<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended August 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 or other jurisdiction (IRS Employer
of Identification No.)
incorporation or
organization)
155 N. Lake Avenue, Pasadena,
California 91101
(Address of principal executive
offices) (Zip Code)
(818) 304-8400
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X N
o
Indicate the number of shares outstanding of each of the issuer's
classes of common
stock, as of the latest practicable date.
Class Outstanding at
September 22, 1994
Common Stock $.05 par value 91,283,829
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
August 31, February 28,
1994 1994
(Dollar amounts in thousands)
ASSETS
Cash $ 6,867 $ 4,034
Receivables for mortgage loans shipped 1,738,640 1,970,431
Mortgage loans held for sale 1,639,132 1,743,830
Other receivables 423,347 349,770
Property, equipment and leasehold
improvements, at cost - net of
accumulated depreciation 157,011 145,625
Capitalized servicing fees receivable 364,772 289,541
Purchased servicing rights 1,057,363 836,475
Other assets 251,556 245,815
Total assets $5,638,688 $5,585,521
Borrower and investor custodial accounts
(segregated in special
accounts - excluded from corporate
assets) $1,186,421 $1,366,643
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $4,094,349 $3,859,227
Drafts payable issued in connection with 174,450 449,814
mortgage loan closings
Accounts payable and accrued liabilities 106,793 87,818
Deferred income taxes 343,750 308,525
Total liabilities 4,719,342 4,705,384
Commitments and contingencies - -
Shareholders' equity
Preferred stock - authorized, 1,316,000
shares of $.05 par value;
issued and outstanding, none - -
Common stock - authorized, 240,000,000
shares of $.05 par value;
issued and outstanding, 91,260,013
shares at August 31, 1994
and 91,063,751 shares at February 28,
1994 4,563 4,553
Additional paid-in capital 606,977 606,031
Retained earnings 307,806 269,553
Total shareholders' equity 919,346 880,137
Total liabilities and shareholders'
equity $5,638,688 $5,585,521
Borrower and investor custodial accounts $1,186,421 $1,366,643
The accompanying notes are an integral part of these statements
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Six Months
Ended August 31, Ended August 31,
1994 1993 1994 1993
(Dollar amounts in thousands, except per share data)
Revenues
Loan origination fees $49,041 $96,382 $122,777 $175,622
Gain (loss) on sale of
loans, net of
commitment fees (16,503) 14,711 (4,755) 43,834
Loan production revenue 32,538 111,093 118,022 219,456
Interest earned 72,868 93,344 163,650 158,878
Interest charges (54,379) (67,434) (118,022) (119,162)
Net interest income 18,489 25,910 45,628 39,716
Loan servicing income 103,248 75,306 199,178 139,144
Less amortization of
servicing assets (25,068) (80,007) (48,068) (137,435)
Add (less) servicing hedge
benefit (expense) (19,344) 44,000 (39,260) 70,900
Less write-off of
servicing hedge (25,600) 0 (25,600) 0
Net loan administration
income 33,236 39,299 86,250 72,609
Gain on sale of servicing 56,880 0 56,880 0
Commissions, fees and
other income 9,963 11,970 21,444 23,156
Total revenues 151,106 188,272 328,224 354,937
Expenses
Salaries and related
expenses 48,990 55,583 109,122 103,150
Occupancy and other office
expenses 25,611 24,611 51,616 45,912
Guarantee fees 20,720 13,737 39,778 25,617
Marketing expenses 5,395 5,855 12,152 10,525
Branch and administrative
office
consolidation costs 8,000 0 8,000 0
Other operating expenses 10,541 11,721 19,492 20,806
Total expenses 119,257 111,507 240,160 206,010
Earnings before income
taxes 31,849 76,765 88,064 148,927
Provision for income taxes
12,739 30,706 35,225 59,571
NET EARNINGS $19,110 $46,059 $52,839 $89,356
Earnings per share
Primary $0.21 $0.51 $0.57 $1.00
Fully diluted $0.21 $0.50 $0.57 $0.97
The accompanying notes are an integral part of these statements.
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months
Ended August 31,
1994 1993
(Dollar amounts in thousands)
Cash flows from operating activities:
Net earnings $ 52,839 $ 89,356
Adjustments to reconcile net earnings
to net cash
used by operating activities:
Amortization of purchased servicing
rights 46,768 69,434
Amortization of capitalized servicing
fees receivable 1,300 68,001
Depreciation and other amortization 12,647 6,484
Deferred income taxes 35,225 59,571
Gain on bulk sale of servicing rights (56,880) -
Origination and purchase of loans held (15,588,789) (25,099,516)
for sale
Principal repayments and sale of loans
15,925,278 23,352,773
Decrease (increase) in mortgage loans
shipped and held for sale 336,489 (1,746,743)
Increase in other receivables and
other assets (45,218) (77,565)
Increase in accounts payable and
accrued liabilities 18,975 36,964
Net cash provided (used) by operating
activities 402,145 (1,494,498)
Cash flows from investing activities:
Additions to purchased servicing rights (267,656) (250,990)
Additions to capitalized servicing fees
receivable (106,596) (67,839)
Book value of excess servicing sold 30,065 -
Proceeds from bulk sale of servicing
rights 20,547 -
Purchase of property, equipment and
leasehold
improvements - net (21,800) (34,196)
Net cash used by investing activities
(345,440) (353,025)
Cash flows from financing activities:
Net (decrease) increase in warehouse
debt and other
short-term borrowings (176,029) 1,409,353
Issuance of long-term debt 201,205 500,000
Repayment of long-term debt (65,418) (50,987)
Issuance of common stock 956 2,628
Cash dividends paid (14,586) (11,786)
Net cash (used) provided by financing
activities (53,872) 1,849,208
Net increase in cash 2,833 1,685
Cash at beginning of period 4,034 12,573
Cash at end of period $ 6,867 $ 14,258
Supplemental cash flow information:
Cash used to pay interest $ 125,321 $ 115,490
Cash refunded from income taxes ($ 814) ($ 1,789)
Noncash financing activities -
conversion of preferred stock - $ 25,800
The accompanying notes are an integral part of these statements.
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for
the three- and six-month periods ended August 31, 1994 are not necessarily
indicative of the results that may be expected for the fiscal year ending
February 28, 1995. For further information, refer to the consolidated
financial statements and footnotes thereto included in the annual report on
Form 10-K for the fiscal year ended February 28, 1994 of Countrywide Credit
Industries, Inc. (the "Company").
On March 21, 1994, the Company's Board of Directors declared a 3-for-2
stock split payable May 3, 1994 to shareholders of record on April 11,
1994. All references in the accompanying consolidated financial statements
to the number of common shares and share amounts have been restated to
reflect the stock split.
NOTE B - NOTES PAYABLE
Notes payable consisted of the following.
(Dollar amounts in thousands)
August 31, February 28,
1994 1994
Commercial paper $2,100,517 $2,194,543
Medium-term notes, Series A, B and C, 1,088,550
net of discounts 1,223,050
Reverse-repurchase agreements 568,700 312,129
Pre-sale funding facilities - 63,210
Subordinated notes 200,000 200,000
Other notes payable (2.40%-2.90%) 2,082 795
$4,094,349 $3,859,227
Bank Mortgage Warehouse Credit Facility and Commercial Paper
As of August 31, 1994, Countrywide Funding Corporation ("CFC"), the
Company's mortgage banking subsidiary, had an unsecured credit arrangement
(mortgage warehouse credit facility) with forty-three commercial banks
permitting CFC to borrow an aggregate maximum amount of $2.9 billion,
including commercial paper. As of August 31, 1994, CFC had no outstanding
direct borrowings under the mortgage warehouse credit facility, and
commercial paper borrowings amounted to $2.1 billion. The maximum amount
that can be borrowed under the mortgage warehouse credit facility may be
increased to $3.0 billion in the event any lender or lenders agree with CFC
to increase such lender's maximum commitment and/or through the inclusion
as a lender of an additional financial institution or institutions. The
facility contains various financial covenants and restrictions, including
the prohibition of paying dividends, if at the date of payment or
distribution an event of default or potential default exists with respect
to the credit agreement. Interest on direct borrowings is based on the
prime rate and/or the London Interbank Offered Rates ("LIBOR") for U.S.
dollar deposits. The weighted average commercial paper rate for the six
months ended August 31, 1994, including the effect of the interest rate
swap agreements discussed below, was 4.07%. Under certain circumstances,
including the failure to maintain specified minimum credit ratings,
borrowings under the mortgage loan warehouse credit facility and commercial
paper may become secured by mortgage loans held for sale and receivables
for mortgage loans shipped. Under the provisions of the mortgage warehouse
credit facility, $977 million of the total aggregate maximum borrowing
amount expires on November 14, 1994; the remaining amount available under
the facility of $1.95 billion expires on November 15, 1995.
<PAGE>
Medium-Term Notes
As of August 31, 1994, outstanding medium-term notes issued by the
parent and CFC under various shelf registrations filed with the Securities
and Exchange Commission were as follows.
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity
Floating-
Rate Fixed-Rate Total From To From To
<S> <C> <C> <C> <C> <C> <S> <C> <S> <C>
Parent
$ - $ 12,750 $ 12,750 10.60% 10.60% Dec 1994 Aug 1995
Series A
CFC
5,000 449,800 454,800 5.78% 8.79% Sep 1994 Mar 2002
Series A
11,000 469,000 480,000 5.11% 6.98% Mar 1996 Aug 2005
Series B
150,000 125,500 275,500 5.13% 7.75% Apr 1999 Mar 2004
Series C
Subtotal $166,000 $1,044,300 $1,210,300
Total $166,000 $1,057,050 $1,223,050
</TABLE>
As of August 31, 1994, all of the outstanding fixed-rate notes of CFC had
been effectively converted by interest rate swap agreements to floating-
rate notes. The weighted average borrowing rate on CFC's medium-term note
borrowings for the six months ended August 31, 1994, including the effect
of the interest rate swap agreements, was 4.85%. In addition, as of August
31, 1994, $224.5 million was available for future issuances under the
Series C shelf registration.
Reverse-Repurchase Agreements
As of August 31, 1994, the Company had entered into short-term
financing arrangements to sell mortgage-backed securities and whole loans
under agreements to repurchase. The weighted average borrowing rate for the
six months ended August 31, 1994 was 4.09%. The reverse-repurchase
agreements were collateralized by either mortgage-backed securities or
whole loans. All mortgage-backed securities and whole loans underlying
reverse-repurchase agreements are held in safekeeping by broker-dealers,
and all agreements are to repurchase the same or substantially identical
mortgage-backed securities or whole loans.
<PAGE>
Pre-Sale Funding Facilities
As of August 31, 1994, CFC had a $1.5 billion revolving credit facility
("Early Funding Agreement") with the Federal Home Loan Mortgage Corporation
("FHLMC"). The credit facility is secured by conforming mortgage loans
which are in the process of being pooled into FHLMC participation
certificates. Interest rates under the agreement are based on the
prevailing rates for mortgage-backed securities reverse-repurchase
agreements. The weighted average borrowing rate for the six months ended
August 31, 1994 was 3.65%. Of the total credit facility, $750 million is
committed through November 18, 1994. This commitment is subject to CFC's
compliance with certain financial and operational covenants. The balance
of the credit facility is cancelable by either party upon the maturity of
all, if any, then existing obligations. As of August 31, 1994, CFC had no
outstanding borrowings under this facility.
As of August 31, 1994, CFC had a $1 billion revolving credit facility ("As
Soon as Pooled Agreement") with the Federal National Mortgage Association
("FNMA"). The credit facility is secured by conforming mortgage loans
which are in the process of being pooled into FNMA mortgage-backed
securities. Interest rates are based on LIBOR and/or federal funds. The
weighted average borrowing rate for the six months ended August 31, 1994
was 3.73%. Of the total credit facility, $500 million is committed through
July 20, 1995. This commitment is subject to CFC's compliance with certain
financial and operational covenants. The balance of the credit facility is
cancelable by either party upon the maturity of all, if any, then existing
obligations. As of August 31, 1994, the Company had no outstanding
borrowings under this facility.
Subordinated Notes
In October 1992, CFC issued $200 million of 8.25% subordinated notes (the
"Subordinated Notes") due July 15, 2002 under a registration statement
filed in September 1992. Interest on the Subordinated Notes is payable
semi-annually on each January 15 and July 15, beginning January 15, 1993.
The Subordinated Notes are not redeemable prior to maturity and are not
subject to any sinking fund.
Other
As of August 31, 1994, CFC had interest rate swap agreements with certain
financial institutions having notional principal amounts totaling $2.82
billion. The effect of these agreements is to enable CFC to convert a
portion of its fixed-rate cost borrowings to LIBOR-based floating-rate cost
borrowings (notional amount $1.04 billion), to convert a portion of its
commercial paper and medium-term note borrowings from one floating-rate
index to another (notional amount $.53 billion) and to further manage the
Company's exposure to interest rate risk (notional amount $1.25 billion).
Payments are due periodically through the termination date of each
agreement. The agreements expire between September 1994 and August 2005.
NOTE C - SUBSEQUENT EVENTS
On September 21, 1994, the Company declared a cash dividend of $0.08 per
common share payable October 18, 1994 to shareholders of record on
October 3, 1994.
On September 23, 1994, CFC entered into a new three-year revolving credit
agreement with a group of forty commercial banks, replacing the mortgage
warehouse credit facility described in Note B. The revolving credit
agreement permits CFC to borrow an aggregate maximum amount of $2.5
billion, including commercial paper. The revolving credit agreement
expires on September 19, 1997.
<PAGE>
NOTE D - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
The following tables present summarized financial information for
Countrywide Funding Corporation.
(Dollar amounts in thousands)
August 31, February 28,
1994 1994
Balance Sheets:
Mortgage loans shipped and held for sale $3,377,772 $3,714,261
Other assets 2,203,511 1,809,403
Total assets $5,581,283 $5,523,664
Short- and long-term debt $4,262,048 $4,296,291
Other liabilities 416,545 374,559
Equity 902,690 852,814
Total liabilities and equity $5,581,283 $5,523,664
(Dollar amounts in thousands) Six Months Ended August 31,
1994 1993
Statements of Earnings:
Revenues $310,146 $332,698
Expenses 227,020 193,619
Provision for income taxes 33,251 55,632
Net earnings $ 49,875 $ 83,447
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter Ended August 31, 1994 Compared to Quarter Ended August 31, 1993
Revenues for the quarter ended August 31, 1994 decreased 20% to $151.1
million from $188.3 million for the quarter ended August 31, 1993. Net
earnings decreased 59% to $19.1 million for the quarter ended August 31,
1994 from $46.1 million for the quarter ended August 31, 1993. The
decrease in revenues for the quarter ended August 31, 1994 was due to
decreased loan production (resulting primarily from increased mortgage
interest rates) and the write-off of the remaining unamortized costs of the
Company's prior servicing hedge. These negative effects were somewhat
offset by the favorable impact of a larger and more slowly prepaying loan
servicing portfolio and of a gain recognized on the sale of servicing. The
decrease in net earnings was primarily the result of the decrease in
revenues, higher guarantee fees caused by the larger servicing portfolio
and a nonrecurring charge due to the Company's downsizing and office
consolidation process.
The total volume of loans produced decreased 54% to $6.2 billion for
the quarter ended August 31, 1994 from $13.6 billion for the quarter ended
August 31, 1993. Refinancings totaled $1.2 billion, or 20% of total
fundings for the quarter ended August 31, 1994, as compared to $10.0
billion or 73% of total fundings for the quarter ended August 31, 1993.
Adjustable-rate mortgage loan production totaled $2.2 billion, or 34% of
total fundings for the quarter ended August 31, 1994, as compared to $2.6
billion or 19% of total fundings for the quarter ended August 31, 1993.
During the quarter ended August 31, 1994, the operations of the Company's
Retail and Consumer Divisions were combined into the Consumer Markets
Division. Production in the Company's Consumer Markets Division amounted
to $1.8 billion for the quarter ended August 31, 1994 compared to $2.6
billion combined production for the Retail and Consumer Divisions for the
quarter ended August 31, 1993. Production in the Company's Wholesale
Division decreased to $2.0 billion (which included approximately $0.4
billion of originated loans and $1.6 billion of purchased loans) for the
quarter ended August 31, 1994 compared to $5.9 billion (which included
approximately $3.7 billion of originated loans and $2.2 billion of
purchased loans) for the quarter ended August 31, 1993. The Company's
Correspondent Division purchased $2.4 billion in mortgage loans for the
quarter ended August 31, 1994 compared to $5.1 billion for the quarter
ended August 31, 1993. The factors which affect the relative volume of
production among the Company's three divisions include loan pricing
decisions and the relative competitiveness of such pricing, the level of
real estate and mortgage lending activity in each Division's markets, and
the success of each Division's sales and marketing efforts.
At August 31, 1994 and 1993, the Company's pipeline of loans in
process was $3.7 billion and $9.0 billion, respectively. Historically,
approximately 41% to 75% of the pipeline of loans in process has funded.
In addition, at August 31, 1994 and 1993, the Company had committed to make
loans in the amount of $3.2 billion and $0.9 billion, respectively, subject
to property identification and borrower qualification ("Lock n' Shop
Pipeline"). For the quarters ended August 31, 1994 and 1993, the Company
received 69,896 and 135,532 new loan applications, respectively, at an
average daily rate of $121 million and $299 million, respectively. The
following actions were taken during the quarter ended August 31, 1994 on
the total applications received during that quarter: 36,648 loans (52% of
total applications received) were funded and 7,939 applications (11% of
total applications received) were either rejected by the Company or
withdrawn by the applicant. The following actions were taken during the
quarter ended August 31, 1993 on the total applications received during
that quarter: 59,715 loans (44% of total applications received) were
funded and 18,028 applications (13% of total applications received) were
either rejected by the Company or withdrawn by the applicant. The factors
that affect the percentage of applications received and funded during a
given time period include changes in interest rates, the purpose of the
loan, the average length of loan commitments issued, the creditworthiness
of applicants, the production divisions' loan processing efficiency and
loan pricing decisions.
<PAGE>
Loan origination fees and gain (loss) on sale of loans decreased due
to lower loan production that resulted primarily from an increase in the
level of mortgage interest rates. Gain (loss) on sale of loans also
decreased as a result of reduced margins due to increased competition
caused by lower demand for mortgage loans in the quarter ended August 31,
1994 than in the quarter ended August 31, 1993. In general, loan
origination fees and gain (loss) on sale of loans are affected by numerous
factors including loan pricing decisions, the volume of loans produced and
the volatility and general direction of interest rates.
Net interest income (interest earned net of interest charges)
decreased to $18.5 million for the quarter ended August 31, 1994 from $25.9
million for the quarter ended August 31, 1993. Consolidated net interest
income is principally a function of: (i) net interest income earned from
the Company's mortgage loan warehouse ($7.8 million and $29.3 million for
the quarters ended August 31, 1994 and 1993, respectively); (ii) interest
expense related to the Company's investment in servicing rights ($2.4
million and $16.0 million for the quarters ended August 31, 1994 and 1993,
respectively); and (iii) interest income earned from the escrow balances
associated with the Company's servicing portfolio ($13.1 million and $12.6
million for the quarters ended August 31, 1994 and 1993, 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 attributable to a decrease in
the average mortgage loan warehouse due to the decline in production and to
a decrease in the net earnings rate. The decrease in interest expense
related to the investment in servicing rights resulted primarily from 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"). Such decrease was caused by a
decline in prepayments caused by increased interest rates. The increase in
net interest income earned from the escrow balances was related to an
increase in the earnings rate, partially offset by a decline in the escrow
balances caused by a decline in the prepayment rate, from the quarter ended
August 31, 1993 to the quarter ended August 31, 1994.
During the quarter ended August 31, 1994, loan administration income
was positively affected by the continued growth and decreased prepayment
rate of the loan servicing portfolio. At August 31, 1994, the Company
serviced $96.8 billion of loans (including $1.1 billion of loans
subserviced for others) compared to $72.2 billion (including $0.4 billion
of loans subserviced for others) at August 31, 1993, a 34% increase. The
growth in the Company's servicing portfolio during the quarter ended August
31, 1994 was primarily the result of loan production volume and the
acquisition of bulk servicing rights, partially offset by prepayments and a
sale of servicing rights for loans with principal balances of $5.9 billion.
The weighted average interest rate of the mortgage loans in the Company's
servicing portfolio at August 31, 1994 was 7.3% compared to 7.5% at August
31, 1993. 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 origination income. In periods of rising interest rates (as
occurred in the quarter ended August 31, 1994), prepayments tend to decline
and income from the servicing portfolio generally rises.
During the quarter ended August 31, 1994, the annualized prepayment
rate of the Company's servicing portfolio was 8%, as compared to 34% for
the quarter ended August 31, 1993. In general, the prepayment rate is
affected by the relative level of mortgage interest rates, activity in the
home purchase market and the relative level of home prices in a particular
market. The decrease in the prepayment rate was primarily attributable to
decreased refinance activity caused by increased mortgage interest rates in
the quarter ended August 31, 1994 from the quarter ended August 31, 1993.
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 (which is deducted from loan
servicing income) resulting from increased prepayment activity, the Company
purchases call options and other financial instruments that increase in
value when interest rates decline (the "Servicing Hedge").
<PAGE>
For the quarter ended August 31, 1994, total amortization amounted to
$25.1 million, representing an annualized rate of 8% of average capitalized
servicing fees receivable and purchased servicing rights ("Servicing
Assets"). During the quarter ended August 31, 1994, the Company did not
realize any Servicing Hedge gains; in addition, amortization of option
premiums related to the Servicing Hedge amounted to $19.3 million. Also
during that quarter, the Company decided to replace its prior Servicing
Hedge with a new hedge resulting in a write-down of the remaining
unamortized costs of the prior hedge of $25.6 million. For the quarter
ended August 31, 1993, total amortization was $80.0 million, representing
an annualized rate of 39% of the average Servicing Assets. During the
quarter ended August 31, 1993, the Company realized $44.0 million in net
Servicing Hedge gains. The factors affecting the rate of amortization
recorded in an accounting period include the level of prepayments during
the period, the change in prepayment expectations and the amount of
Servicing Hedge gains or losses. The decline in the rate of amortization
from the quarter ended August 31, 1993 to the quarter ended August 31, 1994
resulted primarily from a decline in the current and projected future
prepayment rates caused by an increase in mortgage interest rates.
The following summarizes the notional amounts of servicing hedge
transactions.
Long Long Call
Options
Call Options on U.S. Treasury
(Dollar amounts in millions) on MBS Futures
Balance, May 31, 1994 $ 500 $ 3,070
Deletions (500) (3,070)
Balance, August 31, 1994 $ 0 $ 0
During the quarter ended August 31, 1994, the Company decided to
replace its prior servicing hedge strategy with a new hedge, which the
Company believes will be more cost effective in the higher interest rate
environment being experienced. As a result, the Company recorded an
additional write-down of $25.6 million during the quarter ended August 31,
1994, representing the unamortized costs of the prior hedge. The new hedge
strategy, which was implemented in September 1994, consists of interest
rate floors with terms ranging from 3 to 5 years under which the Company
receives a cash payment when interest rates fall below a certain level and
call options that increase in value when interest rates decline. Neither
the interest rate floors nor the call options expose the Company to loss
beyond its initial outlay to acquire them.
During the quarter ended August 31, 1994, the Company acquired bulk
servicing rights for loans with principal balances aggregating $5.1 billion
at a price of $68.9 million or 1.34% of the aggregate outstanding principal
balances of the servicing portfolios acquired. During the quarter ended
August 31, 1993, the Company acquired bulk servicing rights for loans with
principal balances aggregating $0.4 billion at a price of $1.2 million or
1.02% of the aggregate outstanding principal balances of the servicing
portfolios acquired.
<PAGE>
During the quarter ended August 31, 1994, 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 the quarter
ended August 31, 1993.
Salaries and related expenses are summarized below for the quarters
ended August 31, 1994 and 1993.
<TABLE>
<CAPTION>
(Dollar amounts in thousands) Quarter Ended August 31, 1994
Production Loan Other
Activities Administration Activities Total
<S> <C> <C> <C> <C>
Base Salaries $26,602 $ 5,926 $ 1,205 $33,733
Incentive Bonus 7,934 98 2,085 10,117
Payroll Taxes and Benefits 4,047 956 137 5,140
Total Salaries and Related Expenses $38,583 $ 6,980 $ 3,427 $48,990
Average Number of Employees 2,430 835 235 3,500
</TABLE>
<TABLE>
<CAPTION>
(Dollar amounts in thousands) Quarter Ended August 31, 1993
Production Loan Other
Activities Administration Activities Total
<S> <C> <C> <C> <C>
Base Salaries $29,041 $ 4,541 $ 1,211 $34,793
Incentive Bonus 14,205 79 616 14,900
Payroll Taxes and Benefits 4,961 781 148 5,890
Total Salaries and Related Expenses $48,207 $ 5,401 $ 1,975 $55,583
Average Number of Employees 3,148 648 136 3,932
</TABLE>
Salaries expense decreased during the quarter ended August 31, 1994
primarily due to the decreased number of employees resulting from decreased
loan production. Incentive bonuses earned during the quarter ended August
31, 1994 decreased primarily due to decreased loan production.
<PAGE>
Occupancy and other office expenses for the quarter ended August 31,
1994 increased 4% to $25.6 million from $24.6 million for the quarter ended
August 31, 1993. This increase was attributable to the expansion of the
Consumer Markets Division branch network. As of August 31, 1994, there
were 272 Consumer Markets Division branch offices (including 47 satellite
offices). As of August 31, 1993, there were 259 Consumer Markets branch
offices (including 105 satellite offices and 13 regional service centers).
In addition, the increase in the Company's loan production that occurred
subsequent to August 31, 1993 and the larger servicing portfolio resulted
in an increase in occupancy and other office expenses related to the
Company's central office. The increases in occupancy and other office
expenses were partially offset by a decline in the number of Wholesale
Division branch offices from 69 (including 11 regional support centers) at
August 31, 1993 to 62 (including six regional support centers) at August
31, 1994.
Guarantee fees (fees paid to guarantee timely and full payment of
principal and interest on mortgage-backed securities and whole loans sold
to permanent investors and to transfer the recourse provisions of the loans
in the servicing portfolio) for the quarter ended August 31, 1994 increased
51% to $20.7 million from $13.7 million for the quarter ended August 31,
1993. This increase resulted primarily from an increase in the servicing
portfolio.
Marketing expenses for the quarter ended August 31, 1994 decreased 8%
to $5.4 million from $5.9 million for the quarter ended August 31, 1993.
The decrease in marketing expenses reflects an effort to reduce expenses as
a result of decreased production caused by higher mortgage interest rates.
The Company incurred an $8.0 million nonrecurring charge for the
quarter ended August 31, 1994. This expense relates to the consolidation
and relocation of branch and administrative offices that occurred as a
result of the reduction in staff caused by declining production.
Other operating expenses for the quarter ended August 31, 1994
decreased from the quarter ended August 31, 1993 by $1.2 million, or 10%.
This decrease was due primarily to decreased loan production.
Profitability of Loan Production and Servicing Activities
During the quarter ended August 31, 1994, the Company's pre-tax loss
from its loan production activities (which include loan originations and
purchases, warehousing and sales) was $38.3 million. For the quarter ended
August 31, 1993, the Company's comparable pre-tax income was $60.0 million.
The decrease of $98.3 million is primarily attributable to lower loan
production and increased competition caused by lower demand for mortgage
loans. During the quarter ended August 31, 1994, 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
and acting as tax payment agent) was $68.1 million as compared to $16.6
million during the quarter ended August 31, 1993. The increase is
primarily due to an increase in the servicing portfolio and a sale of
servicing during the quarter ended August 31, 1994 which resulted in a gain
of $56.9 million. A write-off of the remaining cost of the Servicing Hedge
in the amount of $25.6 million partially offset the increase in pre-tax
income.
<PAGE>
RESULTS OF OPERATIONS
Six Months Ended August 31, 1994 Compared to Six Months Ended August 31,
1993
Revenues for the six months ended August 31, 1994 decreased 8% to
$328.2 million from $354.9 million for the six months ended August 31,
1993. Net earnings decreased 41% to $52.8 million for the six months ended
August 31, 1994 from $89.4 million for the six months ended August 31,
1993. The decrease in revenues for the six months ended August 31, 1994
was due to decreased loan production (resulting primarily from increased
mortgage interest rates) and the write-off of the remaining unamortized
costs of the Company's prior servicing hedge. These negative effects were
somewhat offset by the favorable impact of a larger and more slowly
prepaying loan servicing portfolio and of a gain recognized on the sale of
servicing. The decrease in net earnings was primarily the result of the
decrease in revenues, higher guarantee fees caused by the larger servicing
portfolio and a nonrecurring charge due to the Company's downsizing and
office consolidation process.
The total volume of loans produced decreased 38% to $15.6 billion for
the six months ended August 31, 1994 from $25.1 billion for the six months
ended August 31, 1993. Refinancings totaled $6.1 billion, or 39% of total
fundings for the six months ended August 31, 1994, as compared to $18.7
billion or 74% of total fundings for the six months ended August 31, 1993.
Adjustable-rate mortgage loan production totaled $4.1 billion, or 27% of
total fundings for the six months ended August 31, 1994, as compared to
$5.6 billion or 22% of total fundings for the six months ended August 31,
1993. Production in the Company's Consumer Markets Division was $4.7
billion for each of the six months ended August 31, 1994 and August 31,
1993. Production in the Company's Wholesale Division decreased to $5.0
billion (which included approximately $2.2 billion of originated loans and
$2.8 billion of purchased loans) for the six months ended August 31, 1994
compared to $11.0 billion (which included approximately $7.0 billion of
originated loans and $4.0 billion of purchased loans) for the six months
ended August 31, 1993. The Company's Correspondent Division purchased $5.9
billion in mortgage loans for the six months ended August 31, 1994 compared
to $9.4 billion for the six months ended August 31, 1993.
For the six months ended August 31, 1994 and 1993, the Company
received 160,796 and 258,938 new loan applications, respectively, at an
average daily rate of $143 million and $285 million, respectively. The
following actions were taken during the six months ended August 31, 1994 on
the total applications received during that six months: 100,670 loans (63%
of total applications received) were funded and 30,743 applications (19% of
total applications received) were either rejected by the Company or
withdrawn by the applicant. The following actions were taken during the
six months ended August 31, 1993 on the total applications received during
that six months: 150,945 loans (58% of total applications received) were
funded and 43,592 applications (17% of total applications received) were
either rejected by the Company or withdrawn by the applicant.
Loan origination fees and gain (loss) on sale of loans decreased due
to lower loan production that resulted from an increase in the level of
mortgage interest rates. Gain (loss) on sale of loans also decreased as a
result of reduced margins due to increased competition caused by lower
demand for mortgage loans in the six months ended August 31, 1994 than in
the six months ended August 31, 1993.
<PAGE>
Net interest income increased to $45.6 million for the six months
ended August 31, 1994 from $39.7 million for the six months ended August
31, 1993. Net interest income is principally a function of: (i) net
interest income earned from the Company's mortgage loan warehouse ($27.2
million and $47.2 million for the six months ended August 31, 1994 and
1993, respectively); (ii) interest expense related to the Company's
investment in servicing rights ($8.8 million and $29.2 million for the six
months ended August 31, 1994 and 1993, respectively); and (iii) interest
income earned from the escrow balances associated with the Company's
servicing portfolio ($27.2 million and $21.9 million for the six months
ended August 31, 1994 and 1993, respectively). The decrease in net
interest income from the mortgage loan warehouse was attributable to a
decrease from the six months ended August 31, 1993 to the six months ended
August 31, 1994 in the average mortgage loan warehouse due to the decline
in production and to a decrease in the net earnings rate. The decrease in
interest expense related to the investment in servicing rights resulted
primarily from decreased Interest Costs Incurred on Payoffs. The increase
in net interest income earned from the escrow balances was related to an
increase in the earnings rate from the six months ended August 31, 1993 to
the six months ended August 31, 1994.
Loan administration income was positively affected by the continued
growth of the loan servicing portfolio. The growth in the Company's
servicing portfolio during the six months ended August 31, 1994 was the
result of loan production volume and the acquisition of bulk servicing
rights, partially offset by prepayments and a sale of servicing rights for
loans with principal balances of $5.9 billion.
During the six months ended August 31, 1994, the annualized prepayment
rate of the Company's servicing portfolio was 13%, as compared to 32% for
the six months ended August 31, 1993. The decrease in the prepayment rate
was primarily attributable to decreased refinance activity caused by
increased mortgage interest rates in the six months ended August 31, 1994
from the six months ended August 31, 1993.
For the six months ended August 31, 1994, total amortization amounted
to $48.1 million, representing an annualized rate of 8% of average
Servicing Assets. During the six months ended August 31, 1994, the Company
did not realize any Servicing Hedge gains; in addition, amortization of
option premiums related to the Servicing Hedge amounted to $39.3 million.
Also during that six months, the Company decided to replace its prior
Servicing Hedge with a new hedge resulting in a write-down of the remaining
unamortized costs of the prior hedge of $25.6 million For the six months
ended August 31, 1993, total amortization was $137.4 million, representing
an annualized rate of 36% of the average Servicing Assets. During the six
months ended August 31, 1993, the Company realized $70.9 million in net
Servicing Hedge gains. The decline in the rate of amortization from the six
months ended August 31, 1993 to the six months ended August 31, 1994
resulted primarily from a decline in the current and projected future
prepayment rates caused by an increase in mortgage interest rates.
During the six months ended August 31, 1994, the Company acquired bulk
servicing rights for loans with principal balances aggregating $8.6 billion
at a price of $119.8 million or 1.30% of the aggregate outstanding
principal balances of the servicing portfolios acquired. During the six
months ended August 31, 1993, the Company acquired bulk servicing rights
for loans with principal balances aggregating $3.3 billion at a price of
$44.6 million or 1.35% of the aggregate outstanding principal balances of
the servicing portfolios acquired.
During the six months ended August 31, 1994, 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
the six months ended August 31, 1993.
<PAGE>
Salaries and related expenses are summarized below for the six months
ended August 31, 1994 and 1993.
<TABLE>
<CAPTION>
(Dollar amounts in thousands) Six Months Ended August 31, 1994
Production Loan Other
Activities Administration Activities Total
<S> <C> <C> <C> <C>
Base Salaries $60,258 $11,419 $2,921 $ 74,598
Incentive Bonus 18,628 208 2,767 21,603
Payroll Taxes and Benefits 10,587 1,914 420 12,921
Total Salaries and Related Expenses $89,473 $13,541 $6,108 $109,122
Average Number of Employees 2,910 819 220 3,949
</TABLE>
<TABLE>
<CAPTION>
(Dollar amounts in thousands) Six Months Ended August 31, 1993
Production Loan Other
Activities Administration Activities Total
<S> <C> <C> <C> <C>
Base Salaries $53,390 $ 8,750 $2,470 $ 64,610
Incentive Bonus 26,183 141 1,349 27,673
Payroll Taxes and Benefits 8,951 1,576 340 10,867
Total Salaries and Related Expenses $88,524 $10,467 $4,159 $ 103,150
Average Number of Employees 2,926 627 128 3,681
</TABLE>
The amount of expense attributable to salaries increased during the
six months ended August 31, 1994 primarily due to the increased number of
employees (resulting from hirings that occurred subsequent to August 31,
1993 during periods of increased loan production), a larger servicing
portfolio and the Company's strategy to expand its market share,
particularly in the home purchase lending market. Incentive bonuses earned
during the six months ended August 31, 1994 decreased primarily due to
decreased loan production.
Occupancy and other office expenses for the six months ended August
31, 1994 increased 12% to $51.6 million from $45.9 million for the six
months ended August 31, 1993. This increase was attributable primarily to
the expansion of the Consumer Markets Division branch network but was
partially offset by a decline in the number of Wholesale Division branch
offices. In addition, the increase in the Company's loan production that
occurred subsequent to August 31, 1993 and a larger servicing portfolio
resulted in an increase in occupancy and other office expenses related to
the Company's central office.
<PAGE>
Guarantee fees for the six months ended August 31, 1994 increased 55%
to $39.8 million from $25.6 million for the six months ended August 31,
1993. This increase resulted primarily from an increase in the servicing
portfolio.
Marketing expenses for the six months ended August 31, 1994 increased
15% to $12.2 million from $10.5 million for the six months ended August 31,
1993. The increase in marketing expenses reflects the Company's strategy
to penetrate the home purchase lending market.
Other operating expenses for the six months ended August 31, 1994
decreased over expenses for the six months ended August 31, 1993 by $1.3
million, or 6%. This decrease was due primarily to decreased loan
production and related expenses.
Profitability of Loan Production and Servicing Activities
During the six months ended August 31, 1994, the Company's pre-tax
loss from its loan production activities was $17.4 million. For the six
months ended August 31, 1993, the Company's comparable pre-tax income was
$119.2 million. The decrease of $136.6 million is primarily attributable
to lower loan production and increased competition caused by lower demand
for mortgage loans. During the six months ended August 31, 1994, the
Company's pre-tax income from its loan servicing activities was $100.1
million as compared to $28.9 million during the six months ended August 31,
1993. The increase is primarily due to an increase in the servicing
portfolio and a sale of servicing during the six months ended August 31,
1994 which resulted in a gain of $56.9 million, partially offset by a write-
off of the remaining costs of the Servicing Hedge in the amount of $25.6
million.
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 decline, loan production, particularly from loan
refinancings, increases. However, during such periods, prepayment rates
tend to accelerate (principally on the portion of the servicing 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 of the Servicing Assets, a decreased rate of
interest earned from the escrow balances, and increased Interest Costs
Incurred on Payoffs. Conversely, 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 a more vibrant economy or anticipation of
increasing real estate values. 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 Interest Costs Incurred on Payoffs, and because the
rate of interest earned from the escrow balances tends to increase. This
is particularly noteworthy as the Company's servicing portfolio grows.
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.
<PAGE>
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 relies on commercial paper supported by the
revolving credit facility, medium-term notes, mortgage-backed securities
and whole loan reverse-repurchase agreements, subordinated notes and cash
flow from operations. In addition, in the past the Company has relied on
bank borrowings collateralized by mortgage loans held for sale, servicing-
secured bank facilities, pre-sale funding facilities, privately-placed
financings and public offerings of preferred and common stock.
Certain of the Company's and CFC's debt obligations contain various
provisions that may affect the ability of the Company and CFC to pay
dividends and remain in compliance with such obligations. These provisions
include requirements concerning current ratio, net worth 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 CFC to pay
dividends.
On September 23, 1994, CFC entered into a new three-year revolving
credit agreement with a group of forty commercial banks, replacing the
existing mortgage warehouse credit facility. The revolving credit
agreement permits CFC to borrow an aggregate maximum amount of $2.5
billion, including commercial paper. The revolving credit agreement
expires on September 19, 1997.
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.
At times, the Company must meet margin requirements to cover changes
in the market value of its commitments to sell mortgage-backed securities.
To the extent that aggregate commitment prices are less than the current
market prices, the Company must deposit cash or certain government
securities or obtain letters of credit. The Company's credit facility
provides a means of obtaining such letters of credit to meet these margin
requirements.
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.
Cash Flows
Operating Activities During the six months ended August 31, 1994, the
decrease of the Company's warehouse of mortgage loans provided cash of
approximately $0.3 billion. The Company's operating activities used cash to
fund other asset and working capital increases of $26 million and provided
cash of $92 million, which was principally allocated to the long-term
investment in servicing as discussed below under Investing Activities.
Investing Activities Net cash used by investing activities decreased
to $345 million for the six months ended August 31, 1994 from $353 million
for the six months ended August 31, 1993. The Company's sale of servicing
rights generated cash of $21 million during the quarter ended August 31,
1994. The Company's primary investing activities are the long-term
investment in purchased servicing rights and capitalized servicing fees
receivable.
<PAGE>
Financing Activities Net cash used by financing activities was $54
million for the six months ended August 31, 1994. In the six months ended
August 31, 1993, net cash was provided by financing activities in the
amount of $1.8 billion. This change was primarily the result of
significant short-term borrowings by the Company during the six months
ended August 31, 1993 and a net repayment of such borrowings in the six
months ended August 31, 1994.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
During the quarter ended August 31, 1994, the Company received new
loan applications at an average daily rate of $121 million, and at August
31, 1994, the Company's pipeline of loans in process was $3.7 billion.
This compares to a daily application rate during the quarter ended August
31, 1993 of $299 million and a pipeline of loans in process at August 31,
1993 of $9.0 billion. The decline in the pipeline of loans in process from
August 31, 1993 to August 31, 1994 was primarily due to an increase in
mortgage interest rates. The size of the pipeline is generally an
indication of the level of future fundings, as historically 41% to 75% of
the pipeline of loans in process has funded. In addition, the Company's
Lock n' Shop Pipeline at August 31, 1994 was $3.2 billion and at August 31,
1993 was $0.9 billion. Future application levels and loan fundings are
dependent on numerous factors, including the level of competition, the
direction of interest rates, seasonal factors and general economic
conditions. For the month ended September 30, 1994, the average daily
amount of applications received was $142 million, and at September 30,
1994, the pipeline of loans in process was $3.9 billion and the Lock n'
Shop Pipeline was $2.5 billion.
Market Factors
Since late 1993, mortgage interest rates have increased. An
environment of rising interest rates has resulted in lower production
(particularly from refinancings) and greater price competition, which has
adversely impacted earnings from loan origination activities and may do so
in the future. The Company has taken steps to maintain its productivity
and efficiency, particularly in the loan production area, by reducing staff
and embarking on a program to reduce production-related and overhead costs.
However, there has been a time lag between the reduction in income caused
by declining production and the reduction in expenses. The Company's
production staff declined 41% from approximately 2,700 at February 28, 1994
to approximately 1,600 at August 31, 1994. The Company has reduced its
total staffing levels from approximately 4,800 at February 28, 1994 to
approximately 3,300 at August 31, 1994. However, with rising interest
rates, earnings from the Company's loan servicing portfolio should increase
over time as amortization of the Servicing Assets and Interest Costs
Incurred on Payoffs decrease and the rate of interest earned from the
escrow balances associated with the Company's servicing portfolio
increases. The Company has further increased the size of its servicing
portfolio, thereby increasing its servicing revenue base, by acquiring
servicing contracts through bulk purchases. During the six months ended
August 31, 1994, the Company purchased servicing contracts for loans with
principal balances of approximately $8.6 billion.
The Company's primary competitors are commercial banks and savings and
loans and mortgage banking subsidiaries of diversified companies, as well
as other mortgage bankers. Particularly in California, savings and loans
are competing with the Company by offering aggressively priced adjustable-
rate mortgage products since interest rates have increased. Generally, the
Company has noted significant price competition among mortgage lenders,
which has resulted in downward pressure on gain (loss) on sale of loans.
<PAGE>
Some regions in which the Company operates have been experiencing
slower economic growth, and real estate financing activity in these regions
has been negatively impacted. As a result, home lending activity for
single- (one-to-four) family residences in these regions may also have
experienced slower growth. There can be no assurance that the Company's
operations and results will not be negatively impacted by adverse economic
conditions such as those discussed above. The Company's California
mortgage loan production (measured by principal balance) constituted 28% of
its total production during the quarter ended August 31, 1994, down from
48% for the quarter ended August 31, 1993. The decline in the percentage
of California production was due to the Company's continued effort to
expand its production capacity outside of California. Since California's
mortgage loan production constitutes a significant portion of the Company's
production during the quarter, there can be no assurance that the Company's
operations will not be adversely affected to the extent California
experiences a period of slower or negative economic growth resulting in
decreased residential real estate lending activity.
As of August 31, 1994, approximately 47% of the principal balance of
mortgage loans in the Company's servicing portfolio were secured by
properties located in California. 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 (19% of the Company's servicing portfolio at August
31, 1994) are insured or partially guaranteed against loss by the Federal
Housing Administration or the Veterans Administration. As such, the
limited unreimbursed costs 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 realized no gains and recorded
amortization of Servicing Hedge option premiums amounting to $19.3 million
during the quarter ended August 31, 1994. In addition, the Company decided
to replace its prior servicing hedge strategy with a new hedge, which the
Company believes will be more cost effective in the higher interest rate
environment being experienced. As a result, the Company recorded an
additional write-down of $25.6 million during the quarter ended August 31,
1994, representing the unamortized costs of the prior hedge. The new hedge
strategy will be implemented in the quarter ending November 30, 1994.
Implementation of New Accounting Standards
Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan, was issued in May 1993. Implementation
of this standard, which is required for the Company's fiscal year beginning
March 1, 1995, is not expected to have a material effect on the Company's
financial statements.
In June 1994, the Financial Accounting Standards Board ("FASB")
issued a Proposed Statement of Financial Accounting Standards, Accounting
for Mortgage Servicing Rights and Excess Servicing Receivables and for
Securitization of Mortgage Loans. This proposed statement would, among
other provisions, require the recognition of originated mortgage servicing
rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"),
as assets. Presently, the cost of OMSRs is included with the cost of the
related loans and written off against income when the loans are sold, but
the cost of PMSRs is recorded as an asset. Under the proposed statement,
all capitalized mortgage servicing rights would be evaluated for impairment
on a discounted, disaggregated basis. Under current accounting
requirements, the impairment evaluation may be made on either a discounted
or an undiscounted basis. The Company uses a disaggregated, undiscounted
method. A final statement is expected in the first quarter of calendar
year 1995. The effect on the Company's financial position and results of
operations will be evaluated when the FASB finalizes its decisions.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders was held on July 13,
1994.
(c) At the Annual Meeting, the shareholders voted on the following
matters:
(1) Election of Directors
Votes For Votes
Withheld
Ben M. 82,277,464 313,650
Enis
Edwin 82,120,020 471,094
Heller
(2) Approval of selection of Grant Thornton as the
independent accountants for the fiscal year ending February
28, 1995
Votes 82,217,9
For: 52
Votes 174,636
Against:
Votes 198,525
Abstain:
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement Regarding Computation of Per Share Earnings.
(b) Reports on Form 8-K. No reports on Form 8-K have been filed during
this reporting period.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Registrant)
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Registrant)
DATE: October 14, /s/ Stanford L.
1994 Kurland
Senior Managing
Director and
Chief Operating
Officer
DATE: October 14, /s/ Stanford L. Kurland
1994
Chief Financial
Officer
<PAGE>
EXHIBIT INDEX
Exhibit Number Document Description
11.1 Statement Regarding Computation of Per Share Earnings.
Page 3
Exhibit 11.1
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Three Months Six Months
Ended August 31, Ended August 31,
1994 1993 1994 1993
(Dollar amounts in thousands, except per share data)
Primary
Net earnings $19,110 $46,059 $52,839 $89,356
Preferred stock dividend
requirement - 168 - 732
Net earnings applicable to
common stock $19,110 $45,891 $52,839 $88,624
Average shares outstanding
91,208 88,667 91,165 86,661
Net effect of dilutive
stock options --
based on the treasury
stock method
using average market
price 847 1,927 935 1,958
Total average shares 92,055 90,594 92,100 88,619
Per share amount $0.21 $0.51 $0.57 $1.00
Fully diluted
Net earnings applicable to
common stock $19,110 $46,059 $52,839 $89,356
Average shares outstanding
91,208 88,667 91,165 86,661
Assumed conversion of
convertible preferred
shares
- 1,957 - 3,912
Net effect of dilutive
stock options --
based on the treasury
stock method using
the closing market price,
if higher than
average market price 860 1,927 948 1,958
Total average shares 92,068 92,551 92,113 92,531
Per share amount $0.21 $0.50 $0.57 $0.97
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> AUG-31-1994
<CASH> 6,867
<SECURITIES> 0
<RECEIVABLES> 423,347
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 205,097
<DEPRECIATION> 48,086
<TOTAL-ASSETS> 5,638,688
<CURRENT-LIABILITIES> 0
<BONDS> 1,425,132
<COMMON> 4,563
0
0
<OTHER-SE> 914,783
<TOTAL-LIABILITY-AND-EQUITY> 5,638,688
<SALES> 0
<TOTAL-REVENUES> 328,224<F1>
<CGS> 0
<TOTAL-COSTS> 240,160
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 88,064
<INCOME-TAX> 35,225
<INCOME-CONTINUING> 52,839
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,839
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
<FN>
<F1>Includes 118,022 of interest charges related to mortgage loan activities.
</FN>
</TABLE>
