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 June 30, 2000
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)
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 August 14, 2000
----- ------------------------------
Common stock $1.00 par value 100 shares
FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands, Except Share Data)
June 30, 2000 September 30, 1999
------------------ ----------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $178,713 $202,859
Mortgage loans held for sale, net 1,269,953 1,292,562
Mortgage servicing rights, net 4,156,482 3,488,957
Early pool buyout advances 181,106 335,059
Accounts receivable, net 375,514 255,759
Premises and equipment, net 77,683 67,900
Goodwill, net 621,696 648,087
Other assets 79,901 84,534
------------------ ----------------------
Total Assets $6,941,048 $6,375,717
================== ======================
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $545,350 $707,657
Notes payable 3,371,202 2,899,304
Long-term debt 1,373,208 1,184,384
Deferred income taxes, net 290,722 209,408
------------------ ----------------------
Total Liabilities 5,580,482 5,000,753
------------------ ----------------------
Stockholder's Equity:
Common stock:
Common stock, $1.00 par value, 100 shares authorized, issued, and
outstanding, all pledged as second priority collateral on the
long-term debt of the Parent - -
Additional paid-in capital 1,342,541 1,342,541
Retained earnings 18,025 32,423
------------------ ----------------------
Total Stockholder's Equity 1,360,566 1,374,964
------------------ ----------------------
Total Liabilities and Stockholder's Equity $6,941,048 $6,375,717
================== ======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands)
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------- ---------------- --------------- ---------------
REVENUES:
<S> <C> <C> <C> <C>
Mortgage servicing fees $182,542 $163,461 $539,369 $442,088
Amortization of mortgage servicing rights (97,085) (118,759) (297,272) (299,246)
---------------- ---------------- --------------- ---------------
Net servicing revenue 85,457 44,702 242,097 142,842
Interest income 26,329 43,754 92,601 140,352
Interest expense (42,068) (29,878) (115,812) (92,572)
---------------- ---------------- --------------- ---------------
Net interest revenue (15,739) 13,876 (23,211) 47,780
Net mortgage origination revenue 13,631 45,685 52,540 125,610
Other income 1,505 2,067 3,617 4,580
---------------- ---------------- --------------- ---------------
Total Revenues 84,854 106,330 275,043 320,812
EXPENSES:
Salaries and employee benefits 27,905 32,639 83,594 100,967
Occupancy and equipment 7,690 6,898 23,959 20,042
Servicing losses on investor-owned loans
and foreclosure-related expenses 9,092 10,822 24,847 29,465
Goodwill amortization 8,761 8,753 26,283 26,206
Other expenses 13,288 15,460 35,964 47,857
---------------- ---------------- --------------- ---------------
Total Expenses 66,736 74,572 194,647 224,537
Income before income taxes 18,118 31,758 80,396 96,275
Income tax expense 9,811 15,260 32,138 47,228
---------------- ---------------- --------------- ---------------
Net income $ 8,307 $ 16,498 $ 48,258 $ 49,047
================ ================ =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
--------------------------------------------------------------
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $ 8,307 $ 16,498 $ 48,258 $ 49,046
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of mortgage servicing rights 97,085 118,759 297,272 299,246
Depreciation and amortization 12,609 20,624 37,682 41,690
Servicing losses on investor-owned loans 2,407 2,784 7,611 9,419
Change in deferred income tax liability 9,805 15,228 81,313 28,407
Origination, purchase and sale of loans held for sale, net
of repayments (501,879) 245,672 22,609 444,869
Change in accounts receivable (88,372) (2,107) (127,669) 35,232
Change in other assets and accounts payable and accrued
liabilities 40,300 2,515 (61,377) 140,427
-------------- ------------------------------------------------
Net cash (used in) provided by operating activities (419,738) 419,973 305,699 1,048,336
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (5,546) (6,913) (18,989) (19,225)
Acquisition of mortgage servicing rights (229,248) (319,536) (587,421) (992,348)
Net purchase of risk management contracts 80,567 (69,250) (472,272) (543,711)
Net early pool buyout reimbursements 30,773 98,494 153,953 404,746
-------------- ------------------------------------------------
Net cash used in investing activities (123,454) (297,205) (924,729) (1,150,538)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from (repayments to) banks 200,600 140,001 135,800 (853,999)
Net issuance (repayments) of commercial paper - (88,698) 336,097 1,189,502
Issuance of notes payable 500,000 - 500,000 -
Payment of debt issue costs (1,317) - (3,688) -
Repayment of long-term debt (250,225) (122) (310,669) (424)
Dividends paid to Parent (31,343) (31,313) (62,656) (69,159)
-------------- ------------------------------------------------
Net cash provided by financing activities 417,715 19,868 594,884 265,920
Net (decrease) increase in cash and cash equivalents (125,477) 142,636 (24,146) 163,718
Cash and cash equivalents at beginning of period 304,190 56,089 202,859 35,008
-------------- ------------------------------------------------
Cash and cash equivalents at end of period $178,713 $198,725 $178,713 $198,726
============== ================================================
Supplemental disclosure of cash flow information:
Interest paid $ 32,517 $ 35,590 $108,202 $110,014
</TABLE>
The accompanying notes are an integral part of these financial statements.
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. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosed amounts of contingent liabilities at the date of
the financial statements. Actual results may differ from those estimates.
On March 6, 2000, HomeSide Holdings, Inc. ("HomeSide Holdings") was merged with
and into HomeSide Lending, Inc. ("HomeSide" or the "Company"). Prior to the
merger, HomeSide Holdings was a wholly owned subsidiary of HomeSide
International, Inc. (the "Parent"). Pursuant to the merger, (i) the Company
succeeded to all of the assets of, and assumed all of the liabilities of,
HomeSide Holdings, and (ii) the shares of capital stock of HomeSide Holdings
issued and outstanding as of the date of the merger were canceled and exchanged
for 10,000 shares of common stock of the Company which were issued to the
Parent. In order to facilitate the exchange of shares required by the merger,
the Company amended its Articles of Incorporation to increase the authorized
number of shares of common stock to 10,100. Thereafter, the Company amended and
restated its Articles of Incorporation to reduce the number of authorized,
issued and outstanding shares of capital stock to 100 shares of common stock,
par value $1.00. The merger does not have a material affect on the financial
statements of the Company. All prior period consolidated financial statements
have been restated to include the combined results of operations, financial
position and cash flows of HomeSide Holdings.
Operating results for the three and nine month periods ended June 30, 2000 and
1999 are not necessarily indicative of the results that may be expected for the
fiscal period ending September 30, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Form
10-K for the fiscal year ended September 30, 1999 of HomeSide Lending, Inc.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and cash due from banks, interest-bearing
deposits and margin deposits with an original maturity of three months or less.
Margin deposits associated with the risk management program for mortgage
servicing rights are maintained with brokers in accordance with the requirements
of International Swap Dealer Agreements. At June 30, 2000, margin deposits
amounted to approximately $210.5 million.
3. MORTGAGE SERVICING RIGHTS
The change in the balance of mortgage servicing rights was as follows (in
thousands):
Balance, September 30, 1999 $3,488,957
Additions 587,421
Deferred hedge loss 377,376
Amortization (297,272)
-----------------
Balance, June 30, 2000 $4,156,482
=================
4. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
Weighted Average Interest Rate
Total Outstanding At Period End During the Period
<S> <C> <C> <C>
Floating Rate Notes $ 230,000 6.93% 6.62%
Commercial paper 1,500,000 6.68% 6.32%
National Australia Bank Credit Facility 1,641,202 6.80% 6.42%
----------------------
Total, June 30, 2000 $ 3,371,202
======================
Floating Rate Notes $ 230,000 5.67% 5.67%
Commercial Paper 1,163,903 5.57% 5.12%
National Australia Bank Credit Facility 1,505,401 5.46% 5.22%
----------------------
Total, September 30, 1999 $ 2,899,304
</TABLE>
======================
On October 18, 1999, HomeSide entered into a $2.0 billion revolving credit
facility (the "Independent Bank Credit Facility") with an independent syndicate
of banks. This facility replaces HomeSide's previous bank credit facility.
Borrowings under the Independent Bank Credit Facility bear interest at rates per
annum, based on, at HomeSide's option, (i) the Eurodollar rate plus an
applicable margin, (ii) the greater of the federal funds rate plus an applicable
margin or the prime rate, (iii) in the case of swingline loans, the federal
funds rate plus an applicable margin, or (iv) in the case of competitive bid
loans, the lowest competitive Eurodollar or fixed rate submitted by a bidding
lender. The primary purpose of the Independent Bank Credit Facility is to
provide liquidity back-up for HomeSide's $1.5 billion commercial paper program.
At June 30, 2000, there was no balance outstanding under this credit line.
On August 16, 1999, HomeSide issued $230.0 million in floating rate notes (the
"Floating Rate Notes") due August 16, 2000. Interest is payable quarterly in
arrears on February 16, May 16, and August 16, 2000. The Floating Rate Notes are
unsecured obligations of HomeSide and rank equally with all other unsecured and
unsubordinated indebtedness of HomeSide. The per annum interest rate on the
Floating Rate Notes is equal to the three-month LIBOR, reset quarterly, plus
twenty basis points, or 0.20%. The weighted average interest rates on the
Floating Rate Notes during the three and nine-month periods ended June 30, 2000
were 6.62% and 6.28%, respectively.
On October 21, 1998, HomeSide established a $1.5 billion commercial paper
program. The program is supported by the Company's Independent Bank Credit
Facility (as defined below) and outstanding commercial paper reduces available
borrowings under the Independent Bank Credit Facility. At June 30, 2000, a total
of $1.5 billion of commercial paper was outstanding. The weighted average
interest rates on commercial paper outstanding during the three and nine-month
periods ended June 30, 2000 were 6.32% and 5.99%, respectively.
On June 23, 1998, HomeSide entered into an agreement for an unsecured revolving
credit facility with the National (the "NAB Credit Facility"). The agreement was
renewed on June 22, 1999 and again on June 21, 2000. Under the credit facility,
HomeSide can borrow up to $2.5 billion, subject to limits imposed by regulatory
authorities. As of June 30, 2000, Australian financial regulations limited the
National's ability to lend funds to HomeSide, a non-bank affiliate, to $2.1
billion. Borrowings under the NAB Credit Facility may be overnight or for
periods of 7,30,60 or 90 days. For overnight borrowings, the interest rate is
determined by HomeSide and the National at the time of the borrowing. For LIBOR
- based borrowings, the interest rate is charged at the corresponding LIBOR
rate. The NAB Credit Facility is renewed at the option of the National on an
annual basis. At June 30, 2000, the amount outstanding under the NAB Credit
Facility totaled $1.6 billion. The weighted average interest rate on outstanding
borrowings under the NAB Credit Facility during the three and nine-month periods
ended June 30, 2000 were 6.42% and 6.10%, respectively.
5. LONG-TERM DEBT
Medium-term notes
As of June 30, 2000, outstanding medium-term notes issued by HomeSide Lending
under a $2.258 billion shelf registration statement were as follows (in
thousands):
<TABLE>
<CAPTION>
Issue Date Outstanding Balance Coupon Rate Maturity Date
<S> <C> <C> <C> <C> <C>
June 30, 1997 200,000 6.8750% June 30, 2002
June 30, 1997 40,000 6.8200% July 2, 2001
July 1, 1997 15,000 6.8600% July 2, 2001
July 31, 1997 200,000 6.7500% August 1, 2004
September 15, 1997 45,000 6.7700% September 17, 2001
April 23, 1998 125,000 5.7875% (a) April, 24, 2001
May 22, 1998 225,000 6.2000% May 15, 2003
June 9, 2000 200,000 6.8850% (a) April 9, 2002
June 9, 2000 300,000 7.0675% (a) June 10, 2002
---------------------------
Total $1,350,000
===========================
(a) Floating rate
</TABLE>
At June 30, 2000, the total amount of medium-term notes outstanding was $1,350
million, made up of $625 million of floating-rate notes and $725 million fixed
rate notes that have been converted by interest rate swap agreements to
floating-rate notes. The weighted average borrowing rates on medium-term
borrowings issued for the three and nine-month periods ended June 30, 2000,
including the effect of the interest rate swap agreements, were 6.58% and 6.18%,
respectively.
On June 9, 2000, HomeSide completed two floating rate medium term note issuances
for $200 million and $300 million maturing on April 9, 2002 and June 10, 2002,
respectively. The floating rate for each issuance is LIBOR-based and will be
reset quarterly.
The balance of the medium-term notes at June 30, 2000, including the fair value
adjustment resulting from the merger with the National, was $1.35 billion, of
which $0.13 billion is current.
Mortgage note payable
In connection with the acquisition of BancBoston Mortgage Corporation, HomeSide
assumed a mortgage note payable that is due in 2017 and bears interest at a
stated rate of 9.5%. HomeSide's main office building is pledged as collateral
for the mortgage note payable. The balance of the mortgage payable at June 30,
2000, including the fair value adjustments resulting from the merger with the
National, was $22.8 million.
Parent Notes
On May 14, 1996, the Parent issued $200.0 million of 11.25% notes (the "Parent
Notes") maturing on May 15, 2003, and paying interest semiannually in arrears on
May 15 and November 15 of each year. The Parent Notes are redeemable at the
option of HomeSide, in whole or in part, at any time on or after May 15, 2001,
at certain fixed redemption prices. The indenture contains covenants that impose
limitations and restrictions, including requirements to maintain certain net
worth and ratio requirements. In addition, the Parent Notes are secured by a
second priority pledge of the common stock of HomeSide Lending. HomeSide is in
compliance with all net worth and ratio requirements included in the indenture
relating to the Parent Notes. 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 Parent
Notes at a premium of $7.9 million. The amount outstanding at June 30, 2000 was
$130.0 million. The balance of the Parent Notes at June 30, 2000, including the
fair value adjustment resulting from the merger with the National, was $143.2
million.
6. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (the "FASB")issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). This statement standardizes the
accounting for derivative instruments and hedging activities by requiring that
an entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. If certain conditions are
met, a derivative instrument may be specifically designated as (a) a hedge of
the exposure to changes in the fair value of a recognized asset or liability, or
of an unrecognized firm commitment, (b) a hedge of the exposure to variability
in the cash flows of a recognized asset, liability or forecasted transaction or
(c) a hedge of the foreign currency exposure of an unrecognized firm commitment,
an available-for-sale security, a forecasted transaction or a net investment in
a foreign operation. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - an
Amendment of FASB Statement No. 133" ("FAS 137"). This statement deferred the
effective date of FAS 133 to fiscal quarters of fiscal years beginning after
June 15, 2000. In June 2000, the FASB issued Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Hedging
Activities" ("FAS 138"), an amendment to FAS 133. FAS 138 amends the treatment
of certain transactions under FAS 133 and incorporates guidance provided by the
FASB Derivatives Implementation Group. Management has not yet determined the
impact of these statements on the financial statements of HomeSide.
6. DIVIDENDS
On April 3, 2000 the Company paid dividends to the Parent in the amount of $31.3
million. On October 20, 1999, the Company paid dividends in the amount of $31.3
million.
6. SUBSEQUENT EVENT
On July 6, 2000 the Company established a grantor trust (commonly known as a
"Rabbi Trust") with SunTrust Bank, as trustee. The purpose of the Rabbi Trust is
to serve as a vehicle for accumulating the assets needed to pay certain deferred
compensation benefits. The Company's Deferred Compensation Plan expressly
authorizes the use of a Rabbi Trust for this purpose. Assets held in the trust
are subject to claims by the creditors of the Company in the event of
insolvency. The trustee will make payments to plan participants in accordance
with the Company's instructions and the provisions of the Deferred Compensation
Plan and Trust Agreement. The Company will reimburse the trustee for its
expenses incurred in connection with its administration of the trust.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
HomeSide Lending, Inc. ("HomeSide" or the "Company") is one of the largest full
service residential mortgage banking companies in the United States. On February
10, 1998, National Australia Bank, Ltd. (the "National") acquired all
outstanding shares of the common stock of HomeSide International, Inc. (the
"Parent") and the Company adopted a fiscal year end of September 30 to conform
to the fiscal year of the National. The Company was formed through the
acquisition of the mortgage banking operations of BankBoston, N.A. ("BBMC
Predecessor") on March 16, 1996 and subsequently purchased the mortgage banking
operations of Barnett Banks, Inc.
On March 6, 2000, HomeSide Holdings, Inc. ("HomeSide Holdings") was merged with
and into HomeSide Lending, Inc. ("HomeSide" or the "Company"). Prior to the
merger, HomeSide Holdings was a wholly owned subsidiary of HomeSide
International, Inc. (the "Parent"). Pursuant to the merger, (i) the Company
succeeded to all of the assets of, and assumed all of the liabilities of,
HomeSide Holdings, and (ii) the shares of capital stock of HomeSide Holdings
issued and outstanding as of the date of the merger were canceled and exchanged
for 10,000 shares of common stock of the Company which were issued to the
Parent. In order to facilitate the exchange of shares required by the merger,
the Company amended its Articles of Incorporation to increase the authorized
number of shares of common stock to 10,100. Thereafter, the Company amended and
restated its Articles of Incorporation to reduce the number of authorized,
issued and outstanding shares of capital stock to 100 shares of common stock,
par value $1.00. The merger does not have a material affect on the financial
statements of the Company. All prior period consolidated financial statements
have been restated to include the combined results of operations, financial
position and cash flows of HomeSide Holdings.
HomeSide's strategy emphasizes variable cost and diversified mortgage
origination, efficient servicing, and effective risk management. Headquartered
in Jacksonville, Florida, HomeSide ranks as the 14th largest originator and the
6th largest servicer in the United States at June 30, 2000, based on data
published by Inside Mortgage Finance .
HomeSide plans to build its core operations through (i) improved economies of
scale in servicing costs; (ii) increased productivity using proprietary
technology; and (iii) expanded and diversified variable cost origination
channels. In addition, HomeSide intends to pursue additional loan portfolio
acquisitions and strategic origination relationships similar to the existing
relationships with Banc One Mortgage Corporation ("Banc One"), People's Bank,
Cendant Mortgage Corporation ("Cendant") and Colonial Bank.
Operating results for the three and nine-month periods ended June 30, 2000 and
1999 are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Form
10-K for the fiscal year ended September 30, 1999 of HomeSide Lending, Inc.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. This Quarterly Report on Form 10-Q
contains forward-looking statements which reflect the Company's current views
with respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below, which could cause actual results to differ materially from
historical results or those anticipated. The words "believe," "expect,"
"anticipate," "intend," "estimate" and other expressions which indicate future
events and trends identify forward-looking statements, which speak only as of
their dates. The Company undertakes no obligation to publicly update or revise
any forward-looking statements whether as a result of new information, future
events or otherwise. The following factors could cause actual results to differ
materially from historical results or those anticipated: (1) the Company's
ability to grow which depends on its ability to obtain additional financing in
the future for originating loans, investment in servicing rights, working
capital, capital expenditure and general corporate purposes, (2) economic
downturns may negatively affect the Company's profitability as the frequency of
loan default tends to increase in such environments and (3) changes in interest
rates may affect the volume of loan originations and acquisitions, the interest
rate spread on loans held for sale, the amount of gain or loss on the sale of
loans and the value of the Company's servicing portfolio. These risks and
uncertainties are more fully detailed in the Company's filings with the
Securities and Exchange Commission.
Loan Production Activities
HomeSide participates in several origination channels, with a focus on wholesale
origination (correspondent, co-issue, and broker). HomeSide's other origination
channels include Internet and telemarketing, direct mail campaigns and other
advertising, and mortgages related to affinity group and co-branding
partnerships. HomeSide also purchases servicing rights in bulk from time to
time. This multi-channel production base provides access to and flexibility
among production channels in a wide variety of market and economic conditions.
By focusing on production channels with a variable cost structure, HomeSide
reduces the fixed costs associated with traditional mortgage branch offices.
The following information regarding loan production activities for HomeSide is
presented to aid in understanding the results of operations and financial
condition of HomeSide for the three and nine-month periods ended June 30, 2000
and 1999 (in millions):
<TABLE>
<CAPTION>
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------------ ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Correspondent $ 2,169 $4,156 $6,448 $14,750
Co-issue 1,939 1,956 6,011 3,871
Broker 540 967 1,352 3,217
------------------ ---------------- --------------- ---------------
Total wholesale 4,648 7,079 13,811 21,838
Direct 169 470 445 1,153
------------------ ---------------- --------------- ---------------
Total production 4,817 7,549 14,256 22,991
Bulk acquisitions 5,152 4,665 12,176 33,748
------------------ ---------------- --------------- ---------------
Total production and
acquisitions $9,969 $12,214 26,432 $56,739
================== ================ =============== ===============
</TABLE>
Total loan production, excluding bulk acquisitions, was $4.8 billion for the
three months ended June 30, 2000 compared to $7.5 billion for the three months
ended June 30, 1999, a 36% decrease. Loan production was $14.3 billion for the
nine months ended June 30, 2000 compared to $23.0 billion for the nine months
ended June 30, 1999, a 38% decrease. Rising interest rates have contracted
refinance activity and have caused the mortgage origination market to drop by
half. When interest rates rise, loan production decreases as fewer mortgagees
refinance their loans. As a result, the mortgage origination market declines.
For the three and nine-month periods ended June 30, 2000, refinances were 19%
and 21%, respectively, of HomeSide's production volume, compared to 49% and 66%,
respectively, for the three and nine month periods ended June 30, 1999. Extreme
pricing competition for mortgage production continued as some mortgage
originators have reduced their pricing margins in order to fill capacity.
During the quarter, HomeSide continued to pursue growth opportunities through
bulk acquisitions of mortgage servicing rights and expansion of its Preferred
Partnership program. Preferred partnerships generally include a bulk servicing
acquisition and an ongoing mortgage origination flow. HomeSide services loans on
a priority basis on behalf of the Preferred Partners and offers the customer
mortgage-related products. Preferred Partner relationships contributed 37% and
35%, respectively, of HomeSide's production volume for the three and nine month
periods ended June 30, 2000. On July 11, 2000, HomeSide announced its Preferred
Partnership agreement with Colonial Bank, which included a bulk acquisition of
approximately $5.1 billion with the right to service or subservice and a
long-term production flow arrangement to service new mortgage loans originated
by Colonial Bank.
The current market environment has created portfolio acquisition opportunities.
HomeSide continues to pursue acquisitions and Preferred Partner relationships as
part of its strategy to accelerate portfolio growth, expand production market
share and grow a diversified revenue base. HomeSide completed bulk acquisitions
totaling $5.2 billion and $12.2 billion during the three and nine month periods
ended June 30, 2000, respectively. Bulk acquisitions totaled $4.7 billion for
the three months ended June 30, 1999 and $33.7 billion for the nine months ended
June 30, 1999, which included, as part of HomeSide's Preferred Partner
relationship with Banc One, approximately $18 billion from the March 4, 1999
purchase of First Chicago NBD Mortgage Company's servicing portfolio.
Servicing Portfolio
Management believes that HomeSide is one of the most efficient mortgage
servicers in the industry based on its servicing cost per loan and the number of
loans serviced per employee. The servicing operation makes extensive use of
state-of-the-art technology, process re-engineering and expense management. With
a portfolio size of $157 billion, HomeSide services the loans of approximately
1.8 million homeowners from across the United States. HomeSide's focus on
efficient and low cost processes is pursued through the selective use of
automation, strategic outsourcing of selected servicing functions and effective
control of delinquencies and foreclosures.
The following information on the dollar amounts of loans serviced is presented
to aid in understanding the results of operations and financial condition of
HomeSide for the three and nine-month periods ended June 30, 2000 and 1999 (in
millions):
<TABLE>
<CAPTION>
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------------ ------------------ -- ---------------- -- ---------------
<S> <C> <C> <C> <C>
Balance at beginning of
period $ 152,501 $ 139,653 $ 145,552 $ 115,800
Additions, net 9,882 12,019 26,266 55,166
Scheduled amortization 1,079 849 3,162 2,401
Prepayments 4,207 7,807 11,009 24,956
Foreclosures 266 395 816 988
------------------ ------------------ -- ---------------- -- ---------------
Total reductions 5,552 9,051 14,987 28,345
------------------ -- ---------------- -- ---------------
------------------
Balance at end of period $ 156,831 $ 142,621 $ 156,831 $ 142,621
================== ================== == ================ == ===============
</TABLE>
The number of loans serviced at June 30, 2000 was 1,772,999 compared to
1,667,124 at June 30, 1999. HomeSide's strategy is to build its mortgage
servicing portfolio and benefit from improved economies of scale. A key to
HomeSide's future growth is its proprietary servicing software. This system
allows HomeSide to increase the number of loans typically serviced on a single
system. At June 30, 2000, substantially all of the servicing portfolio was
serviced on the proprietary system.
Results of Operations
For the three months ended June 30, 2000 compared to the three months ended June
30, 1999
Summary
HomeSide's net income decreased 50% to $8.3 million for the three months ended
June 30, 2000, compared to $16.5 million for the three months ended June 30,
1999. HomeSide's net income, excluding goodwill amortization from the
acquisition of HomeSide by the National, was $17.1 million for the three months
ended June 30, 2000, compared to $25.3 million for the three months ended June
30, 1999. Total revenues for the three months ended June 30, 2000 were $84.9
million compared to $106.3 million for the three months ended June 30, 1999, a
20% decrease. An increase in net servicing revenue was offset by decreases in
net interest revenue and net mortgage origination revenue. Net servicing revenue
increased 91% for the three months ended June 30, 2000 compared to the three
months ended June 30, 1999, primarily due to an increase in the servicing
portfolio and a decrease in the amortization rate of mortgage servicing rights.
Net interest revenue decreased primarily due to a decreased average balance of
originated mortgage loans held for sale and increased funding necessary to
support increased mortgage servicing assets. Net mortgage origination revenue
decreased due to a decrease in production volumes and pricing competition caused
by the increase and volatility in mortgage interest rates. Total expenses
decreased as a result of a decrease in production related expenses associated
with a decline in refinance activity and a decrease in servicing related
expenses associated with a decline in prepayment activity and improvements in
servicing efficiency. Income tax expense decreased as a result of a decrease in
taxable net income and a decrease in the effective income tax rate caused by a
change in the geographic mix of the servicing portfolio into lower tax states
and a decrease in production volume in states with higher tax rates.
Net Servicing Revenue
Net servicing revenue was $85.5 million for the three months ended June 30, 2000
compared to $44.7 million for the three months ended June 30, 1999, a 91%
increase. Net servicing revenue is comprised of mortgage servicing fees,
ancillary servicing revenue, and amortization of mortgage servicing rights.
Mortgage servicing fees increased 12% to $182.5 million for the three months
ended June 30, 2000 compared to $163.5 million for the three months ended June
30, 1999, primarily as a result of portfolio growth. The servicing portfolio
increased $14.2 billion to $156.8 billion at June 30, 2000 compared to $142.6
billion at June 30, 1999, a 10% increase. The portfolio growth is primarily due
to loan production, bulk acquisitions, and a decrease in mortgage loan
prepayments as fewer mortgagees refinance their loans. HomeSide's weighted
average interest rates of the mortgage loans in the servicing portfolio were
7.53% and 7.47% at June 30, 2000 and 1999, respectively. The weighted average
servicing fee, including ancillary income, for the servicing portfolio was
0.473% for the three months ended June 30, 2000 compared to 0.465% for the three
months ended June 30, 1999. The increase in the weighted average servicing fee
was primarily due to a decrease in loans purchased but not yet on the servicing
system, for which HomeSide earns a lower net servicing fee.
Amortization expense was $97.1 million for the three months ended June 30, 2000
compared to $118.8 million for the three months ended June 30, 1999, an 18%
decrease. Amortization expense decreased due to a decrease in the amortization
rate, partially offset by a higher average balance of mortgage servicing rights
during the quarter. Amortization charges are highly dependent upon the level of
prepayments during the period and changes in prepayment expectations, which are
significantly influenced by the direction and level of long-term interest rate
movements. An increase in mortgage interest rates results in a decrease in
prepayment estimates used in calculating periodic amortization expense. Because
mortgage servicing rights are amortized over the expected period of service fee
revenues, a decrease in mortgage prepayment activity typically results in a
longer estimated life of the mortgage servicing assets and, accordingly, lower
amortization expense.
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the direction in
which rates are moving and the spread between short and long-term interest rates
and the rates at which HomeSide is able to borrow. These factors influence the
size of the residential mortgage origination market, HomeSide's loan production
volumes and the interest rates HomeSide earns on loans and pays to its lenders.
Loan refinancing levels are the largest contributor to changes in the size of
the mortgage origination market. As interest rates rise, fewer borrowers
refinance their mortgages, resulting in a decrease in the mortgage origination
market. Lower loan production volumes result in lower average balances of loans
held for sale and consequently lower levels of interest income from interest
earned on such loans prior to their sale. This lower level of interest income
due to decreased volumes is partially offset by the higher rates earned on the
loans.
Overall borrowing costs also fluctuate with changes in interest rates.
Currently, the interest expense HomeSide pays to finance mortgage loans held for
sale and other net assets is generally calculated with reference to short-term
interest rates. In addition, because mortgage loans held for sale earn interest
based on longer term interest rates, the level of net interest revenue is also
influenced by the spread between long-term and short-term interest rates.
Net interest revenue totaled ($15.7) million for the three months ended June 30,
2000 compared to $13.9 million for the three months ended June 30, 1999. The
decrease in net interest revenue was primarily due to a decrease in interest
income earned on loans held for sale as a result of lower average balances and a
narrowing of the spread between short-term and long-term interest rates. The
interest rate environment also caused a decrease in interest earned on early
pool buyout loans. Interest earned on escrow balances also decreased as a result
of a decrease in loan prepayment activity associated with the rise in interest
rates. In addition, interest expense increased due to the funding of higher
mortgage servicing assets.
Net Mortgage Origination Revenue
Net mortgage origination revenue is comprised of fees earned on the origination
of mortgage loans, gains and losses on the sale of loans, gains and losses
resulting from hedging of secondary marketing activities and fees charged to
review loan documents for purchased loan production.
Net mortgage origination revenue was $13.6 million for the three months ended
June 30, 2000 compared to $45.7 million for the three months ended June 30,
1999. The decrease was primarily due to a decrease in production volumes and
margins resulting from pricing competition and the volatile and rising interest
rate environment.
Other Income
Other income for the three months ended June 30, 2000 was $1.5 million compared
to $2.1 million for the three months ended June 30, 1999, a 27% decrease. The
decrease is primarily due to a decrease in real estate tax service fees
associated with decreased production.
Salaries and Employee Benefits
Salaries and employee benefits expense was $27.9 million for the three months
ended June 30, 2000 compared to $32.6 million for the three months ended June
30, 1999, a 15% decrease. The average number of full-time equivalent employees
was 2,365 for the three months ended June 30, 2000 compared to 2,706 for the
three months ended June 30, 1999. The decrease in salaries and employee benefits
is primarily attributable to lower commissions expense and lower incentives
associated with lower production volume as well as a reduction in temporary and
overtime staff resulting from the decrease in production volumes and reduced
prepayment activity.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs and
maintenance costs, certain computer software expenses and depreciation of
HomeSide's premises and equipment. Occupancy and equipment expense for the three
months ended June 30, 2000 was $7.7 million compared to $6.9 million for the
three months ended June 30, 1999, a 12% increase. The increase in expense was
primarily due to additional leased space and technology related assets.
Servicing Losses on Investor-Owned Loans and Foreclosure-Related Expenses
Servicing losses on investor-owned loans represent anticipated losses primarily
attributable to servicing FHA and VA loans for investors. These amounts include
actual losses for the final disposition of loans, non-recoverable foreclosure
costs, accrued interest for which payment has been curtailed and estimates for
potential losses based on HomeSide's experience as a servicer of government
loans.
The servicing losses on investor-owned loans and foreclosure-related expenses
totaled $9.1 million for the three months ended June 30, 2000 compared to $10.8
million for the three months ended June 30, 1999. The decrease was mainly
attributable to a decrease in delinquencies and decreased foreclosure-related
expenses.
Included in the balance of accounts payable and accrued liabilities at June 30,
2000 is a reserve for estimated servicing losses on investor-owned loans of
$16.7 million. The reserve has been established for potential losses related to
the mortgage servicing portfolio. Increases to the reserve are charged to
earnings as servicing losses on investor-owned loans. The reserve is decreased
for actual losses incurred related to the mortgage servicing portfolio.
HomeSide's historical loss experience on VA loans generally has been consistent
with industry experience. Management believes that HomeSide has an adequate
level of reserve based on servicing volume, portfolio composition, credit
quality and historical loss rates, as well as estimated future losses. Servicing
losses are generally greatest during the three to six year age of the loan.
The following table sets forth HomeSide's delinquency and foreclosure
experience:
<TABLE>
<CAPTION>
Servicing Portfolio Delinquencies
(percent by loan count)
June 30, 2000 June 30, 1999
-------------------- -------------------
Servicing Portfolio Delinquencies, excluding
bankruptcies (at end of period)
<S> <C> <C>
30 days 2.46% 3.20%
60 days 0.50% 0.59%
90+ days 0.44% 0.47%
-------------------- -------------------
Total past due 3.40% 4.26%
==================== ===================
Foreclosures pending 0.47% 0.66%
==================== ===================
Weighted average portfolio age in months 47.9 44.4
</TABLE>
Other Expenses and Goodwill Amortization
Other expenses consist mainly of professional fees, communications expense,
advertising and public relations, data processing expenses and certain loan
origination expenses. The level of other expenses fluctuates in part based upon
the level of HomeSide's mortgage servicing portfolio and loan production
volumes.
Other expenses were $13.3 million for the three months ended June 30, 2000,
compared to $15.5 million for the three months ended June 30, 1999, a 14%
decrease. The decrease is primarily due to a decrease in expenses associated
with decreased production volumes and a decrease in prepayment activity.
Goodwill amortization was $8.8 million and $8.8 million for the three-month
periods ended June 30, 2000 and 1999, respectively.
Income Tax Expense
HomeSide's income tax expense was $9.8 million for the three months ended June
30, 2000 compared to $15.3 million for the three months ended June 30, 1999. The
effective income tax rates for the three month periods ended June 30, 2000 and
1999 were 54% and 48%, respectively. The increase in the effective income tax
rate was due to an increase in the proportion of goodwill amortization, which is
not deductible for income tax purposes, to net income before taxes. This
increase was partially offset by a change in the geographic mix of the portfolio
into lower tax states and a decrease in production volume in states with higher
tax rates. Excluding goodwill amortization, the effective income tax rates for
the three months ended June 30, 2000 and 1999 were 36.5% and 37.7%,
respectively.
Results of Operations
For the nine months ended June 30, 2000 compared to the nine months ended June
30, 1999
Summary
HomeSide's net income decreased 2% to $48.3 million for the nine months ended
June 30, 2000, compared to $49.0 million for the nine months ended June 30,
1999. HomeSide's net income, excluding goodwill amortization from the
acquisition of HomeSide by the National, was $74.5 million for the nine months
ended June 30, 2000, compared to $75.3 million for the nine months ended June
30, 1999. Total revenues for the nine months ended June 30, 2000 were $275.0
million compared to $320.8 million for the nine months ended June 30, 1999, a
14% decrease. An increase in net servicing revenue was offset by decreases in
net interest revenue, net mortgage origination revenue, and other income. Net
servicing revenue increased 70% for the nine months ended June 30, 2000 compared
to the nine months ended June 30, 1999, primarily due to an increase in the
servicing portfolio and a decrease in the amortization rate of mortgage
servicing rights. Net interest revenue decreased due to a decreased average
balance of originated mortgage loans held for sale and increased funding
necessary to support increased mortgage servicing assets. Net mortgage
origination revenue decreased due to a decrease in production volumes and
pricing competition caused by the increase and volatility in mortgage interest
rates. Total expenses decreased as a result of a decrease in production related
expenses associated with a decline in refinance activity and a decrease in
servicing related expenses associated with a decline in prepayment activity and
improvements in servicing efficiency. Income tax expense decreased as a result
of a decrease in taxable net income and a decrease in the effective income tax
rate caused by a change in the geographic mix of the servicing portfolio into
lower tax states and a decrease in production volume in states with higher tax
rates.
Net Servicing Revenue
Net servicing revenue was $242.1 million for the nine months ended June 30, 2000
compared to $142.8 million for the nine months ended June 30, 1999, a 70%
increase. Net servicing revenue is comprised of mortgage servicing fees,
ancillary servicing revenue, and amortization of mortgage servicing rights.
Mortgage servicing fees increased 22% to $539.4 million for the nine months
ended June 30, 2000 compared to $442.1 million for the nine months ended June
30, 1999, primarily as a result of portfolio growth. The servicing portfolio
increased $14.2 billion to $156.8 billion at June 30, 2000 compared to $142.6
billion at June 30, 1999, a 10% increase. The portfolio growth is primarily due
to loan production, bulk acquisitions, and a decrease in mortgage loan
prepayments as fewer mortgagees refinance their loans. HomeSide's weighted
average interest rates of the mortgage loans in the servicing portfolio were
7.53% and 7.47% at June 30, 2000 and 1999, respectively. The weighted average
servicing fee, including ancillary income, for the servicing portfolio was
0.476% for the nine months ended June 30, 2000 compared to 0.467% for the nine
months ended June 30, 1999. The increase in the weighted average servicing fee
was primarily due to a decrease in loans purchased but not yet on the servicing
system, for which HomeSide earns a lower net servicing fee.
Amortization expense was $297.3 million for the nine months ended June 30, 2000
compared to $299.2 million for the nine months ended June 30, 1999, a 1%
decrease. Amortization expense decreased mainly as a result of a decrease in the
amortization rate, partially offset by a higher average balance of mortgage
servicing rights during the period. Amortization charges are highly dependent
upon the level of prepayments during the period and changes in prepayment
expectations, which are significantly influenced by the direction and level of
long-term interest rate movements. An increase in mortgage interest rates
results in a decrease in prepayment estimates used in calculating periodic
amortization expense. Because mortgage servicing rights are amortized over the
expected period of service fee revenues, a decrease in mortgage prepayment
activity typically results in a longer estimated life of the mortgage servicing
assets and, accordingly, lower amortization expense.
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the direction in
which rates are moving and the spread between short and long-term interest rates
and the rates at which HomeSide is able to borrow. These factors influence the
size of the residential mortgage origination market, HomeSide's loan production
volumes and the interest rates HomeSide earns on loans and pays to its lenders.
Loan refinancing levels are the largest contributor to changes in the size of
the mortgage origination market. As interest rates rise, fewer borrowers
refinance their mortgages, resulting in a decrease in the mortgage origination
market. Lower loan production volumes result in lower average balances of loans
held for sale and consequently lower levels of interest income from interest
earned on such loans prior to their sale. This lower level of interest income
due to decreased volumes is partially offset by the higher rates earned on the
loans.
Overall borrowing costs also fluctuate with changes in interest rates.
Currently, the interest expense HomeSide pays to finance mortgage loans held for
sale and other net assets is generally calculated with reference to short-term
interest rates. In addition, because mortgage loans held for sale earn interest
based on longer term interest rates, the level of net interest revenue is also
influenced by the spread between long-term and short-term interest rates.
Net interest revenue totaled ($23.2) million for the nine months ended June 30,
2000 compared to $47.8 million for the nine months ended June 30, 1999. The
decrease in net interest revenue was primarily due to a decrease in interest
income earned on loans held for sale as a result of lower average balances and a
narrowing of the spread between short-term and long-term interest rates.
Interest earned on escrow balances also decreased as a result of a decrease in
loan prepayment activity associated with the rise in interest rates. In
addition, interest expense increased due to the funding of higher mortgage
servicing assets.
Net Mortgage Origination Revenue
Net mortgage origination revenue is comprised of fees earned on the origination
of mortgage loans, gains and losses on the sale of loans, gains and losses
resulting from hedging of secondary marketing activities and fees charged to
review loan documents for purchased loan production.
Net mortgage origination revenue was $52.5 million for the nine months ended
June 30, 2000 compared to $125.6 million for the nine months ended June 30,
1999. The decrease was primarily due to a decrease in production volumes and
margins resulting from pricing competition and the volatile and rising interest
rate environment.
Other Income
Other income for the nine months ended June 30, 2000 was $3.6 million compared
to $4.6 million for the nine months ended June 30, 1999, a 21% decrease. The
decrease is primarily due to decreases in real estates tax service revenues
associated with the decrease in production.
Salaries and Employee Benefits
Salaries and employee benefits expense was $83.6 million for the nine months
ended June 30, 2000 compared to $101.0 million for the nine months ended June
30, 1999, a 17% decrease. The average number of full-time equivalent employees
was 2,463 for the nine months ended June 30, 2000 compared to 2,616 for the nine
months ended June 30, 1999. The decrease in salaries and employee benefits is
primarily attributable to lower commissions expense and lower incentives
associated with lower production volume as well as a reduction in temporary and
overtime staff resulting from the decrease in production volumes and reduced
prepayment activity.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs and
maintenance costs, certain computer software expenses and depreciation of
HomeSide's premises and equipment. Occupancy and equipment expense for the nine
months ended June 30, 2000 was $24.0 million compared to $20.0 million for the
nine months ended June 30, 1999, a 20% increase. The increase in expense was
primarily due to additional leased space and technology related assets.
Servicing Losses on Investor-Owned Loans and Foreclosure-Related Expenses
Servicing losses on investor-owned loans represent anticipated losses primarily
attributable to servicing FHA and VA loans for investors. These amounts include
actual losses for the final disposition of loans, non-recoverable foreclosure
costs, accrued interest for which payment has been curtailed and estimates for
potential losses based on HomeSide's experience as a servicer of government
loans.
The servicing losses on investor-owned loans and foreclosure-related expenses
totaled $24.8 million for the nine months ended June 30, 2000 compared to $29.5
million for the nine months ended June 30, 1999. The decrease was mainly
attributable to a decrease in delinquencies and a decrease in
foreclosure-related expenses.
Included in the balance of accounts payable and accrued liabilities at June 30,
2000 is a reserve for estimated servicing losses on investor-owned loans of
$16.7 million. The reserve has been established for potential losses related to
the mortgage servicing portfolio. Increases to the reserve are charged to
earnings as servicing losses on investor-owned loans. The reserve is decreased
for actual losses incurred related to the mortgage servicing portfolio.
HomeSide's historical loss experience on VA loans generally has been consistent
with industry experience. Management believes that HomeSide has an adequate
level of reserve based on servicing volume, portfolio composition, credit
quality and historical loss rates, as well as estimated future losses. Servicing
losses are generally greatest during the three to six year age of the loan.
The following table sets forth HomeSide's delinquency and foreclosure
experience:
<TABLE>
<CAPTION>
Servicing Portfolio Delinquencies
(percent by loan count)
June 30, 2000 June 30, 1999
-------------------- -------------------
Servicing Portfolio Delinquencies, excluding
bankruptcies (at end of period)
<S> <C> <C>
30 days 2.46% 3.20%
60 days 0.50% 0.59%
90+ days 0.44% 0.47%
-------------------- -------------------
Total past due 3.40% 4.26%
==================== ===================
Foreclosures pending 0.47% 0.66%
==================== ===================
Weighted average portfolio age in months 47.9 44.4
</TABLE>
Other Expenses and Goodwill Amortization
Other expenses consist mainly of professional fees, communications expense,
advertising and public relations, data processing expenses and certain loan
origination expenses. The level of other expenses fluctuates in part based upon
the level of HomeSide's mortgage servicing portfolio and loan production
volumes.
Other expenses were $36.0 million for the nine months ended June 30, 2000,
compared to $47.9 million for the nine months ended June 30, 1999, a 25%
decrease. The decrease is primarily due to a decrease in expenses associated
with decreased production volumes and a decrease in prepayment activity.
Goodwill amortization was $26.3 million for nine months ended June 30, 2000 and
$26.2 million for the nine months ended June 30, 1999.
Income Tax Expense
HomeSide's income tax expense was $32.1 million for the nine months ended June
30, 2000 compared to $47.2 million for the nine months ended June 30, 1999. The
effective income tax rates for the nine month periods ended June 30, 2000 and
1999 were 41% and 50%, respectively. The decrease in the effective income tax
rate was due to a change in the geographic mix of the servicing portfolio into
lower tax states and a decrease in production volume in states with higher tax
rates. In the current interest rate environment, this trend is expected to
continue.
Risk Management Activities
HomeSide has a risk management program designed to protect the economic value of
its mortgage servicing portfolio from declines in value due to increases in
estimated loan prepayment speeds, which are mainly influenced by declines in
interest rates. When loans prepay faster than anticipated, the cash flow
HomeSide expects to receive from servicing such loans is reduced. When interest
rates increase, prepayment rates decline and influence an increase in expected
cash flows. 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 and increases
as prepayments decline.
During the three months ended June 30, 2000, HomeSide utilized options on U.S.
Treasury bond and note futures, Eurodollar futures, interest rate swaps,
interest rate swaptions, interest rate caps, mortgage pass-throughs and options
on mortgage pass-throughs to protect a significant portion of the market value
of its mortgage servicing portfolio from a decline in value. The risk management
contracts used by HomeSide have characteristics such that they tend to increase
in value as interest rates decline. Conversely, these risk management contracts
tend to decline in value as interest rates rise. Accordingly, changes in value
of these risk management instruments will tend to move inversely with changes in
value of HomeSide's mortgage servicing rights.
These risk management instruments are designated as hedges on the purchase date
and such designation is at a level at least as specific as the level at which
mortgage servicing rights are evaluated for impairment. The risk management
instruments are marked-to-market with changes in market value deferred and
applied as an adjustment to the basis of the related mortgage servicing right
asset being hedged. As a result, any changes in market value that are deferred
are amortized and evaluated for impairment in the same manner as the related
mortgage servicing rights. The effectiveness of HomeSide's hedging activity can
be measured by the correlation between changes in the value of the risk
management instruments and changes in the value of HomeSide's mortgage servicing
rights. This correlation is assessed on a quarterly basis to ensure that high
correlation is maintained over the term of the hedging program. If management's
ongoing assessment of correlation indicates that high correlation is not being
achieved, the Company will discontinue the application of hedge accounting and
recognize a gain or loss to the extent the hedge results have not been offset by
changes in value of the hedged asset during the hedge period.
At June 30, 2000, deferred losses on risk management contracts resulted in
cumulative net deferred hedge losses of $821.8 million which were substantially
offset by changes in the value of mortgage servicing rights and included in the
carrying value of mortgage servicing rights. Activity in the deferred hedge
account during the nine months ended June 30, 2000 is as follows (in thousands):
Net deferred hedge balance at September 30, 1999 $ (494,743)
Net deferred hedge loss (377,376)
Amortization of deferred hedge losses 50,285
---------------
Net deferred hedge balance at June 30, 2000 $ (821,834)
===============
HomeSide's future cash needs as they relate to its hedging program will be
influenced by such factors as long-term interest rates, loan production levels
and growth in the mortgage servicing portfolio. The fair value of open risk
management contracts at June 30, 2000 was $(202.8) million. This amount is
comprised of interest rate swaps, caps and swaptions with a fair value of
$(226.6) million, partially offset by options on U.S. Treasury bonds, Eurodollar
futures, options on mortgage pass-throughs and mortgage pass-throughs with a
fair market value of $23.8 million. The premiums paid on options along with
amounts due to or from counterparties related to risk management contracts are
included in Other Assets and Other Liabilities in the accompanying consolidated
balance sheet. See "Liquidity and Capital Resources" for further discussion of
HomeSide's sources and uses of cash. See Note 3 of the Notes to Consolidated
Financial Statements included in HomeSide's Form 10-K for the fiscal year ended
September 30, 1999 for a description of HomeSide's accounting policy for its
risk management contracts. See Notes 12 and 13 of the Notes to Consolidated
Financial Statements included in HomeSide's Form 10-K for the fiscal year ended
September 30, 1999 for additional fair value disclosures with respect to
HomeSide's risk management contracts.
Liquidity and Capital Resources
The Company's principal financing needs are the financing of loan origination
activities and the investment in mortgage servicing rights. To meet these needs,
the Company currently utilizes funding from its commercial paper program, a
credit facility with the National, medium-term notes, floating-rate notes, an
independent syndicate of banks, repurchase agreements, and cash flow from
operations. HomeSide continues to investigate and pursue alternative and
supplementary methods to finance its growing operations through the public and
private capital markets. These may include methods designed to expand the
Company's financial capacity and reduce its cost of capital. In addition, to
facilitate the sale and distribution of certain mortgage products, HomeSide
Mortgage Securities, Inc., a wholly-owned subsidiary of HomeSide Lending, Inc.,
may continue to issue mortgage-backed securities.
Operations
Net cash used in operations for the quarter ended June 30, 2000 was $419.7
million. Net cash provided by operations for the quarter ended June 30, 1999 was
$420.0 million. Net cash provided by operating activities for the nine month
periods ended June 30, 2000 and 1999 was $305.7 million and $1,048.3 million,
respectively. Cash provided from servicing fee income, loan sales and principal
repayments was offset by cash used for the origination and purchase of mortgage
loans held for sale and to pay corporate expenses. Cash flows from loan
originations are dependent upon current economic conditions and the level of
long-term interest rates. Increases in long-term interest rates generally result
in lower loan refinancing activity, which results in lower cash demands to meet
loan production levels.
Investing
Net cash used in investing activities for the quarters ended June 30, 2000 and
1999 were $123.5 million and $297.2 million, respectively. Net cash used in
investing activities for the nine month periods ended June 30, 2000 and 1999
were $924.7 million and $1,150.5 million, respectively. Cash used in investing
activities was primarily for the purchase of mortgage servicing rights and risk
management contracts. Cash was provided by proceeds from risk management
contracts and early pool buyout reimbursements. Future uses of cash for
investing activities will be dependent on the mortgage origination market and
HomeSide's hedging needs. HomeSide is not able to estimate the timing and amount
of cash uses for future acquisitions of other mortgage banking entities, if such
acquisitions were to occur.
Financing
Net cash provided by financing activities for the quarters ended March 31, 2000
and 1999 was $417.7 million and $19.9 million, respectively. Net cash provided
by financing activities for the nine month periods ended June 30, 2000 and 1999
were $594.9 million and $265.9 million, respectively. Cash was provided by
borrowings from the National and the issuance of notes payable and commercial
paper. Cash was used for repayment of borrowings from the National and
commercial paper, payment of debt issue costs, payment of dividends to the
Parent, and repayment of medium-term notes which became due during the quarter
ended June 30, 2000.
HomeSide expects that to the extent cash generated from operations is inadequate
to meet its liquidity needs, those needs can be met through financing from its
bank credit facility and other facilities which may be entered into from time to
time, as well as from the issuance of debt securities in the public markets.
Accordingly, HomeSide does not currently anticipate that it will make sales of
servicing rights to any significant degree for the purpose of generating cash.
Nevertheless, in addition to its cash and mortgage loans held for sale balances,
HomeSide's portfolio of mortgage servicing rights provides a potential source of
funds to meet liquidity requirements, especially in periods of rising interest
rates when loan origination volume slows. Repurchase agreements also provide an
alternative to the established funding sources 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.
Quantitative and Qualitative Market Risk
There have been no material changes in the Company's market risk from September
30, 1999. For information regarding the Company's market risk, refer to Form
10-K for the fiscal year ended September 30, 1999 of HomeSide International,
Inc.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
HomeSide is a defendant in a number of legal proceedings arising in the normal
course of business. HomeSide, in management's estimation, has recorded adequate
reserves in the financial statements for pending litigation. Management, after
reviewing all actions and proceedings pending against or involving HomeSide,
considers that the aggregate liability or loss, if any, resulting from the final
outcome of these proceedings will not have a material effect on the financial
position of HomeSide.
In recent years, the mortgage banking industry has been subject to class action
lawsuits which allege violations of federal and state laws and regulations,
including the propriety of collecting and paying various fees and charges. Class
action lawsuits may be filed in the future against the mortgage banking
industry.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following document is filed as a part of this Report:
Number Description
10.1 Trust under NAB Group - USA Deferred Compensation Plan
10.2 Second Amendment dated June 21, 2000 to Unsecured Revolving Credit
Agreement between HomeSide Lending, Inc. and National Australia Bank Ltd.
10.3 Second Amended and Restated Renewal Promissory Note dated June 21, 2000
between HomeSide Lending, Inc. and National Australia Bank, Ltd.
27 Financial Data Schedule
(b) Reports on form 8-K
HomeSide filed no reports on Form 8-K during the quarter ended June 30,
2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HomeSide Lending, Inc.
----------------------
(Registrant)
Date: August 14, 2000 By: /s/__________________________
Hugh R. Harris
Chief Executive Officer (Principal Executive Officer)
Date: August 14, 2000 By: /s/__________________________
W. Blake Wilson
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
