UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 15, 2000
Common stock $1.00 par value 100 shares
<PAGE>
FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands, Except Share Data)
March 31, 2000 September 30, 1999
---------------------- ----------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $304,190 $202,859
Mortgage loans held for sale, net 768,074 1,292,562
Mortgage servicing rights, net 4,035,323 3,488,957
Early pool buyout advances 211,879 335,059
Accounts receivable, net 289,852 255,759
Premises and equipment, net 75,269 67,900
Goodwill, net 630,493 648,087
Other assets 81,375 84,533
---------------------- ----------------------
Total Assets $ 6,396,455 $ 6,375,717
====================== ======================
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 437,732 $ 707,657
Notes payable 3,170,602 2,899,304
Long-term debt 1,123,602 1,184,384
Deferred income taxes, net 280,917 209,408
---------------------- ----------------------
Total Liabilities 5,012,853 5,000,753
---------------------- ----------------------
Stockholder's Equity:
Common stock:
Common stock, $1.00 par value, 100 shares authorized, issued, and
outstanding, all pledged as second priority collateral on the
long-term debt of the Parent - -
Additional paid-in capital 1,342,541 1,342,541
Retained earnings 41,061 32,423
---------------------- ----------------------
Total Stockholder's Equity 1,383,602 1,374,964
---------------------- ----------------------
Total Liabilities and Stockholder's Equity $ 6,396,455 $ 6,375,717
====================== ======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands)
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
March 31, 2000 March 31, 1999 March 31, 2000 March 31, 1999
---------------- ---------------- --------------- ---------------
REVENUES:
<S> <C> <C> <C> <C>
Mortgage servicing fees $185,629 $144,450 $356,827 $278,627
Amortization of mortgage servicing rights (102,659) (96,830) (200,187) (180,488)
---------------- ---------------- --------------- ---------------
Net servicing revenue 82,970 47,620 156,640 98,139
Interest income 30,107 50,423 66,272 96,598
Interest expense (40,593) (32,779) (73,744) (62,694)
---------------- ---------------- --------------- ---------------
Net interest revenue (10,486) 17,644 (7,472) 33,904
Net mortgage origination revenue 21,900 41,639 38,909 79,925
Other income 1,248 727 2,112 2,513
---------------- ---------------- --------------- ---------------
Total Revenues 95,632 107,630 190,189 214,481
EXPENSES:
Salaries and employee benefits 25,870 33,814 55,689 68,328
Occupancy and equipment 7,719 6,697 16,269 13,144
Servicing losses on investor-owned loans
and foreclosure-related expenses 7,386 8,859 15,755 18,643
Goodwill amortization 8,761 8,746 17,522 17,453
Other expenses 9,315 15,939 22,676 32,397
---------------- ---------------- --------------- ---------------
Total Expenses 59,051 74,055 127,911 149,965
Income before income taxes 36,581 33,575 62,278 64,516
Income tax expense 16,550 16,505 22,327 31,968
---------------- ---------------- --------------- ---------------
Net income $20,031 $17,070 $39,951 $32,548
================ ================ =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
March 31, 2000 March 31, 1999 March 31, 2000 March 31, 1999
--------------- --------------- -------------- --------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $ 20,031 $17,070 $ 39,951 $ 32,548
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of mortgage servicing rights 102,659 96,830 200,187 180,488
Depreciation and amortization 12,568 10,503 25,073 21,066
Servicing losses on investor-owned loans 2,674 2,962 5,204 6,635
Change in deferred income tax liability 18,599 12,670 71,508 13,179
Origination, purchase and sale of loans held for sale, net
of repayments 412,154 367,189 524,488 199,197
Change in accounts receivable (3,528) 32,897 (39,297) 37,339
Change in other assets and accounts payable and accrued
liabilities (49,566) 57,508 (101,677) 134,808
-------------- --------------- -------------- --------------
Net cash provided by operating activities 515,591 597,629 725,437 625,260
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (7,192) (5,855) (13,443) (12,312)
Acquisition of mortgage servicing rights (123,255) (418,578) (358,174) (672,812)
Net purchase of risk management contracts (414,032) (253,528) (552,839) (474,460)
Net early pool buyout reimbursements 28,184 33,700 123,180 306,252
-------------- --------------- -------------- --------------
Net cash used in investing activities (516,295) (644,261) (801,276) (853,332)
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Net (repayments to ) borrowings from banks (559,398) 41,000 (64,799) (990,899)
Net issuance (repayments) of commercial paper 318,743 (30,167) 336,097 1,278,200
Payment of debt issue costs (249) - (2,371) -
Repayment of long-term debt (60,223) (120) (60,444) (302)
Dividends paid to Parent - - (31,313) (37,846)
-------------- --------------- -------------- --------------
Net cash (used in) provided by financing activities (301,127) 10,713 177,170 249,153
Net (decrease) increase in cash and cash equivalents (301,831) (35,919) 101,331 21,081
Cash and cash equivalents at beginning of period 606,021 92,008 202,859 35,008
-------------- --------------- -------------- --------------
Cash and cash equivalents at end of period $304,190 $ 56,089 $304,190 $ 56,089
============== =============== ============== ==============
Supplemental disclosure of cash flow information:
Interest paid $ 43,063 $ 36,288 $ 75,489 $ 74,424
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
HOMESIDE LENDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included.
On March 6, 2000, HomeSide Holdings, Inc. ("HomeSide Holdings") was merged with
and into HomeSide Lending, Inc. ("HomeSide" or the "Company"). Prior to the
merger, HomeSide Holding was a wholly owned subsidiary of HomeSide
International, Inc. (the "Parent"). Pursuant to the merger, (i) the Company
succeeded to all of the assets of, and assumed all of the liabilities of,
HomeSide Holdings, and (ii) the shares of capital stock of HomeSide Holdings
issued and outstanding as of the date of the merger were canceled and exchanged
for 10,000 shares of common stock of the Company which were issued to the
Parent. In order to facilitate the exchange of shares required by the merger,
the Company amended its Articles of Incorporation to increase the authorized
number of shares of common stock to 10,100. Thereafter, the Company amended and
restated its Articles of Incorporation to reduce the number of authorized,
issued and outstanding shares of capital stock to 100 shares of commons stock,
par value $1.00. The merger does not have a material affect on the financial
statements of the Company. All prior period consolidated financial statements
have been restated to include the combined results of operations, financial
position and cash flows of HomeSide Holdings.
Operating results for the three and six month periods ended March 31, 2000 and
1999 are not necessarily indicative of the results that may be expected for the
fiscal period ending September 30, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Form
10-K for the fiscal year ended September 30, 1999 of HomeSide Lending, Inc.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and cash due from banks, interest-bearing
deposits and margin deposits with an original maturity of three months or less.
Margin deposits associated with the risk management program for mortgage
servicing rights are maintained with brokers in accordance with the requirements
of International Swap Dealer Agreements. At March 31, 2000, margin deposits
amounted to approximately $237.1 million.
3. MORTGAGE SERVICING RIGHTS
The change in the balance of mortgage servicing rights was as follows (in
thousands):
Balance, September 30, 1999 $3,488,957
Additions 358,174
Deferred hedge loss 388,379
Amortization (200,187)
-----------------
Balance, March 31, 2000 $4,035,323
=================
4. 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>
Floating Rate Notes $ 230,000 6.29% 6.28%
Commercial paper 1,500,000 6.22% 5.91%
National Australia Bank unsecured facility 1,440,602 6.44% 6.10%
----------------------
Total, March 31, 2000 $ 3,170,602
======================
Floating Rate Notes $ 230,000 5.67% 5.67%
Commercial Paper 1,163,903 5.57% 5.12%
National Australia Bank unsecured facility 1,505,401 5.46% 5.22%
----------------------
Total, September 30, 1999 $ 2,899,304
======================
</TABLE>
On August 16, 1999, HomeSide issued $230.0 million in floating rate notes (the
"Floating Rate Notes") due August 16, 2000. Interest is payable quarterly in
arrears on February 16, May 16, and August 16, 2000. The Floating Rate Notes are
unsecured obligations of HomeSide and rank equally with all other unsecured and
unsubordinated indebtedness of HomeSide. The per annum interest rate on the
Floating Rate Notes is equal to the three-month LIBOR, reset quarterly, plus
twenty basis points, or 0.20%. The weighted average interest rates on the
Floating Rate Notes during the three and six month periods ended March 31, 2000
were 6.28% and 6.12%, respectively.
On October 21, 1998, HomeSide established a $1.5 billion commercial paper
program. The program is supported by the Company's bank line of credit and
outstanding commercial paper reduces available borrowings under the bank line of
credit. At March 31, 2000, a total of $1.5 billion of commercial paper was
outstanding. The weighted average interest rates on commercial paper outstanding
during the three and six month periods ended March 31, 2000 were 5.91% and
5.81%, respectively.
On October 18, 1999, HomeSide entered into a $2.0 billion revolving credit
facility (the "Independent Bank Credit Facility") with an independent syndicate
of banks. This facility replaces HomeSide's previous bank credit facility.
Borrowings under the Independent Bank Credit Facility bear interest at rates per
annum, based on, at HomeSide's option, (i) the Eurodollar rate plus an
applicable margin, (ii) the greater of the federal funds rate plus an applicable
margin or the prime rate, (iii) in the case of swingline loans, the federal
funds rate plus an applicable margin, or (iv) in the case of competitive bid
loans, the lowest competitive Eurodollar or fixed rate submitted by a bidding
lender. The primary purpose of the Independent Bank Credit Facility is to
provide liquidity back-up for HomeSide's $1.5 billion commercial paper program.
At March 31, 2000, there was no balance outstanding under this credit line.
On June 23, 1998, HomeSide entered into an agreement for an unsecured revolving
credit facility with the National. The agreement was amended on June 22, 1999.
Under the credit facility, HomeSide can borrow up to $2.5 billion, subject to
limits imposed by regulatory authorities. As of March 31, 2000, Australian
financial regulations limited the National's ability to lend funds to HomeSide,
a non-bank affiliate, to $2.1 billion. Borrowings under the credit facility may
be overnight or for periods of 7,30,60 or 90 days. For overnight borrowings, the
interest rate is determined by HomeSide and the National at the time of the
borrowing. For LIBOR - based borrowings, the interest rate is charged at the
corresponding LIBOR rate. At March 31, 2000, the amount outstanding under this
credit facility totaled $1.4 billion. The weighted average interest rate on
outstanding borrowings under this credit facility during the three and six month
periods ended March 31, 2000 were 6.10% and 5.94%, respectively.
5. LONG-TERM DEBT
Medium-term notes
As of March 31, 2000, outstanding medium-term notes issued by HomeSide Lending
under a $2.568 billion shelf registration statement were as follows (in
thousands):
Issue Date Outstanding Balance Coupon Rate Maturity Date
May 20, 1997 $ 250,000 6.875% May 15, 2000
June 30, 1997 200,000 6.875% 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 6.750% August 1, 2004
September 15, 1997 45,000 6.770% September 17, 2001
April 23, 1998 125,000 5.7875% April, 24, 2001
May 22, 1998 225,000 6.200% May 15, 2003
------------
Total $1,100,000
============
At March 31, 2000, the total amount of medium-term notes outstanding was $1,100
million, made up of $125 million of floating-rate notes and $975 million fixed
rate notes that have been converted by interest rate swap agreements to
floating-rate notes. The weighted average borrowing rates on medium-term
borrowings issued for the three and six month periods ended March 31, 2000,
including the effect of the interest rate swap agreements, were 6.13% and 6.00%,
respectively.
The balance of the medium-term notes at March 31, 2000, including the fair value
adjustment resulting from the merger with the National, was $1.1 billion, of
which $0.3 billion is current.
Mortgage note payable
In connection with the acquisition of BancBoston Mortgage Corporation, HomeSide
assumed a mortgage note payable that is due in 2017 and bears interest at a
stated rate of 9.5%. HomeSide's main office building is pledged as collateral
for the mortgage note payable. The balance of the mortgage payable at March 31,
2000, including the fair value adjustments resulting from the merger with the
National, was $23.0 million.
Parent Notes
On May 14, 1996, the Parent issued $200.0 million of 11.25% notes (the "Parent
Notes") maturing on May 15, 2003, and paying interest semiannually in arrears on
May 15 and November 15 of each year. The Parent Notes are redeemable at the
option of HomeSide, in whole or in part, at any time on or after May 15, 2001,
at certain fixed redemption prices. The indenture contains covenants that impose
limitations and restrictions, including requirements to maintain certain net
worth and ratio requirements. In addition, the Parent Notes are secured by a
second priority pledge of the common stock of HomeSide Lending. HomeSide is in
compliance with all net worth and ratio requirements included in the indenture
relating to the Parent Notes. The Parent used a portion of the proceeds from its
February 5, 1997 offering of common stock to pre-pay $70.0 million of the Parent
Notes at a premium of $7.9 million. The amount outstanding at March 31, 2000 was
$130.0 million. The balance of the Parent Notes at March 31, 2000, including the
fair value adjustment resulting from the merger with the National, was $144.4
million.
6. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement standardizes the accounting for
derivative instruments and hedging activities by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. If certain conditions are met, a
derivative instrument may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability, or of
an unrecognized firm commitment, (b) a hedge of the exposure to variability in
the cash flows of a recognized asset, liability or forecasted transaction or (c)
a hedge of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a forecasted transaction or a net investment in a
foreign operation. In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an Amendment of FASB Statement No. 133." This statement
deferred the effective date of FAS 133 to fiscal quarters of fiscal years
beginning after June 15, 2000. Management has not yet determined the impact of
these statements on the financial statements of HomeSide.
7. DIVIDENDS
On October 20, 1999 the Company paid dividends to the Parent in the amount of
$31.3 million.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
HomeSide Lending, Inc. ("HomeSide or the "Company") is one of the largest full
service residential mortgage banking companies in the United States. On February
10, 1998, National Australia Bank, Ltd. (the "National") acquired all
outstanding shares of the common stock of HomeSide International, Inc. (the
"Parent") and the Company adopted a fiscal year end of September 30 to conform
to the fiscal year of the National. The Company was formed through the
acquisition of the mortgage banking operations of BankBoston, N.A. ("BBMC
Predecessor") on March 16, 1996 and subsequently purchased the mortgage banking
operations of Barnett Banks, Inc.
On March 6, 2000, HomeSide Holdings, Inc. ("HomeSide Holdings") was merged with
and into HomeSide Lending, Inc. ("HomeSide" or the "Company"). Prior to the
merger, HomeSide Holding was a wholly owned subsidiary of HomeSide
International, Inc. (the "Parent"). Pursuant to the merger, (i) the Company
succeeded to all of the assets of, and assumed all of the liabilities of,
HomeSide Holdings, and (ii) the shares of capital stock of HomeSide Holdings
issued and outstanding as of the date of the merger were canceled and exchanged
for 10,000 shares of common stock of the Company which were issued to the
Parent. In order to facilitate the exchange of shares required by the merger,
the Company amended its Articles of Incorporation to increase the authorized
number of shares of common stock to 10,100. Thereafter, the Company amended and
restated its Articles of Incorporation to reduce the number of authorized,
issued and outstanding shares of capital stock to 100 shares of commons stock,
par value $1.00. The merger does not have a material affect on the financial
statements of the Company. All prior period consolidated financial statements
have been restated to include the combined results of operations, financial
position and cash flows of HomeSide Holdings.
HomeSide's strategy emphasizes variable cost mortgage origination, low cost
servicing, and effective risk management. Headquartered in Jacksonville,
Florida, HomeSide ranks as the 10th largest originator and the 6th largest
servicer in the United States at March 31, 2000, based on data published by
Inside Mortgage Finance .
HomeSide plans to build its core operations through (i) improved economies of
scale in servicing costs; (ii) increased productivity using proprietary
technology; and (iii) expanded and diversified variable cost origination
channels. In addition, HomeSide intends to pursue additional loan portfolio
acquisitions and strategic origination relationships similar to the existing
relationships with Banc One Mortgage Corporation ("Banc One"), People's Bank,
and Cendant Mortgage Corporation ("Cendant").
Operating results for the three and six month periods ended March 31, 2000 and
1999 are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Form
10-K for the fiscal year ended September 30, 1999 of HomeSide Lending, Inc.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. This Quarterly Report on Form 10-Q
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 depends on its ability to obtain additional financing in
the future for originating loans, investment in servicing rights, working
capital, capital expenditure and general corporate purposes, (2) economic
downturns 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.
Loan Production Activities
HomeSide participates in several origination channels, with a focus on wholesale
origination (correspondent, co-issue, and broker). HomeSide's other origination
channels include telemarketing, direct mail campaigns and other advertising, and
mortgages related to affinity group and co-branding partnerships. HomeSide also
purchases servicing rights in bulk from time to time. This multi-channel
production base provides access to and flexibility among production channels in
a wide variety of market and economic conditions. By focusing on production
channels with a variable cost structure, HomeSide eliminates the fixed costs
associated with traditional mortgage branch offices. Without the burden of high
fixed cost origination overhead, HomeSide is well positioned to weather a
variety of interest rate environments.
The following information regarding loan production activities for HomeSide is
presented to aid in understanding the results of operations and financial
condition of HomeSide for the three and six month periods ended March 31, 2000
and 1999 (in millions):
<TABLE>
<CAPTION>
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
March 31, 2000 March 31, 1999 March 31, 2000 March 31, 1999
------------------ ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Correspondent $ 1,717 $5,296 $4,279 $10,594
Co-issue 1,642 1,043 4,072 1,915
Broker 343 1,160 812 2,250
------------------ ---------------- --------------- ---------------
Total wholesale 3,702 7,499 9,163 14,759
Direct 129 360 276 683
------------------ ---------------- --------------- ---------------
Total production 3,831 7,859 9,439 15,442
Bulk acquisitions 2,466 22,037 7,024 29,083
------------------ ---------------- --------------- ---------------
Total production and
acquisitions $6,297 $29,896 16,463 $44,525
================== ================ =============== ===============
</TABLE>
Total loan production, excluding bulk acquisitions, was $3.8 billion for the
three months ended March 31, 2000 compared to $7.9 billion for the three months
ended March 31, 1999, a 51% decrease. Loan production was $9.4 billion for the
six months ended March 31, 2000 compared to $15.4 billion for the six months
ended March 31, 1999, a 39% decrease. The decreases were primarily due to an
increase in interest rates that resulted in a decrease in the size of the
mortgage origination market. Rising interest rates have caused the mortgage
origination market to drop by half, sparking fierce pricing competition for
mortgage production as some mortgage originators have reduced their pricing
margins in order to fill capacity.
When interest rates rise, loan production decreases as fewer mortgagees
refinance their loans. As a result, the mortgage origination market declines.
For the three and six month periods ended March 31, 2000, refinances were 22%
and 21%, respectively, of HomeSide's production volume, compared to 68% and 66%,
respectively, for the three and six month periods ended March 31, 1999.
During the quarter, HomeSide continued to pursue growth opportunities through
bulk acquisitions of mortgage servicing rights and expansion of its Preferred
Partnership program. Preferred partnerships generally include a bulk servicing
acquisition and an ongoing mortgage origination flow. HomeSide services loans on
a priority basis on behalf of the Preferred Partners and offers the customer
mortgage-related products. Preferred Partner relationships contributed 34% of
HomeSide's production volume for the six months ended March 31, 2000. Homeside
completed bulk acquisitions totaling $2.5 billion and $7.0 billion during the
three and six month periods ended March 31, 2000, respectively. Bulk
acquisitions totaled $22.0 billion and $29.1 billion for the three and six month
periods ended March 31, 1999, respectively, which included, as part of
HomeSide's Preferred Partner relationship with Banc One, approximately $18
billion from the March 4, 1999 purchase of First Chicago NBD Mortgage Company's
servicing portfolio.
HomeSide has also significantly expanded its use of business-to-business and
business-to-consumer e-commerce initiatives. Internet volume now contributes
approximately 18% of HomeSide's wholesale loan rate-lock activity.
Servicing Portfolio
Management believes that HomeSide is one of the most efficient mortgage
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 $153 billion, HomeSide services the loans of approximately
1.7 million homeowners from across the United States and is committed to
protecting the value of this important asset by a sophisticated risk management
strategy. HomeSide anticipates its low cost of servicing loans will continue to
maximize the bottom-line impact of its growing servicing portfolio. HomeSide's
focus on efficient and low cost processes is pursued through the selective use
of automation, 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 for the three and six month periods ended March 31, 2000 and 1999 (in
millions):
<TABLE>
<CAPTION>
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months ended
March 31, 2000 March 31, 1999 March 31, 2000 March 31, 1999
------------------ ------------------ -- ---------------- -- ---------------
<S> <C> <C> <C> <C>
Balance at beginning of
period $ 150,735 $ 118,797 $ 145,552 $ 115,800
Additions, net 6,227 29,479 16,384 43,147
Scheduled amortization 1,045 780 2,083 1,552
Prepayments 3,112 7,563 6,802 17,149
Foreclosures 304 280 550 593
------------------ ------------------ -- ---------------- -- ---------------
Total reductions 4,461 8,623 9,435 19,294
------------------ -- ---------------- -- ---------------
------------------
Balance at end of period $ 152,501 $ 139,653 $ 152,501 $ 139,653
================== ================== == ================ == ===============
</TABLE>
The number of loans serviced at March 31, 2000 was 1,726,192 compared to
1,640,279 at March 31, 1999. HomeSide's strategy is to build its mortgage
servicing portfolio by concentrating on variable cost loan origination
strategies, and as a result, benefit from improved economies of scale. A key to
HomeSide's future growth is its proprietary servicing software. This system
allows HomeSide to double the number of loans typically serviced on a single
system. At March 31, 2000, substantially all of the servicing portfolio was
serviced on the proprietary system.
Results of Operations
For the three months ended March 31, 2000 compared to the three months ended
March 31, 1999
Summary
HomeSide's net income increased 17% to $20.0 million for the three months ended
March 31, 2000, compared to $17.1 million for the three months ended March 31,
1999. HomeSide's net income, excluding goodwill amortization from the
acquisition of HomeSide by the National, was $28.8 million for the three months
ended March 31, 2000, compared to $25.8 for the three months ended March 31,
1999. Total revenues for the three months ended March 31, 2000 were $95.6
million compared to $107.6 million for the three months ended March 31, 1999, an
11% decrease. An increase in net servicing revenue was offset by decreases in
net interest revenue and net mortgage origination revenue. Net servicing revenue
increased 74% for the three months ended March 31, 2000 compared to the three
months ended March 31, 1999, primarily due to an increase in the servicing
portfolio and a decrease in the amortization rate of mortgage servicing rights.
Net interest revenue decreased primarily due to a decreased average balance of
originated mortgage loans held for sale and increased funding necessary to
support increased mortgage servicing assets. Net mortgage origination revenue
decreased due to a decrease in production volumes and pricing competition caused
by the increase in mortgage interest rates. Total expenses decreased as a result
of a decrease in production related expenses associated with a decline in
refinance activity and a decrease in servicing related expenses associated with
a decline in prepayment activity. Income tax expense increased as a result of an
increase in net income, partially offset by a decrease in the effective income
tax rate caused by a change in the geographic mix of the servicing portfolio
into lower tax states and a decrease in production volume in states with higher
tax rates.
Net Servicing Revenue
Net servicing revenue was $83.0 million for the three months ended March 31,
2000 compared to $47.6 million for the three months ended March 31, 1999, a 74%
increase. Net servicing revenue is comprised of mortgage servicing fees,
ancillary servicing revenue, and amortization of mortgage servicing rights.
Mortgage servicing fees increased 29% to $185.6 million for the three months
ended March 31, 2000 compared to $144.5 million for the three months ended March
31, 1999, primarily as a result of portfolio growth. The servicing portfolio
increased $12.8 billion to $152.5 billion at March 31, 2000 compared to $139.7
billion at March 31, 1999, a 9% increase. The portfolio growth is primarily due
to loan production, bulk acquisitions, and a decrease in mortgage loan
prepayments as fewer mortgagees refinance their loans. HomeSide's weighted
average interest rates of the mortgage loans in the servicing portfolio were
7.48% and 7.55% at March 31, 2000 and 1999, respectively. The weighted average
servicing fee, including ancillary income, for the servicing portfolio was
0.491% for the three months ended March 31, 2000 compared to 0.471% for the
three months ended March 31, 1999. The increase in the weighted average
servicing fee was due to a change in the mix such that the portfolio is made up
of loans with higher service fees and to a refinement in the calculation of
accrued late charges.
Amortization expense was $102.7 million for the three months ended March 31,
2000 compared to $96.8 million for the three months ended March 31, 1999, a 6%
increase. Amortization expense increased mainly as a result of a higher average
balance of mortgage servicing rights during the quarter, partially offset by a
decrease in the amortization rate. 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. An increase in mortgage interest rates
results in a decrease in prepayment estimates used in calculating periodic
amortization expense. Because mortgage servicing rights are amortized over the
expected period of service fee revenues, a decrease in mortgage prepayment
activity typically results in a longer estimated life of the mortgage servicing
assets and, accordingly, lower 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
and the rates at which HomeSide is able to borrow. These factors influence the
size of the residential mortgage origination market, HomeSide's loan production
volumes and the interest rates HomeSide earns on loans and pays to its lenders.
Loan refinancing levels are the largest contributor to changes in the size of
the mortgage origination market. As interest rates rise, fewer borrowers
refinance their mortgages, resulting in a decrease in the mortgage origination
market. Lower loan production volumes result in lower average balances of loans
held for sale and consequently lower levels of interest income from interest
earned on such loans prior to their sale. This lower level of interest income
due to decreased volumes is partially offset by the higher rates earned on the
loans.
Overall borrowing costs also fluctuate with changes in interest rates.
Currently, the interest expense HomeSide pays to finance mortgage loans held for
sale and other net assets is generally calculated with reference to short-term
interest rates. In addition, because mortgage loans held for sale earn interest
based on longer term interest rates, the level of net interest revenue is also
influenced by the spread between long-term and short-term interest rates.
Net interest revenue totaled ($10.5) million for the three months ended March
31, 2000 compared to $17.6 million for the three months ended March 31, 1999.
The decrease in net interest revenue was primarily due to a decrease in interest
income earned on loans held for sale as a result of lower average balances and a
narrowing of the spread between short-term and long-term interest rates.
Interest earned on escrow balances also decreased as a result of a decrease in
loan prepayment activity associated with the rise in interest rates. In
addition, interest expense increased due to the funding of higher mortgage
servicing assets.
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 $21.9 million for the three months ended
March 31, 2000 compared to $41.6 million for the three months ended March 31,
1999. The decrease was primarily due to a decrease in production volumes
resulting from the rising interest rate environment. Rising interest rates have
caused the mortgage origination market to drop by half, sparking fierce pricing
competition for mortgage production as some mortgage originators have reduced
their pricing margins in order to fill capacity.
Other Income
Other income for the three months ended March 31, 2000 was $1.2 million compared
to $0.7 million for the three months ended March 31, 1999, a 72% increase. This
increase is primarily due to revenue associated with services provided to
National Australia Bank.
Salaries and Employee Benefits
Salaries and employee benefits expense was $25.9 million for the three months
ended March 31, 2000 compared to $33.8 million for the three months ended March
31, 1999, a 23% decrease. The average number of full-time equivalent employees
was 2,474 for the three months ended March 31, 2000 compared to 2,647 for the
three months ended March 31, 1999. The decrease in salaries and employee
benefits is primarily attributable to lower commissions expense and lower
incentives associated with lower production volume as well as a reduction in
temporary and overtime staff.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs and
maintenance costs, certain computer software expenses and depreciation of
HomeSide's premises and equipment. Occupancy and equipment expense for the three
months ended March 31, 2000 was $7.7 million compared to $6.7 million for the
three months ended March 31, 1999, a 15% increase. The increase in expense was
primarily due to additional leased space and technology related assets necessary
to support the growth in the 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 the final disposition of loans, non-recoverable foreclosure
costs, accrued interest for which payment has been curtailed and estimates for
potential losses based on HomeSide's experience as a servicer of government
loans.
The servicing losses on investor-owned loans and foreclosure-related expenses
totaled $7.4 million for the three months ended March 31, 2000 compared to $8.9
million for the three months ended March 31, 1999. The decrease was mainly
attributable to a decrease in delinquencies and decreased foreclosure-related
expenses.
Included in the balance of accounts payable and accrued liabilities at March 31,
2000 is a reserve for estimated servicing losses on investor-owned loans of
$16.7 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's historical loss experience on VA loans generally has been consistent
with industry experience. Management believes that HomeSide 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
losses are generally greatest during the three to six year age of the loan.
The following table sets forth HomeSide's delinquency and foreclosure
experience:
Servicing Portfolio Delinquencies
(percent by loan count)
March 31, 2000 March 31, 1999
----------------- ---------------
Servicing Portfolio Delinquencies, excluding
bankruptcies (at end of period)
30 days 2.23% 2.85%
60 days 0.48% 0.56%
90+ days 0.55% 0.57%
----------------- ---------------
Total past due 3.26% 3.98%
================= ===============
Foreclosures pending 0.52% 0.77%
================= ===============
Weighted average portfolio age in months 54.6 46.5
Other Expenses and Goodwill Amortization
Other expenses consist mainly of professional fees, communications expense,
advertising and public relations, data processing expenses and certain loan
origination expenses. The level of other expenses fluctuates in part based upon
the level of HomeSide's mortgage servicing portfolio and loan production
volumes.
Other expenses were $9.3 million for the three months ended March 31, 2000,
compared to $15.9 million for the three months ended March 31, 1999, a 42%
decrease. The decrease is primarily due to a decrease in expenses associated
with decreased production volumes and a decrease in prepayment activity.
Goodwill amortization was $8.8 million and $8.7 million for the three month
periods ended March 31, 2000 and 1999, respectively.
Income Tax Expense
HomeSide's income tax expense was $16.6 million for the three months ended March
31, 2000 compared to $16.5 million for the three months ended March 31, 1999.
The effective income tax rates for the three month periods ended March 31, 2000
and 1999 were 45% and 49%, respectively. The decrease in the effective income
tax rate was due to a change in the geographic mix of the servicing portfolio
into lower tax states and a decrease in production volume in states with higher
tax rates. In the current interest rate environment, this trend is expected to
continue.
Results of Operations
For the six months ended March 31, 2000 compared to the six months ended March
31, 1999
Summary
HomeSide's net income increased 23% to $40.0 million for the six months ended
March 31, 2000, compared to $32.5 million for the six months ended March 31,
1999. HomeSide's net income, excluding goodwill amortization from the
acquisition of HomeSide by the National, was $57.5 million for the six months
ended March 31, 2000, compared to $50.0 for the six months ended March 31, 1999.
Total revenues for the six months ended March 31, 2000 were $190.2 million
compared to $214.5 million for the six months ended March 31, 1999, an 11%
decrease. An increase in net servicing revenue was offset by decreases in net
interest revenue, net mortgage origination revenue, and other income. Net
servicing revenue increased 60% for the six months ended March 31, 2000 compared
to the six months ended March 31, 1999, primarily due to an increase in the
servicing portfolio and a decrease in the amortization rate of mortgage
servicing rights. Net interest revenue decreased due to a decreased average
balance of originated mortgage loans held for sale and increased funding
necessary to support increased mortgage servicing assets. Net mortgage
origination revenue decreased due to a decrease in production volumes and
pricing competition caused by the increase in mortgage interest rates. Total
expenses decreased as a result of a decrease in production related expenses
associated with a decline in refinance activity and a decrease in servicing
related expenses associated with a decline in prepayment activity. Income tax
expense decreased as a result of a decrease in the effective income tax rate
caused by a change in the geographic mix of the servicing portfolio into lower
tax states and a decrease in production volume in states with higher tax rates.
Net Servicing Revenue
Net servicing revenue was $156.6 million for the six months ended March 31, 2000
compared to $98.1 million for the six months ended March 31, 1999, a 60%
increase. Net servicing revenue is comprised of mortgage servicing fees,
ancillary servicing revenue, and amortization of mortgage servicing rights.
Mortgage servicing fees increased 28% to $356.8 million for the six months ended
March 31, 2000 compared to $278.6 million for the six months ended March 31,
1999, primarily as a result of portfolio growth. The servicing portfolio
increased $12.8 billion to $152.5 billion at March 31, 2000 compared to $139.7
billion at March 31, 1999, a 9% increase. The portfolio growth is primarily due
to loan production, bulk acquisitions, and a decrease in mortgage loan
prepayments as fewer mortgagees refinance their loans. HomeSide's weighted
average interest rates of the mortgage loans in the servicing portfolio were
7.48% and 7.55% at March 31, 2000 and 1999, respectively. The weighted average
servicing fee, including ancillary income, for the servicing portfolio was
0.479% for the six months ended March 31, 2000 compared to 0.468% for the six
months ended March 31, 1999. The increase in the weighted average servicing fee
was due to a change in the mix such that the portfolio is made up of loans with
higher service fees and to a refinement in the calculation of accrued late
charges.
Amortization expense was $200.2 million for the six months ended March 31, 2000
compared to $180.5 million for the six months ended March 31, 1999, an 11%
increase. Amortization expense increased mainly as a result of a higher average
balance of mortgage servicing rights during the quarter, partially offset by a
decrease in the amortization rate. 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. An increase in mortgage interest rates
results in a decrease in prepayment estimates used in calculating periodic
amortization expense. Because mortgage servicing rights are amortized over the
expected period of service fee revenues, a decrease in mortgage prepayment
activity typically results in a longer estimated life of the mortgage servicing
assets and, accordingly, lower 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
and the rates at which HomeSide is able to borrow. These factors influence the
size of the residential mortgage origination market, HomeSide's loan production
volumes and the interest rates HomeSide earns on loans and pays to its lenders.
Loan refinancing levels are the largest contributor to changes in the size of
the mortgage origination market. As interest rates rise, fewer borrowers
refinance their mortgages, resulting in a decrease in the mortgage origination
market. Lower loan production volumes result in lower average balances of loans
held for sale and consequently lower levels of interest income from interest
earned on such loans prior to their sale. This lower level of interest income
due to decreased volumes is partially offset by the higher rates earned on the
loans.
Overall borrowing costs also fluctuate with changes in interest rates.
Currently, the interest expense HomeSide pays to finance mortgage loans held for
sale and other net assets is generally calculated with reference to short-term
interest rates. In addition, because mortgage loans held for sale earn interest
based on longer term interest rates, the level of net interest revenue is also
influenced by the spread between long-term and short-term interest rates.
Net interest revenue totaled ($7.5) million for the six months ended March 31,
2000 compared to $33.9 million for the six months ended March 31, 1999. The
decrease in net interest revenue was primarily due to a decrease in interest
income earned on loans held for sale as a result of lower average balances and a
narrowing of the spread between short-term and long-term interest rates.
Interest earned on escrow balances also decreased as a result of a decrease in
loan prepayment activity associated with the rise in interest rates. In
addition, interest expense increased due to the funding of higher mortgage
servicing assets.
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 $38.9 million for the six months ended
March 31, 2000 compared to $79.9 million for the six months ended March 31,
1999. The decrease was primarily due to a decrease in production volumes
resulting from the rising interest rate environment. Rising interest rates have
caused the mortgage origination market to drop by half, sparking fierce pricing
competition for mortgage production as some mortgage originators have reduced
their pricing margins in order to fill capacity.
Other Income
Other income for the six months ended March 31, 2000 was $2.1 million compared
to $2.5 million for the six months ended March 31, 1999, a 16% decrease. The
decrease is primarily due to decreases in tax service revenues associated with
the decrease in production.
Salaries and Employee Benefits
Salaries and employee benefits expense was $55.7 million for the six months
ended March 31, 2000 compared to $68.3 million for the six months ended March
31, 1999, a 19% decrease. The average number of full-time equivalent employees
was 2,513 for the six months ended March 31, 2000 compared to 2,572 for the six
months ended March 31, 1999. The decrease in salaries and employee benefits is
primarily attributable to lower commissions expense and lower incentives
associated with lower production volume as well as a reduction in temporary and
overtime staff.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs and
maintenance costs, certain computer software expenses and depreciation of
HomeSide's premises and equipment. Occupancy and equipment expense for the six
months ended March 31, 2000 was $16.3 million compared to $13.1 million for the
six months ended March 31, 1999, a 24% increase. The increase in expense was
primarily due to additional leased space and technology related assets necessary
to support the growth in the 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 the final disposition of loans, non-recoverable foreclosure
costs, accrued interest for which payment has been curtailed and estimates for
potential losses based on HomeSide's experience as a servicer of government
loans.
The servicing losses on investor-owned loans and foreclosure-related expenses
totaled $15.8 million for the six months ended March 31, 2000 compared to $18.6
million for the six months ended March 31, 1999. The decrease was mainly
attributable to a decrease in delinquencies and a decrease in
foreclosure-related expenses
Included in the balance of accounts payable and accrued liabilities at March 31,
2000 is a reserve for estimated servicing losses on investor-owned loans of
$16.7 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's historical loss experience on VA loans generally has been consistent
with industry experience. Management believes that HomeSide 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
losses are generally greatest during the three to six year age of the loan.
The following table sets forth HomeSide's delinquency and foreclosure
experience:
Servicing Portfolio Delinquencies
(percent by loan count)
March 31, 2000 March 31, 1999
--------------- ----------------
Servicing Portfolio Delinquencies, excluding
bankruptcies (at end of period)
30 days 2.23% 2.85%
60 days 0.48% 0.56%
90+ days 0.55% 0.57%
--------------- ----------------
Total past due 3.26% 3.98%
=============== ================
Foreclosures pending 0.52% 0.77%
=============== ================
Weighted average portfolio age in months 54.6 46.5
Other Expenses and Goodwill Amortization
Other expenses consist mainly of professional fees, communications expense,
advertising and public relations, data processing expenses and certain loan
origination expenses. The level of other expenses fluctuates in part based upon
the level of HomeSide's mortgage servicing portfolio and loan production
volumes.
Other expenses were $22.7 million for the six months ended March 31, 2000,
compared to $32.4 million for the six months ended March 31, 1999, a 30%
decrease. The decrease is primarily due to a decrease in expenses associated
with decreased production volumes and a decrease in prepayment activity.
Goodwill amortization was $17.5 million for both of the six month periods ended
March 31, 2000 and 1999.
Income Tax Expense
HomeSide's income tax expense was $22.3 million for the six months ended March
31, 2000 compared to $32.0 million for the six months ended March 31, 1999. The
effective income tax rates for the six month periods ended March 31, 2000 and
1999 were 36% and 50%, respectively. The decrease in the effective income tax
rate was due to a change in the geographic mix of the servicing portfolio into
lower tax states and a decrease in production volume in states with higher tax
rates. In the current interest rate environment, this trend is expected to
continue.
Risk Management Activities
HomeSide has a risk management program designed to protect the economic value of
its mortgage servicing portfolio from declines in value due to increases in
estimated loan prepayment speeds, which are mainly influenced by declines in
interest rates. When loans prepay faster than anticipated, the cash flow
HomeSide expects to receive from servicing such loans is reduced. 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 three months ended March 31, 2000, HomeSide utilized options on U.S.
Treasury bond and note futures, U.S. Treasury bond futures, Eurodollar futures,
options on Eurodollar futures, interest rate swaps, interest rate swaptions,
interest rate caps, mortgage pass-throughs and options on mortgage pass-throughs
to protect a significant portion of the market value of its mortgage servicing
portfolio from a decline in value. The risk management contracts used by
HomeSide have characteristics such that they tend to increase in value as
interest rates decline. Conversely, these risk management contracts tend to
decline in value as interest rates rise. Accordingly, changes in value of these
risk management instruments will tend to move inversely with changes in value of
HomeSide's mortgage servicing rights.
These risk management instruments are designated as hedges on the purchase date
and such designation is at a level at least as specific as the level at which
mortgage servicing rights are evaluated for impairment. The risk management
instruments are marked-to-market with changes in market value deferred and
applied as an adjustment to the basis of the related mortgage servicing right
asset being hedged. As a result, any changes in market value that are deferred
are amortized and evaluated for impairment in the same manner as the related
mortgage servicing rights. The effectiveness of HomeSide's hedging activity can
be measured by the correlation between changes in the value of the risk
management instruments and changes in the value of HomeSide's mortgage servicing
rights. This correlation is assessed on a quarterly basis to ensure that high
correlation is maintained over the term of the hedging program. If management's
ongoing assessment of correlation indicates that high correlation is not being
achieved, the Company will discontinue the application of hedge accounting and
recognize a gain or loss to the extent the hedge results have not been offset by
changes in value of the hedged asset during the hedge period.
At March 31, 2000, deferred losses on risk management contracts resulted in
cumulative net deferred hedge losses of $846.2 million which were substantially
offset by changes in the value of mortgage servicing rights and included in the
carrying value of mortgage servicing rights. Activity in the deferred hedge
account during the three months ended March 31, 2000 is as follows (in
thousands):
Net deferred hedge balance at September 30, 1999 $ (494,743)
Net deferred hedge loss (388,379)
Amortization of deferred hedge losses 36,962
-----------------
Net deferred hedge balance at March 31, 2000 $ (846,160)
=================
HomeSide's future cash needs as they relate to its hedging program will be
influenced by such factors as long-term interest rates, loan production levels
and growth in the mortgage servicing portfolio. The fair value of open risk
management contracts at March 31, 2000 was $(135.8) million. This amount is
comprised of interest rate swaps, caps and swaptions with a fair value of
$(182.8) million, partially offset by options on U.S. Treasury bond and note
futures, Eurodollar futures, options on Eurodollar futures, options on mortgage
pass-throughs and mortgage pass-throughs with a fair market value of $47.0
million. The premiums paid on options along with amounts due to or from
counterparties related to risk management contracts are included in Other Assets
and Other Liabilities in the accompanying consolidated balance sheet. See
"Liquidity and Capital Resources" for further discussion of HomeSide's sources
and uses of cash. See Note 3 of the Notes to Consolidated Financial Statements
included in HomeSide's Form 10-K for the fiscal year ended September 30, 1999
for a description of HomeSide's accounting policy for its risk management
contracts. See Notes 12 and 13 of the Notes to Consolidated Financial Statements
included in HomeSide's Form 10-K for the fiscal year ended September 30, 1999
for additional fair value disclosures with respect to HomeSide's risk management
contracts.
Liquidity and Capital Resources
The Company's principal financing needs are the financing of loan origination
activities and the investment in mortgage servicing rights. To meet these needs,
the Company currently utilizes funding from its commercial paper program, a
credit facility with the National, medium-term notes, floating-rate notes, an
independent syndicate of banks, repurchase agreements, and cash flow from
operations. HomeSide continues to investigate and pursue alternative and
supplementary methods to finance its growing operations through the public and
private capital markets. These may include methods designed to expand the
Company's financial capacity and reduce its cost of capital. In addition, to
facilitate the sale and distribution of certain mortgage products, HomeSide
Mortgage Securities, Inc., a wholly-owned subsidiary of HomeSide Lending, Inc.,
may continue to issue mortgage-backed securities.
Operations
Net cash provided by operations for the quarters ended March 31, 2000 and 1999
were $515.6 million and $597.6 million, respectively. Net cash provided by
operating activities for the six month periods ended March 31, 2000 and 1999
were $725.4 million and $625.3 million, respectively. Cash provided from
servicing fee income, loan sales and principal repayments was partially offset
by cash used for the origination and purchase of mortgage loans held for sale
and to pay corporate expenses. Cash flows from loan originations are dependent
upon current economic conditions and the level of long-term interest rates.
Increases in long-term interest rates generally result in lower loan refinancing
activity, which results in lower cash demands to meet loan production levels.
Investing
Net cash used in investing activities for the quarters ended March 31, 2000 and
1999 were $516.3 million and $644.3 million, respectively. Net cash used in
investing activities for the six month periods ended March 31, 2000 and 1999
were $801.3 million and $853.3 million, respectively. Cash used in investing
activities was primarily for the purchase of mortgage servicing rights and risk
management contracts. Cash was provided by proceeds from risk management
contracts and early pool buyout reimbursements. Future uses of cash for
investing activities will be dependent on the mortgage origination market and
HomeSide's hedging needs. HomeSide is not able to estimate the timing and amount
of cash uses for future acquisitions of other mortgage banking entities, if such
acquisitions were to occur.
Financing
Net cash used in financing activities for the quarter ended March 31, 2000 was
$301.1 million. Net cash provided by financing activities for the quarter ended
March 31, 1999 was $10.7 million. Net cash provided by financing activities for
the six month periods ended March 31, 2000 and 1999 were $177.2 million and
$249.2 million, respectively. Cash was provided by borrowings from the National
and the issuance of commercial paper. Cash was used for repayment of borrowings
from the National and commercial paper, payment of debt issue costs, payment of
dividends to the Parent, and repayment of medium-term notes which became due
during the quarter ended March 31, 2000.
HomeSide expects that to the extent cash generated from operations is inadequate
to meet its liquidity needs, those needs can be met through financing from its
bank credit facility and other facilities which may be entered into from time to
time, as well as from the issuance of debt securities in the public markets.
Accordingly, HomeSide does not currently anticipate that it will make sales of
servicing rights to any significant degree for the purpose of generating cash.
Nevertheless, in addition to its cash and mortgage loans held for sale balances,
HomeSide's portfolio of mortgage servicing rights provides a potential source of
funds to meet liquidity requirements, especially in periods of rising interest
rates when loan origination volume slows. Repurchase agreements also provide an
alternative to the established funding sources 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
General. In common with many business users of computers around the world, the
Company established a program designed to minimize the impact of the change to
2000 (including Leap Day 2000) on the Company and its customers. The Board of
Directors made the work associated with the change to 2000 a key priority for
management. As of the date of this filing, the Company has encountered no Year
2000 or Leap Day issue.
The Company began its information technology Year 2000 assessment and
remediation efforts in the third quarter of calendar year 1996 under the
sponsorship of its executive management. A formal, enterprise-wide program
commenced in January 1998. The Year 2000 issue was identified as a top priority.
The Company's executive management and Board of Directors were provided with
frequent detailed updates. The Company dedicated resources to assess, repair and
test programs, applications, equipment and facilities. The Company established a
Year 2000 Program Office that coordinated the preparations for the change to
2000 with each business unit throughout the Company. The Year 2000 Program
Office discontinued its efforts on March 31, 2000. Residual Year 2000 risk was
delegated to individual business units for ongoing monitoring and management.
The Company's strategy for addressing Year 2000 focused on four teams, which
together addressed all aspects of the Company's business. The Information
Technology team addressed all of the Mainframe, LAN and client server
applications. The End User Computing (or Business) team addressed the business
risks within each of the operating departments, including facilities' risk. The
Enterprise team addressed the corporate-wide risks posed by the Year 2000,
including business continuity planning to be implemented by individual business
units. Finally, the Year 2000 Program Office coordinated the Company's Year 2000
readiness efforts and was responsible for communications, vendor management,
project documentation and reporting. The Company's Year 2000 Program Office and
overall Year 2000 Program were managed by a Year 2000 Program Director whose
full-time resources and responsibilities were dedicated to this effort under the
sponsorship of the President and Chief Operating Officer and the Chief
Information Officer.
Throughout all phases of the Year 2000 Program the goal of the Year 2000 teams
was to complete all required work while minimizing disruption to the current
service delivery levels of the Company. Central management of the project was
executed using fully dedicated staff with high levels of subject matter
knowledge. In order to speed the assessment and remediation aspects of the
mainframe and client server IT projects, a factory philosophy was adopted using
Paragon Computer Professionals, Inc. as the primary outsourcer. Contractors were
used internally where subject matter expertise was not required.
State of Readiness. The Company's approach to preparing for the change to 2000
included a standard set of methods and tools, customized as applicable to each
team, to coordinate and drive the project to completion. The approach consisted
of six phases:
Assessment - Defining each system and process to determine if there are date
dependencies and how to resolve them. For business continuity purposes,
assessment included identifying event and dependency risk.
Remediation - Implementing the steps identified in the assessment phase,
including code remediation and development of contingency plans.
Testing - Developing and implementing test plans to determine if remediated code
was correct and assurance testing of business continuity plans.
Implementation - Moving all approved changes from testing into production and
execution of contingency plans as was required.
Check-Off - Formally acknowledging that each process has been implemented and is
functioning correctly.
Clean Management - Employing procedures and practices to prevent the
reintroduction of non-compliant applications, products and processes into the
operating environment, once Check-Off was completed.
The Company's Information Technology and Business Teams' assessment of the
Company's systems and business processes for Year 2000 vulnerability included
substantially all hardware and software systems, embedded systems, buildings and
equipment, and business processes. The assessment also included a review of the
Company's dependencies on third parties, including vendors, suppliers and
customers.
The Company established in its Year 2000 Program certain key milestones and an
internal timetable for the change to 2000 in line with or ahead of its
regulator's suggested completion dates for core systems. All of the Company's
key milestones were either completed or substantially completed by the assigned
target dates.
The Company's two most critical business applications are its primary mortgage
servicing software systems: MSP (licensed from and supported by Alltel
Information Services, Inc.) and ALSS (a proprietary software system supported by
the Company). As to these two systems, assessment, remediation, testing,
implementation and check-off were completed on time, the systems were returned
to production and clean management procedures were implemented.
The Company's Year 2000 Program also addressed end-user computing issues
presented by the Year 2000 change. As to end-user computing issues (systems and
business processes other than information technology systems), assessment,
remediation, testing, implementation and check-off were completed on time and
clean management procedures were implemented.
Beginning September 30, 1999, the emphasis of the Company's Year 2000 Program
was on continued assurance testing, finalization, refinement and testing of
transition plans, monitoring of Year 2000 readiness efforts by the Company's
customers, vendors and other third parties with whom the Company has
relationships, and clean management of systems and processes. The Company
successfully developed and implemented a Clean Management Strategy on a
Company-wide basis.
The Company was concerned that third parties on which the Company relies would
not complete their Year 2000 programs on time or that Year 2000 failures by such
third parties would have a material adverse effect on the Company's results of
operations. The Company conducted ongoing reviews of the Year 2000 efforts of
its mission critical vendors, customers and service providers. As of the date of
filing, the Company has not experienced any material disruptions in service from
any of its vendors, customers or service providers as a result of Year 2000
issues.
The Company conducted ongoing reviews of the Year 2000 efforts of its mission
critical vendors, customers and service providers through December 31, 1999. The
Company identified a number of mission critical third parties whose Year 2000
failure may reasonably be expected to have a material adverse impact on the
Company's results of operations. Examples of such third parties include: the
Company's primary software licensor, Alltel Information Services, Inc.; the
Company's sole provider of insurance processing services; the Company's sole
provider of tax payment services; and the Company's sole provider of foreclosure
services. Catastrophic failure by any of these parties would have a material
adverse effect on the Company. The Company targeted these mission critical third
parties for particular scrutiny regarding their preparations for the change to
2000. That process continued through the first quarter of 2000.
Transition Planning. The Company developed a corporate-wide Year 2000 Transition
Strategy to identify and prepare for specific issues and risks associated with
the period of October 1, 1999 through March 31, 2000. The objective of the
Company in transition planning is to ensure a Company-wide capability to manage
internal and externally generated events as and when they might arise.
As part of the Company's Transition planning and overall Year 2000 Program, the
Company established a moratorium period using a scaled implementation plan to
restrict the introduction of minor, significant and major changes to systems or
business processes. The moratorium period did not impair the Company's ability
to conduct its core businesses and meet the needs of its customers. The
Company's Year 2000 Program continued through March 31, 2000 with the following
activities:
Monitoring and verification activities surrounding business information
systems;
Implementation of maintenance programs associated with the system changes
made to manage the date change to 2000;
Working with customers and suppliers regarding any impacts they may have
sustained as a result of the date change to 2000; and
Completing a formal post-implementation review of the Year 2000 Program to
assess achievements and lessons learned.
Risks. The Company's risk management office was actively involved in the
Company's Year 2000 Program. The Company determined that the most reasonably
likely worst case Year 2000 scenario, disregarding the Company's remediation
efforts and contingency planning, was: (i) a failure in its loan servicing
software and/or systems, or (ii) a failure by one of the Company's key third
party providers. Either such failure would have resulted in material disruption
in the Company's operations possibly preventing it from discharging its
contractual obligations to service mortgage loans in an accurate and timely
fashion. The Company did not experience any such disruption.
There is ongoing Year 2000 risk following the century rollover. This risk arises
from, among other things, maturation of pivot dates in windowing and inferencing
solutions used to address the Year 2000 issue, and as yet unrevealed problems
with system preparedness and data integrity.
Contingency Planning. The Company's Year 2000 Program was based on the
assumption that 100% impact coverage is neither feasible nor practical. It is
possible that the Company or third parties on which the Company depends may have
unplanned system difficulties following the date of this filing as a result of
the transition through 2000 or Leap Day, or that third parties may not
successfully manage the change to 2000 or Leap Day; therefore, an integral part
of the Company's Year 2000 Program was the development of contingency plans in
anticipation of systems or third party failure.
The Company's contingency plans were reviewed and approved by the Company's
Program Office and executive management and, where possible, tested. Given the
potential scope of Year 2000 events, it is possible that despite considerable
planning, the Company's business continuity plans for the date change to 2000
may only assist in the reduction of the degree of disruption rather than its
avoidance. However, the Company is encouraged by the absence of any material
adverse impacts by the century rollover or Leap Day and no contingency plans
have been invoked to date.
Cost of Year 2000 Efforts. As described above, the Company conducted a thorough
Year 2000 program, covering all aspects of its business, to ensure that it
successfully managed the change to 2000. The Company presently estimates its
total Year 2000 costs were $12.3 million. The Company does not anticipate
incurring any Year 2000 expenses after March 31, 2000. The Company does not
separately track the indirect costs incurred in its Year 2000 program.
For the quarter ended March 31, 2000, the Company incurred expenditures of $ .4
million, primarily associated with employee retention efforts, transition
planning and maintenance of its Year 2000 Program Office.
The Company expensed its remediation costs as they were incurred, with the
exception of new hardware and software purchases, which were capitalized. The
source of funds for Year 2000 remediation was operating income of the Company.
The percentage of the Company's information technology budget devoted to Year
2000 efforts in the quarter ended March 31, 2000 was approximately 2.17%. The
Company is unable to readily determine the cost of replacement of non-compliant
systems that are being replaced in the ordinary course of business. No
significant information technology projects have been deferred due to Year 2000
efforts.
The Company's original Year 2000 budget of $15 million, later revised to 13.5
million and further revised to $12.4 million, were each based on management's
best estimates and did not take into account any Year 2000-related claims for
loss or damage that may be asserted against the Company by third parties. Actual
costs were less than budget primarily because of lower than anticipated costs
associated with third party repair, employee retention and transition related
activities for the rollover weekend and Leap Day.
The foregoing disclosure is furnished in response to and in compliance with the
Statement of the Commission Regarding Disclosure of Year 2000 Issues and
Consequences by Public Companies, Investment Advisers, Investment Companies, and
Municipal Securities Issuers, Securities Act Rel. No. 33-7448 (July 30, 1998).
Quantitative and Qualitative Market Risk
There have been no material changes in the Company's market risk from September
30, 1999. For information regarding the Company's market risk, refer to Form
10-K for the fiscal year ended September 30, 1999 of HomeSide International,
Inc.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
HomeSide is a defendant in a number of legal proceedings arising in the normal
course of business. HomeSide, in management's estimation, has recorded adequate
reserves in the financial statements for pending litigation. Management, after
reviewing all actions and proceedings pending against or involving HomeSide,
considers that the aggregate liability or loss, if any, resulting from the final
outcome of these proceedings will not have a material effect on the financial
position of HomeSide.
In recent years, the mortgage banking industry has been subject to class action
lawsuits which allege violations of federal and state laws and regulations,
including the propriety of collecting and paying various fees and charges. Class
action lawsuits may be filed in the future against the mortgage banking
industry.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following document is filed as a part of this Report:
Number Description
10.1 Articles of Merger of HomeSide Holdings, Inc. Into HomeSide Lending, Inc.
10.2 Plan of Merger by and between HomeSide Holdings, Inc. and HomeSide
Lending, Inc.
10.3 Articles of Amendment to Articles of Incorporation of HomeSide Lending,
Inc.
10.4 Amended and Restated Articles of Incorporation of HomeSide Lending, Inc.
27 Financial Data Schedule
(b) Reports on form 8-K
HomeSide filed no reports on Form 8-K during the quarter ended March 31, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HomeSide Lending, Inc.
----------------------
(Registrant)
Date: May 15, 2000 By: /s/__________________________
Hugh R. Harris
Chief Executive Officer (Principal Executive Officer)
Date: May 15, 2000 By: /s/__________________________
W. Blake Wilson
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
ARTICLES OF MERGER
OF
HOMESIDE HOLDINGS, INC.
INTO
HOMESIDE LENDING, INC.
Pursuant to the provisions of Chapter 607, Florida Statutes, the
parties hereto hereby adopt the following Articles of Merger for the purpose of
merging them into one corporation:
1. HOMESIDE HOLDINGS, INC., a Florida corporation (the "Merging
Corporation"), shall be merged with and into HOMESIDE LENDING, INC., a Florida
corporation (the "Surviving Corporation"), which shall be the surviving
corporation in the merger.
2. The merger shall become effective on the date on which these Articles of
Merger are filed with the Florida Department of State (the "Effective Date").
3. The Articles of Incorporation of the Merging Corporation as in effect
immediately prior to the Effective Date shall become the Articles of
Incorporation of the Surviving Corporation.
4. The Plan of Merger, a copy of which is attached hereto and made a part
hereof, was adopted and approved by the directors of the Merging Corporation on
February 15, 2000 and by the directors of the Surviving Corporation on February
15, 2000.
5. Pursuant to Section 607.1104, Florida Statutes, no shareholder approval
was required for this merger.
6. The name of the Surviving Corporation after the Merger shall remain and
be HOMESIDE LENDING, INC.
IN WITNESS WHEREOF, the Surviving Corporation and the Merging
Corporation have caused these Articles of Merger to be executed by their
respective officers as of February 15, 2000.
HOMESIDE HOLDINGS, INC. HOMESIDE LENDING, INC.
By: /S/ By: /S/
------------------------------------- ------------------
Name: Robert J. Jacobs Name: Robert J. Jacobs
Its: Vice President Its: Vice President
PLAN OF MERGER
THIS PLAN OF MERGER (the "Plan") is made and entered into as of this
15th day of February, 2000 by and between HOMESIDE HOLDINGS, INC., a Florida
corporation (the "Merging Corporation"), and HOMESIDE LENDING, INC., a Florida
corporation (the "Surviving Corporation"). The Merging Corporation and the
Surviving Corporation are hereinafter sometimes referred to collectively as the
"Constituent Corporations."
W I T N E S S E T H:
WHEREAS, the directors of the Constituent Corporations have determined
that it would be in the best interest of such corporations and their respective
shareholders for the Merging Corporation to merge with and into the Surviving
Corporation in accordance with Florida Business Corporation Act.
NOW, THEREFORE, in consideration of the premises, and the mutual
covenants, agreements, provisions and grants herein contained, the Constituent
Corporations hereby agree and prescribe the terms and conditions of this Plan of
Merger and the mode of carrying the same into effect, as follows:
1. Merger. Subject to and on the terms and conditions set forth herein, on
the Effective Date (as defined in Section 2 below), the Merging Corporation
shall be merged (the "Merger") with and into the Surviving Corporation, with the
Surviving Corporation remaining the surviving corporation.
2. Effective Date. The Merger shall become effective upon the filing of the
Articles of Merger with the Florida Department of State (the "Effective Date").
3. Effect of Merger. Upon the Effective Date: (a) the Merging Corporation
and the Surviving Corporation shall become a single corporation and the separate
corporate existence of the Merging Corporation shall cease; (b) the Surviving
Corporation shall succeed to and posses all the rights, privileges, powers, and
immunities of the Merging Corporation which, together with all of the assets,
properties, business, patents, trademarks, and goodwill of the Merging
Corporation, of every type and description wherever located, shall vest in the
Surviving Corporation without further act or deed; (c) all rights of creditors
and all liens upon any property of the Constituent Corporations shall remain
unimpaired; and (d) the name of the Merging Corporation shall remain and be
HOMESIDE LENDING, INC., without further act or deed.
4. Articles of Incorporation, Bylaws, Officers and Directors of Surviving
Corporation. Upon the Effective Date: (a) the Articles of Incorporation of the
Merging Corporation shall become the Articles of Incorporation of the Surviving
Corporation until amended in the manner provided by law; (b) the Bylaws of the
Surviving Corporation shall remain and continue as the Bylaws of the Surviving
Corporation until amended in the manner provided by law; and (c) the officers
and directors of the Surviving Corporation shall remain and continue as the
officers and directors of the Surviving Corporation until their successors are
duly elected and qualified in the manner provided for in the Bylaws of the
Surviving Corporation or by law.
5. Cancellation of Shares. Upon the Effective Date, all of the then-issued
and outstanding shares of capital stock of the Merging Corporation shall be
automatically canceled, without any action on the part of the holder thereof,
and converted, on a one-for-one basis, into shares of common stock of the
Surviving Corporation.
6. Articles of Merger. At the closing of the Merger, the parties shall
promptly execute the Articles of Merger attached hereto and file the same with
the Florida Department of State.
7. Governing Law. This Plan of Merger shall be governed and construed in
accordance with the laws of the State of Florida.
8. Counterparts. This Plan of Merger may be executed in counterparts, each
of which when so executed shall constitute an original copy hereof, but both of
which together shall be considered but one and the same document.
IN WITNESS WHEREOF, the parties have executed this Plan of Merger on
the date first above written.
HOMESIDE HOLDINGS, INC.
By: /S/
------------------
Name: Robert J. Jacobs
Title: Vice President
HOMESIDE LENDING, INC.
By: /S/
------------------
Name: Robert J. Jacobs
Title: Vice President
ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION OF
HOMESIDE LENDING, INC.
HomeSide Lending, Inc., pursuant to Section 607.1006, Florida Statutes,
hereby files the following Articles of Amendment:
1. The name of the Corporation is HomeSide Lending, Inc. The corporation
was assigned document number J33658.
2. Article III of the Articles of Incorporation of HomeSide Lending, Inc.
is hereby amended to read as follows:
ARTICLE III
Capital Stock
The maximum number of shares of capital stock which this corporation is
authorized to have outstanding at any one time is 10,100 shares,
$100.00 per share par value.
3. The foregoing amendment was approved and adopted by the sole shareholder
of the Corporation on March 7, 2000. No action by the Board of Directors was
required pursuant to Section 1003(6), Florida Statutes.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment as of the 7TH day of March, 2000.
HOMESIDE LENDING, INC.
By: /s/______________________________
Robert J. Jacobs
Executive Vice President, Secretary
and General Counsel
Prepared by G. Alan Howard, Esq.
50 N. Laura Street, Suite 2750
Jacksonville, Florida 32202
(904) 798-3700
Fla. Bar No. 629091
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
HOMESIDE LENDING, INC.
1. The name of the corporation is HomeSide Lending, Inc., a Florida
corporation (the "Corporation").
2. This restatement contains amendments requiring shareholder approval and
was approved and adopted by the sole shareholder of the Corporation on March 7,
2000.
3. The duly adopted Amended and Restated Articles of Incorporation
supersede the original Articles of Incorporation and all amendments to them.
4. The Articles of Incorporation of the Corporation are hereby amended and
restated in their entirety to read as follows:
"ARTICLE I
NAME, PRINCIPAL OFFICE,
REGISTERED OFFICE AND REGISTERED AGENT
1.1 Name. The name of this corporation is HomeSide Lending, Inc. (the
"Corporation").
1.2 Offices. The principal office and mailing address of the Corporation
is:
7301 Baymeadows Way
Jacksonville, Florida 32256
The Corporation may also have, maintain and operate other offices as shall be
proper or advisable in the discretion of the officers or Board of Directors of
the Corporation.
Prepared by G. Alan Howard, Esq.
50 North Laura Street, Suite 2750
Jacksonville, Florida 32202
Florida Bar No. 0629091
<PAGE>
1.3 Registered Agent. The registered office of the Corporation shall be at:
7301 Baymeadows Way
Jacksonville, Florida 32256
The name of the registered agent of the Corporation is Marilyn Lea at the
above address.
ARTICLE II
PURPOSES
2.1 Purposes. The purposes for which the Corporation is organized are:
To engage in any or all lawful business purposes or enterprises for which
corporations may be organized under the Florida Business Corporation Act, and
which the Board of Directors may deem to be in the best interests of the
Corporation, and to do all other things deemed by the Board of Directors to be
necessary or desirable in connection with any of the Corporation's business.
ARTICLE III
AUTHORIZED STOCK
3.1 Number and Designation. The Corporation shall have the authority to
issue One Hundred (100) shares of Common Stock, par value $1.00 per share.
3.2 Preemptive Rights. No holder of capital stock of the Corporation of any
class shall have any preemptive right to subscribe to or purchase (i) any shares
of capital stock of this Corporation, (ii) any securities convertible into such
shares or, or (iii) any options, warrants or rights to purchase such shares or
securities convertible into any such shares.
3.3 Voting Rights. The holders of Common Stock shall have unlimited voting
rights and are entitled to receive the net assets of the Corporation upon
liquidation, dissolution or winding up of the affairs of the Corporation.
ARTICLE IV
DIRECTORS
The number of the Directors of this Corporation shall be not less than
three (3) nor more than fifteen (15) as fixed from time to time by the
provisions of the By-Laws.
<PAGE>
ARTICLE V
LIMIT ON LIABILITY AND INDEMNIFICATION
5.1 The Corporation shall indemnify any person who has or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was a Director or officer of the Corporation or served, at
the written request of the President of the Corporation, as a Director or
officer of another corporation (all of whom are hereinafter in this Article
referred to in the aggregate as "indemnified persons" and in the singular as an
indemnified person") against expenses (including attorneys' fees except as
otherwise state in Section 5.3 of this Article), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by a judgment, order, settlement, adjudication or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
5.2. The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor
against expenses (including attorneys' fees except as otherwise stated in
Section 5.3 of this Article) actually and reasonably incurred by him in the
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the Corporation unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnify for such
expenses which such court shall deem proper.
5.3. The Corporation will be entitled to participate at its own expense in
the defense and, if it so elects, to assume the defense of any claim, action,
suit or proceeding. If the Corporation elects to assume the defense, such
defense shall be conducted by counsel of good standing, chosen by it. In the
event the Corporation elects to assume the defense of any such claim, action,
suit or proceeding and retain such counsel, the indemnified persons shall bear
the fees and expense of any additional counsel retained by them unless there are
conflicting interests as between the Corporation and the indemnified persons
that are for valid reasons objected to in writing by the indemnified persons.
5.4. In discharging his duty to the Corporation, an indemnified person,
when acting in good faith, may rely upon financial statements of the Corporation
represented to him to be correct by the officer of the Corporation having charge
of its books of accounts, or stated in a written report by an independent public
or certified public accountant or firm of such accountants fairly to reflect the
financial condition of such Corporation.
5.5. Any indemnification under this Article V (unless ordered by a court)
shall be made only as authorized in the specific case upon a determination (1)
by the Board of Directors by a majority vote of a quorum consisting of Directors
who were not parties to such action, suit or proceeding, or (2) if such quorum
is not obtainable, or even if obtainable, when a quorum of disinterested
Directors so directs, by independent legal counsel in a written opinion that the
indemnified person has met the standards of conduct set forth in this Article V
or (3) by the stockholder or stockholders.
5.6. Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Corporation in advance of the final disposition of
such action, suit or proceeding as authorized by the Board of Directors in the
manner provided in Section 5.5 of this Article V upon receipt of an undertaking
by or on behalf of the indemnified person to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation as authorized in this Article V.
5.7. The indemnification provided by this Article V shall not be deemed
exclusive of any other rights to which any indemnified person may be entitled
under any agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to the action in
another capacity while holding such office and shall inure to the benefit of the
heirs, executors and administrators of such a person.
5.8. The Board of Directors shall have power on behalf of the Corporation
to grant indemnification to any person other than an indemnified person to such
extent as the Board in its discretion may from time to time and at any time
determine, but in no event to exceed the indemnification provided by this
Article V.
5.9. If any part of this Article V shall be found, in any action, suit or
proceeding, to be invalid or ineffective, the validity and the effect of the
remaining parts shall not be affected.
5.10. Contractual Nature of Indemnification Obligations. The obligations of
the Corporation to provide indemnification and advancement of expenses under
this Article V are, and are intended by the Corporation to be treated as,
contractual obligations owed by the Corporation to, and contractual rights of,
all such present and former Directors, officers, employees and agents of the
Corporation who satisfy the requirements set forth in this Article V for the
receipt of indemnification or the advancement of expenses, and such obligations
and rights shall be enforceable by all such persons against the Corporation.
5.11. No Repeal or Retroactive Amendment. Notwithstanding anything herein
to the contrary, the provisions of this Article V may not be repealed, amended
or altered in any way that would impair or diminish the obligation of the
Corporation to provide, or the rights of present and former Directors, officers,
employees and agents of the Corporation to receive, indemnification and
advancement of expenses pursuant to this Article V in connection with or in
relation to any act, inaction or other event, or alleged act, inaction or other
event, occurring before the time of such repeal, amendment or alteration.
ARTICLE VI
AMENDMENT
As to each voting group entitled to vote on an amendment or restatement of
these Articles of Incorporation, the vote required for approval shall be (i) the
vote required by the terms of these Articles of Incorporation, as amended or as
restated from time to time, if such terms specifically require the approval of
more than a majority of the votes entitled to be cast thereon by such voting
group; or (ii) if clause (i) of this Article is not applicable, a majority of
the votes entitled to be cast thereon.
ARTICLE VII
TERM
The term of the Corporation is perpetual.
IN WITNESS WHEREOF, the undersigned officer of the aforesaid
Corporation has executed these Articles of Amendment and Restatement as of March
7, 2000.
HOMESIDE LENDING, INC.
By: /s/
Robert J. Jacobs
Executive Vice President, General Counsel
and Secretary
<PAGE>
REGISTERED AGENT CERTIFICATE
In pursuance of the Florida Business Corporations Act, the following is
submitted, in compliance with said statute:
That HomeSide Lending, Inc., which has been organized under the laws of
the State of Florida, with its registered office, as indicated in the Articles
of Incorporation at the City of Jacksonville, County of Duval, State of Florida,
has named Marilyn Lea, located at said registered office, as its registered
agent to accept service of process and perform such other duties as are required
in the State.
ACKNOWLEDGMENT
Having been named to accept service of process and serve as registered
agent for the above-stated Corporation, at the place designated in this
Certificate, the undersigned hereby accepts to act in this capacity, is familiar
with ss. 617.0501, Florida Statutes, and agrees to comply with the provision of
said statute relative in keeping open said office.
DATED this 7th day of March, 2000.
/s/
Marilyn Lea
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