FORM 10-K/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission file number: 1-11017
NORTH AMERICAN MORTGAGE COMPANY
(Exact name of registrant as specified in its charter)
Delaware 68-0267088
(State or other jurisdiction I.R.S. Employer Identification No.)
of incorporation or organization)
3883 Airway Drive, Santa Rosa, California 95403-1699
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (707) 546-3310
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 Par Value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
1
<PAGE>
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
As of March 18, 1997, the latest practicable date, there were
14,057,820 shares of North American Mortgage Company(R) Common Stock, $.01 par
value, (the "Common Stock") outstanding. Based on the closing price for shares
of Common Stock on that date, the aggregate market value of Common Stock held by
non-affiliates of the registrant was approximately $290,845,005. For the
purposes of the foregoing calculation only, all members of the Board of
Directors and executive officers of the registrant have been deemed affiliates.
2
<PAGE>
NORTH AMERICAN MORTGAGE COMPANY
The registrant hereby amends the following items, financial statements, exhibits
or other portions of its Annual Report on Form 10-K for the twelve months ended
December 31, 1996, as set forth in the pages attached hereto:
Exhibits.
Page
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.
3. Exhibits Index........................................ 4
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly amended
NORTH AMERICAN MORTGAGE COMPANY
By: /s/Terrance G. Hodel
-------------------------------------
Terrance G. Hodel
President and Chief Operating Officer
Date: April 2, 1997
3
<PAGE>
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company (Exhibit 3.1(5))
3.2 Amended and Restated Certificate of Incorporation of the Company
(Exhibit 3.2 (5))
3.3 Certificate of Amendment dated April 1, 1992 to Amended and Restated
Certificate of Incorporation of the Company (Exhibit 3.3(5))
3.4 Certificate of Designation of Preferences and Rights of Series A
Convertible Preferred Stock of the Company filed July 13, 1992 (Exhibit
3.4(5))
3.5 Certificate of Merger dated July 16, 1992 of NAMC Sub I, Inc. into the
Company (Exhibit 3.5(5))
3.6 Certificate of Designation of Preferences and Rights of Series A
Cumulative Preferred Stock of the Company filed November 6, 1992
(Exhibit 3.6(5))
3.7* Amended and Restated By-Laws of the Company
4.1 Specimen Common Stock Certificate of the Company (Exhibit 4.1(2))
4.2 Specimen Class A Convertible Preferred Stock Certificate of the Company
(Exhibit 4.4(3))
4.3 Certificate of Designation of Preferences and Rights of Series A
Convertible Preferred Stock of the Company filed July 13, 1992 (See
Exhibit 3.4)
4.4 Certificate of Designation of Preferences and Rights of Series A
Cumulative Preferred Stock of the Company filed November 6, 1992 (See
Exhibit 3.6)
4.5 Shareholder Rights Agreement, dated as of October 19, 1992 between the
Company and The Bank of New York, as Rights Agent (Exhibit 4(4))
4.6 Form of Commercial Paper Note of the Company (Exhibit 4.3(9))
4.7 Form of Indenture between the Company and IBJ Schroder Bank & Trust
Company, as Trustee (Exhibit 4.1(7))
4.8 Form of Medium-Term Note, Series A (Fixed Rate) of the Company (Exhibit
4.2 (8))
4.9 Form of Medium-Term Note, Series A (Floating Rate) of the Company
(Exhibit 4.3(8))
10.1 Master Agreement dated October 22, 1992 between Federal National
Mortgage Association and the Company, as amended (Exhibit 10.4(5))
10.2+ North American Mortgage Company Supplemental Executive Retirement Plan
(Exhibit 10.16(5))
10.3+ Form of Letter Agreement regarding Grant of Non-qualified Stock Options
dated February 1, 1993 (Exhibit 10.19(5))
10.4 Letters of approval to IMCO Realty Services -- a California Limited
Partnership (predecessor of the Company), from Federal National
Mortgage Association, Federal Home Loan Mortgage Corporation,
Government National Mortgage Association, Veterans Administration and
Department of Housing and Urban Development (Exhibit 10.26(1))
- ---------------
+This exhibit constitutes a management contract, compensatory plan or
arrangement. *These exhibits were previously filed as part of this Annual Report
on Form 10-K for the twelve months ended December 31, 1996.
4
<PAGE>
10.5 Priority Forward Commitment dated April 30, 1993 between Residential
Funding Corporation and the Company (Exhibit 10.58(6))
10.6 Servicing Rights Purchase Agreement dated March 31, 1993 between the
Company and GE Capital Mortgage Services, Inc. (Exhibit 10.59(6))
10.7 Commercial Paper Dealer Agreement dated October 6, 1993 between Morgan
Stanley & Co. Incorporated and the Company (Exhibit 10.62(9))
10.8.1 First Amendment to Master Agreement dated December 17, 1992 between
Federal National Mortgage Association and the Company (Exhibit
10.64.1(9))
10.8.2 Second Amendment to Master Agreement dated March 25, 1993 between
Federal National Mortgage Association and the Company (Exhibit
10.64.2(9))
10.8.3 Third Amendment to Master Agreement dated March 18, 1993 between
Federal National Mortgage Association and the Company (Exhibit
10.64.3(9))
10.8.4 Fourth Amendment to Master Agreement dated April 28, 1993 between
Federal National Mortgage Association and the Company (Exhibit
10.64.4(9))
10.8.5 Fifth Amendment to Master Agreement dated May 17, 1993 between Federal
National Mortgage Association and the Company (Exhibit 10.64.5(9))
10.8.6 Sixth Amendment to Master Agreement dated June 11, 1993 between Federal
National Mortgage Association and the Company (Exhibit 10.64.6(9))
10.8.7 Seventh Amendment to Master Agreement dated July 8, 1993 between
Federal National Mortgage Association and the Company (Exhibit
10.64.7(9))
10.8.8 Eighth Amendment to Master Agreement dated August 16, 1993 between
Federal National Mortgage Association and the Company (Exhibit
10.64.8(9))
10.8.9 Ninth Amendment to Master Agreement dated September 2, 1993 between
Federal National Mortgage Association and the Company (Exhibit
10.64.9(9))
10.8.10 Tenth Amendment to Master Agreement dated September 3, 1993 between
Federal National Mortgage Association and the Company (Exhibit 10.64.10
(9))
10.9 As Soon As Pooled/Early Purchase Option Agreement dated August 12, 1993
between Federal National Mortgage Association and the Company (Exhibit
10.65(9))
10.10 Mandatory Commitment Letter Agreement dated November 11, 1993 between
The Prudential Home Mortgage Company, Inc. and the Company (Exhibit
10.29(10))
10.11 Standby Commitment Contract dated December 9, 1993 between GE Capital
Mortgage Services, Inc. and the Company (Exhibit 10.30(10))
10.12 Agreement for Purchase and Sale of Servicing dated as of December 24,
1993 between BancBoston Mortgage Corporation and the Company (Exhibit
10.32(10))
10.13.1 Eleventh Amendment to Master Agreement dated November 15, 1993 between
Federal National Mortgage Association and the Company (Exhibit
10.33.1(10))
10.13.2 Twelfth Amendment to Master Agreement dated November 24, 1993 between
Federal National Mortgage Association and the Company (Exhibit
10.33.2(10))
10.13.3 Thirteenth Amendment to Master Agreement dated December 22, 1993
between Federal National Mortgage Association and the Company (Exhibit
10.33.3(10))
10.14 Renewal of Master Agreement dated as of December 22, 1993 between the
Federal Home Loan Mortgage Corporation and the Company (Exhibit
10.34(10))
5
<PAGE>
10.15 Administrative Procedures for Deferral Elections for the North American
Mortgage Company 1994 Deferred Compensation Program for Executive Vice
Presidents, the President and the Chief Executive Officer (Exhibit
10.36(10))
10.16 Deferred Compensation Program and Administrative Procedures for
Deferral Elections (Exhibit 10.37(10))
10.17 Master Agreement dated March 31, 1994 between Federal National Mortgage
Association and the Company (Exhibit 10.41(11))
10.18 Renewal of Master Agreement dated March 31, 1994 between Federal Home
Loan Mortgage Corporation and the Company (Exhibit 10.42(11))
10.19 First through Fourth Amendments to Master Agreement dated March 31,
1994, between Federal National Mortgage Association and the Company
(Exhibit 10.45(12))
10.20+ Form of Letter Agreement regarding Grant of Qualified Stock Options
dated April 29, 1994 and Schedule of Option Agreements with Executive
Officers (Exhibit 10.32(13))
10.21+ Termination Agreement between John F. Farrell, Jr. and the Company
dated February 6, 1995 (Exhibit 10.34(13))
10.22+ Termination Agreement between Terrance G. Hodel and the Company dated
February 6, 1995 (Exhibit 10.35(13))
10.23+ Form of Termination Agreement for Executive Officers, other than the
Chief Executive Officer and the President, and Schedule of Termination
Agreements with Executive Officers (Exhibit 10.36(13))
10.24+ Form of Letter Agreement regarding Grant of Qualified Stock Options
dated February 22, 1995 and Schedule of Agreements with Executive
Officers (Exhibit 10.37(13))
10.25+ North American Mortgage Company Incentive Stock Option Plan, as amended
(Exhibit 10.38(13))
10.26.1 Fifth Amendment to Master Agreement dated December 8, 1994, between
Federal National Mortgage Association and the Company (Exhibit
10.39.1(13))
10.26.2 Sixth Amendment to Master Agreement dated January 31, 1995, between
Federal National Mortgage Association and the Company (Exhibit
10.39.2(13))
10.26.3 Seventh Amendment to Master Agreement dated March 7, 1995, between
Federal National Mortgage Association and the Company (Exhibit
10.39.3(13))
10.26.4 Eighth Amendment to Master Agreement dated March 22, 1995, between
Federal National Mortgage Association and the Company (Exhibit
10.39.4(13))
10.27 Commercial Paper Dealer Agreement dated as of February 15, 1995 between
the Company and Chase Securities, Inc. (Exhibit 10.42(13))
10.28 Third Amendment to Pool Purchase Contract between Federal National
Mortgage Association and the Company (Exhibit 10.44(14))
10.29 Renewal of Master Agreement dated as of March 23, 1995 between Federal
National Mortgage Association and the Company (Exhibit 10.45(14))
- ---------------
+This exhibit constitutes a management contract, compensatory plan or
arrangement.
6
<PAGE>
10.30 Master Agreement dated April 17, 1995 between Federal National Mortgage
Association and the Company (Exhibit 10.46(15))
10.31 Amendment No. One to Master Agreement dated April 17, 1995 between
Federal National Mortgage Association and the Company (Exhibit
10.47(15))
10.32 Amendment No. Two to Master Agreement dated April 17, 1995 between
Federal National Mortgage Association and the Company (Exhibit
10.48(15))
10.33 Amendment No. Three to Master Agreement dated April 17, 1995 between
Federal National Mortgage Association and the Company (Exhibit
10.49(15))
10.34 Consolidated Second Amended and Restated Revolving Credit Agreement
dated as of January 23, 1996 by and among the Company and The First
National Bank of Chicago, as administrative agent, and certain other
parties identified therein (Exhibit 10.37(16))
10.35 Renewal of Master Agreement dated as of March 23, 1996 between Federal
Home Loan Mortgage Corporation and the Company (Exhibit 10.38(16))
10.36+ Form of Letter Agreement regarding Grant of Qualified Stock Options
dated February 14, 1996 and Schedule of Agreements with Executive
Officers (Exhibit 10.39(16))
10.37+ North American Mortgage Company Deferred Base Salary or Bonus Program
(Exhibit 10.40(16))
10.38+ National Union Fire Insurance Company of Pittsburgh, PA.(R) Directors
and Officers Insurance and Company Reimbursement Policy (Exhibit
10.41(16))
10.39+ Chubb Group of Insurance Companies Directors and Officers Liability and
Reimbursement Excess Policy (Exhibit 10.42(16))
10.40 Master Agreement dated as of April 4, 1996, between Federal National
Mortgage Association and the Company (Exhibit 10.43(17))
10.41 Master Commitment Amendment dated May 31, 1996 between Federal Home
Loan Mortgage Corporation and the Company (Exhibit 10.44(18))
10.42 Master Commitment Amendment dated July 23, 1996 between Federal Home
Loan Mortgage Corporation and the Company (Exhibit 10.45(18))
10.43 American International Companies Directors, Officers and Corporate
Insurance Policy (Exhibit 10.46(19))
10.44 Chubb Group of Insurance Companies Directors and Officers Liability and
Reimbursement Excess Policy (Exhibit 10.47(19))
10.45+* Senior Executive Severance Pay Plan of North American Mortgage Company
11* Statement re Computation of Per Share Earnings
13** 1996 Annual Report to Stockholders
21* Subsidiaries of the Registrant
23* Consent of Independent Auditors
27* Financial Data Schedule
- ---------------
+This exhibit constitutes a management contract, compensatory plan or
arrangement. *These exhibits were previously filed as part of this Annual Report
on Form 10-K for the twelve months ended December 31, 1996.
*These exhibits were previously filed as part of this Annual Report on Form 10-K
for the twelve months ended December 31, 1996.
**Filed herewith.
7
<PAGE>
(1) Incorporated by reference to designated exhibit to the Company's
Registration Statement on Form S-4, filed under Registration No.
33-44681 on December 23, 1991.
(2) Incorporated by reference to designated exhibit to the Company's
Registration Statement on Form S-1 and Amendment No. 1 thereto, filed
under Registration No. 33-44680 on February 12, 1992.
(3) Incorporated by reference to designated exhibit to the Company's
Registration Statement on Form S-4 and Amendment No. 2 thereto, filed
under Registration No. 33-44681 on February 26, 1992.
(4) Incorporated by reference to designated exhibit to the Company's
Current Report on Form 8-K filed under Commission File No. 1-11017 on
November 6, 1992.
(5) Incorporated by reference to designated exhibit or schedule to the
Company's Annual Report on Form 10-K filed under Commission File No.
1-11017 on March 30, 1993.
(6) Incorporated by reference to designated exhibit to the Company's
Quarterly Report on Form 10-Q filed under Commission File No. 1-11017
on May 14, 1993.
(7) Incorporated by reference to designated exhibit to the Company's
Registration Statement on Form S-3, filed under Registration No.
33-69318 on September 23, 1993.
(8) Incorporated by reference to designated exhibit to the Company's
Current Report on Form 8-K filed under Commission File No. 1-11017 on
October 25, 1992.
(9) Incorporated by reference to designated exhibit to the Company's
Quarterly Report on Form 10-Q filed under Commission File No. 1-11017
on November 12, 1993.
(10) Incorporated by reference to designated exhibit or schedule to the
Company's Annual Report on Form 10-K filed under Commission File No.
1-11017 on March 30, 1994.
(11) Incorporated by reference to designated exhibit to the Company's
Quarterly Report on Form 10-Q filed under Commission File No. 1-11017
on May 14, 1994.
(12) Incorporated by reference to designated exhibit to the Company's
Quarterly Report on Form 10-Q filed under Commission File No. 1-11017
on November 12, 1994.
(13) Incorporated by reference to designated exhibit or schedule to the
Company's Annual Report on Form 10-K filed under Commission File No.
1-11017 on March 30, 1995.
(14) Incorporated by reference to designated exhibit to the Company's
Quarterly Report on Form 10-Q filed under Commission File No. 1-11017
on May 14, 1995.
(15) Incorporated by reference to designated exhibit to the Company's
Quarterly Report on Form 10-Q filed under Commission File No. 1-11017
on August 14, 1995.
(16) Incorporated by reference to designated exhibit or schedule to the
Company's Annual Report on Form 10-K filed under Commission File No.
1-11017 on March 30, 1996.
(17) Incorporated by reference to designated exhibit to the Company's
Quarterly Report on Form 10-Q filed under Commission File No. 1-11017
on May 14, 1996.
(18) Incorporated by reference to designated exhibit to the Company's
Quarterly Report on Form 10-Q filed under Commission File No. 1-11017
on August 14, 1996.
(19) Incorporated by reference to designated exhibit to the Company's
Quarterly Report on Form 10-Q filed under Commission File No. 1-11017
on September 14, 1996.
8
[INSIDE FRONT COVER]
CONTENTS
Letter to Stockholders 2
Financial Highlights 4
Positioned for Profits 5
Financials 17
Corporate Directory 48
Stockholder Information 49
<PAGE>
COMPANY OVERVIEW
North American Mortgage Company is a leading U.S. mortgage banker funding $9.5
billion in loans for the purchase or refinance of homes in 1996 and operating
more than 100 loan production offices in 32 states. The Company is the nation's
third largest independent mortgage banker and ranks in the top dozen of all home
mortgage lenders It offers a wide array of loan products and programs to
consumers realty brokers, mortgage brokers and builders, and in addition
provides related financial products, including home equity credit and full lines
of insurance. The Company also services Mortgage loans and ended 1996 with a
servicing portfolio of $13.3 billion.
<PAGE>
[PHOTO]
<PAGE>
TO OUR STOCKHOLDERS
During the past year, North American Mortgage Company completed the investment
phase of the corporate strategy we developed to strengthen, diversify and grow
the Company. Many key initiatives are now fully implemented and others are well
underway. We believe that, due to strategic decisions and additional investments
made during the past two years, the Company is well positioned to succeed in
today's difficult mortgage-banking environment.
In 1996, the strong housing market and relatively favorable interest rate
environment spurred consumer loan demand, resulting in an estimated $785 billion
in new residential mortgage originations. This growth in volume, however, was
accompanied by continued consolidation within the industry and severe price
competition. In this highly charged environment, your Company increased its loan
fundings by 26 percent over 1995, to $9.5 billion. Earnings for the year were
$2.30 per share despite price competition and continued start-up costs
associated with strategic investments. We believe that, with initiatives on
course, investments made and major expansions complete, we will be able to
compete effectively in 1997.
The recent trend toward consolidation in our industry shows no signs of abating.
Commercial banks have become major players in the mortgage market through
banking industry consolidation and the acquisition of independent mortgage
companies. North American Mortgage Company faces larger and more powerful
competitors than ever before. Fewer companies control more of the market. At the
beginning of the decade, the combined market shares of the 25 largest
originators accounted for little more than one-quarter of the total, while in
1996 the same group captured nearly 40 percent. Consolidation has also resulted
in price competition, driving the Company's price subsidies to borrowers to an
average of 35 basis points on loans originated in 1996, compared with 32 basis
points in 1995 and 22 basis points in 1994.
As these statistics demonstrate, mortgage banking today is an enterprise that
demands new thinking. North American Mortgage Company has considered carefully
how best to compete under these evolving conditions, and we have taken specific
strategic actions to deal with each of the challenges presented by our industry.
We have met our challenges by strengthening our core business of mortgage
origination; by entering related businesses where we can leverage our expertise
and resources; by reducing our production costs through hub-and-spoke processing
between branches and satellites; and by investing in people and technology. Each
of these actions merits discussion, and each should strengthen our competitive
position in 1997.
2
<PAGE>
STRENGTHENING OUR CORE BUSINESS North American Mortgage Company has gained
capacity through expanded operations and a continuing push for efficiencies,
with a focus on processing. From our origins in California, your Company has
sought and achieved a national presence that allows us to take full advantage of
the regional nature of business cycles, expanding where the local economy is
growing. With 109 offices in 32 states in every region of the country, our
expansion drive is now complete. We have also worked to become a more efficient
producer with the full implementation of our re- engineered loan processing
system, developed in consultation with Coopers & Lybrand.
ENTERING RELATED BUSINESSES In today's competitive climate, a broad market
presence and efficient operations cannot, in themselves, ensure the continued
financial health of your Company. We are engaged in ongoing evaluation of and
entry into closely related businesses that draw on our core competencies as
mortgage bankers, businesses where we can capitalize on our existing
distribution network and physical and technological infrastructure. We look for
opportunities in higher-margin businesses that will generate additional revenue
streams and that will offset the cycles of the mortgage industry. In prior
years, we took the first steps of introducing insurance, home equity and credit
card products.
In 1996, we made an important decision to enter subprime lending, which offers
considerably higher profit margins than conventional mortgage lending. After
examining alternatives, we inaugurated this highly promising venture in a
strategic alliance with a major subprime securitizer, ContiMortgage, a
subsidiary of ContiFinancial. Following a pilot phase in seven of our branches
during the fourth quarter of 1996, we are now rolling out the subprime program
across the Company and we expect to complete implementation in our wholesale
branches during the first quarter of 1997.
During 1996, the Company decided to securitize mortgage loans that exceed Fannie
Mae and Freddie Mac guidelines in order to offer desirable products with more
timely approvals and consistent pricing and underwriting standards than are
possible under sale to a loan conduit. We intend to sponsor our first
securitization in the second quarter of 1997.
We also introduced an affinity program with United Airlines that offers members
of United's frequent flier program miles for mortgages, and we are actively
investigating similar programs with market leaders in travel and other industry
sectors.
REDUCING PRODUCTION COSTS In addition to expanding our reach during the past
year, we continued to seek ways to lower production costs. Beginning in
wholesale branches, we experimented with a hub-and-spoke transaction model in
which full-service branches within a region carry out the processing and
underwriting functions for loan applications generated by satellite offices. We
then expanded the model to selected retail branches. Our retail branches now
support processing for more than 50 satellites. We are currently analyzing the
existing branch network to identify additional locations where hub-and-spoke
linkages will generate further savings.
3
<PAGE>
INVESTING IN PEOPLE AND TECHNOLOGY In tandem with our geographical expansion and
cost-saving initiatives, we have invested significant resources in recruiting,
training and retaining top employees and adding important new technological
tools. These investments are now complete and we look forward to profiting from
them in the years to come.
In addition to inaugurating and following through on its strategic initiatives,
North American Mortgage Company continues to pay close attention to financial
fundamentals. Our balance sheet remains strong; we have a current warehouse line
of credit of $1 billion; our investment-grade debt ratings were affirmed by the
rating agencies; and we continue to enjoy good financial liquidity.
Despite the challenges of the increasingly competitive lending environment, we
believe that 1997 will offer many opportunities to North American Mortgage
Company. The economy is healthy, and consumer confidence is high - both primary
determinants for home purchase decisions. Your Company is now positioned to
benefit from the initiatives we have implemented and the investments we have
made. We thank you for your support during this period of building, and we look
forward to rewarding your confidence in 1997.
[s/John F. Farrell, Jr.] [s/Terrance G. Hodel]
John F. Farrell, Jr Terrance G. Hodel
Chairman of the Board President
Chief Executive Officer Chief Operating Officer
March 14, 1997
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan production In millions $9,473 $7,495 $9,755 $17,607
Servicing portfolio
In millions $13,293 $14,109 $14,839 $17,280
Net income In thousands $32,953 $40,455 $8,182 $47,694
Total assets In thousands $853,657 $746,368 $765,374 $1,627,843
Stockholders' equity
In thousands $203,401 $193,144 $153,105 $165,380
Net income per share $2.30 $2.69 $0.53 $3.17
Average shares outstanding
In thousands 14,317 15,039 15,480 15,035
</TABLE>
4
<PAGE>
NORTH AMERICAN MORTGAGE COMPANY
POSITIONED FOR PROFITS
In 1996, North American Mortgage Company increased originations by 26 percent to
$9.5 billion, while implementing initiatives designed to increase profits in
1997 and beyond. As we continue to compete effectively in a mortgage-banking
environment characterized by fewer major players and greater price competition,
we know that long-term success depends on maintaining a solid foundation in our
core business, entering promising new businesses, operating through the most
efficient structure, and making the most of our investments in people and
technology.
LOAN ORIGINATIONS($ IN BILLIONS)
[BAR CHART]
- -----------------------------------
'95 '96
7.5 9.5
- -----------------------------------
5
<PAGE>
<PAGE>
[PHOTO]
Profitability depends on making the right strategic decisions - like growing our
retail market share by offering customers attractive products and the ability to
do business at their convenience.
<PAGE>
NORTH AMERICAN MORTGAGE COMPANY
A STRONG BASE
The Company has steadily developed its core business of mortgage lending by
extending its geographical market reach, employing multiple origination
channels, offering a range of diverse products and emphasizing operational
efficiency. In addition to generating revenue from mortgage production, the
Company has continued to improve the performance of its servicing operation.
Over the past five years, we have achieved a significant presence in all major
markets. We are particularly pleased with the performance of our Midwest and
Northeast regions, both operations we built from the ground up. Within four
years of start-up, together the Midwest and Northeast regions have grown to
generate more than one-quarter of the Company's total fundings.
THE RIGHT BALANCE OF ORIGINATION CHANNELS The Company recognizes the value of
reaching customers through retail, wholesale and telemarketing channels. This
three-part approach allows the Company to benefit from the advantages of each
channel without becoming too dependent on any one. Our branch expansion,
completed in 1996, has increased our volume of retail business, which today is
our most profitable origination channel. Retail is primarily oriented to the
purchase market, which, since the refinancing boom in 1993, has accounted for
more than 70 percent of originations nationwide. At North American Mortgage
Company, retail volume, including telemarketing, stood at 42 percent of all
originations in 1996.
The wholesale channel, which produces a higher percentage of refinancings than
retail production, is based on the Company's relationship with a network of more
than 6,500 independent mortgage brokers. The Company maintains ties with this
broker network through calling officers and marketing seminars, which are
designed to increase awareness of the Company's loan products and to assist
brokers in educating their customers.
AN ARRAY OF PROGRAMS AND PRODUCTS We believe that providing consumers with a
diverse array of attractive programs and products is a way to differentiate
North American Mortgage Company in the marketplace. Accordingly, we have created
programs that are directed primarily at purchase loans and are targeted to
different kinds of consumers and markets. These programs are particularly
important to maintaining a healthy retail channel, and they performed well in
1996. Purchase Express(R), for example, is an advance credit approval program
intended to build customer loyalty. As popular among realty brokers as it is
among buyers, Purchase Express accounted for 24 percent of the Company's total
retail fundings in 1996.
RETAIL/WHOLESALE COMPARISON
($ In Millions)
[BAR CHART]
'94 '95 '96
- ----------------------------------
* 3,822 3,312 3,995
+ 5,933 4,183 5,478
- ----------------------------------
* Retail
+ Wholesale
FUNDING BY REGION
(% of Total Funding)
[CHART BY REGION]
'94 '95 '96
- ------------------------------------------------
Pacific 23% 19% 20%
Southern CA/NV 21% 19% 18%
Southwest 24% 23% 18%
Midwest 3% 14% 18%
Mid-Atlantic 20% 15% 13%
Northeast 2% 5% 8%
Telemarketing 7% 5% 5%
- ------------------------------------------------
[REGIONAL GRAPHIC MAP OF UNITED STATES]
7
<PAGE>
NORTH AMERICAN MORTGAGE COMPANY
NUMBER OF LOANS PER SERVICING EMPLOYEE
[BAR CHART]
'94 '95 '96
- ----------------------------------
+ 933 1,070 1,086
* 692 732 n/a
- ----------------------------------
+ NAMC*
* MBA**
* North American Mortgage Company
**Mortgage Bankers Association
LOAN DELINQUENCY RATE
(INCLUDES FORECLOSURES)
[BAR CHART]
'94 '95 '96
- ----------------------------------
+ 2.43% 3.06% 3.43%
* 5.28% 5.40% 5.40%
- ----------------------------------
+ North American Mortgage Company
* Mortgage Bankers Association
Some of the Company's most successful loan programs are aimed at fast-growing
but traditionally underserved segments of the overall mortgage market. Opening
Doors for America(TM)is a community lending program that uses such vehicles as
special loan programs, flexible underwriting, outreach and education to help
make home buying a reality for first-time, low- to moderate-income and minority
purchasers. This commitment has benefited communities across the country, and it
has had a significant impact on the Company, accounting for $2.6 billion of our
1996 production. Opening Doors for America has also earned us recognition from
the Federal Housing Administration as one of the nation's top five FHA lenders
to African-American, Asian-American and Hispanic households.
Another innovative program, introduced in 1995, is Rehab Express,(TM)a
government-insured loan that targets older, urban markets by combining purchase
and property improvement costs. In 1996, the first full year Rehab Express was
offered, North American Mortgage Company was the fourth-largest originator of
loans of this type, according to the Department of Housing and Urban
Development. Although this specialized and complex product represents modest
volume for the Company, it generates high revenue due to limited price
competition. Based on the success of Rehab Express, we are planning to add a
conventional loan to our rehabilitation product line in 1997.
A HIGH-QUALITY SERVICING PORTFOLIO North American Mortgage Company ended 1996
with a servicing portfolio of $13.3 billion. The delinquency rate is a key
measure of portfolio quality, and in 1996 the Company continued its enviable
record against the industry average. While our delinquency rate rose slightly in
1996 to 3.58 percent (including foreclosures), it compares very favorably with
the industry-wide figure of 5.65 percent. Our average coupon rate also rose
modestly, to 7.80 percent in 1996 from 7.73 percent in 1995, but it remained in
line with prevailing interest rates, continuing to reduce the probability of
borrower refinancing and consequent portfolio runoff.
Making optimal use of technology, reporting and tracking regulatory changes, the
Company is among the most efficient servicers in the industry. For example, in
1996, the Company serviced an average of 1,086 loans per servicing employee.
This figure, up for the third consecutive year, compares with an industry
average of 732 loans per servicing employee in 1995, the latest year for which
statistics are available.
8
<PAGE>
NORTH AMERICAN MORTGAGE COMFPANY
NEW OPPORTUNITIES
North American Mortgage Company actively evaluates related new business
opportunities that hold promise for the future. We subject these ventures to
stringent tests: they must draw on our core competencies as mortgage bankers,
they must be delivered through our existing channels, they must be congruent
with our corporate mission and they must hold significant potential for profit.
In 1996, we expanded our existing related businesses, introduced three highly
promising new initiatives and began planning for future additions.
CROSS-SELLING PRODUCTS TO CURRENT CUSTOMERS North American Mortgage Company has
a broad database of qualified customers - new homebuyers, refinancers and those
whose loans it services - who are potential buyers of related products and
services. New homeowners, for example, frequently encounter changing insurance
requirements, and the Company has expanded its product lines through its
subsidiary North American Mortgage Insurance Services (NAMIS) to serve them.
NAMIS has a dedicated sales force operating in conjunction with the Company's
production branches and from its headquarters in Santa Rosa. The insurance
operation offers homeowners, auto and life insurance and is licensed to write
policies in most states where the Company originates loans.
The Company more than doubled the size of its insurance portfolio in 1996 with
the acquisition of the assets of Lomas Insurance Services, a national provider
of personal lines insurance products and services. At year-end, NAMIS had 89,068
policies in force, compared with 33,225 at the close of 1995.
In December 1995, the Company introduced EquityEdge,(TM)a home equity line of
credit. Homebuyers can take advantage of this convenient product at the time of
a mortgage loan closing with virtually no extra paperwork. Some customers use
the credit line for immediate improvements, some employ it to eliminate the need
for mortgage insurance or to reduce a "jumbo" loan to meet the conforming limit,
and some simply want to have a cushion for unexpected expenses. EquityEdge is
also available as a stand-alone product, allowing homeowners to draw on the
equity in their homes to meet such needs as home improvements, major purchases,
college tuition or debt consolidation while taking advantage of tax benefits. In
1996, the product's first year, EquityEdge generated $58.5 million in fundings.
As these examples demonstrate, the Company and its insurance subsidiary have
recently increased the number of products available for cross-sale, and each is
actively marketing its products to customers - at the point of sale, when the
customer has an active need.
9
<PAGE>
[PHOTO]
Through subprime lending, we offer people who have hit a financial rough spot
the chance to consolidate debt and get on with their lives.
<PAGE>
SUBPRIME LENDING The most significant strategic decision the Company reached in
1996 was to enter subprime lending. This line of business, generating loans used
primarily as debt-consolidation vehicles by homeowners with less than impeccable
credit histories, offers opportunity on many fronts. Consumers, who have
collectively run up the highest rates of personal debt ever, are now eager to
use the equity they have in their homes to help them manage that debt,
especially at interest rates considerably lower than those on credit cards.
Current market size is estimated at $120 billion, and no lender controls even a
five percent market share. The yields available to originators are much higher
than for conventional mortgage loans. Subprime lending will flow through the
retail, wholesale and telemarketing channels already employed by the Company.
North American Mortgage Company can take advantage of this market, originating
subprime loans in its existing production offices, for the most part with
current personnel. As a leading mortgage lender, we can bring efficiencies, add
credibility and increase the customer service quotient in subprime lending.
In determining the course of its entry into the subprime market, the Company
evaluated and rejected the alternative scenarios of acquisition and start-up.
Instead, we decided to capitalize on our strengths in processing and
distribution by seeking a strategic alliance with a major securitizer of
subprime loans. This option had a threefold advantage: it was the quickest, the
most cost effective and entailed the least amount of risk.
In October, the Company officially entered the subprime business in a strategic
alliance with ContiMortgage, a subsidiary of ContiFinancial, a major securitizer
of subprime loans. ContiMortgage will underwrite and purchase the Company's
originations and will also assist us in training our originators and processors
in the special characteristics of these loans.
A pilot subprime program was inaugurated in six wholesale branch offices and our
telemarketing operation during the fourth quarter of 1996, using our existing
broker network and reaching out to additional brokers who specialize in subprime
lending. Initial response has been very positive, and we plan to roll out
subprime lending to our 46 wholesale branches during the first quarter. We will
also implement training, tools and systems to support subprime lending through
our retail channel.
SECURITIZING NONCONFORMING LOANS Nonconforming loans, in contrast to subprime
loans, are distinguished by size or other characteristics apart from borrower
credit. Traditionally, nonconforming loans have been sold to securitizers who
offer a patchwork of constantly changing guidelines, leading inevitably to
approval delays and inconsistent pricing and underwriting standards. In 1996,
North American Mortgage Company studied the option of leveraging the Company's
financial strength to create its own nonconforming products. We determined that
we can benefit by acting as our own securitizer, gaining control over product,
pricing and underwriting while streamlining approval. We plan to complete our
first securitization during the second quarter of the year.
UNITED AIRLINES AFFINITY PROGRAM In late 1996, North American Mortgage Company
entered into a partnership with United Airlines in a miles-for-mortgage program
offered to United's MILEAGE PLUS(R) members. The HouseMiles(TM)program proved
immediately popular with consumers because of its special features: a simple
formula based on loan amount rather than interest payment, with no ceiling; all
miles delivered up front rather than in installments; and the draw of a major
airline carrier. The size of the average HouseMiles loan to date is in excess of
$156,000, compared with the 1996 Company-wide average of $97,162. The program
underscores the value of strategic partnerships with leading companies, an
avenue the Company will continue to pursue in 1997.
11
<PAGE>
[PHOTO]
We have structured our business to foster entrepreneurship and flexibility
within regions while lowering costs.
<PAGE>
NORTH AMERICAN MORTGAGE COMPANY
A Flexible Business Structure
Throughout the entire organization, North American Mortgage Company practices
autonomous decision making in the context of a cohesive corporate culture. In
growing our Company to a national organization, we opted for a decentralized
structure supported by significant management guidance. Branches function as
entrepreneurial small businesses, competing aggressively in their local
territories and making their own decisions, within Company guidelines, on
pricing, processing, underwriting and funding. This approach has enabled us to
operate flexibly, seeking maximum opportunity in a highly regionalized mortgage
market, while giving us an edge in recruiting able, ambitious staff.
HUBS AND SPOKES In 1996, we experimented with a lower-cost way to expand our
market penetration through a regional hub-and-spoke transaction model. We
believe that delegating authority within established guidelines allows us to be
more competitive in regional markets. Nevertheless, we recognize that certain
processing and underwriting functions can be accomplished more efficiently by
full-service branches on behalf of satellite offices within the same region. We
began applying the hub-and-spoke model in existing wholesale branches and
expanded it to include selected retail branches and satellites in 1996. In 1997,
we will extend the use of the model to additional locations within our network
of existing branches. In addition to benefiting from processing efficiencies, we
can now respond more quickly to local economic conditions because satellite
offices are easier to open and less costly to operate than full-service
branches. With hub-and-spoke processing, we will ultimately achieve a greater
local presence, while giving loan officers in satellite offices the back-up they
need to be successful and reducing our overall origination costs.
RETAIL BRANCH FUNCTIONS IN HUB-AND-SPOKE SYSTEM
[FLOW CHART]
- ---------------------------------------------------------------
SATELLITE BRANCHES SATELLITE BRANCHES
FULL-SERVICE BRANCHES
SATELLITE BRANCHES SATELLITE BRANCHES
- ---------------------------------------------------------------
FULL-SERVICE BRANCHES SATELLITE BRANCHES
Meet with customers Meet with customers
Take applications Take applications
Process loans Ship loans to full-service
Underwrite loans branches for processing
Prepare loan documents
Fund loans
Ship funded loan packages
to corporate headquarters
- ---------------------------------------------------------------
13
<PAGE>
[PHOTO}
Bringing the origination process closer to the customer is one of the ways we
deliver superior service...and gain competitive advantage.
<PAGE>
NORTH AMERICAN MORTGAGE COMPANY
A UNIQUE CONVERGENCE OF PEOPLE AND TECHNOLOGY
The Company has invested heavily in both skilled people and appropriate
technology over the past several years - adding 172 retail loan officers in
1996, for example. We fully expect to capitalize on that investment in 1997 and
the years to come. We take an integrated approach to human and technological
resources: by recruiting the right people, by giving them the training to make
them more productive and by putting powerful and user-friendly technological
tools on their desktops, we benefit from a unique convergence of these two key
resources.
In 1996, we implemented a new telecommunications infrastructure that will be
capable of supporting future growth even if specific overlaying business
strategies change. In 1997, we plan to create an enterprise-wide data warehouse
to ensure consistency and usability of data throughout the Company. This
initiative symbolizes our philosophy of maintaining centralized control of data
with decentralized delivery of information so that all offices and all functions
- - production, processing, underwriting and servicing - can access the tools they
need to do their jobs more efficiently and more profitably.
FASTER, BETTER, CLOSER TO THE CUSTOMER Automated credit scoring, introduced in
1995, was fully implemented across all wholesale branches in 1996. This system
gives the Company immediate feedback regarding a customer's credit risk and
increases the accuracy and consistency of our credit scoring, resulting in
greater efficiencies and higher-quality loan originations.
Even more ambitious is the automated underwriting program, which is currently
being integrated into the process our underwriters use to do their jobs. We
anticipate that this automated system will handle approximately one-third of our
loans with very little manual intervention by underwriters, thus saving
personnel costs. For the balance of our loan applications, the system will flag
specific problems for the underwriter to investigate. Automated underwriting
will be moved further forward in the production system. By the fourth quarter of
1997, we expect to have it installed on originators' laptop computers so that
they can have an early indication of risk and counsel customers accordingly.
Automated underwriting at the laptop level is part of our ongoing effort to
bring the entire production process closer to the customer at the retail point
of sale, whether that point is a kitchen table, a satellite office or a
full-service branch. In 1996, we completed the enhancement of software on
laptops across the Company, transforming them from data recorders for
applications into interactive tools capable of generating prequalification or
loan status reports when the loan officer and customer are face to face.
Technology also plays a major role in the efficient handling of our servicing
portfolio. Our artificial intelligence and scoring collection system enables our
servicing employees to spot potential problem areas earlier in the process so
they may contact certain borrowers sooner in the credit cycle and work with
those who need help.
RETAIL LOAN OFFICERS AND RETAIL BRANCHES
[BAR CHART]
- ---------------------------------
'94 '95 '96
* 638 623 803
+ 85 91 106
- ---------------------------------
* Number of Retail Loan Officers
+ Number of Retail Branches
15
<PAGE>
NORTH AMERICAN MORTGAGE COMPANY
ENHANCED COMMUNICATIONS In 1996, we began to make use of the World Wide Web for
communicating inside and outside the Company. We implemented a Company intranet
for internal communications, a particular advantage for a national organization
such as ours. Currently, our intranet offers features such as bulletin boards
where employees in different regions can share information. The intranet will
also deliver information during the production process and serve as a training
medium. On the external front, the Company launched its site on the World Wide
Web in February 1997 at www.namc.com. As electronic commerce develops more
fully, we expect our Web site to emerge as an alternative delivery channel for
retail customers, realty brokers, builders and our partners in business
alliances.
DEVELOPING THE POTENTIAL OF OUR PEOPLE During the past year, we increased our
emphasis on branch management training, raising capabilities with new management
tools and techniques. In small-group sessions throughout the year, all regional,
district and branch managers participated in Branch Management Works, a
week-long intensive learning experience at North American Mortgage Company's
Santa Rosa headquarters. The curriculum, which was developed at the corporate
level with input from the field, covered financial analysis, pricing, planning
for growth and sales management.
16
<PAGE>
FINANCIALS
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA YEAR ENDED DECEMBER 31
(Amounts in thousands, except Operating and Per Share Data)
<CAPTION>
SELECTED STATEMENT OF OPERATING DATA 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Loan administration fees, net $ 45,280 $ 41,830 $ 50,574 $ 38,784 $ 26,314
Loan origination fees 84,605 69,282 75,140 125,807 80,860
Gain (loss) from sales of loans 101,153 81,652 (14,951) 37,912 26,508
Net interest income 28,680 27,534 29,491 30,021 24,425
Gain from sales of servicing 37,634 46,037 120,739 88,821 52,102
Other 9,441 8,445 7,172 7,594 6,279
----- ----- ----- ----- -----
Total Revenues $306,793 $274,780 $268,165 $ 328,939 $ 216,488
Expenses:
Amortization and impairment
of purchased and originated
servicing 10,462 7,310 965 5,072 5,799
Other expenses 241,349 203,753 255,963 250,435 163,233
------- ------- ------- ------- -------
Total Expenses $251,811 $211,063 $256,928 $ 255,507 $ 169,032
======== ======== ======== ========= ==========
Income before income tax expense 54,982 63,717 11,237 73,432 47,456
Income tax expense 22,029 23,262 3,055 25,738 7,290
Net Income $ 32,953 $ 40,455 $ 8,182 $ 47,694 $ 40,166
-------- -------- ------- --------- ----------
Net income per share(1) $ 2.30 $ 2.69 $ .53 $ 3.17
-------- -------- ------- ---------
Dividends per share $ .24 $ .24 $ .24 $ .21 $ .05
-------- -------- ------- --------- ------
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL PRO FORMA INFORMATION(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental pro forma net income $ 32,456
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental pro forma net income per share $ 2.37
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding(3) 14,317 15,039 15,480 15,035 13,704
------ ------ ------ ------ ------
SELECTED BALANCE SHEET DATA AT END OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 22,005 $ 12,273 $102,045 $ 11,695 $ 5,192
Total assets 853,657 746,368 765,374 1,627,843 1,020,560
Short-term borrowings(4) 158,584 146,833 205,175 1,047,357 783,801
Term loan -- -- -- -- 16,388
Purchase money note -- -- 10,580 12,091 13,473
Notes payable 75,724 74,801 99,699 99,592
Subordinated debt 10,070 10,070 10,070 10,070 9,967
Total liabilities 650,256 553,224 612,269 1,462,463 945,117
Stockholders' equity/partners'
capital $203,401 $193,144 $153,105 $ 165,380 $ 75,443
======== ======== ======== =========== ==========
SELECTED OPERATING DATA ($ in millions)
Volume of loans originated $ 9,473 $ 7,495 $ 9,755 $ 17,607 $ 11,789
Loan servicing portfolio @ end of period(5) $ 13,293 $ 14,109 $ 14,839 $ 17,280 $ 11,813
======== ======== ======== ========== ==========
1 1996 and 1995 results are not directly comparable to results for 1994 and
prior years due to the adoption of FAS No. 122. See Financial Accounting
Standards Board No. 122, "Accounting for Mortgage Servicing Rights" on page
23 for further discussion.
2 Supplemental pro forma net income is computed by adjusting revenues and
expenses for interest savings from the net proceeds of the public offering,
additional operating expenses caused by the corporate structure and income
taxes on adjusted net income that would have been payable had the Company
purchased the Partnership at the beginning of the first period presented in
the Company's Registration Statement related to its initial public
offering. Supplemental pro forma net income per share is then computed on
the basis of the weighted average number of shares that would have been
outstanding during the year.
3 1992 is pro forma.
4 Short-term borrowings are comprised of warehouse lines of credit and
commercial paper.
5 Excludes servicing rights of $1.4 billion, $2.5 billion, $1.2 billion, $2.1
billion, and $2.6 billion, for the years ended December 31, 1992, through
1996 respectively, which had been sold but were sub-serviced by the Company
prior to transfer.
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's revenues from its mortgage origination activities result from loan
originations and related fees, interest income earned on mortgage loans that are
held by the Company pending their sale and net gains on the sale of mortgage
loans. The Company's revenues related to servicing rights are derived
principally from loan servicing fees earned on servicing rights and from gains
realized on the sale of servicing rights.
LOAN ORIGINATIONS - During 1996, total U.S. mortgage originations increased to
an estimated $785 billion from $636 billion in 1995. Generally, U.S. mortgage
origination volume varies with two factors: the level of new and existing home
purchases and the level of refinancings of existing mortgage loans. (See
adjacent table.) Both of these factors are impacted by interest rates. To the
extent the economy encounters a period of rising interest rates, mortgage loan
originations may decline, particularly loan originations due to refinancings.
Mortgage originations for the purchase of new and existing homes increased in
1996 to an estimated $556 billion from $480 billion in 1995. This increase
reflects the very strong U.S. housing market in 1996. According to industry
estimates, 1996 was the highest purchase market in history.
Mortgage originations from refinances also increased to an estimated $229
billion compared with $156 billion during 1995. As demonstrated in the graph
shown below, refinancing activity is especially sensitive to changes in mortgage
interest rates. The strongest refinance quarters for the industry over the past
two years were the last quarter of 1995 and the first quarter of 1996, when
30-year mortgage rates were generally below the 7.5% level. The overall higher
level of refinancings in 1996 compared with 1995 resulted from a particularly
slow first half of 1995, when prevailing refinance mortgage rates were on
average above borrowers' existing fixed mortgage rates.
<TABLE>
<CAPTION>
1-4 Family U.S.
Mortgage Originations*
----------------------
($ in Billions) 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
New and existing home purchases $556 $480 $551
Refinancings 229 156 222
- ------------------------------------------------------------------------
Total $785 $636 $773
========================================================================
*Sources: HUD and Mortgage Bankers Association (1996 market data based on
current estimates).
</TABLE>
INDUSTRY REFINANCING AND 30-YEAR FIXED INTEREST RATES
1995-1996
[BAR/MOUNTAIN CHART]
- ---------------------------------
Industry
Refinance Fundings (in billions)
- ---------------------------------
1995 1st Qtr 14
2nd Qtr 21
3rd Qtr 54
4th Qtr 67
1996 1st Qtr 89
2nd Qtr 59
3rd Qtr 36
4th Qtr 45
- ----------------------------------
30 Year Fixed Interest Rate
- ----------------------------------
Jan95 9.15% Jan96 7.03%
Feb95 8.83% Feb96 7.08%
Mar95 8.46% Mar96 7.62%
Apr95 8.32% Apr96 7.93%
May95 7.96% May96 8.07%
Jun95 7.57% Jun96 8.32%
Jul95 7.61% Jul96 8.25%
Aug95 7.86% Aug96 8.00%
Sep95 7.64% Sep96 8.23%
Oct95 7.48% Oct96 7.92%
Nov95 7.38% Nov96 7.62%
Dec95 7.20% Dec96 7.60%
20
<PAGE>
The Company's loan origination volume in 1996 of $9.5 billion increased by 26%
over the $7.5 billion in 1995. This increase in origination volume is primarily
attributable to the general rise in the total level of U.S. mortgage
originations and to the positive impact of the Company's retail sales
initiatives. During the year, the Company increased its retail branch offices by
15, its satellite locations by 29 and added 172 retail loan officers. Despite
these increases, however, the Company's loan origination volumes have been and
continue to be negatively impacted by aggressive price competition from other
originators. (See discussion of price subsidies following.)
The adjacent tables show the Company's market share and its originations by
distribution channel:
CURRENT ORIGINATION TRENDS - The first quarter of the year is generally the
slowest for housing sales due to seasonal conditions. Total fundings for the
Company in the first two months of 1997 totaled $1.3 billion compared with $1.6
billion for the same period in 1996. As previously discussed, the origination
level for the first quarter of 1996 benefited from a relatively high level of
refinance activity. Refinance fundings for the Company were $549 million in the
first two months of 1997 compared with $868 million in the same period of 1996.
<TABLE>
<CAPTION>
COMPANY'S MARKET SHARE*
------------------------
1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C>
New and existing home purchases 1.04% 1.08% 0.94%
Refinancings 1.57% 1.48% 2.28%
Total 1.20% 1.18% 1.26%
- -------------------------------------------------------------------------
*Based on total 1-4 Family Mortgage Originations as reported by HUD and Mortgage
Bankers Association (1996 market data based on current estimates).
COMPANY'S ORIGINATION
BY DISTRIBUTION CHANNEL
($ in billions) 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Wholesale $5.5 $4.2 $5.9
Retail* 4.0 3.3 3.9
- -----------------------------------------------------------------------
Total $9.5 $7.5 $9.8
- -----------------------------------------------------------------------
*Includes telemarketing.
</TABLE>
NET INTEREST INCOME - Between the closing of a loan and its sale, the Company's
loans are financed by short-term borrowings under a warehouse line of credit, a
commercial paper facility and with general corporate funds. The Company's net
interest income or loss is the difference between the interest income it earns
on the mortgage loans it originates and its interest costs under its short-term
borrowings during the holding period. Generally, the Company's net interest
income is impacted by: (i) the spread between short-term and long-term interest
rates, (ii) the average balance of the Company's real estate loans held for sale
and (iii) the level of corporate cash balances and compensating balances used to
reduce short-term borrowing costs. A decrease in any of the above factors would
have a negative impact on the Company's net interest income.
21
<PAGE>
During 1996, the Company's interest rate spread, its average balance of loans
held for sale and its compensating balances used to reduce short-term borrowing
costs increased compared with 1995. This increase, however, was largely offset
by a reduction in corporate cash used to finance the loans held for sale (see
"Liquidity and Capital Resources").
GAIN (LOSS) FROM SALES OF LOANS - In 1996 and 1995, the Company's gain from
sales of loans was impacted by three factors: price subsidies, hedging activity
and the recognition of gains related to Originated Mortgage Servicing Rights
(OMSRs) under FAS No. 122. In 1994, OMSRs were not recognized for accounting
purposes, and therefore, the only comparable factors were pricing and hedging.
The following paragraphs describe each of these factors.
Price subsidies: The Company may make a loan at a price (i.e., interest rate and
discount) that is higher or lower than it would receive if it immediately sold
the loan in the secondary market. The Company adjusts the pricing on its loans
depending on competitive pressures. From 1994 through 1996, price competition
for mortgage loans remained intense, and the Company generally priced its loans
below the secondary market. The price competition was largely led by major
banks, which were aggressively trying to increase market share and build their
servicing portfolios.
Price competition in the Company's wholesale origination channel was
particularly intense throughout 1996 and remained intense even when origination
volumes were increasing during the year. In the opinion of management, this
prolonged price competition for loans sourced through wholesale brokers has
signaled that a secular change has taken place in the pricing structure of this
origination channel. To the extent that such pricing pressure continues or
intensifies further, the Company's gain on sales of loans will be negatively
impacted. Hedging activity: Gains or losses may result from changes in interest
rates that result in changes in the market value of the loans, or commitments to
purchase loans, from the time the interest rate lock is given to the borrower
until the time that the loan is sold by the Company to the investor. The Company
uses an options pricing model to provide information to hedge this latter
interest rate risk. The Company uses forward delivery contracts for
mortgage-backed securities and whole loan sales as hedging instruments. This
strategy virtually eliminates basis risk as the borrower's loan is used to
satisfy the forward delivery contract. In periods of gradually declining rates
with relatively low volatility, such as the Company experienced for most of
1995, the Company's hedging activity generally produces gains. The Company's
hedging strategy is negatively impacted during periods of high interest rate
volatility or during periods when there is a significant change in the direction
of interest rates. The Company experienced both of these conditions during the
first nine months of 1996 and, therefore, its hedging profitability for the year
was negatively affected.
22
<PAGE>
OMSR impact: OMSR gains result from the creation of servicing rights in the loan
origination process. OMSR gains are affected by the volume of loan originations,
the product mix of servicing originated and the general market for mortgage
servicing rights. (See discussion Financial Accounting Standards Board No. 122,
"Accounting for Mortgage Servicing Rights," which follows.)
FINANCIAL ACCOUNTING STANDARDS BOARD NO. 122, "ACCOUNTING FOR MORTGAGE SERVICING
RIGHTS" - In May 1995, the Financial Accounting Standards Board issued FAS No.
122, "Accounting for Mortgage Servicing Rights," an amendment to FAS No. 65.
Effective January 1, 1995, the Company adopted FAS No. 122. Since FAS No. 122
prohibits retroactive application, the historical accounting results for 1994
and before have not been restated and, accordingly, the accounting results for
the years ended December 31, 1996, and December 31, 1995, are not directly
comparable to the year ended December 31, 1994. The primary difference between
FAS No. 122 and FAS No. 65, as it relates to the Company, is the accounting
treatment for the normal servicing fee associated with in-house OMSRs. Virtually
all of the Company's originations are in-house, whereby the underlying loan is
funded and closed by the Company. Under FAS No. 65, OMSRs were not recorded as
an asset. In 1994, the revenues and costs of creating OMSRs were recognized by
the Company in the financial statements at the time the underlying loans were
sold. As a result of this accounting treatment, the Company's financial
statements in 1994 did not recognize any balance sheet or income statement value
for the OMSRs created by the Company, even though these OMSRs had a substantial
market value. Under FAS No. 122, OMSRs are treated as an asset separate from the
underlying loan. In 1996 and 1995, the total cost of creating a mortgage loan
was allocated at the time of origination between the loan and the servicing
right based on their respective fair values. Additionally, gains on the sales of
loans attributable to the allocation of costs to the OMSR were recognized when
the related loan was sold, even though the OMSR asset was recognized on the date
the loan was originated. A portion of the asset established for OMSRs was
amortized and the OMSR asset was analyzed for impairment based on market prices
under comparable servicing sale contracts when available or, alternatively, on
the expected future net servicing revenue stream. Several financial statement
captions reported in the Company's Statement of Operations for the year ended
December 31, 1996, and December 31, 1995, were impacted by the adoption of FAS
No. 122, including: Gain (loss) from sale of loans, Gain from sales of
servicing, and Amortization and impairment of loan servicing. The impact on each
of these line items is discussed in detail in the Results of Operations
discussion for the years ended December 31, 1996, and December 31, 1995.
23
<PAGE>
SERVICING RIGHTS - The principal balance of the Company's servicing portfolio
was $13.3 billion and $14.1 billion at December 31, 1996, and December 31, 1995,
respectively. Substantially all of these servicing rights have been obtained
through in-house origination sources (i.e., loans which are funded and closed by
the Company). As more fully described above, servicing rights for mortgage loans
originated prior to 1995 were capitalized on the balance sheet only to the
extent of the value of excess servicing, while essentially all of the value of
servicing originated since 1995 has been capitalized. As a result of the
difference in accounting treatment, the balance sheet carrying value for
servicing rights is significantly different depending on whether the servicing
was originated before January 1, 1995 (pre-1995), or after January 1, 1995
(post-1995). Management believes that the total fair market value of its
pre-1995 servicing rights is substantially more than its carrying value, while
the fair market value of post-1995 servicing rights is approximately equal to
its total carrying value. In 1996, the Company sold $2.8 billion of pre-1995
servicing rights and recorded a net pre-tax gain of $32.8 million. The prices
received for sales in 1996 may not necessarily reflect the value of the
remaining pre-1995 portfolio, due to differences in portfolio characteristics
(i.e., servicing fees, age, coupon rates) and changes in market conditions. At
December 31, 1996, the net balance sheet carrying value (the total OMSR,
Purchased Servicing and Excess Servicing Assets) and the principal balance of
the servicing portfolio originated pre-1995 and post-1995 were as shown in the
adjacent table: Management continually evaluates the Company's investment in
retained servicing rights and periodically makes decisions to sell servicing
rights after considering the following criteria: cash requirements, market value
for servicing rights compared with their economic value to the Company, exposure
to prepayment risk, and earnings impact. To the extent the Company elects to
sell pre-1995 servicing rights, virtually all of the net proceeds from such
sales are recognized as one-time gains from the sale of servicing due to the
minimal book value of these servicing rights. Of the approximately $5.8 billion
of pre-1995 servicing remaining at December 31, 1996, the Company estimates that
it may be economically advantageous (i.e., where market value equals or exceeds
the economic value to the Company) to sell approximately $2.5 billion as part of
its future servicing sales. The Company's results of operations have
historically been and will continue to be impacted by the amount and timing of
sales of pre-1995 servicing rights. Historically, when interest rates decline,
the incremental value created by the Company's production organization from
higher refinance originations has more than offset the loss in value to its
servicing portfolio resulting from higher prepayments. Accordingly, the Company
does not presently hold any financial prepayment hedges, but it has relied on
its ability to originate new servicing as a macro-hedge. Under FAS No. 122,
however, if rates were to decline, the timing of additional production revenues
and any servicing impairment charge might not occur in the same period for
financial statement purposes. The Company could be required to recognize a
servicing impairment charge in one reporting period, while the incremental
production revenues could be generated over several periods.
<TABLE>
<CAPTION>
TOTAL AT
PRE-1995 POST-1995 12/31/96
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Balance sheet carrying value $1,338 $132,440 $133,778
(In thousands)
Servicing portfolio principal $5,757 $ 7,536 $ 13,293
balance (In millions)
- -----------------------------------------------------------------------
Carrying Value Percentage 0.03% 1.76% 1.01%
</TABLE>
24
<PAGE>
RESULTS OF OPERATIONS
Year ended December 31, 1996, compared with the year ended December 31, 1995.
SUMMARY - Net income in 1996 was $33.0 million, compared with $40.5 million for
1995. The decrease in net income was attributable to a combination of factors.
The Company's direct origination income (origination fees and OMSR gains less
origination expenses) increased as a result of the 26% rise in origination
volume. This increase was more than offset by lower servicing sale gains, lower
hedging gains and higher amortization and impairment of OMSRs.
REVENUES - Revenues for 1996 were $306.8 million, a $32.0 million or 12%
increase, compared with 1995 revenue of $274.8 million.
Loan administration fees were $45.3 million in 1996, an 8% increase, compared
with $41.8 million in 1995. Loan administration fees rose, despite a 2% decline
in the average size of the Company's servicing portfolio, due to an increase in
the Company's weighted average service fee and a reduction in excess servicing
fee amortization, which is netted against servicing revenues. Loan origination
fees were $84.6 million in 1996, a 22% increase, compared with $69.3 million in
1995. This increase reflects the higher origination level, partially offset by a
decrease in the average origination fees collected on each loan as a result of a
slightly higher percentage of wholesale and telemarketing originations. In 1996,
the Company's wholesale and telemarketing originations represented 63% of total
production as opposed to 60% in 1995. The gain on sales of loans was $101.2
million in 1996, compared with $81.7 million in 1995. The gain from sales of
loans is impacted by hedging activities, pricing subsidies and gains recorded
due to the allocation of a portion of the cost of the loan to OMSR under FAS No.
122. (See adjacent table.)
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Hedging gains $ 6,631 $ 14,289
Pricing subsidies (33,471) (23,697)
FAS No. 122 impact 127,993 91,060
- -----------------------------------------------------------------------
$101,153 $ 81,652
- -----------------------------------------------------------------------
</TABLE>
Hedging gains were $6.6 million, or 7 basis points on loans originated in 1996,
compared with $14.3 million, or 19 basis points, in 1995. The Company's hedging
results were negatively impacted by the upward turn in interest rates and
increased bond market volatility experienced during the first three quarters of
this year. Hedging gains for this period averaged 1 basis point on loans
originated compared with 25 basis points on loans originated during the fourth
quarter of 1996. Pricing subsidies increased to $33.5 million during 1996, with
the average subsidy on loans produced at 35 basis points, compared with $23.7
million, or 32 basis points, during 1995. This increase reflects the continued
price competition for mortgage loans, particularly loans sourced through
wholesale brokers. FAS No. 122 related gains were $128.0 million in 1996, an
increase of 41%, compared with $91.1 million during 1995. This increase is
related to a 36% increase in loans sold during 1996, compared with 1995, that
were originated after the implementation of FAS No. 122 and a higher OMSR
capitalization rate, resulting from changes in product mix and market values.
Interest income, net of warehouse interest expense, increased to $28.7 million
for 1996, compared with $27.5 million for 1995. This 4% increase in net interest
income was due to an increase in the average balance of loans held for sale, an
increase in the interest rate spread earned, and an increase in compensating
balance credits used to reduce warehouse borrowing costs. These increases were
partially offset by a reduction in corporate cash used to fund the warehouse
(see "Liquidity and Capital Resources").
25
<PAGE>
Gain from sales of servicing was $37.6 million in 1996, compared with $46.0
million in 1995, an 18% decrease. In 1996, the Company sold $8.2 billion (or 87%
of originations) of servicing rights, compared with the sale of $6.7 billion (or
89% of originations) in 1995. The related gain decreased, however, due to a
smaller amount of pre-1995 servicing sold during 1996. The gain on sale of
pre-1995 servicing during 1996 was $32.8 million (on $2.8 billion of principal
sold), compared with a gain of $37.3 million (on $3.3 billion of principal sold)
in 1995.
EXPENSES - Expenses for 1996 were $251.8 million, a 19% increase compared with
$211.1 million in 1995. Personnel costs were $150.1 million, a 23% increase,
compared with $122.0 million in 1995, caused primarily by a 26% growth rate in
loan origination volume. Personnel costs were also impacted by hiring additional
loan officers in connection with the Company's retail sales initiative. Other
operating costs increased 15% to $73.5 million for 1996 from $64.1 million in
1995. These expense increases were primarily attributable to the 26% increase in
origination volume and the higher startup and operating costs associated with
new branches and satellite locations. Interest expense decreased to $9.4 million
in 1996, compared with $9.8 million in 1995. This decrease was the result of the
decline in interest expense on the medium-term notes (MTNs), due to a lower
average balance of MTNs outstanding in 1996. Amortization and impairment of loan
servicing increased to $10.5 million during 1996, compared with $7.3 million
during 1995. The primary causes for this increase were the size of the OMSR
assets on the balance sheet, which caused higher amortization expense, partially
offset by a lower impairment charge in 1996.
YEAR ENDED DECEMBER 31, 1995, COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994.
SUMMARY - Net income in 1995 increased by 394% to $40.5 million, compared with
net income of $8.2 million for 1994. The increase in net income for 1995
reflected a significant improvement in gain on sale of loans (see discussion of
FAS No. 122 impact below) and a reduction of costs, largely due to the closing
of 29 offices in a downsizing plan during 1994. These improved results were
partially offset by a reduction in the gain from sales of servicing resulting
from a reduction in the volume of servicing sold and due to higher book value of
the servicing rights.
REVENUES - Revenues for 1995 were $274.8 million, a $6.6 million, or 2%
increase, compared with 1994 revenue of $268.2 million. Loan administration
fees, net of the amortization of excess servicing fees of $4.7 million in 1995
and $629,000 in 1994, were $41.8 million in 1995, a 17% decrease, compared with
$50.6 million in 1994. This decrease is primarily the result of the 12% decrease
in the average size of the Company-owned loan servicing portfolio, partially
offset by an increase in the average servicing fee collected. Loan origination
fees were $69.3 million in 1995, an 8% decrease, compared with $75.1 million in
1994. This decrease resulted primarily from a 23% decrease in loan originations,
partially offset by an increase in origination fees collected on each loan. This
increase in the average fees collected was primarily a result of a higher
percentage of retail production in 1995 (44% as opposed to 39%), on which the
Company receives higher loan origination fees. The gain on sales of loans was
$81.7 million in 1995, compared with a loss of $15.0 million during 1994. In
1994, gains or losses on sales of loans resulted from hedging activities and
pricing subsidies. In 1995, gains or losses on sales of loans were affected by
these same factors, but were also affected by FAS No. 122. Under FAS No. 122, a
higher gain on sale is recorded when a loan originated by the Company is sold
and the servicing is retained compared with FAS No. 65, because under FAS No.
122, the cost of the loan is reduced by the amount allocated to OMSRs.
26
<PAGE>
Hedging gains increased by $7.6 million as a result of periods of declining
interest rates and lower interest rate volatility, both of which existed during
most of 1995. Adjacent is a summary of marketing results for 1995 and 1994:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C>
Hedging gains $ 14,289 $ 6,640
Pricing subsidies (23,697) (21,591)
FAS No. 122 impact 91,060 --
- ------------------------------------------------------------------------
$ 81,652 $ (14,951)
- ------------------------------------------------------------------------
</TABLE>
Pricing subsidies increased 10%, with the average subsidy on loans produced
increasing to 32 basis points during 1995, compared with 22 basis points in
1994, due to intense price competition associated with industry overcapacity.
Interest income, net of warehouse interest expense, decreased to $27.5 million
for 1995, compared with $29.5 million for 1994. This 7% decrease in net interest
income was primarily due to a lower average daily balance of loans held for
sale. Gain from sales of servicing was $46.0 million in 1995, compared with
$120.7 million in 1994, a 62% decrease. The reduction in gain resulted primarily
from a 32% decrease in the volume of servicing sold and the reduction of the
gain from sales of servicing by $34.8 million in 1995 due to OMSR basis
associated with servicing sold. The Company sold mortgage servicing rights with
an aggregate principal balance of $6.7 billion in 1995, or 89% of originations,
compared with $9.9 billion, or 101% of originations, in 1994.
EXPENSES - Expenses for 1995 were $211.1 million, an 18% decrease compared with
$256.9 million in 1994.
Personnel costs were $122.0 million, an 18% decrease, compared with $147.9
million in 1994. This decrease in personnel expenses from 1994 occurred
principally in the residential loan production area. These declining expense
levels resulted from staffing reductions and reduced commission payments as a
result of lower production volume. Other operating costs decreased 21% to $64.1
million for 1995 from $81.1 million in 1994. These cost reductions occurred
throughout the Company, but were greatest in the loan production area, due to
the closing of 29 offices in the downsizing plan during 1994 and the reduced
loan origination volumes from 1994 to 1995. Interest expense decreased to $9.8
million for 1995, compared with $10.8 million for 1994. This decrease was the
result of lower prepayments on certain securitized loan pools serviced by the
Company, which require the Company to pay interest to the security holders for
the period from the prepayment to the end of the month, as well as reduced
interest on its purchase money note, which matured in March 1995. Amortization
and impairment of loan servicing increased to $7.3 million during 1995, compared
with $965,000 during 1994. The primary cause for the increase relates to
amortization and impairment of OMSRs of $6.6 million in 1995 resulting from the
adoption of FAS No. 122 and a pattern of falling interest rates, which produces
higher prepayment activity.
INFLATION
The Company is affected by inflation primarily through its impact on interest
rates. During periods of rising inflation, interest rates generally tend to
increase, causing decline in loan origination volumes, particularly loan
refinancing activity. During periods of rising interest rates, prepayment rates
tend to slow, extending the average life of the Company's servicing portfolio
and generally enhancing its value. During periods of reduced inflation, interest
rates generally tend to decline, resulting in increased loan origination volume
and loan refinancing activity, affecting the Company's servicing portfolio in
the opposite manner.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow requirements primarily depend on both the level and cost
of its loan originations, the level of its servicing sales and the cash flow
generated by, or required by its other operating activities. Additionally, the
Company may use or provide cash through its investing and other financing
activities.
27
<PAGE>
LIQUIDITY SOURCES - The Company's loan originations are primarily financed
through warehouse borrowings, commercial paper borrowings, and with corporate
funds. This financing requirement begins at the time of loan closing and extends
for an average of approximately 30 days until the loan is sold into the
secondary market. On January 23, 1996, the Company entered into a new warehouse
line of credit facility which will expire on January 23, 1999. The outstanding
commitment under this facility was $1.0 billion at December 31, 1996. The
Company's management expects, although there can be no assurance, that this
facility will continue to be available in the future. The Company also has a
commercial paper borrowing program. Borrowings under this $500 million program
replace, at a reduced interest rate, borrowings under the Company's warehouse
line of credit. The warehouse line of credit acts as the liquidity backup
facility for the commercial paper borrowings. At times, the Company will
accelerate the sale of its mortgage loan inventory through the use of
"gestation" facilities provided by an investment bank and the Federal National
Mortgage Association. The Company's corporate funds are generally invested in
its inventory of mortgage loans held for sale. The level of funds available to
support its inventory decreased from 1995 to 1996 because of the cash used for
the investing and other financial activities detailed below. In October 1993,
the Company implemented a $250 million MTN program. Since 1993, $126 million in
MTNs have been issued and $76 million remain outstanding at December 31, 1996.
INVESTING AND OTHER FINANCIAL ACTIVITIES
COMMON STOCK - On February 7, 1996, the Company authorized the repurchase of up
to 1.5 million shares of common stock. During 1996, the Company repurchased
1,182,400 shares under this authorization at an aggregate cost of $21.5 million.
As of December 31, 1996, the Company held 2,322,916 shares in treasury stock,
which have been acquired since 1994 under the current and prior repurchase
authorizations at an aggregate cost of $40.7 million.
DIVIDENDS - The Company has paid quarterly common stock dividends since the
initial public offering on July 15, 1992. Dividend payments totaled $3.4 million
in 1996 and $3.6 million in 1995. In February 1997, the Company's board of
directors approved a common stock dividend of $.06 per share.
BUSINESS INVESTMENT - In October 1996, the Company purchased the assets of Lomas
Insurance Services for $3.5 million.
MTN PROGRAM AND PURCHASE MONEY NOTE - In 1996, the Company issued $26 million in
seven-year MTNs. The Company paid off in both 1996 and 1995, $25 million of MTNs
that matured. Also, in 1995, the Company paid off a purchase money mortgage for
$10.2 million.
PROPERTY, PLANT AND EQUIPMENT - During 1996 and 1995, the Company purchased
property and equipment totaling $10.0 million and $3.6 million, respectively.
EXCESS SERVICING FEES - During 1996 and 1995, the Company created $37.9 million
and $49.1 million of excess servicing fees during loan sales transactions. In
general, the Company creates excess servicing fees when the secondary market
price offered for that servicing asset is lower than the economic value or the
amount the Company could receive by accumulating the asset and selling it as
part of a bulk sale at a later date. During the Company's holding period of the
Excess Servicing Fee asset, the Company is at risk that the asset will decline
in value and a write down will be required, primarily due to faster prepayment
speeds. The carrying amount of excess servicing rights was $25.5 million and
$20.6 million at December 31, 1996 and December 31, 1995, respectively.
28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
North American Mortgage Company(R)
We have audited the accompanying consolidated balance sheets of North American
Mortgage Company(R) and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of North American Mortgage
Company(R)'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of North
American Mortgage Company(R) and subsidiaries at December 31, 1996 and 1995 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
In 1995, North American Mortgage Company(R) adopted Financial Accounting
Standards Board Statement No. 122, "Accounting for Mortgage Servicing Rights."
These changes are discussed in Note D of the Notes to the Consolidated Financial
Statements.
[s/ERNST & YOUNG LLP]
San Francisco, California
January 31, 1997
29
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
DOLLARS IN THOUSANDS
ASSETS
Cash and cash equivalents $ 22,005 $ 12,273
Advances and other receivables 85,299 76,628
Real estate loans held for sale to
investors
net of unearned discounts 554,415 526,913
Originated loan servicing - Note D 107,679 56,353
Excess servicing fees - Note D 25,540 20,559
Purchased loan servicing - Note D 559 1,163
Other intangible assets - Note D 9,391 6,438
Property and equipment - Note E 38,541 36,339
Other assets 10,228 9,702
- ------------------------------------------------------------------------
$853,657 $746,368
========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Warehouse line of credit - Note C $158,584 $146,833
Notes payable - Note C 75,724 74,801
Commercial paper - Note C 340,115 279,221
Subordinated debt - Note C 10,070 10,070
Accounts payable and other
liabilities 65,763 42,299
- ------------------------------------------------------------------------
650,256 553,224
========================================================================
COMMITMENTS AND CONTINGENCIES -
Notes I, J, K, and N
STOCKHOLDERS' EQUITY - Note G
Convertible preferred stock (1,000,000
shares authorized,
748,179 shares issued and outstanding) -- --
Common stock (50,000,000 shares
authorized, 16,394,544 and
16,394,543 shares issued at
December 31, 1996 and 1995,
respectively) 164 163
Additional paid-in capital 112,492 110,250
Retained earnings 131,435 101,909
Treasury stock (2,322,916 and
1,140,516 shares at
December 31, 1996 and 1995,
respectively) (40,690) (19,178)
203,401 193,144
- ------------------------------------------------------------------------
$853,657 $746,368
========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31 1996 1995 1994
Amounts in thousands, except per share data
<S> <C> <C> <C>
INCOME
Loan administration fees, net
of excess servicing fee amortization $ 45,280 $ 41,830 $ 50,574
Loan origination fees 84,605 69,282 75,140
Gain (loss) from sales of loans 101,153 81,652 (14,951)
Interest income, net of warehouse
interest expense of
$20,428, $11,588 and $11,166 for 1996,
1995 and 1994, respectively - Note C 28,680 27,534 29,491
Gain from sales of servicing - Note J 37,634 46,037 120,739
Other 9,441 8,445 7,172
- ----------------------------------------------------------------------------------------------
306,793 274,780 268,165
EXPENSES
Personnel 150,076 122,033 147,941
Other operating expenses 73,487 64,142 81,121
Interest expense 9,430 9,828 10,812
Downsizing expenses - Note M -- -- 8,470
Depreciation and amortization of
property and equipment 7,852 7,306 7,207
Amortization and impairment of
loan servicing 10,462 7,310 965
Amortization of other intangibles 504 444 412
- ----------------------------------------------------------------------------------------------
251,811 211,063 256,928
==============================================================================================
Income before income taxes 54,982 63,717 11,237
Income tax expense - Note H 22,029 23,262 3,055
- ----------------------------------------------------------------------------------------------
NET INCOME $ 32,953 $ 40,455 $ 8,182
==============================================================================================
Net income per share $ 2.30 $ 2.69 $ .53
- ----------------------------------------------------------------------------------------------
Weighted average shares outstanding 14,317 15,039 15,480
- ----------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE $ .24 $ .24 $ .24
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADD. TOTAL
COMMON STOCK PAID-IN RETAINED TREASURY STCKHLDRS
STOCK SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 15,848 $158 $104,620 $ 60,602 $165,380
Net income 8,182 8,182
Dividends (3,716) (3,716)
Stock issuances under option plan 82 1 1,324 1,325
Stock issuances under Employee
Stock Purchase Plan 89 1 1,111 1,112
Purchases of Treasury Stock $(19,178) (19,178)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 16,019 160 107,055 65,068 (19,178) 153,105
Net income 40,455 40,455
Dividends (3,614) (3,614)
Stock issuances under option plan 144 2 2,002 2,004
Stock issuances under Employee
Stock Purchase Plan 95 1 1,193 1,194
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 16,258 163 110,250 101,909 (19,178) 193,144
Net income 32,953 32,953
Dividends (3,427) (3,427)
Stock issuances under option plan 39 599 599
Stock issuances under Employee
Stock Purchase Plan 98 1 1,643 1,644
Purchases of Treasury Stock (21,512) (21,512)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 16,395 $164 $112,492 $131,435 $(40,690) $203,401
============================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
32
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
DOLLARS IN THOUSANDS
OPERATING ACTIVITIES
Net income $32,953 $ 40,455 $ 8,182
Adjustments to reconcile net
income to net cash
provided by (used in) operating activities
Depreciation and amortization 21,441 19,738 9,214
Capitalized excess servicing fee income (37,937) (49,110) (5,407)
Gain on sales of servicing rights (37,634) (46,037) (120,739)
Cash proceeds from sales of servicing
rights 135,126 111,850 122,244
Decrease (increase) in real estate
loans held for sale,
net of unearned discounts (27,502) 15,090 952,641
Decrease (increase) in advances and
other receivables (8,671) (19,887) 3,397
Increase (decrease) in accounts payable
and other liabilities 23,464 17,440 (19,049)
Decrease (increase) in other assets (527) (1,720) 3,571
- ---------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 100,713 87,819 954,054
INVESTING ACTIVITIES
Acquisition of assets of branches
and insurance operations
acquired including purchase
accounting adjustments (3,551) (143) (913)
Purchase of servicing rights -- (80) (131)
Acquisition of originated
servicing rights (128,343) (97,751) --
Purchase of property and equipment (9,959) (3,608) (11,058)
Retirement of property and equipment -- 892 --
- ---------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (141,853) (100,690) (12,102)
FINANCING ACTIVITIES
Issuance of notes payable 25,844 -- --
Principal payments on long-term debt (24,921) (35,478) (1,511)
Net increase (decrease) in
warehouse line of credit
and commercial paper 72,645 (41,007) (829,634)
Dividends (3,427) (3,614) (3,716)
Purchases of Treasury Stock (21,512) -- (19,178)
Stock issuance under Employee
Stock Purchase Plan
and Stock Option Plan 2,243 3,198 2,437
- ----------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 50,872 (76,901) (851,602)
- ----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 9,732 (89,772) 90,350
- ---------------------------------------------------------------------------------------
Cash and cash equivalents at beginning
of year 12,273 102,045 11,695
- ---------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $22,005 $ 12,273 $102,045
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
Notes to Consolidated Financial Statements
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
ORGANIZATION The accompanying Consolidated Financial Statements include the
accounts of North American Mortgage Company(R); North American Mortgage
Insurance Services; Sonoma Conveyancing Corporation; Fairfield Financial
Holdings Inc.; IC Capital Co., Inc.; Vintage Reinsurance Company; and IMCO
Capital Co., Inc.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and in
banks and short-term investments with maturities of three months or less.
REAL ESTATE LOAN VALUATION Real estate loans held for sale, net of the related
commitments, are stated at the lower of aggregate cost or market value.
PURCHASED LOAN SERVICING Purchased loan servicing is recorded at cost which is
not in excess of the future net cash flows related to the servicing portfolio.
The cost is being amortized in proportion to the estimated future net servicing
income. Impairment of purchased loan servicing is determined using the estimated
fair value of the purchased mortgage servicing rights on a disaggregated
portfolio basis.
ORIGINATED LOAN SERVICING Originated loan servicing is recorded based on its
fair value relative to the loan as a whole. The cost is being amortized in
proportion to the estimated future net servicing income. Impairment of
originated loan servicing is determined using the estimated fair value of the
mortgage servicing rights on a disaggregated portfolio basis.
EXCESS SERVICING FEES In determining the gain or loss on sale of mortgage loans
to investors where the stated servicing fee rate differs materially from a
normal servicing fee rate, the sales price is adjusted by the difference between
the actual sales price and the estimated sales price that would have been
obtained if a normal servicing fee rate had been specified and a capitalized
servicing fee receivable is recorded. Capitalized servicing fees are carried at
amounts not in excess of the estimated future discounted cash flows using
original discount rates on a disaggregated portfolio basis. The Company uses the
income forecast method to amortize capitalized servicing fees. Under the income
forecast method, capitalized servicing fees are amortized in proportion to the
estimated future excess servicing income and over the period of the estimated
economic life of the loans sold. The estimated economic lives of the loans used
by the Company are based on the median prepayment rates forecasted by several
large brokerage firms.
OTHER INTANGIBLE ASSETS Amortization of other intangible assets is provided by
the straight-line method over estimated useful lives of 5 to 20 years.
PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation
and amortization is calculated using the straight-line method over estimated
useful lives of the assets (3 to 35 years).
LOAN ADMINISTRATION The Company services mortgages for investors as well as
mortgages held for sale. In connection with mortgage servicing activities, the
Company segregates escrow and custodial funds in separate trust accounts and
excludes these balances (approximately $276.9 million and $230.1 million at
December 31, 1996 and 1995, respectively) from the balance sheet. These funds
represent principal and interest payment amounts held for investors pending
scheduled remittance and funds held for borrowers for payment of scheduled
items, primarily taxes and insurance.
34
<PAGE>
INCOME RECOGNITION Lending transaction costs are deferred until the related loan
is sold. Commitment fees paid to investors are being deferred until either the
expiration of the commitment or the sale of the related loan. Upon sale of the
loan or expiration of the commitment, the deferred origination fees are
recognized as loan origination fees in the statement of operations and deferred
origination costs are recognized in the applicable expense classification. Loan
administration income represents fees earned for servicing loans for various
investors. The fees are either based on a contractual percentage of the
outstanding principal balance or a fixed dollar amount per loan. Fees are
credited to income when the related payments are received. Discounts and
premiums from the origination of real estate loans held for sale are deferred
and recognized as adjustments to gain or loss upon sale.
INCOME TAXES The Company has adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." The Company has provided disclosures
related to income taxes (see Note H). The Company and its subsidiaries file
separate United States federal income tax returns and separate or combined
returns for certain states, including California. State and local income tax
returns are filed according to the taxable activities of the Company. The
liability method of accounting is used for income taxes. Under the liability
method, deferred tax assets and liabilities are recognized for the expected
future tax consequences of existing differences between financial reporting and
tax reporting bases of assets and liabilities, as well as for the operating
losses and tax credit carry-forwards, using enacted tax laws and rates. Deferred
tax expense represents the net change in the deferred tax asset or liability
balance during the year. This amount, together with income taxes currently
payable or refundable for the current year, represents the total income tax
expense for the year.
NET INCOME PER SHARE Net income per share is computed by dividing net income by
the average number of common shares outstanding and the additional dilutive
effect (if any) of stock options outstanding during the period. The dilutive
effect of stock options is computed using the Treasury Stock method.
COMMITMENT DEPOSITS FROM BUILDERS AND PRE-PAID COMMITMENT FEES Commitment
deposits from builders are included in other liabilities and represent fees
received for guaranteeing the funding of mortgage loans to borrowers. Prepaid
commitment fees are included in other assets and represent fees paid to
permanent investors to ensure the ultimate sale of the loans. These fees are
recognized as revenue or expense when the loans are sold to permanent investors
or when the commitment expires.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of
the Consolidated Financial Statements of the Company requires management to make
estimates and assumptions that affect reported amounts. These estimates are
based on information available as of the date of the financial statements.
Therefore, actual results could differ from those estimates.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD In June 1996, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS No. 125). As amended, SFAS No. 125,
applies to securities lending, repurchase agreements, dollar rolls, and other
similar secured financing transactions occurring after December 31, 1997, and to
all other transfers and servicing of financial assets occurring after December
31, 1996. FAS 125 will result in the recording of
35
<PAGE>
Originated Mortgage Servicing Rights (OMSR) on the date of the sale of a
mortgage loan as opposed to the current practice of recording OMSRs on the date
that loans are originated. Additionally, under FAS 125, excess servicing fees
will be combined with OMSR for balance sheet presentation as well as for
transactions beginning in the first quarter of 1997. Based on current
circumstances, the Company believes that the application of the new rules will
not have a material impact on the financial statements.
NOTE B - NATURE OF OPERATIONS
- --------------------------------------------------------------------------------
The Company is engaged primarily in the mortgage banking business and
accordingly, originates, acquires, sells and services mortgage loans which are
principally first-lien mortgage loans secured by single (one to four) family
residences. The Company also sells the servicing rights associated with a
portion of such loans. The Company sells the majority of the conventional
mortgage loans it originates under purchase and guarantee programs sponsored by
the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal National
Mortgage Association ("FNMA"). The Company's loans insured by the Federal
Housing Administration ("FHA") or partially guaranteed by the Veterans
Administration ("VA") or Farmers Home Administration are pooled to form
Government National Mortgage Association ("GNMA") securities. The Company sells
FHLMC, FNMA and GNMA securities to investment banking firms that are primary
dealers in government securities. Loans not conforming to requirements of such
agencies are sold to private institutional investors. The principal sources of
revenue from the Company's business are (i) loan administration fees, (ii) loan
origination fees, (iii) gain from sales of loans, (iv) net interest earned on
mortgage loans during the period that they are held by the Company pending sale
and (v) gain from sales of servicing.
<TABLE>
NOTE C - BORROWING ARRANGEMENTS
- -------------------------------------------------------------------------------------------------------------------
Borrowing arrangements consist of the following:
<CAPTION>
December 31 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dollars in thousands
Warehouse line of credit facilities with banks at December 31, 1996, of $1
billion expiring January 23, 1999, and at December 31, 1995, of $800 million,
bearing a variable interest rate, as described below, with outstanding interest
and principal due on demand and
collateralized by mortgage loans held for sale. $158,584 $146,833
Outstanding medium-term notes, net of discount, bearing interest rates between
5.78% and 7.34% at December 31, 1996, and between 4.61% and 6.53% at December
31, 1995. Interest is payable semi-annually and principal is due at various
dates through August 25, 2003. $75,724 $74,801
Outstanding Commercial paper notes at December 31, 1996, bearing interest rates
of 5.59% to 6.75% and due between January 2, 1997 and January 16, 1997 and at
December 31, 1995, bearing interest rates of 5.78% to 6.30% and due
between January 2, 1996 and January 24, 1996. $340,115 $279,221
Unsecured notes payable to insurance companies and accrued interest, due August
1999, subordinated to the warehouse line of credit, interest at 10 percent
payable or capitalized at the Company's option semi-annually, principal
and accrued interest due upon maturity. $10,070 $10,070
</TABLE>
36
<PAGE>
The Company has a warehouse line of credit with banks to fund its mortgage loan
activity. The line bears interest at various interest rates. The weighted
average cost of funds to fund the Company's mortgage loan activity in 1996,
1995, and 1994 was 5.99 percent, 6.68 percent and 5.62 percent, respectively.
Under various agreements, interest expense is reduced as a result of holding
escrows and custodial funds at non-affiliated banks. Borrowing costs were
reduced by $10.9 million, $9.9 million and $10.7 million during 1996, 1995, and
1994 respectively, for the use of such compensating balances. Compensating
balances averaged $217.3 million and $209.5 million for the years ended December
31, 1996 and 1995, respectively, and were comprised of corporate and custodial
accounts. The Company must comply with certain covenants provided in its
warehouse loan agreement, including requirements relating to net worth, working
capital and leverage. In addition, the Company is limited to $35 million as the
aggregate amount it may disburse for cash dividends and stock repurchases in any
four consecutive quarters. At any time that the Company is not in compliance
with certain covenants to its loan agreement, the Company cannot declare or pay
any non-stock dividends. At December 31, 1996, and December 31, 1995, the
Company was in compliance with the aforementioned loan covenants. Aggregate
maturities of borrowing arrangements excluding discounts, at December 31, 1996,
are as shown in the chart.
<TABLE>
<CAPTION>
Years Ended December 31
- --------------------------------------------------------------------------------
<S> <C>
(In thousands)
1997 $498,699
1998 25,000
1999 10,070
2000 25,000
2001 --
2002 and beyond 26,000
$584,769
</TABLE>
Interest paid for the years ended December 31, 1996, 1995 and 1994 was $29.9
million, $22.5 million and $21.6 million, respectively.
NOTE D - ORIGINATED LOAN SERVICING, PURCHASED LOAN SERVICING,
EXCESS SERVICING FEES AND OTHER INTANGIBLE ASSETS
- --------------------------------------------------------------------------------
The Company elected to adopt FAS No. 122, "Accounting for Mortgage Servicing
Rights" for its financial statement reporting beginning January 1, 1995. FAS No.
122 prohibits retroactive application prior to that date. FAS No. 122 requires
that mortgage servicing rights be capitalized when acquired either through
purchase or origination for mortgage loans that will be subsequently sold or
securitized with the servicing rights retained. The amount of the mortgage
servicing right capitalized is based on its fair value relative to the loan as a
whole. To determine the fair value of servicing rights created, the Company used
the market prices under comparable servicing sale contracts, when available, or
alternatively used a valuation model that calculates the present value of future
cash flows to determine the fair value of the servicing rights. In using this
valuation method, the Company incorporated assumptions that market participants
would use in estimating future net servicing income which included estimates of
the cost of servicing per loan, the discount rate, float value, an inflation
rate, ancillary income per loan, prepayment speeds and default rates. In
determining servicing value impairment, the post-implementation originated
servicing portfolio was disaggregated into its predominant risk characteristics.
The Company has determined those risk characteristics to be prepayment and
foreclosure risks. The Company has disaggregated the portfolio by loan type,
investor type and interest rate to reflect those risk characteristics. To
determine the fair value for impairment measurement purposes, the Company used
the market prices under comparable servicing sale contracts, when available, or
alternatively used a valuation model to determine the fair value of the
servicing rights.
37
<PAGE>
The fair value of post-implementation Originated Loan Servicing was $109.5
million and $56.4 million at December 31, 1996 and 1995, respectively.
Originated loan servicing and the related valuation allowance activity for 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
In thousands 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Originated Valuation Originated Valuation
Loan Servicing, Allowance, Loan Servicing, Allowance,
Net of Originated Net of Originated
Amortization Servicing Amortization Servicing
<S> <C> <C> <C> <C>
Balance at beginning of year $ 58,905 $(2,552) $ -- $ --
Additions 128,343 -- 97,751 --
Scheduled amortization (8,321) -- (3,067) --
Impairment additions charged to
operations -- (3,589) -- (3,517)
Impairment reductions credited to
operations -- 2,052 -- --
Basis on servicing sales (67,159) -- (35,779) 965
- ------------------------------------------------------------------------------------------------------------------
$111,768 $(4,089) $58,905 $(2,552)
===================================================================================================================
</TABLE>
Purchased loan servicing and excess servicing fees, net of accumulated
amortization were as follows:
<TABLE>
<CAPTION>
Purchased Loan Servicing, Excess Servicing Fees,
Net of Amortization Net of Amortization
In thousands 1996 1995 1994 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $1,163 $1,933 $2,907 $20,559 $ 7,001 $ 3,588
Additions -- 80 131 37,937 49,110 5,407
Scheduled amortization (604) (725) (964) (2,498) (1,878) (630)
Amortization resulting from higher
than anticipated prepayments -- -- -- (125) (2,800) --
Basis on servicing sales -- (125) (141) (30,333) (30,874) (1,364)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 559 $1,163 $1,933 $25,540 $20,559 $7,001
=======================================================================================================================
</TABLE>
Other intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31 1996 1995
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Goodwill $7,479 $7,412
Book of insurance business 3,354 55
Organization costs 1,731 1,641
Trademark 349 349
- --------------------------------------------------------------------------------
12,913 9,457
Accumulated amortization (3,522) (3,019)
- --------------------------------------------------------------------------------
$9,391 $6,438
================================================================================
</TABLE>
38
<PAGE>
NOTE E - PROPERTY AND EQUIPMENT
- --------------------------------------------------------------------------------
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31 1996 1995
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Land $ 3,900 $ 3,900
Building 17,230 17,163
Furniture and equipment 49,674 40,567
Leasehold improvements 2,191 1,500
- --------------------------------------------------------------------------------
72,995 63,130
Accumulated depreciation
and amortization (34,454) (26,791)
- --------------------------------------------------------------------------------
$38,541 $36,339
================================================================================
</TABLE>
NOTE F - RETIREMENT AND 401(K) SAVINGS PLAN AND SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN
- --------------------------------------------------------------------------------
The Company has a defined contribution Retirement Plan and 401(k) Savings Plan
which covers substantially all employees. The Company's contributions to the
Retirement Plan are equal to 4% of the participants' compensation and were $1.8
million, $2.0 million, and $1.9 million in 1996, 1995, and 1994, respectively.
The Company began contributions to the 401(k) Savings Plan in 1996 equal to 50%
of the participants' contributions not to exceed the lessor of 1 1/2% of the
participants' basic compensation or the maximum amount permissible under the
plan. Company contributions for the 401(k) Savings Plan were $0.9 million in
1996. The Retirement Plan contains a vesting schedule graduated from three to
seven years of service, and the 401(k) Savings Plan contains a vesting schedule
graduated from one to four years of service. The Company has a Supplemental
Executive Retirement Plan, which covers certain members of management. The plan
benefits accrue as a percentage of the portion of each participant's annual
salary and bonuses in excess of the amount included in the retirement plan
covering all employees. The cost of the Plan was $87,000, $69,000, and $30,000
in 1996, 1995 and 1994, respectively. The plan is an unfunded plan.
NOTE G - PREFERRED STOCK, STOCK PLANS AND STOCK RIGHTS PLAN
- --------------------------------------------------------------------------------
The Board of Directors of the Company is authorized, without further action of
stockholders of the Company, to issue up to 20,000,000 shares of Preferred Stock
in one or more classes or series and to fix the number of shares constituting
such series, the designations, relative rights, preferences and limitations
relating to shares of any such series. The Company's Board of Directors has
authorized the issuance of a series of Preferred Stock consisting of 1,000,000
shares of Series A Convertible Preferred Stock par value $0.01 per share, with a
dividend rate of $0.20 per annum and for which unpaid dividends are cumulative.
Unpaid cumulative dividends were $667,000 and $517,000 at December 31, 1996 and
December 31, 1995, respectively. The Company has the option to convert each
share of Convertible Preferred Stock into one share of Common Stock. At December
31, 1996 and 1995, 748,179 shares of Series A Convertible Preferred Stock were
outstanding, all of which are held by Fairfield Financial Holdings, Inc., a
wholly-owned subsidiary.
39
<PAGE>
During 1992, the Board of Directors declared a dividend distribution of one
Preferred Stock Purchase Right (a "Right") for each outstanding share of Common
Stock. The Rights are not currently exercisable and are attached to all
outstanding shares of Common Stock. The Rights will generally separate from the
Common Stock and be distributed to registered holders of the Common Stock upon
(1) acquisition of beneficial ownership by a person or persons of 15% or more of
the Company's Common Stock, (2) a tender offer or exchange offer for 15% or more
of the Company's Common Stock which is not approved by the board of directors of
the Company, or (3) the declaration by the board that any person holding 10% or
more of the Company's Common Stock is an "adverse person" (generally, an adverse
person is a party seeking a financial gain by taking actions that are not in the
interest of the remaining stockholders). Each Right gives the registered holder
the right to purchase from the Company one one-hundredth of a share of Series A
Cumulative Preferred Stock upon certain terms and subject to certain conditions.
The Company has a stock option plan (the "Plan") that provides for the granting
of non-qualified and qualified options to employees and directors. Options are
generally granted at the average market price of the Company's common stock on
the date of grant, vest over a three-year period of equal amounts each year and
expire 10 years after the date of grant. Stock option transactions under the
Plan were as follows:
<TABLE>
<CAPTION>
Weighted-Average
Options Exercise Price Options
1996 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding options at beginning
of year 1,338,193 $18.18 1,323,379
Options granted 234,475 $25.63 236,822
Options exercised (39,005) $15.35 (143,915)
Options expired or canceled (3,457) $19.88 (78,093)
- ---------------------------------------------------------------------------------------------------
Outstanding options at
end of year 1,530,206 $19.39 1,338,193
- ---------------------------------------------------------------------------------------------------
Exercise price:
Per share for options
exercised during
the year $11.50-$18.625 $11.50-$24.19
Per share for options outstanding
at end of year $11.50-$29.375 $11.50-$29.375
Weighted-average fair value of
options granted $ 12.90 $ 8.78
Weighted-average contractual life of
options outstanding (in years) 7.6 5.6
</TABLE>
Of the outstanding options as of December 31, 1996, 1,306,189 options were
immediately exercisable under the Plan. Options designated for future grants
under the Plan were 149,521 and 446,294 as of December 31, 1996, and December
31, 1995, respectively.
The Company has an Employee Stock Purchase Plan which covers substantially all
employees. Employees may purchase stock at a price equal to 85% of the lower
stock price at the beginning or the end of the purchase period. The Company
issued 97,924 shares of Common Stock for the Employee Stock Purchase Plan at
$16.7875 per share on December 31, 1996, and 95,193 shares at $12.5375 per share
on December 31, 1995.
40
<PAGE>
The Company currently follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized. The Company
intends to follow the provisions of APB 25 for future years. Pro forma
information regarding net income and earnings per share is required by FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"),
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1996 and 1995,
respectively: risk-free interest rates of 5.5% and 7.4%; dividend yields of 1.5%
and 1.5%; volatility factors of the expected market price of the Company's
common stock of .50 and .50; and a weighted-average expected life of the options
of 7 years. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. The Company's pro forma net income and
earnings per share determined as if the Company had accounted for its employee
stock options under Statement 123 follows (in thousands except for earnings per
share information):
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------
<S> <C> <C>
Pro forma net income $30,625 $39,310
Pro forma earnings per share $ 2.14 $ 2.61
</TABLE>
41
<PAGE>
NOTE H - INCOME TAXES
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
Years Ended 1996 1995
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Deferred tax liabilities
Warehouse capitalized origination costs $ 533 $ 875
Depreciation 4,079 4,062
Originated and excess servicing 40,635 20,099
Other 247 543
- --------------------------------------------------------------------------------
Total deferred tax liabilities $45,494 $25,579
================================================================================
Deferred tax assets:
Purchased servicing 1,916 3,011
Loss, foreclosure & other book reserves 2,080 2,295
Accrued expenses 549 876
Other 512 464
- --------------------------------------------------------------------------------
Total deferred tax assets $ 5,057 $ 6,646
- --------------------------------------------------------------------------------
Net deferred liability $40,437 $18,933
================================================================================
During 1996, net income of the Company was entirely from the U.S. Significant
components of the provision for income taxes are as follows:
</TABLE>
<TABLE>
<CAPTION>
Years Ended 1996 1995 1994
- ----------------------------------------------------------------------
In thousands
<S> <C> <C> <C>
Current:
Federal $ 371 $ 3,845 $ 2,297
State 154 484 758
- ----------------------------------------------------------------------
Total Current 525 4,329 3,055
- ----------------------------------------------------------------------
Deferred:
Federal $17,133 $14,271 0
State 4,371 4,662 0
- ----------------------------------------------------------------------
Total Deferred 21,504 18,933 0
- ----------------------------------------------------------------------
$22,029 $23,262 $ 3,055
======================================================================
</TABLE>
The reconciliation of income tax expense at the U.S. federal statutory tax rate
to income tax expense calculated for financial reporting purposes is:
<TABLE>
<CAPTION>
Years Ended 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
In thousands % % %
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rate $19,244 35 $22,301 35 $3,933 35
State income taxes net of federal benefit 2,941 5 3,345 5 590 5
Change in valuation allowance 0 --- (2,519) (4) (1,971) (17)
Other (156) --- 135 1 503 4
- -------------------------------------------------------------------------------------------------------------
$22,029 40 $23,262 37 $3,055 27
=============================================================================================================
</TABLE>
Income taxes paid in 1996, 1995 and 1994 totaled $2.5 million, $7.7 million, and
$7.5 million, respectively.
42
<PAGE>
NOTE I - LEASES
- --------------------------------------------------------------------------------
The Company occupies certain office space and rents equipment under various
operating leases which expire at various dates through 2001. Future minimum
payments consist of the following at December 31, 1996. Rental expense for the
years ended December 31, 1996, 1995 and 1994, was $13.9 million, $14.6 million
and $17.2 million, respectively.
<TABLE>
<CAPTION>
Years Ended December 31
- --------------------------------------------------------------------------------
In thousands
<S> <C>
1997 $12,545
1998 8,155
1999 4,009
2000 1,865
2001 and beyond 992
- --------------------------------------------------------------------------------
Total $27,566
================================================================================
</TABLE>
NOTE J - MORTGAGE SERVICING PORTFOLIO AND RELATED OFF-BALANCE SHEET RISK AND
INSURANCE COVERAGE
- --------------------------------------------------------------------------------
The Company's origination and servicing activities are primarily concentrated
within the states of California, Texas, Virginia, Arizona and Maryland. The
Company's servicing portfolio is comprised of the following:
<TABLE>
<CAPTION>
December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Number Principal Number Principal Number Principal
of Balance of Balance of Balance
Loans Outstanding Loans Outstanding Loans Outstanding
<S> <C> <C> <C> <C> <C> <C>
GNMA FHA/VA 29,772 $ 2,646 28,041 $ 2,488 21,611 $ 1,900
Conventional loans & other 107,043 10,647 115,276 11,621 130,236 12,936
Loans subserviced for others 3 -- 3 -- 41 3
- -----------------------------------------------------------------------------------------------------------------------
136,818 $13,293 143,320 $14,109 151,888 $14,839
=======================================================================================================================
</TABLE>
The above amounts exclude servicing rights, which had been sold but were being
subserviced by the Company prior to transfer, of $2,646 million, $2,146 million
and $1,224 million as of December 31, 1996, 1995 and 1994, respectively. The
Company is required to advance, from corporate funds, escrow and foreclosure
costs for loans which it services. A portion of the advances is not recoverable
for loans serviced for GNMA. In addition, VA insurance only protects the Company
from losses for a set percentage of the initial loan amount or a set dollar
amount. As of December 31, 1996 and 1995, a reserve for the unrecoverable
advances and losses of approximately $852,000 and $798,000 has been established
for GNMA loans in default. GNMA FHA/VA losses including GNMA VA no-bid losses
for the years ended December 31, 1996, 1995 and 1994, were $1,444,000, $949,000
and $572,000, respectively. Upon foreclosure, a FHA/VA property is typically
conveyed to HUD or VA. However, when it is in the VA's financial interest, they
have the authority to deny conveyance of the foreclosed property to the VA ("VA
no-bid"). The VA instead reimburses the Company based on a percentage of the
loans' outstanding principal balance ("guarantee" amount). For GNMA VA no-bids,
the foreclosed property is conveyed to the Company, and the Company then assumes
the market risk of disposing of the property, GNMA VA no-bid losses were
approximately $1,270,000 and $685,000 during 1996 and 1995, respectively. There
were no significant GNMA VA no-bid losses for the year ended December 31, 1994.
Prior to conveying title to HUD on FHA loans that have been foreclosed upon, the
Company is required to return the property to an inhabitable condition. The cost
of returning the property to an inhabitable condition is not recoverable from
HUD. The related reserve for unrecoverable advances and losses on FHA/VA loans
in default for potential no-bid losses as of December 31, 1996 and 1995 is
included in the reserve for unrecoverable advances described above.
43
<PAGE>
The Company has servicing agreements with certain investors which require the
repurchase of real estate mortgages in the event of default by the primary and,
if applicable, secondary obligors. The aggregate principal balances outstanding
as of December 31, 1996 and 1995 relating to these agreements are approximately
$8.2 million and $16.8 million, respectively. As of December 31, 1996, there
have been no significant repurchases of loans under the terms of the servicing
agreements. The Company has the ability to meet these funding requirements under
normal business circumstances. At December 31, 1996 and 1995, the number of
loans in the Company's servicing portfolio included loans collateralized by
California properties of 37% and 45%, respectively, and loans collateralized by
Texas properties of 12% and 14%, respectively. Loans from no other state exceed
5% of the number of loans in the portfolio of either year. The Company sold
servicing rights for mortgages with outstanding principal balances of $8.2
billion, $6.7 billion and $9.9 billion during the years ended December 31, 1996,
1995 and 1994, respectively. These sales resulted in gains of $37.6 million,
$46.0 million and $120.7 million. The Company has issued various representations
and warranties associated with whole loan and bulk servicing sales. These
representations and warranties may require the Company to repurchase defective
loans as defined in the applicable servicing and sales agreements. At December
31, 1996 and 1995, the Company had reserved $4.5 million and $3.6 million,
respectively, for potential losses resulting from these representations and
warranties. Errors and omissions coverage was $23.5 million and fidelity bond
insurance coverage under a mortgage banker's bond was $47.0 million at December
31, 1996 and 1995.
NOTE K - MORTGAGE LOAN PIPELINE, HEDGES AND RELATED OFF-BALANCE SHEET RISK
- ------------------------------------------------------------------------
The Company enters into financial instruments with off-balance sheet risk in the
normal course of business through the origination and sale of mortgage loans and
the management of the related loss exposure caused by fluctuations in interest
rates. These financial instruments include commitments to extend credit (e.g.,
mortgage loan pipeline), mandatory and optional forward commitments, and other
hedging instruments. The Company's pipeline of loans in process totaled
approximately $2.1 billion and $2.4 billion as of December 31, 1996 and 1995,
respectively. Until a rate commitment is extended by the Company to a borrower,
there is no market risk to the Company. Loans in process for which interest
rates were committed to the borrower totaled approximately $534.7 million and
$509.9 million as of December 31, 1996 and 1995, respectively. For loans in
process for which interest rates were committed to borrowers, the Company
determines daily what portion of those loans to hedge. In making this
determination, both the anticipated percentage of the pipeline that is expected
to fund and the inherent risk position of the portfolio are considered.
Mandatory and optional forward commitments are used by the Company to hedge its
interest rate exposure during the period from when the Company extends an
interest rate lock to a loan applicant until the time in which the loan is sold
to an investor. These instruments involve, to varying degrees, elements of
credit and interest rate risk. Credit risk is managed by the Company by entering
into agreements only with Wall Street investment bankers with primary dealer
status and with permanent investors meeting the credit standards of the Company.
At any time the risk to the Company, in the event of
44
<PAGE>
default by the purchaser, is the difference between the contract price and
current market value, which amount is a percentage of the outstanding
commitments. To the extent that the counterparties are not able to fulfill the
forward commitments, the Company is at risk to the extent that there are
fluctuations in the market value of the mortgage loans and locked pipeline.
Realized gains and losses on mandatory and optional delivery forward commitments
are recognized in gain (loss) from sales of loans in the period settlement
occurs. Unrealized gains and losses on mandatory and optional forward
commitments are included in the lower of cost or market valuation adjustment to
mortgage loans held for sale. At December 31, 1996 and 1995, the Company had
mandatory and optional forward commitments aggregating $756.9 million and $589.1
million, respectively, which covered the market risk associated with the real
estate loans held for sale to investors of $554 million and $527 million,
respectively, and the pipeline loans for which interest rates were committed of
$534.7 million and $509.9 million, respectively. The Company had adequate lines
of credit at December 31, 1996 and 1995 to fund its projected loan closings from
its mortgage loan pipeline. At December 31, 1996 and 1995, the Company had firm
commitments outstanding to fund residential mortgages for various builders
totaling $96.0 million and $38.0 million, respectively. These commitments expose
the Company to market risk as the builder has the option to require the Company
to fund loans to borrowers at precommitted interest rates. The Company hedges
its optional builder commitments by investing in put and call options to sell
and purchase Treasury bonds and notes and in over-the-counter put and call
options to sell and purchase mortgage-backed securities. During 1996 and 1995,
the Company did not have any significant open put or call options.
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
* Cash and cash equivalents, warehouse line of credit, purchase money notes and
commercial paper: The carrying amounts of the assets and liabilities approximate
fair value because of the short maturity of those instruments.
* Real estate loans held for sale (LHS) to investors and mandatory and optional
delivery forward commitments used to hedge market-rate risk: Fair values of LHS
and commitments are based on quoted market prices.
* Excess servicing fees: Fair values for excess servicing fee assets approximate
the present values, based on market interest rates for similar instruments, of
the difference between the normal and stated servicing fees over the estimated
lives of the underlying mortgage loans. The estimated lives of the loans used by
the Company are based on the median prepayment rates forecasted by several large
brokerage firms.
* Notes payable and subordinated debt: The fair value is estimated using
discounted cash flow analysis for similar types of borrowing arrangements to
companies with similar credit standing.
* Loans in process for which interest rates were committed to the borrower
(locked pipeline) and mandatory and optional-delivery forward commitments used
to hedge market-rate risk: Fair values of the locked pipeline, allowing for
estimated fallout based on historical experience and commitments, are based on
quoted market prices.
45
<PAGE>
The following table presents the carrying amounts and estimated fair values of
certain of the Company's financial instruments at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
In millions 1996 1995
- -------------------------------------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Financial assets:
Real estate loans for
sale to investors $554.4 $557.5 $526.9 $532.3
Locked Pipeline --- (1.8) --- 3.1
Forward Delivery
Commitments --- 5.4 --- (2.2)
- -------------------------------------------------------------------------------------------
Net 554.4 561.1 526.9 533.2
===========================================================================================
Excess servicing fees 25.5 26.8 20.6 20.8
Financial liabilities:
Notes payable (75.7) (75.5) (74.8) (74.7)
Subordinated debt (10.1) (10.1) (10.1) (10.1)
</TABLE>
The carrying amounts shown in the table are included in the balance sheet under
the indicated captions.
NOTE M - DOWNSIZING EXPENSES
Beginning in the second quarter of 1994, the Company's loan production volumes
began to decline significantly. The decline in volume was consistent with
overall industry trends and was the result of a contracting origination market
caused by sharp increases in interest rates. Lower origination volumes resulted
in production over capacity within the mortgage banking industry. In addition,
industry overcapacity intensified price competition reducing margins throughout
the Company's branch origination network. During 1994, management developed a
plan to downsize the Company's production capacity in order to adjust to the
contracted loan origination market. Management first reduced headcount
throughout its branches and at its corporate office in order to bring personnel
costs in line with lower production levels. Approximately 1,100 employees were
terminated during 1994 as a result of the downsizing efforts. Total severance
expenses recognized for the year were $2.5 million.
<TABLE>
<CAPTION>
December 31, 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Occupancy lease costs, net
of recovery on subleases $ 293 $ 907 $ 3,397
Fixed asset write-offs and
equipment lease buyouts 160 236 1,438
Severance costs -- -- 40
Other 81 89 302
---------------------------------------------------------------------
$534 $1,232 $5,177
========================================================================
</TABLE>
Management also identified unprofitable and marginally profitable production
locations and decided to close 29 facilities. Each lease on the closed branches
was evaluated for a possible buyout or sublease arrangement to either eliminate
or reduce the future lease obligations associated with the closed production
facilities. Based on this analysis, the Company established a reserve totaling
$3.8 million which was charged to expense in the fourth quarter of 1994. At
December 31, 1996, 1995 and 1994, $293,000, $907,000 and $3.4 million in the
reserve remained. During the fourth quarter of 1994, the Company also recorded a
reserve totaling $1.6 million for write-offs of leasehold improvements,
furniture and equipment and terminations of certain equipment leases for assets
located at the production facilities identified above. At December 31, 1996,
1995 and 1994, $160,000, $236,000 and $1.4 million of the reserve remained.
Downsizing expenses incurred during 1994 were $8.5 million. There were no
downsizing expenses incurred during 1995 or 1996. The related reserves at
December 31, 1996, 1995 and 1994 are shown in the above chart. Management
believes that remaining reserves are adequate to cover future costs expected to
be incurred from remaining payments required from the downsizing plan.
46
<PAGE>
NOTE N - CONTINGENCIES
The Company is a defendant in litigation arising in the normal course of its
business. Although the ultimate outcome of pending litigation cannot be
reasonably estimated at this time, the Company believes that any liability
resulting from the aggregate amount of damages for outstanding lawsuits and
claims will not have a material adverse effect on its financial position.
NOTE O - QUARTERLY FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 UNAUDITED
- --------------------------------------------------------------------------------
Dollars in
thousands, except
per share data First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Revenues $68,562 $77,163 $76,836 $84,232 $306,793
Costs and expenses 56,128 62,698 61,961 71,024 251,811
Income before
income taxes 12,434 14,465 14,875 13,208 54,982
Income tax expense 4,974 5,794 5,950 5,311 22,029
Net income $ 7,460 $ 8,671 $ 8,925 $ 7,897 $ 32,953
================================================================================
Net income per share $ 0.50 $ 0.61 $ 0.64 $ 0.57 $ 2.30
================================================================================
Stock price per
Common Share:
High 26.250 20.750 19.000 23.000
Low 19.750 15.750 15.000 18.625
- --------------------------------------------------------------------------------
Dividends per
Common Share $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.24
================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995 UNAUDITED
- --------------------------------------------------------------------------------
Dollars in
thousands, except
per share data First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Revenues $53,736 $67,267 $74,579 $79,198 $274,780
Costs and expenses 45,039 51,325 55,029 59,670 211,063
Income before
income taxes 8,697 15,942 19,550 19,528 63,717
Income tax expense 3,039 5,893 7,427 6,903 23,262
- --------------------------------------------------------------------------------
Net income $ 5,658 $10,049 $12,123 $ 12,625 $ 40,455
================================================================================
Net income per share $ 0.38 $ 0.67 $ 0.80 $ 0.84 $ 2.69
================================================================================
Stock price per
Common Share:
High 18.125 25.875 26.000 25.375
Low 14.500 17.125 20.000 20.250
- --------------------------------------------------------------------------------
Dividends per
Common Share $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.24
================================================================================
</TABLE>
47
<PAGE>
CORPORATE DIRECTORY
BOARD OF DIRECTORS
JOHN F. FARRELL, JR.
Chairman of the Board and
Chief Executive Officer
TERRANCE G. HODEL
President and
Chief Operating Officer
WILLIAM L. BROWN*+
Former Chairman and
Chief Executive Officer
Bank of Boston
WILLIAM F. CONNELL*+
Chairman and Chief Executive Officer
Connell Limited Partnership
MAGNA L. DODGE*
Senior Vice President
Lehman Brothers Inc.
WILLIAM O. MURPHY+*
Retired Partner
Simpson Thacher & Bartlett
ROBERT J. MURRAY*+
Chairman,
Chief Executive Officer and President
New England Business Services
JAMES B. NICHOLSON+
President and Chief Executive Officer
Pressure Vessel Services, Inc.
SENIOR OFFICERS
JOHN F. FARRELL, JR.
Chairman of the Board and
Chief Executive Officer
TERRANCE G. HODEL
President and
Chief Operating Officer
HAROLD B. BONNIKSON
Executive Vice President
Residential Loan Production
MICHAEL G. CONWAY
Executive Vice President
Secondary Marketing and
Credit Risk Management
ROBERT J. GALLAGHER
Executive Vice President
Planning and Business Development
MARTIN S. HUGHES
Executive Vice President,
Chief Financial Officer and Treasurer
GARY F. MOORE
Executive Vice President
Information Technology,
Human Resources and Training
ROBERT A. ROSEN
Executive Vice President
Loan Administration
CAROLYN OWENS VOGT
Senior Vice President,
General Counsel and Secretary
* Member of Audit Committee
+ Member of Compensation Committee
* Member of Nominating Committee
48
<PAGE>
STOCKHOLDER INFORMATION
EXECUTIVE OFFICE
North American Mortgage Company
3883 Airway Drive
Santa Rosa, California 95403-1699
707-536-3310
Internet: www.namc.com
TRANSFER AGENT AND REGISTRAR
The Bank of New York
101 Barclay Street
New York, New York 10286
800-524-4458
ANNUAL MEETING OF SHAREHOLDERS
To be held at Chase Manhattan Bank, 270 Park Avenue, 3rd floor, New York, New
York, at 10:00 a.m. (Eastern time) on May 28, 1997.
COMMON STOCK
Shares of North American Mortgage Company are traded on the New York Stock
Exchange under the symbol NAC. As of February 18, 1997, North American Mortgage
Company had 997 registered stockholders of record.
STOCKHOLDER INQUIRIES
Communications concerning stock transfers, lost certificates, changes of address
and dividend payments should be directed to the Transfer Agent (see above). The
Company's Form 10-K as filed with the Securities and Exchange Commission will be
provided without charge, but without exhibits. Requests should be addressed to:
Martin S. Hughes
Executive Vice President
Investor Relations
North American Mortgage Company
3883 Airway Drive
Santa Rosa, California 95403-1699
INVESTOR RELATIONS
Inquiries concerning the Company or its operations should be directed to:
Martin S. Hughes
Executive Vice President
North American Mortgage Company
3883 Airway Drive
Santa Rosa, California 95403-1699
707-523-5049
EMPLOYEES
As of January 31, 1997, the Company had 2,877 employees.
49
