UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended February 10, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 1-12979
HomeSide Lending, Inc.
(Exact name of registrant as specified in its charter)
Florida 59-2725415
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
7301 Baymeadows Way, Jacksonville, FL 32256
(Address of principal executive offices) (Zip Code)
(904) 281-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _x_ No __
Indicate the number of shares outstanding of each of the Company's classes of
common stock, as of the latest practicable date.
Title of each class Outstanding at February 10, 1998
------------------- --------------------------------
Common Stock, $1.00 Par Value 100 shares
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Current Report on Form 8-K dated February 25, 1998, April 3, 1998, April
15, 1998 and May 8, 1998.
PART I
ITEM 1. BUSINESS
General
HomeSide Lending is one of the largest full-service residential
mortgage banking companies in the United States. HomeSide Lending's strategy
emphasizes variable cost mortgage origination and low cost servicing. HomeSide
Lending's mortgage loan production volume, excluding bulk purchases, was $20.5
billion for the period from March 1, 1997 through February 10, 1998 and $20.9
billion for the period from March 16, 1996 to February 28, 1997. Its servicing
portfolio was $98.9 billion on February 10, 1998 and $ 89.2 billion on February
28, 1997. HomeSide Lending ranks as the 5th largest originator and 6th largest
servicer in the United States for calendar year 1997 based on data published by
Inside Mortgage Finance.
The residential mortgage market totaled over $3.9 trillion in 1996 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 Lending competes in a
mortgage banking market which is highly fragmented with no single company
controlling or dominating the market. In 1997, the largest originator
represented 6.5% of the market and the largest servicer represented 5.0%, while
the top 30 originators and servicers represented 48.0% and 48.7% of their
markets, respectively, based on data published by Inside Mortgage Finance.
Residential mortgage lenders compete primarily on the basis of loan pricing and
service, making effective cost management essential. The industry has
experienced rapid consolidation which has been accelerated by the introduction
of significant technology improvements and the economies of scale present in
mortgage servicing. The top 10 mortgage loan servicers have increased their
aggregate market share from 16.6% in 1990 to 30.2% in 1997.
HomeSide Lending'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 Lending
focuses on variable cost channels of production, including correspondent,
broker, consumer direct, affinity, and co-issue sources. HomeSide Lending also
pursues strategic relationships with other production sources to acquire and
service residential mortgage loans. Management believes that these variable cost
channels of production deliver consistent origination opportunities for HomeSide
Lending without the fixed cost investment associated with traditional retail
mortgage branch networks. HomeSide Lending 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 Lending has
been one of the industry's most efficient mortgage servicers. The Company's
average cost per employee approximates the average cost per employee of its
major competitors.
HomeSide Lending 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 Lending intends to pursue additional
loan portfolio acquisitions and strategic origination relationships similar to
its existing agreement with BankBoston, N.A. ("BKB").
HomeSide Lending's business activities consist primarily of:
Mortgage production: origination and purchase of residential
single family mortgage loans through multiple channels including
correspondents, strategic partners, mortgage brokers, co-issue
partners, direct consumer telemarketing 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.
Production
HomeSide Lending, Inc. participates in several origination channels,
with a focus on wholesale origination. Since the acquisition of BancBoston
Mortgage Corporation ("BBMC"), wholesale channels (correspondent, co-issue, and
broker) have represented more than 95% of HomeSide Lending's total production.
Excluding the volumes purchased from BKB and Barnett Bank, N.A. ("Barnett"), no
single source within the correspondent or broker channels accounted for more
than 3% of total production during the period from March1, 1997 to February 10,
1998 and the period from March 16, 1996 to February 28,1997. HomeSide Lending's
other origination channels include telemarketing, direct mail campaigns and
other advertising, and mortgages related to affinity group and co-branding
partnerships. HomeSide Lending 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 following table sets forth production detail by HomeSide Lending's
origination channels:
Residential Loan Production by Channel
For the Period from For the Period from
March 1, 1997 to March 16, 1996 to
(dollars in millions) February 10, 1998 February 28, 1997
------------------- -------------------
Wholesale:
Correspondent (includes volumes
purchased from BKB and Barnett) $ 13,304 $ 11,113
Co-issue (a) 5,584 8,222
Broker 1,305 843
------------------- -------------------
Total wholesale 20,193 20,178
Direct 337 700
------------------- -------------------
Total production 20,530 20,878
Bulk acquisitions (a) 3,446 4,073
------------------- -------------------
Total production and acquisitions $ 23,976 $ 24,951
=================== ===================
- ---------------------
(a) Represents the acquisition of servicing rights, not the underlying loans.
Amounts represent the unpaid principal balance of mortgage debt to which
the acquired servicing rights relate.
HomeSide Lending competes nationwide by offering a wide variety of
mortgage products designed to respond to consumer needs and tailored to address
market competition. HomeSide Lending is primarily an originator of fixed rate
15- and 30-year mortgage loans, which collectively represented 78% of the total
production in the period from March 1, 1997 to February 10, 1998 and 73% of
total production in the period from March 16, 1996 to February 28, 1997.
HomeSide Lending also offers other products, such as ARMs, balloon, and jumbo
mortgages.
HomeSide Lending's national loan production operation has resulted in
geographically diverse originations, enabling HomeSide Lending to diversify its
risk across many markets in the United States. HomeSide Lending's servicing
portfolio composition reflects its production markets. The largest segments of
the servicing portfolio by state on February 10, 1998 were Florida (17.2% of
unpaid principal balance of production), California (15.3%), Massachusetts
(7.0%), Texas (6.3) and Maryland (4.6%). The largest segments of the servicing
portfolio by state on February 28, 1997 were Florida (18.7% of unpaid principal
balance), California (15.4%), Massachusetts (8.4%), Texas (6.1%), and Maryland
(4.6%).
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general national pattern of sales and resales of homes.
Sales and resales of homes typically peak during the spring and summer seasons
and decline to lower levels from mid-November through February. Refinancings
tend to be less seasonal and more closely related to changes in interest rates.
Historically, changes in the interest rate environment have mitigated the impact
of seasonality on HomeSide Lending's results of operations. In addition,
delinquency rates typically rise in the winter months, which result in higher
servicing costs. However, late charge income has historically been sufficient to
offset such incremental expenses.
HomeSide Lending's production strategy is to maintain and improve its
reputation as one of the largest, most cost effective originators of mortgage
loans nationwide. HomeSide Lending 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 Lending plans to expand production
through its low cost wholesale and direct channels and to continue to streamline
its production operation. HomeSide Lending 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 Lending 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 Lending for legal review and funding. The participants in this program
are prequalified and monitored on an ongoing basis by HomeSide Lending. If a
correspondent subsequently fails to meet HomeSide Lending's requirements,
HomeSide Lending 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 Lending's production. The
co-issue correspondent controls the entire loan process from application to
closing. This arrangement particularly suits large originators who have the
ability to deliver on an automated basis. Reflecting this delegated underwriting
authority, the co-issue correspondent is obligated to make certain
representations and warranties and is required to repurchase loans in the event
of fraud or misrepresentation in the origination process or for certain other
reasons.
Broker Production
Under its broker program, HomeSide Lending 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 Lending to verify the borrower's credit. All
loans originated through brokers are underwritten by HomeSide Lending's approved
contract underwriters. Loans are funded by HomeSide Lending and may be closed in
either the broker's name or HomeSide Lending'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
Lending.
Direct Production
HomeSide Lending's direct production includes the use of telemarketing to
solicit loans from several sources, including refinancing of mortgage loans in
HomeSide Lending's existing servicing portfolio, leads generated from direct
mail campaigns and other advertising, and mortgages related to affinity group
and co-branding partnerships. HomeSide Lending 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 Lending's servicing portfolio.
Refinancing retention represents the percentage of loans refinanced through
HomeSide Lending's direct channel that were serviced by HomeSide Lending prior
to refinancing.
Bulk Acquisition
Bulk acquisition is the large scale purchase of mortgage servicing rights.
In connection with such acquisitions, HomeSide Lending does not purchase the
underlying mortgage loans which were originated by other originators. HomeSide
Lending 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 Lending's loans are underwritten in accordance with applicable
FNMA, 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 Lending currently employs underwriters with an average of
ten years of underwriting experience.
HomeSide Lending 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
Lending and include General Electric Capital Corp., Mortgage Guaranty Insurance
Corp., and Private Mortgage Insurance Corp. HomeSide Lending grants delegated
underwriting status to the remaining approximately 20% of correspondents which
enables the correspondents to submit conventional loans to HomeSide Lending
without prior underwriting approval. Generally, HomeSide Lending 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 Lending's underwriting process for its retail production
operation is fully automated. 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 Lending believes
that these technologies have contributed to improved productivity and reduced
underwriting and processing turnaround time.
Quality Control
HomeSide Lending maintains a compliance and quality assurance
department that operates independently of the production, underwriting,
secondary marketing and loan administration department. For its production
compliance process, HomeSide Lending randomly selects a statistical sample of
all closed loans monthly for review. The sample generally comprises 3.5% - 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
addition, random reviews of the servicing portfolio, covering selected aspects
of the loan administration process, are conducted.
HomeSide Lending 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 Lending's quality control findings, less that 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
mortgage-backed security is indemnified against future losses resulting from
such flaws by HomeSide Lending or, ultimately, the originating correspondent.
Correspondents or co-issue partners are required to repurchase any flawed loans
originated by them.
Secondary Marketing
HomeSide Lending customarily sells all loans that it originates or
purchases while retaining the servicing rights to such loans. HomeSide Lending
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 Lending's FHA and VA loans are generally
pooled and sold in the form of GinnieMae ("GNMA") Mortgage Backed Securities.
Conforming conventional mortgage loans are generally pooled and exchanged under
the purchase and guarantee programs sponsored by Fannie Mae and FHLMC for Fannie
Mae Mortgage Backed Securities or FHLMC participation certificates,
respectively. HomeSide Lending 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. For the period from March
1, 1997 to February 10, 1998, approximately 92% of the mortgage loans originated
by HomeSide Lending were sold to GNMA (47%), FNMA (31%), and FHLMC (14%). For
the period from March 16, 1996 to February 28, 1997, approximately 78% of the
mortgage loans originated by HomeSide Lending were sold to GNMA (38%), FNMA
(27%), and FHLMC (13%). The remaining were sold to private investors.
The sale of mortgage loans may generate a gain or loss to HomeSide
Lending. Gains or losses result primarily from two factors. First, HomeSide
Lending may purchase a loan at a price that may be higher or lower than HomeSide
Lending 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 Lending 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 Lending constantly monitors these factors and adjusts its hedging on a
daily basis as needed. HomeSide Lending 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
Lending's interest rate risk is currently hedged using a combination of forward
sales of mortgage backed securities and over-the-counter options, including both
puts and calls, on fixed income securities. HomeSide Lending generally commits
to sell to investors for delivery at a future time for a stated price all of its
closed loans and a percentage of the mortgage loan commitments for which the
interest rate has been established. HomeSide Lending aims to price loans
competitively, hedge the interest rate risk of loan originations and sell loans
on a break-even basis. For the period from March 1, 1997 to February 10, 1998
and the period from March 16, 1996 to February 28, 1997, HomeSide Lending has
not experienced secondary marketing losses on an aggregate basis.
HomeSide Lending'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
Lending is responsible for losses which exceed the VA's guaranteed limitations.
In connection with HomeSide Lending's loan exchanges and sales, HomeSide Lending
makes representations and warranties customary in the industry relating to,
among other things, compliance with laws, regulations and program standards, and
to the accuracy of information. In the event of a breach of these
representations and warranties, HomeSide Lending typically corrects such
problems, but, if the problems cannot be corrected, may be required to
repurchase such loans. In cases where loans are originated by a correspondent,
HomeSide Lending may sell the flawed loan back to the correspondent under a
repurchase obligation.
Loan Servicing
HomeSide Lending derives its revenues predominantly from its servicing
operations. HomeSide Lending anticipates that the sale of servicing rights will
not be a significant component of its business strategy in the future. Since its
formation, HomeSide Lending has also maintained a risk management program
designed to protect, within certain parameters, the economic value of its
servicing portfolio, which is subject to prepayment risk when interest rates
decline, providing mortgagors with refinancing opportunities.
Loan servicing includes collecting payments of principal and interest from
borrowers, remitting aggregate loan payments to investors, accounting for
principal and interest payments, holding escrow funds for payment of mortgage
related expenses such as taxes and insurance, making advances to cover
delinquent payments, inspecting the mortgaged premises as required, contacting
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults, and other miscellaneous duties related to loan
administration. HomeSide Lending 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 Lending's weighted average
servicing fee including ancillary income was 0.438% for the period from March 1,
1997 to February 10, 1998 and 0.432% for the period from March 16, 1996 to
February 28, 1997. HomeSide Lending also maintains certain subservicing
relationships whereby servicing is performed by another servicer under an
agreement with HomeSide Lending, 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 Lending's servicing strategy is to continue to build its mortgage
servicing portfolio and benefit from the economies of scale inherent in the
business. HomeSide Lending services substantially all of the mortgage loans that
it originates. In addition, HomeSide Lending purchases the rights to service
mortgage loans originated by other lenders.
As part of the BMC Acquisition, HomeSide Lending acquired a full-service
mortgage company in Hawaii, Honolulu Mortgage Co. Honolulu Mortgage's servicing
portfolio totaled $1.9 billion at November 30, 1996 and its loan production was
$257.4 million from its acquisition on May 31, 1996 to February 18, 1997. In
February 1997, Honolulu Mortgage Co. sold substantially all its assets to an
unaffiliated third party. The sale did not materially affect HomeSide Lending's
financial results.
HomeSide Lending's servicing strategy is also to enhance the profitability
of its servicing activities through low cost and efficient processes. This
strategy is pursued through highly automated, cost effective processing systems,
strategic outsourcing of selected servicing functions and effective control of
delinquencies and foreclosures. HomeSide Lending outsources to third party
vendors functions relating to insurance, taxes and default management,
contributing to HomeSide Lending's ability to maintain a highly variable cost
structure. Using a variety of factors, including loans serviced per employee and
direct cost per loan, management believes that HomeSide Lending 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 Lending originates and purchases servicing rights for mortgage
loans nationwide. The broad geographic distribution of HomeSide Lending's
servicing portfolio reflects the national scope of HomeSide Lending's
originations and bulk servicing acquisitions. The nine largest states accounted
for 64.5% of the outstanding unpaid principal balance ("UPB") of HomeSide
Lending's total servicing portfolio on February 10, 1998, while the largest
volume by state is Florida with a 17.2% share of the total portfolio on February
10, 1998. The nine largest states accounted for 66.9% of the outstanding UPB of
HomeSide Lending's total servicing portfolio on February 28, 1997, while the
largest volume by state is Florida with a 18.7% share of the total portfolio on
February 28, 1997. HomeSide Lending actively monitors the geographic
distribution of its servicing portfolio to maintain a mix that it deems
appropriate and makes adjustments as it considers necessary.
The following table sets forth the geographic distribution of the
Company's servicing portfolio as of February 10, 1998 and February 28, 1997:
<PAGE>
Servicing Portfolio by State (a)
At February 10, 1998 At February 28, 1997
-------------------- --------------------
(dollars in millions) UPB % of UPB UPB % of UPB
--- -------- --- --------
Florida $ 16,664 17.2% $ 16,559 18.7%
California 14,858 15.3 13,686 15.4
Massachusetts 6,792 7.0 7,383 8.4
Texas 6,096 6.3 5,434 6.1
Maryland 4,424 4.6 4,079 4.6
Georgia 3,720 3.8 3,427 3.9
Virginia 3,377 3.5 3,218 3.6
Illinois 3,729 3.8 2,913 3.3
New York 2,939 3.0 2,517 2.9
Other (b) 34,327 35.5 29,244 33.1
-----------------------------------------------------
Total $ 96,926 100.0% $ 88,460 100.0%
=====================================================
- --------------
(a) Servicing statistics are based on loans serviced by HomeSide Lending and
exclude loans purchased but not yet on the servicing system.
(b) No other state represents more than 2.9% of HomeSide Lending's servicing
portfolio.
At February 10, 1998, HomeSide Lending's servicing portfolio consisted of
$74.2 billion of FHA/VA
servicing and $24.7 billion of conventional servicing. At February 28, 1997,
HomeSide Lending's servicing portfolio consisted of $29.4 billion of FHA/VA
servicing and $59.0 billion of conventional servicing.
The weighted average interest rate of the loans in the Company's servicing
portfolio at February 10, 1998 was 7.85% and at February 28, 1997 was 7.92%.
HomeSide Lending's servicing portfolio of loans was stratified by interest rate
as follows:
<TABLE>
Servicing Portfolio by Interest Rate
<CAPTION>
At February 10, 1998 At February 28, 1997
-------------------- --------------------
UPB (a) UPB (a)
(dollars in Cumulative (dollars in Cumulative
Interest Rate millions) % of UPB % of UPB millions) % of UPB % of UPB
- ------------- ------------ -------- --------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Less than 6.0% $ 922 0.9% 0.9% $ 983 1.1% 1.1%
6.0% to 6.9% 10,851 11.2 12.1 9,633 10.9 12.0
7.0% to 7.9% 41,895 43.2 55.3 37,542 42.4 54.4
8.0% to 8.9% 34,076 35.2 90.5 29,293 33.1 87.5
9.0% to 9.9% 6,331 6.5 97.0 7,274 8.2 95.7
10.0% to 10.9% 2,227 2.3 99.3 2,912 3.3 99.0
Over 11.0% 624 0.7 100.0 823 1.0 100.0
------------- -------------- ----------- -------------
Total $ 96,926 100.0% $ 88,460 100.0%
============= ============== =========== =============
</TABLE>
- ------------------------------
(a) Servicing statistics are based on loans serviced by HomeSide Lending and
exclude loans purchased not yet on servicing system.
<PAGE>
Loan Servicing Credit Issues
HomeSide Lending 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
Lending 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 Lending is generally reimbursed,
subject to certain limitations with respect to FHA/VA loans as described below,
by the mortgage owner or from liquidation proceeds for payments advanced that
the servicer is unable to recover from the mortgagor, although the timing of
such reimbursements is typically uncertain. In the interim, HomeSide Lending
absorbs the cost of funds advanced during the time the advance is outstanding.
Further, HomeSide Lending bears the increased costs of collection activities on
delinquent and defaulted loans. HomeSide Lending also foregoes servicing income
from the time such loans become delinquent until foreclosure, when, if any
proceeds are available, HomeSide Lending may recover such amounts. Delinquency
rates typically rise in the winter months, which result in higher servicing
costs. However, late charge income has historically been sufficient to offset
such incremental expenses.
HomeSide Lending 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 Lending, servicing losses on investor-owned loans and
foreclosure-related expenses totaled $22.0 million for the period March 1, 1997
to February 10, 1998, and $17.9 million for the period from March 16, 1996 to
February 28, 1997, primarily representing losses on 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 Lending's historical delinquency and foreclosure rate experience on VA
loans has generally been consistent with that of the industry.
Management believes that it has an adequate level of reserve based on
HomeSide Lending's servicing volume, portfolio composition, credit quality and
historical loss rates, as well as estimated future losses.
The following table sets forth HomeSide Lending's delinquency and foreclosure
experience:
<TABLE>
Servicing Portfolio Delinquencies
(Percent by Loan Count)
<CAPTION>
At February 10, 1998 At February 28, 1997
-------------------- --------------------
<S> <C> <C>
Delinquent Mortgage Loans (at end of period)
30 Days 3.52% 3.27%
60 Days 0.78 0.69
90 Days 0.72 0.54
Total Delinquencies 5.02% 4.50%
Foreclosure Pending (at end of period) 0.74% 0.72%
</TABLE>
Servicing Portfolio Hedging Program
The value of HomeSide Lending'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 Lending'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 Lending estimate its exposure to loss. This potential loss exposure
determines the hedge profile, which is monitored daily and may be adjusted to
reflect significant moves in key variables such as interest rate and yield curve
changes and revised prepayment speed assumptions. Results of the risk management
program depend on a variety of factors, including the hedge instruments
typically issued by HomeSide Lending, the relationship between mortgage rates
and Treasury securities and certain other factors. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - HomeSide Lending
- - for the period from March 1, 1997 to February 10, 1998 and the period from
March 16, 1996 to February 28, 1997- 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 Lending is unable to predict what effect, if any, changes
in accounting principles would have on HomeSide Lending's financial statements
or HomeSide Lending's use of hedge accounting.
Servicing Integration
HomeSide Lending intends to convert the entire servicing platform to its
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 Lending expects to achieve significant competitive advantages
over time by converting to the proprietary servicing software, which is expected
to cost less to operate and is configured to accommodate growth more efficiently
than HomeSide Lending's current outsourced system. Once the conversion has been
completed, this architecture is expected to support HomeSide Lending's portfolio
growth up to approximately twice the number of loans serviced on a single
system. The system is also expected to permit continued development of workflow
and other client-server applications, contributing to increased productivity.
At February 10, 1998 and February 28, 1997, approximately 512,732 and 406,221
loans, respectively, were serviced on the proprietary system at HomeSide
Lending's San Antonio facility. The remainder of the loans serviced at the
Jacksonville facility is expected to be transferred by the end of calendar year
1998.
Regulation
HomeSide Lending'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
Lending, 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 Lending 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 Lending's business is also subject to
examination by Fannie Mae, FHLMC and GNMA and state regulatory agencies at all
times to assure compliance with applicable regulations, policies and procedures.
Mortgage origination activities are subject to the provisions of various
federal and state statutes including, among others, the Equal Credit Opportunity
Act, the Federal Truth-in Lending Act, RESPA, the Fair Housing Act, and the
regulations promulgated thereunder, which among other provisions, prohibit
discrimination, prohibit unfair and deceptive trade practices and require the
disclosure of certain basic information to mortgagors concerning credit terms
and settlement costs, limit fees and charges paid by borrowers and lenders, and
otherwise regulate terms and conditions of credit and the procedures by which
credit is offered and administered. Many of the aforementioned regulatory
requirements are designed to protect the interests of consumers, while others
protect the owners or insurers of mortgage loans. Failure to comply with these
requirements can lead to loss of approved status, termination of servicing
contracts without compensation to the servicers, demands for indemnification or
loan repurchases, class action lawsuits and administrative enforcement actions.
Such regulatory requirements are subject to change from time to time and may in
the future become more restrictive, thereby making compliance more difficult or
expensive or otherwise restricting HomeSide Lending's ability to conduct its
business as it is now conducted.
During the period that BKB or Barnett, or any of their subsidiaries, held
a material ownership interest in HomeSide Lending and its subsidiaries (i) were
under the jurisdiction, supervision, and examining authority of the OCC, and
(ii) could only engage in activities that were 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 Lending's operations. HomeSide Lending 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.
<PAGE>
Competition
Mortgage bankers operate in a highly competitive and fragmented market. In
1997 the largest originator of loans represented 6.5% of the market and the
largest servicer represented 5.0%, while the top 30 originators and servicers
represented 48% and 49% of their markets, respectively, based on data published
by Inside Mortgage Finance.
<TABLE>
TOP 10 ORIGINATORS AND SERVICERS
(dollars in billions)
<CAPTION>
1997 Originations Servicing Portfolio at December 31, 1997
<S> <C> <C> <C>
1 Norwest Mortgage, IA $55.3 1 Norwest Mortgage, IA $205.8
2 Countrywide Home Loans, CA 43.1 2 Countrywide Home Loans, CA 171.4
3 Chase Manhattan Mortgage Holdings, FL 40.1 3 Chase Manhattan Mortgage Holdings, FL 169.3
4 Washington Mutual, WA 23.4 4 NationsBanc & Affiliates, TX 122.3
5 HomeSide Lending, FL 21.8 5 Fleet Mortgage Group, SC 121.0
6 Dime/North American Mortgage, CA 16.1 6 HomeSide Lending, FL 99.2
7 BankAmerica, CA 16.0 7 GE Capital Mortgage Svcs., NC 99.0
8 Fleet Mortgage Group, SC 15.6 8 Washington Mutual, WA 97.7
9 ABN AMRO Mtg., IL (Standard Federal) 15.2 9 BankAmerica, CA 89.7
10 NationsBanc & Affiliates, TX 15.1 10 Mellon Mortgage, TX 66.6
</TABLE>
- -----------------
Source: Inside Mortgage Finance.
HomeSide Lending competes with other mortgage bankers, financial
institutions, and other providers of financial services. The underwriting
guidelines and servicing requirements set by the participants in the secondary
markets are standardized. As a result, mortgage banking products (i.e., mortgage
loans and the servicing of those loans) have become difficult to differentiate.
Therefore, mortgage bankers compete primarily on the basis of price or service,
making effective cost management essential.
Mortgage bankers generally seek to develop cost efficiencies in one of two
ways: economies of scale or specialization. Large full-service national or
regional mortgage bankers have sought economies of scale through an emphasis on
wholesale originations, the introduction of automated processing systems and
expansion through acquisition. Smaller companies frequently identify and pursue
a particular expertise or customer base in an attempt to create a market niche.
The industry has experienced rapid consolidation which has been
accelerated by the introduction of significant technology improvements and the
economies of scale present in mortgage servicing. The automation of many
functions in mortgage banking, especially those related to servicing, has
reduced costs significantly for industry participants. Many mortgage bankers
that were not low cost, high volume producers or did not operate in a low cost
specialized field experienced earnings declines in the nineties, causing many to
exit the business or to be acquired. Surviving cost effective firms purchased
servicing portfolios or other companies to expand their servicing economies of
scale, while others acquired market niche operations. As evidence of this
consolidation, the top 25 mortgage loan servicers have increased their aggregate
market share from 16.6% in 1990 to 30.9% in 1997.
<PAGE>
Employees
As of February 10, 1998 and February 28, 1997, respectively, HomeSide
Lending had approximately 1,891 and 1,689 total employees, substantially all of
whom were full-time employees. HomeSide Lending has no unionized employees and
considers its relationship with its employees generally to be satisfactory.
ITEM 2. PROPERTIES
HomeSide Lending'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 202,000
square feet of leased space. The servicing center lease expires on August 31,
1999 unless HomeSide Lending exercises its options to renew, which could extend
the lease for an additional six years. HomeSide Lending 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 Lending owns an additional 190,000 square feet of
space in San Antonio, Texas. HomeSide Lending believes that its present
facilities are adequate for its operations.
ITEM 3. LEGAL PROCEEDINGS
HomeSide Lending is a defendant in a number of legal proceedings arising
in the normal course of business. HomeSide Lending, 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 Lending, 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 Lending.
In recent years, the mortgage banking industry has been subject to class
action lawsuits which allege violations of federal and state laws and
regulations, including the propriety of collecting and paying various fees and
charges. Class action lawsuits may be filed in the future against the mortgage
banking industry.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended February 10, 1998, except that in December
1997, the stockholders of the Company's parent, HomeSide, Inc., adopted an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which a newly
formed wholly-owned subsidiary of National Australia Bank Limited ("the
National") was merged with and into the Company. Pursuant to the Merger
Agreement, the Company became an indirect, wholly-owned subsidiary of the
National.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As a consequence of the merger described in Item 4, there is no market for
the Registrant's common equity.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA - HOMESIDE LENDING
The selected consolidated financial and operating information of HomeSide
Lending set forth below is for the periods from March 1, 1997 to February 10,
1998 and March 16, 1996 to February 28, 1997 and should be read in conjunction
with, and is qualified in its entirety by reference to, the Consolidated
Financial Statements and the Notes thereto and in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
HomeSide Lending included elsewhere in this document.
<TABLE>
<CAPTION>
For the Period From For the Period From
(in thousands, except share data) March 1, 1997 to March 16, 1996 to
February 10,1998 February 28,1997
Selected Income Statement: ------------------- -------------------
<S> <C> <C>
Revenues:
Mortgage servicing fees $ 393,292 $ 308,906
Amortization of mortgage servicing rights (207,508) (153,694)
------------------- -------------------
Net servicing revenue 185,784 155,212
Interest income 97,050 81,507
Interest expense (81,770) (66,833)
------------------- -------------------
Net interest revenue 15,280 14,674
Net mortgage origination revenue 85,206 66,073
Other income 1,671 682
------------------- -------------------
Total revenues 287,941 236,641
Expenses:
Salaries and employee benefits 75,419 72,976
Occupancy and equipment 15,447 11,770
Servicing losses on investor-owned loans and
foreclosure-related expenses 21,974 17,934
Other expenses 38,231 40,766
------------------- -------------------
Total expenses 151,071 143,446
Income before provision for income taxes 136,870 93,195
Provision for income taxes 53,379 37,278
------------------- -------------------
Net income $ 83,491 $ 55,917
=================== ===================
Selected Balance Sheet Data at Period End:
Mortgage loans held for sale $ 1,292,403 $ 805,274
Mortgage servicing rights 1,766,357 1,596,838
Total assets 3,859,291 2,717,321
Bank credit facility 2,074,956 1,818,503
Long-term debt 770,466 21,128
Total liabilities 3,178,468 2,105,277
Total stockholder's equity 680,823 612,044
=================== ===================
Selected Operating Data:
Volume of loan production $ 20,529,530 $ 20,877,535
Loan servicing portfolio (at period end) 98,906,102 89,217,846
Loan servicing portfolio (average outstanding 94,963,812 74,677,171
during the period)
Weighted average interest rate of the servicing
portfolio (at period end) 7.85% 7.92%
Weighted average servicing fee of the servicing
portfolio, including ancillary income (during the
period) 0.438% 0.432%
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HOMESIDE LENDING-- FOR THE PERIOD FROM MARCH 1, 1997 TO FEBRUARY 10, 1998
AND FOR THE PERIOD FROM MARCH 16, 1996 TO FEBRUARY 28, 1997
General
HomeSide Lending, Inc., a wholly-owned subsidiary of Homeside, Inc. ("the
Parent") is one of the largest full service residential mortgage banking
companies in the United States, formed through the acquisition of the mortgage
banking operations of BankBoston, N.A., formerly known as The First National
Bank of Boston ("BankBoston"), and Barnett Banks, Inc. ("Barnett"). HomeSide
Lending, Inc. is a wholly-owned subsidiary of HomeSide Holdings, Inc., which is
a wholly-owned subsidiary of the Parent. HomeSide Lending's strategy emphasizes
variable cost mortgage loan originations, low cost mortgage servicing and
effective risk management. Headquartered in Jacksonville, Florida, HomeSide
Lending ranks as the 5th largest mortgage loan originator and the 6th largest
servicer in the United States for the twelve months ended December 31, 1997
based on data published by Inside Mortgage Finance.
HomeSide Lending 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 Lending intends to pursue additional
loan portfolio acquisitions and strategic origination relationships similar to
its existing agreement with BankBoston (see Note 4).
On February 10, 1998, National Australia Bank Limited (the "National") acquired
all outstanding shares of common stock of the Parent for $27.825 per share or
approximately $1.2 billion. Following this transaction, the National owns 100%
of the registrant's common stock and the Parent became an indirect, wholly-owned
subsidiary of the National.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. This report contains forward-looking
statements, which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including those identified below, which
could cause actual results to differ materially from historical results or those
anticipated. The words "believe," "expect," "anticipate," "intend," "estimate"
and other expressions, which indicate future events and trends, identify
forward-looking statements, which speak only as of their dates. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
The following factors could cause actual results to differ materially from
historical results or those anticipated: (1) the Company's ability to grow which
is dependent on its ability to obtain additional financing in the future for
originating loans, investment in servicing rights, working capital, capital
expenditures and general corporate purposes, (2) economic factors may negatively
affect the Company's profitability as the frequency of loan default tends to
increase in such environments and (3) changes in interest rates may affect the
volume of loan originations and acquisitions, the interest rate spread on loans
held for sale, the amount of gain or loss on the sale of loans and the value of
the Company's servicing portfolio. These risks and uncertainties are more fully
detailed in the Company's filings with the Securities and Exchange Commission.
<PAGE>
Mortgage Banking
Mortgage banking is a specialized branch of the financial services industry
which primarily involves (i) originating and purchasing mortgage loans
("origination" and/or "production"); (ii) selling the originated mortgages to
third parties either as mortgage-backed securities or as whole loans ("secondary
marketing"); (iii) servicing of mortgage loans on behalf of the ultimate
purchasers, which includes the collection and disbursement of payments of
mortgage principal and interest, the collection of payments of taxes and
insurance premiums to pay property taxes and insurance premiums and management
of certain loan default activities (collectively, "servicing"); and (iv) risk
management, a program primarily designed to protect the economic performance of
the servicing portfolio that could otherwise be adversely affected by increased
loan prepayments due to declines in interest rates.
Mortgage bankers originate loans generally through two channels: wholesale and
direct. Wholesale origination involves the origination of mortgage loans from
sources other than homeowners, including mortgage brokers and other mortgage
lenders. Direct origination typically includes (i) networks of retail loan
offices with sales staff that solicit business from homeowners, realtors,
builders and other real estate professionals, (ii) centers that use
telemarketing, direct mail, and advertising to market loans directly to home
buyers or homeowners, (iii) affinity and co-branding partnerships and (iv)
corporate relocation programs. Once originated or purchased, mortgage bankers
hold the loans temporarily ("warehousing") until they are sold, typically
earning an interest spread equal to the difference between the loan's interest
rate and the cost of financing the loan. Each loan is sold either excluding or
including the associated right to service the loan ("servicing retained" or
"servicing released," respectively).
Mortgage bankers rely mainly on short-term borrowings, such as warehouse lines,
to finance the origination of mortgages that are sold. Mortgage bankers also
borrow on a longer term basis to finance their servicing assets and working
capital requirements. Revenues consist primarily of those related to servicing
and, to a lesser extent, fees and interest spreads from originations. The major
expenses of a mortgage banker include costs of financing, operating costs
related to origination and servicing and the amortization of mortgage servicing
rights.
Mortgage bankers typically seek to retain the rights to service the loans they
originate or acquire in order to generate recurring fee income. The purchase and
sale of servicing rights can occur on a loan-by-loan basis ("flow") or on a
portfolio (group of loans) basis ("bulk" or "mini-bulk"). Prices for servicing
rights are typically stated as a multiple of the servicing fee or as a
percentage of the outstanding unpaid principal balance for a group of mortgage
loans. Values of servicing portfolios are generally based on the present value
of the servicing fee income stream, net of servicing costs, expected to be
received over the estimated life of the loans. The assets of a mortgage banking
company consist primarily of mortgage loans held for sale and the value of the
servicing rights.
Loan Production Activities
As a multi-channel loan production lender, HomeSide Lending has one of the
industry's largest correspondent lending production operations, a full-service
brokered loan program and a national production center for consumer direct
mortgage lending. By focusing on production channels with a variable cost
structure, HomeSide Lending eliminates the fixed costs associated with
traditional mortgage branch offices. Without the burden of high fixed cost loan
origination networks, HomeSide Lending is positioned to weather a variety of
interest rate environments. The following information regarding loan production
activities for HomeSide Lending is presented to aid in understanding the results
of operations and financial condition of HomeSide Lending for the period from
March 1, 1997 to February 10, 1998 and for the period from March 16, 1996 to
February 28, 1997 (in millions):
<PAGE>
For the Period From For the Period From
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
------------------- -------------------
Correspondent $13,304 $11,113
Co-issue 5,584 8,222
Broker 1,305 843
---------------------------------------------
Total wholesale 20,193 20,178
Consumer Direct 337 700
---------------------------------------------
Total production 20,530 20,878
Bulk acquisitions 3,446 4,073
---------------------------------------------
Total production and acquisitions $23,976 $24,951
=============================================
Total loan production, excluding bulk acquisitions, was $20.5 billion for the
period from March 1, 1997 to February 10, 1998, relatively equal to the period
from March 16, 1996 to February 28, 1997. HomeSide Lending also purchased bulk
servicing acquisitions of $3.4 billion and $4.1 billion during the period from
March 1, 1997 to February 10, 1998 and the period from March 16, 1996 to
February 28, 1997, respectively.
HomeSide Lending continues to examine a number of ways to diversify and grow
revenue sources from its existing and new customer base. As part of this effort,
HomeSide Lending has announced an alliance with a subprime lender, which allows
HomeSide Lending to offer additional mortgage-related products to the production
network. HomeSide Lending then sells the loans, servicing released, to its
strategic partners. The subprime lending unit began operations in January 1998.
Servicing Portfolio
Management believes that HomeSide Lending is one of the most efficient mortgage
loan servicers in the industry based on its servicing cost per loan and the
number of loans serviced per employee. The servicing operation makes extensive
use of state-of-the-art technology, process re-engineering and expense
management. With a portfolio size of $98.9 billion, HomeSide Lending services
the loans of approximately 1.2 million homeowners from across the United States
and is committed to protecting the value of this important asset by a
sophisticated risk management strategy. HomeSide Lending anticipates its low
cost of servicing loans will continue to maximize the bottom-line impact of its
growing servicing portfolio. HomeSide Lending's focus on efficient and low cost
processes is pursued through the selective use of automation as well as the
strategic outsourcing of selected servicing functions and effective control of
delinquencies and foreclosures.
The following information on the dollar amounts of loans serviced is presented
to aid in understanding the results of operations and financial condition of
HomeSide Lending for the period from March 1, 1997 to February 10, 1998 and for
the period from March 16, 1996 to February 28, 1997 (in millions):
<PAGE>
For the Period From For the Period From
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
----------------- ------------------
Balance at beginning of period $89,218 $41,844
Acquisition of Barnett Mortgage Company - 33,082
Other additions 23,976 25,252
----------------- ------------------
Total additions 23,976 58,334
----------------- ------------------
Scheduled amortization 2,035 1,733
Prepayments 11,176 6,226
Foreclosures 682 514
Sales of servicing 395 2,487(a)
----------------- ------------------
Total reductions 14,288 10,960
----------------- ------------------
Balance at end of period $98,906 $89,218
================= ==================
(a) Includes $1.9 billion of servicing sold as part of the sale of Honolulu
Mortgage Company.
The number of loans serviced at February 10, 1998 was 1,167,210, compared to
1,070,000 at February 28, 1997. HomeSide Lending's strategy is to build its
mortgage servicing portfolio by concentrating on variable cost loan origination
strategies, and as a result, benefit from improved economies of scale. A key to
HomeSide Lending's future growth is the proprietary servicing software purchased
from Barnett. This system will allow HomeSide Lending to double the number of
loans serviced on a single system. During the period from March 1, 1997 to
February 10, 1998, HomeSide Lending transferred approximately 210,000 of the
loans serviced to its proprietary servicing software. After the transfer, over
half the servicing portfolio is serviced on the proprietary system. The transfer
of the remaining portfolio is expected to occur by the end of calendar 1998.
Results of Operations
For the period from March 1, 1997 to February 10, 1998 compared to the period
from March 16, 1996 to February 28, 1997
Summary
HomeSide Lending's net income increased 49% to $83.5 million for the period from
March 1, 1997 to February 10, 1998 from $55.9 million for the period from March
16, 1996 to February 28, 1997. Total revenues for the period from March 1, 1997
to February 10, 1998 increased 22% to $287.9 million from $236.6 million for the
period from March 16, 1996 to February 28, 1997. The increases in net income and
revenues for the period from March 1, 1997 to February 10, 1998 compared to the
period from March 16, 1996 to February 28, 1997 were primarily attributable to
the acquisition of Barnett Mortgage Company ("BMC") on May 31, 1996 and
increases of $30.6 million in net servicing revenue, $19.1 million in net
mortgage origination revenue and $0.6 million in net interest revenue. The BMC
servicing portfolio was $33.1 billion at May 31, 1996. Its acquisition increased
HomeSide Lending's servicing portfolio by 75% on that date, and was a major
factor in the increase in net servicing revenue. In addition, subsequent
increases in the size of the servicing portfolio contributed to the increased
revenue. The servicing portfolio increased to $98.9 billion at February 10, 1998
from $89.2 billion at February 28, 1997, a 11% increase. As part of the BMC
acquisition, Barnett agreed to sell HomeSide Lending the loans produced by the
loan production networks retained by Barnett, which contributed to the increase
in net mortgage origination revenue. Net interest revenue increased primarily
because of lower borrowing costs resulting from the lower interest rate
environment during the period ending February 10, 1998, improved terms for the
bank line of credit and the issuance of medium-term notes. The Company's
improved credit ratings lowered the cost of borrowing under the bank line of
credit and enabled HomeSide Lending to issue publicly traded notes, which
expanded borrowing capacity.
Net Servicing Revenue
Net servicing revenue was $185.8 million for the period from March 1, 1997 to
February 10, 1998 compared to $155.2 million for the period from March 16, 1996
to February 28, 1998. Net servicing revenue is comprised of mortgage servicing
fees, ancillary servicing revenue, and amortization of mortgage servicing rights
expense.
Mortgage servicing fees increased 27% to $393.3 million for the period from
March 1, 1997 to February 10, 1998 from $308.9 million for the period from March
16, 1996 to February 28,1997, primarily as a result of the BMC acquisition and
growth of the servicing portfolio through loan production channels and bulk
servicing acquisitions. The servicing portfolio increased to $98.9 billion at
February 10, 1997 compared to $89.2 billion at February 28, 1997. HomeSide
Lending's weighted average interest rate of the mortgage loans in the servicing
portfolio was 7.85% at February 10, 1998 and 7.92% at February 28, 1997. The
weighted average servicing fee, including ancillary income, for the servicing
portfolio was 0.438% and 0.432% for the period from March 1, 1997 to February
10, 1998 and the period from March 16, 1996 to February 28, 1997, respectively.
The increase in the weighted average servicing fee for the period from March 1,
1997 to February 10, 1998 compared to the period from March 16, 1996 to February
28, 1997 was due to growth of ancillary revenues, including late fees and other
mortgage-related products.
Amortization expense increased to $207.5 million for the period March 1, 1997 to
February 10, 1998 from $153.7 million for the period from March 16, 1996 to
February 28, 1997 mainly as a result of a higher average balance of mortgage
servicing rights and a decrease of 86 basis points in average mortgage interest
rates from the period from March 16, 1996 to February 28, 1997 to the period
from March 1, 1997 to February 10, 1998. Amortization charges are highly
dependent upon the level of prepayments during the period and changes in
prepayment expectations, which are significantly influenced by the direction and
level of long-term interest rate movements. A decrease in mortgage interest
rates results in an increase in prepayment estimates used in calculating
periodic amortization expense. Because mortgage servicing rights are amortized
over the expected period of service fee revenues, an increase in mortgage
prepayment activity typically results in a shorter estimated life of the
mortgage servicing assets and, accordingly, higher amortization expense.
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the direction in
which rates are moving and the spread between short and long-term interest
rates. These factors influence the size of the residential mortgage origination
market, HomeSide Lending's loan production volumes and the interest rates
HomeSide Lending earns on loans and pays to its lenders.
Loan refinancing levels are the largest contributor to changes in the size of
the mortgage origination market. To reduce the cost of their home mortgages,
borrowers tend to refinance their loans during periods of declining interest
rates, increasing the size of the origination market and HomeSide Lending's loan
production volumes. Higher loan production volumes resulted in higher average
balances of loans held for sale and consequently higher levels of interest
income earned on such loans prior to their sale. This higher level of interest
income due to increased volumes is partially offset by the lower rates earned on
the loans.
Overall borrowing costs also fluctuate with changes in interest rates.
Currently, the interest expense HomeSide Lending pays to finance mortgage loans
held for sale and other net assets is generally calculated with reference to
short-term interest rates. In addition, because mortgage loans held for sale
earn interest based on longer term interest rates, the level of net interest
revenue is also influenced by the spread between long-term and short-term
interest rates.
Net interest revenue increased $0.6 million for the period from March 1, 1997 to
February 10, 1998 to $15.3 million from $14.7 million for the period from March
16, 1996 to February 28, 1997, primarily due to improved funding rates obtained
through improved credit ratings, the issue of medium-term notes and the adoption
of an early pool buyout program. During the period from March 1, 1997 to
February 10, 1998, HomeSide Lending issued $750.0 million of medium-term notes
to the public market at an average cost of 6.251% as of February 10, 1998. The
proceeds were used to pay down existing bank debt, increasing HomeSide Lending's
borrowing capacity. An immediate benefit of this increased borrowing capacity
was the initiation of an early pool buyout program, which involves the purchase
of delinquent government loans from pools early in the foreclosure process,
thereby reducing the unreimbursed interest expense that HomeSide Lending incurs.
Interest income increased from the period from March 16, 1996 to February 28,
1997 to the period from March 1, 1997 to February 10, 1998, primarily as a
result of an increase of $246.6 million in the average balance of loans held for
sale. Interest expense increased from the period from March 16, 1996 to February
28, 1997 to the period from March 1, 1997 to February 10, 1998 as a result of
increased borrowings to fund growth of the servicing portfolio and loan
origination activity. These expenses were offset by an increase in credits
received on borrowings as a result of higher average balances of custodial
deposits.
Net Mortgage Origination Revenue
Net mortgage origination revenue is comprised of fees earned on the origination
of mortgage loans, gains and losses on the sale of loans, gains and losses
resulting from hedging of secondary marketing activities and fees charged to
review loan documents for purchased loan production.
Net mortgage origination revenue was $85.2 million for the period from March 1,
1997 to February 10, 1998 compared to $66.1 million for the period from March
16, 1996 to February 28, 1997, a 29% increase. The increase in net mortgage
origination revenue during the period from March 1, 1997 to February 10, 1998 as
compared to the period from March 16, 1996 to February 28, 1997 is due in part
to an increase in loan production volumes resulting from the preferred seller
relationships with Barnett and BankBoston and HomeSide Lending's broker and
correspondent lending channels. The increase also reflects larger gains from
secondary marketing activities.
Salaries and Employee Benefits
Salaries and employee benefits expense was $75.4 million for the period from
March 1, 1997 to February 10, 1998 compared to $73.0 million for the period from
March 16, 1996 to February 28, 1997 due to growth in the number of employees as
a result of the purchase of the BMC mortgage servicing operations acquired on
May 31, 1996. The average number of full-time equivalent employees increased to
1,805 for the period from March 1, 1997 to February 10, 1998 from 1,593 for the
period from March 16, 1996 to February 28, 1997.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs and
maintenance costs, certain computer software expenses and depreciation of
HomeSide Lending's premises and equipment. Occupancy and equipment expense for
the period from March 1, 1997 to February 10, 1998 was $15.4 million compared to
$11.8 million for the period from March 16, 1996 to February 28, 1997. The
increase in expense was mainly due to increases in the costs of information
systems required to handle the growing mortgage servicing portfolio.
Servicing Losses on Investor-Owned Loans and Foreclosure-Related Expenses
Servicing losses on investor-owned loans represent anticipated losses primarily
attributable to servicing FHA and VA loans for investors. These amounts include
actual losses for final disposition of loans, non-recoverable foreclosure costs,
accrued interest for which payment has been denied and estimates for potential
losses based on HomeSide Lending's experience as a servicer of government loans.
During the period from March 1, 1997 to February 10, 1998, the servicing losses
on investor-owned loans and foreclosure-related expenses totaled $22.0 million
compared to $17.9 million for the period from March 16, 1996 to February 28,
1997. The increase was largely attributable to the growth of the servicing
portfolio resulting from loan production and increased foreclosure losses.
Included in accounts payable and accrued liabilities at February 10, 1998 and
February 28, 1997 is a reserve for estimated servicing losses on investor-owned
loans of $21.7 million. The reserve has been established for potential losses
related to the mortgage servicing portfolio. Increases to the reserve are
charged to earnings as servicing losses on investor-owned loans. The reserve is
decreased for actual losses incurred related to the mortgage servicing
portfolio. HomeSide Lending's historical loss experience on VA loans generally
has been consistent with industry experience. Management believes that HomeSide
Lending has an adequate level of reserve based on servicing volume, portfolio
composition, credit quality and historical loss rates, as well as estimated
future losses. Servicing portfolio delinquencies increased from prior year due
to an increased delinquency trend throughout the industry.
The following table sets forth HomeSide Lending's delinquency and foreclosure
experience:
Servicing Portfolio Delinquencies
(percent by loan count)
February 10, 1998 February 28, 1997
----------------- -----------------
Servicing Portfolio Delinquencies,
excluding bankruptcies (at end of period)
30 days 3.52% 3.27%
60 days 0.78% 0.69%
90+ days 0.72% 0.54%
----------------- -----------------
Total past due 5.02% 4.50%
================= =================
Foreclosures pending 0.74% 0.72%
================= =================
Other Expenses
Other expenses consist mainly of professional fees, communications expense,
advertising and public relations, data processing expenses and certain loan
origination expenses. The level of other expenses fluctuates in part based upon
the level of HomeSide Lending's mortgage servicing portfolio and loan production
volumes.
Other expenses during the period from March 1, 1997 to February 10, 1998 were
$38.2 million, compared to $40.8 million for the period from March 16, 1996 to
February 28, 1997. The decrease was primarily due to decreases in advertising
and certain loan origination expenses.
<PAGE>
Income Tax Expense
HomeSide Lending's income tax expense was $53.4 million for the period from
March 1, 1997 to February 10, 1998 and $37.3 million for the period from March
16, 1996 to February 28, 1997. The increase was attributable to an increase in
net income. The effective income tax rate for the period from March 1, 1997 to
February 10, 1998 and the period from March 16, 1996 to February 28, 1997 was
approximately 39% and 40%, respectively.
Risk Management Activities
HomeSide Lending 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 Lending expects to receive from servicing such loans is reduced.
The value of mortgage servicing rights is based on the present value of the cash
flows to be received over the life of the loan and therefore, the value of the
servicing portfolio declines as prepayments increase.
During the period from March 1, 1997 to February 10, 1998, HomeSide Lending
utilized options on U.S. Treasury bond futures and U.S. Treasury bond futures to
protect a significant portion of the market value of its mortgage servicing
portfolio from a decline in value. The risk management contracts used by
HomeSide Lending have characteristics such that they tend to increase in value
as interest rates decline. Conversely, these risk management contracts tend to
decline in value as interest rates rise. Accordingly, changes in value of these
risk management instruments will tend to move inversely with changes in value of
HomeSide Lending's mortgage servicing rights.
These risk management instruments are designated as hedges on the purchase date
and such designation is at a level at least as specific as the level at which
mortgage servicing rights are evaluated for impairment. The risk management
instruments are marked-to-market with changes in market value deferred and
applied as an adjustment to the basis of the related mortgage servicing right
asset being hedged. As a result, any changes in market value that are deferred
are amortized and evaluated for impairment in the same manner as the related
mortgage servicing rights. The effectiveness of HomeSide Lending's hedging
activity can be measured by the correlation between changes in the value of the
risk management instruments and changes in the value of HomeSide Lending'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 Lending has experienced a high measure of
correlation between changes in the value of mortgage servicing rights and the
risk management contracts. However, in periods of rising interest rates, the
increase in value of mortgage servicing rights may outpace the decline in value
of the options included in the hedge position, because the loss on the options
is limited to the premium paid.
During the period from March 1, 1997 to February 10, 1998, deferred gains and
losses on risk management contracts resulted in net deferred hedge gains of
$142.7 million. As of February 10, 1998, net deferred hedge gains of $39.5
million are included in the carrying value of mortgage servicing rights.
Activity in the deferred hedge account during the period from March 1, 1997 to
February 10,1998 is as follows (in thousands):
Net deferred hedge loss at February 28, 1997 $ (110,637)
Amortization of net deferred hedge losses
7,423
Net deferred hedge gains 142,667
================
Net deferred hedge gain at February 10, 1998 $ 39,453
================
HomeSide Lending's future cash needs as they relate to its hedging program will
be influenced by such factors as long-term interest rates, loan production
levels and growth in the mortgage servicing portfolio. The fair value of open
risk management contracts at February 10, 1998 was $43.9 million, which was
equal to their carrying amount because the risk management contracts are
marked-to-market at each reporting date. See "-- Liquidity and Capital
Resources" for further discussion of HomeSide Lending's sources and uses of
cash. See Note 3 of Notes to Consolidated Financial Statements for a description
of HomeSide Lending's accounting policy for its risk management contracts. See
Notes 13 and 14 of Notes to Consolidated Financial Statements for additional
fair value disclosures with respect to HomeSide Lending's risk management
contracts.
Liquidity and Capital Resources
The Company's principal financing needs are the financing of loan origination
activities and the investment in mortgage servicing rights. To meet these needs,
the Company currently utilizes funding from an independent syndicate of banks,
including a warehouse credit facility and a servicing-related facility,
medium-term notes and cash flow from operations. HomeSide Lending continues to
investigate and pursue alternative and supplementary methods to finance its
growing operations through the public and private capital markets. These may
include methods designed to expand the Company's financial capacity and reduce
its cost of capital. In addition, to facilitate the sale and distribution of
certain mortgage products, HomeSide Lending Mortgage Securities, Inc., a
wholly-owned subsidiary of HomeSide Lending, Inc., may continue to issue
mortgage backed securities.
Operations
Net cash used in operations for the period from March 1, 1997 to February 10,
1998 was $231.0 million. Net cash provided by operations for the period from
March 16, 1996 to February 28, 1997 was $216.6 million. The primary uses of cash
in operations were to fund loan originations and pay corporate expenses. These
uses of cash were offset by cash provided from servicing fee income, loan sales
and principal repayments. Cash flows from loan originations are dependent upon
current economic conditions and the level of long-term interest rates. Decreases
in long-term interest rates generally result in higher loan refinancing
activity, which results in higher cash demands to meet increased loan production
levels. Higher cash demands to meet increased loan production levels are
primarily met through borrowings and loan sales.
Investing
Net cash used in investing activities was $773.7 million for the period from
March 1, 1997 to February 10, 1998 and $862.2 million for the period from March
16, 1996 to February 28, 1997. Cash used in investing activities was for the
purchase and origination of mortgage servicing rights. For the period from March
1, 1997 to February 10, 1998, cash was also used for funding the early pool
buyout program. During the period from March 1, 1997 to February 10, 1998, these
uses of cash were offset by net proceeds from risk management contracts, while
during the period from March 16, 1997 to February 28, 1997, cash was used to
purchase risk management contracts. Other assets increased $49.5 million to
$125.0 million at February 10, 1998 from $75.5 million at February 28, 1997
primarily as a result of an increase in HomeSide Lending's hedge assets. Early
pool buyout advances, a program initiated in fiscal 1998, totaled $374.1 million
at February 10, 1998. During the period from March 16, 1996 to February 28,
1997, HomeSide Lending also made net payments of $133.4 million and $106.2
million to acquire certain mortgage banking operations of BBMC and BMC,
respectively (see Note 4 of Notes to Consolidated Financial Statements). Future
uses of cash for investing activities will be dependent on the mortgage
origination market and HomeSide Lending's hedging needs. Except for the Banc One
acquisition (see Note 19), HomeSide Lending is not able to estimate the timing
and amount of cash uses for future acquisitions of other mortgage banking
entities, if such acquisitions were to occur. HomeSide Lending will fund the
Banc One acquisition under existing borrowing capacity.
Financing
Net cash provided by financing activities was $984.1 million for the period from
March 1, 1997 to February 10, 1998 and $698.4 million for the period from March
16, 1996 to February 28, 1997. The primary source of cash from financing
activities during the period from March 1, 1997 to February 10, 1998 was $750.0
million from the issuance of medium-term notes and net borrowings of $256.5 from
HomeSide Lending's line of credit. The primary sources of cash from financing
activities during the period from March 16, 1996 to February 28, 1997 were net
borrowings under HomeSide Lending's lines of credit of $334.2 million, $393.4
million from capital contributions from the Parent. Cash used in financing
activities during the period ended February 10, 1998 was used for the payment of
debt issue costs and dividends paid to the Parent totaling $14.7 million. Cash
used in financing activities for the period ended February 28, 1997 was used for
the payment of debt issue costs and dividends paid to the Parent totaling $17.0
million..
During the period from March 1, 1997 to February 10, 1998, net cash used in
operations was $231.0 million, net cash used in investing activities was $773.7
million and net cash provided by financing activities was $984.1 million,
resulting in a net decrease in cash of $20.6 million. HomeSide Lending expects
that to the extent cash generated from operations is inadequate to meet its
liquidity needs, those needs can be met through financing from its bank credit
facility and other facilities which may be entered into from time to time, as
well as from the issuance of debt securities in the public markets. Accordingly,
HomeSide Lending 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 Lending's portfolio of mortgage servicing rights provides a potential
source of funds to meet liquidity requirements, especially in periods of rising
interest rates when loan origination volume slows. Repurchase agreements also
provide an alternative to the bank line of credit for mortgages held for sale.
Future cash needs are highly dependent on future loan production and servicing
results, which are influenced by changes in long-term interest rates.
Year 2000 Compliance
HomeSide Lending uses and is dependent upon a significant number of computer
software programs and operating systems to conduct its business. Such programs
and systems include those developed and maintained by HomeSide Lending, software
and systems purchased from outside vendors and software and systems used by
HomeSide Lending's third party providers. HomeSide Lending has initiated a
review and assessment of all hardware and software to determine whether it will
function properly in the Year 2000. It is anticipated that some level of
modification or replacement of hardware and software will be necessary in order
to make HomeSide Lending's systems "Year 2000 Compliant." HomeSide Lending
presently estimates these remediation costs to total approximately $15.0
million. Remediation costs are expected to be expensed as incurred, with the
exception of new software purchases, which will be capitalized. The Company has
not incurred significant remediation costs prior to February 10, 1998. Year 2000
remediation costs are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. In
addition, HomeSide Lending has relationships with vendors, customers and other
third parties that rely on software and systems that may not be Year 2000
compliant. With respect to such third parties, Year 2000 compliance matters will
not be within HomeSide Lending's direct control. There can be no assurance that
Year 2000 compliance failures by such third parties will not have a material
adverse effect on HomeSide Lending's results of operations.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholder of HomeSide Lending, Inc.
We have audited the accompanying consolidated balance sheets of HomeSide
Lending, Inc., (a Delaware corporation, see Note 1) and subsidiaries as of
February 10, 1998 and February 28, 1997, and the related consolidated statements
of income, changes in stockholder's equity and cash flows for the periods from
March 1, 1997 to February 10, 1998 and March 16, 1996 to February 28, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HomeSide Lending,
Inc. and subsidiaries as of February 10, 1998 and February 28, 1997 and the
results of their operations and their cash flows for the periods from March 1,
1997 to February 10, 1998 and March 16, 1996 to February 28, 1997, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Jacksonville, Florida
April 15, 1998
<PAGE>
<TABLE>
HOMESIDE LENDING, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
<CAPTION>
February 10, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 32,113 $ 52,691
Mortgage loans held for sale, net 1,292,403 805,274
Mortgage servicing rights, net 1,766,357 1,596,838
Accounts receivable, net 227,294 157,518
Early pool buyout advances 374,097 --
Premises and equipment, net 41,982 29,515
Other assets 125,045 75,485
----------------- -----------------
Total Assets $ 3,859,291 $ 2,717,321
================= =================
LIABILITIES AND STOCKHOLDER'S EQUITY
Notes payable $ 2,074,956 $1,818,503
Accounts payable and accrued liabilities 135,803 123,231
Deferred income taxes 197,243 142,415
Long-term debt 770,466 21,128
----------------- -----------------
Total Liabilities 3,178,468 2,105,277
----------------- -----------------
Commitments and Contingencies
Stockholder's Equity:
Common stock:
Common stock, $1.00 par value, 100 shares authorized, issued and
Outstanding in 1998 and 1997, respectively, all pledged as second
priority
Collateral on the long-term debt of the Parent
Additional paid-in capital 573,092 573,092
Retained earnings 107,731 38,952
----------------- -----------------
Total Stockholder's Equity 680,823 612,044
----------------- -----------------
Total Liabilities and Stockholder's Equity $ 3,859,291 $ 2,717,321
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
HOMESIDE LENDING, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
<CAPTION>
For the Period from For the Period from
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
REVENUES:
Mortgage servicing fees $ 393,292 $ 308,906
Amortization of mortgage servicing rights (207,508) (153,694)
----------------- -----------------
Net servicing revenue 185,784 155,212
Interest income 97,050 81,507
Interest expense (81,770) (66,833)
----------------- -----------------
Net interest revenue 15,280 14,674
Net mortgage origination revenue 85,206 66,073
Other income 1,671 682
----------------- -----------------
Total Revenues 287,941 236,641
EXPENSES:
Salaries and employee benefits 75,419 72,976
Occupancy and equipment 15,447 11,770
Servicing losses on investor-owned loans
and foreclosure-related expenses 21,974 17,934
Other expenses 38,231 40,766
----------------- -----------------
Total Expenses 151,071 143,446
Income before income taxes 136,870 93,195
Income tax expense 53,379 37,278
----------------- -----------------
Net Income $ 83,491 $ 55,917
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
HOMESIDE LENDING, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY (dollars in
thousands, except share data)
<CAPTION>
Additional
Numbers Common Paid-in Retained
of Shares Stock Capital Earnings Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance,
March 15, 1996 -- -- $ -- $ -- $ --
Issuance of common stock 100 -- --
Contribution associated with BancBoston
Mortgage Corporation acquisition, net -- -- 290,000 -- 290,000
Contribution associated with Barnett
Mortgage Company acquisition, net -- -- 244,294 -- 244,294
Additional capital contributions -- -- 38,798 -- 38,798
Net income -- -- -- 55,917 55,917
Dividends declared and paid to Parent -- -- -- (16,965) (16,965)
----------------------------------------------------------------------------
Balance,
February 28, 1997 100 -- 573,092 38,952 612,044
----------------------------------------------------------------------------
Net income -- -- -- 83,491 83,491
Dividends declared and paid to Parent -- -- -- (14,712) (14,712)
----------------------------------------------------------------------------
Balance,
February 10, 1998 100 -- $573,092 $ 107,731 $680,823
============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
HOMESIDE LENDING, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<CAPTION>
For the Period from For the Period from
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
------------------------ -----------------------
<S> <C> <C>
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net income $ 83,491 $ 55,917
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Amortization of mortgage servicing rights 207,508 153,694
Depreciation and amortization 8,850 8,173
Servicing losses on investor-owned loans 12,346 13,683
Deferred income tax expense 56,352 37,278
Capitalized servicing rights (21,015)
--
Mortgage loans originated and purchased for sale (23,975,752) (12,504,567)
Proceeds and principal repayments of mortgage loans held for 23,540,371 12,572,217
sale
Change in accounts receivable (82,121) (63,378)
Change in other assets and accounts payable and accrued (82,036) (35,448)
liabilities
------------------------ -----------------------
Net cash (used in) provided by operating activities (230,991) 216,554
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (17,252) (4,929)
Acquisition of mortgage servicing rights (519,694) (475,729)
Net proceeds from (purchases of) risk management contracts 137,393 (141,944)
Purchase of early pool buyout advances, net of repayments (374,097) --
Acquisition of BancBoston Mortgage Corp., net of cash acquired -- (133,392)
Acquisition of Barnett Mortgage Co., net of cash acquired -- (106,244)
------------------------ -----------------------
Net cash used in investing activities (773,650) (862,238)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from banks and short-term lines of credit 256,453 334,170
Issuance of notes payable 750,000 --
Payment of debt issue costs (7,017) (11,681)
Repayment of long-term debt (661) (567)
Capital contributions from the Parent -- 393,418
Dividends paid to the Parent (14,712) (16,965)
------------------------ -----------------------
Net cash provided by financing activities 984,063 698,375
Net (decrease) increase in cash and cash equivalents (20,578) 52,691
Cash and cash equivalents at beginning of period 52,691 --
------------------------ -----------------------
Cash and cash equivalents at end of period $ 32,113 $ 52,691
======================== =======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
HOMESIDE LENDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
HomeSide Lending, Inc. ("HomeSide Lending" or the "Company") is primarily
engaged in the mortgage banking business and as such originates, purchases,
sells and services mortgage loans throughout the United States. The accompanying
consolidated financial statements of HomeSide Lending include the accounts of
HomeSide Lending and its subsidiaries, after elimination of all material
intercompany balances and transactions. Amounts of acquired companies have been
included from the date of acquisition.
HomeSide Lending is a wholly-owned subsidiary of HomeSide Holdings, Inc., which
is a wholly-owned subsidiary of HomeSide, Inc. (the "Parent")(see Note 2). The
Parent has no operations and its only significant assets are its investments in
HomeSide Holdings, Inc., HomeSide Lending and certain capitalized debt issue
costs. The Parent has $130 million in outstanding long-term debt. All of the
stock of HomeSide Holdings, Inc. and HomeSide Lending is pledged as collateral
on the debt of the Parent. The Parent is dependent upon dividends from HomeSide
Holdings, Inc. and HomeSide Lending for the cash flow necessary to service the
Parent's debt.
The accompanying financial statements of HomeSide Lending, Inc. have been
prepared for the period March 1, 1997 to February 10, 1998 and for the period
March 16, 1996 to February 28, 1997 to coincide with the commencement of
operations of the Parent and the merger as discussed in Note 2 below. The
financial statements do not reflect the effects of HomeSide Lending's
acquisition by National Australia Bank Limited ("the National"). HomeSide
Lending will adopt a fiscal year end of September 30 to conform to the fiscal
year of the National.
2. ORGANIZATION
On December 11, 1995, HomeSide Lending was formed by an investor group,
consisting of Thomas H. Lee Company and Madison Dearborn Partners (collectively,
the "Investors"), and signed a definitive stock purchase agreement with The
First National Bank of Boston ("BankBoston") for the purpose of acquiring
certain assets and liabilities of the mortgage banking business owned by
BankBoston. BankBoston received cash and an ownership interest in HomeSide
Lending. The transaction closed on March 15, 1996 and HomeSide Lending began
operations on March 16, 1996.
On May 31, 1996, Barnett Banks, Inc. ("Barnett") sold certain of its mortgage
banking operations, primarily its servicing portfolio, mortgage servicing
operations and proprietary mortgage banking software systems, to HomeSide
Lending. Barnett received cash and an ownership interest in HomeSide Lending.
The accompanying financial statements reflect the effects of both of these
acquisitions. For more information on these acquisitions, see Note 4. From May
31, 1996 until the 1997 public offering of common stock, the Investors as a
group, BankBoston and Barnett each owned approximately one-third of HomeSide
Lending. Following the public offering, the Investors as a group, BankBoston and
Barnett owned in the aggregate approximately 79% of the outstanding common
stock.
On January 9, 1998, NationsBank Corporation acquired all the outstanding common
stock of Barnett Banks, Inc. (see Note 15).
On February 10, 1998, the National acquired all outstanding shares of the common
stock of the Parent. As consideration, the National paid $27.825 per share for
all of the outstanding common stock and paid $17.7 million cash to retire all
outstanding stock options. The total purchase price was approximately $1.2
billion. The National paid for the purchase with borrowed and available funds.
The transaction was accounted for as a purchase. As a result, all assets and
liabilities were recorded at their fair value on February 11, 1998, and the
purchase price in excess of the fair value of net assets acquired of $713.6
million was recorded as goodwill. Following the transaction described above, the
National now owns 100% of the Parent's common stock and the Parent has become an
indirect wholly-owned subsidiary of the National.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Risk management of mortgage loan originations
HomeSide Lending utilizes a risk management program to protect and manage the
value of its mortgage loans held for sale and mortgage commitment pipeline. As a
result, the Company is party to various derivative financial instruments to
reduce its exposure to interest rate risk. These financial instruments primarily
include mandatory forward delivery commitments, put and call option contracts
and treasury futures contracts. The Company uses these financial instruments for
the purposes of managing its resale pricing and interest rate risks. These
financial instruments are designated as hedges to the extent they demonstrate a
high degree of correlation with the underlying hedged items. Accordingly,
hedging gains and losses related to this risk management program are deferred
and recognized as a component of the gain or loss on sale of the underlying
mortgage loans or mortgage-backed securities. Such gains and losses are included
in mortgage origination revenue. Hedge losses are recognized currently if the
deferral of such losses would result in mortgage loans held for sale and the
pipeline being valued in excess of their estimated net realizable value.
Premiums paid for purchased put and call option contracts are included in other
assets and amortized over the options' contract period as a component of
mortgage origination revenue. Unamortized premiums are recognized as a component
of the gain or loss on sale of loans at the earlier of the expiration of the
underlying contract or when exercise of the contract is considered unlikely.
Risk management of mortgage servicing rights
Mortgage servicing rights permit HomeSide Lending to receive a portion of the
interest coupon and fees collected from the mortgagor for performing specified
servicing activities. The mortgage notes underlying the mortgage servicing
rights permit the borrower to prepay the loan. As a result, the value of the
related mortgage servicing rights tends to diminish in periods of declining
interest rates and increase in value in periods of rising rates. This tendency
subjects HomeSide Lending to substantial interest rate risk. It also directly
affects the volatility of reported earnings because mortgage servicing rights
are carried at the lower of amortized cost or fair value. It is HomeSide
Lending's policy to mitigate and hedge this risk through its risk management
program.
The risk management instruments used by HomeSide Lending have characteristics
such that they tend to increase in value as interest rates decline. Conversely,
these risk management instruments tend to decline in value as interest rates
rise. Accordingly, changes in value of these hedge instruments will tend to move
inversely with changes in value of HomeSide Lending's mortgage servicing rights.
Options on U.S. Treasury bond futures and U.S. Treasury bond futures have been
purchased by HomeSide Lending to manage interest rate risk. When purchased, the
options and futures contracts are designated to a specific strata of mortgage
servicing rights. The risk management instruments are marked-to-market and
changes in market value are included as adjustments to the basis of the related
mortgage servicing right asset being hedged. Deferred hedge gains and losses are
amortized and evaluated for impairment in the same manner as the related
mortgage servicing rights. Correlation between changes in the risk management
contracts and changes in value of HomeSide Lending's mortgage servicing rights
is assessed on a quarterly basis to ensure that high correlation is maintained
over the term of the hedging program.
Mortgage loans
Mortgage loans held for sale are carried at the lower of aggregate cost or fair
value. Fair value is based on the contract prices at which the mortgage loans
will be sold or, if the loans are not committed for sale, the current market
price. Deferred hedge gains and losses on risk management hedging instruments
are included in the cost of the mortgage loans held for sale for the purpose of
determining the lower of aggregate cost or fair value.
Mortgage loans held for investment are included in other assets and stated at
the lower of cost or fair value at the time the permanent investment decisions
are made. Discounts, if any, are amortized over the anticipated life of the
investment.
Loans are placed on non-accrual status when any portion of the principal or
interest is ninety days past due or earlier when concern exists as to the
ultimate collectibility of principal or interest. When loans are placed on
nonaccrual status, the related interest receivable is reversed against interest
income of the current period. Interest payments received on nonaccrual loans are
applied as a reduction of the principal balance when concern exists as to the
ultimate collection of principal; otherwise, such payments are recognized as
interest income. Loans are removed from nonaccrual status when principal and
interest become current and they are anticipated to be fully collectible.
Mortgage servicing rights
The total cost of loans originated or acquired is allocated between the mortgage
servicing rights and the mortgage loans (without the servicing rights) based on
relative fair values. The value of servicing rights acquired through bulk
acquisitions is capitalized at cost.
Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 125 supersedes SFAS No. 122 and is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996. SFAS No. 125 is based on a financial-components approach
which focuses on control. Under the approach required by this standard, after a
transfer of financial assets (for example, the sale of mortgage loans), an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered and derecognizes liabilities when extinguished. The capitalization,
amortization and impairment principles of SFAS No. 125 are substantially
consistent with the principles previously defined by SFAS No. 122, insofar as
they relate to the mortgage banking activities of HomeSide Lending. Accordingly,
the impact of the adoption of SFAS No.125 was not material to the Company's
financial statements.
Mortgage servicing rights are amortized in proportion to and over the period of
the estimated net servicing revenue. They are evaluated for impairment by
comparing the carrying amount of the servicing rights to their fair value. Fair
value is estimated based on the market prices of similar servicing assets and on
discounted anticipated future net cash flows considering market prepayment
estimates, historical prepayment rates, portfolio characteristics, interest
rates and other economic factors. For purposes of measuring impairment, the
mortgage servicing rights are stratified by the predominant risk characteristics
which include product types of the underlying loans and interest rates of
mortgage notes . Impairment is recognized through a valuation reserve for each
impaired stratum and is included in amortization of mortgage servicing rights.
An analysis of HomeSide Lending's mortgage servicing rights is included in Note
5.
Prior to January 1, 1997, mortgage servicing rights included excess mortgage
servicing rights, which represent the present value of servicing fee income in
excess of a normal servicing fee rate. Until the adoption of SFAS No. 125 on
January 1, 1997, when loans were sold, the estimated excess servicing was
recognized as income and amortized over the estimated servicing period in
proportion to the aggregate net cash flows from the loans serviced. Remaining
asset balances were evaluated for impairment based on current estimates of
future discounted cash flows. Such write-downs were included in amortization of
mortgage servicing rights. Upon the adoption of SFAS No. 125, previously
recognized excess mortgage servicing rights were combined with and accounted for
as mortgage servicing rights.
Accounts receivable
Accounts receivable includes advances, consisting primarily of payments for
property taxes and insurance premiums, as well as principal and interest
remitted to investors before they are collected from mortgagors, made in
connection with loan servicing activities. Accounts receivable also includes
loans purchased from mortgage-backed securities serviced by HomeSide Lending for
others and mortgage claims filed primarily with the FHA and the VA.
Early pool buyout advances
Early pool buyout advances consist of delinquent government loans in foreclosure
process that have been purchased from pools. The program reduces the
unreimbursed interest expense that HomeSide Lending incurs. The funding of the
purchases of these delinquent loans for the early pool buyout program is
recorded as interest expense. Interest income earned from the guarantor agency
during the foreclosure process is accrued to match the funding expense incurred.
Scheduled interest payments made to the investor before the loans were purchased
from the pool are recorded as early pool buyout advances with a reserve for
advances which will not ultimately be collected.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the
shorter of the estimated life of the improvement or the term of the lease.
Long-lived assets are evaluated regularly for the other-than- temporary
impairment. If circumstances suggest that their value may be impaired and the
write-down would be material, an assessment of recoverability is performed prior
to any write-down of the asset. Impairment, if any, is recognized through a
valuation allowance with a corresponding charge recorded in the statement of
income.
Goodwill
Net assets acquired in purchase transactions are recorded at fair value at the
inception of the date of acquisition. Goodwill, representing the excess of the
purchase price over the fair value of the net assets purchased, is amortized on
a straight-line basis over 15 years. Goodwill is reviewed periodically for
events or changes in circumstances that may indicate that the carrying amounts
of the assets are not recoverable on an undiscounted cash flow basis.
Mortgage servicing fees
Mortgage servicing fees represent servicing and other fees earned for servicing
mortgage loans owned by investors. Servicing fees are generally calculated on
the outstanding principal balances of the loans serviced and are recognized as
income on an accrual basis.
HomeSide Lending's mortgage servicing portfolio totaled $98.9 billion at
February 10, 1998. Related custodial deposits are segregated in trust accounts,
principally held with depository institutions, and are not included in the
accompanying financial statements.
Interest expense
Interest expense is reduced by credits received from depository institutions for
custodial balances placed with such institutions.
Net mortgage origination revenue
Mortgage origination revenue includes gains and losses from sales of mortgage
loans and fees associated with the origination and purchase of mortgage loans.
Servicing losses on investor-owned loans and foreclosure-related expenses
HomeSide Lending records losses attributable to servicing FHA and VA loans for
investors. These amounts include actual losses for final disposition of loans,
foreclosure-related expenses, accrued interest for which payment is
uncollectible and estimates for potential losses based on HomeSide Lending's
experience as a servicer of government loans.
A reserve for estimated servicing losses on investor-owned loans is available
for potential losses related to the mortgage servicing portfolio and is included
in accounts payable and accrued liabilities (see Note 7).
Income taxes
Current tax liabilities or assets are recognized through charges or credits to
the current tax provision for the estimated taxes payable or refundable for the
current year.
Deferred tax liabilities are recognized for temporary differences that will
result in amounts taxable in the future and deferred tax assets are recognized
for temporary differences and tax benefit carryforwards that will result in
amounts deductible or creditable in the future. Net deferred tax liabilities or
assets are recognized through charges or credits to the deferred tax provision.
A deferred tax valuation reserve is established if it is more likely than not
that all or a portion of the deferred tax assets will not be realized. Changes
in the deferred tax valuation reserve are recognized through charges or credits
to the deferred tax provision. The effect of enacted changes in tax law,
including changes in tax rates, on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date.
Statement of cash flow
For purposes of reporting on the statement of cash flows, cash and cash
equivalents include cash and due from banks and interest-bearing deposits with
an original maturity of three months or less.
New accounting standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements
with the same prominence as other financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Management expects
that the impact of this statement on the presentation of the financial
statements of HomeSide Lending will be immaterial.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This statement is
effective for fiscal years beginning after December 15, 1997. Management expects
that the impact of this statement on the presentation of the financial
statements of HomeSide Lending will be immaterial.
4. ACQUISITIONS
Acquisition of BancBoston Mortgage Corporation
On March 15, 1996, HomeSide Lending acquired from BankBoston all of the
outstanding stock of BancBoston Mortgage Corporation ("BBMC"), which was
subsequently renamed HomeSide Lending, Inc. Certain assets and liabilities of
BBMC were retained by BankBoston, including BBMC's mortgage retail production
operations in New England.
HomeSide Lending made cash payments of $139.5 million in cash and issued $86.8
million of common stock to BankBoston in consideration for certain assets, net
of assumed liabilities, and the stock of BBMC. Also, in connection with the BBMC
acquisition, the Investors purchased approximately 55% of the then outstanding
common stock of HomeSide Lending for $107.2 million in cash. Simultaneously,
BankBoston paid approximately $1.0 million in cash for all of HomeSide Lending's
class C non-voting common stock. In consideration of services rendered to
HomeSide Lending with respect to the BBMC Acquisition, class B non-voting stock
valued at $1.0 million was issued to an investment bank. Management purchased
common stock for $4.1 million in cash, $1.9 million of which was financed by
loans from HomeSide Lending. On May 31, 1996, HomeSide Lending paid an
additional $5.0 million to BankBoston in connection with the closing of the
Barnett Mortgage Company ("BMC") acquisition. The transaction was accounted for
under the purchase method of accounting. The assets and liabilities of BBMC were
recorded at their fair values at March 16, 1996, which totaled $1.5 billion and
$1.2 billion, respectively. The total purchase price paid for BBMC, including
transaction costs and interest, was $247.0 million. The excess of fair value of
net assets acquired over cost was $56.0 million and was allocated as a reduction
mortgage servicing period rights.
Acquisition of Barnett Mortgage Company
On May 31, 1996, HomeSide Lending acquired from Barnett certain assets, net of
assumed liabilities, and the outstanding common stock of BMC (the "BMC
Acquisition"). Certain assets and liabilities of BMC were retained by Barnett,
including those assets of BMC and its subsidiaries (other than Honolulu Mortgage
Company, Inc.) associated with the loan origination or production activities.
HomeSide Lending made cash payments of $228.0 million to Barnett in
consideration for certain assets, net of assumed liabilities, and the stock of
BMC. In connection with the BMC Acquisition, an affiliate of Barnett purchased
shares of HomeSide Lending common stock for an aggregate purchase price of
$118.0 million. Also in connection with the BMC Acquisition, BankBoston and the
Investors paid approximately $42.3 million in cash for additional shares of
HomeSide Lending. The transaction was accounted for using the purchase method of
accounting and, accordingly, the results of operations of HomeSide Lending
include BMC from the date of acquisition. The assets and liabilities of BMC were
recorded by HomeSide Lending at their estimated fair values at May 31, 1996,
which totaled $764.8 million and $521.4 million, respectively. The total
purchase price paid for BMC, including transaction costs and interests, was
$235.0 million. The excess of the purchase price over the fair value of net
assets acquired was $8.4 million and was allocated to goodwill and is being
amortized on a straight-line basis over 15 years.
The unaudited condensed pro forma statement of income for the period from March
16, 1996 to February 28, 1997, assuming BMC had been acquired as of March 16,
1996 is as follows (in millions, except per share data):
Pro Forma for the Period
From March 16, 1996 to
February 28, 1997
Net servicing revenue $167.3
Net interest revenue (4.5)
Net mortgage origination revenue 67.1
Other income 0.7
Total revenues 230.6
Expenses (157.5)
Income before income
taxes and extraordinary loss 73.1
Income tax expense (29.5)
Income before extraordinary loss 43.6
Extraordinary loss (6.4)
========
Net income $ 37.2
========
The purchase accounting adjustments in the above pro forma statement of
operations are based on the actual purchase price and the amount of assets and
liabilities actually acquired. No adjustments have been made for restructuring
costs that might have been incurred or for cost efficiencies that might have
been realized during the period presented. Accordingly, these pro forma results
are not indicative of future results.
<PAGE>
5. MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights is as follows (in thousands):
<TABLE>
<CAPTION>
February 10, 1998 February 28, 1997
<S> <C> <C>
Beginning balance $ 1,596,838 $ -
Additions, including BBMC and BMC acquisitions 416,822 1,665,640
Sales of servicing (342) (25,745)
Net deferred hedge (gain) loss, net of amortization (39,453) 110,637
Amortization (207,508) (153,694)
----------------------- ----------------------
Ending balance $ 1,766,357 $ 1,596,838
======================= ======================
</TABLE>
At February 10, 1998, the net deferred hedge gain of $39.5 million consists of
the net deferred loss for the period from March 16, 1996 to February 28, 1997 of
$110.6 million adjusted for gains of $195.2 million, losses of $52.5 million,
and amortization of $7.4 million. For the period from March 16, 1996 to February
28, 1997, the net deferred hedge loss of $ 110.6 million consists of gains of
$133.3 million and losses of $254.9 million, less $11.0 million of amortization.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
February 10, 1998 February 28, 1997
<S> <C> <C>
Land $ 3,451 $ 3,451
Buildings and building improvements 10,604 10,986
Furniture and equipment 22,464 15,739
Leasehold improvements 14,717 3,808
----------------------- ----------------------
----------------------- ----------------------
51,236 33,984
Accumulated depreciation and amortization (9,254) (4,469)
======================= ======================
Ending balance $ 41,982 $ 29,515
======================= ======================
</TABLE>
7. RESERVE FOR ESTIMATED SERVICING LOSSES ON INVESTOR-OWNED LOANS
An analysis of the reserve for estimated servicing losses on investor-owned
loans is as follows (in thousands):
<TABLE>
<CAPTION>
For the Period For the Period
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
-------- --------
<S> <C> <C>
Beginning balance $ 21,650 $ 11,100
Provision for servicing losses on
investor-owned loans 12,346 13,683
Charge-offs (12,747) (10,295)
Recoveries 401 60
Additions from acquisition of BMC - 7,102
------------------ -----------------
Ending balance $ 21,650 $ 21,650
================== =================
</TABLE>
8. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
Weighted Average Interest Rate
Total Outstanding At Period End During the Period
<S> <C> <C> <C>
Bank line of credit, February 10, 1998 $ 2,074,956 6.00% 6.04%
======================
Bank line of credit, February 28, 1997 $ 1,778,496 5.65% 5.83%
Short-term credit facilities 40,007 8.25% 8.25%
----------------------
Total, February 28, 1997 $ 1,818,503
======================
</TABLE>
HomeSide Lending borrows funds on a demand basis from an independent syndicate
of banks under a $2.5 billion credit facility which, at the request of HomeSide
Lending, may be increased to $3.0 billion. The line of credit is used to provide
funds for HomeSide Lending's business of originating, acquiring and servicing
mortgage loans. The line of credit includes both a warehouse credit facility,
which is limited to 98% of the fair value of eligible mortgage loans held for
sale, and a servicing-related facility, which is capped at $950.0 million. On
February 14, 2000, the line of credit will terminate. The credit agreement
contains covenants that impose limitations and restrictions on HomeSide Lending,
including the maintenance of certain net worth and ratio requirements. Under
certain circumstances set forth in the credit agreement, borrowings under the
agreement become collateralized by substantially all of HomeSide Lending's
assets. HomeSide Lending is in compliance with all requirements included in the
credit agreement. At February 10, 1998 and February 28, 1997, $2.1 billion and
$1.8 billion, respectively, was outstanding under the credit line. Amounts
outstanding at February 10, 1998 and February 28, 1997 under the bank line of
credit are comprised of a warehouse credit facility of $1.2 billion and $0.8
billion and a servicing-related credit facility of $0.9 billion and $0.9
billion, respectively. The amount of the unused bank line of credit was $0.4
billion and $0.7 billion as of February 10, 1998 and February 28, 1997,
respectively.
Borrowings under the bank line of credit bear interest at rates per annum, based
on, at HomeSide Lending's option (A) the highest of (i) the lead bank's prime
rate, (ii) the secondary market rate of certificates of deposit plus 100 basis
points and (iii) the federal funds rate in effect from time to time plus 0.5% or
(B) various rates based on federal fund rates.
On January 15, 1997, HomeSide Lending entered into a short-term credit facility
with a bank in a maximum aggregate principal amount of $85.0 million. On March
14, 1997, HomeSide Lending entered into another short-term credit facility in an
aggregate principal amount of $100.0 million. The facilities each expired on May
1, 1997 and amounts borrowed under these lines were repaid.
9. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
February 10, 1998 February 28, 1997
----------------- -----------------
Medium-term notes $ 750,000 $ -
Mortgage note payable 20,466 21,128
----------------- -----------------
Total $ 770,466 $ 21,128
================= =================
<PAGE>
Medium-term notes
As of February 10, 1998, $650.0 million of the outstanding medium-term notes had
been effectively converted by interest rate swap agreements to floating-rate
notes. The weighted average borrowing rates on medium-term borrowings issued for
the period from March 1, 1997 to February 10, 1998, including the effect of the
interest rate swap agreements, was 6.251% . Net proceeds from the issuance were
primarily used to reduce the amounts outstanding under the bank credit
agreement. Amounts were subsequently reborrowed under the bank credit facility
to fund the early pool buyout program.
As of February 10, 1998, outstanding medium-term notes issued by HomeSide
Lending, Inc., under a $1.0 billion shelf registration statement were as follows
(in thousands):
Issue Date Outstanding Balance Stated Interest Rate Maturity Date
May 20, 1997 $250,000 6.890% May 15, 2000
June 30, 1997 200,000 6.883% June 30, 2002
June 30, 1997 40,000 6.820% July 2, 2001
July 1, 1997 15,000 6.860% July 2, 2001
July 31, 1997 200,000 6.818% August 1, 2004
September 15, 1997 45,000 6.770% tember 17, 2001
----------
Total $750,000
==========
As of February 10, 1998, $250.0 million was available for future issuances under
the shelf registration. On March 6, 1998, HomeSide Lending, Inc. filed an
amendment increasing the shelf registration to $1.5 billion.
Mortgage note payable
HomeSide Lending assumed a mortgage note payable that is due in 2017 and bears
interest at a stated rate of 9.50%. HomeSide Lending's main office building is
pledged as collateral. A purchase accounting premium was recorded in connection
with HomeSide Lending assuming the mortgage note payable.
Principal payments due on long-term debt at February 10, 1998 are as follows (in
thousands):
Fiscal Year
1999 $ 256
2000 250,281
2001 100,309
2002 200,340
2003 373
Thereafter 211,724
Unamortized purchase accounting premium 7,183
==============
Total $ 770,466
==============
Long-term debt of Parent
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 redemption prices. The indenture contains
covenants that impose limitations and restrictions on the Parent, including the
maintenance of certain net worth and ratio requirements. In addition, the Notes
are secured by a second priority pledge of the common stock of HomeSide Lending,
Inc and principal and interest payments on the Notes are funded by dividends
received from HomeSide Lending. The Parent is in compliance with all net worth
and ratio requirements contained in the indenture relating to the notes. The
amount of Notes outstanding at February 10, 1998 is $130.0 million.
On February 5, 1997, the Parent issued 8,452,500 shares of common stock to the
public at $15 per share. A portion of the proceeds from the offering was used to
pre-pay $70.0 million of the Notes at a premium of $7.9 million. In connection
with the early repayment of the Notes, the Parent wrote off a portion of the
unamortized debt issuance costs related to the Notes and incurred a prepayment
penalty equal to one year's interest on the Notes retired . The loss amounted to
$6.4 million, net of tax, and was recorded as an extraordinary item. The
remaining proceeds were used to reduce amounts outstanding under the bank line
of credit.
During the period from March 1, 1997 through February 10, 1998, and the period
from March 16, 1996 through February 28, 1997, HomeSide Lending paid $14.7
million and $17.0 million, respectively, in dividends to the Parent to enable
the Parent to service the debt and pay certain debt issuance costs.
10. INCOME TAXES
The Company files a consolidated federal income tax return. All companies
included in the consolidated federal income tax return are jointly and severally
liable for any tax assessments based on such consolidated return.
Components of the provision for income taxes before the effect of the tax
benefit associated with the early extinguishment of debt were as follows (in
thousands):
For the Period From For the Period From
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
--------------------- ---------------------
Current:
Federal $ 2,856 $ -
State - -
--------------------- ---------------------
$ 2,856 -
Deferred;
Federal 42,462 30,872
State 8,061 6,406
--------------------- ---------------------
$ 50,523 $ 37,278
--------------------- ---------------------
Total $ 53,379 $ 37,278
===================== =====================
The following is a reconciliation of the statutory federal income tax rate to
the effective income tax rate as reflected in the consolidated statements of
income.
For The Period From For The Period From
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
Statutory federal income tax rate 35.0% 35.0%
State income and franchise taxes,
net of federal tax effect 3.5% 4.0%
Other .5% 1.0%
-------------------- -------------------
Effective income tax rate 39.0% 40.0%
==================== ===================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):
February 10, 1998 February 28, 1997
Deferred tax assets:
Net operating loss carryforwards $ 23,114 $ 40,891
Alternative minimum tax credit
carry forward 2,856 -
Loss reserves 25,404 17,563
Hedge activities 30,754 -
Other assets 4,879 12,087
=============== ==============
Total gross deferred tax assets $ 87,007 $ 70,541
=============== ==============
Deferred tax liabilities:
Mortgage servicing fees $ 267,871 $ 207,278
Other liabilities 16,379 5,678
--------------- --------------
Total gross deferred tax liabilities 284,250 212,956
=============== ==============
Net deferred tax liability $ 197,243 $ 142,415
=============== ==============
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which these temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. No valuation allowance
was recorded at February 10, 1998 or February 28, 1997.
The Company has consolidated tax net operating loss carryforwards at February
10, 1998. These carryforwards expire in the years 2002 to 2012.
11. LEASE COMMITMENTS
HomeSide Lending leases office facilities and equipment under noncancelable
leases that include renewal options and escalation clauses which extend into
2004. Rental expense for leases of office facilities and equipment was $4.5
million and $3.9 million for the period March 1, 1997 to February 10, 1998 and
for the period March 16, 1996 to February 28, 1997, respectively. HomeSide
Lending's minimum future lease commitments are as follows (in thousands):
Fiscal Year
1999 $ 2,124
2000 984
2001 800
2002 710
2003 625
Thereafter 700
---------------
Total $ 5,943
===============
12. SUPPLEMENTAL CASH FLOW INFORMATION
In connection with the acquisitions of BBMC and BMC, HomeSide Lending recorded
non-cash assets and assumed liabilities, including fair value adjustments, of
approximately $2.3 billion and $1.7 billion in 1998 and 1997, respectively.
HomeSide Lending paid $58.8 million and $60.1million of interest during the
period from March 1, 1997 to February 10, 1998 and March 16, 1996 to February
28, 1997, respectively. HomeSide Lending paid taxes totaling $0.3 million and
received $51.7 million cash for reinstated loans from early pool buyout advances
for the period from March 1, 1997 to February 10, 1998.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market
information. Where available, quoted market prices are used. In other cases,
fair values are based on estimates using other valuation techniques, such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are significantly affected by the assumptions used and the judgments made
regarding risk characteristics of various financial instruments, prepayments,
discount rates, estimates of future cash flows, future anticipated loss
experience and other factors. Changes in assumptions could significantly affect
these estimates. Derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
an immediate sale of the instrument. Also because of differences in
methodologies and assumptions used to estimate fair value, the Company's fair
values should not be compared to those of other companies.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company. For certain assets and liabilities, the
information required is supplemented with additional information relevant to an
understanding of the fair value.
The methods and assumptions used to estimate the fair values of each class of
financial instruments are as follows:
Cash and cash equivalents
The carrying amount reported in the balance sheet approximates fair value.
Mortgage loans held for sale
Fair values are based on the estimated value at which the loans could be sold in
the secondary market. These loans are priced to be sold with servicing rights
retained, as this is the Company's normal business practice.
Accounts receivable, early pool buyout advances and accounts payable
Carrying amounts are considered to approximate fair value. Accounts payable do
not include the effects of additional costs incurred and additional liabilities
assumed in connection with HomeSide Lending's acquisition by the National.
Risk management contracts
Fair values are estimated based on actual market quotes or option models.
Notes payable
The carrying amount of the notes payable reported in the balance sheet
approximates its fair value due to the short-term nature of the borrowings under
the credit agreements.
Long-term debt
Fair value of long-term debt is estimated by discounting estimated future cash
flows using a rate consistent with the Company's current borrowing rate as
adjusted for the effects of certain prepayment penalties.
Commitments to originate mortgage loans
Fair value is estimated using quoted market prices for securities backed by
similar loans adjusted for differences in loan characteristics.
Forward contracts to sell mortgages
Forward contracts to sell mortgages, which represent legally binding agreements
to sell loans to permanent investors at a specified price or yield, are valued
using market prices for securities backed by similar loans and are reflected in
the fair values of the mortgages held for sale, to the extent that these
commitments relate to mortgage loans already originated, or of the related
commitments to extend credit.
Options on mortgage-backed securities and U.S. treasury bond futures
The fair values of options are estimated based on actual market quotes. In some
instances, quoted prices for the underlying loans or valuations determined by
option models are used.
Interest rate swaps
The fair values of interest rate swaps are estimated based on dealer quotes.
Fair Value
The fair values of the Company's financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
February 10, 1998 February 28, 1997
----------------- -----------------
Carrying Fair Carrying Fair
<S> <C> <C> <C> <C>
Amount Value Amount Value
ASSETS
Cash and cash equivalents $ 32,113 $ 32,113 $ 52,691 $ 52,691
Mortgage loans held for sale 1,292,403 1,296,685 805,274 806,432
Accounts receivable and early pool buyout
advances 601,391 601,391 157,518 157,518
Risk management contracts for
mortgage servicing rights 43,947 43,947 45,212 45,212
LIABILITIES
Notes payable 2,074,956 2,074,956 1,818,503 1,818,503
Long-term debt 770,466 799,893 21,128 21,128
Accounts payable and accrued liabilities 135,802 135,802 123,231 123,231
Off-balance sheet(1)
Commitments to originate mortgage loans -- (1,510) -- (2,805)
Mandatory forward contracts to sell mortgages -- (3,621) -- 3,588
Mandatory forward contracts to sell U.S.
Treasuries -- 65 -- 7
Option contracts on mortgage-backed
securities 3,543 5,890 2,025 1,741
Option contracts on U.S. treasury bond futures 743 604 321 (147)
Interest rate swaps -- 13,496 -- --
- -----------------------------
(1) Parenthesis denote a liability
</TABLE>
Fair value estimates are made as of a specific point in time, based on relevant
market data and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale the
Company's entire holding of a particular financial instrument. Because no active
market exists for some portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, current interest rates and prepayment
trends, risk characteristics of various financial instruments and other factors.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and, therefore, cannot be determined with precision.
Changes in any of these assumptions used in calculating fair value would also
significantly affect the estimates. Further, the fair value estimates were
calculated as of February 10, 1998 and February 28, 1997. Subsequent changes in
market interest rates and prepayment assumptions could significantly change the
fair value.
14. RISK MANAGEMENT AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
As discussed in Note 3, HomeSide Lending utilizes risk management financial
instruments to manage interest rate risk related to the value of its mortgage
servicing rights. A summary of HomeSide Lending's position in risk management
financial instruments at February 10, 1998 and February 28, 1997 is included
below.
The fair value of HomeSide Lending's risk management contracts is based on
quoted market prices of the underlying instruments at February 10, 1998 and
February 28, 1997. The notional amounts represent the par value of the
underlying U.S. Treasury bonds. However, the notional amounts are not recognized
in the balance sheet and should not be considered as a measure of credit risk or
future cash requirement.
The amount of the risk management contracts maintained depends on factors such
as interest rates, interest volatility and growth in the mortgage servicing
portfolio. HomeSide Lending is subject to market risk to the extent that
interest rates fluctuate; however, the purpose of the risk management contracts
is to hedge the value of the mortgage servicing rights portfolio. HomeSide
Lending's risk management financial instruments qualify as hedges, and gains or
losses on the risk management instruments correlate to movements in the value of
the mortgage servicing rights. Cash requirements for HomeSide Lending's option
contracts are limited to premiums paid. Cash requirements for futures contracts
are managed based on limits established by HomeSide Lending's risk management
committee. HomeSide Lending's credit risk on its risk management contracts is
limited because the contracts are traded on a national exchange which guarantees
counterparty performance.
As discussed in Note 3, HomeSide Lending purchases financial instruments and
enters into financial agreements with off-balance sheet risk in the normal
course of business through the origination and selling of mortgage loans and as
part of its risk management programs. These instruments involve, to varying
degrees, elements of credit and interest rate risk. Credit risk is the
possibility that a loss may occur if a counterparty to a transaction fails to
perform according to the terms of the contract. Interest rate risk is the
possibility that a change in interest rates will cause the value of a financial
instrument to decrease or become more costly to settle.
Options and forward contracts
The notional amount of the options and forward contracts used in HomeSide
Lending's risk management programs is the amount upon which interest and other
payments under the contract are based and is generally not exchanged. Therefore,
the notional amounts should not be taken as the measure of credit risk or a
reflection of future cash requirements. The risk associated with options and
forwards is the exposure to current and expected market movements in interest
rates and the ability of the counterparties to meet the terms of the contracts.
The cash requirements associated with these options and forward contracts, aside
from the initial purchase price, are minimal. These contracts generally require
future performance on the part of the counterparty upon exercise of the option
or execution of the forward contract by HomeSide Lending.
HomeSide Lending is exposed to credit loss in the event of nonperformance by the
counterparties to the various instruments. HomeSide Lending controls credit and
market risk associated with interest rate products by establishing and
monitoring limits with counterparties as to the types and degree of risks that
may be undertaken. HomeSide Lending's exposure to credit risk in the event of
default by the counterparties for the options is $57.0 million at February 10,
1998.
HomeSide Lending's exposure to credit risk in the event of default by the
counterparty for mandatory forward commitments to sell mortgage loans is the
difference between the contract price and the current market price, offset by
any available margins retained by HomeSide Lending or an independent clearing
agent, which totaled $30.2 million at February 10, 1998. The amount of credit
risk as of February 10, 1998, if all counterparties failed completely and if the
margins, if any, retained by HomeSide Lending or an independent clearing were to
become unavailable, was approximately $4.4 million for mandatory forward
commitments of mortgage-backed securities.
The following is a summary of HomeSide Lending's notional amounts and fair
values of interest rate products (in thousands):
<TABLE>
<CAPTION>
February 10, February 28, 1997
1998
Notional Notional
Amount FairValue(1) Amount Fair Value (1)
------ ------------ ------ --------------
<S> <C> <C> <C> <C>
Purchased commitments to sell Mortgage loans:
Mandatory forward contracts $ 2,847,668 $ (3,556) $ 1,445,345 $ 3,588
Options on mortgage-backed
securities 835,000 5,890 755,000 1,741
Options on U.S. treasury
bond futures 145,000 604 140,000 (147)
Risk management contracts on
mortgage servicing rights:
Options on U.S. treasury
bond futures 4,440,100 50,487 3,572,300 45,212
Futures contracts on U.S. treasury
bonds 2,121,800 (6,540) -- --
- ------------------------------------------------
(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.
</TABLE>
Commitments to originate mortgage loans
HomeSide Lending regularly enters into commitments to originate and purchase
mortgage loans at a future date subject to compliance with stated conditions.
Commitments to originate mortgage loans have off-balance sheet risk to the
extent HomeSide Lending does not have matching commitments to sell loans, which
exposes HomeSide Lending to lower of cost or market valuation adjustments in a
rising interest rate environment. Additionally, the extension of a commitment,
which is subject to HomeSide Lending's credit review and approval policies,
gives rise to credit exposure when certain borrowing conditions are met and the
loan is made. Until such time, it represents only potential exposure. The
obligation to lend may be voided if the customer's financial condition
deteriorates or if the customer fails to meet certain conditions. Commitments to
originate mortgage loans do not necessarily reflect future cash requirements
since some of the commitments will not be drawn upon before expiration.
Commitments to originate mortgage loans totaled $3.2 billion and $2.7 billion at
February 10, 1998 and February 28, 1997, respectively.
Mortgage loans sold with recourse
HomeSide Lending sells mortgage loans with recourse to various investors and
retains the servicing rights and responsibility for credit losses on these
loans. The total outstanding balance of loans sold with recourse does not
necessarily represent future cash outflows. The total outstanding principal
balance of loans sold with recourse was $16.7 million and $14.2 million at
February 10, 1998 and February 28, 1997, respectively.
For five years following the May 31, 1996 acquisition of BMC, Barnett is
obligated to repurchase or reimburse HomeSide Lending for any credit losses
related to $101.0 million of loans serviced with recourse.
Servicing commitment to investors
HomeSide Lending is required to submit to certain investors, primarily GNMA,
guaranteed principal and interest payments from the underlying mortgage loans
regardless of actual collections.
Purchase mortgage servicing rights commitments
HomeSide Lending routinely enters into commitments to purchase mortgage
servicing rights associated with mortgages originated by third parties, subject
to compliance with stated conditions. These commitments to purchase mortgage
servicing rights correspond to mortgage loans having an aggregate loan principal
balance of approximately $0.6 billion and $2.3 billion at February 10, 1998 and
February 28, 1997, respectively.
Geographical concentration of credit risk
HomeSide Lending is engaged in business nationwide and has no material
concentration of credit risk in any geographic region.
15. OTHER RELATED PARTY TRANSACTIONS
HomeSide Lending entered into an agreement with BankBoston and Barnett for
certain corporate support services. For the period March 1, 1997 through
February 10, 1998, HomeSide Lending paid BankBoston and Barnett approximately
$5.2 million and $0.5 million, respectively, for these services. For the period
March 16, 1996 to February 28, 1997, HomeSide Lending paid BankBoston and
Barnett approximately $2.5 million and $0.9 million, respectively, for these
services.
HomeSide Lending purchases mortgage loans eligible for sale from BankBoston and
Barnett. For the period March 1, 1997 through February 10, 1998, HomeSide
Lending paid approximately $5.3 million and $45.4 million, respectively, to
BankBoston and Barnett for the purchase of mortgage servicing rights. For the
period from March 1, 1996 through February 28, 1997, HomeSide Lending paid
approximately $4.7 million and $27.6 million, respectively, to BankBoston and
Barnett for the purchase of mortgage servicing rights. HomeSide Lending also
purchases the mortgage servicing rights to the mortgage loans BankBoston and
Barnett hold in their portfolios. For the period March 1, 1997 through February
10, 1998, HomeSide Lending purchased mortgage servicing rights for loans
retained by BankBoston and Barnett totaling approximately $1.6 million and $9.5
million, respectively. For the period from March 16, 1996 to February 28, 1997
HomeSide Lending purchased mortgage servicing rights for loans retained by
BankBoston and Barnett totaling approximately $1.3 million and $8.2 million,
respectively. The BankBoston and Barnett purchases represent 2.8% and 20.4%,
respectively, of the Company's total production for the period from March 1,
1997 to February 10, 1998. For the period of March 16, 1996 through February 28,
1997, the BankBoston and Barnett purchases represented 2.8% and 16.0 %,
respectively, of the Company's total production.
HomeSide Lending services residential mortgage loans held in portfolio by
BankBoston and Barnett. The servicing fees paid by BankBoston and Barnett to
HomeSide Lending are market-based fees consistent with the fees charged by
HomeSide Lending to other investors. For the period March 1, 1997 to February
10, 1998, BankBoston and Barnett paid $3.8 million and $29.1 million in
servicing fees, respectively. For the period March 16, 1996 to February 28,
1997, BankBoston and Barnett paid $5.3 million and $ 23.6 million in servicing
fees, respectively.
As a result of NationsBank Corporation's acquisition of Barnett Banks, Inc., the
Company agreed to release Barnett from a five year agreement to sell certain of
its mortgage loans to HomeSide Lending. In consideration, the Company received
the right to purchase $5.0 billion in mortgage servicing rights, an increase in
the weighted average servicing fee for Barnett portfolio loans currently
serviced, and will receive $3.0 million cash in June 1998.
16. CONTINGENCIES
HomeSide Lending, along with its subsidiaries, is a defendant in a number of
legal proceedings arising in the normal course of business. HomeSide Lending, 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 Lending, considers that the
aggregate liabilities or loss, if any, resulting from the final outcome of these
proceedings will not have a material effect on the financial position, results
of operations or liquidity of HomeSide Lending.
17. EMPLOYEE BENEFITS
HomeSide Lending offers a 401(k) defined contribution benefit plan in which
employees may contribute a portion of their compensation. Substantially all
employees are eligible for participation in the plan. The Company matches 100%
of amounts contributed up to 4% of an employee's compensation. Further, the
Company may contribute additional amounts at its discretion. Total expense
related to the benefit plan was approximately $3.0 million and $4.0 million for
the period from March 1, 1997 to February 10, 1998 and the period from March 16,
1996 to February 28, 1997, respectively.
18. QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
For the Period From For the Three Months For the Three Months For the Three Months
December 1, 1997 to Ended November 30, Ended August 31, Ended May 31,
February 10, 1998 1997 1997 1997
----------------- ---- ---- ----
<S> <C> <C> <C> <C>
(in thousands, except share data)
Revenue $ 65,264 $ 75,619 $ 76,330 $ 70,727
Expenses 38,241 39,432 37,454 35,943
Provision for income taxes 11,433 14,577 14,391 12,978
------------------------- ---------------------- ---------------------- ---------------------
Net income $ 17,888 $ 22,801 $ 22,507 $ 20,295
========================= ====================== ====================== =====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Period From For the Three Months For the Three Months For the Three Months
December 1, 1997 to Ended November 30, Ended August 31, Ended May 31,
February 10, 1998 1997 1997 1997
----------------- ---- ---- ----
<S> <C> <C> <C> <C>
(in thousands, except share data)
Revenue $ 68,841 $ 68,073 $ 63,640 $ 36,087
Expenses 39,987 40,335 40,515 22,609
Provision for income taxes 10,898 11,373 9,481 5,526
------------------------- ---------------------- ---------------------- ---------------------
Net income $ 17,956 $ 16,365 $ 13,644 $ 7,952
========================= ====================== ====================== =====================
</TABLE>
19. SUBSEQUENT EVENTS
On April 1, 1998, HomeSide Lending entered into an agreement with Banc One
Mortgage Corporation ("Banc One") to acquire the mortgage servicing assets of
Banc One. HomeSide Lending and Banc One have also entered into a Preferred
Partner agreement, whereby Banc One will sell a significant portion of its
residential mortgage loans to HomeSide Lending over the next five years. The
total purchase consideration is $201.0 million cash. The mortgage servicing
rights acquired relate to mortgage servicing loans of approximately $18 billion.
The transaction is subject to regulatory approvals and is expected to close late
in the second calendar quarter of 1998.
On April 6, 1998, the Company signed an agreement with NationsBank Corporation
whereby NationsBank agreed to sell HomeSide Lending a national wholesale
mortgage loan network which was formerly owned by Barnett Banks, Inc.
Effective April 30, 1998, HomeSide, Inc., the Parent, amended its charter
to change its name to HomeSide International, Inc.
<PAGE>
BBMC (Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide
Lending, Inc.)
ITEM 6. Summary Historical Consolidated Financial and Operating Information
The following table sets forth summary historical consolidated financial
and operating information for BBMC (formerly BancBoston Mortgage Corporation and
the Predecessor to the Issuer) 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 and the
Notes thereto and in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of BBMC included elsewhere in
this document.
<TABLE>
<CAPTION>
For the Period
From January 1,
Years ended December 31, 1996 to March 15,
------------------------------------------------- ---------------------
1993 1994 1995 1996
---------------- --------------- ---------------- ---------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Consolidated Statements of Operations
Data:
Revenues:
Mortgage servicing fees $ 111,822 $ 140,491 $ 173,038 $ 38,977
Gain (loss) on risk management contracts 6,688 (6,702) 108,702 (128,795)
Amortization of mortgage servicing rights (112,492) (66,801) (108,013) (7, 245)
---------------- --------------- ---------------- ---------------------
Net servicing revenue 6,018 66,988 173,727 (97,063)
Interest income 50,156 31,585 24,324 8,423
Interest expense (44,199) (33,952) (27,128) (10,089)
---------------- --------------- ---------------- ---------------------
Net interest revenue 5,957 (2,367) (2,804) (1,666)
Net mortgage origination revenue (expense) 6,173 4,983 3,417 7,638
Gain on sales of servicing rights 651 10,862 10,230 --
Other income 50 147 511 253
---------------- --------------- ---------------- ---------------------
Total revenues 18,849 80,613 185,081 (90,838)
Expenses:
Salaries and employee benefits 33,096 40,370 45,381 10,287
Occupancy and equipment 7,966 9,012 10,009 2,041
Servicing losses on investor-owned loans 2,770 7,177 9,981 5,560
Real estate acquired 1,600 253 1,054 291
Other expenses 22,058 19,326 21,896 7,377
---------------- --------------- ---------------- ---------------------
Total expenses 67,490 76,138 88,321 25,556
Income (loss) before income taxes and
cumulative effects of changes in
accounting principles $ (48,641) $ 4,475 $ 96,760 $ (116,394)
================ =============== ================= ====================
Net income (loss) $ (85,185) $ 5,405 $ 58,826 $ (73,861)
================ =============== ================ =====================
Selected Balance Sheet Data (at Period
end):
Mortgage loans held for sale $ 607,506 $ 271,215 $ 388,436 $ 628,504
Mortgage servicing rights 281,727 431,148 551,338 542,862
Total assets 1,193,583 1,006,887 1,254,303 1,520,357
Note payable to Bank of Boston 1,019,011 779,021 966,000 1,256,000
Total Liabilities 1,071,223 879,122 1,067,712 1,407,627
Total stockholders' equity 122,360 127,765 186,591 112,730
Selected Operating Data
Volume of loans originated and acquired $ 13,682,761 $4,473,000 $9,567,521 $ 4,187,603(a)
Loan servicing portfolio (at period end) 27,999,100 37,971,200 41,555,354 44,158,163(a)
Loan servicing portfolio (average) 25,852,400 33,178,600 39,283,700 43,158,072(a)
Weighted average interest rate (at period
end) 8.07% 7.91% 7.97% 7.90%(a)
Weighted average servicing fee (average
for period) 0.372% 0.389% 0.383% 0.380%(a)
- -------------------------
(a) Period information is for the period January 1, 1996 to March 31, 1996 and
period end information is at March 31, 1996.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS BANCBOSTON MORTGAGE CORPORATION--FOR THE
PERIODS JANUARY 1, 1996 TO MARCH 15, 1996 AND JANUARY 1, 1995 TO MARCH 31,
1995 AND FOR THE YEAR ENDED DECEMBER 31, 1996
General
Prior to March 15, 1996, BBMC was a wholly-owned subsidiary of Bank of
Boston, a subsidiary of Bank of Boston Corporation ("BKBC"). On March 15, 1996,
BBMC was acquired by HomeSide. The interim financial statements of BBMC have
been prepared for the period January 1, 1996 to March 15, 1996 to coincide with
the closing of the BBMC 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.
BBMC reported earnings on a calendar year basis.
BBMC operates as a full-service mortgage banking firm emphasizing
wholesale mortgage originations and low cost mortgage servicing. Servicing
activities represent BBMC's primary revenue source. BBMC also generates revenue,
to a lesser extent, from mortgage loan origination fees. BBMC incurs expenses
for amortization of mortgage servicing rights, interest on its line of credit
and general corporate activities.
On June 1, 1995, BBMC 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 BancBoston Mortgage Corporation for further
discussion.
Results of Operations
Summary
BBMC 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, BBMC had income of $58.8 million in 1995 and $2.0
million in 1994. See Note 2 of Notes to Consolidated Financial Statements for
further discussion of BBMC'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 BBMC's servicing portfolio. The lower interest rate environment
resulted in a gain related to BBMC's risk management activities in 1995 as
compared to a loss in 1994. BBMC also benefited from a 9% increase in the
balance of 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 larger mortgage 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 BBMC's
mortgage 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
affected BBMC's results of operations for the first quarter. BBMC 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 of $128.8 million on BBMC's risk management contracts
during the first quarter of 1996, a result of increasing interest rates in late
February and March 1996.
Net Servicing Revenue
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 growth was
comprised of a $115.4 million increase 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 BBMC's average servicing portfolio during 1995. Average servicing
fees, excluding ancillary income, decreased slightly from 0.389% in 1994 to
0.383% in 1995.
At December 31, 1995, BBMC serviced approximately 510,000 loans,
including loans purchased not yet on BBMC's servicing system, with an unpaid
principal balance ("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
BBMC's servicing portfolio was primarily generated by wholesale loan production,
which includes correspondent, co-issue and broker channels. BBMC also purchased
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 as a component of mortgage servicing revenue. BBMC
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 BBMC's servicing portfolio size and average loan size.
The higher average loan size 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, BBMC had net servicing revenues of
$(97.1) million, as compared to servicing revenues of $24.2 million in the first
quarter of 1995. The net negative amount recorded as servicing revenue in 1996
was primarily due to losses on BBMC'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, BBMC 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, BBMC experienced losses on risk management contracts of
$128.8 million during the quarter. Changes in the value of BBMC'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 BBMC 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 favorable effect on the prepayment estimates used in
calculating BBMC's periodic amortization expense. Because mortgage servicing
rights are amortized over the expected period of service fee revenues, a
reduction in mortgage prepayment activity typically results in a longer
estimated life of the mortgage servicing asset and, accordingly, lower
amortization expense. Amortization charges are highly dependent upon the level
of prepayments during the period and changes in prepayment expectations, which
are significantly influenced by the direction and level of long-term interest
rate movements.
Risk Management Activities
BBMC had 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 BBMC would expect to receive from servicing such loans was reduced. Because
the value of the mortgage servicing rights is based on the present value of the
net 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, BBMC purchased risk
management contracts that increased in value when long-term interest rates
declined, or when prepayment speeds increased above a specified level. During
1994 and 1995, BBMC 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
BBMC's risk management position was designed to perform inversely with changesin
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. BBMC 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 BBMC's financial results
because the value of the associated service rights exceeded its book value. Due
to a rising interest rate environment, BBMC experienced a $6.7 million loss
related to its risk management contracts in 1994.
BBMC 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 BBMC in
March 1996, BBMC 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 BBMC'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 BBMC because servicing rights are recorded at the
lower of amortized cost or market value.
Net Interest Revenue/Expense
Net interest expense was $2.4 million in 1994 and $2.8 million in 1995.
Interest income decreased $7.3 million in 1995 as compared with 1994, 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 income on warehouse
loans was partially offset by a $2.1 million increase in interest earned on
mortgage loans held for investment. Interest expense decreased $6.8 million in
1995 as compared with 1994 as a result of a decline in the average rate paid on
BBMC's borrowings from 7.14% in 1994 to 6.89% in 1995.
Net interest expense decreased from $2.0 million in the first quarter
of 1995 to $1.7 million in the first quarter of 1996. Interest income increased
in the first quarter of 1996 as compared with the first quarter of 1995 as a
result of an increase in the average balance of mortgage loans held for sale
from $124.6 million during the first quarter of 1995 to $535.6 million during
the first quarter of 1996. Increased loan production volumes, $4.2 billion in
the first quarter of 1996 compared to $1.2 billion in the first quarter of 1995,
created the increased average balance of mortgage loans held for sale. In
addition, an increase in long-term interest rates during February and March 1996
improved the yield on its mortgage loans held for sale. Interest expense
incurred on BBMC's credit facility with Bank of Boston increased in the first
quarter of 1996 as compared with the first quarter of 1995 as a result of the
increase in the average balance of BBMC's loans held for sale. In the first
quarter of 1996 as well as the first quarter of 1995, interest earned on loans
held for sale was less than interest expense on borrowings, thereby creating net
interest expense for BBMC; but the increase in long-term interest rates during
February and March 1996, without a corresponding increase in short-term rates on
BBMC's credit facility, resulted in a decrease in net interest expense in the
first quarter of 1996 as compared with the first quarter of 1995.
Net Mortgage Origination Revenue
Net mortgage origination revenue decreased from $5.0 million in 1994 to
$3.4 million in 1995. Lower production volumes and gains on sales of mortgage
loans were the primary reasons for this decline.
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 SFAS No. 122, "Accounting for Mortgage
Servicing Rights" as of January 1, 1996, which had the effect of increasing net
mortgage origination revenue by $3.1 million. In previous periods, the cost of
mortgage servicing rights for originated loans was included in the basis of the
related loan. SFAS No. 122 requires that the cost of an originated loan be
allocated between the loan sold and the servicing rights retained. Consequently,
the cost basis of loans originated in 1996 was lower than the basis that would
have been recorded prior to the adoption of SFAS No. 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 from $10.9 million in 1994
to $10.2 million in 1995. Gains on sales of servicing rights represent the
excess of proceeds from the sale over the cost basis of the assets. Gains tend
to be higher on sales of servicing rights with little or no cost basis, as was
the case for BBMC's sales in 1994. The servicing rights sold during 1994
consisted primarily of retail originated loans and consequently had relatively
low cost basis. 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.
Gain on sales of servicing rights during the first quarter of 1995 was
$4.3 million. There were no sales of servicing rights during the first quarter
of 1996.
Salaries and Employee Benefits
Salaries and employee benefits increased from $40.4 million in 1994 to
$45.4 million in 1995, or 12.4%. Including capitalized direct loan origination
costs (principally salary and employee benefits), salaries and employee benefits
increased from $51.5 million to $56.5 million from 1994 to 1995, or 9.7%. The
increase included a $3.9 million increase in salaries and a $1.1 million
increase in benefits and were the result of a larger staff needed to support
BBMC's growing servicing portfolio. The increases in salaries and benefits were
partially offset by the outsourcing of certain default administration and tax
payment administration activities during 1995. BBMC 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 from $11.7 million
in the first quarter of 1995 to $10.3 million in the first quarter of 1996, or
12.1%. If capitalized direct loan origination costs (principally salary and
employee benefits) were included, the salaries and employee benefits increased
from $12.8 million in the first quarter of 1995 to $13.5 million in the first
quarter of 1996, or 5.8%. 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. 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
Servicing losses on investor-owned loans primarily represent
anticipated 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 experience as a servicer of government loans.
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. In
1994 and 1995, BBMC recorded provisions in excess of actual foreclosure
losses. Management believes that BBMC had 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 BancBoston Mortgage Corporation.
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 BBMC. The increase in the VA marketing rate effectively
represents a potential increase in BBMC's exposure on properties conveyed to the
VA. BBMC 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 BBMC 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 BBMC Acquisition, BKB retained all real
estate owned.
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 Expenses
Other expenses increased from $19.3 million to $21.9 million, or 13.3%,
from 1994 to 1995. The increase in other expenses 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 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
also increased with the larger BBMC servicing volume. Software costs increased
as BBMC 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.
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 BBMC'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
BBMC 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 BBMC'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 BancBoston
Mortgage Corporation.
BBMC'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 BBMC'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, BBMC changed its method of accounting for mortgage
servicing fees from the cash basis to the accrual basis. See Note 2 of Notes to
Consolidated Financial Statements of BancBoston Mortgage Corporation for further
discussion of BBMC'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 BBMC in 1996.
Liquidity and Capital Resources
Overview
BBMC's primary sources of cash were revenues earned from the servicing
of mortgage loans, sales of mortgage loans and servicing rights and borrowings
under BBMC's warehouse line of credit. BBMC's primary uses of cash were to fund
loan originations and purchases, purchase bulk servicing rights, repay its
warehouse line of credit and pay general corporate expenses. BBMC had a net
increase (decrease) in cash of ($4.8 million) and $0.3 million in 1995 and 1994,
respectively, and ($4.4 million) and $22.4 million in the first quarter of 1995
and the first quarter of 1996, respectively.
The net decrease in cash in 1995 compared with 1994 was primarily
attributable to the use of cash to meet growth in loan origination volume and
purchases of mortgage servicing rights, coupled with a reduction in proceeds on
sales of mortgage loans. Declining interest rates in 1995 increased loan
production across the industry. Cash inflows in 1995 were positively affected by
an increase in the proceeds from risk management contracts, which increased in
value as a result of the decline in interest rates.
Prior to the BBMC Acquisition, a line of credit with Bank of Boston 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 BBMC. 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.
Net cash provided by operating activities and investing activities
decreased in the first quarter of 1996 as compared with the first quarter of
1995, principally as a result of an increase in net cash used in the origination
and purchase of loans held for sale and in the purchase and origination of
mortgage servicing rights and the purchase of risk management contracts. These
increases were the result of higher loan production levels and an increasing
loan servicing portfolio. As a result of increased loan production and held for
sale balances in the first quarter of 1996 as compared to the first quarter of
1995, BBMC had net borrowings of $290.0 million on its line of credit with Bank
of Boston during the first quarter of 1996, as opposed to net repayments of
$130.5 million on the line of credit during the first quarter of 1995.
Impact of Inflation
Inflation affects BBMC primarily through its effect on interest rates
because interest rates normally increase during periods of high inflation and
decrease during periods of low inflation.
New Accounting Standard
In May 1995, FASB issued 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, 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. BBMC adopted this Statement
effective January 1, 1996.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
BancBoston Mortgage Corporation
We have audited the accompanying consolidated balance sheet of BancBoston
Mortgage Corporation as of December 31, 1995, and the related consolidated
statements of operations and retained earnings and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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, 1995, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
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
<PAGE>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
BancBoston Mortgage Corporation
We have audited the accompanying consolidated balance sheet of BancBoston
Mortgage Corporation and subsidiaries (see Note 1) as of March 15, 1996, and the
related consolidated statements of operations and retained earnings and cash
flows for the period from January 1, 1996 to March 15, 1996. 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 audit.
We conducted our audit 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 audit provides 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 and subsidiaries as of March 15, 1996 and the consolidated
results of their operations and their cash flows for the period from January 1,
1996 to March 15, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Jacksonville, Florida
March 14, 1997
<PAGE>
<TABLE>
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending, Inc. -- Note 1)
CONSOLIDATED BALANCE SHEETS
<CAPTION>
At December 31, 1995 At March 15, 1996
(in thousands)
----------------------- ----------------------
<S> <C> <C>
ASSETS
Cash................................................. $ 830 $ 23,216
Mortgage loans
Held for sale, net................................. 388,436 628,504
Held for investment................................ 33,183 65,068
Purchased mortgage servicing rights, net............. 533,891 522,469
Excess mortgage servicing receivable, net............ 17,447 20,393
Accounts receivable.................................. 82,473 65,599
Accounts receivable from Bank of Boston and affiliates 343 --
Pool loan purchases.................................. 65,272 56,261
Mortgage claims receivable, net...................... 45,422 17,563
Accrued income tax receivable........................ -- 40,867
Deferred tax asset................................... 40,724 36,390
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 $1,520,357
======================= ======================
LIABILITIES & STOCKHOLDER'S EQUITY
Note payable to Bank of Boston....................... $966,000 $1,256,000
Accounts payable and accrued liabilities............. 51,683 137,837
Accrued income taxes................................. 36,213 --
Long-term debt....................................... 13,816 13,790
----------------------- ----------------------
Total liabilities.......................... 1,067,712 1,407,627
----------------------- ----------------------
Commitments and Contingencies (Notes 9, 11, 12, 13, 15, and 16)
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)............ 29,925 (43,936)
----------------------- ----------------------
Total stockholder's equity................. 186,591 112,730
======================= ======================
Total Liabilities and Stockholder's Equity. $1,254,303 $1,520,357
======================= ======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending, Inc. -- Note 1)
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<CAPTION>
For the Period
Year Ended January 1, 1996
December 31, through
1995 March 15, 1996
---- --------------
(In thousands)
<S> <C> <C>
Revenues:
Mortgage servicing fees...................... $ 173,038 $ 38,977
Gain (loss) on risk management contracts..... 108,702 (128,795)
Amortization of mortgage servicing rights.... (108,013) (7,245)
--------------------- -------------------------
Net servicing revenues.................... 173,727 (97,063)
--------------------- -------------------------
Interest income.............................. 24,324 8,423
Interest expense............................. (27,128) (10,089)
--------------------- -------------------------
Net interest revenue (expense)............ (2,804) (1,666)
--------------------- -------------------------
Net mortgage origination revenue............. 3,417 7,638
Gain on sales of servicing rights............ 10,230 --
Other income................................. 511 253
--------------------- -------------------------
Total Revenues....................... 185,081 (90,838)
--------------------- -------------------------
Expenses:
Salaries and employee benefits............... 45,381 10,287
Occupancy and equipment...................... 10,009 2,041
Servicing losses on investor-owned loans..... 9,981 5,560
Real estate acquired......................... 1,054 291
Other expenses............................... 21,896 7,377
--------------------- -------------------------
Total Expenses....................... 88,321 25,556
--------------------- -------------------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle..... 96,760 (116,394)
Income tax expense (benefit) before cumulative
effect of change in accounting principle:
Current...................................... 47,646 (46,867)
Deferred..................................... (9,712) 4,334
--------------------- -------------------------
Total Income Tax Expense (Benefit)... 37,934 (42,533)
--------------------- -------------------------
Net Income (Loss).................... 58,826 (73,861)
Retained Earnings (Accumulated Deficit), January 1 (28,901) 29,925
===================== =========================
Retained Earnings (Accumulated Deficit), end of
period....................................... $29,925 $ (43,936)
===================== =========================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending, Inc. -- Note 1)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the Period
Year Ended January 1, 1996
December 31, through
1995 March 15, 1996
(In thousands)
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss)........................... $ 58,826 $ (73,861)
Adjustments to reconcile net income (loss)
to cash
provided by (used in) operations:
Cumulative effect of change in
accounting for -- --
mortgage servicing fees, net of tax....
Amortization............................. 108,404 7,327
Depreciation............................. 3,133 719
Servicing losses on investor-owned loans. 9,981 5,560
Deferred tax (benefit) expense........... (9,712) 4,334
Gain on sale of mortgage servicing rights (10,230) --
(Gain) loss on risk management contracts. (108,702) 128,795
Write down of real estate acquired....... 1,699 1,067
Capitalized excess mortgage servicing
receivable............................. (7,513) (3,967)
Mortgage loans originated and purchased
for (4,816,964) (2,027,741)
sale...................................
Proceeds and principal repayments of
mortgage 4,694,909 1,787,673
loans held for sale....................
Change in accounts receivable............ (16,053) 17,217
Change in pool loan purchases............ 12,205 9,011
Change in mortgage claims receivable..... (5,383) 25,863
Change in accrued income taxes........... 31,388 (77,080)
Change in other assets and accounts
payable and (11,899) 82,622
accrued liabilities....................
---------------- ----------------
Net cash provided by (used in) operating
activities............................. (65,911) (112,461)
---------------- ----------------
Cash flows provided by (used in) investing
activities:
Principal payments on (net origination) of
mortgage
loans 12,966 (31,885)
held for investment......................
Purchase of premises and equipment.......... (3,141) (404)
Acquisition of Bell Mortgage................ (891) --
Purchase of mortgage servicing rights....... (193,013) (60,171)
Proceeds from (amounts paid for) risk
management 27,120 (63,426)
contracts, net...........................
Proceeds from real estate acquired.......... 2,610 759
Proceeds from sales of mortgage servicing 28,649 --
rights........................................
---------------- ----------------
Net cash used in investing activities.... (125,700) (155,127)
---------------- ----------------
Cash flows provided by (used in) financing activities:
Borrowings from Bank of Boston.............. 3,669,085 1,692,500
Repayments to Bank of Boston................ (3,482,106) (1,402,500)
Repayment of long-term debt................. (191) (26)
---------------- ----------------
Net cash provided by (used in) financing
activities............................. 186,788 289,974
---------------- ----------------
Net increase (decrease) in cash............... (4,823) 22,386
Cash at January 1........................... 5,653 830
================ ================
Cash at end of period....................... $ 830 $ 23,216
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................. $ 27,498 $ 9,211
Income taxes............................. $ 16,258 $ 30,213
================ ================
Supplemental schedule of non-cash investing
activities:
BBMC purchased bulk mortgage servicing
rights
during the years 1994 and 1995. In $ 23,022 $ --
conjunction
with purchases, accounts payable were
assumed.......................................
================ ================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
BancBoston Mortgage Corporation ("BBMC" or the "Company") was a
wholly-owned subsidiary of The First National Bank of Boston ("Bank of Boston"),
which was a wholly-owned subsidiary of Bank of BostonCorporation. 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
received cash and an equity interest in the new company, HomeSide, Inc. The
Investors
acquired majority interest in HomeSide, Inc. The transaction closed March 15,
1996. Upon completion of the transaction, BBMC was renamed HomeSide Lending,
Inc. BBMC is the Predecessor company to both HomeSide, Inc. and HomeSide
Lending, Inc.
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
HomeSide, Inc. Barnett received cash and an ownership interest in HomeSide, Inc.
The transaction closed May 31, 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. These
financial statements have been prepared using the carrying values of BBMC and do
not reflect the purchase of BBMC as discussed in Note 1.
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.
Specifically, management adjusts the amount of amortization recorded based on
the effect of anticipated changes in prepayment speeds.
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 15, 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. Unamortized
premiums are included in other assets on the balance sheet. At March 15, 1996,
BBMC had call options to purchase mortgage-backed securities with a total face
amount of $653.0 million. The unamortized premiums associated with these options
were $2.6 million at March 15, 1996. 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 March
15, 1996, the current market value of these option contracts included in
mortgage servicing rights was $20.2 million. Unrealized gains (losses) at
December 31, 1995 and March 15, 1996, included in the consolidated statements of
operations were $86.5 million and ($56.6) million, respectively.
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.
On January 1, 1996, BBMC adopted Statement of Financial Accounting
Standards (SFAS) No. 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 BBMC'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, OMSRs 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, BBMC capitalized $3.1 million of OMSR,
which had the effect of increasing net mortgage origination revenue by $3.1
million 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. Since SFAS No. 122
prohibits retroactive application, historical accounting results have not been
restated and, accordingly, the accounting results for the previous years ended
are not directly comparable with the period January 1, 1996 through March 15,
1996.
SFAS No. 122 also requires that capitalized mortgage servicing rights
be evaluated for impairment based on the fair value of these rights. For the
purposes of determining impairment, BBMC'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. BBMC did not record any impairment charges related to its
mortgage servicing right portfolio for the period January 1, 1996 through March
15, 1996.
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.
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 ($9.8
million at March 15, 1996) 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
anaccrual basis.
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."
Under SFAS No. 109, 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.
3. PURCHASED MORTGAGE SERVICING RIGHTS AND EXCESS MORTGAGE SERVICING RECEIVABLE
PMSR consist of the following:
December 31, March 15,
1995 1996
------------------ -------------------
(in thousands)
PMSR $ 954,931 $ 951,817
Accumulated amortization (421,040) (429,348)
------------------- -------------------
Balance $ 533,891 $ 522,469
=================== ===================
EMSR consist of the following:
December 31, March 15,
1995 1996
------------------- -------------------
(in thousands)
PMSR $ 66,465 $ 70,432
Accumulated amortization (49,018) (50,039)
------------------- -------------------
Balance $ 17,447 $ 20,393
=================== ===================
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:
December 31, March 15,
1995 1996
---------------- ----------------
(in thousands)
Balance at January 1 $ (6,650) $ (9,400)
Servicing losses on investor-owned loans (9,981) (5,560)
Charge-offs 7,473 2,725
Recoveries (242) -
----------------- ----------------
Ending Balance $ (9,400) $ (12,235)
================= ================
5. MORTGAGE SERVICING PORTFOLIO
BBMC's residential mortgage servicing portfolio totaled $41.5 billion
and $44.2 billion at December 31, 1995 and March 15, 1996, respectively, and
included mortgage-backed securities of $28.5 billion and $29.1 billion at
December 31, 1995 and March 15, 1996, respectively. In addition, BBMC's
commercial loan servicing portfolio totaled $0.9 billion and $0.2 billion at
December 31, 1995 and March 15, 1996, 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 $25
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:
December 31, March 15,
1995 1996
---------------- --------------
(in thousands)
Land $ 4,086 $ 4 086
Building 14,477 14,476
Furniture and Equipment 26,870 25,967
Leasehold improvements 824 877
--------------- --------------
46,257 45,406
Accumulated depreciation and amortization (20,871) (20,335)
--------------- --------------
Balance $ 25,386 $ 25,071
=============== ==============
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, 1995 and March 15, 1996, the interest rate was 6.8% and 7.7%,
respectively, less the benefit received from balances held at Bank of Boston.
Interest expense, net of this benefit, was $20.5 million and $6.7 million for
the years ended December 31, 1995, and for the period January 1, 1996 to March
15, 1996, respectively.
8. LONG-TERM DEBT
Long-term debt consists of a 30-year mortgage note, payable monthly
with interest at 9.5%, maturing in 2017. BBMC's main office building is pledged
as collateral. Principal payments due on long-term debt as of March 15, 1996,
are as follows:
March 15, 1996
---------------------
1997 $ 230
1998 234
1999 258
2000 283
2001 312
Thereafter 12,473
---------------------
Total Due $ 13,790
=====================
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 $0.5 million for the year ended December 31, 1995, and $0.3
million for the period January 1, 1996 to March 15, 1996.
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, 1995
and March 15, 1996, approximately $0.7 million and $0.7 million, respectively,
were included in accrued expenses and other liabilities for these plans. For the
year ended December 31, 1995 and for the period January 1, 1996 to March 15,
1996, expense related to these plans was $0.2 million and $0.1 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 $0.2 million and $0.1 million for the
year ended December 31, 1995 and for the period January 1, 1996 to March 15,
1996, respectively. BBMC employees are eligible to participate in the thrift
plan until October 1, 1996 at which time BBMC participant accounts will become
part of a similar plan offered by the new company.
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 ofservice,
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 $0.5 million and $0.8 million
for the year ended December 31, 1995 and for the period January 1, 1996 to March
15, 1996, respectively.
After March 15, 1996 retiree benefits associated with current retirees will be
assumed by Bank of Boston.
<PAGE>
The components of post-retirement benefits expense for the year
ended December 31 were as follows:
1995
---------------
(In Thousands)
Service cost (benefits earned during the period) $ 53
Interest cost on projected benefit obligation 264
Amortization:
Unrecognized net asset 250
Unamortized gain (53)
---------------
Net post-retirement benefit cost $ 514
===============
BBMC's unfunded accumulated post-retirement benefit obligation for the year
ended December 31 was as follows:
1995
-----------------
(In Thousands)
Accumulated post-retirement benefit
obligation for retirees $ 3,515
Unrecognized net gain 1,541
Unrecognized net obligation (4,250)
----------------
Post-retirement benefit liability $ 806
================
Assumptions used in actuarial computations were:
1995
----------------
Rate of increase in future
compensation levels 4.50%
Weighted average discount rate 7.25%
Medical inflation rate 8% declining to
5% in 1999
An increase of 1% in the assumed health care cost trend rate would
result in an increase of 5.8% in the accumulated post-retirement benefit
obligation and 4.9% in annual post-retirement benefit expense for the yearended
December 31, 1995.
These retirement plans are assessed annually. There was no actuarial
valuation at March 15, 1996. Post-retirement benefit expense for the period
January 1, 1996 to March 15, 1996 was $0.1 million.
<PAGE>
10. INCOME TAXES
The components of the net deferred tax asset are as follows:
December 31, March 15,
1995 1996
-------------------- --------------------
(In Thousands)
PMSR $ 34,008 $ 28,167
EMSR 8,957 8,881
Reserve for estimated servicing
losses on investor-owned loans 3,657 4,759
Other (1,301) (1,303)
Valuation reserve (4,597) (4,114)
Net deferred tax assets,
------------------- --------------------
Net of reserve $ 40,724 $ 36,390
=================== ====================
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.
The components of the provision for (benefit from) income taxes are as follows:
December 31, March 15,
1995 1996
--------------- --------------
(In Thousands)
Current tax provision (benefit) $ 47,646 $ (46,867)
Deferred tax (benefit) expense on income (8,651) 4,817
Change in valuation reserve (1,061) (483)
--------------- --------------
Net deferred tax (benefit) expense (9,712) 4,334
Income tax provision (benefit) before
cumulative effect of changes in
accounting principles 37,934 (42,533)
Total income tax provision (benefit) $ 37,934 $ (42,533)
=============== ==============
The following table reconciles the expected federal tax provision
(benefit) on income (loss) before cumulative effect of change in accounting
principle, based on the federal statutory tax rate of 35%, to the actual tax
provision (benefit) before cumulative effect of changes in accounting
principles:
<PAGE>
December 31, March 15,
1995 1996
-------------- --------------
(In Thousands)
Expected tax provision (benefit) applicable to
income (loss) before cumulative effect of
change in accounting principle $ 33,866 $ (40,738)
Effect of:
State income taxes, net of federal tax
benefits 3,774 743
Other 294 (2,538)
Actual tax provision (benefit) before
cumulative effect of change in
-------------- -------------
accounting principle $ 37,934 $ (42,533)
============== =============
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 $3.9million for
the year ended December 31, 1995 and $1.8 million for the period January 1, 1996
to March 15, 1996. BBMC's minimum future lease commitments are as follows:
December 31, March 15,
1995 1996
-------------- ---------------
(In Thousands)
1996 $ 1,996 $ 1,837
1997 622 1,910
1998 280 1,764
1999 52 1,079
2000 - 107
Thereafter - 21
-------------- --------------
Total $ 2,950 $ 6,718
============== ==============
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
$20.2 million which was due at March 15, 1996.
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 March 15, 1996, if all counterparties failed
completely and if the margins, if any, retained by BBMC or an independent
clearing agent were to become unavailable, was approximately $16.1 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, 1995, and March 15, 1996:
<TABLE>
<CAPTION>
December 31, 1995 March 15, 1996
Notional Estimated Notional Estimated
Amount Fair Value(1) Amount Fair Value(1)
---------------- -------------------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C> <C>
Purchased commitments to sell mortgage loans:
Mandatory forward contracts $ 1,169,559 $ (9,798) $ 941,087 $ 16,099
Options on mortgage-backed securities 315,000 - 653,000 7,607
Risk management contracts:
Purchased 3,107,500 118,753 781,000 17,990
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 $885.6 million at December 31, 1995 and $956.4
million at March 15, 1996.
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 $6.8
million at December 31, 1995 and $7.0 million at March 15, 1996.
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 purchase mortgage servicing rights, correspond to mortgage loans
having an aggregate loan principal balance of approximately $2.7 billion at
December 31, 1995 and $0.9 billion at March 15, 1996.
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 $2.0 billion and $2.0 billion at December
31, 1995 and March 15, 1996, respectively. Related servicing fees are included
in mortgage servicing fees and were $7.6 million and $1.2 million for the year
ended December 31, 1995 and for the period January 1, 1996 to March 15, 1996,
respectively. BBMC reimburses Bank of Boston and its affiliates for certain
occupancy and supplies costs. Total costs reimbursed were $0.7 million for the
year ended December 31, 1995 and $0.2 million for the period January 1, 1996 to
March 15, 1996.
BBMC services real estate acquired by the Bank of Boston and its
affiliates. Related expenses are reimbursed and were $1.7 million for the year
ended December 31, 1995 and $1.7 million for the period January 1,1996 to March
15, 1996.
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 $6.5billion for the
year ended December 31, 1995, and $0.7 billion for the period January 1, 1996 to
March 15, 1996.
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 $0.5 billion for the year ended
December 31, 1995, and $0.6 billion for the period January 1, 1996 to March 15,
1996. Included in mortgage loans held for sale are loans which will be sold to
Bank of Boston and its affiliates totaling $18.1 million at December 31, 1995,
and $64.1 million at March 15, 1996.
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 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.
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.
<PAGE>
The estimated fair values of BBMC's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1995 March 15, 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------- ------------------- ----------------- -------------------
(In Thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash $ 830 $ 830 $ 23,216 $ 23,216
Mortgages held for sale 388,436 395,984 628,504 633,993
Mortgages held for investment 33,183 35,003 65,068 65,068
Accounts receivable 82,816 82,816 65,599 65,599
Pool loan purchases 65,272 65,272 56,261 56,261
Mortgage claims receivable 45,422 45,422 17,563 17,563
Excess mortgage servicing receivable 17,447 19,117 20,393 23,100
Risk management contracts, classified as
PMSR, and other assets (2) 84,520 84,920 20,169 20,169
LIABILITIES
Note payable to Bank of Boston 966,000 966,000 1,256,000 1,256,000
Long-term debt 13,816 16,211 13,790 21,695
OFF-BALANCE SHEET (1)
Commitments to originate mortgage loans - 1,094 - 27,250
Mandatory forward contracts to
sell mortgages (2) - (9,798) - 16,099
Options on mortgage-backed securities (2) - - - 7,607
</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 fromoffering
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 December 31, 1995 and March 15, 1996. 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.
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
consolidated financial statements. Pro forma financial results would not have
been materially different as a result of this acquisition.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective April 1, 1998, HomeSide Lending, Inc. dismissed its prior certifying
accountants, Arthur Andersen, L.L.P. and retained as its new certifying
accountants, KPMG Peat Marwick, L.L.P. Arthur Andersen's report on HomeSide's
financial statements during the two most recent fiscal years and all subsequent
interim periods preceding the date hereof contained no adverse opinion or a
disclaimer of opinions, and was not qualified as to uncertainty, audit scope or
accounting principles. The decision to change accountants was approved by
HomeSide's Board of Directors.
During the last two fiscal years and the subsequent interim period to the date
hereof, there were no disagreements between HomeSide and Arthur Andersen on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Arthur Andersen would have caused it to make a reference to the
subject matter of the disagreements in connection with its reports.
None of the "reportable events" described in Item 304(a)(1) of Regulation S-K
occurred with respect to HomeSide within the last two fiscal years and the
subsequent interim period to the date hereof.
Effective April 1, 1998, HomeSide Lending engaged KPMG Peat Marwick, L.L.P. as
its principal accountants. During the last two fiscal years and the subsequent
interim period to the date hereof, HomeSide did not consult KPMG Peat Marwick
regarding any of the matters or events set forth in Item 304(a)(2) of Regulation
S-K.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The following table sets forth the name, age and position with the Company of
each person who is an executive officer or director of the Company.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Position
Joe K. Pickett.................... 52 Chairman of the Board and Chief Executive Officer, Director
Hugh R. Harris.................. 46 President and Chief Operating Officer; Director
Kevin D. Race................... 37 Executive Vice President and Chief Financial Officer
Robert J. Jacobs................. 45 Executive Vice President, Secretary and General Counsel; Director
Betty L. Francis................. 51 Chief Credit Officer and Executive Vice President
Mark F. Johnson................ 43 Executive Vice President - Production
William Glasgow, Jr.......... 48 Executive Vice President - Servicing
Daniel T. Scheuble............. 39 Executive Vice President - Technology
Thomas H. Fisher............... 65 Executive Vice President and Assistant Secretary
W. Blake Wilson................ 32 Executive Vice President, Director of Capital Markets
Charles D. Gilmer............... 50 Senior Vice President and Treasurer
Ann R. Mackey.................. 40 Senior Vice President and Finance Director
Debra F. Watkins............... 40 Senior Vice President, Cash Management and marketing Operations
</TABLE>
The directors of the Company 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 Company
will be appointed annually by its Board of Directors.
Joe K. Pickett has served as chairman of the Board and Chief Executive Officer
of the Company since 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 and of Baptist Medical Center, Jacksonville, Florida.
Hugh R. Harris has served as President and Chief Operating Officer of the
Company 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 Company 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
Company 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 Company 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 Production of the
Company 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 Company 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 Company 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 Company 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 Executive Vice President and Director of Capital
Markets of the Company since September 1997. He previously served as Senior vice
President and Director of Capital Markets of the Company from 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
Company 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
Company 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.
Debra F. Watkins has served as Senior Vice President, Cash Management and
Marketing Operations of the Company since October 1993. From July 1987 to
October 1993, Ms. Watkins served in various management positions in Secondary
Marketing and Production Operations at the Company. Ms. Watkins currently
serves as Chairperson of the GNMA Liaison Committee of Mortgage Association of
America.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by
or paid to the Company's Chief Executive Officer and the Company's 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 the Company and its subsidiaries for the periods from March
1, 1997 to February 10, 1998, and from March 16, 1996 to February 28, 1997.
<TABLE>
Summary Compensation Table
<CAPTION>
Long-Term
Compensation
Awards
--------------------
Annual Securities
Name and Principal Fiscal Compensation Underlying All Other
----------------------
HomeSide Lending Position Year Salary Bonus Options Compensation
- ------------------------------------------ -------- ---------- ---------- -------------------- -- ---------------
<S> <C> <C> <C> <C> <C>
Joe K. Pickett ....................... 1998 $ 372,000 $ 500,000 45,000 $ 23,954
Chairman & CEO 1997 312,000 362,000 242,862 (a) 16,135 (b)
Hugh R. Harris....................... 1998 360,000 470,000 45,000 14,411
President and Chief 1997 300,000 350,000 242,862 (a) 7,842 (b)
Operating Officer
Kevin D. Race ......................... 1998 250,000 300,000 45,000 9,333
Executive Vice President 1997 250,000 100,000 97,155 (a) 413,145 (b)(d)
and Chief Financial
Officer (c)
Mark F. Johnson ...................... 1998 230,000 200,000 30,000 10,623
Executive Vice President 1997 200,000 150,000 97,155 (a) 6,714 (b)
Secondary Marketing and
Production
William Glasgow, Jr. ............... 1998 230,000 200,000 30,000 14,299
Executive Vice President 1997 200,000 150,000 97,155 (a) 6,522 (b)
- ------------------------------------------
</TABLE>
(a) Reflects a 17 for 1 stock split of the Company's Common Stock effected
immediately prior to the Company's January 1997 initial public offering.
(b) Includes amounts received for (1) matching contributions under the
Company's savings plan of $6,000 with respect to each of Messrs.
Pickett, Harris, Johnson, Glasgow; and (2) the dollar value of life
insurance premiums paid by the Company with respect to: Mr. Pickett
$10,135; Mr. Harris $1,842; Mr. Race $74; Mr. Johnson $714; Mr. Glasgow
$522.
(c) The salary of Mr. Race is per annum. Mr. Race has been employed by the
Company since October 1996.
(d) Includes a bonus of $375,000 received by Mr. Race as an inducement to
join the Company and $38,071 in relocation expenses.
<PAGE>
Option Grants for the Period from March 1, 1997 to February 10, 1998
The following table provides information on option grants with respect
to common Stock of the Company for the period from March 1, 1997 to February 10,
1998 to the named executive officers. Pursuant to applicable regulations of the
Securities and Exchange commission (the "Commission"), the following table also
sets forth the hypothetical value which might have been realized with respect to
such options based on assumed rates of stock appreciation of 5% and 10%
compounded annually from date of grant to the end of the option terms:
<TABLE>
<CAPTION>
Individual Grants
------------ -- ------------------ -- -------------- -- ----------------
Number of
Securities % of Total Potential Realizable
Value at
Underlying Options Assumed Annual Rates of Stock
Options Granted to Exercise Price Appreciation for Option
Granted Employees Price Expiration Term (a)
-- -------------- -----
Name (#) in 1997 ($/Sh) Date 5% 10%
- --------------------- ------------ ------------- --------------- ------------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Joe K.Pickett.......... 15,000(b) 10.84% $20.500 07/10/07 193,385 490,076
30,000(c) 10.84% $20.500 01/10/07 362,919 907,645
Hugh R.Harris.......... 15,000 (b) 10.84% $20.500 05/31/07 193,385 490,076
30,000 (c) 10.84% $20.500 11/20/06 362,919 907,645
Kevin D.Race... 15,000 (b) 10.84% $20.500 10/08/07 193,385 490,076
30,000 (c) 10.84% $20.500 04/08/07 362,919 907,645
Mark F.Johnson........ 10,000 (b) 7.23% $20.500 05/31/06 128,923 326,717
20,000 (c) 7.23% $20.500 11/30/05 241,946 605,096
William Glasgow,Jr. 10,000 (b) 7.23% $20.500 05/31/06 128,923 326,717
20,000 (c) 7.23% $20.500 11/30/05 241,946 605,096
- ---------------------
</TABLE>
(a) 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 Company's Common Stock.
(b) Non-qualified, timed-based options granted pursuant to the Company's
1996 Stock Option Plan. Options vest annually in arrears in five equal
installments of 20% per year.
(c) Non-qualified, performance-based options granted pursuant to the
Parent's 1996 Time Accelerated Restricted Stock Option Plan. These
options vest no later than nine years from the date of grant unless
accelerated based on the achievement of certain performance criteria.
<PAGE>
Aggregated Option Exercises and Option Values
for the Period from March 1, 1997 to February 10, 1998
The following table provides information on option exercises during the
period from March 1, 1997 to February 10, 1998 with respect to the Common Stock
of the Company and on the values of the named executive officers' unexercised
options at February 10, 1998:
<TABLE>
<CAPTION>
Shares Number of Value of Unexercised
Securities
Acquired Underlying Unexercised In-the-Money
on Value Options at Year-End (#) Options at Year-End
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable (a)
- ---------------------- ----------- ---------- ------------- ------------------ ------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Joe K.Pickett........... 0 $0 48,573 239,289 $500,010 $2,922,511
Hugh R. Harris....... 0 0 48,573 239,289 500,010 2,922,511
Kevin D.Race.......... 0 0 19,431 122,724 200,023 1,722,591
Mark F. Johnson...... 0 0 19,431 107,724 200,023 1,415,091
William Glasgow, Jr. 0 0 19,431 107,724 200,023 1,415,091
- ----------------------
</TABLE>
(a) 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 10, 1998
Employment Contracts and Termination of Employment Arrangements
Certain of the Company's executive officers including each of the named
executive officers are party to employment agreements and/or non-competition
agreements with the Company. The Company is therefore contractually obligated to
continue to pay such salaries during the executive officer's term of employment
with the Company.
Pursuant to severance agreements with the Company, certain executive
officers, including each of the named executive officers, were entitled to
severance benefits if he were 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 Company for one year following any Trigger Event, and is either
terminated during the 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) twice 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 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 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 Company'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 Company 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. Since the 1998 fiscal year end and the NAB merger,
all severance agreements have been canceled.
Employment Agreements with NAB and the Company. In connection with the
acquisition of the Parent by NAB, NAB and the Company entered into employment
agreements (the "Employment Agreement") with Joe K. Pickett, the Company's
Chairman and Chief Executive Officer; Hugh R. Harris, the Company's President
and Chief Operating Officer; Kevin D. Race, the Company's Vice President,
Treasurer and Chief Financial Officer; Mark F. Johnson, the Company's Vice
President, Loan Production; and William Glasgow, Jr., the Company's Vice
President, Loan Administration and six other officers of the Company (the
"Executives"). Each Employment Agreement became effective upon the consummation
of the Merger and provides for a three-year term of employment commencing upon
the consummation of the Merger. Pursuant to the Employment Agreements, Mr.
Pickett serves as Chairman and Chief Executive Officer of the Company. Mr.
Harris serves as President and Chief Operating Officer of the Company and Mr.
Race serves as Executive Vice President and Chief Financial Officer of the
Company. The Employment Agreements for Messrs. Johnson and Glasgow provide that
each such Executive serves as an Executive Vice President of the Company.
Pursuant to their respective Employment Agreements, Messrs. Pickett, Harris,
Race, Johnson and Glasgow each (i) will receive an annual base salary of
$450,000, $410,000, $300,000, $230,000 and $230,000, respectively, (ii) will
receive a guaranteed annual bonus of $800,000, $800,000, $337,500, $362,500 and
$362,500 respectively, payable on each of the first and second anniversaries of
the effective time of the Merger, (iii) will be eligible to participate in the
Company's annual bonus plan ("ABP"), (iv) will be eligible to participate in
NAB's Executive Share Option Plan and will receive an initial grant of options
to purchase 50,000, 45,000, 35,000, 30,000 and 30,000 NAB ordinary shares,
respectively, and (v) will be eligible to participate in a long-term incentive
plan (funded by NAB with a cash pool not in excess of $15,000,000), the first
award under such plan (the "Anniversary Award") to be payable in a lump sum cash
payment within 30 days following the third anniversary of the effective time of
the Merger (the "Anniversary Date"), provided that the Executive is employed by
the Company on the Anniversary Date. The Employment Agreements provide that NAB
shall cause the entire long-term incentive plan cash pool to be distributed to
eligible Company executives. The Employment Agreements for the six other
officers provide for annual base salaries aggregating $1,120,000, and guaranteed
annual bonuses aggregating $712,500; and such officers will receive in the
aggregate initial grants of options of purchase 150,000 NAB ordinary shares and
will be eligible to participate in the Company's annual bonus plan and in the
long-term incentive plan referred to in clause (v) above. The Employment
Agreements also provide that each Executive will be (i) entitled to participate
in employee benefit plans as may be in effect of senior executives of the
Company from time to time, (ii) entitled to paid vacation in accordance with the
vacation policy applicable to the Company's senior executives, (iii) reimbursed
by the Company for reasonable business expenses and (iv) entitled to receive the
same perquisites that such Executives received immediately prior to the
Effective Time. The Employment Agreements further provide that each Executive
will be eligible to participate in a nonqualified deferred compensation plan to
which such Executive may elect to defer any amount of such Executive's cash
compensation.
Each Employment Agreement may be terminated by the applicable Executive for
"good reason" and by the Company for "cause," as such terms are defined in the
Employment Agreements, or by voluntary resignation of the Executive, upon ninety
(90) days' written notice provided the Executive waives any amounts payable
under the Employment Agreement and provided further that Executive's obligations
under the Confidentiality and Noncompetition Agreement (described below) to
which such Executive is a party remain unaffected by such resignation. In the
event that the Company terminates the Executive's employment for any reason
other than cause or disability or the Executive terminates his employment for
good reason, the Company is obligated to (A) pay to the Executive his
Anniversary Award pursuant to the long-term incentive plan if he is terminated
prior to the third anniversary of the Merger and (B) (i) pay to the Executive
for the twenty-four (24) month period ( the eighteen (18) month period, in the
case of each Executive other than Messrs. Pickett and Harris) following the
Executive's termination (the "Continuation Period"), an amount equal to his
average monthly base salary for the two year period (or portion thereof)
immediately preceding the date of termination, plus (ii) at the end of the
Continuation Period, an amount equal to two times (1.5 times, in the case of
each Executive other than Messrs. Pickett and Harris) the average of (x) the
Executive's target bonus under the ABP for the year in which termination occurs
and (y) the annual bonus under the ABP for the year immediately preceding the
year in which termination occurs, (iii) the pro rata portion of the guaranteed
annual bonus, if any, for the year of termination and (iv) the pro rata portion
of Executive's ABP award for the year of termination, and (C) provide the
Executive during the Continuation Period with continued coverage under the
Company's health, life and disability insurance plans, provided that Executive
continues to contribute the employee share of the cost applicable to such
coverages. The amounts under clauses (B) (i) and (ii) and the coverage under
clause (C) in the immediately preceding sentence will be payable or provided, as
the case may be, only so long as the Executive complies with his obligations
under the confidentiality and Noncompetition Agreement (described below) to
which such Executive is a party.
In the event an Executive's employment is terminated by reason of death or
disability, the Company shall pay such Executive (or his designated beneficiary
or estate, as the case may be) the pro-rated portion of (i) the guaranteed
annual bonus, if any, for the year of termination of employment, (ii) any ABP
award such Executive would have received for the year of termination of
employment, and (iii) any applicable award payable under the long-term incentive
plan (which is the Anniversary Award in the event of termination of employment
on or before the third anniversary of the Merger).
Each Employment Agreement provides that the Executive waives any and all rights
to benefits payable under any prior severance agreement to which the Executive
and the Company are parties and agrees that such severance agreement shall be
void and of no further effect and shall be superseded in its entirety by the
Employment Agreement
Historical Executive Compensation
The following table sets forth all compensation awarded to, earned by
or paid to the Company's Chief Executive Officer and the Company's four most
highly compensated Executive Officers other than the Chief executive officer
whose total annual salary and bonus exceeded $100,000 for all services rendered
in all capacities to BancBoston Mortgage Corporation and its subsidiaries for
the fiscal year ended December 31, 1995. None of the Company's named executive
officers received any compensation from Barnett Mortgage Company during 1995.
<TABLE>
Summary Compensation Table
<CAPTION>
Long-Term Compensation
------------------------------- -- ---------
Awards (b) Payouts
------------------ -----------
Long-Term
Annual Restricted Securities Incentive
Name and Principal Fiscal Compensation Stock Underlying Plan
---------------------
Position Year Salary(a) Bonus(a) Awards Options Payouts (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 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 acquisition of
BancBoston Mortgage Corporation: 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:
<TABLE>
<CAPTION>
As of December 31, 1995
Total Number of Aggregate
Name Restricted Shares Held Market Value
<S> <C> <C>
Joe K. Pickett.................................... 5,600 $259,900
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 BancBoston Mortgage Corporation acquisition,
vesting on all of the restricted stock owned by its 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
BankBoston thrift-incentive plan and the BankBoston deferred
compensation plan for the named executive officers.
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:
Prior Years of Service Estimated Annual
Name as of 12/31/95 Retirement Benefit
- ---------------------- ------------------------ -------------------------
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
The estimates shown above reflect BankBoston'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 BankBoston's tax-qualified retirement plan and certain
supplemental plans.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Capital Stock of the Company
All of the outstanding common stock of HomeSide Holdings, Inc., consisting of
10,000 shares, is owned by the Parent, and all of the outstanding common stock
of HomeSide Lending, consisting of 100 shares, is owned by HomeSide Holdings,
Inc.
Capital Stock of the Parent
The following table and the paragraphs that follow set for the information with
respect to the beneficial ownership of shares of the Parent's voting securities
as of February 10, 1998 by (i) all shareholders of the Company 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 Securities Exchange Act of 1934 and the rules thereunder:
<TABLE>
<CAPTION>
Amount and Nature of
Name of Beneficial Owner Title of Class Beneficial Ownership Percentage of Class
- ------------------------ -------------- -------------------- -------------------
<S> <C> <C> <C>
BankBoston, N.A. Common Stock 11,461,400 26.42%
100 Federal Street
Boston, MA
Siesta Holdings, Inc. Common Stock 11,461,400 26.42%
3800 Howard Hughes
Parkway, Suite 1560
Las Vegas, NV
THL (a) Common Stock 8,596,050 19.82%
75 State Street
Boston, MA
Madison Dearborn Capital Common Stock 2,865,350 6.60%
Partners, L.P.
Three First National Plaza
Chicago, IL
Joe K. Pickett Common Stock 126,797 (a) *
Hugh R. Harris Common Stock 121,435 (a) *
Kevin D. Race Common Stock 48,586 (b) *
William Glasgow, Jr. Common Stock 63,955 (b) *
Mark F. Johnson Common Stock 68,051 (b) *
Thomas M. Hagerty Common Stock 25,194 (c) *
David V. Harkins Common Stock 39,661 (d) *
All Directors and Executive
Officers as a Group
(18 persons) Common Stock 593,568 (e) 1.36%
- --------------------------------------
* Less than 1%
</TABLE>
(a) Includes 48,573 shares currently exercisable under the Parent's stock option
plan. (b) Includes 19,431 shares currently exercisable under the Parent's stock
option plan. (c) Does not include 8,570,856 shares owned by THL, as to which Mr.
Hagerty disclaims beneficial ownership. (d) Does not include 8,556,389 shares
owned by THL, as to which Mr. Harkins disclaims beneficial ownership.
(e) Does not include the shares held by THL, MDP, Bank of Boston and
Siesta, with which certain directors are affiliated; includes 202,073
shares currently exercisable under the Parent's stock option plan.
The Parent was formed on December 11, 1995, to acquire HomeSide
(formerly BancBoston Mortgage Corporation) the mortgage banking subsidiary of
BankBoston Corporation. That acquisition was completed on March 15, 1996. On May
31, 1996 the Parent acquired HomeSide Holdings, Inc. (formerly Barnett Mortgage
Company), the mortgage banking subsidiary of Barnett Banks, Inc. ("Barnett").
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 in January 1997, a holder 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 of 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Exclusive Marketing Agreements
HomeSide Lending has entered into a Marketing Agreement dated March 15,
1996 (the "BKBC Marketing Agreement") with BankBoston Corporation ("BKBC")
pursuant to which HomeSide Lending and BKBC may market services to HomeSide
Lending customers who are also BKBC customers ("BKBC Customers") and other
customers of HomeSide Lending. Under this agreement: (a) HomeSide Lending has
the exclusive right, subject to certain limitations, to market to all customers
any mortgage loan refinancing, (b) HomeSide Lending has the non-exclusive right
to market first mortgage loans (other than refinancing) to BKBC Customers and
the exclusive right market such loans to other HomeSide Lending customers, (c)
HomeSide Lending has the exclusive right to market "other" mortgage loans to
customers who are not BKBC Customers, (d) HomeSide Lending 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 Lending's customers for refinancing.
The terms 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.
HomeSide Lending 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.
HomeSide Lending does not pay any fee or moneys (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 Boston and its affiliate banks (the "BKB Banks") and HomeSide Lending have
entered into a series of Transitional Services Agreement dated March 15, 1996,
pursuant to which the BKB Banks agreed to make available to HomeSide Lending, 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 Lending also agreed to make available to
the BKB Banks, at HomeSide Lending'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 from March 1, 1997 to February 10, 1998, HomeSide Lending paid to BKB
Banks approximately $5.2 million under such Transitional Services Agreements.
For the period from March 16, 1996 to February 28, 1997, HomeSide Lending paid
to BKB Banks approximately $2.5 million under such Transitional Services
Agreements.
Barnett and HomeSide Lending have entered into a Transitional Services
Agreement dated May 31, 1996, pursuant to which Barnett agreed to make available
to HomeSide Lending 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 Lending pays Barnett a monthly fee based on rates
established under a fee schedule for the different services provided to HomeSide
Lending. For the period from March 1, 1997 to February 10, 1998, HomeSide
Lending paid to Barnett approximately $0.5 million under such Transitional
Services Agreements. For the period from March 16, 1996 to February 28, 1997,
HomeSide Lending paid to Barnett approximately $0.9 million under such
Transitional Services Agreements.
The terms of the services provided under the Transitional Services
Agreements vary. As a general matter, the services were to 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 was extended to June 30, 1997
with respect to some services.
Other BKBC Agreements
Operating Agreement
The BKB Banks and HomeSide Lending 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 Lending 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 Lending from
BKB Banks, (b) ensures that the BKB Banks receive the most favorable pricing and
service released premiums offered by HomeSide Lending to correspondent lenders,
(c) describes HomeSide Lending'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
Lending 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 Lending'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 Lending's right to
service mortgage loans serviced prior to the termination date.
Correspondent Loan Purchase and Sale Agreement
HomeSide Lending 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 Lending by BKB, and related pricing and delivery
requirements for such loans. The BKB Banks receive the most favorable pricing
offered by HomeSide Lending to correspondent lenders. For the periods from March
1, 1997 to February 10, 1998 and March 16, 1996 to February 28, 1997, HomeSide
Lending paid approximately $5.3 million and $4.7 million, respectively to the
BKB Banks under the BKB Correspondent Loan Purchase and Sale Agreement. Under
certain conditions, the BKB Banks must indemnify HomeSide Lending or repurchase
mortgage loans from HomeSide Lending. 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
HomeSide Lending 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 Lending 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 periods from March 1, 1997 to February 10, 1998 and March
16, 1996 to February 28, 1997, HomeSide Lending paid approximately $1.6 million
and $1.3 million, respectively, 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 Lending. 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 Lending.
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
HomeSide Lending and the BKB Banks have entered into a Mortgage Loan
Servicing Agreement dated March 15, 1996 (the "BKBC Servicing Agreement"), which
requires HomeSide Lending, subject to certain exceptions, to service the BKB
Banks' portfolio mortgage loans. HomeSide Lending 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 certain default loan
administration and foreclosure activities. HomeSide Lending provides additional
services for the BKB Banks' private banking clients.
The servicing fees paid by the BKB Banks to HomeSide Lending are
market-based fees consistent with the fees charged by HomeSide Lending to other
mortgagees. For the periods from March 1, 1997 to February 10, 1998 and March
16, 1996 to February 2, 1997, the BKB Banks paid approximately $3.8million and
$5.3 million, respectively, to HomeSide Lending 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 Lending upon the termination of the BKBC Operating Agreement. However,
the termination of the BKBC Operating Agreement will not affect HomeSide
Lending's right to continue servicing the BKB Banks' portfolio loans that are
being serviced by HomeSide Lending as of such termination date.
<PAGE>
Other Barnett Agreements
Operating Agreement
Barnett and HomeSide Lending 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 Lending 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 Lending from Barnett Banks, (b) ensures that the Barnett
Banks receive the most favorable pricing and servicing released premiums offered
by HomeSide Lending to mortgage correspondents, (c) describes HomeSide Lending'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 Lending to the Barnett Banks,
including, but not limited to, risk 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 Lending's
ability to sell servicing rights relating to the Barnett Banks' portfolio
mortgage loans.
Correspondent Loan Purchase Agreement
HomeSide Lending 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 Lending by the Barnett Banks and related pricing and delivery
requirements for such loans. The Barnett Banks receive the most favorable
pricing offered by HomeSide Lending to other correspondents. For the periods
from March 1, 1997 to February 10, 1998 and March 16, 1996 to February 28, 1997,
HomeSide Lending paid approximately $45.4 million and $27.6 million,
respectively to Barnett under the Barnett Correspondent Agreement. Under certain
conditions, the Barnett Banks must repurchase mortgage loans for HomeSide
Lending. The Barnett Correspondent Loan Purchase Agreement provides certain
underwriting, appraisal, mortgage insurance and escrow requirements.
PMSR Flow Agreement
HomeSide Lending 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 Lending 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 periods from March 1, 1997 to
February 10, 1998 and from March 16, 1996 to February 28, 1997, HomeSide Lending
paid approximately $9.5 million and $8.2 million, respectively, 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 Lending. 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 Lending.
As a result of NationsBank Corporation's acquisition of Barnett Banks,
Inc., the Company agreed to release Barnett from its five year agreement to sell
certain of its mortgage loans to HomeSide Lending. In consideration, the Company
received the right to purchase $5.0 billion in mortgage servicing rights, an
increase in the weighted average servicing fee for Barnett portfolio loans
currently serviced, and will receive $3.0 million cash in June 1998.
Mortgage Loan Servicing Agreement
HomeSide Lending 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 Lending, subject to certain exceptions, to
service the Barnett Banks' portfolio mortgage loans. HomeSide Lending 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 Lending is also
required to perform certain default loan administration and foreclosure
activities. HomeSide Lending provides additional services for the Barnett Banks'
private banking clients. For the periods from March 1, 1997 to February 10, 1998
and March 16, 1996 to February 28, 1997, Barnett paid $29.1 million and $23.6
million in servicing fees, respectively.
Each of the foregoing agreements described under "Certain Relationships
and Related Transactions" was entered into in connection with either the
acquisition of BancBoston Mortgage Corporation or Barnett Mortgage Company. No
additional consideration was paid or received by HomeSide Lending in connection
with the execution and delivery thereof.
Management Agreements
HomeSide Lending agreed to pay the Thomas H. Lee Company, MDP,
BankBoston and Barnett pursuant to management agreements entered into in
connection with the BancBoston Mortgage Corporation and the Barnett Mortgage
Company acquisitions, 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.
As of February 28, 1997, certain members of management owed $1.9 million
related to loans granted to purchase shares of the Company's common stock.
During the period from March 1, 1997 to February 10, 1998, all related loans
were repaid.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements: See Part II, Item 7 hereof.
2. Financial Statement Schedule and Auditors' Report
All schedules omitted are inapplicable or the information
required is shown in the Consolidated Financial Statements or notes thereto.
3. The following exhibits are submitted herewith:
<TABLE>
<CAPTION>
Unless otherwise indicated, all Exhibits are incorporated by
reference to the Company's Registration Statement on Form S-1, No. 333-17685.
Number Description
<S> <C>
3.1 Certificate of Incorporation of HomeSide Lending, Inc.
3.2 By-Laws of HomeSide Lending, Inc.
4.1 Form of Common Stock Certificate
10.1 Stock Purchase Agreement dated December 11, 1995 between HomeAmerica Capital,
Inc. (currently known as HomeSide, Inc.) and The First National Bank of Boston
(the "BBMC Purchase Agreement")
10.2 Amendment No. 1, dated as of March 15, 1996, to the BBMC Purchase Agreement
10.3 Marketing Agreement dated as of March 15, 1996 between HomeSide, Inc. and The First National
Bank of Boston
10.4 Repurchase of Mortgage Loan Servicing Rights Letter Agreement between The First
National Bank of Boston (currently known as BankBoston, N.A.) and BancBoston Mortgage Corporation
(currently known as HomeSide Lending, Inc.)
10.5 Operating Agreement effective as of March 15, 1996
between The First National Bank of Boston (currently known as BankBoston, N.A.)
and BancBoston Mortgage Corporation (currently known as HomeSide Lending, Inc.)
10.6 Brokered Loan Purchase and Sale Agreement dated as of March 15, 1996 between
BancBoston Mortgage Corporation (currently known as HomeSide Lending, Inc.) and
each of The First National Bank of Boston (currently known as BankBoston N.A.),
Bank of Boston Connecticut, Rhode Island Hospital Trust National Bank and Bank
of Boston Florida, N.A.
10.7 Master Take-Out Commitment dated as of March 15, 1996 between BancBoston
Mortgage Corporation (currently known as HomeSide Lending, Inc.) and each of The
First National Bank of Boston (currently known as BankBoston, N.A.), Bank of
Boston Connecticut, Rhode Island Hospital Trust National Bank and Bank of Boston
Florida, N.A.
10.8 Neighborhood Assistance Corporation of America Mortgage Loan Take-Out
Commitment dated as of March 15, 1996 between BancBoston Mortgage Corporation
(currently known as HomeSide Lending, Inc.) and The First National Bank of
Boston (currently known as BankBoston, N.A.)
10.9(DELTA) PMSR Flow Agreement dated as of March 15, 1996
between BancBoston Mortgage Corporation (currently known as HomeSide Lending,
Inc.) and each of The First national Bank of Boston (currently known as
BankBoston, N.A.), Bank of Boston Connecticut, Rhode Island Hospital Trust
National Bank and Bank of Boston Florida, N.A.
10.10(DELTA) Mortgage Loan Servicing Agreement dated as of March 15, 1996 between BancBoston
Mortgage Corporation (currently known asHomeSide Lending, Inc.) and each of the First National Bank
of Boston, Bank of Boston Connecticut, Rhode Island Hospital Trust National Bank and Bank of Boston
Florida, N.A.
10.11 Stock Purchase Agreement dated as of March 4, 1996 between Grant America, Inc.
(currently known as HomeSide, Inc.) and Barnett Banks, Inc. (the "BMC Purchase Agreement")
10.12 Amendment No. 1, dated as of May 31, 1996, to the BMC
Purchase Agreement 10.13 Tax Indemnity Letter Agreement dated
as of March 4, 1996 between Barnett Mortgage
Company (currently known as HomeSide Holdings, Inc.) and Barnett Banks, Inc.
10.14 Amended and Restated Shareholder Agreement dated as of May 31, 1996 among
HomeSide, Inc. and the shareholders thereof
10.15 Amended and Restated Registration Rights Agreement dated
as of May 31, 1996 between HomeSide, Inc. and certain shareholders thereof
10.16 Marketing Agreement dated as of May 31, 1996 between HomeSide, Inc. and Barnett Banks, Inc.
10.17 Transitional Services Agreement dated as of may 31, 1996 between Barnett Banks, Inc.,
Barnett Mortgage Company (currently known as HomeSide Holdings, Inc.) and HomeSide, Inc.
10.18 Operating Agreement dated as of May 31, 1996 between HomeSide Lending, Inc. and
Barnett Banks, Inc.
10.19(DELTA) Mortgage Loan Servicing Agreement dated as of April, 1996 between HomeSide
Lending, Inc. and Barnett Banks, Inc.
10.20(DELTA) 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 Lending,
Inc. and The Chase Manhattan Bank, as Administrative Agent for the Lenders parties to
the Credit Agreement
10.25* Amended and Restated HomeSide Lending Pledge Agreement dated as of January 31, 1997
between HomeSide Lending, Inc. and The Chase Manhattan Bank, as Administrative Agent for the Lenders
parties to the Credit Agreement
10.26* Amended and Restated BMC Pledge Agreement dated as of January 31, 1997 between HomeSide Holdings, Inc.
and The Chase Manhattan Bank, as Administrative Agent for the Lenders parties to the Credit Agreement
10.27 Registration Rights Agreement dated as of May 14, 1996 among HomeSide, Inc. and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Smith Barney Inc. and Friedman, Billings,
Ramsey & Co., Inc.
10.28* Amended and Restated Holdings Guaranty dated as of January 31, 1997 by HomeSide, Inc.
in favor of The Chase Manhattan Bank, as Administrative Agent for the Lenders parties to the
Credit Agreement
10.29* Amended and Restated HomeSide Lending Guaranty dated as of January 31, 1997 by HomeSide Lending,
Inc. in favor of The Chase Manhattan Bank, as Administrative Agent for the Lenders parties to
the Credit Agreement
10.30* Amended and Restated Subsidiaries Guaranty dated as of January 31, 1997 by each of SWD Properties, Inc.,
Stockton Plaza, Inc., HomeSide Lending Mortgage Securities, Inc. and Honolulu Mortgage Company, Inc. in
favor of The Chase Manhattan Bank, as Administrative Agent for the Lenders parties to the
Credit Agreement
10.31* Amended and Restated BMC Guaranty dated as of January 31, 1997 by HomeSide
Holdings, Inc. in favor of The Chase Manhattan Bank, as Administrative Agent for the Lenders parties to
the Credit Agreement
10.32* Amended and Restated Security and Collateral Agency Agreement dated as of January
31, 1997 between HomeSide Lending, Inc. and The Chase Manhattan Bank, as Administrative
Agent for the Lenders parties to the Credit Agreement
10.33* Amended and Restated Security and Collateral Agency Agreement dated as of January
31, 1997 between Honolulu Mortgage Company, Inc. and The Chase Manhattan Bank, as Administrative
Agent for the Lenders parties to the Credit Agreement
10.34* Amended and Restated Security and Collateral Agency Agreement dated as of January
31, 1997 between HomeSide Holdings, Inc. and The Chase Manhattan Bank, as Administrative
Agent for the Lenders parties to the Credit Agreement
10.35* Intercreditor Agreement dated as of May 31, 1996 between HomeSide Lending, Inc. HomeSide Holdings,
The Bank of New York, as Trustee, and The Chase Manhattan Bank, as Administrative Agent under the
Credit Agreement
10.36 HomeSide, Inc. Time Accelerated Restricted Stock Option Plan
10.37 HomeSide, Inc. Non-Qualified Stock Option Plan
10.38 Class B Non-Voting Common Stock Issuance Agreement dated as of March 14, 1996
between HomeSide, Inc. and Smith Barney Inc.
10.39 Transitional Services Agreement dated as of March 15, 1996 between The First National
Bank of Boston (currently known as BankBoston, N.A.) and BancBoston Mortgage Corporation
(currently known as HomeSide Lending, Inc.)
10.40 Transitional Services Agreement dated as of March 15, 1996 between The First National
Bank of Boston (currently known as BankBoston, N.A.) and BancBoston Mortgage corporation
(currently known as HomeSide Lending, Inc.)
10.41 Management Agreement dated as of March 15, 1996 between BancBoston Mortgage
Corporation (currently known as HomeSide Lending, Inc.) and The First National Bank of Boston
(currently known as BankBoston, N.A.)
10.42 Management Agreement dated as of March 15, 1996 between BancBoston Mortgage
Corporation (currently known as HomeSide Lending, Inc.) and Thomas H. Lee Company
10.43 Management Agreement dated as of March 15, 1996 between BancBoston Mortgage
Corporation (currently known as HomeSide Lending, Inc.) and Madison Dearborn Partners, Inc.
10.44 Management Stockholder Agreement dated as of May 15, 1996 between HomeSide, Inc.,
The First National Bank of Boston (currently known BankBoston, N.A.), Thomas H. Lee Equity Fund III,
L.P. and certain affiliates thereof, Madison Dearborn Capital Partners, L.P. and
certain employees of HomeSide Lending, Inc. and its subsidiaries
10.45 Management Agreement dated as of May 31, 1996 between HomeSide Lending, Inc. and
Barnett Banks, Inc.
10.46 Form of HomeSide Severance Agreement
10.47* Loan and Security Agreement dated January 15, 1997 between HomeSide Lending, Inc.
and The Chase Manhattan Bank
10.48* First Amendment dated February 28, 1997 to Loan and Security Agreement dated
January 15, 1997 between HomeSide Lending, Inc. and The Chase Manhattan Bank
10.49* Second Amendment dated March 31, 1997 to Loan and
Security Agreement dated January 15, 1997 between HomeSide Lending, Inc. and The
Chase Manhattan Bank.
10.50* Loan and Security Agreement dated March 14, 1997 between HomeSide Lending, Inc.
and Merrill Lynch Mortgage Capital Inc.
10.51* First Amendment dated March 31, 1997 to Loan and
Security Agreement dated March 14, 1997 between HomeSide Lending, Inc. and
Merrill Lynch Mortgage Capital Inc.
10.52* Third Amendment dated April 11, 1997 to Loan and
Security Agreement dated January 15, 1997 between HomeSide Lending, Inc. and The
Chase Manhattan Bank.
10.53* Second Amendment dated April 14, 1997 to Loan and
Security Agreement dated March 14, 1997 between HomeSide Lending, Inc. and
Merrill Lynch Mortgage Capital Inc.
10.54* Fourth Amendment dated April 29, 1997 to Loan and
Security Agreement dated January 15, 1997 between HomeSide Lending, Inc. and The
Chase Manhattan Bank.
10.55* Third Amendment dated April 29, 1997 to Loan and
Security Agreement dated March 14, 1997 between HomeSide Lending, Inc. and
Merrill Lynch Mortgage Capital Inc.
10.56* Amendment dated as of September 30, 1997 to the
Credit Agreement dated as of January 31, 1997.
10.57* Second Amendment dated as of December 31, 1997 to the Credit Agreement dated as of
January 31, 1997.
10.58* Employment Agreement and Confidentiality and Non-Competition Agreement, each dated
as of October 25, 1997, each between HomeSide Lending, Inc. and Joe K. Pickett.
10.59* Employment Agreement and Confidentiality and Non-Competition Agreement, each dated
as of October 25, 1997, each between HomeSide Lending, Inc. and Hugh R. Harris.
10.60* Employment Agreement and Confidentiality and Non-Competition Agreement, each dated
as of October 25, 1997, each between HomeSide Lending, Inc. and Kevin D. Race.
10.61* Employment Agreement and Confidentiality and Non-Competition Agreement, each dated
as of October 25, 1997, each between HomeSide Lending, Inc. and William Glasgow.
10.62* Employment Agreement and Confidentiality and
Non-Competition Agreement, each dated
October 25, 1997, each between HomeSide
Lending, Inc., and Mark F. Johnson.
12.1 Computation of the Ratio of Earnings to Fixed Charges
21.1* List of subsidiaries of HomeSide Lending, Inc.
23.6(a) Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included in
Exhibit 5.1)
24.1 Powers of Attorney
26.0 Excerpts from 1997 and 1998 Annual Report to Stockholders
26.1 Item 15 of the Company's Registration Statement on form S-1, No. 333-17685
27.1 Financial Data Schedule
----------------
</TABLE>
* Incorporated by reference to Exhibits of HomeSide Lending, Inc.'s (a
wholly-owned subsidiary of the Registrant Registration Statement on
Form S-1, Registration No. 333-21193 (DELTA) Portions of this Exhibit
have been omitted pursuant to an order by the Securities and Exchange
Commission granting confidential treatment.
(b) Reports on form 8-K
HomeSide Lending filed no reports on form 8-K for the period from
December 1, 1997 to February 10, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HomeSide Lending, Inc.
(Registrant)
By: _ /s/____________________
Joe K. Pickett
Chairman and Chief Executive Officer
<TABLE>
<CAPTION>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<S> <C> <C>
Signature Title Date
/s/ Chairman of the Board, Chief Executive Officer and May 8, 1998
- ---------------------------
Joe K. Pickett Director (Principal Executive Officer)
/s/ ___________ President, Chief Operating Officer and Director May 8, 1998
- ----------------
Hugh R. Harris
/s/ ____________ Vice President and Chief Financial Officer and Treasurer May 8, 1998
- ---------------
Kevin D. Race (Principal Financial and Accounting Officer)
/s/ _____________ Vice President and Secretary, General Counsel May 8, 1998
- --------------
Robert J. Jacobs
</TABLE>
HOMESIDE LENDING, INC.
EXHIBIT 12 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
The following table sets forth the ratio of earnings to fixed charges of
HomeSide Lending, Inc. for the period from March 1, 1997 to February 10, 1998
and the period from March 16, 1996 to February 28, 1997. The ratio of earnings
to fixed charges is computedby dividing net fixed charges (interest expense on
all debt plus the interest portion of rent expense) into earnings before income
taxes and fixed charges.
For the Period For the Period
From From
March 1, March 16,
1997 to 1996 to
February 10, February 28,
1998 1997
-------------- ---------------
Earnings before income taxes $ 136,870 $ 93,195
-------------- ---------------
Interest expense 81,770 66,833
Interest portion of rental
expense 1,387 1,550
-------------- ---------------
Fixed charges 83,157 68,383
-------------- ---------------
Earnings before fixed charges 220,027 161,578
-------------- ---------------
Fixed Charges:
Interest expense 81,770 66,833
Interest portion of rental
expense 1,387 1,550
-------------- ---------------
Fixed charges $ 83,157 $ 68,383
-------------- ---------------
Ratio of earnings to fixed
charges $ 2.65 $ 2.36
============== ===============
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<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-10-1998
<PERIOD-START> MAR-1-1997
<PERIOD-END> FEB-10-1998
<EXCHANGE-RATE> 1
<CASH> 32,113
<SECURITIES> 0
<RECEIVABLES> 227,294
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,817,309
<PP&E> 41,982
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,859,291
<CURRENT-LIABILITIES> 2,408,002
<BONDS> 770,466
0
0
<COMMON> 0
<OTHER-SE> 680,823
<TOTAL-LIABILITY-AND-EQUITY> 3,859,291
<SALES> 0
<TOTAL-REVENUES> 287,941
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 151,071
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 136,870
<INCOME-TAX> 53,379
<INCOME-CONTINUING> 83,491
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,491
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
