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 November 30, 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.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
59-3387041
(I.R.S. Employer Identification No.)
7301 Baymeadows Way, Jacksonville, FL 32256
(Address of principal executive offices) (Zip Code)
(904) 281-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _x_ No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class December 29, 1997
----- -----------------
Common stock $0.01 par value 43,375,430
Class C non-voting common stock $1.00 par value 97,138
1
<PAGE>
FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
HOMESIDE, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, Except Share Data)
<CAPTION>
Unaudited)
November 30, 1997 February 28, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 16,590 $ 52,691
Mortgage loans held for sale, net 984,706 805,274
Mortgage servicing rights, net 1,748,806 1,614,307
Accounts receivable, net 252,823 157,518
Early pool buyout advances 311,616 --
Premises and equipment, net 35,414 29,515
Other assets 164,566 92,877
------------- --------------
Total Assets $ 3,514,521 $ 2,752,182
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 1,732,649 $ 1,818,503
Accounts payable and accrued liabilities 140,550 140,304
Deferred income taxes 169,572 129,951
Long-term debt 900,671 151,128
------------- -------------
Total Liabilities 2,943,442 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 95,732 36,969
------------- -------------
572,909 514,146
Less: Notes received in payment for capital stock (1,830) (1,850)
------------- -------------
Total Stockholders' Equity 571,079 512,296
------------- -------------
Total Liabilities and Stockholders' Equity $ 3,514,521 $2,752,182
============= =============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
2
<PAGE>
<TABLE>
HOMESIDE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands, Except Share Data)
<CAPTION>
For the Three For the Three For the Nine For the Period
Months Ended Months Ended Months Ended from
November 30, November 30, November 30, March 16, 1996 to
1997 1996 1997 November 30, 1996
------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Mortgage servicing fees $108,864 $91,636 $312,333 $216,470
Amortization of mortgage servicing rights (58,713) (48,831) (161,454) (105,737)
---------------- ---------------- ---------------- -----------------
Net servicing revenue 50,151 42,805 150,879 110,733
Interest income 28,470 25,241 74,354 60,230
Interest expense (27,386) (22,321) (73,340) (61,203)
---------------- ---------------- ---------------- -----------------
Net interest revenue 1,084 2,920 1,014 (973)
Net mortgage origination revenue 20,676 16,521 59,186 43,604
Other income 220 79 1,256 541
---------------- ---------------- ---------------- -----------------
Total Revenues 72,131 62,325 212,335 153,905
EXPENSES:
Salaries and employee benefits 19,191 20,650 58,473 53,307
Occupancy and equipment 4,262 3,337 11,889 8,267
Servicing losses on investor-owned loans
and foreclosure-related expenses 5,171 4,957 15,680 12,953
Other expenses 9,913 11,711 29,959 29,579
---------------- ---------------- ---------------- -----------------
Total Expenses 38,537 40,655 116,001 104,106
Income before income taxes 33,594 21,670 96,334 49,799
Income tax expense 13,102 9,015 37,571 20,523
---------------- ---------------- ---------------- -----------------
Net Income $20,492 $12,655 $58,763 $29,276
================ ================ ================ =================
Net income per share $0.46 $0.36 $1.33 $0.97
================ ================ ================ =================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
3
<PAGE>
<TABLE>
HOMESIDE, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
<CAPTION>
For the Period
For the Three For the Three For the Nine from March 16,
Months Ended Months Ended Months Ended 1996 to
November 30, 1997 November 30, 1996 November 30, 1997 November 30, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 20,492 $ 12,655 $ 58,763 $ 29,276
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Amortization of mortgage servicing rights 58,713 48,831 161,454 105,737
Depreciation and amortization 2,829 1,870 8,231 6,259
Servicing losses on investor-owned loans expenses 3,682 4,957 10,247 12,953
Deferred income tax expense 16,920 9,015 41,389 20,523
Capitalized excess servicing rights -- (7,133) -- (16,373)
Mortgage loans originated and purchased for sale (6,564,839) (3,527,008) (19,087,320) (9,081,815)
Proceeds and principal repayments of mortgage loans
held for sale 6,609,753 3,716,620 18,907,888 8,853,510
Change in accounts receivable (71,814) (59,129) (105,451) (78,235)
Change in other assets and accounts payable and accrued
liabilities (21,312) (43,316) (28,989) (33,624)
----------------- ----------------- ----------------- -----------------
Net cash provided by (used in) operating activities 54,424 157,362 (33,788) (181,789)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of premises and equipment, net (4,539) (596) (9,754) (3,354)
Acquisition of mortgage servicing rights (146,598) (96,639) (404,904) (344,288)
Net purchases of risk management contracts 148,058 (9,549) 67,145 (88,438)
Early pool buyout reimbursements (advances) 56,689 -- (311,717) --
Acquisition of BancBoston Mortgage Corp., net of cash
acquired -- -- -- (133,392)
Acquisition of Barnett Mortgage Co., net of cash acquired -- -- -- (106,244)
----------------- ----------------- ----------------- -----------------
Net cash provided by (used in) investing activities 53,610 (106,784) (659,230) (675,716)
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from (repayments to) banks (135,680) (77,419) (85,854) 526,480
Issuance of notes payable 45,000 -- 750,000 200,000
Payment of debt issue costs (641) 31 (6,772) (20,290)
Repayment of long term debt (154) (148) (457) (417)
Proceeds from issuance of common stock -- 150 -- 152,915
Issuance of bridge financing -- -- -- 90,000
Repayment of bridge financing -- -- -- (90,000)
----------------- ----------------- ----------------- -----------------
Net cash (used in) provided by financing activities (91,475) (77,386) 656,917 858,688
Net increase (decrease) in cash and cash equivalents 16,559 (26,808) (36,101) 1,183
Cash and cash equivalents at beginning of period 31 27,991 52,691 --
----------------- ----------------- ----------------- -----------------
Cash and cash equivalents at end of period $ 16,590 $ 1,183 $ 16,590 $ 1,183
================= ================= ================= =================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
4
<PAGE>
HOMESIDE, INC. and SUBSIDIARIES
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 and nine months ended November 30,
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").
HomeSide, through its wholly-owned 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 ("BankBoston"), and Barnett Banks, Inc. ("Barnett").
2. MORTGAGE SERVICING RIGHTS
The rollforward of mortgage servicing rights is as follows (in thousands):
Balance, February 28, 1997 $1,614,307
Additions 404,904
Deferred hedge results (108,951)
Amortization (161,454)
---------------
Balance, November 30, 1997 $1,748,806
===============
3. NOTES PAYABLE
HomeSide borrows funds on a demand basis from an independent syndicate of
banks under a $2.5 billion credit facility which, at the request of HomeSide,
may be increased to $3.0 billion. The line of credit is used to provide funds
for HomeSide's business of originating, acquiring and servicing mortgage loans.
The line of credit includes both a warehouse credit facility, which is limited
to 98% of the fair value of eligible mortgage loans held for sale, and a
servicing-related facility, which is capped at $950.0 million. On February 14,
2000, the line of credit will terminate. The credit agreement contains covenants
that impose limitations and restrictions on HomeSide, including the maintenance
of certain net worth and ratio requirements. Under certain circumstances set
forth in the credit agreement, borrowings under the agreement become
collateralized by substantially all of HomeSide's assets. HomeSide is in
compliance with all requirements included in the credit agreement. At November
30, 1997, $1.7 billion is outstanding under the credit line. Amounts outstanding
at November 30, 1997 under the bank line of credit are comprised of a warehouse
credit facility of $962.6 million and a servicing-related credit facility of
$770.0 million. The amount of the unused bank line of credit was $0.8 billion as
of November 30, 1997.
Borrowings 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) various rates based on federal fund rates . At November 30, 1997, the
weighted average interest rate on the amounts borrowed under the bank credit
facility was 6.05%. The weighted average interest rates during the three and
nine month periods ended November 30, 1997 were 6.05% and 6.03%, respectively.
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 fixed 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 Lending, Inc. HomeSide is in compliance with all net worth and ratio
requirements included in the indenture relating to the Parent Notes. HomeSide
used a portion of the proceeds from its February 5, 1997 offering of common
stock to pre-pay $70.0 million of the Parent Notes at a premium of $7.9 million.
The amount outstanding at November 30, 1997 is $130.0 million.
5
<PAGE>
As of November 30, 1997, outstanding medium-term notes issued by HomeSide
Lending, Inc., under a shelf registration statement filed with the Securities
and Exchange Commission (SEC) were as follows (in thousands):
Issue Date Outstanding Balance Interest Rate Maturity Date
- ------------------ ------------------- ------------- -------------------
May 20, 1997 $ 250,000 6.890% May 15, 2000
June 30, 1997 200,000 6.883% June 30, 2002
June 30, 1997 40,000 6.820% July 2, 2001
July 1, 1997 15,000 6.860% July 2, 2001
July 31, 1997 200,000 6.818% August 1, 2004
September 15, 1997 45,000 6.770% September 17, 2001
-------------------
Total $750,000
============================
As of November 30, 1997, $650.0 million of the outstanding medium-term
notes had been effectively converted by interest rate swap agreements to
floating-rate notes. The weighted average borrowing rates on medium-term note
borrowings issued for the three and nine month periods ended November 30, 1997,
including the effect of the interest rate swap agreements, were 6.77%, and
6.20%, respectively. Net proceeds from the issuances were primarily used to
reduce the amounts outstanding under the bank credit agreement. As of November
30, 1997, $250.0 million was available for future issuances under the Shelf
Registration Statement.
5. EARLY POOL BUYOUT ADVANCES
During fiscal 1998, HomeSide initiated an early pool buyout program which
involves the purchase of delinquent government loans from pools early in the
foreclosure process, thereby reducing the unreimbursed interest expense that
HomeSide incurs. The funding of the purchases of these delinquent loans for the
early pool buyout program is recorded as interest expense, and interest income
earned from the guarantor agency during the foreclosure process is accrued to
match the funding expense incurred. Scheduled interest payments made to the
investor before the loans were purchased from the pool are recorded as early
pool buyout advances with a reserve for advances which will not ultimately be
collected.
6. COMMITMENTS AND CONTINGENCIES
On October 25, 1997, HomeSide and National Australia Bank ("the National")
entered into an Agreement and Plan of Merger under which the National will
acquire HomeSide. The National will pay $27.825 in cash for each HomeSide share
or a total of US$1.2 billion (AUD$1.7 billion). The transaction is subject to
regulatory approvals and approval by HomeSide's stockholders at a special
stockholders' meeting scheduled for January 16, 1998. HomeSide's major
stockholders, who collectively own approximately 76% of HomeSide's outstanding
common stock, have agreed to vote in favor of the approval of the transaction at
the stockholders' meeting. The proposed transaction is expected to close early
in the first quarter of calendar 1998.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
HomeSide, Inc., through its wholly-owned 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 ("BankBoston"), 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 4th largest
originator and the 7th largest servicer in the United States for the nine months
ended September 30, 1997 based on data published by Inside Mortgage Finance.
HomeSide plans to build its core operations through (i) improved
economies of scale in servicing costs; (ii) increased productivity using
proprietary technology; and (iii) expanded and diversified variable cost
origination channels. In addition, HomeSide intends to pursue additional loan
portfolio acquisitions and strategic origination relationships similar to the
existing BankBoston and Barnett arrangements.
6
<PAGE>
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 materially from historical results or those
anticipated: (1) the Company's ability to grow which depends on its ability to
obtain additional financing in the future for originating loans, investment in
servicing rights, working capital, capital expenditure and general corporate
purposes, (2) economic downturns may negatively affect the Company's
profitability as the frequency of loan default tends to increase in such
environments and (3) changes in interest rates may affect the volume of loan
originations and acquisitions, the interest rate spread on loans held for sale,
the amount of gain or loss on the sale of loans and the value of the Company's
servicing portfolio. These risks and uncertainties are more fully detailed in
the Company's filings with the Securities and Exchange Commission ("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.
The following information regarding loan production activities for
HomeSide is presented to aid in understanding the results of operations and
financial condition of HomeSide for the three months ended November 30, 1997,
the three months ended November 30, 1996, and for the nine months ended November
30, 1997 and the period from March 16, 1996 to November 30, 1996 (in millions):
<TABLE>
<CAPTION>
For the Period
For the Three For the Three For the Nine from March 16,
Months Ended Months Ended Months Ended 1996 to
November 30, 1997 November 30, 1996 November 30, 1997 November 30, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Correspondent $ 3,310 $ 3,249 $ 10,334 $ 8,092
Co-issue 1,745 1,985 4,422 5,612
Broker 319 168 1,015 543
----------------- ----------------- ----------------- -----------------
Total wholesale 5,374 5,402 15,771 14,247
Direct 106 139 250 566
----------------- ----------------- ----------------- -----------------
Total production 5,480 5,541 16,021 14,813
Bulk acquisitions 1,085 -- 3,066 4,073
================= ================= ================= =================
Total production and acquisitions $ 6,565 $ 5,541 $ 19,087 $ 18,886
================= ================= ================= =================
</TABLE>
Total loan production, excluding bulk acquisitions, was $5.5 billion for
the three months ended November 30, 1997, approximately equal to production,
excluding bulk acquisitions, for the three months ended November 30, 1996. Loan
production for the nine months ended November 30, 1997, excluding bulk
acquisitions, increased $1.2 billion to $16.0 billion from $14.8 billion for the
period from March 16, 1996 to November 30, 1996. The increase was primarily due
to growth in HomeSide's correspondent lending channel, which increased 27% to
$10.3 billion for the nine months ended November 30, 1997 from $8.1 billion for
the period from March 16, 1996 to November 30, 1996. In addition, the May 31,
1996 acquisition of Barnett Mortgage Company, a wholly-owned subsidiary of
Barnett ("BMC") and the preferred partnership agreement with Barnett under which
all loans originated by Barnett are sold to HomeSide contributed to the growth
in production for the nine month period ended November 30, 1997 compared to the
period from March 16, 1996 to November 30, 1996. HomeSide also made bulk
servicing acquisitions of $1.1 billion during the three months ended November
30, 1997, with no bulk servicing acquisitions occurring during the three months
ended November 30, 1996.
HomeSide continues to examine a number of ways to diversify and grow
revenue sources from its existing and new customer base. HomeSide has announced
an alliance with a subprime lender which allows HomeSide to offer additional
mortgage-related products to the production network. The subprime lending unit
is scheduled to begin operations in January 1998.
7
<PAGE>
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 $98 billion, HomeSide services the loans of over one
million homeowners from across the United States and is committed to protecting
the value of this important asset by a sophisticated risk management strategy.
HomeSide anticipates its low cost of servicing loans will continue to maximize
the bottom-line impact of its growing servicing portfolio. HomeSide's focus on
efficient and low cost processes is pursued through the selective use of
automation as well as the strategic outsourcing of selected servicing functions
and effective control of delinquencies and foreclosures.
The following information on the dollar amounts of loans serviced is
presented to aid in understanding the results of operations and financial
condition of HomeSide for the three months ended November 30, 1997, the three
months ended November 30, 1996, and for the nine months ended November 30, 1997
and the period from March 16, 1996 to November 30, 1996 (in millions):
<TABLE>
<CAPTION>
For the Period
For the Three For the Three For the Nine from March 16,
Months Ended Months Ended Months Ended 1996 to
November 30, 1997 November 30, 1996 November 30, 1997 November 30, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 96,554 $ 85,835 $ 90,192 $ 42,907
Acquisition of BMC -- -- -- 33,082
Other additions 6,565 5,244 19,087 19,188
----------------- ----------------- --------------- -----------------
Total additions 6,565 5,244 19,087 52,270
----------------- ----------------- ----------------- -----------------
Scheduled amortization 535 517 1,600 1,246
Prepayments 3,159 1,529 7,853 4,552
Foreclosures 220 106 532 373
Sales of servicing 337 221 426 300
----------------- ---------------- ----------------- -----------------
Total reductions 4,251 2,373 10,411 6,471
================= ================= ================= =================
Balance at end of period $ 98,868 $ 88,706 $ 98,868 $ 88,706
================= ================= ================= =================
</TABLE>
The number of loans serviced at November 30, 1997 was 1,179,563, compared
to 1,085,000 at November 30, 1996. HomeSide's strategy is to build its mortgage
servicing portfolio by concentrating on variable cost loan origination
strategies, and as a result, benefit from improved economies of scale. A key to
HomeSide's future growth is the proprietary servicing software purchased from
Barnett. This system will allow HomeSide to double its current servicing
capacity on a single system. During the three months ended November 30, 1997,
HomeSide transferred approximately one-third of the loans serviced to its
proprietary servicing software. After the transfer, over half of the servicing
portfolio is serviced on the proprietary system. The transfer of the remaining
portfolio is expected to occur by the end of 1998.
Results of Operations
Three months ended November 30, 1997 compared to three months ended November 30,
1996
Summary
HomeSide's net income increased approximately 61% to $20.5 million for the
three months ended November 30, 1997 from $12.7 million for the three months
ended November 30, 1996. Total revenues for the three months ended November 30,
1997 increased 16% to $72.1 million from $62.3 million for the three months
ended November 30, 1996. The increases in net income and revenues for the three
months ended November 30, 1997 compared to the three months ended November 30,
1996 were primarily attributable to increases of $7.3 million in net servicing
revenue and $4.2 million in net mortgage origination revenue, while total
expenses decreased by $2.1 million. The increase in net servicing revenue was
mainly a result of a $10.2 billion increase in the servicing portfolio to $98.9
billion at November 30, 1997 from $88.7 billion at November 30, 1996. Net
mortgage origination revenue increased due to gains in secondary marketing
activities.
Net Servicing Revenue
Net servicing revenue was $50.2 million for the three months ended
November 30, 1997 compared to $42.8 million for the three months ended November
30, 1996. Net servicing revenue is comprised of mortgage servicing fees,
ancillary servicing revenue, and amortization of mortgage servicing rights.
8
<PAGE>
Mortgage servicing fees increased 19% to $108.9 million for the three
months ended November 30, 1997 from $91.6 million for the three months ended
November 30, 1996, primarily as a result of growth of the servicing portfolio
through loan production channels and bulk servicing acquisitions. The servicing
portfolio increased to $98.9 billion at November 30, 1997 compared to $88.7
billion at November 30, 1996, an 11% increase. HomeSide's weighted average
interest rate of the mortgage loans in the servicing portfolio was 7.87% at
November 30, 1997 and 7.91% at November 30, 1996. The weighted average servicing
fee, including ancillary income, for the servicing portfolio was 0.445% and
0.419% for the three months ended November 30, 1997 and the three months ended
November 30, 1996, respectively. The increase in the weighted average servicing
fee from the three months November 30, 1997 to the three months ended November
30, 1996 was due to growth of ancillary revenues, including late fees and other
mortgage-related products, and higher proportions of government loans serviced
which typically have a higher servicing fee. Amortization expense increased to
$58.7 million for the three months ended November 30, 1997 from $48.8 million
for the three months ended November 30, 1996 as a result of a higher average
balance of mortgage servicing rights and a decrease of 57 basis points in
average mortgage interest rates from the three months ended November 30, 1996 to
the three months ended November 30, 1997. Amortization charges are highly
dependent upon the level of prepayments during the period and changes in
prepayment expectations, which are significantly influenced by the direction and
level of long-term interest rate movements. A decrease in mortgage interest
rates results in an increase in prepayment estimates used in calculating
periodic amortization expense. Because mortgage servicing rights are amortized
over the expected period of service fee revenues, an increase in mortgage
prepayment activity typically results in a shorter estimated life of the
mortgage servicing assets and, accordingly, higher amortization expense.
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the
direction in which rates are moving and the spread between short and long-term
interest rates. These factors influence the size of the residential mortgage
origination market, HomeSide'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 decreased $1.8 million to $1.1 million for the three
months ended November 30, 1997 from $2.9 million for the three months ended
November 30, 1996, primarily due to a decrease in the spread between average
mortgage interest rates and short-term borrowing rates on mortgage loans held
for sale and an increase in interest expense,caused by increases in paid in full
scheduled interest payments and a higher funding of the mortgage servicing
assets. During the three months ended November 30, 1997, HomeSide's primary
operating subsidiary, HomeSide Lending, Inc. issued $45 million of medium-term
notes to the public market at an average cost of 6.77% as of November 30, 1997.
The proceeds were used to pay down existing bank debt, increasing HomeSide's
borrowing capacity. An immediate benefit of this increased borrowing capacity
was the investment in HomeSide's early pool buyout program, which involves the
purchase of delinquent government loans from pools early in the foreclosure
process, thereby reducing the unreimbursed interest expense that HomeSide
incurs.
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 $20.7 million for the three months
ended November 30, 1997 compared to $16.5 million for the three months ended
November 30, 1996, a 25% increase. The increase in net mortgage origination
revenue during the three months ended November 30, 1997 as compared to the three
months ended November 30, 1996 reflects an increase in gains from secondary
marketing activities.
9
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Salaries and Employee Benefits
Salaries and employee benefits expense was $19.2 million for the three
months ended November 30, 1997 compared to $20.7 million for the three months
ended November 30, 1996 due to the continuing integration of BMC mortgage
servicing systems acquired on May 31, 1996 and decreases in commission expense
from the elimination of the retail branch network. The average number of
full-time equivalent employees increased to 1,805 for the three months ended
November 30, 1997 from 1,708 for the three months ended November 30, 1996.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs
and maintenance costs, certain computer software expenses and depreciation of
HomeSide's premises and equipment. Occupancy and equipment expense for the three
months ended November 30, 1997 was $4.3 million compared to $3.3 million for the
three months ended November 30, 1996. The increase in expense was mainly due to
office renovation, personal property taxes, and the 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 the final disposition of loans,
non-recoverable foreclosure costs, accrued interest for which payment has been
curtailed and estimates for potential losses based on HomeSide's experience as a
servicer of government loans.
During the three months ended November 30, 1997, the servicing losses on
investor-owned loans and foreclosure-related expenses totaled $5.2 million
compared to $5.0 million for the three months ended November 30, 1996. The
increase was largely attributable to the growth of the servicing portfolio
resulting from loan production and increased foreclosure losses, which are
likely to continue at this level as the servicing portfolio ages.
Included in the balance of accounts payable and accrued liabilities at
November 30, 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. Management believes that HomeSide has an
adequate level of reserve based on servicing volume, portfolio composition,
credit quality and historical loss rates, as well as estimated future losses.
The following table sets forth HomeSide's delinquency and foreclosure
experience:
Servicing Portfolio Delinquencies
(percent by loan count)
November 30, 1997 November 30, 1996
-------------------- -------------------
Servicing Portfolio Delinquencies,
excluding bankruptcies
(at end of period)
30 days 4.12% 3.50%
60 days 0.82% 0.68%
90+ days 0.69% 0.58%
=================== ===================
Total past due 5.63% 4.76%
=================== ===================
Foreclosures pending 0.73% 0.64%
=================== ===================
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 three months ended November 30, 1997 were $9.9
million compared to $11.7 million for the three months ended November 30, 1996,
primarily due to the continuing integration of the BMC mortgage servicing
operations acquired on May 31, 1996.
10
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Income Tax Expense
HomeSide's income tax expense was $13.1 million for the three months ended
November 30, 1997 and $9.0 million for the three months ended November 30, 1996.
The effective income tax rates for the three months ended November 30, 1997 and
the three months ended November 30, 1996 were approximately 39% and 42%,
respectively.
Results of Operations
Nine months ended November 30, 1997 compared to period from March 16, 1996 to
November 30, 1996
Summary
HomeSide's net income increased 101% to $58.8 million for the nine months
ended November 30, 1997 from $29.3 million for the period from March 16, 1996 to
November 30, 1996. Total revenues for the nine months ended November 30, 1997
increased 38% to $212.3 million from $153.9 million for the period from March
16, 1996 to November 30, 1996. The increases in net income and revenues for the
nine months ended November 30, 1997 compared to the period from March 16, 1996
to November 30, 1996 were primarily attributable to the acquisition of BMC on
May 31, 1996 and increases of $40.2 million in net servicing revenue, $15.6
million in net mortgage origination revenue, and $2.0 million in net interest
revenue. The BMC 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. In addition,
subsequent increases in the size of the servicing portfolio contributed to the
increased revenue. The servicing portfolio increased to $98.9 billion at
November 30, 1997 from $88.7 billion at November 30, 1996, an 11% increase. As
part of the BMC acquisition, Barnett agreed to sell HomeSide the loans produced
by the loan production networks retained by Barnett, which contributed to the
increase in net mortgage origination revenue. Net interest revenue increased
primarily as a result of reduced borrowing costs from the bank line of credit
from improved credit ratings and the issuance of medium-term notes which
expanded borrowing capacity.
Net Servicing Revenue
Net servicing revenue was $150.9 million for the nine months ended
November 30, 1997 compared to $110.7 million for the period from March 16, 1996
to November 30, 1996. Net servicing revenue is comprised of mortgage servicing
fees, ancillary servicing revenue, and amortization of mortgage servicing rights
expense.
Mortgage servicing fees increased 44% to $312.3 million for the nine
months ended November 30, 1997 from $216.5 million for the period from March 16,
1996 to November 30, 1996, primarily as a result of the BMC acquisition and
growth of the servicing portfolio through loan production channels and bulk
servicing acquisitions. The servicing portfolio increased to $98.9 billion at
November 30, 1997 compared to $88.7 billion at November 30, 1996. HomeSide's
weighted average interest rate of the mortgage loans in the servicing portfolio
was 7.87% at November 30, 1997 and 7.91% at November 30, 1996. The weighted
average servicing fee, including ancillary income, for the servicing portfolio
was 0.439% and 0.432% for the nine months ended November 30, 1997 and the period
from March 16, 1996 to November 30, 1996, respectively. The increase in the
weighted average servicing fee for the nine months ended November 30, 1997 from
the period from March 16, 1996 to November 30, 1996 was due to growth of
ancillary revenues, including late fees and revenues from other mortgage-related
products, and higher proportions of government loans serviced which typically
have a higher servicing fee. Amortization expense increased to $161.5 million
for the nine months ended November 30, 1997 from $105.7 million for the period
from March 16, 1996 to November 30, 1996 mainly as a result of a higher average
balance of mortgage servicing rights and a decrease of 36 basis points in
average mortgage interest rates from the period from March 16, 1996 to November
30, 1996 to the nine months ended November 30, 1997. Amortization charges are
highly dependent upon the level of prepayments during the period and changes in
prepayment expectations, which are significantly influenced by the direction and
level of long-term interest rate movements. A decrease in mortgage interest
rates results in an increase in prepayment estimates used in calculating
periodic amortization expense. Because mortgage servicing rights are amortized
over the expected period of service fee revenues, an increase in mortgage
prepayment activity typically results in a shorter estimated life of the
mortgage servicing assets and, accordingly, higher amortization expense. A
decrease in mortgage interest rates results in an increase in prepayment
estimates used in calculating periodic amortization expense. Because mortgage
servicing rights are amortized over the expected period of service fee revenues,
a reduction in mortgage prepayment activity typically results in a longer
estimated life of the mortgage servicing assets and, accordingly, lower
amortization expense. Amortization charges are highly dependent upon the level
of prepayments during the period and changes in prepayment expectations, which
are significantly influenced by the direction and level of long-term rate
movements.
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<PAGE>
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 increased $2.0 million for the nine months ended
November 30, 1997 to $1.0 from $(1.0) million for the period from March 16, 1996
to November 30, 1996, primarily due to improved funding rates obtained through
improved credit ratings, the issue of medium-term notes and the adoption of an
early pool buyout program. During the nine months ended November 30, 1997,
HomeSide's primary operating subsidiary, HomeSide Lending, Inc. issued $750
million of medium-term notes to the public market at an average cost of 6.20% as
of November 30, 1997. The proceeds were used to pay down existing bank debt,
increasing HomeSide's borrowing capacity. An immediate benefit of this increased
borrowing capacity was the initiation of an early pool buyout program, which
involves the purchase of delinquent government loans from pools early in the
foreclosure process, thereby reducing the unreimbursed interest expense that
HomeSide incurs.
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 $59.2 million for the nine months
ended November 30, 1997 compared to $43.6 million for the period from March 16,
1996 to November 30, 1996, a 36% increase. The increase in net mortgage
origination revenue during the nine months ended November 30, 1997 as compared
to the period from March 16, 1996 to November 30, 1996 is due in part to
increased production resulting from the preferred seller relationship with
Barnett established as part of the BMC acquisition. Barnett agreed to sell
HomeSide loans produced by the loan production networks retained by Barnett. The
increase also reflects an increase in loan production volumes primarily through
HomeSide's correspondent lending channel and an increase in gains from secondary
marketing activities.
Salaries and Employee Benefits
Salaries and employee benefits expense was $58.5 million for the nine
months ended November 30, 1997 compared to $53.3 million for the period from
March 16, 1996 to November 30, 1996 due to the purchase of the BMC mortgage
servicing operations acquired on May 31, 1996. The average number of full-time
equivalent employees increased to 1,805 for the nine months ended November 30,
1997 from 1,708 for the period from March 16, 1996 to November 30, 1996.
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 nine
months ended November 30, 1997 was $11.9 million compared to $8.3 million for
the period from March 16, 1996 to November 30, 1996. The increase in expense was
mainly due to the purchase of the BMC mortgage servicing operations acquired on
May 31, 1996.
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.
12
<PAGE>
During the nine months ended November 30, 1997, the servicing losses on
investor-owned loans and foreclosure-related expenses totaled $15.7 million
compared to $13.0 million for the period from March 16, 1996 to November 30,
1996. The increase was largely attributable to the growth of the servicing
portfolio resulting from loan production and increased foreclosure losses, which
are likely to continue at this level as the servicing portfolio ages.
Included in the balance of accounts payable and accrued liabilities at
November 30, 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. Management believes that HomeSide has an
adequate level of reserve based on servicing volume, portfolio composition,
credit quality and historical loss rates, as well as estimated future losses.
The following table sets forth HomeSide's delinquency and foreclosure
experience:
Servicing Portfolio Delinquencies
(percent by loan count)
November 30,1997 November 30, 1996
------------------- -------------------
Servicing Portfolio Delinquencies,
excluding bankruptcies
(at end of period)
30 days 4.12% 3.50%
60 days 0.82% 0.68%
90+ days 0.69% 0.58%
=================== ===================
Total past due 5.63% 4.76%
=================== ===================
Foreclosures pending 0.73% 0.64%
=================== ===================
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 nine months ended November 30, 1997 were $30.0
million, approximately equal to other expenses for the period from March 16,
1996 to November 30, 1996.
Income Tax Expense
HomeSide's income tax expense was $37.6 million for the nine months ended
November 30, 1997 and $20.5 million for the period from March 16, 1996 to
November 30, 1996. The increases were attributable to increases in net income.
The effective income tax rates for the nine months ended November 30, 1997 and
the period from March 16, 1996 to November 30, 1996 were approximately 39% and
41%, respectively.
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 utilized options on U.S. Treasury bond
futures and U.S. Treasury bond futures to protect a significant portion of the
market value of its mortgage servicing portfolio from a decline in value. These
risk management instruments have characteristics such that they tend to increase
in value as interest rates decline. Conversely, these risk management
instruments tend to decline in value as interest rates rise. Accordingly,
changes in value of these hedge instruments will tend to move inversely with
changes in value of HomeSide's mortgage servicing rights.
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<PAGE>
These risk management instruments are designated as hedges on the purchase
date and such designation is at a level at least as specific as the level at
which mortgage servicing rights are evaluated for impairment. The risk
management instruments are marked-to-market with changes in market value
deferred 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 risk
management instruments and changes in the value of HomeSide's mortgage servicing
rights. This correlation is assessed on a quarterly basis to ensure that high
correlation is maintained over the term of the hedging program. 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 risk
management instruments. However, in periods of rising interest rates, the
increase in value of mortgage servicing rights may outpace the decline in value
of the options included in the hedge position, because the loss on options is
limited to the premium paid.
The hedge strategy continued to perform as expected during the three
months ended November 30, 1997 and proved especially effective as long-term
rates reached their lowest level since November of 1996. For the three month
periods ended November 30, 1997 and 1996, HomeSide experienced net gains on risk
management contracts of $161.5 million and $133.3 million, respectively. For the
nine months ended November 30, 1997 and the period from March 16, 1996 to
November 30, 1996, net gains on risk management contracts were $108.9 million
and $60.2 million, respectively. The decrease in the estimated fair value of the
mortgage servicing rights approximated the net gains on risk management
contracts for these periods. 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 option contracts at November 30, 1997 was $87.0
million, and the fair value of open futures contracts was $3.7 million, which
was equal to their carrying amount because the risk management instruments are
marked-to-market at each reporting date.
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, Inc., may issue mortgage backed
securities.
Operations
Net cash used in operations was $33.8 million for the nine months ended
November 30, 1997. Proceeds from the issuance of medium-term notes were used to
fund loan originations. These uses of cash were offset by cash provided from
servicing fee income, loan sales and principal repayments. Cash flows from loan
originations are dependent upon current economic conditions and the level of
long-term interest rates. Higher cash demands to meet increased loan production
levels are primarily met through borrowings and loan sales.
Investing
Net cash used in investing activities was $659.2 million for the nine
months ended November 30, 1997. Cash used in investing activities was for the
purchase and origination of mortgage servicing rights, the purchase of options
of U.S. Treasury bond futures as part of HomeSide's hedging program, and for
funding the early pool buyout program. Other assets increased $71.7 million to
$164.6 million at November 30, 1997 from $92.9 million at February 28, 1997
primarily as a result of an increase in loans held for investment and an
increase in HomeSide's hedge asset. 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 $657.0 million for the nine
months ended November 30, 1997. The primary source of cash from financing
activities during the period was $750.0 million from the issuance of medium-term
notes. Cash used in financing activities was used for the payment of debt issue
costs and repayments to HomeSide's line of credit..
14
<PAGE>
During the nine months ended November 30, 1997, net cash used in
operations was $33.8 million, net cash used in investing activities was $659.2
million and net cash provided by financing activities was $657.0 million,
resulting in a net decrease in cash of $36.1 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.
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
Number Description
2 Agreement and Plan of Merger dated as of October 25,
1997 by and between National Australia Bank Limited
and the Parent, HomeSide, Inc. (Incorporated by
reference to the Definitive Proxy Statement of
HomeSide, Inc. filed with the SEC on December 15,
1997 (File No. 1-12655)).
10 Amendment dated as of September 30, 1997 to Credit
Agreement dated as of January 31, 1997, among
HomeSide Lending, Inc. and the Lenders party
thereto.
11 Statement Regarding Computation of Earnings per share
27 Financial Data Schedule
(b) Reports on form 8-K
HomeSide filed a report on form 8-K dated October 25, 1997 to report
under "Item 5. Other Events" that HomeSide and National Australia Bank Limited
entered into an Agreement and Plan of Merger dated as of October 25, 1997.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HomeSide, Inc.
(Registrant)
Date: January 13, 1998 By: /s/Joe K. Pickett
-----------------
Joe K. Pickett
Chairman of the Board, Chief Executive Officer
and Director (Principal Executive Officer)
Date: January 13, 1998 By: /s/Kevin D. Race
----------------
Kevin D. Race
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
16
<PAGE>
AMENDMENT
AMENDMENT, dated as of September 30, 1997 (this "Amendment"), to the
Credit Agreement, dated as of January 31, 1997 (as amended, the "Credit
Agreement"), among HomeSide Lending, Inc. ("HomeSide"), Honolulu Mortgage
Company, Inc. (no longer a party to the Credit Agreement pursuant to its
disposition in accordance with the terms thereof), the Lenders parties thereto,
NationsBank of Texas, N.A., as Syndication Agent, The First National Bank of
Boston, as Collateral Agent, and The Chase Manhattan Bank, as Administrative
Agent (the "Administrative Agent").
W I T N E S S E T H:
WHEREAS, HomeSide, the Lenders and the Administrative Agent are parties
to the Credit Agreement; and
WHEREAS, HomeSide has requested that the Lenders and the Administrative
Agent agree to amend or waive certain provisions of the Credit Agreement, and
the Lenders and the Administrative Agent are agreeable to such request upon the
terms and subject to the conditions set forth herein;
NOW THEREFORE, in consideration of the premises and mutual agreements
contained herein, and for other valuable consideration the receipt of which is
hereby acknowledged, HomeSide, the Lenders and the Administrative Agent hereby
agree as follows:
1. Definitions. All terms defined in the Credit Agreement shall have
such defined meanings when used herein unless otherwise defined herein.
Subsection 1.1 of the Credit Agreement is hereby amended by:
(a) adding, in the appropriate alphabetical order, the
definition "`CP Refunding Borrowing': a borrowing of Committed Loans
that is immediately applied to repay Permitted Commercial Paper at its
scheduled maturity in an aggregate amount equal to the amount of such
borrowing.";
(b) deleting the definition of Adjusted Consolidated Tangible
Net Worth in its entirety;
(c) deleting the definition of Consolidated Tangible Net Worth
and inserting in lieu thereof the following new definition:
"`Consolidated Tangible Net Worth': at any date, the
amount equal to (a) Consolidated Net Worth at such date less
(b) Consolidated Intangibles at such date.";
<PAGE>
(d) deleting the definition of MTN Deduction Amount and
inserting in lieu thereof the following definition:
"`MTN Deduction Amount': at any time, the amount by which (a)
the aggregate principal amount of Permitted Medium Term Debt
outstanding at such time exceeds (b) the sum of (i) the remainder (if
positive) of (A) the Servicing Advance Portion of the Tranche B
Borrowing Base at such time (determined, for the purposes of this
definition only, without giving effect to the first proviso appearing
in subsection 4.1) minus (B) the amount equal to 50% of the Tranche B
Commitment Amount at such time plus (ii) 70% of the Appraised Value of
Ineligible Servicing (as defined below) at such time (determined, for
the purposes of this definition only, as if the Ineligible Servicing
constituted the Eligible Servicing constituted the Eligible Servicing
Portfolio as used in the definition of Appraised Value). For the
purposes of this definition only, "Ineligible Servicing" shall mean, at
any time, Direct Servicing Rights that would be included in Eligible
Servicing Portfolio but for failing (x) to satisfy clause (b) of the
definition thereof or (y) to constitute Non-Recourse Servicing Rights."
(e) adding the phrase "increased or" immediately after the
phrase "such amount may be" in the definition of Tranche A Commitment;
and
(f) adding to the definition of Tranche B Commitment the
phrase "increased or" immediately after the phrase "such amount may
be".
2. Amendment to Section 2. The Credit Agreement is hereby amended by
adding the following new subsection 2.12 to the end of Section 2:
"2.12 Increase of Revolving Credit Commitments. (a) HomeSide
may from time to time, by notice to the Administrative Agent, request
that the Tranche A and Tranche B Commitments be increased by an
aggregate amount that is not less than $10,000,000 and will not result
in the aggregate amount of the Commitments for all Lenders exceeding
$3,000,000,000 after giving effect thereto, provided that such increase
shall be allocated proportionally among the Tranche A Commitments and
Tranche B Commitments such that, after giving effect to such increase,
the total amount of each of the Tranche A Commitments and Tranche B
Commitments bears the same relative proportion immediately before
giving effect thereto. Upon receipt of such notice the Administrative
Agent will seek the agreement of one or more existing or new Lenders to
increase or, in the case of new Lenders, provide, its or their Tranche
A Commitments and Tranche B Commitments in an aggregate amount equal to
the increase so requested by such Borrower.
17
<PAGE>
(b) If one or more of the Lenders shall have agreed to
increase its or their Tranche A Commitments and Tranche B Commitments
pursuant to a request made as described in the foregoing clause (a) (it
being understood that no Lender shall have any obligation to agree to
any such increase of its Commitments) in an aggregate amount not less
than $10,000,000, such increases and such new Tranche A Commitments and
Tranche B Commitments shall become effective on a date mutually agreed
upon among the Administrative Agent, HomeSide and the Lenders providing
such increase and/or such new Commitments and shall be implemented
pursuant to documentation consistent herewith and otherwise in form and
substance reasonably satisfactory to the Administrative Agent,
providing, among other things, for adjustments to cause Tranche A Loans
and the Tranche B Loans of each Lender to correspond ratably to their
respective Tranche A Commitment Percentages and Tranche B Commitment
Percentages, as applicable, after giving effect to such increase
(including, without limitation, by providing for prepaying and
reborrowing all then outstanding Loans of the affected Tranches)."
3. Amendments to Section 4. (a) Subsection 4.1 of the Credit Agreement
is hereby amended (i) by deleting clauses (c) and (d) thereof and inserting in
lieu thereof the following:
"(c) (i) for Eligible Mortgage-Backed Securities, 99% of the
lesser of (A) the face amount thereof and (B) the Applicable Take-Out
Price multiplied by the face amount thereof, and (ii) cash or Cash
Equivalents pledged as Collateral in accordance with the applicable
Borrower Security Agreement and held in the Settlement Accounts
referred to in such Borrower Security Agreement; and
(d) (i) 90% of Eligible P&I Advance Receivables and (ii) 85%
of Eligible Paid-in-Full Buyout Advance Receivables;".
(b) Subsection 4.2 of the Credit Agreement is hereby amended
by deleting clause (g) of the first paragraph of such subsection and by
inserting the following in its place;
"(g) 70% of (i) the Appraised Value of the Eligible Servicing
Portfolio at such time minus (ii) the MTN Deduction Amount at such
time;".
(c) Subsection 4.2 of the Credit Agreement is hereby further
amended (i) by deleting the phrase "90% of Eligible P&I Advance Receivables"
from clause (a) thereof and inserting in lieu thereof the phrase "[Intentionally
Omitted]" and (ii) by deleting the phrase "85% of Eligible Paid-in-Full Buyout
Advance Receivables" from clause (f) thereof and inserting in lieu thereof the
phrase "[Intentionally Omitted]".
(d) Subsection 4.3 of the Credit Agreement is hereby amended
by adding, immediately before the period at the end of the proviso to the
definition of "Eligible Servicing Portfolio" the following new proviso:
18
<PAGE>
"; provided further, that, notwithstanding the applicable
provisions of the foregoing or of the definitions of "Direct Servicing
Rights" or "Non-Recourse Servicing Rights" to the contrary, for the
purposes of determining the Tranche B Borrowing Base under subsection
4.2(g) at any time, the value that would be attributed to servicing in
respect of Mortgage Loans owned by HomeSide and not serviced for any
third party if such servicing was pursuant to contracts and
Acknowledgment Agreements with Approved Investors in respect thereof
shall be deemed to be included in the Eligible Servicing Portfolio for
the purposes of clause (g) of subsection 4.2(g) so long as (i) all
other applicable requirements for inclusion therein, other than the
existence of servicing contracts and Acknowledgment Agreements with
Approved Investors in respect thereof, are satisfied and (ii) such
Mortgage Loans are eligible for sale to FNMA or FHLMC or for inclusion
in a pool of Mortgage Loans underlying GNMA Mortgage-Backed
Securities".
4. Amendment to Section 6. Subsection 6.2(a) of the Credit Agreement is
hereby amended by inserting immediately after the words "such Loans" the
phrase", other than, in the case of a CP Refunding Borrowing, the
representations and warranties set forth in subsection 5.2, 5.3(f), 5.6, the
first sentence of subsection 5.7 or the last sentence of subsection 5.9,".
5. Amendment to Subsection 8.1. (a) Subsection 8.1 of the Credit
Agreement is hereby amended by deleting clause (c) thereof in its entirety and
inserting in lieu thereof the phrase "[Intentionally Omitted]".
(b) Subsection 8.1 of the Credit Agreement is hereby further
amended by deleting clause (a) thereof and inserting in lieu thereof the
following:
(a) Maintenance of Consolidated Tangible Net Worth. Permit
Consolidated Tangible Net Worth at any date to be less than an amount
equal to the sum of (i) an amount equal to 80% of Consolidated Tangible
Net Worth as at February 28, 1997, plus, (ii) an amount equal to the
excess of (A) the aggregate amount of net proceeds received during the
period from February 28, 1997 through such date by Holdings from the
issuance of Capital Stock other than to Sponsors over (B) the amount
thereof applied to prepay or redeem the Holdings Notes plus (iii) an
amount equal to 50% of the sum of Consolidated Net Income for each
fiscal quarter for which Consolidated Net Income is positive during the
period from February 28, 1997 through the last day of the most recently
ended fiscal quarter of HomeSide less (iv) the amount of Restricted
Payments actually made by HomeSide as permitted under subsection 8.9
during the period from February 28, 1997 through such date (to the
extent such Restricted Payments were not deducted in determining such
Consolidated Tangible Net Worth)."
(c) Subsection 8.1 of the Credit Agreement is hereby further
amended by deleting the term "Adjusted Consolidated Tangible Net Worth" in each
place where it appears in clause (b) thereof and inserting in lieu thereof in
each such place the term "Consolidated Tangible Net Worth".
6. Amendment to Subsection 8.2. Subsection 8.2 of the Credit Agreement
is hereby amended by inserting the caption (i) before the word "intra-day" at
the beginning of clause (g) thereof and inserting at the end of clause (g)
thereof the following:
19
<PAGE>
"and (ii) intra-day overdrafts or drawings against uncollected funds,
and obligations under agreements that HomeSide or any of its
Subsidiaries must enter into in anticipation of such overdrafts or
drawings, in each case arising in the ordinary course of business of
servicing mortgages, so long as such overdraft or drawing is not
outstanding for more than two Business Days".
7. Representations; No Default. On and as of the date hereof, and after
giving effect to this Amendment, HomeSide confirms, reaffirms and restates that
the representations and warranties set forth in Section 5 of the Credit
Agreement and in the other Loan Documents are true and correct in all material
respects, provided that the references to the Credit Agreement therein shall be
deemed to be references to this Amendment and to the Credit Agreement as amended
by this Amendment.
8. Conditions to Effectiveness. This Amendment shall become effective
on and as of the date that the Administrative Agent shall have received
counterparts of this Amendment, duly executed and delivered by a duly authorized
officer of each of the Borrowers, the Administrative Agent, and the Required
Lenders.
9. Limited Amendment. Except as expressly amended herein, the Credit
Agreement shall continue to be, and shall remain, in full force and effect. This
Amendment shall not be deemed to be a waiver of, or consent to, or a
modification or amendment of, any other term or condition of the Credit
Agreement or any other Loan Document or to prejudice any other right or rights
which the Lenders may now have or may have in the future under or in connection
with the Credit Agreement or any of the instruments or agreements referred to
therein, as the same may be amended form time to time.
10. Counterparts. This Amendment may be executed by one or more of the
parties hereto in any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
11. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their respective duly authorized officers as of the
date first above written.
HOMESIDE LENDING, INC. THE CHASE MANHATTAN BANK, as
Administrative Agent and as
a Lender
By: s/Debra F. Watkins By:s/Signature
Title: Senior Vice President Title: Vice President
By: s/Kevin D. Race
Title: Executive Vice President
and Chief Financial
Officer
THE FIRST NATIONAL BANK OF BOSTON, NATIONSBANK OF TEXAS, N.A., as
as Collateral Agent Syndication Agent and as a Lender
By: s/David L. Hall By: s/Warren
Title: Title: Senior Vice President
MORGAN GUARANTY TRUST COMPANY BANK OF AMERICA NATIONAL TRUST
OF NEW YORK, as Senior Managing AND SAVINGS ASSOCIATION, as a
Agent and as a Lender Managing Agent and as a Lender
By: s/Seija K. Hurskainen By: s/Robert J. McCollom
Title: Vice President Title: Vice President
CANADIAN IMPERIAL BANK OF CREDIT LYONNAIS, NEW YORK
COMMERCE, as a Managing Agent and BRANCH, as a Managing Agent and
as a Lender as a Lender
By: s/Gerald J. Girardi By: s/Renaud Diherbes
Title: Director, CIBC Wood Gundy Title: Senior Vice President
Securities Corp., as
Agent
UNION BANK OF SWITZERLAND, WESTDEUTSCHE LANDESBANK
NEW YORK BRANCH, as a Managing GIROZENTRALE, as a Managing Agent
and as a Lender and as Lender
21
<PAGE>
By: s/Robert Mendeles By: s/Kenneth R. Crespo
Title: Director Title: Vice President
By: s/Didier Magloire By: s/David J.
Title: Director Title: Vice President
THE BANK OF NEW YORK, as a Managing BANKERS TRUST COMPANY, as a
Agent and as a Lender Co-Agent and as a Lender
By: s/Signature By: s/John O'Rourke
Title: Vice President Title: Managing Director
BANQUE NATIONALE DE PARIS, as a MELLON BANK, N.A., as a Co-Agent
Co-Agent and as a Lender and as a Lender
By: s/Riva L. Howard By: s/Signature
Title: Vice President Title: Vice President
By: s/Signature
Title:
COMMERZBANK AKTIENGESELLSCHAFT, FLEET BANK, N.A., as a Co-Agent and
ATLANTA AGENCY, as Co-Agent and as as a Lender
a Lender
By: s/Signature By: s/Signature
Title: Title:
By: s/Signature
Title: Assistant Vice President
THE NATIONAL BANK OF KUWAIT FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
By: s/Muhannad Kamal By: s/Signature
Title: Executive Manager Title: Vice President
By: s/Robert J. McNeill
Title: Deputy Division Manager
22
<PAGE>
THE FUJI BANK, LIMITED, NEW YORK BANK OF TOKYO - MITSUBISHI
BRANCH TRUST COMPANY
By: s/Signature By: s/Signature
Title: Title:
THE SUMITOMO BANK, LIMITED SUNTRUST BANK, INC.
By: s/Masayuki Fukushima By: s/Signature
Title: Joint General Manager Title: First Vice President
THE TOKYO TRUST & BANKING CO., LTD. THE INDUSTRIAL BANK OF JAPAN,
LIMITED, ATLANTA AGENCY
By: s/Signature By: s/Signature
Title: Title:
PNC BANK KENTUCKY, INC. THE SAKURA BANK, LIMITED
ATLANTA AGENCY
By: s/Signature By: s/Signature
Title: Vice President Title:
COMPASS BANK BANQUE PARIBAS
By: s/Johanna Duke Paley By: s/Signature
Title: Senior Vice President Title:
COMERICA BANK BANQUE FRANCAISE, DU, COMMERCE
EXTEDRIEUR
By: s/Randy S. Banker By: s/Signature
Title: Account Officer Title: First Vice President
23
<PAGE>
By: s/Signature
Title: Vice President
THE DAI-ICHI KANGYO BANK, LIMITED DG BANK DEUTSCHE GENOSSENSCHAFTSBANK,
ATLANTA AGENCY CAYMAN ISLAND BRANCH
By: s/Signature By: s/Signature
Title: Title: First Vice President
By: s/Karen A. Brinkman
Title: Vice President
THE FIRST NATIONAL BANK OF CHICAGO LTCB TRUST COMPANY
By: s/Signature By: s/Signature
Title: First Vice President Title: Senior Vice President
NATIONAL CITY BANK OF KENTUCKY KREDIETBANK N.V., GRAND
CAYMAN BRANCH
By: s/Signature By: s/Signature
Title: Title:
ALLIED IRISH BANK PT. BANK NEGARA INDONESIA
(PERSERO), TBK
By: s/Signature By: s/Signature
Title: Title:
GUARANTY FEDERAL CAISSE NATIONALE DE CREDIT
AGRICOLE
By: s/James B. Clapp By: s/Dean Balice
Title: Assistant Vice President Title: Senior Vice President
Branch Manager
THE SUMITOMO TRUST AND BANKING BANCA CRT S.p.A.
CO LTD., LOS ANGELES AGENCY
24
<PAGE>
By: s/Signature By: s/J. Slade Carter, Jr.
Title: Title: Vice President
By: s/Robert P. DeSantes
Title: First Vice President
Head of Corporate
Banking
For the Period
For the Nine From March 16,
Months Ended 1996 to
November 30, 1997 November 30, 1996
----------------- -----------------
Net earnings applicable to common stock $ 58,763 $ 29,276
================= =================
Average shares outstanding 44,152,698 30,207,927
================= =================
Per share amount $ 1.33 $0.97
================= =================
<TABLE> <S> <C>
<ARTICLE> 5
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<NAME> HOMESIDE, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<EXCHANGE-RATE> 1
<CASH> 16,590
<SECURITIES> 0
<RECEIVABLES> 252,823
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,479,107
<PP&E> 35,414
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,514,521
<CURRENT-LIABILITIES> 2,042,771
<BONDS> 900,671
0
0
<COMMON> 531
<OTHER-SE> 570,548
<TOTAL-LIABILITY-AND-EQUITY> 3,514,521
<SALES> 0
<TOTAL-REVENUES> 72,131
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 38,537
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 33,594
<INCOME-TAX> 13,102
<INCOME-CONTINUING> 20,492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,492
<EPS-PRIMARY> 0.46
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