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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 28, 1997
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 5, 1997, there were 106,383,483 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
$2,935,411,000. 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 1997 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"), 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 ("Prime mortgages"). The Company also
offers home equity loans both in conjunction with newly produced Prime mortgages
and as a separate product. In addition, the Company offers sub-prime credit
quality first-lien single-family mortgage loans ("Sub-prime loans").
The Company, through its other wholly-owned subsidiaries, offers products and
services complementary to its mortgage banking business. One of these
subsidiaries acts as an agent in the sale of insurance, including homeowners,
fire, flood, earthquake, auto, annuities, home warranty, life and disability, to
CHL's mortgagors and others. The Company also has a subsidiary that acts as a
title insurance agent and provides escrow, credit reporting and home appraisal
services. The Company also has subsidiaries that reinsure a portion of mortgage
insurance losses on loans originated by the Company that are insured by the
mortgage insurance companies with which the Company entered into the reinsurance
agreement. Another subsidiary of the Company serves as trustee under deeds of
trust in connection with foreclosures on loans in the Company's servicing
portfolio in California and other states. There is a subsidiary of the Company
which also provides tax services to ensure that property taxes are paid current
at origination and throughout the life of the loan. On February 28, 1997, the
Company acquired a mutual fund manager which provides investment advisory
services for 15 affiliated mutual funds and individual investors and management
services for unaffiliated funds. The Company also has a registered broker-dealer
which trades to other broker-dealers and institutional investors mortgage-backed
securities ("MBS") and other mortgage-related assets. Through two subsidiaries,
the Company issues mortgage- and asset-backed securities which are backed by
Prime mortgage loans, Sub-prime loans or home equity loans. In addition,
Countrywide Asset Management Corp. ("CAMC") a wholly owned subsidiary of CCI,
receives fee income for managing the operations of CWM Mortgage Holdings, Inc.
("CWM"), a publicly-traded real estate investment trust. On January 29, 1997,
CCI and CWM entered into an agreement pursuant to which CWM will acquire the
operations and employees of CAMC, and as a result, CWM will cease paying the
management fee. The proposed transaction is structured as a merger of CAMC with
and into CWM with CCI to receive approximately 3.6 million newly issued common
shares of CWM. Based on the closing sales price of CWM common stock on the New
York Stock Exchange on May 5, 1997, the market value of CWM common stock to be
received in the proposed transaction is approximately $72 million. The closing
of the transaction is contingent on, among other things, the receipt of required
regulatory and shareholder approvals. There can be no assurance that the
proposed transaction will be consummated. 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 "safe
harbor" for certain forward-looking statements. This Annual Report on Form 10-K
may contain 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 future 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 future 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 Sub-prime 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
$214,600 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 Prime mortgage, home equity and Sub-prime loan production for the
periods indicated.
----------------------------- --- -------------------------------------------------------------------------------
Summary of the Company's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------------------------- --- -------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
Conventional Loans
Number of Loans 190,250 191,534 175,823 315,699 192,385
Volume of Loans $22,676.2 $21,883.4 $20,958.7 $46,473.4 $28,669.9
Percent of Total Volume 60.0% 63.3% 75.2% 88.6% 88.5%
FHA/VA Loans
Number of Loans 143,587 125,127 72,365 67,154 42,022
Volume of Loans $13,657.1 $12,259.3 $6,808.3 $5,985.5 $3,717.9
Percent of Total Volume 36.1% 35.5% 24.4% 11.4% 11.5%
Home Equity Loans
Number of Loans 20,053 7,986 2,147 - -
Volume of Loans $613.2 $220.8 $99.2 - -
Percent of Total Volume 1.6% 0.6% 0.4% - -
Sub-prime Loans
Number of Loans 9,161 1,941 - - -
Volume of Loans $864.3 $220.2 - - -
Percent of Total Volume 2.3% 0.6% - - -
Total Loans
Number of Loans 363,051 326,588 250,335 382,853 234,407
Volume of Loans $37,810.8 $34,583.7 $27,866.2 $52,458.9 $32,387.8
Average Loan Amount $104,000 $106,000 $111,000 $137,000 $138,000
----------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
The increase in the dollar amount and the decrease in the number of
conventional loans in the year ended February 28, 1997 ("Fiscal 1997") as
compared to the year ended February 29, 1996 ("Fiscal 1996") was attributable
primarily to the expansion of the Company's jumbo loan production activities,
and an improvement in the relative attractiveness of FHA loan products as an
alternate to conventional loans for providing homeownership to low-and
moderate-income borrowers. The increase in the number and dollar amount of FHA
and VA loans produced in the year ended February 28, 1997 from those produced in
the years ended February 29(28), 1996 and 1995 was attributable to their
relative attractiveness discussed in the previous sentence 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. Production of the Company's home equity
and Sub-prime products also increased from the year ended February 29, 1996.
This increase was attributable primarily to the Company's efforts to grow its
production of these products due to the high returns they generate and growth
opportunities that exist in the market.
For the years ended February 28(29), 1997, 1996 and 1995, jumbo loans
represented 12%, 6% and 17%, respectively, of the Company's total volume of
mortgage loans produced. The increase in the percentage of jumbo loans was
primarily the result of more competitive pricing of the Company's jumbo loan
products from Fiscal 1996 to Fiscal 1997. For the years ended February 28(29),
1997, 1996 and 1995, adjustable-rate mortgage loans ("ARMs") comprised
approximately 26%, 22% and 34%, respectively, of the Company's total volume of
mortgage loans produced. The increase in the Company's percentage of ARM
production from Fiscal 1996 to Fiscal 1997 was primarily caused by the higher
mortgage interest rate environment that prevailed through most of the year ended
February 28, 1997 compared to the year ended February 29, 1996. For the years
ended February 28(29), 1997, 1996 and 1995, refinancing activity represented
33%, 34% and 30%, respectively, of the Company's total volume of mortgage loans
produced. The percentage of refinance loans for each of these years reflects an
interest rate environment conducive to a moderate level of refinance activity.
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 and 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 Prime mortgage, home equity and Sub-prime loans using direct contact
with consumers through its nationwide network of retail branch offices, its
telemarketing systems and its site on the World Wide Web. As of February 28,
1997, the Company had 276 Consumer Markets Division branch offices, two
satellite offices and two processing support centers located in 42 states and
the District of Columbia. The Company's branch offices are each staffed
typically by four employees and connected to the Company's central office by a
computer network. In addition, the Company operates two telemarketing centers
which receive telephone calls placed by potential borrowers primarily 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 borrowers, 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
high-quality 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 Prime mortgage, home equity and Sub-prime loan
production for the periods indicated.
----------------------------- -- -------------------------------------------------------------------------------
Summary of the Consumer Markets Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- ------------
1997 1996 1995 1994 1993
----------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- ------------
Conventional Loans
Number of Loans 43,261 47,260 48.772 73,249 39,787
Volume of Loans $5,145.3 $5,271.8 $5,442.2 $9,264.8 $5,026.7
Percent of Total Volume 63.7% 70.7% 77.0% 80.2% 82.4%
FHA/VA Loans
Number of Loans 27,746 22,829 19,060 26,418 11,739
Volume of Loans $2,514.3 $2,025.4 $1,612.1 $2,282.3 $1,073.0
Percent of Total Volume 31.2% 27.1% 22.8% 19.8% 17.6%
Home Equity Loans
Number of Loans 14,028 6,000 297 - -
Volume of Loans $384.7 $160.9 $11.4 - -
Percent of Total Volume 4.8% 2.2% 0.2% - -
Sub-prime Loans
Number of Loans 303 - - - -
Volume of Loans $27.0 - - - -
Percent of Total Volume 0.3% - - - -
Total Loans
Number of Loans 85,338 76,089 68,129 99,667 51,526
Volume of Loans $8,071.3 $7,458.1 $7,065.7 $11,547.1 $6,099.7
Average Loan Amount $95,000 $98,000 $104,000 $116,000 $118,000
----------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- ------------
Wholesale Division
In its Wholesale Division (the "Wholesale Division"), the Company
produces Prime mortgage, home equity and Sub-prime loans through mortgage loan
brokers. As of February 28, 1997, the Wholesale Division operated 58 loan
centers and nine 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. Sub-prime 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 10,800
mortgage brokers qualify to participate in the Wholesale Division's loan
delivery 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 Prime mortgage, home equity and Sub-prime loan production
for the periods indicated.
----------------------------- --- ----------------------------------------------------------------------------
Summary of the Wholesale Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
1997 1996 1995 1994 1993
----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
Conventional Loans
Number of Loans 50,570 59,670 65,713 130,937 92,922
Volume of Loans $6,187.8 $6,766.9 $7,790.0 $21,271.0 $15,480.1
Percent of Total Volume 73.4% 84.0% 91.6% 98.9% 100.0%
FHA/VA Loans
Number of Loans 12,505 10,448 6,239 2,700 15
Volume of Loans $1,190.0 $1,016.2 $626.3 $244.4 $1.5
Percent of Total Volume 14.1% 12.6% 7.4% 1.1% 0.0%
Home Equity Loans
Number of Loans 6,017 1,937 1,836 - -
Volume of Loans $227.7 $57.5 $86.9 - -
Percent of Total Volume 2.7% 0.7% 1.0% - -
Sub-prime Loans
Number of Loans 8,568 1,941 - - -
Volume of Loans $823.9 $220.2 - - -
Percent of Total Volume 9.8% 2.7% - - -
Total Loans
Number of Loans 77,660 73,996 73,788 133,637 92,937
Volume of Loans $8,429.4 $8,060.8 $8,503.2 $21,515.4 $15,481.6
Average Loan Amount $109,000 $109,000 $115,000 $161,000 $167,000
----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
Correspondent Division
Through its network of correspondent offices (the "Correspondent
Division"), the Company purchases loans 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 1,200 financial
intermediaries serving all 50 states are eligible to participate in this
program. 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. 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 28, 1997, approximately 88% 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, including those granted delegated underwriting authority, for
compliance with the Company's underwriting criteria. The purchase agreement used
by the Correspondent Division provides the Company with recourse to the
correspondent 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.
The following table sets forth the number and dollar amount of the
Correspondent Division's Prime mortgages, home equity and Sub-prime loan
production for the periods indicated.
----------------------------- ------------------------------------------------------------------------------- --
Summary of the Correspondent Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
1997 1996 1995 1994 1993
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Conventional Loans
Number of Loans 96,419 84,604 61,338 111,513 59,676
Volume of Loans $11,343.1 $9,844.7 $7,726.5 $15,937.6 $8,163.0
Percent of Total Volume 53.2% 51.7% 62.8% 82.2% 75.5%
FHA/VA Loans
Number of Loans 103,336 91,850 47,066 38,036 30,268
Volume of Loans $9,952.8 $9,217.7 $4,570.0 $3,458.8 $2,643.5
Percent of Total Volume 46.7% 48.3% 37.2% 17.8% 24.5%
Home Equity Loans
Number of Loans 8 49 14 - -
Volume of Loans $0.8 $2.4 $0.8 - -
Percent of Total Volume 0.0% 0.0% 0.0% - -
Sub-prime Loans
Number of Loans 290 - - - -
Volume of Loans $13.4 - - - -
Percent of Total Volume 0.1% - - - -
Total Loans
Number of Loans 200,053 176,503 108,418 149,549 89,944
Volume of Loans $21,310.1 $19,064.8 $12,297.3 $19,396.4 $10,806.5
Average Loan Amount $107,000 $108,000 $113,000 $130,000 $120,000
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
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 affordable home loan program for low-
and moderate-income borrowers, offering loans that are eligible for purchase by
Fannie Mae and Freddie Mac. During the years ended February 28(29), 1997 and
1996, the Company produced approximately $0.6 billion and $1.3 billion,
respectively, of mortgage loans under this program. The decline in House America
production from the fiscal year ended February 29, 1996 to the year ended
February 28, 1997, was the result of an improvement in the relative
attractiveness of FHA loan products as an alternative means of providing
homeownership to low- and moderate-income borrowers. 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.
The Company's affordable housing outreach also includes participation in
over 80 local mortgage revenue bond programs for first-time home buyers. Federal
law allows local government agencies to sell tax exempt bonds to purchase
mortgages securing loans made to first-time, lower-income home buyers. These
programs thereby provide for mortgages with fixed interest rates that are lower
than then-current market rates.
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, 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.
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
investors for such loans. 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 (which may be paid by the
borrower or by the lender).
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 Prime mortgage
loan application.
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 association 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 garnishments 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 items on the credit decision. Credit scoring is
used in some cases to supplement evaluation of an applicant's credit history.
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 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 Sub-prime loan production for the year ended
February 28, 1997.
--- --------------------------------------------------------------------------------------------- ---
Geographic Distribution of the Company's
Prime Mortgage, Home Equity and Sub-prime Loan Production
--- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
Percentage of
Number Principal Total Dollar
(Dollar amounts in of Loans Amount Amount
millions)
--- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
California 74,547 $9,378,990 24.8%
Florida 21,947 1,789,521 4.7%
Texas 19,627 1,725,552 4.6%
Michigan 16,291 1,633,920 4.3%
Illinois 13,530 1,478,097 3.9%
Colorado 12,693 1,427,256 3.8%
Ohio 16,624 1,407,647 3.7%
Washington 11,737 1,267,116 3.4%
Arizona 12,519 1,177,569 3.1%
Georgia 12,115 1,138,153 3.0%
Maryland 9,642 1,119,214 3.0%
New York 9,248 1,071,971 2.8%
Virginia 9,342 1,013,037 2.7%
Massachusetts 7,475 966,530 2.6%
Utah 8,994 918,843 2.4%
Nevada 7,864 854,458 2.3%
New Jersey 7,083 799,657 2.1%
Others (1) 91,773 8,643,230 22.8%
------------------ ----------------- -----------------
363,051 $37,810,761 100.0%
================== ================= =================
--- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
(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
28(29), 1997, 1996 and 1995 was 25%, 31% and 31%, 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 period ended February 28, 1997
is the result of implementing the Company's strategy to expand production
capacity and market share outside of California. At February 28, 1997, 81% 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 28, 1997.
--- ---------------------------------------------------------------------------------------------- --
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 19,163 $2,562.4 27.3%
San Diego 5,030 595.1 6.3%
Placer 3,917 561.1 6.0%
Sacramento 4,486 487.7 5.2%
Orange 3,372 476.1 5.1%
Others (1) 38,579 4,696.6 50.1%
------------------ ----------------- ------------------
74,547 $9,379.0 100.0%
================== ================= ==================
--- ----------------------------- -- ------------------ -- ----------------- -- ------------------ --
(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. 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, the Company pays guarantee fees to
Fannie Mae, Freddie Mac and Ginnie Mae.
Alternatively, the Company may sell FHA-insured and VA-guaranteed mortgage
loans and conforming conventional loans, home equity and Sub-prime 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 Prime mortgage 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
28(29), 1997, 1996 and 1995, the aggregate loss experience of the Company on VA
loans in excess of the VA guaranty was approximately $9.3 million, $3.8 million
and $2.6 million, respectively. In the opinion of management, the losses on VA
loans increased from the year ended February 29, 1996 to the year ended February
28, 1997 primarily due to the aging of the VA loan servicing portfolio and
declines in values of properties securing VA loans, particularly in California.
The Company retains credit risk on the home equity and Sub-prime loans it
sells in the form of pools backing securities. As such, through retention of a
subordinated interest in the trust, the Company bears primary responsibility for
credit losses on the loans. At February 28, 1997, the Company had investments in
such subordinated interests amounting to $106 million, which represents the
maximum exposure to credit losses on the securitized home equity and Sub-prime
loans. While the Company does not retain credit risk with respect to the Prime
mortgage loans it sells, it does have potential liability under representations
and warranties made to purchasers and insurers of the loans. In the event of a
breach of the representations and warranties, the Company may be required to
repurchase a mortgage loan and any subsequent loss on the mortgage loan may be
borne by the Company.
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 28(29),
1997, 1996 and 1995, CWM purchased $51.5 million, $14.3 million and $80.4
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 inventory being hedged and the
hedge instruments is very high due to the similarity of the asset and the
related hedge instrument. The Company is exposed to the risk that the portion of
loans from the Committed Pipeline that actually closes at the committed price is
less than or more than the amount estimated to close in the event of a decline
or rise in rates during the commitment period. The amount of loans estimated to
close from the Committed Pipeline is influenced by many factors, including the
composition of the Company's Committed Pipeline, the historical portion of the
Committed Pipeline that has closed given changes in interest rates and the
timing of such closings. See Note G 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 pursuant to servicing agreements
with investors in the loans. 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 16% of the Company's mortgage servicing portfolio
as of February 28, 1997. Servicing mortgage loans includes collecting and
remitting loan payments, answering customers' questions, 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 located in Simi Valley,
California and Plano, Texas (see "Properties"). The Company has developed
systems that enable it to service mortgage loans efficiently and therefore
enhance earnings from its investments in servicing rights. Some of these systems
are highlighted in the following paragraphs.
All data elements pertaining to each individual loan are entered into the
applicable automated loan system at the point of origination or acquisition.
These data elements are captured and automatically transferred to the loan
servicing system without manual intervention.
Customer service representatives in both servicing 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's telephone system controls the flow of calls to
each servicing site and has a "Smart Call Routing" filter. This filter is
designed to match the originating phone number to phone numbers in the Company's
data base. Having identified the customer, the Company can communicate topical
loan information electronically without requiring the caller to enter
information. The caller can get more detailed information through an Interactive
Voice Response application or can speak with a customer service representative.
Countrywide also features an Internet site for existing customers wherein the
customer can obtain current account status, history, answers to frequently asked
questions and a dictionary to help the customer understand industry terminology.
The collection department utilizes its collection management system in
conjunction with its predictive dialing system to maximize and track each
individual collector's performance as well as to track the success of each
collection campaign.
The Company tracks its foreclosure activity through its default processing
system ("DPS"). DPS is a client server based application which allows each
foreclosure to be assigned to a state/investor specific workflow template. The
foreclosure processor is automatically guided through each function required to
successfully complete a foreclosure in any state and for any investor.
The company's high speed payment processing equipment enables the Company to
deposit virtually all cash on the same day as it is received, thereby minimizing
float.
The insurance department, in conjunction with one of the Company's business
partners, has developed a client server based application that generally
eliminates paper billings and automates decision making.
The Company believes that the financial results of its servicing
portfolio hedging activities largely offset the effect of interest rate
fluctuations on the earnings from its loan servicing activities. The Company
also believes that its loan production earnings are countercyclical to its loan
servicing earnings. 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 increasing
interest rates, the rate of current and projected future prepayments decreases,
resulting in a decreased rate of amortization and impairment of 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.
Generally, in an environment of declining interest rates, the rate of current
and projected future prepayments increases, resulting in an increased rate of
amortization and impairment of 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).
The following table sets forth certain information regarding the
Company's servicing portfolio of single-family mortgage loans, including loans
and securities held for sale and loans subserviced for others, for the periods
indicated.
---------------------------------- -- -------------------------------------------------------------------------
(Dollar amounts in millions) Year Ended February 28(29),
---------------------------------- -- -------------------------------------------------------------------------
Composition of Servicing 1997 1996 1995 1994 1993
Portfolio
----------- -- ------------ -- ----------- -- ----------- -- ------------
at Period End:
FHA-Insured Mortgage Loans $ 30,686.3 $ 23,206.5 $ 17,587.5 $ 9,793.7 $ 8,233.8
VA-Guaranteed Mortgage Loans 13,446.4 10,686.2 7,454.3 3,916.0 3,307.2
Conventional Mortgage Loans 112,685.4 102,417.0 87,998.2 70,915.2 42,876.8
Home Equity Loans 689.9 204.5 31.3 - -
Sub-prime Loans 1,048.9 289.1 - - -
----------- ------------ ----------- ----------- ------------
Total Servicing Portfolio $158,556.9 $136,803.3 $113,071.3 $84,624.9 $54,417.8
=========== ============ =========== =========== ===========
Beginning Servicing Portfolio $136,803.3 $113,071.3 $ 84,624.9 $54,417.8 $27,543.0
Add: Loan Production 37,810.8 34,583.7 27,866.2 52,458.9 32,387.8
Bulk Servicing and
Subservicing 2,808.1 6,428.5 17,888.1 3,514.9 3,083.9
Acquired
Less: Servicing Transferred (1) (70.8) (53.5) (6,287.4) (8.1) (12.6)
Runoff (2) (18,794.5) (17,226.7) (11,020.5) (25,758.6) (8,584.3)
=========== ============ =========== =========== ===========
Ending Servicing Portfolio $158,556.9 $136,803.3 $113,071.3 $84,624.9 $54,417.8
=========== ============ =========== =========== ===========
Delinquent Mortgage Loans and Pending
Foreclosures at Period End (3):
30 days 2.26% 2.13% 1.80% 1.82% 2.05%
60 days 0.52 0.48 0.29 0.28 0.40
90 days or more 0.66 0.59 0.42 0.39 0.58
----------- ----------- ------------ ----------- ------------
Total Delinquencies 3.44% 3.20% 2.51% 2.49% 3.03%
=========== =========== ============ =========== ===========
Foreclosures Pending 0.71% 0.49% 0.29% 0.29% 0.36%
----------- ----------- ------------ ----------- ------------
---------------------------------- -- ----------- -- ----------- -- ------------ -- ----------- -- ------------
(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 28, 1997, the Company's servicing portfolio of
single-family mortgage loans was stratified by interest rate as follows.
-- -------------------------- -- --------------------------------------------------------------------------------
(Dollar amounts in Total Portfolio at February 28, 1997
millions)
-- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
Mortgage
Weighted Servicing
Interest Principal Percent Average Rights
Rate Balance of Total Maturity (Years) Balance
-- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
7% and under $ 31,286.3 19.7% 23.8 $ 659.2
7.01-8% 74,886.5 47.3% 25.8 1,516.1
8.01-9% 43,501.0 27.4% 27.0 726.0
9.01-10% 7,430.3 4.7% 26.3 105.0
over 10% 1,452.8 0.9% 24.5 17.5
=============== ============== ===================== ===============
$158,556.9 100.0% 25.7 $3,023.8
=============== ============== ===================== ===============
-- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
The weighted average interest rate of the single-family mortgage loans
in the Company's servicing portfolio at both February 28(29), 1997 and 1996, was
7.8%. At February 28, 1997, 81% of the loans in the servicing portfolio bore
interest at fixed rates and 19% bore interest at adjustable rates. The weighted
average net service fee of the loans in the portfolio was 0.402% at February 28,
1997 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
and securities held for sale and loans subserviced for others, as of February
28, 1997.
--------------------------------------------------------- -- ----------------------------- --------------------
Percentage of Principal
Balance Serviced
--------------------------------------------------------- -- ----------------------------- --------------------
California 37.3%
Florida 4.6%
Texas 4.3%
Washington 3.4%
New York 3.1%
Illinois 3.0%
Colorado 2.9%
Arizona 2.7%
Virginia 2.6%
Massachusetts 2.5%
New Jersey 2.5%
Ohio 2.5%
Maryland 2.5%
Georgia 2.3%
Michigan 2.0%
Other (1) 21.9%
==============
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, pre-sale funding facilities, an optional cash purchase feature in the
dividend reinvestment plan, redeemable capital trust pass-through securities and
cash flow from operations. The Company estimates that it had available committed
and uncommitted credit facilities aggregating approximately $7.1 billion at
February 28, 1997. In the past the Company has utilized whole loan repurchase
agreements, servicing-secured bank facilities, private placements of unsecured
notes and other financings, direct borrowings from CHL's revolving credit
facility and public offerings of common and 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. This relationship is in the process of
being restructured, as described in the following paragraph. 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%. As of December 31, 1996, 1995 and 1994,
the consolidated total assets of CWM were $3.4 billion, $2.6 billion and $2.0
billion, respectively. During the fiscal years ended February 28(29), 1997, 1996
and 1995, CAMC earned $1.6 million, $2.0 million and $0.3 million, respectively,
in base management fees from CWM and its subsidiaries. In addition, during the
fiscal years ended February 28(29), 1997, 1996 and 1995, CAMC recorded $8.6
million, $6.6 million and $1.1 million, respectively, in incentive compensation.
At February 28, 1997, the Company owned 1,120,000 shares, or approximately 2.2%,
of the common stock of CWM.
On January 29, 1997, CCI and CWM entered into an agreement pursuant to which
CWM will acquire the operations and employees of CAMC, and as a result, CWM will
cease paying the management fee. The proposed transaction is structured as a
merger of CAMC with and into CWM with CCI to receive approximately 3.6 million
newly issued common shares of CWM. Based on the closing sales price of CWM
common stock on the New York Stock Exchange on May 5, 1997, the market value of
CWM common stock to be received in the proposed transaction is approximately $72
million. The closing of the transaction is contingent on, among other things,
the receipt of required regulatory approvals. There can be no assurance that the
proposed transaction will be consummated. 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 are described in the following paragraphs:
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, auto, annuities, home warranty, 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
foreclosures on loans in the Company's servicing portfolio 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 title insurance agent and
a provider of escrow services, appraisal and credit reporting services. The
Company offers title insurance commitments and policies, settlement services and
property profiles to realtors, builders, consumers, mortgage brokers and other
financial institutions. Appraisal services are provided to consumers, mortgage
brokers and other financial institutions through a network of appraisers. Credit
reporting services are also provided to the Company and its subsidiaries.
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.
Two of the Company's subsidiaries, Charter Reinsurance Corporation
("CRC") and Second Charter Reinsurance Corporation ("SCRC"), partially reinsure
loans originated by the Company that are insured by the mortgage insurance
companies with which CRC and SCRC have entered into a reinsurance agreement. CRC
and SCRC share in the premiums collected and losses incurred by the mortgage
insurance company.
Countrywide Financial Services, Inc. ("CFSI") (formerly Leshner
Financial, Inc.), operates as a service provider for unaffiliated mutual funds,
broker-dealer, investment advisor and fund manager. CFSI currently has
approximately $1 billion in funds under management and services accounts
aggregating over $9 billion for other fund management companies.
Countrywide Tax Services Corporation ("CTSC") provides tax services for
CHL mortgagors. CTSC monitors the payment of real estate taxes and pays property
tax bills from mortgagors' escrow accounts.
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 the 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. Other systems currently in use by the production divisions are the EDGE
(primarily used by the Consumer Markets and Wholesale Lending Divisions) and
GEMS (primarily used by the Correspondent Lending Division) systems, which are
loan origination and telemarketing systems that are designed to reduce the time
and cost associated with the loan application and funding process. These
front-end systems were internally developed for the Company's exclusive use and
are integrated with the Company's loan servicing, sales, accounting, treasury
and other systems. The Company believes that both the EDGE and GEMS systems
improve the quality of its loan products and customer service by: (i) reducing
the risk of deficient loans; (ii) facilitating accurate and customized pricing;
(iii) promptly generating loan documents with the use of laser printers; (iv)
providing for electronic communication with credit bureaus, financial
institutions, HUD and other third parties; (v) providing Internet home page
access for Correspondent Lending customers and (vi) generally minimizing manual
data input. The Company believes both EDGE and GEMS significantly reduce
origination and processing costs and speed 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 adaptation of CLUESTM, which is designed to allow the
mortgage broker to submit loan information and receive a qualified underwriting
decision within minutes.
Another system developed and implemented by the Company is the LOAN
COUNSELOR. The LOAN COUNSELOR is designed for telemarketing and production
branches and is currently being used by the Telemarketing unit in conjunction
with its Customer Contact Management System ("CCMS"). (See discussion in the
following paragraph.) LOAN COUNSELOR provides the Telemarketing unit the ability
to: (i) pre-qualify a prospective applicant; (ii) provide "what if" scenarios to
help find the appropriate loan product; (iii) obtain an on-line price quote;
(iv) take an application; (v) request a credit report electronically through
LandSafe, Inc.; (vi) issue a LOCK 'N SHOP (R) certificate and (vii) transmit a
loan application to the production units for processing.
CCMS is a telemarketing application designed to provide enterprise-wide
information on both current and prospective customers. CCMS helps the production
divisions identify prospective customers to solicit for specific products or
services, and obtain the results of any solicitation. Management believes that
CCMS will provide the Company the opportunity to (i) reduce the loss of
customers who prepay their loan and obtain a new loan from another source and
(ii) 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 Lending 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, inter alia, 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 and mutual fund 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. 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.
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 57% during
calendar year 1996. The Company believes that it has benefited from this trend.
H. Employees
At February 28, 1997, the Company employed 6,134 persons, 2,460 of whom
were engaged in production activities, 1,644 were engaged in loan administration
activities and 2,030 were engaged in other activities, including 480 employees
of CAMC who provide services solely to CWM. 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 currently located in leased space at 155 North Lake Avenue and
35 North Lake Avenue, Pasadena, California, and consist of 230,000 square feet.
The Company also leases a 44,000 square foot facility in Calabasas, California,
which primarily houses part of the Company's data processing operations. The
principal leases covering such space expire in the year 2011. In September 1996,
the Company acquired the facility at 4500 Park Granada Boulevard, Calabasas,
California, which consists of approximately 225,000 square feet and is situated
on 20.1 acres of land. This facility will house the primary executive and
administrative offices of the Company and some of its subsidiaries. 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 21.5 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 300 to
2,840 square feet), Wholesale Division loan centers (each ranging from
approximately 490 to 4,830 square feet) and Correspondent Division offices (each
ranging from approximately 7,130 to 10,930 square feet). These leases vary in
term and have different rent escalation provisions. In general, the leases
extend through fiscal year 2002, 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 CHL 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 the
Company's results of operations or financial position.
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 or results of operations
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 28(29), 1997 and 1996.
----- --------------- ------------------------- --- ------------------------- --- -------------------------------
Cash Dividends
Fiscal 1997 Fiscal 1996 Declared
----- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- --------------
Quarter High Low High Low Fiscal 1997 Fiscal 1996
----- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- --------------
First $23.88 $19.75 $20.50 $15.50 $0.08 $0.08
Second 25.13 20.75 23.13 18.38 0.08 0.08
Third 30.25 23.25 26.75 20.00 0.08 0.08
Fourth 31.13 26.38 24.00 19.00 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 28(29),
1997 and 1996, the Company declared quarterly cash dividends aggregating $0.32
per share. On March 19, 1997, the Company declared a quarterly cash dividend of
$0.08 per common share, paid April 30, 1997.
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 5, 1997, there were 2,779 shareholders of record of the Company's
common stock, with 106,383,483 common shares outstanding.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
----------------------------------------------- -----------------------------------------------------------------
Years ended February 28(29),
(Dollar amounts in thousands, except per 1997 1996 1995 1994 1993
share data)
----------------------------------------------- ------------ ------------ ------------ ------------- ------------
Selected Statement of Earnings Data:
Revenues:
Loan origination fees $193,079 $199,724 $203,426 $379,533 $241,584
Gain (loss) on sale of loans 247,450 92,341 (41,342) 88,212 67,537
------------ ------------ ------------ ------------- ------------
Loan production revenue 440,529 292,065 162,084 467,745 309,121
Interest earned 350,263 308,449 249,560 300,999 179,785
Interest charges (316,705) (281,573) (205,464) (219,898) (128,612)
------------ ------------ ------------ ------------- ------------
Net interest income 33,558 26,876 44,096 81,101 51,173
Loan servicing income 773,715 620,835 460,351 326,695 188,895
Amortization and impairment/recovery of
mortgage servicing rights (101,380) (342,811) (95,768) (242,177) (151,362)
Servicing hedge benefit (expense) (125,306) 200,135 (40,030) 73,400 74,075
Less write-off of servicing hedge - - (25,600) - -
------------ ------------ ------------ ------------- ------------
Net loan administration income 547,029 478,159 298,953 157,918 111,608
91,346
Commissions, fees and other income 91,346 63,642 40,650 48,816 33,656
Gain on sale of servicing - - 56,880 - -
------------ ------------ ------------ ------------- ------------
Total revenues 1,112,462 860,742 602,663 755,580 505,558
------------ ------------ ------------ ------------- ------------
Expenses:
Salaries and related expenses 286,884 229,668 199,061 227,702 140,063
Occupancy and other office expenses 129,877 106,298 102,193 101,691 64,762
Guarantee fees 159,360 121,197 85,831 57,576 29,410
Marketing expenses 34,255 27,115 23,217 26,030 12,974
Other operating expenses 80,188 50,264 37,016 43,481 24,894
Branch and administrative office - - 8,000 - -
consolidation costs
------------ ------------ ------------ ------------- ------------
Total expenses 690,564 534,542 455,318 456,480 272,103
------------ ------------ ------------ ------------- ------------
421,898
Earnings before income taxes 421,898 326,200 147,345 299,100 233,455
Provision for income taxes 164,540 130,480 58,938 119,640 93,382
------------ ------------ ------------ ------------- ------------
============ ============ ============ ============= =============
Net earnings $257,358 $195,720 $88,407 $179,460 $140,073
=============================================== ============ ============ ============ ============= =============
----------------------------------------------- ============ ============ ============ ============= =============
Per Share Data (1):
Primary $2.44 $1.95 $0.96 $1.97 $1.65
Fully diluted $2.42 $1.95 $0.96 $1.94 $1.52
Cash dividends per share $0.32 $0.32 $0.32 $0.29 $0.25
Weighted average shares outstanding:
Primary 105,677,000 100,270,000 92,087,000 90,501,000 82,514,000
Fully diluted 106,555,000 100,270,000 92,216,000 92,445,000 92,214,000
=============================================== ============ ============ ============ ============= =============
----------------------------------------------- ============ ============ ============ ============= =============
Selected Balance Sheet Data at End of Period:
Total assets $8,089,292 $8,657,653 $5,710,182 $5,631,061 $3,369,499
Short-term debt $2,567,420 $4,423,738 $2,664,006 $3,111,945 $1,579,689
Long-term debt $2,367,661 $1,911,800 $1,499,306 $1,197,096 $ 734,762
Convertible preferred stock - - - - $
25,800
Common shareholders' equity $1,611,531 $1,319,755 $ 942,558 $ 880,137 $ 693,105
=============================================== ============ ============ ============ ============= =============
----------------------------------------------- ============ ============ ============ ============= =============
Operating Data (dollar amounts in millions):
Loan servicing portfolio (2) $158,585 $136,835 $113,111 $84,678 $54,484
Volume of loans originated $ 37,811 $ 34,584 $ 27,866 $52,459 $32,388
=============================================== ============ ============ ============ ============= =============
(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 the effect of interest rate
changes on loan production income is countercyclical to their effect 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 insurance, including homeowners, fire, flood, earthquake, life and
disability to its mortgagors and others; providing various title insurance and
escrow services in the capacity of an agent rather than an underwriter; offering
appraisal and credit reporting services; 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 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. During
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. 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 then a
record year in profits for the Company. Loan production increased to $34.6
billion from $27.9 billion in Fiscal 1995. The Company attributed 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 the 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.
The fiscal year ended February 28, 1997 ("Fiscal 1997") was a period in
which interest rates were somewhat volatile, generally higher than during the
previous fiscal year but at levels that remained conducive to certain refinance
and home purchase activity. The Company's earnings increased 31% from Fiscal
1996. Loan production increased to $37.8 billion from $34.6 billion in the prior
year. The Company attributed the increase in production to: (i) the generally
strong economy and home purchase market; (ii) the continued implementation of a
national advertising campaign, which was started in Fiscal 1996, aimed at
developing a brand identity for Countrywide and reaching the consumer directly;
and (iii) the integration of home equity and sub-prime lending into the
Company's product offerings and production capacity. For calendar 1996, the
Company ranked second in the amount of single-family mortgage originations
nationwide. The Company's market share for both Fiscal 1997 and 1996 was
approximately 5% of the estimated $800 billion and $650 billion, respectively,
single-family mortgage origination market. During Fiscal 1997, the Company's
loan servicing portfolio grew to $158.6 billion from $136.8 billion at the end
of Fiscal 1996. This growth resulted from the Company's loan production during
the year and bulk servicing acquisitions amounting to $1.4 billion, partially
offset by prepayments, partial prepayments and scheduled amortization of $18.8
billion. The prepayment rate in the servicing portfolio was 11%, slightly down
from the prior year due to the higher mortgage interest rate environment in
Fiscal 1997.
RESULTS OF OPERATIONS
Fiscal 1997 Compared with Fiscal 1996
Revenues for Fiscal 1997 increased 29% to $1,112.5 million from $860.7
million for Fiscal 1996. Net earnings increased 31% to $257.4 million in Fiscal
1997 from $195.7 million in Fiscal 1996. The increase in revenues and net
earnings in Fiscal 1997 compared to Fiscal 1996 was primarily attributable to a
larger gain on sale of loans resulting from greater sales of higher-margin home
equity loans, sales of sub-prime loans in Fiscal 1997 at significantly higher
margins than prime credit quality first mortgages, improved pricing margins on
prime credit quality first mortgages, an increase in the size of the Company's
servicing portfolio and higher loan production volume. These positive factors
were partially offset by increased expenses in Fiscal 1997 over Fiscal 1996.
The total volume of loans produced increased 9% to $37.8 billion for
Fiscal 1997 from $34.6 billion for Fiscal 1996. Refinancings totaled $12.3
billion, or 33% of total fundings, for Fiscal 1997, as compared to $11.7
billion, or 34% of total fundings, for Fiscal 1996. Fixed-rate mortgage loan
production totaled $27.9 billion, or 74% of total fundings, for Fiscal 1997, as
compared to $26.9 billion, or 78% of total fundings, for Fiscal 1996.
Total loan volume in the Company's production divisions is summarized below.
- -------------------------------------------- ------------------------------------ --------
(Dollar amounts in millions) Loan Production
- -------------------------------------------- ------------------------------------ --------
Fiscal 1997 Fiscal 1996
------------- -------------
Consumer Markets Division $ 8,071 $ 7,458
Wholesale Lending Division 8,430 8,061
Correspondent Lending Division 21,310 19,065
============= =============
Total Loan Volume $37,811 $34,584
============= =============
- -------------------------------------------- ------------- -------- ------------- --------
The factors which affect the relative volume of production among the
Company's three divisions include the price competitiveness of each division's
product offerings, the level of mortgage lending activity in each division's
market and the success of each division's sales and marketing efforts.
Included in the Company's total volume of loans produced are $613
million of home equity loans funded in Fiscal 1997 and $221 million funded in
Fiscal 1996. Sub-prime credit quality loan production, which is also included in
the Company's total production volume, was $864 million in Fiscal 1997 and $220
million in Fiscal 1996.
At February 28(29), 1997 and 1996, the Company's pipeline of loans in
process was $4.7 billion and $5.6 billion, respectively. Historically,
approximately 43% to 77% of the pipeline of loans in process has funded. In
addition, at February 28, 1997, the Company had committed to make loans in the
amount of $1.8 billion, subject to property identification and approval of the
loans (the "LOCK 'N SHOP (R) Pipeline"). At February 29, 1996, the LOCK 'N SHOP
(R) Pipeline was $1.3 billion. In Fiscal 1997 and Fiscal 1996, the Company
received 499,861 and 460,486 new loan applications, respectively, at an average
daily rate of $206 million and $194 million, respectively. 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 1997 as compared to Fiscal
1996 primarily because production by the Correspondent Division (which, due to
its lower cost structures, charges lower origination fees per dollar loaned)
comprised a greater percentage of total production in Fiscal 1997 than in Fiscal
1996. Gain on sale of loans improved in Fiscal 1997 as compared to Fiscal 1996
primarily due to the sale during Fiscal 1997 of higher-margin home equity and
sub-prime loans and improved pricing margins on prime credit quality first
mortgages. The sale of home equity loans contributed $20 million and $4 million
to gain on sale of loans in Fiscal 1997 and Fiscal 1996, respectively. Sub-prime
loans contributed $72 million to the gain on sale of loans in Fiscal 1997. There
were no sub-prime loan sales in Fiscal 1996. In general, loan origination fees
and gain (loss) on sale of loans are affected by numerous factors including the
volume and mix of loans produced and sold, loan pricing decisions, interest rate
volatility and the general direction of interest rates.
Net interest income (interest earned net of interest charges) increased
to $33.6 million for Fiscal 1997 from $26.9 million for Fiscal 1996. Net
interest income is principally a function of: (i) net interest income earned
from the Company's mortgage loan warehouse ($61.6 million and $35.0 million for
Fiscal 1997 and Fiscal 1996, respectively); (ii) interest expense related to the
Company's investment in servicing rights ($148.3 million and $112.4 million for
Fiscal 1997 and Fiscal 1996, respectively) and (iii) interest income earned from
the custodial balances associated with the Company's servicing portfolio ($116.9
million and $102.3 million for Fiscal 1997 and Fiscal 1996, respectively). The
Company earns interest on, and incurs interest expense to carry, mortgage loans
held in its warehouse. The increase in net interest income from the mortgage
loan warehouse was primarily
attributed to a higher net earnings rate partially resulting from aggregating
home equity and sub-prime loans (which generally bear interest at higher rates
than prime credit quality first mortgages) prior to their sale or
securitization. The increase in interest expense on the investment in servicing
rights resulted primarily from a larger servicing portfolio, partially offset by
a decrease 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 average custodial balances
(caused by growth of the servicing portfolio and an increase in the amount of
prepayments), offset somewhat by a decrease in the earnings rate from Fiscal
1996 to Fiscal 1997.
During Fiscal 1997, loan administration income was positively affected
by the continued growth of the loan servicing portfolio. At February 28, 1997,
the Company serviced $158.6 billion of loans (including $3.9 billion of loans
subserviced for others), compared to $136.8 billion (including $1.9 billion of
loans subserviced for others) at February 29, 1996, a 16% increase. The growth
in the Company's servicing portfolio during Fiscal 1997 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 both February 28(29), 1997 and 1996 was 7.8%. 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 1997, the prepayment rate of the Company's servicing portfolio
was 11%, compared to 12% for Fiscal 1996. In general, the prepayment rate is
affected by the level of refinance activity, which in turn is driven by the
relative level of mortgage interest rates, and activity in the home purchase
market. The slight decrease in the prepayment rate from Fiscal 1996 to Fiscal
1997 was primarily attributable to a small decrease in refinance activity caused
by somewhat higher interest rates during Fiscal 1997 than during Fiscal 1996.
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. In addition, to mitigate the effect on
earnings of higher amortization and impairment that may result from increased
current and projected future prepayment activity, the Company acquires financial
instruments, including derivative contracts, that increase in aggregate 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"),
options on interest rate swaps ("Swaptions"), interest rate caps, principal-only
("P/O") swaps and certain tranches of collateralized mortgage obligations
("CMOs").
With the Swap Caps, the Company receives and pays interest on a
specified notional amount. The rate received is fixed; 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."
With the Swaptions, the Company has the option to enter into a
receive-fixed, pay-floating interest rate swap at a future date or to settle the
transaction for cash.
The P/O swaps are derivative contracts, the value of which is
determined by changes in the value of the 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 decrease,
prepayments on the collateral underlying the CMOs should increase. This should
result in a decline in the average lives of the P/O securities and a
corresponding increase in the present values of their cash flows. Conversely, as
interest rates increase, prepayments on the collateral underlying the CMOs
should decrease. These changes should result in an increase in the average lives
of the P/O securities and a decrease 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 mortgage servicing rights ("MSRs") 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 MSRs increases while the value of the hedge instruments declines. With
respect to the options, Swaptions, floors, caps 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
28, 1997, the Company estimates that its maximum exposure to loss over the
contractual term is $26.2 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 1997, the Company recognized a net
expense of $125.3 million from its Servicing Hedge. The net expense included
unrealized losses of $56.9 million and realized losses of $68.4 million from the
premium amortization and sale of various financial instruments that comprise the
Servicing Hedge. In Fiscal 1996, the Company recognized a net benefit of $200.1
million from its Servicing Hedge. The net benefit included unrealized gains of
$108.8 million and net realized gains of $91.3 million from the sale of various
financial instruments that comprise 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 MSRs.
See Note G to the Company's Consolidated Financial Statements.
The Company recorded amortization and net impairment of its MSRs for Fiscal
1997 totaling $101.4 million (consisting of amortization amounting to $220.1
million and recovery of previous impairment of $118.7 million), compared to
$342.8 million of amortization and impairment (consisting of amortization
amounting to $168.0 million and net impairment of $174.8 million) for Fiscal
1996. The factors affecting the amount of amortization and impairment or
recovery of the MSRs recorded in an accounting period include the level of
prepayments during the period, the change in estimated future prepayments and
the amount of Servicing Hedge gains or losses.
During Fiscal 1997, the Company acquired bulk servicing rights for
loans with principal balances aggregating $1.4 billion at a price of 1.60% of
the aggregate outstanding principal balances of the servicing portfolios
acquired. During Fiscal 1996, the Company acquired bulk servicing rights for
loans with principal balances aggregating $5.2 billion at a price of 1.30% of
the aggregate outstanding principal balances of the servicing portfolios
acquired.
Salaries and related expenses are summarized below for Fiscal 1997 and
Fiscal 1996.
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1997
thousands)
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
Base Salaries $ 91,054 $41,806 $54,244 $12,852 $199,956
Incentive Bonus 34,501 763 14,820 6,799 56,883
Payroll Taxes and Benefits 15,105 7,747 5,389 1,804 30,045
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $140,660 $50,316 $74,453 $21,455 $286,884
============ ============= ============= ============= =============
Average Number of 2,303 1,555 1,107 251 5,216
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(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
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
The amount of salaries increased during Fiscal 1997 primarily due to an
increase in the number of employees resulting from higher loan production and
diversification of loan products, a larger servicing portfolio and growth in the
Company's non-mortgage banking activities.
Occupancy and other office expenses for Fiscal 1997 increased to $129.9
million from $106.3 million for Fiscal 1996 primarily due to: (i) the continued
effort by the Company to expand its retail branch network, particularly outside
of California, (ii) the purchase of an office facility to house the Company's
primary executive and administrative offices and some of its non-mortgage
banking subsidiaries, (iii) higher loan production, (iv) a larger servicing
portfolio and (v) growth in the Company's non-mortgage banking activities.
Guarantee fees represent 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
1997, guarantee fees increased 31% to $159.4 million from $121.2 million for
Fiscal 1996. The increase resulted from an increase in the servicing portfolio,
changes in the mix of permanent investors and terms negotiated at the time of
loan sales.
Marketing expenses for Fiscal 1997 increased 26% to $34.3 million from $27.1
million for Fiscal 1996, reflecting the Company's continued implementation of a
marketing plan to increase consumer brand awareness.
Other operating expenses for Fiscal 1997 increased from Fiscal 1996 by
$29.9 million, or 60%. This increase was due primarily to higher loan
production, a larger servicing portfolio, increased reserves for bad debts and
increased systems development and operation costs in Fiscal 1997 than in Fiscal
1996.
Profitability of Loan Production and Servicing Activities
In Fiscal 1997, the Company's pre-tax earnings from its loan production
activities (which include loan origination and purchases, warehousing and sales)
were $141.9 million. In Fiscal 1996, the Company's comparable pre-tax earnings
were $61.2 million. The increase of $80.7 million was primarily attributable to
a greater sale of higher-margin home equity loans, sales of sub-prime loans at
significantly higher margins than prime credit quality first mortgages and
improved pricing margins on prime credit quality first mortgages. There were no
sub-prime loan sales in Fiscal 1996. These positive results were partially
offset by higher production costs and a change in the internal method of
allocating overhead between the Company's production and servicing activities.
In Fiscal 1997, the Company's pre-tax income from its loan servicing activities
(which include administering the loans in the servicing portfolio, selling
homeowners and other insurance, acting as tax payment agent, marketing
foreclosed properties and acting as reinsurer) was $254.2 million as compared to
$251.2 million in Fiscal 1996. The increase of $3.0 million was due to an
increase in the size of the servicing portfolio and in the rate of servicing and
miscellaneous fees earned. Largely offsetting these positive factors was an
increase in the net expense resulting from amortization and impairment of MSRs
and from the Servicing Hedge from Fiscal 1996 to Fiscal 1997. The increase in
such net expense is due primarily to increased amortization resulting from a
higher cost basis in the MSRs. This higher basis is attributable to adoption of
a new accounting standard effective March 1, 1995 that required recognition of
originated mortgage servicing rights.
Profitability of Other Activities
In addition to loan production and loan servicing, the Company offers
ancillary products and services related to its mortgage banking activities.
These include title insurance and escrow services, home appraisals, credit
cards, management of a publicly traded real estate investment trust ("REIT"),
securities brokerage and servicing rights brokerage. For Fiscal 1997, these
activities contributed $25.8 million to the Company's pre-tax income compared to
$13.8 million for Fiscal 1996. This increase to pre-tax income primarily results
from improved performance of the title insurance, escrow and REIT management
services.
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 Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting
for Mortgage Servicing Rights. SFAS No. 122 amended SFAS No. 65, Accounting for
Certain Mortgage Banking Activities. Since SFAS No. 122 prohibited retroactive
application, historical accounting results were not 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.
Total loan volume in the Company's production divisions is summarized below.
- -------------------------------------------- ------------------------------------ --------
(Dollar amounts in millions) Loan Production
- -------------------------------------------- ------------------------------------ --------
Fiscal 1996 Fiscal 1995
------------- -------------
Consumer Markets Division $ 7,458 $ 7,066
Wholesale Lending Division 8,061 8,503
Correspondent Lending Division 19,065 12,297
============= =============
Total Loan Volume $34,584 $27,866
============= =============
- -------------------------------------------- ------------- -------- ------------- --------
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(28), 1996 and 1995, the Company's LOCK 'N SHOP (R) Pipeline was $1.3
billion and $2.7 billion, respectively. 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.
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.
Net interest income (interest earned net of interest charges) decreased
to $26.9 million for Fiscal 1996 from $44.1 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 ($112.4 million and $52.7 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 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.
During Fiscal 1996, the prepayment rate of the Company's servicing
portfolio was 12%, as compared to 9% for Fiscal 1995.
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 capitalized servicing fees receivable and
mortgage servicing rights 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 MSRs. See
Note G to the Company's Consolidated Financial Statements.
The Company recorded amortization and impairment of its MSRs 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 MSRs 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.
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 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 sub-prime 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).
Profitability of Other Activities
For Fiscal 1996, these activities contributed $13.8 million to the
Company's pre-tax income compared to $12.6 million for Fiscal 1995. This
increase to pre-tax income primarily results from improved performance of the
securities brokerage and REIT management services.
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 MSRs 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 a note 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 MSRs, a decreased rate of interest earned
from the custodial balances and increased Interest Costs Incurred on Payoffs.
The impacts of changing interest rates on servicing-related earnings are reduced
by performance of the Servicing Hedge, which is designed to mitigate the impact
on earnings of higher amortization and impairment that may result from declining
interest rates.
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 the revolving
credit facility, medium-term notes, MBS repurchase agreements, subordinated
notes, pre-sale funding facilities, an optional cash purchase feature in the
dividend reinvestment plan, redeemable capital trust pass-through securities and
cash flow from operations. In addition, in the past the Company has utilized
whole loan repurchase agreements, servicing-secured bank facilities, private
placements of unsecured notes and other financings, direct borrowings from the
revolving credit facility and public offerings of preferred stock.
Certain of the debt obligations of the Company and Countrywide Home
Loans, Inc. ("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
December 1996, Countrywide Capital I, a statutory business trust and a
subsidiary of the Company, issued $300 million of 8% Company-obligated
redeemable capital trust pass-through securities, the proceeds of which were
used to purchase subordinated debt securities from the Company. The Company used
the net proceeds from the sale of the subordinated debt securities for general
corporate purposes, principally to reduce short-term debt.
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 1997, the Company's operating activities
provided cash of approximately $2.0 billion on a short-term basis primarily from
the decrease in its mortgage loans and MBS held for sale. Mortgage loans and MBS
held for sale are generally financed with short-term borrowings; therefore, the
operating cash so provided was used to repay short-term debt as discussed under
"Financing Activities."
Investing Activities The primary investing activity for which cash was
used in Fiscal 1997 was the investment in servicing. Net cash used by investing
activities was $0.9 billion for Fiscal 1997 and Fiscal 1996.
Financing Activities Net cash used by financing activities amounted to
$1.0 billion for Fiscal 1997. Net cash provided by financing activities amounted
to $2.4 billion for Fiscal 1996. The decrease in cash flow from financing
activities was primarily the result of net short-term debt repayments by the
Company in Fiscal 1997 and net short-term borrowings during Fiscal 1996.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
During Fiscal 1997, the Company received new loan applications at an
average daily rate of $206 million and at February 28, 1997, the Company's
pipeline of loans in process was $4.7 billion. This compares to a daily
application rate in Fiscal 1996 of $194 million and a pipeline of loans in
process at February 29, 1996 of $5.6 billion. 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 28, 1997 was $1.8 billion and at February
29, 1996 was $1.3 billion. For the month ended March 31, 1997, the average daily
amount of applications received was $228 million, and at March 31, 1997, the
pipeline of loans in process was $5.1 billion and the Lock n' Shop(R) Pipeline
was $2.6 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.
Market Factors
Mortgage interest rates generally decreased in Fiscal 1996 and were
somewhat volatile, although generally slightly higher than the prior year, in
Fiscal 1997. Loan production increased 9% from Fiscal 1996 to Fiscal 1997. This
is primarily due to several factors. First, sub-prime and home equity loan
fundings, which are generally less sensitive to interest rate fluctuations than
prime credit quality first mortgages, increased from Fiscal 1996 to Fiscal 1997.
Second, certain of the Company's loan products, particularly jumbo loan
products, were more competitively priced in Fiscal 1997 than in Fiscal 1996.
Further, home purchase market activity was stronger during Fiscal 1997 than in
Fiscal 1996.
The prepayment rate in the servicing portfolio declined slightly from
Fiscal 1996 to Fiscal 1997. Because interest rates were generally higher in
Fiscal 1997 than in Fiscal 1996, recovery of previously recorded impairment of
MSRs was recognized and, conversely, the Servicing Hedge posted a loss.
The Company's primary competitors are commercial banks, savings and
loans and mortgage banking subsidiaries of diversified companies, as well as
other mortgage bankers. Over the past three years, certain commercial banks have
expanded their mortgage banking operations through acquisition of formerly
independent mortgage banking companies or through internal growth. The Company
believes that these transactions and activities have not had a material impact
on the Company or on the degree of competitive pricing in the market.
The Company's California mortgage loan production (measured by
principal balance) constituted 25% of its total production during Fiscal 1997,
down from 31% for Fiscal 1996. The Company is continuing its efforts to expand
its production capacity outside of California. Some regions in which the Company
operates have experienced 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. To the extent that any geographic
region's mortgage loan production constitutes a significant portion of the
Company's production, there can be no assurance that the Company's operations
will not be adversely affected if that region experiences slow or negative
economic growth resulting in decreased residential real estate lending activity,
or market factors further impact the Company's competitive position in that
region.
The delinquency rate in the Company-owned servicing portfolio increased
to 3.44% at February 28, 1997 from 3.20% at February 29, 1996. 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 45% of the portfolio at February 29, 1996
to 48% at February 28, 1997. In addition, the weighted average age of the
portfolio is 27 months at February 28, 1997, up from 25 months at February 29,
1996. 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 0.71% at February 28, 1997 from 0.49% at
February 29, 1996. 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 (28% of the Company's
servicing portfolio at February 28, 1997) 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, the Company's Servicing Hedge is designed to
protect the value of its investment in servicing rights from the effects of
increased prepayment activity that generally results from declining interest
rates. In periods of increasing interest rates, the value of the Servicing Hedge
generally declines and the value of MSRs generally increases. There can be no
assurance that, in periods of increasing interest rates, the increase in value
of the MSRs will offset the amount of Servicing Hedge expense; or in periods of
declining interest rates, that the Company's Servicing Hedge will generate gains
or if gains are generated, that they will fully offset impairment of the MSRs.
Implementation of New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share, which supersedes Accounting Principles Board ("APB")
Opinion No. 15, of the same name. SFAS No. 128 simplifies the standards for
computing earnings per share ("EPS") and makes them comparable to international
standards. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, with earlier application not permitted. Upon
adoption, all prior EPS data will be restated.
The following table presents basic and diluted EPS for the years ended
February 28(29), 1997, 1996 and 1995, computed under the provisions of SFAS No.
128.
- ------------------------ --------- --------- --------- -- - ---------------------------- -- -- --------- ------- ------
Year ended February 28(29),
--------- --------- --------- -- - ---------------------------- -- -- --------- ------- ------
1997 1996 1995
--------- --------- --------- ---------- --------- --------- --------- -------- ---------
(Dollar amounts in Per-Share Per-Share Per-Share
thousands, except per Net Amount Net Amount Net Amount
share data) Earnings Shares Earnings Shares Earnings Shares
- ------------------------ --------- --------- --------- --------- -------- ---------
========= ========== =========
Net earnings $257,358 $195,720 $88,407
========= ========== =========
Basic EPS
Net earnings available
to common shareholders $257,358 103,112 $2.50 $195,720 98,352 $1.99 $88,407 91,240 $0.97
Effect of dilutive
stock options - 2,565 - 1,918 - 847
--------- --------- ---------- --------- --------- --------
Diluted EPS
Net earnings available
to common shareholders $257,358 105,677 $2.44 $195,720 100,270 $1.95 $88,407 92,087 $0.96
========= ========= ========= ========== ========= ========= ========= ======== ========
- ------------------------ --------- --------- --------- - ---------- --------- --------- -- --------- -------- ---------
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
----------- -----------------------------------------------------------
2.1 Agreement and Plan of Merger Among CWM Mortgage Holdings, Inc.,
Countrywide Asset Management Corporation and Countrywide Credit
Industries, Inc.
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).
4.1.1* Amendment No. 1 to Rights Agreement dated as of March 24, 1992
(incorporated by reference to Exhibit 1 to the Company's Form 8 filed
with the SEC on March 27, 1992).
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).
4.4* Form of Medium-Term Notes, Series A (fixed-rate) of Countrywide
Funding Corporation (now known as Countrywide Home Loans, Inc.)
("CHL") (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).
4.5* Form of Medium-Term Notes, Series A (floating-rate) of CHL
(incorporated by reference to Exhibit 4.3 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).
4.6* Form of Medium-Term Notes, Series B (fixed-rate) of CHL (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).
4.7* Form of Medium-Term Notes, Series B (floating-rate) of CHL
(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).
4.8* Form of Medium-Term Notes, Series C (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.2 to the registration statement on Form S-3
of CHL and the Company (File Nos. 33-50661 and 33-50661-01) filed with
the SEC on October 19, 1993).
4.9* Form of Medium-Term Notes, Series C (floating-rate) of CHL
(incorporated by reference to Exhibit 4.3 to the registration
statement on Form S-3 of CHL and the Company (File Nos. 33-50661 and
33-50661-01) filed with the SEC on October 19, 1993).
4.10*Indenture dated as of January 1, 1992 among CHL, the Company and The
Bank of New York, as trustee (incorporated by reference to Exhibit 4.1
to the registration statement on Form S-3 of CHL and the Company (File
Nos. 33-50661 and 33-50661-01) filed with the SEC on October 19,
1993).
4.10.1* Form of Supplemental Indenture No. 1 dated as of June 15, 1995, to
the Indenture dated as of January 1, 1992, among CHL, 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 CHL (File Nos. 33-59559 and 33-59559-01) filed with
the SEC on June 16, 1995).
4.11*Form of Medium-Term Notes, Series D (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.10 to Amendment No. 2 to the registration
statement on Form S-3 of the Company and CHL (File Nos. 33-59559 and
33-59559-01) filed with the SEC on June 16, 1995).
4.12*Form of Medium-Term Notes, Series D (floating-rate) of CHL
(incorporated by reference to Exhibit 4.11 to Amendment No. 2 to the
registration statement on Form S-3 of the Company and CHL (File Nos.
33-59559 and 33-59559-01) filed with the SEC on June 16, 1995).
4.13*Form of Medium-Term Notes, Series E (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 to the
registration statement on Form S-3 of the Company and CHL (File Nos.
333-3835 and 333-3835-01) filed with the SEC on August 2, 1996).
4.14*Form of Medium-Term Notes, Series E (floating rate) of CHL
(incorporated by reference to Exhibit 4.4 to Post-Effective Amendment
No. 1 to the registration statement on Form S-3 of the Company and CHL
(File Nos. 333-3835 and 333-3835-01) filed with the SEC on August 2,
1996).
+ 10.1*Indemnity Agreements with Directors and Officers of Countrywide
Credit Industries, Inc. (incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 8-K dated February 6, 1987).
+ 10.2*Restated Employment Agreement for David S. Loeb dated March 26, 1996
(incorporated by reference to Exhibit 10.1 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
+ 10.3* Restated Employment Agreement for Angelo R Mozilo dated March 26,
1996 (incorporated by reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
+ 10.4 Employment Agreement for Stanford L. Kurland dated May 7, 1996
(incorporated by reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-Q dated August 31, 1996).
+ 10.5*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).
+ 10.6*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).
+ 10.7* 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).
10.8* Revolving Credit Agreement dated as of May 20, 1996 by and among CFC,
First National Bank of Chicago, Bankers Trust Company, The Bank of New York, The
Chase Manhattan Bank, N.A., Chase Securities, Inc. 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, 1996).
+ 10.9* Severance Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated May 31, 1988).
+ 10.10* 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).
+ 10.11* 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).
+ 10.12* 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).
+ 10.13* 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).
+ 10.14* 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).
+ 10.15* 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).
+ 10.16* 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).
10.17* 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).
10.18* 1987 Amended and Restated Servicing Agreement, dated as of May 15,
1987, between CWM and CHL (incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K dated February 28, 1990).
10.19* 1995 Amended and Restated Loan Purchase and Administrative Services
Agreement, dated as of May 15, 1995, between CWM and CHL (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1995).
+ 10.20* 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).
+ 10.20.1* 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).
+ 10.20.2* 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).
+ 10.20.3* 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).
+ 10.20.4* 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).
+ 10.20.5* 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).
+ 10.21* 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).
+ 10.22* Amended and Restated 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1996).
+ 10.22.1* First Amendment to the Amended and Restated 1993 Stock Option
Plan (incorporated by reference to Exhibit 10.5.1 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
+ 10.23* 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).
+ 10.24* 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).
+ 10.25* 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).
+ 10.26* Annual Incentive Plan (incorporated by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q dated August 31, 1996).
+ 10.27 Change in Control Severance Plan
11.1 Statement Regarding Computation of Earnings Per Share.
12.1 Computation of the Ratio of Earnings to 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 15, 1997
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 15, 1997
------------------ Directors and Director (Principal
------------------ Executive Officer)
David S. Loeb
/s/ ANGELO R. MOZILO Executive Vice President and Director May 15, 1997
- ---------------------
- ---------------------
Angelo R. Mozilo
/s/ STANFORD L. KURLAND Senior Managing Director and Chief May 15, 1997
- ------------------------ Operating Officer
- ------------------------
Stanford L. Kurland
/s/ CARLOS M. GARCIA Managing Director; Chief Financial May 15, 1997
--------------------- Officer and Chief Accounting
--------------------- Officer (Principal Financial
Carlos M. Garcia Officer and Principal Accounting
Officer)
/s/ ROBERT J. DONATO Director May 15, 1997
---------------------
---------------------
Robert J. Donato
/s/ BEN M. ENIS Director May 15, 1997
- ---------------
- ---------------
Ben M. Enis
/s/ EDWIN HELLER Director May 15, 1997
- -----------------
Edwin Heller
/s/ HARLEY W. SNYDER Director May 15, 1997
- ----------------------
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 28, 1997
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
February 28, 1997
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-30
Schedule II - Valuation and Qualifying Accounts.............. F-33
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 28(29), 1997 and 1996,
and the related consolidated statements of earnings, common shareholders'
equity, and cash flows for each of the three years in the period ended February
28, 1997. 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 28(29), 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended February 28, 1997, in conformity
with generally accepted accounting principles.
We have also audited Schedules I and II for each of the three years in the
period ended February 28, 1997. In our opinion, such schedules present fairly,
in all material respects, the information required to be set forth therein.
In March 1995, the Company adopted Financial Accounting Standards Board
Statement No. 122, "Accounting for Mortgage Servicing Rights." In January 1997,
the Company adopted Financial Accounting Standards Board Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." These changes are discussed in Note A-5 and Note A-6 of the
Notes to Consolidated Financial Statements.
GRANT THORNTON LLP
Los Angeles, California
April 22, 1997
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28(29),
(Dollar amounts in thousands, except per share data)
A S S E T S
1997 1996
------------------ -------------------
Cash $ 18,269 $ 16,444
Mortgage loans and mortgage-backed securities held for sale 2,579,972 4,740,087
Other receivables 1,451,979 912,613
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 190,104 140,963
Mortgage servicing rights 3,023,826 2,323,665
Other assets 825,142 523,881
------------------ -------------------
Total assets $8,089,292 $8,657,653
================== ===================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $1,695,523 $2,548,549
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $4,713,324 $6,097,518
Drafts payable issued in connection with mortgage loan closings 221,757 238,020
Accounts payable and accrued liabilities 607,037 505,148
Deferred income taxes 635,643 497,212
------------------ -------------------
Total liabilities 6,177,761 7,337,898
Commitments and contingencies - -
Company-obligated mandatorily redeemable capital trust pass-through securities
of subsidiary trust holding solely a Company
guaranteed related subordinated debt 300,000 -
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, 106,095,558 shares in 1997 and
102,242,329 shares in 1996 5,305 5,112
Additional paid-in capital 917,942 820,183
Unrealized loss on available-for-sale securities (30,545) -
Retained earnings 718,829 494,460
------------------ -------------------
Total shareholders' equity 1,611,531 1,319,755
------------------ -------------------
Total liabilities and shareholders' equity $8,089,292 $8,657,653
================== ===================
Borrower and investor custodial accounts $1,695,523 $2,548,549
================== ===================
The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended February 28(29),
(Dollar amounts in thousands, except per share data)
1997 1996 1995
---------------- -------------- --------------
Revenues
Loan origination fees $ 193,079 $199,724 $203,426
Gain (loss) on sale of loans, net of commitment fees 247,450 92,341 (41,342)
---------------- -------------- --------------
Loan production revenue 440,529 292,065 162,084
Interest earned 350,263 308,449 249,560
Interest charges (316,705) (281,573) (205,464)
---------------- -------------- --------------
Net interest income 33,558 26,876 44,096
Loan servicing income 773,715 620,835 460,351
Amortization and impairment/recovery of
mortgage servicing rights (101,380) (342,811) (95,768)
Servicing hedge benefit (expense) (125,306) 200,135 (40,030)
Less write-off of servicing hedge - - (25,600)
---------------- -------------- --------------
Net loan administration income 547,029 478,159 298,953
Commissions, fees and other income 91,346 63,642 40,650
Gain on sale of servicing - - 56,880
---------------- -------------- --------------
Total revenues 1,112,462 860,742 602,663
Expenses
Salaries and related expenses 286,884 229,668 199,061
Occupancy and other office expenses 129,877 106,298 102,193
Guarantee fees 159,360 121,197 85,831
Marketing expenses 34,255 27,115 23,217
Other operating expenses 80,188 50,264 37,016
Branch and administrative office consolidation costs - - 8,000
---------------- -------------- --------------
Total expenses 690,564 534,542 455,318
---------------- -------------- --------------
Earnings before income taxes 421,898 326,200 147,345
Provision for income taxes 164,540 130,480 58,938
---------------- -------------- --------------
NET EARNINGS $ 257,358 $195,720 $88,407
================ ============== ==============
Earnings per share
Primary $2.44 $1.95 $0.96
Fully diluted $2.42 $1.95 $0.96
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 28, 1997
(Dollar amounts in thousands)
Unrealized
Loss on
Additional Available-
Number Common Paid-in- for-Sale Retained
of Shares Stock Capital Securities Earnings Total
---------------- -------------- -------------- ---------------- -------------- ------------
Balance at March 1, 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
Cash dividends paid - common - - - - (32,989) (32,989)
Stock options exercised 1,000,798 50 15,337 - - 15,387
Tax benefit of stock options exercised - - 3,656 - - 3,656
Dividend reinvestment plan 2,198,563 110 60,040 - - 60,150
401(k) Plan contribution 79,878 4 2,038 - - 2,042
Issuance of common stock in business
acquisition 573,990 29 16,688 - - 16,717
Unrealized loss on available-for-sale
securities - - - (30,545) - (30,545)
Net earnings for the year - - - - 257,358 257,358
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1997 106,095,558 $5,305 $917,942 ($30,545) $718,829 $1,611,531
====================================================================================================================================
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 28(29),
(Dollar amounts in thousands)
1997 1996 1995
---------------- ---------------- -----------------
Cash flows from operating activities
Net earnings $ 257,358 $ 195,720 $ 88,407
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Amortization and impairment of mortgage servicing
rights 101,380 342,811 95,768
Servicing hedge unrealized loss (gain) 56,903 (108,800) -
Depreciation and other amortization 40,378 30,545 26,050
Deferred income taxes 164,540 130,480 58,938
Gain on bulk sale of servicing rights - - (56,880)
Origination and purchase of loans held for sale (37,810,761) (34,583,653) (27,866,170)
Principal repayments and sale of loans 39,970,876 32,742,391 28,681,606
---------------- ---------------- -----------------
Decrease (increase) in mortgage loans and
mortgage-backed securities held for sale 2,160,115 (1,841,262) 815,436
Increase in other receivables and other assets (890,740) (483,364) (227,220)
Increase in accounts payable and accrued liabilities 96,712 269,531 102,258
---------------- ---------------- -----------------
Net cash provided (used) by operating activities 1,986,646 (1,464,339) 902,757
---------------- ---------------- -----------------
Cash flows from investing activities
Additions to mortgage servicing rights (858,912) (869,579) (796,714)
Purchase of property, equipment and leasehold
improvements - net (77,294) (19,003) (21,414)
Proceeds from bulk sale of servicing rights - - 100,676
---------------- ---------------- -----------------
Net cash used by investing activities (936,206) (888,582) (717,452)
---------------- ---------------- -----------------
Cash flows from financing activities
Net (decrease) increase in warehouse debt and other
short-term borrowings (1,924,308) 1,742,290 (451,915)
Issuance of long-term debt 637,624 526,500 399,205
Repayment of long-term debt (113,773) (96,563) (93,019)
Issuance of Company-obligated mandatorily redeemable
capital trust pass-through securities of subsidiary trust
holding solely a Company guaranteed related
subordinated debt 300,000 - -
Issuance of common stock 84,831 210,475 2,273
Cash dividends paid (32,989) (30,961) (28,259)
---------------- ---------------- -----------------
Net cash (used) provided by financing activities (1,048,615) 2,351,741 (171,715)
---------------- ---------------- -----------------
Net increase (decrease) in cash 1,825 (1,180) 13,590
Cash at beginning of period 16,444 17,624 4,034
================ ================ =================
Cash at end of period $ 18,269 $ 16,444 $ 17,624
================ ================ =================
Supplemental cash flow information
Cash used to pay interest $ 309,575 $ 317,156 $ 262,858
Cash used to pay (refunded from) income taxes $ 15 $ 54 ($ 841)
Noncash financing activities - issuance of common stock
in business acquisition $ 16,717 - -
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"), 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. 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 and the carrying value of
mortgage-backed securities ("MBS") held for sale in the near-term are 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.
3. Mortgage-Backed Securities
The Company's MBS held for sale in the near term and MBS retained in
securitizations are classified as trading securities. Trading securities are
recorded at fair value, with the change in fair value during the period included
in earnings. The fair value of the MBS held for sale in the near term is based
on quoted market prices. The fair value of MBS retained in securitizations is
determined by discounting future cash flows using discount rates that
approximate current market rates, market consensus prepayment rates and
estimated foreclosure losses to the extent the Company has retained the risk of
such losses.
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. Mortgage Servicing Rights, Amortization and Impairment
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. Retroactive application was
prohibited. SFAS No. 125 supersedes, but generally retains, the requirements of
SFAS No. 122, Accounting for Mortgage Servicing Rights, which the Company
adopted in March 1995. Both Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
require the recognition of originated and purchased mortgage servicing rights
("MSRs") as assets by allocating total costs incurred between the loan and the
servicing rights retained based on their relative fair values. In addition, SFAS
No. 125 eliminates the distinction between normal and excess servicing to the
extent the servicing fee does not exceed that specified in the contract. The
adoption of SFAS No. 125 did not have a material impact on the Company's
financial position or results of operations for the year ended February 28,
1997.
Amortization of MSRs 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 MSRs. Projected net servicing income is 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. Prior to January 1, 1997, amortization of
capitalized servicing fees receivable was based on the decline during the period
in the present value of the projected excess servicing fees using the same
discount rate as that implied by the price that investors were willing to pay
for the excess servicing fees at the time of the loan sale. Amortization of MSRs
(including capitalized excess servicing fees prior to January 1, 1997) amounted
to $220.1 million, $168.0 million and $95.8 million for the years ended February
28(29), 1997, 1996 and 1995, respectively.
SFAS No. 125 also requires that all 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). A net recovery of
previously impaired MSRs amounted to $118.7 million and impairment of MSRs
amounted to $174.8 million for the years ended February 28(29), 1997 and 1996,
respectively.
6. Servicing Portfolio Hedge
The Company acquires financial instruments, including derivative contracts,
that change in aggregate value inversely to the movement of interest rates
("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"), options on interest rate
swaps ("Swaptions"), interest rate 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 MSRs from the effects of increased
prepayment activity that generally results from declining interest rates. The
value of the interest rate floors, caps, call options, Swap Caps, Swaptions 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, caps 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 MSRs for realized
and unrealized gains and losses in the derivative financial instruments
comprising the Servicing Hedge. Effective January 1, 1997, the Company adopted
SFAS No. 125 which supersedes, but generally retains, the provisions of SFAS No.
122 related to MSRs. For the year ended February 28, 1997, the net expense from
the Servicing Hedge included a net unrealized loss of $56.9 million and a
realized loss of $68.4 million from the premium amortization and sale of various
derivative financial instruments. For the year ended February 29, 1996, the
Servicing Hedge benefit included unrealized gains of $108.8 million and realized
gains of $91.3 million. 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 MSRs by such excess through additional amortization.
For the year ended February 28, 1995, the Company recognized $66 million in net
loss (including a write-off of the Servicing Hedge amounting to $26 million) as
an offset to Incremental Amortization.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
7. 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 sold and 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.
8. 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 ("APB") 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.
9. Available-for-Sale Securities
The Company has designated its purchased investments in certain tranches of
CMOs as available for sale. Those securities are included 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.
10. 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.
11. Interest Rate Swap Agreements
The differential to be received or paid under the interest rate swap
agreements associated with the Company's debt and custodial accounts 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.
12. 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.
13. 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 $26.6 million and $20.6 million for the years ended
February 28(29), 1997 and 1996, respectively.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
14. 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.
15. 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
stock options were converted at the beginning of the reporting period.
The weighted average shares outstanding for computing primary and fully
diluted earnings per share were 105,677,000 and 106,555,000, respectively, for
the year ended February 28, 1997; both 100,270,000 for the year ended February
29, 1996 and 92,087,000 and 92,216,000, respectively, for the year ended
February 28, 1995.
16. Financial Statement Reclassifications and Restatement
Certain amounts reflected in the Consolidated Financial Statements for the
years ended February 29(28), 1996 and 1995 have been reclassified to conform to
the presentation for the year ended February 28, 1997.
NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following.
--------------------------------------------------------- ---- -------------------------------------------- ---
February 28(29),
----------------- --- ---------------- --
(Dollar amounts in thousands) 1997 1996
----------------------------------------------------------------- --- ----------------- --- ---------------- --
Buildings $ 69,786 $ 37,723
Office equipment 176,957 138,326
Leasehold improvements 26,853 25,269
----------------- ----------------
273,596 201,318
Less accumulated depreciation and amortization (102,259) (72,685)
----------------- ----------------
171,337 128,633
Land 18,767 12,330
================= ================
$190,104 $140,963
================= ================
----------------------------------------------------------------- --- ----------------- --- ---------------- --
Depreciation expense amounted to $29.0 million, $21.1 million and $19.0
million for the years ended February 28(29), 1997, 1996 and 1995, respectively.
NOTE C - MORTGAGE SERVICING RIGHTS
The components of mortgage servicing rights were as follows.
--------------------------------------------- -- -------------------------------------------------------------
February 28(29),
---------------- --- ---------------- --- ---------------- --
(Dollar amounts in thousands) 1997 1996 1995
--------------------------------------------- -- ---------------- --- ---------------- --- ---------------- --
Mortgage Servicing Rights
Balance at beginning of period $2,385,299 $1,796,897 $1,126,016
Additions 858,912 869,579 796,714
Sale of servicing - -
(30,065)
Scheduled amortization (220,099) (168,017) (95,768)
Hedge losses (gains) applied 59,753 (113,160) -
Reclassification of rights in excess
of contractually specified
servicing fees (57,371) - -
---------------- ---------------- ----------------
Balance before valuation reserve
at end of period 3,026,494 2,385,299 1,796,897
---------------- ---------------- ----------------
Reserve for Impairment of Mortgage Servicing Rights
Balance at beginning of period (61,634) - -
Reductions (additions) 58,966 (61,634) -
---------------- ---------------- ----------------
Balance at end of period ( 2,668) (61,634) -
================ ================ ================
Mortgage Servicing Rights, net $3,023,826 $2,323,665 $1,796,897
================ ================ ================
--------------------------------------------- -- ---------------- --- ---------------- --- ---------------- --
The estimated fair value of recognized mortgage servicing rights aggregated
$3.1 billion and $2.3 billion at February 28(29), 1997 and 1996, respectively.
Fair value is determined by discounting estimated net future cash flows from
mortgage servicing activities using discount rates that approximate current
market rates and using current expected future prepayment rates.
NOTE D - NOTES PAYABLE
Notes payable consisted of the following.
---------------------------------------------------------- -- ---------------------------------------------- --
February 28(29),
----------------- --- ---------------- --
(Dollar amounts in thousands) 1997 1996
------------------------------------------------------------------ -- ----------------- --- ---------------- --
Commercial paper $1,943,368 $2,847,442
Medium-term notes, Series A, B, C, D and E 2,346,800 1,824,800
Repurchase agreements 220,637 808,353
Subordinated notes 200,000 200,000
Unsecured notes payable - 235,000
Pre-sale funding facilities - 181,255
Other notes payable 2,519 668
================= ================
$4,713,324 $6,097,518
================= ================
------------------------------------------------------------------ -- ----------------- --- ---------------- --
NOTE D - NOTES PAYABLE (Continued)
Revolving Credit Facility and Commercial Paper
As of February 28, 1997, CHL had an unsecured credit agreement (revolving
credit facility) with fifty commercial banks permitting CHL to borrow an
aggregate maximum amount of $3.5 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 and mortgage-backed securities held for
sale and MSRs. 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 28, 1997. The weighted average borrowing rate on direct and
commercial paper borrowings for the year ended February 28, 1997 was 5.40%. The
weighted average borrowing rate on commercial paper outstanding as of February
28, 1997 was 5.40%. 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 and
mortgage-backed securities held for sale and MSRs. The facility expires on May
14, 2000.
Medium-Term Notes
As of February 28, 1997, 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 $ - $ 304,800 $ 304,800 6.53% 8.79% Mar-1997 Mar-2002
Series B 11,000 396,000 407,000 5.82% 6.98% Aug-1997 Aug-2005
Series C 303,000 197,000 500,000 5.78% 8.43% Dec-1997 Mar-2004
Series D 115,000 385,000 500,000 5.70% 6.88% Aug-1998 Sep-2005
Series E 310,000 325,000 635,000 5.59% 7.45% Feb-2000 Oct-2008
-------------------------------------------
$739,000 $1,607,800 $2,346,800
===========================================
- -----------------------------------------------------------------------------------------------------------------
As of February 28, 1997, 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 28, 1997, including the effect of the interest rate swap
agreements, was 6.11%.
NOTE D - NOTES PAYABLE (Continued)
Repurchase Agreements
As of February 28, 1997, the Company had entered into short-term financing
arrangements to sell MBS under agreements to repurchase. The weighted average
borrowing rate for the year ended February 28, 1997 was 5.41%. The weighted
average borrowing rate on repurchase agreements outstanding as of February 28,
1997 was 5.39%. 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 28, 1997, 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 28, 1997 was 5.57%. As of February 28, 1997, the Company had no
outstanding borrowings under any of these facilities.
Maturities of notes payable are as follows.
---------------- ------------------------------------------ ------------------------------------------
Year ending February 28(29), (Dollar amounts in thousands)
---------------- ------------------------------------------ ------------------------------------------
1998 $2,345,663
1999 143,131
2000 328,030
2001 407,000
2002 291,000
Thereafter 1,198,500
================
$4,713,324
================
---------------- ------------------------------------------ -------- ------------------ --------------
NOTE E - COMPANY-OBLIGATED CAPITAL TRUST PASS-THROUGH SECURITIES OF
SUBSIDIARY TRUST
On December 11, 1996, Countrywide Capital I (the "Subsidiary Trust"), a
subsidiary of the Company, issued $300 million of 8% Capital Trust Pass-through
Securities (the "Capital Securities"). In connection with the Subsidiary Trust's
issuance of the Capital Securities, CHL issued to the Subsidiary Trust $309
million of its 8% Junior Subordinated Deferrable Interest Debentures (the
"Subordinated Debt Securities"). The sole assets of the subsidiary trust are the
Subordinated Debt Securities and a related guarantee by the Company. CHL's and
the Company's obligations under the Subordinated Debt Securities, the related
guarantee and certain agreements, taken together, constitute a full and
unconditional guarantee by the Company of the Subsidiary Trust's obligations
under the Capital Securities.
NOTE F - INCOME TAXES
Components of the provision for income taxes were as follows.
-- ----------------------------------------- --- -------------------------------------------------- --
Year ended February 28(29),
---------------- -- ------------- -- ------------- --
(Dollar amounts in thousands) 1997 1996 1995
-- ----------------------------------------- --- ---------------- -- ------------- -- ------------- --
Federal expense - deferred $135,991 $106,789 $48,680
State expense - deferred 28,549 23,691 10,258
================ ============= =============
$164,540 $130,480 $58,938
================ ============= =============
-- ----------------------------------------- --- ---------------- -- ------------- -- ------------- --
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 28(29),
--------------- -- -------------- --- ------------ --
1997 1996 1995
-- ----------------------------------------- --- --------------- -- -------------- --- ------------ --
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income and franchise taxes, net
of federal tax effect 4.0 5.0 5.0
=============== ============== ============
Effective income tax rate 39.0% 40.0% 40.0%
=============== ============== ============
-- ----------------------------------------- --- --------------- -- -------------- --- ------------ --
The tax effects of temporary differences that gave rise to deferred income
tax assets and liabilities are presented below.
--- ------------------------------------------- -------------------------------------------------- --
Year Ended February 28(29),
--------------------------------------------------
(Dollar amounts in thousands) 1997 1996 1995
------------------------------------------------------------------------------------------------------
Deferred income tax assets:
Net operating losses $131,253 $101,303 $85,508
Alternative minimum tax credits 3,989 3,989 3,989
State income and franchise taxes 39,487 30,276 25,183
Reserves and accrued expenses 40,193 17,740 9,392
Other 720 833 224
----------------- --------------- -------------
Total deferred income tax assets 215,642 154,141 124,296
----------------- --------------- -------------
Deferred income tax liabilities:
Mortgage servicing rights 846,450 645,693 487,269
Accumulated depreciation 4,835 5,660 5,722
----------------- --------------- -------------
Total deferred income tax liabilities 851,285 651,353 492,991
----------------- --------------- -------------
Deferred income taxes $635,643 $497,212 $368,695
================= =============== =============
------------------------------------------------------------------------------------------------------
At February 28, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of $4,663,000 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, $41,004,000 expiring in 2011 and
$92,206,000 expiring in 2012.
NOTE G - FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company utilizes a variety of derivative financial instruments to manage
interest rate risk. These instruments include MBS mandatory forward delivery and
purchase commitments, options to sell or buy MBS and treasury securities,
interest rate floors, interest rate swaps, interest rate caps, Swap Caps,
Swaptions 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.
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 put or call options to sell or buy mortgage-backed and treasury
securities, interest rate floors and caps, swaps, Swap Caps, Swaptions 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 28, 1997, 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 $3 million for MBS mandatory forward delivery
commitments, approximately $25 million for interest rate swaps and approximately
$19 million for interest rate floors.
Hedge of Mortgage Loan Inventory and Committed Pipeline
As of February 28, 1997, the Company had short-term rate and point
commitments amounting to approximately $2.7 billion (including $1.9 billion
fixed-rate and $0.8 billion adjustable-rate) to fund mortgage loan applications
in process subject to approval of the loans ("Committed Pipeline") and an
additional $1.8 billion of mortgage loans subject to property identification and
borrower qualification. Substantially all of these commitments are for periods
of 60 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 H5. The Company uses the same credit policies in
the commitments as are applied to all lending activities.
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
loan commitments, 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 28, 1997, the Company
had open commitments amounting to approximately $8.0 billion to sell MBS with
varying settlement dates generally not extending beyond December 1997 and
options to sell MBS through February 1998 with a total notional amount of $4.8
billion. 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 mortgage loan
inventory net of gains or losses of associated hedge positions. The correlation
between the price performance of the inventory being hedged and the hedge
instruments is very high due to the similarity of the asset and the related
hedge instrument. The Company
NOTE G - FINANCIAL INSTRUMENTS (Continued)
is exposed to the risk that in the event of a decline or rise in rates during
the commitment period, the portion of loans from the Committed Pipeline that
actually closes at the committed price is less than or more than the amount
estimated to close. At February 28, 1997, the notional amount of forward
contracts and options to purchase MBS aggregated $3.7 billion and $3.4 billion,
respectively. The forward contracts extend through April 1997 and the options
extend through January 1998. The estimated amount of loans closing from the
Committed Pipeline is influenced by many factors, including the composition of
the Company's Committed Pipeline, the historical and expected portion of the
Committed Pipeline likely to close and the timing of such closings.
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 of MSRs resulting from increased prepayment
activity that generally occurs when interest rates decline, the Company utilizes
its Servicing Hedge, consisting of financial instruments, including derivative
contracts, that increase in aggregate value when interest rates decline. These
financial instruments include call options on interest rate futures and MBS,
interest rate floors, interest rate caps, Swap Caps, Swaptions, 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 28, 1997, the carrying value of
CMOs included in the Servicing Hedge was approximately $165 million.
The following summarizes the notional amounts of Servicing Hedge derivative
contracts.
- --------------------------------------------------------------------------------------------------------------------------
Long Call
Options on
Interest Long Call Interest Principal
Rate Options Rate Futures Swap - Only Interest
(Dollar amounts in Floors on MBS Caps Swaps Rate Caps Swaptions
millions)
- --------------------------------------------------------------------------------------------------------------------------
Balance, March 1, 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 - -
Additions 11,500 - 13,890 - - 1,000 1,750
Dispositions/Expirations 1,000 1,500 13,240 - - - -
========== =========== ============= ========= =========== ============ ============
Balance, February 28, 1997 $26,250 $ - $ 4,200 $1,000 $268 $1,000 $1,750
========== =========== ============= ========= =========== ============ ============
- --------------------------------------------------------------------------------------------------------------------------
NOTE G - FINANCIAL INSTRUMENTS (Continued)
The terms of the open Servicing Hedge derivative contracts at February 28,
1997 are presented below.
- ---------------------------------------------------------------------------------------------------------------------
Long Call
Options on
Interest Principal
Interest Rate Rate Futures Swap - Only Interest
Floors Caps Swaps Rate Caps Swaptions
- ---------------------------------------------------------------------------------------------------------------------
Index or 2-, 5- or Interest 3-Month FNMA 10-Year 3-Month
Underlying 10-Year Constant Rate Futures LIBOR capped Trust Constant LIBOR
Instrument Maturity at 7.00% P/O Maturity
Treasury Yield (floating-pay Treasury
or rate) Yield
3-Month LIBOR
Strike Price 4.50%-7.00% 104.00-124.00 5.65%-5.77% 72.74% of 8.00% 5.49%-6.00%
(fixed-receive the
rate) remaining
face value
at the end
of the
contract
Term 2-10 Years 3-4 Months 5 Years 2 Years 5 Years 3-11 Years
- ---------------------------------------------------------------------------------------------------------------------
The Servicing Hedge instruments utilized by the Company are intended to
protect the value of the investment in MSRs 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 MSRs increases while the
value of hedge instruments declines. With respect to the options, Swaptions,
floors, caps 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 28, 1997, the Company estimates that
its maximum exposure to loss over the contractual term is $26.2 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, or if gains are generated, that they will fully offset impairment of the
MSRs.
Interest Rate Swaps
As of February 28, 1997, CHL had interest rate swap agreements with certain
financial institutions having notional principal amounts totaling $2.61 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 $1.61 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 $0.88
billion). Payments are due periodically through the termination date of each
agreement. The agreements expire between March 1997 and October 2008.
NOTE G - FINANCIAL INSTRUMENTS (Continued)
The terms of the open interest rate swap agreements at February 28, 1997 are
presented below.
- --- ------------------------------------- --------- -- --------------------------------- --
Swaps related to debt
Average receive rate 6.414%
Average pay rate 5.597%
Index 3-Month LIBOR
Swaps related to escrow accounts
Average receive rate 6.783%
Average pay rate 5.541%
Index 1- thru 3-Month LIBOR
- --- ------------------------------------- --------- -- --------------------------------- --
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments as of February 28(29), 1997 and 1996 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 28, 1997 February 29, 1996
-------------------------------- --- --------------------------
Carrying Estimated Carrying Estimated
(Dollar amounts in thousands) amount fair value amount fair value
-- ------------------------------------------- ------------ -- ------------- --- ------------ -- -------------
Assets:
Mortgage loans and mortgage-backed
securities held for sale $2,579,972 $2,579,972 $4,740,087 $4,740,087
Items included in Other Assets:
Purchased principal-only securities 165,452 165,452 139,343 125,463
Mortgage-backed securities retained
in securitizations 293,030 293,030 132,378 129,828
Derivatives:
Interest rate floors 167,204 137,047 142,339 132,621
Contracts and options related to Committed
Pipeline, mortgage loans and mortgage-
backed securities held for sale 43,058 (8,879) 33,497 117,426
Options related to Servicing Hedge 6,431 1,625 14,341 6,102
Interest rate caps 12,259 11,614 - -
Swap Caps (11,609) (11,609) 5,910 5,910
Swaptions 19,701 19,482 - -
Principal-only swaps (19,446) (19,446) (6,625) (6,625)
Liabilities:
Notes payable 4,713,324 4,738,763 6,097,518 6,151,774
Derivatives gain (loss):
Interest rate swaps 5,340 (4,951) 1,739 31,602
Short-term commitments to extend credit - 40,439 - (39,716)
-- ------------------------------------------- ------------ -- ------------- --- ------------ -- -------------
NOTE G - FINANCIAL INSTRUMENTS (Continued)
The fair value estimates as of February 28(29), 1997 and 1996 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 and Mortgage-Backed Securities 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.
Purchased Principal-only Securities
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.
Mortgage-backed securities retained in securitizations
Fair value is estimated by discounting future cash flows using discount
rates that approximate current market rates, market consensus prepayment rates
and estimated foreclosure losses to the extent the Company has retained the risk
of such losses.
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 H - 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 CHL 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 the
Company's results of operations and financial position.
NOTE H - COMMITMENTS AND CONTINGENCIES (Continued)
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 or results of operations
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
noncancelable operating leases with initial or remaining terms of one year or
more are as follows.
--- ------------------------------------------ ---------------------------------
Year ending February 28(29), (Dollar amounts in thousands)
--- ------------------------------- -------------------- -------------- --------
1998 $ 17,173
1999 14,299
2000 10,580
2001 8,604
2002 7,074
Thereafter 59,563
==============
$117,293
==============
--- ------------------------------- -------------------- -------------- --------
Rent expense was $22,260,000, $20,408,000 and $22,136,000 for the years
ended February 28(29), 1997, 1996 and 1995, 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 28, 1997, the Company is required to
maintain $1.1 billion in consolidated net worth and CHL is required to maintain
$1.0 billion of net worth, as defined in the credit agreement.
5. Loan Servicing
As of February 28(29), 1997, 1996 and 1995, the Company serviced loans
totaling approximately $158.6 billion, $136.8 billion and $113.1 billion,
respectively. Included in the loans serviced at February 28(29), 1997, 1996 and
1995 were loans being serviced under subservicing agreements with total
principal balances of $3.9 billion, $1.9 billion and $0.7 billion, respectively.
NOTE H - COMMITMENTS AND CONTINGENCIES (Continued)
Conforming conventional loans serviced by the Company (57% of the servicing
portfolio at February 28, 1997) 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 (19% of the servicing portfolio at February 28, 1997) or
partially guaranteed against loss by the Veterans Administration (9% of the
servicing portfolio at February 28, 1997). In addition, jumbo mortgage loans
(15% of the servicing portfolio at February 28, 1997) 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 28,
1997, approximately 37% 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 I - 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, are exercisable beginning one year from the
date of grant and expire up to eleven years from the date of grant.
Stock options transactions under the Plans were as follows.
- ---------------------------------------------------------------------------------------------------------------
Year ended February 28(29),
-----------------------------------------------------
1997 1996 1995
- ----- ------------------------------------------------- -- -------------- -- ------------- --- ------------- --
Number of Shares:
Outstanding options at beginning of year 6,911,180 6,683,414 5,603,325
Options granted 4,516,237 1,110,205 1,948,290
Options exercised (1,001,510) (752,071) (307,847)
Options expired or canceled (184,045) (130,368) (560,354)
============== ============= =============
Outstanding options at end of year 10,241,862 6,911,180 6,683,414
============== ============= =============
Weighted Average Exercise Price:
Outstanding options at beginning of year $15.67
$14.75 $13.79
Options granted 23.14
18.56 16.35
Options exercised 14.26
11.60 4.79
Options expired or canceled 19.38
16.25 16.26
============== ============= =============
Outstanding options at end of year $19.03 $15.67
$14.75
============== ============= =============
Options exercisable at end of year 3,862,565 3,437,985 2,704,728
Options available for future grant 3,078,591 1,410,485 2,393,441
- ----- ------------------------------------------------- -- -------------- -- ------------- --- ------------- --
NOTE I - EMPLOYEE BENEFITS (Continued)
Status of the outstanding stock options under the Plans at February 28, 1997
was as follows.
- ----------------------------------------------------------------------------------------------------------------
Outstanding Options Exercisable Options
--------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Life Number Price Number Price
------------------- --------------- -------------- ------------- ------------- -------------
$2.39 - $16.19 5.3 years 2,575,213 $12.77 2,207,360 $12.31
$16.81 - $18.56 7.5 2,591,175 $17.65 1,152,459 $17.43
$19.50 - $23.06 7.8 1,401,540 $22.18 498,996 $21.35
$23.19 - $23.19 9.4 3,655,700 $23.19 3,750 $23.19
$23.75 - $29.31 9.6 18,234 $26.46 - $ -
=================== =============== ============== ============= ============= -------------
$2.39 - $29.31 7.7 years 10,241,862 $19.03 3,862,565 $15.01
=================== =============== ============== ============= ============= -------------
- ----- ------------------- - --------------- - -------------- -- ------------- -- ------------- -- -------------
Had the estimated fair value of the options granted during the period been
included in compensation expense, the Company's net earnings and earnings per
share would have been as follows.
- ------------------------------------------- -------------------------------------
(Dollar amounts in thousands, Year ended February 28(29),
-------------------------------------
except per share data) 1997 1996
- ------------------------------------------- ----------------- -- ----------------
Net Earnings
As reported $257,358 $195,720
Pro forma $241,115 $191,652
Primary Earnings Per Share
As reported $2.44 $1.95
Pro forma $2.28 $1.91
Fully Diluted Earnings Per Share
As reported $2.42 $1.95
Pro forma $2.26 $1.91
- ------------------------------------------- ----------------- -- ----------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model modified to consider cash dividends to be
paid. The following weighted-average assumptions were used for grants in fiscal
1997 and 1996, respectively: dividend yield of 1.38% and 1.72%; expected
volatility of 26% and 32%; risk-free interest rates of 6.6% and 5.9% and
expected lives of five years for options granted in both years. The average fair
value of options granted during fiscal 1997 and 1996 was $7.15 and $6.11,
respectively.
NOTE I - EMPLOYEE BENEFITS (Continued)
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.
The following table sets forth the Plan's funded status and amounts
recognized in the Company's financial statements.
--- ---------------------------------------------------------------------- ----------------------------------
Year ended February 28(29),
----------------------------------
-- ------------- --- ------------
(Dollar amounts in thousands) 1997 1996
--- ------------------------------------------------------------------- -- ------------- --- ------------ ---
Actuarial present value of benefit obligations:
Vested $8,640 $7,641
Nonvested 3,425 2,068
------------- ------------
Total accumulated benefit obligation 12,065 9,709
Additional benefits based on estimated future salary levels 6,439 5,026
------------
-------------
Projected benefit obligations for service rendered to date 18,504 14,735
Less Plan assets at fair value, primarily mortgage-backed securities (13,677) (12,515)
------------- ------------
Projected benefit obligation in excess of Plan assets 4,827 2,220
Unrecognized net (loss) gain from past experience different from that
assumed and
effects of changes in assumptions (903) 1,422
Prior service cost not yet recognized in net periodic pension cost (1,223) (1,322)
Unrecognized net asset at February 28, 1987 being recognized over 15 years 354 425
------------- ------------
Accrued pension cost $3,055 $2,745
============= ============
Net pension cost included the following components:
Service cost - benefits earned during the period $2,331 $1,832
Interest cost on projected benefit obligations 1,153 955
Actual return on Plan assets 598 (839)
Net amortization and deferral (1,614) 29
============= ============
Net periodic pension cost $2,468 $1,977
============= ============
--- ------------------------------------------------------------------- -- ------------- --- ------------ ---
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 7.5% and 4.0% for the years ended February
28(29), 1997 and 1996, respectively. The expected long-term rate of return on
assets used was 8.0% for both years ended February 28(29), 1997 and 1996.
Pension expense for the years ended February 28(29), 1997, 1996 and 1995 was
$2,468,000, $1,977,000 and $1,792,000, respectively. The Company makes
contributions to the Plan in amounts that are deductible in accordance with
federal income tax regulations.
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.
NOTE J - SHAREHOLDERS' EQUITY (Continued)
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. During the fiscal years ended February 28(29), 1997,
1996 and 1995, CAMC earned $1.6 million, $2.0 million and $0.3 million,
respectively, in base management fees from CWM and its subsidiaries. In
addition, during the fiscal years ended February 28(29), 1997, 1996 and 1995,
CAMC recorded $8.6 million, $6.6 million and $1.1 million, respectively, in
incentive compensation. The Management Agreement is renewable annually and
expires on May 15, 1997. As of February 28, 1997, the Company owned 1,120,000
shares, or approximately 2.2%, 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 28(29), 1997, 1996 and 1995, the amount of expenses incurred by
CHL which were allocated to CAMC and reimbursed by CWM totaled $29.2 million,
$17.1 million and $9.9 million, respectively.
CWM has an option to purchase conventional loans from CHL at the prevailing
market price. During the years ended February 28(29), 1997, 1996 and 1995, CWM
purchased $51.5 million, $14.3 million and $80.4 million, respectively, of
conventional nonconforming mortgage loans from CHL pursuant to this option.
NOTE K - RELATED PARTY TRANSACTIONS (Continued)
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. CHL services mortgage loans collateralizing three series
of CMOs issued by subsidiaries of CWM with outstanding balances of approximately
$77.7 million at February 28, 1997. 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 year ended February 28, 1997 were approximately $0.2 million. Approximately
$0.3 million of servicing fees were received for each of the years ended
February 29(28), 1996 and 1995.
The Company has reached a definitive agreement with CWM on restructuring the
business relationship between the two companies. In substance, CWM will acquire
the operations and employees of CAMC and will no longer pay a management fee. In
return, the Company will receive approximately 3.6 million newly issued common
shares of CWM. The proposed transaction is structured as a merger of CAMC with
and into CWM. The transaction will occur after regulatory and shareholder
approvals are obtained.
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 28, 1997 was as follows.
----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- -------------
Adjustments
Mortgage and
(Dollar amounts in thousands) Banking Other Eliminations Consolidated
----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- -------------
Unaffiliated revenue $1,006,146 $ 106,316 $ - $1,112,462
Intersegment revenue 392 - (392) -
------------ ----------- ------------ ----------
Total revenues $1,006,538 $ 106,316 $ (392) $1,112,462
============ =========== ============ =============
Earnings before income taxes $ 369,020 $ 52,878 $ - $ 421,898
============ =========== ============ =============
Identifiable assets,
February 28, 1997 $7,415,050 $ 2,559,037 ($1,884,795) $8,089,292
============ =========== ============ =============
----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- -------------
NOTE L - SEGMENT INFORMATION (Continued)
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 revenues $ 808,589 $ 53,929 ($ 1,776) $ 860,742
============ =========== ============== ==============
Earnings before income taxes $ 308,596 $ 17,604 $ - $ 326,200
============ =========== ============== ==============
Identifiable assets,
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 revenues $ 564,330 $ 39,077 ($ 744) $ 602,663
============ =========== ============= ==============
Earnings before income taxes $ 136,220 $ 11,125 $ - $ 147,345
============ =========== ============= ==============
Identifiable assets,
February 28, 1995 $5,520,283 $1,144,911 ($955,012) $ 5,710,182
============ =========== ============= ==============
----------------------------- --- ---- -- ------------ ----- ----------- -- ------------- ----- -------------
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, 1997, the Company declared a cash dividend of $0.08 per common
share payable April 30, 1997 to shareholders of record on April 14, 1997.
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 28(29)
-------------- --------------- -------------- ----------------
---------------------------------------------- -------------- --------------- -------------- ----------------
Year ended February 28, 1997
Revenues $263,282 $270,815 $281,530 $296,835
Expenses 163,898 168,361 173,440 184,865
Provision for income taxes 38,760 39,957 42,155 43,668
Net earnings 60,624 62,497 65,935 68,302
Earnings per share(1)
Primary $0.58 $0.60 $0.62 $0.63
Fully diluted $0.58 $0.60 $0.62 $0.63
Year ended February 29, 1996
Revenues $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
---------------------------------------------- -------------- --------------- -------------- ----------------
(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 28(29),
-------------- ----------- -------------- ---------
(Dollar amounts in thousands) 1997 1996
-- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
Balance Sheets:
Mortgage loans and mortgage-backed
securities held for sale $2,579,972 $4,740,087
Other assets 4,835,078 3,441,678
============== ==============
Total assets $7,415,050 $8,181,765
============== ==============
Short- and long-term debt $5,220,277 $6,335,538
Other liabilities 742,435 588,446
Equity 1,452,338 1,257,781
============== ==============
Total liabilities and equity $7,415,050 $8,181,765
============== ==============
-- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
NOTE P - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY (Continued)
--- ----------------------------------------- --- --------------------------------------------------- --------
Year ended February 28(29),
--------------- ---------- --------------- ---------
(Dollar amounts in thousands) 1997 1996
--- --------------------------------------------- ------- --------------- ---------- --------------- ---------
Statements of Earnings:
Revenues $1,006,538 $808,589
Expenses 637,518 499,993
Provision for income taxes 143,918 123,438
=============== ===============
Net earnings $ 225,102 $185,158
=============== ===============
--- --------------------------------------------- ------- --------------- ---------- --------------- ---------
NOTE Q - IMPLEMENTATION OF NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share, which supersedes APB Opinion No. 15, of the same name.
SFAS No. 128 simplifies the standards for computing earnings per share ("EPS")
and makes them comparable to international standards. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997, with
earlier application not permitted. Upon adoption, all prior EPS data will be
restated.
The following table presents basic and diluted EPS for the years ended
February 28(29), 1997, 1996 and 1995, computed under the provisions of SFAS No.
128.
- ------------------------ --------- --------- --------- -- - --------------------------- -- -- --------- -------- -----
Year ended February
28(29),
--------- --------- --------- -- - --------------------------- -- -- --------- -------- -----
1997 1996 1995
--------- --------- --------- ---------- --------- -------- --------- -------- ---------
(Dollar amounts in Per-Share Per-Share Per-Share
thousands, except per Net Amount Net Amount Net Amount
share data) Earnings Shares Earnings Shares Earnings Shares
- ------------------------ --------- --------- --------- -------- -------- ---------
========= ========== =========
Net earnings $257,358 $195,720 $88,407
========= ========== =========
Basic EPS
Net earnings available
to common shareholders $257,358 103,112 $2.50 $195,720 98,352 $1.99 $88,407 91,240 $0.97
Effect of dilutive
stock options - 2,565 - 1,918 - 847
--------- --------- ---------- --------- --------- --------
Diluted EPS
Net earnings available
to common shareholders $257,358 105,677 $2.44 $195,720 100,270 $1.95 $88,407 92,087 $0.96
========= ========= ========= ========== ========= ======== ========= ======== ---------
- ------------------------ --------- --------- --------- - ---------- --------- -------- -- --------- -------- ---------
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COUNTRYWIDE CREDIT INDUSTRIES, INC.
BALANCE SHEETS
(Dollar amounts in thousands)
February 28(29),
-------------- -- --------------
1997 1996
-------------- --------------
Assets
Cash $ - $ -
Other receivables 2,668 5,825
Intercompany receivable 120,126 33,805
Investment in subsidiaries at equity in net assets 1,560,341 1,299,088
Equipment and leasehold improvements 108 106
Other assets 34,266 22,442
-------------- --------------
Total assets $1,717,509 $1,361,266
============== ==============
Liabilities and Shareholders' Equity
Intercompany payable $ 44,023 $ 22,684
Accounts payable and accrued liabilities 16,971 11,437
Deferred income taxes 14,439 7,390
-------------- --------------
Total liabilities 75,433 41,511
Common shareholders' equity
Common stock 5,305 5,112
Additional paid-in capital 917,942 820,183
Retained earnings 718,829 494,460
-------------- --------------
Total shareholders' equity 1,642,076 1,319,755
-------------- --------------
Total liabilities and shareholders' equity $1,717,509 $1,361,266
============== ==============
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 28(29),
-------------- -- -------------- -- --------------
1997 1996 1995
-------------- -------------- --------------
Revenue
Interest earned $ 1,148 $ 31 $ 36
Interest charges - (1,952) (2,646)
-------------- -------------- --------------
Net interest income 1,148 (1,921) (2,610)
Dividend income 1,550 2,332 96
-------------- -------------- --------------
2,698 411 (2,514)
Expenses (3,398) (3,761) (3,200)
-------------- -------------- --------------
Loss before income tax benefit and equity in net
earnings of subsidiaries (700) (3,350) (5,714)
Income tax benefit 273 1,340 2,285
-------------- -------------- --------------
Loss before equity in net earnings of subsidiaries (427) (2,010) (3,429)
Equity in net earnings of subsidiaries 257,785 197,730 91,836
-------------- -------------- --------------
NET EARNINGS $257,358 $195,720 $88,407
============== ============== ==============
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 28(29),
-------------- -- -------------- -- --------------
1997 1996 1995
-------------- -------------- --------------
Cash flows from operating activities:
Net earnings $257,358 $195,720 $88,407
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Earnings of subsidiaries (257,785) (197,730) (91,836)
Depreciation and amortization 24 18 16
Increase in other receivables and other assets (1,644) (8,241) (2,925)
Increase in accounts payable and accrued liabilities 5,534 2,488 3,079
-------------- -------------- --------------
Net cash provided (used) by operating activities 3,487 (7,745) (3,259)
-------------- -------------- --------------
Cash flows from investing activities:
Net change in intercompany receivables and payables (44,901) 76,236 31,458
Investment in subsidiaries (6,832) (239,368) (63)
-------------- -------------- --------------
Net cash (used) provided by investing activities (51,733) (163,132) 31,395
-------------- -------------- --------------
Cash flows from financing activities:
Repayment of long-term debt - (10,600) (2,150)
Issuance of common stock 81,235 212,438 2,273
Cash dividends paid (32,989) (30,961) (28,259)
-------------- -------------- --------------
Net cash provided (used) by financing activities 48,246 170,877 (28,136)
-------------- -------------- --------------
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
Cash refunded from income taxes - - ($ 841)
Noncash financing activities - issuance of common stock
to acquire subsidiary $16,717 - -
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three years ended February 28(29), 1997
(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 Deductions (1) of period
- ---------------------------------- -------------- -------------- ---------------- ------------------ -------------
Year ended February 28, 1997
Allowance for losses $15,635 $21,064 $ 242 $12,192 $24,749
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
- ----------------------------------
(1) Actual losses charged against reserve, net of recoveries and reclassification.
Exhibit List
Exhibit Description Page No.
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2.1 Agreement and Plan of Merger Among CWM Mortgage Holdings, Inc.,
Countrywide Asset Management Corporation and Countrywide Credit Industries, Inc.
---
---
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).
---
---
4.1.1* Amendment No. 1 to Rights Agreement dated as of March 24, 1992
(incorporated by reference to Exhibit 1 to the Company's Form 8 filed with the
SEC on March 27, 1992).
- ---
- ---
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).
---
---
4.4* Form of Medium-Term Notes, Series A (fixed-rate) of Countrywide
Funding Corporation (now known as Countrywide Home Loans, Inc.) ("CHL")
(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).
---
---
4.5* Form of Medium-Term Notes, Series A (floating-rate) of CHL
(incorporated by reference to Exhibit 4.3 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).
---
---
4.6* Form of Medium-Term Notes, Series B (fixed-rate) of CHL (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).
---
---
4.7* Form of Medium-Term Notes, Series B (floating-rate) of CHL
(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).
---
---
4.8* Form of Medium-Term Notes, Series C (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.2 to the registration statement on Form S-3 of CHL and
the Company (File Nos. 33-50661 and 33-50661-01) filed with the SEC on October
19, 1993).
---
---
4.9* Form of Medium-Term Notes, Series C (floating-rate) of CHL
(incorporated by reference to Exhibit 4.3 to the registration statement on Form
S-3 of CHL and the Company (File Nos. 33-50661 and 33-50661-01) filed with the
SEC on October 19, 1993).
---
---
4.10* Indenture dated as of January 1, 1992 among CHL, the Company and The
Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the
registration statement on Form S-3 of CHL and the Company (File Nos. 33-50661
and 33-50661-01) filed with the SEC on October 19, 1993).
---
---
4.10.1* Form of Supplemental Indenture No. 1 dated as of June 15, 1995, to
the Indenture dated as of January 1, 1992, among CHL, 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 CHL (File
Nos. 33-59559 and 33-59559-01) filed with the SEC on June 16, 1995).
---
---
4.11* Form of Medium-Term Notes, Series D (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.10 to Amendment No. 2 to the registration statement on
Form S-3 of the Company and CHL (File Nos. 33-59559 and 33-59559-01) filed with
the SEC on June 16, 1995).
---
---
4.12* Form of Medium-Term Notes, Series D (floating-rate) of CHL
(incorporated by reference to Exhibit 4.11 to Amendment No. 2 to the
registration statement on Form S-3 of the Company and CHL (File Nos. 33-59559
and 33-59559-01) filed with the SEC on June 16, 1995).
---
---
4.13* Form of Medium-Term Notes, Series E (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 to the
registration statement on Form S-3 of the Company and CHL (File Nos. 333-3835
and 333-3835-01) filed with the SEC on August 2, 1996).
---
---
4.14* Form of Medium-Term Notes, Series E (floating rate) of CHL
(incorporated by reference to Exhibit 4.4 to Post-Effective Amendment No. 1 to
the registration statement on Form S-3 of the Company and CHL (File Nos.
333-3835 and 333-3835-01) filed with the SEC on August 2, 1996).
---
---
+ 10.1* Indemnity Agreements with Directors and Officers of Countrywide
Credit Industries, Inc. (incorporated by reference to Exhibit 10.1 to the
Company's Report on Form 8-K dated February 6, 1987).
---
---
+ 10.2* Restated Employment Agreement for David S. Loeb dated March 26,
1996 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
---
---
+ 10.3* Restated Employment Agreement for Angelo R Mozilo dated March 26,
1996 (incorporated by reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
---
---
+ 10.4* Employment Agreement for Stanford L. Kurland dated May 7, 1996
(incorporated by reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-Q dated August 31, 1996).
---
---
+ 10.5* 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).
---
---
+ 10.6* 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).
---
+ 10.7* 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).
---
---
10.8* Revolving Credit Agreement dated as of May 20, 1996 by and among CFC,
First National Bank of Chicago, Bankers Trust Company, The Bank of New York, The
Chase Manhattan Bank, N.A., Chase Securities, Inc. 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, 1996).
---
---
+ 10.9* Severance Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated May 31, 1988).
---
---
+ 10.10* 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).
---
---
+ 10.11* 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).
---
---
+ 10.12* 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).
---
---
+ 10.13* 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).
---
---
+ 10.14* 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).
---
---
+ 10.15* 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).
---
---
+ 10.16* 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).
---
---
10.17* 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).
---
---
10.18* 1987 Amended and Restated Servicing Agreement, dated as of May 15,
1987, between CWM and CHL (incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K dated February 28, 1990).
---
---
10.19* 1995 Amended and Restated Loan Purchase and Administrative Services
Agreement, dated as of May 15, 1995, between CWM and CHL (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1995).
---
---
+ 10.20* 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).
---
---
+ 10.20.1* 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).
---
---
+ 10.20.2* 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).
---
---
+ 10.20.3* 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).
---
---
+ 10.20.4* 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).
---
---
+ 10.20.5* 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).
---
---
+ 10.21* 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).
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---
+ 10.22* Amended and Restated 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1996).
---
---
+ 10.22.1* First Amendment to the Amended and Restated 1993 Stock Option
Plan (incorporated by reference to Exhibit 10.5.1 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
---
---
+ 10.23* 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).
---
---
+ 10.24* 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).
---
---
+ 10.25* 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).
---
---
+ 10.26* Annual Incentive Plan (incorporated by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q dated August 31, 1996).
---
---
+ 10.27 Change in Control Severance Plan
---
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11.1 Statement Regarding Computation of Earnings Per Share.
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---
12.1 Computation of the Ratio of Earnings to Fixed Charges.
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22.1 List of subsidiaries.
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24.1 Consent of Grant Thornton LLP.
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27 Financial Data Schedules (included only with the electronic filing with
the SEC)
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-------------------------
*Incorporated by reference.
+Constitutes a management contract or compensatory plan or arrangement.