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 November 30, 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.
----------------------------------------------------------------------
(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 January 15, 1996
----- -------------------------------
Common Stock $.05 par value 102,054,364
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
November 30, February 28,
1995 1995
---------------- -----------------
(Dollar amounts in thousands)
ASSETS
<S> <C> <C>
Cash $ 6,798 $ 17,624
Receivables for mortgage loans shipped 1,362,848 1,174,648
Mortgage loans held for sale 3,303,490 1,724,177
Other receivables 446,209 476,754
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 139,416 145,612
Capitalized servicing fees receivable 585,213 464,268
Mortgage servicing rights 1,515,203 1,332,629
Other assets 568,461 243,950
---------------- -----------------
Total assets $7,927,638 $5,579,662
================ =================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $2,216,899 $1,063,676
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $5,812,846 $3,963,091
Drafts payable issued in connection with mortgage loan closings 247,692 200,221
Accounts payable and accrued liabilities 139,886 105,097
Deferred income taxes 460,750 368,695
---------------- -----------------
Total liabilities 6,661,174 4,637,104
Commitments and contingencies - -
Shareholders' equity
Common stock - authorized, 240,000,000 shares of $.05 par value; issued and
outstanding, 102,022,880 shares at November 30, 1995
and 91,370,364 shares at February 28, 1995 5,101 4,568
Additional paid-in capital 816,377 608,289
Retained earnings 444,986 329,701
---------------- -----------------
Total shareholders' equity 1,266,464 942,558
---------------- -----------------
Total liabilities and shareholders' equity $7,927,638 $5,579,662
================ =================
Borrower and investor custodial accounts $2,216,899 $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 Nine Months
Ended November 30, Ended November 30,
1995 1994 1995 1994
------------------------------ ------------------------------
(Dollar amounts in thousands, except per share data)
Revenues
<S> <C> <C> <C> <C>
Loan origination fees $ 52,049 $ 45,289 $146,955 $168,066
Gain (loss) on sale of loans 23,674 (25,551) 55,688 (30,306)
------------------------------ ------------------------------
Loan production revenue 75,723 19,738 202,643 137,760
Interest earned 94,148 66,345 259,762 201,585
Interest charges (72,093) (50,134) (207,510) (139,746)
------------------------------ ------------------------------
Net interest income 22,055 16,211 52,252 61,839
Loan servicing income 148,111 110,898 416,624 310,076
Less amortization and impairment of
servicing assets (156,284) (23,329) (355,705) (71,397)
Servicing hedge benefit (expense) 119,365 (162) 254,445 (39,422)
Less write-off of servicing hedge - - - (25,600)
------------------------------ ------------------------------
Net loan administration income 111,192 87,407 315,364 173,657
Gain on sale of servicing - - - 56,880
Commissions, fees and other income 16,598 10,370 43,582 31,814
------------------------------ ------------------------------
Total revenues 225,568 133,726 613,841 461,950
------------------------------ ------------------------------
Expenses
Salaries and related expenses 57,652 44,926 164,260 154,048
Occupancy and other office expenses 26,800 25,273 77,883 76,889
Guarantee fees 31,675 21,940 85,956 61,718
Marketing expenses 6,848 5,704 19,388 17,856
Branch and administrative office
consolidation costs - - - 8,000
Other operating expenses 14,336 8,952 36,217 28,444
------------------------------ ------------------------------
Total expenses 137,311 106,795 383,704 346,955
------------------------------ ------------------------------
Earnings before income taxes 88,257 26,931 230,137 114,995
Provision for income taxes 35,303 10,773 92,055 45,998
------------------------------ ------------------------------
NET EARNINGS $ 52,954 $ 16,158 $138,082 $ 68,997
============================== ==============================
Earnings per share
Primary $0.51 $0.18 $1.39 $0.75
Fully diluted $0.51 $0.18 $1.39 $0.75
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)
Nine Months
Ended November 30,
1995 1994
---------------- -----------------
(Dollar amounts in thousands)
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 138,082 $ 68,997
Adjustments to reconcile net earnings to net cash
used by operating activities:
Amortization and impairment of mortgage servicing rights 283,443 69,080
Amortization and impairment of capitalized servicing fees
receivable 72,262 2,317
Depreciation and other amortization 22,086 19,277
Deferred income taxes 92,055 45,998
Gain on bulk sale of servicing rights - (56,880)
Origination and purchase of loans held for sale (24,981,842) (22,081,979)
Principal repayments and sale of loans 23,214,329 21,894,904
---------------- -----------------
Increase in mortgage loans shipped and held for sale (1,767,513) (187,075)
(Increase) decrease in other receivables and other assets (298,691) 12,292
Increase in accounts payable and accrued liabilities 34,789 18,890
---------------- -----------------
Net cash used by operating activities (1,423,487) (7,104)
---------------- -----------------
Cash flows from investing activities:
Additions to mortgage servicing rights (466,017) (444,063)
Additions to capitalized servicing fees receivable (193,207) (145,149)
Proceeds from bulk sale of servicing rights - 20,547
Purchase of property, equipment and leasehold
improvements - net (11,165) (24,212)
---------------- -----------------
Net cash used by investing activities (670,389) (592,877)
---------------- -----------------
Cash flows from financing activities:
Net increase in warehouse debt and other
short-term borrowings 1,703,547 439,840
Issuance of long-term debt 290,000 271,205
Repayment of long-term debt (96,321) (90,632)
Issuance of common stock 208,621 1,229
Cash dividends paid (22,797) (21,889)
---------------- -----------------
Net cash provided by financing activities 2,083,050 599,753
---------------- -----------------
Net decrease in cash (10,826) (228)
Cash at beginning of period 17,624 4,034
================ =================
Cash at end of period $ 6,798 $ 3,806
================ =================
Supplemental cash flow information:
Cash used to pay interest $ 254,631 $ 196,088
Cash paid for (refunded from) income taxes $ 25 ($ 894)
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 nine month period ended November 30, 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 nine months ended November 30, 1995 are not directly comparable to
prior periods. See Note E.
Certain amounts reflected in the consolidated financial statements for the
three and nine month periods ended November 30, 1994 have been reclassified to
conform to the presentation for the three and nine months ended November 30,
1995.
NOTE B - NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable consisted of the following.
------------------------------------------------------------------ ---- --------------- --- -------------- --
(Dollar amounts in thousands) November 30, February 28,
1995 1995
------------------------------------------------------------------ ---- --------------- --- -------------- --
<S> <C> <C>
Commercial paper $2,788,251 $2,122,348
Revolving credit facility 100,000 -
Medium-term notes, Series A, B, C and D 1,588,300 1,393,900
Repurchase agreements 855,379 245,212
Subordinated notes 200,000 200,000
Unsecured notes payable, matured December 1995 113,000 -
Pre-sale funding facilities 167,006 -
Other notes payable (2.40%-2.90%) 910 1,631
=============== ==============
$5,812,846 $3,963,091
=============== ==============
------------------------------------------------------------------ ---- --------------- --- -------------- --
</TABLE>
Revolving Credit Facility and Commercial Paper
As of November 30, 1995, Countrywide Funding Corporation ("CFC"), the
Company's mortgage banking subsidiary, had an unsecured credit agreement
(revolving credit facility) with forty-seven commercial banks permitting CFC to
borrow an aggregate maximum amount of $3.01 billion, less commercial paper
backed by the agreement. The amount available under the facility is subject to a
borrowing base, which consists of mortgage loans held for sale, receivables for
mortgage loans shipped and mortgage servicing rights. The facility contains
various financial covenants and restrictions, certain of which limit the amount
of dividends that can be paid by the Company or CFC. The interest rate on direct
borrowings is based on a variety of sources, including the prime rate and the
London Interbank Offered Rates ("LIBOR") for U.S. dollar deposits. This interest
rate varies, depending on CFC's credit ratings. The weighted average borrowing
rate on direct and commercial paper borrowings for the nine months ended
November 30, 1995 was 5.82%. The weighted average borrowing rate on commercial
paper outstanding as of November 30, 1995 was 5.82%. 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
<TABLE>
<CAPTION>
As of November 30, 1995, outstanding medium-term notes issued by CFC under
various shelf registrations filed with the Securities and Exchange Commission
were as follows.
- -----------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
------------------------------------------- ----------- ---------- ------------- -------------
Floating-Rate Fixed-Rate Total From To From To
------------------------------------------- ----------- ---------- ------------- -------------
<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 5.57% 8.43% Dec 1997 Mar 2004
Series D 115,000 150,000 265,000 6.07% 6.88% Aug 1998 Sep 2005
-------------------------------------------
Total $429,000 $1,159,300 $1,588,300
===========================================
---------------------------------------------------------------------------------------------------------------
</TABLE>
As of November 30, 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 nine
months ended November 30, 1995, including the effect of the interest rate swap
agreements, was 6.79%. In addition, as of November 30, 1995, $1.5 million and
$235 million were available for future issuances under the Series C and Series D
shelf registrations, respectively.
Repurchase Agreements
As of November 30, 1995, the Company had entered into short-term financing
arrangements to sell mortgage-backed securities ("MBS") under agreements to
repurchase. The weighted average borrowing rate for the nine months ended
November 30, 1995 was 5.95%. The weighted average borrowing rate on repurchase
agreements outstanding as of November 30, 1995 was 5.84%. The repurchase
agreements were collateralized by MBS. All MBS underlying repurchase agreements
are held in safekeeping by broker-dealers, and all agreements are to repurchase
the same or substantially identical MBS.
Pre-Sale Funding Facilities
As of November 30, 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 the prevailing rates for MBS repurchase agreements. The
weighted average borrowing rate for all three facilities for the nine months
ended November 30, 1995 was 6.03%. The balance outstanding under the facilities
at November 30, 1995 was $167 million.
NOTE C - SUBSEQUENT EVENTS
On December 11, 1995, the Company declared a cash dividend of $0.08 per
common share payable January 22, 1996 to shareholders of record on December 29,
1995.
NOTE D - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
<TABLE>
<CAPTION>
The following tables present summarized financial information for
Countrywide Funding Corporation.
-- ----------------------------------------- ---- --------------------------------------------------- -------
(Dollar amounts in thousands) November 30, February 28,
1995 1995
-- ---------------------------------------------- -------- -------------- ---------- -------------- ---------
Balance Sheets:
<S> <C> <C>
Mortgage loans shipped and held for sale $4,640,543 $2,898,825
Other assets 3,209,140 2,621,458
============== ==============
Total assets $7,849,683 $5,520,283
============== ==============
Short- and long-term debt $6,060,538 $4,152,712
Other liabilities 568,641 433,025
Equity 1,220,504 934,546
============== ==============
Total liabilities and equity $7,849,683 $5,520,283
============== ==============
-- ---------------------------------------------- -------- -------------- ---------- -------------- ---------
</TABLE>
<TABLE>
<CAPTION>
--- ----------------------------------------- --- -------------------------------------------------- ---------
(Dollar amounts in thousands) Nine Months Ended November 30,
--------------- ---------- ---------------
1995 1994
--- --------------------------------------------- ------- --------------- ---------- --------------- ---------
Statements of Earnings:
<S> <C> <C>
Revenues $577,648 $433,812
Expenses 358,687 327,226
Provision for income taxes 87,584 42,634
=============== ===============
Net earnings $131,377 $ 63,952
=============== ===============
--- --------------------------------------------- ------- --------------- ---------- --------------- ---------
</TABLE>
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 November 30, 1995 of $8.1 million, or $0.08 per
share. The overall increase to earnings for the nine months ended November 30,
1995 was $27.7 million, or $0.28 per share.
SFAS No. 122 requires the recognition of originated mortgage servicing
rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as
assets by allocating total costs incurred between the loan and the servicing
rights based on their relative fair values. Under SFAS No. 65, the cost of OMSRs
was not recognized as an asset and was charged to earnings when the related loan
was sold. The separate impact of recognizing OMSRs as assets in the Company's
financial statements in accordance with SFAS No. 122 was an increase in net
earnings of $23.8 million, or $0.23 per share, and $67.3 million, or $0.68 per
share, for the quarter and nine months ended November 30, 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 $15.7 million, or $0.15 per
share and $39.6 million, or $0.40 per share, for the quarter and nine months
ended November 30, 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 $46.4 million and $116.7 million for the quarter and nine months
ended November 30, 1995, respectively, the Company reduced the servicing assets
by an additional $109.9 million and $239.0 million of impairment during the
quarter and nine months ended November 30, 1995, respectively. The entire amount
of such impairment was offset by a pre-tax net gain of $119.4 million and $254.4
million for the quarter and nine months ended November 30, 1995, respectively,
in the Company's servicing hedge which is designed to protect its servicing
investment. For the quarter and nine months ended November 30, 1995,
respectively, the net gain included net unrealized gains of $96.2 million and
$188.7 million and realized gains of $23.2 million and $65.7 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 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
<TABLE>
<CAPTION>
The following summarizes the notional amounts of servicing hedge derivative
contracts.
- ---------------------------------------- --------------------- ---------------------- ---------------------
(Dollar amounts in millions) Long Call Options
Interest Rate on Interest Rate Long Call Options
Floors Futures on MBS
- ---------------------------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1995 $ 4,000 $ - $ -
Additions 12,500 5,950 2,000
Dispositions (1,000) (2,950) (600)
===================== ====================== ---------------------
Balance, November 30, 1995 $15,500 $3,000 $1,400
===================== ====================== ---------------------
- ---------------------------------------- --------------------- ---------------------- ---------------------
</TABLE>
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 57,050
--------------------------
At November 30, 1995 $57,050
--------------------------
- ---------------------------------------------------- --------------------------
NOTE H - RATIO OF EARNINGS TO FIXED CHARGES
The ratios of earnings to fixed charges for the nine months ended November
30, 1995 and 1994 were 2.08 and 1.79, respectively. For purposes of calculating
the ratio of earnings to fixed charges, earnings consist of income before 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 nine months ended November 30, 1995 and 1994 were
9.30 and 3.54, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter Ended November 30, 1995 Compared to Quarter Ended November 30, 1994
Revenues for the quarter ended November 30, 1995 increased 69% to
$225.6 million from $133.7 million for the quarter ended November 30, 1994. Net
earnings increased 228% to $53.0 million for the quarter ended November 30, 1995
from $16.2 million for the quarter ended November 30, 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 November 30, 1995
are not directly comparable to periods prior to the implementation date. The
overall impact on the Company's financial statements of adopting SFAS No. 122
was an increase in net earnings for the quarter ended November 30, 1995 of $8.1
million, or $0.08 per share. In addition to the accounting change, the increase
in revenues and net earnings for the quarter ended November 30, 1995 compared to
the quarter ended November 30, 1994 was attributable to an increase in the size
of the Company's servicing portfolio, higher production volume and improved
pricing margins.
The total volume of loans produced increased 44% to $9.3 billion for
the quarter ended November 30, 1995 from $6.5 billion for the quarter ended
November 30, 1994. Refinancings totaled $3.4 billion, or 36% of total fundings,
for the quarter ended November 30, 1995, as compared to $1.3 billion, or 20% of
total fundings, for the quarter ended November 30, 1994. Fixed-rate loan
production totaled $7.3 billion, or 79% of total fundings, for the quarter ended
November 30, 1995, as compared to $3.6 billion, or 55% of total fundings, for
the quarter ended November 30, 1994. Production in the Company's Consumer
Markets Division increased to $1.9 billion for the quarter ended November 30,
1995 compared to $1.3 billion for the quarter ended November 30, 1994.
Production in the Company's Wholesale Division amounted to $2.1 billion for each
of the quarters ended November 30, 1995 and November 30, 1994. The Company's
Correspondent Division purchased $5.3 billion in mortgage loans for the quarter
ended November 30, 1995 compared to $3.1 billion for the quarter ended November
30, 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 November 30, 1995 and 1994, the Company's pipeline of loans in
process was $4.5 billion and $4.4 billion, respectively. In addition, at
November 30, 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 November 30, 1994, the LOCK N' SHOP Pipeline was $2.7
billion. Historically, approximately 43% to 75% of the pipeline of loans in
process has funded. For the quarters ended November 30, 1995 and 1994, the
Company received 113,280 and 82,355 new loan applications, respectively, at an
average daily rate of $193 million and $149 million, respectively. The following
actions were taken during the quarter ended November 30, 1995 on the total
applications received during that quarter: 62,140 loans (55% of total
applications received) were funded and 16,340 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 November
30, 1994 on the total applications received during that quarter: 43,123 loans
(52% of total applications received) were funded and 8,702 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 issued, the
creditworthiness of applicants, the production divisions' loan processing
efficiency and loan pricing decisions.
Loan origination fees increased during the quarter ended November 30,
1995 as compared to the quarter ended November 30, 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 November 30, 1995 than in the quarter ended
November 30, 1994. Gain (loss) on sale of loans improved during the quarter
ended November 30, 1995 as compared to the quarter ended November 30, 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
November 30, 1995 was an increase in gain on sale of loans of $39.7 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 November 30, 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
$26.3 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 $22.1 million for the quarter ended November 30, 1995 from $16.2 million for
the quarter ended November 30, 1994. Consolidated net interest income is
principally a function of: (i) net interest income earned from the Company's
mortgage loan warehouse ($10.0 million and $5.1 million for the quarters ended
November 30, 1995 and 1994, respectively); (ii) interest expense related to the
Company's investment in servicing rights ($18.4 million and $4.6 million for the
quarters ended November 30, 1995 and 1994, respectively) and (iii) interest
income earned from the custodial balances associated with the Company's
servicing portfolio ($30.5 million and $15.7 million for the quarters ended
November 30, 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 November 30, 1994 to the quarter ended
November 30, 1995.
During the quarter ended November 30, 1995, loan administration income
was positively affected by the continued growth of the loan servicing portfolio.
At November 30, 1995, the Company serviced $132.8 billion of loans (including
$2.2 billion of loans subserviced for others) compared to $105.4 billion
(including $0.7 billion of loans subserviced for others) at November 30, 1994, a
26% increase. The growth in the Company's servicing portfolio during the quarter
ended November 30, 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. The weighted average
interest rate of the mortgage loans in the Company's servicing portfolio at
November 30, 1995 was 7.8% compared to 7.4% at November 30, 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 November 30, 1995, the prepayment rate of the
Company's servicing portfolio was 13%, as compared to 7% for the quarter ended
November 30, 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 November 30, 1995 from
the quarter ended November 30, 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 interest rate 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 November 30, 1995, the Company recognized
a net gain of $119.4 million from its Servicing Hedge. The net gain included
unrealized gains of $96.2 million and realized gains of $23.2 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, or that if gains
are generated, they will fully offset impairment of the Servicing Assets.
The Company recorded amortization and impairment of its servicing
assets in the quarter ended November 30, 1995 totaling $156.3 million
(consisting of normal amortization amounting to $46.4 million and impairment of
$109.9 million), compared to $23.3 million of amortization in the quarter ended
November 30, 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 November 30, 1995, the Company acquired bulk
servicing rights for loans with principal balances aggregating $1.3 billion at a
price of 1.41% of the aggregate outstanding principal balance of the servicing
portfolios acquired. During the quarter ended November 30, 1994, the Company
acquired bulk servicing rights for loans with principal balances aggregating
$4.5 billion at a price of $80.9 million or 1.79% of the aggregate outstanding
principal balance of the servicing portfolios acquired.
<TABLE>
<CAPTION>
Salaries and related expenses are summarized below for the quarters
ended November 30, 1995 and 1994.
-- --------------------------- -- -- --------- ------------------------------------------------- -- --- --- -----
(Dollar amounts in Quarter Ended November 30, 1995
thousands)
-- --------- ------------------------------------------------- -- --- --- -----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $18,051 $8,489 $12,043 $2,467 $41,050
Incentive Bonus 8,128 96 2,504 1,003 11,731
Payroll Taxes and Benefits 2,670 1,381 548 272 4,871
------------ ------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $28,849 $9,966 $15,095 $3,742 $57,652
============ ============= ============= ============= -------------
Average Number of 1,813 1,240 937 198 4,188
Employees
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
</TABLE>
<TABLE>
<CAPTION>
-- --------------------------- -- --- -------- ------------------------------------------------- ---- --- -- ----
(Dollar amounts in Quarter Ended November 30, 1994
thousands)
--- -------- ------------------------------------------------- ---- --- -- ----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ - -------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $15,429 $6,025 $9,013 $1,858 $32,325
Incentive Bonus 4,461 128 2,264 627 7,480
Payroll Taxes and Benefits 2,111 929 1,881 200 5,121
------------ -------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $22,001 $7,082 $13,158 $2,685 $44,926
============ ============== ============= ============= -------------
Average Number of 1,601 853 743 138 3,335
Employees
-- --------------------------- -- ------------ - -------------- - ------------- -- ------------- -- -------------
</TABLE>
The amount of salaries increased during the quarter ended November 30,
1995 primarily due to the increased number of employees resulting from increased
production volume and a larger servicing portfolio. Incentive bonuses earned
during the quarter ended November 30, 1995 increased primarily due to larger
loan production and increased loan production personnel, and growth in the
Company's non-mortgage banking subsidiaries operations.
Occupancy and other office expenses for the quarter ended November 30,
1995 increased to $26.8 million from $25.3 million for the quarter ended
November 30, 1994. The increase was primarily due to increased postage and
telephone usage associated with loan servicing activities.
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 the
quarter ended November 30, 1995 increased 44% to $31.7 million from $21.9
million for the quarter ended November 30, 1994. This increase resulted
primarily from an increase in the servicing portfolio.
Marketing expenses for the quarter ended November 30, 1995 increased
20% to $6.8 million from $5.7 million for the quarter ended November 30, 1994.
The increase in marketing expenses reflected the Company's implementation of a
new marketing plan.
Other operating expenses for the quarter ended November 30, 1995
increased from the quarter ended November 30, 1994 by $5.4 million, or 60%. This
increase was primarily due to an increased provision for bad debts resulting
from a larger servicing portfolio, home equity loans held in portfolio pending
securitization and increased production.
Profitability of Loan Production and Servicing Activities
In the quarter ended November 30, 1995, the Company's pre-tax earnings
from its loan production activities (which include loan origination and
purchases, warehousing and sales) were $17.3 million. In the quarter ended
November 30, 1994, the Company's comparable pre-tax loss was $41.2 million. The
increase of $58.5 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 $11.3 million in the Company's internal
method of allocating overhead between its production and servicing activities.
In the quarter ended November 30, 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 $66.3 million as compared to $64.4 million in the quarter
ended November 30, 1994. The increase of $1.9 million was principally due to an
increase in the servicing portfolio, partially offset by the change in the
Company's internal overhead allocation method and the increase in Interest Costs
Incurred on Payoffs.
RESULTS OF OPERATIONS
Nine Months Ended November 30, 1995 Compared to Nine Months Ended November
30, 1994
Revenues for the nine months ended November 30, 1995 increased 33% to
$613.8 million from $462.0 million for the nine months ended November 30, 1994.
Net earnings increased 100% to $138.1 million for the nine months ended November
30, 1995 from $69.0 million for the nine months ended November 30, 1994. Since
SFAS No. 122 prohibits retroactive application, historical accounting results
have not been restated and, accordingly, the accounting results for the nine
months ended November 30, 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 nine months ended November 30, 1995 of
$27.7 million, or $0.28 per share. In addition to the accounting change, the
increase in revenues and net earnings for the nine months ended November 30,
1995 compared to the nine months ended November 30, 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 increased 13% to $25.0 billion for
the nine months ended November 30, 1995 from $22.1 billion for the nine months
ended November 30, 1994. Refinancings totaled $7.1 billion, or 28% of total
fundings, for the nine months ended November 30, 1995, as compared to $7.4
billion, or 34% of total fundings, for the nine months ended November 30, 1994.
Fixed-rate mortgage loan production totaled $18.5 billion, or 74% of total
fundings, for the nine months ended November 30, 1995, as compared to $15.0
billion, or 68% of total fundings, for the nine months ended November 30, 1994.
Production in the Company's Consumer Markets Division decreased to $5.3 billion
for the nine months ended November 30, 1995 from $6.0 billion for the nine
months ended November 30, 1994. Production in the Company's Wholesale Division
decreased to $5.9 billion for the nine months ended November 30, 1995 from $7.1
billion for the nine months ended November 30, 1994. The Company's Correspondent
Division purchased $13.8 billion in mortgage loans for the nine months ended
November 30, 1995 compared to $9.0 billion for the nine months ended November
30, 1994.
For the nine months ended November 30, 1995 and 1994, the Company
received 330,267 and 243,151 new loan applications, respectively, at an average
daily rate of $183 million and $145 million, respectively. The following actions
were taken during the nine months ended November 30, 1995 on the total
applications received during that nine months: 219,972 loans (67% of total
applications received) were funded and 69,811 applications (21% of total
applications received) were either rejected by the Company or withdrawn by the
applicant. The following actions were taken during the nine months ended
November 30, 1994 on the total applications received during that nine months:
161,136 loans (66% of total applications received) were funded and 47,028
applications (19% of total applications received) were either rejected by the
Company or withdrawn by the applicant.
Loan origination fees decreased during the nine months ended November
30, 1995 as compared to the nine months ended November 30, 1994 primarily
because production by the Correspondent Division comprised a greater percentage
of total production in the nine months ended November 30, 1995 than in the nine
months ended November 30, 1994. Gain (loss) on sale of loans improved during the
nine months ended November 30, 1995 as compared to the nine months ended
November 30, 1994 primarily due to the impact of adopting SFAS No. 122 and
improved pricing margins. The separate impact of recognizing OMSRs as assets in
the Company's financial statements in accordance with SFAS No. 122 for the nine
months ended November 30, 1995 was an increase in gain on sale of loans of
$112.1 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 $65.9 million during the nine months ended November 30, 1995.
Net interest income (interest earned net of interest charges) decreased
to $52.3 million for the nine months ended November 30, 1995 from $61.8 million
for the nine months ended November 30, 1994. Consolidated net interest income is
principally a function of: (i) net interest income earned from the Company's
mortgage loan warehouse ($21.6 million and $32.3 million for the nine months
ended November 30, 1995 and 1994, respectively); (ii) interest expense related
to the Company's investment in servicing rights ($42.7 million and $13.4 million
for the nine months ended November 30, 1995 and 1994, respectively) and (iii)
interest income earned from the custodial balances associated with the Company's
servicing portfolio ($73.4 million and $42.9 million for the nine months ended
November 30, 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
nine months ended November 30, 1994 to the nine months ended November 30, 1995.
During the nine months ended November 30, 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 nine
months ended November 30, 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.
The prepayment rate of the Company's servicing portfolio was 11% for
each of the nine month periods ended November 30, 1995 and 1994.
During the nine months ended November 30, 1995, the Company recognized
a net gain of $254.4 million from its Servicing Hedge. The net gain included
unrealized gains of $188.7 million and realized gains of $65.7 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 nine months ended November 30, 1995 totaling $355.7 million
(consisting of normal amortization amounting to $116.7 million and impairment of
$239.0 million), compared to $71.4 million of amortization in the nine months
ended November 30, 1994.
During the nine months ended November 30, 1995, the Company acquired
bulk servicing rights for loans with principal balances aggregating $4.7 billion
at a price of $62.2 million or 1.32% of the aggregate outstanding principal
balance of the servicing portfolios acquired. During the nine months ended
November 30, 1994, the Company acquired bulk servicing rights for loans with
principal balances aggregating $13.1 billion at a price of $192.7 million or
1.47% of the aggregate outstanding principal balance of the servicing portfolios
acquired.
During the nine months ended November 30, 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
nine months ended November 30, 1995.
<TABLE>
<CAPTION>
Salaries and related expenses are summarized below for the nine months
ended November 30, 1995 and 1994.
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Nine Months Ended November 30, 1995
thousands)
-- ------ ------------------------------------------------- ----- -- ---- -----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
<S> <C> <C> <C> <C> <C>
Base Salaries $49,718 $22,478 $33,804 $6,920 $112,920
Incentive Bonus 23,053 346 7,289 3,571 34,259
Payroll Taxes and Benefits 7,920 3,754 4,563 844 17,081
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $80,691 $26,578 $45,656 $11,335 $164,260
============ ============= ============= ============= ------------
Average Number of 1,670 1,079 872 177 3,798
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
</TABLE>
<TABLE>
<CAPTION>
-- --------------------------- -- -- ------ ------------------------------------------------- ----- --- --- -----
(Dollar amounts in Nine Months Ended November 30, 1994
thousands)
-- ------ ------------------------------------------------- ----- --- --- -----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ----------- -- -------------- -- -------------- - ------------ -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $55,009 $17,444 $29,691 $4,780 $106,924
Incentive Bonus 18,989 336 6,364 3,393 29,082
Payroll Taxes and Benefits 9,081 2,842 5,498 621 18,042
----------- -------------- -------------- ------------ -------------
Total Salaries and Related
Expenses $83,079 $20,622 $41,553 $8,794 $154,048
=========== ============== ============== ============ -------------
Average Number of 1,847 830 875 120 3,672
Employees
-- --------------------------- -- ----------- -- -------------- -- -------------- - ------------ -- -------------
</TABLE>
The amount of salaries increased during the nine months ended November
30, 1995 primarily due to the increased number of employees resulting from a
larger servicing portfolio and growth in the Company's non-mortgage banking
subsidiaries.
Occupancy and other office expenses for the nine months ended November
30, 1995 increased slightly to $77.9 million from $76.9 million for the nine
months ended November 30, 1994. The increase was primarily attributable to loan
servicing activities.
Guarantee fees for the nine months ended November 30, 1995 increased
39% to $86.0 million from $61.7 million for the nine months ended November 30,
1994. This increase resulted primarily from an increase in the servicing
portfolio.
Marketing expenses for the nine months ended November 30, 1995
increased 9% to $19.4 million from $17.9 million for the nine months ended
November 30, 1994, reflecting the Company's implementation of a new marketing
plan.
In the nine months ended November 30, 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 nine months
ended November 30, 1995.
Other operating expenses for the nine months ended November 30, 1995
increased from the nine months ended November 30, 1994 by $7.8 million, or 27%.
This increase was primarily due to an increased provision for bad debts
resulting from a larger servicing portfolio, home equity loans held in portfolio
pending securitization and increased production.
Profitability of Loan Production and Servicing Activities
In the nine months ended November 30, 1995, the Company's pre-tax
earnings from its loan production activities were $33.8 million. In the nine
months ended November 30, 1994, the Company's comparable pre-tax loss was $58.6
million. The increase of $92.4 million was primarily attributable to improved
pricing margins, the effect of the adoption of SFAS No. 122 previously discussed
and a change of $31.8 million in the Company's internal method of allocating
overhead between its production and servicing activities. In the nine months
ended November 30, 1995, the Company's pre-tax income from its loan servicing
activities was $187.2 million as compared to $164.4 million in the nine months
ended November 30, 1994. The increase of $22.8 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 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. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan
funding activities and the investment in servicing rights. To meet these needs,
the Company currently utilizes commercial paper supported by its revolving
credit facility, medium-term notes, MBS repurchase agreements, subordinated
notes, unsecured notes, pre-sale funding facilities, 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 whole loan repurchase agreements, 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 nine months ended November 30, 1995, the
Company's operating activities used cash of approximately $1.8 billion on a
short-term basis to fund the increase in its warehouse of mortgage loans. The
Company's operating activities also generated $344 million of positive cash
flow, which was principally allocated to the long-term investment in servicing
as discussed below under "Investing Activities."
Investing Activities The primary investing activity for which cash was
used during the nine months ended November 30, 1995 was the investment in
servicing rights. Net cash used by investing activities increased to $670
million for the nine months ended November 30, 1995 from $593 million for the
nine months ended November 30, 1994.
Financing Activities Net cash provided by financing activities amounted
to $2.1 billion and $600 million for the nine months ended November 30, 1995 and
1994, respectively. The increase in net cash provided was primarily the result
of higher net short-term borrowings by the Company during the nine months ended
November 30, 1995 and from the issuance and sale of common stock.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
During the nine months ended November 30, 1995, the Company received
new loan applications at an average daily rate of $183 million and at November
30, 1995, the Company's pipeline of loans in process was $4.5 billion. This
compares to a daily application rate during the nine months ended November 30,
1994 of $149 million and a pipeline of loans in process at November 30, 1994 of
$4.4 billion. During the nine months ended November 30, 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 November 30, 1995 was $1.2
billion and at November 30, 1994 was $2.7 billion. Future application levels and
loan fundings are dependent on numerous factors, including the level of demand
for mortgage credit, the extent of price competition in the market, the
direction of interest rates, seasonal factors and general economic conditions.
For the month ended December 31, 1995, the average daily amount of applications
received was $192 million, and at December 31, 1995, the pipeline of loans in
process was $4.4 billion and the LOCK N' SHOP pipeline was $863 million.
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 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 nine months ended November 30, 1995 resulted in
impairment (as specified in SFAS No. 122) of $239.0 million and a servicing
hedge gain of $254.4 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 nine months
ended November 30, 1995, the Company purchased such servicing contracts with
principal balances amounting to $4.7 billion. Prepayments in the Company's
servicing portfolio were $9.3 billion during the nine months ended November 30,
1995 and $1.6 billion during the month ended December 31, 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 interest rates
rise. Generally, the Company has experienced significant price competition among
mortgage lenders which has resulted in downward pressure on loan production
earnings.
Some regions in which the Company operates, particularly some regions
of California, have been experiencing slower economic growth, and real estate
financing activity in these regions has been negatively impacted. As a result,
home lending activity for single- (one-to-four) family residences in these
regions may also have experienced slower growth. The Company's California
mortgage loan production (measured by principal balance) constituted 31% of its
total production during the nine months ended November 30, 1995 and 32% for the
nine months ended November 30, 1994. The Company is continuing its efforts to
expand its production capacity outside of California. Since California's
mortgage loan production constituted a significant portion of the Company's
production during the 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.
The Company's servicing portfolio delinquency rate increased to 3.52%
at December 31, 1995 and 3.20% at November 30, 1995, up from 1.94% at November
30, 1994. This increase was primarily the result of portfolio mix changes and
aging. The proportion of government and high loan-to-value conventional loans,
which tend to experience higher delinquency rates than low loan-to-value
conventional loans, has increased from 37% of the portfolio at November 30, 1994
to 45% at December 31, 1995. In addition, the weighted average age of the
portfolio is 25 months at December 31, 1995, up from 19 months at November 30,
1994. Delinquency rates tend to increase as loans age, reaching a peak at three
to five years of age. However, because the loans in the portfolio are serviced
on a non-recourse basis, the Company's exposure to credit loss resulting from
increased delinquency rates is substantially limited. Further, related late
charge income has historically been sufficient to offset incremental servicing
expenses resulting from an increased delinquency rate.
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 (24% of the Company's servicing
portfolio at November 30, 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 $254.4
million during the nine months ended November 30, 1995 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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. No reports on Form 8-K were filed during this
reporting period.
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: January 16, 1996 /s/ Stanford L. Kurland
-------------------------------------
Senior Managing Director and
Chief Operating Officer
DATE: January 16, 1996 /s/ Carlos M. Garcia
-------------------------------------
Managing Director; Chief Financial
Officer and Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.1
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Three Months Nine Months
Ended November 30, Ended November 30,
1995 1994 1995 1994
----------------------------- -----------------------------
(Dollar amounts in thousands, except per share data)
Primary
<S> <C> <C> <C> <C>
Net earnings applicable to common stock $52,954 $16,158 $138,082 $68,997
============================= =============================
Average shares outstanding 101,926 91,296 97,165 91,208
Net effect of dilutive stock options --
based on the treasury stock method
using average market price 2,420 799 1,893 888
----------------------------- -----------------------------
Total average shares 104,346 92,095 99,058 92,096
============================= =============================
Per share amount $0.51 $0.18 $1.39 $0.75
============================= =============================
Fully diluted
Net earnings applicable to common stock $52,954 $16,158 $138,082 $68,997
============================= =============================
Average shares outstanding 101,926 91,296 97,165 91,208
Net effect of dilutive stock options --
based on the treasury stock method using
the closing market price, if higher than
average market price. 2,420 799 2,095 888
----------------------------- -----------------------------
Total average shares 104,346 92,095 99,260 92,096
============================= =============================
Per share amount $0.51 $0.18 $1.39 $0.75
============================= =============================
</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 nine months ended November 30, 1995 and 1994 and for the five
fiscal years ended February 28, 1995 computed by dividing 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).
Nine Months Ended
November 30, For Fiscal Years Ended February 28(29),
------------------------- ------------------------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
------------ ------------ ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings $138,082 $68,997 $88,407 $179,460 $140,073 $60,196 $22,311
Income tax expense 92,055 45,998 58,938 119,640 93,382 40,131 14,874
Interest charges 207,510 139,746 205,464 219,898 128,612 69,760 60,888
Interest portion of rental
expense 5,002 5,667 7,379 6,372 4,350 2,814 2,307
------------ ------------ ------------- ------------ ------------- ------------ ------------
Earnings available to cover
fixed charges $442,649 $260,408 $360,188 $525,370 $366,417 $172,901 $100,380
============ ============ ============= ============ ============= ============ ============
Fixed charges
Interest charges $207,510 $139,746 $205,464 $219,898 $128,612 $69,760 $60,888
Interest portion of rental
expense 5,002 5,667 7,379 6,372 4,350 2,814 2,307
------------ ------------ ------------- ------------ ------------- ------------ ------------
Total fixed charges $212,512 $145,413 $212,843 $226,270 $132,962 $72,574 $63,195
============ ============ ============= ============ ============= ============ ============
Ratio of earnings to fixed
charges 2.08 1.79 1.69 2.32 2.76 2.38 1.59
============ ============ ============= ============ ============= ============ ============
</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 nine months ended November 30, 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).
Nine Months Ended
November 30, For Fiscal Years Ended February 28(29),
-------------------------- -----------------------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
------------ ------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings $138,082 $68,997 $88,407 $179,460 $140,073 $60,196 $22,311
Income tax expense 92,055 45,998 58,938 119,640 93,382 40,131 14,874
Interest charges 22,715 39,647 (7,176) 29,232 31,398 33,729 11,069
Interest portion of rental
expense 5,002 5,667 7,379 6,372 4,350 2,814 2,307
------------ ------------- ------------ ------------ ------------- ------------ ------------
Earnings available to cover
net fixed charges $257,854 $160,309 $147,548 $334,704 $269,203 $136,870 $50,561
============ ============= ============ ============ ============= ============ ============
Net fixed charges
Interest charges $22,715 $39,647 ($7,176) $29,232 $31,398 $33,729 $11,069
Interest portion of rental
expense 5,002 5,667 7,379 6,372 4,350 2,814 2,307
------------ ------------- ------------ ------------ ------------- ------------ ------------
Total net fixed charges $27,717 $45,314 $ 203 $35,604 $35,748 $36,543 $13,376
============ ============= ============ ============ ============= ============ ============
Ratio of earnings to net
fixed charges 9.30 3.54 726.84 9.40 7.53 3.75 3.78
============ ============= ============ ============ ============= ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> NOV-30-1995
<CASH> 6,798
<SECURITIES> 0
<RECEIVABLES> 446,209
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 206,615
<DEPRECIATION> 67,199
<TOTAL-ASSETS> 7,927,638
<CURRENT-LIABILITIES> 0
<BONDS> 1,789,210
<COMMON> 5,101
0
0
<OTHER-SE> 1,261,363
<TOTAL-LIABILITY-AND-EQUITY> 7,927,638
<SALES> 0
<TOTAL-REVENUES> 613,841
<CGS> 0
<TOTAL-COSTS> 383,704
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 230,137
<INCOME-TAX> 92,055
<INCOME-CONTINUING> 138,082
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 138,082
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.39
<FN>
Includes $207,510 of interest expense related to
mortgage loan activities.
</FN>
</TABLE>
