UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-12655
HomeSide International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 59-3387041
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No.)
7301 Baymeadows Way, Jacksonville, FL 32256
(Address of principal executive offices) (Zip Code)
(904) 281-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _x_ No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 8, 1998
Common stock $0.01 par value 1
Class C non-voting common stock $1.00 par none
FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
HOMESIDE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
<CAPTION>
(Unaudited) Predecessor
March 31, 1998 February 10, 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 14,045 $ 32,113
Mortgage loans held for sale, net 1,597,550 1,292,403
Mortgage servicing rights, net 1,872,961 1,781,134
Accounts receivable, net 312,081 227,294
Early pool buyout advances 448,909 374,097
Premises and equipment, net 31,595 41,982
Goodwill 708,619 8,870
Other assets 53,263 125,710
------------ ------------
Total Assets $5,039,023 $3,883,603
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $2,458,747 $2,074,956
Accounts payable and accrued liabilities 205,209 143,870
Deferred income taxes 148,808 175,178
Long-term debt 989,855 900,466
------------ ------------
Total Liabilities 3,802,619 3,294,470
------------ ------------
Common stock:
Common stock, $.01 par value, 119,610,000 shares authorized and 1
share issued and outstanding after the merger, 43,394,861 shares
issued and outstanding before the merger - 434
Class C non-voting common stock, $1.00 par value, 195,000 shares
authorized, and 0 shares issued and outstanding after the merger,
97,138 shares issued and outstanding before the merger - 97
Additional paid-in capital 1,230,618 476,846
Retained earnings 5,786 111,756
Total Stockholders' Equity 1,236,404 589,133
------------ ------------
Total Liabilities and Stockholders' Equity $5,039,023 $3,883,603
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
HOMESIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands, Except Share Data)
<CAPTION>
Predecessor
For the Period From For the Period From For the Period From
February 11,1998 to December 1, 1997 to December 1, 1996 to
March 31, 1998 February 10, 1998 February 28, 1997
------------------- ------------------- -------------------
<S> <C> <C> <C>
REVENUES:
Mortgage servicing fees $ 64,267 $ 85,826 $ 95,871
Amortization of mortgage servicing rights (50,090)
(37,366) (48,745)
----------------- -------------------- -------------------
Net servicing revenue 26,901 37,081 45,781
Interest income 18,290 22,696 21,277
Interest expense (15,453) (23,688) (26,497)
----------------- -------------------- -------------------
Net interest revenue 2,837 (992) (5,220)
Net mortgage origination revenue 14,269 26,019 22,469
Other income 620 414 141
----------------- -------------------- -------------------
Total Revenues 44,627 62,522 63,171
EXPENSES:
Salaries and employee benefits 14,630 16,945 19,669
Occupancy and equipment 2,394 3,558 3,503
Servicing losses on investor-owned loans
and foreclosure-related expenses 1,823 6,294 4,981
Goodwill amortization 4,941 128 152
Other expenses 8,195 9,327 11,983
----------------- -------------------- -------------------
Total Expenses 31,983 36,252 40,288
Income before income taxes and extraordinary loss 12,644 26,270 22,883
Income tax expense
6,858 10,245 8,750
----------------- -------------------- -------------------
Income before extraordinary loss
5,786 16,025 14,133
Extraordinary loss - - 6,440
----------------- -------------------- -------------------
Net income $ 5,786 $ 16,025 $ 7,693
================= ==================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
HOMESIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands, Except Share Data)
<CAPTION>
Predecessor
For the Period For the Period From For the Period From
From February September 1, 1997 September 1, 1996 to
11, 1998 to to February 28, 1997
March 31, 1998 February 10, 1998
------------------ -------------------- -----------------------
<S> <C> <C> <C>
REVENUES:
Mortgage servicing fees $ 64,267 $194,690 $187,507
Amortization of mortgage servicing rights (37,366) (107,458) (98,921)
------------------ -------------------- -----------------------
Net servicing revenue 26,901 87,232 88,586
Interest income 18,290 51,166 46,518
Interest expense (15,453) (51,074) (48,818)
------------------ -------------------- -----------------------
Net interest revenue 2,837 92 (2,300)
Net mortgage origination revenue 14,269 46,695 38,990
Other income 620 635 220
------------------ -------------------- -----------------------
Total Revenues 44,627 134,654 125,496
EXPENSES:
Salaries and employee benefits 14,630 36,137 40,319
Occupancy and equipment 2,394 7,820 6,840
Servicing losses on investor-owned loans
and foreclosure-related expenses 1,823 11,465 9,938
Goodwill amortization 4,941 283 304
Other expenses 8,195 19,085 23,542
------------------ -------------------- -----------------------
Total Expenses 31,983 74,790 80,943
Income before income taxes and extraordinary loss 12,644 59,864 44,553
Income tax expense 6,858 23,347 17,765
------------------ -------------------- -----------------------
Income 5,786 36,517 26,788
Extraordinary loss - - 6,440
------------------ -------------------- -----------------------
Net income $ 5,786 $ 36,517 $ 20,348
================== ==================== =======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
HOMESIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
<CAPTION>
Predecessor
-----------
For the Period From For the Period From For the Period From
February 11, 1998 to December 1, 1997 to December 1, 1996 to
March 31, 1998 February 10, 1998 February 28, 1997
-------------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net income $ 5,786 $ 16,025 $ 7,693
Adjustments to reconcile net income to net cash used
in operating activities:
Amortization of mortgage servicing rights 37,366 48,745 50,090
Depreciation and amortization 5,345 2,208 2,755
Servicing losses on investor-owned loans 1,193 2,099 730
Deferred income tax expense 6,859 3,838 4,450
Mortgage loans originated and purchased for sale (2,793,790) (4,888,432) (3,422,752)
Proceeds and principal repayments of mortgage loans held 2,434,895 4,632,483 3,718,707
for sale
Change in accounts receivable (56,462) 23,330 14,857
Change in other assets and accounts payable and accrued
liabilities 123,728 (52,441) 9,082
------------------- -------------------- ---------------------
Net cash (used in) provided by operating activities (235,080) (212,115) 385,612
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (3,549) (7,498) (1,574)
Acquisition of mortgage servicing rights (162,259) (114,789) (131,441)
Net purchases of (proceeds from) risk management contracts 14,185 70,248 (53,506)
Purchases of early pool buyout advances (74,910) (62,381) -
------------------- -------------------- ---------------------
Net cash used in investing activities (226,533) (114,420) (186,521)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net borrowings from (repayments to) banks 383,791 342,307 (192,310)
Issuance of notes payable 60,000 - -
Payment of debt issue costs (208) (245) (1,800)
Repayment of long term debt (38) (204) (70,150)
Proceeds from issuance of common stock - 200 116,677
------------------- -------------------- ---------------------
Net cash provided by (used in) financing activities 443,545 342,058 (147,583)
Net (decrease) increase in cash and cash equivalents (18,068) 15,523 51,508
Cash and cash equivalents at beginning of period 32,113 16,590 1,183
------------------- -------------------- ---------------------
Cash and cash equivalents at end of period $ 14,045 $ 32,113 $ 52,691
=================== ==================== =====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
HOMESIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
<CAPTION>
Predecessor
For the Period For the Period From For the Period From
From September 1, 1997 September 1, 1996 to
February 11, 1998 to February 10, 1998 February 28, 1997
to March 31, 1998
<S> <C> <C> <C>
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net income $ 5,786 $ 36,517 $ 26,788
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization of mortgage servicing rights 37,366 107,458 98,921
Depreciation and amortization 5,345 5,037 4,625
Servicing losses on investor-owned loans 1,193 5,781 7,800
Deferred income tax expense 6,859 20,758 12,902
Mortgage loans originated and purchased for sale (2,793,790) (11,453,271) (6,949,760)
Proceeds and principal repayments of mortgage loans held 2,434,895 11,242,236 7,435,327
for sale
Change in accounts receivable (56,462) (48,484) (37,860)
Change in other assets and accounts payable and accrued 123,728 (73,723) (56,622)
liabilities
------------------- -------------------- ---------------------
Net cash (used in) provided by operating activities (235,080) (157,691) 542,121
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (3,549) (12,037) (2,170)
Acquisition of mortgage servicing rights (162,259) (261,387) (229,620)
Net purchases of (proceeds from) risk management contracts 14,185 218,306 (63,055)
Purchases of early pool buyout advances (74,910)
(5,692) -
------------------- -------------------- ---------------------
Net cash used in investing activities (226,533) (60,810) (294,845)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net borrowings from (repayments to) banks 383,791 206,627 (269,729)
Issuance of notes payable 60,000 45,000 -
Payment of debt issue costs (208) (886) 624
Repayment of long term debt (38) (358) (70,298)
Proceeds from issuance of common stock - 200 116,827
------------------- -------------------- ---------------------
Net cash provided by (used in) financing activities 443,545 250,583 (222,576)
Net (decrease) increase in cash and cash equivalents (18,068) 32,082 24,700
Cash and cash equivalents at beginning of period 32,113 31 27,991
------------------- -------------------- ---------------------
Cash and cash equivalents at end of period $ 14,045 $ 32,113 $ 52,691
=================== ==================== =====================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
<PAGE>
HOMESIDE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included.
On February 10, 1998, National Australia Bank, Ltd. (the "National")
acquired all outstanding shares of the common stock of HomeSide International,
Inc. ("HomeSide" or the "Company"). As consideration, the National paid $27.825
per share for all of the outstanding common stock and paid $17.7 million cash to
retire all outstanding stock options. The total purchase price was approximately
$1.2 billion. The transaction was accounted for as a purchase. As a result, all
assets and liabilities were recorded at their fair value on February 11, 1998,
and the purchase price in excess of the fair value of net assets acquired of
$713.6 million was recorded as goodwill. Following the transaction described
above, the National now owns 100% of HomeSide's common stock and HomeSide
International, Inc. has become an indirect wholly-owned subsidiary of the
National.
As a result of the merger with the National, HomeSide adopted a fiscal year
end of September 30 to conform to the fiscal year of the National. Accordingly,
comparative financial statements for the same period in the prior year have not
been presented. Instead, a comparison of the period of the prior year that most
closely corresponds to the present period is presented. HomeSide's operating
results are not directly comparable to its historical operating results due, in
part, to different balance sheet valuations (estimated fair value as compared to
historical cost). In addition, because HomeSide's operating results are produced
and managed on a quarterly basis, it is not practicable to furnish a period
prior to February 11, 1998 that corresponds to any period other than the
period reported according to the Company's prior fiscal year periods.
Therefore, the prior year period from December 1, 1997 to February 10, 1998 has
been presented in accordance with Regulation 15d-10(e)(4).
Operating results for the period from February 11, 1998 to March 31, 1998,
the predecessor company's period from December 1, 1997 to February 10, 1998 and
the predecessor period from September 1, 1997 to February 10, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 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
10, 1998 of HomeSide International, Inc.
HomeSide, through its, indirect, wholly-owned operating subsidiary
HomeSide Lending, Inc. ("HomeSide Lending"), 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):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Balance, February 10, 1998 $1,781,134 Balance, November 30, 1997 $1,748,806
Additions 95,015 Additions 114,136
Deferred hedge loss 34,178 Deferred hedge gain (33,063)
Amortization (37,366) Amortization (48,745)
------------- -------------
Balance, March 31, 1998 $1,872,961 Balance, February 10, 199 $1,781,134
============= =============
</TABLE>
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 March 31,
1998 and February 28, 1997, $2.4 billion and $1.8 billion, respectively, were
outstanding under the credit line. Amounts outstanding at March 31, 1998 and
February 28, 1997 under the bank line of credit are comprised of a warehouse
credit facility of $1.5 billion and $0.8 billion and a servicing-related credit
facility of $0.9 billion and $1.0 billion, respectively. HomeSide established
short-term borrowings with National Australia Bank at a maximum capacity of $115
million at interest rates equal to LIBOR. At March 31, 1998, total borrowings
from National Australia Bank were $115 million.
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 March 31, 1998, the
weighted average interest rate on the amounts borrowed under the bank credit
facility was 5.983%, and the weighted average interest rate during the period
from February 11, 1998 to March 31, 1998 was 5.986%.
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 March 31, 1998 is $130.0 million. As a result of the
merger with the National, a fair value adjustment of $23.4 million is included
in the balance of the Parent Notes at March 31, 1998.
As of March 31, 1998, outstanding medium-term notes issued by HomeSide
Lending, Inc. under a $1.5 billion shelf registration statement were as follows
(in thousands):
Issue Date Outstanding Balance Stated Interest Rate Maturity Date
May 20, 1997 $250,000 6.890% May 15, 2000
June 30, 1997 200,000 6.883% June 30, 2002
June 30, 1997 40,000 6.820% July 2, 2001
July 1, 1997 15,000 6.860% July 2, 2001
July 31, 1997 200,000 6.818% August 1, 2004
September 15, 1997 45,000 6.770% September 17,2001
March 19, 1998 60,000 5.688% March 20, 2000
----------
Total $810,000
==========
As of March 31, 1998, $650.0 million of the outstanding medium-term notes
had been effectively converted by interest rate swap agreements to floating-rate
notes. The weighted average borrowing rates on medium-term borrowings issued for
the period from February 11, 1998 to March 31, 1998, including the effect of the
interest rate swap agreements, was 6.071% . Net proceeds from the issuance were
primarily used to reduce the amounts outstanding under the bank credit
agreement. Amounts were subsequently reborrowed under the bank credit facility
to fund the early pool buyout program. As a result of the merger with the
National, a fair value adjustment of $1.8 million is included in the balance of
medium-term notes at March 31, 1998.
In connection with the acquisition of BancBoston Mortgage Corporation,
HomeSide assumed a mortgage note payable that is due in 2017 and bears interest
at a stated rate of 9.5%. HomeSide's main office building is pledged as
collateral for the mortgage note payable. A purchase accounting premium was
recorded in connection with HomeSide assuming the mortgage note payable. As a
result of the merger with the National, a fair value adjustment of $4.2 million
is included in the balance of the mortgage-note payable. The balance of the
mortgage payable at March 31, 1998 was $26.5 million.
5. SUBSEQUENT EVENTS
On April 1, 1998, HomeSide entered into an agreement with Banc One
Mortgage Corporation ("Banc One") to acquire the mortgage servicing assets of
Banc One. HomeSide and Banc One have also entered into a Preferred Partner
agreement, whereby Banc One will sell a significant portion of its residential
mortgage loans to HomeSide over the next five years. The total purchase
consideration is $201.0 million cash. The mortgage servicing rights acquired
relate to mortgage servicing loans of approximately $18.0 billion. The
transaction is subject to regulatory approvals and is expected to close in the
second calendar quarter of 1998.
On April 6, 1998, the Company signed an agreement with NationsBank
Corporation ("NationsBank") whereby NationsBank agreed to sell HomeSide a
national wholesale mortgage loan network which was formerly owned by Barnett
Banks, Inc.
On April 24, 1998, an additional $125.0 million of 5.788% medium term
notes maturing on April 24, 2001 were issued by HomeSide Lending, Inc. under its
Shelf Registration Statement. Interest is payable quarterly in arrears on
January 24, April 24, July 24 and October 24 of each year, commencing on July
24, 1998. Net proceeds were used for working capital and general corporate
purposes.
Effective April 30, 1998, HomeSide Inc., amended its charter to change its
name to HomeSide International, Inc.
As a result of NationsBank's acquisition of Barnett Banks, Inc.,
NationsBank and the Company entered into an agreement, subsequently amended, to
release Barnett from a five year agreement to sell certain of its mortgage loans
to HomeSide. In consideration, the Company received an increase in the weighted
average servicing fee for Barnett portfolio loans currently serviced and a cash
payment.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
HomeSide International, 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 5th largest originator and the 6th largest servicer in the
United States for calendar year 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 BancOne relationships.
On February 10, 1998, National Australia Bank, Ltd. (the "National")
acquired all outstanding shares of the common stock of HomeSide International,
Inc. As consideration, the National paid $27.825 per share for all of the
outstanding common stock and paid $17.7 million cash to retire all outstanding
stock options. The total purchase price was approximately $1.2 billion. The
transaction was accounted for as a purchase. As a result, all assets and
liabilities were recorded at their fair value on February 11, 1998, and the
purchase price in excess of the fair value of net assets acquired of $713.6
million was recorded as goodwill. Following the transaction described above, the
National now owns 100% of HomeSide's common stock and HomeSide International,
Inc. has become an indirect wholly-owned subsidiary of the National.
As a result of the merger with the National, HomeSide adopted a fiscal
year end of September 30 to conform to the fiscal year of the National.
Accordingly, comparative financial statements for the same period in the prior
year have not been presented. Instead, a comparison of the period of the prior
year that most closely corresponds to the present period is presented.
HomeSide's operating results are not directly comparable to its historical
operating results due, in part, to different balance sheet valuations (estimated
fair value as compared to historical cost). In addition, because HomeSide's
operating results are produced and managed on a quarterly basis, it is not
practicable to furnish a period prior to February 11, 1998 that corresponds to
any period other than the period(s) reported according to the Company's prior
fiscal year periods. Therefore, the prior year period from December 1, 1997 to
February 10, 1998 has been presented in accordance with Regulation 15d-10(e)(4).
Operating results for the period from February 11, 1998 to March 31,
1998, the predecessor period from December 1, 1997 to February 10, 1998 and the
predecessor period from September 1, 1997 to February 10, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 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
10, 1998 of HomeSide International, Inc.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on Form
10-Q contains forward-looking statements which reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "believe,"
"expect," "anticipate," "intend," "estimate" and other expressions which
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.
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 period from February 11, 1998 to March
31, 1998 and the predecessor periods from December 1, 1997 to February 10, 1998,
September 1, 1997 to February 10, 1998, December 1, 1996 to February 28, 1997
and September 1, 1996 to February 28, 1997 (in millions):
<TABLE>
<CAPTION>
For the Period From For the Period From For the Period From For the Period From For the Period From
February 11, 1998 December 1, 1997 to December 1, 1996 to September 1, 1997 to September 1, 1996 to
to March 31, 1998 February 10, 1998 February 28, 1997 February 10, 1998 February 28, 1997
<S> <C> <C> <C> <C> <C>
Correspondent $2,325 $2,970 $3,021 $6,280 $6,270
Co-issue 1,488 1,162 2,610 2,907 4,595
Broker 372 290 300 609 468
-------- -------- -------- -------- --------
Total wholesale 4,185 4,422 5,931 9,796 11,333
Direct 97 87 134 193 273
-------- -------- -------- -------- --------
Total production 4,282 4,509 6,065 9,989 11,606
Bulk acquisitions 2 380 - 1,465 -
-------- -------- -------- -------- --------
Total production and
acquisitions $4,284 $4,889 $6,065 $11,454 $11,606
======== ======== ======== ======== ========
</TABLE>
Total loan production, excluding bulk acquisitions, was $4.3 billion for
the period from February 11, 1998 to March 31, 1998 compare to $4.5 billion for
the predecessor period from December 1, 1997 to February 10, 1998 compared to
$6.1 billion for the predecessor period from December 1, 1996 to February 28,
1997. Loan production for the predecessor period from September 1, 1997 to
February 10, 1998, excluding bulk acquisitions, totaled $10.0 billion while loan
production for the predecessor period from September 1, 1996 to February 28,
1997, excluding bulk acquisitions, totaled $11.6 billion. Production increases
were primarily due to growth in HomeSide's correspondent lending and broker
channels. HomeSide also made bulk servicing acquisitions of $2.0 million during
the period from February 11, 1998 to March 31, 1998 compared to $380 million for
the predecessor period from December 1, 1997 to February 10, 1998 and $1.5
billion during the predecessor period from September 1, 1997 to February 10,
1998.
HomeSide continues to examine a number of ways to diversify and grow
revenue sources from its existing and new customer base. As part of this effort,
HomeSide has announced an alliance with a sub-prime mortgage lender, which
allows HomeSide to offer additional mortgage-related products to the production
network. HomeSide then sells the loans, servicing released, to its strategic
partners. The subprime lending unit began operations in January 1998.
On April 1, 1998, HomeSide entered into an agreement with Banc One
Mortgage Corporation ("Banc One") to acquire the mortgage servicing assets of
Banc One. HomeSide and Banc One have also entered into a Preferred Partner
agreement, whereby Banc One will sell a significant portion of its residential
mortgage loans to HomeSide over the next five years. The total purchase
consideration is $201.0 million cash. The mortgage servicing rights acquired
relate to mortgage servicing loans of approximately $18.0 billion. The
transaction is subject to regulatory approvals and is expected to close in the
second calendar quarter of 1998.
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 $100 billion, HomeSide services the loans of approximately
1.2 million homeowners from across the United States and is committed to
protecting the value of this important asset by a sophisticated risk management
strategy. HomeSide 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 period from February 11, 1998 to March 31, 1998
and the predecessor period from December 1, 1997 to February 10, 1998, September
1, 1997 to February 10, 1998, December 1, 1996 to February 28, 1997 and
September 1, 1996 to February 28, 1997 (in millions):
<TABLE>
<CAPTION>
For the Period From For the Period From For the Period From For the Period From For the Period From
February 11, 1998 December 1, 1997 December 1, 1996 September 1, 1997 September 1, 1996
to March 31, 1998 to February 10, 1998 to February 28, 1997 to February 10, 1998 to February 28, 1997
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period $99,956 $98,868 $88,706 $96,554 $85,835
Additions 4,284 4,920 6,064 11,454 11,308
Scheduled amortization 320 438 576 973 1,093
Prepayments 3,833 3,244 1,674 6,403 3,203
Foreclosures 129 150 141 370 247
Sales of servicing 40 - 2,187 (a) 306 2,408
--------- --------- --------- --------- ---------
Total reductions 4,322 3,832 4,578 8,052 6,951
========= ========= ========= ========= =========
Balance at end of period $99,918 $99,956 $90,192 $99,956 $90,192
========= ========= ========= ========= =========
</TABLE>
(a) Includes $1.9 billion of servicing sold as part of the sale of Honolulu
Mortgage Company.
The number of loans serviced at March 31, 1998 was 1,182,913 compared to
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. A key to
HomeSide's future growth is the proprietary servicing software purchased from
Barnett. This system will allow HomeSide to double the number of loans serviced
on a single system. 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 calendar year 1998.
Results of Operations
For the period from February 11, 1998 to March 31, 1998 compared to the
predecessor period from December 1, 1997 to February 10, 1998 and the
predecessor period from December 1, 1996 to February 28, 1997
Summary
HomeSide's net income was $5.8 million for the period from February 11,
1998 to March 31, 1998 compared to $16.0 million for the predecessor period from
December 1, 1997 to February 10, 1998 and $7.7 million for the predecessor
period from December 1, 1996 to February 28, 1997. Total revenues for the period
from February 11, 1998 to March 31, 1998 were $44.6 million compared to $62.5
million for the predecessor period from December 1, 1997 to February 10, 1998
and $63.2 million for the predecessor period from December 1, 1996 to February
28, 1997. The increases on an annualized basis in net income and revenues for
the period from February 11, 1998 to March 31, 1998 compared to the predecessor
period from December 1, 1997 to February 10, 1998 and the predecessor period
from December 1, 1996 to February 28, 1997 were primarily attributable to
increases in net servicing revenue, net mortgage origination revenue, and net
interest revenue. Total expenses increased on an annualized basis as a result of
amortization expense of $4.9 million related to the goodwill associated with the
merger with the National (see Note 1). The increase in net servicing revenue on
an annualized basis was mainly a result of a $9.8 billion increase in the
servicing portfolio to $100.0 billion at March 31, 1998 from $90.2 billion at
February 28, 1997. Net mortgage origination revenue increased on an annualized
basis due to loan production volume increases. Net interest revenue increased on
an annualized basis 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 $26.9 million for the period from February 11,
1998 to March 31, 1998 compared to $37.1 million for the predecessor period from
December 1, 1997 to February 10, 1998 and $45.8 million for the predecessor
period from December 1, 1996 to February 28, 1997. Net servicing revenue is
comprised of mortgage servicing fees, ancillary servicing revenue, and
amortization of mortgage servicing rights.
Mortgage servicing fees totaled $64.3 million for the period from February
11, 1998 to March 31, 1998 compared to $85.8 million for the predecessor period
from December 1, 1997 to February 10, 1998 and $95.9 million for the predecessor
period from December 1, 1996 to February 28, 1997. The servicing portfolio
increased to $100.0 billion at March 31, 1998 compared to $90.2 billion at
February 28, 1997, an 11% increase. HomeSide's weighted average interest rate of
the mortgage loans in the servicing portfolio was 7.82% at March 31, 1998, 7.85%
at February 10, 1998 and 7.92% at February 28, 1997. The weighted average
servicing fee, including ancillary income, for the servicing portfolio was
0.463% for the period from February 11, 1998 to March 31, 1998, 0.444% for the
predecessor period from December 1, 1997 to February 10, 1998, and 0.423% for
the predecessor period from December 1, 1996 to February 28, 1997, respectively.
The increase in the weighted average servicing fee 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 was $37.4 million for the period from
February 11, 1998 to March 31, 1998 compared to $48.7 million for the
predecessor period from December 1, 1997 to February 10, 1998 and $50.1 million
for the predecessor period from December 1, 1996 to February 28, 1997.
Amortization expense increased on an annualized basis mainly as a result of a
higher average balance of mortgage servicing rights and a decrease of 0.59% in
average mortgage interest rates from February 28, 1997 to March 31, 1998.
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 totaled $2.8 million for the period from February 11,
1998 to March 31, 1998 compared to ($1.0) million for the predecessor period
from December 1, 1997 to February 10, 1998 and ($5.2) million for the
predecessor period from December 1, 1996 to February 28, 1997. Increases in net
interest revenue were 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. HomeSide's primary operating subsidiary, HomeSide
Lending, Inc. has issued a total of $810.0 million of medium-term notes to the
public market at an average cost of 6.071% as of March 31, 1998. 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 $14.3 million for the period from
February 11, 1998 to March 31, 1998 compared to $26.0 million for the
predecessor period from December 1, 1997 to February 10, 1998 and $22.5 million
for the predecessor period from December 1, 1996 to February 28, 1997. The
increase in net mortgage origination revenue on an annualized basis reflects an
increase in loan production volumes, primarily through HomeSide's correspondent
lending and broker channels, and an increase in gains from secondary marketing
activities.
Salaries and Employee Benefits
Salaries and employee benefits expense was $14.6 million for the period
from February 11, 1998 to March 31, 1998 compared to $16.9 million for the
predecessor period from December 1, 1997 to February 10, 1998 and $19.7 million
for the predecessor period from December 1, 1996 to February 28, 1997. The
average number of full-time equivalent employees was 1,968 for the period from
February 11, 1998 to March 31, 1998 compared to 1,891 for the predecessor period
from December 1, 1997 to February 10, 1998 and 1,689 for the predecessor period
from December 1, 1996 to February 28, 1997.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs
and maintenance costs, certain computer software expenses and depreciation of
HomeSide's premises and equipment. Occupancy and equipment expense for the
period from February 11, 1998 to March 31, 1998 was $2.4 million compared to
$3.6 million for the predecessor period from December 1, 1997 to February 10,
1998 and $3.5 million for the predecessor period from December 1, 1996 to
February 28, 1997. The increase in expense on an annualized basis was mainly due
to 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.
The servicing losses on investor-owned loans and foreclosure-related
expenses totaled $1.8 million for the period from February 11, 1998 to March 31,
1998 compared to $6.3 million for the predecessor period from December 1, 1997
to February 10, 1998 and $5.0 million for the predecessor period from December
1, 1996 to February 28, 1997. The decrease was due to the implementation of the
early pool buyout program.
Included in the balance of accounts payable and accrued liabilities at
March 31, 1998 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)
At Predecessor At
March 31, 1998 February 28, 1997
Servicing Portfolio Delinquencies,
excluding bankruptcies (at end of period)
30 days 3.20% 3.27%
60 days 0.67% 0.69%
90+ days 0.61% 0.54%
======= =======
Total past due 4.48% 4.50%
======= =======
Foreclosures pending 0.80% 0.72%
======= =======
Other Expenses
Other expenses consist mainly of professional fees, communications
expense, advertising and public relations, data processing expenses and certain
loan origination expenses. The level of other expenses fluctuates in part based
upon the level of HomeSide's mortgage servicing portfolio and loan production
volumes.
Other expenses were $8.2 million for the period from February 11, 1998 to
March 31, 1998 compared to $9.3 million for the predecessor period from December
1, 1997 to February 10, 1998 and $12.0 million for the predecessor period from
December 1, 1996 to February 28, 1997. The increase in other expenses on an
annualized basis was primarily due to expenses associated with the growing
mortgage servicing portfolio.
Income Tax Expense
HomeSide's income tax expense was $6.9 million for the period from February
11, 1998 to March 31, 1998 compared to $10.2 million the predecessor period from
December 1, 1997 to February 10, 1998 and $8.8 million for the predecessor
period from December 1, 1996 to February 28, 1997. The effective income tax rate
for the period from February 11, 1998 to March 31, 1998 was 54% compared to 39%
for the predecessor period from December 1, 1997 to February 10, 1998 and 38%
for the predecessor period from December 1, 1996 to February 28, 1997, due to
the tax effects of goodwill as a result of the merger with the National.
Results of Operations
For the period from February 11, 1998 to March 31, 1998 compared to the
predecessor period from September 1, 1997 to February 10, 1998 and the
predecessor period from September 1, 1996 to February 28, 1997
Summary
HomeSide's net income was $5.8 million for the period from February 11,
1998 to March 31, 1998 compared to $36.5 million for the predecessor period from
September 1, 1997 to February 10, 1998 and $20.3 million for the predecessor
period from September 1, 1996 to February 28, 1997. Total revenues for the
period from February 11, 1998 to March 31, 1998 were $44.6 million compared
$134.7 million for the predecessor period from September 1, 1997 to February 10,
1998 and $125.5 million for the predecessor period from September 1, 1996 to
February 28, 1997. The increases on an annualized basis in net income and
revenues for the period from February 11, 1998 to March 31, 1998 compared to the
predecessor period from September 1, 1997 to February 10, 1998 and the
predecessor period from September 1, 1996 to February 28, 1997 were primarily
attributable to increases in net servicing revenue, net mortgage origination
revenue, and net interest revenue. Total expenses increased on an annualized
basis as a result of amortization expense related to the goodwill associated
with the merger with the National (see Note 1). The increase in net servicing
revenue on an annualized basis was mainly a result of a $9.8 billion increase in
the servicing portfolio to $100.0 billion at March 31, 1998 from $90.2 billion
at February 28, 1997. Net mortgage origination revenue increased on an
annualized basis due to loan production volume increases. Net interest revenue
increased on an annualized basis 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 $26.9 million for the period from February 11,
1998 to March 31, 1998 compared to $87.2 million for the predecessor period from
September 1, 1997 to February 10, 1998 and $88.6 million for the predecessor
period from September 1, 1996 to February 28, 1997. Net servicing revenue is
comprised of mortgage servicing fees, ancillary servicing revenue, and
amortization of mortgage servicing rights.
Mortgage servicing fees totaled $64.3 million for the period from February
11, 1998 to March 31, 1998 compared to $194.7 million for the predecessor period
from September 1, 1997 to February 10, 1998 and $187.5 million for the
predecessor period from September 1, 1996 to February 28, 1997. The servicing
portfolio increased to $100.0 billion at March 31, 1998 compared to $90.2
billion at February 28, 1997, an 11% increase. HomeSide's weighted average
interest rate of the mortgage loans in the servicing portfolio was 7.82% at
March 31, 1998, 7.85% at February 10, 1998 and 7.92% at February 28, 1997. The
weighted average servicing fee, including ancillary income, for the servicing
portfolio was 0.463% for the period from February 11, 1998 to March 31, 1998
compared to 0.451% for the predecessor period from September 1, 1997 to February
10, 1998 and 0.421% for the predecessor period from September 1, 1996 to
February 28, 1997. The increase in the weighted average servicing fee 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 was $37.4 million for the
period from February 11, 1998 to March 31, 1998 compared to $107.4 million for
the predecessor period from September 1, 1997 to February 10, 1998 and $98.9
million for the predecessor period from September 1, 1996 to February 28, 1997.
The amortization expense increased on an annualized basis mainly as a result of
a higher average balance of mortgage servicing rights and a decrease of 0.59% in
average mortgage interest rates from February 28, 1997 to March 31, 1998.
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 totaled $2.8 million for the period from February 11,
1998 to March 31, 1998 compared to $0.09 million for the predecessor period from
September 1, 1997 to February 10, 1998 and ($2.3) million for the predecessor
period from September 1, 1996 to February 28, 1997. Increases in net interest
revenue on an annualized basis were 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. HomeSide's primary operating
subsidiary, HomeSide Lending, Inc. has issued a total of $810.0 million of
medium-term notes to the public market at an average cost of 6.071% as of March
31, 1998. 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 $14.3 million for the period from
February 11, 1998 to March 31, 1998 compared to $46.7 million for the
predecessor period from September 1, 1997 to February 10, 1998 and $39.0 million
for the predecessor period from September 1, 1996 to February 28, 1997. The
increase in net mortgage origination revenue on an annualized basis reflects an
increase in loan production volumes, primarily through HomeSide's correspondent
lending and broker channels, and an increase in gains from secondary marketing
activities.
Salaries and Employee Benefits
Salaries and employee benefits expense was $14.6 million for the period
from February 11, 1998 to March 31, 1998 compared to $36.1 million for the
predecessor period from September 1, 1997 to February 10, 1998 and $40.3 million
for the predecessor period from September 1, 1996 to February 28, 1997. The
average number of full-time equivalent employees was 1,968 for the period from
February 11, 1998 to March 31, 1998 compared to 1,848 for the predecessor period
from September 1, 1997 to February 10, 1998 and 1,698 for the predecessor period
from September 1, 1996 to February 28, 1997.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs
and maintenance costs, certain computer software expenses and depreciation of
HomeSide's premises and equipment. Occupancy and equipment expense was $2.4
million for the period from February 11, 1998 to March 31, 1998 compared to $7.8
million for the predecessor period from September 1, 1997 to February 10, 1998
and $6.8 million for the predecessor period from September 1, 1996 to February
28, 1997. The increase in expense on an annualized basis was mainly due to 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.
Servicing losses on investor-owned loans and foreclosure-related expenses
totaled $1.8 million for the period from February 11, 1998 to March 31, 1998
compared to $11.5 million for the predecessor period from September 1, 1997 to
February 10, 1998 and $9.9 million for the predecessor period from September 1,
1996 to February 28, 1997. The decrease was due to the implementation of the
early pool buyout program.
Included in the balance of accounts payable and accrued liabilities at
March 31, 1998 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)
At Predecessor At
March 31, 1998 February 28, 1997
Servicing Portfolio Delinquencies,
excluding bankruptcies (at end of period)
30 days 3.20% 3.27%
60 days 0.67% 0.69%
90+ days 0.61% 0.54%
======= =======
Total past due 4.48% 4.50%
======= =======
Foreclosures pending 0.80% 0.72%
======= =======
Other Expenses
Other expenses consist mainly of professional fees, communications
expense, advertising and public relations, data processing expenses and certain
loan origination expenses. The level of other expenses fluctuates in part based
upon the level of HomeSide's mortgage servicing portfolio and loan production
volumes.
Other expenses were $8.2 million for the period from February 11, 1998 to
March 31, 1998 compared to $19.1 million the predecessor period from September
1, 1997 to February 10, 1998 and $23.5 million for the predecessor period from
September 1, 1996 to February 28, 1997. The increase in other expenses on an
annualized basis was primarily due to expenses associated with the growing
mortgage servicing portfolio.
Income Tax Expense
HomeSide's income tax expense was $6.9 million for the period from February
11, 1998 to March 31, 1998 compared to $23.3 million for the predecessor period
from September 1, 1997 to February 10, 1998 and $17.8 million for the
predecessor period from September 1, 1996 to February 28, 1997. The effective
income tax rate for the period from February 11, 1998 to March 31, 1998 was 54%
compared to 39% for the predecessor period from September 1, 1997 to February
10, 1998 and 40% for the predecessor period from September 1, 1996 to February
28, 1997, due to the tax effects of goodwill as a result of the merger with the
National.
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 loan and therefore, the value of the servicing
portfolio declines as prepayments increase.
During the period from February 11, 1998 to March 31, 1998, HomeSide
utilized options on U.S. Treasury bond futures and U.S. Treasury bond futures to
protect a significant portion of the market value of its mortgage servicing
portfolio from a decline in value. The risk management contracts used by
HomeSide have characteristics such that they tend to increase in value as
interest rates decline. Conversely, these risk management contracts tend to
decline in value as interest rates rise. Accordingly, changes in value of these
risk management instruments will tend to move inversely with changes in value of
HomeSide's mortgage servicing rights.
These risk management instruments are designated as hedges on the purchase
date and such designation is at a level at least as specific as the level at
which mortgage servicing rights are evaluated for impairment. The risk
management instruments are marked-to-market with changes in market value
deferred and applied as an adjustment to the basis of the related mortgage
servicing right asset being hedged. As a result, any changes in market value
that are deferred are amortized and evaluated for impairment in the same manner
as the related mortgage servicing rights. The effectiveness of HomeSide's
hedging activity can be measured by the correlation between changes in the value
of the risk management instruments and changes in the value of HomeSide's
mortgage servicing rights. This correlation is assessed on a quarterly basis to
ensure that high correlation is maintained over the term of the hedging program.
During the periods presented, HomeSide has experienced a high measure of
correlation between changes in the value of mortgage servicing rights and the
risk management contracts. However, in periods of rising interest rates, the
increase in values of mortgage servicing rights may outpace the decline in value
of the options included in the hedge position, because the loss on the options
is limited to the premium paid.
During the period from February 11, 1998 to March 31, 1998, deferred gains
and losses on risk management contracts resulted in net deferred hedge loss of
$33.1 million. As of March 31, 1998, net deferred gains of $6.4 million are
included in the carrying value of mortgage servicing rights. The increase in the
estimated fair value of the mortgage servicing rights approximated the net
losses 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 March
31, 1998 was ($14.7) million, which was equal to their carrying amount because
they 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 mortgage servicing rights. To meet
these needs, the Company currently utilizes funding from an independent
syndicate of banks, including a warehouse credit facility and a
servicing-related facility, medium-term notes and cash flow from operations.
HomeSide continues to investigate and pursue alternative and supplementary
methods to finance its growing operations through the public and private capital
markets. These may include methods designed to expand the Company's financial
capacity and reduce its cost of capital. In addition, to facilitate the sale and
distribution of certain mortgage products, HomeSide Mortgage Securities, Inc., a
wholly-owned subsidiary of HomeSide Lending, Inc., may continue to issue
mortgage-backed securities.
Operations
Net cash used in operations for the period from February 11, 1998 to March
31, 1998 was $235.1 million. The primary uses of cash in operations were to fund
loan originations and pay corporate expenses. These uses of cash were offset by
cash provided from servicing fee income, loan sales and principal repayments.
Cash flows from loan originations are dependent upon current economic conditions
and the level of long-term interest rates. Decreases in long-term interest rates
generally result in higher loan refinancing activity, which results in higher
cash demands to meet increased loan production levels. Higher cash demands to
meet increased loan production levels are primarily met through borrowings and
loan sales.
Investing
Net cash used in investing activities was $226.5 million for the period
from February 11, 1998 to March 31, 19987. Cash used in investing activities was
for the purchase and origination of mortgage servicing rights and for funding
the early pool buyout program. These uses of cash were offset by net proceeds
from risk management contracts. Other assets decreased $72.4 million to $53.3
million at March 31, 1998 from $125.7 million at February 11, 1998 primarily as
a result of a decrease in HomeSide's hedge assets. Early pool buyout advances
totaled $448.9 million at March 31, 1998. Future uses of cash for investing
activities will be dependent on the mortgage origination market and HomeSide's
hedging needs. Except for the Banc One acquisition (see Note 5), 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. HomeSide
will fund the Banc One acquisition under existing medium-term note borrowing
capacity.
Financing
Net cash provided by financing activities was $443.5 million for the period
from February 11, 1998 to March 31, 1998. The primary source of cash from
financing activities during the period from February 11, 1998 to March 31, 1998
was $60.0 million from the issuance of medium-term notes and net borrowings of
$383.8 million from HomeSide's line of credit.
During the period from February 11, 1998 to March 31, 1998, net cash used in
operations was $235.1 million, net cash used in investing activities was $226.5
million and net cash provided by financing activities was $443.5 million,
resulting in a net decrease in cash of $18.1 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.
Year 2000 Compliance
HomeSide uses and is dependent upon a significant number of computer
software programs and operating systems to conduct its business. Such programs
and systems include those developed and maintained by HomeSide, software and
systems purchased from outside vendors and software and systems used by
HomeSide's third party providers. HomeSide has initiated a review and assessment
of all hardware and software to determine whether it will function properly in
the Year 2000. It is anticipated that some level of modification or replacement
of hardware and software will be necessary in order to make HomeSide's systems
"Year 2000 Compliant." HomeSide presently estimates these remediation costs to
total approximately $15.0 million. Remediation costs are expected to be expensed
as incurred, with the exception of new software purchases, which will be
capitalized. The Company has not incurred significant remediation costs prior to
March 31, 1998. Year 2000 remediation costs are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. In addition, HomeSide has relationships with vendors, customers and
other third parties that rely on software and systems that may not be Year 2000
compliant. With respect to such third parties, Year 2000 compliance matters will
not be within HomeSide's direct control. There can be no assurance that Year
2000 compliance failures by such third parties will not have a material adverse
effect on HomeSide's results of operations.
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
27 Financial Data Schedule
(b) Reports on form 8-K
HomeSide filed a report on Form 8-K dated February 25, 1998, Items 1
and 7, including Unaudited Consolidated Pro Forma Balance Sheet and Income
Statements. HomeSide filed reports on form 8-K dated April 3, 1998, April 15,
1998 and May 8, 1998, each on Item 5.
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 International, Inc.
(Registrant)
Date: March 15, 1998 By: /s/Joe K. Pickett
-----------------
Joe K. Pickett
Chairman of the Board, Chief Executive Officer
and Director (Principal Executive Officer)
Date: March 15, 1998 By: /s/Kevin D. Race
----------------
Kevin D. Race
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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