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 December 31, 1999
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 February 14, 2000
Common stock $0.01 par value 1
Class C non-voting common stock $1.00 par value none
FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
HOMESIDE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands, Except Share Data)
<CAPTION>
December 31, 1999 September 30, 1999
---------------------- ----------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 606,021 $ 202,859
Mortgage loans held for sale, net 1,180,228 1,292,562
Mortgage servicing rights, net 3,907,681 3,488,957
Early pool buyout advances 240,063 335,059
Accounts receivable, net 288,998 255,759
Premises and equipment, net 71,114 67,900
Goodwill, net 654,719 663,729
Other assets 85,973 84,530
---------------------- ----------------------
Total Assets $7,034,797 $6,391,355
====================== ======================
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 800,491 $ 666,442
Notes payable 3,411,258 2,899,304
Long-term debt 1,329,664 1,331,292
Deferred income taxes, net 225,672 220,775
---------------------- ----------------------
Total Liabilities 5,767,085 5,117,813
---------------------- ----------------------
Stockholder's Equity:
Common stock:
Common stock, $.01 par value, 100 shares authorized and 1 share issued and
outstanding - -
Class C non-voting common stock, $1.00 par value, 195,000 shares
authorized, and 0 shares issued and outstanding - -
Additional paid-in capital 1,231,302 1,231,302
Retained earnings 36,410 42,240
---------------------- ----------------------
Total Stockholder's Equity 1,267,712 1,273,542
---------------------- ----------------------
Total Liabilities and Stockholder's Equity $7,034,797 $6,391,355
====================== ======================
</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)
<CAPTION>
For the Three For the Three
Months Ended Months Ended
December 31, 1999 December 31, 1998
------------------ --------------------
REVENUES:
<S> <C> <C>
Mortgage servicing fees $171,198 $134,177
Amortization of mortgage servicing rights (97,528) (83,658)
------------------ --------------------
Net servicing revenue 73,670 50,519
Interest income 36,165 46,175
Interest expense (35,572) (32,334)
------------------ --------------------
Net interest revenue 593 13,841
Net mortgage origination revenue 17,008 38,286
Other income 863 1,786
------------------ --------------------
Total Revenues 92,134 104,432
EXPENSES:
Salaries and employee benefits 29,818 34,514
Occupancy and equipment 8,550 6,447
Servicing losses on investor-owned loans
and foreclosure-related expenses 8,368 9,784
Goodwill amortization 9,010 8,919
Other expenses 13,325 16,458
------------------ --------------------
Total Expenses 69,071 76,122
Income before income taxes 23,063 28,310
Income tax expense 4,893 14,519
------------------ --------------------
Net income $18,170 $13,791
================== ====================
</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>
For the Three For the Three
Months Ended Months Ended
December 31, 1999 December 31, 1998
------------------- ---------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 18,170 $ 13,791
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of mortgage servicing rights 97,528 83,658
Depreciation and amortization 11,483 9,537
Servicing losses on investor-owned loans 2,530 3,673
Change in deferred income tax liability 4,897 15,294
Origination, purchase and sale of loans held for sale, net of
repayments 112,334 (167,992)
Change in accounts receivable (35,769) 4,442
Change in other assets and accounts payable and accrued
liabilities (8,639) 57,916
------------------- ---------------------
Net cash provided by operating activities 202,534 20,319
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (6,251) (6,457)
Acquisition of mortgage servicing rights (234,919) (254,234)
Net purchase of risk management contracts (138,807) (220,933)
Net early pool buyout reimbursements 94,996 272,552
------------------- ---------------------
Net cash used in investing activities (284,981) (209,072)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from (repayments to) banks 494,599 (1,031,899)
Issuance of commercial paper, net of repayments 17,354 1,308,367
Payment of debt issue costs (2,123) -
Repayment of long-term debt (221) (182)
Dividends paid to the Parent (24,000) (30,533)
------------------- ---------------------
Net cash provided by financing activities 485,609 245,753
Net increase in cash and cash equivalents 403,162 57,000
Cash and cash equivalents at beginning of period 202,859 35,008
------------------- ---------------------
Cash and cash equivalents at end of period $606,021 $ 92,008
=================== =====================
Supplemental disclosure of cash flow information:
Interest paid $ 38,699 $ 38,136
Income taxes paid $ - $ 14,953
</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.
Operating results for the three months ended December 31, 1999 and the three
months ended December 31, 1998 are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Form 10-K for the fiscal year ended September 30, 1999
of HomeSide International, Inc.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and cash due from banks, interest-bearing
deposits and margin deposits with an original maturity of three months or less.
Margin deposits associated with the risk management program for mortgage
servicing rights are maintained with brokers in accordance with the requirements
of International Swap Dealer Agreements. At December 31, 1999, margin deposits
amounted to approximately $318.7 million.
3. MORTGAGE SERVICING RIGHTS
The change in the balance of mortgage servicing rights was as follows (in
thousands):
Balance, September 30, 1999 $3,488,957
Additions 234,919
Deferred hedge loss 281,333
Amortization (97,528)
-----------------
Balance, December 31, 1999 $3,907,681
=================
4. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
Weighted Average Interest Rate
Total Outstanding At Period End During the Period
<S> <C> <C> <C>
Floating Rate Notes $ 230,000 6.26% 5.96%
Commercial Paper 1,181,258 6.16% 5.69%
National Australia Bank unsecured facility 2,000,000 6.20% 5.78%
----------------------
Total, December 31, 1999 $ 3,411,258
======================
Floating Rate Notes $ 230,000 5.67% 5.67%
Commercial Paper 1,163,903 5.57% 5.12%
National Australia Bank unsecured facility 1,505,401 5.46% 5.22%
----------------------
Total, September 30, 1999 $ 2,899,304
======================
</TABLE>
On August 16, 1999, HomeSide issued $230.0 million in floating rate notes (the
"Floating Rate Notes") due August 16, 2000. Interest is payable quarterly in
arrears on February 16, May 16, and August 16, 2000. The floating Rate Notes are
unsecured obligations of HomeSide and rank equally with all other unsecured and
unsubordinated indebtedness of HomeSide. The per annum interest rate on the
Floating Rate Notes is equal to the three-month LIBOR, reset quarterly, plus
twenty basis points, or 0.20%. The weighted average interest rate on Floating
Rate Notes during the three months ended December 31, 1999 was 5.96%
On October 21, 1998, HomeSide Lending, Inc. established a $1.5 billion
commercial paper program. The program is supported by the Company's bank line of
credit and outstanding commercial paper reduces available borrowings under the
bank line of credit. At December 31, 1999, a total of $1.2 billion of commercial
paper was outstanding. The weighted average interest rate on commercial paper
outstanding during the three month period ended December 31, 1999 was 5.69%.
On October 18, 1999, HomeSide entered into a $2.0 billion revolving credit
facility (the "Independent Bank Credit Facility") with an independent syndicate
of banks. This agreement replaces HomeSide's previous bank credit facility.
Borrowings under the Independent Bank Credit Facility bear interest at rates per
annum, based on, at HomeSide's option, (i) the Eurodollar rate plus an
applicable margin, (ii) the greater of the prime rate or various federal fund
rates plus an applicable margin, or (iii) various federal fund rates plus an
applicable margin. The primary purpose of this credit facility is to provide
liquidity back-up for HomeSide's $1.5 billion commercial paper program. At
December 31, 1999, there was no balance outstanding under this credit line.
On June 23, 1998, HomeSide entered into an agreement for an unsecured revolving
credit facility with the National. The agreement was amended on June 22, 1999.
Under the credit facility, HomeSide can borrow up to $2.5 billion, subject to
limits imposed by regulatory authorities. As of December 31, 1999, Australian
financial regulations limited the National's ability to lend funds to HomeSide,
a non-bank affiliate, to approximately $2.1 billion. Borrowings under the credit
facility may be overnight or for periods of 7, 30, 60 or 90 days. For overnight
borrowings, the interest rate is determined by HomeSide and the National at the
time of the borrowing. For LIBOR-based borrowings, the interest rate is charged
at the corresponding LIBOR rate. At December 31, 1999, the amount outstanding
under this credit facility totaled $2.0 billion. The weighted average interest
rate on outstanding borrowings under this credit facility during the three month
periods ended December 31, 1999 and 1998 were 5.78% and 5.22%, respectively.
5. LONG-TERM DEBT
11.25 % Notes
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. The Parent Notes are redeemable at the
option of HomeSide, in whole or in part, at any time on or after May 15, 2001,
at certain fixed redemption prices. The indenture contains covenants that impose
limitations and restrictions, including requirements to maintain certain net
worth and ratio requirements. In addition, the Parent Notes are secured by a
second priority pledge of the common stock of HomeSide Lending. HomeSide is in
compliance with all net worth and ratio requirements included in the indenture
relating to the Parent Notes. 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 December 31, 1999
was $130.0 million. The balance of the Parent Notes at December 31, 1999,
including the fair value adjustment resulting from the merger with the National,
was $145.7 million.
Medium-term notes
As of December 31, 1999, outstanding medium-term notes issued by HomeSide
Lending under a $2.568 billion shelf registration statement were as follows (in
thousands):
<TABLE>
<CAPTION>
Issue Date Outstanding Balance Coupon Rate Maturity Date
<S> <C> <C> <C>
May 20, 1997 $ 250,000 6.875% May 15, 2000
June 30, 1997 200,000 6.875% June 30, 2002
June 30, 1997 40,000 6.820% July 2, 2001
July 1, 1997 15,000 6.860% July 2, 2001
July 31, 1997 200,000 6.750% August 1, 2004
September 15, 1997 45,000 6.770% September 17, 2001
March 19, 1998 60,000 5.6875% March 20, 2000
April 23, 1998 125,000 5.7875% April, 24, 2001
May 22, 1998 225,000 6.200% May 15, 2003
---------------------------
Total $1,160,000
===========================
</TABLE>
At December 31, 1999, the total amount of medium-term notes outstanding was
$1,160 million, made up of $185 million of floating-rate notes and $975 million
of fixed-rate notes that have been converted by interest rate swap agreements to
floating-rate notes. The weighted average borrowing rate on medium-term
borrowings issued for the three months ended December 31, 1999, including the
effect of the interest rate swap agreements, was 5.87%.
The balance of the medium-term notes at December 31, 1999, including the fair
value adjustment resulting from the merger with the National, was $1.2 billion,
of which $0.3 billion is current.
Mortgage note payable
In connection with the acquisition of BancBoston Mortgage Corporation, HomeSide
assumed a mortgage note payable that is due in 2017 and bears interest at a
stated rate of 9.5%. HomeSide's main office building is pledged as collateral
for the mortgage note payable. The balance of the mortgage payable at December
31, 1999, including the fair value adjustments resulting from the merger with
the National, was $23.2 million.
6. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). This statement standardizes the accounting
for derivative instruments and hedging activities by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. If certain conditions are met, a
derivative instrument may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability, or of
an unrecognized firm commitment, (b) a hedge of the exposure to variability in
the cash flows of a recognized asset, liability or forecasted transaction or (c)
a hedge of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a forecasted transaction or a net investment in a
foreign operation. In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an Amendment of FASB Statement No. 133." This statement
deferred the effective date of FAS 133 to fiscal quarters of fiscal years
beginning after June 15, 2000. Management has not yet determined the impact of
these statements on the financial statements of HomeSide.
10. DIVIDENDS
On October 20, 1999, the Company paid dividends to the Parent in the amount of
$24.0 million.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
HomeSide International, Inc. ("HomeSide" or the "Company"), through its
wholly-owned operating subsidiary HomeSide Lending, Inc. ("HomeSide Lending"),
is one of the largest full service residential mortgage banking companies in the
United States. The Company is the successor to HomeSide, Inc. ("HomeSide, Inc.
Predecessor"). On February 10, 1998, National Australia Bank, Ltd. (the
"National") acquired all outstanding shares of the common stock of HomeSide,
Inc. Predecessor and the Company adopted a fiscal year end of September 30 to
conform to the fiscal year of the National. HomeSide, Inc. Predecessor was
formed through the acquisition of the mortgage banking operations of BankBoston,
N.A. ("BBMC Predecessor" to HomeSide, Inc. Predecessor) on March 16, 1996 and
subsequently purchased the mortgage banking operations of Barnett Banks, Inc.
HomeSide's strategy emphasizes variable cost mortgage origination, low cost
servicing, and effective risk management. Headquartered in Jacksonville,
Florida, HomeSide Lending ranks as the 7th largest originator and the 7th
largest servicer in the United States at December 31, 1999, 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 its existing
relationships with Banc One Mortgage Corporation ("Banc One"), People's Bank,
and Cendant Mortgage Company ("Cendant").
Operating results for the three month periods ended December 31, 1999 and
December 31, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 2000. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Form 10-K for the fiscal year ended September 30, 1999 of HomeSide
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 indicate future
events and trends identify forward-looking statements, which speak only as of
their dates. The Company undertakes no obligation to publicly update or revise
any forward-looking statements whether as a result of new information, future
events or otherwise. The following factors could cause actual results to differ
materially from historical results or those anticipated: (1) the Company's
ability to grow which depends on its ability to obtain additional financing in
the future for originating loans, investment in servicing rights, working
capital, capital expenditure and general corporate purposes, (2) economic
downturns may negatively affect the Company's profitability as the frequency of
loan default tends to increase in such environments and (3) changes in interest
rates may affect the volume of loan originations and acquisitions, the interest
rate spread on loans held for sale, the amount of gain or loss on the sale of
loans and the value of the Company's servicing portfolio. These risks and
uncertainties are more fully detailed in the Company's filings with the
Securities and Exchange Commission.
Loan Production Activities
HomeSide participates in several origination channels, with a focus on wholesale
origination (correspondent, co-issue, and broker). HomeSide's other origination
channels include telemarketing, direct mail campaigns and other advertising, and
mortgages related to affinity group and co-branding partnerships. HomeSide also
purchases servicing rights in bulk from time to time. This multi-channel
production base provides access to and flexibility among production channels in
a wide variety of market and economic conditions. By focusing on production
channels with a variable cost structure, HomeSide eliminates the fixed costs
associated with traditional mortgage branch offices. Without the burden of high
fixed cost origination overhead, HomeSide is well positioned to weather a
variety of interest rate environments.
The following information regarding loan production activities for HomeSide is
presented to aid in understanding the results of operations and financial
condition of HomeSide for the three month periods ended December 31, 1999 and
December 31, 1998 (in millions):
For the Three For the Three
Months Ended Months Ended
December 31, 1999 December 31, 1998
-------------------- --------------------
Correspondent $ 2,563 $5,298
Co-issue 2,430 872
Broker 469 1,090
-------------------- --------------------
Total wholesale 5,462 7,260
Direct 147 323
-------------------- --------------------
Total production 5,609 7,583
Bulk acquisitions 4,558 7,046
-------------------- --------------------
Total production and
Acquisitions $10,167 $14,629
==================== ====================
Total loan production, excluding bulk acquisitions, was $5.6 billion for the
three months ended December 31, 1999 compared to $7.6 billion for the three
months ended December 31, 1998, a 26% decrease. The decrease was primarily due
to an increase in interest rates which resulted in a decrease in the size of the
mortgage origination market.
When interest rates rise, loan production decreases as fewer mortgagees
refinance their loans. Refinances were 21% of HomeSide's production volume for
the quarter ended December 31, 1999, compared to 64% for the quarter ended
December 31, 1998.
Economies of scale are vital to the long-term viability of mortgage servicing
and are increasingly important to remain competitive in the industry. During the
quarter, HomeSide continued to pursue growth opportunities through bulk
acquisitions of mortgage servicing rights and expansion of its Preferred
Partnership program. Preferred partnerships generally include a bulk servicing
acquisition and an ongoing mortgage origination flow. HomeSide services loans on
a priority basis on behalf of the Preferred Partners and offers the customer
mortgage-related products. Preferred Partner relationships contributed 38% of
HomeSide's production volume for the quarter. HomeSide completed bulk
acquisitions totaling $4.6 billion and $7.0 billion during the three month
periods ended December 31, 1999 and 1998, respectively.
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 $151 billion, HomeSide services the loans of approximately
1.7 million homeowners from across the United States and is committed to
protecting the value of this important asset by a sophisticated risk management
strategy. HomeSide anticipates its low cost of servicing loans will continue to
maximize the bottom-line impact of its growing servicing portfolio. HomeSide's
focus on efficient and low cost processes is pursued through the selective use
of automation, strategic outsourcing of selected servicing functions and
effective control of delinquencies and foreclosures.
The following information on the dollar amounts of loans serviced is presented
to aid in understanding the results of operations and financial condition of
HomeSide for the three month periods ended December 31, 1999 and December 31,
1998 (in millions):
For the Three For the Three
Months Ended Months Ended
December 31, 1999 December 31, 1998
------------------ -----------------
Balance at beginning of
Period $ 145,552 $ 115,800
Additions 10,157 13,668
Scheduled amortization 1,038 772
Prepayments 3,690 9,586
Foreclosures 246 313
------------------ -----------------
Total reductions 4,974 10,671
------------------ -----------------
Balance at end of period $ 150,735 $ 118,797
================== =================
The number of loans serviced at December 31, 1999 was 1,706,806 compared to
1,426,822 at December 31, 1998. HomeSide's strategy is to build its mortgage
servicing portfolio by concentrating on variable cost loan origination
strategies, and as a result, benefit from improved economies of scale. A key to
HomeSide's future growth is its proprietary servicing software. This system
allows HomeSide to double the number of loans typically serviced on a single
system. At December 31, 1999, substantially all of the servicing portfolio was
serviced on the proprietary system.
Results of Operations
For the three months ended December 31, 1999 compared to the three months ended
December 31, 1998
Summary
HomeSide's net income increased 32% to $18.2 million for the three months ended
December 31, 1999 compared to $13.8 million for the three months ended December
31, 1998. HomeSide's net income, excluding goodwill amortization from the
acquisition of HomeSide by the National, increased 19% to $27.1 million for the
three months ended December 31, 1999 compared to $22.7 million for the three
months ended December 31, 1998. Total revenues for the three months ended
December 31, 1999 were $92.1 million compared to $104.4 million for the three
months ended December 31, 1998, a 12% decrease. An increase in net servicing
revenue was offset by decreases in net interest revenue, net mortgage
origination revenue and other income. Net servicing revenue increased 46% for
the three months ended December 31, 1999 compared to the three months ended
December 31, 1998, primarily due to an increase in the servicing portfolio. Net
interest revenue decreased due to increased funding necessary to support
increased mortgage servicing assets and a decreased average balance of
interest-earning assets. Net mortgage origination revenue decreased due to the
increase in interest rates which resulted in decreased production volumes and
pricing competition. Total expenses decreased as a result of a decrease in
production related expenses associated with a decline in refinance activity and
a decrease in servicing related expenses associated with a decline in prepayment
activity. Income tax expense decreased as a result of a decrease in the
effective income tax rate caused by a change in the geographic mix of the
servicing portfolio into lower tax states and a decrease in production volume in
states with higher tax rates.
Net Servicing Revenue
Net servicing revenue was $73.7 million for the three months ended December 31,
1999 compared to $50.5 million for the three months ended December 31, 1998, a
46% increase. Net servicing revenue is comprised of mortgage servicing fees,
ancillary servicing revenue, and amortization of mortgage servicing rights.
Mortgage servicing fees increased 28% to $171.2 million for the three months
ended December 31, 1999 compared to $134.2 million for the three months ended
December 31, 1998, primarily as a result of portfolio growth. The servicing
portfolio increased $31.9 billion to $150.7 billion at December 31, 1999
compared to $118.8 billion at December 31, 1998, a 27% increase. The portfolio
growth is primarily due to loan production, bulk acquisitions, and a decrease in
mortgage loan prepayments as fewer mortgagees refinance their loans. A
significant portion of this portfolio growth was also due to the purchase of
First Chicago NBD Mortgage Company's $18 billion servicing portfolio on March 4,
1999. HomeSide's weighted average interest rates of the mortgage loans in the
servicing portfolio were 7.45% and 7.65% at December 31, 1999 and December 31,
1998, respectively. The weighted average servicing fee, including ancillary
income, for the servicing portfolio was 0.467% for the three months ended
December 31, 1999 compared to 0.463% for the three months ended December 31,
1998. The increase in the weighted average servicing fee was due to a change in
the mix such that the portfolio is made up of loans with higher service fees.
Amortization expense was $97.5 million for the three months ended December 31,
1999 compared to $83.7 million for the three months ended December 31, 1998, a
16% increase. Amortization expense increased mainly as a result of a higher
average balance of mortgage servicing rights during the quarter. This increase
was partially offset by the effects of rising mortgage interest rates.
Amortization charges are highly dependent upon the level of prepayments during
the period and changes in prepayment expectations, which are significantly
influenced by the direction and level of long-term interest rate movements. An
increase in mortgage interest rates results in a decrease in prepayment
estimates used in calculating periodic amortization expense. Because mortgage
servicing rights are amortized over the expected period of service fee revenues,
a decrease in mortgage prepayment activity typically results in a longer
estimated life of the mortgage servicing assets and, accordingly, lower
amortization expense.
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the direction in
which rates are moving and the spread between short and long-term interest rates
and the rates at which HomeSide is able to borrow. These factors influence the
size of the residential mortgage origination market, HomeSide's loan production
volumes and the interest rates HomeSide earns on loans and pays to its lenders.
Loan refinancing levels are the largest contributor to changes in the size of
the mortgage origination market. As interest rates rise, fewer borrowers
refinance their mortgages, resulting in a decrease in the mortgage origination
market. Lower loan production volumes result in lower average balances of loans
held for sale and consequently lower levels of interest income from interest
earned on such loans prior to their sale. This lower level of interest income
due to decreased volumes is partially offset by the higher rates earned on the
loans.
Overall borrowing costs also fluctuate with changes in interest rates.
Currently, the interest expense HomeSide pays to finance mortgage loans held for
sale and other net assets is generally calculated with reference to short-term
interest rates. In addition, because mortgage loans held for sale earn interest
based on longer term interest rates, the level of net interest revenue is also
influenced by the spread between long-term and short-term interest rates.
Net interest revenue totaled $0.6 million for the three months ended December
31, 1999 compared to $13.8 million for the three months ended December 31, 1998.
The decrease in net interest revenue was primarily due to a decrease in interest
income earned on loans held for sale as a result of lower average balances and a
narrowing of the spread between short-term and long-term interest rates.
Interest credits earned on custodial balances decreased due to lower prepayment
activity. In addition, interest expense increased due to the funding of higher
mortgage servicing assets.
Net Mortgage Origination Revenue
Net mortgage origination revenue is comprised of fees earned on the origination
of mortgage loans, gains and losses on the sale of loans, gains and losses
resulting from hedging of secondary marketing activities and fees charged to
review loan documents for purchased loan production.
Net mortgage origination revenue was $17.0 million for the three months ended
December 31, 1999 compared to $38.3 million for the three months ended December
31, 1998. The decrease was primarily due to a decrease in production volumes
resulting from the rising interest rate environment. Higher interest rates have
also sparked fierce pricing competition for mortgage production as some mortgage
originators have reduced their pricing margins in order to fill capacity.
Other Income
Other income for the three months ended December 31, 1999 was $0.9 million
compared to $1.8 million for the three months ended December 31, 1998, a 50%
decrease. The decrease was due to volume decreases in real estate tax service
fees.
Salaries and Employee Benefits
Salaries and employee benefits expense was $29.8 million for the three months
ended December 31, 1999 compared to $34.5 million for the three months ended
December 31, 1998, a 14% decrease. The average number of full-time equivalent
employees was 2,551 for the three months ended December 31, 1999 compared to
2,496 for the three months ended December 31, 1998. The decrease in salaries and
employee benefits is primarily attributable to decreases in incentives and
temporary staffing as a result of the decrease in production volumes and
decreased prepayment activity.
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 December 31, 1999 was $8.6 million compared to $6.4 million for the
three months ended December 31, 1998, a 34% increase. The increase in expense
was mainly due to the increased expenses incurred to enhance processing systems
and technology expenditures necessary to support targeted business growth.
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 $8.4 million for the three months ended December 31, 1999 compared to
$9.8 million for the three months ended December 31, 1998. The decrease was
primarily attributable to the Company's Early Pool Buyout Program. As HomeSide
sells mortgage loans to HomeSide Funding, Inc., HomeSide no longer incurs credit
related expenses associated with the transferred loans.
Included in the balance of accounts payable and accrued liabilities at December
31, 1999 is a reserve for estimated servicing losses on investor-owned loans of
$16.7 million. The reserve has been established for potential losses related to
the mortgage servicing portfolio. Increases to the reserve are charged to
earnings as servicing losses on investor-owned loans. The reserve is decreased
for actual losses incurred related to the mortgage servicing portfolio.
HomeSide's historical loss experience on VA loans generally has been consistent
with industry experience. Management believes that HomeSide has an adequate
level of reserve based on servicing volume, portfolio composition, credit
quality and historical loss rates, as well as estimated future losses. Servicing
losses are generally greatest during the three to six year age of the loan.
The following table sets forth HomeSide's delinquency and foreclosure
experience:
<TABLE>
<CAPTION>
Servicing Portfolio Delinquencies
(percent by loan count)
December 31, 1999 December 31, 1998
-------------------- -------------------
<S> <C> <C>
Servicing Portfolio Delinquencies, excluding bankruptcies (at end of period)
30 days 3.37% 3.84%
60 days 0.62% 0.78%
90+ days 0.59% 0.72%
-------------------- -------------------
Total past due 4.58% 5.34%
==================== ===================
Foreclosures pending 0.55% 0.73%
==================== ===================
</TABLE>
Other Expenses and Goodwill Amortization
Other expenses consist mainly of professional fees, communications expense,
advertising and public relations, data processing expenses and certain loan
origination expenses. The level of other expenses fluctuates in part based upon
the level of HomeSide's mortgage servicing portfolio and loan production
volumes.
Other expenses were $13.3 million for the three months ended December 31, 1999,
compared to $16.5 million for the three months ended December 31, 1998, a 19%
decrease. The decrease is primarily due to a decrease in expenses associated
with decreased production volumes and a decrease in prepayment activity.
Goodwill amortization was $9.0 million and $8.9 million, respectively, for the
three month periods ended December 31, 1999 and December 31, 1998.
Income Tax Expense
HomeSide's income tax expense was $4.9 million for the three months ended
December 31, 1999 compared to $14.5 million for the three months ended December
31, 1998. The effective income tax rates for the three month periods ended
December 31, 1999 and December 31, 1998 were 21% and 51%, respectively. The
decrease in the effective income tax rate was due to a change in the geographic
mix of the servicing portfolio into lower tax states and a decrease in
production volume in states with higher tax rates. In the current interest rate
environment, this trend is expected to continue.
Risk Management Activities
HomeSide has a risk management program designed to protect the economic value of
its mortgage servicing portfolio from declines in value due to increases in
estimated loan prepayment speeds, which are mainly influenced by declines in
interest rates. When loans prepay faster than anticipated, the cash flow
HomeSide expects to receive from servicing such loans is reduced. The value of
mortgage servicing rights is based on the present value of the cash flows to be
received over the life of the loan and therefore, the value of the servicing
portfolio declines as prepayments increase.
During the three months ended December 31, 1999, HomeSide utilized options on
U.S. Treasury bond and note futures, U.S. Treasury bond futures, options on
Eurodollar futures, swaptions, interest rate swap cap structures and mortgage
pass-throughs to protect a significant portion of the market value of its
mortgage servicing portfolio from a decline in value. The risk management
contracts used by HomeSide have characteristics such that they tend to increase
in value as interest rates decline. Conversely, these risk management contracts
tend to decline in value as interest rates rise. Accordingly, changes in value
of these risk management instruments will tend to move inversely with changes in
value of HomeSide's mortgage servicing rights.
These risk management instruments are designated as hedges on the purchase date
and such designation is at a level at least as specific as the level at which
mortgage servicing rights are evaluated for impairment. The risk management
instruments are marked-to-market with changes in market value deferred and
applied as an adjustment to the basis of the related mortgage servicing right
asset being hedged. As a result, any changes in market value that are deferred
are amortized and evaluated for impairment in the same manner as the related
mortgage servicing rights. The effectiveness of HomeSide's hedging activity can
be measured by the correlation between changes in the value of the risk
management instruments and changes in the value of HomeSide's mortgage servicing
rights. This correlation is assessed on a quarterly basis to ensure that high
correlation is maintained over the term of the hedging program. If management's
ongoing assessment of correlation indicates that high correlation is not being
achieved, the Company will discontinue the application of hedge accounting and
recognize a gain or loss to the extent the hedge results have not been offset by
changes in value of the hedged asset during the hedge period. 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.
At December 31, 1999, deferred losses on risk management contracts resulted in
net deferred hedge losses of $760.8 million which were substantially offset by
changes in the value of mortgage servicing rights and included in the carrying
value of mortgage servicing rights. Activity in the deferred hedge account
during the three months ended December 31, 1999 is as follows (in thousands):
Net deferred hedge balance at September 30, 1999 $ (494,743)
Net deferred hedge loss (281,333)
Amortization 15,230
------------------
Net deferred hedge balance at December 31, 1999 $ (760,846)
==================
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 December 31, 1999 was $(445.3) million. This amount is
comprised of interest rate swaps, caps and swaptions with a fair value of
$(481.4) million, partially offset by options on U.S. Treasury bond and note
futures, options on Eurodollar futures, and mortgage pass-throughs with a fair
market value of $36.1 million. The premiums paid on options along with amounts
due to or from counterparties related to risk management contracts are included
in Other Assets and Other Liabilities in the accompanying consolidated balance
sheet. See "Liquidity and Capital Resources" for further discussion of
HomeSide's sources and uses of cash. See Note 3 of Notes to Consolidated
Financial Statements for a description of HomeSide's accounting policy for its
risk management contracts and Notes 12 and 13 of Notes to Consolidated Financial
Statements for additional fair value disclosures with respect to HomeSide's risk
management contracts included in HomeSide's Form 10-K for the fiscal year ended
September 30, 1999.
Liquidity and Capital Resources
The Company's principal financing needs are the financing of loan origination
activities and the investment in mortgage servicing rights. To meet these needs,
the Company currently utilizes funding from its commercial paper program, a
credit facility with the National, medium-term notes, floating-rate notes, an
independent syndicate of banks, repurchase agreements, and cash flow from
operations. HomeSide retained excess cash at December 31, 1999 in order to
mitigate the risk that the Company might not have been able to borrow funds
during the beginning of calendar 2000 as a result of potential complications
associated with the change to Year 2000. HomeSide continues to investigate and
pursue alternative and supplementary methods to finance its growing operations
through the public and private capital markets. These may include methods
designed to expand the Company's financial capacity and reduce its cost of
capital. In addition, to facilitate the sale and distribution of certain
mortgage products, HomeSide Mortgage Securities, Inc., a wholly-owned subsidiary
of HomeSide Lending, Inc., may continue to issue mortgage-backed securities.
Operations
Net cash provided by operations for the quarter ended December 31, 1999 was
$202.5 million. Net cash provided by operations for the quarter ended December
31, 1998 was $20.3 million. Cash provided from servicing fee income, loan sales
and principal repayments was partially offset by cash used for the origination
and purchase of mortgage loans held for sale and to pay corporate expenses. Cash
flows from loan originations are dependent upon current economic conditions and
the level of long-term interest rates. Increases in long-term interest rates
generally result in lower loan refinancing activity, which results in lower cash
demands to meet loan production levels.
Investing
Net cash used in investing activities for the quarter ended December 31, 1999
was $285.0 million. Net cash used in investing activities for the quarter ended
December 31, 1998 was $209.1 million. Cash used in investing activities was
primarily for the purchase of mortgage servicing rights and risk management
contracts. Cash was provided by proceeds from risk management contracts and
early pool buyout reimbursements. Future uses of cash for investing activities
will be dependent on the mortgage origination market and HomeSide's hedging
needs. HomeSide is not able to estimate the timing and amount of cash uses for
future acquisitions of other mortgage banking entities, if such acquisitions
were to occur.
Financing
Net cash provided by financing activities for the quarters ended December 31,
1999 and 1998 were $485.6 million and $245.8 million, respectively. Cash was
provided by borrowings from the National and the issuance of commercial paper.
Cash was used to repay borrowings from the National, commercial paper, payment
of debt issue costs, and to pay dividends to the Parent.
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
General. In common with many business users of computers around the world, the
Company established a program designed to minimize the impact of the change to
2000 (including Leap Day 2000) on the Company and its customers. The Board of
Directors made the work associated with the change to 2000 a key priority for
management. As of the date of this filing, the Company has encountered no Year
2000 issue that has impacted customer service levels and is conducting business
as usual. The Company experienced a few minor Year 2000-related incidents, all
of which were corrected prior to any disruption in customer service. However,
there remains the possibility of isolated issues throughout the first quarter of
2000, particularly over Leap Day. For this reason, HomeSide's Year 2000 Program
continues through March 31, 2000.
The Company 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 the Company, software and
systems purchased from outside vendors and software and systems used by the
Company's third party providers. The Company recognized that the Year 2000 issue
is one of the most complex data processing problems faced by businesses
worldwide. As the Company approached the century change, its primary objective
was to maintain "business as usual."
The Company began its information technology Year 2000 assessment and
remediation efforts in the third quarter of calendar year 1996 under the
sponsorship of its executive management. A formal, enterprise-wide program
commenced in January 1998. The Year 2000 issue was identified as a top priority.
The Company's executive management and Board of Directors were provided with
frequent detailed updates. The Company dedicated resources to assess, repair and
test programs, applications, equipment and facilities. The Company established a
Year 2000 Program Office that coordinated the preparations for the change to
2000 with each business unit throughout the Company.
The Company's program involved an extensive review of its own operations and
scoping the work that needed to be completed to minimize any potential impact.
This included reviewing the possible effects on the Company arising out of how
third parties manage their transition to 2000. The work demonstrated that there
were two possible key impacts:
Internal - the change to 2000 could cause interruptions, errors in
calculations or delays to the Company's critical business processes via
unexpected system or application malfunctioning.
External - the impact on the Company's own operations from third
parties, including customers, vendors, suppliers, regulators and
electronic distribution channels which may be impacted by the change to
2000. This includes any secondary or systemic impact that may arise
from the change to 2000 and the risk of disruption in the capital and
secondary mortgage markets on which the Company is dependent.
The Company's strategy for addressing Year 2000 focused on four teams, which
together addressed all aspects of the Company's business. The Information
Technology team addressed all of the Mainframe, LAN and client server
applications. The End User Computing (or Business) team addressed the business
risks within each of the operating departments, including facilities' risk. This
area of the strategy involved the greatest concentration of embedded chips. The
Enterprise team addressed the corporate-wide risks posed by the Year 2000,
including business continuity planning to be implemented by individual business
units. Finally, the Year 2000 Program Office coordinated the Company's Year 2000
readiness efforts and was responsible for communications, vendor management,
project documentation and reporting. The Company's Year 2000 Program Office and
overall Year 2000 Program are managed by a Year 2000 Program Director whose
full-time resources and responsibilities are dedicated to this effort under the
sponsorship of the President and Chief Operating Officer and the Chief
Information Officer.
Throughout all phases of the Year 2000 Program the goal of the Year 2000 teams
was to complete all required work while minimizing disruption to the current
service delivery levels of the Company. Central management of the project was
executed using fully dedicated staff with high levels of subject matter
knowledge. In order to speed the assessment and remediation aspects of the
mainframe and client server IT projects, a factory philosophy was adopted using
Paragon Computer Professionals, Inc. as the primary outsourcer. Contractors were
used internally where subject matter expertise was not required.
State of Readiness. The Company's approach to preparing for the change to 2000
included a standard set of methods and tools, customized as applicable to each
team, to coordinate and drive the project to completion. The approach consisted
of six phases:
1. Assessment - Defining each system and process to determine if there
are date dependencies and how to resolve them. For business continuity
purposes, assessment included identifying event and dependency risk.
2. Remediation - Implementing the steps identified in the assessment
phase, including code remediation and development of contingency
plans.
3. Testing - Developing and implementing test plans to determine if
remediated code was correct and assurance testing of business
continuity plans.
4. Implementation - Moving all approved changes from testing into
production and execution of contingency plans as was required.
5. Check-Off - Formally acknowledging that each process has been
implemented and is functioning correctly.
6. Clean Management - Employing procedures and practices to prevent the
reintroduction of non-compliant applications, products and processes
into the operating environment, once Check-Off was completed.
The Company's Information Technology and Business Teams' assessment of the
Company's systems and business processes for Year 2000 vulnerability included
substantially all hardware and software systems, embedded systems, buildings and
equipment, and business processes. The assessment also included a review of the
Company's dependencies on third parties, including vendors, suppliers and
customers.
The Company established in its Year 2000 Program certain key milestones and an
internal timetable for the change to 2000 in line with or ahead of its
regulator's suggested completion dates for core systems. These were:
o Assessment of substantially all systems and processes by July 31, 1998
- Completed by target date;
o Remediation and internal testing of all mission critical applications
by December 31, 1998 - Completed by target date;
o End-to-end testing of all mission critical systems with material third
parties by March 31, 1999 - Substantially completed by July 31, 1999,
now complete;
o Remediation and testing of all non-mission critical systems by June
30, 1999 - Substantially completed by target date, now complete; and
o clean management of all systems through 1999 - implemented throughout
the Company.
All End-to-End testing, with material external parties and others, was
successfully completed. As of March 31, 1999, HomeSide successfully completed
the mandatory components of the MBA Year 2000 Readiness Test, including Fannie
Mae, Freddie Mac and Ginnie Mae. Optional components of the MBA Year 2000
Readiness Test were substantially completed by June 30, 1999.
The Company's two most critical business applications are its primary mortgage
servicing software systems: MSP (licensed from and supported by Alltel
Information Services, Inc.) and ALSS (a proprietary software system supported by
the Company). As to these two systems, assessment, remediation, testing,
implementation and check-off were completed on time, the systems were returned
to production and clean management procedures were implemented.
The Company's Year 2000 Program also addressed end-user computing issues
presented by the Year 2000 change. As to end-user computing issues (systems and
business processes other than information technology systems), assessment,
remediation, testing, implementation and check-off were completed on time and
clean management procedures were implemented.
Since September 30, 1999, the emphasis of the Company's Year 2000 Program was on
continued assurance testing, finalization, refinement and testing of transition
plans, monitoring of Year 2000 readiness efforts by the Company's customers,
vendors and other third parties with whom the Company has relationships, and
clean management of systems and processes. The Company successfully developed
and implemented a Clean Management Strategy on a Company-wide basis.
The Company was concerned that third parties on which the Company relies would
not complete their Year 2000 programs on time or that Year 2000 failures by such
third parties would have a material adverse effect on the Company's results of
operations. The Company conducted ongoing reviews of the Year 2000 efforts of
its mission critical vendors, customers and service providers. As of the date of
filing, the Company has not experienced any material disruptions in service from
any of its vendors, customers or service providers as a result of Year 2000
issues.
The Company conducted ongoing reviews of the Year 2000 efforts of its mission
critical vendors, customers and service providers through December 31, 1999. The
Company identified a number of mission critical third parties whose Year 2000
failure may reasonably be expected to have a material adverse impact on the
Company's results of operations. Examples of such third parties include: the
Company's primary software licensor, Alltel Information Services, Inc.; the
Company's sole provider of insurance processing services; the Company's sole
provider of tax payment services; and the Company's sole provider of foreclosure
services. Catastrophic failure by any of these parties would have a material
adverse effect on the Company. The Company targeted these mission critical third
parties for particular scrutiny regarding their preparations for the change to
2000. That process will continue into the first quarter of 2000.
The Company was successful in negotiating Year 2000 amendments to its contracts
with several mission critical vendors. These amendments contain representations
and warranties by the vendors as to their state of readiness to meet the Year
2000 challenge and indemnification and other remedies in favor of the Company in
the event the Company suffered a loss because the vendor did not successfully
manage the change to 2000.
Transition Planning. Transition planning is concerned with identifying and
preparing for specific issues and risks associated with the period of October 1,
1999 through March 31, 2000. The Company has developed a corporate-wide
Transition Strategy. The objective of the Company in transition planning is to
ensure a Company-wide capability to manage internal and externally generated
events as and when they might arise. Transition plans for the century rollover
and beyond were completed by September 30, 1999.
As part of the Company's Transition planning and overall Year 2000 Program, the
Company established a moratorium period using a scaled implementation plan to
restrict the introduction of minor, significant and major changes to systems or
business processes. The moratorium period will not impair the Company's ability
to conduct its core businesses and meet the needs of its customers. The
Company's Year 2000 Program will continue until the end of March 2000.
Activities planned for the first quarter of 2000 include:
o Monitoring and verification activities surrounding business
information systems;
o Implementation of maintenance programs associated with the system
changes made to manage the date change to 2000;
o Working with customers and suppliers regarding any impacts they may
have sustained as a result of the date change to 2000; and
o Completing a formal post-implementation review of the Year 2000
Program to assess achievements and lessons learned.
Risks. The Company's risk management office is actively involved in the
Company's Year 2000 Program. The most reasonably likely worst case Year 2000
scenario, disregarding the Company's remediation efforts and contingency
planning, is: (i) a failure in its loan servicing software and/or systems, or
(ii) a failure by one of the Company's key third party providers. Either such
failure would result in material disruption in the Company's operations possibly
preventing it from discharging its contractual obligations to service mortgage
loans in an accurate and timely fashion. The consequences of such disruption
could include, among other things, revocation of the Company's status as an
FHA/VA approved lender/servicer or Ginnie Mae/Fannie Mae/Freddie Mac approved
seller/servicer, incorrect processing and/or reporting of payments to consumers
and investors, a material loss of revenue, and litigation with third parties
alleging losses related to servicing failure.
While working to ensure that the Company's primary objective of business as
usual before, during and through 2000 is achieved, there can be no guarantee
that its Year 2000 program will be successful in all respects or that the date
change from 1999 to 2000 or Leap Day 2000 will not materially affect the
Company's business in some form.
Contingency Planning. The Company's Year 2000 Program is based on the assumption
that 100% impact coverage is neither feasible nor practical. It is possible that
the Company or third parties on which the Company depends may have unplanned
system difficulties during the transition through 2000 or Leap Day, or that
third parties may not successfully manage the change to 2000 or Leap Day;
therefore, an integral part of the Company's Year 2000 Program is the
development of contingency plans in anticipation of systems or third party
failure.
These contingency plans have been developed for individual applications, systems
and business processes. Individual departments within the Company, including
information technology, acting under the supervision and direction of the Year
2000 Program Enterprise team, have (a) identified applicable Year 2000 events
and threats, (b) considered the likelihood of occurrence, (c) determined the
severity of impact of such events and threats, and (d) created preventive and
continuity plans to address such events and threats. Although the contingency
plans vary by application, system and business process, each of the Company's
contingency plans include: identification of the Company's systems and third
party risks that the plan addresses; an analysis of strategies and available
resources to restore and continue operations; and a recovery and continuity
program that identifies participants, processes, and significant resources
required. Contingency plans include: identifying alternate providers and locking
them in contractually as applicable; securing redundant telecommunications
resources; stockpiling of critical supplies; developing manual procedures to
replace automated procedures; altering delivery schedules for certain reports
and services to avoid the rollover period. Alternate providers are not available
for those key third parties identified above as the Company's sole providers of
certain services. As to those providers, the Company has in each case reviewed
and approved the Year 2000 contingency plans adopted by those third parties. In
the event of a failure in those third parties' contingency plans, the Company is
prepared, as an additional contingency, to terminate its contract with any
non-compliant provider and take over the performance of those services in-house.
In that regard, it should be noted that the Company retains control of the data
essential to the provision of these services.
The Company's contingency plans have been reviewed and approved by the Company's
Program Office and executive management and, where possible, tested. Assurance
testing of the Company's continuity plans was completed by September 30, 1999.
Given the potential scope of Year 2000 events, it is possible that despite
considerable planning, the Company's business continuity plans for the date
change to 2000 may only assist in the reduction of the degree of disruption
rather than its avoidance. However, the Company is encouraged by the absence of
any material adverse impacts by the century rollover and no contingency plans
have been invoked to date.
Cost of Year 2000 Efforts. As described above, the Company conducted a thorough
Year 2000 program, covering all aspects of its business, to ensure that it
successfully managed the change to 2000. The Company presently estimates these
costs will total approximately $12.4 million, less than the $13.5 million the
Company previously estimated.
Year 2000 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. The
Company does not separately track the indirect costs incurred in its Year 2000
program.
Through December 31, 1999, the Company had expended approximately $12.0 million
of its total Year 2000 budget. The Company incurred significant expenditures in
the fourth calendar quarter of 1999 associated with proactive communications to
its customers. The Company will continue to incur expenditures associated with
employee retention efforts, transition planning and maintenance of its Year 2000
Program Office through March 31, 2000. The Company does not foresee any expenses
not provided for in the current budget, unless there are unanticipated Year 2000
problems.
The Company expensed its remediation costs as they were incurred, with the
exception of new hardware and software purchases, which were capitalized. The
source of funds for Year 2000 remediation was operating income of the Company.
The percentage of the Company's information technology budget devoted to Year
2000 efforts in the quarter ended December 31, 1999 was approximately 5.0%. The
Company is unable to readily determine the cost of replacement of non-compliant
systems that are being replaced in the ordinary course of business. No
significant information technology projects have been deferred due to Year 2000
efforts.
The Company's original Year 2000 budget of $13.5 million and revised budget of
$12.4 million were each based on management's best estimates and did not take
into account any Year 2000-related claims for loss or damage that may be
asserted against the Company by third parties.
The foregoing disclosure is furnished in response to and in compliance with the
Statement of the Commission Regarding Disclosure of Year 2000 Issues and
Consequences by Public Companies, Investment Advisers, Investment Companies, and
Municipal Securities Issuers, Securities Act Rel. No. 33-7448 (July 30, 1998).
Quantitative and Qualitative Market Risk
There have been no material changes in the Company's market risk from September
30, 1999. For information regarding the Company's market risk, refer to Form
10-K for the fiscal year ended September 30, 1999 of HomeSide International,
Inc.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
HomeSide is a defendant in a number of legal proceedings arising in the normal
course of business. HomeSide, in management's estimation, has recorded adequate
reserves in the financial statements for pending litigation. Management, after
reviewing all actions and proceedings pending against or involving HomeSide,
considers that the aggregate liability or loss, if any, resulting from the final
outcome of these proceedings will not have a material effect on the financial
position of HomeSide.
In recent years, the mortgage banking industry has been subject to class action
lawsuits which allege violations of federal and state laws and regulations,
including the propriety of collecting and paying various fees and charges. Class
action lawsuits may be filed in the future against the mortgage banking
industry.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following document is filed as a part of this Report:
Number Description
27 Financial Data Schedule
(b) Reports on form 8-K
HomeSide filed no reports on Form 8-K during the quarter ended December 31,
1999.
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: February 14, 2000 By: _/s/_____________________
Joe K. Pickett
Chairman of the Board, Chief Executive Officer
and Director (Principal Executive Officer)
Date: February 14, 2000 By: _/s/______________________
W. Blake Wilson
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
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<INCOME-CONTINUING> 18,170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,170
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
