<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-12655
HOMESIDE, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 59-3387041
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
7301 BAYMEADOWS WAY, JACKSONVILLE, FL 32256
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(Address of principal executive offices) (Zip Code)
(904) 281-3000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
Class Outstanding at July 14, 1997
----- ----------------------------
<CAPTION>
<S> <C>
Common stock $0.01 par value 43,375,430
Class C non-voting common stock $1.00 par value 97,138
</TABLE>
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FINANCIAL INFORMATION
ITEM 1. Financial Statements
--------------------
<TABLE>
HOMESIDE, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
(UNAUDITED)
MAY 31, 1997 FEBRUARY 28, 1997
------------ -----------------
<S> <C> <C>
Cash and cash equivalents $ 16,775 $ 52,691
Mortgage loans held for sale, net 806,389 805,274
Mortgage servicing rights, net 1,738,524 1,614,307
Accounts receivable, net 200,570 157,518
Premises and equipment, net 31,928 29,515
Other assets 65,105 92,877
---------- ----------
Total Assets $2,859,291 $2,752,182
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $1,657,434 $1,818,503
Accounts payable and accrued liabilities 130,676 140,304
Deferred income taxes 139,775 129,951
Long-term debt 400,977 151,128
---------- ----------
Total Liabilities 2,328,862 2,239,886
---------- ----------
Common stock:
Common stock, $.01 par value, 119,610,000 shares authorized and
43,375,430 shares issued and outstanding 434 434
Class C non-voting common stock, $1.00 par value, 195,000 shares
authorized, and 97,138 shares issued and outstanding 97 97
Additional paid-in capital 476,646 476,646
Retained earnings 55,102 36,969
---------- ----------
532,279 514,146
Less: Notes received in payment for capital stock (1,850) (1,850)
---------- ----------
Total Stockholders' Equity 530,429 512,296
---------- ----------
Total Liabilities and Stockholders' Equity $2,859,291 $2,752,182
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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<TABLE>
HOMESIDE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
FOR THE THREE FOR THE PERIOD FROM FOR THE THREE
MONTHS ENDED MARCH 16, 1996 TO MONTHS ENDED
MAY 31, 1997 MAY 31, 1996 FEBRUARY 28, 1997
------------- ------------------- -----------------
<S> <C> <C> <C>
REVENUES:
Mortgage servicing fees $ 99,824 $ 41,485 $ 95,871
Amortization of mortgage servicing rights (48,206) (16,442) (50,090)
-------- -------- --------
Net servicing revenue 51,618 25,043 45,781
Interest income 19,242 12,719 21,277
Interest expense (22,104) (14,962) (26,497)
-------- -------- --------
Net interest revenue (2,862) (2,243) (5,220)
Net mortgage origination revenue 17,926 10,810 22,469
Other income 776 107 141
-------- -------- --------
Total Revenues 67,458 33,717 63,171
EXPENSES:
Salaries and employee benefits 19,736 11,480 19,669
Occupancy and equipment 3,806 1,846 3,503
Servicing losses on investor-owned loans
and foreclosure-related expenses 4,752 3,938 4,981
Other expenses 9,437 5,345 12,135
-------- -------- --------
Total Expenses 37,731 22,609 40,288
Income before income taxes and extraordinary
loss on early extinguishment of debt 29,727 11,108 22,883
Income tax expense 11,594 4,554 8,750
-------- -------- --------
Income before extraordinary loss on
early extinguishment of debt 18,133 6,554 14,133
Extraordinary loss on early extinguishment
of debt -- -- 6,440
-------- -------- --------
Net Income $ 18,133 $ 6,554 $ 7,693
======== ======== ========
Income Per Share:
Income before extraordinary loss on early
extinguishment of debt $ 0.41 $ 0.34 $ 0.37
Extraordinary loss, net of tax -- -- 0.17
-------- -------- --------
Net Income $ 0.41 $ 0.34 $ 0.20
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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<TABLE>
HOMESIDE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<CAPTION>
FOR THE THREE FOR THE PERIOD FROM FOR THE THREE
MONTHS ENDED MARCH 16, 1996 TO MONTHS ENDED
MAY 31, 1997 MAY 31, 1996 FEBRUARY 28, 1997
------------- ------------------- -----------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income $ 18,133 $ 6,554 $ 7,693
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of mortgage servicing rights 48,206 16,442 50,090
Depreciation and amortization 2,608 1,231 5,837
Servicing losses on investor-owned loans expenses 3,183 3,938 730
Deferred income tax expense 11,594 4,554 8,750
Capitalized excess servicing rights -- (2,714) (4,642)
Mortgage loans originated and purchased for sale (5,372,472) (2,316,207) (3,422,752)
Proceeds and principal repayments of mortgage loans held for sale 5,371,357 2,227,398 3,718,707
Change in accounts receivable (46,235) (1,468) 14,857
Change in other assets and accounts payable and accrued liabilities (5,915) (67,710) 6,343
----------- ----------- -----------
Net cash provided by (used in) operating activities 30,459 (127,982) 385,613
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (3,763) (1,838) (1,575)
Acquisition of mortgage servicing rights (120,060) (81,034) (131,441)
Net purchases of risk management contracts (29,645) (40,987) (53,506)
Acquisition of BancBoston Mortgage Corp., net of cash acquired -- (133,392) --
Acquisition of Barnett Mortgage Co., net of cash acquired -- (106,244) --
----------- ----------- -----------
Net cash used in investing activities (153,468) (363,495) (186,522)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net borrowings from banks (161,069) 417,146 (192,310)
Issuance of bridge financing -- 90,000 --
Repayment of bridge financing -- (90,000) --
Issuance of notes payable 250,000 200,000 --
Payment of debt issue costs (1,687) (19,799) (1,800)
Repayment of long term debt (151) (121) (70,121)
Proceeds from issuance of common stock -- 152,665 116,677
----------- ----------- -----------
Net cash provided by (used in) financing activities 87,093 749,891 (147,583)
Net increase (decrease) in cash and cash equivalents (35,916) 258,414 51,508
Cash and cash equivalents at beginning of period 52,691 -- 1,183
----------- ----------- -----------
Cash and cash equivalents at end of period $ 16,775 $ 258,414 $ 52,691
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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HOMESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended May 31, 1997 are not
necessarily indicative of the results that may be expected for the fiscal year
ending February 28, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the annual report which
is incorporated by reference in the Form 10-K for the fiscal year ended February
28, 1997 of HomeSide, Inc. ("HomeSide" or the "Company").
2. MORTGAGE SERVICING RIGHTS
<TABLE>
The components of mortgage servicing rights are as follows (in thousands):
<S> <C>
Balance, February 28, 1997 $1,614,307
Additions 120,060
Deferred hedge loss 52,363
Amortization (48,206)
----------
Balance, May 31, 1997 $1,738,524
==========
</TABLE>
3. NOTES PAYABLE
HomeSide borrows funds on a demand basis from an independent syndicate of
banks under a $2.5 billion line of credit. Under certain circumstances set forth
in the bank line of credit agreement, borrowings under such line of credit
become collateralized by substantially all of HomeSide's assets. The bank line
of credit is used to provide funds for HomeSide's business of originating,
acquiring and servicing mortgage loans. The bank line of credit includes both a
warehouse credit facility, which is limited to 98% of the fair value of eligible
mortgage loans held for sale, and a servicing-related facility, which is capped
at $950.0 million. At May 31, 1997, $1.7 billion outstanding is due on February
14, 2000 at which time the bank line of credit will terminate. The bank line of
credit agreement contains covenants that impose limitations and restrictions on
HomeSide, including the maintenance of certain net worth and ratio requirements.
Amounts outstanding at May 31, 1997 under the bank line of credit are comprised
of a warehouse credit facility of $772.4 million and a servicing-related credit
facility of $885.0 million. The amount of the unused bank line of credit was
$842.6 million as of May 31, 1997.
Drawings under the bank line of credit bear interest at rates per annum,
based on, at HomeSide's option (A) the highest of (i) the lead bank's prime
rate, (ii) the secondary market rate of certificates of deposit plus 100 basis
points and (iii) the federal funds rate in effect from time to time plus 0.5%,
or (B) a eurodollar rate. At May 31, 1997, the weighted average interest rate on
the amounts borrowed was 5.935%. The weighted average interest rate during the
quarter ended May 31, 1997 was 6.042%.
HomeSide's short-term credit facilities with maximum aggregate principal
amounts of $85.0 million and $100.0 million expired upon the initial sale of
medium-term debt securities by HomeSide's primary operating subsidiary, HomeSide
Lending, Inc. (see Note 4).
4. LONG-TERM DEBT
On May 14, 1996, HomeSide issued $200.0 million of 11.25% notes (the
"Parent Notes") maturing on May 15, 2003 and paying interest semiannually in
arrears on May 15 and November 15 of each year, commencing on November 15, 1996.
The Parent Notes are redeemable at the option of HomeSide, in whole or in part,
at any time on or after May 15, 2001, at certain pre-set redemption prices. The
indenture contains covenants that impose limitations and restrictions, including
the maintenance of certain net worth and ratio requirements. In addition, the
Parent Notes are secured by a second priority pledge of the common stock of
HomeSide. HomeSide is in compliance with all net worth and ratio requirements
contained in the indenture relating to the Parent Notes. HomeSide used a portion
of
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the proceeds from its February 5, 1997 offering of common stock to pre-pay $70.0
million of the Parent Notes at a premium of $7.9 million. The amount outstanding
at May 31, 1997 is $130.0 million.
On May 20, 1997, HomeSide's primary operating subsidiary, HomeSide
Lending, Inc., issued $250.0 million of 6 7/8% notes maturing on and payable in
full on May 15, 2000 and paying interest semiannually in arrears on May 15 and
November 15 of each year, commencing on November 15, 1997. The notes were issued
under the Registration statement on Form S-1 (Registration Number 333-21193)
(the "Shelf Registration Statement") filed with the Securities and Exchange
Commission (SEC). The 6 7/8% notes due 2000 are not subject to redemption or
repayment prior to maturity and are not subject to any sinking fund. The
proceeds were used to pay down short-term credit facilities of $176.2 million
and to reduce amounts outstanding under the bank credit agreement. As of May 31,
1997, $250.0 million of the outstanding 6 7/8% notes had been effectively
converted by interest rate swap agreements to floating-rate notes. The weighted
average borrowing rate on medium-term note borrowings for the period from
issuance to May 31, 1997, including the effect of the interest rate swap
agreements, was 6.054%. As of May 31, 1997, $750.0 million was available for
future issuances under the Shelf Registration Statement.
5. SUBSEQUENT EVENTS
On June 30, 1997, HomeSide Lending, Inc. issued $200.0 million of 6 7/8%
notes under the Shelf Registration Statement. These notes mature on June 30,
2002 and interest is payable semiannually in arrears on June 30 and December 30
of each year, commencing on December 30, 1997. As of July 1, 1997, $100.0
million of these outstanding 6 7/8% notes had been effectively converted by
interest rate swap agreements to floating-rate notes with a weighted average
rate of 5.97% at July 1, 1997. The net proceeds were used to reduce the amounts
outstanding under the bank credit agreement. Subsequently, HomeSide will
reborrow amounts to fund an early pool buyout program, which involves the
purchase of delinquent FHA and VA loans from GNMA pools, thereby reducing the
carrying cost of servicing such loans.
On June 30, 1997, an additional $40.0 million of 6.82% notes and on July
1, 1997, an additional $15.0 million of 6.86% notes, both maturing on July 2,
2001, were issued under the Shelf Registration Statement. Interest on both
issuances is payable semiannually in arrears on June 30 and December 30 of each
year, commencing on December 30, 1997. Net proceeds were used for working
capital and general corporate purposes.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
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General
HomeSide, Inc., through its operating subsidiary HomeSide Lending, Inc.,
is one of the largest full service residential mortgage banking companies in the
United States, formed through the acquisition of the mortgage banking operations
of BankBoston, N.A., formerly known as The First National Bank of Boston ("Bank
of Boston"), and Barnett Banks, Inc. ("Barnett"). HomeSide's strategy emphasizes
variable cost mortgage origination and low cost servicing. Headquartered in
Jacksonville, Florida, HomeSide ranks as the 5th largest originator and the 7th
largest sevicer in the United States for calendar 1996 based on data published
by National Mortgage News.
HomeSide plans to build its core operations through (i) improved economies
of scale in servicing costs; (ii) increased productivity using proprietary
technology; and (iii) expanded and diversified variable cost origination
channels. In addition, HomeSide intends to pursue additional loan portfolio
acquisitions and strategic origination relationships similar to the existing
Bank of Boston and Barnett arrangements.
Results of operations prior to May 31, 1996 do not include the results of
operations of Barnett Mortgage Company, because it was acquired on May 31, 1996.
For this reason, comparisons to the first fiscal quarter of fiscal 1997 are not
particularly meaningful. The results of operations for the first fiscal quarter
of fiscal 1998 are, therefore, most directly comparable to the results of
operations for the fourth quarter of 1997, the results of which have also been
included for comparative purposes.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on Form
10-Q contains forward-looking statements which reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "believe,"
"expect," "anticipate," "intend," "estimate" and other expressions which
indicated future events and trends identify forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements whether as a result of new
information, future events or otherwise. The following factors could cause
actual results to differ
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materially from historical results or those anticipated: (1) the Company's
ability to grow which depends on its ability to obtain additional financing in
the future for originating loans, investment in servicing rights, working
capital, capital expenditure and general corporate purposes, (2) economic
downturns may negatively affect the Company's profitability as the frequency of
loan default tends to increase in such environments and (3) Changes in interest
rates may affect the volume of loan originations and acquisitions, the interest
rate spread on loans held for sale, the amount of gain or loss on the sale of
loans and the value of the Company's servicing portfolio. These risks and
uncertainties are more fully detailed in the Company's filings with the SEC.
Loan Production Activities
As a multi-channel loan production lender, HomeSide has one of the
industry's largest correspondent lending production operations, a full-service
brokered loan program and a national production center for consumer direct
mortgage lending. By focusing on production channels with a variable cost
structure, HomeSide eliminates the fixed costs associated with traditional
mortgage branch offices. Without the burden of high fixed cost origination
overhead, HomeSide is well positioned to weather a variety of interest rate
environments.
<TABLE>
The following information regarding loan production activities for
HomeSide is presented to aid in understanding the results of operations and
financial condition of HomeSide for the first quarter of fiscal 1998, the first
quarter of fiscal 1997 and for the fourth quarter of fiscal 1997 (in millions).
<CAPTION>
FOR THE THREE FOR THE PERIOD FOR THE THREE
MONTHS ENDED MARCH 16, 1996 MONTHS ENDED
MAY 31, 1997 TO MAY 31, 1996 FEBRUARY 28, 1997
------------ --------------- -----------------
<S> <C> <C> <C>
Correspondent $3,222 $1,893 $3,021
Co-issue 1,191 1,419 2,610
Broker 389 220 300
------ ------ ------
Total wholesale 4,802 3,532 5,931
Direct 69 248 134
------ ------ ------
Total production 4,871 3,780 6,065
Bulk acquisitions 501 -- --
------ ------ ------
Total production and acquisitions $5,372 $3,780 $6,065
====== ====== ======
</TABLE>
Total loan production was $5.4 billion for the first quarter of fiscal
1998 compared to $3.8 billion for the first quarter of fiscal 1997. The increase
was primarily due to the additional production resulting from the acquisition of
Barnett on May 31, 1996 and growth in HomeSide's existing wholesale channels.
Total loan production was $5.4 billion for the first quarter of fiscal
1998 compared to $6.1 billion for the fourth quarter of fiscal 1997, a decrease
of $0.7 billion. This was primarily due to an increase in interest rates during
the first quarter of fiscal 1998. As reflected in the Freddie Mac 30-year
mortgage index, the average mortgage interest rate increased to 8.11% in the
first quarter of fiscal 1998 from 7.86% in the fourth quarter of fiscal 1997.
The result was a lower volume of loan originations nationally in the first
quarter of fiscal 1998.
HomeSide strives for maximum efficiency in all of its production channels.
Homeside continues increase its use of automated underwriting, improve in its
internet web site and enhance in work-flow technology. During the quarter, a new
internet site was launched for wholesale and broker customers. This electronic
link will facilitate business communication between HomeSide and its
correspondent and broker customers. HomeSide is also examining a number of ways
to diversify revenue sources for the future. HomeSide is currently reviewing
potential relationships with a nationwide credit card provider, an alliance to
create a B&C paper product line for HomeSide's production network and other
mortgage-related products.
Servicing Portfolio
Management believes that HomeSide is one of the most efficient mortgage
servicers in the industry based on its servicing cost per loan and the number of
loans serviced per employee. The servicing operation makes extensive use of
state-of-the-art technology, process re-engineering and expense management. With
a portfolio size of over $92 billion, HomeSide services the loans of over one
million homeowners from across the United States. HomeSide is committed to
protecting the value of this important asset by a sophisticated risk management
strategy. HomeSide anticipates its low cost of servicing loans will continue to
maximize the bottom-line impact of its growing servicing portfolio. HomeSide's
focus on efficient and low cost processes is pursued through the selective use
of automation as well as the strategic outsourcing of selected servicing
functions and effective control of delinquencies and foreclosures.
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<TABLE>
The following information on the dollar amounts of loans serviced is
presented to aid in understanding the results of operations and financial
condition of HomeSide for the first quarter of fiscal 1998, the first quarter of
fiscal 1997, and the fourth quarter of fiscal 1997 (in millions):
<CAPTION>
FOR THE THREE FOR THE PERIOD FOR THE THREE
MONTHS ENDED MARCH 1, 1996 MONTHS ENDED
MAY 31, 1997 TO MAY 31, 1996 FEBRUARY 28, 1997
------------ --------------- -----------------
<S> <C> <C> <C>
Balance at beginning of period $90,192 $42,907 $88,706
Acquisition of Barnett Mortgage Co. -- 33,082 --
Other additions 5,372 4,102 6,065
------- ------- -------
Total additions 5,372 37,184 6,065
------- ------- -------
Scheduled amortization 531 235 577
Prepayments 2,144 1,321 1,674
Foreclosures 171 130 141
Sales of servicing 81 14 2,187(a)
------- ------- -------
Total reductions 2,927 1,700 4,579
------- ------- -------
Balance at end of period 92,637 $78,391 $90,192
======= ======= =======
</TABLE>
(a) Included $1.9 billion of servicing sold as part of the sale of Honolulu
Mortgage Company
The number of loans serviced at May 31, 1997 was 1,124,911, compared to
984,000 at May 31, 1996 and 1,087,336 at February 28, 1997. HomeSide's strategy
is to build its mortgage servicing portfolio by concentrating on variable cost
loan origination strategies, and as a result, benefit from improved economies of
scale.
RESULTS OF OPERATIONS
Summary
HomeSide's net income for the first quarter of fiscal 1998 increased to
$18.1 million from $6.6 million for the first quarter of fiscal 1997 and $14.1
million before an extraordinary item for the fourth quarter of fiscal 1997.
Total revenues for the first quarter of fiscal 1998, for the first quarter of
fiscal 1997 and the fourth quarter of fiscal 1997 were $67.5 million, $33.7
million and $63.2 million, respectively.
Total revenues for the first quarter of fiscal 1998 increased to $67.5
million from $33.7 million for the first quarter of fiscal 1997. This was a
result of the acquisition of Barnett Mortgage Co. on May 31, 1996 and increases
in net servicing revenue and net mortgage origination revenue. The Barnett
Mortgage Co. servicing portfolio was $33.1 billion at May 31, 1996 and its
acquisition increased HomeSide's servicing portfolio by 75% on that date, which
was a major factor in the increase in net servicing revenue to $50.8 million in
the first quarter of fiscal 1998 from $25.0 million in the first quarter of
fiscal 1997. In addition, subsequent increases in the size of the portfolio
throughout fiscal 1997 and the first quarter of fiscal 1998 contributed to the
increased revenue. The servicing portfolio was $92.6 billion at May 31, 1997,
$78.4 billion at May 31, 1996 and $90.2 billion at February 28, 1997. As part of
the Barnett Mortgage Co. acquisition, Barnett agreed to sell HomeSide Lending
the loans produced by the loan production networks retained by Barnett. This
additional production increased net mortgage origination revenue. Net mortgage
origination revenue increased to $17.9 million in the first quarter of fiscal
1998 from $10.8 million in the first quarter of fiscal 1997 due to increased
loan production during the same period.
Revenues for the first quarter of fiscal 1998 increased by $4.3 million to
$67.5 million from $63.2 million for the fourth quarter of fiscal 1997. This was
mainly a result of an increase of $5.8 million in net servicing revenue and an
increase of $2.3 million in net interest revenue, offset by a decrease of $4.6
million in net mortgage origination revenue. The increase in net servicing
revenue was due to a $2.4 billion increase in the loan servicing portfolio
during the first quarter of fiscal 1998 and decreased amortization expense. The
lower amount of amortization of mortgage servicing rights reflects the increase
in interest rates during the first quarter of fiscal 1998 and the consequent
increase in the estimated value of future net servicing revenue. Net interest
revenue increased as a result of reduced costs from the bank line of credit from
improved credit ratings after HomeSide raised additional capital through its
initial public offering of stock in February, 1997. Net mortgage origination
revenue decreased due to the increase in mortgage interest rates during the
first quarter of fiscal 1998, which resulted in a lower volume of loan
originations throughout the industry. Mortgage origination expenses decreased in
line with the lower volume of originations, a reflection of HomeSide's variable
cost production structure, which unlike traditional retail branch loan
origination networks, is not burdened by high fixed costs during industry wide
loan production downturns.
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<PAGE> 9
Net Servicing Revenue
Net servicing revenue was $51.6 million in the first quarter of fiscal
1998 compared to $25.0 million in the first quarter of fiscal 1997, and $45.8
million in the fourth quarter of fiscal 1997. Net servicing revenue is comprised
of mortgage servicing fees, which generally range from 0.25% to 0.50% per annum
of the outstanding principal balances of the loans in the servicing portfolio,
ancilliary servicing revenue, and amortization of mortgage servicing rights
expense. HomeSide's weighted average servicing fee, excluding ancillary income,
was 0.364%, 0.367% and 0.359% during the first quarter of fiscal 1998, the first
quarter of fiscal 1997, and the fourth quarter of fiscal 1997, respectively.
Mortgage servicing fees increased to $99.8 million in the first quarter of
fiscal 1998 from $41.5 million in the first quarter of 1997, primarily as a
result of the Barnett Mortgage Co. acquisition and growth of the servicing
portfolio through the loan production channels. The servicing portfolio
increased to $92.6 billion at the end of the first quarter of fiscal 1998
compared to $78.4 billion at the end of the first quarter of fiscal 1997. The
decrease in the weighted average servicing fee from the first quarter of fiscal
1997 to the first quarter of fiscal 1998 was due to lower proportions of
government loans serviced which typically have a higher servicing fee.
Amortization expense increased to $48.2 million for the first quarter of fiscal
1998 from $16.4 million for the first quarter of fiscal 1997 mainly as a result
of a higher average balance of mortgage servicing rights.
Mortgage servicing fees increased by $3.9 million to $99.8 million for the
first quarter of fiscal 1998 from $95.9 million in the fourth quarter of fiscal
1997. The increase was a result of continued growth in the size of the servicing
portfolio. The increase in the weighted average servicing fee from the fourth
quarter of fiscal 1997 to the first quarter of fiscal 1998 was due to higher
proportions of government loans serviced during the quarter. Amortization of
mortgage servicing rights decreased during the same period as a consequence of
the increase in interest rates during the first quarter of fiscal 1998, which
had the effect of extending the estimated life of the mortgage servicing rights.
Risk Management Activities
HomeSide has a risk management program designed to protect the economic
value of its mortgage servicing portfolio from declines in value due to
increases in estimated loan prepayment speeds, which are primarily influenced by
declines in interest rates. When loans prepay faster than anticipated, the cash
flow HomeSide expects to receive from servicing such loans is reduced. The value
of mortgage servicing rights is based on the present value of the cash flows to
be received over the life of the loans and therefore, the value of the servicing
portfolio declines as prepayments increase.
Since its formation, HomeSide has purchased options on U.S. Treasury bond
futures to protect a significant portion of the market value of its mortgage
servicing portfolio from a decline in value. The option contracts used by
HomeSide have characteristics such that they tend to increase in value as
interest rates decline. Conversely, these option contracts tend to decline in
value as interest rates rise. Accordingly, changes in value of these securities
will tend to move inversely with changes in value of HomeSide's mortgage
servicing rights.
These option contracts are designated as hedges on the purchase date and
such designation is at a level at least as specific as the level at which
mortgage servicing rights are evaluated for impairment. The option contracts are
marked-to-market with changes in market value deferred as an adjustment to the
carrying value of the related mortgage servicing right asset being hedged.
Changes in market value that are deferred are amortized and evaluated for
impairment in the same manner as the related mortgage servicing rights. The
effectiveness of HomeSide's hedging activity can be measured by the correlation
between changes in the value of the options and changes in the value of
HomeSide's mortgage servicing rights. This correlation is assessed on a
quarterly basis to ensure that high correlation is maintained over the term of
the hedging program. During each of the periods presented, HomeSide has
experienced a high measure of correlation between changes in the value of
mortgage servicing rights and the option contracts. However, in periods of
rising interest rates, such as the first quarter of fiscal 1998, the increase in
value of mortgage servicing rights may outpace the decline in value of the
option contracts because the loss on the options is limited to the premium paid.
As a result of rising interest rates during the first quarter of fiscal
1998, the increase in the estimated fair value of the mortgage servicing rights
more than offset the $52.4 million loss on risk management contracts during the
period. Interest rates were also rising during the first and fourth fiscal
quarters of 1997 and the losses on risk management contracts during these
periods were $37.6 million and $170.6 million, respectively. The cumulative net
deferred gains and losses on risk management contracts resulted in a $121.6
million net loss in fiscal 1997. The increase in the estimated fair value of the
mortgage servicing rights approximated the net loss on risk management contracts
for this period. HomeSide's future cash needs as they relate to its hedging
program will be influenced by such factors as long-term interest rates, loan
production levels and growth in the mortgage servicing portfolio. The fair value
of open risk management contracts at May 31, 1997 was $22.5 million, which was
equal to their carrying amount because the options are marked-to-market at each
reporting date.
9
<PAGE> 10
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the
direction in which rates are moving and the spread between short and long-term
interest rates. These factors influence the size of the residential mortgage
origination market, HomeSide's loan production volumes and the interest rates
HomeSide earns on loans and pays to its lenders.
Loan refinancing levels are the largest contributor to changes in the size
of the mortgage origination market. To reduce the cost of their home mortgages,
borrowers tend to refinance their loans during periods of declining interest
rates, increasing the size of the origination market and Homeside's loan
production volumes. Higher loan production volumes result in higher average
balances of loans held for sale and consequently higher levels of interest
income from interest earned on such loans prior to their sale. This higher level
of interest income due to increased volumes is partially offset by the lower
rates earned on the loans.
Overall borrowing costs also fluctuate with changes in interest rates.
Currently, the interest expense HomeSide pays to finance mortgage loans held for
sale and other net assets is generally calculated with reference to short-term
interest rates. In addition, because mortgage loans held for sale earn interest
based on longer term interest rates, the level of net interest revenue is also
influenced by the spread between long-term and short-term interest rates.
Net interest revenue for the first fiscal quarter of 1998 was ($2.9)
million compared to $(2.2) million for the first quarter of fiscal 1997, and
($5.2) million for the fourth quarter of fiscal 1997. Interest income increased
during the first quarter of fiscal 1998 as compared to the first quarter of
fiscal 1997 as a result of an increase in the average balance of loans held for
sale to $1.0 billion in the first quarter of fiscal 1998 from $0.8 billion
during the first quarter of fiscal 1997, higher interest rates and an increase
in escrow balances to $1.3 billion at the end of the first quarter of fiscal
1998 compared to $1.1 billion at the end of the first quarter of fiscal 1997.
Interest expense increased as a result of an increase in the average balance of
notes payable to the banks to $1.9 billion during the first quarter of fiscal
1998 from $1.3 billion during the first quarter of fiscal 1997. Borrowings
increased to fund growth of the servicing portfolio and increased loan
origination activity.
Interest income decreased during the first quarter of fiscal 1998 as
compared to the fourth quarter of fiscal 1997 as a result of more mortgage loans
being sold under repurchase agreements than in the fourth quarter of fiscal
1997. Repurchase agreements provide an alternative to the bank line of credit
for mortgage loans held for sale. Under these agreements, mortgage loans are
sold earlier and not held as long in the warehouse. These agreements have the
effect of increasing gains on sales of loans and reducing interest income. In
addition, the lower volume of loan originations during the first quarter of
fiscal 1998, as compared to the fourth quarter of fiscal 1997 contributed to the
reduction in interest income. Interest expense decreased during the first
quarter of fiscal 1998 as compared to the fourth quarter of fiscal 1997 as a
result of lower funding rates. The lower rates were obtained through improved
credit ratings due to capital raised through HomeSide's initial public offering
of stock. In addition, in February 1997, HomeSide Lending Inc., HomeSide's
primary operating subsidiary, filed a Shelf Registration Statement in connection
with a public offering of medium-term notes. On May 20, 1997, $250.0 million was
raised from the issuance of 6 7/8% medium-term notes. A portion of the proceeds
were used to repay borrowings under the short-term credit facilities which
reduced interest expense during the first quarter of fiscal 1998.
Net Mortgage Origination Revenue
Net mortgage origination revenue is comprised of fees earned on the
origination of mortgage loans, gains and losses on the sale of loans, gains and
losses resulting from hedging of secondary marketing activities and fees charged
to review loan documents for purchased loan production.
Net mortgage origination revenue was $17.9 million for the first quarter
of fiscal 1998 compared to $10.8 million for the first quarter of fiscal 1997
and $22.5 million for the fourth quarter of fiscal 1997. The increase in net
mortgage origination revenue during the first quarter of fiscal 1998 as compared
to the first quarter of fiscal 1997 reflects an increase in loan production
volumes. The increase in loan production during the first quarter of fiscal 1998
as compared to the first quarter of fiscal 1997 is due in part to increased
production resulting from the preferred seller relationship with Barnett
established as part of the Barnett Mortgage Co. acquisition. Barnett agreed to
sell HomeSide loans produced by the loan production networks retained by
Barnett. The increase in net mortgage origination revenue to the first quarter
of fiscal 1998 from the first quarter of fiscal 1997 was also attributable to a
higher level of repurchase agreements.
Net mortgage origination revenue decreased to $17.9 million for the first
quarter of fiscal 1998 as compared to $22.5 million for the fourth quarter of
fiscal 1997. This was a reflection of lower production volumes during the first
quarter of fiscal 1998, a consequence of interest rate increases during the
quarter and a lower volume of loan originations. HomeSide's primary origination
activities during the first quarter of 1998 were through correspondent and
co-issue channels. HomeSide expects these channels to continue to be the primary
loan origination sources in the future.
10
<PAGE> 11
Salaries and Employee Benefits
Salaries and employee benefits expense was $19.7 million in the first
quarter of fiscal 1998 compared to $11.5 million for the first quarter of fiscal
1997 and remained constant from the fourth quarter of fiscal 1997. The increase
in the first quarter of fiscal 1997 from the first quarter of fiscal 1998 was
due to growth in the number of employees as a result of the acquisition of the
mortgage servicing operations of Barnett Mortgage Co. on May 31, 1996. The
average number of full-time equivalent employees grew from 1,096 during the
first quarter of fiscal 1997 to 1,689 during the fourth quarter of fiscal 1997
and decreased to 1,647 during the first quarter of fiscal 1998. The decrease was
due to the continuing integration of the Barnett Mortgage Co. servicing
operations and the corresponding reduction in the number of employees.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs
and maintenance costs, certain computer software expenses and depreciation of
HomeSide's premises and equipment. Occupancy and equipment expense for the first
quarter of fiscal 1998 was $3.8 million compared to $1.9 million for the first
quarter of fiscal 1997 and $3.5 million for the fourth quarter of fiscal 1997.
The increase in expense to the first quarter of fiscal 1998 from the first
quarter of fiscal 1997 was mainly due to the premises and equipment acquired in
the Barnett Mortgage Co. acquisition. The increase in occupancy and equipment
expense to the first quarter of fiscal 1998 from the fourth quarter of fiscal
1997 was primarily due to an increase in information systems costs required to
handle the growing mortgage servicing portfolio.
Servicing Losses on Investor-Owned Loans and Foreclosure-related Expenses
Servicing losses on investor-owned loans represent anticipated losses
primarily attributable to servicing FHA and VA loans for investors. These
amounts include actual losses for final disposition of loans, non-recoverable
foreclosure costs, accrued interest for which payment has been denied and
estimates for potential losses based on HomeSide's experience as a servicer of
government loans.
During the first quarter of fiscal 1998 the servicing losses on
investor-owned loans and foreclosure-related expenses totaled $4.8 million
compared to $3.9 million for the first quarter of 1997 and $5.0 million for
the fourth quarter of fiscal 1997. The increase during the first quarter of
fiscal 1998 as compared to the first quarter of fiscal 1997 was largely
attributable to the acquisition of the Barnett Mortgage Co. servicing portfolio
and the growth of the servicing portfolio resulting from loan production.
Servicing losses on investor-owned loans and foreclosure-related expenses for
the first quarter of fiscal 1998 remained relatively flat compared to the
fourth quarter of fiscal 1997.
Included in the balance of accounts payable and accrued liabilities at May
31, 1997 is a reserve for estimated servicing losses on investor-owned loans of
$21.7 million. The reserve has been established for potential losses related to
the mortgage servicing portfolio. Increases to the reserve are charged to
earnings as servicing losses on investor-owned loans. The reserve is decreased
for actual losses incurred related to the mortgage servicing portfolio.
HomeSide's historical loss experience on VA loans generally has been consistent
with industry experience.
Other Expenses
Other expenses consist mainly of professional fees, communications
expense, advertising and public relations, data processing expenses and certain
loan origination expenses. The level of other expenses fluctuates in part based
upon the level of HomeSide's mortgage servicing portfolio and loan production
volumes.
Other expenses during the first quarter of fiscal 1998 were $9.4 million
compared to $5.4 million for the first quarter of 1997 and $12.1 million for the
fourth quarter of 1997. The increase in other expenses in the first quarter of
fiscal 1998 from the first quarter of fiscal 1997 was the result of the
acquisition of Barnett Mortgage Co. The decrease in other expenses in the first
quarter of fiscal 1998 from the fourth quarter of fiscal 1997 was primarily due
to lower production expenses associated with the lower production volumes.
Income Tax Expense
HomeSide's income tax expense was $11.6 million for the first quarter of
fiscal 1998, $4.6 million for the first quarter of fiscal 1997 and $8.8 million
for the fourth quarter of fiscal 1997. The increases were attributable to
increases in net income. The effective income tax rate for fiscal 1997 and the
first quarter of 1998 was approximately 39%.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan
origination activities and the investment in servicing rights. To meet these
needs, the Company currently utilizes funding from an independent syndicate of
banks, including a warehouse credit facility and a servicing-related facility,
medium-term notes, and cash flow from operations. In the past, the Company has
also utilized short-term credit facilities and public offerings of common stock.
HomeSide continues to investigate and pursue alternative and supplementary
methods to finance its growing operations through the public and private capital
markets. These may include methods designed to expand the Company's financial
capacity and reduce its cost of capital. In addition, to facilitate the sale and
distribution of certain mortgage products, HomeSide Mortgage Securities, Inc., a
wholly owned subsidiary of HomeSide Lending, may issue mortgage backed
securities.
Operations
Net cash provided by operations was $30.5 million for the first quarter of
fiscal 1998. Cash was primarily provided from servicing fee income, loan sales
and principal repayments. Cash flows from loan originations are dependent upon
current economic conditions and the level of long-term interest rates. Increases
in long-term interest rates generally result in lower loan refinancing activity
which results in lower cash demands to meet lower loan production levels.
Investing
Net cash used in investing activities was $153.5 million for the first
quarter of fiscal 1998. Cash used in investing activities was primarily used for
the purchase and origination of mortgage servicing rights and the purchase of
options of U.S. Treasury bond futures as part of HomeSide's hedging program.
Future uses of cash for investing activities will be dependent on the mortgage
origination market and HomeSide's hedging needs. HomeSide is not able to
estimate the timing and amount of cash uses for future acquisitions of other
mortgage banking entities, if such acquisitions were to occur.
Financing
Net cash provided by financing activities was $87.1 million for the first
quarter of fiscal 1998. The primary source of cash from financing activities
during the period was $250.0 million from the issuance of medium-term notes.
Cash used in financing activities was used to repay borrowings from the
short-term credit facilities and for the payment of debt issue costs related to
the bank credit agreement.
During the first quarter of fiscal 1998, net cash provided by operations
was $30.5 million, net cash used in investing activities was $153.5 million and
net cash provided by financing activities was $87.1 million, resulting in a net
increase in cash of $16.8 million. HomeSide expects that to the extent cash
generated from operations is inadequate to meet its liquidity needs, those needs
can be met through financing from its bank credit facility and other facilities
which may be entered into from time to time, as well as from the issuance of
debt securities in the public markets. Accordingly, HomeSide does not currently
anticipate that it will make sales of servicing rights to any significant degree
for the purpose of generating cash. Nevertheless, in addition to its cash and
mortgage loans held for sale balances, HomeSide's portfolio of mortgage
servicing rights provides a potential source of funds to meet liquidity
requirements, especially in periods of rising interest rates when loan
origination volume slows. Repurchase agreements also provide an alternative to
the bank line of credit for mortgages held for sale. Future cash needs are
highly dependent on future loan production and servicing results, which are
influenced by changes in long-term interest rates.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
HomeSide is a defendant in a number of legal proceedings arising in the
normal course of business. HomeSide, in management's estimation, has recorded
adequate reserves in the financial statements for pending litigation.
Management, after reviewing all actions and proceedings pending against or
involving HomeSide, considers that the aggregate liability or loss, if any,
resulting from the final outcome of these proceedings will not have a material
effect on the financial position of HomeSide.
In recent years, the mortgage banking industry has been subject to class
action lawsuits which allege violations of federal and state laws and
regulations, including the propriety of collecting and paying various fees and
charges. Class action lawsuits may be filed in the future against the mortgage
banking industry.
12
<PAGE> 13
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
<TABLE>
HomeSide's Annual Meeting of Stockholders was held June 10, 1997. At the
Annual Meeting, the stockholders voted in the following matter:
<CAPTION>
Election of Directors Votes For Votes Withheld
--------------------- --------- --------------
<S> <C> <C>
Joe K. Pickett 41,418,028 6,485
Hugh R. Harris 41,418,028 6,485
Thomas M. Haggerty 41,251,928 172,585
David Harkins 41,251,728 172,785
Justin S. Huscher 41,418,028 6,485
Peter J. Manning 41,251,728 172,785
William J. Shea 41,251,928 172,585
Kathleen M. McGillycuddy 41,251,928 172,585
Hinton F. Nobles, Jr. 41,251,928 172,585
Douglas K. Freeman 41,251,728 172,785
Charles W. Newman 41,251,728 172,785
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following documents are filed as a part of this Report:
Number Description
------ -----------
11 Statement Regarding Computation of Earnings per share
27 Financial Data Schedule
(b) Reports on form 8-K
HomeSide filed no reports on Form 8-K during the first quarter of
the fiscal year ending February 28, 1998.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HomeSide, Inc.
--------------
(Registrant)
Date: July 15, 1997 By: /s/ Joe K. Pickett
----------------- ---------------------------------------
Joe K. Pickett
Chairman of the Board, Chief Executive Officer
and Director (Principal Executive Officer)
Date: July 15, 1997 By: /s/ Kevin D. Race
----------------- ---------------------------------------
Kevin D. Race
Vice President, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting Officer)
14
<PAGE> 1
Exhibit 11
HOMESIDE, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(dollar amounts in thousands, except per share data)
PRIMARY AND FULLY DILUTED
Net earnings applicable to common stock $18,133,000
===========
Average shares outstanding 43,472,568
Net effect of dilutive stock options (based
on the treasury stock method using
average market price) 495,443
-----------
Total average shares 43,968,011
===========
Per share amount $ 0.41
===========
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> MAY-31-1997
<CASH> 16,775
<SECURITIES> 0
<RECEIVABLES> 200,570
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,827,363
<PP&E> 31,928
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,859,291
<CURRENT-LIABILITIES> 1,927,885
<BONDS> 400,977
0
0
<COMMON> 531
<OTHER-SE> 529,898
<TOTAL-LIABILITY-AND-EQUITY> 2,859,291
<SALES> 0
<TOTAL-REVENUES> 67,458
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 37,731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 29,727
<INCOME-TAX> 11,594
<INCOME-CONTINUING> 18,133
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,133
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0
</TABLE>
