UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended August 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________________
Commission File Number: 1-8422
COUNTRYWIDE CREDIT INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-2641992
- ----------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
155 N. Lake Avenue, Pasadena, California 91101
- ---------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
(818) 304-8400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 3, 1995
----- ------------------------------
Common Stock $.05 par value 101,882,904
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
August 31, February 28,
1995 1995
------------ ------------
(Dollar amounts in thousands)
ASSETS
<S> <C> <C>
Cash ............................................................. $ 5,455 $ 17,624
Receivables for mortgage loans shipped ........................... 2,236,407 1,174,648
Mortgage loans held for sale ..................................... 2,084,511 1,724,177
Other receivables ................................................ 428,233 476,754
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization ..................... 138,170 145,612
Capitalized servicing fees receivable ............................ 555,595 464,268
Mortgage servicing rights ........................................ 1,471,097 1,332,629
Other assets ..................................................... 444,472 243,950
------------ ------------
Total assets .............................................. $ 7,363,940 $ 5,579,662
============ ============
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) .................... $ 2,126,707 $ 1,063,676
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable .................................................... $ 5,479,172 $ 3,963,091
Drafts payable issued in connection with mortgage loan closings .. 142,288 200,221
Accounts payable and accrued liabilities ......................... 98,213 105,097
Deferred income taxes ............................................ 425,447 368,695
------------ ------------
Total liabilities ......................................... 6,145,120 4,637,104
Commitments and contingencies
Shareholders' equity
Common stock - authorized, ......................................
240,000,000 shares of $.05 par value; issued and
outstanding, 101,823,400 shares at August 31, 1995
and 91,370,364 shares at February 28, 1995 .................... 5,091 4,568
Additional paid-in capital ....................................... 813,546 608,289
Retained earnings ................................................ 400,183 329,701
------------ ------------
Total shareholders' equity ................................ 1,218,820 942,558
------------ ------------
Total liabilities and shareholders' equity ................ $ 7,363,940 $ 5,579,662
============ ============
Borrower and investor custodial accounts ......................... $ 2,126,707 $ 1,063,676
============ ============
The accompanying notes are an integral part of these statements ..
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Six Months
Ended August 31, Ended August 31,
1995 1994 1995 1994
--------- --------- --------- ---------
(Dollar amounts in thousands, except per share data)
Revenues
<S> <C> <C> <C> <C>
Loan origination fees ......................................... $ 53,385 $ 49,041 $ 94,906 $ 122,777
Gain (loss) on sale of loans .................................. 19,283 (16,503) 32,014 (4,755)
--------- --------- --------- ---------
Loan production revenue ..................................... 72,668 32,538 126,920 118,022
Interest earned .............................................. 116,726 72,868 208,457 163,650
Interest charges ............................................. (98,148) (54,379) (178,260) (118,022)
--------- --------- --------- ---------
Net interest income ........................................ 18,578 18,489 30,197 45,628
Loan servicing income ........................................ 139,131 103,248 268,513 199,178
Less amortization and impairment of
servicing assets ............................................ (53,678) (25,068) (199,421) (48,068)
Servicing hedge benefit (expense) ............................ 18,105 (19,344) 135,080 (39,260)
Less write-off of servicing hedge ............................ -- (25,600) -- (25,600)
--------- --------- --------- ---------
Net loan administration income ............................. 103,558 33,236 204,172 86,250
Gain on sale of servicing .................................... -- 56,880 -- 56,880
Commissions, fees and other income ........................... 14,506 9,963 26,984 21,444
--------- --------- --------- ---------
Total revenues .......................................... 209,310 151,106 388,273 328,224
--------- --------- --------- ---------
Expenses
Salaries and related expenses ................................. 55,969 48,990 106,608 109,122
Occupancy and other office expenses ........................... 24,538 25,611 51,083 51,616
Guarantee fees ................................................ 28,259 20,720 54,281 39,778
Marketing expenses ............................................ 6,589 5,395 12,540 12,152
Branch and administrative office
consolidation costs ......................................... -- 8,000 -- 8,000
Other operating expenses ...................................... 12,369 10,541 21,881 19,492
--------- --------- --------- ---------
Total expenses .......................................... 127,724 119,257 246,393 240,160
--------- --------- --------- ---------
Earnings before income taxes ..................................... 81,586 31,849 141,880 88,064
Provision for income taxes .................................... 32,634 12,739 56,752 35,225
--------- --------- --------- ---------
NET EARNINGS .................................................. $ 48,952 $ 19,110 $ 85,128 $ 52,839
========= ========= ========= =========
Earnings per share
Primary ....................................................... $ 0.49 $ 0.21 $ 0.88 $ 0.57
Fully diluted ................................................. $ 0.49 $ 0.21 $ 0.88 $ 0.57
The accompanying notes are an integral part of these statements ..
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months
Ended August 31,
1995 1994
------------ ------------
(Dollar amounts in thousands)
Cash flows from operating activities:
<S> <C> <C>
Net earnings .................................................. $ 85,128 $ 52,839
Adjustments to reconcile net earnings to net cash
(used) provided by operating activities:
Amortization and impairment of mortgage servicing rights .... 162,821 46,768
Amortization and impairment of capitalized servicing fees
receivable ............................................ 36,600 1,300
Depreciation and other amortization ......................... 14,175 12,647
Deferred income taxes ....................................... 56,752 35,225
Gain on bulk sale of servicing rights ....................... -- (56,880)
Origination and purchase of loans held for sale ............. (15,634,664) (15,588,789)
Principal repayments and sale of loans ...................... 14,212,571 15,925,278
------------ ------------
(Increase) decrease in mortgage loans shipped and held for
Sale ................................. (1,422,093) 336,489
Increase in other receivables and other assets .............. (154,833) (15,153)
(Decrease) increase in accounts payable and accrued liabilities (6,884) 18,975
------------ ------------
Net cash (used) provided by operating activities .......... (1,228,334) 432,210
------------ ------------
Cash flows from investing activities:
Additions to mortgage servicing rights ........................ (301,289) (267,656)
Additions to capitalized servicing fees receivable ............ (127,927) (106,596)
Proceeds from bulk sale of servicing rights ................... -- 20,547
Purchase of property, equipment and leasehold
improvements - net .......................................... (3,901) (21,800)
------------ ------------
Net cash used by investing activities ..................... (433,117) (375,505)
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in warehouse debt and other
short-term borrowings ....................................... 1,414,229 (176,029)
Issuance of long-term debt .................................... 140,000 201,205
Repayment of long-term debt ................................... (96,081) (65,418)
Issuance of common stock ...................................... 205,780 956
Cash dividends paid ........................................... (14,646) (14,586)
------------ ------------
Net cash provided (used) by financing activities .......... 1,649,282 (53,872)
------------ ------------
Net (decrease) increase in cash .................................. (12,169) 2,833
Cash at beginning of period ...................................... 17,624 4,034
============ ============
Cash at end of period ............................................ $ 5,455 $ 6,867
============ ============
Supplemental cash flow information:
Cash used to pay interest ..................................... $ 169,642 $ 125,321
Cash refunded from income taxes ............................... -- ($ 814)
The accompanying notes are an integral part of these statements ..
</TABLE>
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the six month period ended August 31, 1995 are
not necessarily indicative of the results that may be expected for the fiscal
year ending February 29, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the annual
report on Form 10-K for the fiscal year ended February 28, 1995 of Countrywide
Credit Industries, Inc. (the "Company").
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage
Servicing Rights, which the Company adopted effective March 1, 1995. SFAS No.
122 amended SFAS No. 65, Accounting for Certain Mortgage Banking Activities.
Since SFAS No. 122 prohibits retroactive application, historical accounting
results have not been restated and, accordingly, the accounting results for the
quarter and six months ended August 31, 1995 are not directly comparable to
prior periods. See Note E.
NOTE B - NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable consisted of the following ........................
(Dollar amounts in thousands) ................................ August 31, February 28,
1995 1995
<S> <C> <C>
Commercial paper ............................................. $2,698,754 $2,122,348
Revolving credit facility .................................... 75,000 --
Medium-term notes, Series A, B, C and D,
net of discounts ........................................... 1,438,300 1,393,900
Reverse-repurchase agreements ................................ 965,967 245,212
Subordinated notes ........................................... 200,000 200,000
Unsecured note payable, matured September 7, 1995 ............ 100,000 --
Other notes payable (2.40%-2.90%) ............................ 1,151 1,631
========== ==========
$5,479,172 $3,963,091
========== ==========
</TABLE>
Revolving Credit Facility and Commercial Paper
As of August 31, 1995, Countrywide Funding Corporation ("CFC"), the
Company's mortgage banking subsidiary, had an unsecured credit agreement
(revolving credit facility) with forty-three commercial banks permitting CFC to
borrow an aggregate maximum amount of $3 billion, less commercial paper backed
by the agreement. The amount available under the facility is subject to a
borrowing base, which consists of mortgage loans held for sale, receivables for
mortgage loans shipped and mortgage servicing rights. The facility contains
various financial covenants and restrictions, certain of which limit the amount
of dividends that can be paid by
<PAGE>
the Company or CFC. The interest rate on direct borrowings is based on a variety
of sources, including the prime rate and the London Interbank Offered Rates
("LIBOR") for U.S. dollar deposits. This interest rate varies, depending on
CFC's credit ratings. The weighted average borrowing rate on direct borrowings
and commercial paper borrowings for the six months ended August 31, 1995,
including the effect of the interest rate swap agreements discussed below, was
5.91%. The weighted average borrowing rate on commercial paper outstanding as of
August 31, 1995 was 5.83%. Under certain circumstances, including the failure to
maintain specified minimum credit ratings, borrowings under the revolving credit
facility and commercial paper may become secured by mortgage loans held for
sale, receivables for mortgage loans shipped and mortgage servicing rights. The
facility expires in May 1998.
Medium-Term Notes
As of August 31, 1995, outstanding medium-term notes issued by CFC under
various shelf registrations filed with the Securities and Exchange Commission
were as follows.
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
Floating-Rate Fixed-Rate Total From To From To
---------- ---------- ---------- ----- ---- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Series A . -- 344,800 344,800 6.10% 8.79% Mar 1997 Mar 2002
Series B . 11,000 469,000 480,000 5.11% 6.98% Mar 1996 Aug 2005
Series C . 303,000 195,500 498,500 5.81% 8.43% Dec 1997 Mar 2004
Series D . 115,000 -- 115,000 6.10% 6.22% Aug 1998 Aug 2000
---------- ---------- ----------
Total ..$ 429,000 $1,009,300 $1,438,300
========== ========== ==========
</TABLE>
As of August 31, 1995, all of the outstanding fixed-rate notes had been
effectively converted by interest rate swap agreements to floating-rate notes.
The weighted average borrowing rate on medium-term note borrowings for the six
months ended August 31, 1995, including the effect of the interest rate swap
agreements, was 6.93%. In addition, as of August 31, 1995, $1.5 million and $385
million were available for future issuances under the Series C and Series D
shelf registrations, respectively.
Reverse-Repurchase Agreements
As of August 31, 1995, the Company had entered into short-term financing
arrangements to sell mortgage-backed securities ("MBS") and whole loans under
agreements to repurchase. The weighted average borrowing rate for the six months
ended August 31, 1995 was 6.01%. The weighted average borrowing rate on
reverse-repurchase agreements outstanding as of August 31, 1995 was 5.83%. 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 August 31, 1995, CFC had uncommitted revolving credit facilities with
two government-sponsored entities and an affiliate of an investment banking
firm. The credit facilities are secured by conforming mortgage loans which are
in the process of being pooled into MBS.
Interest rates are based on LIBOR, federal funds and/or
<PAGE>
the prevailing rates for MBS reverse-repurchase agreements. The weighted average
borrowing rate for all three facilities for the six months ended August 31, 1995
was 6.10%. As of August 31, 1995, the Company had no outstanding borrowings
under any of these facilities.
NOTE C - SUBSEQUENT EVENTS
On September 13, 1995, the Company declared a cash dividend of $0.08 per
common share payable October 17, 1995 to shareholders of record on October 3,
1995.
NOTE D - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
The following tables present summarized financial information for
Countrywide Funding Corporation.
(Dollar amounts in thousands) ............ August 31, February 28,
1995 1995
Balance Sheets:
Mortgage loans shipped and held for sale $4,320,918 $2,898,825
Other assets ........................... 2,963,899 2,621,458
========== ==========
Total assets ........................ $7,284,817 $5,520,283
========== ==========
Short- and long-term debt .............. $5,621,460 $4,152,712
Other liabilities ...................... 479,213 433,025
Equity ................................. 1,184,144 934,546
========== ==========
Total liabilities and equity ......... $7,284,817 $5,520,283
========== ==========
(Dollar amounts in thousands) ........... Six Months Ended August 31,
1995 1994
Statements of Earnings:
Revenues .............................. $ 363,793 $ 310,146
Expenses .............................. 229,667 227,020
Provision for income taxes ............ 53,650 33,251
---------- ----------
Net earnings ........................ $ 80,476 $ 49,875
========== ==========
NOTE E - IMPLEMENTATION OF NEW ACCOUNTING STANDARD
In May 1995, the Financial Accounting Standards Board issued SFAS No. 122,
which the Company adopted effective March 1, 1995. The overall impact on the
Company's financial statements of adopting SFAS No. 122 was an increase in net
earnings for the quarter ended August 31, 1995 of $10.7 million, or $0.11 per
fully diluted share. The overall impact on earnings for the six months ended
August 31, 1995 was $19.6 million, or $0.20 per fully diluted share.
SFAS No. 122 requires the recognition of originated mortgage servicing
rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as
assets by allocating total costs incurred between the loan and the servicing
rights based on their relative fair values. Under SFAS No. 65, the cost of OMSRs
was not recognized as an asset and was charged to earnings when the related loan
was sold. The separate impact of
<PAGE>
recognizing OMSRs as assets in the Company's financial statements in accordance
with SFAS No. 122 was an increase in net earnings of $24.8 million, or $0.25 per
fully diluted share and $43.4 million, or $0.45 per fully diluted share for the
quarter and six months ended August 31, 1995, respectively.
With respect to PMSRs, SFAS No. 122 has a different cost allocation
methodology than SFAS No. 65. In contrast to a cost allocation based on relative
market value as set forth in SFAS No. 122, the prior requirement was to allocate
the costs incurred in excess of the market value of the loans without the
servicing rights to PMSRs. The separate impact of the application of the SFAS
No. 122 cost allocation method, along with the effect of changes in market
conditions, was to reduce PMSR capitalization by $14.1 million, or $0.14 per
fully diluted share and $23.8 million, or $0.25 per fully diluted share, for the
quarter and six months ended August 31, 1995, respectively.
SFAS No. 122 also requires that all capitalized mortgage servicing rights
("MSRs") be evaluated for impairment based on the excess of the carrying amount
of the MSRs over their fair value. For purposes of measuring impairment, MSRs
are stratified on the basis of interest rate and type of interest rate (fixed or
adjustable). In addition to normal amortization of the servicing assets
amounting to $41.2 million and $70.3 million for the quarter and six months
ended August 31, 1995, respectively, the Company reduced the servicing assets by
an additional $12.5 million and $129.1 million of impairment during the quarter
and six months ended August 31, 1995, respectively. The entire amount of such
impairment was offset by a pre-tax net gain of $18.1 million and $135.1 million
for the quarter and six months ended August 31, 1995, respectively, in the
Company's servicing hedge which is designed to protect its servicing investment.
The net gain included net unrealized gains of $2.4 million and $92.5 million and
net realized gains of $15.7 million and $42.6 million for the quarter and six
months ended August 31, 1995, respectively, from the sale of various financial
instruments that comprise the hedge. As a part of the adoption of SFAS No. 122,
the Company revised its servicing hedge accounting policy, effective March 1,
1995, to adjust the basis of the servicing assets for unrealized gains or losses
in the derivative financial instruments comprising the servicing hedge.
NOTE F - SERVICING HEDGE
The following summarizes the notional amounts of servicing hedge derivative
contracts.
Long Call Options
Interest Rate on U.S. Treasury Long Call Options
(Dollar amounts in millions) Floors Futures on MBS
Balance, February 28, 1995 . $ 4,000 $ -- $ --
Additions ........... 9,000 2,950 1,500
Dispositions ........ -- (950) --
------------- ------------------ -----------------
Balance, August 31, 1995 ... $13,000 $ 2,000 $ 1,500
============= ================== =================
<PAGE>
NOTE G - VALUATION ALLOWANCE FOR CAPITALIZED MORTGAGE SERVICING RIGHTS
The following summarizes the aggregate activity in the valuation allowances
for capitalized mortgage servicing rights.
(Dollar amounts in thousands) Aggregate Balances
At February 28, 1995 $ --
Additions charged 49,175
-------
At August 31, 1995 $49,175
=======
NOTE H - RATIO OF EARNINGS TO FIXED CHARGES
The ratios of earnings to fixed charges for the six months ended August 31,
1995 and 1994 were 1.78 and 1.72, respectively. For purposes of calculating the
ratio of earnings to fixed charges, earnings consist of income before Federal
income taxes, plus fixed charges. Fixed charges include interest expense on debt
and the portion of rental expenses which is considered to be representative of
the interest factor (one-third of operating leases). Since the major portion of
the Company's interest costs is incurred to finance mortgage loans which
generate interest income, and since interest income and interest expense are
generated simultaneously, management believes that a more meaningful measure of
its debt service requirements is the ratio of earnings to net fixed charges.
Under this alternative formula, net fixed charges are defined as interest
expense on debt, other than debt incurred to finance the Company's mortgage loan
inventory, plus the interest element (one-third of operating leases). Under such
alternative formula, these ratios for the six months ended August 31, 1995 and
1994 were 5.67 and 3.82, respectively.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter Ended August 31, 1995 Compared to Quarter Ended August 31, 1994
Revenues for the quarter ended August 31, 1995 increased 39% to $209.3
million from $151.1 million for the quarter ended August 31, 1994. Net earnings
increased 156% to $49.0 million for the quarter ended August 31, 1995 from $19.1
million for the quarter ended August 31, 1994. Effective March 1, 1995, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 122,
Accounting for Mortgage Servicing Rights. Since SFAS No. 122 prohibits
retroactive application, historical accounting results have not been restated
and, accordingly, the accounting results for the quarter ended August 31, 1995
are not directly comparable to prior periods. The overall impact on the
Company's financial statements of adopting SFAS No. 122 was an increase in net
earnings for the quarter ended August 31, 1995 of $10.7 million, or $0.11 per
fully diluted share. In addition to the accounting change, the increase in
revenues and net earnings for the quarter ended August 31, 1995 compared to the
quarter ended August 31, 1994 was attributable to an increase in the size of the
Company's servicing portfolio, higher production volume and improved pricing
margins, partially offset by the non-recurring gain on the sale of servicing in
the prior year which was offset, in part, by a non-recurring write-off of the
servicing hedge in the prior year.
The total volume of loans produced increased 42% to $8.9 billion for
the quarter ended August 31, 1995 from $6.2 billion for the quarter ended August
31, 1994. Refinancings totaled $2.6 billion, or 28% of total fundings, for the
quarter ended August 31, 1995, as compared to $1.2 billion, or 20% of total
fundings, for the quarter ended August 31, 1994. Fixed-rate loan production
totaled $6.7 billion, or 75% of total fundings, for the quarter ended August 31,
1995, as compared to $4.0 billion, or 66% of total fundings, for the quarter
ended August 31, 1994. Production in the Company's Consumer Markets Division
increased to $2.0 billion for the quarter ended August 31, 1995 compared to
production of $1.8 for the quarter ended August 31, 1994. Production in the
Company's Wholesale Division increased to $2.1 billion for the quarter ended
August 31, 1995 compared to $2.0 billion for the quarter ended August 31, 1994.
The Company's Correspondent Division purchased $4.8 billion in mortgage loans
for the quarter ended August 31, 1995 compared to $2.4 billion for the quarter
ended August 31, 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 August 31, 1995 and 1994, the Company's pipeline of loans in process
was $5.2 billion and $3.7 billion, respectively. In addition, at August 31,
1995, the Company had committed to make loans in the amount of $1.2 billion,
subject to property identification and borrower qualification ("LOCK N' SHOPSM
Pipeline"). At August 31, 1994, the LOCK N' SHOP Pipeline was $3.2 billion.
Historically, approximately 43% to 75% of the pipeline of loans in process has
funded. For the quarters ended August 31, 1995 and 1994, the Company received
115,782 and 69,896 new loan applications, respectively, at an average daily rate
of $196 million and $121 million, respectively. The following actions were taken
during the quarter ended August 31, 1995 on the total applications received
during that quarter: 59,502 loans (51% of total applications received) were
funded and 15,764 applications (14% of total applications received) were either
rejected by the Company or withdrawn by the applicant. The following actions
were taken during the quarter ended August 31, 1994 on the total applications
received during that quarter: 36,648 loans (52% of total applications received)
were funded and 7,939 applications (11% of total applications received) were
either rejected by the Company or withdrawn by the applicant. The 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
<PAGE>
issued, the creditworthiness of applicants, the production divisions' loan
processing efficiency and loan pricing decisions.
Loan origination fees increased during the quarter ended August 31,
1995 as compared to the quarter ended August 31, 1994 due to higher loan
production that resulted from a decrease in the level of mortgage interest
rates. The percentage increase in loan origination fees was less than the
percentage increase in total production. This is primarily because production by
the Correspondent Division (which, due to lower cost structures, charges lower
origination fees per dollar loaned) comprised a greater percentage of total
production in the quarter ended August 31, 1995 than in the quarter ended August
31, 1994. Gain (loss) on sale of loans improved during the quarter ended August
31, 1995 as compared to the quarter ended August 31, 1994 primarily due to
improved pricing margins and the impact of adopting SFAS No. 122. SFAS No. 122
requires the recognition of originated mortgage servicing rights ("OMSRs"), as
well as purchased mortgage servicing rights ("PMSRs"), as assets by allocating
total costs incurred between the loan and the servicing rights based on their
relative fair values. This accounting methodology, in turn, increases the gain
(or reduces the loss) on sale of loans as compared to the accounting results
obtained under SFAS No. 65, the previously applicable accounting standard. Under
SFAS No. 65, the cost of OMSRs was not recognized as an asset and was included
in the gain or loss recorded when the related loan was sold. The separate impact
of recognizing OMSRs as assets in the Company's financial statements in
accordance with SFAS No. 122 for the quarter ended August 31, 1995 was an
increase in gain on sale of loans of $41.3 million.
With respect to PMSRs, SFAS No. 122 has a different cost allocation
methodology than SFAS No. 65. In contrast to a cost allocation based on relative
market value as set forth in SFAS No. 122, the prior requirement was to allocate
the costs incurred in excess of the market value of the loans without the
servicing rights to PMSRs. During the quarter ended August 31, 1995, the
separate impact of the application of the SFAS No. 122 cost allocation method,
along with the effect of changes in market conditions, was to reduce PMSR
capitalization, and therefore negatively impact gain (loss) on sale of loans, by
$23.5 million. In general, loan origination fees and gain (loss) on sale of
loans are affected by numerous factors including loan pricing decisions,
interest rate volatility, the general direction of interest rates and the volume
of loans produced.
Net interest income (interest earned net of interest charges) increased
to $18.6 million for the quarter ended August 31, 1995 from $18.5 million for
the quarter ended August 31, 1994. Consolidated net interest income is
principally a function of: (i) net interest income earned from the Company's
mortgage loan warehouse ($9.4 million and $7.8 million for the quarters ended
August 31, 1995 and 1994, respectively); (ii) interest expense related to the
Company's investment in servicing rights ($15.5 million and $2.4 million for the
quarters ended August 31, 1995 and 1994, respectively) and (iii) interest income
earned from the custodial balances associated with the Company's servicing
portfolio ($24.7 million and $13.1 million for the quarters ended August 31,
1995 and 1994, respectively). The Company earns interest on, and incurs interest
expense to carry, mortgage loans held in its warehouse. The increase in net
interest income from the mortgage loan warehouse was attributable to an increase
in the average amount of the mortgage loan warehouse due to increased
production, offset somewhat by a lower net earnings rate. The increase in
interest expense on the investment in servicing rights resulted primarily from a
larger servicing portfolio and an increase in the payments of interest to
certain investors pursuant to customary servicing arrangements with regard to
paid-off loans in excess of the interest earned on these loans through their
respective payoff dates ("Interest Costs Incurred on Payoffs"). The increase in
net interest income earned from the custodial balances was related to an
increase in the earnings rate and an increase in the average custodial balances
(caused by growth of the servicing portfolio and an increase in prepayments)
from the quarter ended August 31, 1994 to the quarter ended August 31, 1995.
During the quarter ended August 31, 1995, loan administration income
was positively affected by the continued growth of the loan servicing portfolio.
At August 31, 1995, the Company serviced $126.4 billion of loans (including $1.7
billion of loans subserviced for others) compared to $96.8 billion (including
$1.1 billion of loans subserviced for others) at August 31, 1994, a 31%
increase. The growth in the Company's servicing portfolio during the quarter
ended August 31, 1995 was the result of loan production volume and the
acquisition of bulk servicing rights, partially offset by prepayments, partial
prepayments, and scheduled
<PAGE>
amortization of mortgage loans. The weighted average interest rate of the
mortgage loans in the Company's servicing portfolio at August 31, 1995 was 7.8%
compared to 7.3% at August 31, 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 production income.
During the quarter ended August 31, 1995, the prepayment rate of the
Company's servicing portfolio was 13%, as compared to 8% for the quarter ended
August 31, 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 increase in the
prepayment rate is primarily attributable to increased refinance activity caused
by decreased mortgage interest rates in the quarter ended August 31, 1995 from
the quarter ended August 31, 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 and impairment (which are deducted
from loan servicing income) resulting from increased prepayment activity, the
Company acquires financial instruments, including derivative contracts, that
increase in value when interest rates decline (the "Servicing Hedge"). These
financial instruments include call options on U.S. Treasury futures and MBS,
interest rate floors and certain tranches of collateralized mortgage obligations
("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 are designed to
protect the value of the investment in servicing rights from the effects of
increased prepayment activity that generally results from declining interest
rates. To the extent that interest rates increase, the value of the servicing
rights increases while the value of the hedge instruments declines. However, the
Company is not exposed to loss beyond its initial outlay to acquire the hedge
instruments. During the quarter ended August 31, 1995, the Company recognized a
net gain of $18.1 million from its Servicing Hedge. The net gain included
unrealized gains of $2.4 million and realized gains of $15.7 million from the
sale of various financial instruments that comprise the Servicing Hedge. As a
part of the adoption of SFAS No. 122, the Company has revised its servicing
hedge accounting policy, effective March 1, 1995, to adjust the basis of the
servicing assets for unrealized gains or losses in the derivative financial
instruments comprising the Servicing Hedge. There can be no assurance the
Company's Servicing Hedge will generate gains in the future.
The Company recorded amortization and impairment of its servicing
assets in the quarter ended August 31, 1995 totaling $53.7 million (consisting
of normal amortization amounting to $41.2 million and impairment of $12.5
million), compared to $25.1 million of amortization in the quarter ended August
31, 1994. SFAS No. 122 requires that all capitalized mortgage servicing rights
be evaluated for impairment based on the excess of the carrying amount of the
mortgage servicing rights over their fair value. Under SFAS No. 65, the
impairment evaluation could be made using either discounted or undiscounted cash
flows. No uniform required level of disaggregation was specified. The Company
used a disaggregated undiscounted method. The factors affecting the amount of
amortization and impairment recorded in an accounting period include the level
of prepayments during the period, the change in prepayment expectations and the
amount of Servicing Hedge gains.
During the quarter ended August 31, 1995, the Company acquired bulk
servicing rights for loans with principal balances aggregating $0.5 billion at a
price of 1.10% of the aggregate outstanding principal balance of the servicing
portfolios acquired. During the quarter ended August 31, 1994, the Company
acquired bulk servicing rights for loans with principal balances aggregating
$5.1 billion at a price of approximately $68.9 million or 1.34% of the aggregate
outstanding principal balance of the servicing portfolios acquired.
<PAGE>
During the quarter ended August 31, 1994, the Company sold servicing
rights for loans with principal balances of $5.9 billion and recognized a gain
of $56.9 million. No servicing rights were sold during the quarter ended August
31, 1995.
Salaries and related expenses are summarized below for the quarters
ended August 31, 1995 and 1994.
(Dollar amounts in thousands) . Quarter Ended August 31, 1995
Production Loan Other
Activities Administration Activities Total
Base Salaries ............... $27,893 $ 7,337 $ 2,389 $37,619
Incentive Bonus ............. 11,711 114 813 12,638
Payroll Taxes and Benefits .. 4,266 1,171 275 5,712
------- ------- ------- -------
Total Salaries and Related $43,870 $ 8,622 $ 3,477 $55,969
Expenses
======= ======= ======= =======
Average Number of Employees .. 2,509 1,036 189 3,734
(Dollar amounts in thousands) . Quarter Ended August 31, 1994
Production Loan Other
Activities Administration Activities Total
Base Salaries ............... $26,602 $ 5,926 $ 1,205 $33,733
Incentive Bonus ............. 7,934 98 2,085 10,117
Payroll Taxes and Benefits .. 4,047 956 137 5,140
------- ------- ------- -------
Total Salaries and Related $38,583 $ 6,980 $ 3,427 $48,990
Expenses
======= ======= ======= =======
Average Number of Employees .. 2,430 835 120 3,385
The amount of salaries increased during the quarter ended August 31,
1995 primarily due to the increased number of employees resulting from increased
production volume, a larger servicing portfolio and growth in the Company's
non-mortgage banking subsidiaries. Incentive bonuses earned during the quarter
ended August 31, 1995 increased primarily due to larger loan production and
increased loan production personnel, offset somewhat by reduced bonuses paid to
employees of the Company's non-mortgage banking subsidiaries.
Occupancy and other office expenses for the quarter ended August 31,
1995 decreased to $24.5 million from $25.6 million for the quarter ended August
31, 1994. The decrease was primarily the result of decreased office and
equipment rental expenses resulting from the closure of 10 Wholesale Division
branch offices from the quarter ended August 31, 1994 to the quarter ended
August 31, 1995.
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
<PAGE>
the quarter ended August 31, 1995 increased 36% to $28.3 million from $20.7
million for the quarter ended August 31, 1994. This increase resulted primarily
from an increase in the servicing portfolio.
Marketing expenses for the quarter ended August 31, 1995 increased 22%
to $6.6 million from $5.4 million for the quarter ended August 31, 1994. The
increase in marketing expenses reflected the Company's implementation of a new
marketing plan.
In the quarter ended August 31, 1994, the Company incurred an $8.0
million charge related to the consolidation and relocation of branch and
administrative offices that occurred as a result of the reduction in staff
caused by declining production. No such charge was incurred in the quarter ended
August 31, 1995.
Other operating expenses for the quarter ended August 31, 1995
increased from the quarter ended August 31, 1994 by $1.8 million, or 17%. This
increase was primarily due to increased activity in the Company's servicing
operations and non-mortgage banking subsidiaries.
Profitability of Loan Production and Servicing Activities
In the quarter ended August 31, 1995, the Company's pre-tax earnings
from its loan production activities (which include loan origination and
purchases, warehousing and sales) were $17.9 million. In the quarter ended
August 31, 1994, the Company's comparable pre-tax loss was $38.3 million. The
increase of $56.2 million was primarily attributable to increased loan
production, improved pricing margins, the effect of the adoption of SFAS No. 122
previously discussed and a change of $10.5 million in the Company's internal
method of allocating overhead between its production and servicing activities.
In the quarter ended August 31, 1995, the Company's pre-tax income from its loan
servicing activities (which include administering the loans in the servicing
portfolio, selling homeowners and other insurance and acting as tax payment
agent) was $60.9 million as compared to $68.1 million in the quarter ended
August 31, 1994. The decrease of $7.2 million was principally due to a
non-recurring gain on the sale of servicing in the prior year (which was offset,
in part, by a non-recurring write-off of the servicing hedge in the prior year)
and the change in the Company's internal overhead allocation method discussed
above, partially offset by an increase in the size of the servicing portfolio.
RESULTS OF OPERATIONS
Six Months Ended August 31, 1995 Compared to Six Months Ended August 31, 1994
Revenues for the six months ended August 31, 1995 increased 18% to
$388.3 million from $328.2 million for the six months ended August 31, 1994. Net
earnings increased 61% to $85.1 million for the six months ended August 31, 1995
from $52.8 million for the six months ended August 31, 1994. Since SFAS No. 122
prohibits retroactive application, historical accounting results have not been
restated and, accordingly, the accounting results for the six months ended
August 31, 1995 are not directly comparable to prior periods. The overall impact
on the Company's financial statements of adopting SFAS No. 122 was an increase
in net earnings for the six months ended August 31, 1995 of $19.6 million, or
$0.20 per fully diluted share. In addition to the accounting change, the
increase in revenues and net earnings for the six months ended August 31, 1995
compared to the six months ended August 31, 1994 was attributable to an increase
in the size of the Company's servicing portfolio and improved pricing margins,
partially offset by the non-recurring gain on the sale of servicing in the prior
year which was offset, in part, by a non-recurring write-off of the servicing
hedge in the prior year.
The total volume of loans produced was $15.6 billion for each of the
six months ended August 31, 1995 and August 31, 1994. Refinancings totaled $3.6
billion, or 23% of total fundings, for the six months ended August 31, 1995, as
compared to $6.1 billion, or 39% of total fundings, for the six months ended
August 31, 1994. Fixed-rate mortgage loan production totaled $11.2 billion, or
72% of total fundings, for the six months ended August 31, 1995, as compared to
$11.5 billion, or 73% of total fundings, for the six months ended August 31,
1994. Production in the Company's Consumer Markets Division decreased to $3.3
billion for
<PAGE>
the six months ended August 31, 1995 compared to $4.7 billion for the six months
ended August 31, 1994. Production in the Company's Wholesale Division decreased
to $3.9 billion for the six months ended August 31, 1995 compared to $5.0
billion for the six months ended August 31, 1994. The Company's Correspondent
Division purchased $8.4 billion in mortgage loans for the six months ended
August 31, 1995 compared to $5.9 billion for the six months ended August 31,
1994.
For the six months ended August 31, 1995 and 1994, the Company received
216,987 and 160,796 new loan applications, respectively, at an average daily
rate of $178 million and $143 million, respectively. The following actions were
taken during the six months ended August 31, 1995 on the total applications
received during that six months: 131,694 loans (61% of total applications
received) were funded and 40,674 applications (19% of total applications
received) were either rejected by the Company or withdrawn by the applicant. The
following actions were taken during the six months ended August 31, 1994 on the
total applications received during that six months: 100,670 loans (63% of total
applications received) were funded and 30,743 applications (19% of total
applications received) were either rejected by the Company or withdrawn by the
applicant.
Loan origination fees decreased during the six months ended August 31,
1995 as compared to the six months ended August 31, 1994 primarily because
production by the Correspondent Division comprised a greater percentage of total
production in the six months ended August 31, 1995 than in the six months ended
August 31, 1994. Gain (loss) on sale of loans improved during the six months
ended August 31, 1995 as compared to the six months ended August 31, 1994
primarily due to the impact of adopting SFAS No. 122. The separate impact of
recognizing OMSRs as assets in the Company's financial statements in accordance
with SFAS No. 122 for the six months ended August 31, 1995 was an increase in
gain on sale of loans of $72.4 million. The separate impact of the application
of the SFAS No. 122 cost allocation method, along with the effect of changes in
market conditions, was to reduce PMSR capitalization, and therefore negatively
impact gain (loss) on sale of loans, by $39.7 million during the six months
ended August 31, 1995.
Net interest income (interest earned net of interest charges) decreased
to $30.2 million for the six months ended August 31, 1995 from $45.6 million for
the six months ended August 31, 1994. Consolidated net interest income is
principally a function of: (i) net interest income earned from the Company's
mortgage loan warehouse ($11.6 million and $27.2 million for the six months
ended August 31, 1995 and 1994, respectively); (ii) interest expense related to
the Company's investment in servicing rights ($24.2 million and $8.8 million for
the six months ended August 31, 1995 and 1994, respectively) and (iii) interest
income earned from the custodial balances associated with the Company's
servicing portfolio ($42.8 million and $27.2 million for the six months ended
August 31, 1995 and 1994, respectively). The decrease in net interest income
from the mortgage loan warehouse was primarily attributable to a lower net
earnings rate. The increase in interest expense on the investment in servicing
rights resulted primarily from a larger servicing portfolio. The increase in net
interest income earned from the custodial balances was related to an increase in
the earnings rate and an increase in the average custodial balances from the six
months ended August 31, 1994 to the six months ended August 31, 1995.
During the six months ended August 31, 1995, loan administration income
was positively affected by the continued growth of the loan servicing portfolio.
The growth in the Company's servicing portfolio during the six months ended
August 31, 1995 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.
During the six months ended August 31, 1995, the prepayment rate of the
Company's servicing portfolio was 9%, as compared to 13% for the six months
ended August 31, 1994. The decrease in the prepayment rate was due to a decline
in the level of refinancings caused by generally higher interest rates prior to
and during the six months ended August 31, 1995 than prior to and during the six
months ended August 31, 1994.
<PAGE>
During the six months ended August 31, 1995, the Company recognized a
net gain of $135.1 million from its Servicing Hedge. The net gain included
unrealized gains of $92.5 million and realized gains of $42.6 million from the
sale of various financial instruments that comprise the Servicing Hedge.
The Company recorded amortization and impairment of its servicing
assets in the six months ended August 31, 1995 totaling $199.4 million
(consisting of normal amortization amounting to $70.3 million and impairment of
$129.1 million), compared to $48.1 million of amortization in the six months
ended August 31, 1994.
During the six months ended August 31, 1995, the Company acquired bulk
servicing rights for loans with principal balances aggregating $3.5 billion at a
price of approximately $44.3 million or 1.28% of the aggregate outstanding
principal balance of the servicing portfolios acquired. During the six months
ended August 31, 1994, the Company acquired bulk servicing rights for loans with
principal balances aggregating $8.6 billion at a price of approximately $119.8
million or 1.30% of the aggregate outstanding principal balance of the servicing
portfolios acquired.
During the six months ended August 31, 1994, the Company sold servicing
righs for loans with principal balances of $5.9 billion and recognized a gain of
$56.9 million. No servicing rights were sold during the six months ended August
31, 1995.
Salaries and related expenses are summarized below for the six months
ended August 31, 1995 and 1994.
(Dollar amounts in thousands) Six Months Ended August 31, 1995
Production Loan Other
Activities Administration Activities Total
Base Salaries .............. $ 53,428 $ 13,990 $ 4,453 $ 71,871
Incentive Bonus ............ 19,711 249 2,567 22,527
Payroll Taxes and Benefits . 9,264 2,373 573 12,210
------- -------- -------- -------
Total Salaries and Related $ 82,403 $ 16,612 $ 7,593 $106,608
Expenses
======= ======== ======== =======
Average Number of Employees . 2,438 998 167 3,603
(Dollar amounts in thousands) Six Months Ended August 31, 1994
Production Loan Other
Activities Administration Activities Total
Base Salaries .............. $ 60,258 $ 11,419 $ 2,921 $ 74,598
Incentive Bonus ............ 18,628 208 2,767 21,603
Payroll Taxes and Benefits . 10,587 1,914 420 12,921
------- -------- -------- -------
Total Salaries and Related $ 89,473 $ 13,541 $ 6,108 $109,122
Expenses
======= ======== ======== =======
Average Number of Employees . 2,910 819 112 3,841
<PAGE>
The amount of salaries decreased during the six months ended August 31,
1995 primarily due to the decreased number of employees resulting from the
Company's strategy to increase productivity and efficiency primarily in the loan
production area, offset somewhat by an increased number of employees due to a
larger servicing portfolio and growth in the Company's non-mortgage banking
subsidiaries.
Occupancy and other office expenses for the six months ended August 31,
1995 decreased slightly to $51.1 million from $51.6 million for the six months
ended August 31, 1994. The decrease was due to the net reduction in costs
resulting from the opening and closing of various Consumer Markets and Wholesale
Division branch offices.
Guarantee fees for the six months ended August 31, 1995 increased 36%
to $54.3 million from $39.8 million for the six months ended August 31, 1994.
This increase resulted primarily from an increase in the servicing portfolio.
Marketing expenses for the six months ended August 31, 1995 increased 3% to
$12.5 million from $12.2 million for the six months ended August 31, 1994.
In the six months ended August 31, 1994, the Company incurred an $8.0
million charge related to the consolidation and relocation of branch and
administrative offices that occurred as a result of the reduction in staff
caused by declining production. No such charge was incurred in the six months
ended August 31, 1995.
Other operating expenses for the six months ended August 31, 1995
increased from the six months ended August 31, 1994 by $2.4 million, or 12%.
This increase was due primarily to increased activity in the Company's servicing
operations and non-mortgage banking subsidiaries.
Profitability of Loan Production and Servicing Activities
In the six months ended August 31, 1995, the Company's pre-tax earnings
from its loan production activities were $16.5 million. In the six months ended
August 31, 1994, the Company's comparable pre-tax loss was $17.4 million. The
increase of $33.9 million was primarily attributable to improved pricing
margins, the effect of the adoption of SFAS No. 122 previously discussed and a
change of $20.5 million in the Company's internal method of allocating overhead
between its production and servicing activities. In the six months ended August
31, 1995, the Company's pre-tax income from its loan servicing activities was
$120.9 million as compared to $100.1 million in the six months ended August 31,
1994. The increase of $20.8 million was principally due to the increase in the
size of the servicing portfolio, partially offset by the change in the Company's
internal overhead allocation method discussed above and a non-recurring gain on
the sale of servicing in the prior year (which was offset, in part, by a
non-recurring write-off of the servicing hedge in the prior year).
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. This extends the average life of the Company's servicing portfolio and
reduces both amortization of the servicing assets and Interest Costs Incurred on
Payoffs. In addition, 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
<PAGE>
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. This is primarily due to
increased amortization and impairment of the Servicing Assets (which may be
offset by income from the Servicing Hedge), 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 utilizes commercial paper supported by its revolving
credit facility, medium-term notes, pre-sale funding facilities, MBS and whole
loan reverse-repurchase agreements, subordinated notes, unsecured notes, cash
flow from operations and direct borrowings from its revolving credit facility.
In June 1995, the Company completed a public offering of its common stock
through the issuance and sale of 10,000,000 shares at a price of $21 per share.
In addition, in the past the Company has utilized servicing-secured bank
facilities, privately-placed financings and public offerings of preferred stock.
See Note B 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.
The Company continues to investigate and pursue alternative and
supplementary methods to finance its growing operations through the public and
private capital markets. These may include such methods as mortgage loan sale
transactions designed to expand the Company's financial capacity and reduce its
cost of capital and the securitization of servicing income cash flows.
In connection with its derivative contracts, the Company may be
required to deposit cash or certain government securities or obtain letters of
credit to meet margin requirements. The Company considers such potential margin
requirements in its overall liquidity management.
In the course of the Company's mortgage banking operations, the Company
sells to investors the mortgage loans it originates and purchases but generally
retains the right to service the loans, thereby increasing the Company's
investment in loan servicing rights. The Company views the sale of loans on a
servicing-retained basis in part as an investment vehicle. Significant
unanticipated prepayments in the Company's servicing portfolio could have a
material adverse effect on the Company's future operating results and liquidity.
Cash Flows
Operating Activities In the six months ended August 31, 1995, the
Company's operating activities used cash of approximately $1.4 billion on a
short-term basis to fund the increase in its warehouse of mortgage loans. The
Company's operating activities also generated $194 million of positive cash
flow, which was principally allocated to the long-term investment in servicing
as discussed below under "Investing Activities."
<PAGE>
Investing Activities The primary investing activity for which cash was
used during the six months ended August 31, 1995 was the investment in
servicing. Net cash used by investing activities increased to $433 million for
the six months ended August 31, 1995 from $376 million for the six months ended
August 31, 1994.
Financing Activities Net cash provided by financing activities amounted
to $1.6 billion for the six months ended August 31, 1995. Net cash used by
financing activities amounted to $54 million for the six months ended August 31,
1994. The increase in net cash provided was primarily the result of net
short-term borrowings by the Company during the six months ended August 31, 1995
and net short-term debt repayments in the six months ended August 31, 1994.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
During the six months ended August 31, 1995, the Company received new
loan applications at an average daily rate of $178 million and at August 31,
1995, the Company's pipeline of loans in process was $5.2 billion. This compares
to a daily application rate during the six months ended August 31, 1994 of $143
million and a pipeline of loans in process at August 31, 1994 of $3.7 billion.
During most of the period from August 31, 1994 to February 28, 1995, interest
rates increased, resulting in a decrease in demand for mortgage loans. However,
during the six months ended August 31, 1995, interest rates decreased, resulting
in an increase in demand for mortgage loans. The size of the pipeline is
generally an indication of the level of future fundings, as historically 43% to
75% of the pipeline of loans in process has funded. In addition, the Company's
LOCK N' SHOP Pipeline at August 31, 1995 was $1.2 billion and at August 31, 1994
was $3.2 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 September 30, 1995,
the average daily amount of applications received was $208 million, and at
September 30, 1995, the pipeline of loans in process was $5.3 billion and the
LOCK N' SHOP pipeline was $1.4 billion.
Market Factors
Mortgage interest rates generally increased in 1994 and have declined
in 1995. The environment of rising interest rates resulted in lower production
(particularly from refinancings) and greater price competition, which adversely
impacted earnings from loan production activities and may continue to do so in
the future. The Company took steps to maintain its productivity and efficiency,
particularly in the loan production area, by reducing staff and embarking on a
program to reduce production-related and overhead costs. However, the rising
interest rates enhanced earnings from the Company's loan servicing portfolio as
amortization and impairment 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
decline in interest rates during the six months ended August 31, 1995 resulted
in impairment (as specified in SFAS No. 122) of $129.1 million and a servicing
hedge gain of $135.1 million. In addition, the Company has further increased the
size of its servicing portfolio, thereby increasing its servicing revenue base,
by acquiring servicing contracts through bulk purchases. During the six months
ended August 31, 1995, the Company purchased such servicing contracts with
principal balances amounting to $3.5 billion. Prepayments in the Company's
servicing portfolio were $5.3 billion during the six months ended August 31,
1995 and $1.2 billion during the month of September 1995.
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 have competed with the Company by offering aggressively priced
adjustable-rate mortgage products which grow in popularity when in interest
rates rise. Generally, the
<PAGE>
Company has experienced significant price competition among mortgage lenders
which has resulted in downward pressure on loan production earnings.
Some regions in which the Company operates, particularly some regions
of California, have been experiencing slower economic growth, and real estate
financing activity in these regions has been negatively impacted. As a result,
home lending activity for single- (one-to-four) family residences in these
regions may also have experienced slower growth. The Company's California
mortgage loan production (measured by principal balance) constituted 30% of its
total production during the six months ended August 31, 1995, down from 31% for
the six months ended August 31, 1994. The Company is making a continued effort
to expand its production capacity outside of California. Since California's
mortgage loan production constituted a significant portion of the Company's
production during the period, 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 (23% of the Company's servicing
portfolio at August 31, 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 recorded a net gain of $135.1
million from its Servicing Hedge which is designed to protect its servicing
investment from the effects of increased prepayment activity that generally
results from declining interest rates. There can be no assurance the Company's
Servicing Hedge will generate gains in the future, or that if gains are
generated, they will fully offset impairment of the Servicing Assets.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders was held July 12, 1995.
(b) At the Annual Meeting, the stockholders voted on the following matters:
(1) Election of Directors
Voted For Votes Withheld
Robert J. Donato 82,911,480 327,297
Harley W. Snyder 82,913,822 324,955
(2) Amendment to Stock Option Financing Plan
Votes For: 64,486,405
Votes Against: 2,263,637
Votes Abstain: 1,166,640
(3) Approval of selection of Grant Thornton as the independent accountants
for the fiscal year ending February 29, 1996
Votes For: 82,991,290
Votes Against: 91,216
Votes Abstain: 156,271
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 1995 Amended and Extended Management Agreement, dated as of May 15,
1995, between CWM Mortgage Holdings, Inc.
("CWM") and Countrywide Asset Management Corporation.
10.2 1995 Amended and Extended Loan Purchase and Administrative
Services Agreement, dated as of May 15, 1995, between CWM and
Countrywide Funding Corporation.
11.1 Statement Regarding Computation of Per Share Earnings.
12.1 Computation of the Ratio of Earnings to Fixed Charges.
12.2 Computation of the Ratio of Earnings to Net Fixed Charges.
27 Financial Data Schedules (included only with the electronic filing
with the SEC).
(b) Reports on Form 8-K. A Form 8-K was filed June 12, 1995, which
contained the press release announcing the Company's results for the
quarter ended May 31, 1995.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Registrant)
DATE: October 13, 1995 /s/ Stanford L. Kurland
----------------------------------
Senior Managing Director and
Chief Operating Officer
DATE: October 13, 1995 /s/ Carlos M. Garcia
----------------------------------
Managing Director; Chief Financial
Officer and Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit Number Document Description
10.1 1995 Amended and Extended Management Agreement, dated as of May 15,
1995, between CWM Mortgage Holdings, Inc. ("CWM") and Countrywide Asset
Management Corporation.
10.2 1995 Amended and Extended Loan Purchase and
Administrative Services Agreement, dated as of May 15, 1995, between CWM and
Countrywide Funding Corporation.
11.1 Statement Regarding Computation of Per
Share Earnings.
12.1 Computation of the Ratio of Earnings to Fixed Charges.
12.2 Computation of the Ratio of Earnings to Net Fixed Charges.
27 Financial Data Schedules (included only with the electronic filing
with the SEC).
15
1995 AMENDED AND EXTENDED
MANAGEMENT AGREEMENT
THIS AGREEMENT, initially made as of September 3, 1985 and
amended and extended from time to time thereafter, is amended and extended as of
May 15, 1995 by and between CWM MORTGAGE HOLDINGS, INC. (formerly known as
Countrywide Mortgage Investments, Inc.), a Delaware corporation which has
elected to qualify as a real estate investment trust (the "Company"), and
COUNTRYWIDE ASSET MANAGEMENT CORPORATION, a Delaware corporation, and its
permitted successors and assigns under this agreement (the "Manager").
WITNESSETH
WHEREAS, the Company has elected to qualify for the tax benefits accorded
by Sections 856 to 860 of the Internal Revenue Code of 1986, as amended; and
WHEREAS, the Company, directly or through Subsidiaries, in the
conduct of its business primarily operates a mortgage loan conduit, engages in
warehouse lending and construction lending, purchases and sells credit-impaired
mortgage loans, and invests in mortgage loans and mortgage-related securities
meeting the investment criteria established from time to time by its Board of
Directors; and
WHEREAS, the Company desires to retain the Manager to manage
the operations and investments of the Company and its Subsidiaries and to
perform administrative services for the Company and its Subsidiaries, each in
the manner and on the terms set forth in this Agreement; and
WHEREAS, the Company and the Manager wish to amend and extend
their agreement originally entered into as of September 3, 1985 for a one year
period through May 14, 1996;
NOW, THEREFORE, in consideration of the mutual agreements set
forth in this Agreement, the Company and the Manager agree as follows:
Section 1. Definitions. Whenever used in this Agreement, the following
terms, unless the context otherwise requires, shall have the following meanings:
(a) "Affiliate" of another person shall mean any person
directly or indirectly owning, controlling or holding with power to vote, more
than 5% of the outstanding voting securities of such other person; any person 5%
or more of whose outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote by such other person; any person directly
or indirectly controlling, controlled by or under common control with, such
other person; and any officer, director, partner or employee of such other
person. The term "person" includes a natural person, corporation, partnership,
trust, company or other entity.
(b) "Agency Securities" shall mean (i) fully modified
pass-through mortgage-backed certificates guaranteed as to timely payment of
principal and interest by the Government National Mortgage Association, (ii)
mortgage participation certificates guaranteed as to payment of interest and
principal by the Federal Home Loan Mortgage Corporation and (iii) mortgage
pass-through certificates guaranteed as to payment of interest and principal by
the Federal National Mortgage Association.
(c) "Agreement" shall mean this 1995 Amended and Extended Management
Agreement.
(d) "Average Invested Assets" for any period shall mean the
average of the aggregate book value of the assets of the mortgage conduit
operations of the Company and its Subsidiaries invested, directly or indirectly,
in loans secured by real estate (including without limitation whole mortgage
loans, retained undivided interests in mortgage loans and Agency Securities, but
not including any whole mortgage loans, retained undivided interests in mortgage
loans, or Agency Securities pledged to secure the issuance of collateralized
mortgage obligations or other mortgage collateralized debt or sold in the form
of mortgage backed securities in transactions entered into by the Company or a
Subsidiary), computed by taking the average of such values at the end of each
calendar month during such period.
(e) "Average Net Worth" for any period shall mean the
arithmetic average of the Net Worth of the Company at the beginning of such
period and at the end of each calendar month during such period.
(f) "Board of Directors" shall mean the Board of Directors of the Company.
(g) "CCI" shall mean Countrywide Credit Industries, Inc., a Delaware
corporation. (h) "CFC" shall mean Countrywide Funding Corporation, a Subsidiary
of CCI, and a New York corporation.
(i) "Commitment" shall mean any document containing the terms
pursuant to which the Company or any Subsidiary agrees to purchase on a forward
basis any specified mortgage loans, including purchases from Affiliates of the
Manager.
(j) "Consolidated Average Invested Assets" for any period
shall mean the Average Invested Assets for the Company and its consolidated
subsidiaries taken as a whole, computed by taking the average of such values at
the end of each calendar month during such period.
(k) "Governing Instruments" shall mean the articles or
certificate of incorporation, trust agreement and bylaws of the Company or any
Subsidiary, as applicable.
(l) "INMC" shall mean Independent National Mortgage Corporation, a Delaware
corporation. (m) "Internal Revenue Code" shall mean the Internal Revenue Code of
1986, as amended.
(n) "Loan Purchase Agreement" shall mean the 1995 Amended and
Extended Loan Purchase and Administrative Services Agreement, dated as of May
15, 1995, as thereafter amended or supplemented, between the Company and CFC.
(o) "Mortgage Backed Securities" shall mean the collateralized
mortgage obligations, mortgage collateralized debt, mortgage pass-through
securities including real estate mortgage investment conduits or other
mortgage-related securities issued by the Company or a Subsidiary of the
Company.
(p) "Net Income" for any period shall mean total revenues
applicable to such period, less the expenses applicable to such period
determined in accordance with generally accepted accounting principles.
(q) "Net Worth" at any time shall mean the sum of the gross
proceeds from any offerings of equity securities by the Company (before
deducting any underwriting discounts and commissions and other expenses and
costs relating to the offering), plus or minus any retained earnings or losses
of the Company, computed in accordance with generally accepted accounting
principals.
(r) "Return on Equity" for a period shall be calculated by
dividing the Company's Net Income for such period by the Company's Average Net
Worth for such period.
(s) "Servicing Agreement" shall mean an agreement between the
Company or any Subsidiary and each seller or servicer of mortgage loans
purchased by the Company, including CFC, which agreement governs the sale and/or
servicing of such mortgage loans.
(t) "Shareholders" shall mean the owners of the shares of the Company.
(u) "Subsidiary" shall mean any corporation, whether now
existing or in the future established, of which the Company, directly or
indirectly, owns more than 50% of the outstanding voting securities of any class
or classes, any business trust, partnership or similar non-corporate form in
which the Company, directly or indirectly, owns more than 50% of the beneficial
interests, and INMC.
(v) "Ten Year Average Yield" shall mean the average yield to
maturity for actively traded marketable U.S. Treasury fixed interest rate
securities (adjusted to constant maturities of 10 years).
(w) "Ten Year U.S. Treasury Rate" for a quarterly period shall
mean the arithmetic average of the weekly per annum Ten Year Average Yields
published by the Federal Reserve Board during such quarter. In the event that
the Federal Reserve Board does not publish a weekly per annum Ten Year Average
Yield during any week in a quarter, then the Ten Year U.S. Treasury Rate for
such week shall be the weekly per annum Ten Year Average Yields published by any
Federal Reserve Bank or by any U.S. Government department or agency selected by
the Company for such week. In the event that the Company determines in good
faith that for any reason the Company cannot determine the Ten Year U.S.
Treasury Rate for any quarter as provided above, then the Ten Year U.S. Treasury
Rate for such quarter shall be the arithmetic average of the per annum average
yields to maturity based upon the daily closing bids during such quarter for
each of the issues of actively traded marketable U.S. Treasury fixed interest
rate securities (other than securities which can, at the option of the holder,
be surrendered at face value in payment of any federal estate tax) with a final
maturity date not less than eight nor more than twelve years from the date of
each such quotation, as chosen and quoted for each business day (or less
frequently if daily quotations shall not be generally available) in each such
quarterly period in New York City to the Company by at least three recognized
dealers in U.S. Government securities selected by the Company.
(x) "Unaffiliated Directors" shall mean those members of the Board of
Directors of the Company who are not Affiliates of the Manager.
Section 2. General Duties of the Manager. Subject to the
supervision of the Board of Directors and in accordance with the Governing
Instruments, the Manager shall provide services to the Company and INMC, and to
the extent directed by the Board of Directors, shall provide similar services to
any other Subsidiary of the Company, as follows:
(a) conduct the day-to-day mortgage loan conduit, warehouse
lending and construction lending and other operations of the Company and INMC as
approved by the Board of Directors, including without limitation, the purchase,
accumulation, financing and securitization of mortgage loans, the establishment
and financing of warehouse lending and construction lending facilities, the
management of assets and investments and the administration thereof; and
(b) provide such reports and analysis to the Board of
Directors regarding the operating strategies and results of the Company and its
Subsidiaries as the Board may reasonably request.
The Manager shall perform its duties and shall take actions on
behalf of the Company and its Subsidiaries consistent with (i) the operating
policies and criteria established from time to time by the Board of Directors or
any authorized officer with respect thereto, and (ii) the obligations of the
Company and its Subsidiaries under the various agreements to which each is a
party. So long as the Manager is serving as the Manager under this Agreement, it
shall be and remain a Subsidiary of and wholly owned, directly or indirectly, by
CCI.
Section 3. Additional Activities of Manager. Except as
provided in the Letter Agreement between CCI and the Company attached hereto as
Exhibit A, nothing herein shall prevent the Manager or its Affiliates from
engaging in other businesses or from rendering services of any kind to any other
person or entity, including investment in or advisory service to others
investing in any type of real estate investment, including investments which
meet the principal investment objectives of the Company or any Subsidiary of the
Company. Directors, officers, employees and agents of the Manager or Affiliates
of the Manager may serve as directors, officers, employees, agents, nominees or
signatories for the Company or any Subsidiary of the Company, to the extent
permitted by its Governing Instruments, as from time to time amended, or by any
resolutions duly adopted by the Board of Directors pursuant to its Governing
Instruments. When executing documents or otherwise acting in such capacities for
the Company or any Subsidiary of the Company, such persons shall use their
respective titles in the Company or such Subsidiary.
Section 4. Purchases and Sales of Investments and Loans from
the Manager and its Affiliates. The Manager agrees that sales of investments to
and purchases of investments from the Manager and its Affiliates, including
without limitation purchases and sales of mortgage loans, Agency Securities and
Commitments, shall only be made as stated in an agreement therefor setting forth
in general the operating policies and guidelines within which such sales or
purchases may be made, which agreement has been approved by the Board of
Directors, including a majority of the Unaffiliated Directors. Notwithstanding
the terms of any other agreements between the manager or its Affiliates and the
Company, the Manager further agrees that all such sales and purchases will be
made upon terms no less favorable to the Company than are generally available to
other third parties. The Manager shall purchase or exercise the Company's option
to purchase mortgage loans from CFC in accordance with the Company's rights and
obligations under the Loan Purchase Agreement or any other applicable agreement
between the Company and CFC which is approved by the Board of Directors,
including a majority of the Unaffiliated Directors.
Section 5. Repurchase Obligation.
(a) The Manager agrees that if the Company purchases any
mortgage loan, Agency Security or other investment which does not meet the
investment and/or purchase criteria and policies of the Company and/or INMC as
applicable at the time of purchase, the Manager will repurchase or will cause
the repurchase of such mortgage loan, Agency Security or other investment from
the Company for an amount not less than the unpaid principal balance of the
mortgage loan, Agency Security or other investment as of the date of repurchase,
less any amounts received by the Company representing prepaid interest not
accrued as of the date of repurchase, plus any amounts representing accrued and
unpaid interest to the date of repurchase and any amounts incurred by the
Company, including, but not limited to reasonable fees and out-of-pocket
expenses of counsel, in enforcing the obligation of the Manager to repurchase or
cause the repurchase of such mortgage loan. In lieu of repurchasing or causing
the repurchase of any mortgage loan, Agency Security or other investment, the
Manager may, in its discretion, substitute or cause the substitution,
respectively, of a mortgage loan, Agency Security or other investment having an
unpaid principal amount and yield at least equivalent to and a maturity not
later than the defective mortgage loan, Agency Security or other investment and
otherwise meeting the investment and/or purchase criteria and policies of the
Company and/or INMC as applicable and the terms of the agreement, if any,
pursuant to which the mortgage loan, Agency Security or other investment has
been securitized.
(b) The Manager shall be subrogated to any and all rights of
the Company or any Subsidiary, and the Company agrees to assign to the Manager
or direct its Subsidiary to assign to the Manager its rights, under any
Servicing Agreement with any third party with respect to any mortgage loan
repurchased or substituted for, by or on behalf of the Manager under Subsection
(a).
Section 6. Bank Accounts. The Manager may establish and
maintain one or more bank accounts in the name of the Company or any Subsidiary,
at the direction of the Board of Directors, and may collect and deposit into any
such account or accounts, and disburse from any such account or accounts, any
money on behalf of the Company or any Subsidiary, under such terms and
conditions as the Board of Directors may approve; and the Manager shall from
time to time render appropriate accountings of such collections and payment to
the Board of Directors and, when requested, to the auditors of the Company or
any Subsidiary.
Section 7. Records; Confidentiality. The Manager shall
maintain appropriate books of account and records relating to services performed
hereunder, which books of account and records shall be accessible for inspection
by the Company or any Subsidiary at any time during normal business hours. The
Manager agrees to keep confidential any and all information it obtains from time
to time in connection with the services it renders under this Agreement and
shall not disclose any portion thereof to non-affiliated third parties except
with the prior written consent of the Company.
Section 8. Obligations of Manager.
(a) The Manager shall use its best efforts to provide that
each mortgage loan conforms to the purchase criteria of the Company or INMC as
applicable and shall require each seller or transferor of mortgage loans to the
Company or INMC in connection with such purchase or transfer to make all
applicable representations and warranties contained in the Servicing Agreement
for such loans. The Manager shall take such other action as the Manager deems
necessary or appropriate with regard to the protection of the Company's or
INMC's investments.
(b) Anything else in this Agreement to the contrary
notwithstanding, the Manager shall refrain from any action which in its sole
judgment made in good faith would adversely affect the status of the Company, or
any Subsidiary which elects to so qualify, as a real estate investment trust as
defined and limited in Section 856 through 860 of the Internal Revenue Code or
which in its sole judgment made in good faith would violate any law, rule or
regulation of any governmental body or agency having jurisdiction over the
Company or any Subsidiary or which would otherwise not be permitted by the
Company's or its Subsidiary's Governing Instruments except if such action shall
be ordered by the Board of Directors, in which event the Manager shall promptly
notify the Board of Directors of the Manager's judgment that such action would
adversely affect such status or violate any such law, rule or regulation or the
Governing Instruments and shall refrain from taking such action pending further
clarification or instructions from the Board of Directors. If the Board of
Directors thereafter instructs the Manager, despite the Manager's notification
as provided herein, to take any such action and the Manager so acts upon the
instructions given, the Manager shall not be responsible for any loss of the
Company's or Subsidiary's status as a real estate investment trust or violation
of any law, rule or regulation or the Governing Instruments caused thereby.
Section 9. Fidelity Bond. The Manager shall maintain a
fidelity bond with a responsible surety company in an amount approved by the
Board of Directors covering all officers and employees of the Manager handling
funds of the Company or any Subsidiary and any documents or papers, which bond
shall protect the Company or any Subsidiary against all losses of any such
property from acts of such officers and employees through theft, embezzlement,
fraud, negligent acts, errors and omissions or otherwise. The premium for said
bond shall be paid by the Manager.
Section 10. Compensation.
(a) Manager will receive a base management fee equal to the Average
Invested Assets multiplied by 1/8 of 1%.
(b) The Manager shall be paid for services rendered with
respect to warehouse lending and construction lending activities a management
fee in an amount equal to two tenths of 1% of the average daily balance of the
amounts outstanding under warehouse lines of credit extended by the Company or
its Subsidiaries to originators of mortgage loans.
(c) If the Company's annualized Return on Equity during any
fiscal quarter (computed by multiplying the Return on Equity for such fiscal
quarter by four) is in excess of the Ten Year U.S. Treasury Rate, plus 2% after
taking into account any recovery of the Manager's fees under Subsection (d), the
Company will pay the Manager as incentive compensation for such quarter an
amount equal to 25% of the amount by which the annualized Return on Equity of
the Company for such fiscal quarter exceeds the Ten Year U.S. Treasury Rate plus
2%, but in no event shall any payment of incentive compensation under this
Subsection reduce the Company's annualized Return on Equity for such quarter to
less than the Ten Year U.S. Treasury Rate plus 2%. For purposes of the
calculation contained in this Subsection, all Net Income of the Company and any
Subsidiaries shall be deemed to have been distributed on the last day of each
quarter. The incentive compensation shall be paid to the Manager within 60 days
after the end of each fiscal quarter on an interim basis, subject to adjustment
under Subsection (d).
(d) The Manager shall compute the compensation payable under
Subsections (a), (b) and (c) within 45 days after the end of each fiscal
quarter. A copy of the computations made by the Manager to calculate its
compensation shall thereafter by promptly delivered to the Company and, upon
such delivery, payment of the interim compensation earned under Subsections (a),
(b) and (c) shown therein shall be due and payable within 60 days after the end
of such fiscal quarter. The aggregate amount of the Manager's compensation for
each fiscal year shall be adjusted within 120 days after the end of such fiscal
year so as to provide compensation for such year in the annual amounts stated in
Subsections (a), (b) and (c) and any excess owed to, or shortfall owed by, the
Manager with respect to such compensation, collectively, shall be promptly
remitted by, or paid to, the Company.
(e) Notwithstanding the definition of Average Invested Assets,
in the event the Company implements a strategy of investing directly or
indirectly in loans secured by real estate which are not intended to be
securitized, the base management fee in Subsection (a) shall be paid with
respect to these assets.
Section 11. Operating Expenses. The Manager shall be
reimbursed by the Company for its operating expenses on a monthly basis. Any
allocation of general administrative costs and overhead by the Manager to the
Company shall be supported by documentation establishing that each other
applicable affiliate of the Manager is also charged a pro rata share of such
expenses. Promptly following the end of each month for which reimbursement is
due, the Manager shall submit an itemized accounting of its expenses to the
Company, and the Company shall pay within 30 days of the receipt of the
accounting. The Board of Directors shall have the authority to approve the
incurrence of any expenses by the Manager for the account of the Company, either
prior to or after such expenses have been incurred. The Manager shall be
required to request and receive the approval of the Board of Directors with
respect to the compensation and expense reimbursement provided to the executive
officers of the Company. In the event the Company determines that any expenses,
costs or overhead charged by the Manager can be reduced by the Company's
utilizing another provider or source, the Company shall so notify the Manager,
and thirty (30) days after the delivery of such notice (the "Notice Effective
Date"), the Company shall have the right to utilize any other such provider or
source pursuant to such arrangements as the Company may from time to time make;
provided that any expenses, costs or overhead allocable by the Manager to the
Company in accordance with the terms of this section shall be reimbursed by the
Company for the period up to and including the Notice Effective Date.
Section 12. Limits of Manager Responsibility. The Manager
assumes no responsibility under this Agreement other than to render the services
called for hereunder in good faith and shall not be responsible for any action
of the Board of Directors in following or declining to follow any advice or
recommendations of the Manager, including as set forth in Subsection 8(b) above.
The Manager, its directors, officers, shareholders and employees will not be
liable to the Company, any Subsidiary, the Unaffiliated Directors of the Company
or the Company's or any Subsidiary's shareholders for any acts performed by the
Manager, its directors, officers, shareholders or employees in accordance with
this Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties. The Company
or any Subsidiaries, as applicable, shall reimburse, indemnify and hold harmless
the Manager, its shareholders, directors, officers or employees for and from any
and all expenses, losses, damages, liabilities, demands, charges and claims of
any nature whatsoever in respect of or arising from any acts or omissions of the
Manager, its shareholders, directors, officers and employees made in good faith
in the performance of the Manager's duties under this Agreement and not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of duties.
Section 13. No Joint Venture. The Company and the Manager are
not partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
Section 14. Term; Termination. This agreement shall continue in force
through May 14, 1996, and thereafter it may be extended only with the consent of
the Manager and by the affirmative vote of a majority of the Unaffiliated
Directors.
Each extension shall be executed in writing by all parties
hereto before the expiration of this Agreement or of any extension thereof. Each
such extension shall be effective for a period in no case exceeding twelve
months.
Notwithstanding any other provision to the contrary, this
Agreement, or any extension hereof, may be terminated by any party, upon sixty
(60) days' written notice, by majority vote of the Unaffiliated Directors or by
majority vote of the Shareholders, in the case of termination by the Company,
or, in the case of termination by the Manager, by majority vote of the directors
of the Manager.
If this Agreement is terminated pursuant to this Section, such
termination shall be without any further liability or obligation of either party
to the other, except as provided in Section 17.
Section 15. Assignment; Subcontract.
(a) This Agreement may not be assigned, in whole or in part,
by the Manager, unless such assignment is to a corporation, association, trust
or other organization which shall acquire the property and carry on the business
of the Manager, if at the time of such assignment a majority of the voting stock
of such assignee organization shall be owned, directly or indirectly, by CCI or
any of its Affiliates or unless such assignment is consented to in writing by
the Company with the consent of a majority of the Unaffiliated Directors. Such a
permitted assignment shall bind the assignee hereunder in the same manner as the
Manager is bound under this Agreement and, to further evidence its obligations,
under this Agreement, the assignee shall execute and deliver to the Company a
counterpart of this Agreement. This Agreement shall not be assignable by the
Company without the consent of the Manager, except in the case of assignment by
the Company to a real estate investment trust or other organization which is a
successor (by merger, consolidation, or otherwise purchase of assets) to the
Company, in which case such successor organization shall be bound hereunder and
by the terms of said assignment in the same manner as the Company is bound
hereunder.
(b) Notwithstanding the foregoing, the Company and the Manager
agree that the Manager may enter into a subcontract with CFC or any of its
Affiliates pursuant to which CFC or such Affiliate will provide such of the
management services required under this Agreement as the Manager deems
necessary, and the Company hereby consents to the entering into and performance
of such subcontract; provided, however, that no such arrangement between the
Manager and CFC or any of its Affiliates shall relieve the Manager of any of its
duties or obligations under this Agreement; and, provided further, that if any
subcontract results in operating expenses to be paid by the Company to the
Manager, such expenses shall be in the amount actually incurred by the Manager.
In the event the Company determines that any expenses, costs or overhead charged
by such subcontractor can be reduced by the Company's utilizing another provider
or source, the Company shall so notify the Manager, and thirty (30) days after
the delivery of such notice (the "Notice Effective Date"), the Company shall
have the right to utilize any other such provider or source pursuant to such
arrangements as the Company may from time to time make; provided that any
expenses, costs or overhead allocable by the Manager to the Company in
accordance with the terms of this section shall be reimbursed by the Company for
the period up to and including the Notice Effective Date. .
Section 16. Termination by Company for Cause. At the option
solely of the Company, this Agreement shall be and become terminated upon thirty
days' written notice of termination from the Board of Directors to the Manager
if any of the following events shall occur:
(a) If the Manager shall violate any provision of this
Agreement and, after notice of such violation, shall not cure such default
within 30 days; or
(b) There is entered an order for relief or similar decree or
order with respect to the Manager by a court having jurisdiction in the premises
in an involuntary case under the federal bankruptcy laws as now or hereafter
constituted or under any applicable federal or state bankruptcy, insolvency or
other similar laws; or the Manager (i) ceases or admits in writing its inability
to pay debts as they become due and payable, or makes a general assignment for
the benefit of, or enters into any composition or arrangement with, creditors;
(ii) applies for, or consents (by admission of material allegations of a
petition or otherwise) to the appointment of a receiver, trustee, assignee,
custodian, liquidator or sequestrator (or other similar official) of the Manager
or of any substantial part of its properties or assets, or authorizes such an
application or consent, or proceedings seeking such appointment are commenced
without such authorization, consent or application against the Manager and
continue undismissed for 30 days; (iii) authorizes or files a voluntary petition
in bankruptcy, or applies for or consents (by admission of material allegations
of a petition or otherwise) to the application of any bankruptcy,
reorganization, arrangement, readjustment of debt, insolvency, dissolution,
liquidation or other similar law of any jurisdiction, or authorizes such
application or consent, or proceedings to such end are instituted against the
Manager without such authorization, application or consent and remain
undismissed for 30 days or result in adjudication of bankruptcy or insolvency;
or (iv) permits or suffers all or any substantial part of its properties or
assets to be sequestered or attached by court order and the order remains
undismissed for 30 days.
(c) The Manager agrees that if any of the events specified in
paragraph (b) of this Section 16 shall occur, it will give prompt written notice
thereof to the Board of Directors after the happening of such event.
Section 17. Action Upon Termination. From and after the
effective date of termination of this Agreement, pursuant to Sections 14, 15, or
16 hereof, the Manager shall not be entitled to compensation for further
services hereunder, but shall be paid all compensation accruing to the date of
termination, subject to adjustment on an annualized basis in accordance with
Section 10(d). The Manager shall forthwith upon such termination:
(a) Pay over to the Company or any Subsidiary, as applicable,
all money collected and held for the account of the Company or any Subsidiary
pursuant to this Agreement, after deducting any accrued compensation and
reimbursement for its expenses to which it is then entitled;
(b) Deliver to the Board of Directors a full accounting,
including a statement showing all payments collected by it and a statement of
all money held by it, covering the period following the date of the last
accounting furnished to the Board of Directors with respect to the Company or
any Subsidiary; and
(c) Deliver to the Board of Directors all property and documents of the
Company or any Subsidiary then in the custody of the Manager.
Section 18. Release of Money or Other Property Upon Written
Request. The Manager agrees that any money or other property of the Company or
any Subsidiary held by the Manager under this Agreement shall be held for the
Company or such Subsidiary in a custodial capacity, and the Manager's records
shall be appropriately marked to reflect clearly the ownership of such money or
other property by the Company or such Subsidiary. Upon the receipt by the
Manager of a written request signed by a duly authorized officer of the Company
requesting the Manager to release to the Company or any Subsidiary any money or
other property then held by the Manager for the account of the Company or any
Subsidiary under this Agreement, the Manager shall release such money or other
property to the Company or any Subsidiary within a reasonable period of time,
but in no event later than 60 days following such request. The Manager shall not
be liable to the Company, any Subsidiary, the Unaffiliated Directors, or the
Company's Shareholders for any acts thereafter performed or omissions thereafter
to act by the Company or any Subsidiary of the Company in connection with the
money or other property released to the Company or any Subsidiary in accordance
with this Section. The Company and any Subsidiary receiving released money or
other property hereby agree to indemnify the Manager, its directors, officers,
shareholders and employees against any and all expenses, losses, damages,
liabilities, demands, charges and claims of any nature whatsoever, which arise
in connection with the Manager's release of such money or other property to the
Company or such Subsidiary in accordance with the terms of this Section unless
the Manager's release of such money constitutes bad faith, willful misconduct,
gross negligence or reckless disregard of duties. This provision shall be in
addition to any right of the Manager to indemnification under Section 12.
<PAGE>
Section 19. Representations and Warranties.
(a) The Company hereby represents and warrants to the Manager as follows:
(i) Corporate Existence. The Company is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, has the
corporate power to own its assets and to transact the business in which it is
now engaged and is duly qualified as a foreign corporation and in good standing
under the laws of each jurisdiction where its ownership or lease of property or
the conduct of its business requires such qualification, except for failures to
be so qualified, authorized or licensed that could not in the aggregate have a
material adverse effect on the business operations, assets or financial
condition of the Company and its Subsidiaries, taken as a whole. The Company
does not do business under any fictitious business name.
(ii) Corporate Power; Authorization; Enforceable Obligations. The Company
has the
corporate power, authority and legal right to execute, deliver and perform this
Agreement and all obligations required hereunder and has taken all necessary
corporate action authorize this Agreement on the terms and conditions hereof and
its execution, delivery and performance of this Agreement and all obligations
required hereunder. Except such as have been obtained, no consent of any other
person including, without limitation, stockholders and creditors of the Company,
and no license, permit, approval or authorization of, exemption by, notice or
report to, or registration, filing or declaration with, any governmental
authority is required by the Company in connection with this Agreement or the
execution, delivery, performance, validity or enforceability of this Agreement
and all obligations required hereunder. This Agreement has been, and each
instrument or document required hereunder will be, executed and delivered by a
duly authorized officer of the Company, and this Agreement constitutes, and each
instrument or document required hereunder when executed and delivered hereunder
will constitute, the legally valid and binding obligation of the Company
enforceable against the Company in accordance with its terms.
(iii) No Legal Bar to This Agreement. The execution, delivery and
performance of this
Agreement and the documents or instruments required hereunder, will not violate
any provision of any existing law or regulation binding on the Company, or any
order, judgment, award or decree of any court, arbitrator or governmental
authority binding on the Company, or the certificate of incorporation or by-laws
of, or any securities issued by the Company or of any mortgage, indenture,
lease, contract or other agreement, instrument or undertaking to which the
Company is a party or by which the Company or any of its assets may be bound,
the violation of which would have a material adverse effect on the business
operations, assets or financial condition of the Company and its Subsidiaries,
taken as a whole, and will not result in, or require, the creation or imposition
of any lien on any of its property, assets or revenues pursuant to the
provisions of any such mortgage, indenture, lease, contract or other agreement,
instrument or undertaking.
<PAGE>
(b) The Manager hereby represents and warrants to the Company as follows:
(i) Corporate Existence. The Manager is duly organized, validly existing
and in
good standing under the laws of the jurisdiction of its incorporation, has the
corporate power to own its assets and to transact the business in which it is
now engaged and is duly qualified as a foreign corporation and in good standing
under the laws of each jurisdiction where its ownership or lease of property or
the conduct of its business requires such qualification, except for failures to
be so qualified, authorized or licensed that could not in the aggregate have a
material adverse effect on the business operations, assets or financial
condition of the Manager and its Subsidiaries, taken as a whole. The Manager
does not do business under any fictitious business name.
(ii) Corporate Power; Authorization; Enforceable Obligations. The Manager
has the
corporate power, authority and legal right to execute, deliver and perform this
Agreement and all obligations required hereunder and has taken all necessary
corporate action to authorize this Agreement on the terms and conditions hereof
and its execution, delivery and performance of this Agreement and all
obligations required hereunder. Except such as have been obtained, no consent of
any other person including, without limitation, stockholders and creditors of
the Manager, and no license, permit, approval or authorization of, exemption by,
notice or report to, or registration, filing or declaration with, any
governmental authority is required by the Manager in connection with this
Agreement or the execution, delivery, performance, validity or enforceability of
this Agreement and all obligations required hereunder. This Agreement has been,
and each instrument or document required hereunder will be, executed and
delivered by a duly authorized officer of the Manager, and this Agreement
constitutes, and each instrument or document required hereunder when executed
and delivered hereunder will constitute, the legally valid and binding
obligation of the Manager enforceable against the Manager in accordance with its
terms.
(iii) No Legal Bar to This Agreement. The execution, delivery and
performance of this
Agreement and the documents or instruments required hereunder, will not violate
any provision of any existing law or regulation binding on the Manager, or any
order, judgment, award or decree of any court, arbitrator or governmental
authority binding on the Manager, or the certificate of incorporation or by-laws
of, or any securities issued by the Manager or of any mortgage, indenture,
lease, contract or other agreement, instrument or undertaking to which the
Manager is a party or by which the Manager or any of its assets may be bound,
the violation of which would have a material adverse effect on the business
operations, assets or financial condition of the Manager and its Subsidiaries,
taken as a whole, and will not result in, or require, the creation or imposition
of any lien on any of its property, assets or revenues pursuant to the
provisions of any such mortgage, indenture, lease, contract or other agreement,
instrument or undertaking.
Section 20. Notices. Any notice, report, or other
communication required or permitted to be given hereunder shall be in writing
unless some other method of giving such notice, report, or other communication
is accepted by the party to whom it is given, and shall be given by being
delivered at the following addresses of the parties hereto:
The Company: CWM Mortgage Holdings, Inc.
35 North Lake Avenue
P.O. Box 7211
Pasadena, California 91109-7311
Attention: General Counsel
The Manager: Countrywide Asset Management Corporation
155 North Lake Avenue
P.O. Box 7137
Pasadena, California 91109-7137
Attention: General Counsel
Either party may at any time give notice in writing to the
other party of a change of its address for the purpose of this Section 20.
Section 21. Name Change Upon Termination of Management
Agreement. The Company agrees that, if at any time the Manager or any Affiliate
of CCI shall cease to serve generally as manager of the Company or any
Subsidiary, upon receipt of a written request from the Manager, the Company and
such Subsidiary will cause their Governing Instruments to be amended so as to
change their names to a name that does not include "Countrywide" or any
approximation thereof; provided, however, that such requirement shall not apply
to any trust in which the Company or any of its Subsidiaries has sold a majority
of the beneficial interest, and which has issued Mortgage Backed Securities that
remain outstanding in whole or in part.
Section 22. Amendments. This Agreement shall not be amended,
changed, modified, terminated or discharged in whole or in part except by an
instrument in writing signed by all parties hereto, or their respective
successors or assigns, or otherwise as provided herein.
Section 23. Successors and Assigns. This Agreement shall bind any
successors or assigns
of the parties hereto as herein provided.
Section 24. Governing Law. This Agreement shall be governed, construed and
interpreted in
accordance with the laws of the State of California.
Section 25. Headlines and Cross References. The section
headings hereof have been inserted for convenience of reference only and shall
not be construed to affect the meaning, construction or effect of this
Agreement. Any reference in this Agreement to a "Section" or "subsection" shall
be construed, respectively, as referring to a section of this Agreement or a
subsection of a section of this Agreement in which the reference appears.
Section 26. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity of any other
provision, and all other provisions shall remain in full force and effect.
<PAGE>
Section 27. Entire Agreement. This instrument contains the entire agreement
between the
parties as to the rights granted and the obligations assumed in this instrument.
Section 28. Waiver. Any forbearance by a party to this
Agreement in exercising any right or remedy under this Agreement or otherwise
afforded by applicable law shall not be a waiver of or preclude the exercise of
that or any other right or remedy.
Section 29. Execution in Counterparts. This Agreement may be
executed in one or more counterparts, any of which shall constitute an original
as against any party whose signature appears on it, and all of which shall
together constitute a single instrument. This Agreement shall become binding
when one or more counterparts, individually or taken together, bear the
signatures of both parties.
Section 30. Guaranty of Manager's Obligations. The Manager
agrees that in order to insure the performance of its duties under this
Agreement, it will be necessary for CFC to guarantee the full performance of the
Manager, and this Agreement is conditioned upon the execution and delivery to
the Company of a Guaranty Agreement in the form attached to this Agreement as
Exhibit B. Such Guaranty Agreement shall remain in effect through the term of
this Agreement, including any renewals or extensions; provided, however, that
the Guaranty Agreement may be terminated by the Guarantor as provided therein at
such time as the Manager and the Guarantor are no longer Affiliates.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their officers thereunto duly authorized as of the
day and year first above written.
CWM MORTGAGE HOLDINGS, INC.
By: \s\ Michael W. Perry
Michael W. Perry
Executive Vice President
COUNTRYWIDE ASSET MANAGEMENT CORPORATION
By: \s\ Stanford L. Kurland
Stanford L. Kurland
President
8
1
1995 AMENDED AND EXTENDED
LOAN PURCHASE AND ADMINISTRATIVE SERVICES AGREEMENT
THIS AGREEMENT is made as of May 15, 1995, by and between CWM
Mortgage Holdings, Inc. (formerly known as Countrywide Mortgage Investments,
Inc.), a Delaware corporation (the "Company"), and Countrywide Funding
Corporation, a New York corporation ("CFC").
WITNESSETH:
WHEREAS, the Company has elected to qualify for the tax benefits accorded
by Sections 856 to 860 of the Internal Revenue Code of 1986, as amended; and
WHEREAS, the Company, directly or through Subsidiaries, in the
conduct of its business primarily operates a mortgage loan conduit, engages in
warehouse lending and construction lending, and invests in mortgage loans and
mortgage-related securities meeting the investment criteria established from
time to time by the Board of Directors; and
WHEREAS, the Company may desire to purchase mortgage loans
originated or purchased by CFC and may want CFC to cause the issuance of Agency
Securities supported by pools of such mortgage loans on its behalf; and
WHEREAS, the Company may desire to appoint CFC to service
mortgage loans originated by others and purchased by the Company through its
mortgage loan conduit operations; and
WHEREAS, the Company and CFC desire to amend and extend the
Loan Purchase and Administrative Services Agreement originally entered into as
of September 3, 1985, for a one-year period through May 14, 1996, upon the terms
and subject to the conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the mutual agreements
herein set forth, the parties hereto agree as follows:
Section 1. Definitions. Whenever used in this Agreement, the following
terms, unless the
context otherwise requires, shall have the following meanings:
(a) "Affiliate" shall have the meaning attributed to such term in the
Management Agreement.
(b) "Agency Securities" shall mean GNMA Certificates, FHLMC Certificates
and/or FNMA
Certificates.
(c) "Agreement" shall mean this 1995 Amended and Extended Loan Purchase and
Administrative
Services Agreement.
(d) "Board of Directors" shall mean the Board of Directors of the Company.
(e) "Conforming Loan" shall mean an FHA Loan, a VA Loan or a
conventional mortgage loan eligible for sale to FNMA or FHLMC.
(f) "FHA Loan" shall mean any mortgage loan insured by the
Federal Housing Administration under the National Housing Act.
(g) "FHLMC" shall mean the Federal Home Loan Mortgage
Corporation, a corporation organized and existing under the laws of the United
States, or any successor thereto.
(h) "FHLMC Certificate" shall mean a mortgage participation
certificate, guaranteed as to payment of interest and principal by FHLMC and
backed by a pool of conventional mortgage loans.
(i) "FNMA" shall mean the Federal National Mortgage
Association, a corporation organized and existing under the laws of the United
States, or any successor thereto.
(j) "FNMA Certificate" shall mean a guaranteed mortgage
pass-through certificate, guaranteed as to timely payment of interest and
principal by FNMA and backed by a pool of FHA Loans, VA Loans, and/or
conventional mortgage loans.
(k) "GNMA" shall mean the Government National Mortgage
Association, a wholly owned corporate instrumentality of the United States
within the Department of Housing and Urban Development, or any successor
thereto.
(l) "GNMA Certificate" shall mean a fully modified
pass-through mortgage-backed certificate guaranteed as to timely payment of
interest and principal by GNMA and backed by a pool of FHA Loans or VA Loans.
(m) "Jumbo Loan" shall mean any mortgage loan which is not a Conforming
Loan.
(n) "Management Agreement" shall mean that certain agreement
dated as of May 15, 1995 between the Company and the Manager governing the
management of the Company's investments and day-to-day operations.
(o) "Manager" shall mean Countrywide Asset Management
Corporation, or any successor thereto, under a Management Agreement with the
Company.
(p) "Mortgage Backed Securities" shall have the meaning attributed to such
term in the
Management Agreement.
(q) "Subsidiary" shall have the meaning attributed to such term in the
Management
Agreement.
(r) "Unaffiliated Directors" shall mean those members of the Board of
Directors who are
not Affiliates of the Manager.
(s) "VA Loan" shall mean any mortgage loan guaranteed by the
Veterans Administration under the Servicemen's Readjustment Act of 1944, as
amended, or Chapter 37 of Title 38, United States Code.
Section 2. Purchase of Mortgage Loans and Agency Securities
from CFC by the Company. (a) CFC may sell to the Company mortgage loans, Agency
Securities and other mortgage-related assets meeting the Company's investment
criteria. CFC agrees that all such sales shall be made in accordance with the
normal and customary industry practices with respect to the sale of mortgage
loans, Agency Securities and other mortgage-related assets. CFC agrees that all
mortgage loans or other investments sold by it to the Company will meet the
investment criteria of the Company in effect at the time of sales.
(b) CFC agrees that, any sale of mortgage loans, Agency
Securities and other mortgage-related assets from CFC to the Company will be
made at prices no less favorable to the Company than are available to CFC from
other purchasers.
(c) The Company agrees that prior to the delivery of each
mortgage loan purchased, it shall have no interest in such mortgage loan. CFC
shall bear all expenses and costs associated with the mortgage loans prior to
delivery, including the costs associated with mortgage loans that are not sold.
Upon the delivery of such mortgage loan, the Company shall be the sole
beneficial owner of such mortgage loan although legal title to the mortgage and
the mortgage note will be held by CFC if so directed by the Company to permit
the issuance of Agency Securities under Section 3.
(d) Notwithstanding the fact that the Company is the
beneficial owner of the mortgage loans it purchases, the Company and CFC agree
that from and after the date first written above, the Conforming Loans sold to
the Company under this Agreement shall be sold "servicing retained" and the
servicing rights therefor shall remain with CFC or the other holder thereof.
Notwithstanding the foregoing, neither CFC nor such holder may assign its
servicing rights to such Conforming Loans without the consent of the Company
prior to the issuance of Agency Securities backed by such Conforming Loans. The
Company agrees that it will not unreasonably withhold its consent to such an
assignment of servicing rights. CFC's rights to assign the servicing rights to
Conforming Loans that have been pooled and exchanged for Agency Securities shall
be subject to Subsection 3(c).
(e) CFC hereby represents and warrants that at the time of
sale of mortgage loans to the Company such mortgage loans will meet the
representations and warranties required to be made by sellers of mortgage loans
to the Company or any Subsidiary pursuant to the Seller/Servicer Guide
incorporated by reference into the Seller/Servicer Contract executed by CFC.
(f) CFC shall act as an independent contractor and not as an
agent of the Company for purposes of originating and purchasing mortgage loans
and selling to the Company mortgage loans and Agency Securities and other
investments.
Section 3. Pooling of Mortgage Loans; Issuance of Agency
Securities; Payments of Certain Amounts to Company. (a) If directed by the
Company, CFC on behalf of the Company will pool any FHA Loans and VA Loans
purchased by the Company in accordance with the requirements of FNMA and will
use its best efforts to have GNMA Certificates issued backed by such FHA Loans
and VA Loans. In connection therewith, CFC will (i) apply to GNMA for a
commitment to guarantee mortgage-backed securities by the issuance of such GNMA
Certificates; (ii) once such a commitment has been issued by GNMA, deliver the
pool of mortgage loans to a custodian (selected by CFC and acceptable to the
Company, subject to GNMA requirements) to be held for the benefit of the holder
of the Certificates; and (iii) once the custodian verifies to GNMA that it has
custody of the pool, enter into or cause to be created an appropriate GNMA
guaranty pursuant to which CFC will issue a GNMA Certificate owned by and
registered in the name of or deposited into a depository institution for the
account of the Company. After the issuance of such GNMA Certificates, CFC will
retain all responsibilities and duties to GNMA, including the payment of all
GNMA guaranty fees, with respect to such FHA Loans, VA Loans and GNMA
Certificates and will service such FHA Loans and VA Loans after the issuance of
the GNMA Certificates in accordance with GNMA requirements.
(b) If directed by the Company, CFC on behalf of the Company
will pool any conventional mortgage loans and/or FHA Loans and VA Loans
purchased by the Company in accordance with the requirements of FNMA and/or the
requirements of FHLMC and will use its best efforts to have FNMA Certificates
and/or FHLMC Certificates issued backed by such conventional mortgage loans, FHA
Loans and VA Loans, but only if CFC in its sole discretion determines that such
conventional mortgage loans, FHA Loans and VA Loans meet all FNMA or FHLMC
underwriting and other requirements for such issuance. In connection therewith,
CFC will (i) apply to FNMA or FHLMC for a commitment to issue FNMA Certificates
or FHLMC Certificates and (ii) once such commitment has been approved, CFC will
contract with FNMA or FHLMC to pool such conventional mortgage loans, FHA Loans
and VA Loans and cause to be issued FNMA Certificates or FHLMC Certificates
backed by such loans, which FNMA Certificates or FHLMC Certificates will be
owned by and will be registered in the name of or deposited into a depository
institution for the account of the Company. After the issuance of such FNMA
Certificates and FHLMC Certificates, CFC will retain all responsibilities and
duties to FNMA and FHLMC, including the payment of all FNMA or FHLMC guaranty
fees, with respect to such conventional mortgage loans, FHA Loans, VA Loans,
FNMA Certificates and FHLMC Certificates and will service such conventional
mortgage loans, FHA Loans and VA Loans after the issuance of the FNMA or FHLMC
Certificates which they back, in accordance with FNMA and FHLMC requirements.
(c) If Agency Securities are issued to the Company pursuant to
this Section, CFC agrees that for such time as it is servicing the mortgage
loans underlying each Agency Security on behalf of the Company, in addition to
all duties and obligations imposed on CFC by the servicing agreement which
incorporates the appropriate GNMA, FNMA or FHLMC requirements, CFC shall remit
to the Company at the same time it remits each periodic installment of principal
and interest on the Agency Security, the amount, if any, representing the
difference between (i) the scheduled installment of principal and interest on
the mortgage loans underlying the Agency Security, less the applicable GNMA,
FNMA or FHLMC guaranty fee and CFC's servicing fee as agreed to between the
Company and CFC, and (ii) the scheduled installment of principal and interest on
the Agency Security. The obligation of CFC to remit such amounts to the Company
shall arise upon receipt by CFC from the mortgagor of the scheduled installment
of principal and interest on the underlying mortgage loan. CFC agrees that in
the event it assigns its right to service the mortgage loans underlying Agency
Securities, either the successor servicer of such mortgage loans will continue
to remit the amounts referred to above to the Company or CFC will remit to the
Company an amount representing the present value of the anticipated amounts
which would otherwise be received by the Company over the life of the mortgage
loans under this Subsection.
Section 4. Obligation to Assume Servicing. In the event the
Company or any Subsidiary acquires rights to service mortgage loans or
terminates the servicing rights of any entity which has sold mortgage loans to
the Company or any Subsidiary on a servicing retained basis, the Company and CFC
agree to negotiate a servicing agreement pursuant to which CFC will assume the
servicing function.
Section 5. Additional Activities of CFC. Nothing herein shall
prevent CFC or its Affiliates from engaging in other businesses or from
rendering services of any kind to any other person or entity, including the
performance of monitoring, administering or servicing activities for others
investing in any type of real estate investment.
Section 6. Bank Accounts. Fidelity Bond. (a) CFC may establish and maintain
in connection with the services performed hereunder one or more bank accounts in
the name of the Company, at the direction of the Company, and may collect and
deposit into any such account or accounts, and disburse from any such account or
accounts, moneys on behalf of the Company, under such terms and conditions as
the Company may approve; and CFC shall from time to time render appropriate
accountings of such collections and payments to the Company and, when requested,
to the auditors of the Company.
(b) CFC shall maintain a fidelity bond with a responsible
surety company in an amount approved by the Board of Directors covering all
officers and employees of CFC handling funds of the Company and any documents or
papers, which bond shall protect the Company against all losses of any such
property from acts of such officers and employees through theft, embezzlement,
fraud, negligent acts, errors and omissions or otherwise, the premium for said
bond to be paid by CFC.
Section 7. Records; Confidentiality. CFC shall maintain
appropriate books of account and records relating to services performed
hereunder, which books of account and records shall be accessible for inspection
and copying by the Company at any time during normal business hours. CFC agrees
to keep confidential any and all information it obtains from time to time in
connection with the services it renders hereunder and shall not disclose any
portion thereof to nonaffiliated third parties except with the prior written
consent of the Company.
Section 8. Term; Termination. (a) This Agreement shall
continue in force through May 14, 1996, and thereafter it may be extended only
with the consent of CFC and by the affirmative vote of a majority of the
Unaffiliated Directors. Each extension shall be executed in writing by both
parties hereto before the expiration of this Agreement or of any extension
thereof.
(b) CFC may terminate this Agreement upon 30 days' written notice if at any
time any of the Affiliates of Countrywide Credit Industries, Inc. are no longer
serving as Manager.
(c) Notwithstanding any other provision herein to the
contrary, this Agreement, or any extension hereof, may be terminated by the
Company with cause, upon 30 days' written notice, or by either party without
cause, upon 60 days' written notice, by majority vote of the Unaffiliated
Directors or by vote of the holders of a majority of the outstanding shares of
common stock of the Company, in the case of termination by the Company, or in
the case of termination by CFC, by majority vote of the Directors of CFC.
Section 9. Assignment. This Agreement shall not be assignable
in whole or in part by CFC, unless such assignment is to a corporation,
association, trust or other organization which shall acquire the property and
carry on the business of CFC, if at the time of such assignment a majority of
the voting stock of such assignee organization shall be owned, directly or
indirectly, by Countrywide Credit Industries, Inc. or unless such assignment is
consented to in writing by the Company with the consent of a majority of the
Unaffiliated Directors. Such an assignment shall bind the assignee hereunder in
the same manner as CFC is bound hereunder, and, to further evidence its
obligations hereunder, the assignee shall execute and deliver to the Company a
counterpart of this Agreement. This Agreement shall not be assignable by the
Company without the consent of CFC, except in the case of an assignment by the
Company to a corporation or other organization which is a successor (by merger,
consolidation or purchase of assets) to the Company, in which case such
successor organization shall be bound hereunder by the terms of said assignment
in the same manner as the Company is bound hereunder.
Section 10. Termination by Company for Cause. At the option
solely of the Company, this Agreement may be and become terminated upon receipt
of thirty days' written notice of termination from the Board of Directors to CFC
is any of the following events shall occur:
(a) If CFC shall violate any provisions of this Agreement and,
after notice of such violation, shall not cure such default within 30 days; or
(b) There is entered an order for relief or similar decree or
order with respect to CFC by a court having jurisdiction in the premises in an
involuntary case under the federal bankruptcy laws as now or hereafter
constituted or under any applicable federal or state bankruptcy, insolvency or
other similar laws; or CFC (i) ceases or admits in writing its inability to pay
its debts as they become due and payable, or makes a general assignment for the
benefit of, or enters into any composition or arrangement with, creditors; (ii)
applies for, or consents (by admission of material allegations of a petition or
otherwise) to the appointment of a receiver, trustee, assignee, custodian,
liquidator or sequestrator (or other similar official) of CFC or of any
substantial part of its properties or assets, or authorizes such an application
or consent, or proceedings seeking such appointment are commenced without such
authorization, consent or application against CFC and continue undismissed for
30 days; (iii) authorizes or files a voluntary petition in bankruptcy, or
applies for or consents (by admission of material allegations of a petition or
otherwise) to the application of any bankruptcy, reorganization, arrangement,
readjustment of debt, insolvency, dissolution, liquidation or other similar law
of any jurisdiction, or authorizes such application or consent, or proceedings
to such end are instituted against CFC without such authorization, application
or consent and remain undismissed for 30 days or result in adjudication of
bankruptcy or insolvency; or (iv) permits or suffers all or any substantial part
of its properties or assets to be sequestered or attached by court order and the
order remains undismissed for 30 days.
(c) CFC agrees that if any of the events specified in
paragraph (b) of this Section 10 shall occur, it will give prompt written notice
thereof to the Board of Directors after the happening of such event.
Section 11. Action Upon Termination. From and after the
effective date of termination of this Agreement, pursuant to Sections 8, 9 or 10
hereof, CFC shall not be entitled to compensation for further services
hereunder, but shall be paid all compensation accruing to the date of
termination. CFC shall forthwith upon such termination:
(a) Pay over to the Company any money collected and held for
the account of the Company pursuant to this Agreement or otherwise, after
deducting any accrued compensation to which it is then entitled;
(b) Deliver to the Board of Directors a full accounting,
including a statement showing any payments collected by it and a statement of
any money held by it, covering the period following the date of the last
accounting furnished to the Board of Directors; and
(c) Deliver to the Board of Directors all property and
documents of the Company then in the custody of CFC, except to the extent that
to do so would conflict with the terms of its servicing agreement with the
Company.
Section 12. Release of Money or other Property Upon Written
Request. CFC agrees that any money or other property of the Company held by CFC
under this Agreement shall be held for the Company in a custodial capacity, and
CFC's records shall be appropriately marked to clearly reflect the ownership of
such money or other property of the Company. CFC shall release its custody of
any money or other property only in accordance with written instructions from
the Company.
Section 13. Notices. Any notice, report or other communication
required or permitted to be given hereunder shall be in writing, unless some
other method of giving such notice , report or other communication is accepted
by the party to whom it is given, and shall be given by being delivered at the
following addresses of the parties hereto:
<PAGE>
The Company: CWM Mortgage Holdings, Inc.
35 North Lake Avenue
Pasadena, California 91101-1857
Attention: General Counsel
CFC: Countrywide Funding Corporation
155 North Lake Avenue
Post Office 7137
Pasadena, California 91109-7137
Attention: General Counsel
Either party may at any time give notice in writing to the
other party of a change of its address for the purpose of this Section 13.
Section 14. No Joint Venture. The Company and CFC are not
partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
Section 15. Amendments. This Agreement shall not be amended,
changed, modified, terminated or discharged in whole or in part, and the
performance of any obligation hereunder may not be waived, except by an
instrument in writing signed by both parties hereto, or their respective
successors or permitted assigns, or otherwise as provided herein.
Section 16. Successors and Assigns. This Agreement shall bind any
successors or permitted
assigns of the parties hereto as herein provided.
Section 17. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity of any other
provision, and all other provisions shall remain in full force and effect.
Section 18. Entire Agreement. This instrument contains the entire agreement
between the parties as to the rights granted and the obligations assumed in this
instrument.
Section 19. Waiver. Any forbearance by a party to this
Agreement in exercising any right or remedy under this Agreement or otherwise
afforded by applicable laws shall not be a waiver of or preclude the exercise of
that or any other right or remedy.
Section 20. Governing Law. This Agreement shall be governed by, construed
under and interpreted in accordance with the laws of the State of California.
Section 21. Supplemental Servicing. From and after the date of this
Agreement the Supplemental Servicing Agreement dated as of May 15, 1987, by and
among the Company, CFC and the Manager shall be of no further force and effect.
Section 22. Headings and Cross-References. The section
headings hereof have been inserted for convenience of reference only and shall
not be construed to affect the meaning, construction or effect of this
Agreement. Any reference in this Agreement to a "Section" or "Subsection" shall
be construed, respectively, as referring to a section of this Agreement or a
subsection of a section of this Agreement in which the reference appears.
Section 23. Execution in Counterparts. This Agreement may be
executed in one or more counterparts, any of which shall constitute an original
as against any party whose signature appears on it, and all of which shall
together constitute a single instrument. This Agreement shall become binding
when one or more counterparts, individually or taken together, bear the
signatures of both parties.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their officers thereunto duly authorized as of the
day and year first above written.
CWM MORTGAGE HOLDINGS, INC.
By: \s\ Michael W. Perry
Michael W. Perry
Title: Executive Vice President
COUNTRYWIDE FUNDING CORPORATION
By: \s\ Kevin W. Bartlett
Kevin W. Bartlett
Title: Managing Director
The undersigned, as Manager, consents to the foregoing terms
and provisions of this Agreement and agrees to be bound by them in performing
its duties as Manager of the Company.
COUNTRYWIDE ASSET MANAGEMENT
CORPORATION
By: \s\ Stanford L. Kurland
Stanford L. Kurland
Title: President
<TABLE>
<CAPTION>
Exhibit 11.1
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Six Months
Ended August 31,
1995 1994
---------------- -----------------
(Dollar amounts in thousands,
except per share data)
Primary
<S> <C> <C>
Net earnings applicable to common stock $85,128 $52,839
================ =================
Average shares outstanding 94,875 91,165
Net effect of dilutive stock options --
based on the treasury stock method
using average market price 1,607 935
---------------- -----------------
Total average shares 96,482 92,100
================ =================
Per share amount $0.88 $0.57
================ =================
Fully diluted
Net earnings applicable to common stock $85,128 $52,839
================ =================
Average shares outstanding 94,875 91,165
Net effect of dilutive stock options --
based on the treasury stock method using
the closing market price, if higher than
average market price. 2,096 948
---------------- -----------------
Total average shares 96,971 92,113
================ =================
Per share amount $0.88 $0.57
================ =================
</TABLE>
<TABLE>
<CAPTION>
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 six months ended August 31, 1995 and 1994 and 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).
Six Months Ended
August 31, For Fiscal Years Ended February 28(29),
------------------- ----------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings ............... $ 85,128 $ 52,839 $ 88,407 $179,460 $140,073 $ 60,196 $ 22,311
Income tax expense ......... 56,752 35,225 58,938 119,640 93,382 40,131 14,874
Interest charges ........... 178,260 118,022 267,685 275,906 148,765 81,959 73,428
Interest portion of rental
expense .................. 3,342 3,843 7,379 6,372 4,350 2,814 2,307
-------- -------- -------- -------- -------- -------- --------
Earnings available to cover
fixed charges ............ $323,482 $209,929 $422,409 $581,378 $386,570 $185,100 $112,920
======== ======== ======== ======== ======== ======== ========
Fixed charges
Interest charges ......... $178,260 $118,022 $267,685 $275,906 $148,765 $ 81,959 $ 73,428
Interest portion of rental
expense ................ 3,342 3,843 7,379 6,372 4,350 2,814 2,307
-------- -------- -------- -------- -------- -------- --------
Total fixed charges .. $181,602 $121,865 $275,064 $282,278 $153,115 $ 84,773 $ 75,735
======== ======== ======== ======== ======== ======== ========
Ratio of earnings to fixed
charges .................. 1.78 1.72 1.54 2.06 2.52 2.18 1.49
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
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 six months ended August 31, 1995 and 1994 and 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 the
interest element (one-third) of operating leases) into earnings (income before
income taxes and net fixed charges).
Six Months Ended
August 31, For Fiscal Years Ended February 28(29),
------------------- ----------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings ................ $ 85,128 $ 52,839 $ 88,407 $179,460 $140,073 $ 60,196 $ 22,311
Income tax expense .......... 56,752 35,225 58,938 119,640 93,382 40,131 14,874
Interest charges ............ 27,023 27,348 55,045 85,240 51,551 45,928 23,609
Interest portion of rental
expense ................... 3,342 3,843 7,379 6,372 4,350 2,814 2,307
-------- -------- -------- -------- -------- -------- --------
Earnings available to cover
net fixed charges ......... $172,245 $119,255 $209,769 $390,712 $289,356 $149,069 $ 63,101
======== ======== ======== ======== ======== ======== ========
Net fixed charges
Interest charges .......... $ 27,023 $ 27,348 $ 55,045 $ 85,240 $ 51,551 $ 45,928 $ 23,609
Interest portion of rental
expense ................. 3,342 3,843 7,379 6,372 4,350 2,814 2,307
-------- -------- -------- -------- -------- -------- --------
Total net fixed charges $ 30,365 $ 31,191 $ 62,424 $ 91,612 $ 55,901 $ 48,742 $ 25,916
======== ======== ======== ======== ======== ======== ========
Ratio of earnings to net
fixed ....................... 5.67 3.82 3.36 4.26 5.18 3.06 2.43
charges
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> AUG-31-1995
<CASH> 5,455
<SECURITIES> 0
<RECEIVABLES> 428,233
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 199,358
<DEPRECIATION> 61,188
<TOTAL-ASSETS> 7,363,940
<CURRENT-LIABILITIES> 0
<BONDS> 1,639,451
<COMMON> 5,091
0
0
<OTHER-SE> 1,213,729
<TOTAL-LIABILITY-AND-EQUITY> 7,363,940
<SALES> 0
<TOTAL-REVENUES> 388,273
<CGS> 0
<TOTAL-COSTS> 246,393
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 141,880
<INCOME-TAX> 56,752
<INCOME-CONTINUING> 85,128
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,128
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
<FN>
Total Revenues includes $178,260 of interest expense related to mortgage
loan activities.
</FN>
</TABLE>
