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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended February 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 1-8422
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13 - 2641992
(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
155 N. Lake Avenue, Pasadena, California 91101-1857
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 304-8400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.05 Par Value New York Stock Exchange
Pacific Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ X ]
As of May 7, 1996, there were 102,363,651 shares of Countrywide Credit
Industries, Inc. Common Stock, $.05 par value, outstanding. Based on the closing
price for shares of Common Stock on that date, the aggregate market value of
Common Stock held by non-affiliates of the registrant was approximately
$1,996,789,000. For the purposes of the foregoing calculation only, all
directors and executive officers of the registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1996 Annual Meeting
PART I
ITEM 1. BUSINESS
A. General
Countrywide Credit Industries, Inc. (the "Company" or "CCI") is a holding
company which, through its principal subsidiary, Countrywide Home Loans, Inc.
("CHL") (formerly Countrywide Funding Corporation), is engaged primarily in the
mortgage banking business, and as such originates, purchases, sells and services
mortgage loans. The Company's mortgage loans are principally prime credit
quality first-lien mortgage loans secured by single- (one to four) family
residences. The Company also offers home equity loans both in conjunction with
newly produced first-lien mortgages and as a separate product, and sub-prime
credit quality first-lien single-family mortgage loans ("B&C loans"). The
Company, through its other wholly-owned subsidiaries, offers products and
services complementary to its mortgage banking business. A subsidiary of the
Company trades to other broker-dealers and institutional investors
mortgage-backed securities ("MBS") and other mortgage-related assets. In
addition, a subsidiary of the Company receives fee income for managing the
operations of CWM Mortgage Holdings, Inc. ("CWM"), a real estate investment
trust whose shares are traded on the New York Stock Exchange. CWM conducts real
estate lending activities and has an affiliate engaged in the operation of a
jumbo and non-conforming mortgage loan conduit. The Company also has a
subsidiary which acts as an agent in the sale of insurance, including
homeowners, fire, flood, earthquake, mortgage life and disability, to CHL's
mortgagors and others. Another subsidiary of the Company earns fee income by
brokering servicing contracts owned by other mortgage lenders and loan
servicers. The Company also has a subsidiary that acts as a provider of various
title insurance and escrow services in the capacity of an agent rather than an
underwriter. Unless the context otherwise requires, references to the "Company"
herein shall be deemed to refer to the Company and its consolidated
subsidiaries.
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for certain forward-looking statements. This Annual Report on Form 10-K
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. Readers are cautioned not
to place undue reliance on these 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 level of
demand for mortgage credit, which is affected by such external factors as the
level of interest rates, the strength of the various segments of the economy and
demographics of the Company's lending markets; (2) the direction of interest
rates; (3) the relationship between mortgage interest rates and the cost of
funds; (4) federal and state regulation of the Company's mortgage banking
operations and (5) competition within the mortgage banking industry.
B. Mortgage Banking Operations
The principal sources of revenue from the Company's mortgage banking
business are: (i) loan origination fees; (ii) gains from the sale of loans, if
any; (iii) interest earned on mortgage loans during the period that they are
held by the Company pending sale, net of interest paid on funds borrowed to
finance such mortgage loans; (iv) loan servicing fees and (v) interest benefit
derived from the custodial balances associated with the Company's servicing
portfolio.
Loan Production
The Company originates and purchases conventional mortgage loans, mortgage
loans insured by the Federal Housing Administration ("FHA"), mortgage loans
partially guaranteed by the Veterans Administration ("VA"), home equity loans
and, beginning in 1995, B&C loans. A majority of the conventional loans are
conforming loans which qualify for inclusion in guarantee programs sponsored by
the Federal National Mortgage Association ("Fannie Mae") or the Federal Home
Loan Mortgage Corporation ("Freddie Mac"). The remainder of the conventional
loans are non-conforming loans (i.e., jumbo loans with an original balance in
excess of $207,000 or other loans that do not meet Fannie Mae or Freddie Mac
guidelines). As part of its mortgage banking activities, the Company makes
conventional loans generally with original balances of up to $1 million.
The following table sets forth the number and dollar amount of the Company's
mortgage, home equity and B&C loan production for the periods indicated.
----------------------------- --- -------------------------------------------------------------------------------
Summary of the Company's Mortgage*,
(Dollar amounts in millions, Home Equity and B&C Loan Production
except average loan amount) Year Ended February 29(28),
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
Conventional Loans
Number of Loans 191,534 175,823 315,699 192,385 63,919
Volume of Loans $21,883.4 $20,958.7 $46,473.4 $28,669.9 $9,986.6
Percent of Total Volume 63.3% 75.2% 88.6% 88.5% 82.2%
FHA/VA Loans
Number of Loans 125,127 72,365 67,154 42,022 24,329
Volume of Loans $12,259.3 $6,808.3 $5,985.5 $3,717.9 $2,169.7
Percent of Total Volume 35.5% 24.4% 11.4% 11.5% 17.8%
Home Equity Loans
Number of Loans 7,986 2,147 - - -
Volume of Loans $220.8 $99.2 - - -
Percent of Total Volume 0.6% 0.4% - - -
B&C Loans
Number of Loans 1,941 - - - -
Volume of Loans $220.2 - - - -
Percent of Total Volume 0.6% - - - -
Total Loans
Number of Loans 326,588 250,335 382,853 234,407 88,248
Volume of Loans $34,583.7 $27,866.2 $52,458.9 $32,387.8 $12,156.3
Average Loan Amount $106,000 $111,000 $137,000 $138,000 $138,000
----------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
* Prime-credit quality first mortgages.
The increase in the number and dollar amount of conventional loans in the
year ended February 29, 1996 as compared to year ended February 28, 1995 was
attributable primarily to the decreasing mortgage interest rate environment,
resulting in an increase in mortgage loan activity, particularly refinancings.
The increase in the number and dollar amount of FHA and VA loans produced in the
year ended February 29, 1996 from those produced in the years ended February 28,
1995 and 1994 was attributable to the decreasing mortgage interest rate
environment and the Company's effort to expand its share of that market due to
the popularity of FHA and VA loans among borrowers and the returns earned on
those products by the Company.
For the years ended February 29(28), 1996, 1995 and 1994, jumbo loans
represented 6%, 17% and 30%, respectively, of the Company's total volume of
mortgage loans produced. The decrease in the percentage of jumbo loans was
primarily the result of pricing of the Company's jumbo loans compared to pricing
offered by competitors for similar products, diversification of the Company's
loan production out of states with relatively higher housing costs and into
states with relatively lower housing costs and an increase in the percentage of
total volume attributable to FHA and VA loans. For the years ended February
29(28), 1996, 1995 and 1994, adjustable-rate mortgage loans ("ARMs") comprised
approximately 22%, 34% and 19%, respectively, of the Company's total volume of
mortgage loans produced. The decrease in the Company's percentage of ARM
production from 1995 to 1996 was primarily caused by consumer preference for
fixed-rate mortgages due to the decreasing mortgage interest rate environment
that prevailed through most of the year ended February 29, 1996. For the years
ended February 29(28), 1996, 1995 and 1994, refinancing activity represented
34%, 30% and 75%, respectively, of the Company's total volume of mortgage loans
produced. The increase in the percentage of refinance loans from the year ended
February 28, 1995 to the year ended February 29, 1996 was principally due to the
general decrease in average mortgage interest rates during that period which
caused an increase in the demand for refinance loans.
The Company produces mortgage loans through three separate divisions. The
Company maintains a staff of central office quality control personnel that
performs audits of the loan production of the three divisions on a regular
basis. In addition, each division has implemented various procedures to control
the quality of loans produced, as described below. The Company believes that its
use of technology, benefits derived from economies of scale and a
noncommissioned sales force allow it to produce loans at a low cost relative to
its competition.
Consumer Markets Division
The Company's Consumer Markets Division (the "Consumer Markets Division")
originates loans using direct contact with consumers through its nationwide
network of retail branch offices and its telemarketing systems. As of February
29, 1996, the Company had 250 Consumer Markets Division branch offices, one
satellite office and two processing support centers located in 41 states and the
District of Columbia. The Company's branch offices are each staffed typically by
three employees and connected to the Company's central office by a computer
network. During the year ended February 29, 1996, the Consumer Markets Division
converted substantially all of its satellite offices into branch offices. In
addition, the Company operates two telemarketing centers which receive telephone
calls placed by potential borrowers in response to print or broadcast
advertising. The loan counselors employed in the telemarketing centers provide
information and accept loan applications, which are then forwarded to a branch
office for processing and funding. Business is also solicited through other
forms of telemarketing and advertising, participation of branch management in
local real estate-related business functions and extensive use of direct
mailings to real estate brokers and builders. Consumer Markets Division
personnel are not paid a commission on sales; however, they are paid a bonus
based on various factors, including branch profitability. The Company believes
that this approach allows it to originate loans at a comparatively low cost. The
Consumer Markets Division uses continuous quality control audits of loans
originated within each branch by branch management and quality control personnel
to monitor compliance with the Company's underwriting criteria.
The following table sets forth the number and dollar amount of the Consumer
Markets Division's mortgage and home equity loan production for the periods
indicated.
----------------------------- -- -----------------------------------------------------------------------------
Summary of the Consumer Markets Division's Mortgage* and
(Dollar amounts in millions, Home Equity Loan Production
except average loan amount) Year Ended February 29(28),
----------------------------- -- ------------- --- ------------ -- ------------ --- ----------- -- -----------
1996 1995 1994 1993 1992
----------------------------- -- ------------- --- ------------ -- ------------ --- ----------- -- -----------
Conventional Loans
Number of Loans 47,260 48.772 73,249 39,787 19,549
Volume of Loans $5,271.8 $5,442.2 $9,264.8 $5,026.7 $2,553.3
Percent of Total Volume 70.7% 77.0% 80.2% 82.4% 81.8%
FHA/VA Loans
Number of Loans 22,829 19,060 26,418 11,739 6,505
Volume of Loans $2,025.4 $1,612.1 $2,282.3 $1,073.0 $567.2
Percent of Total Volume 27.1% 22.8% 19.8% 17.6% 18.2%
Home Equity Loans
Number of Loans 6,000 297 - - -
Volume of Loans $160.9 $11.4 - - -
Percent of Total Volume 2.2% 0.2% - - -
Total Loans
Number of Loans 76,089 68,129 99,667 51,526 26,054
Volume of Loans $7,458.1 $7,065.7 $11,547.1 $6,099.7 $3,120.5
Average Loan Amount $98,000 $104,000 $116,000 $118,000 $120,000
----------------------------- -- ------------- --- ------------ -- ------------ --- ----------- -- -----------
* Prime-credit quality first mortgages.
Wholesale Division
Through its Wholesale Division (the "Wholesale Division"), the Company
originates loans through and purchases loans from mortgage loan brokers. As of
February 29, 1996, the Wholesale Division operated 56 loan centers and six
regional support centers in various parts of the country. Prime credit quality
loans produced by the Wholesale Division comply with the Company's general
underwriting criteria for loans originated through the Consumer Markets
Division, and each such loan is approved by one of the Company's loan
underwriters. B&C loans are underwritten centrally by a specialized underwriting
group and comply with the Company's underwriting criteria for such loans. In
addition, quality control personnel review loans for compliance with the
Company's underwriting criteria. Approximately 7,700 mortgage brokers qualify to
participate in this program. Mortgage loan brokers qualify to participate in the
Wholesale Division's program only after a review by the Company's management of
their reputation and mortgage lending expertise, including a review of their
references and financial statements.
The following table sets forth the number and dollar amount of the Wholesale
Division's mortgage, home equity and B&C loan production for the periods
indicated.
----------------------------- --- ----------------------------------------------------------------------------
Summary of the Wholesale Division's Mortgage*,
(Dollar amounts in millions, Home Equity and B&C Loan Production
except average loan amount) Year Ended February 29(28),
----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
1996 1995 1994 1993 1992
----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
Conventional Loans
Number of Loans 59,670 65,713 130,937 92,922 27,661
Volume of Loans $6,766.9 $7,790.0 $21,271.0 $15,480.1 $5,093.5
Percent of Total Volume 84.0% 91.6% 98.9% 100.0% 99.7%
FHA/VA Loans
Number of Loans 10,448 6,239 2,700 15 230
Volume of Loans $1,016.2 $626.3 $244.4 $1.5 $17.4
Percent of Total Volume 12.6% 7.4% 1.1% 0.0% 0.3%
Home Equity Loans
Number of Loans 1,937 1,836 - - -
Volume of Loans $57.5 $86.9 - - -
Percent of Total Volume 0.7% 1.0% - - -
B&C Loans
Number of Loans 1,941 - - - -
Volume of Loans $220.2 - - - -
Percent of Total Volume 2.7% - - - -
Total Loans
Number of Loans 73,996 73,788 133,637 92,937 27,891
Volume of Loans $8,060.8 $8,503.2 $21,515.4 $15,481.6 $5,110.9
Average Loan Amount $109,000 $115,000 $161,000 $167,000 $183,000
----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
* Prime-credit quality first mortgages.
Correspondent Division
Through its network of correspondent offices (the "Correspondent Division"),
the Company purchases loans primarily from other mortgage bankers, commercial
banks, savings and loan associations, credit unions and other financial
intermediaries. The Company's correspondent offices are located in Pasadena,
California; Plano, Texas and Pittsburgh, Pennsylvania. Over 1,300 financial
intermediaries serving all 50 states are eligible to participate in this
program. Loans purchased by the Company through the Correspondent Division
comply with the Company's general underwriting criteria for loans that it
originates through the Consumer Markets Division, and, except as described in
the next sentence, each loan is accepted only after review either by one of the
Company's loan underwriters or, in the case of FHA or VA loans, by a
government-approved underwriter. The Company accepts loans without such review
from an institution that has met the Company's standards for the granting of
delegated underwriting authority following a review by the Company of the
institution's financial strength, underwriting and quality control procedures,
references and prior experience with the Company. During the year ended February
29, 1996, approximately 80% of conventional loans purchased through the
Correspondent Division were accepted without review by a Company underwriter. In
addition, quality control personnel review loans purchased from correspondents
for compliance with the Company's underwriting criteria. The purchase agreement
used by the Correspondent Division provides the Company with recourse to the
seller in the event of such occurrences as fraud or misrepresentation in the
origination process or a request by the investor who purchased an underlying
mortgage loan that the Company repurchase the loan due to the loan's failure to
meet eligibility requirements at the time the Company originally purchased the
loan. Financial intermediaries qualify to participate in the Correspondent
Division's program after a review by the Company's management of the reputation
and mortgage lending expertise of such institutions, including a review of their
references and financial statements.
The following table sets forth the number and dollar amount of the
Correspondent Division's mortgage and home equity loan production for the
periods indicated.
----------------------------- ------------------------------------------------------------------------------- --
Summary of the Correspondent Division's Mortgage*
(Dollar amounts in millions, and Home Equity Loan Production
except average loan amount) Year Ended February 29(28),
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
1996 1995 1994 1993 1992
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Conventional Loans
Number of Loans 84,604 61,338 111,513 59,676 16,709
Volume of Loans $9,844.7 $7,726.5 $15,937.6 $8,163.0 $2,340.0
Percent of Total Volume 51.7% 62.8% 82.2% 75.5% 59.6%
FHA/VA Loans
Number of Loans 91,850 47,066 38,036 30,268 17,594
Volume of Loans $9,217.7 $4,570.0 $3,458.8 $2,643.5 $1,585.0
Percent of Total Volume 48.3% 37.2% 17.8% 24.5% 40.4%
Home Equity Loans
Number of Loans 49 14 - - -
Volume of Loans $2.4 $0.8 - - -
Percent of Total Volume 0.0% 0.0% - - -
Total Loans
Number of Loans 176,503 108,418 149,549 89,944 34,303
Volume of Loans $19,064.8 $12,297.3 $19,396.4 $10,806.5 $3,925.0
Average Loan Amount $108,000 $113,000 $130,000 $120,000 $114,000
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
* Prime-credit quality first mortgages.
Fair Lending Programs
In conjunction with fair lending initiatives undertaken by both Fannie Mae
and Freddie Mac and promoted by various government agencies including the
Department of Housing and Urban Development ("HUD"), the Company has established
affordable home loan and fair lending programs for low- and moderate-income and
designated minority borrowers. These programs offer more flexible underwriting
guidelines (consistent with those guidelines adopted by Fannie Mae and Freddie
Mac) than historical industry standards, thereby enabling more people to qualify
for home loans than had qualified under such historical guidelines. Highlights
of these flexible guidelines include a lower down payment requirement, more
liberal guidelines in areas such as credit and employment history, less income
required to qualify and no cash reserve requirements at the date of funding.
House America(R) is the Company's principal affordable home loan program for
low- and moderate-income borrowers. During the year ended February 29, 1996, the
Company produced approximately $1.3 billion of mortgage loans under this
program. House America(R) personnel work with all of the Company's production
divisions to help properly implement the flexible underwriting guidelines. In
addition, an integral part of the program is the House America(R) Counseling
Center, a free educational service, which can provide consumers a homebuyers
educational program, pre-qualify them for a loan or provide a customized budget
plan to help consumers obtain their goal of home ownership. To assist a broad
spectrum of consumers, counselors are bilingual and work with consumers for up
to one year, providing guidance on a regular basis via phone and mail. The
Company also organizes and participates in local homebuyer fairs across the
country. At these fairs, branch personnel and Counseling Center counselors
discuss various loan programs, provide free prequalfications and distribute
credit counseling and homebuyer education videos and workbooks.
In addition, a selection of applications from certain designated minority
and other borrowers that are initially recommended for denial within the
Company's Consumer Markets Division is forwarded for an additional review by a
manager of the Company to insure that denial is appropriate. The application of
more flexible underwriting guidelines may carry a risk of increased
delinquencies; however, based upon the Company's experience since the inception
of the program, the performance of loans approved under these more flexible
guidelines has been similar to that of FHA and VA loans in the Company's
servicing portfolio.
Loan Underwriting
The Company's guidelines for underwriting FHA-insured loans and
VA-guaranteed loans comply with the criteria established by such agencies. The
Company's guidelines for underwriting conventional conforming loans comply with
the underwriting criteria employed by Fannie Mae and/or Freddie Mac. The
Company's underwriting guidelines and property standards for conventional
non-conforming loans are based on the underwriting standards employed by private
mortgage insurers and private investors for such loans. The Company requires all
conventional non-conforming loans to be approved by a mortgage insurer's
contract underwriting division in addition to its own underwriters. In addition,
conventional loans originated or purchased by the Company with a loan-to-value
ratio greater than 80% at origination are covered by private mortgage insurance.
In conjunction with fair lending initiatives undertaken by both Fannie Mae
and Freddie Mac, the Company has established affordable home loan programs for
low- and moderate-income and designated minority borrowers offering more
flexible underwriting guidelines than historical industry standards. See
"Business--Mortgage Banking Operations--Fair Lending Programs."
The following describes the general underwriting criteria taken into
consideration by the Company in determining whether to approve a loan
application. These criteria generally apply to all types of loans.
Employment and Income
Applicants must exhibit the ability to generate income on a regular basis in
order to meet the housing payments relating to the loan as well as any other
debts they may have. Evidence of employment and income is obtained through a
written verification of employment with the current and prior employers or by
obtaining a recent pay stub and W-2 forms. Self-employed applicants are required
to provide tax returns, financial statements or other documentation to verify
income. Sources of income to be considered include salary, bonus, overtime,
commissions, retirement benefits, notes receivable, interest, dividends,
unemployment benefits and rental income.
Debt-to-Income Ratios
Generally, an applicant's monthly income should be three times the amount of
monthly housing expenses (loan payment, real estate taxes, hazard insurance and
homeowner dues, if applicable). Monthly income should generally be two and
one-half times the amount of total fixed monthly obligations (housing expense
plus other obligations such as car loans or credit card payments). Other areas
of financial strength, such as equity in the property, large cash reserves or a
history of meeting prior home mortgage or rental obligations are considered to
be compensating factors and may result in an adjustment of these ratio
limitations.
Credit History
An applicant's credit history is examined for both favorable and unfavorable
occurrences. An applicant who has made payments on outstanding or previous
credit obligations according to the contractual terms may be considered
favorable. Unfavorable items such as slow payment records, suits, judgments,
bankruptcy, liens, foreclosure or garnishment are discussed with the applicant
in order to determine the reasons for the unfavorable rating. In some instances,
the applicant may explain the reasons for these ratings to indicate that there
were extenuating circumstances beyond the applicant's control which would
mitigate the effect of such unfavorable item on the credit decision.
Property
The property's market value and physical condition as compared to the value
of similar properties in the area is assessed to ensure that the property
provides adequate collateral for the loan. Generally, properties are appraised
by licensed real estate appraisers where a purchase, rate-and-term refinance or
cash-out refinance is involved.
Funds for Closing
Generally, applicants are required to have sufficient funds of their own to
make a minimum five percent down payment. Funds for closing costs may come from
the applicant or may be a gift from a family member. Certain loan programs
require the applicant to have sufficient funds for a down payment of only three
percent and the remaining funds provided by a gift or an unsecured loan from a
municipality or a non-profit organization.
Certain programs require the applicant to have cash reserves after closing.
Maximum Indebtedness to Appraised Value
Generally, the maximum amount the Company will loan is 95% of the appraised
value of the property. For certain types of loans, this percentage may be
increased. Loan amounts in excess of 80% of the appraised value require mortgage
insurance (which may be paid by the borrower or by the lender) to protect
against foreclosure loss. After funding and sale of the mortgage loans, the
Company's exposure to credit loss in the event of non-performance by the
mortgagor is limited as described in the section "Business--Mortgage Banking
Operations--Sale of Loans."
Geographic Distribution
The following table sets forth the geographic distribution of the Company's
mortgage, home equity and B&C loan production for the year ended February 29,
1996.
--- --------------------------------------------------------------------------------------------- ---
Geographic Distribution of the Company's
Mortgage*, Home Equity and B&C Loan Production
--- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
Percentage of
Number Principal Total Dollar
(Dollar amounts in of Loans Amount Amount
millions)
--- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
California 79,898 $10,712,145 31.0%
Florida 20,379 1,696,245 4.9%
Texas 18,630 1,629,125 4.7%
Colorado 12,783 1,374,940 4.0%
Washington 11,851 1,363,291 3.9%
Arizona 11,902 1,097,770 3.2%
Illinois 10,019 1,077,205 3.1%
New York 7,868 1,028,925 3.0%
Michigan 9,687 992,632 2.9%
Maryland 7,447 875,216 2.5%
New Jersey 7,414 856,206 2.5%
Ohio 9,431 809,328 2.3%
Utah 7,668 805,458 2.3%
Georgia 8,322 794,447 2.3%
Nevada 7,223 773,607 2.2%
Virginia 6,933 751,415 2.2%
Pennsylvania 8,157 739,993 2.1%
Others (1) 80,976 7,205,705 20.9%
------------------ ----------------- -----------------
326,588 $34,583,653 100.0%
================== ================= =================
--- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
* Prime-credit quality first mortgage.
(1) No other state constitutes more than 2.0% of the total dollar amount of
loan production.
California mortgage loan production as a percentage of total mortgage loan
production (measured by principal balance) for the fiscal years ended February
29(28), 1996, 1995 and 1994 was 31%, 31% and 46%, respectively. Loan production
within California is geographically dispersed, which minimizes dependence on any
individual local economy. The decline in the percentage of the Company's
mortgage loan production in California during the three-year period ended
February 29, 1996 is the result of implementing the Company's strategy to expand
production capacity and market share outside of California and increased price
competition in the California mortgage loan market, particularly with respect to
ARM products which are generally preferred by consumers in an increasing
interest rate environment (as generally was the environment during the year
ended February 28, 1995). In California, the Company competes with savings and
loans and other portfolio lenders which offer aggressively-priced ARM products,
particularly in an environment of increasing interest rates. At February 29,
1996, 79% of the Consumer Markets Division branch offices and the Wholesale
Division loan centers were located outside of California.
The following table sets forth the distribution by county of the Company's
California loan production for the year ended February 29, 1996.
--- ---------------------------------------------------------------------------------------------- --
Distribution by County of the Company's California
Loan Production
--- ----------------------------- -- ------------------ -- ----------------- -- ------------------ --
Percentage of
Number Principal Total Dollar
(Dollar amounts in of Loans Amount Amount
millions)
--- ----------------------------- -- ------------------ -- ----------------- -- ------------------ --
Los Angeles 21,306 $2,929.0 27.3%
Orange 7,494 1,113.7 10.4%
San Diego 6,451 903.5 8.4%
San Bernardino 5,483 596.3 5.6%
Riverside 4,965 556.1 5.2%
Others (1) 34,199 4,613.5 43.1%
------------------ ----------------- ------------------
79,898 $10,712.1 100.0%
================== ================= ==================
--- ----------------------------- -- ------------------ -- ----------------- -- ------------------ --
(1) No other county in California constitutes more than 5.0% of the
total dollar amount of California loan production.
Sale of Loans
As a mortgage banker, the Company customarily sells all loans that it
originates or purchases. The Company packages substantially all of its
FHA-insured and VA-guaranteed mortgage loans into pools of loans. It sells these
pools in the form of modified pass-through MBS guaranteed by the Government
National Mortgage Association ("Ginnie Mae") to national or regional
broker-dealers. With respect to loans securitized through Ginnie Mae programs,
the Company is insured against foreclosure loss by the FHA or partially
guaranteed against foreclosure loss by the VA (at present, generally 25% to 50%
of the loan, up to a maximum amount of $50,750, depending upon the amount of the
loan). Conforming conventional loans may be pooled by the Company and exchanged
for securities guaranteed by Fannie Mae or Freddie Mac, which securities are
then sold to national or regional broker-dealers. Loans securitized through
Fannie Mae or Freddie Mac are sold on a non-recourse basis whereby foreclosure
losses are generally the responsibility of Fannie Mae and Freddie Mac, and not
the Company. Alternatively, the Company may sell FHA-insured and VA-guaranteed
mortgage loans and conforming conventional loans, and consistently sells its
jumbo loan production, to large buyers in the secondary market (which can
include national or regional broker-dealers) on a non-recourse basis. These
loans can be sold either on a whole-loan basis or in the form of pools backing
securities which are not guaranteed by any governmental instrumentality but
which generally have the benefit of some form of external credit enhancement,
such as insurance, letters of credit, payment guarantees or senior/subordinated
structures. Substantially all loans sold by the Company are sold without
recourse, subject, in the case of VA loans to the limits of the VA guaranty
described above. For the fiscal years ended February 29(28), 1996, 1995 and
1994, the aggregate loss experience of the Company on VA loans in excess of the
VA guaranty was approximately $3.8 million, $2.6 million and $2.1 million,
respectively. In the opinion of management, the losses on VA loans increased
from the year ended February 28, 1995 to the year ended February 29, 1996 due to
the increase in the size and the aging of the VA loan servicing portfolio.
CWM, a real estate investment trust managed by a subsidiary of the Company,
may purchase at market prices both conforming and non-conforming conventional
loans from the Company. During the years ended February 29(28), 1996, 1995 and
1994, CWM purchased $14.3 million, $80.4 million and $300.5 million,
respectively, of conventional non-conforming mortgage loans from the Company.
In order to offset the risk that a change in interest rates will result in a
decrease in the value of the Company's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("Committed Pipeline"), the
Company enters into hedging transactions. The Company's hedging policies
generally require that substantially all of the Company's inventory of
conforming and government loans and the maximum portion of its Committed
Pipeline that the Company believes may close be hedged with forward contracts
for the delivery of MBS or options on MBS. The inventory is then used to form
the MBS that will fill the forward delivery contracts and options. The Company
hedges its inventory and Committed Pipeline of jumbo mortgage loans by using
whole-loan sale commitments to ultimate buyers or by using temporary "cross
hedges" with sales of MBS since such loans are ultimately sold based on a market
spread to MBS. As such, the Company is not exposed to significant risk nor will
it derive any significant benefit from changes in interest rates on the price of
the inventory net of gains or losses of associated hedge positions. The
correlation between the price performance of the hedge instruments and the
inventory being hedged is very high due to the similarity of the asset and the
related hedge instrument. The Company is exposed to interest-rate risk to the
extent that the portion of loans from the Committed Pipeline that actually
closes at the committed price is less than the portion expected to close in the
event of a decline in rates and such decline in closings is not covered by
forward contracts and options to purchase MBS needed to replace the loans in
process that do not close at their committed price. The Company determines the
portion of its Committed Pipeline that it will hedge based on numerous factors,
including the composition of the Committed Pipeline, the portion of such
Committed Pipeline likely to close, the timing of such closings and anticipated
changes in interest rates. See Note F to the Company's Consolidated Financial
Statements.
Loan Servicing
The Company services on a non-recourse basis substantially all of the
mortgage loans that it originates or purchases. In addition, the Company
purchases bulk servicing contracts, also on a non-recourse basis, to service
single-family residential mortgage loans originated by other lenders. Servicing
contracts acquired through bulk purchases accounted for 19% of the Company's
mortgage servicing portfolio as of February 29, 1996. Servicing mortgage loans
includes collecting and remitting loan payments, making advances when required,
accounting for principal and interest, holding custodial (impound) funds for
payment of property taxes and hazard insurance, making any physical inspections
of the property, counseling delinquent mortgagors, supervising foreclosures and
property dispositions in the event of unremedied defaults and generally
administering the loans. The Company receives a fee for servicing mortgage loans
ranging generally from 1/4% to 1/2% per annum on the declining principal
balances of the loans. The servicing fee is collected by the Company out of
monthly mortgage payments.
The Company's servicing portfolio is subject to reduction by scheduled
amortization or by prepayment or foreclosure of outstanding loans. In addition,
the Company has sold, and may sell in the future, a portion of its portfolio of
loan servicing rights to other mortgage servicers. In general, the decision to
sell servicing rights or newly originated loans on a servicing-released basis is
based upon management's assessment of the Company's cash requirements, the
Company's debt-to-equity ratio and other significant financial ratios, the
market value of servicing rights and the Company's current and future earnings
objectives.
Generally, it is the Company's strategy to build and retain its servicing
portfolio. Loans are serviced from two facilities, in Simi Valley, California
and in Plano, Texas (see "Properties"). The Company has developed systems that
it believes enable it to service mortgage loans efficiently and therefore
enhance the returns it can earn from its investments in servicing rights. For
example, data elements pertaining to loans originated or purchased by the
Company are entered into the Company's advanced automated loan system ("EDGE")
at the time of origination or purchase and are transferred to the loan servicing
system without manual re-entry. Customer service representatives in both the
California and Texas facilities have access to on-line screens containing all
pertinent data about a customer's account, thus eliminating the need to refer to
paper files and shortening the average length of a customer call. The Company
has a telephone system which enables it to control the flow of calls to both
locations. The Company's payment processing equipment can process 10,000 checks
per hour, which enables the Company to deposit virtually all cash on the same
day it is received. Many tax and insurance remittances on behalf of borrowers
are processed electronically, thus eliminating the need for printed
documentation and shortening the processing time required. Telephone collectors
utilize a predictive dialing system that maximizes each employee's efficiency by
accessing the borrower's account record on the collector's computer screen and
connecting the collector to the call when the telephone has been answered.
The Company believes that loan production earnings will partially offset the
effect of interest rate fluctuations on the earnings from its servicing
portfolio. In general, the value of the Company's servicing portfolio and the
income generated therefrom improve as interest rates increase and decline when
interest rates fall. Generally, in an environment of declining interest rates,
which prevailed through most of the Company's fiscal year ended February 29,
1996, the rate of current and projected future prepayments increases, resulting
in an increased rate of amortization and impairment of capitalized servicing
fees receivable and mortgage servicing rights. However, the Company's servicing
portfolio hedging activities generally generate a gain during periods of
declining interest rates. At the same time, the decline in interest rates
generally contributes to high levels of loan production (particularly
refinancings). Generally, in an environment of increasing interest rates, which
prevailed through most of the Company's fiscal year ended February 28, 1995, the
rate of current and projected future prepayments decreases, resulting in a
decreased rate of amortization and impairment of capitalized servicing fees
receivable and mortgage servicing rights, and a decrease in gain from servicing
portfolio hedging activities. Amortization and impairment, net of servicing
hedge gain, is deducted from loan administration revenue. An increase in
interest rates also generally causes loan production (particularly refinancings)
to decline.
The following table sets forth certain information regarding the Company's
servicing portfolio of single-family mortgage loans, including loans held for
sale and loans subserviced for others, for the periods indicated.
---------------------------------- -- -------------------------------------------------------------------------
(Dollar amounts in millions) Year Ended February 29(28),
---------------------------------- -- -------------------------------------------------------------------------
Composition of Servicing 1996 1995 1994 1993 1992
Portfolio at Period End:
----------- -- ------------ -- ----------- -- ----------- -- ------------
FHA-Insured Mortgage Loans $ 23,206.5 $ 17,587.5 $ 9,793.7 $ 8,233.8 $ 6,271.2
VA-Guaranteed Mortgage Loans 10,686.2 7,454.3 3,916.0 3,307.2 2,438.3
Conventional Mortgage Loans 102,417.0 87,998.2 70,915.2 42,876.8 18,833.5
Home Equity Loans 204.5 31.3 - - -
B&C Loans 289.1 - - - -
----------- ------------ ----------- ----------- ------------
Total Servicing Portfolio $136,803.3 $113,071.3 $84,624.9 $54,417.8 $27,543.0
=========== ============ =========== =========== ============
Beginning Servicing Portfolio $113,071.3 $ 84,624.9 $54,417.8 $27,543.0 $15,680.6
Add: Loan Production 34,583.7 27,866.2 52,458.9 32,387.8 12,156.3
Bulk Servicing and
Subservicing 6,428.5 17,888.1 3,514.9 3,083.9 2,932.6
Acquired
Less: Servicing Transferred (1) (53.5) (6,287.4) (8.1) (12.6) (269.3)
Runoff (2) (17,226.7) (11,020.5) (25,758.6) (8,584.3) (2,957.2)
----------- ------------ ----------- ----------- ------------
Ending Servicing Portfolio $136,803.3 $113,071.3 $84,624.9 $54,417.8 $27,543.0
=========== ============ =========== =========== ============
Delinquent Mortgage Loans and Pending
Foreclosures at Period End (3):
30 days 2.13% 1.80% 1.82% 2.05% 2.45%
60 days 0.48 0.29 0.28 0.40 0.58
90 days or more 0.59 0.42 0.39 0.58 0.80
----------- ----------- ------------ ----------- ------------
Total Delinquencies 3.20% 2.51% 2.49% 3.03% 3.83%
=========== =========== ============ =========== ============
Foreclosures Pending 0.49% 0.29% 0.29% 0.36% 0.46%
----------- ----------- ------------ ----------- ------------
---------------------------------- -- ----------- -- ----------- -- ------------ -- ----------- -- ------------
(1) Servicing rights sold are generally deleted from the servicing
portfolio at the time of sale. The Company generally subservices such
loans from the sales contract date to the transfer date.
(2) Runoff refers to scheduled principal repayments on loans and
unscheduled prepayments (partial prepayments or total prepayments due
to refinancing, modifications, sale, condemnation or foreclosure).
(3) As a percentage of the total number of loans serviced excluding
subserviced loans.
At February 29, 1996, the Company's servicing portfolio of single-family
mortgage loans was stratified by interest rate as follows.
-- -------------------------- -- --------------------------------------------------------------------------------
(Dollar amounts in Total Portfolio at February 29, 1996
millions)
-- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
Weighted Servicing
Interest Principal Percent Average Assets
Rate Balance of Total Maturity (Years) Balance (1)
-- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
7% and under $ 29,992.3 21.9% 23.9 $ 470.5
7.01-8% 63,870.4 46.7% 26.0 1,283.6
8.01-9% 33,626.1 24.6% 26.8 457.7
9.01-10% 7,975.3 5.8% 26.3 97.8
over 10% 1,339.2 1.0% 23.5 14.1
=============== ============== ===================== ===============
$136,803.3 100.0% 25.7 $2,323.7
=============== ============== ===================== ===============
-- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
(1) Capitalized servicing fees receivable and mortgage servicing rights.
The weighted average interest rate of the single-family mortgage loans in
the Company's servicing portfolio at February 29, 1996 was 7.8% as compared with
7.6% at February 28, 1995. At February 29, 1996, 80% of the loans in the
servicing portfolio bore interest at fixed rates and 20% bore interest at
adjustable rates. The weighted average net service fee of the portfolio was
0.378% at February 29, 1996 and the weighted average interest rate of the
fixed-rate loans in the servicing portfolio was 7.8%.
The following table sets forth the geographic distribution of the Company's
servicing portfolio of single-family mortgage loans, including loans held for
sale and loans subserviced for others, as of February 29, 1996.
---------------------------------------------------- --------------------
Percentage of Principal
Balance Serviced
---------------------------------------------------- --------------------
California 40.5%
Florida 4.4%
Texas 4.1%
Washington 3.5%
New York 2.9%
Illinois 2.8%
Colorado 2.6%
Massachusetts 2.6%
New Jersey 2.5%
Arizona 2.5%
Virginia 2.4%
Maryland 2.3%
Georgia 2.1%
Ohio 2.0%
Other (1) 22.8%
==============
100.0%
==============
---------------------------------------------------------------------------
(1) No other state contains more than 2.0% of the properties securing loans
in the Company's servicing portfolio.
Financing of Mortgage Banking Operations
The Company's principal financing needs are the financing of loan funding
activities and the investment in servicing rights. To meet these needs, the
Company currently utilizes commercial paper supported by CHL's revolving credit
facility, medium-term notes, MBS repurchase agreements, subordinated notes,
unsecured notes, pre-sale funding facilities and cash flow from operations. The
Company estimates that it had available committed and uncommitted credit
facilities aggregating approximately $6.0 billion at February 29, 1996. In June
1995, the Company completed a public offering of its common stock through the
issuance and sale of 10,000,000 shares at a price of $21 per share. In addition,
in the past the Company has utilized whole loan repurchase agreements,
servicing-secured bank facilities, direct borrowings from CHL's revolving credit
facility, privately-placed financings and public offerings of preferred stock.
For further information on the material terms of the borrowings utilized by the
Company to finance its inventory of mortgage loans and MBS and its investment in
servicing rights, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." The
Company continues to investigate and pursue alternative and supplementary
methods to finance its operations through the public and private capital
markets. These may include such methods as mortgage loan sale transactions
designed to expand the Company's financial capacity and reduce its cost of
capital and the securitization of servicing income cash flows.
Seasonality
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
C. Countrywide Asset Management Corporation
Through its subsidiary Countrywide Asset Management Corporation ("CAMC"),
the Company manages the investments and oversees the day-to-day operations of
CWM and its subsidiaries. For performing these services, CAMC receives a base
management fee of 1/8 of 1% per annum of CWM's average-invested mortgage-related
assets not pledged to secure collateralized mortgage obligations ("CMOs"). CAMC
also receives a management fee equal to 0.2% per annum of the average amounts
outstanding under CWM's warehouse lines of credit. In addition, CAMC receives
incentive compensation equal to 25% of the amount by which the CWM annualized
return on equity exceeds the ten-year U.S. treasury rate plus 2%. In connection
with a new business plan implemented by CWM in 1993, CAMC waived all management
fees for calendar year 1993 and 25% of the incentive compensation earned in
1994. In addition, in 1993 CAMC absorbed $0.9 million of operating expenses
incurred in connection with the new business plan. In June 1993, CWM and its
subsidiaries began reimbursing CAMC for all expenses of the new operations. As
of December 31, 1995, 1994 and 1993, the consolidated total assets of CWM were
$2.6 billion, $2.0 billion and $1.4 billion, respectively. During the fiscal
years ended February 29(28), 1996, 1995 and 1994, CAMC earned $2.0 million, $0.3
million and $0.1 million, respectively, in base management fees from CWM and its
subsidiaries. In addition, during the fiscal years ended February 29(28), 1996
and 1995, CAMC recorded $6.6 million and $1.1 million, respectively, in
incentive compensation, net of the amount waived as described above. At February
29, 1996, the Company and CAMC owned 1,120,000 shares, or approximately 2.58%,
of the common stock of CWM. See Note K to the Company's Consolidated Financial
Statements.
D. Other Operations
Through various other subsidiaries, the Company conducts business in a
number of areas related to the mortgage banking business. The activities of
these subsidiaries include:
The Company operates a securities broker-dealer, Countrywide Securities
Corporation ("CSC"), which is a member of the National Association of Securities
Dealers, Inc. and the Securities Investor Protection Corporation. CSC trades MBS
and other mortgage-related assets with broker-dealers and institutional
investors.
The Company's insurance agency subsidiary, Countrywide Agency, Inc., acts as
an agent for the sale of insurance, including homeowners, fire, flood,
earthquake, mortgage life and disability, to CHL's mortgagors and others.
Another subsidiary of the Company, CTC Foreclosure Services Corporation,
serves as trustee under deeds of trust in connection with the Company's mortgage
loan production in California and certain other states.
Countrywide Servicing Exchange ("CSE") is a national servicing brokerage and
consulting firm. CSE acts as an agent facilitating transactions between buyers
and sellers of bulk servicing contracts.
LandSafe, Inc. and its subsidiaries act as a provider of various title
insurance and escrow services in the capacity of an agent rather than an
underwriter. The Company offers title insurance commitments and policies,
settlement services and property profiles to realtors, builders, consumers,
mortgage brokers and other financial institutions.
Countrywide Financial Services Corporation and its subsidiaries act as a
provider of various financial services to CHL customers.
Countrywide General Agency of Texas, Inc., manages the day-to-day operations
of an agency for the sale of homeowners, life and automobile insurance to CHL
customers in the State of Texas.
Another subsidiary of the Company, Charter Reinsurance Corporation ("CRC"),
reinsures a portion of mortgage insurance losses on loans originated by the
Company that are insured by the mortgage insurance company with which CRC has
entered into a reinsurance agreement. CRC shares in the premiums collected and
losses incurred by the mortgage insurance company.
E. Proprietary Data Processing Systems
The Company employs technology wherever applicable and continually searches
for new and better ways of both providing services to its customers and
maximizing efficiency of its operations. Proprietary systems currently in use by
the Company include CLUESTM, an artificial intelligence system that is designed
to expedite the review of applications, credit reports and property appraisals.
The Company believes that CLUESTM increases underwriters' productivity, reduces
costs and provides greater consistency to the underwriting process. Another
system in use is EDGE, which is an advanced automated loan origination system
that is designed to reduce the time and cost associated with the loan
application and funding process. This front-end system was internally developed
for the Company's exclusive use and is integrated with the Company's loan
servicing, sales, accounting and other systems. The Company believes that the
EDGE system improves the quality of the loan products and customer service by:
(i) reducing risk of deficient loans; (ii) facilitating accurate pricing; (iii)
promptly generating loan documents with the use of laser printers; (iv)
providing for electronic communication with credit bureaus and other vendors and
(v) generally minimizing manual data input. From pre-qualification to funding,
the Company believes EDGE significantly reduces origination and processing costs
and speeds funding time.
The Company has developed and implemented DirectLine Plus(R), which is
designed to provide support to mortgage brokers and enable them to obtain the
latest pricing, to review the Company's lending program guidelines, to submit
applications, to directly obtain information about specific loans in progress
and to send and receive electronic messages to and from the Company's processing
center. Recent enhancements to DirectLine Plus(R) integrate that application
with CLUES-ON-LINE, an adaption of CLUESTM for use with DirectLine Plus(R) ,
which is designed to allow the mortgage broker to submit loan information and
receive a qualified underwriting decision within minutes.
In addition, the Company is developing CLASS, which is designed to offer
automated loan settlement services by using electronic data interchange to
facilitate the preparation of closing documents at the office of the closing
agent. The Company plans to deploy CLASS in the offices of a wide range of
business partners (such as Realtors and other entities that are involved in the
closing of a mortgage loan transaction). Another system that was recently
developed is the LOAN COUNSELOR. The LOAN COUNSELOR is designed to give business
partners direct access to the Company's package of financial services and to
permit such business partners to pre-qualify prospective applicants, provide
"what if" scenarios to help find the appropriate loan product, take the
application and receive a qualified underwriting decision. The Company plans to
integrate the LOAN COUNSELOR with both CLUESTM and the EDGE system.
The Company has implemented a telemarketing application designed to provide
enterprise-wide information on both current and prospective customers. The
system, called Mortgage Counselor, helps production divisions to identify
prospective customers to solicit for specific products or services, and to
obtain the results of any solicitation. Management believes that the database
will give the Company a significant advantage in its ability to protect its
servicing portfolio and generate additional revenue by cross-selling other
products and services.
The Company also participates on the Internet with the goal of enhancing
business partner relationships and providing loan origination services directly
to the consumer. The Company has a public site on the World Wide Web from which
information as to product offerings as well as prequalification applications,
can be obtained. In addition, a similar 'private site' is available for business
partners of the Correspondent Division to view pricing and product information
as well as loan status. In management's view, the Internet provides a unique
medium to deliver mortgage services at a cost significantly lower than that
incurred in conventional marketing methods.
F. Regulation
The Company's mortgage banking business is subject to the rules and
regulations of HUD, FHA, VA, Fannie Mae, Freddie Mac and Ginnie Mae with respect
to originating, processing, selling and servicing mortgage loans. Those rules
and regulations, among other things, prohibit discrimination, provide for
inspections and appraisals, require credit reports on prospective borrowers and
fix maximum loan amounts. Moreover, FHA lenders such as the Company are required
annually to submit to the Federal Housing Commissioner audited financial
statements, and Ginnie Mae requires the maintenance of specified net worth
levels (which vary depending on the amount of Ginnie Mae securities issued by
the Company). The Company's affairs are also subject to examination by the
Federal Housing Commissioner at all times to assure compliance with the FHA
regulations, policies and procedures. Mortgage origination activities are
subject to the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Home
Mortgage Disclosure Act and the Real Estate Settlement Procedures Act and the
regulations promulgated thereunder which prohibit discrimination, require the
disclosure of certain basic information to mortgagors concerning credit and
settlement costs, limit payment for settlement services to the reasonable value
of the services rendered and require the maintenance and disclosure of
information regarding the disposition of mortgage applications based on race,
gender, geographical distribution and income level.
Additionally, various state laws and regulations affect the Company's
mortgage banking operations. The Company is licensed as a mortgage banker or
regulated lender in those states in which such license is required.
Conventional mortgage operations may also be subject to state usury
statutes. FHA and VA loans are exempt from the effect of such statutes.
Securities broker-dealer operations are subject to federal and state
securities laws, as well as the rules of both the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
Insurance agency and title insurance operations are subject to insurance
laws of each of the states in which the Company conducts such operations.
G. Competition
The mortgage banking industry is highly competitive and fragmented. The
Company competes with other financial intermediaries (such as mortgage bankers,
commercial banks, savings and loan associations, credit unions and insurance
companies) and mortgage banking subsidiaries or divisions of diversified
companies. During the year ended February 29, 1996, several independent mortgage
banking companies and the mortgage banking operations of financial or
diversified companies exited the market through acquisition by another company
(especially banks), merger or attrition. The Company believes that this exit
from the marketplace by other mortgage banking companies was the result of such
factors as declining profits due to adverse market conditions in 1994 and
changing management focus. Generally, the Company competes by offering products
with competitive features, by emphasizing the quality of its service and by
pricing its range of products at competitive rates. During periods of decreasing
interest rates, (as was the case during most of the year ended February 29,
1996), consumers tend to prefer fixed-rate mortgage products over ARM products.
Particularly in California, savings and loans and other portfolio lenders have
competed with the Company by offering aggressively priced ARM products which
tend to grow in popularity when interest rates rise.
In recent years, the aggregate share of the United States market for
residential mortgage loans that is served by mortgage bankers has risen,
principally due to the decline in the savings and loan industry. According to
industry statistics, mortgage bankers' aggregate share of this market increased
from approximately 19% during calendar year 1989 to approximately 56% during
calendar year 1995. The Company believes that it has benefited from this trend.
G. Employees
At February 29, 1996, the Company employed 4,825 persons, 1,936 of whom were
engaged in production activities, 1,242 were engaged in loan administration
activities and 1,647 were engaged in other activities. None of these employees
is represented by a collective bargaining agent.
ITEM 2. PROPERTIES
The primary executive and administrative offices of the Company and its
subsidiaries are located in leased space at 155 North Lake Avenue and 35 North
Lake Avenue, Pasadena, California, and consist of approximately 220,000 square
feet. The principal leases covering such space expire in the year 2011. The
Company also owns an office facility of approximately 300,000 square feet
located on 43.5 acres in Simi Valley, California, which is used primarily to
house a portion of the Company's loan servicing and data processing operations,
and a 253,000 square foot office building situated on 18 acres in Plano, Texas,
which houses additional loan servicing, loan production and data processing
operations. In addition, the Plano facility provides the Company with a business
recovery site located out of the State of California.
The Company leases or owns office space in several other buildings in the
Pasadena area. Additionally, CHL leases office space for each of its Consumer
Markets Division branch offices (each ranging from approximately 308 to 2,840
square feet), Wholesale Division loan centers (each ranging from approximately
1,310 to 4,831 square feet) and Correspondent Division offices (each ranging
from approximately 7,132 to 10,929 square feet). These leases vary in term and
have different rent escalation provisions. In general, the leases extend through
fiscal year 1999, contain buyout provisions and provide for rent escalation tied
to increases in the Consumer Price Index or operating costs of the premises.
ITEM 3. LEGAL PROCEEDINGS
On June 22, 1995, a lawsuit was filed by Jeff and Kathy Briggs, as a
purported class action, against Countrywide Funding Corporation (now known as
Countrywide Home Loans, Inc.) and a mortgage broker in the Northern Division of
the United Sates District Court for the Middle District of Alabama. The suit
claims, among other things, that in connection with residential mortgage loan
closings, CHL made certain payments to mortgage brokers in violation of the Real
Estate Settlement Procedures Act and induced mortgage brokers to breach their
alleged fiduciary duties to their customers. The plaintiffs seek unspecified
compensatory and punitive damages plus, as to certain claims, treble damages.
CHL's management believes that its compensation programs to mortgage brokers
comply with applicable law and with long-standing industry practice, and that it
has meritorious defenses to the action. CHL intends to defend vigorously against
the action and believes that the ultimate resolution of such claims will not
have a material adverse effect on CHL or the Company.
The Company and certain subsidiaries are defendants in various lawsuits
involving matters generally incidental to their business. Although it is
difficult to predict the ultimate outcome of these cases, management believes,
based on discussions with counsel, that any ultimate liability will not
materially affect the consolidated financial position of the Company and its
subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange ("NYSE")
and the Pacific Stock Exchange (Symbol: CCR). The following table sets forth the
high and low sales prices (as reported by the NYSE) for the Company's common
stock and the amount of cash dividends declared for the fiscal years ended
February 29(28), 1996 and 1995.
----- --------------- ------------------------- --- ------------------------- --- -------------------------------
Cash Dividends
Fiscal 1996 Fiscal 1995 Declared
----- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- --------------
Quarter High Low High Low Fiscal 1996 Fiscal 1995
----- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- --------------
First $20.50 $15.50 $17.50 $13.33 $0.08 $0.08
Second 23.13 18.38 18.75 12.88 0.08 0.08
Third 26.75 20.00 15.38 13.63 0.08 0.08
Fourth 24.00 19.00 16.25 12.38 0.08 0.08
----- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- --------------
The Company has declared and paid cash dividends on its common stock
quarterly since 1979, except that no cash dividend was declared in the fiscal
quarter ended February 28, 1982. For the fiscal years ended February 29(28),
1996 and 1995, the Company declared quarterly cash dividends aggregating $0.32
per share. On March 19, 1996, the Company declared a quarterly cash dividend of
$0.08 per common share, paid April 16, 1996.
The ability of the Company to pay dividends in the future is limited by
various restrictive covenants in the debt agreements of the Company; the
earnings, cash position and capital needs of the Company; general business
conditions and other factors deemed relevant by the Company's Board of
Directors. The Company is prohibited under certain of its debt agreements,
including its guaranties of CHL's revolving credit facility, from paying
dividends on any capital stock (other than dividends payable in capital stock or
stock rights), except that so long as no event of default under the agreements
exists at the time, the Company may pay dividends in an aggregate amount not to
exceed the greater of: (i) the after-tax net income of the Company, determined
in accordance with generally accepted accounting principles, for the fiscal year
to the end of the quarter to which the dividends relate and (ii) the aggregate
amount of dividends paid on common stock during the immediately preceding year.
The primary source of funds for payments to stockholders by the Company is
dividends received from its subsidiaries. Accordingly, such payments by the
Company in the future also depend on various restrictive covenants in the debt
obligations of its subsidiaries; the earnings, the cash position and the capital
needs of its subsidiaries; as well as laws and regulations applicable to its
subsidiaries. Unless the Company and CHL each maintain specified minimum levels
of net worth and certain other financial ratios, dividends cannot be paid by the
Company and CHL in compliance with certain of CHL's debt obligations (including
the revolving credit facility). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The Company has paid stock dividends and declared stock splits since 1978 as
follows: 50% in October 1978; 50% in July 1979; 15% in November 1979; 15% in May
1980; 30% in November 1980; 30% in May 1981; 3% in February 1982; 2% in May
1982; 0.66% in April 1983; 1% in July 1983; 2% in April 1984; 2% in November
1984; 2% in June 1985; 2% in October 1985; 2% in March 1986; 3-for-2 split in
September 1986; 2% in April 1987; 2% in April 1988; 2% in October 1988; 2% in
November 1989; 3-for-2 split in July 1992; 5% in April 1993 and 3-for-2 split in
May 1994.
As of May 7, 1996, there were 2,653 shareholders of record of the Company's
common stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
----------------------------------------------- -----------------------------------------------------------------
Years ended February 29(28),
(Dollar amounts in thousands, except per 1996 1995 1994 1993 1992
share data)
----------------------------------------------- ------------ ------------ ------------ ------------- ------------
Selected Statement of Earnings Data:
Revenues:
Loan origination fees $199,724 $203,426 $379,533 $241,584 $91,933
Gain (loss) on sale of loans 92,341 (41,342) 88,212 67,537 38,847
------------ ------------ ------------ ------------- ------------
Loan production revenue 292,065 162,084 467,745 309,121 130,780
Interest earned 354,226 280,917 320,217 191,389 103,014
Interest charges (281,573) (205,464) (219,898) (128,612) (69,760)
------------ ------------ ------------ ------------- ------------
Net interest income 72,653 75,453 100,319 62,777 33,254
Loan servicing income 575,058 428,994 307,477 177,291 94,830
Less amortization and impairment of
servicing assets (342,811) (95,768) (242,177) (151,362) (53,768)
Servicing hedge gain (loss) 200,135 (40,030) 73,400 74,075 17,000
Less write-off of servicing hedge - (25,600) - - -
------------ ------------ ------------ ------------- ------------
Net loan administration income 432,382 267,596 138,700 100,004 58,062
Commissions, fees and other income 63,642 40,650 48,816 33,656 19,714
Gain on sale of servicing - 56,880 - - 4,302
------------ ------------ ------------ ------------- ------------
Total revenues 860,742 602,663 755,580 505,558 246,112
------------ ------------ ------------ ------------- ------------
Expenses:
Salaries and related expenses 229,668 199,061 227,702 140,063 72,654
Occupancy and other office expenses 106,298 102,193 101,691 64,762 36,645
Guarantee fees 121,197 85,831 57,576 29,410 13,622
Marketing expenses 27,115 23,217 26,030 12,974 5,015
Other operating expenses 50,264 37,016 43,481 24,894 17,849
Branch and administrative office
consolidation costs - 8,000 - - -
------------ ------------ ------------ ------------- ------------
Total expenses 534,542 455,318 456,480 272,103 145,785
------------ ------------ ------------ ------------- ------------
Earnings before income taxes 326,200 147,345 299,100 233,455 100,327
Provision for income taxes 130,480 58,938 119,640 93,382 40,131
------------ ------------ ------------ ------------- ------------
Net earnings $195,720 $88,407 $179,460 $140,073 $60,196
=============================================== ============ ============ ============ ============= ============
Per Share Data (1):
Primary - $1.95 $0.96 $1.97 $1.65 $0.89
Fully diluted - $1.95 $0.96 $1.94 $1.52 $0.81
Cash dividends per share $0.32 $0.32 $0.29 $0.25 $0.15
Weighted average shares outstanding -
Primary 100,270,000 92,087,000 90,501,000 82,514,000 63,800,000
Fully diluted 100,270,000 92,216,000 92,445,000 92,214,000 74,934,000
=============================================== ============ ============ ============ ============= ============
Selected Balance Sheet Data at End of Period:
Total assets $8,657,653 $5,710,182 $5,631,061 $3,369,499 $2,474,625
Short-term debt $4,423,738 $2,664,006 $3,111,945 $1,579,689 $1,046,289
Long-term debt $1,911,800 $1,499,306 $1,197,096 $ 734,762 $ 383,065
Convertible preferred stock - - - $ 25,800 $ 37,531
Common shareholders' equity $1,319,755 $ 942,558 $ 880,137 $ 693,105 $ 558,617
=============================================== ============ ============ ============ ============= ============
Operating Data (dollar amounts in millions):
Loan servicing portfolio (2) $136,835 $113,111 $84,678 $54,484 $27,546
Volume of loans originated $ 34,584 $ 27,866 $52,459 $32,388 $12,156
=============================================== ============ ============ ============ ============= ============
(1) Adjusted to reflect subsequent stock dividends and splits.
(2) Includes warehoused loans and loans under subservicing agreements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's strategy is concentrated on three components of its business:
loan production, loan servicing and businesses ancillary to mortgage lending.
See "Business--Mortgage Banking Operations." The Company intends to continue its
efforts to increase its market share of, and realize increased income from, its
loan production. In addition, the Company is engaged in building its loan
servicing portfolio because of the returns it can earn from such investment. A
strong production capability and a growing servicing portfolio are the primary
means used by the Company to reduce the sensitivity of its earnings to changes
in interest rates because loan production income characteristics are
countercyclical to the effect of interest rate changes on servicing income.
Finally, the Company is involved in business activities complementary to its
mortgage banking business, such as acting as agent in the sale of homeowners,
fire, flood, earthquake, mortgage life and disability insurance to its
mortgagors, providing various title insurance and escrow services in the
capacity of an agent rather than an underwriter, brokering servicing contracts
and trading mortgage-backed securities ("MBS") and other mortgage-related
assets.
The Company's results of operations historically have been primarily
influenced by: (i) the level of demand for mortgage credit, which is affected by
such external factors as the level of interest rates, the strength of the
various segments of the economy and the demographics of the Company's lending
markets; (ii) the direction of interest rates and (iii) the relationship between
mortgage interest rates and the cost of funds.
The Company's performance during the fiscal year ended February 28, 1994
("Fiscal 1994") set new operating records. In calendar year 1993, the Company
became the nation's largest servicer of single-family mortgages and at February
28, 1994 had a servicing portfolio of $84.7 billion, an increase of 55% over the
portfolio at the end of Fiscal 1993. This servicing portfolio growth was
accomplished through increased loan production volume of low-coupon mortgages.
In addition, the Company acquired bulk servicing rights with an aggregate
principal balance of $3.4 billion. In Fiscal 1994, the Company also maintained
its position as the nation's leader in originations of single-family mortgages
for the second consecutive year. This performance was due to: (i) continued
implementation of the Company's production expansion strategy designed to
penetrate new markets and expand in existing markets, particularly outside
California, and to further increase market share; (ii) a continued decline in
average mortgage interest rates that prevailed during most of 1993 and (iii)
introduction of new technologies that improved productivity. In Fiscal 1994, the
Company's market share increased to approximately 5.1% of the estimated $1.0
trillion single-family mortgage origination market, up from approximately 4% of
the estimated $825 billion market in Fiscal 1993.
The fiscal year ended February 28, 1995 ("Fiscal 1995") was a period of
transition from a mortgage market dominated by refinances resulting from
historically low interest rates to an extremely competitive and smaller mortgage
market in which refinances declined to a relatively small percentage of total
fundings and customer preference for adjustable-rate mortgages increased. In
this transition, which resulted from the increase in interest rates during the
year, intense price competition developed that resulted in the Company
experiencing negative production margins in Fiscal 1995. At the same time, the
increase in interest rates caused a decline in the prepayment rate in the
servicing portfolio which, combined with a decline in the rate of expected
future prepayments, caused a reduction in amortization of the capitalized
servicing fees receivable and purchased servicing rights ("Servicing Assets").
This decrease in amortization contributed to improved earnings from the
Company's servicing activities. The Company addressed the challenges of the year
by: (i) expanding its share of the home purchase market; (ii) reducing costs to
maintain its production infrastructure in line with reduced production levels
and (iii) accelerating the growth of its servicing portfolio by aggressively
acquiring servicing contracts through bulk purchases. These strategies produced
the following results: (i) home purchase production increased from $13.3
billion, or 25% of total fundings, in Fiscal 1994 to $19.5 billion, or 70% of
total fundings, in Fiscal 1995, helping the Company maintain its position as the
nation's leader in originations of single-family mortgages for the third
consecutive year; (ii) the number of staff engaged in production activities
declined from approximately 3,900 at the end of Fiscal 1994 to approximately
2,400 at the end of Fiscal 1995; (iii) production-related and overhead costs
declined from $328 million in Fiscal 1994 to $270 million in Fiscal 1995 and
(iv) bulk servicing purchases increased to $17.6 billion in Fiscal 1995 from
$3.4 billion in Fiscal 1994. These bulk servicing acquisitions, combined with
slower prepayments caused by increased mortgage interest rates, helped the
Company maintain its position as the nation's largest servicer of single-family
mortgages for the second
consecutive year. In Fiscal 1995, the Company's market share decreased to
approximately 4% of the estimated $660 billion single-family mortgage
origination market.
The fiscal year ended February 29, 1996 ("Fiscal 1996") was a record year in
profits for the Company. Loan production increased to $34.6 billion from $27.9
billion in Fiscal 1995. The Company attributes the increase to (i) a decline in
mortgage interest rates during most of the year; (ii) the implementation of a
national advertising campaign aimed at developing a brand identity for
Countrywide and reaching the consumer directly and (iii) the opening of two
telemarketing centers which, through the use of proprietary systems, provide
product information specific to the potential borrower's needs and allow a
telemarketer to take an application and pass it to a branch office for
processing. For calendar 1995, the Company ranked second in amount of
single-family mortgage originations nationwide. In Fiscal 1996, the Company's
market share increased to approximately 5% of the estimated $650 billion
single-family mortgage origination market, up from approximately 4% of the
estimated $660 billion market in Fiscal 1995. The interest rate environment that
prevailed during Fiscal 1996 was favorable for fixed-rate mortgages.
Additionally, the percentage of loan production attributable to refinances
increased from 30% in Fiscal 1995 to 34% in Fiscal 1996, as borrowers took
advantage of declining interest rates. During Fiscal 1996, the Company's loan
servicing portfolio grew to $136.8 billion from $113.1 billion at the end of
Fiscal 1995. This growth resulted from the Company's loan production during the
year and bulk servicing acquisitions amounting to $5.2 billion, partially offset
by prepayments, partial prepayments and scheduled amortization of $17.2 billion.
The prepayment rate in the servicing portfolio was 12%, up from the prior year
due to the decreasing mortgage interest rate environment in Fiscal 1996.
However, this rate was lower than the 35% prepayment rate in Fiscal 1994 because
a substantial number of loans in the servicing portfolio were produced in Fiscal
1994 and bear interest at rates lower than the lowest interest rate level
reached during Fiscal 1996.
RESULTS OF OPERATIONS
Fiscal 1996 Compared with Fiscal 1995
Revenues for Fiscal 1996 increased 43% to $860.7 million from $602.7 million
for Fiscal 1995. Net earnings increased 121% to $195.7 million in Fiscal 1996
from $88.4 million in Fiscal 1995. Effective March 1, 1995, the Company adopted
SFAS No. 122. SFAS No. 122 amended SFAS No. 65, Accounting for Certain Mortgage
Banking Activities. Since SFAS No. 122 prohibits retroactive application,
historical accounting results have not been restated and, accordingly, the
accounting results for Fiscal 1996 are not directly comparable with Fiscal 1995.
The overall impact on the Company's financial statements of adopting SFAS No.
122 was an increase in net earnings for Fiscal 1996 of $41.9 million, or $0.42
per share. In addition to the accounting change, the increase in revenues and
net earnings for Fiscal 1996 compared to Fiscal 1995 was attributable to an
increase in the size of the Company's servicing portfolio and improved pricing
margins, partially offset by the non-recurring gain on sale of servicing in
Fiscal 1995 which gain was offset, in part, by a non-recurring write-off of the
servicing hedge during the same prior period.
The total volume of loans produced increased 24% to $34.6 billion for Fiscal
1996 from $27.9 billion for Fiscal 1995. Refinancings totaled $11.7 billion, or
34% of total fundings, for Fiscal 1996, as compared to $8.4 billion, or 30% of
total fundings, for Fiscal 1995. Fixed-rate mortgage loan production totaled
$26.9 billion, or 78% of total fundings, for Fiscal 1996, as compared to $18.4
billion, or 66% of total fundings, for Fiscal 1995. Production in the Company's
Consumer Markets Division increased to $7.4 billion for Fiscal 1996 compared to
$7.1 billion for Fiscal 1995. Production in the Company's Wholesale Division
decreased to $8.1 billion for Fiscal 1996 from $8.5 billion for Fiscal 1995. The
Company's Correspondent Division purchased $19.1 billion in mortgage loans for
Fiscal 1995 compared to $12.3 billion for Fiscal 1995. The factors which affect
the relative volume of production among the Company's three divisions include
pricing decisions and the relative competitiveness of such pricing, the level of
real estate and mortgage lending activity in each division's markets, and the
success of each division's sales and marketing efforts.
At February 29(28), 1996 and 1995, the Company's pipeline of loans in
process was $5.6 billion and $3.6 billion, respectively. In addition, at
February 29, 1996, the Company has committed to make loans in the amount of $1.3
billion, subject to property identification and approval of the loans ("Lock n'
Shop(R) Pipeline"). At February 28, 1995, the Lock n' Shop(R) Pipeline was $2.7
billion. Historically, approximately 43% to 77% of the pipeline of loans in
process has funded. In Fiscal 1996 and Fiscal 1995, the Company received 460,486
and 315,632 new loan applications, respectively, at an average daily rate of
$194 million and $141 million, respectively. The following actions were taken
during Fiscal 1996 on the total applications received during that year: 309,433
loans (67% of total applications received) were funded and 101,747 applications
(22% of total applications received) were either rejected by the Company or
withdrawn by the applicant. The following actions were taken during Fiscal 1995
on the total applications received during that year: 220,715 loans (70% of total
applications received) were funded and 66,725 applications (21% of total
applications received) were either rejected by the Company or withdrawn by the
applicant. The factors that affect the percentage of applications received and
funded during a given time period include the movement and direction of interest
rates, the average length of loan commitments issued, the creditworthiness of
applicants, the production divisions' loan processing efficiency and loan
pricing decisions.
Loan origination fees decreased in Fiscal 1996 as compared to Fiscal 1995
primarily because production by the Correspondent Division (which, due to lower
cost structures, charges lower origination fees per dollar loaned) comprised a
greater percentage of total production in Fiscal 1996 than in Fiscal 1995. Gain
(loss) on sale of loans improved in Fiscal 1996 compared to Fiscal 1995
primarily due to improved pricing margins and the impact of adopting SFAS No.
122. SFAS No. 122 requires recognition of originated mortgage servicing rights
("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as assets
by allocating total costs incurred between the loan and the servicing rights
based on their relative fair values. This accounting methodology, in turn,
increases the gain (or reduces the loss) on sale of loans as compared to the
accounting results obtained from SFAS No. 65, the previously applicable
standard. Under SFAS No. 65, the cost of OMSRs was not recognized as an asset
and was included in the gain or loss recorded when the related loans were sold.
The separate impact of recognizing OMSRs as assets in the Company's financial
statements in accordance with SFAS No. 122 for Fiscal 1996 was an increase in
gain on sale of loans of $153.3 million.
With respect to PMSRs, SFAS No. 122 has a different cost allocation
methodology than SFAS No. 65. In contrast to a cost allocation based on relative
market value as set forth in SFAS No. 122, the prior requirement was to allocate
the costs incurred in excess of the market value of the loans without the
servicing rights to PMSRs. In Fiscal 1996, the separate impact of the
application of SFAS No. 122 cost allocation method, along with the effect of
changes in market conditions, was to reduce PMSR capitalization, and therefore
negatively impact gain (loss) on sale of loans, by $83.5 million. In general,
loan origination fees and gain (loss) on sale of loans are affected by numerous
factors including loan pricing decisions, interest rate volatility, the general
direction of interest rates and the volume and mix of loans produced.
Net interest income (interest earned net of interest charges) decreased to
$72.7 million for Fiscal 1996 from $75.5 million for Fiscal 1995. Net interest
income is principally a function of: (i) net interest income earned from the
Company's mortgage loan warehouse ($35.0 million and $35.7 million for Fiscal
1996 and Fiscal 1995, respectively); (ii) interest expense related to the
Company's investment in servicing rights ($64.6 million and $20.0 million for
Fiscal 1996 and Fiscal 1995, respectively) and (iii) interest income earned from
the custodial balances associated with the Company's servicing portfolio ($102.3
million and $59.8 million for Fiscal 1996 and Fiscal 1995, respectively). The
Company earns interest on, and incurs interest expense to carry, mortgage loans
held in its warehouse. The decrease in net interest income from the mortgage
loan warehouse was primarily attributable to a lower net earnings rate. The
increase in interest expense on the investment in servicing rights resulted
primarily from a larger servicing portfolio and an increase in the payments of
interest to certain investors pursuant to customary servicing arrangements with
regard to paid-off loans in excess of the interest earned on these loans through
their respective payoff dates ("Interest Costs Incurred on Payoffs"). The
increase in net interest income earned from the custodial balances was related
to an increase in the earnings rate and an increase in the average custodial
balances (caused by growth of the servicing portfolio and an increase in
prepayments) from Fiscal 1995 to Fiscal 1996.
During Fiscal 1996, loan administration income was positively affected by
the continued growth of the loan servicing portfolio. At February 29, 1996, the
Company serviced $136.8 billion of loans (including $1.9 billion of loans
subserviced for others) compared to $113.1 billion (including $0.7 billion of
loans subserviced for others) at February 28, 1995, a 21% increase. The growth
in the Company's servicing portfolio during Fiscal 1996 was the result of loan
production volume and the acquisition of bulk servicing rights, partially offset
by prepayments, partial prepayments and scheduled amortization of mortgage
loans. The weighted average interest rate of the mortgage loans in the Company's
servicing portfolio at February 29, 1996, was 7.8% compared to 7.6% at February
28, 1995. Generally, it is the Company's strategy to build and retain its
servicing portfolio because of the returns the Company can earn from such
investment and because the Company believes that servicing income is
countercyclical to loan production income. See "Prospective Trends--Market
Factors."
During Fiscal 1996, the prepayment rate of the Company's servicing portfolio
was 12%, as compared to 9% for Fiscal 1995. In general, the prepayment rate is
affected by the relative level of mortgage interest rates, activity in the home
purchase market and the relative level of home prices in a particular market.
The increase in the prepayment rate is primarily attributable to increased
refinance activity caused by decreased mortgage interest rates in Fiscal 1996
from Fiscal 1995. The primary means used by the Company to reduce the
sensitivity of its earnings to changes in interest rates is through a strong
production capability and a growing servicing portfolio. To mitigate the effect
on earnings of higher amortization and impairment (which are deducted from loan
servicing income) resulting from increased prepayment activity, the Company
acquires financial instruments, including derivative contracts, that increase in
value when interest rates decline (the "Servicing Hedge"). These financial
instruments include call options on interest rate futures and MBS, interest rate
floors, interest rate swaps (with the Company's maximum payment capped) ("Swap
Caps"), principal-only ("P/O") swaps and certain tranches of collateralized
mortgage obligations ("CMOs").
In the interest rate Swap Caps contracts, the Company receives and pays
interest on a specified notional amount. The rate received is fixed; and the
rate paid is adjustable, is indexed to the London Interbank Offered Rates for
U.S. dollar deposits ("LIBOR") and has a specified maximum, or "cap. "
The P/O swaps are derivative contracts, the value of which is determined by
changes in the value of a referenced P/O security. The payments received by the
Company under the P/O swaps relate to the cash flows of the referenced P/O
security. The payments made by the Company are based upon a notional amount tied
to the remaining balance of the referenced P/O security multiplied by a floating
rate indexed to LIBOR.
The CMOs, which consist primarily of P/O securities, have been purchased at
deep discounts to their par values. As interest rates decline, prepayments on
the collateral underlying the CMOs should increase. These changes should result
in a decline in the average lives of the P/O securities and an increase in the
present values of their cash flows.
The Servicing Hedge instruments utilized by the Company are designed to
protect the value of the investment in servicing rights from the effects of
increased prepayment activity that generally results from declining interest
rates. To the extent that interest rates increase, the value of the servicing
rights increases while the value of the hedge instruments declines. With respect
to the options, floors and CMOs, the Company is not exposed to loss beyond its
initial outlay to acquire the hedge instruments. With respect to the Swap Caps
contracts entered into by the Company as of February 29, 1996, the Company
estimates that its maximum exposure to loss over the contractual term is $35
million. The Company's exposure to loss in the P/O swaps is related to changes
in the market value of the referenced P/O security over the life of the
contract. In Fiscal 1996, the Company recognized a net gain of $200.1 million
from its Servicing Hedge. The net gain included unrealized gains of $108.8
million and realized gains of $91.3 million from the sale of various financial
instruments that comprise the Servicing Hedge. As a part of the adoption of SFAS
No. 122, the Company has revised its servicing hedge accounting policy,
effective March 1, 1995, to adjust the basis of the Servicing Assets for
unrealized gains or losses in the derivative financial instruments comprising
the Servicing Hedge. There can be no assurance that the Company's Servicing
Hedge will generate gains in the future, or if gains are generated, that they
will fully offset impairment of the Servicing Assets. See Note F to the
Company's Consolidated Financial Statements.
The Company recorded amortization and impairment of its Servicing Assets for
Fiscal 1996 totaling $342.8 million (consisting of amortization amounting to
$168.0 million and impairment of $174.8 million), compared to $95.8 million of
amortization for Fiscal 1995. SFAS No. 122 requires that all capitalized
mortgage servicing rights be evaluated for impairment based on the excess of the
carrying amount of the mortgage servicing rights over their fair value. Under
SFAS No. 65, the impairment evaluation could be made using either discounted or
undiscounted cash flows. No uniform required level of disaggregation was
specified. The Company used a disaggregated undiscounted method. The factors
affecting the amount of amortization and impairment recorded in an accounting
period include the level of prepayments during the period, the change in
prepayment expectations and the amount of Servicing Hedge gains.
During Fiscal 1996, the Company acquired bulk servicing rights for loans
with principal balances aggregating $5.2 billion at a price of $67.0 million or
1.30% of the aggregate outstanding principal balances of the servicing
portfolios acquired. During Fiscal 1995, the Company acquired bulk servicing
rights for loans with principal balances aggregating $17.6 billion at a price of
$261.9 million or 1.49% of the aggregate outstanding principal balances of the
servicing portfolios acquired.
During Fiscal 1995, the Company sold servicing rights for loans with
principal balances of $5.9 billion and recognized a gain of $56.9 million. No
servicing rights were sold during Fiscal 1996.
Salaries and related expenses are summarized below for Fiscal 1996 and
Fiscal 1995.
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1996
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
Base Salaries $ 68,502 $32,080 $46,504 $9,711 $156,797
Incentive Bonus 33,022 445 9,711 4,546 47,724
Payroll Taxes and Benefits 11,472 5,571 6,824 1,280 25,147
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $112,996 $38,096 $63,039 $15,537 $229,668
============ ============= ============= ============= ============
Average Number of 1,743 1,160 887 192 3,982
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1995
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
Base Salaries $ 70,230 $23,929 $39,046 $6,811 $140,016
Incentive Bonus 21,178 463 8,637 4,204 34,482
Payroll Taxes and Benefits 11,633 4,020 8,062 848 24,563
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $103,041 $28,412 $55,745 $11,863 $199,061
============ ============= ============= ============= ============
Average Number of 1,780 850 851 126 3,607
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
The amount of salaries increased during Fiscal 1996 primarily due to the
increased number of employees resulting from a larger servicing portfolio and
growth in the Company's non-mortgage banking subsidiaries. Incentive bonuses
earned during Fiscal 1996 increased primarily due to increased loan production.
Occupancy and other office expenses for Fiscal 1996 slightly increased to
$106.3 million from $102.2 million for Fiscal 1995. The increase was primarily
attributable to a larger loan servicing portfolio.
Guarantee fees (fees paid to guarantee timely and full payment of principal
and interest on MBS and whole loans sold to permanent investors and to transfer
the credit risk of the loans in the servicing portfolio) for Fiscal 1996
increased 41% to $121.2 million from $85.8 million for Fiscal 1995. This
increase resulted primarily from an increase in the servicing portfolio.
Marketing expenses for Fiscal 1996 increased 17% to $27.1 million from $23.2
million for Fiscal 1995, reflecting the Company's implementation of a new
marketing plan.
In Fiscal 1995, the Company incurred an $8.0 million charge related to the
consolidation and relocation of branch and administrative offices that occurred
as a result of the reduction in staff caused by declining production. No such
charge was incurred in Fiscal 1996.
Other operating expenses for Fiscal 1996 increased from Fiscal 1995 by $13.2
million, or 36%. This increase was due primarily to an increase in unreimbursed
costs on foreclosed loans resulting from a larger servicing portfolio, and an
increased provision for bad debts resulting from home equity and B&C loans held
in portfolio pending securitization.
Profitability of Loan Production and Servicing Activities
In Fiscal 1996, the Company's pre-tax earnings from its loan production
activities (which include loan origination and purchases, warehousing and sales)
was $61.2 million. In Fiscal 1995, the Company's comparable pre-tax loss was
$94.8 million. The increase of $156.0 million was primarily attributable to
improved pricing margins, the effect of the adoption of SFAS No. 122 previously
discussed and a change of $44.6 million in the Company's internal method of
allocating overhead between its production and servicing activities. In Fiscal
1996, the Company's pre-tax earnings from its loan servicing activities (which
include administering the loans in the servicing portfolio, selling homeowners
and other insurance and acting as tax payment agent) was $251.2 million as
compared to $229.6 million in Fiscal 1995. The increase of $21.6 million was
principally due to the increase in the size of the servicing portfolio,
partially offset by the change in the Company's internal overhead allocation
method discussed above and a non-recurring gain on sale of servicing in Fiscal
1995 (which was offset, in part, by a non-recurring write-off of the servicing
hedge).
Fiscal 1995 Compared with Fiscal 1994
Revenues for Fiscal 1995 decreased 20% to $602.7 million from $755.6 million
for Fiscal 1994. Net earnings decreased 51% to $88.4 million in Fiscal 1995 from
$179.5 million in Fiscal 1994. The decrease in revenues was due to decreased
loan production resulting from increased mortgage interest rates in Fiscal 1995.
In addition, intense price competition during Fiscal 1995 resulted in the
Company's recording a loss on the sale of loans. The Company had a gain on sale
of loans in Fiscal 1994. In Fiscal 1995, the Company did not realize any
servicing hedge gains; in addition, amortization of option and interest rate
floor premiums related to the servicing hedge amounted to $40.0 million and the
write-off of the remaining unamortized costs of the Company's prior servicing
hedge amounted to $25.6 million. During Fiscal 1994, the Company realized $73.4
million in net servicing hedge gains. These negative effects experienced in
Fiscal 1995 were somewhat offset by the favorable impact of a larger and more
slowly prepaying loan servicing portfolio and of a gain recognized on the sale
of servicing. The decrease in net earnings for Fiscal 1995 was primarily the
result of the decrease in revenues, a smaller decline in expenses than revenues
from Fiscal 1994 to Fiscal 1995, higher guarantee fees caused by the larger
servicing portfolio and a charge due to the Company's downsizing and office
consolidation process.
The total volume of loans produced decreased 47% to $27.9 billion for Fiscal
1995 from $52.5 billion for Fiscal 1994. Refinancings totaled $8.4 billion, or
30% of total fundings, for Fiscal 1995, as compared to $39.2 billion, or 75% of
total fundings, for Fiscal 1994. ARM loan production totaled $9.5 billion, or
34% of total fundings, for Fiscal 1995, as compared to $10.1 billion, or 19% of
total fundings for Fiscal 1994. Production in the Company's Consumer Markets
Division decreased to $7.1 billion for Fiscal 1995 compared to combined
production of $11.6 billion for the Retail and Consumer Divisions (which
Divisions were combined into the Consumer Markets Division) for Fiscal 1994.
Production in the Company's Wholesale Division decreased to $8.5 billion (which
included approximately $3.3 billion of originated loans and $5.2 billion of
purchased loans) for Fiscal 1995 from $21.5 billion (which included
approximately $10.9 billion of originated loans and $10.6 billion of purchased
loans) for Fiscal 1994. The Company's Correspondent Division purchased $12.3
billion in mortgage loans for Fiscal 1995 compared to $19.4 billion for Fiscal
1994.
At February 28, 1995 and 1994, the Company's pipeline of loans in process
was $3.6 billion and $7.6 billion, respectively. In addition, at February 28,
1995 and 1994, the Company's Lock n' Shop(R) Pipeline was $2.7 billion and $1.6
billion, respectively. In Fiscal 1995 and Fiscal 1994, the Company received
315,632 and 515,104 new loan applications, respectively, at an average daily
rate of $141 million and $282 million, respectively. The following actions were
taken during Fiscal 1995 on the total applications received during that year:
220,715 loans (70% of total applications received) were funded and 66,725
applications (21% of total applications received) were either rejected by the
Company or withdrawn by the applicant. The following actions were taken during
Fiscal 1994 on the total applications received during that year: 358,257 loans
(70% of total applications received) were funded and 98,809 applications (19% of
total applications received) were either rejected by the Company or withdrawn by
the applicant.
Loan origination fees decreased in Fiscal 1995 as compared to Fiscal 1994
and a loss was recorded in Fiscal 1995 on the sale of loans due to lower loan
production that resulted from an increase in the level of mortgage interest
rates. Reduced margins due to increased price competition caused by lower demand
for mortgage loans during Fiscal 1995 than Fiscal 1994 also contributed to the
loss on the sale of loans.
Net interest income (interest earned net of interest charges) decreased to
$75.5 million for Fiscal 1995 from $100.3 million for Fiscal 1994. Consolidated
net interest income is principally a function of: (i) net interest income earned
from the Company's mortgage loan warehouse ($35.7 million and $110.1 million for
Fiscal 1995 and Fiscal 1994, respectively); (ii) interest expense related to the
Company's investment in servicing rights ($20.0 million and $68.0 million for
Fiscal 1995 and Fiscal 1994, respectively) and (iii) interest income earned from
the custodial balances associated with the Company's servicing portfolio ($59.8
million and $58.2 million for Fiscal 1995 and Fiscal 1994, respectively). The
decrease in net interest income from the mortgage loan warehouse was
attributable to a decrease in the average amount of the mortgage loan warehouse
due to the decline in production and to a decrease in the net earnings rate. The
decrease in interest expense on the investment in servicing rights resulted
primarily from a decline in Interest Costs Incurred on Payoffs. The increase in
net interest income earned from the custodial balances was related to an
increase in the earnings rate, offset somewhat by a decline in the average
custodial balances from Fiscal 1994 to Fiscal 1995.
During Fiscal 1995, loan administration income was positively affected by
the continued growth of the Company's loan servicing portfolio. At February 28,
1995, the Company serviced $113.1 billion of loans (including $0.7 billion of
loans subserviced for others) compared to $84.7 billion (including $0.6 billion
of loans subserviced for others) at February 28, 1994, a 34% increase. The
growth in the Company's servicing portfolio during Fiscal 1995 was the result of
loan production volume and the acquisition of bulk servicing rights, partially
offset by prepayments, partial prepayments, scheduled amortization of mortgage
loans and a sale of servicing rights of loans with principal balances of $5.9
billion. The weighted average interest rate of the mortgage loans in the
Company's servicing portfolio at February 28, 1995, was 7.6% compared to 7.2% at
February 28, 1994.
During Fiscal 1995, the prepayment rate of the Company's servicing portfolio
was 9%, as compared to 35% for Fiscal 1994.
For Fiscal 1995, total amortization amounted to $95.8 million, representing
an annual rate of 7% of average Servicing Assets. During Fiscal 1995, the
Company did not realize any Servicing Hedge gains; in addition, amortization of
option and interest rate floor premiums related to the Servicing Hedge amounted
to $40.0 million. Also during Fiscal 1995, the Company decided to replace its
prior Servicing Hedge with a new hedge resulting in a write-down of the
remaining unamortized costs of the prior hedge of $25.6 million. For Fiscal
1994, total amortization was $242.2 million, or an annual rate of 28% of the
average Servicing Assets. Amortization for Fiscal 1994 was offset by Servicing
Hedge gains which aggregated $73.4 million. The decline in the rate of
amortization from Fiscal 1994 to Fiscal 1995 resulted primarily from a decline
in the current and projected future prepayment rates caused by an increase in
mortgage interest rates.
During Fiscal 1995, the Company acquired bulk servicing rights for loans
with principal balances aggregating $17.6 billion at a price of $261.9 million
or 1.49% of the aggregate outstanding principal balances of the servicing
portfolios acquired. During Fiscal 1994, the Company acquired bulk servicing
rights for loans with principal balances aggregating $3.4 billion at a price of
$46.6 million or 1.36% of the aggregate outstanding principal balances of the
servicing portfolios acquired.
During Fiscal 1995, the Company sold servicing rights for loans with
principal balances of $5.9 billion and recognized a gain of $56.9 million. No
servicing rights were sold during Fiscal 1994.
Salaries and related expenses are summarized below for Fiscal 1995 and
Fiscal 1994.
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1995
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
Base Salaries $ 70,230 $23,929 $39,046 $6,811 $140,016
Incentive Bonus 21,178 463 8,637 4,204 34,482
Payroll Taxes and Benefits 11,633 4,020 8,062 848 24,563
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $103,041 $28,412 $55,745 $11,863 $199,061
============ ============= ============= ============= ============
Average Number of 1,780 850 851 126 3,607
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1994
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
Base Salaries $ 81,555 $18,974 $41,899 $4,730 $147,158
Incentive Bonus 47,447 323 7,013 2,663 57,446
Payroll Taxes and Benefits 15,598 3,544 3,298 658 23,098
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $144,600 $22,841 $52,210 $8,051 $227,702
============ ============= ============= ============= ============
Average Number of 2,359 680 992 101 4,132
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
The amount of salaries decreased during Fiscal 1995 primarily due to the
decreased number of employees resulting from reduced loan production, offset
somewhat by increased employees due to a larger servicing portfolio. Incentive
bonuses earned during Fiscal 1995 decreased primarily due to decreased loan
production and decreased loan production personnel.
Occupancy and other office expenses for Fiscal 1995 slightly increased to
$102.2 million from $101.7 million for Fiscal 1994. This was due to increased
office and equipment rental expenses resulting from the opening of 59 Consumer
Markets Division branch offices in Fiscal 1995, partially offset by a decline in
expenses resulting from the closure of 86 Consumer Markets Division satellite
offices and 13 Wholesale Division branch offices.
Guarantee fees (fees paid to guarantee timely and full payment of principal
and interest on MBS and whole loans sold to permanent investors and to transfer
the credit risk of the loans in the servicing portfolio) for Fiscal 1995
increased 49% to $85.8 million from $57.6 million for Fiscal 1994. This increase
resulted primarily from an increase in the servicing portfolio.
Marketing expenses for Fiscal 1995 decreased 11% to $23.2 million from $26.0
million for Fiscal 1994. The decrease in marketing expenses reflected the
Company's strategy to centralize and streamline its marketing functions.
In Fiscal 1995, the Company incurred an $8.0 million charge related to the
consolidation and relocation of branch and administrative offices that occurred
as a result of the reduction in staff caused by declining production.
Other operating expenses for Fiscal 1995 decreased from Fiscal 1994 by $6.5
million, or 15%. This decrease was due primarily to decreased loan production.
Profitability of Loan Production and Servicing Activities
In Fiscal 1995, the Company's pre-tax loss from its loan production
activities was $94.8 million. In Fiscal 1994, the Company's comparable pre-tax
earnings were $250.1 million. The decrease of $344.9 million was primarily
attributed to lower loan production and increased price competition caused by
lower demand for mortgage loans. In Fiscal 1995, the Company's pre-tax earnings
from its loan servicing activities was $229.6 million as compared to $46.6
million in Fiscal 1994. This increase was primarily due to an increase in the
servicing portfolio, a reduction in amortization due to lower prepayment
activity and reduced prepayment expectations and a sale of servicing during
Fiscal 1995 which resulted in a gain of $56.9 million. The increase was
partially offset by an increase in Servicing Hedge expense and a write-off of
the remaining costs of the prior Servicing Hedge.
INFLATION
Inflation affects the Company in the areas of loan production and servicing.
Interest rates normally increase during periods of high inflation and decrease
during periods of low inflation. Historically, as interest rates increase, loan
production, particularly from loan refinancings, decreases, although in an
environment of gradual interest rate increases, purchase activity may actually
be stimulated by an improving economy or the anticipation of increasing real
estate values. In such periods of reduced loan production, production margins
may decline due to increased competition resulting from overcapacity in the
market. In a higher interest rate environment, servicing-related earnings are
enhanced because prepayment rates tend to slow down, thereby extending the
average life of the Company's servicing portfolio and reducing both amortization
and impairment of the Servicing Assets and Interest Costs Incurred on Payoffs,
and because the rate of interest earned from the custodial balances tends to
increase. Conversely, as interest rates decline, loan production, particularly
from loan refinancings, increases. However, during such periods, prepayment
rates tend to accelerate (principally on the portion of the portfolio having an
interest rate higher than the then-current interest rates), thereby decreasing
the average life of the Company's servicing portfolio and adversely impacting
its servicing-related earnings primarily due to increased amortization and
impairment of the Servicing Assets, a decreased rate of interest earned from the
custodial balances, and increased Interest Costs Incurred on Payoffs.
SEASONALITY
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan funding
activities and the investment in servicing rights. To meet these needs, the
Company currently utilizes commercial paper supported by CHL's revolving credit
facility, medium-term notes, MBS repurchase agreements, subordinated notes,
unsecured notes, pre-sale funding facilities and cash flow from operations. In
June 1995, the Company completed a public offering of its common stock through
the issuance and sale of 10,000,000 shares at a price of $21 per share. In
addition, in the past the Company has utilized whole loan repurchase agreements,
servicing-secured bank facilities, direct borrowings from CHL's revolving credit
facility, privately-placed financings and public offerings of preferred stock.
See Note D to the Company's Consolidated Financial Statements included herein
for more information on the Company's financings.
Certain of the debt obligations of the Company and CHL contain various
provisions that may affect the ability of the Company and CHL to pay dividends
and remain in compliance with such obligations. These provisions include
requirements concerning net worth, current ratio and other financial covenants.
These provisions have not had, and are not expected to have, an adverse impact
on the ability of the Company and CHL to pay dividends.
The Company continues to investigate and pursue alternative and
supplementary methods to finance its growing operations through the public and
private capital markets. These may include such methods as mortgage loan sale
transactions designed to expand the Company's financial capacity and reduce its
cost of capital and the securitization of servicing income cash flows.
In connection with its derivative contracts, the Company may be required to
deposit cash or certain government securities or obtain letters of credit to
meet margin requirements. The Company considers such potential margin
requirements in its overall liquidity management.
In the course of the Company's mortgage banking operations, the Company
sells to investors the mortgage loans it originates and purchases but generally
retains the right to service the loans, thereby increasing the Company's
investment in loan servicing rights. The Company views the sale of loans on a
servicing-retained basis in part as an investment vehicle. Significant
unanticipated prepayments in the Company's servicing portfolio could have a
material adverse effect on the Company's future operating results and liquidity.
Cash Flows
Operating Activities In Fiscal 1996, the Company's operating activities used
cash of approximately $1.8 billion on a short-term basis to fund the increase in
its warehouse of mortgage loans. The Company's operating activities also
generated $377 million of positive cash flow, which was principally allocated to
the long-term investment in servicing as discussed below under "Investing
Activities."
Investing Activities The primary investing activity for which cash was used
in Fiscal 1996 was the investment in servicing rights. Net cash used by
investing activities increased to $889 million for Fiscal 1996 from $717 million
for Fiscal 1995.
Financing Activities Net cash provided by financing activities amounted to
$2.4 billion for Fiscal 1996. Net cash used by financing activities amounted to
$0.2 billion for Fiscal 1995. The increase in net cash provided was primarily
the result of higher net short-term borrowings by the Company in Fiscal 1996 and
from the issuance and sale of common stock.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
During Fiscal 1996, the Company received new loan applications at an average
daily rate of $194 million and at February 29, 1996, the Company's pipeline of
loans in process was $5.6 billion. This compares to a daily application rate in
Fiscal 1995 of $141 million and a pipeline of loans in process at February 28,
1995 of $3.6 billion. During most of Fiscal 1996, interest rates decreased,
resulting in an increase in demand for mortgage loans. The size of the pipeline
is generally an indication of the level of future fundings, as historically 43%
to 77% of the pipeline of loans in process has funded. In addition, the
Company's Lock n' Shop(R) Pipeline at February 29, 1996 was $1.3 billion and at
February 28, 1995 was $2.7 billion. Future application levels and loan fundings
are dependent on numerous factors, including the level of demand for mortgage
credit, the extent of price competition in the market, the direction of interest
rates, seasonal factors and general economic conditions. For the month ended
March 31, 1996, the average daily amount of applications received was $255
million, and at March 31, 1996, the pipeline of loans in process was $6.0
billion and the Lock n' Shop(R) Pipeline was $1.8 billion.
Market Factors
Mortgage interest rates generally increased in Fiscal 1995 and declined in
Fiscal 1996. The decline in interest rates in Fiscal 1996 resulted in increased
production (particularly from refinancings), impairment (as specified in SFAS
No. 122) of $174.8 million and a servicing hedge gain of $200.1 million.
Conversely, the environment of rising interest rates that prevailed in Fiscal
1995 resulted in lower production (particularly from refinancings) and greater
price competition, which adversely impacted earnings from loan production
activities. In Fiscal 1995, the Company took steps to maintain its productivity
and efficiency, particularly in the loan production area, by reducing staff and
embarking on a program to reduce production-related and overhead costs. However,
the rising interest rates in that year enhanced earnings from the Company's loan
servicing portfolio as amortization and impairment of the Servicing Assets and
Interest Costs Incurred on Payoffs decreased and the rate of interest earned
from the custodial balances associated with the Company's servicing portfolio
increased.
The Company's primary competitors are commercial banks, savings and loans
and mortgage banking subsidiaries of diversified companies, as well as other
mortgage bankers. In Fiscal 1996, several of the mortgage banking companies that
competed with the Company exited the business or have been acquired by other
companies, particularly banks. The integration of these formerly independent
mortgage banking companies by the acquiring institutions has not been
accomplished. Therefore, management cannot evaluate the impact these
transactions will have on the Company or the overall market. Particularly in
California, savings and loans and other portfolio lenders have competed with the
Company by offering aggressively priced adjustable-rate mortgage products which
grow in popularity when interest rates rise. Generally, the Company has
experienced significant price competition among mortgage lenders which has
resulted in downward pressure on loan production earnings.
Some regions in which the Company operates, particularly some regions of
California, have been experiencing slower economic growth, and real estate
financing activity in these regions has been negatively impacted. As a result,
home lending activity for single- (one-to-four) family residences in these
regions may also have experienced slower growth. The Company's California
mortgage loan production (measured by principal balance) constituted 31% of its
total production during both Fiscal 1996 and 1995. The Company is continuing its
efforts to expand its production capacity outside of California. Since
California's mortgage loan production constituted a significant portion of the
Company's production during the year, there can be no assurance that the
Company's operations will not continue to be adversely affected to the extent
California continues to experience slow or negative economic growth resulting in
decreased residential real estate lending activity or market factors further
impact the Company's competitive position in the state.
The delinquency rate in the Company-owned servicing portfolio increased to
3.20% at February 29, 1996 from 2.51% at February 28, 1995. The Company believes
that this increase was primarily the result of portfolio mix changes and aging.
The proportion of government and high loan-to-value conventional loans, which
tend to experience higher delinquency rates than low loan-to-value conventional
loans, has increased from 39% of the portfolio at February 28, 1995 to 45% at
February 29, 1996. In addition, the weighted average age of the portfolio is 25
months at February 29, 1996, up from 20 months at February 28, 1995. Delinquency
rates tend to increase as loans age, reaching a peak at three to five years of
age. However, because the loans in the portfolio are generally serviced on a
non-recourse basis, the Company's exposure to credit loss resulting from
increased delinquency rates is substantially limited. Further, related late
charge income has historically been sufficient to offset incremental servicing
expenses resulting from an increased delinquency rate.
The percentage of loans in the Company's owned servicing portfolio that are
in foreclosure increased to 0.49% at February 29, 1996 from 0.29% at February
28, 1995. Because the Company services substantially all conventional loans on a
non-recourse basis, foreclosure losses are generally the responsibility of the
investor or insurer and not the Company. Accordingly, any increase in
foreclosure activity should not result in significant foreclosure losses to the
Company. However, the Company's expenses may be increased somewhat as a result
of the additional staff efforts required to foreclose on a loan. Similarly,
government loans serviced by the Company (25% of the Company's servicing
portfolio at February 29, 1996) are insured or partially guaranteed against loss
by the Federal Housing Administration or the Veterans Administration. In the
Company's view, the limited unreimbursed costs that may be incurred by the
Company on government foreclosed loans are not material to the Company's
consolidated financial statements.
Servicing Hedge
As previously discussed, in Fiscal 1996 the Company recorded a net gain of
$200.1 million from its Servicing Hedge which is designed to protect its
servicing investment from the effects of increased prepayment activity that
generally results from declining interest rates. There can be no assurance the
Company's Servicing Hedge will generate gains in the future, or that if gains
are generated, they will fully offset impairment of the Servicing Assets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item 8 is hereby incorporated by
reference from the Company's Financial Statements and Auditors' Report beginning
at page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by reference
from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
The information required by this Item 11 is hereby incorporated by reference
from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
The information required by this Item 12 is hereby incorporated by reference
from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by reference
from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) - Financial Statement Schedules.
The information called for by this section of Item 14 is set forth in the
Financial Statements and Auditors' Report beginning at page F-1 of this Form
10-K. The index to Financial Statements and Schedules is set forth at page F-2
of this Form 10-K.
(3) - Exhibits
Exhibit
No. Description
----------- -----------------------------------------------------------
3.1* Certificate of Amendment of Restated Certificate of Incorporation of
Countrywide Credit Industries, Inc. (incorporated by reference to Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q dated August 31, 1987).
3.2* Restated Certificate of Incorporation of Countrywide Credit
Industries, Inc. (incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q dated August 31, 1987).
3.3* Bylaws of Countrywide Credit Industries,Inc., as amended and restated
(incorporated by reference to Exhibit 3 to the Company's Current Report on Form
8-K dated February 10, 1988).
4.1* Rights Agreement, dated as of February 10, 1988, between Countrywide
Credit Industries, Inc. and Bank of America NT & SA, as Rights Agent
(incorporated by reference to Exhibit 4 to the Company's Form 8-A filed pursuant
to Section 12 of the Securities Exchange Act of 1934 on February 12, 1988).
4.2* Specimen Certificate of the Company's Common Stock (incorporated by
reference to Exhibit 4.2 to the Current Company's Report on Form 8-K dated
February 6, 1987).
4.3* Specimen Debenture Certificate (incorporated by reference to Exhibit
4.3 to the Company's Current Report on Form 8-K dated February 6, 1987).
4.6* Form of Medium-Term Notes, Series A (fixed-rate) of the Company
(incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Company's
registration statement on Form S-3 (File No. 33-19708) filed with the SEC on
January 26, 1988).
4.7* Form of Medium-Term Notes, Series A (floating-rate) of the Company
(incorporated by reference to Exhibit 4.3 to Amendment No. 1 to the Company's
registration statement on Form S-3 (File No. 33-19708) filed with the SEC on
January 26, 1988).
4.8* Indenture dated as of January 15, 1988 between the Company and The
Chase Manhattan Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1
to Amendment No. 1 to the Company's registration statement on Form S-3 (File No.
33-19708) filed with the SEC on January 26, 1988).
4.10* Form of Medium-Term Notes, Series B (fixed-rate) of the Company
(incorporated by reference to Exhibit 4.2 to the Company's registration
statement on Form S-3 (File No. 33-29941) filed with the SEC on July 13, 1989).
4.11* Form of Medium-Term Notes, Series A (fixed-rate) of Countrywide
Funding Corporation (now known as Countrywide Home Loans, Inc.) ("CFC")
(incorporated by reference to Exhibit 4.2 to the Company's registration
statement on Form S-3 (File Nos. 33-44194 and 33-44194-1) filed with the SEC on
November 27, 1991).
4.13* Form of Medium-Term Notes, Series B (fixed-rate) of CFC (incorporated
by reference to Exhibit 4.2 to the Company's registration statement on Form S-3
(File No. 33-51816) filed with the SEC on September 9, 1992).
4.14* Form of Medium-Term Notes, Series B (floating-rate) of CFC
(incorporated by reference to Exhibit 4.3 to the Company's registration
statement on Form S-3 (File No. 33-51816) filed with the SEC on September 9,
1992).
4.15* Countrywide Credit Industries, Inc. Dividend Reinvestment Plan dated
October 30, 1992 (incorporated by reference to the Company's registration
statement on Form S-3 (File No. 33-53048) filed with the SEC on October 9,
1992).
4.16* Form of Medium-Term Notes, Series C (fixed-rate) of CFC (incorporated
by reference to Exhibit 4.2 to the registration statement on Form S-3 of CFC and
the Company (File Nos. 33-50661 and 33-50661-01) filed with the SEC on October
19, 1993).
4.17* Form of Medium-Term Notes, Series C (floating-rate) of CFC
(incorporated by reference to Exhibit 4.3 to the registration statement on Form
S-3 of CFC and the Company (File Nos. 33-50661 and 33-50661-01) filed with the
SEC on October 19, 1993).
4.18.1* Form of Supplemental Indenture No. 1 dated as of June 15, 1995, to
the Indenture dated as of January 1, 1992, among CFC, the Company, and The Bank
of New York, as trustee (incorporated by reference to Exhibit 4.9 to Amendment
No. 2 to the registration statement on Form S-3 of the Company and CFC (File
Nos. 33-59559 and 33-59559-01) filed with the SEC on June 16, 1995).
+ 10.2* Restated Employment Agreements for David S. Loeb and Angelo R.
Mozilo dated February 2, 1993 (incorporated by reference to Exhibit 10.2 to the
Company's Annual Report on Form 10-K dated February 28, 1993).
+ 10.3* Countrywide Credit Industries, Inc. Deferred Compensation Agreement
for Non-Employee Directors (incorporated by reference to Exhibit 5.2 to the
Company's Quarterly Report on Form 10-Q dated August 31, 1987).
+ 10.3.1* Countrywide Credit Industries, Inc. Deferred Compensation Plan
for Key Management Employees dated April 15, 1992 (incorporated by reference to
Exhibit 10.3.1 to the Company's Annual Report on Form 10-K dated February 28,
1993).
+ 10.3.2* Countrywide Credit Industries, Inc. Deferred Compensation Plan
effective August 1, 1993 (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q dated August 31, 1993).
10.4* Revolving Credit Agreement dated as of September 23, 1994 by and
among CFC, the First National Bank of Chicago, Bankers Trust Company and the
Lenders Party Thereto (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated November 30, 1994).
10.4.1* First Amendment to Credit Documents dated as of June 1, 1995, by
and among CFC, the Company, The First National Bank of Chicago, Bankers Trust
Company and the Lenders Party Thereto (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q dated May 31, 1995).
+ 10.5* Severance Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated May 31, 1988).
+ 10.6* Key Executive Equity Plan (incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1988).
+ 10.7* 1987 Stock Option Plan, as Amended and Restated on May 15, 1989
(incorporated by reference to Exhibit 10.7 to the Company's Annual Report on
Form 10-K dated February 28, 1989).
+ 10.8* 1986 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.11 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
+ 10.9* 1985 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.9 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
+ 10.10* 1984 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.7 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
+ 10.11* 1982 Incentive Stock Option Plan as amended (incorporated by
reference to Exhibits 10.2 - 10.5 to Post-Effective Amendment No. 2 to the
Company's registration statement on Form S-8 (File No. 33-9231) filed with the
SEC on December 20, 1988).
+ 10.12* Amended and Restated Stock Option Financing Plan (incorporated by
reference to Exhibit 10.12 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
10.13* 1995 Amended and Extended Management Agreement, dated as of May 15,
1995, between CWM Mortgage Holdings, Inc. ("CWM") and Countrywide Asset
Management Corporation (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated August 31, 1995).
10.14* 1987 Amended and Restated Servicing Agreement, dated as of May 15,
1987, between CWM and CFC (incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K dated February 28, 1990).
10.15* 1995 Amended and Restated Loan Purchase and Administrative Services
Agreement, dated as of May 15, 1995, between CWM and CFC (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1995).
+ 10.19* 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19
to the Company's Annual Report on Form 10-K dated February 29, 1992).
+ 10.19.1* First Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.1 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.19.2* Second Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.2 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.19.3* Third Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.3 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.19.4* Fourth Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.4 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.19.5* Fifth Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K dated
February 28, 1995).
+ 10.20* 1992 Stock Option Plan dated as of December 22, 1992 (incorporated
by reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K
dated February 28, 1993).
+ 10.21* 1993 Stock Option Plan (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q dated August 31, 1993).
+ 10.21.1* First Amendment to the 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.21.1 to the Company's Annual Report on Form 10-K dated
February 28, 1995).
+ 10.26* Supplemental Executive Retirement Plan effective March 1, 1994
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q dated May 31, 1994).
+ 10.27* Split-Dollar Life Insurance Agreement (incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q dated May 31,
1994).
+ 10.27.1* Split-Dollar Collateral Assignment (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994).
11.1 Statement Regarding Computation of Earnings Per Share.
12.1 Computation of the Ratio of Earnings to Fixed Charges.
12.2 Computation of the Ratio of Earnings to Net Fixed Charges.
22.1 List of subsidiaries.
24.1 Consent of Grant Thornton LLP.
27 Financial Data Schedules (included only with the electronic filing with
the SEC)
-------------------------
*Incorporated by reference.
+Constitutes a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
By: /s/ DAVID S. LOEB
-------------------------------------
David S. Loeb, Chairman and President
Dated: May 13, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signatures Title Date
/s/ DAVID S. LOEB President, Chairman of the Board of May 13, 1996
- ------------------------- Directors and Director (Principal
David S. Loeb Executive Officer)
/s/ ANGELO R. MOZILO Executive Vice President and Director May 13, 1996
- -------------------------
Angelo R. Mozilo
/s/ STANFORD L. KURLAND Senior Managing Director and Chief May 13, 1996
- ------------------------- Operating Officer
Stanford L. Kurland
/s/ CARLOS M. GARCIA Managing Director; Chief Financial May 13, 1996
- ------------------------- Officer and Chief Accounting Officer
Carlos M. Garcia (Principal Financial Officer and
Principal Accounting Officer)
/s/ ROBERT J. DONATO Director May 13, 1996
- -------------------------
Robert J. Donato
/s/ BEN M. ENIS Director May 13, 1996
- -------------------------
Ben M. Enis
/s/ EDWIN HELLER Director May 13, 1996
- -------------------------
Edwin Heller
/s/ HARLEY W. SNYDER Director May 13, 1996
- -------------------------
Harley W. Snyder
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
For Inclusion in Form 10-K
Annual Report Filed with
Securities and Exchange Commission
February 29, 1996
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
February 29, 1996
Page
----------------
Report of Independent Certified Public Accountants........... F-3
Financial Statements
Consolidated Balance Sheets............................. F-4
Consolidated Statements of Earnings..................... F-5
Consolidated Statement of Common Shareholders' Equity... F-6
Consolidated Statements of Cash Flows................... F-7
Notes to Consolidated Financial Statements.............. F-8
Schedules
Schedule I - Condensed Financial Information of Registrant F-32
Schedule II - Valuation and Qualifying Accounts......... F-35
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Countrywide Credit Industries, Inc.
We have audited the accompanying consolidated balance sheets of Countrywide
Credit Industries, Inc. and Subsidiaries as of February 29(28), 1996 and 1995,
and the related consolidated statements of earnings, common shareholders'
equity, and cash flows for each of the years in the three-year period ended
February 29, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Countrywide Credit
Industries, Inc. and Subsidiaries as of February 29(28), 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three-year period ended February 29, 1996, in
conformity with generally accepted accounting principles.
In March 1995, Countrywide Credit Industries, Inc. adopted Financial
Accounting Standards Board Statement No. 122, "Accounting for Mortgage Servicing
Rights." These changes are discussed in Note A-6 of the Notes to Consolidated
Financial Statements.
We have also audited Schedules I and II for each of the three years in the
period ended February 29, 1996. In our opinion, such schedules present fairly,
in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Los Angeles, California
April 23, 1996
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 29(28),
(Dollar amounts in thousands, except per share data)
A S S E T S
1996 1995
------------------ -------------------
Cash $ 16,444 $ 17,624
Receivables for mortgage loans shipped 2,299,979 1,174,648
Mortgage loans held for sale 2,440,108 1,724,177
Other receivables 912,613 607,274
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 140,963 145,612
Capitalized servicing fees receivable 631,784 464,268
Mortgage servicing rights 1,691,881 1,332,629
Other assets 523,881 243,950
------------------ -------------------
Total assets $8,657,653 $5,710,182
================== ===================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $2,548,549 $1,063,676
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $6,097,518 $3,963,091
Drafts payable issued in connection with mortgage loan closings 238,020 200,221
Accounts payable and accrued liabilities 505,148 235,617
Deferred income taxes 497,212 368,695
------------------ -------------------
Total liabilities 7,337,898 4,767,624
Commitments and contingencies - -
Shareholders' equity
Preferred stock - authorized, 1,500,000 shares of $0.05 par value;
issued and outstanding, none - -
Common stock - authorized, 240,000,000 shares of $0.05 par
value; issued and outstanding, 102,242,329 shares in 1996 and
91,370,364 shares in 1995 5,112 4,568
Additional paid-in capital 820,183 608,289
Retained earnings 494,460 329,701
------------------ -------------------
Total shareholders' equity 1,319,755 942,558
------------------ -------------------
Total liabilities and shareholders' equity $8,657,653 $5,710,182
================== ===================
Borrower and investor custodial accounts $2,548,549 $1,063,676
================== ===================
The accompanying notes are an integral part of these
statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended February 29(28),
(Dollar amounts in thousands, except per share data)
1996 1995 1994
-------------- -------------- --------------
Revenues
Loan origination fees $199,724 $203,426 $379,533
Gain (loss) on sale of loans, net of commitment fees 92,341 (41,342) 88,212
-------------- -------------- --------------
Loan production revenue 292,065 162,084 467,745
Interest earned 354,226 280,917 320,217
Interest charges (281,573) (205,464) (219,898)
-------------- -------------- --------------
Net interest income 72,653 75,453 100,319
Loan servicing income 575,058 428,994 307,477
Less amortization and impairment of servicing assets (342,811) (95,768) (242,177)
Servicing hedge gain (loss) 200,135 (40,030) 73,400
Less write-off of servicing hedge - (25,600) -
-------------- -------------- --------------
Net loan administration income 432,382 267,596 138,700
Commissions, fees and other income 63,642 40,650 48,816
Gain on sale of servicing - 56,880 -
-------------- -------------- --------------
Total revenues 860,742 602,663 755,580
Expenses
Salaries and related expenses 229,668 199,061 227,702
Occupancy and other office expenses 106,298 102,193 101,691
Guarantee fees 121,197 85,831 57,576
Marketing expenses 27,115 23,217 26,030
Other operating expenses 50,264 37,016 43,481
Branch and administrative office consolidation costs - 8,000 -
-------------- -------------- --------------
Total expenses 534,542 455,318 456,480
-------------- -------------- --------------
Earnings before income taxes 326,200 147,345 299,100
Provision for income taxes 130,480 58,938 119,640
-------------- -------------- --------------
NET EARNINGS $195,720 $88,407 $179,460
============== ============== ==============
Earnings per share
Primary $1.95 $0.96 $1.97
Fully diluted $1.95 $0.96 $1.94
The accompanying notes are an integral part of these
statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Three years ended February 29, 1996
(Dollar amounts in thousands)
Additional
Number Common Paid-in Retained
of Shares Stock Capital Earnings Total
--------------- --------------- --------------- --------------- ---------------
Balance at March 1, 1993 55,668,560 $2,784 $573,635 $116,686 $ 693,105
Cash dividends paid - preferred - - - (732) (732)
Cash dividends paid - common - - - (24,389) (24,389)
Stock options exercised 452,522 22 3,338 - 3,360
Tax benefit of stock options exercise - - 2,495 - 2,495
Conversion of preferred stock
for common stock 4,511,283 225 25,575 - 25,800
Dividend reinvestment plan 1,994 - 55 - 55
401(k) Plan contribution 33,637 2 1,005 - 1,007
Settlement of 5% stock dividend 41,171 2 1,446 (1,472) (24)
Net earnings for the year - - - 179,460 179,460
Effect of three-for-two stock split
effective subsequent to year-end 30,354,584 1,518 (1,518) - -
- -------------------------------------- --------------- -- --------------- -- --------------- -- --------------- --- ---------------
Balance at February 28, 1994 91,063,751 4,553 606,031 269,553 880,137
Cash dividends paid - common - - - (28,259) (28,259)
Stock options exercised 283,147 14 1,584 - 1,598
Tax benefit of stock options exercised - - 697 - 697
Dividend reinvestment plan - - (14) - (14)
Settlement of three-for-two stock split 23,466 1 (9) - (8)
Net earnings for the year - - - 88,407 88,407
- ------------------------------------------------------ -- --------------- -- --------------- -- --------------- --- ---------------
Balance at February 28, 1995 91,370,364 4,568 608,289 329,701 942,558
Issuance of common stock 10,000,000 500 200,775 - 201,275
Cash dividends paid - common - - - (30,961) (30,961)
Stock options exercised 752,380 38 6,686 - 6,724
Tax benefit of stock options exercised - - 1,963 - 1,963
Dividend reinvestment plan 33,345 2 697 - 699
401(k) Plan contribution 86,240 4 1,773 - 1,777
Net earnings for the year - - - 195,720 195,720
- ------------------------------------------------------ -- --------------- -- --------------- -- --------------- --- ---------------
Balance at February 29, 1996 102,242,329 $5,112 $820,183 $494,460 $1,319,755
====================================================== == =============== == =============== == =============== === ===============
The accompanying notes are an integral part of this
statement.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Year ended February 29(28),
(Dollar amounts in thousands)
1996 1995 1994
---------------- ---------------- -----------------
Cash flows from operating activities:
Net earnings $ 195,720 $ 88,407 $ 179,460
Adjustments to reconcile net earnings to net cash
(used) provided by operating activities:
Amortization and impairment of mortgage servicing
rights 269,322 92,897 141,321
Amortization and impairment of capitalized servicing
fees receivable 73,489 2,871 100,856
Servicing hedge unrealized gain (108,800) - -
Depreciation and other amortization 30,545 26,050 15,737
Deferred income taxes 130,480 58,938 119,640
Gain on bulk sale of servicing rights - (56,880) -
Origination and purchase of loans held for sale (34,583,653) (27,866,170) (52,458,879)
Principal repayments and sale of loans 32,742,391 28,681,606 51,060,915
---------------- ---------------- -----------------
(Increase) decrease in mortgage loans shipped and
held for sale (1,841,262) 815,436 (1,397,964)
Increase in other receivables and other assets (483,364) (227,220) (392,255)
Increase in accounts payable and accrued liabilities 269,531 102,258 5,397
---------------- ---------------- -----------------
Net cash (used) provided by operating activities (1,464,339) 902,757 (1,217,808)
---------------- ---------------- -----------------
Cash flows from investing activities:
Additions to mortgage servicing rights (628,574) (589,051) (521,326)
Additions to capitalized servicing fees receivable (241,005) (207,663) (178,612)
Purchase of property, equipment and leasehold
improvements - net (19,003) (21,414) (64,660)
Proceeds from bulk sale of servicing rights - 100,676 -
---------------- ---------------- -----------------
Net cash used by investing activities (888,582) (717,452) (764,598)
---------------- ---------------- -----------------
Cash flows from financing activities:
Net increase (decrease) in warehouse debt and other
short-term borrowings 1,742,290 (451,915) 1,477,593
Issuance of long-term debt 526,500 399,205 576,718
Repayment of long-term debt (96,563) (93,019) (59,721)
Issuance of common stock 210,475 2,273 4,398
Cash dividends paid (30,961) (28,259) (25,121)
---------------- ---------------- -----------------
Net cash provided (used) by financing activities 2,351,741 (171,715) 1,973,867
---------------- ---------------- -----------------
Net (decrease) increase in cash (1,180) 13,590 (8,539)
Cash at beginning of period 17,624 4,034 12,573
================ ================ =================
Cash at end of period $ 16,444 $ 17,624 $ 4,034
================ ================ =================
Supplemental cash flow information:
Cash used to pay interest $ 317,156 $ 262,858 $ 277,518
Cash used to pay (refunded from) income taxes $ 54 ($ 841) ($
1,823)
Noncash financing activities - conversion of preferred stock $ - $ - $ 25,800
The accompanying notes are an integral part of these
statements.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Countrywide Credit Industries, Inc. (the "Company") is a holding company.
Through its principal subsidiary, Countrywide Home Loans, Inc. ("CHL") (formerly
Countrywide Funding Corporation), the Company is engaged primarily in the
mortgage banking business and as such originates, purchases, sells and services
mortgage loans throughout the United States. In preparing financial statements
in conformity with generally accepted accounting principles, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial statements
follows.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the parent and
all wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
2. Receivables for Mortgage Loans Shipped
Gain or loss on the sale of mortgage loans is recognized at the date the
loans are shipped to investors pursuant to existing sales commitments.
3. Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market,
which is computed by the aggregate method (unrealized losses are offset by
unrealized gains). The cost of mortgage loans is adjusted by gains and losses
generated from corresponding closed hedging transactions entered into to protect
the inventory value from increases in interest rates. Hedge positions are also
used to protect the pipeline of loan applications in process from changes in
interest rates. Gains and losses resulting from changes in the market value of
the inventory, pipeline and open hedge positions are netted. Any net gain that
results is deferred; any net loss that results is recognized when incurred.
Hedging gains and losses realized during the commitment and warehousing period
related to the pipeline and mortgage loans held for sale are deferred. Hedging
losses are recognized currently if deferring such losses would result in
mortgage loans held for sale and the pipeline being valued in excess of their
estimated net realizable value.
4. Property, Equipment and Leasehold Improvements
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using the
straight-line method. Leasehold improvements are amortized over the lesser of
the life of the lease or service lives of the improvements using the
straight-line method.
5. Capitalized Servicing Fees Receivable
The Company sells substantially all of the mortgage loans it produces and
retains the servicing rights thereto. These servicing rights entitle the Company
to a future stream of cash flows based on the outstanding principal balance of
the mortgage loans and the related contractual service fee. The sales price of
the loans, which is generally at or near par, and the resulting gain or loss on
sale are adjusted to provide for the recognition of a normal service fee rate
over the estimated lives of the serviced loans. The amount of the adjustment
approximates the amount that investors were willing to pay for the excess
servicing fees at the time of the loan sale. The adjustment results in a
receivable that is expected to be realized through receipt of the excess service
fee over time.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
6. Mortgage Servicing Rights and Amortization
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage
Servicing Rights, which the Company adopted effective March 1, 1995. SFAS No.
122 amended SFAS No. 65, Accounting for Certain Mortgage Banking Activities. The
overall impact on the Company's financial statements of adopting SFAS No. 122
was an increase in net earnings for the year ended February 29, 1996 of $41.9
million, or $0.42 per share.
SFAS No. 122 requires the recognition of originated mortgage servicing
rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as
assets by allocating total costs incurred between the loan and the servicing
rights based on their relative fair values. Under SFAS No. 65, the cost of OMSRs
was not recognized as an asset and was charged to earnings when the related loan
was sold. The separate impact of recognizing OMSRs as assets in the Company's
financial statements in accordance with SFAS No. 122 was an increase in net
earnings of $92.0 million, or $0.92 per share, for the year ended February 29,
1996.
With respect to PMSRs, SFAS No. 122 has a different cost allocation
methodology than SFAS No. 65. In contrast to a cost allocation based on relative
market value as set forth in SFAS No. 122, the prior requirement was to allocate
the costs incurred in excess of the market value of the loans without the
servicing rights to PMSRs. The separate impact of the application of the SFAS
No. 122 cost allocation method, along with the effect of changes in market
conditions, was to reduce net earnings by $50.1 million, or $0.50 per share, for
the year ended February 29, 1996.
Amortization of mortgage servicing rights is based on the ratio of net
servicing income received in the current period to total net servicing income
projected to be realized from the mortgage servicing rights. Amortization of
capitalized servicing fees receivable is based on the decline during the period
in the present value of the projected excess servicing fees using the same
discount rate as that which is implied by the price that investors were willing
to pay for the excess servicing fees at the time of the loan sale. Projected net
servicing income and excess servicing fees are in turn determined on the basis
of the estimated future balance of the underlying mortgage loan portfolio, which
declines over time from prepayments and scheduled loan amortization. The Company
estimates future prepayment rates based on current interest rate levels, other
economic conditions and market forecasts, as well as relevant characteristics of
the servicing portfolio, such as loan types, interest rate stratification and
recent prepayment experience.
SFAS No. 122 also requires that all capitalized mortgage servicing rights
("MSRs") be evaluated for impairment based on the excess of the carrying amount
of the MSRs over their fair value. For purposes of measuring impairment, MSRs
are stratified on the basis of interest rate and type of interest rate (fixed or
adjustable). In addition to normal amortization of capitalized servicing fees
receivable and mortgage servicing rights ("Servicing Assets"), which amounted to
$168.0 million, the Company reduced the Servicing Assets by an additional $174.8
million of impairment during the year ended February 29, 1996.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
7. Servicing Portfolio Hedge
The Company acquires financial instruments, including derivative contracts,
that change in value inversely to the movement of interest rates ("Servicing
Hedge"). These financial instruments include call options on interest rate
futures and mortgage-backed securities ("MBS"), interest rate floors, interest
rate swaps (with the Company's maximum payment capped) ("Swap Caps"),
principal-only ("P/O") swaps and certain tranches of collateralized mortgage
obligations ("CMOs"). The Servicing Hedge is designed to protect the value of
the Servicing Assets from the effects of increased prepayment activity that
generally results from declining interest rates. The value of the interest rate
floors, call options, Swap Caps and P/O swaps is derived from an underlying
instrument or index; however, the notional or contractual amount is not
recognized in the balance sheet. The cost of the interest rate floors and call
options is charged to expense (and deducted from net loan administration income)
over the life of the contract. Unamortized costs are included in Other Assets in
the balance sheet. As part of the adoption of SFAS No. 122, the Company revised
its Servicing Hedge accounting policy, effective March 1, 1995, to adjust the
basis of the Servicing Assets for realized and unrealized gains and losses in
the derivative financial instruments comprising the Servicing Hedge. For the
year ended February 29, 1996, the net gain from the Servicing Hedge included net
unrealized gains of $108.8 million and realized gains of $91.3 million from the
sale of various derivative financial instruments. Prior to the year ended
February 29, 1996, gains from the Servicing Hedge were recognized first as an
offset to the "Incremental Amortization" of the Servicing Assets (i.e.,
amortization due to impairment caused by increased projected prepayment speeds).
To the extent the Servicing Hedge generated gains in excess of Incremental
Amortization, the Company reduced the carrying amount of the Servicing Assets by
such excess through additional amortization. For the years ended February 28,
1995 and 1994, the Company recognized $66 million in net loss (including a
write-off of the Servicing Hedge amounting to $26 million) and $73 million of
realized gains, respectively, as an offset to incremental amortization. The
Company measures the effectiveness of its Servicing Hedge by computing the
correlation under a variety of interest rate scenarios between the present value
of servicing cash flows and the value of the Servicing Hedge instruments.
8. Deferred Commitment Fees
Deferred commitment fees, included in Other Assets, primarily consist of
fees paid to permanent investors to ensure the ultimate sale of loans and net
put and call option fees paid for the option of selling or buying MBS. Fees paid
to permanent investors are recognized as an adjustment to the sales price when
the loans are shipped to permanent investors or charged to expense when it
becomes evident the commitment will not be used. Put and call option fees are
amortized over the life of the option to reflect the decline in its time value.
Any unamortized option fees are charged to income when the related option is
exercised.
9. Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. That Opinion requires that compensation cost related to fixed stock
option plans be recognized only to the extent that the fair value of the shares
at the grant date exceeds the exercise price. Accordingly, the Company
recognizes no compensation expense for its stock option grants.
10. Investment Securities
The Company has designated its investments in certain tranches of CMOs as
available for sale. Those securities are reported in Other Assets at fair value,
with any net material unrealized gains and losses included in equity.
Unrealized losses that are other than temporary are recognized in earnings.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
11. Loan Origination Fees
Loan origination fees and costs and discount points are recorded as an
adjustment of the cost of the loan and are included in loan production revenue
when the loan is sold.
12. Interest Rate Swap Agreements
With respect to the interest rate swap agreements associated with the
Company's debt and custodial accounts, the differential to be received or paid
under the agreements is accrued and is recognized as an adjustment to net
interest income. The related amount payable to or receivable from counterparties
is included in Accounts Payable and Accrued Liabilities.
13. Sale of Servicing Rights
The Company recognizes gain or loss on the sale of servicing rights when
title and substantially all risks and rewards have irrevocably passed to the
buyer and any minor protection provisions retained can be reasonably estimated.
14. Advertising Costs
The Company charges to expense the production costs of advertising the first
time the advertising takes place, except for direct-response advertising, which
is capitalized and amortized over the expected period of future benefits.
Advertising expense was $20.6 million in the year ended February 29, 1996.
15. Income Taxes
The Company utilizes an asset and liability approach in its accounting for
income taxes. This approach requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of temporary differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities.
16. Earnings Per Share
Primary earnings per share is computed on the basis of the weighted average
number of common and common equivalent shares outstanding during the respective
periods after giving retroactive effect to stock dividends and stock splits.
Fully diluted earnings per share is based on the assumption that all dilutive
convertible preferred stock and stock options were converted at the beginning of
the reporting period. The computations assume that net earnings have been
adjusted for dividends on convertible preferred stock.
The weighted average shares outstanding for computing primary and fully
diluted earnings per share were both 100,270,000 for the year ended February 29,
1996; 92,087,000 and 92,216,000, respectively, for the year ended February 28,
1995 and 90,501,000 and 92,445,000, respectively, for the year ended February
28, 1994.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
17. Financial Statement Reclassifications and Restatement
Certain amounts reflected in the Consolidated Financial Statements for the
years ended February 28, 1995 and 1994 have been reclassified to conform to the
presentation for the year ended February 29, 1996.
On April 23, 1993, a 5% stock dividend was paid. On May 3, 1994, the
Company's $0.05 par value common stock was split 3 for 2. All references in the
accompanying consolidated balance sheets, consolidated statements of earnings
and notes to consolidated financial statements to the number of common shares
and share amounts have been restated to reflect the stock split and the stock
dividend.
NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following.
--------------------------------------------------------- ---- -------------------------------------------- ---
February 29(28),
----------------- --- ---------------- --
(Dollar amounts in thousands) 1996 1995
----------------------------------------------------------------- --- ----------------- --- ---------------- --
Buildings $ 37,723 $ 36,983
Office equipment 138,326 116,661
Leasehold improvements 25,269 25,729
Mobile homes - 3,751
----------------- ----------------
201,318 183,124
Less: accumulated depreciation and amortization (72,685) (55,848)
----------------- ----------------
128,633 127,276
Land 12,330 18,336
================= ================
$140,963 $145,612
================= ================
----------------------------------------------------------------- --- ----------------- --- ---------------- --
Depreciation expense amounted to $21.1 million, $19.0 million and $12.4
million for the years ended February 29(28), 1996, 1995 and 1994, respectively.
NOTE C - CAPITALIZED SERVICING FEES RECEIVABLE AND MORTGAGE SERVICING
RIGHTS
The components of capitalized servicing fees receivable and mortgage
servicing rights were as follows.
--------------------------------------------- -- --------------------------------------------------------------
February 29(28),
---------------- --- ---------------- --- ---------------- ---
(Dollar amounts in thousands) 1996 1995 1994
--------------------------------------------- -- ---------------- --- ---------------- --- ---------------- ---
Capitalized Servicing Fees Receivable
Balance at beginning of period $464,268 $289,541 $211,785
Additions 241,005 207,663 178,612
Sale of servicing - (30,065) -
Amortization
Scheduled (2,935) (2,871) (32,970)
Unscheduled - - (67,886)
Hedge gains applied (70,554) - -
---------------- ---------------- ----------------
Balance at end of period $631,784 $464,268 $289,541
================ ================ ================
Mortgage Servicing Rights
Balance at beginning of period $1,332,629 $836,475 $456,470
Additions 628,574 589,051 521,326
Amortization
Scheduled (165,082) (92,897) (108,822)
Unscheduled - - (32,499)
Hedge gains applied (42,606) - -
---------------- ---------------- ----------------
Balance at end of period $1,753,515 $1,332,629 $836,475
================ ================ ================
Reserve for Impairment of Mortgage Servicing Rights
Balance at beginning of period $ - $ - $ -
Additions (61,634) - -
================ ================ ================
Balance at end of period $ (61,634) $ - $ -
================ ================ ================
--------------------------------------------- -- ---------------- --- ---------------- --- ---------------- ---
As of February 29, 1996, the net book value of mortgage servicing rights was
$1.692 billion and the estimated fair value of the Company's capitalized
mortgage servicing rights was $1.697 billion. Fair value is determined by
discounting estimated net future cash flows from mortgage servicing activities
using discount rates that approximate current market rates and estimated
prepayment rates, among other assumptions.
NOTE D - NOTES PAYABLE
Notes payable consisted of the following.
---------------------------------------------------------- -- ---------------------------------------------- --
February 29(28),
----------------- --- ---------------- --
(Dollar amounts in thousands) 1996 1995
------------------------------------------------------------------ -- ----------------- --- ---------------- --
Commercial paper $2,847,442 $2,122,348
Medium-term notes, Series A, B, C, and D 1,824,800 1,393,900
Repurchase agreements 808,353 245,212
Subordinated notes 200,000 200,000
Unsecured notes payable, maturing in March 1996 235,000 -
Pre-sale funding facilities 181,255 -
Other notes payable (2.40%-2.90%) 668 1,631
================= ================
$6,097,518 $3,963,091
================= ================
------------------------------------------------------------------ -- ----------------- --- ---------------- --
Revolving Credit Facility and Commercial Paper
As of February 29, 1996, CHL, the Company's mortgage banking subsidiary, had
an unsecured credit agreement (revolving credit facility) with forty-seven
commercial banks permitting CHL to borrow an aggregate maximum amount of $3.06
billion, less commercial paper backed by the agreement. The amount available
under the facility is subject to a borrowing base, which consists of mortgage
loans held for sale, receivables for mortgage loans shipped and mortgage
servicing rights. The facility contains various financial covenants and
restrictions, certain of which limit the amount of dividends that can be paid by
the Company or CHL. The interest rate on direct borrowings is based on a variety
of sources, including the prime rate and the London Interbank Offered Rates
("LIBOR") for U.S. dollar deposits. This interest rate varies, depending on
CHL's credit ratings. No amount was outstanding on the revolving credit facility
at February 29, 1996. The weighted average borrowing rate on direct and
commercial paper borrowings for the year ended February 29, 1996 was 5.79%. The
weighted average borrowing rate on commercial paper outstanding as of February
29, 1996 was 5.32%. Under certain circumstances, including the failure to
maintain specified minimum credit ratings, borrowings under the revolving credit
facility and commercial paper may become secured by mortgage loans held for
sale, receivables for mortgage loans shipped and mortgage servicing rights. The
facility expires on May 31, 1998.
NOTE D - NOTES PAYABLE (Continued)
Medium-Term Notes
As of February 29, 1996, outstanding medium-term notes issued by CHL under
various shelf registrations filed with the Securities and Exchange Commission
were as follows.
- -----------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
------------------------------------------- ---------------------- ----------------------------
Floating-Rate Fixed-Rate Total From To From To
------------------------------------------- ----------- ---------- ------------- --------------
Series A $ - $ 344,800 $ 344,800 6.10% 8.79% July-1996 Mar-2002
Series B 11,000 469,000 480,000 5.11% 6.98% Mar-1996 Aug-2005
Series C 303,000 197,000 500,000 4.82% 8.43% Dec-1997 Mar-2004
Series D 115,000 385,000 500,000 5.45% 6.88% Aug-1998 Sep-2005
-------------------------------------------
Total $429,000 $1,395,800 $1,824,800
===========================================
- -----------------------------------------------------------------------------------------------------------------
As of February 29, 1996, all of the outstanding fixed-rate notes had been
effectively converted by interest rate swap agreements to floating-rate notes.
The weighted average borrowing rate on medium-term note borrowings for the year
ended February 29, 1996, including the effect of the interest rate swap
agreements, was 6.72%.
Repurchase Agreements
As of February 29, 1996, the Company had entered into short-term financing
arrangements to sell MBS under agreements to repurchase. The weighted average
borrowing rate for year ended February 29, 1996 was 5.88%. The weighted average
borrowing rate on repurchase agreements outstanding as of February 29, 1996 was
5.30%. The repurchase agreements were collateralized by MBS. All MBS underlying
repurchase agreements are held in safekeeping by broker-dealers, and all
agreements are to repurchase the same or substantially identical MBS.
Subordinated Notes
The 8.25% subordinated notes are due July 15, 2002. Interest is payable
semi-annually on each January 15 and July 15. The subordinated notes are not
redeemable prior to maturity and are not subject to any sinking fund
requirements.
Pre-Sale Funding Facilities
As of February 29, 1996, CHL had uncommitted revolving credit facilities
with two government-sponsored entities and an affiliate of an investment banking
firm. The credit facilities are secured by conforming mortgage loans which are
in the process of being pooled into MBS. Interest rates are based on LIBOR,
federal funds and/or the prevailing rates for MBS repurchase agreements. The
weighted average borrowing rate for all three facilities for the year ended
February 29, 1996 was 5.99%.
NOTE D - NOTES PAYABLE (Continued)
Maturities of notes payable are as follows.
---------------- ------------------------------------------ ------------------------------------------
Year ending February 29(28), (Dollar amounts in thousands)
---------------- ------------------------------------------ ------------------------------------------
1997 $4,185,718
1998 180,300
1999 142,000
2000 228,000
2001 197,000
Thereafter 1,164,500
================
$6,097,518
================
---------------- ------------------------------------------ -------- ------------------ --------------
NOTE E - INCOME TAXES
Components of the provision for income taxes were as follows.
-- ----------------------------------------- --- -------------------------------------------------- --
Year ended February 29(28),
---------------- -- ------------- -- ------------- --
(Dollar amounts in thousands) 1996 1995 1994
-- ----------------------------------------- --- ---------------- -- ------------- -- ------------- --
Federal expense - deferred $106,789 $48,680 $ 99,074
State expense - deferred 23,691 10,258 20,566
================ ============= =============
$130,480 $58,938 $119,640
================ ============= =============
-- ----------------------------------------- --- ---------------- -- ------------- -- ------------- --
The following is a reconciliation of the statutory federal income tax rate
to the effective income tax rate as reflected in the consolidated statements of
earnings.
-- ----------------------------------------- --- -------------------------------------------------- --
Year ended February 29(28),
--------------- -- -------------- --- ------------ --
1996 1995 1994
-- ----------------------------------------- --- --------------- -- -------------- --- ------------ --
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income and franchise taxes, net
of federal tax effect 5.0 5.0 5.0
=============== ============== ============
Effective income tax rate 40.0% 40.0% 40.0%
=============== ============== ============
-- ----------------------------------------- --- --------------- -- -------------- --- ------------ --
NOTE E - INCOME TAXES (Continued)
The tax effects of temporary differences that gave rise to deferred income
tax assets and liabilities are presented below.
--- ------------------------------------------- -------------------------------------------------- --
Year Ended February 29(28),
--------------------------------------------------
(Dollar amounts in thousands) 1996 1995 1994
------------------------------------------------------------------------------------------------------
Deferred income tax assets:
Net operating losses $101,303 $ 85,508 $ 68,240
Alternative minimum tax credits 3,989 3,989 3,989
State income and franchise taxes 30,276 25,183 22,326
Reserves and accrued expenses 17,740 9,392 5,965
Other 833 224 325
----------------- --------------- -------------
Total deferred income tax assets 154,141 124,296 100,845
----------------- --------------- -------------
Deferred income tax liabilities:
Capitalized servicing fees receivable and
mortgage servicing rights 645,693 487,269 403,431
Accumulated depreciation 5,660 5,722 5,939
----------------- --------------- -------------
Total deferred income tax liabilities 651,353 492,991 409,370
----------------- --------------- -------------
Deferred income taxes $497,212 $368,695 $308,525
================= =============== =============
------------------------------------------------------------------------------------------------------
At February 29, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of $4,300,000 expiring in 2003, $23,082,000 expiring
in 2004, $2,772,000 expiring in 2006, $5,064,000 expiring in 2008, $131,384,000
expiring in 2009, $74,033,000 expiring in 2010 and $45,562,000 expiring in 2011.
NOTE F - FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company utilizes a variety of derivative financial instruments to manage
interest-rate risk. These instruments include short-term rate and point
commitments to extend credit, MBS mandatory forward delivery and purchase
commitments, options to sell or buy mortgage-backed and treasury securities,
interest rate floors, interest rate swaps, Swap Caps and P/O swaps. These
instruments involve, to varying degrees, elements of credit and interest-rate
risk. All of the Company's derivative financial instruments are held or issued
for purposes other than trading.
NOTE F - FINANCIAL INSTRUMENTS (Continued)
While the Company does not anticipate nonperformance by any counterparty,
the Company is exposed to credit loss in the event of nonperformance by the
counterparties to the various instruments. The Company manages credit risk with
respect to MBS mandatory forward commitments, put or call options to sell or buy
mortgage-backed and treasury securities, interest rate swaps and floors, Swap
Caps and P/O swaps by entering into agreements with entities approved by senior
management and initially having a long-term credit rating of single A or better.
These entities include Wall Street firms having primary dealer status, money
center banks and permanent investors. The Company's exposure to credit risk in
the event of default by the counterparty is the difference between the contract
price and the current market price offset by any available margins retained by
the Company or an independent clearing agent. The amounts of credit risk as of
February 29, 1996, if the counterparties failed completely and if the margins,
if any, retained by the Company or an independent clearing agent were to become
unavailable, are approximately $155 million for MBS mandatory forward delivery
commitments, approximately $44 million for interest rate swaps and approximately
$55 million for interest rate floors.
As of February 29, 1996, the Company had short-term rate and point
commitments amounting to approximately $3.1 billion (including $2.7 billion
fixed-rate and $0.4 billion adjustable rate) to fund mortgage loan applications
in process subject to approval of the loans and an additional $1.3 billion of
fixed-rate mortgage loans subject to property identification and borrower
qualification. Substantially all of these commitments are for periods of 90 days
or less. After funding and sale of the mortgage loans, the Company's exposure to
credit loss in the event of nonperformance by the mortgagor is limited as
described in Note G4. The Company uses the same credit policies in the
commitments as are applied to all lending activities.
Hedge of Mortgage Loan Inventory and Committed Pipeline
In order to offset the risk that a change in interest rates will result in a
decrease in the value of the Company's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("Committed Pipeline"), the
Company enters into hedging transactions. The Company's hedging policies
generally require that substantially all of its inventory of conforming and
government loans and the maximum portion of its Committed Pipeline that may
close be hedged with forward contracts for the delivery of MBS or options on
MBS. The MBS that are to be delivered under these contracts and options are
fixed or adjustable-rate, corresponding with the composition of the Company's
inventory and Committed Pipeline. At February 29, 1996, the Company had open
commitments amounting to approximately $9.4 billion to sell MBS with varying
settlement dates generally not extending beyond May 1996 and options to sell MBS
through December 1996 with a total notional amount of $5.7 billion. The mortgage
loan inventory is then used to form the MBS that will fill the forward delivery
contracts and options. The Company hedges its inventory and Committed Pipeline
of jumbo mortgage loans by using whole-loan sale commitments to ultimate buyers
or by using temporary "cross hedges" with sales of MBS since such loans are
ultimately sold based on a market spread to MBS. As such, the Company is not
exposed to significant risk nor will it derive any significant benefit from
changes in interest rates on the price of the mortgage loan inventory net of
gains or losses of associated hedge positions. The correlation between the price
performance of the hedge instruments and the inventory being hedged is very high
due to the similarity of the asset and the related hedge instrument. The Company
is exposed to interest-rate risk to the extent that the portion of loans from
the Committed Pipeline that actually closes at the committed price is less than
the portion expected to close in the event of a decline in rates and such
decline in closings is not covered by forward contracts or options to purchase
MBS needed to replace the loans in process that do not close at their committed
price. At February 29, 1996, the notional amount of forward contracts and
options to purchase MBS aggregated $5.6 billion and $4.6 billion, respectively.
The forward contracts extend through May 1996 and the options extend through
December 1996. The Company determines the portion of its Committed Pipeline that
it will hedge based on numerous factors, including the composition of the
Company's Committed Pipeline, the portion of such Committed Pipeline likely to
close, the timing of such closings and anticipated changes in interest rates.
NOTE F - FINANCIAL INSTRUMENTS (Continued)
Servicing Hedge
The primary means used by the Company to reduce the sensitivity of its
earnings to changes in interest rates is through a strong production capability
and a growing servicing portfolio. To further mitigate the effect on earnings of
higher amortization and impairment (which is deducted from loan servicing
income) resulting from increased prepayment activity, the Company utilizes its
Servicing Hedge, consisting of financial instruments, including derivative
contracts, that increase in value when interest rates decline. Prepayment
activity generally increases when interest rates decline. These financial
instruments include call options on interest rate futures and MBS, interest rate
floors, Swap Caps, P/O swaps and certain tranches of CMOs.
The CMOs, which consist primarily of P/O securities, have been purchased at
deep discounts to their par values. As interest rates decline, prepayments on
the collateral underlying the CMOs should increase. These changes should result
in a decline in the average lives of the P/O securities and an increase in the
present values of their cash flows. At February 29, 1996, the carrying
value of CMOs included in the Servicing Hedge was approximately $139 million.
The following summarizes the notional amounts of Servicing Hedge derivative
contracts.
- --- ----------------------------- --- ------------ -- ----------- -- ---------------- -- ---------- -- ------------
Long Long Call
Interest Call Options on Principal
Rate Options Interest Rate Swap - Only
(Dollar amounts in millions) Floors on MBS Futures Caps Swaps
- --- ----------------------------- --- ------------ -- ----------- -- ---------------- ---------- -- ------------
Balance, March 1, 1993 - - - - -
Additions - 4,700 2,520 - -
Dispositions - 2,700 750 - -
------------ ----------- ---------------- ---------- ------------
Balance, February 28, 1994 - 2,000 1,770 - -
Additions 4,000 - 1,300 - -
Dispositions - 2,000 3,070 - -
------------ ----------- ---------------- ---------- ------------
Balance, February 28, 1995 4,000 - - - -
Additions 13,500 2,500 7,920 1,000 268
Dispositions 1,750 1,000 4,370 - -
============ =========== ================ ========== ============
Balance, February 29, 1996 $15,750 $1,500 $3,550 $1,000 $268
============ =========== ================ ========== ============
- --- ----------------------------- --- ------------ -- ----------- -- ---------------- -- ---------- -- ------------
NOTE F - FINANCIAL INSTRUMENTS (Continued)
The terms of the open Servicing Hedge derivative contracts at February 29,
1996 are presented below.
- --- ----------------------- -------------------- -- ------------ -- --------------- -- ------------ -- ------------
Long Call
Options on
Long Call Interest Rate Principal
Interest Rate Options on Futures Swap - Only
Floors MBS Caps Swaps
- --- ----------------------- -------------------- -- ------------ -- --------------- -- ------------ -- ------------
Index or Underlying 2, 5 or 10-Year MBS Interest Rate 3 - Month FNMA
Instrument Constant Maturity Futures LIBOR Trust
Treasury Yield Capped at P/O
or 7%(Pay Rate)
3-Month LIBOR
Strike Price 4.50% - 7.00% 99.72 - 95.00 - 124.00 5.65% - 5.77% 70.00
103.25 (Receive Rate)
Term 2 - 5 Years 5 - 11 4 - 9 Months 5 Years 2 Years
Months
- --- ----------------------- -------------------- -- ------------ -- --------------- -- ------------ -- ------------
The Servicing Hedge instruments utilized by the Company are intended to
protect the value of the investment in Servicing Assets from the effects of
increased prepayment activity that generally results from declining interest
rates. To the extent that interest rates increase, the value of the Servicing
Assets increases while the value of hedge instruments declines. With respect to
the options, floors and CMOs, the Company is not exposed to loss beyond its
initial outlay to acquire the hedge instruments. With respect to the Swap Caps
contracts entered into by the Company as of February 29, 1996, the Company
estimates that its maximum exposure to loss over the contractual term is $35
million. The Company's exposure to loss in the P/O swaps is related to changes
in the market value of the referenced P/O security over the life of the
contract. There can be no assurance that the Company's Servicing Hedge will
generate gains in the future.
Interest Rate Swaps
As of February 29, 1996, CHL had interest rate swap agreements with certain
financial institutions having notional principal amounts totaling $2.33 billion.
The effect of these agreements is to enable CHL to convert its fixed-rate
medium-term note borrowings to LIBOR-based floating-rate cost borrowings
(notional amount $1.40 billion), to convert a portion of its commercial paper
and medium-term note borrowings from one floating-rate index to another
(notional amount $0.12 billion) and to convert the earnings rate on the
custodial accounts held by CHL from floating to fixed (notional amount $0.80
billion). Payments are due periodically through the termination date of each
agreement. The agreements expire between March 1996 and September 2005.
NOTE F - FINANCIAL INSTRUMENTS (Continued)
The terms of the open interest rate swap agreements at February 29, 1996 are
presented below.
- --- ------------------------------------- ---------------------------------- --
Swaps related to debt
Average receive rate 6.121%
Average pay rate 5.610%
Index 3-month LIBOR
Swaps related to escrow accounts
Average receive rate 6.770%
Average pay rate 5.609%
Index 1-3 month LIBOR
- --- ------------------------------------- ---------------------------------- --
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments as of February 29(28), 1996 and 1995 is made by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
-- ------------------------------------------------------ ----------------------------- -- ----------------------------
February 29, 1996 February 28, 1995
----------------------------- -- ----------------------------
Carrying Estimated Carrying Estimated
(Dollar amounts in thousands) amount fair value amount fair value
-- ------------------------------------------------------ ------------ -- ------------- -- ----------- -- --------------
Assets:
Mortgage loans shipped and held for sale $4,740,087 $4,740,087 $2,898,825 $2,941,709
Capitalized servicing fees receivable 631,784 604,761 464,268 473,623
Items included in other assets:
Principal-only securities 187,147 178,000 91,793 92,726
Derivatives:
Interest rate floors 142,339 132,621 15,820 23,396
Contracts and options related to Committed
Pipeline and mortgage loans shipped and
held for sale 33,497 117,426 47,647 (2,926)
Options related to Servicing Hedge 14,341 6,102 - -
Swap Caps 5,910 5,910 - -
Principal-only swaps (6,625) (6,625) - -
Liabilities:
Notes payable 6,097,518 6,151,774 3,963,091 3,934,160
Derivatives gain (loss):
Interest rate swaps 1,739 31,602 4,093 (55,570)
Short-term commitments to extend credit - (39,716) - 69,252
-- ------------------------------------------------------ ------------ -- ------------- -- ----------- -- --------------
NOTE F - FINANCIAL INSTRUMENTS (Continued)
The fair value estimates as of February 29(28), 1996 and 1995 are based on
pertinent information available to management as of the respective dates.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
The following describes the methods and assumptions used by the Company in
estimating fair values.
Mortgage Loans Shipped and Held for Sale
Fair value is estimated using the quoted market prices for securities backed
by similar types of loans and dealer commitments to purchase loans on a
servicing-retained basis.
Capitalized Servicing Fees Receivable
Fair value is estimated by discounting future cash flows from excess
servicing fees using discount rates that approximate current market rates and
market consensus prepayment rates.
Other Financial Instruments
Fair value is estimated using quoted market prices and by discounting future
cash flows using discount rates that approximate current market rates and market
consensus prepayment rates.
Derivatives
Fair value is estimated as the amounts that the Company would receive or pay
to terminate the contracts at the reporting date, taking into account the
current unrealized gains or losses on open contracts. Market or dealer quotes
are available for many derivatives; otherwise, pricing or valuation models are
applied to current market information to estimate fair value.
Notes Payable
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
NOTE G - COMMITMENTS AND CONTINGENCIES
1. Legal Proceedings
On June 22, 1995, a lawsuit was filed by Jeff and Kathy Briggs, as a
purported class action, against Countrywide Funding Corporation (now known as
Countrywide Home Loans, Inc.) and a mortgage broker in the Northern Division of
the United Sates District Court for the Middle District of Alabama. The suit
claims, among other things, that in connection with residential mortgage loan
closings, CHL made certain payments to mortgage brokers in violation of the Real
Estate Settlement Procedures Act and induced mortgage brokers to breach their
alleged fiduciary duties to their customers. The plaintiffs seek unspecified
compensatory and punitive damages plus, as to certain claims, treble damages.
CHL's management believes that its compensation programs to mortgage brokers
comply with applicable law and with long-standing industry practice, and that it
has meritorious defenses to the action. CHL intends to defend vigorously against
the action and believes that the
NOTE G - COMMITMENTS AND CONTINGENCIES (Continued)
ultimate resolution of such claims will not have a material adverse effect on
CHL or the Company.
The Company and certain subsidiaries are defendants in various lawsuits
involving matters generally incidental to their business. Although it is
difficult to predict the ultimate outcome of these cases, management believes,
based on discussions with counsel, that any ultimate liability will not
materially affect the consolidated financial position of the Company and its
subsidiaries.
2. Commitments to Buy or Sell Mortgage-Backed Securities and Interest Rate
Swap Agreements
In connection with its open commitments to buy or sell MBS and with its
interest rate swap agreements, the Company may be required to maintain margin
deposits. With respect to the MBS commitments, these requirements are generally
greatest during periods of rapidly declining interest rates. The interest rate
swap margin requirements are generally greatest during periods of increasing
interest rates.
3. Lease Commitments
The Company leases office facilities under lease agreements extending
through September 2011. Future minimum annual rental commitments under these
non-cancelable operating leases with initial or remaining terms of one year or
more are as follows.
--- ------------------------------------------ ---------------------------------
Year ending February 29(28), (Dollar amounts in thousands)
--- ------------------------------- -------------------- -------------- --------
1997 $15,657
1998 12,867
1999 10,496
2000 7,705
2001 6,206
Thereafter 21,993
==============
$74,924
==============
--- ------------------------------- -------------------- -------------- --------
Rent expense was $20,408,000, $22,136,000 and $19,115,000 for the years
ended February 29(28), 1996, 1995 and 1994, respectively.
4. Restrictions on Transfers of Funds
The Company and certain of its subsidiaries are subject to regulatory and/or
credit agreement restrictions which limit their ability to transfer funds to the
Company through intercompany loans, advances or dividends. Pursuant to the
revolving credit facility as of February 29, 1996, the Company is required to
maintain $750 million in consolidated net worth and CHL is required to maintain
$725 million of net worth, as defined in the credit agreement.
5. Loan Servicing
As of February 29(28), 1996, 1995 and 1994, the Company was servicing loans
totaling approximately $136.8 billion, $113.1 billion and $84.7 billion,
respectively. Included in the loans serviced as of February 29(28), 1996, 1995
and 1994 were loans being serviced under subservicing agreements with total
principal balances of $1.9 billion, $0.7 billion and $0.6 billion, respectively.
Conforming conventional loans serviced by the Company (57% of the servicing
portfolio at February 29, 1996) are securitized through the Federal National
Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Corporation ("Freddie Mac") programs on a non-recourse basis, whereby
foreclosure losses are generally the responsibility of Fannie Mae or Freddie Mac
and not of the Company. Similarly, the government loans serviced by the Company
are securitized through Government National Mortgage Association programs,
whereby the Company is insured against loss by the Federal Housing
Administration (17% of the servicing portfolio at February 29, 1996) or
partially guaranteed against loss by the Veterans Administration (8% of the
servicing portfolio at February 29, 1996). In addition, jumbo mortgage loans
(18% of the servicing portfolio at February 29, 1996) are also serviced on a
non-recourse basis.
Properties securing the mortgage loans in the Company's servicing portfolio
are geographically dispersed throughout the United States. As of February 29,
1996, approximately 41% of the mortgage loans (measured by unpaid principal
balance) in the Company's servicing portfolio are secured by properties located
in California. No other state contains more than 5% of the properties securing
mortgage loans.
NOTE H - EMPLOYEE BENEFITS
1. Stock Option Plans
The Company has stock option plans (the "Plans") that provide for the
granting of both qualified and non-qualified options to employees and directors.
Options are generally granted at the average market price of the Company's
common stock on the date of grant and are exercisable beginning one year from
the date of grant and expire up to eleven years from the date of grant.
Stock option transactions under the Plans were as follows.
- ----- -------------------------------------------------- -- ---------------------------------------------------
Year ended February 29(28),
---------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Shares subject to: (Number of shares)
Outstanding options at beginning of year 6,683,414 5,603,325 4,478,703
Options granted 1,110,205 1,948,290 1,955,273
Options exercised (752,071) (307,847) (701,619)
Options expired or canceled (130,368) (560,354) (129,032)
============= ============= =============
Outstanding options at end of year 6,911,180 6,683,414 5,603,325
============= ============= =============
Exercise price:
Per share for options exercised during the year $2.39 - $21.83 $2.19 - $19.50 $2.19 - $16.19
Per share for options outstanding at end of year $2.39 - $21.83 $2.39 - $21.83 $2.19 - $21.83
- ----- -------------------------------------------------- ----------------- ---------------- -------------------
Of the outstanding options as of February 29, 1996, 3,437,985 shares were
immediately exercisable under the Plans. Also as of February 29, 1996, 1,410,485
shares were designated for future grants under the Plans.
2. Pension Plan
The Company has a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The Company's policy is to contribute the
amount actuarially determined to be necessary to pay the benefits under the
Plan, and in no event to pay less than the amount necessary to meet the minimum
funding standards of ERISA.
NOTE H - EMPLOYEE BENEFITS (Continued)
The following table sets forth the Plan's funded status and amounts
recognized in the Company's financial statements.
--- ---------------------------------------------------------------------- ----------------------------------
Year ended February 29(28),
----------------------------------
(Dollar amounts in thousands) 1996 1995
--- ------------------------------------------------------------------- -- ------------- --- ------------ ---
Actuarial present value of benefit obligations:
Vested $7,641 $5,112
Non-vested 2,068 1,095
------------- ------------
Total accumulated benefit obligation 9,709 6,207
Additional benefits based on estimated future salary levels 5,026 4,250
------------
-------------
Projected benefit obligations for service rendered to date 14,735 10,457
Less Plan assets at fair value, primarily mortgage-backed securities (12,515) (9,484)
------------- ------------
Projected benefit obligation in excess of Plan assets 2,220 973
Unrecognized net gain (loss) from past experience different from that
assumed and
effects of changes in assumptions 1,422 1,862
Prior service cost not yet recognized in net periodic pension cost (1,322) (1,422)
Unrecognized net asset at February 28, 1987 being recognized over 15 years 425 496
------------- ------------
Accrued pension cost $2,745 $1,909
============= ============
Net pension cost included the following components:
Service cost - benefits earned during the period $1,832 $1,648
Interest cost on projected benefit obligations 955 789
Actual return on Plan assets (839) (318)
Net amortization and deferral 29 (327)
============= ============
Net periodic pension cost $1,977 $1,792
============= ============
--- ------------------------------------------------------------------- -- ------------- --- ------------ ---
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8.25% and 5.0%, respectively. The expected
long-term rate of return on assets used was 8.75%. Pension expense for the years
ended February 29(28), 1996, 1995 and 1994 was $1,977,000, $1,792,000 and
$1,631,000, respectively. The Company makes contributions to the Plan in amounts
that are deductible in accordance with federal income tax regulations.
NOTE I - REDEEMABLE PREFERRED STOCK
On July 6, 1993, the Company called all of its outstanding convertible
preferred stock, which was represented by depositary convertible shares (each
depositary share represented 1/10 of a share of convertible preferred stock).
Each depositary share was convertible into 6.3 shares of common stock, and each
depositary share not converted was redeemable for $27.375 in cash. All holders
converted their shares into common stock.
NOTE J - SHAREHOLDERS' EQUITY
In February 1988, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right ("Right") for each
outstanding share of the Company's common stock. As a result of stock splits and
stock dividends, 0.399 of a Right is presently associated with each outstanding
share of the Company's common stock issued prior to the Distribution Date (as
defined below). Each Right, when exercisable, entitles the holder to purchase
from the Company one one-hundredth of a share of Series A Participating
Preferred Stock, par value $0.05 per share, of the Company (the "Series A
Preferred Stock"), at a price of $145, subject to adjustments in certain cases
to prevent dilution.
The Rights are evidenced by the common stock certificates and are not
exercisable or transferable, apart from the common stock, until the date (the
"Distribution Date") of the earlier of a public announcement that a person or
group, without prior consent of the Company, has acquired 20% or more of the
common stock ("Acquiring Person"), or ten days (subject to extension by the
Board of Directors) after the commencement of a tender offer made without the
prior consent of the Company.
In the event a person becomes an Acquiring Person, then each Right (other
than those owned by the Acquiring Person) will entitle its holder to purchase,
at the then current exercise price of the Right, that number of shares of common
stock, or the equivalent thereof, of the Company which, at the time of such
transaction, would have a market value of two times the exercise price of the
Right. The Board of Directors of the Company may delay the exercisability of the
Rights during the period in which they are exercisable only for Series A
Preferred Stock (and not common stock).
In the event that, after a person has become an Acquiring Person, the
Company is acquired in a merger or other business combination, as defined for
the purposes of the Rights, each Right (other than those held by the Acquiring
Person) will entitle its holder to purchase, at the then current exercise price
of the Right, that number of shares of common stock, or the equivalent thereof,
of the other party (or publicly-traded parent thereof) to such merger or
business combination which at the time of such transaction would have a market
value of two times the exercise price of the Right. The Rights expire on the
earlier of February 28, 2002, consummation of certain merger transactions or
optional redemption by the Company prior to any person becoming an Acquiring
Person.
NOTE K - RELATED PARTY TRANSACTIONS
Countrywide Asset Management Corporation ("CAMC"), a wholly-owned subsidiary
of the Company, has entered into an agreement (the "Management Agreement") with
CWM Mortgage Holdings, Inc. ("CWM"), a real estate investment trust. CAMC has
entered into a subcontract with its affiliate, CHL, to perform such services for
CWM and its subsidiaries as CAMC deems necessary. In accordance with the
Management Agreement, CAMC advises CWM on various facets of its business and
manages its operations subject to the supervision of CWM's Board of Directors.
For performing these services, CAMC receives certain management fees and
incentive compensation. In connection with the implementation of a new business
plan, CAMC waived all management fees under the Management Agreement for
calendar year 1993 and 25% of incentive compensation earned in 1994. In
addition, in 1993 CAMC absorbed $0.9 million of operating expenses incurred in
connection with its duties under the Management Agreement. CWM and its
subsidiaries began paying all expenses of the new operations in June 1993.
During the fiscal years ended February 29(28), 1996, 1995 and 1994, CAMC earned
$2.0 million, $0.3 million and $0.1 million, respectively, in base management
fees from CWM and its subsidiaries. In addition, during the fiscal years ended
February 29(28), 1996 and 1995, CAMC recorded $6.6 million and $1.1 million,
respectively, in incentive compensation, net of the amount waived as described
above. The Management Agreement is renewable annually and expires on May 15,
1996. As of February 29, 1996, the Company and CAMC owned 1,120,000 shares, or
approximately 2.58%, of the common stock of CWM.
CAMC incurs many of the expenses related to the operations of CWM and its
subsidiaries, including personnel and related expenses, subject to reimbursement
by CWM. CWM's conduit operations are primarily conducted in Independent National
Mortgage Corporation ("Indy Mac"), and all other operations are conducted in
CWM. Accordingly, Indy Mac is charged with the majority of the conduit's cost
and CWM is charged with the other operations' costs. During the fiscal years
ended February 29(28), 1996 and 1995, the amount of expenses incurred by CHL
which were allocated to CAMC and reimbursed by CWM totaled $1.8 million and $1.2
million, respectively.
CWM has an option to purchase conventional loans from CHL at the prevailing
market price. During the years ended February 29(28), 1996, 1995 and 1994, CWM
purchased $14.3 million, $80.4 million and $300.5 million, respectively, of
conventional non-conforming mortgage loans from CHL pursuant to this option.
During the year ended February 28, 1995, CHL purchased from Indy Mac bulk
servicing rights for loans with principal balances aggregating $3.0 billion at a
price of $38.2 million. In 1987 and 1993, the subsidiaries of CWM entered into
servicing agreements appointing CHL as servicer of mortgage loans
collateralizing three series of CMOs with outstanding balances of approximately
$87.3 million at February 29, 1996. CHL is entitled under each agreement to an
annual fee of up to 0.32% of the aggregate unpaid principal balance of the
pledged mortgage loans. Servicing fees received by CHL under such agreements for
the years ended February 29(28), 1996 and 1995 were approximately $0.3 million.
Approximately $0.5 million of servicing fees were received for the year ended
February 28, 1994.
NOTE L - SEGMENT INFORMATION
The Company and its subsidiaries operate primarily in the mortgage banking
industry. Operations in mortgage banking involve CHL's origination and purchase
of mortgage loans, sale of mortgage loans in the secondary mortgage market,
servicing of mortgage loans and the purchase and sale of rights to service
mortgage loans.
Segment information for the year ended February 29, 1996 was as follows.
----------------------------- ---- --- -- ------------ ----- ---------- ---- ------------- ---- -------------
Adjustments
Mortgage and
(Dollar amounts in thousands) Banking Other Eliminations Consolidated
----------------------------- ---- --- -- ------------ ----- ---------- ---- ------------- ---- -------------
Unaffiliated revenue $ 806,813 $ 53,929 $ - $ 860,742
Intersegment revenue 1,776 - ( 1,776) -
------------ ---------- ------------- -------------
Total revenue $ 808,589 $ 53,929 $ (1,776) $ 860,742
============ ========== ============= =============
Earnings before income taxes $ 308,596 $ 17,604 $ - $ 326,200
============ ========== ============= =============
Identifiable assets as
of February 29, 1996 $ 8,181,765 $ 1,775,276 ($ 1,299,388) $ 8,657,653
============ ========== ============= =============
----------------------------- ---- --- -- ------------ ----- ---------- ---- ------------- ---- -------------
Segment information for the year ended February 28, 1995 was as follows.
----------------------------- ---- ---- -- ------------ ---- ---------- ----- ------------ ---- -------------
Adjustments
Mortgage and
(Dollar amounts in thousands) Banking Other Eliminations Consolidated
----------------------------- ---- ---- -- ------------ ---- ---------- ----- ------------ ---- -------------
Unaffiliated revenue $ 563,586 $ 39,077 $ - $ 602,663
Intersegment revenue 744 - (744) -
------------ ---------- ------------ -------------
Total revenue $ 564,330 $ 39,077 ($ 744) $ 602,663
============ ========== ============ =============
Earnings before income taxes $ 136,220 $ 11,125 $ - $ 147,345
============ ========== ============ =============
Identifiable assets as
of February 28, 1995 $ 5,520,283 $1,144,911 ($ 955,012) $ 5,710,182
============ ========== ============ =============
----------------------------- ---- ---- -- ------------ ---- ---------- ----- ------------ ---- -------------
NOTE L - SEGMENT INFORMATION (continued)
Segment information for the year ended February 28, 1994 was as follows.
----------------------------- --- ---- -- ------------ ----- ---------- ---- ------------ ----- -------------
Adjustments
Mortgage and
(Dollar amounts in thousands) Banking Other Eliminations Consolidated
----------------------------- --- ---- -- ------------ ----- ---------- ---- ------------ ----- -------------
Unaffiliated revenue $ 719,533 $ 36,047 $ - $ 755,580
Intersegment revenue 744 - (744) -
------------ ---------- ------------ -------------
Total revenue $ 720,277 $ 36,047 ($ 744) $ 755,580
============ ========== ============ =============
Earnings before income taxes $ 286,069 $ 13,031 $ - $ 299,100
============ ========== ============ =============
Identifiable assets as
of February 28, 1994 $ 5,523,664 $ 976,261 ($ 868,863) $ 5,631,062
============ ========== ============ =============
----------------------------- --- ---- -- ------------ ----- ---------- ---- ------------ ----- -------------
NOTE M - BRANCH AND ADMINISTRATIVE OFFICE CONSOLIDATION COSTS
As a result of the decline in production caused by increasing mortgage
interest rates during Fiscal 1995, the Company reduced headcount by
approximately 30%, closed underperforming branch offices and consolidated its
administrative offices. A charge of $8 million related to these consolidation
efforts was recorded during the year ended February 28, 1995.
NOTE N - SUBSEQUENT EVENTS
On March 19, 1996, the Company declared a cash dividend of $0.08 per common
share payable April 16, 1996 to shareholders of record on April 2, 1996.
NOTE O - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data was as follows.
--------------------------------------------- ---------------------------------------------------------------
Three months ended
---------------------------------------------------------------
(Dollar amounts in thousands, except per share dataMay 31 August 31 November 30 February 29(28)
---------------------------------------------- -------------- --------------- -------------- ----------------
Year ended February 29, 1996
Revenue $178,963 $209,310 $225,568 $246,901
Expenses 118,669 127,724 137,311 150,838
Provision for income taxes 24,118 32,634 35,303 38,425
Net earnings 36,176 48,952 52,954 57,638
Earnings per share(1)
Primary $0.39 $0.49 $0.51 $0.55
Fully diluted $0.39 $0.49 $0.51 $0.55
Year ended February 28, 1995
Revenue $177,118 $151,106 $133,726 $140,713
Expenses 120,903 119,257 106,795 108,363
Provision for income taxes 22,486 12,739 10,773 12,940
Net earnings 33,729 19,110 16,158 19,410
Earnings per share(1)
Primary $0.37 $0.21 $0.18 $0.21
Fully diluted $0.37 $0.21 $0.18 $0.21
---------------------------------------------- -------------- --------------- -------------- ----------------
(1) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share
amounts may not equal the annual amount. This is caused by rounding
and the averaging effect of the number of share equivalents utilized
throughout the year, which changes with the market price of the common
stock.
NOTE P - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Summarized financial information for Countrywide Home Loans, Inc., was as
follows.
-- ----------------------------------------- ---- ------------------------------------------------- ---------
February 29(28),
-------------- ----------- -------------- ---------
(Dollar amounts in thousands) 1996 1995
-- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
Balance Sheets:
Mortgage loans shipped and held for sale $4,740,087 $2,898,825
Other assets 3,441,678 2,621,458
============== ==============
Total assets $8,181,765 $5,520,283
============== ==============
Short- and long-term debt $6,335,538 $4,152,712
Other liabilities 588,446 433,025
Equity 1,257,781 934,546
============== ==============
Total liabilities and equity $8,181,765 $5,520,283
============== ==============
-- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
--- ----------------------------------------- --- --------------------------------------------------- --------
Year ended February 29(28),
--------------- ---------- --------------- ---------
(Dollar amounts in thousands) 1996 1995
--- --------------------------------------------- ------- --------------- ---------- --------------- ---------
Statements of Earnings:
Revenues $808,589 $564,330
Expenses 499,993 428,110
Provision for income taxes 123,438 54,488
=============== ===============
Net earnings $185,158 $ 81,732
=============== ===============
--- --------------------------------------------- ------- --------------- ---------- --------------- ---------
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COUNTRYWIDE CREDIT INDUSTRIES, INC.
BALANCE SHEETS
(Dollar amounts in thousands)
February 29(28),
-------------- -- --------------
1996 1995
-------------- --------------
Assets
Cash $ - $ -
Other receivables 5,825 3,344
Intercompany receivable 33,805 49,234
Investment in subsidiaries at equity in net assets 1,299,088 954,123
Equipment and leasehold improvements 106 113
Other assets 22,442 16,984
-------------- --------------
$1,361,266 $1,023,798
============== ==============
Liabilities and Shareholders' Equity
Notes payable $ - $ 10,600
Intercompany payable 22,684 54,010
Accounts payable and accrued liabilities 11,437 8,949
Deferred income taxes 7,390 7,681
Preferred stock - -
Common shareholders' equity
Common stock 5,112 4,568
Additional paid-in capital 820,183 608,289
Retained earnings 494,460 329,701
-------------- --------------
$1,361,266 $1,023,798
============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF EARNINGS
(Dollar amounts in thousands)
Year ended February 29(28),
-------------- -- -------------- -- --------------
1996 1995 1994
-------------- -------------- --------------
Revenue
Interest earned $ 31 $ 36 $ 221
Interest charges (1,952) (2,646) (2,247)
-------------- -------------- --------------
Net interest income (1,921) (2,610) (2,026)
Dividend income 2,332 96 96
-------------- -------------- --------------
411 (2,514) (1,930)
Expenses (3,761) (3,200) (2,737)
-------------- -------------- --------------
Loss before income tax benefit and equity in net
earnings of subsidiaries (3,350) (5,714) (4,667)
Income tax benefit 1,340 2,285 1,867
-------------- -------------- --------------
Loss before equity in net earnings of subsidiaries (2,010) (3,429) (2,800)
Equity in net earnings of subsidiaries 197,730 91,836 182,260
-------------- -------------- --------------
NET EARNINGS $195,720 $88,407 $179,460
============== ============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
(Dollar amounts in thousands)
Year ended February 29(28),
-------------- -- -------------- -- --------------
1996 1995 1994
-------------- -------------- --------------
Cash flows from operating activities:
Net earnings $195,720 $88,407 $179,460
Adjustments to reconcile net earnings to net cash
(used) provided by operating activities:
Earnings of subsidiaries (197,730) (91,836) (182,260)
Depreciation and amortization 18 16 12
Increase in accounts payable and accrued liabilities 2,488 3,079 2,560
(Increase) decrease in other receivables and other assets (8,241) (2,925) 14,971
-------------- -------------- --------------
Net cash (used) provided by operating activities (7,745) (3,259) 14,743
-------------- -------------- --------------
Cash flows from investing activities:
Net change in intercompany receivables and payables 76,236 31,458 29,000
Investment in subsidiaries (239,368) (63) -
-------------- -------------- --------------
Net cash (used) provided by investing activities (163,132) 31,395 29,000
-------------- -------------- --------------
Cash flows from financing activities:
Repayment of long-term debt (10,600) (2,150) (23,020)
Issuance of common stock 212,438 2,273 4,398
Cash dividends paid (30,961) (28,259) (25,121)
-------------- -------------- --------------
Net cash provided (used) by financing activities 170,877 (28,136) (43,743)
-------------- -------------- --------------
Net change in cash - - -
Cash at beginning of year - - -
-------------- -------------- --------------
Cash at end of year $ - $ - $ -
============== ============== ==============
Supplemental cash flow information:
Cash used to pay interest $2,744 $ 2,114 $ 2,554
Cash refunded from income taxes - ($ 841) ($ 1,823)
Noncash financing activities - conversion of preferred stock - - $ 25,800
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three years ended February 29(28), 1996
(Dollar amounts in thousands)
Column A Column B Column C Column D Column E
- ---------------------------------- -------------- -------------------------------- ----------------- --------------
Additions
--------------------------------
Balance at Charged to Charged Balance
beginning costs and to other at end
of period expenses accounts (2) Deductions (1) of period
- ---------------------------------- -------------- -------------- ---------------- ------------------ -------------
Year ended February 29, 1996
Allowance for losses $11,183 $8,831 $ 800 $ 5,179 $15,635
Year ended February 28, 1995
Allowance for losses $13,826 $1,808 $3,466 $ 7,917 $11,183
Year ended February 28, 1994
Allowance for losses $16,144 $6,046 $3,051 $11,415 $13,826
- ----------------------------------
(1) Actual losses charged against reserve, net of recoveries and reclassification.
(2) Additions charged to gain (loss) on sale of loans.