<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-12979
HOMESIDE LENDING, INC.
----------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
FLORIDA 59-2725415
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
7301 BAYMEADOWS WAY, JACKSONVILLE, FL 32256
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(Address of principal executive offices) (Zip Code)
(904) 281-3000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No x
--- ---
<TABLE>
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<CAPTION>
Class Outstanding at July 14, 1997
----- ----------------------------
<S> <C>
Common stock $1.00 par value 100 shares
</TABLE>
1
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FINANCIAL INFORMATION
ITEM 1. Financial Statements
--------------------
<TABLE>
HOMESIDE LENDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
(UNAUDITED)
MAY 31, 1997 FEBRUARY 28, 1997
------------ -----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 16,774 $ 52,691
Mortgage loans held for sale, net 806,389 805,274
Mortgage servicing rights, net 1,721,767 1,596,838
Accounts receivable, net 200,570 157,518
Premises and equipment, net 31,928 29,515
Other assets 59,655 75,485
---------- ----------
Total Assets $2,837,083 $2,717,321
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $1,657,434 $1,818,503
Accounts payable and accrued liabilities 129,864 123,231
Deferred income taxes 153,867 142,415
Long-term debt 270,977 21,128
---------- ----------
Total Liabilities 2,212,143 2,105,277
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Common stock:
Common stock, $1.00 par value, 10,000 shares authorized and
100 shares issued and outstanding, all pledged as second priority collateral
on the long-term debt of the Parent
Additional paid-in capital 573,092 573,092
Retained earnings 51,848 38,952
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Total Stockholder's Equity 624,940 612,044
---------- ----------
Total Liabilities and Stockholder's Equity $2,837,083 $2,717,321
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
<TABLE>
HOMESIDE LENDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<CAPTION>
FOR THE THREE FOR THE PERIOD FROM FOR THE THREE
MONTHS ENDED MARCH 16, 1996 TO MONTHS ENDED
MAY 31, 1997 MAY 31, 1996 FEBRUARY 28, 1997
------------- ----------------- -----------------
<S> <C> <C> <C>
REVENUES:
Mortgage servicing fees $ 98,338 $ 41,485 $ 94,750
Amortization of mortgage servicing rights (47,494) (16,442) (49,379)
-------- -------- --------
Net servicing revenue 50,844 25,043 45,371
Interest income 19,242 12,719 21,277
Interest expense (18,062) (12,592) (20,417)
-------- -------- --------
Net interest revenue 1,180 127 860
Net mortgage origination revenue 17,926 10,810 22,469
Other income 777 107 141
-------- -------- --------
Total Revenues 70,727 36,087 68,841
EXPENSES:
Salaries and employee benefits 19,736 11,480 19,669
Occupancy and equipment 3,806 1,846 3,503
Servicing losses on investor-owned loans
and foreclosure-related expenses 4,752 3,938 4,981
Other expenses 9,160 5,345 11,834
-------- -------- --------
Total Expenses 37,454 22,609 39,987
Income before income taxes 33,273 13,478 28,854
Income tax expense 12,978 5,526 10,898
-------- -------- --------
Net Income $ 20,295 $ 7,952 $ 17,956
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
<TABLE>
HOMESIDE LENDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<CAPTION>
FOR THE THREE FOR THE PERIOD FROM FOR THE THREE
MONTHS ENDED MARCH 16, 1996 TO MONTHS ENDED
MAY 31, 1997 MAY 31, 1996 FEBRUARY 28, 1997
------------- ------------------- -----------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 20,295 $ 7,952 $ 17,956
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of mortgage servicing rights 47,494 16,442 49,379
Depreciation and amortization 1,350 688 4,995
Servicing losses on investor-owned loans 3,183 3,938 730
Deferred income tax expense 12,978 5,526 10,898
Capitalized excess servicing rights -- (2,714) (4,642)
Mortgage loans originated and purchased for sale (5,372,472) (2,316,207) (3,422,752)
Proceeds and principal repayments of mortgage loans held for sale 5,371,357 2,227,398 3,718,707
Change in accounts receivable (46,235) (1,468) 14,857
Changes in other assets and accounts payable and accrued liabilities (93) (68,253) (2,265)
----------- ----------- -----------
Net cash provided by (used in) operating activities 37,857 (126,698) 387,863
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (3,763) (1,838) (1,575)
Acquisition of mortgage servicing rights (120,060) (81,034) (131,441)
Net purchases of risk management contracts (29,645) (40,987) (53,506)
Acquisition of BancBoston Mortgage Corp., net of cash acquired -- (133,392) --
Acquisition of Barnett Mortgage Corp., net of cash acquired -- (106,244) --
----------- ----------- -----------
Net cash used in investing activities (153,468) (363,495) (186,522)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net borrowings from banks (161,069) 417,146 (192,310)
Issuance of notes 250,000 -- --
Payment of debt issue costs (1,687) (13,299) (1,231)
Repayment of long-term debt (151) (121) (150)
Capital contribution from parent -- 352,665 47,003
Dividends paid to parent (7,399) (7,784) (3,145)
----------- ----------- -----------
Net cash provided by (used in) financing activities 79,694 748,607 (149,833)
Net increase (decrease) in cash and cash equivalents (35,917) 258,414 51,508
Cash and cash equivalents at beginning of period 52,691 -- 1,183
----------- ----------- -----------
Cash and cash equivalents at end of period $ 16,774 $ 258,414 $ 52,691
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
HOMESIDE LENDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended May 31, 1997 are not
necessarily indicative of the results that may be expected for the fiscal year
ending February 28, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Prospectus dated May
15, 1997 filed with the Securities and Exchange Commission ("SEC") as part of
the Registration statement on Form S-1 (Registration Number 333-21193, the
"Shelf Registration Statement") of HomeSide Lending, Inc. ("HomeSide Lending" or
the "Company") and the annual report on Form 10-K for the fiscal year ended
February 28, 1997 of HomeSide, Inc. (the "Parent").
HomeSide Lending is a wholly-owned subsidiary of HomeSide Holdings, Inc.
which is a wholly-owned subsidiary of the Parent. The Parent has no operations
and its only significant assets are its investments in HomeSide Holdings, Inc,
HomeSide Lending and certain capitalized debt issuance costs. The Parent has
$130 million in outstanding long-term debt. All of the stock of HomeSide
Holdings, Inc. and HomeSide Lending is pledged as collateral on the debt of the
Parent. The Parent is dependent upon dividends from HomeSide Holdings, Inc. and
HomeSide Lending for the cash flow necessary to service the Parent's debt.
2. MORTGAGE SERVICING RIGHTS
<TABLE>
The components of mortgage servicing rights are as follows (in thousands):
<S> <C>
Balance, February 28, 1997 $1,596,838
Additions 120,060
Deferred hedge loss 52,363
Amortization (47,494)
----------
Balance, May 31, 1997 $1,721,767
==========
</TABLE>
3. NOTES PAYABLE
HomeSide Lending borrows funds on a demand basis from an independent
syndicate of banks under a $2.5 billion line of credit. Under certain
circumstances set forth in the bank line of credit agreement, borrowings under
such line of credit become collateralized by substantially all of HomeSide
Lending's assets. The bank line of credit is used to provide funds for HomeSide
Lending's business of originating, acquiring and servicing mortgage loans. The
bank line of credit includes both a warehouse credit facility, which is limited
to 98% of the fair value of eligible mortgage loans held for sale, and a
servicing-related facility, which is capped at $950.0 million. At May 31, 1997,
$1.7 billion outstanding under the servicing-related facility is due on February
14, 2000 at which time the bank line of credit will terminate. The bank line of
credit agreement contains covenants that impose limitations and restrictions on
HomeSide Lending, including the maintenance of certain net worth and ratio
requirements. Amounts outstanding at May 31, 1997 under the bank line of credit
are comprised of a warehouse credit facility of $772.4 million and a
servicing-related credit facility of $885.0 million. The amount of the unused
bank line of credit was $842.6 million as of May 31, 1997.
Drawings under the bank line of credit bear interest at rates per annum,
based on, at HomeSide Lending's option (A) the highest of (i) the lead bank's
prime rate, (ii) the secondary market rate of certificates of deposit plus 100
basis points and (iii) the federal funds rate in effect from time to time plus
0.5%, or (B) a eurodollar rate. As of May 31, 1997, the weighted average
interest rate on the amounts borrowed was 5.935%. The weighted average interest
rate during the quarter ended May 31, 1997 was 6.042%.
HomeSide Lending's short-term credit facilities with maximum aggregate
principal amounts of $85.0 million and $100.0 million expired upon the initial
sale of medium-term debt securities (see Note 4).
5
<PAGE> 6
4. LONG-TERM DEBT
On May 14, 1996, the Parent issued $200.0 million of 11.25% notes ("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 the Parent, in whole or in part, at any
time on or after May 15, 2001, at certain pre-set redemption prices. The
indenture contains covenants that impose limitations and restrictions, including
the maintenance of certain net worth and ratio requirements. In addition, the
Parent Notes are secured by a second priority pledge of the common stock of the
Parent's subsidiaries, HomeSide Lending and HomeSide Holdings, Inc. The Parent
is in compliance with all net worth and ratio requirements contained in the
indenture relating to the Parent Notes. The Parent used a portion of the
proceeds from its February 5, 1997 offering of common stock to pre-pay $70.0
million of the Notes at a premium of $7.9 million. The amount outstanding at May
31, 1997 is $130.0 million.
On May 20, 1997, HomeSide Lending issued $250.0 million of 6 7/8% notes
maturing on and payable in full on May 15, 2000 and paying interest semiannually
in arrears on May 15 and November 15 of each year, commencing on November 15,
1997. The notes were issued under the $1.0 billion Shelf Registration Statement.
The 6 7/8% notes due 2000 are not subject to redemption or repayment prior to
maturity and are not subject to any sinking fund. The proceeds were used to pay
down the short-term credit facilities of $176.2 million and to reduce amounts
outstanding under the bank credit agreement. As of May 31, 1997, $250.0 million
of the outstanding 6 7/8% notes had been effectively converted by interest rate
swap agreements to floating-rate notes. The weighted average borrowing rate on
medium-term note borrowings for the period from issuance to May 31, 1997,
including the effect of the interest rate swap agreements, was 6.054%. As of May
31, 1997, $750.0 million was available for future issuances under the Shelf
Registration Statement.
5. SUBSEQUENT EVENTS
-----------------
On June 30, 1997, HomeSide Lending issued $200.0 million of 6 7/8% notes
under the Shelf Registration Statement. These notes mature on June 30, 2002 and
interest is payable semiannually in arrears on June 30 and December 30 of each
year, commencing on December 30, 1997. As of July 1, 1997, $100.0 million of
these outstanding 6 7/8% notes had been effectively converted by interest rate
swap agreements to floating-rate notes with a weighted average interest rate of
5.97% at July 1, 1997. The net proceeds were used to reduce the amounts
outstanding under the bank credit agreement. Subsequently, HomeSide Lending will
reborrow amounts to fund an early pool buyout program, which involves the
purchase of delinquent FHA and VA loans from GNMA pools, thereby reducing the
carrying cost of servicing such loans.
On June 30, 1997, an additional $40.0 million of 6.82% notes and on July
1, 1997, an additional $15.0 million of 6.86% notes, both maturing on July 2,
2001, were issued under the Shelf Registration Statement. Interest on both
issuances is payable semiannually in arrears on June 30 and December 30 of each
year, commencing on December 30, 1997. Net proceeds were used for working
capital and general corporate purposes.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
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General
HomeSide Lending, Inc. (the "Company") and collectively with its
consolidated subsidiaries ("HomeSide Lending"), the primary operating subsidiary
of the Parent, is one of the largest full service residential mortgage banking
companies in the United States, formed through the acquisition of the mortgage
banking operations of BankBoston, N.A., formerly known as The First National
Bank of Boston ("Bank of Boston"), and Barnett Banks, Inc. ("Barnett"). HomeSide
Lending's strategy emphasizes variable cost mortgage origination and low cost
servicing. Headquartered in Jacksonville, Florida, HomeSide Lending ranks as the
5th largest originator and the 7th largest sevicer in the United States for
calendar 1996 based on data published by National Mortgage News.
HomeSide Lending 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 Lending intends to pursue additional
loan portfolio acquisitions and strategic origination relationships similar to
the existing Bank of Boston and Barnett arrangements.
Results of operations prior to May 31, 1996 do not include the results of
operations of Barnett Mortgage Company, because it was acquired on May 31, 1996.
For this reason, comparisons to the first fiscal quarter of fiscal 1997 are not
particularly meaningful. The results of operations for the first fiscal quarter
of fiscal 1998 are, therefore, most directly comparable to the results of
operations for the fourth quarter of 1997, the results of which have also been
included for comparative purposes.
6
<PAGE> 7
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 SEC.
Loan Production Activities
As a multi-channel loan production lender, HomeSide Lending 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 Lending eliminates the fixed costs associated with
traditional mortgage branch offices. Without the burden of high fixed cost
origination overhead, HomeSide Lending is well positioned to weather a variety
of interest rate environments.
<TABLE>
The following information regarding loan production activities for
HomeSide Lending is presented to aid in understanding the results of operations
and financial condition of HomeSide Lending for the first quarter of fiscal
1998, the first quarter of fiscal 1997 and for the fourth quarter of fiscal 1997
(in millions).
<CAPTION>
FOR THE THREE FOR THE PERIOD FOR THE THREE
MONTHS ENDED MARCH 16, 1996 MONTHS ENDED
MAY 31, 1997 TO MAY 31, 1996 FEBRUARY 28, 1997
------------ --------------- -----------------
<S> <C> <C> <C>
Correspondent $3,222 $1,893 $3,021
Co-issue 1,191 1,419 2,610
Broker 389 220 300
------ ------ ------
Total wholesale 4,802 3,532 5,931
Direct 69 248 134
------ ------ ------
Total production 4,871 3,780 6,065
Bulk acquisitions 501 -- --
------ ------ ------
Total production and acquisitions $5,372 $3,780 $6,065
</TABLE>
Total loan production was $5.4 billion for the first quarter of fiscal
1998 compared to $3.8 billion for the first quarter of fiscal 1997. The increase
was primarily due to the additional production resulting from the acquisition of
Barnett Mortgage Co. on May 31, 1996 and growth in HomeSide Lending's existing
wholesale channels.
Total loan production was $5.4 billion for the first quarter of fiscal
1998 compared to $6.1 billion for the fourth quarter of fiscal 1997, a decrease
of $0.7 billion. This was primarily due to an increase in interest rates during
the first quarter of fiscal 1998. As reflected in the Freddie Mac 30-year
mortgage index, the average mortgage interest rate increased to 8.11% in the
first quarter of fiscal 1998 from 7.86% in the fourth quarter of fiscal 1997.
The result was a lower volume of loan originations nationally in the first
quarter of fiscal 1998.
HomeSide Lending strives for maximum efficiency in all of its production
channels. HomeSide Lending continues to increase its use of automated
underwriting, improve its internet web site and enhance work-flow technology.
During the quarter, a new internet site was launched for wholesale and broker
customers. This electronic link will facilitate business communication between
HomeSide Lending and its correspondent and broker customers. HomeSide Lending is
also examining a number of ways to diversity revenue sources for the future.
HomeSide is currently reviewing potential relationships with a nationwide credit
card provider, an alliance to create a B&C paper product line for HomeSide's
production network and other mortgage-related products.
7
<PAGE> 8
Servicing Portfolio
Management believes that HomeSide Lending is one of the most efficient
mortgage servicers in the industry based on its servicing cost per loan and the
number of loans serviced per employee. The servicing operation makes extensive
use of state-of-the-art technology, process re-engineering and expense
management. With a portfolio size of over $91 billion, HomeSide Lending services
the loans of over one million homeowners from across the United States. HomeSide
Lending is committed to protecting the value of this important asset by a
sophisticated risk management strategy. HomeSide Lending anticipates its low
cost of servicing loans will continue to maximize the bottom-line impact of its
growing servicing portfolio. HomeSide Lending'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.
<TABLE>
The following information about dollar amounts of loans serviced is
presented to aid in understanding the results of operations and financial
condition of HomeSide Lending for the first quarter of fiscal 1998, the first
quarter of fiscal 1997, and the fourth quarter of fiscal 1997 (in millions):
<CAPTION>
FOR THE THREE FOR THE PERIOD FOR THE THREE
MONTHS ENDED MARCH 1, 1996 MONTHS ENDED
MAY 31, 1997 TO MAY 31, 1996 FEBRUARY 28, 1997
------------ --------------- -----------------
<S> <C> <C> <C>
Balance at beginning of period $89,218 $41,844 $87,713
Acquisition of Barnett Mortgage Co. -- 33,082 --
Other additions 5,372 4,102 6,065
------- ------- -------
Total additions 5,372 37,184 6,065
------- ------- -------
Scheduled amortization 499 212 558
Prepayments 2,370 1,321 1,674
Foreclosures 171 130 141
Sales of servicing 81 14 2,187(a)
------- ------- -------
Total reductions 3,121 1,677 4,560
------- ------- -------
Balance at end of period $91,469 $77,351 $89,218
======= ======= =======
</TABLE>
(a) Includes $1.9 billion of servicing sold as part of the sale of Honolulu
Mortgage Company
The number of loans serviced at May 31, 1997 was 1,105,672, compared to
966,000 at May 31, 1996 and 1,070,000 at February 28, 1997. HomeSide Lending's
strategy is to build its mortgage servicing portfolio by concentrating on
variable cost loan origination strategies, and as a result, benefit from
improved economies of scale.
RESULTS OF OPERATIONS
Summary
HomeSide Lending's net income for the first quarter of fiscal 1998
increased to $20.3 million from $7.9 million for the first quarter of fiscal
1997 and from $18.0 million for the fourth fiscal quarter of 1997. Total
revenues for the first quarter of fiscal 1998, for the first quarter of fiscal
1997 and the fourth quarter of fiscal 1997 were $70.7 million, $36.1 million and
$68.8 million, respectively.
Total revenues for the first quarter of fiscal 1998 increased to $70.7
million from $36.1 million for the first quarter of fiscal 1997. This was a
result of the acquisition of Barnett Mortgage Co. on May 31, 1996 and an
increase in net servicing revenue and increases in net mortgage origination
revenue. The Barnett Mortgage Co. servicing portfolio was $33.1 billion at May
31, 1996 and its acquisition increased HomeSide Lending's servicing portfolio by
75% on that date, and this was a major factor in the increase in net servicing
revenue to $50.8 million in the first quarter of fiscal 1998 from $25.0 million
in the first quarter of fiscal 1997. In addition, subsequent increases in the
size of the portfolio throughout fiscal 1997 and the first quarter of fiscal
1998 contributed to the increased revenue. The servicing portfolio was $91.5
billion at May 31, 1997, $77.4 billion at May 31, 1996 and $89.2 billion at
February 28, 1997. As part of the Barnett Mortgage Co. acquisition, Barnett
agreed to sell HomeSide Lending the loans produced by the loan production
networks retained by Barnett. This additional production increased net mortgage
origination revenue. Net mortgage origination revenue increased to $17.9 million
in the first quarter of fiscal 1998 from $10.8 million in the first quarter of
fiscal 1997 due to increased loan production during the same period.
8
<PAGE> 9
Revenues for the first quarter of fiscal 1998 increased by $1.9 million to
$70.7 million from $68.8 million for the fourth quarter of fiscal 1997. This was
mainly a result of an increase of $5.4 million in net servicing revenue and an
increase of $0.3 million in net interest revenue, offset by a decrease of $4.6
million in net mortgage origination revenue. The increase in net servicing
revenue was due to a $2.3 billion increase in the loan servicing portfolio
during the three months ended May 31, 1997 and decreased amortization expense.
The lower amount of amortization of mortgage servicing rights reflects the
increase in interest rates during the first quarter of fiscal 1998 and the
consequent increase in the estimated value of future net servicing revenue. Net
interest revenue increased as a result of reduced costs from the bank line of
credit from improved credit ratings after the Parent raised additional capital
through its initial public offering of stock in February, 1997. Net mortgage
origination revenue decreased due to the increase in mortgage interest rates
during the first quarter of fiscal 1998, which resulted in a lower volume of
loan originations throughout the industry. Mortgage origination expenses
decreased in line with the lower volume of originations, a reflection of
HomeSide Lending's variable cost production structure, which unlike traditional
retail branch loan origination networks, is not burdened by high fixed costs
during industry wide loan production downturns.
Net Servicing Revenue
Net servicing revenue was $50.8 million in the first quarter of fiscal
1998 compared to $25.0 million in the first quarter of fiscal 1997, and $45.4
million in the fourth quarter of fiscal 1997. Net servicing revenue is comprised
of mortgage servicing fees, which generally range from 0.25% to 0.50% per annum
of the outstanding principal balances of the loan servicing portfolio,
ancilliary servicing revenues and amortization of mortgage servicing rights.
HomeSide Lending's weighted average servicing fee, excluding ancillary income,
was 0.364%, 0.367% and 0.359% during the first quarter of fiscal 1998, the first
quarter of fiscal 1997 and the fourth quarter of fiscal 1997, respectively.
Mortgage servicing fees increased to $98.3 million in the first quarter of
fiscal 1998 from $41.5 million in the first quarter of 1997, primarily as a
result of the Barnett Mortgage Co. acquisition and growth of the portfolio
through the loan production channels. The servicing portfolio increased to $91.5
billion at the end of the first quarter of fiscal 1998 compared to $77.4 billion
at the end of the first quarter of fiscal 1997. The decrease in the weighted
average servicing fee from the first quarter of fiscal 1997 to the first quarter
of fiscal 1998 was due to lower proportions of government loans serviced which
typically have a higher servicing fee. Amortization expense increased to $47.5
million for the first quarter of fiscal 1998 from $16.4 million for the first
quarter of fiscal 1997 mainly as a result of a higher average balance of
mortgage servicing rights.
Mortgage servicing fees increased by $3.6 million to $98.3 million for the
first quarter of fiscal 1998 from $94.7 million in the fourth quarter of fiscal
1997. The increase was a result of continued growth in the size of the servicing
portfolio. The increase in the weighted average servicing fee from the fourth
quarter of fiscal 1997 to the first quarter of fiscal 1998 was due to a higher
proportions of government loans serviced during the quarter. Amortization of
mortgage servicing rights decreased during the same period as a consequence of
the increase in interest rates during the first quarter of fiscal 1998, which
extended the estimated life of the mortgage servicing rights.
Risk Management Activities
HomeSide Lending 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 Lending expects to receive from servicing such loans is reduced.
The value of mortgage servicing rights is based on the present value of the cash
flows to be received over the life of the loans and therefore, the value of the
servicing portfolio declines as prepayments increase.
Since its formation, HomeSide Lending has purchased options on U.S.
Treasury bond futures to protect a significant portion of the market value of
its mortgage servicing portfolio from a decline in value. The option contracts
used by HomeSide Lending have characteristics such that they tend to increase in
value as interest rates decline. Conversely, these option contracts tend to
decline in value as interest rates rise. Accordingly, changes in value of these
securities will tend to move inversely with changes in value of HomeSide
Lending's mortgage servicing rights.
These option contracts are designated as hedges on the purchase date and
such designation is at a level at least as specific as the level at which
mortgage servicing rights are evaluated for impairment. The option contracts are
marked-to-market with changes in market value deferred as an adjustment to the
carrying value of the related mortgage servicing right asset being hedged.
Changes in market value that are deferred are amortized and evaluated for
impairment in the same manner as the related mortgage servicing rights. The
effectiveness of HomeSide Lending's hedging activity can be measured by the
correlation between changes in the value of the options and changes in the value
of HomeSide Lending's mortgage servicing rights. This correlation is assessed on
a quarterly basis to ensure that high correlation is maintained over the term of
the hedging program. During each of the periods presented, HomeSide Lending has
experienced a high measure of correlation between changes in the value of
mortgage servicing rights and the option contracts. However, in periods of
rising
9
<PAGE> 10
interest rates, such as the first quarter of fiscal 1998, the increase in value
of mortgage servicing rights may outpace the decline in value of the option
contracts because the loss on the options is limited to the premium paid.
As a result of rising interest rates during the first quarter of fiscal
1998, the increase in the estimated fair value of the mortgage servicing rights
more than offset the $52.4 million loss on risk management contracts during the
period. Interest rates were also rising during the first and fourth fiscal
quarters of 1997 and the losses on risk management contracts during these
periods were $37.6 million and $170.6 million, respectively. The cumulative net
deferred gains and losses on risk management contracts resulted in a $121.6
million net loss in fiscal 1997. The increase in the estimated fair value of the
mortgage servicing rights approximated the net loss on risk management contracts
for this period. HomeSide Lending's future cash needs as they relate to its
hedging program will be influenced by such factors as long-term interest rates,
loan production levels and growth in the mortgage servicing portfolio. The fair
value of open risk management contracts at May 31, 1997 was $22.5 million, which
was equal to their carrying amount because the options are marked-to-market at
each reporting date.
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 Lending's loan production volumes and the interest
rates HomeSide Lending earns on loans and pays to its lenders.
Loan refinancing levels are the biggest 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 Lending'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 Lending pays to finance mortgage loans
held for sale and other net assets is generally calculated with reference to
short-term interest rates. In addition, because mortgage loans held for sale
earn interest based on longer term interest rates, the level of net interest
revenue is also influenced by the spread between long-term and short-term
interest rates.
Net interest revenue for the first quarter of fiscal 1998 was $1.2 million
compared to $0.1 million for the first quarter of fiscal 1997 and $0.9 million
for the fourth quarter of fiscal 1997. Interest income and interest expense
increased during the first quarter of fiscal 1998 as compared to the first
quarter of fiscal 1997 as a result of an increase in the average balance of
loans held for sale to $1.0 billion in the first quarter of fiscal 1998 from
$0.8 billion during the first quarter of fiscal 1997, higher interest rates and
an increase in escrow balances to $1.3 billion at the end of the first quarter
of fiscal 1998 compared to $1.1 billion at the end of the first quarter of
fiscal 1997. Interest expense increased as a result of an increase in the
average balance of notes payable to the banks from $1.9 billion in the first
quarter of fiscal 1998 from $1.3 billion in the first quarter of fiscal 1997.
Borrowings increased to fund growth of the servicing portfolio and increased
loan origination activity.
Interest income decreased during the first quarter of fiscal 1998 as
compared to the fourth quarter of fiscal 1997 as a result of more mortgage loans
being sold under repurchase agreements than in the fourth quarter of fiscal
1997. Repurchase agreements provide an alternative to the bank line of credit
for mortgage loans held for sale. Under these agreements, mortgage loans are
sold earlier and not held as long in the warehouse. These agreements have the
effect of increasing gains on sales of loans and reducing interest income. In
addition, the lower volume of loan originations during the first quarter of
fiscal 1998, as compared to the fourth quarter of fiscal 1997, contributed to
the reduction in interest income. Interest expense decreased during the first
quarter of fiscal 1998 as compared to the fourth quarter of fiscal 1997 as a
result of lower funding rates. The lower rates were obtained through improved
credit ratings due to capital raised through the Parent's initial public
offering of stock. In addition, in February 1997, HomeSide Lending filed a Shelf
Registration Statement in connection with a public offering of medium term
notes. On May 20, 1997, $250.0 million was raised from the issuance of 6 7/8%
medium-term notes. The proceeds were primarily used to repay borrowings under
the short-term credit facilities which reduced interest expense during the first
quarter of fiscal 1998.
Net Mortgage Origination Revenue
Net mortgage origination revenue is comprised of fees earned on the
origination of mortgage loans, gains and losses on the sale of loans, gains and
losses resulting from hedges of secondary marketing activity and fees charged to
review loan documents for purchased loan production.
Net mortgage origination revenue was $17.9 million for the first quarter
of fiscal 1998 compared to $10.8 million for the first quarter of fiscal 1997
and $22.5 million for the fourth quarter of fiscal 1997. The increase in net
mortgage origination revenue during the first
10
<PAGE> 11
quarter of fiscal 1998 as compared to the first quarter of fiscal 1997 reflects
an increase in loan production volumes. The increase in loan production during
the first quarter of fiscal 1998 as compared to the first quarter of fiscal 1997
is due in part to increased production resulting from the preferred seller
relationship with Barnett established as part of the Barnett Mortgage Co.
acquisition. Barnett agreed to sell HomeSide Lending the loans produced by the
loan production networks retained by Barnett. The increase in net mortgage
origination revenue during the same period is also attributable to larger
production volumes and a higher level of repurchase agreements.
Net mortgage origination revenue decreased to $17.9 million for the first
quarter of fiscal 1998 as compared to $22.5 million during the fourth quarter of
fiscal 1997. This was a reflection of lower production volumes during the first
quarter of fiscal 1998, a consequence of interest rate increases during the
quarter and a lower volume of loan originations. HomeSide Lending's primary
origination activities during the first quarter of 1998 were through
correspondent and co-issue channels. HomeSide Lending expects these channels to
continue to be the primary loan origination sources in the future.
Salaries and Employee Benefits
Salaries and employee benefits expense was $19.7 million for the first
quarter of fiscal 1998 compared to $11.5 million for the first quarter of fiscal
1997. The increase in the first quarter of fiscal 1997 from the first quarter of
fiscal 1998 was due to growth in the number of employees as a result of the
acquisition of the mortgage servicing operations of Barnett Mortgage Co. on May
31, 1996. The average number of full- time equivalent employees grew from 1,096
during the first quarter of fiscal 1997 to 1,689 during the fourth quarter of
fiscal 1997 and decreased to 1,647 during the first quarter of fiscal 1998. The
decrease was due to the continuing integration of Barnett Mortgage Co. servicing
operations and the corresponding reduction in the number of employees.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs
and maintenance costs, certain computer software expenses and depreciation of
HomeSide Lending's premises and equipment. Occupancy and equipment expense for
the first quarter of fiscal 1998 was $3.8 million compared to $ 1.8 million for
the first quarter of fiscal 1997 and $3.5 million for the fourth quarter of
fiscal 1997. The increase in expense to the first quarter of fiscal 1998 from
the first quarter of fiscal 1997 was mainly due to the premises and equipment
acquired in the Barnett Mortgage Co. acquisition. The increase in occupancy and
equipment expense to the first quarter of fiscal 1997 from the fourth quarter of
fiscal 1997 was primarily due to an increase in information systems costs
required to handle the growing mortgage servicing portfolio.
Servicing Losses on Investor-Owned Loans and Foreclosure-Related Expenses
Servicing losses on investor-owned loans primarily represent anticipated
losses primarily attributable to servicing FHA and VA loans for investors. These
amounts include actual losses for final disposition of loans, non-recoverable
foreclosure costs, accrued interest for which payment has been denied and
estimates for potential losses based on HomeSide Lending's experience as a
servicer of government loans.
During the first quarter of fiscal 1998 the servicing losses on
investor-owned loans and foreclosure related expenses totaled $4.8 million
compared to $3.9 million for the first quarter of 1997 and $5.0 for the fourth
quarter of fiscal 1997. The increase during the first quarter of fiscal 1998 as
compared to the first quarter of fiscal 1997 was largely attributable to the
acquisition of the Barnett Mortgage Co. servicing portfolio and the growth of
the servicing portfolio resulting from loan production. Servicing losses on
investor-owned loans and foreclosure-related expenses for the first quarter of
fiscal 1998 remained relatively flat compared to the fourth quarter of fiscal
1997.
Included in the balance of accounts payable and accrued liabilities at May
31, 1997 is a reserve for estimated servicing losses on investor-owned loans of
$21.7 million. The reserve has been established for potential losses related to
the mortgage servicing portfolio. Increases to the reserve are charged to
earnings as servicing losses on investor-owned loans. The reserve is decreased
for actual losses incurred related to the mortgage servicing portfolio. HomeSide
Lending's historical loss experience on VA loans generally has been consistent
with industry experience.
Other Expenses
Other expenses consist mainly of professional fees, communications
expense, advertising and public relations, data processing expenses and certain
loan origination expenses. The level of other expenses fluctuates in part based
upon the level of HomeSide Lending's mortgage servicing portfolio and loan
production volumes.
Other expenses during the first quarter of fiscal 1998 were $9.2 million
compared to $5.3 million for the first quarter of 1997. The increase was the
result of the acquisition of Barnett Mortgage Co. A decrease of $2.6 million to
$9.2 million for the first quarter of fiscal
11
<PAGE> 12
1998 from $11.8 for the fourth quarter of fiscal 1997 was primarily due to lower
production expenses associated with the lower production volumes.
Income Tax Expense
HomeSide Lending's income tax expense was $13.0 million for the first
quarter of fiscal 1998, $5.5 million for the first quarter of fiscal 1997 and
$10.9 million for the fourth quarter of fiscal 1997. The increase was
attributable to the increase in net income. The effective income tax rate for
fiscal 1997 and the first quarter of 1998 was approximately 39%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan
origination activities and the investment in servicing rights. To meet these
needs, the Company currently utilizes funding from an independent syndicate of
banks, including a warehouse credit facility and a servicing-related facility,
medium-term notes, and cash flow from operations. HomeSide Lending continues to
investigate and pursue alternative and supplementary methods to finance its
growing operations through the public and private capital markets. These may
include methods designed to expand the Company's financial capacity and reduce
its cost of capital. In addition, to facilitate the sale and distribution of
certain mortgage products, HomeSide Mortgage Securities, Inc., a wholly owned
subsidiary of HomeSide Lending, may issue mortgage backed securities.
Operations
Net cash provided by operations was $37.9 million for the first quarter of
fiscal 1998. Cash was primarily provided from servicing fee income, loan sales
and principal repayments. Cash flows from loan originations are dependent upon
current economic conditions and the level of long-term interest rates. Increases
in long-term interest rates generally result in lower loan refinancing activity
which results in lower cash demands to meet lower loan production levels.
Investing
Net cash used in investing activities was $153.5 million for the first
quarter of fiscal 1998. Cash used in investing activities was primarily used for
the purchase and origination of mortgage servicing rights and the purchase of
options of U.S. Treasury bond futures as part of HomeSide Lending's hedging
program. Future uses of cash for investing activities will be dependent on the
mortgage origination market and HomeSide Lending's hedging needs. HomeSide
Lending is not able to estimate the timing and amount of cash uses for future
acquisitions of other mortgage banking entities, if such acquisitions were to
occur.
Financing
Net cash provided by financing activities was $79.7 million for the first
quarter of fiscal 1998. The primary source of cash from financing activities
during the period was $250.0 million from the issuance of medium-term notes.
Cash used in financing activities was used to fund operations of the Parent,
primarily interest payment obligations on the 11.25% notes due may 15, 2003 of
the Parent, and the payment of debt issue costs related to the bank credit
agreement.
HomeSide Lending expects to pay dividends to the Parent only to the extent
necessary to meet debt obligations and income tax expense of the Parent. The
ability of HomeSide Lending to pay dividends to the Parent for other purposes is
restricted by covenants contained in the Bank Credit Agreement. During the first
quarter of fiscal 1998, HomeSide Lending declared and paid dividends of $7.4
million to the Parent.
During the first quarter of fiscal 1998, net cash provided by operations
was $37.9 million, net cash used in investing activities was $153.5 million and
net cash provided by financing activities was $79.7 million, resulting in a net
increase in cash of $16.8 million. HomeSide Lending 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 Lending
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 Lending'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.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
HomeSide Lending is a defendant in a number of legal proceedings arising
in the normal course of business. HomeSide Lending, 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 Lending, 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 Lending.
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
------ -----------
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on form 8-K
HomeSide Lending filed no reports on form 8-K during the first quarter of
the fiscal year ending February 28, 1998.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HomeSide Lending, Inc.
(Registrant)
Date: July 15, 1997 By: /s/ Joe K. Pickett
-------------------- -------------------------------------
Joe K. Pickett
Chairman and Chief Executive Officer
Date: July 15, 1997 By: /s/ Kevin D. Race
-------------------- -------------------------------------
Kevin D. Race
Executive Vice President, Chief Financial and
Accounting Officer
14
<PAGE> 1
HOMESIDE LENDING, INC.
EXHIBIT 12.1(a) - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
The following table sets forth the ratio of earnings to fixed charges of
HomeSide Lending, Inc. for the three months ended May 31, 1997, the period
from March 16, 1996 (start of operations) to May 31, 1996 and the three
months ended February 28, 1997. The ratio of earnings to fixed charges is
computed by dividing net fixed charges (interest expense on all debt plus the
interest portion of rent expense) into earnings before income taxes and fixed
charges.
<TABLE>
<CAPTION>
For the period For the period For the period
three months ended March 16, 1996 three months ended
May 31, 1997 to May 31, 1996 February 28, 1997
------------------ --------------- ------------------
<S> <C> <C> <C>
Earnings before income taxes $33,273 $13,478 $28,854
-----------------------------------------------------------
Interest expense 18,062 12,592 20,417
Interest portion of rental expense 322 259 476
-----------------------------------------------------------
Fixed charges 18,384 12,851 20,893
-----------------------------------------------------------
Earnings before fixed charges 51,657 26,329 49,747
-----------------------------------------------------------
Fixed Charges:
- --------------
Interest expense 18,062 12,592 20,417
Interest portion of rental expense 322 259 476
-----------------------------------------------------------
Fixed charges $18,384 $12,851 $20,893
-----------------------------------------------------------
-----------------------------------------------------------
Ratio of earnings to fixed charges $ 2.81 $ 2.05 $ 2.38
===========================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> MAY-31-1997
<EXCHANGE-RATE> 1
<CASH> 16,774
<SECURITIES> 0
<RECEIVABLES> 200,570
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,805,155
<PP&E> 31,928
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,837,083
<CURRENT-LIABILITIES> 2,483,120
<BONDS> 270,977
0
0
<COMMON> 0
<OTHER-SE> 624,940
<TOTAL-LIABILITY-AND-EQUITY> 2,837,083
<SALES> 0
<TOTAL-REVENUES> 70,727
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 37,454
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 33,273
<INCOME-TAX> 12,978
<INCOME-CONTINUING> 20,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,295
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
