied in all material respects with each
term, covenant, condition of this PMSR Flow Agreement applicable to the Buyer as
of such date.
10.3. NO MATERIAL ADVERSE CHANGE.
There will not have been any material adverse change in the Buyer's relationship
with, or authority from, an Agency.
10.4. NO ACTIONS.
Through and including the Sale Date, there will not have been commenced or
threatened any action, suit, or proceeding against the Buyer, which could
reasonably be expected to materially and adversely affect the Buyer's ability to
consummate the transactions contemplated hereby.
10.5. SERVICING AGREEMENT.
The Servicing Agreement be in full force and effect and the representations and
warranties of the Buyer in the Servicing Agreement shall be true and correct in
all material respects.
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PMSR Agreement
ARTICLE 11.
MISCELLANEOUS.
11.1. TERM OF THIS PMSR FLOW AGREEMENT.
This PMSR Flow Agreement will have the same term as set forth in SECTION 5.6 of
the Operating Agreement, which SECTION 5.6 is incorporated herein by reference.
11.2. TERMINATION OF THIS PMSR FLOW AGREEMENT.
This Agreement shall be terminated only in accordance with the provisions of
SECTION 5.7 of the Operating Agreement.
11.3. FURTHER ASSURANCES.
The Buyer and the Seller will from time to time execute and promptly deliver to
each other such documents, assignments, applications or other instruments
necessary or reasonably proper or convenient to effectuate the assignments,
transfers and other transactions contemplated by this PMSR Flow Agreement.
11.4. INDEMNIFICATION.
The Seller shall indemnify the Buyer and shall hold the Buyer harmless from and
against any and all losses, liabilities, penalties, damages, expenses or other
harm or injury which the Buyer may incur or suffer or which may be asserted by
any person or entity, including reasonable attorneys' fees and court costs,
arising out of any action at any time taken or omitted to be taken (a) by the
Seller under or in connection with this PMSR Flow Agreement and/or any
applicable Exhibit to the Agreement, including, without limitation, any failure
by the Seller to observe and perform properly each and every covenant of this
PMSR Flow Agreement and/or any applicable Exhibit to the Agreement, or (b) by
the Buyer in reliance upon information provided to the Buyer by the Seller.
Without limiting the above, the Seller shall indemnify the Buyer and shall hold
the Buyer harmless from and against any and all losses, liabilities, penalties,
damages, expenses or other harm or injury which the Buyer may incur or suffer or
which may be asserted by any person or entity, including reasonable attorneys'
fees and court costs, arising out of any Mortgage Loan or the Servicing Rights
relating to such Mortgage Loan which result from:
(a) Any misrepresentation made by the Seller in this PMSR Flow Agreement
(b) Any breach by the Seller or Prior Originator of any of the Seller's
representations or warranties under this PMSR Flow Agreement,
(c) Any act, or failure to act or perform any term, covenant, condition or
obligation of the Seller under this PMSR Flow Agreement,
(d) Any defect in any Mortgage Loan existing as of the Sale Date,
(e) Errors in originating, closing, any Mortgage Loan prior to the Sale Date,
including any improper act or failure to act when required to do so,
(f) The Seller's failure to: (i) allow the Buyer to inspect the Seller's
records, (ii) comply with the terms and conditions of this PMSR Flow Agreement,
(iii) comply with the Buyer's reasonable instructions relating to the transfer
of the Servicing Rights for the Mortgage Loans, (iv) give the Buyer accurate
information relating to the Mortgage Loans when reasonably requested by the
Buyer,
(g) Any Agency demand for indemnification relating to an error or omission of
the Seller or Prior Originator,
(h) Any and all losses incurred as a result of the forfeiture of any Mortgaged
Property to the United States under 21 U.S.C. Section 881 or to any other
governmental entity, including, but not limited to, any state or municipality
under any comparable state or local law by reason that: (i) the Mortgaged
Property is proceeds traceable to an exchange for a controlled substance, (ii)
the Mortgage Property was purchased with proceeds traceable to an exchange for a
controlled substance, (iii) the Mortgaged Property was used and was intended to
be used to facilitate the commission of a violation of 21 U.S.C. Section 841,
and/or (iv) the Mortgaged Property was used in a manner violating a comparable
state or local law, such that the Buyer cannot prevail in asserting an "innocent
owner" defense due to the acts or omissions of the Seller or any Prior
Originator of a Mortgage Loan,
(i) Any pattern or practice under which the Seller makes representations or
promises to Mortgagors or Borrowers that Mortgage Loans could be refinanced at
any time after the closing with any term or condition which is more favorable
than the terms and conditions
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PMSR Agreement
offered by the Buyer to members of the general public, and/or
(j) Any and all losses incurred as a result of a VA no bid or buydown in lieu of
such no-bid for Mortgage Loans on which foreclosure action is commenced.
The Buyer shall indemnify the Seller and shall hold the Seller harmless from and
against any and all losses, liabilities, penalties, damages, expenses or other
harm or injury which the Seller may incur or suffer or which may be asserted by
any person or entity, including reasonable attorneys' fees and court costs,
arising out of any action at any time taken or omitted to be taken (a) by the
Buyer under or in connection with this PMSR Flow Agreement and/or any applicable
Exhibit to the Agreement, including, without limitation, any failure by the
Buyer to observe and perform properly each and every covenant of this PMSR Flow
Agreement and/or any applicable Exhibit to the Agreement, or (b) by the Seller
in reliance upon information provided to the Seller by the Buyer. Without
limiting the above, the Buyer shall indemnify the Seller and shall hold the
Seller harmless from and against any and all losses, liabilities, penalties,
damages, expenses or other harm or injury which the Seller may incur or suffer
or which may be asserted by any person or entity, including reasonable
attorneys' fees and court costs, arising out of any Mortgage Loan or the
Servicing Rights relating to such Mortgage Loan which result from:
(a) Any misrepresentation made by the Buyer in this PMSR Flow Agreement,
(b) Any breach by the Buyer of any of the Buyer's representations or warranties
under this PMSR Flow Agreement,
(c) Any act, or failure to act or perform any term, covenant, condition or
obligation of the Buyer under this PMSR Flow Agreement,
11.5. POWER OF ATTORNEY.
The Seller irrevocably constitutes and appoints the Buyer and its duly
authorized officers as the Seller's agent and attorney-in-fact coupled with an
interest, to endorse checks and other instruments of payment with respect to the
Mortgage Loans.
11.6. NOTICES.
All notices and other communications required or permitted to be given under
this Agreement shall be in writing and shall be deemed given if delivered
personally, transmitted by facsimile (and telephonically confirmed), mailed by
registered or certified mail with postage prepaid and return receipt requested,
or sent by commercial overnight courier, courier fees prepaid, to the parties at
the following addresses:
If to Buyer, to:
Debra F. Watkins
Senior Vice President
HomeSide Lending, Inc.
7301 Baymeadows Way
Jacksonville, FL 32256
With a copy to:
Robert J. Jacobs
General Counsel
HomeSide Lending, Inc.
7301 Baymeadows Way
Jacksonville, FL 32256
If to Seller to:
Hinton Nobles
Barnett Banks, Inc.
50 N. Laura Street
Jacksonville, Florida 32202-3638
With a copy to:
Karen Lugar
Senior Counsel
Barnett Banks, Inc.
9000 Southside Boulevard, Building 700
Jacksonville, Florida 32256
or to such other address as the Buyer or the Seller will have specified in
writing to the other.
11.7. EXHIBITS PART OF THIS PMSR FLOW AGREEMENT.
The Exhibits are incorporated by reference into this PMSR Flow Agreement, are
made a part of this PMSR Flow Agreement, and will be binding on the Buyer and
the Seller. The Exhibits to this PMSR Flow Agreement may not be amended or
supplemented by the Buyer or the Seller without the prior written agreement of
the other party.
11.8. ATTORNEYS' FEES AND COSTS.
If it is determined in a judicial proceeding that either party has failed under
any provision of this PMSR Flow Agreement, and if either party will employ
attorneys or incur other expenses for the enforcement, performance, or
observance of the terms of this PMSR Flow Agreement, then said party, to the
extent permitted by law, will be reimbursed by the
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PMSR Agreement
losing party, for reasonable attorneys' fees and other out-of-pocket expenses.
11.10. BROKER'S FEE.
Each of the Buyer and the Seller represents and warrants to each other that it :
(a) has made no agreement to pay any agent, finder, or broker or any other
representative, any fee or commission in the nature of a finder's or
originator's fee arising out of or in connection with the subject matter of this
PMSR Flow Agreement, except as they have otherwise disclosed in writing, and (b)
is liable for any and all such fees and commissions.
11.11. ASSIGNMENT AND DELEGATION.
No party may assign this PMSR Flow Agreement or delegate any of its functions
hereunder to any other party without the prior written consent of Buyer or the
respective Seller; provided, however, that either party may assign and/or
delegate, in whole or in part, any of its rights under this PMSR Flow Agreement
to any of its affiliates or subsidiaries without the prior written consent of
the Buyer or the respective Seller.
11.12. AMENDMENT.
No amendment or modification to this PMSR Flow Agreement will be valid unless
executed in writing by the Buyer and the Seller.
11.13. WAIVER.
No waiver of any right or obligation under this PMSR Flow Agreement by any party
on any occasion will be deemed to operate as a waiver on any subsequent
occasion.
11.14. PROVISIONS SEVERABLE.
If any provision of this PMSR Flow Agreement will be held to be void or
unenforceable by any court of competent jurisdiction or any governmental
regulatory agency, such provision will be considered by all parties to be
severed from this PMSR Flow Agreement. All remaining provisions of this PMSR
Flow Agreement will be considered by the parties to remain in full force and
effect.
11.15. GOVERNING LAW.
This PMSR Flow Agreement is entered into in the state of Florida. Its
construction and rights, remedies and obligations arising by, under, through, or
on account of it will be governed by the laws of the State of Florida excluding
its conflict of laws rules and will be deemed performable in the State of
Florida.
11.16. NO AGENCY OR JOINT VENTURE CREATED.
This PMSR Flow Agreement will not be deemed to constitute the Buyer and the
Seller as partners or joint venturers, nor will the Buyer or the Seller be
deemed to constitute the other as its agent.
11.17. SUCCESSORS.
This PMSR Flow Agreement will inure to the benefit of and be binding upon the
parties hereto and their successors and permitted assigns. Nothing in this PMSR
Flow Agreement expressed or implied is intended to confer on any person other
that the parties hereto and their successors and assigns, any rights,
obligations, remedies or liabilities.
11.18. FORCE MAJEURE.
No party shall be liable for delays or errors occurring by reason of
circumstances beyond such party's control, including, without limitation, acts
of civil, military, or banking authorities, national emergencies, labor
difficulties, fire, flood or other catastrophes, acts of God, insurrection, war,
riots, failure of transportation or equipment, or failure of vendors,
communication or power supply.
11.19. SECTION HEADINGS.
Section headings are intended only to assist in the organization of this PMSR
Flow Agreement and do not in any way limit or otherwise define the rights and
liabilities of the parties.
11.20. ENTIRE AGREEMENT.
This PMSR Flow Agreement and the Exhibits to this PMSR Flow Agreement constitute
the entire agreement among the parties and supersede all other prior
communications and understandings, written or oral, among the parties with
respect to the subject matter of this PMSR Flow Agreement. There are no
contemporaneous oral agreements.
11.21. COUNTERPARTS.
This PMSR Flow Agreement may be executed in multiple counterparts each of which
will be deemed an original. Regardless of the number of counterparts, the total
will constitute only one agreement.
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PMSR Agreement
11.22. PLURALS AND GENDER.
In construing the words of this PMSR Flow Agreement, plural constructions will
include the singular, and singular constructions will include plural. No
significance will be attached to whether a pronoun is masculine, feminine, or
neuter.
IN WITNESS WHEREOF, the Buyer and the Seller, as of the day first set forth
above, have caused their seals to be affixed on this instrument to be signed on
their behalf by their duly authorized officers.
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PMSR Agreement
HOMESIDE LENDING, INC.
By: /s/ Joe K. Pickett
---------------------------------
Joe K. Pickett
- -------------------------------------
(Print Name)
Title: Chief Executive Officer
------------------------------
<PAGE> 17
PMSR Agreement
BARNETT BANKS, INC.
By: /s/ Hinton F. Nobles, Jr.
---------------------------------
Hinton F. Nobles, Jr.
- -------------------------------------
(Print Name)
Title: Executive Vice President
------------------------------
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PMSR Agreement
LIST OF EXHIBITS
EXHIBIT A Purchase Price Percentage Schedule
EXHIBIT B Transfer Instructions
EXHIBIT C List of Flood Service Providers Acceptable to the Buyer
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<PAGE> 19
PMSR Agreement
EXHIBIT A
PURCHASE PRICE PERCENTAGE SCHEDULE
I. PURCHASE PRICE PERCENTAGE TABLE FOR PORTFOLIO MORTGAGE LOANS PURCHASED ON A
FLOW BASIS.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRODUCT TYPE ANNUAL BASE RATE BASE RATE BASE RATE
SERVICING [* ]%
TO
FEE RATE [* ]% [* ]% TO BASE RATE
AND BASE RATE [* ]%
UNDER
============================================================================================================================
<S> <C> <C> <C> <C>
A and A- 30-year conforming fixed rate [* ]% [* ]% [* ]% [* ]%
A and A- 15-year conforming fixed rate [* ]% [* ]% [* ]% [* ]%
A and A- conforming conventional ARM [* ]% [* ]% [* ]% [* ]%
FHA 30-year fixed rate [* ]% [* ]% [* ]% [* ]%
FHA 15-year fixed rate [* ]% [* ]% [* ]% [* ]%
FHA ARM [* ]% [* ]% [* ]% [* ]%
CRA low-to-moderate conventional 30-year fixed rate [* ]% [* ]% [* ]% [* ]%
CRA low-to-moderate conventional 15-year fixed rate [* ]% [* ]% [* ]% [* ]%
CRA low-to-moderate conventional ARM [* ]% [* ]% [* ]% [* ]%
A and A- non-conforming conventional 30-year fixed rate [* ]% [* ]% [* ]% [* ]%
A and A- non-conforming conventional 15-year fixed rate [* ]% [* ]% [* ]% [* ]%
A and A- non-conforming conventional ARM [* ]% [* ]% [* ]% [* ]%
A and A 7-year Balloons [* ]% [* ]% [* ]% [* ]%
A and A 5-year Balloons [* ]% [* ]% [* ]% [* ]%
Less than A- quality mortgage loans TBD TBD TBD TBD
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Unless otherwise specifically indicated, all Mortgage Loans described above are
first Mortgage Loans.
- ------------------------
* Confidential treatment requested. Confidential portion has been filed
separately with the Commission.
-19-
<PAGE> 20
PMSR AGREEMENT
EXHIBIT A
CONTINUED
II. ADJUSTMENTS TO THE PURCHASE PRICE.
- - Deduct [* ] basis points ([* ]%) for VA Mortgage Loans.
- - Deduct [* ] basis points ([* ]%) for First-Lien Mortgage Loans w/o Escrow
Funds for taxes and hazard insurance.
- - Deduct [* ] basis points ([* ]%) for Buydown Mortgage Loans.
- - Deduct [* ] dollar ($[* ]) TRETS fee for each Mortgage Loan.
- - Add [* ] basis points ([* ]%) for 30 and 15-year fixed rate Mortgage Loans
with original principal balances less than or equal to the applicable FNMA
maximum loan amount and greater than or equal to $140,000.
- - Add [* ] basis points ([* ]%) for 30 and 15-year fixed rate Mortgage Loans
with original principal balances less than $140,000 and greater than or equal
to $120,000.
- - Deduct [* ] basis points ([* ]%) for 30 and 15-year fixed rate Mortgage
Loans with original principal balances less than $100,000 and greater than or
equal to $80,000.
- - Deduct [* ] basis points ([* ]%) for 30 and 15-year fixed rate Mortgage
Loans with original principal balances less than $80,000 and greater than or
equal to $60,000.
- - Deduct [* ] basis points ([* ]%) for 30 and 15-year fixed rate Mortgage
Loans with original principal balances less than $60,000 and greater than or
equal to $50,000.
- - Deduct [* ] basis points ([* ]%) for 30 and 15-year fixed rate Mortgage
Loans with original principal balances less than $50,000 and greater than or
equal to $40,000.
- - Deduct [* ] basis points ([* ]%) for 30 and 15-year fixed rate Mortgage
Loans with original principal balances less than $40,000 and greater than or
equal to $30,000.
- - No servicing released premium to be paid for Mortgage Loans with original
principal balance of $30,000 or less.
III. PRICING ASSUMPTIONS.
- - Assumes fixed rate and ARM Mortgage Loan balance is $100,000 or greater.
- - Assumes balloon Mortgage Loan balance is $60,000 or greater.
- - Conforming Mortgage Loans are Mortgage Loans with a balance less than or equal
to the then current applicable FNMA maximum loan amount.
- - Non-conforming Mortgage Loans are Mortgage Loans with a balance greater than
the then current applicable FNMA maximum loan amount.
- ------------------------
* Confidential treatment requested. Confidential portion has been filed
separately with the Commission.
-20-
<PAGE> 1
SECOND AMENDMENT
SECOND AMENDMENT, dated as of March 31, 1997, (this "Amendment"), to
the Loan Agreement, dated as of January 15, 1997, as amended February 28, 1997
(the "Loan Agreement"), between HOMESIDE LENDING, INC., a Florida corporation
(the "Borrower"), and THE CHASE MANHATTAN BANK, a New York banking corporation
(the "Lender").
W I T N E S S E T H:
-------------------
WHEREAS, pursuant to the Loan Agreement, the Lender has agreed to make,
and has made, certain loans and other extensions of credit to the Borrower, and
WHEREAS, the Borrower has requested, and, upon this Amendment becoming
effective, the Lender has agreed, that certain provisions of the Loan Agreement
be amended in the manner provided for in this Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
I. DEFINED TERMS. Terms defined in the Loan Agreement and used
herein shall have the meanings given to them in the Loan Agreement or the Credit
Agreement (as such term is defined in the Loan Agreement).
II. Amendments to Credit Agreement.
------------------------------
1. AMENDMENTS TO SECTION 1. Subsection 1.1 of the Loan Agreement is
hereby amended by adding thereto the following definition in the appropriate
alphabetical order-
"SECOND AMENDMENT": the Second Amendment, dated as of
March 31, 1997, to this Agreement.
III. Amendments and Endorsements to the Note.
---------------------------------------
1. AMENDMENTS TO THE NOTE. The Note held by the Lender is hereby
amended by deleting the following terms "the earlier of (a) April 1, 1997 and
(b) the closing of an offering of debt securities or medium-term notes of
HomeSide Lending, Inc. in an aggregate principal amount of not less than $85
million" wherever such terms appear therein and substituting in lieu thereof the
terms "the earlier of (a) May 1, 1997 and (b) the closing of an offering of debt
securities or medium-term notes of HomeSide Lending, Inc. in an aggregate
principal amount of not less than $85 million".
2. ENDORSEMENT OF THE NOTE. The Borrower hereby requests and
authorizes the
<PAGE> 2
Lender, and, the Lender hereby agrees, to permanently affix to the Note held by
the Lender, as of the Amendment Effective Date (as hereinafter defined) and in
any event prior to any transfer of the Note, the following endorsement:
This Note has been amended pursuant to, and as provided in,
Section III.1 of the Second Amendment, dated as of March 31,
1997, to the Loan Agreement.
IV. CONDITIONS TO EFFECTIVENESS. This Amendment shall become
effective as of the date (the "Amendment Effective Date") on which the Lender
receives (i) this Amendment duly executed and delivered by a duly authorized
officer of the Borrower, (ii) such instruments and documents as the Lender
requests in connection with the Collateral and the security interest therein
granted hereunder, including executed Uniform Commercial Code filings in proper
form for filing and acknowledgement agreements relating thereto in form and
substance satisfactory to the Lender, and (iii) such opinions of counsel to the
Borrower as the Lender shall request and certified copies of the resolutions of
the Board of Directors of the Borrower authorizing this Agreement and the
borrowings and security interests contemplated hereby.
V. General.
-------
1. REPRESENTATIONS AND WARRANTIES. To induce the Lender to enter
into this Amendment, the Borrower confirms, reaffirms and restates to the Lender
that, as of the Amendment Effective Date, the representations and warranties set
forth in Section 5 of the Credit Agreement are true and correct in all material
respects, PROVIDED that the references to the Credit Agreement therein shall be
deemed to be references to this Amendment, the Loan Agreement and the Note, as
the case may be. Each request by the Borrower that a Loan be made hereunder or
under the Loan Agreement, and each borrowing thereof, shall constitute a
representation and warranty by the Borrower on the date thereof that all such
representations and warranties set forth in the preceding sentence are true and
correct in all material respects as if made on such date.
2. PAYMENT OF EXPENSES. The Borrower agrees to pay or reimburse
the Lender for all of its out-of-pocket costs and reasonable expenses incurred
in connection with this Amendment, any other documents prepared in connection
herewith and the transactions contemplated hereby, including, without
limitation, the reasonable fees and disbursements of counsel to the Lender.
3. NO OTHER AMENDMENTS; CONFIRMATION. Except as expressly
amended, modified and supplemented hereby, the provisions of the Credit
Agreement, the Loan Agreement ind the Note are and shall remain in full force
and effect.
4. GOVERNING LAW; COUNTERPARTS. (a) This Amendment and the rights
and obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.
- 2 -
<PAGE> 3
(b) This Amendment may be executed by one or more of the parties to
this Amendment on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the copies of this Amendment signed by all the parties
shall be lodged with the Borrower and the Lender.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective proper and duly authorized
officers as of the day and year first above written.
HOMESIDE LENDING, INC.
By: /s/ Debra F. Watkins
---------------------------------
Title: Senior Vice President
THE CHASE MANHATTAN BANK
By: /s/ P.A. Parker
---------------------------------
Title: Vice President
- 3 -
<PAGE> 1
LOAN AGREEMENT, dated as of March 14, 1997 (as amended, modified or
supplemented from time to time, this "AGREEMENT"), among HOMESIDE LENDING, INC.,
a Florida corporation (the "BORROWER"), and MERRILL LYNCH MORTGAGE CAPITAL INC.,
a Delaware corporation (the "LENDER"), and THE CHASE MANHATTAN BANK, as
Collateral Agent hereunder (in such capacity, the "COLLATERAL AGENT") and as
"Lender" under the Chase Agreement (as defined below).
The parties hereto hereby agree as follows:
1. DEFINED TERMS. As used in this Agreement, capitalized terms
defined in the Credit Agreement (as defined below) and not otherwise defined
herein have the meanings given in the Credit Agreement, or in the case of
paragraph 4 hereof and the definition of Collateral below, the HomeSide Security
Agreement (as such terms are modified in such paragraph and such definition),
and the following terms have the meanings specified below:
"Chase" means The Chase Manhattan Bank, a New York banking corporation.
-----
"CHASE AGREEMENT" means the Loan Agreement, dated as of January 15,
1997, between the Borrower and Chase, as the same has been and may be amended,
supplemented or modified from time to time.
"CHASE COLLATERAL" means "Collateral" under and as defined in the Chase
Agreement.
"CHASE OBLIGATIONS" means all "Obligations" under and as defined in the
Chase Agreement.
"CREDIT AGREEMENT" means (i) the Amended and Restated Credit Agreement,
dated as of January 31, 1997, among (a) the Borrower, (b) Honolulu Mortgage
Company, Inc., (c) the lenders and agents parties thereto, (d) the Lenders from
time to time designated as Balance Lenders thereunder, (e) The First National
Bank of Boston, as Collateral Agent, (f) NationsBank of Texas, N.A., as
Syndication Agent, (g) the Senior Managing Agent, Managing Agents and Co- Agents
and (h) Chase, as Administrative Agent, and (ii) any credit agreement which
amends and restates or otherwise replaces the Credit Agreement referred to in
clause (i) above, in each case as the same may be amended, modified or
supplemented from time to time.
"COLLATERAL" means (i) Servicing Rights, (ii) Servicing Contracts,
(iii) rights to receive payments in connection with Servicing Contracts and
Servicing Rights, whether on account of the performance of services, upon the
termination of Servicing Rights, Servicing Contracts or otherwise (including,
without limitation, all Eligible Servicing Receivables (and all deeds,
contracts, agreements, instruments of title and other documents received or
receivable in respect thereof)), (iv) rights with respect to the placement of
escrow deposits associated with such Servicing Rights and Servicing Contracts
and all rights to the payment of money or provision of concessions or services
with respect thereto, (v) those Mortgage Loans owned by the Borrower and
described on Schedule II hereto, and (vi) all Proceeds of each of the foregoing,
PROVIDED that the foregoing term "Servicing Contracts" shall have the meaning
ascribed thereto in the
<PAGE> 2
HomeSide Security Agreement, but only in reference to the contracts listed on
Schedule I hereto, and the foregoing terms "Servicing Rights" and "Eligible
Servicing Receivables" shall have the meanings ascribed thereto in the HomeSide
Security Agreement to the extent, and as if, such terms and the items described
in such terms related only to such Servicing Contracts as defined above.
"HOMESIDE SECURITY AGREEMENT" means the HomeSide Security Agreement (as
defined in the Credit Agreement) and any security agreement which amends and
restates or otherwise replaces such HomeSide Security Agreement under the Credit
Agreement, in each case as the same may be amended, modified or supplemented
from time to time.
"OBLIGATIONS" means the unpaid principal of and interest on the Loans
and the Note and all other obligations and liabilities of the Borrower to the
Lender (including, without limitation, interest accruing at the then applicable
rate provided in the Note after the maturity of the Loans and interest accruing
at the then applicable rate provided in the Note after the filing of any
petition in bankruptcy, or the commencement of any insolvency, reorganization or
like proceeding, relating to the Borrower, whether or not a claim for
post-filing or post-petition interest is allowed in such proceeding), whether
direct or indirect, absolute or contingent, due or to become due, or now
existing or hereafter incurred, which may arise under, out of, or in connection
with, this Agreement, the Loans, the Note, or any other document made, delivered
or given in connection therewith, in each case whether on account of principal,
interest, fees, indemnities, costs, expenses or otherwise (including, without
limitation, all fees and disbursements of counsel to the Lender that are
required to be paid by the Borrower pursuant to the terms of this Agreement).
2. AMOUNT AND TERMS OF LOANS. Subject to the terms and conditions
hereof and so long as no Event of Default (as defined herein) has occurred and
in continuing, the Lender agrees to make revolving credit loans (the "LOANS") to
the Borrower from time to time during the period from the Initial Loan Date (as
defined below), through but not including the Maturity Date (as defined in the
Note) in an aggregate principal amount not to exceed $35,000,000 outstanding at
any time. The Loans shall be evidenced by a promissory note (the "NOTE") of the
Borrower, substantially in the form of Exhibit A, to be executed and delivered
to the Lender on the Initial Loan Date. The Borrower hereby unconditionally
promises to pay to the Lender the then unpaid principal amount of the Loans
outstanding on the Maturity Date (or the then unpaid principal amount of the
Loans on the date that the Loans become due and payable pursuant to paragraph
5). The Borrower hereby further agrees to pay interest on the unpaid principal
amount of the Loans from time to time outstanding from the Initial Loan Date
until payment in full thereof at the rate per annum, and on the dates, set forth
in the Note. The Loans may be borrowed on any Business Day upon notice to the
Lender prior to 2:00 P.M. New York City times on the date of such borrowing
(which such notice shall be accompanied by such information regarding the value
of the Collateral as shall be requested by the Lender) and may be prepaid at any
time with out premium or penalty.
3. COVENANTS. The Borrower hereby covenants and agrees that, so
long as any amount is outstanding or unpaid hereunder under the Note, the
Borrower shall comply with all
<PAGE> 3
the covenants and agreement set forth in Section 7 and Section 8 of the Credit
Agreement, and such provisions of the Credit Agreement (other than Section 8.3,
8.9 and 8.11 thereof) are incorporated herein by reference, MUTATIS MUTANDIS,
PROVIDED that (i) all references therein to the "Administrative Agent" or
"Lenders" shall be deemed to refer to the Lender and (ii) such other
modifications thereto shall be deemed made as are necessary to effectuate the
intent of the parties hereunder.
4. COLLATERAL; SECURITY AGREEMENT. As collateral security for the
full and prompt payment when due (whether at stated maturity, by acceleration or
otherwise) of, and the performance of, all the Obligations and to induce the
Lender to make the Loans, (i) the Borrower hereby assigns, conveys, mortgages,
pledges, hypothecates and transfers to the Collateral Agent, for the benefit of
the Lender, and hereby grants to the Collateral Agent, for the benefit of the
Lender, a security interest in, all of the Borrower's rights, title and interest
in, to and under the Collateral, and (ii) the Borrower hereby assigns, conveys,
mortgages, pledges, hypothecates and transfers to the Collateral Agent, for the
benefit of the Lender, and hereby grants to the Collateral Agent, for the
benefit of the Lender, a second priority security interest in, all of the
Borrower's right, title and interest in, to and under the Chase Collateral,
which security interest shall be subject to the prior rights of Chase therein
under the Chase Agreement, as further described in paragraph 5(b) hereof. In
addition, as collateral security for the full and prompt payment when due
(whether at stated maturity, by acceleration or otherwise) of, and the
performance of, all the Chase Obligations and to induce Chase to agree to the
provisions hereof and to make further Loans under the Chase Agreement, the
Borrower hereby assigns, conveys, mortgages, pledges, hypothecates and transfers
to the Collateral Agent, for the benefit of Chase, and hereby grants to the
Collateral Agent, for the benefit of Chase, a second priority security interest
shall be subject to the prior rights of the Lender therein under this Agreement,
as further described in paragraph 5(b) hereof. All provisions of the HomeSide
Security Agreement are incorporated by reference herein, MUTATIS MUTANDIS, to
the extent applicable to any of the Collateral as defined above, and the
Borrower agrees, covenants and makes representations and warranties herein as
set forth therein, PROVIDED that (i) all references therein related to items of
type included in such Collateral shall be deemed to refer only to such items
included in or related to such Collateral, and the terms defined therein and
referred to in the definition of Collateral herein shall be modified as set
forth in such definition, (ii) all references therein to the "Collateral Agent"
or "Administrative Agent" shall be deemed to refer the Collateral Agent as
defined herein, and all references therein to "Lenders" shall be deemed to refer
to the Lender and Chase, (iii) all references therein to "Grantor" shall be
deemed to refer to the Lender and Chase, (iii) all references therein to
"Grantor" shall be deemed to refer to the Borrower, (iv) provisions solely
relating to items of Collateral under (and as defined in) the HomeSide Security
Agreement that are not included in the definition of Collateral above shall be
disregarded for purposes hereof and (v) such other modifications thereto shall
be deemed made as are necessary to effectuate the intent of the parties
hereunder. Without limiting the foregoing, the Collateral Agent, Chase and the
Lender shall have all rights and remedies of a secured party in respect of the
Collateral as provided under the Uniform Commercial Code in effect in the State
of New York from time to time.
5. EVENTS OF DEFAULT, REMEDIES; COLLATERAL AGENT. (a) If (i) the
Borrower shall fail to pay any principal of the Loans when due in accordance
with the terms hereof and of the Note, or
<PAGE> 4
(ii) the Borrower shall fail to pay any interest on the Loans, or any other
amount payable hereunder or under the Note, within five days after any such
interest or other amount becomes due in accordance with the terms thereof or
hereof, or (iii) any representations or warranty made or deemed made by the
Borrower herein or in any document delivered by the Borrower in connection
herewith or which is contained in any certificate, document or financial or
other statement furnished by it at any time under or in connection with this
Agreement or any such other document shall prove to have been incorrect in any
material respect on or as of the date made or deemed made, and the facts or
circumstances in respect of which such representation or warranty was incorrect
have not changed to make such representation or warranty correct within 30 days
after it was made, or (iv) any Event of Default under (and as defined in) the
Credit Agreement shall occur and be continuing, or (v) at any time (A) the
aggregate value that would be attributable to the Collateral and the Chase
Collateral as a component of the HomeSide Tranche A Borrowing Base or the
HomeSide Tranche B Borrowing Base, as the case may be, if calculated pursuant to
the advance rates set forth in Section 4.1 and 4.2 of the Credit Agreement (but
without regard to any characteristics of such Collateral or Chase Collateral
that have been disclosed to Chase and Merrill on or before the date hereof as
characteristics existing on the date hereof that make such assets ineligible for
inclusion in the applicable borrowing bases under the Credit Agreement) is less
than (B) the aggregate principal amount of loans, outstanding at such time under
this Agreement and the Chase Agreement, then, and in any such event, (A) if such
event is an Event of Default specified in clause (i) or (ii) of paragraph (f) of
Section 9 of the Credit Agreement, automatically the commitment of the Lender to
make Loans hereunder shall be terminated and the Loans (with accrued interest
thereon) and all other amounts owing under this Agreement and the Note shall
immediately become due and payable, (B) if such event is any other default
described in clause (i), (ii), (iii), or (iv) above, the Lender may by notice to
the Borrower declare the commitment of the Lender to make Loans hereunder to be
terminated and the Loans (with accrued interest thereon) and all other amounts
owing under this Agreement and the Note to be due and payable forthwith,
whereupon the same shall immediately become due and payable, and (C) the
Collateral Agent, for the benefit of Chase and the Lender, shall have such
remedies with respect to the Collateral as are set forth in the HomeSide
Security Agreement (as incorporated and modified pursuant to the definition of
the term "Collateral" and paragraph 4 hereof).
(b) Chase hereby agrees that the security interest of the Lender in the
Collateral shall have priority over the interest granted to Chase hereunder in
the Collateral, and any rights of Chase to such Collateral or any proceeds
thereof, or any remedies in respect thereof, shall be subject to the prior
satisfaction in full of the Obligations. The Lender hereby agrees that the
security interest of Chase in the Chase Collateral shall have priority over the
interest granted to the Lender hereunder in the Chase Collateral, and any rights
of the Lender to such Chase Collateral or any proceeds thereof, or any remedies
in respect thereof, shall be
subject to the prior satisfaction in full of the Chase Obligations. Any money,
property or securities realized upon the sale, disposition or other realization
by the Collateral Agent upon all or any part of the Collateral, shall be applied
by the Collateral Agent FIRST, to the payment in full of all costs and expenses
(including, without limitation, attorneys' fees and disbursements) paid or
incurred by the Collateral Agent or the Lender in connection with such
realization on the
<PAGE> 5
Collateral or the protection of their rights and interests therein; SECOND, to
the payment in full of all Obligations; THIRD, to the payment in full of all
Chase Obligations; and FOURTH, to pay to the Borrower or its respective
representatives or as a court of competent jurisdiction may direct, any surplus
then remaining. Any money, property or securities realized upon the sale,
disposition or other realization by the Collateral Agent upon all or any part of
the Chase Collateral, shall be applied by the Collateral Agent FIRST, to the
payment in full of all costs and expenses (including, without limitation,
attorneys' fees and disbursements) paid or incurred by the Collateral Agent or
Chase in connection with such realization on the Chase Collateral or the
protection of their rights and interests therein; SECOND, to the payment in full
of all Chase Obligations; THIRD, to the payment in full of all Obligations; and
FOURTH, to pay to the Borrower or its respective representatives or as a court
of competent jurisdiction may direct, any surplus then remaining.
(c) The Lender and Chase hereby appoint Chase as Collateral Agent
hereunder for the purpose of carrying out the terms of this Agreement with
respect to the Collateral and the Chase Collateral, and authorize Chase in such
capacity to take any and all appropriate action and to execute any and all
documents and instruments which may be necessary or desirable to accomplish the
purposes of this paragraph, including, without limitation, any financing
statements, endorsements, assignments or other instruments of transfer or
release. The Lender waives any claim it might have against Chase as Collateral
Agent with respect to, or arising out of, any action or failure to act or any
error of judgment or negligence on the part of Chase or its respective
directors, officers, employees or agents with respect to any exercise of rights
or remedies relating to the Collateral or the Chase Collateral. Neither Chase
nor any of its respective directors, officers, employees or agents shall be
liable for failure to demand, collect or realize upon any of the Collateral or
the Chase Collateral or for any delay in doing so or shall be under any
obligation to sell or otherwise dispose of any Collateral or Chase Collateral
upon the request of the Lender or any other Person or to take any other action
whatsoever with regard to the Collateral or Chase Collateral or any part
thereof.
6. PAYMENT OF EXPENSES. The Borrower agrees (a) to pay or
reimburse the Lender for all of its out-of-pocket costs and expenses incurred in
connection with the development, preparation and execution of, and any
amendment, supplement or modification to, this Agreement and the Note and any
other documents prepared in connection herewith or therewith, and the
consummation and administration of the transactions contemplated hereby and
thereby, including, without limitation, the reasonable fees and disbursements of
counsel to the Lender, (b) to pay or reimburse the Lender for all its costs and
expenses incurred in connection with the enforcement or preservation of any
rights under this Agreement, the Note and any such other documents, including,
without limitation, the fees and disbursements of counsel to the Lender, (c) to
pay, indemnify, and hold the Lender harmless from, any and all recording and
filing fees and any and all liabilities with respect to, or resulting from any
delay in paying, stamp, excise and other taxes, if any, which may be payable or
determined to be payable in connection with the execution and delivery of, or
consummation or administration of any of the transactions contemplated by, or
any amendment, supplement or modification of, or any waiver or consent under or
in respect of, this Agreement, the Note and any such other documents, and (d) to
pay, indemnify, and hold the Lender harmless from and against any and all other
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or
<PAGE> 6
disbursements of any kind or nature whatsoever with respect to the execution,
delivery, enforcement, performance and administration of this Agreement, the
Note and any such other documents (all the foregoing in this clause (d),
collectively, the "indemnified liabilities"), PROVIDED that the Borrower shall
have no obligation hereunder to the Lender with respect to indemnified
liabilities arising from the gross negligence or willful misconduct of the
Lender. The agreements in this subsection shall survive repayment of the Loans
and all other amounts payable hereunder.
7. REPRESENTATIONS; NO DEFAULT. On and as of the date hereof, the
Borrower confirms, reaffirms and restates that the representations and
warranties set forth in Section 5 of the Credit Agreement are true and correct
in all material respects, PROVIDED, that the references to the Credit Agreement
therein shall be deemed to be references to this Agreement and the Note. Each
request by the Borrower that a Loan be made hereunder, and each borrowing
thereof, shall constitute a representation and warranty by the Borrower on the
date thereof that all such representations and warranties set forth in the
preceding sentence are true and correct in all material respects as if made on
such date.
8. CONDITIONS TO EFFECTIVENESS. This Agreement shall be
considered effective as of the date on which the Lender receives (i) the Note,
duly executed and delivered by a duly authorized officer of each of the
Borrower, (ii) such instruments and documents as the Lender requests in
connection with the Collateral and the security interest therein granted
hereunder, including executed Uniform Commercial Code filings in proper form for
filing and acknowledgment agreements relating thereto in form and substance
satisfactory to the Lender, (iii) such opinions of counsel to the Borrower as
the Lender shall request and certified copies of the resolutions of the Board of
Directors of the Borrower authorizing this Agreement and the borrowings and
security interests contemplated hereby, and (iv) evidence satisfactory to it
that the Borrower has taken all actions necessary to provide the Lender with a
perfected, first priority security interest in such Collateral.
9. COUNTERPARTS. This Agreement may be executed by one or more of
the parties hereto in any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
11. SUBMISSION TO JURISDICTION; WAIVERS. The Borrower hereby
irrevocably and unconditionally (a) submits for itself and its property in any
legal action or proceeding relating to this Agreement and the Note, or for
recognition and enforcement of any judgment in respect thereof, to the
non-exclusive general jurisdiction of the Courts of the State of New York, the
courts of the United States of America for the Southern District of New York,
and appellate courts from any thereof, (b) consents that any such action or
proceeding may be brought in such courts and waives any objection that it may
now or hereafter have to the venue of any such action or proceeding in any such
court or that such action or proceeding was brought in an inconvenient
<PAGE> 7
court and agrees not to plead or claim the same, (c) agrees that service of
process in any such action or proceeding may be effected by mailing a copy
thereof by registered or certified mail (or any substantially similar form of
mail), postage prepaid, to the Borrower at its address set forth in subsection
11.2 of the Credit Agreement or at such other address of which the Lender shall
have been notified pursuant thereto, (d) agrees that nothing herein shall affect
the right to effect service of process in any other manner permitted by law or
shall limit the right to sue in any other jurisdiction, and (e) waives, to the
maximum extent not prohibited by law, any right it may have to claim or recover
in any legal action or proceeding referred to in this subsection any special,
exemplary, punitive or consequential damages.
12. WAIVERS OF JURY TRIAL. THE BORROWER AND THE LENDER HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their respective duly authorized officers as of the
date first above written.
HOMESIDE LENDING, INC.
By: /s/ Debra F. Watkins
-------------------------------------
Title: Senior Vice President
MERRILL LYNCH MORTGAGE
CAPITAL, INC.
By:
-------------------------------------
Title: Director
THE CHASE MANHATTAN BANK, as
Lender under the Chase Agreement and as
Collateral Agent hereunder
By: /s/ P.A. Parker
-------------------------------------
Title: Vice President
<PAGE> 1
FIRST AMENDMENT
FIRST AMENDMENT, dated as of March 31, 1997, (this "Amendment"), to the
Loan Agreement, dated as of March 14, 1997, as heretofore amended (the "Loan
Agreement"), among HOMESIDE LENDING, INC., a Florida corporation (the
"Borrower"), MERRILL LYNCH MORTGAGE CAPITAL INC., a Delaware corporation (the
"Lender"), and THE CHASE MANHATTAN BANK, as Collateral Agent hereunder (in such
capacity, the "Collateral Agent") and as "Lender" under the Chase Agreement.
W I T N E S S E T H
WHEREAS, the Borrower has requested, and, upon this Amendment becoming
effective, each of the Lender and the Collateral Agent has agreed, that certain
provisions of the Loan Agreement be amended in the manner provided for in this
Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
I. DEFINED TERMS. Terms defined in the Loan Agreement and used
herein shall have the meanings given to them in the Loan Agreement or the Credit
Agreement (as such term is defined in the Loan Agreement).
II. Amendments to Credit Agreement.
------------------------------
1. AMENDMENTS TO SECTION 1. Subsection 1.1 of the Loan Agreement
is hereby amended by adding thereto the following definition in the appropriate
alphabetical order:
"FIRST, AMENDMENT": the First Amendment, dated as of March 31, 1997, to
this Agreement.
2. AMENDMENTS TO SCHEDULES. Schedule II of the Loan Agreement is
hereby amended by deleting such Schedule and substituting in lieu thereof
Schedule IIA, a copy of which is attached hereto.
III. Amendments and Endorsements to the Note.
---------------------------------------
1. AMENDMENTS TO THE NOTE. The Note held by the Lender is hereby
amended by (i) deleting the date "April 1, 1997" wherever such date appears
therein and substituting in lieu thereof the date "the earlier of (a) May 1,
1997 and (b) the closing of an offering of debt securities or medium-term notes
of HomeSide Lending, Inc. in an aggregate principal amount of not less than $85
million" and (ii) deleting the amount "35,000,000" or "Thirty-Five Million
Dollars" wherever such amount appears therein and substituting in lieu thereof
the amount "$50,000,000" or "Fifty Million Dollars", as the case may be.
<PAGE> 2
2. ENDORSEMENT OF THE NOTE. The Borrower hereby requests and
authorizes Lender, and the Lender hereby agrees, to permanently affix to the
Note held by the Lender, as of the Amendment Effective Date (as hereinafter
defined) and in any event prior to any transfer of the Note, the following
endorsement:
This Note has been amended pursuant to, and as provided in,
Sections III of the First Amendment, dated as of March 31,
1997, to the Loan Agreement.
IV. CONDITIONS TO EFFECTIVENESS. This Amendment shall become
effective as of the date (the "AMENDMENT EFFECTIVE DATE") on which each of the
Lender and the Collateral Agent receives (i) this Amendment duly executed and
delivered by a duly authorized officer of the Borrower, (ii) such instruments
and documents as the Lender or the Collateral Agent requests in connection with
the Collateral and the security interest therein granted hereunder, including
executed Uniform Commercial Code filings in proper form for filing and
acknowledgement agreements relating thereto in form and substance satisfactory
to each of the Lender and the Collateral Agent, and (iii) such opinions of
counsel to the Borrower as the Lender or the Collateral Agent shall request and
certified copies of the resolutions of the Board of Directors of the Borrower
authorizing this Amendment and the borrowings and security interests
contemplated hereby.
V. General.
-------
1. REPRESENTATION AND WARRANTIES. To induce each of the Lender
and the Collateral Agent to enter into this Amendment, the Borrower confirms,
reaffirms and restates to each of the Lender and the Collateral Agent that, as
of the Amendment Effective Date, the representations and warranties set forth in
Section 5 of the Credit Agreement are true and correct in all material respects,
PROVIDED that the references to the Credit Agreement therein shall be deemed to
be references to this Amendment, the Loan Agreement and the Note, as the case
may be. Each request by the Borrower that a Loan be made hereunder or under the
Loan Agreement, and each borrowing thereof, shall constitute a representation
and warranty by the Borrower on the date thereof that all such representations
and warranties set forth in the preceding sentence are true and correct in all
material respects as if made on such date.
2. PAYMENT OF EXPENSES. The Borrower agrees to pay or reimburse
the Lender and the Collateral Agent for all of their out-of-pocket costs and
reasonable expenses incurred in connection with this Amendment, any other
documents prepared in connection herewith and the transactions contemplated
hereby, including, without limitations the reasonable fees and disbursements of
counsel to each of the Lender and the Collateral Agent.
3. NO OTHER AMENDMENTS: CONFIRMATION. Except as expressly
amended, modified and supplemented hereby, the provisions of the Credit
Agreement, the Loan Agreement and the Note are and shall remain in full force
and effect.
<PAGE> 3
4. GOVERNING LAW: COUNTERPARTS. (a) This Amendment and the rights
and obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.
(b) This Amendment may be executed by one or more of the
parties to this Amendment on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the copies of this Amendment signed by all the parties
shall be lodged with the Borrower, the Leader and the Collateral Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective proper and duly authorized
officers as of the day and year first above written.
HOMESIDE LENDING, INC.
By: /s/ Debra F. Watkins
------------------------------------
Title: Senior Vice President
---------------------------------
MERRILL LYNCH MORTGAGE CAPITAL,
INC.
By:
------------------------------------
Title: Director
---------------------------------
THE CHASE MANHATTAN BANK, as
Lender under the Chase Agreement and as
Collateral Agent hereunder
By: /s/ P.A. Parker
------------------------------------
Title: Vice President
---------------------------------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use
of our report, dated March 8, 1996, on our audits of the consolidated financial
statements of Barnett Mortgage Company and subsidiaries (and to all references
to our firm) included in or made a part of this registration statement.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
April 7, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. 333-21193) of our report, which includes an explanatory paragraph on
the adoption of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, and the changing of methods for accounting for purchased
mortgage servicing rights and accounting for mortgage servicing fee income,
dated January 18, 1996, except for the second paragraph of Note 1 and the fifth
paragraph of Note 2, as to which the date is March 4, 1996, on our audits of the
consolidated financial statements of BancBoston Mortgage Corporation. We also
consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND, L.L.P.
Jacksonville, Florida
April 7, 1997
<PAGE> 1
EXHIBIT 23.3
The Board of Directors
HomeSide Lending, Inc.:
The audits of the consolidated financial statements of BancPLUS Financial
Corporation and subsidiary referred to in our report dated March 17, 1995,
including the related financial statement schedule as of December 31, 1993 and
1994, included in the registration statement. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statement taken as a whole, presents fairly in
all material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus. Our report refers to
a change to the asset and liability method of accounting for income taxes.
KPMG Peat Marwick LLP
San Antonio, Texas
April 7, 1997
