<PAGE>
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, 1995
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 (I.R.S. Employer
jurisdiction Identification No.)
of incorporation)
155 N. Lake Avenue, 91101-1857
Pasadena, California
(Address of principal (Zip Code)
executive offices)
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 New York Stock Exchange
Value Pacific Stock Exchange
Preferred Stock Purchase New York Stock Exchange
Rights 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 16, 1995, there were 91,528,939 shares of Countrywide Credit
Industries, Inc. Common Stock, $.05 par value, outstanding. Based on the
closing price for shares of Common Stock on that date, the aggregate market
value of Common Stock held by non-affiliates of the registrant was
approximately $1,786,905,000. 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 1995 Annual Meeting - Part III
<PAGE>
PART I
ITEM 1. BUSINESS
A. General
Countrywide Credit Industries, Inc. (the "Company") is a holding company
which, through its principal subsidiary Countrywide Funding Corporation
("CFC"), 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 first-lien mortgage loans secured by single-
(one to four) family residences. The Company also offers home equity loans
both in conjunction with newly produced first-lien mortgages and as a separate
product. The Company, through its other wholly-owned subsidiaries, offers
products and services complementary to its mortgage banking business. A
subsidiary of the Company sells to other broker-dealers mortgage-backed
securities, including agency mortgage-backed securities and agency-issued
collateralized mortgage obligation ("CMO") classes, primarily on an odd-lot
basis (i.e., in denominations between $25,000 and $1,000,000) and to
institutional investors, subordinate structures of whole loan CMOs. In
addition, a subsidiary of the Company receives fee income for managing the
operations of CWM Mortgage Holdings, Inc. (formerly Countrywide Mortgage
Investments, Inc.) ("CWM"), a real estate investment trust whose shares are
traded on the New York Stock Exchange. In 1993, CWM adopted a new operating
plan and established a taxable subsidiary that principally operates as a jumbo
and otherwise non-conforming mortgage loan conduit. CWM has also commenced
warehouse lending operations which provide short-term revolving financing to
certain mortgage bankers, and construction lending operations which provide
financing to developers and individuals. See "Business--Countrywide Asset
Management Corporation." The Company also has a subsidiary which acts as an
agent in the sale of homeowners, fire, flood, earthquake, mortgage life and
disability insurance to CFC's mortgagors in connection with CFC's mortgage
banking operations. Another subsidiary of the Company earns fee income by
brokering servicing contracts owned by other mortgage lenders and loan
servicers. The Company also has a subsidiary that provides title insurance
services to realtors, builders, consumers, mortgage brokers and other
financial institutions. References to the "Company" herein shall be deemed to
refer to the Company and its consolidated subsidiaries, unless the context
requires otherwise.
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
(although in the year ended February 28, 1995 the Company incurred a loss on
the sale of loans); (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 mortgage loans insured by the
Federal Housing Administration ("FHA"), mortgage loans partially guaranteed by
the Veterans Administration ("VA"), conventional mortgage loans and, beginning
in the year ended February 28, 1995, home equity 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 $203,150 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.
<PAGE>
The following table sets forth the number and dollar amount of the
Company's mortgage and home equity loan production for the periods indicated.
<TABLE>
<CAPTION>
(Dollar amounts Summary of the Company's Mortgage and Home Equity Loan
in millions, Production
except average
loan amount) Year Ended February 28(29),
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Conventional
Loans
Number of Loans 175,823 315,699 192,385 63,919 23,130
Volume of Loans $20,958.7 $46,473.4 $28,669.9 $9,986.6 $3,140.9
Percent of Total 82.2% 68.6%
Volume 75.2% 88.6% 88.5%
FHA/VA Loans
Number of Loans 72,365 67,154 42,022 24,329 17,328
Volume of Loans $6,808.3 $5,985.5 $3,717.9 $2,169.7 $1,435.8
Percent of Total
Volume 24.4% 11.4% 11.5% 17.8% 31.4%
Home Equity
Loans
Number of Loans 2,147 - - - -
Volume of Loans $99.2 - - - -
Percent of Total
Volume .4% - - - -
Total Loans
Number of Loans 250,335 382,853 234,407 88,248 40,458
Volume of Loans $27,866.2 $52,458.9 $32,387.8 $12,156.3 $4,576.7
Average Loan
Amount $111,000 $137,000 $138,000 $138,000 $113,000
</TABLE>
The increase in the number and dollar amount of FHA and VA loans produced
in the year ended February 28, 1995 ("Fiscal 1995") from that produced in the
years ended February 28, 1994 ("Fiscal 1994") and February 28, 1993 ("Fiscal
1993") was attributable to the Company's effort to expand its share of that
market. The decrease in the number and dollar amount of conventional loans in
Fiscal 1995 as compared to Fiscal 1994 was attributable primarily to the
increasing mortgage interest rate environment, resulting in a decrease in
mortgage loan activity, particularly refinancings. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations -- Fiscal 1995 Compared with Fiscal 1994."
For the years ended February 28, 1995, 1994 and 1993, jumbo loans
represented 17%, 30% and 27%, respectively, of the Company's total volume of
mortgage loans produced. The decrease in the percentage of jumbo loans was
primarily the result of diversification of the Company's loan production out
of states with relatively higher housing costs (particularly California) and
into states with relatively lower housing costs. For the years ended February
28, 1995, 1994 and 1993, adjustable-rate mortgage loans ("ARMs") comprised
approximately 34%, 19% and 28%, respectively, of the Company's total volume of
mortgage loans produced. The increase in the Company's percentage of ARM
production from 1994 to 1995 was primarily caused by consumer preference for
adjustable-rate mortgages due to the increasing mortgage interest rate
environment that prevailed through most of the fiscal year ended February 28,
1995. For the years ended February 28, 1995, 1994 and 1993, refinancing
activity represented 30%, 75% and 73%, respectively, of the Company's total
volume of mortgage loans produced. The decrease in the percentage of
refinance loans was principally due to the general increase in average
mortgage interest rates which caused a decline in the demand for refinance
loans.
The Company produces mortgage loans through three separate divisions.
The Company maintains a staff of central office quality control personnel that
performs audits of the loan production of the three divisions on a regular
basis. In addition, each division has implemented various procedures to
control the quality of loans produced, as described below. The Company
believes that its use of technology, benefits derived from economies of scale
and a noncommissioned sales force allow it to produce loans at a low cost
relative to its competition.
<PAGE>
Consumer Markets Division (formerly Retail and Consumer Divisions)
The Company originates loans through its network of branch offices and
through other means of direct contact with the borrower (the "Consumer Markets
Division"). As of February 28, 1995, the Company had 235 Consumer Markets
Division branch offices, 24 satellite offices (each typically staffed by one
employee who accepts loan applications and forwards them to the host branch
for processing) and three processing support centers. These various
facilities are located in 41 states. The Company utilizes small branch
offices, each staffed typically by three employees and connected to the
Company's central office by a computer network. Business is also solicited
through telemarketing, advertising in various forms of mass media,
participation of branch management in local real estate-related business
functions and extensive use of direct mailings to real estate brokers and
builders. Consumer Markets Division personnel are not paid a commission on
sales; however, they are paid a bonus based on various factors, including
branch profitability. The Company believes that this approach allows it to
originate loans at a competitively low cost. The Consumer Markets Division
uses continuous quality control audits of loans originated within each branch
by branch management and quality control personnel to monitor compliance with
the Company's underwriting criteria.
The following table sets forth the number and dollar amount of the
Consumer Markets Division's mortgage and home equity loan production for the
periods indicated.
<TABLE>
<CAPTION>
(Dollar amounts Summary of the Consumer Markets Division's Mortgage and
in millions, Home Equity Loan Production
except average
loan amount) Year Ended February 28(29),
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Conventional
Loans
Number of Loans 48.772 73,249 39,787 19,549 9,333
Volume of Loans $5,442.2 $9,264.8 $5,026.7 $2,553.3 $1,141.4
Percent of Total
Volume 77.0% 80.2% 82.4% 81.8% 67.3%
FHA/VA Loans
Number of Loans 19,060 26,418 11,739 6,505 6,489
Volume of Loans $1,612.1 $2,282.3 $1,073.0 $567.2 $555.0
Percent of Total
Volume 22.8% 19.8% 17.6% 18.2% 32.7%
Home Equity
Loans
Number of Loans 297 - - - -
Volume of Loans $11.4 - - - -
Percent of Total
Volume 0.2% - - - -
Total Loans
Number of Loans 68,129 99,667 51,526 26,054 15,822
Volume of Loans $7,065.7 $11,547.1 $6,099.7 $3,120.5 $1,696.4
Average Loan
Amount $104,000 $116,000 $118,000 $120,000 $107,000
Wholesale Division
In its wholesale division (the "Wholesale Division"), the Company
originates loans through and purchases loans from mortgage loan brokers. As
of February 28, 1995, the division operated 56 branch offices and six regional
support centers in various parts of the country. 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. In addition, quality
control personnel review loans for compliance with the Company's underwriting
criteria. Approximately 8,700 mortgage brokers qualify to participate in this
program. Mortgage loan brokers qualify to participate in the Wholesale
Division's program only after a review by the Company's management of their
reputation and mortgage lending expertise, including a review of their
references and financial statements.
<PAGE>
The following table sets forth the number and dollar amount of the
Wholesale Division's mortgage and home equity loan production for the periods
indicated.
(Dollar amounts
in millions, Summary of the Wholesale Division's Mortgage and Home
except average Equity Loan Production
loan amount) Year Ended February 28(29),
1995 1994 1993 1992 1991
Conventional
Loans
Number of Loans 65,713 130,937 92,922 27,661 8,763
Volume of Loans $7,790.0 $21,271.0 $15,480.1 $5,093.5 $1,392.3
Percent of Total
Volume 91.6% 98.9% 100.0% 99.7% 97.0%
FHA/VA Loans
Number of Loans 6,239 2,700 15 230 611
Volume of Loans $626.3 $244.4 $1.5 $17.4 $43.1
Percent of Total
Volume 7.4% 1.1% 0.0% 0.3% 3.0%
Home Equity
Loans
Number of Loans 1,836 - - - -
Volume of Loans $86.9 - - - -
Percent of Total -
Volume 1.0% - - -
Total Loans
Number of Loans 73,788 133,637 92,937 27,891 9,374
Volume of Loans $8,503.2 $21,515.4 $15,481.6 $5,110.9 $1,435.4
Average Loan
Amount $115,000 $161,000 $167,000 $183,000 $153,000
Correspondent Division
The Company purchases loans through its network of correspondent offices
(the "Correspondent Division") primarily from other mortgage bankers,
commercial banks, savings and loan associations, credit unions and other
financial intermediaries. The Company's correspondent offices are located in
Pasadena, California; Plano, Texas and Pittsburgh, Pennsylvania. Over 1,500
financial intermediaries serving all 50 states are eligible to participate in
this program. Loans purchased by the Company through the Correspondent
Division comply with the Company's general underwriting criteria for loans
that it originates through the Consumer Markets Division, and, except as
described in the next sentence, each loan is accepted only after review either
by one of the Company's loan underwriters or, in the case of FHA or VA loans,
by a government-approved underwriter. The Company accepts loans without such
review from an institution that has met the Company's standards for the
granting of delegated underwriting authority following a review by the Company
of the institution's financial strength, underwriting and quality control
procedures, references and prior experience with the Company. In addition,
quality control personnel review loans purchased from correspondents for
compliance with the Company's underwriting criteria. The purchase agreement
used by the Correspondent Division provides the Company with recourse to the
seller in the event of such occurrences as fraud or misrepresentation in the
origination process or a request by the investor that the Company repurchase
the loan. Financial intermediaries qualify to participate in the
Correspondent Division's program after a review by the Company's management of
the reputation and mortgage lending expertise of such institutions, including
a review of their references and financial statements.
<PAGE>
The following table sets forth the number and dollar amount of the
Correspondent Division's mortgage and home equity loan production for the
periods indicated.
(Dollar amounts Summary of the Correspondent Division's Mortgage and Home
in millions, Equity Loan Production
except average
loan amount) Year Ended February 28(29),
1995 1994 1993 1992 1991
Conventional
Loans
Number of Loans 61,338 111,513 59,676 16,709 5,034
Volume of Loans $7,726.5 $15,937.6 $8,163.0 $2,340.0 $607.2
Percent of Total
Volume 62.8% 82.2% 75.5% 59.6% 42.0%
FHA/VA Loans
Number of Loans 47,066 38,036 30,268 17,594 10,228
Volume of Loans $4,570.0 $3,458.8 $2,643.5 $1,585.0 $837.7
Percent of Total
Volume 37.2% 17.8% 24.5% 40.4% 58.0%
Home Equity
Loans
Number of Loans 14 - - - -
Volume of Loans $0.8 - - - -
Percent of Total
Volume 0.0% - - - -
Total Loans
Number of Loans 108,418 149,549 89,944 34,303 15,262
Volume of Loans $12,297.3 $19,396.4 $10,806.5 $3,925.0 $1,444.9
Average Loan
Amount $113,000 $130,000 $120,000 $114,000 $95,000
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 Americar is the Company's principal affordable home loan program
for low- and moderate-income borrowers. During the year ended February 28,
1995, the Company produced approximately $2.0 billion of mortgage loans under
this program. House Americar 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
Americar Counseling Center, a free educational service, which can provide
consumers a home buyers 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 multi-
lingual and work with consumers for up to one year, providing guidance on a
regular basis via phone and mail.
In addition, a selection of applications from certain designated minority
and other borrowers that are initially recommended for denial by one of the
Company's production divisions are forwarded for an additional review by a
manager of the Company to insure that denial is appropriate. The application
of more flexible underwriting guidelines may carry a risk of increased
delinquencies; however, based upon the Company's experience since the
inception of the program, the performance of loans approved under these more
flexible guidelines has been similar to that of FHA and VA loans in the
Company's servicing portfolio.
<PAGE>
Loan Underwriting
The Company's guidelines for underwriting FHA-insured loans and VA-
guaranteed loans comply with the criteria established by such agencies. The
Company's guidelines for underwriting conventional conforming loans comply
with the underwriting criteria employed by Fannie Mae and/or Freddie Mac. The
Company's underwriting guidelines and property standards for conventional non-
conforming loans are based on the underwriting standards employed by private
mortgage insurers and private investors for such loans. In addition,
conventional loans originated or purchased by the Company with a loan-to-value
ratio greater than 80% at origination are covered by private mortgage
insurance.
In conjunction with fair lending initiatives undertaken by both Fannie
Mae and Freddie Mac, the Company has established affordable home loan programs
for low- and moderate-income and designated minority borrowers offering more
flexible underwriting guidelines than historical industry standards. See
"Business--Mortgage Banking Operations--Fair Lending Programs."
The following describes the general underwriting criteria taken into
consideration by the Company in determining whether to approve a loan
application. These criteria generally apply to all types of loans.
Employment and Income
Applicants must exhibit the ability to generate income on a regular basis
in order to meet the housing payments relating to the loan as well as any
other debts they may have. Evidence of employment and income is obtained
through a written verification of employment with the current and prior
employers or by obtaining a recent pay stub and W-2 forms. Self-employed
applicants are required to provide tax returns, financial statements or other
documentation to verify income. Sources of income to be considered include
salary, bonus, overtime, commissions, retirement benefits, notes receivable,
interest, dividends, unemployment benefits and rental income.
Debt-to-Income Ratios
Generally, an applicant's monthly income should be three times the amount
of monthly housing expenses (loan payment, real estate taxes, hazard insurance
and homeowner dues, if applicable). Monthly income should generally be two
and one-half times the amount of total fixed monthly obligations (housing
expense plus other obligations such as car loans or credit card payments).
Other areas of financial strength, such as equity in the property, large cash
reserves or a history of meeting prior home mortgage or rental obligations are
considered to be compensating factors and may result in an adjustment of these
ratio limitations.
Credit History
An applicant's credit history is examined for both favorable and
unfavorable occurrences. An applicant who has made payments on outstanding or
previous credit obligations according to the contractual terms may be
considered favorable. Unfavorable items such as slow payment records, suits,
judgments, bankruptcy, liens, foreclosure or garnishment are discussed with
the applicant in order to determine the reasons for the unfavorable rating.
In some instances, the applicant may explain the reasons for these ratings to
indicate that there were extenuating circumstances beyond the applicant's
control which would mitigate the effect of such unfavorable item on the credit
decision.
Property
The property's market value and physical condition as compared to the
value of similar properties in the area is assessed to ensure that the
property provides adequate collateral for the loan.
<PAGE>
Funds for Closing
Generally, applicants are required to have sufficient funds of their own
to make a minimum five percent down payment. Funds for closing costs may come
from the applicant or may be a gift from a family member. Certain loan
programs require the applicant to have sufficient funds for a down payment of
only three percent and the remaining funds provided by a gift or an unsecured
loan from a municipality or a non-profit organization. Certain programs
require the applicant to have cash reserves after closing.
Maximum Indebtedness to Appraised Value
Generally, the maximum amount the Company will loan is 95% of the
appraised value of the property. For certain types of loans, this percentage
may be increased. Loan amounts in excess of 80% of the appraised value
require mortgage insurance (which is generally paid by the borrower but which
may be paid by the lender) to protect against foreclosure loss. After funding
and sale of the mortgage loans, the Company's exposure to credit loss in the
event of non-performance by the mortgagor is limited as described in the
section "Business--Mortgage Banking Operations--Sale of Loans."
Proprietary Data Processing Systems
The Company employs technology wherever applicable and continually
searches for new and better ways of both providing services to its customers
and maximizing efficiency of its operations. Proprietary systems currently in
use by the Company include CLUES, an artificial intelligence system that is
designed to expedite the review of applications, credit reports and property
appraisals. The Company believes that CLUES increases underwriters'
productivity, reduces costs and provides greater consistency to the
underwriting process. Another system in use is "EDGE," which is an advanced
automated loan origination system that is designed to reduce the time and cost
associated with the loan application and funding process. This front-end
system was internally developed for the Company's exclusive use and is
integrated with the Company's loan servicing, sales, accounting and other
systems. The Company believes that the EDGE system improves the quality of
the loan products and customer service by: (i) reducing risk of deficient
loans; (ii) facilitating accurate pricing; (iii) promptly generating loan
documents with the use of laser printers; (iv) providing for electronic
communication with credit bureaus and other vendors and (v) generally
minimizing manual data input. From pre-qualification to funding, EDGE is
believed to significantly reduce origination and processing costs and speed
funding time.
The Company has developed and implemented DirectLine Plus, 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 integrate that
application with CLUES-ON-LINE, an adaption of CLUES for use with DirectLine
Plus, which allows the mortgage broker to submit loan information and receive
a qualified underwriting decision within minutes.
In addition, the Company is developing CLASS, which is designed to offer
automated loan settlement services by using electronic data interchange to
facilitate the preparation of closing documents at the office of the closing
agent. The Company plans to deploy CLASS in the offices of a wide range of
business partners (for example, Realtors and other entities that are involved
in the closing of a mortgage loan transaction). Currently under development is
the LOAN COUNSELOR. The LOAN COUNSELOR is being designed to give business
partners direct access to the Company's package of financial services and to
permit such business partners to pre-qualify prospective applicants, provide
"what if" scenarios to help find the appropriate loan product, take the
application and receive a qualified underwriting decision. The Company plans
to integrate the LOAN COUNSELOR with both CLUES and the EDGE system.
The Company intends to implement a telemarketing application designed to
provide enterprise-wide information on both current and prospective customers.
The purpose of the telemarketing system is to enable production divisions to
identify prospective customers to solicit for specific products or services,
and to obtain the results of any solicitation. Management believes that the
database will give the Company a significant advantage in its ability to
protect its servicing portfolio and generate additional revenue by cross-
selling other products and services.
<PAGE>
Geographic Distribution
The following table sets forth the geographic distribution of the
Company's mortgage and home equity loan production for the year ended February
28, 1995.
Geographic Distribution of the Company's
Mortgage and Home Equity Loan Production
Percentag
e of
Total
(Dollar amounts Number Principal Dollar
in millions) of Loans Amount Amount
California 58,832 $8,566,233 30.7%
Florida 15,580 1,321,876 4.7%
Washington 11,405 1,296,488 4.7%
Texas 13,786 1,180,763 4.2%
Colorado 10,975 1,139,163 4.1%
New York 7,739 1,041,250 3.7%
Illinois 7,917 878,301 3.2%
New Jersey 6,371 775,101 2.8%
Arizona 8.176 751,798 2.7%
Massachusetts 5,024 694,706 2.5%
Ohio 7,949 664,208 2.4%
Michigan 6,816 663,120 2.4%
Maryland 5,098 617,906 2.2%
Nevada 5,758 611,934 2.2%
Pennsylvania 6,072 584,501 2.1%
Hawaii 2,858 556,870 2.0%
Others (1) 69,979 6,521,952 23.4%
250,335 $27,866,170 100.0%
(1) No other state constitutes more than 2.0% of the total dollar amount
of loan production.
California loan production as a percentage of total loan production
(measured by principal balance) for the fiscal years ended February 28, 1995,
1994 and 1993 was 31%, 46% and 58%, respectively. Loan production within
California is geographically dispersed, which minimizes dependence on any
individual local economy. The continued decline in the percentage of the
Company's mortgage loan production in California is the result of implementing
the Company's strategy to expand production capacity and market share outside
of California. At February 28, 1995 and 1994, 79% and 77%, respectively, of
the Consumer Markets Division branch offices and the Wholesale Division loan
centers were located outside of California.
<PAGE>
The following table sets forth the distribution by county of the
Company's California loan production for the year ended February 28, 1995.
Distribution by County of the Company's California
Loan Production
Percentage
of
(Dollar amounts Number Principal Total Dollar
in millions) of Loans Amount Amount
Los Angeles 15,306 $2,381.3 27.8%
Orange 5,014 844.2 9.9
San Diego 4,519 662.1 7.7
Santa Clara 3,138 587.5 6.9
San Bernardino 3,893 433.6 5.1
Others (1) 26,962 3,657.5 42.6
58,832 $8,566.2 100.0%
(1) No other county in California constitutes more than 5.0% of the
total dollar amount of 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 mortgage-backed securities ("MBS")
guaranteed by the Government National Mortgage Association ("GNMA") to
national or regional broker-dealers. With respect to loans securitized
through GNMA 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 ranging from $22,500
to $46,000, depending upon the amount of the loan). Conforming conventional
loans may be pooled by the Company and exchanged for securities guaranteed by
Fannie Mae or Freddie Mac, which securities are then sold to national or
regional broker-dealers. Loans securitized through Fannie Mae or Freddie Mac
are sold on a non-recourse basis whereby foreclosure losses are generally the
responsibility of Fannie Mae and Freddie Mac, and not the Company.
Alternatively, the Company may sell FHA-insured and VA-guaranteed mortgage
loans and conforming conventional loans, and consistently sells its jumbo loan
production, to large buyers in the secondary market (which can include
national or regional broker-dealers) on a non-recourse basis. These loans can
be sold either on a whole-loan basis or in the form of pools backing
securities which are not guaranteed by any governmental instrumentality but
which may have the benefit of some form of external credit enhancement, such
as insurance, letters of credit, payment guarantees or senior/subordinated
structures. Substantially all loans sold by the Company are sold without
recourse, subject in the case of VA loans to the limits of the VA guaranty
described above. For the fiscal years ended February 28, 1995, 1994 and 1993,
the aggregate loss experience of the Company on VA loans in excess of the VA
guaranty was approximately $2.6 million, $2.1 million and $1.0 million,
respectively. In the opinion of management, the losses increased from the
year ended February 28, 1994 to the year ended February 28, 1995 due to an
increase in the size of the VA loan servicing portfolio.
CWM, a real estate investment trust managed by a subsidiary of the
Company, may purchase at market prices both conforming and non-conforming
conventional loans from the Company. CWM purchased $80.4 million, $300.5
million and $130.3 million of conventional non-conforming mortgage loans
during the years ended February 28, 1995, 1994 and 1993, respectively.
<PAGE>
In order to offset the risk that a change in interest rates will result
in a decrease in the value of the Company's current mortgage loan inventory or
its commitments to purchase or originate mortgage loans ("Committed
Pipeline"), the Company enters into hedging transactions. The Company's
hedging policies generally require that substantially all of its inventory of
conforming and government loans and the maximum portion of its Committed
Pipeline that it believes may close be hedged with forward contracts for the
delivery of MBS or options on MBS. The inventory is then used to form the MBS
that will fill the forward delivery contracts and options. The Company hedges
its inventory and Committed Pipeline of jumbo mortgage loans by using whole-
loan sale commitments to ultimate buyers or by using temporary "cross hedges"
with sales of MBS since such loans are ultimately sold based on a market
spread to MBS. As such, the Company is not exposed to significant risk nor
will it derive any significant benefit from changes in interest rates on the
price of the inventory net of gains or losses of associated hedge positions.
The correlation between the price performance of the hedge instruments and the
inventory being hedged is very high due to the similarity of the asset and the
related hedge instrument. The Company is exposed to interest-rate risk to the
extent that the portion of loans from the Committed Pipeline that actually
closes at the committed price is less than the portion expected to close in
the event of a decline in rates and such decline in closings is not covered by
forward contracts and options to purchase MBS needed to replace the loans in
process that do not close at their committed price. The Company determines the
portion of its Committed Pipeline that it will hedge based on numerous
factors, including the composition of the Company's Committed Pipeline, the
portion of such Committed Pipeline likely to close, the timing of such
closings and anticipated changes in interest rates. See Note F to the
Company's Consolidated Financial Statements.
The Company's data processing systems for processing and recording loan
sales have been integrated with the EDGE system. The integration increases
efficiency of the loan sale process.
Loan Servicing
Servicing includes collecting and remitting loan payments, making
advances when required, accounting for principal and interest, holding
custodial (impound) funds for payment of property taxes and hazard insurance,
making any physical inspections of the property, contacting 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 services on a non-recourse basis substantially all of the
mortgage loans that it originates or purchases. In addition, the Company
purchases bulk servicing contracts, also on a non-recourse basis, to service
single-family residential mortgage loans originated by other lenders.
Servicing contracts acquired through bulk purchases accounted for 17% of the
Company's mortgage servicing portfolio as of February 28, 1995.
At February 28, 1995, the Company's servicing portfolio of single-family
mortgage loans was stratified by interest rate as follows.
(Dollar mounts
in millions) Total Portfolio at February 28, 1995
Weighted
Percent Average Servicing
Interest Principal of Maturity Assets
Rate Balance Total (Years) Balance (1)
7% and under $ 38,292.7 33.9% 25.5 $602.9
7.01-8% 45,012.9 39.8 25.7 694.3
8.01-9% 21,313.5 18.8 26.6 365.8
9.01-10% 7,165.1 6.3 26.5 115.4
over 10% 1,287.1 1.2 23.4 18.5
$113,071.3 100.0% 25.8 $1,796.9
(1) Capitalized servicing fees receivable and purchased servicing
rights.
The weighted average interest rate of the single-family mortgage loans in
the Company's servicing portfolio at February 28, 1995 was 7.6% as compared with
7.2% at February 28, 1994. At February 28, 1995, 77% of the loans in the
servicing portfolio bore interest at fixed rates and 23% bore interest at
adjustable rates. The weighted average net service fee of the portfolio was
0.356% at February 28, 1995 and the weighted average interest rate of the fixed-
rate loans in the servicing portfolio was 7.8%.
<PAGE>
The following table sets forth certain information regarding the Company's
servicing portfolio of single-family mortgage loans, including loans held for
sale and loans subserviced for others, for the periods indicated.
</TABLE>
<TABLE>
<CAPTION>
(Dollar amounts in Year Ended February 28(29),
millions)
Composition of 1995 1994 1993 1992 1991
Servicing Portfolio
at Period End:
<S> <C> <C> <C> <C> <C>
FHA-Insured Mortgage $17,587.5 $ 9,793.7 $ 8,233.8 $ 6,271.2 $ 4,474.1
Loans
VA-Guaranteed
Mortgage Loans 7,454.3 3,916.0 3,307.2 2,438.3 1,910.2
Conventional Mortgage
Loans 88,029.5 70,915.2 42,876.8 18,833.5 9,296.3
Total Servicing
Portfolio $113,071.3 $84,624.9 $54,417.8 $27,543.0 $15,680.6
Beginning Servicing
Portfolio $84,624.9 $54,417.8 $27,543.0 $15,680.6 $12,511.5
Add:Loan Production 27,866.2 52,458.9 32,387.8 12,156.3 4,576.7
Bulk Servicing and
Subservicing Acquired 17,888.1 3,514.9 3,083.9 2,932.6 571.9
Less: Servicing
Transferred (1) (6,287.4) (8.1) (12.6) (269.3) (859.5)
Runoff (2) (11,020.5) (25,758.6) (8,584.3) (2,957.2) (1,120.0)
Ending Servicing
Portfolio $113,071.3 $84,624.9 $54,417.8 $27,543.0 $15,680.6
Delinquent Mortgage Loans
and Pending
Foreclosures at
Period End (3):
30 days 1.84% 1.89% 2.08% 2.46% 3.09%
60 days 0.30 0.29 0.41 0.59 0.61
90 days or more 0.44 0.40 0.60 0.80 0.76
Total Delinquencies 2.58% 2.58% 3.09% 3.85% 4.46%
Foreclosures Pending 0.30% 0.30% 0.38% 0.46% 0.40%
(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.
</TABLE>
The following table sets forth the geographic distribution of the Company's
servicing portfolio of single-family mortgage loans, including loans held for
sale and loans subserviced for others, as of February 28, 1995.
Percentage of
Principal
Balance
Serviced
California 43.0%
Florida 3.9
Washington 3.5
Texas 3.5
Massachusetts 2.6
New York 2.6
Illinois 2.6
Colorado 2.4
New Jersey 2.4
Arizona 2.3
Virginia 2.2
Hawaii 2.2
Other (1) 26.8
100.0%
(1) No other state contains more than 2.0% of the properties securing loans
in the Company's servicing portfolio.
<PAGE>
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.
It is the Company's strategy to build and retain its servicing portfolio.
Loans are serviced from two facilities, one in Simi Valley, California and one
in Plano, Texas (see "Properties"). The Company has developed systems that
enable it to service mortgage loans efficiently and therefore enhance the
returns it can earn from its investments in servicing rights. For example,
data elements pertaining to loans originated or purchased by the Company are
entered into the Company's EDGE system at the time of origination or purchase
and are transferred to the loan servicing system without manual re-entry.
Customer service representatives in both the California and Texas facilities
have access to on-line screens containing all pertinent data about a
customer's account, thus eliminating the need to refer to paper files and
shortening the average length of a customer call. The Company has a telephone
system which enables it to control the flow of calls to both locations. The
Company's payment processing equipment can process 10,000 checks per hour,
which enables the Company to deposit virtually all cash on the same day it is
received. Many tax and insurance remittances on behalf of borrowers are
processed electronically, thus eliminating the need for printed documentation
and shortening the processing time required.
The Company believes that loan production earnings will partially offset
the effect of interest rate fluctuations on the earnings from its servicing
portfolio. In general, the value of the Company's servicing portfolio and the
income generated therefrom improve as interest rates increase and decline when
interest rates fall. Generally, in an environment of increasing interest
rates, which prevailed through most of the Company's fiscal year ended
February 28, 1995, the rate of current and projected future prepayments
decreases, resulting in a decreased rate of amortization of capitalized
servicing fees receivable and purchased servicing rights, and a decrease in
income from servicing portfolio hedging activities. Such amortization, net of
servicing hedge gain, is deducted from loan administration revenue. The
increase in interest rates also causes loan production (particularly
refinancings) to decline. Generally, in an environment of declining interest
rates, which prevailed through most of the Company's fiscal year ended
February 28, 1994, the rate of current and projected future prepayments
increases, resulting in an increased rate of amortization of capitalized
servicing fees receivable and purchased servicing rights. At the same time,
the decline in interest rates contributes to high levels of loan production
(particularly refinancings).
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 relies on commercial paper backed by its revolving credit
facility, medium-term note issuances, pre-sale funding facilities, mortgage-
backed securities and whole loan reverse-repurchase agreements, subordinated
notes and cash flow from operations. The Company estimates that it has
available committed and uncommitted credit facilities aggregating
approximately $5.6 billion at February 28, 1995. In addition, in the past the
Company has relied on direct borrowings from its revolving credit facility,
servicing-secured bank facilities, privately-placed financings and public
offerings of preferred and common stock. For further information on the
material terms of the borrowings utilized by the Company to finance its
inventory of mortgage loans and mortgage-backed securities 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.
<PAGE>
C. Countrywide Asset Management Corporation
Through its subsidiary Countrywide Asset Management Corporation ("CAMC"),
the Company manages the investments and oversees the day-to-day operations of
CWM and its subsidiaries. For performing these services, CAMC receives a base
management fee of 1/8 of 1% per annum of CWM's average-invested mortgage-
related assets not pledged to secure CMOs. CAMC also receives a management
fee equal to 0.2% per annum of the average amounts outstanding under CWM's
warehouse lines of credit. In addition, CAMC receives incentive compensation
equal to 25% of the amount by which the CWM annualized return on equity
exceeds the ten-year U.S. treasury rate plus 2%. In connection with a new
business plan implemented by CWM in 1993, CAMC waived all management fees for
calendar year 1993 and 25% of the incentive compensation earned in 1994. In
addition, in 1993 CAMC absorbed $0.9 million of operating expenses incurred in
connection with the new business plan. In June 1993, CWM and its subsidiaries
began reimbursing CAMC for all expenses of the new operations. As of December
31, 1994, 1993 and 1992, the consolidated total assets of CWM were $2.0
billion, $1.4 billion and $0.7 billion, respectively. During the fiscal years
ended February 28, 1995, 1994 and 1993, CAMC earned $0.3 million, $0.1 million
and $0.8 million, respectively, in base management fees from CWM and its
subsidiaries. In addition, during the fiscal year ended February 28, 1995,
CAMC recorded $1.1 million in incentive compensation, net of the amount waived
as described above. At February 28, 1995, the Company and CAMC owned
1,120,000 shares or approximately 2.77% of the common stock of CWM. See Note
K to the Company's Consolidated Financial Statements.
D. Related Activities
Through various other subsidiaries, the Company conducts business in a
number of areas related to the mortgage banking business. The following is a
brief description of the activities of these subsidiaries.
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 sells mortgage-backed securities on an odd-lot basis, generally at prices
higher than those available in the wholesale, round-lot market and subordinate
structures of whole loan CMOs.
The Company's insurance agency subsidiary, Countrywide Agency, Inc., acts
as an agent for the sale of homeowners, fire, flood, earthquake, mortgage life
and disability insurance to mortgagors whose loans are serviced by CFC.
Another subsidiary of the Company, CTC Foreclosure Services Corporation,
formerly Countrywide Title Corporation, serves as trustee under deeds of trust
in connection with the Company's mortgage loan production in California and
certain other states.
Countrywide Servicing Exchange ("CSE") is a national servicing brokerage
and consulting firm. CSE acts as an agent facilitating transactions between
buyers and sellers of bulk servicing contracts.
LandSafe, Inc. and its subsidiaries act as a provider of various title
insurance services in the capacity of an agent rather than an underwriter.
The Company offers title insurance commitments and policies, settlement
services and property profiles to realtors, builders, consumers, mortgage
brokers and other financial institutions.
While no longer engaged in the business of originating mobile home
installment contracts, a subsidiary of the Company, Countrywide Partnership
Investments, Inc., owned and operated two mobile home parks located in
Houston, Texas, both of which were for sale as of February 28, 1995. During
Fiscal 1995, the Company sold three of its mobile home parks and all of the
mobile home coaches located in Fort Worth, Texas and Jacksonville, Florida.
Subsequent to February 28, 1995, the Company sold one of its two remaining
mobile home parks and the mobile home coaches contained therein for $4.4
million. The Company's investment in mobile home parks and mobile home
coaches was approximately $9 million at February 28, 1995.
<PAGE>
E. Regulation
The Company's mortgage banking business is subject to the rules and
regulations of HUD, FHA, VA, Fannie Mae, Freddie Mac and GNMA 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 GNMA requires the maintenance of specified net worth
levels (which vary depending on the amount of GNMA securities issued by the
Company). The Company's affairs are also subject to examination by the Federal
Housing Commissioner at all times to assure compliance with the FHA
regulations, policies and procedures. Mortgage origination activities are
subject to the Equal Credit Opportunity Act, Federal Truth-in-Lending Act,
Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act and
the regulations promulgated thereunder which prohibit discrimination, require
the disclosure of certain basic information to mortgagors concerning credit
and settlement costs, limit payment for settlement services to the reasonable
value of the services rendered and require the maintenance and disclosure of
information regarding the disposition of mortgage applications based on race,
gender, geographical distribution and income level.
Additionally, there are various state laws and regulations affecting the
Company's mortgage banking operations. The Company is licensed as a mortgage
banker or retail installment lender in those states in which such license is
required.
Conventional mortgage operations may also be subject to state usury
statutes. FHA and VA loans are exempt from the effect of such statutes.
Securities broker-dealer operations are subject to federal and state
securities laws, as well as the rules of both the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
Insurance agency and title insurance operations are subject to insurance
laws of each of the states in which the Company conducts such operations.
F. Competition
The mortgage banking industry is highly competitive and fragmented. The
Company competes with other financial intermediaries (such as mortgage
bankers, commercial banks, savings and loan associations, credit unions and
insurance companies) and mortgage banking subsidiaries or divisions of
diversified companies. During the year ended February 28, 1995, excess
industry capacity caused by increased mortgage interest rates resulted in
intense price competition. Consequently, loan production for the year ended
February 28, 1995 was unprofitable. In addition, during periods of increasing
interest rates, as existed for most of Fiscal 1995, consumers tend to prefer
adjustable-rate mortgage products. Particularly in California, savings and
loans and other portfolio lenders competed with the Company by offering
aggressively-priced ARM products. The Company competes principally 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
49% during the third quarter of calendar year 1994. The Company believes
that it has benefited from this trend.
G. Employees
At February 28, 1995, the Company employed 3,613 persons, 2,377 of whom
were engaged in production activities, 949 were engaged in loan administration
activities, and 287 were engaged in other activities. None of these employees
was represented by a collective bargaining agent.
<PAGE>
ITEM 2. PROPERTIES
The primary executive and administrative offices of the Company and its
subsidiaries are located in leased space at 155 North Lake Avenue and 35 North
Lake Avenue, Pasadena, California, and consist of approximately 220,000 square
feet. The principal leases covering such space expire in the year 2011. The
Company also owns an office facility of approximately 300,000 square feet
located on 43.5 acres in Simi Valley, California, which is used primarily to
house a portion of the Company's loan servicing and data processing
operations, and a 253,000 square foot office building situated on 18 acres in
Plano, Texas, which houses additional loan servicing, loan production and data
processing operations. In addition, the Plano facility provides the Company
with a business recovery site located out of the State of California.
The Company leases or owns office space in several other buildings in the
Pasadena area. Additionally, CFC leases office space for each of its Consumer
Markets Division branch and satellite offices (each ranging from approximately
261 to 2,148 square feet), Wholesale Division branch offices (each ranging
from approximately 525 to 5,038 square feet) and Correspondent Division
offices (each ranging from approximately 6,150 to 10,929 square feet). These
leases vary in term and have different rent escalation provisions. In
general, the leases extend through fiscal year 1999, contain buyout provisions
and provide for rent escalation tied to increases in the Consumer Price Index
or operating costs of the premises.
As of February 28, 1995, the Company owned 148 acres in Texas for use as
mobile home parks. These properties contained 638 completed mobile home pads,
occupied by 309 mobile homes owned by the Company and 240 mobile homes owned
by third parties, with 89 vacant pads.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
SHAREHOLDER 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, 1995 and 1994, both adjusted to reflect the 3-
for-2 stock split paid May 3, 1994 and the 5% stock dividend paid April 23,
1993.
Cash Dividends
Fiscal 1995 Fiscal 1994 Declared
Fiscal Fiscal
Quarter High Low High Low 1995 1994
First $17.50 $13.33 $23.25 $16.92 $0.08 $0.07
Second 18.75 12.88 22.17 17.25 0.08 0.07
Third 15.38 13.63 23.33 16.25 0.08 0.07
Fourth 16.25 12.38 19.08 15.25 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, 1995
and 1994, the Company declared quarterly cash dividends aggregating $0.32 per
share and $0.29 per share, respectively. On March 20, 1995, the Company
declared a quarterly cash dividend of $0.08 per common share, paid April 17,
1995.
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 CFC'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 such
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 CFC each maintain specified minimum levels of net worth
and certain other financial ratios, dividends cannot be paid by the Company
and CFC in compliance with certain of CFC'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 April 26, 1995, there were 2,635 shareholders of record of the
Company's common stock.
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years ended February 28(29),
(Dollar amounts in
thousands, except per
share data) 1995 1994 1993 1992 1991
Selected Statement of
Earnings Data:
<S> <C> <C> <C> <C> <C>
Revenues:
Loan origination fees $203,426 $379,533 $241,584 $91,933 $38,317
Gain (loss) on sale of
loans (41,342) 88,212 67,537 38,847 24,236
Loan production
revenue 162,084 467,745 309,121 130,780 62,553
Interest earned 343,138 376,225 211,542 115,213 83,617
Interest charges (267,685) (275,906) (148,765) (81,959) (73,428)
Net interest income 75,453 100,319 62,777 33,254 10,189
Loan servicing income 428,994 307,477 177,291 94,830 66,486
Less amortization of
servicing assets (95,768) (242,177) (151,362) (53,768) (24,871)
Add (less) servicing
hedge benefit (expense) (40,030) 73,400 74,075 17,000 -
Less write-off of
servicing hedge (25,600) - - - -
Net loan administration
income 267,596 138,700 100,004 58,062 41,615
Gain on sale of
Servicing 56,880 - - 4,302 6,258
Commissions, fees and
other income 40,650 48,816 33,656 19,714 14,396
Total revenues 602,663 755,580 505,558 246,112 135,011
Expenses:
Salaries and related
expenses 199,061 227,702 140,063 72,654 48,961
Occupancy and other
office expenses 102,193 101,691 64,762 36,645 24,577
Guarantee fees 85,831 57,576 29,410 13,622 9,529
Marketing expenses 23,217 26,030 12,974 5,015 3,117
Branch and
Administrative office
consolidation costs 8,000 - - - -
Other operating
expenses 37,016 43,481 24,894 17,849 11,642
Total expenses 455,318 456,480 272,103 145,785 97,826
Earnings before income
taxes 147,345 299,100 233,455 100,327 37,185
Provision for income taxes 58,938 119,640 93,382 40,131 14,874
Net earnings $88,407 $179,460 $140,073 $60,196 $22,311
Per Share Data (1):
Primary earnings $0.96 $1.97 $1.65 $0.89 $0.48
Fully diluted earnings $0.96 $1.94 $1.52 $0.81 $0.43
Cash dividends $0.32 $0.29 $0.25 $0.15 $0.12
Weighted average shares
outstanding -
Primary 92,087,000 90,501,000 82,514,000 63,800,000 41,576,000
Fully diluted 92,216,000 92,445,000 92,214,000 74,934,000 53,679,000
Selected Balance Sheet
Data at End of Period:
Total assets $5,579,662 $5,585,521 $3,299,133 $2,409,974 $1,121,999
Short-term debt $2,664,006 $3,111,945 $1,579,689 $1,046,289 $459,470
Long-term debt $1,499,306 $1,197,096 $ 734,762 $ 383,065 $ 153,811
Convertible preferred
stock - - $ 25,800 $ 37,531 $ 38,098
Common shareholders'
equity $ 942,558 $ 880,137 $ 693,105 $ 558,617 $ 133,460
Operating Data (dollar
amounts in millions):
Loan servicing portfolio
(2) $ 113,111 $ 84,678 $ 54,484 $27,546 $15,684
Volume of loans originated $ 27,866 $ 52,459 $ 32,388 $12,156 $4,577
(1) Adjusted to reflect subsequent stock dividends and splits.
(2) Includes warehoused loans and loans under subservicing agreements.
</TABLE>
<PAGE>
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 "Item 1. 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 loan production capability and a growing
servicing portfolio are the primary means used by the Company to reduce the
sensitivity of its earnings to changes in interest rates because loan
production income characteristics are countercyclical to the effect of
interest rate changes on servicing income. Finally, the Company is involved in
business activities complementary to its mortgage banking business, such as
acting as agent in the sale of homeowners, fire, flood, earthquake, mortgage
life and disability insurance to its mortgagors, brokering servicing rights
and selling odd-lot and other mortgage-backed securities.
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, 1993 ("Fiscal 1993") was a then-record
performance year for the Company. The Company became the nation's leader in
single-family mortgage loan originations in calendar year 1992. This
performance was due to: (i) the development of a stronger capital base that
supported increased production; (ii) the implementation of an expansion
strategy for the production divisions designed to penetrate new markets and
expand in existing markets, particularly outside California, and to further
increase market share in both the purchase and refinance market segments;
(iii) the development of state-of-the-art technologies that expanded the
Company's production and servicing capabilities and capacity and (iv) a
decline in average mortgage interest rates. In Fiscal 1993, the Company's
market share increased to approximately 4% of the single-family mortgage
origination market. During the year ended February 28, 1993, the Company's
servicing portfolio nearly doubled to $54.5 billion.
The Company's performance during the fiscal year ended February 28, 1994
("Fiscal 1994") set new operating records. In calendar year 1993, the Company
became the nation's largest servicer of single-family mortgages and at
February 28, 1994 had a servicing portfolio of $84.7 billion, an increase of
55% over the portfolio at the end of Fiscal 1993. This servicing portfolio
growth was accomplished through increased loan production volume of low-coupon
mortgages. In addition, the Company acquired bulk servicing rights with an
aggregate principal balance of $3.4 billion. The Company also maintained its
position as the nation's leader in originations of single-family mortgages for
the second consecutive year. This performance was due to: (i) continued
implementation of the Company's production expansion strategy designed to
penetrate new markets and expand in existing markets, particularly outside
California, and to further increase market share; (ii) a continued decline in
average mortgage interest rates that prevailed during most of 1993 and (iii)
the introduction of new technologies that improved productivity. In Fiscal
1994, the Company's market share increased to approximately 5.1% of the
estimated $1.0 trillion single-family mortgage origination market, up from
approximately 4% of the estimated $825 billion market in Fiscal 1993.
The fiscal year ended February 28, 1995 ("Fiscal 1995") was a period of
transition from a mortgage market dominated by refinances resulting from
historically low interest rates to an extremely competitive and smaller
mortgage market in which refinances declined to a relatively small percentage
of total fundings and customer preference for adjustable-rate mortgages
increased. In this transition, which resulted from the increase in interest
rates during the year, intense price competition developed that resulted in
the Company experiencing negative production margins in Fiscal 1995. At the
same time, the increase in interest rates caused a decline in the prepayment
rate in the servicing portfolio which, combined with a decline in the rate of
expected future prepayments, caused a reduction in amortization of the
capitalized servicing fees receivable and purchased servicing rights
("Servicing Assets"). This decrease in amortization contributed to improved
earnings from the Company's servicing activities. The Company addressed the
challenges of the year by: (i) expanding its share of the home purchase
market; (ii) reducing costs to maintain its production infrastructure in line
with reduced production levels and (iii) accelerating the growth of its
servicing portfolio by aggressively acquiring servicing contracts through bulk
purchases. These strategies produced the following results: (i) home
purchase production increased from $13.3 billion, or 25% of total fundings,
in Fiscal 1994 to $19.5 billion, or 70% of total fundings, in Fiscal 1995,
helping the Company maintain its position as the nation's leader in
originations of single-family mortgages for the third consecutive year; (ii)
the number of staff engaged in production activities declined from
approximately 3,900 at the end of Fiscal 1994 to approximately 2,400 at the
end of Fiscal 1995; (iii) production-related and overhead costs declined from
$328 million in Fiscal 1994 to $270 million in Fiscal 1995 and (iv) bulk
servicing purchases increased to $17.6 billion in Fiscal 1995 from $3.4
billion in Fiscal 1994. These bulk servicing acquisitions, combined with
slower prepayments caused by increased mortgage interest rates, helped the
Company maintain its position as the nation's largest servicer of single-
family mortgages for the second consecutive year. In Fiscal 1995, the
Company's market share decreased to approximately 4% of the estimated $660
billion single-family mortgage origination market.
<PAGE>
RESULTS OF OPERATIONS
Fiscal 1995 Compared with Fiscal 1994
Revenues for Fiscal 1995 decreased 20% to $602.7 million from $755.6
million for Fiscal 1994. Net earnings decreased 51% to $88.4 million in
Fiscal 1995 from $179.5 million in Fiscal 1994. The decrease in revenues was
due to decreased loan production resulting from increased mortgage interest
rates in Fiscal 1995. In addition, intense price competition during Fiscal
1995 resulted in the Company's recording a loss on the sale of loans. The
Company had a gain on sale of loans in Fiscal 1994. In Fiscal 1995, the
Company did not realize any servicing hedge gains; in addition, amortization
of option and interest rate floor premiums related to the servicing hedge
amounted to $40.0 million and the write-off of the remaining unamortized costs
of the Company's prior servicing hedge amounted to $25.6 million. During
Fiscal 1994, the Company realized $73.4 million in net servicing hedge gains.
These negative effects experienced in Fiscal 1995 were somewhat offset by the
favorable impact of a larger and more slowly prepaying loan servicing
portfolio and of a gain recognized on the sale of servicing. The decrease in
net earnings for Fiscal 1995 was primarily the result of the decrease in
revenues, a smaller decline in expenses than revenues from Fiscal 1994 to
Fiscal 1995, higher guarantee fees caused by the larger servicing portfolio
and a charge due to the Company's downsizing and office consolidation process.
The total volume of loans produced decreased 47% to $27.9 billion for
Fiscal 1995 from $52.5 billion for Fiscal 1994. Refinancings totaled $8.4
billion, or 30% of total fundings, for Fiscal 1995, as compared to $39.2
billion, or 75% of total fundings, for Fiscal 1994. ARM loan production
totaled $9.5 billion, or 34% of total fundings, for Fiscal 1995, as compared
to $10.1 billion, or 19% of total fundings, for Fiscal 1994. Production in
the Company's Consumer Markets Division decreased to $7.1 billion for Fiscal
1995 compared to combined production of $11.6 billion for the Retail and
Consumer Divisions for Fiscal 1994. Production in the Company's Wholesale
Division decreased to $8.5 billion (which included approximately $3.3 billion
of originated loans and $5.2 billion of purchased loans) for Fiscal 1995 from
$21.5 billion (which included approximately $10.9 billion of originated loans
and $10.6 billion of purchased loans) for Fiscal 1994. The Company's
Correspondent Division purchased $12.3 billion in mortgage loans for Fiscal
1995 compared to $19.4 billion for Fiscal 1994. The factors which affect the
relative volume of production among the Company's three divisions include
pricing decisions and the relative competitiveness of such pricing, the level
of real estate and mortgage lending activity in each division's markets, and
the success of each division's sales and marketing efforts.
At February 28, 1995 and 1994, the Company's pipeline of loans in process
was $3.6 billion and $7.6 billion, respectively. In addition, at February 28,
1995, the Company has committed to make loans in the amount of $2.7 billion,
subject to property identification and approval of the loans ("Lock N' Shop
PipelineSM"). At February 28, 1994, the Lock N' Shop Pipeline was $1.6
billion. Historically, approximately 43% to 75% of the pipeline of loans in
process has funded. In Fiscal 1995 and Fiscal 1994, the Company received
315,632 and 515,104 new loan applications, respectively, at an average daily
rate of $141 million and $282 million, respectively. The following actions
were taken during Fiscal 1995 on the total applications received during that
year: 220,715 loans (70% of total applications received) were funded and
66,725 applications (21% of total applications received) were either rejected
by the Company or withdrawn by the applicant. The following actions were
taken during Fiscal 1994 on the total applications received during that year:
358,257 loans (70% of total applications received) were funded and 98,809
applications (19% of total applications received) were either rejected by the
Company or withdrawn by the applicant. 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.
<PAGE>
Loan origination fees decreased in Fiscal 1995 as compared to Fiscal 1994
and a loss was recorded in Fiscal 1995 on the sale of loans due to lower loan
production that resulted from the increase in the level of mortgage interest
rates. Reduced margins due to increased price competition caused by lower
demand for mortgage loans during Fiscal 1995 than Fiscal 1994 also contributed
to the loss on the sale of loans. In general, loan origination fees and gain
or loss on sale of loans are affected by numerous factors including loan
pricing decisions, volatility, the general direction of interest rates and the
volume of loans produced.
Net interest income (interest earned net of interest charges) decreased
to $75.5 million for Fiscal 1995 from $100.3 million for Fiscal 1994.
Consolidated net interest income is principally a function of: (i) net
interest income earned from the Company's mortgage loan warehouse ($35.7
million and $110.1 million for Fiscal 1995 and Fiscal 1994, respectively);
(ii) interest expense related to the Company's investment in servicing rights
($20.0 million and $68.0 million for Fiscal 1995 and Fiscal 1994,
respectively) and (iii) interest income earned from the custodial balances
associated with the Company's servicing portfolio ($59.8 million and $58.2
million for Fiscal 1995 and Fiscal 1994, respectively). The 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 amount of the
mortgage loan warehouse due to the decline in production and to a decrease in
the net earnings rate. The decrease in interest expense on the investment in
servicing rights resulted primarily from a decline in the payments of interest
to certain investors pursuant to customary servicing arrangements with regard
to paid-off loans which payments exceeded the interest earned on these loans
through their respective payoff dates ("Interest Costs Incurred on Payoffs").
The increase in net interest income earned from the custodial balances was
related to an increase in the earnings rate, offset somewhat by a decline in
the average custodial balances from Fiscal 1994 to Fiscal 1995.
During Fiscal 1995, loan administration income was positively affected by
the continued growth of the Company's loan servicing portfolio. At February
28, 1995, the Company serviced $113.1 billion of loans (including $0.7 billion
of loans subserviced for others) compared to $84.7 billion (including $0.6
billion of loans subserviced for others) at February 28, 1994, a 34% increase.
The growth in the Company's servicing portfolio during Fiscal 1995 was the
result of loan production volume and the acquisition of bulk servicing rights,
partially offset by prepayments, partial prepayments, scheduled amortization
of mortgage loans and a sale of servicing rights of loans with principal
balances aggregating $5.9 billion. The weighted average interest rate of the
mortgage loans in the Company's servicing portfolio at February 28, 1995 was
7.6% compared to 7.2% at February 28, 1994. 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. See "Prospective Trends-
-Market Factors."
During Fiscal 1995, the prepayment rate of the Company's servicing
portfolio was 9%, as compared to 35% for Fiscal 1994. 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 is primarily
attributable to decreased refinance activity caused by increased mortgage
interest rates in Fiscal 1995 from Fiscal 1994. The primary means used by the
Company to reduce the sensitivity of its earnings to changes in interest rates
is through a strong loan production capability and a growing servicing
portfolio. To mitigate the effect on earnings of higher amortization (which
is deducted from loan servicing income) resulting from increased prepayment
activity, the Company acquires financial instruments, including derivative
contracts, that increase in value when interest rates decline (the "Servicing
Hedge"). These financial instruments include call options on U.S. treasury
futures and MBS, interest rate floors and certain tranches of CMOs.
The CMOs, which consist primarily of principal-only ("P/O") securities,
have been purchased at deep discounts to their par values. As interest rates
decline, prepayments on the collateral underlying the CMOs should increase,
These changes should result in a decline in the average lives of the P/O
securities and an increase in the present values of their cash flows.
The Servicing Hedge instruments utilized by the Company partially protect
the value of the investment in servicing rights from the effects of increased
prepayment activity that generally results from declining interest rates. To
the extent that interest rates increase, as they did in Fiscal 1995, the value
of the servicing rights increases while the value of the hedge instruments
declines. However, the Company is not exposed to loss beyond its initial
outlay to acquire the hedge instruments. At February 28, 1995, the carrying
value of interest rate floor contracts and P/O securities included in the
Servicing Hedge was approximately $16 million and $42 million, respectively.
There can be no assurance the Company's Servicing Hedge will generate gains in
the future. See Note F to the Company's Consolidated Financial Statements.
<PAGE>
For Fiscal 1995, total amortization amounted to $95.8 million,
representing an annual rate of 7% of average Servicing Assets. During Fiscal
1995, the Company did not realize any Servicing Hedge gains; in addition,
amortization of option and interest rate floor premiums related to the
Servicing Hedge amounted to $40.0 million. Also during Fiscal 1995, the
Company decided to replace its prior Servicing Hedge with a new hedge
resulting in a write-down of the remaining unamortized costs of the prior
hedge of $25.6 million. For Fiscal 1994, total amortization was $242.2
million, or an annual rate of 28% of the average Servicing Assets.
Amortization for Fiscal 1994 was offset by Servicing Hedge gains which
aggregated $73.4 million. The decline in the rate of amortization from Fiscal
1994 to Fiscal 1995 resulted primarily from a decline in the current and
projected future prepayment rates caused by an increase in mortgage interest
rates. 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 in
excess of amortization due to impairment.
During Fiscal 1995, the Company acquired bulk servicing rights for loans
with principal balances aggregating $17.6 billion at a price of $261.9 million
or 1.49% of the aggregate outstanding principal balances of the servicing
portfolios acquired. During Fiscal 1994, the Company acquired bulk servicing
rights for loans with principal balances aggregating $3.4 billion at a price
of $46.6 million or 1.36% of the aggregate outstanding principal balances of
the servicing portfolios acquired.
During Fiscal 1995, the Company sold servicing rights for loans with
principal balances aggregating $5.9 billion and recognized a gain of $56.9
million. No servicing rights were sold during Fiscal 1994.
Salaries and related expenses are summarized below for Fiscal 1995 and
Fiscal 1994.
(Dollar amounts in
thousands) Fiscal 1995
Production Loan Other
Activities Administration Activities Total
Base Salaries $109,276 $23,929 $6,811 $140,016
Incentive Bonus 29,815 463 4,204 34,482
Payroll Taxes and
Benefits 19,695 4,020 848 24,563
Total Salaries and
Related Expenses $158,786 $28,412 $11,863 $199,061
Average Number of
Employees 2,631 850 246 3,727
(Dollar amounts in
thousands) Fiscal 1994
Production Loan Other
Activities Administration Activities Total
Base Salaries $123,454 $18,974 $4,730 $147,158
Incentive Bonus 54,460 323 2,663 57,446
Payroll Taxes and
Benefits 18,896 3,544 658 23,098
Total Salaries and
Related Expenses $196,810 $22,841 $8,051 $227,702
Average Number of
Employees 3,351 680 145 4,176
<PAGE>
The amount of salaries decreased during Fiscal 1995 primarily due to the
decreased number of employees resulting from reduced loan production, offset
somewhat by increased employees due to a larger servicing portfolio.
Incentive bonuses earned during Fiscal 1995 decreased primarily due to
decreased loan production and decreased loan production personnel.
Occupancy and other office expenses for Fiscal 1995 slightly increased to
$102.2 million from $101.7 million for Fiscal 1994. This was due to increased
office and equipment rental expenses resulting from the opening of 59 Consumer
Markets Division branch offices in Fiscal 1995, partially offset by a decline
in expenses resulting from the closure of 86 Consumer Markets Division
satellite offices and 13 Wholesale Division branch offices.
Guarantee fees (fees paid to guarantee timely and full payment of
principal and interest on MBS and whole loans sold to permanent investors and
to transfer the credit risk of the loans in the servicing portfolio) for
Fiscal 1995 increased 49% to $85.8 million from $57.6 million for Fiscal 1994.
This increase resulted primarily from an increase in the servicing portfolio.
Marketing expenses for Fiscal 1995 decreased 11% to $23.2 million from
$26.0 million for Fiscal 1994. The decrease in marketing expenses reflected
the Company's strategy to centralize and streamline its marketing functions.
In Fiscal 1995, the Company incurred an $8.0 million charge related to
the consolidation and relocation of branch and administrative offices that
occurred as a result of the reduction in staff caused by declining production.
Other operating expenses for Fiscal 1995 decreased from Fiscal 1994 by
$6.5 million, or 15%. This decrease was due primarily to decreased loan
production.
Profitability of Loan Production and Servicing Activities
In Fiscal 1995, the Company's pre-tax loss from its loan production
activities (which include loan origination and purchases, warehousing and
sales) was $94.8 million. In Fiscal 1994, the Company's comparable pre-tax
earnings were $250.1 million. The decrease of $344.9 million is primarily
attributed to lower loan production and increased price competition caused by
lower demand for mortgage loans. In Fiscal 1995, the Company's pre-tax
earnings from its loan servicing activities (which include administering the
loans in the servicing portfolio, selling homeowners and other insurance and
acting as tax payment agent) was $229.6 million as compared to $46.6 million
in Fiscal 1994. This increase was primarily due to an increase in the
servicing portfolio, a reduction in amortization due to lower prepayment
activity and reduced prepayment expectations and a sale of servicing during
Fiscal 1995 which resulted in a gain of $56.9 million. The increase was
partially offset by an increase in Servicing Hedge expense and a write-off of
the remaining costs of the prior Servicing Hedge.
Fiscal 1994 Compared with Fiscal 1993
Revenues for Fiscal 1994 increased 49% to $755.6 million from $505.6
million for Fiscal 1993. Net earnings increased 28% to $179.5 million in
Fiscal 1994 from $140.1 million in Fiscal 1993. The increase in revenues and
net earnings for Fiscal 1994 reflected increased loan production and continued
growth of the loan servicing portfolio. The increase in revenues was
partially offset by an increase in expenses.
The total volume of loans produced increased 62% to $52.5 billion for
Fiscal 1994 from $32.4 billion for Fiscal 1993. Refinancings totaled $39.2
billion, or 75% of total fundings, for Fiscal 1994, as compared to $23.6
billion, or 73% of total fundings, for Fiscal 1993. ARM loan production
totaled $10.1 billion, or 19% of total fundings, for Fiscal 1994, as compared
to $9.2 billion, or 28% of total fundings, for Fiscal 1993. Production in the
Company's Retail Division (which in Fiscal 1995 became part of the Consumer
Markets Division) increased to $7.7 billion for Fiscal 1994 compared to $4.6
billion for Fiscal 1993. Production in the Company's Wholesale Division
increased to $21.5 billion (which included approximately $10.9 billion of
originated loans and $10.6 billion of purchased loans) for Fiscal 1994
compared to $15.5 billion (which included approximately $8.7 billion of
originated loans and $6.8 billion of purchased loans) for Fiscal 1993. The
Company's Correspondent Division purchased $19.4 billion in mortgage loans for
Fiscal 1994 compared to $10.8 billion for Fiscal 1993. Production in the
Company's Consumer Division (which in Fiscal 1995 became part of the Consumer
Markets Division) increased to $3.9 billion for Fiscal 1994 compared to $1.5
billion for Fiscal 1993.
<PAGE>
At February 28, 1994 and 1993, the Company's pipeline of loans in process
was $7.6 billion and $5.9 billion, respectively. In addition, at February 28,
1994, the Company had committed to make loans in the amount of $1.6 billion,
subject to property identification and borrower qualification. At February
28, 1993, the amount of loan commitments subject to property identification
and borrower qualification was not material. Historically, approximately 43%
to 75% of the pipeline of loans in process has funded. In Fiscal 1994 and
Fiscal 1993, the Company received 515,104 and 340,242 new loan applications,
respectively, at an average daily rate of $282 million and $191 million,
respectively. The following actions were taken during Fiscal 1994 on the
total applications received during that year: 358,257 loans (70% of total
applications received) were funded and 98,809 applications (19% of total
applications received) were either rejected by the Company or withdrawn by the
applicant. The following actions were taken during Fiscal 1993 on the total
applications received during that year: 212,765 loans (63% of total
applications received) were funded and 79,991 applications (24% of total
applications received) were either rejected by the Company or withdrawn by the
applicant.
Loan origination fees and gain on sale of loans benefited from the
increase in loan production. The percentage increase in loan origination fees
was less than the percentage increase in total production primarily because of
an increase in the percentage of production attributable to products that
contained lower origination fees in their pricing structure.
Net interest income (interest earned net of interest charges) increased
to $100.3 million for Fiscal 1994 from $62.8 million for Fiscal 1993.
Consolidated net interest income is principally a function of: (i) net
interest income earned from the Company's mortgage loan warehouse ($110.1
million and $59.4 million for Fiscal 1994 and Fiscal 1993, respectively); (ii)
interest expense related to the Company's investment in servicing rights
($68.0 million and $21.3 million for Fiscal 1994 and Fiscal 1993,
respectively) and (iii) interest income earned from the custodial balances
associated with the Company's servicing portfolio ($58.2 million and $21.8
million for Fiscal 1994 and Fiscal 1993, respectively). The increase in net
interest income from the mortgage loan warehouse was attributable to an
increase in loan production. The increase in interest expense on the
investment in servicing rights resulted primarily from an increase in Interest
Costs Incurred on Payoffs. The increase in net interest income earned from the
custodial balances was related to larger custodial account balances (caused by
a larger servicing portfolio and an increase in the prepayment rate of the
Company's servicing portfolio), offset somewhat by a decline in the earnings
rate from Fiscal 1993 to Fiscal 1994.
During Fiscal 1994, loan administration income was positively affected by
the continued growth of the loan servicing portfolio. At February 28, 1994,
the Company serviced $84.7 billion of loans (including $0.6 billion of loans
subserviced for others) compared to $54.5 billion (including $0.6 billion of
loans subserviced for others) at February 28, 1993, a 55% increase. The
growth in the Company's servicing portfolio during Fiscal 1994 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 28, 1994 was
7.2% compared to 8.0% at February 28, 1993.
During Fiscal 1994, the prepayment rate of the Company's servicing
portfolio was 35%, as compared to 20% for Fiscal 1993. The increase in the
prepayment rate was primarily attributable to increased refinance activity
caused by generally declining mortgage interest rates. During most of Fiscal
1994, interest rates continued their decline to historically low levels
although they began to rise toward the end of the year.
For Fiscal 1994, total amortization amounted to $242.2 million,
representing an annual rate of 28% of average Servicing Assets. Amortization
for Fiscal 1994 was partially offset by net Servicing Hedge gains which
aggregated $73.4 million. For Fiscal 1993, total amortization was $151.4
million, or an annual rate of 29% of the average Servicing Assets. This
amortization amount was comprised of $101.4 million related to current and
projected prepayment rates and $50.0 million resulting from Servicing Hedge
gains, in accordance with the Company's accounting policies. Amortization for
Fiscal 1993 was offset by Servicing Hedge gains which aggregated $74.1
million.
<PAGE>
The following summarizes the notional amounts of Servicing Hedge
transactions.
Long Long Call
Options
Call on U.S.
Options Treasury
(Dollar amounts in millions) on MBS Futures
Balance, March 1, 1991 $ - $ -
Additions 560 -
Balance, February 29, 1992 560 -
Additions 2,287 700
Dispositions 2,847 700
Balance, February 28, 1993 - -
Additions 4,700 2,520
Dispositions 2,700 750
Balance, February 28, 1994 $2,000 $1,770
The long call options purchased by the Company partially protect the
value of the investment in servicing rights from the effects of increased
prepayment activity that generally results from declining interest rates. To
the extent that interest rates increase, as they did toward the end of Fiscal
1994, the value of the servicing rights increases while the value of the
options declines. The value (i.e., replacement cost) of the options can
decline below the remaining unamortized cost of such options, but the options
cannot expose the Company to loss beyond its initial outlay to acquire them.
Although the replacement cost of the call options tends to decline when
interest rates rise, the options continue to provide protection over their
remaining term against a decline in interest rates below the level implied at
purchase by their exercise price. Accordingly, the Company amortizes option
premiums over the lives of the respective options. Any unamortized premium
remaining when an option gain is realized (through exercise or sale) is
deducted from such gain. At February 28, 1994, the call options on MBS, which
expired from March through September 1994, had an unamortized cost of
approximately $19 million and a replacement value of approximately $1 million.
At February 28, 1994, the call options on U.S. treasury futures, which expired
in September 1994, had an unamortized cost of approximately $21 million and a
replacement value of approximately $7 million.
During Fiscal 1994, the Company acquired bulk servicing rights for loans
with principal balances aggregating $3.4 billion at a price of $46.6 million
or 1.36% of the aggregate outstanding principal balances of the servicing
portfolios acquired. During Fiscal 1993, the Company acquired bulk servicing
rights for loans with principal balances aggregating $2.7 billion at a price
of $34.3 million or 1.29% of the aggregate outstanding principal balances of
the servicing portfolios acquired.
Salaries and related expenses are summarized below for Fiscal 1994 and
Fiscal 1993.
(Dollar amounts in
thousands) Fiscal 1994
Production Loan Other
Activities Administration Activities Total
Base Salaries $123,454 $18,974 $4,730 $147,158
Incentive Bonus 54,460 323 2,663 57,446
Payroll Taxes and
Benefits 18,896 3,544 658 23,098
Total Salaries and
Related Expenses $196,810 $22,841 $8,051 $227,702
Average Number of
Employees 3,351 680 145 4,176
<PAGE>
(Dollar amounts in
thousands) Fiscal 1993
Production Loan Other
Activities Administration Activities Total
Base Salaries $ 73,114 $ 13,801 $ 4,666 $ 91,581
Incentive Bonus 32,455 145 2,502 35,102
Payroll Taxes and
Benefits 10,253 2,470 657 13,380
Total Salaries and
Related Expenses $115,822 $ 16,416 $ 7,825 $140,063
Average Number of
Employees 2,024 490 118 2,632
The amount of salaries increased during Fiscal 1994 primarily due to the
increased number of employees resulting from increased loan production and an
increased servicing portfolio. Incentive bonuses earned during Fiscal 1994
increased primarily due to increased loan production and increases in loan
production personnel.
Occupancy and other office expenses for Fiscal 1994 increased 57% to
$101.7 million from $64.8 million for Fiscal 1993. This increase was
attributable primarily to the expansion of the Retail and Wholesale Divisions'
branch networks. As of February 28, 1994, there were 295 Retail Division
branch offices (including 110 satellite offices and nine regional support
centers) and 80 Wholesale Division branch offices (including 11 regional
support centers). As of February 28, 1993, there were 167 Retail Division
branch offices (including 45 satellite offices and two regional support
centers) and 55 Wholesale Division branch offices (including nine regional
support centers). In addition, the increase in the Company's loan production
and loan servicing portfolio resulted in an increase in occupancy and other
office expenses related to the Company's central office.
Guarantee fees for Fiscal 1994 increased 96% to $57.6 million from $29.4
million for Fiscal 1993. This increase resulted primarily from an increase in
the servicing portfolio.
Marketing expenses for Fiscal 1994 increased 101% to $26.0 million from
$13.0 million for Fiscal 1993. The increase in marketing expenses reflected
the Company's strategy to expand its market share, particularly in the home
purchase lending market.
Other operating expenses for Fiscal 1994 increased over Fiscal 1993 by
$18.6 million, or 75%. This increase was due primarily to several factors,
including increased loan production, a larger servicing portfolio and
expansion of loan production capabilities.
Profitability of Loan Production and Servicing Activities
In Fiscal 1994, the Company's pre-tax earnings from its loan production
activities (which include loan origination and purchases, warehousing and
sales) was $250.1 million. In Fiscal 1993, the Company's comparable pre-tax
earnings were $175.8 million. The increase of $74.3 million was primarily
attributed to higher loan production. In Fiscal 1994, the Company's pre-tax
earnings from its loan servicing activities was $46.6 million as compared to
$53.0 million in Fiscal 1993. The additional loan administration revenues
derived from a larger portfolio during Fiscal 1994 were more than offset by an
increase in amortization of the Servicing Assets, net of gains from the
Servicing Hedge, and an increase in Interest Costs Incurred on Payoffs.
<PAGE>
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 amortization of the Servicing Assets and
Interest Costs Incurred on Payoffs, and because the rate of interest earned
from the custodial balances tends to increase. Conversely, as interest rates
decline, loan production, particularly from loan refinancings, increases.
However, during such periods, prepayment rates tend to accelerate (principally
on the portion of the portfolio having 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 custodial balances, and increased Interest
Costs Incurred on Payoffs.
SEASONALITY
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general national pattern of sales and resales of
homes, although refinancings tend to be less seasonal and more closely related
to changes in interest rates. Sales and resales of homes typically peak
during the spring and summer seasons and decline to lower levels from mid-
November through February.
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 its revolving
credit facility, medium-term note issuances, pre-sale funding facilities, MBS
and whole loan reverse-repurchase agreements, subordinated notes and cash flow
from operations. In addition, in the past the Company has relied on direct
borrowings from its revolving credit facility, servicing-secured bank
facilities, privately-placed financings and public offerings of preferred and
common stock. See Note D to the Company's Consolidated Financial Statements
included herein for more information on the Company's financings.
Certain of the debt obligations of the Company and CFC 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 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 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 agreement permits CFC to borrow an
aggregate maximum amount of $2.5 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 held for sale, receivables for mortgage
loans shipped and mortgage servicing rights. The 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 MBS and of its interest rate
swaps. 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. With respect to the interest rate swap agreements, the margin
requirements are negotiated with the various counterparties and are generally
tied to the credit ratings of CFC and each counterparty.
<PAGE>
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
or liquidity.
Cash Flows
Operating Activities In Fiscal 1995, the Company's operating activities
provided cash primarily from the decline in its warehouse of mortgage loans of
approximately $815 million, offset by increases in other assets and working
capital of $125 million. The Company's operating activities also generated
$212 million of positive cash flow. Cash provided by operating activities was
principally allocated to the long-term investment in servicing as discussed
below under Investing Activities.
Investing Activities The primary investing activity for which cash was
used in Fiscal 1995 was the investment in servicing. Net cash used by
investing activities decreased to $717 million for Fiscal 1995 from $765
million for Fiscal 1994. This decrease was primarily from the cash provided
by the sale of servicing rights during Fiscal 1995 and lower cash outlay for
purchases of property, equipment and leasehold improvements during Fiscal 1995
than in Fiscal 1994, offset somewhat by an increase in purchased servicing
rights and capitalized servicing fees receivable of $97 million during Fiscal
1995.
Financing Activities Net cash used by financing activities amounted to
$0.2 billion for Fiscal 1995. Net cash provided by financing activities
amounted to $2.0 billion for Fiscal 1994. This change was primarily
attributable to the Company's net reduction in borrowings in Fiscal 1995 and
net additions to borrowings in Fiscal 1994.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
During Fiscal 1995, the Company received new loan applications at an
average daily rate of $141 million and at February 28, 1995, the Company's
pipeline of loans in process was $3.6 billion. This compares to a daily
application rate in Fiscal 1994 of $282 million and a pipeline of loans in
process at February 28, 1994 of $7.6 billion. The decline in the pipeline of
loans in process from Fiscal 1994 to Fiscal 1995 was primarily due to a
decrease in demand for mortgage loans caused by an increase in mortgage
interest rates. The size of the pipeline is generally an indication of the
level of future fundings, as historically 43% to 75% of the pipeline of loans
in process has funded. In addition, the Company's Lock N' Shop Pipeline at
February 28, 1995 was $2.7 billion and at February 28, 1994 was $1.6 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. For the month ended March 31, 1995, the
average daily amount of applications received was $153 million, and at March
31, 1995, the pipeline of loans in process was $3.9 billion and the Lock N'
Shop Pipeline was $1.9 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 continue to 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 was a time lag between the reduction in income caused by
declining production and the reduction in expenses. The Company's production
staff declined from approximately 3,900 at February 28, 1994 to approximately
2,400 at February 28, 1995. The Company has reduced its total staffing levels
from approximately 4,900 at February 28, 1994 to approximately 3,600 at
February 28, 1995. However, the rising interest rates enhanced earnings from
the Company's loan servicing portfolio as amortization of the Servicing Assets
and Interest Costs Incurred on Payoffs decreased from levels experienced
during the prior periods of declining interest rates, and the rate of interest
earned from the custodial balances associated with the Company's servicing
portfolio increased. 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 Fiscal 1995, the
Company purchased such servicing contracts with principal balances amounting
to $17.6 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 and
other portfolio lenders are competing with the Company by offering
aggressively priced adjustable-rate mortgage products which have grown in
popularity with the rise in interest rates. Generally, the Company has
experienced significant price competition among mortgage lenders which has
resulted in downward pressure on loan production earnings.
<PAGE>
Some regions in which the Company operates, particularly some regions of
California, have been experiencing slower economic growth, and real estate
financing activity in these regions has been negatively impacted. As a
result, home lending activity for single- (one-to-four) family residences in
these regions may also have experienced slower growth. There can be no
assurance that the Company's operations and results will not continue to be
negatively impacted by such adverse economic conditions. The Company's
California mortgage loan production (measured by principal balance)
constituted 31% of its total production during Fiscal 1995, down from 46% for
Fiscal 1994. The decline in the percentage of California loan production was
due to the Company's continuing effort to expand its production capacity
outside of California and the aggressively priced adjustable-rate mortgage
products offered by the Company's competitors in the state. Since
California's mortgage loan production constituted a significant portion of the
Company's production during Fiscal 1995, there can be no assurance that the
Company's operations will not continue to be adversely affected to the extent
California continues to experience slower or negative economic growth
resulting in decreased residential real estate lending activity or market
factors further impact the Company's competitive position in the state.
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 (22% of the Company's
servicing portfolio at February 28, 1995) 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 realized no gains and recorded
amortization of Servicing Hedge option premiums amounting to $40.0 million
during Fiscal 1995. In addition, the Company decided to replace its prior
Servicing Hedge with a new hedge, which the Company believed would be more
cost effective. As a result, the Company recorded an additional write-down of
$25.6 million during Fiscal 1995, representing the unamortized costs of the
prior Servicing Hedge. At February 28, 1995, the carrying value of interest
rate floor contracts and P/O securities included in the Servicing Hedge was
approximately $16 million and $42 million, respectively. There can be no
assurance the Company's Servicing Hedge will generate gains in the future.
Federal Legislation
In August 1993, a one percent increase in the corporate federal tax rate
was enacted. However, the Company has been diversifying its business
activities outside California, a state which has a corporate tax rate that is
higher than the average tax rate among the states in which the Company does
business. This diversification serves to reduce the Company's average tax
rate which offsets the enacted increase in the federal tax rate.
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.
<PAGE>
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights. This Statement, among other provisions, requires the
recognition of originated mortgage servicing rights ("OMSRs"), as well as
purchased mortgage servicing rights ("PMSRs"), as assets by allocating total
costs incurred between the loan and the servicing rights based on their
relative fair values. Presently, the cost of OMSRs is included with the cost
of the related loans and written off against income when the loans are sold,
while the cost of PMSRs is recorded as an asset. Also under the new
Statement, all capitalized mortgage servicing rights are evaluated for
impairment based on the excess of the carrying amount of the mortgage
servicing rights over their fair value. In measuring impairment, the carrying
amount must be stratified based on one or more predominant risk
characteristics of the underlying loans. Impairment is recognized through a
valuation allowance for an individual stratum. Under current accounting
requirements, the impairment evaluation may be made using either discounted or
undiscounted cash flows. No uniform required level of disaggregation is
specified. The Company uses a disaggregated, undiscounted method.
The Statement is effective prospectively in fiscal years beginning after
December 15, 1995, with earlier application encouraged. The Company plans to
adopt the Statement in the first quarter of its fiscal year ending February
29, 1996. The actual effect of implementing this new Statement on the
Company's financial position and results of operations will depend on factors
determined as of the end of a reporting period, including the amount and mix
of originated and purchased production, the level of interest rates and market
estimates of future prepayment rates. Accordingly, the Company cannot
determine at this time the impact on its future earnings of applying the new
methodologies of recording all mortgage servicing rights as assets, of
calculating impairment and of applying the other provisions of the Statement.
<PAGE>
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.
<PAGE>
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
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
Company's Report on Form 8-K dated February 6,
1987).
4.3* Specimen Debenture Certificate (incorporated by
reference to Exhibit 4.3 to the Company's Current
Report on Form 8-K dated February 6, 1987).
4.6* Form of Medium-Term Notes, Series A (fixed-rate) of
the Company (incorporated by reference to Exhibit
4.2 to Amendment No. 1 to the Company's
registration statement on Form S-3 (File No. 33-
19708) filed with the SEC on January 26, 1988).
4.7* Form of Medium-Term Notes, Series A (floating-rate)
of the Company (incorporated by reference to
Exhibit 4.3 to Amendment No. 1 to the Company's
registration statement on Form S-3 (File No. 33-
19708) filed with the SEC on January 26, 1988).
4.8* Indenture dated as of January 15, 1988 between the
Company and The Chase Manhattan Bank, N.A., as
trustee (incorporated by reference to Exhibit 4.1
to Amendment No. 1 to the Company's registration
statement on Form S-3 (File No. 33-19708) filed
with the SEC on January 26, 1988).
4.9* Form of Medium-Term Notes, Series B (floating-rate)
of the Company (incorporated by reference to
Exhibit 4.3 to the Company's registration statement
on Form S-3 (File No. 33-29941) filed with the SEC
on July 13, 1989).
4.10* Form of Medium-Term Notes, Series B (fixed-rate) of
the Company (incorporated by reference to Exhibit
4.2 to the Company's registration statement on Form
S-3 (File No. 33-29941) filed with the SEC on July
13, 1989).
4.11* Form of Medium-Term Notes, Series A (fixed-rate) of
CFC (incorporated by reference to Exhibit 4.2 to
the Company's registration statement on Form S-3
(File Nos. 33-44194 and 33-44194-1) filed with the
SEC on November 27, 1991).
<PAGE>
4.12* Form of Medium-Term Notes, Series A (floating-rate)
of CFC (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).
4.13* Form of Medium-Term Notes, Series B (fixed-rate) of
CFC (incorporated by reference to Exhibit 4.2 to
the Company's registration statement on Form S-3
(File No. 33-51816) filed with the SEC on September
9, 1992).
4.14* Form of Medium-Term Notes, Series B (floating-rate)
of CFC (incorporated by reference to Exhibit 4.3 to
the Company's registration statement on Form S-3
(File No. 33-51816) filed with the SEC on September
9, 1992).
4.15* Countrywide Credit Industries, Inc. Dividend
Reinvestment Plan dated October 30, 1992
(incorporated by reference to the Company's
registration statement on Form S-3 (File No. 33-
53048) filed with the SEC on October 9, 1992).
4.16* Form of Medium-Term Notes, Series C (fixed-rate) of
CFC (incorporated by reference to Exhibit 4.2 to
the registration statement on Form S-3 of CFC and
the Company (File Nos. 33-50661 and 33-50661-01)
filed with the SEC on October 19, 1993).
4.17* Form of Medium-Term Notes, Series C (floating-rate)
of CFC (incorporated by reference to Exhibit 4.3
to the registration statement on Form S-3 of CFC
and the Company (File Nos. 33-50661 and 33-50661-
01) filed with the SEC on October 19, 1993).
4.18* Indenture dated as of January 1, 1992 among CFC,
the Company and The Bank of New York, as trustee
(incorporated by reference to Exhibit 4.1 to the
registration statement on Form S-3 of CFC and the
Company (File Nos. 33-50661 and 33-50661-01) filed
with the SEC on October 19, 1993).
+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 Agreements for David S. Loeb
and Angelo R. Mozilo dated February 2, 1993
(incorporated by reference to Exhibit 10.2 to the
Company's Annual Report on Form 10-K dated February
28, 1993).
+10.3* Countrywide Credit Industries, Inc. Deferred
Compensation Agreement for Non-Employee Directors
(incorporated by reference to Exhibit 5.2 to the
Company's Quarterly Report on Form 10-Q dated
August 31, 1987).
+10.3.1* Countrywide Credit Industries, Inc. Deferred
Compensation Plan for Key Management Employees
dated April 15, 1992 (incorporated by reference to
Exhibit 10.3.1 to the Company's Annual Report on
Form 10-K dated February 28, 1993).
+10.3.2* Countrywide Credit Industries, Inc. Deferred
Compensation Plan effective August 1, 1993
(incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q dated
August 31, 1993).
10.4* Revolving Credit Agreement dated as of September
23, 1994 by and among CFC, the First National Bank
of Chicago, Bankers Trust Company and the Lenders
Party Thereto (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-
Q dated November 30, 1994).
+10.5* Severance Plan (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q dated May 31, 1988).
+10.6* Key Executive Equity Plan (incorporated by
reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q dated May 31, 1988).
<PAGE>
+10.7* 1987 Stock Option Plan, as Amended and Restated on
May 15, 1989 (incorporated by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-K
dated February 28, 1989).
+10.8* 1986 Non-Qualified Stock Option Plan as amended
(incorporated by reference to Exhibit 10.11 to Post-
Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-
9231) filed with the SEC on December 20, 1988).
+10.9* 1985 Non-Qualified Stock Option Plan as amended
(incorporated by reference to Exhibit 10.9 to Post-
Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-
9231) filed with the SEC on December 20, 1988).
+10.10* 1984 Non-Qualified Stock Option Plan as amended
(incorporated by reference to Exhibit 10.7 to Post-
Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-
9231) filed with the SEC on December 20, 1988).
+10.11* 1982 Incentive Stock Option Plan as amended
(incorporated by reference to Exhibits 10.2 - 10.5
to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-
9231) filed with the SEC on December 20, 1988).
+10.12* Amended and Restated Stock Option Financing Plan
(incorporated by reference to Exhibit 10.12 to Post-
Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-
9231) filed with the SEC on December 20, 1988).
10.13* 1994 Amended and Extended Management Agreement,
dated as of May 15, 1994, between CWM Mortgage
Holdings, Inc. ("CWM") and Countrywide Asset
Management Corporation (incorporated by reference
to Exhibit 10.5 to the Company's Quarterly Report
on Form 10-Q dated May 31, 1994).
10.14* 1987 Amended and Restated Servicing Agreement,
dated as of May 15,1987, between CWM and CFC
(incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K dated February
28, 1990).
10.15* 1994 Amended and Restated Loan Purchase and
Administrative Services Agreement, dated as of May
15, 1994, between CWM and CFC (incorporated by
reference to Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q dated May 31, 1994).
+10.19* 1991 Stock Option Plan (incorporated by reference
to Exhibit 10.19 to the Company's Annual Report on
Form 10-K dated February 29, 1992).
+10.19.1* First Amendment to the 1991 Stock Option Plan
(incorporated by reference to Exhibit 10.19.1 to
the Company's Annual Report on Form 10-K dated
February 28, 1993).
+10.19.2* Second Amendment to the 1991 Stock Option Plan
(incorporated by reference to Exhibit 10.19.2 to
the Company's Annual Report on Form 10-K dated
February 28, 1993).
+10.19.3* Third Amendment to the 1991 Stock Option Plan
(incorporated by reference to Exhibit 10.19.3 to
the Company's Annual Report on Form 10-K dated
February 28, 1993).
+10.19.4* Fourth Amendment to the 1991 Stock Option Plan
(incorporated by reference to Exhibit 10.19.4 to
the Company's Annual Report on Form 10-K dated
February 28, 1993).
+10.19.5 Fifth Amendment to the 1991 Stock Option Plan.
+10.20* 1992 Stock Option Plan dated as of December 22,
1992 (incorporated by reference to Exhibit 10.19.5
to the Company's Annual Report on Form 10-K dated
February 28, 1993).
<PAGE>
+10.21* 1993 Stock Option Plan (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q dated August 31, 1993).
+10.21.1 First Amendment to the 1993 Stock Option Plan.
10.23* Purchase and Sale Agreement and Joint Escrow
Instructions dated March 25, 1992, between
Resolution Trust Company and CFC and the First
Addendum to Purchase and Sale Agreement and Joint
Escrow Instructions dated March 25, 1993
(incorporated by reference to Exhibit 10.21 to the
Company's Annual Report on Form 10-K dated February
28, 1993).
10.24* Contract of Sale dated June 22, 1993, between the
Franklin Life Insurance Company and the Company
(incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q dated
August 31, 1993).
+10.26* Supplemental Executive Retirement Plan effective
March 1, 1994 (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q
dated May 31, 1994).
+10.27* Split-Dollar Life Insurance Agreement (incorporated
by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q dated May 31, 1994).
+10.27.1* Split-Dollar Collateral Assignment (incorporated by
reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q dated May 31, 1994).
11.1 Statement Regarding Computation of Earnings Per
Share.
12.1 Computation of the Ratio of Earnings to Fixed
Charges.
12.2 Computation of the Ratio of Earnings to Net Fixed
Charges.
22.1 List of subsidiaries.
24.1 Consent of Grant Thornton LLP.
*Incorporated by reference.
+Constitutes a management contract or
compensatory plan or arrangement.
<PAGE>
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 23, 1995
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
President, Chairman of
the Board of Directors
and Director (Principal
/s/ DAVID S. LOEB Executive Officer) May 23, 1995
David S. Loeb
Executive Vice
/s/ ANGELO R. MOZILO President and Director May 23, 1995
Angelo R. Mozilo
Senior Managing
Director and Chief
/s/ STANFORD L. KURLAND Operating Officer May 23, 1995
Stanford L. Kurland
Managing Director;
Chief Financial Officer
and Chief Accounting
Officer(Principal
Financial Officer and
Principal Accounting
/s/ CARLOS M. GARCIA Officer) May 23, 1995
Carlos M. Garcia
/s/ ROBERT J. DONATO Director May 23, 1995
Robert J. Donato
/s/ BEN M. ENIS Director May 23, 1995
Ben M. Enis
/s/ EDWIN HELLER Director May 23, 1995
Edwin Heller
/s/ HARLEY W. SNYDER Director May 23, 1995
Harley W. Snyder
<PAGE>
EXHIBIT 22.1
COUNTRYWIDE CREDIT INDUSTRIES, INC.
SUBSIDIARIES
Countrywide Funding Corporation New York
Continental Mobile Home Brokerage Corporation California
Countrywide Agency of Ohio, Inc. Ohio
Countrywide Agency of Texas, Inc. Texas
Countrywide Agency, Inc. New York
Countrywide Asset Management Corporation Delaware
Countrywide Capital Markets, Inc. California
Countrywide Securities Corporation California
Countrywide Servicing Exchange California
Countrywide Financial Services Corporation California
Countrywide Financial Planning Services, Inc. California
Countrywide Investments, Inc. Delaware
Countrywide GP, Inc. Nevada
Countrywide Lending Corporation California
Countrywide LP, Inc. Nevada
Countrywide Mortgage Pass Through Corporation Delaware
Countrywide Partners Corporation Delaware
Countrywide Partnership Investments, Inc. California
Countrywide Parks I, Inc. California
Countrywide Parks V, Inc. California
Countrywide Parks VI, Inc. California
Countrywide Parks VII, Inc. California
Countrywide Parks VIII, Inc. California
Countrywide Tax Services Corporation California
CTC Foreclosure Services Corporation California
CWMBS, Inc. Delaware
Independent National Mortgage Corporation Delaware
LandSafe, Inc. Delaware
LandSafe Finance, Inc. California
LandSafe Title Agency, Inc. California
LandSafe Title of Florida, Inc. Florida
LandSafe Title of Texas, Inc. Texas
LandTrack Data Services, Inc. California
Residential Mortgage Source of America, Inc. California
The Countrywide Foundation California
<PAGE>
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, 1995
F-1
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
February 28, 1995
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 F-31
Registrant
Schedule II - Valuation and Qualifying Accounts F-34
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.
F-2
<PAGE>
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, 1995 and 1994, 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,
1995. 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, 1995 and 1994, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended February 28, 1995, in
conformity with generally accepted accounting principles.
We also have audited Schedules I and II for each of the three years in the
period ended February 28, 1995. In our opinion, such schedules present fairly,
in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Los Angeles, California
April 18, 1995
F-3
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28,
(Dollar amounts in thousands, except per share data)
A S S E T S
1995 1994
Cash $ 17,624 $ 4,034
Receivables for mortgage loans shipped 1,174,648 1,970,431
Mortgage loans held for sale 1,724,177 1,743,830
Other receivables 476,754 349,770
Property, equipment and leasehold
improvements, at cost - net of
accumulated depreciation and
amortization 145,612 145,625
Capitalized servicing fees receivable 464,268 289,541
Purchased servicing rights 1,332,629 836,475
Other assets 243,950 245,815
Total assets $5,579,662 $5,585,521
Borrower and investor custodial
accounts (segregated in special
accounts - excluded from corporate
assets) $1,063,676 $1,366,643
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $3,963,091 $3,859,227
Drafts payable issued in connection
with mortgage loan closings 200,221 449,814
Accounts payable and accrued
liabilities 105,097 87,818
Deferred income taxes 368,695 308,525
Total liabilities 4,637,104 4,705,384
Commitments and contingencies
- -
Shareholders' equity
Preferred stock - authorized,
1,500,000 shares of $0.05 par
value;issued and outstanding, none - -
Common stock - authorized, 240,000,000
shares of $0.05 par value;
issued and outstanding, 91,370,364
shares in 1995 and 91,063,751 shares
in 1994 4,568 4,553
Additional paid-in capital 608,289 606,031
Retained earnings 329,701 269,553
Total shareholders' equity 942,558 880,137
Total liabilities and
shareholders' equity $5,579,662 $5,585,521
Borrower and investor custodial
accounts $1,063,676 $1,366,643
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended February 28,
(Dollar amounts in thousands, except per share data)
1995 1994 1993
Revenues
Loan origination fees $203,426 $379,533 $241,584
Gain (loss) on sale of loans,
net of commitment fees (41,342) 88,212 67,537
Loan production revenue 162,084 467,745 309,121
Interest earned 343,138 376,225 211,542
Interest charges (267,685) (275,906) (148,765)
Net interest income 75,453 100,319 62,777
Loan servicing income 428,994 307,477 177,291
Less amortization of servicing
assets (95,768) (242,177) (151,362)
Add (less) servicing hedge
benefit (expense) (40,030) 73,400 74,075
Less write-off of servicing
hedge (25,600) - -
Net loan administration
income 267,596 138,700 100,004
Gain on sale of servicing 56,880 - -
Commissions, fees and other
income 40,650 48,816 33,656
Total revenues 602,663 755,580 505,558
Expenses
Salaries and related expenses 199,061 227,702 140,063
Occupancy and other office
expenses 102,193 101,691 64,762
Guarantee fees 85,831 57,576 29,410
Marketing expenses 23,217 26,030 12,974
Branch and administrative
office consolidation costs 8,000 - -
Other operating expenses 37,016 43,481 24,894
Total expenses 455,318 456,480 272,103
Earnings before income taxes 147,345 299,100 233,455
Provision for income taxes 58,938 119,640 93,382
NET EARNINGS $88,407 $179,460 $140,073
Earnings per share
Primary $0.96 $1.97 $1.65
Fully diluted $0.96 $1.94 $1.52
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Three years ended February 28, 1995
(Dollar amounts in thousands)
Additional
Number Common Paid-in Retained
of Shares Stock Capital Earnings Total
<C> <C> <C> <C> <C> <C>
Balance at March 1,
1992 50,474,619 $2,523 $462,465 $ 93,629 $558,617
Cash dividends paid -
preferred - - - (3,482) (3,482)
Cash dividends paid -
common - - - (20,090) (20,090)
Stock options exercised 471,288 24 2,252 - 2,276
Tax benefit of stock
options exercised - - 2,808 - 2,808
Conversion of preferred
stock for common stock 1,964,794 98 11,633 - 11,731
Dividend reinvestment
plan 1,571 - 38 - 38
401(k) Plan
contribution 39,716 2 1,141 - 1,143
Settlement of three-for-
two stock split 65,688 4 (13) - (9)
Net earnings for the
year - - - 140,073 140,073
Effect of 5% stock
dividend effective -
subsequent to year end 2,650,884 133 93,311 (93,444)
Balance at February 28,
1993 55,668,560 2,784 573,635 116,686 693,105
Cash dividends paid -
preferred - - - (732) (732)
Cash dividends paid -
common - - - (24,389) (24,389)
Stock options exercised 452,522 22 3,338 - 3,360
Tax benefit of stock -
options exercised - - 2,495 2,495
Conversion of preferred -
stock for common stock 4,511,283 225 25,575 25,800
Dividend reinvestment
plan 1,994 - 55 - 55
401(k) Plan
contribution 33,637 2 1,005 - 1,007
Settlement of 5% stock
dividend 41,171 2 1,446 (1,472) (24)
Net earnings for the
year - - - 179,460 179,460
Effect of three-for-two
stock split effective
subsequent to year end 30,354,584 1,518 (1,518) - -
Balance at February 28,
1994 91,063,751 4,553 606,031 269,553 880,137
Cash dividends paid -
common - - - (28,259) (28,259)
Stock options exercised 283,147 14 1,584 - 1,598
Tax benefit of stock -
options exercised - - 697 697
Dividend reinvestment -
plan - - (14) (14)
Settlement of three-for- -
two stock split 23,466 1 (9) (8)
Net earnings for the
year - - - 88,407 88,407
Balance at February 28,
1995 91,370,364 $4,568 $608,289 $329,701 $942,558
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Year ended February 28,
(Dollar amounts in thousands)
1995 1994 1993
Cash flows from operating
activities:
Net earnings $ 88,407 $ 179,460 $ 140,073
Adjustments to reconcile net
earnings to net cash provided
(used) by operating activities:
Amortization of purchased
servicing rights 92,897 141,321 119,878
Amortization of capitalized
servicing fees receivable 2,871 100,856 31,484
Depreciation and other
amortization 26,050 15,737 8,746
Deferred income taxes 58,938 119,640 93,382
Gain on bulk sale of servicing
rights (56,880) - -
Origination and purchase of
loans held for sale (27,866,170) (52,458,879) (32,387,774)
Principal repayments and sale of
loans 28,681,606 51,060,915 31,725,953
Decrease (increase) in mortgage
loans shipped and held for
sale 815,436 (1,397,964) (661,821)
Increase in other receivables
and other assets (142,241) (407,080) (28,700)
Increase in accounts payable and
accrued liabilities 17,279 30,221 16,462
Net cash provided (used) by
operating activities 902,757 (1,217,809) (280,496)
Cash flows from investing
activities:
Additions to purchased servicing
rights (589,051) (521,326) (280,459)
Additions to capitalized
servicing fees receivable (207,663) (178,611) (148,248)
Purchase of property, equipment
and leasehold improvements - net (21,414) (64,660) (49,401)
Proceeds from bulk sale of
servicing rights 100,676 - -
Proceeds from sale of finance
receivables - - 111,897
Finance receivables originations - - (425)
Principal repayments on finance
receivables - - 4,254
Net cash used by investing
activities (717,452) (764,597) (362,382)
Cash flows from financing
activities:
Net (decrease) increase in
warehouse debt and other short-
term borrowings (451,915) 1,477,593 526,820
Issuance of long-term debt 399,205 576,718 462,000
Repayment of long-term debt (93,019) (59,721) (103,723)
Issuance of common stock 2,273 4,398 3,448
Cash dividends paid (28,259) (25,121) (23,572)
Net decrease in thrift investment
accounts - - (224,036)
Net cash (used) provided by
financing activities (171,715) 1,973,867 640,937
Net increase (decrease) in cash 13,590 (8,539) (1,941)
Cash at beginning of period 4,034 12,573 14,514
Cash at end of period $ 17,624 $ 4,034 $ 12,573
Supplemental cash flow
information:
Cash used to pay interest $ $ 277,518 $ 143,106
262,858
Cash (refunded from) used to pay
income taxes ($841) ($ 1,823) $ 4,567
Noncash financing activities -
conversion of preferred stock $- $ 25,800 $ 11,731
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements follows.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the parent and
all wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
2. Receivables for Mortgage Loans Shipped
Gain or loss on the sale of mortgage loans is recognized at the date the
loans are shipped to investors pursuant to existing sales commitments.
3. Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market,
which is computed by the aggregate method (unrealized losses are offset by
unrealized gains). The cost of mortgage loans is adjusted by gains and losses
generated from corresponding closed hedging transactions entered into to
protect the inventory value from increases in interest rates. Hedge positions
are also used to protect the pipeline of loan applications in process from
changes in interest rates. Gains and losses resulting from changes in the
market value of the inventory, pipeline and open hedge positions are netted.
Any net gain that results is deferred; any net loss that results is recognized
when incurred. Hedging gains and losses realized during the commitment and
warehousing period related to the pipeline and mortgage loans held for sale
are deferred. Hedging losses are recognized currently if deferring such losses
would result in mortgage loans held for sale and the pipeline being valued in
excess of their estimated net realizable value.
4. Property, Equipment and Leasehold Improvements
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using the
straight-line method. Leasehold improvements are amortized over the lesser of
the life of the lease or service lives of the improvements using the straight-
line method.
5. Capitalized Servicing Fees Receivable
The Company sells substantially all of the mortgage loans it produces and
retains the servicing rights thereto. These servicing rights entitle the
Company to a future stream of cash flows based on the outstanding principal
balance of the mortgage loans and the related contractual service fee. The
sales price of the loans, which is generally at or near par, and the resulting
gain or loss on sale are adjusted to provide for the recognition of a normal
service fee rate over the estimated lives of the serviced loans. The amount
of the adjustment approximates the amount that investors were willing to pay
for the excess servicing fees at the time of the loan sale. The adjustment
results in a receivable that is expected to be realized through receipt of the
excess service fee over time.
F-8
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
6. Purchased Servicing Rights
The Company capitalizes the cost of bulk purchases of servicing rights, as
well as the net cost of servicing rights acquired through the purchase of
loans servicing-released which will be sold servicing-retained. The purchase
price of loans acquired servicing-released is allocated between the servicing
rights and the value of the loans on a servicing-retained basis. The portion
of the purchase price that represents the cost of acquiring the servicing
rights in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 65, Accounting for Certain Mortgage Banking Activities, is capitalized as
purchased servicing. The remainder of the purchase price represents the cost
basis of the loan that will be sold. Purchased mortgage loans include closed
loans acquired from financial institutions and table funded loans meeting all
the criteria set forth in EITF Issue 92-10, "Loan Acquisitions Involving Table
Funding Arrangements," acquired from financial institutions and mortgage
brokers. The amount capitalized does not exceed the present value of future
net servicing income related to the purchased loans.
7. Servicing Portfolio Hedge
The Company acquires financial instruments, including derivative contracts,
that increase in value when interest rates decline ("Servicing Hedge"). These
financial instruments include call options on U.S. treasury futures and
mortgage-backed securities ("MBS"), interest rate floors and certain tranches
of collateralized mortgage obligations ("CMOs"). The Servicing Hedge
partially protects the value of the capitalized servicing fees receivable and
purchased servicing rights ("Servicing Assets") from the effects of increased
prepayment activity. The value of the interest rate floors and call options
is derived from an underlying instrument or index. The notional or
contractual amount is not recognized in the balance sheet. The cost of the
interest rate floors and call options is charged to expense (and included in
net loan administration income) over the contractual life of the contract.
Unamortized costs are included in Other Assets in the balance sheet. Realized
gains from the Servicing Hedge are 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 generates gains in excess of Incremental Amortization, the
Company reduces the carrying amount of the Servicing Assets by such excess
through additional amortization. The Company recognized $65 million in net
expense (including a write-off of the Servicing Hedge amounting to $26
million) and $73 million as an offset to incremental amortization for the
years ended February 28, 1995 and 1994, respectively. The Company measures
the effectiveness of its Servicing Hedge by computing the correlation under a
variety of interest rate scenarios between the present value of servicing cash
flows and the value of the Servicing Hedge instruments.
8. Amortization of Purchased Servicing Rights and Capitalized Servicing Fees
Receivable
Amortization of each year's purchased servicing rights is based on the ratio
of net servicing income received in the current period to total net servicing
income projected to be realized from each year's purchased servicing rights.
The Company evaluates the recoverability of each year's purchased servicing
rights separately by type of loan and interest rate stratum. This level of
disaggregation results in pools of loans which have homogeneous credit and
prepayment risk characteristics. The Company records any additional
amortization necessary to adjust the carrying value of each such stratum's
purchased servicing portfolio to its net realizable value. Amortization of
capitalized servicing fees receivable is based on the decline during the
period in the present value of the projected excess servicing fees using the
same discount rate as that which is implied by the price that investors were
willing to pay for the excess servicing fees at the time of the loan sale.
Projected net servicing income and excess servicing fees are in turn
determined on the basis of the estimated future balance of the underlying
mortgage loan portfolio, which declines over time from prepayments and
scheduled loan amortization. The Company estimates future prepayment rates
based on current interest rate levels, other economic conditions and market
forecasts, as well as relevant characteristics of the servicing portfolio,
such as loan types, interest rate stratification and recent prepayment
experience.
F-9
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
9. 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 put and
call option fees paid for the option of selling or buying MBS. Fees paid to
permanent investors are recognized as an adjustment to the sales price when
the loans are shipped to permanent investors or charged to expense when it
becomes evident the commitment will not be used. Put and call option fees are
amortized over the life of the option to reflect the decline in its time
value. Any unamortized option fees are charged to income when the related
option is exercised.
10. Investment Securities
The Company has designated its investments in certain tranches of CMOs as
available for sale. Those securities are reported 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.
11. Loan Origination Fees
Loan origination fees and discount points are recorded as an adjustment of
the cost of the loan and are included in loan production revenue when the loan
is sold.
12. Interest Rate Swap Agreements
The differential to be received or paid under the agreements is accrued and
is recognized as an adjustment to net interest income. The related amount
payable to or receivable from counterparties is included in Accounts Payable
and Accrued Liabilities.
13. Sale of Servicing Rights
The Company recognizes gain or loss on the sale of servicing rights when
title and all risks and rewards have irrevocably passed to the buyer and there
are no significant unresolved contingencies.
14. Income Taxes
Effective March 1, 1993, the Company adopted SFAS No. 109, Accounting for
Income Taxes. The adoption of SFAS 109 changes the Company's method of
accounting from the deferred method to an asset and liability approach.
Previously, the Company deferred the past tax effects of timing differences
between financial reporting and taxable income. The asset and liability
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 other assets and
liabilities. Adoption of SFAS 109 did not result in a material adjustment to
previously recorded deferred income tax 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 convertible preferred stock and stock options were converted
at the beginning of the reporting period. The computations assume that net
earnings have been adjusted for the dividends on the convertible preferred
stock.
F-10
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The weighted average shares outstanding for computing primary and fully
diluted earnings per share were 92,087,000 and 92,216,000 respectively, for
the year ended February 28, 1995; 90,501,000 and 92,445,000, respectively, for
the year ended February 28, 1994 and 82,514,000 and 92,214,000, respectively,
for the year ended February 28, 1993.
16. Financial Statement Reclassifications and Restatement
Certain amounts reflected in the Consolidated Financial Statements for the
years ended February 28, 1994 and 1993 have been reclassified to conform to
the presentation for the year ended February 28, 1995.
On July 17, 1992, a 3-for-2 split of the Company's $0.05 par value common
stock was accomplished. On April 23, 1993, a 5% stock dividend was paid. On
May 3, 1994, the Company's $0.05 par value common stock was split 3 for 2. All
references in the accompanying consolidated balance sheets, consolidated
statements of earnings and notes to consolidated financial statements to the
number of common shares and share amounts have been restated to reflect the
stock splits and the stock dividend.
NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following.
February 28,
(Dollar amounts in thousands) 1995 1994
Buildings $ 36,983 $ 35,305
Office equipment 116,661 95,976
Leasehold improvements 25,729 23,656
Mobile homes 3,751 8,829
183,124 163,766
Less: accumulated depreciation and
amortization (55,848) (41,823)
127,276 121,943
Land 18,336 23,682
$145,612 $145,625
F-11
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE C - CAPITALIZED SERVICING FEES RECEIVABLE AND PURCHASED SERVICING
RIGHTS
The components of capitalized servicing fees receivable and purchased
servicing rights are as follows.
February 28,
(Dollar amounts in
thousands) 1995 1994 1993
Capitalized Servicing
Fees Receivable
Balance at beginning
of period $ 289,541 $211,785 $ 95,021
Additions 207,663 178,612 148,248
Sale of servicing (30,065) - -
Amortization
Scheduled (2,871) (32,970) (21,333)
Unscheduled - (67,886) (10,151)
Balance at end of period $ 464,268 $289,541 $211,785
Purchased Servicing
Rights
Balance at beginning
of period $ 836,475 $456,470 $295,889
Additions 589,051 521,326 280,459
Amortization
Scheduled (92,897) (108,822) (55,511)
Unscheduled - (32,499) (64,367)
Balance at end of period $1,332,629 $836,475 $456,470
NOTE D - NOTES PAYABLE
Notes payable consisted of the following.
February 28,
(Dollar amounts in thousands) 1995 1994
Commercial paper $2,122,348 $2,194,543
Medium-term notes, Series A, B and
C,net of discounts 1,393,900 1,088,550
Reverse-repurchase agreements 245,212 312,129
Pre-sale funding facilities - 63,210
Subordinated notes 200,000 200,000
Other notes payable (2.40%-2.90%) 1,631 795
$3,963,091 $3,859,227
F-12
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE D - NOTES PAYABLE (Continued)
Revolving Credit Facility and Commercial Paper
As of February 28, 1995, Countrywide Funding Corporation ("CFC"), the
Company's mortgage banking subsidiary, had an unsecured credit agreement
(revolving credit facility) with forty-two commercial banks permitting CFC to
borrow an aggregate maximum amount of $2.5 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 held for sale,
receivables for mortgage loans shipped and mortgage servicing rights. The
facility contains various financial covenants and restrictions, certain of
which limit the amount of dividends that can be paid by the Company or CFC.
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 CFC's credit
ratings. The weighted average borrowing rate on direct borrowings and
commercial paper borrowings for the year ended February 28, 1995, including
the effect of the interest rate swap agreements discussed in Note F, was
4.69%. The weighted average borrowing rate on commercial paper outstanding as
of February 28, 1995 was 5.94%. Under certain circumstances, including the
failure to maintain specified minimum credit ratings, borrowings under the
revolving credit facility and commercial paper may become secured by mortgage
loans held for sale, receivables for mortgage loans shipped and mortgage
servicing rights. The revolving credit facility expires on September 19,
1997.
Medium-Term Notes
As of February 28, 1995, 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 Date
Floating-
Rate Fixed-Rate Total From To From To
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Parent
Series A $ - $ 10,600 $ 10,600 10.60% 10.60% Jun 1995 Aug 1995
CFC
Series A 5,000 424,800 429,800 6.10% 8.79% Mar 1995 Mar 2002
Series B 11,000 469,000 480,000 5.11% 6.98% Mar 1996 Aug 2005
Series C 278,000 195,500 473,500 6.31% 8.43% Dec 1997 Mar 2004
Subtotal $294,000 $1,089,300 $1,383,300
Total $294,000 $1,099,900 $1,393,900
</TABLE>
As of February 28, 1995, 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 year ended February 28, 1995, including the effect of the
interest rate swap agreements, was 5.54%. As of February 28, 1995, $26.5
million was available for future issuance under the Series C shelf
registration.
F-13
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE D - NOTES PAYABLE (Continued)
Reverse-Repurchase Agreements
As of February 28, 1995, the Company had entered into short-term financing
arrangements to sell MBS and whole loans under agreements to repurchase. The
weighted average borrowing rate for the year ended February 28, 1995, was
4.63%. The weighted average borrowing rate on reverse-repurchase agreements
outstanding as of February 28, 1995 was 6.01%. The reverse-repurchase
agreements were collateralized by either MBS or whole loans. All MBS 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 MBS or whole loans.
Pre-Sale Funding Facilities
As of February 28, 1995, CFC had a $500 million revolving credit facility
("As Soon as Pooled Agreement") with the Federal National Mortgage Association
("Fannie Mae"). The credit facility is secured by conforming mortgage loans
which are in the process of being pooled into Fannie Mae MBS. Interest rates
are based on LIBOR and/or federal funds. The weighted average borrowing rate
for the year ended February 28, 1995, was 5.03%. This facility is committed
through July 20, 1995, subject to CFC's compliance with certain financial and
operational covenants. As of February 28, 1995, the Company had no
outstanding borrowings under this facility.
As of February 28, 1995, CFC had an uncommitted revolving credit facility
("Pre-sale Funding Facility") with an affiliate of an investment banking firm.
The credit facility is secured by conforming mortgage loans which are in the
process of being pooled into MBS. Interest rates are based on LIBOR. The
weighted average borrowing rate for the year ended February 28, 1995, was
6.03%. As of February 28, 1995, the Company had no outstanding borrowings
under this facility.
As of February 28, 1995, CFC had an uncommitted revolving credit facility
("Early Funding Agreement") with the Federal Home Loan Mortgage Corporation
("Freddie Mac"). The credit facility is secured by conforming mortgage loans
which are in the process of being pooled into Freddie Mac participation
certificates. Interest rates under the agreement are based on the prevailing
rates for MBS reverse-repurchase agreements. The weighted average borrowing
rate for the year ended February 28, 1995 was 3.91%. As of February 28, 1995,
the Company had no outstanding borrowings under this facility.
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.
F-14
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE D - NOTES PAYABLE (Continued)
Maturities of notes payable are as follows.
Year ending February (Dollar amounts
28(29), in thousands)
1996 $2,463,785
1997 114,006
1998 180,300
1999 102,000
2000 228,000
Thereafter 875,000
$3,963,091
NOTE E - INCOME TAXES
Components of the provision for income taxes consisted of the following.
Year ended February 28,
(Dollar amounts
in thousands) 1995 1994 1993
Federal expense - deferred $48,680 $ 99,074 $71,152
State expense - deferred 10,258 20,566 22,230
$58,938 $119,640 $93,382
The following is a reconciliation of the statutory federal income tax rate to
the effective income tax rate reflected in the consolidated statements of
earnings.
Year ended February 28,
1995 1994 1993
Statutory federal income tax rate 35.0% 35.0% 34.0%
State income and franchise taxes 5.0 5.0 6.4
Tax rate differential on reversing
timing differences - - (.4)
Effective income tax rate 40.0% 40.0% 40.0%
In August 1993, legislation was enacted that implemented a one percent
increase in the corporate federal tax rate. As a result, the Company increased
its deferred federal tax liability in the amount of approximately $5 million.
Also, the Company has diversified its business activities outside California,
a state that has a corporate tax rate that is higher than the average tax rate
among the states in which the Company does business. This diversification
reduced the Company's effective state tax rate by approximately one percent,
and therefore its deferred state tax liability was decreased by approximately
$5 million. Consequently, the Company's total deferred tax liability and
combined tax rate did not change materially as a result of these two events.
F-15
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE E - INCOME TAXES (Continued)
The tax effects of temporary differences that gave rise to deferred income
tax assets and liabilities are presented below.
Year ended February 28,
(Dollar amounts in thousands) 1995 1994
Deferred income tax assets:
Federal net operating losses $111,455 $68,240
State net operating losses 10,685 7,342
Alternative minimum tax credits 2,664 2,664
State income and franchise taxes 25,183 22,326
Allowance for losses 4,968 5,965
Other 3,297 1,650
Total deferred income tax assets 158,252 108,187
Deferred income tax liabilities:
Capitalized servicing fees
receivable and purchased
servicing rights 521,225 410,773
Accumulated depreciation 5,722 5,939
Total deferred income tax
liabilities 526,947 416,712
Deferred income taxes $368,695 $308,525
Deferred income tax expense (benefit) resulted from timing differences in the
recognition of revenues and expenses for tax and financial statement purposes.
The sources of these differences and the effects of each were as follows.
(Dollar amounts in thousands) February 28, 1993
Capitalized servicing fees $101,800
State income and franchise taxes (7,729)
Accelerated depreciation 1,022
Allowance for credit losses (1,711)
$ 93,382
At February 28, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of $13,612,000 expiring in 2003, $16,448,000
expiring in 2004, $4,712,000 expiring in 2006, $8,034,000 expiring in 2008,
$124,160,000 expiring in 2009 and $151,477,000 expiring in 2010.
F-16
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F - FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company utilizes a variety of derivative financial instruments in the
management of interest-rate risk. These instruments include priced short-term
commitments to extend credit, MBS mandatory forward delivery and purchase
commitments, put and call options to sell or buy mortgage-backed and treasury
securities, interest rate floors and interest rate 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 MBS mandatory forward commitments, put or call options to sell
or buy mortgage-backed and treasury securities and interest rate swaps and
floors 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, 1995, 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 $61 million for MBS mandatory
forward commitments, approximately $14 million for interest rate swaps and
approximately $23 million for interest rate floors.
As of February 28, 1995, the Company had priced short-term commitments
amounting to approximately $2.2 billion (including $1.5 billion fixed-rate and
$0.7 billion adjustable-rate) to fund mortgage loan applications in process
subject to approval of the loans and an additional $2.7 billion (including
$2.5 billion fixed-rate and $0.2 billion adjustable-rate) subject to property
identification and approval of the loans. Substantially all of these
commitments are for periods of 90 days or less. After funding and sale of the
mortgage loans, the Company's exposure to credit loss in the event of
nonperformance by the mortgagor is limited as described in Note G4. The
Company uses the same credit policies in the approval of the commitments as
are applied to all lending activities.
F-17
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F - FINANCIAL INSTRUMENTS (Continued)
Hedge of Mortgage Loan Inventory and Committed Pipeline
In order to offset the risk that a change in interest rates will result in a
decrease in the value of the Company's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("Committed Pipeline"),
the Company enters into hedging transactions. The Company's hedging policies
generally require that substantially all of its inventory of conforming and
government loans and the maximum portion of its Committed Pipeline that may
close be hedged with forward contracts for the delivery of MBS or options on
MBS. The MBS that are to be delivered under these contracts and options are
fixed- or adjustable-rate, corresponding with the composition of the Company's
inventory and Committed Pipeline. At February 28, 1995, the Company had open
commitments amounting to approximately $8.5 billion to sell MBS with varying
settlement dates generally not extending beyond May 1995 and options on MBS
through October 1995 with a total notional amount of $4.2 billion. The
mortgage loan inventory is used to form the MBS that will fill the forward
delivery contracts and options. The Company hedges its inventory and
Committed Pipeline of jumbo mortgage loans by using whole-loan sale
commitments to ultimate buyers or by using temporary "cross hedges" with sales
of MBS since such loans are ultimately sold based on a market spread to MBS.
As such, the Company is not exposed to significant risk nor will it derive any
significant benefit from changes in interest rates on the price of the
mortgage loan inventory net of gains or losses of associated hedge positions.
The correlation between the price performance of the hedge instruments and the
inventory being hedged is very high due to the similarity of the asset and the
related hedge instrument. The Company is exposed to interest-rate risk to the
extent that the portion of loans from the Committed Pipeline that actually
closes at the committed price is less than the portion expected to close in
the event of a decline in rates and such decline in closings is not covered by
forward contracts and options to purchase MBS needed to replace the loans in
process that do not close at their committed price. At February 28, 1995, the
notional amount of forward contracts and options to purchase MBS aggregated
$4.1 billion and $2.6 billion, respectively. The forward contracts extend
through May 1995 and the options extend through September 1995. The Company
determines the portion of its Committed Pipeline that it will hedge based on
numerous factors, including the composition of the Company's Committed
Pipeline, the portion of such Committed Pipeline likely to close, the timing
of such closings and anticipated changes in interest rates.
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 (which is deducted from loan servicing
income) resulting from increased prepayment activity, the Company utilizes its
Servicing Hedge, consisting of financial instruments, including derivative
contracts, that increase in value when interest rates decline. These
financial instruments include call options on U.S. treasury futures and MBS,
interest rate floors and certain tranches of CMOs.
The CMOs, which consist primarily of principal-only ("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.
F-18
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F - FINANCIAL INSTRUMENTS (Continued)
The following summarizes the notional amounts of Servicing Hedge derivative
contracts.
Long Call
Interest Long Options
Call on U.S.
Rate Options Treasury
(Dollar amounts in millions) Floors on MBS Futures
Balance, March 1, 1992 $ - $ 560 $ -
Additions - 2,287 700
Dispositions - 2,847 700
Balance, February 28, 1993 - - -
Additions - 4,700 2,520
Dispositions - 2,700 750
Balance, February 28, 1994 - 2,000 1,770
Additions 4,000 - 1,300
Dispositions - 2,000 3,070
Balance, February 28, 1995 $4,000 $ - $ -
The terms of the open Servicing Hedge derivative contracts at February 28,
1995 are presented below.
Interest Rate Floors
10-Year Constant
Index Maturity Treasury Yield
Floor 6.50% - 7.25%
Term 3 - 5 Years
The Servicing Hedge instruments utilized by the Company partially protect the
value of the investment in servicing rights from the effects of increased
prepayment activity that generally results from declining interest rates. To
the extent that interest rates increase, the value of the servicing rights
increases while the value of the hedge instruments declines. However, the
Company is not exposed to loss beyond its initial outlay to acquire the hedge
instruments. At February 28, 1995, the carrying value of interest rate floor
contracts and P/O securities included in the Servicing Hedge was approximately
$16 million and $42 million, respectively. There can be no assurance the
Company's Servicing Hedge will generate gains in the future.
Interest Rate Swaps
As of February 28, 1995, CFC had interest rate swap agreements with certain
financial institutions having notional principal amounts totaling $2.47
billion. The effect of these agreements is to enable CFC to convert a portion
of its medium-term note borrowings to LIBOR-based floating-rate cost
borrowings (notional amount $1.09 billion), to convert a portion of its
commercial paper and medium-term note borrowings from one floating-rate index
to another (notional amount $0.13 billion) and to convert the earnings rate on
the custodial accounts held by CFC from floating to fixed (notional amount
$1.25 billion). Payments are due periodically through the termination date of
each agreement. The agreements expire between March 1995 and August 2005.
F-19
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F - FINANCIAL INSTRUMENTS (Continued)
The terms of the open interest rate swap agreements at February 28, 1995 are
presented below.
Swaps related to debt
Average receive rate 6.367%
Average pay rate 6.329%
Index 3-month
LIBOR
Swaps related to custodial accounts
Average receive rate 6.468%
Average pay rate 6.223%
Index 1-3 month
LIBOR
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
as of February 28, 1995 and 1994 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.
<TABLE>
<CAPTION>
February 28, 1995 February 28, 1994
Carrying Estimated Carrying Estimated
(Dollar amounts in thousands) Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Assets:
Mortgage loans shipped
and held for sale $2,898,825 $2,941,709 $3,714,261 $3,725,913
Capitalized servicing
fees receivable 464,268 473,623 289,541 295,403
Items included in
other assets: - - 238,841 173,829
Principal-only 91,793 92,726 - -
securities
Derivatives:
Interest rate floors 15,820 23,396 - -
Contracts and options
related to mortgage
loans shipped and held
for sale 47,647 (2,926) - 59,533
Liabilities:
Notes payable 3,963,091 3,934,160 3,859,227 3,901,179
Derivatives gain (loss):
Interest rate swaps 4,093 (55,570) 2,950 (6,669)
Short-term commitments
to extend credit - 69,252 - (59,533)
</TABLE>
The fair value estimates as of February 28, 1995 and 1994 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.
F-20
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F - FINANCIAL INSTRUMENTS (Continued)
The following describes the methods and assumptions used by the Company in
estimating fair values.
Mortgage Loans Shipped and Held for Sale
Fair value is estimated using the quoted market prices for securities backed
by similar types of loans and dealer commitments to purchase loans on a
servicing-retained basis.
Capitalized Servicing Fees Receivable
Fair value is estimated by discounting future cash flows from excess
servicing fees using discount rates that approximate current market rates and
market consensus prepayment rates.
Other Financial Instruments
Fair value is estimated using quoted market prices and by discounting future
cash flows using discount rates that approximate current market rates and
market consensus prepayment rates.
Derivatives
Fair value is estimated as the amounts that the Company would receive or pay
to terminate the contracts at the reporting date, taking into account the
current unrealized gains or losses on open contracts. Market or dealer quotes
are available for many derivatives; otherwise, pricing or valuation models are
applied to current market information to estimate fair value.
Notes Payable
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
NOTE G - COMMITMENTS AND CONTINGENCIES
1. Commitments to Sell Mortgage-Backed Securities
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.
F-21
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE G - COMMITMENTS AND CONTINGENCIES (Continued)
2. Lease Commitments
The Company leases office facilities under lease agreements extending through
September 2011. Future minimum annual rental commitments under these non-
cancelable operating leases with initial or remaining terms of one year or
more are as follows.
Year ending February 28(29), (Dollar amounts in thousands)
1996 $15,214
1997 13,151
1998 10,778
1999 8,619
2000 6,078
Thereafter 55,588
$109,428
Rent expense was $22,136,000, $19,115,000 and $13,049,000 for the years ended
February 28, 1995, 1994 and 1993, respectively.
3. 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, 1995, the Company is required to
maintain $750 million in consolidated net worth and CFC is required to
maintain $725 million of net worth, as defined in the credit agreement.
4. Loan Servicing
As of February 28, 1995, 1994 and 1993, the Company was servicing loans
totaling approximately $113.1 billion, $84.7 billion and $54.5 billion,
respectively. Included in the loans serviced as of February 28, 1995, 1994
and 1993 were loans being serviced under subservicing agreements with total
principal balances of $679 million, $592 million and $627 million,
respectively.
Conforming conventional loans serviced by the Company (57% of the servicing
portfolio at February 28, 1995) are securitized through Fannie Mae or 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 (16% of the
servicing portfolio at February 28, 1995) or partially guaranteed against loss
by the Veterans Administration (6% of the servicing portfolio at February 28,
1995). In addition, jumbo mortgage loans (21% of the servicing portfolio at
February 28, 1995) 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,
1995, approximately 43% 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 4% of the properties
securing mortgage loans.
F-22
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE H - EMPLOYEE BENEFITS
1. Stock Option Plans
The Company has stock option plans (the "Plans") that provide for the
granting of both qualified and non-qualified options to employees and
directors. Options are generally granted at the average market price of the
Company's common stock on the date of grant and are exercisable beginning one
year from the date of grant and expire up to eleven years from date of grant.
Stock option transactions under the Plans were as follows.
Year ended February 28,
1995 1994 1993
Shares subject to: (Number of shares)
Outstanding options at
beginning of year 5,603,325 4,478,703 3,653,193
Options granted 1,948,290 1,955,273 1,749,678
Options exercised (307,847) (701,619) (837,621)
Options expired or canceled (560,354) (129,032) (86,547)
Outstanding options at
end of year 6,683,414 5,603,325 4,478,703
Exercise price:
Per share for options
exercised during the year $2.19 - $19.50 $2.19 - $16.19 $1.98 - $12.65
Per share for options
outstanding at end of year $2.39 - $21.83 $2.19 - $21.83 $2.19 - $16.19
Of the outstanding options as of February 28, 1995, 2,704,728 shares were
immediately exercisable under the Plans. Also as of February 28, 1995,
2,393,441 shares were designated for future grants under the Plans.
2. Pension Plan
The Company has a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The Company's policy is to contribute the
amount actuarially determined to be necessary to pay the benefits under the
Plan, and in no event to pay less than the amount necessary to meet the
minimum funding standards of ERISA.
F-23
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE H - EMPLOYEE BENEFITS (Continued)
The following table sets forth the Plan's funded status and amounts
recognized in the Company's financial statements.
Year ended February 28,
(Dollar amounts in thousands) 1995 1994
Actuarial present value of benefit
obligations:
Vested $5,112 $5,024
Non-vested 1,095 1,540
Total accumulated benefit obligation 6,207 6,564
Additional benefits based on estimated
future salary levels 4,250 4,517
Projected benefit obligations for service
rendered to date 10,457 11,081
Less Plan assets at fair value, primarily
mortgage-backed securities (9,484) (7,482)
Projected benefit obligation in excess of
Plan assets 973 3,599
Unrecognized net gain (loss) from past
experience different from that assumed and
effects of changes in assumptions 1,862 (780)
Prior service cost not yet recognized in
net periodic pension cost (1,422) (1,522)
Unrecognized net asset at February 28, 1987
being recognized over 15 years 496 566
Accrued pension cost $1,909 $1,863
Net pension cost included the following
components:
Service cost - benefits earned
during the period $1,648 $1,395
Interest cost on projected benefit
obligations 789 677
Actual return on Plan assets (318) (413)
Net amortization and deferral (327) (28)
Net periodic pension cost $1,792 $1,631
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 7.625% and 5.0%, respectively.
The weighted average expected long-term rate of return on assets used was
8.125%. Pension expense for 1995, 1994 and 1993 was $1,792,000, $1,631,000
and $992,000, respectively. The Company makes contributions to the Plan in
amounts that are deductible in accordance with federal income tax regulations.
NOTE I - REDEEMABLE PREFERRED STOCK
On July 6, 1993, the Company called all of its outstanding convertible
preferred stock, which was represented by depositary convertible shares (each
depositary share represented 1/10 of a share of convertible preferred stock).
Each depositary share was convertible into 6.3 shares of common stock, and
each depositary share not converted was redeemable for $27.375 in cash. All
holders converted their shares into common stock.
F-24
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the result of stock splits
and stock dividends, 0.399 Right will also be issued for each share of common
stock issued between the record date for the initial dividend distribution of
Rights and the "Distribution Date" (as defined below). Each Right, when
exercisable, entitles the holder to purchase from the Company one one-
hundredth share of $0.05 par value Serial Preferred Stock, designated as
Series A Participating Preferred Stock (the "Series A Preferred Stock"), at a
price of $145, subject to adjustments in certain cases to prevent dilution.
The Series A Preferred Stock has terms intended to cause the value of one one-
hundredth share of Series A Preferred Stock to be equivalent to the value of
one share of common stock at the time of initial issuance.
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"), formerly Countrywide Mortgage
Investments, Inc., a real estate investment trust. CAMC has entered into a
subcontract with its affiliate, CFC, 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. CAMC waived all management fees pursuant to the above for
calendar year 1993 and 25% of incentive compensation earned in 1994. In
addition, in 1993 CAMC absorbed $0.9 million of operating expenses incurred in
connection with its duties under the Management Agreement. CWM and its
subsidiaries began paying all expenses of the new operations in June 1993.
During the fiscal years ended February 28, 1995, 1994 and 1993, CAMC earned
$0.3 million, $0.1 million and $0.8 million, respectively, in base management
fees from CWM and its subsidiaries. In addition, during the fiscal year ended
February 28, 1995, CAMC recorded $1.1 million in incentive compensation, net
of the amount waived as described above. The Management Agreement is
renewable annually and expires on May 15, 1995. As of February 28, 1995, the
Company and CAMC own 1,120,000 shares or approximately 2.77% of the common
stock of CWM.
F-25
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE K - RELATED PARTY TRANSACTIONS (continued)
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 ("INMC"), formerly Countrywide
Mortgage Conduit, and all other operations are conducted in CWM. Accordingly,
INMC is charged with the majority of the conduit's cost and CWM is charged
with the other operations' costs. During Fiscal 1995, the amount of common
expenses incurred by CFC which were allocated to CAMC and reimbursed by CWM
totaled $1.2 million.
CWM has an option to purchase conventional loans from CFC at the prevailing
market price. During the years ended February 28, 1995, 1994 and 1993, CWM
purchased $80.4 million, $300.5 million and $130.3 million, respectively, of
conventional non-conforming mortgage loans from CFC pursuant to this option.
During the year ended February 28, 1995, CFC purchased from INMC bulk
servicing rights for loans with principal balances aggregating $3.0 billion at
a price of $38.2 million. In 1987 and 1993, subsidiaries of CWM entered into
servicing agreements appointing CFC as servicer of mortgage loans
collateralizing five series of CMOs with outstanding balances of approximately
$94.0 million at February 28, 1995. CFC 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 CFC under such agreements
for the years ended February 28, 1995, 1994 and 1993 were approximately $0.3
million, $0.5 million and $0.3 million, respectively.
CFC has extended CWM a $10 million line of credit bearing interest at prime
and maturing September 30, 1995. At February 28, 1995, there was no
outstanding amount under the agreement.
NOTE L - SEGMENT INFORMATION
The Company and its subsidiaries operate primarily in the mortgage banking
industry. Operations in mortgage banking involve CFC'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, 1995 follows.
Adjustments
(Dollar amounts Mortgage and
in thousands) Banking Other Eliminations Consolidated
Unaffiliated revenue $563,586 $39,077 $ - $602,663
Intersegment revenue 744 - (744) -
Total revenue $564,330 $39,077 ($744) $602,663
Earnings before
income taxes $136,220 $11,125 $ - $147,345
Identifiable assets
as of February 28, 1995 $5,520,283 $1,014,391 ($955,012) $5,579,662
F-26
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE L - SEGMENT INFORMATION (continued)
Segment information for the year ended February 28, 1994 follows.
Adjustments
(Dollar amounts Mortgage and
in thousands) Banking Other Eliminations Consolidated
Unaffiliated revenue $719,533 $36,047 $ - $755,580
Intersegment revenue 744 - (744) -
Total revenue $720,277 $36,047 ($744) $755,580
Earnings before
income taxes $286,069 $13,031 $ - $299,100 $
Identifiable assets
as of February 28, 1994 $5,523,664 $930,720 ($868,863) $5,585,521
Segment information for the year ended February 28, 1993 follows.
Adjustments
(Dollar amounts Mortgage and
in thousands) Banking Other Eliminations Consolidated
Unaffiliated revenue $463,394 $42,164 $ - $505,558
Intersegment revenue 3,021 - (3,021) -
Total revenue $466,415 $42,164 ($ 3,021) $505,558
Earnings before
income taxes $217,073 $16,382 $- $233,455
Identifiable assets
as of February 28, 1993 $3,229,243 $765,954 ($696,064) $3,299,133
F-27
<PAGE)
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Branch and administrative office consolidation costs incurred during Fiscal
1995 and related reserves at February 28, 1995 are presented below.
Reserved at
Expense February
(Dollar amounts in thousands) Incurred 28, 1995
Office lease costs $4,348 $ 743
Equipment and improvement
relocation,disposal and
abandonment costs 1,976 474
Other 1,676 1,146
$8,000 $2,363
NOTE N - SUBSEQUENT EVENTS
On March 20, 1995, the Company declared a cash dividend of $0.08 per common
share paid April 17, 1995 to shareholders of record on April 3, 1995.
F-28
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE O - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data is as follows.
Three months ended
(Dollar amounts in thousands,
except per share data) May 31 August 31 November 30 February 28
Year ended February 28, 1995
Revenue $177,118 $151,106 $133,726 $140,713
Expenses 120,903 119,257 106,795 108,363
Provision for income taxes 22,486 12,739 10,773 12,940
Net earnings 33,729 19,110 16,158 19,410
Earnings per share(1)
Primary $0.37 $0.21 $0.18 $0.21
Fully diluted $0.37 $0.21 $0.18 $0.21
Year ended February 28, 1994
Revenue $166,665 $188,272 $196,446 $204,197
Expenses 94,503 111,507 124,844 125,626
Provision for income taxes 28,865 30,706 28,641 31,428
Net earnings 43,297 46,059 42,961 47,143
Earnings per share(1)
Primary $0.49 $0.51 $0.46 $0.51
Fully diluted $0.47 $0.50 $0.46 $0.51
(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 Funding Corporation is as
follows.
February 28,
(Dollar amounts in thousands) 1995 1994
Balance Sheets:
Mortgage loans shipped
and held for sale $2,898,825 $3,714,261
Other assets 2,621,458 1,809,403
Total assets $5,520,283 $5,523,664
Short- and long-term debt $4,152,712 $4,296,291
Other liabilities 433,025 374,559
Equity 934,546 852,814
Total liabilities and equity $5,520,283 $5,523,664
F-29
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE P - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY (continued)
Year ended February 28,
1995 1994
Statements of Earnings:
Revenues $564,330 $720,277
Expenses 428,110 434,208
Provision for income taxes 54,488 114,427
Net earnings $ 81,732 $171,642
F-30
<PAGE>
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,
1995 1994
Assets
Cash $ - $ -
Other receivables 3,344 3,333
Intercompany receivable 49,234 55,688
Investment in subsidiaries at equity
in net assets 954,123 863,974
Equipment and leasehold improvements 113 79
Other assets 16,984 12,689
$1,023,798 $935,763
Liabilities and Shareholders' Equity
Notes payable $ 10,600 $ 12,750
Intercompany payable 54,010 30,756
Accounts payable and accrued liabilities 8,949 5,870
Deferred income taxes 7,681 6,250
Preferred stock - -
Common shareholders' equity
Common stock 4,568 4,553
Additional paid-in capital 608,289 606,031
Retained earnings 329,701 269,553
$1,023,798 $935,763
F-31
<PAGE>
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,
1995 1994 1993
Revenue
Interest earned $ 36 $ 221 $ 635
Interest charges (2,646) (2,247) (3,862)
(2,610) (2,026) (3,227)
Expenses (3,104) (2,641) (1,415)
Loss before income tax benefit
and equity in net
earnings of subsidiaries (5,714) (4,667) (4,642)
Income tax benefit 2,285 1,867 1,857
Loss before equity in net earnings
of subsidiaries (3,429) (2,800) (2,785)
Equity in net earnings of
subsidiaries 91,836 182,260 142,858
NET EARNINGS $88,407 $179,460 $140,073
F-32
<PAGE>
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,
1995 1994 1993
Cash flows from operating
activities: $88,407 $179,460 $140,073
Net earnings
Adjustments to reconcile net
earnings to net cash (used)
provided by operating activities:
Earnings of subsidiaries (91,836) (182,260) (142,858)
Depreciation and amortization 16 12 12
Increase (decrease) in accounts
payable and accrued liabilities 3,079 2,560 (982)
(Increase) decrease in other
receivables and other assets (2,925) 14,971 (77)
Net cash (used) provided by
operating activities (3,259) 14,743 (3,832)
Cash flows from investing
activities:
Net change in intercompany
receivables and payables 31,458 29,000 65,560
Investment in subsidiaries (63) 0 (10,304)
Net cash provided by investing
activities 31,395 29,000 55,256
Cash flows from financing
activities:
Repayment of long-term debt (2,150) (23,020) (31,300)
Issuance of common stock 2,273 4,398 3,448
Cash dividends paid (28,259) (25,121) (23,572)
Net cash used by financing
activities (28,136) (43,743) (51,424)
Net change in cash - - -
Cash at beginning of year - - -
Cash at end of year $ - $ - $ -
Supplemental cash flow information:
Cash used to pay interest $2,114 $2,554 $4,181
Cash (refunded from) used to pay
income tax ($841) ($1,823) $4,567
Noncash financing activities -
conversion of preferred stock - $25,800 $11,731
F-33
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three years ended February 28, 1995
(Dollar amounts in thousands)
Column A Column Column C Column D Column
B E
Additions
Balance Charged Charged Balance
at to to other at end
beginning costs and accounts Deductions of
of period expenses (2) (1) period
Year ended February
28, 1995
Allowance for losses $13,826 $1,808 $3,466 $ 7,917 $11,183
Year ended February
28, 1994
Allowance for losses $16,144 $6,046 $3,051 $11,415 $13,826
Year ended February
28, 1993
Allowance for losses $ 9,909 $4,103 $7,991 $ 5,859 $16,144
(1) Actual losses charged against reserve, net of recoveries and
reclassification.
(2) Additions charged to gain (loss) on sale of loans.
F-34
<PAGE>
FIFTH AMENDMENT
TO THE
COUNTRYWIDE CREDIT INDUSTRIES, INC.
1991 STOCK OPTION PLAN
WHEREAS, Countrywide Credit Industries, Inc. (the "Company")
established the Countrywide Credit Industries, Inc. 1991 Stock Option Plan
(the
"Plan"); and
WHEREAS, the Company adopted the Fourth Amendment to the Plan
pursuant to which Paragraph (a) of Section 5 of the Plan was amended to permit
a
nonemployee director to elect not to receive a stock option grant thereunder,
provided such election is made prior to the time such person becomes a
director
of the Company or at least six months and one day prior to the time the grant
would have been made under the Plan; and
WHEREAS, the Company desires to amend the Plan to provide that
a
nonemployee director may elect to decline an award thereunder or may elect to
revoke a previously made election to decline an award thereunder, in either
case
at any time prior to the date that Director Options (as defined in the Plan)
are
schedule to be granted under the Plan; and
NOW, THEREFORE,
1. Paragraph (a) of Section 5 of the Plan is hereby deleted
in
its entirety and the following is inserted in its place and stead:
(a) Grant. Director Options shall be granted to each
Nonemployee Director on the first business day of June of each year that the
Plan is in effect. The number of Shares and the purchase price therefor of
each
Director Option shall be as provided in this Section 5 and such Options shall
be
evidenced by an Agreement containing such other terms and conditions not
inconsistent with the provisions of this Plan as determined by the Board.
Notwithstanding the foregoing provisions of this Subsection (a), no Option
shall
be granted in any year to a Nonemployee Director who makes a written election
not to receive such Option under the Plan, provided such election is filed
with
the Secretary of the Company at least one business day prior to the date such
grant would otherwise be made under the Plan; provided, further, that an
election made pursuant to this sentence (including an election that was
effective under this Subsection as in effect before February 2, 1995) shall
remain effective until the next business day following the date a written
notice
revoking such election is made and filed with the Secretary of the Company. A
Nonemployee Director who makes an election not to receive an Option will not
receive anything from the Company in lieu thereof.
IN WITNESS WHEREOF, the Company has caused this Fifth Amendment
to be executed by its duly authorized officer this 2nd day of February, 1995.
Countrywide Credit Industries, Inc.
By
Sandor E. Samuels
Managing Director
[Corporate Seal]
Attest:
Gwen J. Eells
Assistant Secretary
s:\gje\AMEND5.doc
FIRST AMENDMENT
TO THE
COUNTRYWIDE CREDIT INDUSTRIES, INC.
1993 STOCK OPTION PLAN
WHEREAS, Countrywide Credit Industries, Inc. (the "Company")
established the Countrywide Credit Industries, Inc. 1993 Stock Option Plan
(the
"Plan"); and
WHEREAS, Paragraph (a) of Section 5 of the Plan permits a
nonemployee director to elect not to receive a stock option grant thereunder,
provided such election is made prior to the time such person becomes a
director
of the Company or at least six months and one day prior to the time the grant
would have been made under the Plan; and
WHEREAS, the Company desires to amend the Plan to provide that
a
nonemployee director may elect to decline an award thereunder or may elect to
revoke a previously made election to decline an award thereunder, in either
case
at any time prior to the date that Director Options (as defined in the Plan)
are
schedule to be granted under the Plan; and
NOW, THEREFORE,
1. Paragraph (a) of Section 5 of the Plan is hereby deleted
in
its entirety and the following is inserted in its place and stead:
(a) Grant. Director Options shall be granted to each Nonemployee Director on
the first business day of June of each year that the Plan is in effect. The
number of Shares and the purchase price therefor of each Director Option shall
be as provided in this Section 5 and such Options shall be evidenced by an
Agreement containing such other terms and conditions not inconsistent with the
provisions of this Plan as determined by the Board. Notwithstanding the
foregoing provisions of this Subsection (a), no Option shall be granted in any
year to a Nonemployee Director who makes a written election not to receive
such
Option under the Plan, provided such election is filed with the Secretary of
the
Company at least one business day prior to the date such grant would otherwise
be made under the Plan; provided, further, that an election made pursuant to
this sentence (including an election that was effective under this Subsection
as
in effect before February 2. 1995) shall remain effective until the next
business day following the date a written notice revoking such election is
made
and filed with the Secretary of the Company. A Nonemployee Director who makes
an election not to receive an Option will not receive anything from the
Company
in lieu thereof.
IN WITNESS WHEREOF, the Company has caused this First Amendment
to be executed by its duly authorized officer this 2nd day of February, 1995.
Countrywide Credit Industries, Inc.
By
Sandor E. Samuels
Managing Director
[Corporate Seal]
Attest:
Gwen J. Eells
Assistant Secretary
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11.1 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year ended February 28,
(Dollar amounts in thousands, except per share data)
1995 1994 1993
PRIMARY
Net earnings $88,407 $179,460 $140,073
Preferred stock dividend
requirement - (732) (3,482)
Net earnings applicable to common
stock $88,407 $178,728 $136,591
Average shares outstanding 91,240 88,792 80,678
Net effect of dilutive stock
options - based on the treasury
stock method using average
market price 847 1,709 1,836
Total average shares 92,087 90,501 82,514
Per share amount $0.96 $1.97 $1.65
FULLY DILUTED
Net earnings $88,407 $179,460 $140,073
Average shares outstanding 91,240 88,792 80,677
Net effect of dilutive stock
options -- based on the treasury
stock method using the year-end
market price, if higher
than average market price 976 1,709 2,387
Assumed conversion of convertible
preferred shares - 1,944 9,150
Total average shares 92,216 92,445 92,214
Per share amount $0.96 $1.94 $1.52
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 12.1 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
The following table sets forth the ratio of earnings to fixed charges of the
Company for the five fiscal years ended February 28, 1995 computed by dividing
net fixed charges (interest expense on all debt plus the interest element (one-
third) of operating leases) into earnings (income before income taxes and fixed
charges).
For Fiscal Years Ended February 28(29),
1995 1994 1993 1992 1991
Net earnings $ 88,407 $179,460 $140,073 $ 60,196 $ 22,311
Income tax expense 58,938 119,640 93,382 40,131 14,874
Interest charges 267,685 275,906 148,765 81,959 73,428
Interest portion of
rental expense 7,379 6,372 4,350 2,814 2,307
Earnings available
to cover fixed
charges $422,409 $581,378 $386,570 $185,100 $112,920
Fixed charges
Interest charges 267,685 $275,906 $148,765 $ 81,959 $ 73,428
Interest portion
of rental expense 7,379 6,372 4,350 2,814 2,307
Total fixed
charges $275,064 $282,278 $153,115 $ 84,773 $75,735
Ratio of earnings to
fixed charges 1.54 2.06 2.52 2.18 1.49
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 12.2 - COMPUTATION OF THE RATIO OF EARNINGS TO NET FIXED CHARGES
(Dollar amounts in thousands)
The following table sets forth the ratio of earnings to net fixed charges of the
Company for the five fiscal years ended February 28, 1995 computed by dividing
net fixed charges (interest expense on debt other than to finance mortgage loan
inventory plus interest element (one-third) of operating leases) into earnings
(income before income taxes and net fixed charges).
For Fiscal Years Ended February 28(29),
1995 1994 1993 1992 1991
Net earnings $88,407 $179,460 $140,073 $60,196 $22,311
Income tax expense 58,938 119,640 93,382 40,131 14,874
Interest charges 55,045 85,240 51,551 45,928 23,609
Interest portion of
rental expense 7,379 6,372 4,350 2,814 2,307
Earnings available
to cover net fixed
charges $209,769 $390,712 $289,356 $149,069 $63,101
Net fixed charges
Interest charges 55,045 $85,240 $51,551 $45,928 $23,609
Interest portion
of rental expense 7,379 6,372 4,350 2,814 2,307
Total net
fixed charges $62,424 $91,612 $55,901 $48,742 $25,916
Ratio of earnings to
net fixed charges 3.36 4.26 5.18 3.06 2.43
EXHIBIT 22.1
COUNTRYWIDE CREDIT INDUSTRIES, INC.
SUBSIDIARIES
Countrywide Funding Corporation New York
Continental Mobile Home Brokerage Corporation California
Countrywide Agency of Ohio, Inc. Ohio
Countrywide Agency of Texas, Inc. Texas
Countrywide Agency, Inc. New York
Countrywide Asset Management Corporation Delaware
Countrywide Capital Markets, Inc. California
Countrywide Securities Corporation California
Countrywide Servicing Exchange California
Countrywide Financial Services Corporation California
Countrywide Financial Planning Services, Inc. California
Countrywide Investments, Inc. Delaware
Countrywide GP, Inc. Nevada
Countrywide Lending Corporation California
Countrywide LP, Inc. Nevada
Countrywide Mortgage Pass Through Corporation Delaware
Countrywide Partners Corporation Delaware
Countrywide Partnership Investments, Inc. California
Countrywide Parks I, Inc. California
Countrywide Parks V, Inc. California
Countrywide Parks VI, Inc. California
Countrywide Parks VII, Inc. California
Countrywide Parks VIII, Inc. California
Countrywide Tax Services Corporation California
CTC Foreclosure Services Corporation California
CWMBS, Inc. Delaware
Independent National Mortgage Corporation Delaware
LandSafe, Inc. Delaware
LandSafe Finance, Inc. California
LandSafe Title Agency, Inc. California
LandSafe Title of Florida, Inc. Florida
LandSafe Title of Texas, Inc. Texas
LandTrack Data Services, Inc. California
Residential Mortgage Source of America, Inc. California
The Countrywide Foundation California
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 18, 1995, accompanying the
consolidated financial statements and schedules in the Annual
Report of Countrywide Credit Industries, Inc. on form 10-K for
the year ended February 28, 1995. We hereby consent to the
incorporation by reference of said report in the Registration
Statements of Countrywide Credit Industries, Inc. on Form S-3
(File No. 33-19708, effective January 26, 1988; File No. 33-
29941, effective July 25, 1989; File No. 33-44194(-1), effective
November 27, 1991; File No. 33-45174, effective February 6, 1992;
File No. 33-53048, effective October 9, 1992; File No. 33-51816
, effective September 9, 1992; File Nos. 33-50661 and 33-50661-01
, effective October 19, 1993) and on Form S-8
(File No. 33-9231, effective October 20, 1986, as amended on
February 19, 1987; File No. 33-17271, effective October 6, 1987;
File No. 33-42625, effective September 6, 1991; File No. 33-
56168, effective December 22, 1992; and File No. 33-69498,
effective September 28, 1993).
GRANT THORNTON LLP
Los Angeles, California
May 23, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<CASH> 17,624
<SECURITIES> 0
<RECEIVABLES> 476,754
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 201,460
<DEPRECIATION> 55,848
<TOTAL-ASSETS> 5,579,662
<CURRENT-LIABILITIES> 0
<BONDS> 1,595,531
<COMMON> 4,568
0
0
<OTHER-SE> 937,990
<TOTAL-LIABILITY-AND-EQUITY> 5,579,662
<SALES> 0
<TOTAL-REVENUES> 602,663<F1>
<CGS> 0
<TOTAL-COSTS> 455,318
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 147,345
<INCOME-TAX> 58,938
<INCOME-CONTINUING> 88,407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88,407
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.96
<FN>
<F1>Includes $267,685 of interest expense related to mortgage loan activities.
</FN>
</TABLE>
