UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-12655
HomeSide Lending, Inc.
(Exact name of registrant as specified in its charter)
Florida 59-2725415
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
7301 Baymeadows Way, Jacksonville, FL 32256
(Address of principal executive offices) (Zip Code)
(904) 281-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _x_ No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 8, 1998
Common stock $1.00 par value 100 shares
<PAGE>
FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
HOMESIDE LENDING, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
<CAPTION>
(Unaudited) Predecessor
March 31, 1998 February 10, 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 14,045 $ 32,113
Mortgage loans held for sale, net 1,597,550 1,292,403
Mortgage servicing rights, net 1,858,574 1,766,357
Accounts receivable, net 312,081 227,294
Early pool buyout advances 448,909 374,097
Premises and equipment, net 31,595 41,982
Goodwill 691,698 8,870
Other assets 51,328 116,175
----------- -----------
Total Assets $ 5,005,780 $ 3,859,291
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 2,458,747 $ 2,074,956
Accounts payable and accrued liabilities 202,656 135,803
Deferred income taxes 178,636 197,243
Long-term debt 836,464 770,466
------------- ------------
Total Liabilities 3,676,503 3,178,468
------------- ------------
Common stock:
Common stock, $1.00 par value, 10,000 shares authorized, 100
shares issued and outstanding, all pledged as second priority
collateral on the long-term debt of the Parent - -
Additional paid-in capital 1,322,387 573,092
Retained earnings 6,890 107,731
-------------- -------------
Total Stockholders' Equity 1,329,277 680,823
-------------- -------------
Total Liabilities and Stockholders' Equity $ 5,005,780 $ 3,859,291
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
Predecessor
For the Period From For the Period From For the Period From
February 11, 1998 to December 1, 1997 to December 1, 1996 to
March 31, 1998 February 10, 1998 February 28, 1997
-------------- ----------------- -----------------
<S> <C> <C> <C>
REVENUES:
Mortgage servicing fees $ 63,585 $ 84,869 $ 94,750
Amortization of mortgage servicing rights (36,976) (48,186) (49,379)
------------- -------------- -------------
Net servicing revenue 26,609 36,683 45,371
Interest income 18,290 22,696 21,277
Interest expense (13,629) (20,548) (20,417)
------------- -------------- -------------
Net interest revenue 4,661 2,148 860
Net mortgage origination revenue 14,269 26,020 22,469
Other income 620 414 141
-------------- -------------- -------------
Total Revenues 46,158 65,265 68,841
EXPENSES:
Salaries and employee benefits 14,630 16,945 19,669
Occupancy and equipment 2,394 3,558 3,503
Servicing losses on investor-owned loans
and foreclosure-related expenses 1,823 6,294 4,981
Goodwill amortization 4,870 128 152
Other expenses 8,033 9,019 11,682
------------- ------------- -------------
Total Expenses 31,750 35,944 39,987
Income before income taxes 14,408 29,321 28,854
Income tax expense 7,518 11,432 10,898
------------- ------------- -------------
Net Income $ 6,890 $ 17,889 $ 17,956
============= ============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands, Except Share Data)
Predecessor
<CAPTION>
For the Period From For the Period From For the Period From
February 11, 1998 September 1, 1997 September 1, 1996
to March 31, 1998 to February 10, 1998 to February 28, 1997
------------------- -------------------- --------------------
<S> <C> <C> <C>
REVENUES:
Mortgage servicing fees $ 63,585 $ 192,475 $ 185,242
Amortization of mortgage servicing rights (36,976) (106,190) (97,499)
------------- ------------ -------------
Net servicing revenue 26,609 86,285 87,743
Interest income 18,290 51,166 46,518
Interest expense (13,629) (43,897) (36,559)
------------- ------------ -------------
Net interest revenue 4,661 7,269 9,961
Net mortgage origination revenue 14,269 46,696 38,990
Other income 620 634 220
-------------- ------------- -------------
Total Revenues 46,158 140,884 136,914
EXPENSES:
Salaries and employee benefits 14,630 36,137 40,319
Occupancy and equipment 2,394 7,820 6,840
Servicing losses on investor-owned loans
and foreclosure-related expenses 1,823 11,465 9,938
Goodwill amortization 4,870 283 304
Other expenses 8,033 18,480 22,921
-------------- ------------- -------------
Total Expenses 31,750 74,185 80,322
Income before income taxes 14,408 66,699 56,592
Income tax expense 7,518 26,010 22,271
-------------- -------------- -------------
Net Income $ 6,890 $ 40,689 $ 34,321
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
Predecessor
<CAPTION>
For the Period From For the Period From For the Period From
February 11, 1998 December 1, 1997 to December 1, 1996 to
to March 31, 1998 February 10, 1998 February 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net income $ 6,890 $ 17,889 $ 17,956
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization of mortgage servicing rights 36,976 48,186 49,379
Depreciation and amortization 5,608 2,064 1,914
Servicing losses on investor-owned loans 1,193 2,099 730
Deferred income tax expense 7,518 10,587 10,898
Capitalized excess servicing rights - - (4,642)
Mortgage loans originated and purchased for sale (2,793,790) (4,888,432) (3,422,752)
Proceeds and principal repayments of mortgage loans held 2,434,895 4,632,483 3,718,707
for sale
Change in accounts receivable (56,462) 23,330 14,857
Change in other assets and accounts payable and accrued 122,425 (60,306) (1,508)
liabilities
--------------- --------------- --------------
Net cash (used in) provided by operating activities (234,747) (212,100) 385,539
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (3,882) (7,498) (1,574)
Acquisition of mortgage servicing rights (162,259) (114,789) (131,441)
Net proceeds from (purchases of) risk management contracts 14,185 70,248 (53,506)
Early pool buyout advances (74,910) (62,381) -
--------------- --------------- --------------
Net cash used in investing activities (226,866) (114,420) (186,521)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net borrowings from repayments to banks 383,791 342,307 (192,310)
Issuance of notes payable 60,000 - -
Payment of debt issue costs (208) (60) 1,092
Repayment of long-term debt (38) (204) (150)
Capital contributions from the Parent - - 47,003
Dividends paid to the Parent - - (3,145)
--------------- -------------- --------------
Net cash provided by (used in) financing activities 443,545 342,043 (147,510)
Net (decrease) increase in cash and cash equivalents (18,068) 15,523 51,508
Cash and cash equivalents at beginning of period 32,113 16,590 1,183
--------------- -------------- --------------
Cash and cash equivalents at end of period $ 14,045 $ 32,113 $ 52,691
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
<CAPTION>
Predecessor
For the Period From For the Period From For the Period From
February 11, 1998 September 1, 1997 September 1, 1996
to March 31, 1998 to February 10, 1998 to February 28, 1997
----------------- -------------------- --------------------
<S> <C> <C> <C>
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net income $ 6,890 $ 40,689 $ 34,321
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization of mortgage servicing rights 36,976 106,190 97,499
Depreciation and amortization 5,608 4,893 3,784
Servicing losses on investor-owned loans 1,193 5,781 5,687
Deferred income tax expense 7,518 28,983 22,271
Capitalized excess servicing rights - -- (11,775)
Mortgage loans originated and purchased for sale (2,793,790) (11,453,271) (6,949,760)
Proceeds and principal repayments of mortgage loans held 2,434,895 11,242,236 7,435,327
for sale
Change in accounts receivable (56,462) (48,484) (44,272)
Change in other assets and accounts payable and accrued 122,425 (77,196) (38,952)
liabilities
---------------- -------------- --------------
Net cash (used in) provided by operating activities (234,747) (150,179) 554,130
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (3,882) (12,037) (2,170)
Acquisition of mortgage servicing rights (162,259) (261,387) (228,080)
Net proceeds from (purchases of) risk management contracts 14,185 218,306 (63,055)
Purchases of early pool buyout advances (74,910) (5,692) -
---------------- -------------- --------------
Net cash used in investing activities (226,866) (60,810) (293,305)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net borrowings from (repayments to) banks 383,791 206,627 (269,729)
Issuance of notes payable 60,000 45,000 -
Payment of debt issue costs (208) (885) 1,939
Repayment of long term debt (38) (358) (298)
Capital contribution from Parent - - 40,653
Dividends paid to Parent - (7,313) (8,690)
-------------- --------------- --------------
Net cash provided by (used in) financing activities 443,545 243,071 (236,125)
Net (decrease) increase in cash and cash equivalents (18,068) 32,082 24,700
Cash and cash equivalents at beginning of period 32,113 31 27,991
-------------- --------------- --------------
Cash and cash equivalents at end of period $ 14,045 $ 32,113 $ 52,691
============== =============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
HOMESIDE LENDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included.
On February 10, 1998, National Australia Bank, Ltd. (the "National")
acquired all outstanding shares of the common stock of HomeSide International,
Inc. (the "Parent"). As consideration, the National paid $27.825 per share for
all of the outstanding common stock and paid $17.7 million cash to retire all
outstanding stock options. The total purchase price was approximately $1.2
billion. The transaction was accounted for as a purchase. As a result, all
assets and liabilities were recorded at their fair value on February 11, 1998,
and the purchase price in excess of the fair value of net assets acquired of
$713.6 million was recorded as goodwill. Following the transaction described
above, the National now owns 100% of the Parent's common stock and HomeSide
International, Inc. has become an indirect wholly-owned subsidiary of the
National.
As a result of the merger with the National, HomeSide Lending, Inc. ("HomeSide
Lending" or the "Company") adopted a fiscal year end of September 30 to conform
to the fiscal year of the National. Accordingly, comparative financial
statements for the same period in the prior year have not been presented.
Instead, a comparison of the period of the prior year that most closely
corresponds to the present period is presented. HomeSide Lending's operating
results are not directly comparable to its historical operating results due, in
part, to different balance sheet valuations (estimated fair value as compared to
historical cost). In addition, because HomeSide Lending's operating results are
produced and managed on a quarterly basis, it is not practicable to furnish a
period prior to February 11, 1998 that corresponds to any period other than the
period(s) reported according to the Company's prior fiscal year periods.
Therefore, the prior year period from December 1, 1997 to February 10, 1998 has
been presented in accordance with Regulation 15d-10(e)(4).
Operating results for the period from February 11, 1998 to March 31, 1998,
the predecessor company's period from December 1, 1997 to February 10, 1998 and
the predecessor period from September 1, 1997 to February 10, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the annual report which
is incorporated by reference in the Form 10-K for the fiscal year ended February
10, 1998 of HomeSide Lending.
HomeSide Lending is one of the largest full service residential mortgage
banking companies in the United States, formed through the acquisition of the
mortgage banking operations of BankBoston, N.A., formerly known as The First
National Bank of Boston ("Bank Boston") and Barnett Banks, Inc. ("Barnett").
2. MORTGAGE SERVICING RIGHTS
The analysis of the change in balance for mortgage servicing rights is as
follows (in thousands):
<TABLE>
<CAPTION>
Predecessor
<S> <C> <C> <C>
Balance, February 10, 1998 $1,766,357 Balance, November 30, 1997 $1,733,469
Additions 95,015 Additions 114,137
Deferred hedge loss 34,178 Deferred hedge gain (33,063)
Amortization (36,976) Amortization (48,186)
------------- -------------
Balance, March 31, 1998 $1,858,574 Balance, February 10, 1998 $1,766,357
============= =============
</TABLE>
3. NOTES PAYABLE
HomeSide Lending borrows funds on a demand basis from an independent
syndicate of banks under a $2.5 billion credit facility which, at the request of
HomeSide Lending, may be increased to $3.0 billion. The line of credit is used
to provide funds for HomeSide Lending's business of originating, acquiring and
servicing mortgage loans. The line of credit includes both a warehouse credit
facility, which is limited to 98% of the fair value of eligible mortgage loans
held for sale, and a servicing-related facility, which is capped at $950.0
million. On February 14, 2000, the line of credit will terminate. The credit
agreement contains covenants that impose limitations and restrictions on
HomeSide Lending, including the maintenance of certain net worth and ratio
requirements. Under certain circumstances set forth in the credit agreement,
borrowings under the agreement become collateralized by substantially all of
HomeSide Lending's assets. HomeSide Lending is in compliance with all
requirements included in the credit agreement. At March 31, 1998 and February
28, 1997, $2.4 billion and $1.8 billion, respectively, were outstanding under
the credit line. Amounts outstanding at March 31, 1998 and February 28, 1997
under the bank line of credit are comprised of a warehouse credit facility of
$1.5 billion and $0.8 billion and a servicing-related credit facility of $0.9
billion and $1.0 billion, respectively. HomeSide established short-term
borrowings with National Australia Bank at a maximum capacity of $115 million at
interest rates equal to LIBOR. At March 31, 1998, total borrowings from National
Australia Bank were $115 million.
Borrowings under the bank line of credit bear interest at rates per annum, based
on, at HomeSide 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) various rates based on federal fund rates. At March 31, 1998, the weighted
average interest rate on the amounts borrowed under the bank credit facility was
5.983%, and the weighted average interest rate during the period from February
11, 1998 to March 31, 1998 was 5.986%.
4. LONG-TERM DEBT
On May 14, 1996, HomeSide International, Inc. issued $200.0 million of
11.25% notes (the "Parent Notes") maturing on May 15, 2003, and paying interest
semiannually in arrears on May 15 and November 15 of each year, commencing on
November 15, 1996. The Parent Notes are redeemable at the option of HomeSide
International, Inc. in whole or in part, at any time on or after May 15, 2001,
at certain fixed redemption prices. The indenture contains covenants that impose
limitations and restrictions, including the maintenance of certain net worth and
ratio requirements. In addition, the Parent Notes are secured by a second
priority pledge of the common stock of HomeSide Lending. HomeSide International,
Inc. is in compliance with all net worth and ratio requirements included in the
indenture relating to the Parent Notes. HomeSide International, Inc. used a
portion of the proceeds from its February 5, 1997 offering of common stock to
pre-pay $70.0 million of the Parent Notes at a premium of $7.9 million. The
amount outstanding at March 31, 1998 is $ 130.0 million. As a result of the
merger with the National, a fair value adjustment of $23.4 million is included
in the balance of the Parent Notes at March 31, 1998.
As of March 31, 1998, outstanding medium-term notes issued by HomeSide
Lending, under a $1.5 billion shelf registration statement were as follows (in
thousands):
Issue Date Outstanding Balance Stated Interest Rate Maturity Date
May 20, 1997 $250,000 6.890% May 15, 2000
June 30, 1997 200,000 6.883% June 30, 2002
June 30, 1997 40,000 6.820% July 2, 2001
July 1, 1997 15,000 6.860% July 2, 2001
July 31, 1997 200,000 6.818% August 1, 2004
September 15, 1997 45,000 6.770% September 17, 2001
March 19, 1998 60,000 5.688% March 20, 2000
--------------
Total $810,000
==============
As of March 31, 1998, $650.0 million of the outstanding medium-term notes
had been effectively converted by interest rate swap agreements to floating-rate
notes. The weighted average borrowing rates on medium-term borrowings issued for
the period from February 11, 1998 to March 31, 1998, including the effect of the
interest rate swap agreements, was 6.071% . Net proceeds from the issuance were
primarily used to reduce the amounts outstanding under the bank credit
agreement. Amounts were subsequently reborrowed under the bank credit facility
to fund the early pool buyout program. As a result of the merger with the
National, a fair value adjustment of $1.8 million is included in the balance of
medium-term notes at March 31, 1998.
In connection with the acquisition of BancBoston Mortgage Corporation,
HomeSide Lending assumed a mortgage note payable that is due in 2017 and bears
interest at a stated rate of 9.5%. HomeSide Lending's main office building is
pledged as collateral for the mortgage note payable. A purchase accounting
premium was recorded in connection with HomeSide Lending assuming the mortgage
note payable. As a result of the merger with the National, a fair value
adjustment of $4.2 million is included in the balance of the mortgage-note
payable. The balance of the mortgage payable at March 31, 1998 was $26.5
million.
5. SUBSEQUENT EVENTS
On April 1, 1998, HomeSide Lending entered into an agreement with Banc One
Mortgage Corporation ("Banc One") to acquire the mortgage servicing assets of
Banc One. HomeSide Lending and Banc One have also entered into a Preferred
Partner agreement, whereby Banc One will sell a significant portion of its
residential mortgage loans to HomeSide Lending over the next five years. The
total purchase consideration is $201.0 million cash. The mortgage servicing
rights acquired relate to mortgage servicing loans of approximately $18 billion.
The transaction is subject to regulatory approvals and is expected to close in
the second calendar quarter of 1998.
On April 6, 1998, the Company signed an agreement with NationsBank
Corporation ("NationsBank") whereby NationsBank agreed to sell HomeSide Lending
a national wholesale mortgage loan network which was formerly owned by Barnett
Banks, Inc.
On April 24, 1998, an additional $125.0 million of 5.788% medium term
notes maturing on April 24, 2001 were issued by HomeSide Lending under the Shelf
Registration Statement. Interest is payable quarterly in arrears on January 24,
April 24, July 24 and October 24 of each year, commencing on July 24, 1998. Net
proceeds were used for working capital and general corporate purposes.
Effective April 30, 1998, HomeSide, Inc., the Parent, amended its charter to
change its name to HomeSide International, Inc.
As a result of NationsBank's acquisition of Barnett Banks, Inc.,
NationsBank and the Company entered into an agreement, subsequently amended, to
release Barnett from a five year agreement to sell certain of its mortgage loans
to HomeSide Lending. In consideration, the Company received an increase in the
weighted average servicing fee for Barnett portfolio loans currently serviced
and a cash payment.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
HomeSide Lending is one of the largest full service residential mortgage
banking companies in the United States, formed through the acquisition of the
mortgage banking operations of BankBoston, N.A., formerly known as The First
National Bank of Boston ("BankBoston"), and Barnett Banks, Inc. ("Barnett").
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 6th largest servicer in the United
States for calendar year 1997 based on data published by Inside Mortgage
Finance.
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 BankBoston and Banc One relationships.
On February 10, 1998, National Australia Bank, Ltd. (the "National")
acquired all outstanding shares of the common stock of HomeSide International,
Inc. As consideration, the National paid $27.825 per share for all of the
outstanding common stock and paid $17.7 million cash to retire all outstanding
stock options. The total purchase price was approximately $1.2 billion. The
transaction was accounted for as a purchase. As a result, all assets and
liabilities were recorded at their fair value on February 11, 1998, and the
purchase price in excess of the fair value of net assets acquired of $713.6
million was recorded as goodwill. Following the transaction described above, the
National now owns 100% of the Parent's common stock and the Parent has become an
indirect wholly-owned subsidiary of the National.
As a result of the merger with the National, HomeSide Lending adopted a
fiscal year end of September 30 to conform to the fiscal year of the National.
Accordingly, comparative financial statements for the same period in the prior
year have not been presented. Instead, a comparison of the period of the prior
year that most closely corresponds to the present period is presented. HomeSide
Lending's operating results are not directly comparable to its historical
operating results due, in part, to different balance sheet valuations (estimated
fair value as compared to historical cost). In addition, because HomeSide
Lending's operating results are produced and managed on a quarterly basis, it is
not practicable to furnish a period prior to February 11, 1998 that corresponds
to any period other than the period(s) reported according to the Company's prior
fiscal year periods. Therefore, the prior year period from December 1, 1997 to
February 10, 1998 has been presented in accordance with Regulation 15d-10(e)(4).
Operating results for the period from February 11, 1998 to March 31, 1998,
the predecessor period from December 1, 1997 to February 10, 1998 and the
predecessor period from September 1, 1997 to February 10, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the annual report which
is incorporated by reference in the Form 10-K for the fiscal year ended February
10, 1998 of HomeSide Lending.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on Form
10-Q contains forward-looking statements which reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "believe,"
"expect," "anticipate," "intend," "estimate" and other expressions which
indicated future events and trends identify forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements whether as a result of new
information, future events or otherwise. The following factors could cause
actual results to differ materially from historical results or those
anticipated: (1) the Company's ability to grow which depends on its ability to
obtain additional financing in the future for originating loans, investment in
servicing rights, working capital, capital expenditure and general corporate
purposes, (2) economic downturns may negatively affect the Company's
profitability as the frequency of loan default tends to increase in such
environments and (3) changes in interest rates may affect the volume of loan
originations and acquisitions, the interest rate spread on loans held for sale,
the amount of gain or loss on the sale of loans and the value of the Company's
servicing portfolio. These risks and uncertainties are more fully detailed in
the Company's filings with the Securities and Exchange Commission.
Loan Production Activities
As a multi-channel loan production lender, HomeSide 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.
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 period from February 11,
1998 to March 31, 1998 and the predecessor periods from December 1, 1997 to
February 10, 1998, September 1, 1997 to February 10, 1998, December 1, 1996 to
February 28, 1997 and September 1, 1996 to February 28, 1997 (in millions):
<TABLE>
<CAPTION>
For the Period For the Period For the Period For the Period For the Period
From February From December From December From September From September
11, 1998 to 1, 1997 to 1, 1996 to 1, 1997 to 1, 1996 to
March 31, 1998 February 10, 1998 February 28, 1997 February 10, 1998 February 28, 1997
<S> <C> <C> <C> <C> <C>
Correspondent $2,325 $2,970 $3,021 $6,280 $6,270
Co-issue 1,488 1,162 2,610 2,907 4,595
Broker 372 290 300 609 468
-------- -------- -------- -------- --------
Total wholesale 4,185 4,422 5,931 9,796 11,333
Direct 97 87 134 193 273
-------- -------- -------- -------- --------
Total production 4,282 4,509 6,065 9,989 11,606
Bulk acquisitions 2 380 - 1,465 -
-------- -------- -------- -------- --------
Total production and acquisitions $4,284 $4,889 $6,065 $11,454 $11,606
======== ========= ======== ======== ========
</TABLE>
Total loan production, excluding bulk acquisitions, was $4.3 billion for
the period from February 11, 1998 to March 31, 1998 compared to $4.5 billion for
the predecessor period from December 1, 1997 to February 10, 1998 and $6.1
billion for the predecessor period from December 1, 1996 to February 28, 1997.
Loan production for the predecessor period from September 1, 1997 to February
10, 1998, excluding bulk acquisitions, totaled $10.0 billion while loan
production for the predecessor period from September 1, 1996 to February 28,
1997, excluding bulk acquisitions, totaled $11.6 billion. Production increases
were primarily due to growth in HomeSide Lending's correspondent lending and
broker channels. HomeSide Lending also made bulk servicing acquisitions of $2.0
million during the period from February 11, 1998 to March 31, 1998, compared to
$380 million for the predecessor period from December 1, 1997 to February 10,
1998 and $1.5 billion during the predecessor period from September 1, 1997 to
February 10, 1998.
HomeSide Lending continues to examine a number of ways to diversify and
grow revenue sources from its existing and new customer base. As part of this
effort, HomeSide Lending has announced an alliance with a sub-prime mortgage
lender, which allows HomeSide Lending to offer additional mortgage-related
products to the production network. HomeSide Lending then sells the loans,
servicing released, to its strategic partners. The subprime lending unit began
operations in January 1998.
On April 1, 1998, HomeSide Lending entered into an agreement with Banc
One Mortgage Corporation ("Banc One") to acquire the mortgage servicing assets
of Banc One. HomeSide Lending and Banc One have also entered into a Preferred
Partner agreement, whereby Banc One will sell a significant portion of its
residential mortgage loans to HomeSide over the next five years. The total
purchase consideration is $201.0 million cash. The mortgage servicing rights
acquired relate to mortgage servicing loans of approximately $18.0 billion. The
transaction is subject to regulatory approvals and is expected to close in the
second calendar quarter of 1998.
Servicing Portfolio
Management believes that HomeSide 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 $98.9 billion, HomeSide Lending services
the loans of approximately 1.2 million homeowners from across the United States
and is committed to protecting the value of this important asset by a
sophisticated risk management strategy. HomeSide 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.
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 Lending for the period from February 11, 1998 to March 31,
1998 and the predecessor periods from December 1, 1997 to February 10, 1998,
September 1, 1997 to February 10, 1998, December 1, 1996 to February 28, 1997
and September 1, 1996 to February 28, 1997 (in millions):
<TABLE>
<CAPTION>
For the Period From For the Period From For the Period From For the Period From For the Period From
February 11, 1998 December 1, 1997 December 1, 1996 September 1, 1997 September 1, 1996
to March 31, 1998 to February 10, 1998 to February 28, 1998 to February 10,1998 to February 28, 1997
----------------- -------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period $98,906 $97,783 $87,713 $95,429 $84,819
Additions 4,284 4,920 6,064 11,454 11,308
Scheduled amortization 319 437 557 971 1,051
Prepayments 3,820 3,210 1,674 6,330 3,203
Foreclosures 129 150 141 370 247
Sales of servicing 40 - 2,187(a) 306 2,408
----------------- --------------- -------------- -------------- -------------
Total reductions 4,308 3,797 4,559 7,977 6,909
================= =============== ============== ============== =============
Balance at end of period $98,882 $98,906 $89,218 $98,906 $89,218
================= =============== ============== ============== =============
(a) Includes $1.9 billion in servicing sold as part of the sale of Honolulu
Mortgage Company.
</TABLE>
The number of loans serviced at March 31, 1998 was 1,165,587 compared to
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. A key to
HomeSide Lending's future growth is the proprietary servicing software purchased
from Barnett. This system will allow HomeSide Lending to double the number of
loans serviced on a single system. Over half of the servicing portfolio is
serviced on the proprietary system. The transfer of the remaining portfolio is
expected to occur by the end of calendar year 1998.
Results of Operations
For the period from February 11, 1998 to March 31, 1998 compared to the
predecessor period from December 1, 1997 to February 10, 1998 and the
predecessor period from December 1, 1996 to February 28, 1997
Summary
HomeSide Lending's net income was $6.9 million for the period from February
11, 1998 to March 31, 1998 compared to $17.9 million for the predecessor period
from December 1, 1997 to February 10, 1998 and $18.0 million for the predecessor
period from December 1, 1996 to February 28, 1997. Total revenues for the period
from February 11, 1998 to March 31, 1998 were $46.2 million compared to $65.3
million for the predecessor period from December 1, 1997 to February 10, 1998
and $68.8 million for the predecessor period from December 1, 1996 to February
28, 1997. The annualized increases in net income and revenues for the period
from February 11, 1998 to March 31, 1998 compared to the predecessor period from
December 1, 1997 to February 10, 1998 and the predecessor period from December
1, 1996 to February 28, 1997 were primarily attributable to increases in net
servicing revenue, net mortgage origination revenue, and net interest revenue.
Total expenses increased on an annualized basis as a result of amortization
expense of $4.9 million related to the goodwill associated with the merger with
the National (see Note 1). The increase in net servicing revenue on an
annualized basis was mainly a result of a $9.7 billion increase in the servicing
portfolio to $98.9 billion at March 31, 1998 from $89.2 billion at February 28,
1997. Net mortgage origination revenue increased on an annualized basis due to
loan production volume increases. Net interest revenue increased primarily as a
result of reduced borrowing costs from the bank line of credit from improved
credit ratings and the issuance of medium-term notes which expanded borrowing
capacity.
Net Servicing Revenue
Net servicing revenue was $26.6 million for the period from February 11,
1998 to March 31, 1998 compared to $36.7 million for the predecessor period from
December 1, 1997 to February 10, 1998 and $45.4 million for the predecessor
period from December 1, 1996 to February 28, 1997. Net servicing revenue is
comprised of mortgage servicing fees, ancillary servicing revenue, and
amortization of mortgage servicing rights.
Mortgage servicing fees totaled $63.6 million for the period from February
11, 1998 to March 31, 1998 compared to $84.9 million for the predecessor period
from December 1, 1997 to February 10, 1998 and $94.8 million for the predecessor
period from December 1, 1996 to February 28, 1997. The servicing portfolio
increased to $98.9 billion at March 31, 1998 compared to $89.2 billion at
February 28, 1997, an 11% increase. HomeSide Lending's weighted average interest
rate of the mortgage loans in the servicing portfolio was 7.82% at March 31,
1998, 7.85% at February 10, 1998 and 7.92% at February 28, 1997. The weighted
average servicing fee, including ancillary income, for the servicing portfolio
was 0.463% for the period from February 11, 1998 to March 31, 1998, 0.444% for
the predecessor period from December 1, 1997 to February 10, 1998, and 0.423%
for the predecessor period from December 1, 1996 to February 28, 1997. The
increase in the weighted average servicing fee was due to growth of ancillary
revenues including late fees and other mortgage-related products and higher
proportions of government loans serviced which typically have a higher servicing
fee. Amortization expense was $37.0 million for the period from February 11,
1998 to March 31, 1998 compared to $48.2 million for the predecessor period from
December 1, 1997 to February 10, 1998 and $49.4 million for the predecessor
period from December 1, 1996 to February 28, 1997. Amortization expense on an
annualized basis increased mainly as a result of a higher average balance of
mortgage servicing rights and a decrease of 0.59% in average mortgage interest
rates from February 28, 1997 to March 31, 1998.
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the
direction in which rates are moving and the spread between short and long-term
interest rates. These factors influence the size of the residential mortgage
origination market, HomeSide Lending's loan production volumes and the interest
rates HomeSide Lending earns on loans and pays to its lenders.
Loan refinancing levels are the largest contributor to changes in the size
of the mortgage origination market. To reduce the cost of their home mortgages,
borrowers tend to refinance their loans during periods of declining interest
rates, increasing the size of the origination market and Homeside 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 totaled $4.6 million for the period from February 11,
1998 to March 31, 1998, compared to $2.1 million for the predecessor period from
December 1, 1997 to February 10, 1998 and $0.9 million for the predecessor
period from December 1, 1996 to February 28, 1997. Increases in net interest
revenue were primarily due to improved funding rates obtained through improved
credit ratings, the issue of medium-term notes and the adoption of an early pool
buyout program. HomeSide Lending has issued a total of $810.0 million of
medium-term notes to the public market at an average cost of 6.071% as of March
31, 1998. The proceeds were used to pay down existing bank debt, increasing
HomeSide Lending's borrowing capacity. An immediate benefit of this increased
borrowing capacity was the initiation of an early pool buyout program, which
involves the purchase of delinquent government loans from pools early in the
foreclosure process, thereby reducing the unreimbursed interest expense that
HomeSide Lending incurs.
Net Mortgage Origination Revenue
Net mortgage origination revenue is comprised of fees earned on the
origination of mortgage loans, gains and losses on the sale of loans, gains and
losses resulting from hedging of secondary marketing activities and fees charged
to review loan documents for purchased loan production.
Net mortgage origination revenue was $14.3 million for the period from
February 11, 1998 to March 31, 1998 compared to $26.0 million for the
predecessor period from December 1, 1997 to February 10, 1998 and $22.5 million
for the predecessor period from December 1, 1996 to February 28, 1997. The
increase in net mortgage origination revenue on an annualized basis reflects an
increase in loan production volumes, primarily through HomeSide Lending's
correspondent lending and broker channels, and an increase in gains from
secondary marketing activities.
Salaries and Employee Benefits
Salaries and employee benefits expense was $14.6 million for the period
from February 11, 1998 to March 31, 1998 compared to $16.9 million for the
predecessor period from December 1, 1997 to February 10, 1998 and $19.7 million
for the predecessor period from December 1, 1996 to February 28, 1997. The
average number of full-time equivalent employees was 1,968 for the period from
February 11, 1998 to March 31, 1998 compared to 1,891 for the predecessor period
from December 1, 1997 to February 10, 1998 and 1,689 for the predecessor period
from December 1, 1996 to February 28, 1997.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs
and maintenance costs, certain computer software expenses and depreciation of
HomeSide Lending's premises and equipment. Occupancy and equipment expense for
the period from February 11, 1998 to March 31, 1998 was $2.4 million compared to
$3.6 million for the predecessor period from December 1, 1997 to February 10,
1998 and $3.5 million for the predecessor period from December 1, 1996 to
February 28, 1997. The increase in expense on an annualized basis was mainly due
to the increase in information systems costs required to handle the growing
mortgage servicing portfolio.
Servicing Losses on Investor-Owned Loans and Foreclosure-Related Expenses
Servicing losses on investor-owned loans represent anticipated losses
primarily attributable to servicing FHA and VA loans for investors. These
amounts include actual losses for the final disposition of loans,
non-recoverable foreclosure costs, accrued interest for which payment has been
curtailed and estimates for potential losses based on HomeSide Lending's
experience as a servicer of government loans.
Servicing losses on investor-owned loans and foreclosure-related expenses
totaled $1.8 million for the period from February 11, 1998 to March 31, 1998
compared to $6.3 million for the predecessor period from December 1, 1997 to
February 10, 1998 and $5.0 million for the predecessor period from December 1,
1996 to February 28, 1997. The annualized increase was largely attributable to
the growth of the servicing portfolio resulting from loan production and
increased foreclosure losses.
Included in the balance of accounts payable and accrued liabilities at
March 31, 1998 is a reserve for estimated servicing losses on investor-owned
loans of $21.7 million. The reserve has been established for potential losses
related to the mortgage servicing portfolio. Increases to the reserve are
charged to earnings as servicing losses on investor-owned loans. The reserve is
decreased for actual losses incurred related to the mortgage servicing
portfolio. HomeSide Lending's historical loss experience on VA loans generally
has been consistent with industry experience. Management believes that HomeSide
Lending has an adequate level of reserve based on servicing volume, portfolio
composition, credit quality and historical loss rates, as well as estimated
future losses.
The following table sets forth HomeSide Lending's delinquency and foreclosure
experience:
Servicing Portfolio Delinquencies
(percent by loan count)
At Predecessor At
March 31, 1998 February 28, 1997
Servicing Portfolio Delinquencies,
excluding bankruptcies (at end of period)
30 days 3.20% 3.27%
60 days 0.67% 0.69%
90+ days 0.61% 0.54%
============= ============
Total past due 4.48% 4.50%
============= ============
Foreclosures pending 0.80% 0.72%
============= ============
Other Expenses
Other expenses consist mainly of professional fees, communications
expense, advertising and public relations, data processing expenses and certain
loan origination expenses. The level of other expenses fluctuates in part based
upon the level of HomeSide Lending's mortgage servicing portfolio and loan
production volumes.
Other expenses were $8.0 million for the period from February 11, 1998 to
March 31, 1998 compared to $9.0 million for the predecessor period from December
1, 1997 to February 10, 1998 and $11.7 million for the predecessor period from
December 1, 1996 to February 28, 1997. The increase on an annualized basis in
other expenses was primarily due to amortization expense for goodwill associated
with the National acquisition of $4.9 million for the period from February 11,
1998 to March 31, 1998.
Income Tax Expense
HomeSide Lending's income tax expense was $7.5 million for the period from
February 11, 1998 to March 31, 1998 compared to $11.4 million for the
predecessor period from December 1, 1997 to February 10, 1998 and $10.9 million
for the predecessor period from December 1, 1996 to February 28, 1997. The
effective income tax rate for the period from February 11, 1998 to March 31,
1998 was 52% compared to 39% for the predecessor period from December 1, 1997 to
February 10, 1998 and 38% for the predecessor period from December 1, 1996 to
February 28, 1997, due to the tax effects of goodwill as a result of the merger
with the National.
Results of Operations
For the period from February 11, 1998 to March 31, 1998 compared to the
predecessor period from September 1, 1997 to February 10, 1998 and the
predecessor period from September 1, 1996 to February 28, 1997
Summary
HomeSide Lending's net income was $6.9 million for the period from February
11, 1998 to March 31, 1998 compared to $40.7 million for the predecessor period
from September 1, 1997 to February 10, 1998 and $34.3 million for the
predecessor period from September 1, 1996 to February 28, 1997. Total revenues
for the period from February 11, 1998 to March 31, 1998 were $46.2 million
compared to $140.9 million for the predecessor period from September 1, 1997 to
February 10, 1998 and $136.9 million for the predecessor period from September
1, 1996 to February 28, 1997. The annualized increases in net income and
revenues for period from February 11, 1998 to March 31, 1998 compared to the
predecessor period from September 1, 1997 to February 10, 1998 and the
predecessor period from September 1, 1996 to February 28, 1997 were primarily
attributable to increases in net servicing revenue, net mortgage origination
revenue, and net interest revenue. Total expenses increased on an annualized
basis as a result of amortization expense related to the goodwill associated
with the merger with the National (see Note 1). The increase in net servicing
revenue on an annualized basis was mainly a result of a $9.7 billion increase in
the servicing portfolio to $98.9 billion at March 31, 1998 from $89.2 billion at
February 28, 1997. Net mortgage origination revenue increased on an annualized
basis due to loan production volume increases. Net interest revenue increased on
an annualized basis primarily as a result of reduced borrowing costs from the
bank line of credit from improved credit ratings and the issuance of medium-term
notes which expanded borrowing capacity.
Net Servicing Revenue
Net servicing revenue was $26.6 million for the period from February 11,
1998 to March 31, 1998 compared to $86.3 million for the predecessor period from
September 1, 1997 to February 10, 1998 and $87.7 million for the predecessor
period from September 1, 1996 to February 28, 1997. Net servicing revenue is
comprised of mortgage servicing fees, ancillary servicing revenue, and
amortization of mortgage servicing rights.
Mortgage servicing fees totaled $63.6 million for the period from February
11, 1998 to March 31, 1998 compared to $192.5 million for the predecessor period
from September 1, 1997 to February 10, 1998 and $185.2 million for the
predecessor period from September 1, 1996 to February 28, 1997. The servicing
portfolio increased to $98.9 billion at March 31, 1998 compared to $89.2 billion
at February 28, 1997, an 11% increase. HomeSide Lending's weighted average
interest rate of the mortgage loans in the servicing portfolio was 7.82% at
March 31, 1998, 7.85% at February 10, 1998 and 7.92% at February 28, 1997. The
weighted average servicing fee, including ancillary income, for the servicing
portfolio was 0.463% for the period from February 11, 1998 to March 31, 1998
compared to 0.444% for the predecessor period from September 1, 1997 to February
10, 1998 and 0.421% for the predecessor period from September 1, 1996 to
February 28, 1997. The increase in the weighted average servicing fee was due to
growth of ancillary revenues including late fees and other mortgage-related
products and higher proportions of government loans serviced which typically
have a higher servicing fee. Amortization expense was $37.0 million for the
period from February 11, 1998 to March 31, 1998 compared to $106.2 million for
the predecessor period from September 1, 1997 to February 10, 1998 and $97.5
million for the predecessor period from September 1, 1996 to February 28, 1997.
The amortization expense increased on an annualized basis mainly as a result of
a higher average balance of mortgage servicing rights and a decrease of .59% in
average mortgage interest rates from February 28, 1997 to March 31, 1998.
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the
direction in which rates are moving and the spread between short and long-term
interest rates. These factors influence the size of the residential mortgage
origination market, HomeSide Lending's loan production volumes and the interest
rates HomeSide Lending earns on loans and pays to its lenders.
Loan refinancing levels are the largest contributor to changes in the size
of the mortgage origination market. To reduce the cost of their home mortgages,
borrowers tend to refinance their loans during periods of declining interest
rates, increasing the size of the origination market and Homeside 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 Lendng 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 $4.7 million for the period from February 11,
1998 to March 31, 1998 compared to $7.3 million for the predecessor period from
September 1, 1997 to February 10, 1998 and $10.0 million for the predecessor
period from September 1, 1996 to February 28, 1997. Increases in net interest
revenue on an annualized basis were primarily due to improved funding rates
obtained through improved credit ratings, the issue of medium-term notes and the
adoption of an early pool buyout program. HomeSide Lending has issued a total of
$810.0 million of medium-term notes to the public market at an average cost of
6.071% as of March 31, 1998. The proceeds were used to pay down existing bank
debt, increasing HomeSide Lending's borrowing capacity. An immediate benefit of
this increased borrowing capacity was the initiation of an early pool buyout
program, which involves the purchase of delinquent government loans from pools
early in the foreclosure process, thereby reducing the unreimbursed interest
expense that HomeSide Lending incurs.
Net Mortgage Origination Revenue
Net mortgage origination revenue is comprised of fees earned on the
origination of mortgage loans, gains and losses on the sale of loans, gains and
losses resulting from hedging of secondary marketing activities and fees charged
to review loan documents for purchased loan production.
Net mortgage origination revenue was $14.3 million for the period from
February 11, 1998 to March 31, 1998 compared to $46.7 million for the
predecessor period from September 1, 1997 to February 10, 1998 and $39.0 million
for the predecessor period from September 1, 1996 to February 28, 1997. The
increase in net mortgage origination revenue on an annualized basis reflects an
increase in loan production volumes, primarily through HomeSide Lending's
correspondent lending and broker channels, and an increase in gains from
secondary marketing activities.
Salaries and Employee Benefits
Salaries and employee benefits expense was $14.6 million for the period
from February 11, 1998 to March 31, 1998 compared to $36.1 million for the
predecessor period from September 1, 1997 to February 10, 1998 and $40.3 million
for the predecessor period from September 1, 1996 to February 28, 1997. The
average number of full-time equivalent employees was 1,968 for the period from
February 11, 1998 to March 31, 1998 compared to 1,848 for the predecessor period
from September 1, 1997 to February 10, 1998 and 1,698 for the predecessor period
from September 1, 1996 to February 28, 1997.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs
and maintenance costs, certain computer software expenses and depreciation of
HomeSide Lending's premises and equipment. Occupancy and equipment expense was
$2.4 million for the period from February 11, 1998 to March 31, 1998 compared to
$7.8 million for the predecessor period from September 1, 1997 to February 10,
1998 and $6.8 million for the predecessor period from September 1, 1996 to
February 28, 1997. The increase in expense on an annualized basis was mainly due
to the increase in information systems costs required to handle the growing
mortgage servicing portfolio.
Servicing Losses on Investor-Owned Loans and Foreclosure-Related Expenses
Servicing losses on investor-owned loans represent anticipated losses
primarily attributable to servicing FHA and VA loans for investors. These
amounts include actual losses for the final disposition of loans,
non-recoverable foreclosure costs, accrued interest for which payment has been
curtailed and estimates for potential losses based on HomeSide Lending's
experience as a servicer of government loans.
Servicing losses on investor-owned loans and foreclosure-related expenses
totaled $1.8 million for the period from February 11, 1998 to March 31, 1998
compared to $11.5 million for the predecessor period from September 1, 1997 to
February 10, 1998 and $9.9 million for the predecessor period from September 1,
1996 to February 28, 1997. The increase on an annualized basis was largely
attributable to the growth of the servicing portfolio resulting from loan
production and increased foreclosure losses.
Included in the balance of accounts payable and accrued liabilities at
March 31, 1998 is a reserve for estimated servicing losses on investor-owned
loans of $21.7 million. The reserve has been established for potential losses
related to the mortgage servicing portfolio. Increases to the reserve are
charged to earnings as servicing losses on investor-owned loans. The reserve is
decreased for actual losses incurred related to the mortgage servicing
portfolio. HomeSide Lending's historical loss experience on VA loans generally
has been consistent with industry experience. Management believes that HomeSide
Lending has an adequate level of reserve based on servicing volume, portfolio
composition, credit quality and historical loss rates, as well as estimated
future losses.
The following table sets forth HomeSide Lending's delinquency and foreclosure
experience:
Servicing Portfolio Delinquencies
(percent by loan count)
At Predecessor At
March 31, 1998 February 28, 1997
Servicing Portfolio Delinquencies,
excluding bankruptcies (at end of period)
30 days 3.20% 3.27%
60 days 0.67% 0.69%
90+ days 0.61% 0.54%
============== ==============
Total past due 4.48% 4.50%
============== ==============
Foreclosures pending 0.80% 0.72%
============== ==============
Other Expenses
Other expenses consist mainly of professional fees, communications
expense, advertising and public relations, data processing expenses and certain
loan origination expenses. The level of other expenses fluctuates in part based
upon the level of HomeSide Lending's mortgage servicing portfolio and loan
production volumes.
Other expenses were $8.0 million for the period from February 11, 1998 to
March 31, 1998 compared to $18.5 million for the predecessor period from
September 1, 1997 to February 10, 1998 and $22.9 million for the predecessor
period from September 1, 1996 to February 28, 1997. The increase on an
annualized basis in other expenses was primarily due to amortization expense for
goodwill associated with the National merger of $4.9 million for the period from
February 11, 1998 to March 31, 1998.
Income Tax Expense
HomeSide Lending's income tax expense was $7.5 million million for the
period from February 11, 1998 to March 31, 1998 compared to $26.0 million for
the predecessor period from September 1, 1997 to February 10, 1998 and $22.3
million for the predecessor period from September 1, 1996 to February 28, 1997.
The effective income tax rate for the period from February 11, 1998 to March 31,
1998 was 52% compared to 39% for the predecessor periods from September 1, 1997
to February 10, 1998 and from September 1, 1996 to February 28, 1997, due to the
tax effects of goodwill as a result of the merger with the National.
Risk Management Activities
HomeSide 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 loan and therefore, the value of the
servicing portfolio declines as prepayments increase.
During the period from February 11, 1998 to March 31, 1998, HomeSide
Lending utilized options on U.S. Treasury bond futures and U.S. Treasury bond
futures to protect a significant portion of the market value of its mortgage
servicing portfolio from a decline in value. The risk management contracts used
by HomeSide Lending 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 Lending'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
Lending's hedging activity can be measured by the correlation between changes in
the values of the risk management instruments 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 the periods presented, HomeSide Lending has
experienced a high measure of correlation between changes in the value of
mortgage servicing rights and the risk management contracts. However, in periods
of rising interest rates, the increase in value of mortgage servicing rights may
outpace the decline in value of the options included in the hedge position,
because the loss on the options is limited to the premium paid.
During the period from February 11, 1998 to March 31, 1998, deferred gains
and losses on risk management contracts resulted in net deferred hedge loss of
$33.1 million. As of March 31, 1998, net deferred gains of $6.4 million are
included in the carrying value of mortgage servicing rights. The increase in the
estimated fair value of the mortgage servicing rights approximated the net
losses on risk management contracts for this period. HomeSide 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 March 31, 1998 was ($14.7) million, which was equal to their carrying amount
because they are marked-to-market at each reporting date.
Liquidity and Capital Resources
The Company's principal financing needs are the financing of loan
origination activities and the investment in mortgage servicing rights. To meet
these needs, the Company currently utilizes funding from an independent
syndicate of banks, including a warehouse credit facility and a
servicing-related facility, medium-term notes and cash flow from operations.
HomeSide 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
continue to issue mortgage-backed securities.
Operations
Net cash used in operations for the period from February 11, 1998 to March
31, 1998 was $234.7 million. The primary uses of cash in operations were to fund
loan originations and pay corporate expenses. These uses of cash were offset by
cash provided from servicing fee income, loan sales and principal repayments.
Cash flows from loan originations are dependent upon current economic conditions
and the level of long-term interest rates. Decreases in long-term interest rates
generally result in higher loan refinancing activity, which results in higher
cash demands to meet increased loan production levels. Higher cash demands to
meet increased loan production levels are primarily met through borrowings and
loan sales.
Investing
Net cash used in investing activities was $226.9 million for the period from
February 11, 1998 to March 31, 1998. Cash used in investing activities was for
the purchase and origination of mortgage servicing rights and for funding the
early pool buyout program. These uses of cash were offset by net proceeds from
risk management contracts. Other assets decreased $24.2 million to $51.3 million
at March 31, 1998 from $75.5 million at February 11, 1998 primarily as a result
of a decrease in HomeSide Lending's hedge assets. Early pool buyout advances
totaled $448.9 million at March 31, 1998. Future uses of cash for investing
activities will be dependent on the mortgage origination market and HomeSide
Lending's hedging needs. Except for the Banc One acquisition (see Note 5),
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. HomeSide Lending will fund the Banc One acquisition under
existing medium-term note borrowing capacity.
Financing
Net cash provided by financing activities was $443.5 million for the period
from February 11, 1998 to March 31, 1998. The primary source of cash from
financing activities during the period from February 11, 1998 to March 31, 1998
was $60.0 million from the issuance of medium-term notes and net borrowings of
$383.8 from HomeSide Lending's line of credit.
During the period from February 11, 1998 to March 31, 1998, net cash used in
operations was $234.7 million, net cash used in investing activities was $226.9
million and net cash provided by financing activities was $443.5 million,
resulting in a net decrease in cash of $18.1 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.
Year 2000 Compliance
HomeSide Lending uses and is dependent upon a significant number of
computer software programs and operating systems to conduct its business. Such
programs and systems include those developed and maintained by HomeSide Lending,
software and systems purchased from outside vendors and software and systems
used by HomeSide Lending's third party providers. HomeSide Lending has initiated
a review and assessment of all hardware and software to determine whether it
will function properly in the Year 2000. It is anticipated that some level of
modification or replacement of hardware and software will be necessary in order
to make HomeSide Lending's systems "Year 2000 Compliant." HomeSide Lending
presently estimates these remediation costs to total approximately $15.0
million. Remediation costs are expected to be expensed as incurred, with the
exception of new software purchases, which will be capitalized. The Company has
not incurred significant remediation costs prior to March 31, 1998. Year 2000
remediation costs are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. In
addition, HomeSide Lending has relationships with vendors, customers and other
third parties that rely on software and systems that may not be Year 2000
compliant. With respect to such third parties, Year 2000 compliance matters will
not be within HomeSide Lending's direct control. There can be no assurance that
Year 2000 compliance failures by such third parties will not have a material
adverse effect on HomeSide Lending's results of operations.
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 the Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on form 8-K
HomeSide Lending filed a report on Form 8-K dated February 25, 1998,
Items 1 and 7, including Unaudited Consolidated Pro Forma Balance Sheet and
Income Statements. HomeSide Lending filed reports on form 8-K dated April 3,
1998, April 15, 1998 and May 8, 1998, each on Item 5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HomeSide Lending, Inc.
(Registrant)
Date: March 15, 1998 By: /s/Joe K. Pickett_____
-----------------
Joe K. Pickett
Chairman and Chief Executive Officer
Date: March 15, 1998 By: /s/Kevin D. Race_____
----------------
Kevin D. Race
Executive Vice President, Chief Financial
Officer and Accounting Officer
<PAGE>
HOMESIDE LENDING, INC.
EXHIBIT 12 - 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 period from February 11, 1998 to March 31, 1998,
the predecessor period from December 1, 1997 to February 10, 1998 and the
predecessor period from December 1, 1996 to 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>
Predecessor
For the Period From For the Period From For the Period From
February 11, 1998 to December 1, 1997 to December 1, 1996
March 31, 1998 February 10, 1998 February 28, 1997
<S> <C> <C> <C>
Earnings before income taxes $14,408 $29,321 $28,854
-------------- --------------- ----------------
Interest expense 13,629 20,548 20,417
Interest portion of rental 596 370 440
-------------- --------------- ----------------
Fixed charges 14,225 20,918 20,857
-------------- --------------- ----------------
Earnings before fixed charges 28,633 50,239 49,711
-------------- --------------- ----------------
Fixed Charges:
Interest expense 13,629 20,548 20,417
Interest portion of rental
expense 596 370 440
-------------- --------------- ----------------
Fixed charges $14,225 $20,918 $20,857
-------------- --------------- ----------------
Ratio of earnings to fixed
charges $2.01 $2.40 $2.38
============== =============== ================
</TABLE>
The following table sets forth the ratio of earnings to fixed charges of
HomeSide Lending, Inc. for the period from February 11, 1998 to March 31, 1998,
the predecessor period from September 1, 1997 to February 10, 1998 and the
predecessor period from September 1, 1996 to 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>
Predecessor
For the Period From For the Period From For the Period From
February 11, 1998 to September 1, 1997 to September 1, 1996 to
March 31, 1998 February 10, 1998 February 28, 1997
<S> <C> <C> <C>
Earnings before income taxes $14,408 $66,699 $56,592
-------------- --------------- ----------------
Interest expense 13,629 43,897 36,559
Interest portion of rental
expense 596 740 880
-------------- --------------- ----------------
Fixed charges 14,225 44,637 37,439
-------------- --------------- ----------------
Earnings before fixed charges 28,633 111,336 94,031
-------------- --------------- ----------------
Fixed Charges:
Interest expense 13,629 43,897 36,559
Interest portion of rental
expense 596 740 880
-------------- --------------- ----------------
Fixed charges $14,225 $44,637 $37,439
-------------- --------------- ----------------
Ratio of earnings to fixed
charges $2.01 $2.49 $2.51
============== =============== ================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> FEB-11-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 14,045
<SECURITIES> 0
<RECEIVABLES> 312,081
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,974,185
<PP&E> 31,595
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,005,780
<CURRENT-LIABILITIES> 2,840,039
<BONDS> 836,464
0
0
<COMMON> 0
<OTHER-SE> 1,329,277
<TOTAL-LIABILITY-AND-EQUITY> 5,005,780
<SALES> 0
<TOTAL-REVENUES> 46,158
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 31,750
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,408
<INCOME-TAX> 7,518
<INCOME-CONTINUING> 6,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,890
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
